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2 0 1 7 A N N U A L R E P O R T
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017.
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
(State or Other Jurisdiction of
Incorporation or Organization)
75-2402409
(I.R.S. Employer
Identification No.)
4400 Biscayne Blvd., Miami, FL 33137
(Address of Principal Executive Offices) (Zip Code)
(Registrant’s Telephone Number, Including Area Code): (305) 575-4100
Securities registered pursuant to section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, $.01 par value per share
NASDAQ Global Select Market
Securities registered pursuant to section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes No
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. Yes No
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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). Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller
reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller
reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
(in Rule 12b-2 of the Exchange Act) (Check one):
Large accelerated filer
Non-accelerated filer (Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the
price at which the common equity was last sold, as of the last business day of the registrant’s most recently completed second
fiscal quarter was: $2,182,572,438.
As of February 20, 2018, the registrant had 559,473,568 shares of Common Stock outstanding.
Documents Incorporated by Reference
Portions of the registrant’s definitive proxy statement for its 2018 Annual Meeting of Stockholders are incorporated by
reference in Items 10, 11, 12, 13, and 14 of Part III of this Annual Report on Form 10-K.
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Page
Part I.
Item 1.
Business .............................................................................................................................................. 7
Item 1A.
Risk Factors ...................................................................................................................................... 28
Item 1B.
Unresolved Staff Comments ............................................................................................................. 63
Item 2.
Properties .......................................................................................................................................... 63
Item 3.
Legal Proceedings............................................................................................................................. 63
Item 4.
Mine Safety Disclosures ................................................................................................................... 64
Part II.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities ............................................................................................... 65
Item 6.
Selected Financial Data .................................................................................................................... 67
Item 7.
Management’s Discussion and Analysis of Financial Condition and
Results of Operations .................................................................................................................... 67
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk ........................................................... 84
Item 8.
Financial Statements and Supplementary Data ................................................................................. 86
Item 9.
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure .................................................................................................................... 139
Item 9A.
Controls and Procedures ................................................................................................................. 139
Item 9B.
Other Information ........................................................................................................................... 140
Part III.
Item 10.
Directors, Executive Officers and Corporate Governance .............................................................. 141
Item 11.
Executive Compensation ................................................................................................................ 141
Item 12.
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters ....................................................................................................... 141
Item 13.
Certain Relationships and Related Transactions and Director Independence ................................. 141
Item 14.
Principal Accounting Fees and Services ......................................................................................... 141
Part IV.
Item 15.
Exhibits, Financial Statement Schedules ........................................................................................ 142
Signatures
........................................................................................................................................................ 154
Certifications ...................................................................................................................................................... 158
EX-21
EX-23.1
EX-31.1
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EX-31.2
EX-32.1
EX-32.2
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
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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 this Annual Report on Form 10-K. We do not undertake an
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 losses and may not generate sustained positive cash flow sufficient to fund our
operations and research and development programs;
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the risks inherent in developing, obtaining regulatory approvals for and commercializing new,
commercially viable and competitive products and treatments;
our research and development activities may not result in commercially viable products;
that earlier clinical results of effectiveness and safety may not be reproducible or indicative of future
results;
that we may fail to obtain regulatory approval for hGH-CTP or successfully commercialize Rayaldee
and hGH-CTP;
that we may not generate profits or cash flow from our laboratory operations or substantial revenue
from our pharmaceutical and diagnostic products;
that currently available over-the-counter and prescription products, as well as products under
development by others, may prove to be as or more effective than our products for the indications
being studied;
our ability to build a successful pharmaceutical sales and marketing infrastructure;
our ability and our distribution and marketing partners’ ability to comply with regulatory
requirements regarding the sales, marketing and manufacturing of our products and product
candidates and the operation of our laboratories;
the performance of our third-party distribution partners, licensees and manufacturers over which we
have limited control;
our success is dependent on the involvement and continued efforts of our Chairman and Chief
Executive Officer;
integration challenges for Transition Therapeutics, BioReference, EirGen and other acquired
businesses;
changes in regulation and policies in the United States and other countries, including increasing
downward pressure on healthcare reimbursement;
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our ability to manage our growth and our expanded operations;
increased competition, including price competition;
changing relationships with payers, including the various state and multi-state Blues programs,
suppliers and strategic partners;
efforts by third-party payors to reduce utilization and reimbursement for clinical testing services;
failure to timely or accurately bill and collect for our services;
failure in our information technology systems, including cybersecurity attacks or other data security
or privacy incidents;
failure to obtain and retain new clients and business partners, or a reduction in tests ordered or
specimens submitted by existing clients;
failure to establish, and perform to, appropriate quality standards to assure that the highest level of
quality is observed in the performance of our testing services;
failure to maintain the security of patient-related information;
our ability to obtain and maintain intellectual property protection for our products;
our ability to defend our intellectual property rights with respect to our products;
our ability to operate our business without infringing the intellectual property rights of others;
our ability to attract and retain key scientific and management personnel;
our need for, and ability to obtain, additional financing;
adverse results in material litigation matters or governmental inquiries;
failure to obtain and maintain regulatory approval outside the U.S.;
legal, economic, political, regulatory, currency exchange, and other risks associated with
international operations; and
our ability to finance and successfully complete construction of a research, development and
manufacturing center in Waterford, Ireland.
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PART I
Unless the context otherwise requires, all references in this Annual Report on Form 10-K to the “Company”,
“OPKO”, “we”, “our”, “ours”, and “us” refer to OPKO Health, Inc., a Delaware corporation, including our wholly-
owned subsidiaries.
ITEM 1. BUSINESS.
OVERVIEW
We are a diversified healthcare company that seeks to establish industry-leading positions in large and rapidly
growing medical markets. Our diagnostics business includes BioReference Laboratories (“BioReference”), the
nation’s third-largest clinical laboratory with a core genetic testing business and an almost 400-person sales and
marketing team to drive growth and leverage new products, including the 4Kscore prostate cancer test and the
Claros 1 in-office immunoassay platform (in development). Our pharmaceutical business features Rayaldee, an
FDA-approved treatment for secondary hyperparathyroidism (“SHPT”) in adults with stage 3 or 4 chronic kidney
disease (“CKD”) and vitamin D insufficiency (launched in November 2016), and VARUBI™ for chemotherapy-
induced nausea and vomiting (oral formulation launched by partner TESARO in November 2015 and IV
formulation launched in November 2017), OPK88004, a selective androgen receptor modulator being developed for
benign prostate hypertrophy (BPH) and other urologic and metabolic conditions, and OPK88003, a once or twice
weekly oxyntomodulin for type 2 diabetes and obesity which is a clinically advanced drug candidate among the new
class of GLP-1 glucagon receptor dual agonists. Our pharmaceutical business also features hGH-CTP, a once-
weekly human growth hormone injection (in Phase 3 for pediatric growth hormone deficiency and partnered with
Pfizer), and a long-acting Factor VIIa drug for hemophilia (Phase 2a). In addition to our pharmaceutical and
diagnostic development programs, we own established pharmaceutical platforms in Ireland, Chile, Spain and
Mexico which generate revenue and which we expect to facilitate future market entry for our products currently in
development. We have a development and commercial supply pharmaceutical company, as well as a global supply
chain operation and holding company in Ireland, which we expect will play an important role in the development,
manufacturing, distribution and approval of a wide variety of drugs with an emphasis on high potency products. We
also 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.
We have a highly experienced management team that we believe has demonstrated an ability to successfully
build and manage pharmaceutical and healthcare businesses. Based on their experience in the industry, we believe
that our management team has extensive development, regulatory and commercialization expertise and relationships
that provide access to commercial opportunities.
All product or service marks appearing in type form different from that of the surrounding text are trademarks or
service marks owned, licensed to, promoted or distributed by OPKO, its subsidiaries or affiliates, except as noted.
All other trademarks or services marks are those of their respective owners.
GROWTH STRATEGY
We expect our future growth to come from leveraging our commercial infrastructure, proprietary technology and
development strengths, and by opportunistically pursuing complementary, accretive, or strategic acquisitions and
investments.
We launched our first pharmaceutical product, Rayaldee, in the U.S. market in the fourth quarter of 2016. We
have under development a broad and diversified portfolio of diagnostic tests, small molecules, and biologics
targeting a broad range of unmet medical needs. We also operate the third largest full service clinical laboratory in
the U.S. We intend to continue to leverage our proprietary technology and our strengths in all phases of research
and development to further develop and commercialize our portfolio of proprietary pharmaceutical and diagnostic
products. In support of our strategy, we intend to:
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continue to enhance our commercialization capability in the U.S. and internationally;
develop and commercialize Rayaldee for new indications, including the treatment of SHPT in
patients with vitamin D insufficiency and stage 5 CKD requiring regular hemodialysis;
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obtain requisite regulatory approval and compile clinical data for our most advanced product
candidates; and
expand into other medical markets that provide significant opportunities and that we believe are
complementary to and synergistic with our business.
In addition, we expect to leverage the BioReference business and infrastructure to drive rapid and widespread
uptake of our diagnostic products, including the 4Kscore test and the Claros 1 in-office immunoassay platform. We
also intend to leverage the genetic and genomic data generated and accumulated through BioReference’s genetic
sequencing laboratory to enhance drug discovery and clinical trial programs.
We have and expect to continue to be opportunistic and to pursue complementary or strategic acquisitions,
licenses and investments. Our management team has significant experience in identifying, executing and integrating
these transactions. We expect to use well-timed, carefully selected acquisitions, licenses and investments to
continue to drive our growth, including:
• Products and technologies. We intend to continue to pursue product and technology acquisitions
and licenses that will complement our existing businesses and provide new product and market
opportunities, enhance our profitability, leverage our existing assets, and contribute to our own
organic growth.
• Commercial businesses. We intend to continue to pursue acquisitions of commercial businesses that
will both drive our growth and provide geographically diverse sales and distribution opportunities.
• Early stage investments. We have and may continue to make investments in early stage companies
that we perceive to have valuable proprietary technology and significant potential to create value for
OPKO as a shareholder.
CORPORATE INFORMATION
We were originally incorporated in Delaware in October 1991 under the name Cytoclonal Pharmaceutics, Inc.,
which was later changed to eXegenics, Inc. (“eXegenics”). On March 27, 2007, we were part of a three-way merger
with Froptix Corporation (“Froptix”) and Acuity Pharmaceuticals, Inc. (“Acuity”), both research and development
companies. On June 8, 2007, we changed our name to OPKO Health, Inc. Our shares are publicly traded on the
NASDAQ Stock Market under the ticker “OPK” and on the Tel Aviv Stock Exchange. Our principal executive
offices are located in leased office space in Miami, Florida.
We currently manage our operations in two reportable segments: diagnostics and pharmaceuticals. The
pharmaceutical segment consists of the pharmaceutical operations we operate in Chile, Mexico, Ireland, Israel and
Spain and our pharmaceutical research and development operations. The diagnostics segment primarily consists of
the clinical laboratory operations we acquired through the acquisition of BioReference in 2015 and our point-of-care
operations. There are no significant inter-segment sales. We evaluate the performance of each segment based on
operating profit or loss. There is no inter-segment allocation of interest expense and income taxes. Refer to Note 16
for financial information about the segments and geographic areas.
CURRENT PRODUCTS AND SERVICES AND RELATED MARKETS
Diagnostics
BioReference Laboratories
Through BioReference, the third largest full service clinical laboratory in the United States, we offer
comprehensive laboratory testing services utilized by healthcare providers in the detection, diagnosis, evaluation,
monitoring, and treatment of diseases, including esoteric testing, molecular diagnostics, anatomical pathology,
genetics, women’s health and correctional healthcare. We market and sell these services to physician offices,
clinics, hospitals, employers and governmental units nationally, with the largest concentration of business in the
larger metropolitan areas across New York, New Jersey, Maryland, Pennsylvania, Delaware, Washington DC,
Florida, California, Texas, Illinois and Massachusetts. BioReference has an almost 400-person sales and marketing
team and operates a network of approximately 275 patient service centers.
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Our BioReference laboratory testing business consists of routine testing and esoteric testing. Routine tests
measure various health parameters, such as the functions of the heart, kidney, liver, thyroid and other organs,
including such tests as blood cell counts, cholesterol levels, pregnancy, substance abuse and urinalysis. We
typically operate 24 hours per day, 365 days per year and perform and report most routine test results within 24
hours.
The esoteric tests we perform require sophisticated equipment and materials, highly skilled personnel and
professional attention. Esoteric tests are ordered less frequently than routine tests and typically are priced higher
than routine tests. Esoteric tests include tests related to endocrinology, genetics and genomics, immunology,
microbiology, HIV tests, molecular diagnostics, next generation sequencing, oncology, serology, and toxicology.
Through BioReference, we operate in the following highly specialized laboratory divisions:
• BioReference Laboratories. BioReference constitutes our core clinical testing laboratory offering
automated, high volume routine testing services, STAT testing, informatics, HIV, Hep C and other
molecular tests.
• GenPath (Oncology). National oncology presence with expertise in cancer pathology and
diagnostics, as well as molecular diagnostics. Core tests include FLOW, IHC, MicroArray, FISH,
ISH, Morphology, and full service oncology.
• GenPath (Women’s Health). Innovative technology platform for sexually transmitted infections has
enabled expansion nationally with specimens coming from 41 states, including Image Directed Paps
analysis, HPV Plus, and STI Testing.
• GeneDx. Industry leading national laboratory for testing rare and ultra-rare genetic diseases with
international reach, performing testing on specimens from more than 50 countries.
• Laboratorio Bueno Salud. National testing laboratory dedicated to serving the Spanish-speaking
population in the United States, where all business is conducted in Spanish including patient and
physician interaction.
We have one of the largest marketing staffs of any laboratory in the country with sales and marketing groups
dedicated to urology, oncology, women’s health, genetic testing and correctional health, as well as cross-over groups
selling to large institutions. All of our sales and marketing personnel operate in a dual capacity, as both marketing
and client support representatives, which we believe provides better customer service and a strong connection with
our customers.
We expect the clinical laboratory testing industry will continue to experience growth in testing volumes due to
aging of the population in the U.S., patient awareness of the value of laboratory tests, a decrease in the cost of tests,
the development of sophisticated and specialized tests for detection and management of disease, increased
recognition of early detection and prevention as a means of reducing healthcare costs, and ongoing research and
development in genetics and genomics and personalized medicine. Our mission is to be recognized by our clients as
the premier provider of clinical laboratory testing, information and related services.
BioReference provides us with a significant diagnostics commercial infrastructure for marketing and sales that
reached almost 11 million patients in 2017. In addition, its large team of managed care experts complement our
efforts to ensure that payors recognize the value of our diagnostic and laboratory tests for reimbursement purposes.
We continue to leverage the national marketing, sales and distribution resources of BioReference, along with its
almost 400-person sales and marketing team, to enhance sales of and reimbursement for our 4Kscore test, a
laboratory developed blood test that provides a personalized risk score for aggressive prostate cancer. We plan to
continue to leverage the BioReference commercial infrastructure and capabilities, as well as its extensive
relationships with payers, to commercialize OPKO’s other diagnostic products under development, including the
Claros 1.
4Kscore Test
We offer the 4Kscore test through our BioReference laboratory located in Elmwood Park, New Jersey. We
began selling the 4Kscore test in the U.S. in March 2014 and in Europe and Mexico in September 2014 and
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January 2015, respectively. The 4Kscore test is a laboratory developed test that measures the blood plasma levels of
four different prostate-derived kallikrein proteins: Total PSA, Free PSA, Intact PSA and Human Kallikrein-2
(“hK2”). These biomarkers are then combined with a patient’s age, Digital Rectal Exam (DRE) status (nodule / no
nodule), and prior negative biopsy status (yes / no) using a proprietary algorithm to calculate the risk (probability) of
finding a Gleason Score 7 or higher prostate cancer. The four kallikrein panel of biomarkers utilized in the 4Kscore
test is based on decades of research conducted by scientists at Memorial Sloan-Kettering Cancer Center and leading
European institutions. Investigators at the Lund University, Sweden, University of Turku, Finland and Memorial
Sloan Kettering Cancer Center, New York, have also demonstrated that the 4Kscore test can predict the 20-year risk
for development of prostate metastases and mortality in men who present at age 50 or 60 years old with an elevated
PSA.
The 4Kscore test was developed by OPKO and validated in 2014 in a prospective, blinded study of 1,012 men in
collaboration with 26 urology centers across the U.S. and in a clinical study of 366 predominantly African American
men at 8 VA centers in the U.S. African Americans are at 1.7 times more likely to be diagnosed with prostate
cancer than Caucasian men, and 2.2 times more likely to die from the disease. Results showed that the 4Kscore test
was highly accurate for predicting the presence of high-grade cancer (Gleason score 7 or higher) prior to prostate
biopsy, regardless of race. The full data from the blinded, prospective U.S. clinical validation study and the VA
study have been published in peer reviewed medical journals.
The clinical data from both studies demonstrated the ability of the 4Kscore test to discriminate between men
with high-grade, aggressive prostate cancer and those men who had no findings of cancer or had low-grade or
indolent form of the disease. The discrimination, measured by Area Under the Curve (“AUC”) analysis, was greater
than 0.80 and is significantly higher than previously developed tests. Furthermore, the 4Kscore test demonstrated
excellent risk calibration, indicating the accuracy of the result for an individual patient, both Caucasian and African
American. The high value of AUC and the excellent risk calibration make the 4Kscore test result valuable
information for the shared decision-making between the urologist and patient on whether or not to perform a
prostate biopsy.
A separate clinical utility study indicated that the 4Kscore test led to 64.6% fewer biopsies. The study, “The
4Kscore® Test Reduces Prostate Biopsy Rates in Community and Academic Urology Practices”, was published in a
peer reviewed medical journal. The study, which included 611 patients seen by 35 academic and community
urologists across the U.S., evaluated the influence of the 4Kscore test on urologist-patient decisions about whether to
perform a biopsy in men who had an abnormal PSA and or DRE result. Test results for patients were stratified into
low risk (< 7.5%), intermediate risk (7.5%-19.9%) and high risk (≥20%) for developing aggressive prostate cancer.
Nearly half (49.3%) of the men were categorized as low risk; 25.7% and 25.0% fell into the intermediate-risk and
high-risk categories, respectively. Notably, the 4Kscore test results influenced biopsy decisions in 88.7% of the
men. In the three risk groups, a biopsy was avoided in 94.0%, 52.9%, and 19.0% of men in the low, intermediate,
and high-risk categories, respectively.
The value of the 4Kscore test has been demonstrated in more than a dozen peer-reviewed clinical studies
involving more than 22,000 patients and we have been granted a Category I CPT® code by the AMA for our
4Kscore test (CPT Code 81539). A CPT code is used by insurance companies and government payers to describe
health care services and procedures. A Category I CPT code is critical to facilitate reimbursement in government
programs such as Medicare and Medicaid, as well as private insurance programs.
The National Comprehensive Cancer Network (“NCCN”) included the 4Kscore test as a recommended test
in their 2015, 2016, and 2017 Guidelines for Prostate Cancer Early Detection. The panel making this
recommendation concluded that the 4Kscore test is indicated for use prior to a first prostate biopsy, or after a
negative biopsy, to assist patients and physicians in further defining the probability of high-grade cancer. In
addition, the European Association of Urology (EAU) Prostate Cancer Guidelines Panel included the 4Kscore test in
the 2016 EAU Guidelines for Prostate Cancer, concluding that the 4Kscore, as a blood test with greater specificity
over the PSA test, is indicated for use prior to a first prostate biopsy or after a negative biopsy to assist patients and
physicians in further defining the probability of high-grade cancer.
We have and will continue to commit substantial efforts to obtaining broad reimbursement coverage for the
4Kscore test. We have obtained a positive coverage decision from at least one national private payer and pricing
agreements from several regional payers. Novitas Solutions, the local Medicare Administrative Contractor, or
MAC, for our laboratory in New Jersey, has been and continues to pay for the majority of our 4Kscore Medicare
submissions. Although Novitas initially issued a positive draft local coverage determination (LCD) in May 2016,
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the coverage determination was retired due to a conflicting LCD issued by Palmetto, another MAC. We are
working diligently to address concerns raised by Palmetto pertaining primarily to clinical utility. We expect to
significantly expand our efforts to obtain broad reimbursement for the 4Kscore test throughout 2018 and beyond.
Point-of-Care Diagnostics
OPKO Diagnostics, LLC (“OPKO Diagnostics”), formerly Claros Diagnostics, Inc., has developed a novel
diagnostic instrument system to provide rapid, high performance blood test results in the point-of-care setting. The
technology only requires a finger stick drop of blood introduced into the test cassette that can then run a quantitative
test. The instrument performs the tests on a consumable cassette that is a microfluidics-based diagnostic test system.
The credit card-sized test cassette works with a sophisticated desktop analyzer to provide high performance
quantitative blood test results within minutes and permits the transition of complex immunoassays from the
centralized reference laboratory to the physician’s office, hospital nurses station, or other decentralized location.
We completed a multi-center clinical trial for the PSA test in mid-2017 and later filed the pre-marketing
authorization (“PMA”) for the Claros Analyzer and Sangia Total PSA Test with the FDA. The key clinical study
with patients who were suspicious for prostate cancer found that the Sangia Total PSA test improved the sensitivity
of a digital rectal exam (“DRE”) to 91%, detecting 2.9 times the prostate cancers compared to DRE alone. We
submitted our PMA for the PSA test in November 2017 and are actively engaged with FDA in the review of the
PMA. We also intend to commence a clinical trial of a testosterone diagnostic test for our point-of-care system. We
expect to fully leverage BioReference’s marketing, sales and distribution resources for the launch of the Claros 1
system and associated diagnostic tests in the U.S after FDA clearance or approval.
We are also presently working to add additional tests for our point-of-care system, including parathyroid
hormone (PTH) and vitamin D, and we believe that there are many more applications for the technology, including
infectious disease, cardiology, women’s health, and companion diagnostics.
Pharmaceutical Business
We currently have one commercial stage pharmaceutical product and several pharmaceutical compounds and
technologies in various stages of research and development for a broad range of indications and conditions,
including the following:
Renal Products
We launched Rayaldee, our lead renal product, in the U.S. market in November 2016. In June 2016, the FDA
approved Rayaldee extended release capsules for the treatment of secondary hyperparathyroidism (SHPT) in adults
with stage 3 or 4 chronic kidney disease (CKD) and serum total 25-hydroxyvitamin D levels less than 30 ng/mL.
Rayaldee is a patented extended release product containing 30 mcg of a prohormone called calcifediol (25-
hydroxyvitamin D3).
We have a 64-person highly specialized sales and marketing team dedicated to the launch and commercialization
of Rayaldee as of December 31, 2017. Efforts are underway to obtain broad commercial and Part D insurance
coverage for Rayaldee. The Company has contracted for commercial and Part D coverage for more than seventy
percent (70%) of U.S. covered lives as of the end of 2017.
In connection with the launch of Rayaldee, the Company has also engaged in a comprehensive ongoing market
education campaign highlighting the unmet need in treating SHPT, including by leveraging key opinion leaders in
community outreach programs such as speakers’ bureaus and patient advocacy programs.
In May 2016, we entered into a collaboration with Vifor Fresenius Medical Care Renal Pharma (VFMCRP) for
the development and commercialization of Rayaldee in Europe, Canada, Mexico, Australia, South Korea and certain
other international markets for the treatment of SHPT in patients with stage 3 or 4 CKD and vitamin D
insufficiency. Under the terms of the agreement, OPKO received an upfront payment of $50 million, and will
receive up to $232 million in regulatory and sales based milestones. In addition, VFMCRP will pay OPKO tiered,
double digit royalties on sales of the product at percentage rates that range from the mid-teens to the mid-twenties or
a minimum royalty, whichever is greater, upon commencement of sales of the product. OPKO and VFMCRP will
also collaborate to develop and commercialize a new dosage form of Rayaldee for the treatment of SHPT in
hemodialysis patients. OPKO granted VFMCRP an option to acquire rights to this dosage form for the U.S. market;
if exercised, OPKO will receive up to $555 million in additional milestones and double digit royalties.
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On October 12, 2017, we entered into a Development and License Agreement (the “JT Agreement”) with Japan
Tobacco Inc. (“JT”) granting JT the exclusive rights for the development and commercialization of Rayaldee in
Japan (the “JT Territory”). The license grant to JT covers the therapeutic and preventative use of the product for
(i) SHPT in non-dialysis and dialysis patients with CKD, (ii) rickets, and (iii) osteomalacia, as well as such
additional indications as may be added to the scope of the license subject to the terms of the JT Agreement. Under
the terms of the JT Agreement, OPKO received an initial upfront payment of $6 million. OPKO will receive
another $6 million upon the initiation of OPKO’s planned phase 2 study for Rayaldee in dialysis patients in the U.S.
OPKO is also eligible to receive up to an additional aggregate amount of $31 million upon the achievement of
certain regulatory and development milestones by JT for Rayaldee in the JT Territory, and $75 million upon the
achievement of certain sales based milestones by JT in the JT Territory. OPKO will also receive tiered, double digit
royalty payments at rates ranging from low double digits to mid-teens on net product sales within the JT Territory.
JT will, at its sole cost and expense, be responsible for performing all development activities necessary to obtain all
regulatory approvals for Rayaldee in Japan and for all commercial activities pertaining to Rayaldee in Japan, except
for certain preclinical expenses which OPKO has agreed to reimburse JT up to a capped amount.
The FDA approval for Rayaldee was supported by successful results from two pivotal phase 3 trials of Rayaldee
that were identical randomized, double-blind, placebo-controlled, multi-site studies which established the safety and
efficacy of Rayaldee as a new treatment for SHPT in adults with stage 3 or 4 CKD and vitamin D insufficiency.
Vitamin D insufficiency arises in CKD due to the abnormal upregulation of CYP24A1, an enzyme that destroys
vitamin D and its metabolites. Studies in CKD patients have demonstrated that currently available over-the-counter
and prescription vitamin D products cannot reliably raise blood vitamin D prohormone levels and effectively treat
SHPT, a condition commonly associated with CKD in which the parathyroid glands secrete excessive amounts of
parathyroid hormone (“PTH”). Prolonged elevation of blood PTH causes excessive calcium and phosphorus to be
released from bone, leading to elevated serum calcium and phosphorus levels, softening of the bones (osteomalacia)
and calcification of vascular and renal tissues. SHPT affects 40-82% of patients with stage 3 or 4 CKD and
approximately 95% of patients with stage 5 CKD.
The completed pivotal trials for Rayaldee successfully met all primary efficacy and safety endpoints. The
primary efficacy endpoint was a responder analysis in which “responder” was defined as any treated subject who
demonstrated an average 30% decrease in PTH from pre-treatment baseline during the last six weeks of the 26-week
treatment period. A significantly higher response rate was observed with Rayaldee which steadily increased with
treatment duration. The response rate with Rayaldee was similar in CKD stages 3 and 4. Safety and tolerability
data were comparable in both treatment groups. Patients completing the two pivotal trials were treated, at their
election, for an additional six months with Rayaldee during an open-label extension study. Data from the extension
study indicated that the PTH lowering response rates steadily increased with duration of Rayaldee treatment without
deterioration in safety profile.
We also are developing Rayaldee for other indications, including for SHPT in patients with vitamin D
insufficiency and stage 5 CKD requiring regular hemodialysis. A phase 2 study of a higher dose product is expected
to commence during the first half of 2018 for end stage renal disease patients on Rayaldee.
In August 2014, we also announced the submission of an IND to the FDA to evaluate Rayaldee as an adjunctive
therapy for the prevention of skeletal-related events in patients with bone metastases undergoing anti-resorptive
therapy. We commenced a phase 1 dose escalation study in the fourth quarter of 2014 in breast and prostate cancer
patients with bone metastases who are receiving anti-resorptive therapy. The study is evaluating safety, markers of
vitamin D and mineral metabolism and tumor progression. We are currently evaluating interim data from the study.
Our second most advanced renal product, Alpharen (Fermagate Tablets), is a new and potent non-absorbed
phosphate binder to treat hyperphosphatemia in Stage 5 CKD patients requiring regular hemodialysis. Alpharen
(Fermagate Tablets) has been shown to be safe and effective in treating hyperphosphatemia in phase 2 and 3 trials in
stage 5 CKD patients undergoing chronic hemodialysis. Hyperphosphatemia, or elevated serum phosphorus, is
common in dialysis patients and tightly linked to the progression of SHPT and vascular calcification, both of which
drive morbidity and mortality. The kidneys provide the primary route of excretion for excess phosphorus absorbed
from ingested food. As kidney function worsens, serum phosphorus levels increase and directly stimulate PTH
secretion. Stage 5 CKD patients requiring dialysis must reduce their dietary phosphate intake and usually require
regular treatment with orally administered phosphate binding agents to lower serum phosphorus to meet the
recommendations of the Kidney Disease Improving Global Outcomes (“KDIGO”) Clinical Practice Guidelines that
elevated serum phosphorus levels should be lowered toward the normal range. Hyperphosphatemia contributes to
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soft tissue mineralization and affects approximately 90% of dialysis patients. Dialysis patients require ongoing
phosphate binder treatment to maintain controlled serum phosphorus levels. We are currently considering a single
additional Phase 3 clinical trial to support marketing approvals in North America and in Europe.
We believe the CKD patient population is large and growing as a result of obesity, hypertension and diabetes;
therefore this patient population represents a significant market opportunity. According to the National Kidney
Foundation, CKD afflicts over 26 million people in the U.S., including more than 20 million patients with stage 3 or
4 CKD. In stage 5 CKD, kidney function is minimal to absent and most patients require regular dialysis or a kidney
transplant for survival. An estimated 71-97% of CKD patients have vitamin D insufficiency which can lead to
SHPT and its debilitating consequences. CKD continues to be associated with poor outcomes, reflecting the
inadequacies of the current standard of care. Vitamin D insufficiency, hyperphosphatemia and SHPT, when
inadequately treated, are major contributors to poor CKD outcomes. We intend to develop and commercialize
Rayaldee and Alpharen to constitute part of the foundation for a new and markedly improved standard of care for
CKD patients having SHPT and/or hyperphosphatemia.
SARM
Through the acquisition of Transition Therapeutics, a Toronto-based biotechnology company, we acquired
OPK88004, an orally administered selective androgen receptor modulator (SARM) which we are developing for the
treatment of BPH and other urologic and metabolic conditions. The selective and antagonistic properties of
OPK88004 on the prostate appear to be well suited to potentially reduce prostate hyperplasia and volume, as well as
provide anabolic therapeutic benefits such as increased lean body mass and physical function, and decreased fat
mass in specific patient populations.
A Phase 2 study of 350 male subjects for another indication showed significantly increased lean body mass and
muscle strength and significant fat mass reduction with no change in lower PSA levels. OPK88004 is currently
being studied in a Phase 2 study in prostate cancer patients who have undergone radical prostatectomy. The main
objective of the study is to examine the effect of OPK88004 on sexual function and quality of life issues associated
with this patient population. An additional Phase 2b study to determine the optimal dose to treat patients with
Benign Prostatic Hypertrophy (BPH) commenced in November 2017 and is expected to enroll 126 patients in the
U.S. The main focus of the study is to determine the optimal dose of OPK88004 that will reduce prostate volume
and PSA levels, and increase anabolic effects such lean body and decreased fat mass in BPH patients.
Oxyntomodulin
Our internal product development program is also currently focused on developing a once weekly administered
oxyntomodulin for type 2 diabetes and obesity. Our most advanced oxyntomodulin product candidate, OPK88003,
a once-weekly administered peptide for the treatment of type 2 diabetes and associated obesity, is a dual agonist of
the GLP-1 (Glucagon-Like Peptide-1) and glucagon receptors. The receptors play an integral role in regulating
appetite, food intake, satiety and energy utilization in the body. Stimulating both of the receptors, OPK88003 has
the potential to regulate blood glucose.
OPK88003 has been evaluated in a Phase 2 study enrolling 420 type 2 diabetes subjects in a 24 week study
consisting of a 12-week randomized blinded stage followed by a 12-week open-label stage. The study included four
once-weekly dose arms of OPK88003 (10mg, 15mg, 30mg, 50mg), a placebo arm, and an active comparator arm
(exenatide extended release – 2mg). The study was completed in February, 2016. Subjects receiving the highest
dose of OPK88003 peptide once weekly in the study demonstrated significantly superior weight loss compared with
currently approved extended release exenatide and placebo after 12 and 24 weeks of treatment. OPK88003 also
provided a reduction in HbA1c, a marker of sugar metabolism, similar to exenatide at weeks 12 and 24.
We plan to evaluate OPK88003 in a dose escalation Phase 2b trial in 110 type 2 diabetics where patients will be
treated with a dose escalation regimen over 3 months intended to optimize dose levels, and increase body weight
loss and reduce the adverse event profile, such as nausea and vomiting. The patients will be treated for a total of 30
weeks in the study. The key primary endpoint will be HbA1c and secondary endpoints such as weight loss, lipid
profile and safety will also be analyzed.
We believe oxyntomodulin has potential to be a safe, long term therapy for obese and diabetes type II patients,
representing significant market opportunities. More than 380 million are living with diabetes worldwide, of which
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approximately 90% have type II diabetes. According to the World Health Organization, there are more than 500
million severely overweight or obese people.
Biologics
Our biologics business focuses on developing and commercializing longer-acting proprietary versions of already
approved therapeutic proteins. One of our innovative platform technologies uses a short, naturally-occurring amino
acid sequence (carboxl terminal peptide or “CTP”) that has the effect of slowing the removal from the body of the
therapeutic protein to which it is attached. This CTP can be readily attached to a wide array of existing therapeutic
proteins, stabilizing the therapeutic protein in the bloodstream and extending its life span without additional toxicity
or loss of desired biological activity. We are using the CTP technology to develop new, proprietary versions of
certain existing therapeutic proteins that have longer life spans than therapeutic proteins without CTP. We believe
that our products will have greatly improved therapeutic profiles and distinct market advantages.
hGH-CTP
Our lead product candidate utilizing CTP, hGH-CTP, is a recombinant human growth hormone product under
development for the treatment of growth hormone deficiency (“GHD”), which is a pituitary disorder resulting in
short stature in children and other physical ailments in both children and adults.
In December 2014, we entered into an exclusive worldwide agreement with Pfizer for the development and
commercialization of hGH-CTP for the treatment of GHD in adults and children, as well as for the treatment of
growth failure in children born SGA. In connection with the transaction, we granted Pfizer an exclusive license to
commercialize hGH-CTP worldwide, and we received non-refundable and non-creditable upfront payments of $295
million and are eligible to receive up to an additional $275 million upon the achievement of certain regulatory
milestones. In addition, we are eligible to receive initial tiered royalty payments associated with the
commercialization of hGH-CTP for Adult GHD with percentage rates ranging from the high teens to mid-twenties.
Upon the launch of hGH-CTP for Pediatric GHD in certain major markets, the royalties will transition to regional,
tiered gross profit sharing for both hGH-CTP and Pfizer’s Genotropin®.
Pursuant to our agreement with Pfizer, we will lead the clinical development activities for the hGH-CTP
program and will be responsible for funding the development programs for the key indications, which includes
Adult and Pediatric GHD and Pediatric SGA. Pfizer will be responsible for all development costs for additional
indications as well as all post-marketing studies. In addition, Pfizer will fund the commercialization activities for all
indications and lead the manufacturing activities covered by the global development plan.
GHD occurs when the production of growth hormone, secreted by the pituitary gland, is disrupted. Since growth
hormone plays a critical role in stimulating body growth and development, and is involved in the production of
muscle protein and in the breakdown of fats, a decrease in the hormone affects numerous body processes. hGH is
used for the long-term treatment of children and adults with inadequate secretion of endogenous growth hormone.
The primary indications it treats in children are GHD, SGA, kidney disease, Prader-Willi Syndrome and Turner’s
Syndrome. In adults, the primary indications are replacement of endogenous growth hormone and the treatment of
AIDS-induced weight loss. Patients using hGH receive daily injections six or seven times a week. This is
particularly burdensome for pediatric patients. We believe a significant market opportunity exists for a longer-
lasting version of hGH that would require fewer injections.
Our Phase 3 trial of hGH-CTP in pediatric patients was initiated in December 2016 and patient enrollment is
ongoing. The global study is a 220 patient study in pediatric GHD patients designed to evaluate weekly treatment
with hGH-CTP versus daily injections of Genotropin. The hGH-CTP is delivered in a pen device in this multi-
regional study in over 30 countries. The GHD subjects will be treated weekly for 12 months. In addition to the
Phase 3 pediatric study, we have continued without interruption our ongoing Phase 2 pediatric open label extension
study for hGH-CTP. The Phase 2 pediatric patients have been treated with hGH-CTP for over 3 years, and some
patients for over 4 years. We are currently switching all of the pediatric patients in this study to the disposable pen
device. We have also initiated a 44 patient study in pediatric GHD patients in Japan and are planning to commence
a global study for SGA. hGH-CTP has orphan drug designation in the U.S. and Europe for both adults and children
with GHD.
In December 2016, we announced preliminary topline data from our Phase 3, double blind, placebo controlled
study of hGH-CTP in adults with GHD. The multinational, multi-center study, which utilized a 2:1 randomization
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between hGH-CTP and placebo, enrolled 203 subjects, 198 of whom received at least one dose of study treatment.
Treatment was administered through a weekly injection. The topline results showed:
• The active group had a mean change in trunk fat mass of -0.4kg and placebo group was 0;
• There was no statistically significant difference (≤ 0.05 (p value)) between the active and placebo
group;
•
97% of hGH-CTP vs 6% of placebo group showed IGF-1 normalization; and
• The safety profile of hGH-CTP is consistent with that observed with those treated with daily growth
hormone.
Although there was no statistically significant difference between hGH-CTP and placebo on the primary
endpoint of change in trunk fat mass from baseline to 26 weeks, after unblinding the study, we identified an
exceptional value of trunk fat mass reduction in the placebo group that may have affected the primary outcome. We
have now completed post-hoc sensitivity analyses to evaluate the influence of outliers on the primary endpoint
results using multiple statistical approaches. Analyses that excluded outliers showed a statistically significant
difference between hGH-CTP and placebo on the change in trunk fat mass. Additional analyses that did not exclude
outliers showed mixed results. Following completion of the analyses, OPKO and Pfizer have agreed that OPKO
may communicate with the FDA regarding a potential BLA submission. In addition, we have continued the adult
phase 3 study extension to monitor and accumulate long term safety of hGH-CTP treatment in the adult GDH
patient population.
Factor VII
In addition to hGH-CTP, we are developing a product to extend the life span of Factor VIIa (hemophilia) using
the CTP technology. In February 2013, the FDA granted orphan drug designation to our longer-acting version of
clotting Factor VIIa, Factor VIIa-CTP, for the treatment of bleeding episodes in patients with hemophilia A or B
with inhibitors to Factor VIII or Factor IX. Currently, Factor VIIa therapy is available only as an intravenous (IV)
formulation which, due to Factor VIIa’s short half-life, requires multiple infusions to treat a bleeding episode. In
addition, frequent infusions are onerous when used as preventative prophylactic therapy, especially for children.
In February 2016, we commenced a Phase 2a dose escalation study and a phase 1 dose escalating subcutaneous
study in healthy volunteers to determine safety of our long acting Factor VIIa-CTP for the treatment of bleeding
episodes in hemophilia A or B patients with inhibitors to Factor VIII or Factor IX.
We believe that the CTP technology may also be broadly applicable to other therapeutic proteins in the market
and provide a reduction in the number of injections.
APIs
FineTech Pharmaceutical, Ltd. (“FineTech”), is our Israeli-based subsidiary that develops and produces high
value, high potency specialty APIs. Through its FDA registered facility in Nesher, Israel, FineTech currently
manufactures commercial APIs for sale or license to pharmaceutical companies in the U.S., Canada, Europe and
Israel. We believe that FineTech’s significant know-how and experience with analytical chemistry and organic
syntheses, together with its production capabilities, may play a valuable role in the development of our pipeline of
proprietary molecules and compounds for diagnostic and therapeutic products, while providing revenues and profits
from its existing API business.
Oligonucleotide Therapeutics
OPKO CURNA, LLC (“CURNA”), previously CURNA Inc., is engaged in the discovery of new drugs for the
treatment of a wide variety of illnesses, including cancer, heart disease, metabolic disorders and a range of genetic
anomalies. CURNA’s broad platform technology utilizes a short, single strand oligonucleotide and is based on the
up-regulation of protein production through interference with non-coding RNA’s, or natural antisense. This strategy
contrasts with established approaches which down-regulate protein production. CURNA has designed a novel type
of therapeutic modality, termed AntagoNAT, and has initially demonstrated this approach for up-regulation of
several therapeutically relevant proteins in in vitro and animal models. We believe that this short, single strand
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oligonucleotide can be delivered intravenously or subcutaneously without the drug delivery or cell penetration
complications typically associated with double stranded siRNA therapeutics. CURNA has identified and developed
compounds which increase the production of over 80 key proteins involved in a large number of individual diseases.
We have ongoing pre-clinical studies for several of these compounds, with an initial focus on orphan diseases
including Dravet Syndrome, Rett Syndrome and MPS-1. We expect to initiate a phase 1 study for Dravet Syndrome
during the first half of 2018.
NK-1 Program
We acquired rolapitant and other neurokinin-1 (“NK-1”) assets from Merck & Co. In December 2010, we
exclusively out-licensed the development, manufacture and commercialization of our lead NK-1 candidate,
VARUBI™ (rolapitant), to TESARO. VARUBI™, a potent and selective competitive antagonist of the NK-1
receptor, had successfully completed clinical testing for prevention of chemotherapy induced nausea and vomiting,
or CINV, and post-operative induced nausea and vomiting. TESARO’s NDA for oral VARUBI™ was approved by
the FDA in September 2015, and in November 2015, TESARO commenced the commercial launch of oral
VARUBI™ in the United States. TESARO’s IV formulation of VARUBI™ was approved by the FDA in
October 2017 and commercial sales commenced in November 2017. In January 2018, the package insert for
VARUBI™ was updated to include mention of new adverse effects, including anaphylaxis, anaphylactic shock and
other serious hypersensitivity reactions which were reported following its introduction to the market in
November 2017. In late February 2018, TESARO announced it would suspend distribution of VARUBI™ IV, but
would continue to support the oral product.
Under the terms of the license, we received a $6.0 million upfront payment from TESARO and we received
$30.0 million of milestone payments upon achievement of certain regulatory and commercial sale milestones. We
are eligible to receive additional commercial milestone payments of up to $85.0 million if specified levels of annual
net sales are achieved. TESARO is also obligated to pay us tiered royalties on annual net sales achieved in the
United States and Europe at percentage rates that range from the low double digits to the low twenties, and outside
of the United States and Europe at low double-digit percentage rates. TESARO assumed responsibility for clinical
development and commercialization of licensed products at its expense. Under the agreement, we will continue to
receive royalties on a county-by-country and product-by-product basis until the later of the date that all of the
patents rights licensed from us and covering rolapitant expire, are invalidated or are not enforceable, and 12 years
from the date of the first commercial sale of the product.
If TESARO elects to develop and commercialize VARUBI™ in Japan through a third-party licensee, TESARO
will share equally with us all amounts it receives in connection with such activities, subject to certain exceptions and
deductions. The term of the license will remain in force until the expiration of the royalty term unless we terminate
the license earlier for TESARO’s material breach of the license or bankruptcy. TESARO has a right to terminate the
license during the term for any reason on three month’s written notice.
We are currently developing an additional NK-1 compound acquired from Merck for pruritis.
Commercial Operations
We also intend to continue to leverage our global commercialization expertise to pursue acquisitions of
commercial businesses that will both drive our growth and provide geographically diverse sales and distribution
opportunities. During 2015, we acquired EirGen, a growing, profitable and cash flow positive specialty
pharmaceutical company based in Ireland. EirGen is focused on the development and commercial supply of high
potency, high barrier to entry, pharmaceutical products. Through its facility in Waterford, Ireland, EirGen currently
manufactures high potency pharmaceutical products and exports to over 40 countries. High potency drugs such as
those used for cancer chemotherapy are typically unsuitable for manufacture in normal multi-product facilities due
to cross contamination risks.
To date, EirGen and its commercial partners have filed several product applications with the FDA in Europe and
in Japan. EirGen has a strong research and development portfolio of high barrier to entry drugs and we expect to
rapidly expand its drug portfolio. We believe EirGen will play an important role in the development,
manufacturing, distribution and approval of a wide variety of drugs in a variety of dosage forms with an emphasis
on high potency products.
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OPKO Health Europe (previously Farmadiet Group Holding, S.L.) operates primarily in Spain and has more
than 20 years of experience in the development, manufacture, marketing, and sale of pharmaceutical, nutraceutical,
and veterinary products in Europe.
OPKO Mexico (previously Pharmacos Exakta S.A. de C.V.), is engaged in the manufacture, marketing, sale, and
distribution of ophthalmic and other pharmaceutical products to private and public customers in Mexico. OPKO
Mexico manufacturers and sells products primarily in the generics market in Mexico, although it also has some
proprietary products as well.
OPKO Chile (previously Pharma Genexx, S.A.) markets, sells and distributes pharmaceutical and natural
products to the private, hospital, pharmacy and public institutional markets in Chile for a wide range of indications,
including, cardiovascular products, vaccines, antibiotics, gastro-intestinal products, and hormones, among others.
ALS Distribuidora Limitada (“ALS”) is engaged in the business of importation, commercialization and distribution
of pharmaceutical products for private markets in Chile. ALS started operations in 2009 as the exclusive product
distributor of Arama Laboratorios y Compañía Limitada (“Arama”), a company with more than 20 years of
experience in the pharmaceutical products market. In connection with the acquisition of ALS, OPKO acquired all of
the product registrations and trademarks previously owned by Arama, as well as the Arama name.
Strategic Investments
We have and may continue to make investments in other early stage companies that we perceive to have
valuable proprietary technology and significant potential to create value for OPKO as a shareholder.
RESEARCH AND DEVELOPMENT EXPENSES
During the years ended December 31, 2017, 2016, and 2015, we incurred $125.2 million, $111.2 million, and
$99.5 million, respectively, of research and development expenses related to our various product candidates. During
the years ended December 31, 2017, 2016, and 2015, our research and development expenses primarily consisted of
OPKO Biologics and OPKO Renal development programs, including expenses related to the development of hGH-
CTP and phase 3 clinical trials for Rayaldee.
INTELLECTUAL PROPERTY
We believe that technology innovation is driving breakthroughs in healthcare. We have adopted a
comprehensive intellectual property strategy which blends the efforts to innovate in a focused manner with the
efforts of our business development activities to strategically in-license intellectual property rights. We develop,
protect, and defend our own intellectual property rights as dictated by the developing competitive environment. We
value our intellectual property assets and believe we have benefited from early and insightful efforts at
understanding diagnostics, as well as the disease and the molecular basis of potential pharmaceutical intervention.
We actively seek, when appropriate and available, protection for our products and proprietary information by
means of U.S. and foreign patents, trademarks, trade secrets, copyrights, and contractual arrangements. Patent
protection in the pharmaceutical and diagnostic fields, however, can involve complex legal and factual issues. There
can be no assurance that any steps taken to protect such proprietary information will be effective.
We own or license-in over a thousand U.S. and foreign patents and applications for our products, product
candidates and our outlicensed product candidates. These patents cover pharmaceuticals, diagnostics and other
products and their uses, pharmaceutical and diagnostic compositions and formulations and product manufacturing
processes. Our patents are filed in various locations worldwide as is appropriate to the particular patent and its use.
Rayaldee
We have multiple U.S. patent families relating to Rayaldee. These patents are also filed in multiple countries
worldwide. One patent family claims a sustained release oral dosage formulation and a method of treating 25-
hydroxy vitamin D insufficiency or deficiency and will not expire until at least February 2027. A second patent
family claims a method of administering 25-hydroxy vitamin D3 by controlled release, a formulation for controlled
release of a vitamin D compound, a controlled release oral dosage formulation of a vitamin D compound and a
method of treatment, and will not expire until at least April 2028. We also have additional patents and patent
applications pending relating to the sustained release formulation and its use which will expire in 2034 and have
licensed patents covering the capsule shell. The patents issued in the U.S. covering Rayaldee are listed in the
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Approved Drug Products with Therapeutic Equivalents Evaluations, or the Orange Book. OPKO and/or its affiliates
have entered into two exclusive license agreements with respect to Rayaldee patents in certain territories outside of
North America with VFMCRP (Europe plus) and JT (Japan).
Rolapitant
The rolapitant line of patents, licensed to TESARO, includes multiple patent families that cover anti-nausea
treatment for chemotherapy patients. These U.S. patents are also filed and granted in many countries around the
world. One patent family covers the chemical composition of rolapitant and related compounds and expires in
December 2023 (with the patent term adjustment). A patent term extension request was submitted to the USPTO in
October 2015 to obtain an additional 1,716 days which will, upon approval, extend the rolapitant compound patent
expiration date to August 2028.The second patent family covers pharmaceutical formulations, including a capsule
formulation with a related method of use and expires in April of 2027. The third patent family covers particular
aspects of the chemical composition of rolapitant as well as certain methods of treating delayed onset nausea and
expires in April 2027. The fourth patent family covers a powdered pharmaceutical composition of a crystalline salt
of rolapitant and expires in March 2028. The current line of rolapitant patents are approved for oral treatment.
Patent applications directed towards the IV formulation of rolapitant are granted and/or currently pending in
multiple jurisdictions. In addition to the patents covering rolapitant, OPKO has an additional patent family granted
worldwide covering another NK-1 antagonist (SCH900978) and also has method patent applications filed covering
its use in the treatment of pruritus.
hGH-CTP
The hGH-CTP line of patents, which is currently licensed to Pfizer, Inc., includes two main patent families that
cover modified human grown hormone treatment. These U.S. patents are also filed in multiple countries around the
world. One patent family covers certain CTP modified hGH polypeptides relating to growth hormones and their
method of use and expires in February of 2027 (with the exception of two US patents, namely US 8304386 and US
8097435, which expire in Jan 2028 and April 2027, respectively, due to Patent Term Adjustment for each). The
second patent family covers cytokine-based polypeptides relating to human growth hormone treatment and expires
in 2027. In addition to the CTP patents and applications licensed to Pfizer, OPKO has multiple patent families
covering similar biologicals with patents and applications pending in the U.S. and internationally.
OPK88003 and OPK88004
In 2016, we acquired Transition Therapeutics, Inc. which is developing multiple drug candidates that include
OPK88003 (a long acting oxyntomodulin) and OPK88004 (a selective androgen receptor modulator (SARM)), each
of which are licensed from Eli Lilly and have granted patents worldwide covering the compounds and their use in
their respective indications. U.S. Pat. No. 8367607 covers OPK88003 and expires in December 2030, without
extension. U.S. Pat. No. 7968587 covers OPK88004 and expires, without extension, in November 2027. In
addition, Transition and its affiliates have patented compounds (scyllo-inositol) for the treatment of Alzheimer’s
disease. The patents are pending or granted in many countries of the world. We and/or our affiliates will seek all
available patent term extensions for our product candidates and products.
Because the patent positions of pharmaceutical, biotechnology, and diagnostics companies are highly uncertain
and involve complex legal and factual questions, the patents owned and licensed by us, or any future patents, may
not prevent other companies from developing similar or therapeutically equivalent products or ensure that others
will not be issued patents that may prevent the sale of our products or require licensing and the payment of
significant fees or royalties. Furthermore, to the extent that any of our future products or methods are not
patentable, that such products or methods infringe upon the patents of third parties, or that our patents or future
patents fail to give us an exclusive position in the subject matter claimed by those patents, we will be adversely
affected. We may be unable to avoid infringement of third party patents and may have to obtain a license, defend an
infringement action, or challenge the validity of the patents in court. A license may be unavailable on terms and
conditions acceptable to us, if at all. Patent litigation is costly and time consuming, and we may be unable to prevail
in any such patent litigation or devote sufficient resources to even pursue such litigation.
LICENSES AND COLLABORATIVE RELATIONSHIPS
Our strategy is to develop a portfolio of product candidates through a combination of internal development,
acquisition, and external partnerships. Collaborations are key to our strategy and we continue to build relationships
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and forge partnerships in various areas where unmet medical need and commercial opportunities exist. In
October 2017, we entered into a license and development agreement with JT for the development and
commercialization of Rayaldee in Japan for the treatment of SHPT in non-dialysis and dialysis patients with CKD.
In May 2016, we entered into a license and collaboration with VFMCRP for the development and commercialization
of Rayaldee in Europe, Canada, Mexico, Australia, South Korea and certain other international markets for the
treatment of SHPT in adults with CKD and vitamin D insufficiency. In December 2014, we entered into an
exclusive agreement with Pfizer for the development and commercialization of our long-acting hGH-CTP for the
treatment of GHD in adults and children, as well as for the treatment of growth failure in children born small for
gestational age. Previously, we (or entities we have acquired) have completed strategic licensing transactions with
the President and Fellows of Harvard College, Academia Sinica, The Scripps Research Institute, TESARO, INEOS
Healthcare, and Arctic Partners, among others.
COMPETITION
The pharmaceutical and diagnostic testing industries are highly competitive and require an ongoing, extensive
search for technological innovation. The industries are characterized by rapidly advancing technologies, intense
competition and a strong emphasis on proprietary products. They also require, among other things, the ability to
effectively discover, develop, test and obtain regulatory approvals for products, as well as the ability to effectively
commercialize, market and promote approved products.
Numerous companies, including major pharmaceutical companies, specialty pharmaceutical companies and
specialized biotechnology companies, are engaged in the development, manufacture and marketing of
pharmaceutical products competitive with those that we are or intend to commercialize ourselves and through our
partners. Competitors to our diagnostics business include major diagnostic companies, reference laboratories,
molecular diagnostic firms, universities and research institutions. Most of these companies have substantially
greater financial and other resources, larger research and development staffs and more extensive marketing and
manufacturing organizations than ours. This enables them, among other things, to make greater research and
development investments and efficiently utilize their research and development costs, as well as their marketing and
promotion costs, over a broader revenue base. This also provides our competitors with a competitive advantage in
connection with the highly competitive product acquisition and product in-licensing process, which may include
auctions in which the highest bidder wins. Our competitors may also have more experience and expertise in
obtaining marketing approvals from the FDA and other regulatory authorities. In addition to product development,
testing, approval, and promotion, other competitive factors in the pharmaceutical and diagnostics industry include
industry consolidation, product quality and price, product technology, reputation, customer service, and access to
technical information.
In our clinical laboratory operations, we compete with three types of providers in a highly fragmented and
competitive industry: hospital laboratories, physician-office laboratories and other independent clinical laboratories.
Our major competitors in the New York metropolitan area are two of the largest national laboratories, Quest
Diagnostics and Laboratory Corporation of America. Although we are much smaller than these national
laboratories, we believe that we compete successfully with them in our region due to our innovative testing services
and our level of service. We believe our responses to medical consultation are faster and more personalized than
those of the national laboratories. Our client service staff deals only with basic technical questions and those that
have medical or scientific significance are referred directly to our senior scientists and medical staff.
We are commercializing our 4Kscore product in the U.S., Europe and Mexico in a laboratory setting and seek to
capitalize on near-term commercialization opportunities for our proprietary diagnostic point-of-care system by
transitioning laboratory-based tests, including the 4Kscore, PSA, testosterone and other tests to our point-of-care
system. We expect to leverage BioReference’s national marketing, sales and distribution resources, along with its
almost 400-person sales and marketing team to support commercialization of the 4Kscore and Claros 1 products.
Competitors to our diagnostics business are many and include major diagnostic companies, molecular diagnostic
firms, universities, and research institutions.
Our ability to commercialize our pharmaceutical and diagnostic test product candidates and compete effectively
will depend, in large part, on:
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our ability to meet all necessary regulatory requirements to advance our product candidates through
clinical trials and the regulatory approval process in the U.S. and abroad;
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the perception by physicians and other members of the health care community of the safety, efficacy,
and benefits of our products compared to those of competing products or therapies;
our ability to manufacture products we may develop on a commercial scale;
the effectiveness of our sales and marketing efforts;
the willingness of physicians to adopt a new diagnostic or treatment regimen represented by our
technology;
our ability to secure reimbursement for our product candidates;
the price of the products we may develop and commercialize relative to competing products;
our ability to accurately forecast and meet demand for our product candidates if regulatory approvals
are achieved;
our ability to develop a commercial scale infrastructure either on our own or with a collaborator,
which would include expansion of existing facilities, including our manufacturing facilities,
development of a sales and distribution network, and other operational and financial systems
necessary to support our increased scale;
our ability to maintain a proprietary position in our technologies; and
our ability to rapidly expand the existing information technology infrastructure and configure
existing operational, manufacturing, and financial systems (on our own or with third party
collaborators) necessary to support our increased scale, which would include existing or additional
facilities and or partners.
GOVERNMENT REGULATION
The U.S. government regulates healthcare through various agencies, including but not limited to the following:
(i) the FDA, which administers the Federal Food, Drug and Cosmetic Act (“FDCA”), as well as other relevant laws;
(ii) the Centers for Medicare & Medicaid Services (“CMS”), which administers the Medicare and Medicaid
programs; (iii) the Office of Inspector General (“OIG”), which enforces various laws aimed at curtailing fraudulent
or abusive practices, including by way of example, the Anti-Kickback Statute, the Physician Self-Referral Law,
commonly referred to as the Stark law, the Civil Monetary Penalty Law (including the beneficiary inducement
prohibition) (“CMP”), and the laws that authorize the OIG to exclude healthcare providers and others from
participating in federal healthcare programs; and (iv) the Office of Civil Rights, which administers the privacy
aspects of the Health Insurance Portability and Accountability Act of 1996. All of the aforementioned are agencies
within the Department of Health and Human Services (“HHS”). Healthcare is also provided or regulated, as the
case may be, by the Department of Defense through its TRICARE program, the Department of Veterans Affairs,
especially through the Veterans Health Care Act of 1992, the Public Health Service within HHS under Public Health
Service Act § 340B (42 U.S.C. § 256b), the Department of Justice through the Federal False Claims Act and various
criminal statutes, and state governments under the Medicaid and other state sponsored or funded programs and their
internal laws regulating all healthcare activities.
The testing, manufacture, distribution, advertising, and marketing of drug and diagnostic products and medical
devices, as well as the performance of clinical testing services, are subject to extensive regulation by federal, state,
and local governmental authorities in the U.S., including the FDA, and by similar agencies in other countries. Any
drug, diagnostic, or device product that we develop must receive all relevant regulatory approvals or clearances, as
the case may be, before it may be marketed in a particular country.
Clinical Laboratory Operations
Our clinical laboratory operations are subject to regulations, which are designed to ensure the quality and
reliability of clinical laboratories by mandating specific standards in the areas of personnel qualifications,
administration and participation in proficiency testing, patient test management, quality control, quality assurance
and inspections. Laboratories must undergo on-site surveys at least every two years, which may be conducted by
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CMS under the Federal Clinical Laboratory Improvement Amendments (“CLIA”) program or by a private CMS
approved accrediting agency. The sanction for failure to comply with CLIA requirements may be suspension,
revocation or limitation of a laboratory’s CLIA certificate, which is necessary to conduct business, as well as
significant fines and/or criminal penalties. We are also subject to regulation of laboratory operations under state
clinical laboratory laws. State clinical laboratory laws may require that laboratories and/or laboratory personnel
meet certain qualifications, specify certain quality controls or require maintenance of certain records. Certain states,
such as New York, California, Maryland, Pennsylvania, Rhode Island and Florida, each require that we obtain
licenses to test specimens from patients residing in those states and additional states may require similar licenses in
the future. Only Washington and New York State are exempt under CLIA, as these states have established
laboratory quality standards at least as stringent as CLIA’s. Potential sanctions for violation of these statutes and
regulations include significant fines and the suspension or loss of various licenses, certificates and authorizations.
Our clinical laboratory operations are subject to complex laws, regulations and licensure requirements relating to
billing and payment for laboratory services, sales and marketing interactions with ordering physicians and other
health care providers, security and confidentiality of health information, and environmental and occupational safety,
among others. Changes in regulations often increase the cost of testing or processing claims. Also, these laws may
be interpreted or applied by a prosecutorial, regulatory or judicial authority in a manner that could require us to
make changes in our operations, including in our pricing, billing and/or marketing practices in a manner that could
adversely affect operations.
Drug Development
The regulatory process, which includes overseeing preclinical studies and clinical trials of each pharmaceutical
compound to establish its safety and efficacy and confirmation by the FDA that good laboratory, clinical, and
manufacturing practices were maintained during testing and manufacturing, can take many years, requires the
expenditure of substantial resources, and gives larger companies with greater financial resources a competitive
advantage over us. Delays or terminations of clinical trials that we undertake would likely impair our development
of product candidates. Delays or terminations could result from a number of factors, including stringent enrollment
criteria, slow rate of enrollment, size of patient population, having to compete with other clinical trials for eligible
patients, geographical considerations, failure to meet anticipated clinical success, patient safety concerns, and others.
Although accelerated pathways for approval exist for certain drugs, generally, FDA review processes can be
lengthy and unpredictable, and we may encounter delays or rejections of our applications when submitted.
Generally, in order to gain FDA approval, we must first conduct preclinical studies in a laboratory and in animal
models to obtain preliminary information on a compound and to identify any safety problems. The results of these
studies are submitted as part of an IND application that the FDA must review before human clinical trials of an
investigational drug can commence.
Clinical trials are normally done in three sequential phases and generally take two to five years or longer to
complete. Phase 1 consists of testing the drug product in a small number of humans, normally healthy volunteers, to
determine preliminary safety and tolerable dose range. Phase 2 usually involves studies in a limited patient
population to evaluate the effectiveness of the drug product in humans having the disease or medical condition for
which the product is indicated, determine dosage tolerance and optimal dosage, and identify possible common
adverse effects and safety risks. Phase 3 consists of additional controlled testing at multiple clinical sites to establish
clinical safety and effectiveness in an expanded patient population of geographically dispersed test sites to evaluate
the overall benefit-risk relationship for administering the product and to provide an adequate basis for product
labeling. Phase 4 clinical trials may be conducted- and are sometimes required – after approval to gain additional
experience from the treatment of patients in the intended therapeutic indication. There are also certain situations
when drugs and biologics are eligible for one of FDA’s expedited approval programs, designed to shorten review
and development time.
After completion of clinical trials of a new drug product, FDA and foreign regulatory authority marketing
approval must be obtained. Assuming that the clinical data support the product’s safety and effectiveness for its
intended use, a Biologics License Application (BLA) or an NDA is submitted to the FDA for its review. Since the
early 1990s, FDA has managed a user fee program whereby sponsors of drug applications pay a fee to the agency
and the agency commits to meeting a series of performance goals designed to reduce drug review times. Generally,
it takes one to three years to obtain approval. If questions arise during the FDA review process, approval may take a
significantly longer period of time. The testing and approval processes require substantial time and effort and we
may not receive approval on a timely basis, if at all, or the approval that we receive may be for a narrower indication
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than we had originally sought, potentially undermining the commercial viability of the product. Even if regulatory
approvals are obtained, a marketed product is subject to continual review, and later discovery of previously
unknown problems or failure to comply with the applicable regulatory requirements may result in restrictions on the
marketing of a product or withdrawal of the product from the market as well as possible civil or criminal sanctions.
For marketing outside the U.S., we also will be subject to foreign regulatory requirements governing human clinical
trials and marketing approval for pharmaceutical products. The requirements governing the conduct of clinical
trials, product licensing, pricing, and reimbursement vary widely from country to country.
In addition to clinical trial rules, FDA imposes other requirements on applicants including obligations related to
Good Manufacturing Practices (GMPs), proper labeling, and other issues related to manufacturing and marketing a
drug.
Other than Rayaldee, none of our pharmaceutical products under development have been approved for marketing
in the U.S. or elsewhere. We may not be able to obtain regulatory approval for any such products under
development in a timely manner, if at all. Failure to obtain requisite governmental approvals or failure to obtain
approvals of the scope requested will delay or preclude us, or our licensees or marketing partners, from marketing
our products, or limit the commercial use of our products, and thereby would have a material adverse effect on our
business, financial condition, and results of operations. See “Risk Factors — The results of pre-clinical trials and
previous clinical trials for our products may not be predictive of future results, and our current and planned clinical
trials may not satisfy the requirements of the FDA or other non-U.S. regulatory authorities.”
Device Development
Medical devices are subject to varying levels of premarket regulatory control, the most comprehensive of which
requires human clinical trials be conducted before a device receives approval for commercial distribution. The FDA
classifies medical devices into one of three classes based upon their risk profile (both to the patient and provider):
Class I devices are relatively simple “low risk” technologies, and can be manufactured and distributed with general
controls without a premarket clearance or approval from the FDA; Class II devices are somewhat more complex
“moderate risk” devices, and require greater scrutiny from the agency, requiring a premarket clearance from the
FDA before market entry; Class III devices are “high risk” technologies inserted or implanted in the body, intended
to treat life sustaining functions. These Class III technologies require a premarket approval from the FDA before
market entry.
In the U.S., a company generally can obtain permission to distribute a new device in one of two ways. The first
applies to a Class II device that is substantially equivalent to a device first marketed prior to May 1976, or to another
device marketed after that date, but which was substantially equivalent to a pre-May 1976 device. To obtain FDA
permission to distribute the device, a company generally must submit a section 510(k) premarket notification, and
receive an FDA order finding substantial equivalence to a predicate device (pre-May 1976 or post-May 1976 device
that was substantially equivalent to a pre-May 1976 device) and permitting commercial distribution of that device
for its intended use. A 510(k) submission must provide information supporting a claim of substantial equivalence to
the predicate device. If clinical data from human experience are required to support the 510(k) submission, these
data must be gathered in compliance with investigational device exemption (“IDE”), regulations for investigations
performed in the U.S. The 510(k) process is normally used for products of the type that the Company proposes
distributing. The FDA review process for premarket notifications submitted pursuant to section 510(k) takes, on
average, about 90 days, but it can take substantially longer if the FDA has concerns, and there is no guarantee that
the FDA will “clear” the device for marketing, in which case the device cannot be distributed in the U.S. There is
also no guarantee that the FDA will deem the applicable device subject to the 510(k) process, as opposed to the
more time-consuming, resource-intensive and problematic, PMA process described below.
The second, more comprehensive, PMA process, which can take a year or longer, applies to a new device that is
not substantially equivalent to a pre-1976 product or that is to be used in supporting or sustaining life or preventing
impairment. These devices are normally Class III devices. For example, most implantable devices are subject to the
approval process. Two steps of FDA approval are generally required before a company can market a product in the
U.S. that is subject to approval, as opposed to clearance. First, a company must comply with IDE regulations in
connection with any human clinical investigation of the device. These regulations permit a company to undertake a
clinical study of a “non-significant risk” device without formal FDA approval. Prior express FDA approval is
required if the device is a significant risk device. Second, the FDA must review the company’s PMA application,
which contains, among other things, clinical information acquired under the IDE. The FDA will approve the PMA
application if it finds there is reasonable assurance that the device is safe and effective for its intended use. The
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PMA process takes substantially longer than the 510(k) process and it is conceivable that the FDA would not agree
with our assessment that a device that we propose to distribute should be a Class I or Class II device. If that were to
occur we would be required to undertake the more complex and costly PMA process. However, for either the
510(k) or the PMA process, the FDA could require us to run clinical trials, which would pose all of the same risks
and uncertainties associated with the clinical trials of drugs, described above.
In December of 2016, Congress enacted the 21st Century Cures Act (P.L. 114-255) which contained provisions
establishing a new Breakthrough Device pathway to allow faster patient access to devices and breakthrough
technologies that provide for more effective treatment or diagnosis for life-threatening or irreversibly debilitating
diseases, for which no approved or cleared treatment exists or that offer significant advantages over existing
approved or cleared alternatives. FDA has just begun to implement this program and it is not clear if any of our
products would be eligible.
Even when a clinical study has been approved by the FDA or deemed approved, the study is subject to factors
beyond a manufacturer’s control, including, but not limited to the fact that the institutional review board at a given
clinical site might not approve the study, might decline to renew approval which is required annually, or might
suspend or terminate the study before the study has been completed. Also, the interim results of a study may not be
satisfactory, leading the sponsor to terminate or suspend the study on its own initiative or the FDA may terminate or
suspend the study. There is no assurance that a clinical study at any given site will progress as anticipated; there
may be an insufficient number of patients who qualify for the study or who agree to participate in the study or the
investigator at the site may have priorities other than the study. Also, there can be no assurance that the clinical
study will provide sufficient evidence to assure the FDA that the product is safe and effective, a prerequisite for
FDA approval of a PMA, or substantially equivalent in terms of safety and effectiveness to a predicate device, a
prerequisite for clearance under 510(k). Even if the FDA approves or clears a device, it may limit its intended uses
in such a way that manufacturing and distributing the device may not be commercially feasible. For marketing
outside the U.S., we also will be subject to foreign regulatory requirements governing clinical trials and marketing
approval for medical devices. The requirements governing the conduct of clinical trials, device clearance/approval,
pricing, and reimbursement vary widely from country to country. In addition to the regulatory clearance and
approval processes described herein, the FDA periodically issues draft guidance documents designed to provide
additional detail on or reform aspects of the 510(k) and PMA clearance and approval processes. To the extent the
FDA finalizes and implements these documents, the average 510(k) and PMA submission requirements and review
times may change and devices that might previously have been cleared under the 510(k) process may require
approval under the PMA process (and vice-versa). Additionally, since 2012, the FDA has collected user fees for the
review of certain premarket submissions received on or after October 1, 2012, including 510(k) and PMA
applications. These fees are intended to improve the device review process, but it is still too early to assess the
actual impact on the industry.
After clearance or approval to market is given, the FDA and foreign regulatory agencies, upon the occurrence of
certain events, are authorized under various circumstances to withdraw the clearance or approval or require changes
to a device, its manufacturing process or its labeling or additional proof that regulatory requirements have been met.
A manufacturer of a device approved through the PMA is not permitted to make changes to the device, which
affects its safety or effectiveness without first submitting a supplement application to its PMA and obtaining FDA
approval for that supplement. In some instances, the FDA may require clinical trials to support a supplement
application. A manufacturer of a device cleared through the 510(k) process must submit another premarket
notification if it intends to make a change or modification in the device that could significantly affect the safety or
effectiveness of the device, such as a significant change or modification in design, material, chemical composition,
energy source or manufacturing process. Any change in the intended uses of a PMA device or a 510(k) device
requires an approved PMA supplement or a cleared premarket notification. Exported devices are subject to the
regulatory requirements of each country to which the device is exported, as well as certain FDA export
requirements.
A company that intends to manufacture medical devices is required to register with the FDA before it begins to
manufacture the device for commercial distribution. As a result, we and any entity that manufactures products on
our behalf will be subject to periodic inspection by the FDA for compliance with the FDA’s Quality System
Regulation requirements and other regulations. In the European Community, we will be required to maintain certain
International Organization for Standardization (“ISO”), certifications in order to sell products and we or our
manufacturers undergo periodic inspections by notified bodies to obtain and maintain these certifications. These
regulations require us or our manufacturers to manufacture products and maintain documents in a prescribed manner
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with respect to design, manufacturing, testing and control activities. Further, we are required to comply with various
FDA and other agency requirements for labeling and promotion. The Medical Device Reporting regulations require
that we provide information to the FDA whenever there is evidence to reasonably suggest that a device may have
caused or contributed to a death or serious injury or, if a malfunction were to occur, could cause or contribute to a
death or serious injury. In addition, the FDA prohibits us from promoting a medical device for unapproved
indications.
Diagnostic Products
Certain of our diagnostic products in development are subject to regulation by the FDA and similar international
health authorities. For these products, we have an obligation to adhere to the FDA’s cGMP regulations.
Additionally, we are subject to periodic FDA inspections, quality control procedures, and other detailed validation
procedures. If the FDA finds deficiencies in the validation of our manufacturing and quality control practices, they
may impose restrictions on marketing specific products until corrected.
Regulation by governmental authorities in the U.S. and other countries may be a significant factor in how we
develop, test, produce and market our diagnostic test products. Diagnostic tests like ours may not fall squarely
within the regulatory approval process for pharmaceutical or device products as described above, and the regulatory
pathway is not as clear. Although the FDA regulates in vitro diagnostic devices, some companies have successfully
commercialized diagnostic tests for various conditions and disease states without seeking clearance or approval for
such tests through a 510(k) or PMA approval process. These tests are known as laboratory developed tests
(“LDTs”) and are designed, manufactured, and used within a single laboratory that is certified under the Clinical
Laboratory Improvement Amendments of 1988 (“CLIA”). CLIA is a federal law that regulates clinical laboratories
that perform testing on specimens derived from humans for the purpose of providing information for diagnostic,
preventative or treatment purpose. Such LDT testing is currently under the purview of CMS and state agencies that
provide oversight of the safe and effective use of LDTs.
However, the FDA has consistently asserted that it has the regulatory authority to regulate LDTs despite
historically exercising enforcement discretion. In furtherance of that position, the FDA issued two draft guidance
documents in October 2014: (1) Framework for Regulatory Oversight of Laboratory Developed Tests (the
“Framework Guidance”); and (2) FDA Notification and Medical Device Reporting for Laboratory Developed Tests
(the “Notification Guidance”). The Framework Guidance outlines the FDA’s plan to adopt over time a risk-based
approach to regulating LDTs whereby different classifications of LDTs would be subject to different levels of FDA
oversight and enforcement, including, for example, prohibitions on adulteration and misbranding, establishment
registration and device listing, premarket notification, banned devices, records and reports, good manufacturing
practices, adverse event reporting, premarket review of safety, effectiveness, and clinical validity, and quality
system requirements. The Notification Guidance is intended to explain how clinical laboratories should notify the
FDA of the LDTs they develop and how to satisfy Medical Device Reporting requirements. However, the FDA
indicated in November 2016 that it would delay implementation of the Framework Guidance and the Notification
Guidance, and seek additional input from industry. In addition, on January 13, 2017, the FDA published a synthesis
of feedback on the Framework Guidance and Notification Guidance titled, Discussion Paper on Laboratory
Developed Tests (the “Discussion Paper”). The Discussion Paper provided notice that the FDA would not issue a
final guidance on the oversight of LDTs to allow for further public discussion on appropriate oversight approach,
and to give congressional authorizing committees the opportunity to develop a legislative solution.
If finalized in the October 2014 format, the Framework Guidance and the Notification Guidance may have a
materially adverse effect on the time, cost, and risk associated with the Company’s development and
commercialization of LDTs for the U.S. market, and there can be no assurance that clearances or approvals sought
by the Company will be granted and maintained. However, the FDA’s authority to regulate LDTs continues to be
challenged and the regulatory situation remains fluid. The FDA has indicated that it will continue dialogue with the
industry, and the timeline and process for finalizing the draft guidance documents is unknown. We will continue to
monitor changes to all domestic and international LDT regulatory policy so as to ensure compliance with the current
regulatory scheme.
Impact of Regulation
The FDA in the course of enforcing the FDCA may subject a company to various sanctions for violating FDA
regulations or provisions of the FDCA, including requiring recalls, issuing Warning Letters, seeking to impose civil
money penalties, seizing devices that the agency believes are non-compliant, seeking to enjoin distribution of a
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specific drug or device seeking to revoke a clearance or approval, seeking disgorgement of profits and seeking to
criminally prosecute a company and its officers and other responsible parties.
The levels of revenues and profitability of biopharmaceutical companies may be affected by the continuing
efforts of government and third party payors to contain or reduce the costs of health care through various means.
For example, in certain foreign markets, pricing or profitability of therapeutic and other pharmaceutical products is
subject to governmental control. In the U.S., there have been, and we expect that there will continue to be, a number
of federal and state proposals to implement similar governmental control. In addition, in the U.S. and elsewhere,
sales of therapeutic and other pharmaceutical products are dependent in part on the availability and adequacy of
reimbursement from third party payors, such as the government or private insurance plans. Third party payors are
increasingly challenging established prices, and new products that are more expensive than existing treatments may
have difficulty finding ready acceptance unless there is a clear therapeutic benefit. On April 1, 2014, the Protecting
Access to Medicare Act of 2014 (“PAMA”) was enacted into law. Under PAMA, Medicare payment for clinical
diagnostic laboratory tests are established by calculating a weighted mean of private payer rates with new rates. On
November 17, 2017, CMS released the new clinical laboratory fee schedule which took effect on January 1, 2018.
The new Medicare rates are lower than rates paid in 2017 for many of our clinical diagnostic laboratory tests. Even
though the permitted annual decrease will be capped through 2023, the cap does not apply to new tests or new
advanced diagnostic tests. We cannot assure you that any of our products will be considered cost effective, or that
reimbursement will be available or sufficient to allow us to sell them competitively and profitably.
State and Federal Security and Privacy Regulations
The privacy and security regulations under the Health Insurance Portability and Accountability Act of 1996, as
amended by the Health Information Technology for Economic and Clinical Health Act of 2009 ( the “HITECH
Act”, and collectively, “HIPAA”), establish comprehensive federal standards with respect to the uses and
disclosures of protected health information, or PHI, by health plans and health care providers, in addition to setting
standards to protect the confidentiality, integrity and availability of electronic PHI. The regulations establish a
complex regulatory framework on a variety of subjects, including:
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the circumstances under which uses and disclosures of PHI are permitted or required without a
specific authorization by the patient, including but not limited to treatment purposes, to obtain
payments for services and health care operations activities;
a patient’s rights to access, amend and receive an accounting of certain disclosures of PHI;
the content of notices of privacy practices for PHI; and
administrative, technical and physical safeguards required of entities that use or receive PHI
electronically.
The final omnibus rule implementing the HITECH Act took effect on March 26, 2013. The rule is broad in
scope, but certain provisions are particularly significant in light of our business operations. For example, the final
“omnibus” rule implementing the HITECH Act:
• Makes clear that situations involving impermissible access, acquisition, use or disclosure of
protected health information are now presumed to be a breach unless the covered entity or business
associate is able to demonstrate that there is a low probability that the information has been
compromised;
• Defines the term “business associate” to include subcontractors and agents that receive, create,
maintain or transmit protected health information on behalf of the business associate;
• Establishes new parameters for covered entities and business associates on uses and disclosures of
PHI for fundraising and marketing; and
• Establishes clear restrictions on the sale of PHI without patient authorization.
As a provider of clinical laboratory services and as we launch commercial diagnostic tests, we must continue to
implement policies and procedures related to compliance with the HIPAA privacy and security regulations, as
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required by law. The privacy and security regulations provide for significant fines and other penalties for wrongful
use or disclosure of PHI, including potential civil and criminal fines and penalties.
Additionally, as we operate in Europe, we may be subject to laws governing the collection, use, disclosure and
transmission of personal and/or patient information. In December 2015, the European Union approved a General
Data Protection Regulation (“GDPR”) to replace the current data protection directive, Directive 95/46/EC, which
will take effect May 25, 2018. The GDPR governs the use and transfer of personal data and imposes enhanced
penalties for noncompliance. We are currently evaluating how to adjust our operations so as to comply with the
GDPR.
Anti-Kickback Laws, Physician Self-Referral Laws, False Claims Act, Civil Monetary Penalties
We are also subject to various federal, state, and international laws pertaining to health care “fraud and abuse,”
including anti-kickback laws and false claims laws. The federal Anti-Kickback Statute prohibits anyone from
knowingly and willfully soliciting, receiving, offering, or paying any remuneration with the intent to refer, or to
arrange for the referral or order of, services or items payable under a federal health care program, including the
purchase or prescription of a particular drug or the use of a service or device. Recognizing that the Anti-Kickback
Statute is broad and may technically prohibit many innocuous or beneficial arrangements, Congress authorized the
U.S. Department of Health and Human Services Office of Inspector General, or OIG, to issue a series of regulations,
known as “safe harbors.” These safe harbors set forth requirements that, if met in their entirety, will assure health
care providers and other parties that they will not be prosecuted under the Anti-Kickback Statute. The failure of a
transaction or arrangement to fit precisely within one or more safe harbors does not necessarily mean that it is
illegal, or that prosecution will be pursued. However, conduct and business arrangements that do not fully satisfy
each applicable safe harbor may result in increased scrutiny by government enforcement authorities, such as the
OIG.
Violations of the Anti-Kickback Statute are punishable by the imposition of criminal fines, civil money
penalties, treble damages, and/or exclusion from participation in federal health care programs. Many states have
also enacted similar anti-kickback laws. The Anti-Kickback Statute and similar state laws and regulations are
expansive. If the government were to allege against or convict us of violating these laws, there could be a material
adverse effect on our business, results of operations, financial condition, and our stock price. Even an unsuccessful
challenge could cause adverse publicity and be costly to respond to, which could have a materially adverse effect on
our business, results of operations and financial condition. We will consult counsel concerning the potential
application of these and other laws to our business and our sales, marketing and other activities and will make good
faith efforts to comply with them. However, given the broad reach of federal and state anti-kickback laws and the
increasing attention given by law enforcement authorities, we are unable to predict whether any of our activities will
be challenged or deemed to violate these laws.
We are also subject to the physician self-referral laws, commonly referred to as the Stark law, which is a strict
liability statute that generally prohibits physicians from referring Medicare patients to providers of “designated
health services,” including clinical laboratories, with whom the physician or the physician’s immediate family
member has an ownership interest or compensation arrangement, unless an applicable exception applies. Moreover,
many states have adopted or are considering adopting similar laws, some of which extend beyond the scope of the
Stark law to prohibit the payment or receipt of remuneration for the prohibited referral of patients for designated
healthcare services and physician self-referrals, regardless of the source of the payment for the patient’s care. If it is
determined that certain of our practices or operations violate the Stark law or similar statutes, we could become
subject to civil and criminal penalties, including exclusion from the Medicare programs and loss of government
reimbursement. The imposition of any such penalties could harm our business.
Another development affecting the health care industry is the increased use of the federal civil False Claims Act
and, in particular, actions brought pursuant to the False Claims Act’s “whistleblower” or “qui tam” provisions. The
False Claims Act, as amended by the Fraud Enforcement and Recovery Act of 2009 and the Patient Protection and
Affordable Care Act of 2010 (“Affordable Care Act”), imposes liability on any person or entity who, among other
things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment by a federal health
care program. We submit claims for services performed at our laboratories. The qui tam provisions of the False
Claims Act allow a private individual to bring actions on behalf of the federal government alleging that the
defendant has submitted a false claim to the federal government, and to share in any monetary recovery. In recent
years, the number of suits brought by private individuals has increased dramatically. In addition, various states have
enacted false claim laws analogous to the False Claims Act. Many of these state laws apply where a claim is
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submitted to any third-party payor and not merely a federal health care program. When an entity is determined to
have violated the False Claims Act, it may be required to pay up to three times the actual damages sustained by the
government, plus civil penalties for each separate false claim. There are many potential bases for liability under the
False Claims Act. Liability arises, primarily, when an entity knowingly submits, or causes another to submit, a false
claim for reimbursement to the federal government. The False Claims Act has been used to assert liability on the
basis of inadequate care, kickbacks and other improper referrals, improper use of Medicare numbers when detailing
the provider of services, and allegations as to misrepresentations with respect to the services rendered. Our activities
relating to the sale and marketing of our products may be subject to scrutiny under these laws. We are unable to
predict whether we would be subject to actions under the False Claims Act or a similar state law, or the impact of
such actions. However, the costs of defending such claims, as well as any sanctions imposed, could significantly
adversely affect our financial performance.
Further, the beneficiary inducement prohibition of the federal Civil Monetary Penalty Law prohibits any entity
from offering or transferring to a Medicare or Medicaid beneficiary any remuneration that the entity knows or
should know is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier of
Medicare or Medicaid payable items or services, including waivers of copayments and deductible amounts (or any
part thereof) and transfers of items or services for free or for other than fair market value. On December 7, 2016, the
OIG released amendments to the CMP. Some of the amendments may impact our business, such as allowing certain
remuneration to financially needy individuals. Entities found in violation may be liable for civil monetary penalties
of up to $10,000 for each wrongful act. Although we believe that our sales and marketing practices are in material
compliance with all applicable federal and state laws and regulations, relevant regulatory authorities may disagree
and violation of these laws, or, our exclusion from such programs as Medicaid and other governmental programs as
a result of a violation of such laws, could have a material adverse effect on our business, results of operations,
financial condition and cash flows.
Open Payments Program
With the launch of Rayaldee, part of our business is now subject to the federal Physician Payments Sunshine Act
under the Affordable Care Act, and its implementing regulations, which is implemented though the Open Payments
Program (the “Open Payments Program”). The Open Payments Program requires manufacturers of drugs, devices,
biological and medical supplies covered by Medicare, Medicaid or the Children’s Health Insurance Program, to
report information related to certain payments or other transfers of value made or distributed to physicians and
teaching hospitals, or to entities or individuals at the request of, or designated on behalf of, the physicians and
teaching hospitals. Manufacturers must also report, on an annual basis, certain ownership and investment interests
held by physicians and their immediate family members and payments or other “transfers of value” made to such
physician owners. A failure to report each payment, other transfer of value, or ownership/investment interest in a
timely, accurate, and complete manner may result in civil monetary penalties of up to $150,000 annually. Further,
the “knowing” failure to report each payment, other transfer of value, or ownership/investment interest may result in
a one million dollar annual penalty. Several other states and a number of countries worldwide have adopted or are
considering the adoption of similar transparency laws. Any failure by us to implement proper procedures to track
and report on a timely basis transfers of value to physicians and teaching hospitals could result in substantial
penalties.
Foreign Corrupt Practices Act
We are also subject to the U.S. Foreign Corrupt Practices Act (“FCPA”), which prohibits corporations and
individuals from paying, offering to pay, or authorizing the payment of anything of value to any foreign government
official, government staff member, political party, or political candidate in an attempt to obtain or retain business or
to otherwise influence a person working in an official capacity. The FCPA also requires public companies to make
and keep books and records that accurately and fairly reflect their transactions and to devise and maintain an
adequate system of internal accounting controls. Our international activities create the risk of unauthorized
payments or offers of payments by our employees, consultants, sales agents or distributors, even though they may
not always be subject to our control. We discourage these practices by our employees and agents. However, our
existing safeguards and any future improvements may prove to be less than effective, and our employees,
consultants, sales agents or distributors may engage in conduct for which we might be held responsible. Any failure
by us to adopt appropriate compliance procedures and ensure that our employees and agents comply with the FCPA
and applicable laws and regulations in foreign jurisdictions could result in substantial penalties or restrictions on our
ability to conduct business in certain foreign jurisdictions
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MANUFACTURING AND QUALITY
Other than our facilities in Waterford, Ireland, Guadalajara, Mexico, Nesher, Israel, and Banyoles, Spain, we
currently have no pharmaceutical manufacturing facilities. We have entered into agreements with various third
parties for the formulation and manufacture of our pharmaceutical clinical supplies. These suppliers and their
manufacturing facilities must comply with FDA regulations, current good laboratory practices (“cGLPs”) and
current good manufacturing practices (“cGMPs”). We plan to continue to outsource the manufacturing and
formulation of our clinical supplies.
The FDA and similar regulatory bodies may inspect our facilities and the facilities of those who manufacture on
our behalf worldwide. If the FDA or similar regulatory bodies inspecting our facilities or the facilities of our
suppliers find regulatory violations in manufacturing and quality control practices or procedures they may require us
to cease partial or complete manufacturing operations until the violations are corrected. They may also impose
restrictions on distribution of specific products until the violations are corrected.
Our point-of-care diagnostic system consists of a disposable test cassette and an analyzer. We prepare all
necessary test reagents and assemble and package the disposable cassettes at our facility in Woburn, Massachusetts.
We rely on third parties for the manufacture of the analyzer.
We are committed to providing high quality products to our customers, and we plan to meet this commitment by
working diligently to continue implementing updated and improved quality systems and concepts throughout our
organization.
SALES & MARKETING
Our diagnostics business includes BioReference’s almost 400-person sales and marketing team in the U.S. to
drive growth and leverage new products, including the 4Kscore prostate cancer test and the Claros 1 in-office
immunoassay platform. We have a highly specialized, field based 64-person sales and marketing team in the U.S.
dedicated to the launch and commercialization of Rayaldee. We also have limited sales and marketing personnel in
Ireland, Chile, Spain, Mexico and Israel.
EMPLOYEES
As of December 31, 2017, we had 6,030 full-time employees worldwide. None of our employees are
represented by a collective bargaining agreement.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics. We require all employees, including our principal
executive officer and principal accounting officer and other senior officers and our employee directors, to read and
to adhere to the Code of Business Conduct and Ethics in discharging their work-related responsibilities. Employees
are required to report any conduct that they believe in good faith to be an actual or apparent violation of the Code of
Business Conduct and Ethics. The Code of Business Conduct and Ethics is available on our website at
http://www.OPKO.com.
Available Information
We make available free of charge on or through our web site, at www.opko.com, our Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon
as reasonably practicable after such material is electronically filed with the SEC. Additionally, the public may read
and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580,
Washington, D.C., 20549. Information regarding operation of the Public Reference Room is available by calling the
SEC at 1-800-SEC-0330. Information that we file with the SEC is also available at the SEC’s Web-site at
www.sec.gov.
ITEM 1A. RISK FACTORS.
You should carefully consider the risks described below, as well as other information contained in this report,
including the consolidated financial statements and the notes thereto and “Management’s Discussion and Analysis
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of Financial Condition and Results of Operations.” The occurrence of any of the events discussed below could
significantly and adversely affect our business, prospects, results of operations, financial condition, and cash flows.
RISKS RELATED TO OUR BUSINESS
We have a history of operating losses and may not become profitable in the near future.
We are not profitable and have incurred losses since our inception. We may not generate substantial revenue
from the sale of proprietary pharmaceutical products or certain of our diagnostic products for some time and we
have generated only limited revenue from our pharmaceutical operations in the United States, Chile, Mexico, Israel,
Spain, and Ireland, and from sale of the 4Kscore test. We may not successfully leverage the national marketing,
sales and distribution resources of BioReference to enhance sales of, and reimbursement for, our 4Kscore test and
our other diagnostic products under development, which would adversely impact our ability to generate substantial
revenue from the sale of these products for some time. Rayaldee is our only pharmaceutical product that has been
approved for marketing, other than those products sold by our Chilean, Mexican, Israeli, Spanish, and Irish
subsidiaries. We continue to incur substantial research and development and general and administrative expenses
related to our operations and, to date, we have devoted most of our financial resources to research and development,
including our pre-clinical development activities and clinical trials. We may incur losses from our operations for the
foreseeable future and these losses could increase as we continue our research activities and conduct development
of, and seek regulatory approvals and clearances for, our product candidates, and prepare for and begin to
commercialize any approved or cleared products, particularly if we are unable to generate profits and cash flow from
BioReference and our other commercial businesses. If we are unable to generate profits and cash flow from
BioReference and our other commercial businesses, our product candidates fail in clinical trials or do not gain
regulatory approval or clearance, or if our approved products and product candidates do not achieve market
acceptance, we may never become profitable. In particular, if we are unable to successfully commercialize
Rayaldee, we may never generate substantial revenues from Rayaldee or achieve profitability. In addition, if we are
required by the U.S. Food and Drug Administration (“FDA”), to perform studies in addition to those we currently
anticipate, our expenses will increase beyond current expectations and the timing of any potential product approval
may be delayed. Even if we achieve profitability in the future, we may not be able to sustain profitability in
subsequent periods.
We may require substantial additional funding, which may not be available to us on acceptable terms, or at all.
As of December 31, 2017, we have cash and cash equivalents of $91.5 million. We believe we have sufficient
cash and cash equivalents on hand or available to us from operations or through lines of credit to meet our
anticipated cash requirements for operations and debt service beyond the next 12 months. We have based this
estimate on assumptions that may prove to be wrong or subject to change, and we may be required to use our
available capital resources sooner than we currently expect or curtail aspects of our operations in order to preserve
our capital. Because of the numerous risks and uncertainties associated with the development and
commercialization of our products and product candidates, the success of our relationships with Pfizer, VFMCRP
and JT and the success of our integration of BioReference and Transition Therapeutics, we are unable to estimate the
amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical
trials and our expanded commercial operations. Our future capital requirements will depend on a number of factors,
including the successful commercialization of Rayaldee, our relationships with Pfizer, VFMCRP, and JT, cash flow
generated by BioReference and costs associated with the integration of the BioReference and Transition
Therapeutics operations, the continued progress of our research and development of product candidates, the timing
and outcome of clinical trials and regulatory approvals, the costs involved in preparing, filing, prosecuting,
maintaining, defending, and enforcing patent claims and other intellectual property rights, the status of competitive
products, the availability of financing, and our success in developing markets for our products and product
candidates.
Until we can generate a sufficient amount of product and service revenue to finance our cash requirements for
research, development and operations, we will need to finance future cash needs primarily through public or private
equity offerings, debt financings, or strategic collaborations. Our ability to obtain additional capital may depend on
prevailing economic conditions and financial, business and other factors beyond our control. Disruptions in the U.S.
and global financial markets may adversely impact the availability and cost of credit, as well as our ability to raise
money in the capital markets. Economic conditions have been, and continue to be, volatile. Continued instability in
these market conditions may limit our ability to replace, in a timely manner, maturing liabilities and access the
capital necessary to fund and grow our business. There can be no assurance that additional capital will be available
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to us on acceptable terms, or at all, which could adversely impact our business, results of operations, liquidity,
capital resources and financial condition. If we are not able to secure additional funding when needed, we may have
to delay, reduce the scope of, or eliminate one or more of our clinical trials or research and development programs.
To the extent that we raise additional funds by issuing equity securities, our stockholders may experience additional
significant dilution, and debt financing, if available, may involve restrictive covenants. To the extent that we raise
additional funds through collaboration and licensing arrangements, it may be necessary to relinquish some rights to
our technologies or our products and product candidates or grant licenses on terms that may not be favorable to us.
We may seek to access the public or private capital markets whenever conditions are favorable, even if we do not
have an immediate need for additional capital at that time.
Our research and development activities may not result in commercially viable products.
Many of our product candidates are in the early stages of development and are prone to the risks of failure
inherent in drug, diagnostic, and medical device product development. These risks further include the possibility
that such products would:
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be found to be ineffective, unreliable, or otherwise inadequate or otherwise fail to receive regulatory
approval;
be difficult or impossible to manufacture on a commercial scale;
be uneconomical to market or otherwise not be effectively marketed;
fail to be successfully commercialized if adequate reimbursement from government health
administration authorities, private health insurers, and other organizations for the costs of these
products is unavailable;
be impossible to commercialize because they infringe on the proprietary rights of others or compete
with products marketed by others that are superior; or
fail to be commercialized prior to the successful marketing of similar products by competitors.
The results of pre-clinical trials and previous clinical trials for our products may not be predictive of future
results, and our current and planned clinical trials may not satisfy the requirements of the FDA or other non-
U.S. regulatory authorities.
Positive results from pre-clinical studies and early clinical trial experience should not be relied upon as evidence
that later-stage or large-scale clinical trials will succeed. Likewise, there can be no assurance that the results of
studies conducted by collaborators or other third parties will be viewed favorably or are indicative of our own future
study results. We may be required to demonstrate with substantial evidence through well-controlled clinical trials
that our product candidates are either (i) with respect to drugs or Class III devices, safe and effective for use in a
diverse population of their intended uses or (ii) with respect to Class I or Class II devices, are substantially
equivalent in terms of safety and effectiveness to devices that are already marketed under section 510(k) of the
Food, Drug and Cosmetic Act. Success in early clinical trials does not mean that future clinical trials will be
successful because product candidates in later-stage clinical trials may fail to demonstrate sufficient safety and
efficacy to the satisfaction of the FDA and other non-U.S. regulatory authorities despite having progressed through
initial clinical trials.
Further, our drug candidates may not be approved or cleared even if they achieve their primary endpoints in
phase 3 clinical trials or registration trials. In addition, our diagnostic test candidates may not be approved or
cleared, as the case may be, even though clinical or other data are, in our view, adequate to support an approval or
clearance. The FDA or other non-regulatory authorities may disagree with our trial design and our interpretation of
data from pre-clinical studies and clinical trials. In addition, any of these regulatory authorities may change
requirements for the approval or clearance of a product candidate even after reviewing and providing comment on a
protocol for a pivotal clinical trial that has the potential to result in FDA and other non-U.S. regulatory authorities’
approval. Any of these regulatory authorities may also approve or clear a product candidate for fewer or more
limited indications or uses than we request or may grant approval or clearance contingent on the performance of
costly post-marketing clinical trials. The FDA or other non-U.S. regulatory authorities may not approve the labeling
claims necessary or desirable for the successful commercialization of our product candidates.
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The results of our clinical trials may show that our product candidates may cause undesirable side effects, which
could interrupt, delay or halt clinical trials, resulting in the denial of regulatory approval by the FDA and other non-
U.S. regulatory authorities.
Safety concerns with drug products over the years have resulted in the withdrawal of drug products, revisions to
drug labeling that further limit use of the drug products, and establishment of risk management programs that may,
for instance, restrict distribution of drug products. Attention to drug safety issues may result in a more cautious
approach by the FDA to clinical trials. Data from clinical trials may receive greater scrutiny with respect to safety,
which may make the FDA or other regulatory authorities more likely to terminate clinical trials before completion,
or require longer or additional clinical trials that may result in substantial additional expense and a delay or failure in
obtaining approval or approval for a more limited indication than originally sought.
The failure to successfully commercialize Rayaldee would have a material adverse effect on our business.
In June 2016, the FDA approved the Company’s New Drug Application for Rayaldee (calcifediol) extended
release capsules for the treatment of secondary hyperparathyroidism (SHPT) in adults with stage 3 or 4 chronic
kidney disease (CKD) and serum total 25-hydroxyvitamin D levels less than 30 ng/mL. The commercial launch for
Rayaldee began in November 2016. Rayaldee is our only pharmaceutical product approved for marketing in the
U.S. and our ability to generate revenue from product sales and achieve profitability is substantially dependent on
our ability to effectively commercialize Rayaldee. Our failure to successfully commercialize Rayaldee would have
a material adverse effect on our business, financial condition, cash flows and results of operations.
Additionally, the market perception and reputation of Rayaldee and its safety and efficacy are important to our
business and the continued acceptance of our product candidates and products. Any negative publicity about
Rayaldee, such as the discovery of safety issues, adverse events, or even public rumors about such events, could
have a material adverse effect on our business. Levels of market acceptance for Rayaldee could be impacted by
several factors, some of which are not within our control, including but not limited to the:
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safety, efficacy, convenience and cost-effectiveness of our products compared to products of our
competitors;
scope of approved uses and marketing approval;
availability of patent or regulatory exclusivity;
timing of market approvals and market entry;
ongoing regulatory obligations following approval;
any restrictions or “black box” warnings required on the labeling of such products:
availability of alternative products from our competitors;
acceptance of the price of our products;
effectiveness of our sales forces and promotional efforts;
the level of reimbursement of our products;
acceptance of our products on government and private formularies;
ability to market our products effectively at the retail level or in the appropriate setting of care; and
the reputation of our products.
If Rayaldee fails to gain, or loses, market acceptance, our revenues would be adversely impacted and we may be
required to take material impairment charges, all of which could have a material adverse effect on our business,
financial condition, cash flows and results of operations.
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We rely on licensing agreements with Vifor Fresenius Medical Renal Care Pharma Ltd (“VFMCRP”) and Japan
Tobacco (“JT”) for the international development and marketing of Rayaldee. Failure to maintain these license
agreements could prevent us from successfully developing and commercializing Rayaldee worldwide.
In May 2016, EirGen, our wholly-owned subsidiary, partnered with VFMCRP through a Development and
License Agreement for the development and marketing of Rayaldee in Europe, Canada, Mexico, Australia, South
Korea and certain other international markets. The license to VFMCRP potentially covers all therapeutic and
prophylactic uses of the product in human patients, provided that initially the license is for the use of the product for
the treatment or prevention of secondary hyperparathyroidism related to patients with stage 3 or 4 chronic kidney
disease and vitamin D insufficiency/deficiency. We received a non-refundable and non-creditable upfront payment
of $50 million and are eligible to receive up to an additional $232 million upon the achievement of certain
regulatory and sales-based milestones. In addition, we are eligible to receive tiered, double digit royalty payments
or a minimum royalty, whichever is greater, upon commencement of sales of the product. The success of the
Development and License Agreement with VFMCRP is dependent in part on, among other things, the skills,
experience and efforts of VFMCRP’s employees responsible for the project, VFMCRP’s commitment to the
arrangement, and the financial condition of VFMCRP, all of which are beyond our control. In the event that
VFMCRP, for any reason, including but not limited to early termination of the agreement, fails to devote sufficient
resources to successfully develop and market Rayaldee internationally, our ability to earn milestone payments or
receive royalty payments would be adversely affected, which would have a material adverse effect on our financial
condition and prospects.
In October 2017, we entered into a Development and License Agreement (the “JT Agreement”) with JT under
which JT was granted the exclusive rights for the development and commercialization of Rayaldee in Japan. The
license grant to JT covers the therapeutic and preventative use of the product for (i) SHPT in non-dialysis and
dialysis patients with CKD, (ii) rickets, and (iii) osteomalacia, as well as such additional indications as may be
added to the scope of the license subject to the terms of the JT Agreement. Under the terms of the JT Agreement,
we received an initial upfront payment of $6 million and we will receive an additional $6 million upon the initiation
of our planned phase 2 study for Rayaldee in dialysis patients in the U.S. We are also eligible to receive up to an
additional aggregate amount of $31 million upon the achievement of certain regulatory and development milestones
by JT for Rayaldee in Japan, and $75 million upon the achievement of certain sales based milestones by JT. We will
also receive tiered, double digit royalty payments at rates ranging from low double digits to mid-teens on net sales
within Japan. JT will, at its sole cost and expense, be responsible for performing all development activities
necessary to obtain all regulatory approvals for Rayaldee in Japan and for all commercial activities pertaining to
Rayaldee in Japan, except for certain preclinical expenses which we have agreed to reimburse JT up to a capped
amount. If JT, for any reason, including but not limited to early termination of the JT Agreement, fails to devote
sufficient resources to successfully develop and market Rayaldee in Japan, our ability to earn milestone payments or
receive royalty payments would be adversely affected, which could have a material adverse effect on our financial
condition and prospects.
Our exclusive worldwide agreement with Pfizer Inc. is important to our business. If we do not successfully
develop hGH- CTP and/or Pfizer Inc. does not successfully commercialize hGH-CTP, our business could be
adversely affected.
In December 2014, we entered into a development and commercialization agreement with Pfizer relating to our
long-acting hGH- CTP for the treatment of growth hormone deficiency in adults and children. Under the terms of
the agreements with Pfizer, we received non-refundable and non-creditable upfront payments of $295 million and
are eligible to receive up to an additional $275 million upon the achievement of certain regulatory milestones. In
addition, we are eligible to receive initial royalty payments associated with the commercialization of hGH-CTP for
Adult GHD. Upon the launch of hGH-CTP for Pediatric GHD, the royalties will transition to a regional, tiered gross
profit sharing for both hGH-CTP and Pfizer’s Genotropin®. We are also responsible for the development program
and are obligated to pay for the development up to an agreed cap, which may be exceeded under certain
circumstances. If we are required to exceed the agreed cap, it could have a material adverse impact on the expected
benefits to us from the Pfizer transaction and our overall financial condition. In the event that the parties are able to
obtain regulatory approvals to market a product covered by the agreement, we will be substantially dependent on
Pfizer for the successful commercialization of such product. The success of the collaboration arrangement with
Pfizer is dependent in part on, among other things, the skills, experience and efforts of Pfizer’s employees
responsible for the project, Pfizer’s commitment to the arrangement, and the financial condition of Pfizer, all of
which are beyond our control. In the event that Pfizer, for any reason, including but not limited to early termination
of the agreement, fails to devote sufficient resources to successfully develop and commercialize any product
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resulting from the collaboration arrangement, our ability to earn milestone payments or receive royalty or profit
sharing payments would be adversely affected, which would have a material adverse effect on our financial
condition and prospects.
Our business is substantially dependent on the success of clinical trials for hGH-CTP and our ability to achieve
regulatory approval for the marketing of this product.
There is no assurance that clinical trials for hGH-CTP will be successful or support marketing approval, or that
we will be able to obtain marketing approval for the product, or any other product candidate we are developing.
Before they can be marketed, our products in development must be approved by the FDA or similar foreign
governmental agencies. The process for obtaining FDA approval is both time-consuming and costly, with no
certainty of a successful outcome. Before obtaining regulatory approval for the sale of any drug candidate, we must
conduct extensive preclinical tests and clinical trials to demonstrate the safety and efficacy in humans of our product
candidates. Although the safety profile for hGH-CTP has been consistent with that observed with those treated with
daily growth hormone, further testing or patient use may undermine those determinations or unexpected side effects
may arise. A failure of any preclinical study or clinical trial can occur at any stage of testing. The results of
preclinical and initial clinical testing of these products may not necessarily indicate the results that will be obtained
from later or more extensive testing. It also is possible to suffer significant setbacks in advanced clinical trials, even
after obtaining promising results in earlier trials. In December 2016, we announced preliminary topline data from
our Phase 3, double blind, placebo controlled study of hGH-CTP in adults with GHD. Although there was no
statistically significant difference between hGH-CTP and placebo on the primary endpoint of change in trunk fat
mass from baseline to 26 weeks, after unblinding the study, we identified an exceptional value of trunk fat mass
reduction in the placebo group that may have affected the primary outcome. We completed post-hoc sensitivity
analyses to evaluate the influence of outliers on the primary endpoint results using multiple statistical approaches.
Analyses that excluded outliers showed a statistically significant difference between hGH-CTP and placebo on the
change in trunk fat mass. Additional analyses that did not exclude outliers showed mixed results. There can be no
assurance that the FDA will consider the sensitivity analysis or consider the product for approval for adults with
GHD. If phase 3 clinical trials for hGH-CTP are not successful or we are unable to achieve regulatory approval for
this product, our business will be significantly adversely impacted, which could have a materially adverse effect on
our business, financial condition and results of operations.
Our business is substantially dependent on our ability to develop, launch and generate revenue from our
diagnostic products.
Our business is dependent on our ability to successfully commercialize the 4Kscore test and other diagnostic
products, including the Claros 1. We are committing significant resources to the development and
commercialization of these products, and there is no guarantee that we will be able to successfully commercialize
these tests. We have limited experience in developing, manufacturing, selling, marketing and distributing diagnostic
tests. If we fail to leverage the national marketing, sales and distribution resources of BioReference to enhance sale
of, and reimbursement for, the 4Kscore test and other diagnostic products including the Claros 1, our ability to
generate substantial revenue from the sale of these products will be adversely impacted. If we are not able to
successfully develop, market or sell diagnostic tests we develop for any reason, including the failure to obtain any
required regulatory approvals, obtain reimbursement for, or successfully integrate BioReference, we will not
generate any meaningful revenue from the sale of such tests. Even if we are able to develop effective diagnostic
tests for sale in the marketplace, a number of factors could impact our ability to sell such tests or generate any
significant revenue from the sale of such tests, including without limitation:
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our ability to establish and maintain adequate infrastructure to support the commercial launch and
sale of our diagnostic tests, including establishing adequate laboratory space, information
technology infrastructure, sample collection and tracking systems, electronic ordering and reporting
systems and other infrastructure and hiring adequate laboratory and other personnel;
the success of the validation studies for our diagnostic tests under development and our ability to
publish study results in peer-reviewed journals;
the availability of alternative and competing tests or products and technological innovations or other
advances in medicine that cause our technologies to be less competitive;
the accuracy rates of such tests, including rates of false-negatives and/or false-positives;
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concerns regarding the safety or effectiveness or clinical utility of our diagnostic tests;
changes in the regulatory environment affecting health care and health care providers, including
changes in laws regulating laboratory testing and/or device manufacturers;
the extent and success of our sales and marketing efforts and ability to drive adoption of our
diagnostic tests;
coverage and reimbursement levels by government payors and private insurers;
pricing pressures and changes in third-party payor reimbursement policies; and
intellectual property rights held by others or others infringing our intellectual property rights.
Our business is substantially dependent on our ability to generate profits and cash flow from our laboratory
operations.
We have made a significant investment in our laboratory operations through the acquisition of BioReference.
We compete in the clinical laboratory market primarily on the basis of the quality of testing, reporting and
information systems, reputation in the medical community, the pricing of services and ability to employ qualified
personnel. Our failure to successfully compete on any of these factors could result in the loss of clients and a
reduction in our revenues and profits. To offset efforts by payors to reduce the cost and utilization of clinical
laboratory services, we will need to obtain and retain new clients and business partners and grow the laboratory
operations. A reduction in tests ordered, specimens submitted by existing clients, or payment rates, without
offsetting growth in our client base, could impact our ability to successfully grow our business and could have a
material adverse impact on our ability to generate profits and cash flow from the laboratory operations.
Discontinuation or recalls of existing testing products, failure to develop, or acquire, licenses for new or
improved testing technologies or our clients using new technologies to perform their own tests could adversely
affect our business.
From time to time, manufacturers discontinue or recall reagents, test kits or instruments used by us to perform
laboratory testing. Such discontinuations or recalls could adversely affect our costs, testing volume and revenue.
The clinical laboratory industry is subject to changing technology and new product introductions. Our success in
maintaining a leadership position in genomic and other advanced testing technologies will depend, in part, on our
ability to develop, acquire or license new and improved technologies on favorable terms and to obtain appropriate
coverage and reimbursement for these technologies. We may not be able to negotiate acceptable licensing
arrangements and it cannot be certain that such arrangements will yield commercially successful diagnostic tests. If
we are unable to license these testing methods at competitive rates, our research and development costs may
increase as a result. In addition, if we are unable to license or develop new or improved technologies to expand our
esoteric testing operations, our testing methods may become outdated when compared with our competition and
testing volume and revenue may be materially and adversely affected.
Currently, most clinical laboratory testing is categorized as “high” or “moderate” complexity, and thereby is
subject to extensive and costly regulation under CLIA. The cost of compliance with CLIA makes it impractical for
most physicians to operate clinical laboratories in their offices, and other laws limit the ability of physicians to have
ownership in a laboratory and to refer tests to such a laboratory. Manufacturers of laboratory equipment and test
kits could seek to increase their sales by marketing point-of-care laboratory equipment to physicians and by selling
test kits approved for home or physician office use to both physicians and patients. Diagnostic tests approved for
home use are automatically deemed to be “waived” tests under CLIA and may be performed in physician office
laboratories as well as by patients in their homes with minimal regulatory oversight. Other tests meeting certain
FDA criteria also may be classified as “waived” for CLIA purposes. The FDA has regulatory responsibility over
instruments, test kits, reagents and other devices used by clinical laboratories and has taken responsibility from the
Centers for Disease Control for classifying the complexity of tests for CLIA purposes. Increased approval of
“waived” test kits could lead to increased testing by physicians in their offices or by patients at home, which could
affect our market for laboratory testing services and negatively impact our revenues. If our competitors develop and
market products that are more effective, safer or less expensive than our products and product candidates, our net
revenues, profitability and commercial opportunities will be negatively impacted.
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If our competitors develop and market products or services that are more effective, safer or less expensive than
our current and future products or services, our revenues, profitability and commercial opportunities will be
negatively impacted.
The pharmaceutical, diagnostic, and laboratory testing industries are highly competitive and require an ongoing,
extensive search for technological innovation. The industries are characterized by rapidly advancing technologies,
intense competition and a strong emphasis on proprietary products. They also require, among other things, the
ability to effectively discover, develop, test and obtain regulatory approvals for products, as well as the ability to
effectively commercialize, market and promote approved products.
Numerous companies, including major pharmaceutical companies, specialty pharmaceutical companies and
specialized biotechnology companies, are engaged in the development, manufacture and marketing of
pharmaceutical products competitive with those that we intend to commercialize ourselves and through our partners.
Competitors to our diagnostics business include major diagnostic companies, reference laboratories, molecular
diagnostic firms, universities and research institutions. Most of these companies have substantially greater financial
and other resources, larger research and development staffs and more extensive marketing and manufacturing
organizations than ours. This enables them, among other things, to make greater research and development
investments and efficiently utilize their research and development costs, as well as their marketing and promotion
costs, over a broader revenue base. This also provides our competitors with a competitive advantage in connection
with the highly competitive product acquisition and product in-licensing process, which may include auctions in
which the highest bidder wins. Our competitors may also have more experience and expertise in obtaining
marketing approvals from the FDA and other regulatory authorities. We cannot predict with accuracy the timing or
impact of the introduction of potentially competitive products or their possible effect on our sales. In addition to
product development, testing, approval, and promotion, other competitive factors in the pharmaceutical and
diagnostics industry include industry consolidation, product quality and price, product technology, reputation,
customer service, and access to technical information.
In our clinical laboratory operations, we compete with three types of providers in a highly fragmented and
competitive industry: hospital laboratories, physician-office laboratories and other independent clinical laboratories.
Our major competitors in the New York metropolitan area are two of the largest national laboratories, Quest
Diagnostics and Laboratory Corporation of America. We are much smaller than these national laboratories.
The clinical laboratory business is intensely competitive both in terms of price and service. Pricing of laboratory
testing services is often one of the most significant factors used by health care providers and third-party payors in
selecting a laboratory. As a result of the clinical laboratory industry undergoing significant consolidation, larger
clinical laboratory providers are able to increase cost efficiencies afforded by large-scale automated testing. This
consolidation results in greater price competition. We may be unable to increase cost efficiencies sufficiently, if at
all, and as a result, our net earnings and cash flows could be negatively impacted by such price competition.
Additionally, we may also face changes in contracting with third party payors, fee schedules, competitive bidding
for laboratory services or other actions or pressures reducing payment schedules as a result of increased or additional
competition.
If our competitors market products that are more effective, safer, easier to use or less expensive than our current
products and product candidates, or that reach the market sooner than our products and product candidates, we may
not achieve commercial success. In addition, the biopharmaceutical, diagnostic, medical device, and laboratory
industries are characterized by rapid technological change. Because our research approach integrates many
technologies, it may be difficult for us to stay abreast of the rapid changes in each technology. If we fail to stay at
the forefront of technological change, we may be unable to compete effectively. Technological advances or
products developed by our competitors may render our technologies, products or product candidates obsolete or less
competitive.
Our product development activities could be delayed or stopped.
We do not know whether our current or planned pre-clinical and clinical studies will be completed on schedule,
or at all. Furthermore, we cannot guarantee that our planned pre-clinical and clinical studies will begin on time or at
all. The commencement of our planned clinical trials could be substantially delayed or prevented by several factors,
including:
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a limited number of, and competition for, suitable patients with the particular types of disease
required for enrollment in our clinical trials or that otherwise meet the protocol’s inclusion criteria
and do not meet any of the exclusion criteria;
a limited number of, and competition for, suitable serum or other samples from patients with
particular types of disease required for our validation studies;
a limited number of, and competition for, suitable sites to conduct our clinical trials;
delay or failure to obtain FDA or other non-U.S. regulatory authorities’ approval or agreement to
commence a clinical trial;
delay or failure to obtain sufficient supplies of the product candidate for our clinical trials;
requirements to provide the drugs, diagnostic tests, or medical devices required in our clinical trial
protocols or clinical trials at no cost or cost, which may require significant expenditures that we are
unable or unwilling to make;
delay or failure to reach agreement on acceptable clinical trial agreement terms or clinical trial
protocols with prospective sites or investigators;
delay or failure to obtain institutional review board (“IRB”) approval to conduct or renew a clinical
trial at a prospective site; and
insufficient liquidity to fund our preclinical and clinical studies.
The completion of our clinical trials could also be substantially delayed or prevented by several factors,
including:
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slower than expected rates of patient recruitment and enrollment;
failure of patients to complete the clinical trial;
unforeseen safety issues;
lack of efficacy evidenced during clinical trials;
termination of our clinical trials by one or more clinical trial sites;
inability or unwillingness of patients or medical investigators to follow our clinical trial protocols;
inability to monitor patients adequately during or after treatment; and
insufficient liquidity to fund ongoing studies.
Our clinical trials may be suspended or terminated at any time by the FDA, other regulatory authorities, the IRB
for any given site, or us. Additionally, changes in regulatory requirements and guidance may occur and we may
need to amend clinical trial protocols to reflect these changes with appropriate regulatory authorities. Amendments
may require us to resubmit our clinical trial protocols to IRBs for re-examination, which may impact the costs,
timing, or successful completion of a clinical trial. Any failure or significant delay in commencing or completing
clinical trials for our product candidates could materially harm our results of operations and financial condition, as
well as the commercial prospects for our product candidates.
We currently have a sixty-four person specialized sales and marketing team for Rayaldee in the U.S. If we are
unable to develop or maintain a strong sales, marketing and distribution capability on our own or through
collaborations with marketing partners, we will not be successful in commercializing Rayaldee or our other
pharmaceutical products or product candidates in the U.S.
Other than our 64 person specialized sales and marketing team dedicated to Rayaldee, we currently have no
pharmaceutical marketing, sales or distribution capabilities in the U.S. Any failure or inability to maintain adequate
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sales, marketing, and distribution capabilities would adversely impact the commercialization of Rayaldee or our
other pharmaceutical products or candidates. If we are not successful in commercializing our existing and future
pharmaceutical products and product candidates, either on our own or through collaborations with one or more third
parties, our product revenue will suffer and we may incur significant additional losses.
Our approved products or product candidates may have undesirable side effects and cause our products to be
taken off the market.
If we or others identify undesirable side effects caused by our products:
•
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regulatory authorities may require the addition of labeling statements, specific warnings, a
contraindication, or field alerts to physicians and pharmacies;
regulatory authorities may withdraw their approval of the product and require us to take our
approved product off the market;
• we may be required to change the way the product is administered, conduct additional clinical trials,
or change the labeling of the product;
• we may have limitations on how we promote our products;
•
sales of products may decrease significantly;
• we may be subject to litigation or product liability claims; and
•
our reputation may suffer.
Any of these events could prevent us from achieving or maintaining market acceptance of the affected product or
could substantially increase our commercialization costs and expenses, which in turn could delay or prevent us from
generating significant revenues from its sale.
Our inability to meet regulatory quality standards applicable to our manufacturing and quality processes and to
address quality control issues in a timely manner could delay the production and sale of our products or result in
recalls of products.
Manufacturing or design defects, unanticipated use of our products, or inadequate disclosure of risks relating to
the use of our products could lead to injury or other adverse events. These events could lead to recalls or safety
alerts relating to our products (either voluntary or required by governmental authorities) and could result, in certain
cases, in the removal of a product from the market. Any recall could result in significant costs as well as negative
publicity that could reduce demand for our products. Personal injuries relating to the use of our products can also
result in product liability claims being brought against us. In some circumstances, such adverse events could also
cause delays in new product approvals.
We are committed to providing high quality products to our customers, and we plan to meet this commitment by
working diligently to continue implementing updated and improved quality systems and concepts throughout our
organization. We cannot assure you that we will not have quality control issues in the future, which may result in
warning letters and citations from the FDA. If we receive any warning letters from the FDA in the future, there can
be no assurances regarding the length of time or cost it will take us to resolve such quality issues to our satisfaction
and to the satisfaction of the FDA. If our remedial actions are not satisfactory to the FDA, we may have to devote
additional financial and human resources to our efforts, and the FDA may take further regulatory actions against us
including, but not limited to, assessing civil monetary penalties or imposing a consent decree on us, which could
result in further regulatory constraints, including the governance of our quality system by a third party. Our inability
to resolve these issues or the taking of further regulatory action by the FDA may weaken our competitive position
and have a material adverse effect on our business, results of operations and financial condition.
We manufacture pharmaceutical products in Ireland, Mexico, Spain, and Israel. We also prepare necessary test
reagents and assemble and package the cassettes for our point-of-care diagnostic system at our facility in Woburn,
Massachusetts. Any quality control issues at our facilities may weaken our competitive position and have a material
adverse effect on our business results of operations and financial condition.
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As a medical device manufacturer, we are required to register with the FDA and are subject to periodic
inspection by the FDA for compliance with its Quality System Regulation (“QSR”) requirements, which require
manufacturers of medical devices to adhere to certain regulations, including testing, quality control and
documentation procedures. Compliance with applicable regulatory requirements is subject to continual review and
is monitored rigorously through periodic inspections by the FDA. In addition, most international jurisdictions have
adopted regulatory approval and periodic renewal requirements for medical devices, and we must comply with these
requirements in order to market our products in these jurisdictions. In the European Community, we are required to
maintain certain ISO certifications in order to sell our products and must undergo periodic inspections by notified
bodies to obtain and maintain these certifications. Further, some emerging markets rely on the FDA’s Certificate for
Foreign Government (“CFG”) in lieu of their own regulatory approval requirements. Our failure, or our
manufacturers’ failure to meet QSR, ISO, or any other regulatory requirements or industry standards could delay
production of our products and lead to fines, difficulties in obtaining regulatory clearances, recalls or other
consequences, which could, in turn, have a material adverse effect on our business, results of operations, and our
financial condition.
Failure to establish, and perform to, appropriate quality standards to assure that the highest level of quality is
observed in the performance of our testing services could adversely affect the results of our operations and
adversely impact our reputation.
The provision of clinical testing services, including anatomic pathology services, and related services, and the
design, manufacture and marketing of diagnostic products involve certain inherent risks. The services that we
provide and the products that we design, manufacture and market are intended to provide information for healthcare
providers in providing patient care. Therefore, users of our services and products may have a greater sensitivity to
errors than the users of services or products that are intended for other purposes.
Similarly, negligence in performing our services can lead to injury or other adverse events. We may be sued
under physician liability or other liability law for acts or omissions by our pathologists, laboratory personnel and
other employees. We are subject to the attendant risk of substantial damages awards and risk to our reputation.
Even after we receive regulatory approval or clearance to market our product candidates, the market may not be
receptive to our products.
Our products may not gain market acceptance among physicians, patients, health care payors and/or the medical
community. We believe that the degree of market acceptance will depend on a number of factors, including:
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timing of market introduction of competitive products;
safety and efficacy of our product compared to other products;
prevalence and severity of any side effects;
potential advantages or disadvantages over alternative treatments;
strength of marketing and distribution support;
price of our products, both in absolute terms and relative to alternative treatments;
availability of coverage and reimbursement from government and other third-party payors;
potential product liability claims;
limitations or warnings contained in a product’s regulatory authority-approved labeling; and
changes in the standard of care for the targeted indications for any of our products or product
candidates, which could reduce the marketing impact of any claims that we could make following
applicable regulatory authority approval.
In addition, our efforts to educate the medical community and health care payors on the benefits of our products
and product candidates may require significant resources and may never be successful. If our products do not gain
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market acceptance, it would have a material adverse effect on our business, results of operations, and financial
condition.
If our products are not covered and eligible for reimbursement from government and third party payors, we may
not be able to generate significant revenue or achieve or sustain profitability.
The coverage and reimbursement status of newly approved or cleared drugs, diagnostic and laboratory tests is
uncertain, and failure of our pharmaceutical products, diagnostic tests or laboratory to be adequately covered by
insurance and eligible for adequate reimbursement could limit our ability to market any future product candidates
we may develop and decrease our ability to generate revenue from any of our existing and future product candidates
that may be approved or cleared. The commercial success of our existing and future products in both domestic and
international markets will depend in part on the availability of coverage and adequate reimbursement from third-
party payors, including government payors, such as the Medicare and Medicaid programs, managed care
organizations, and other third-party payors, as well as our ability to obtain in network status with such payors. The
government and other third-party payors are increasingly attempting to contain health care costs by limiting both
insurance coverage and the level of reimbursement for new drugs and diagnostic tests and restricting in network
status of laboratory providers. As a result, they may not cover or provide adequate payment for our product
candidates. These payors may conclude that our products are less safe, less effective, or less cost-effective than
existing or later-introduced products. These payors may also conclude that the overall cost of the procedure using
one of our devices exceeds the overall cost of the competing procedure using another type of device, and third-party
payors may not approve our products for insurance coverage and adequate reimbursement or approve our laboratory
for in network status.
The failure to obtain coverage and adequate or any reimbursement for our products, or health care cost
containment initiatives that limit or restrict reimbursement for our products, may reduce any future product revenue.
Even though a drug (not administered by a physician) may be approved by the FDA, this does not mean that a
Prescription Drug Plan (“PDP”), a private insurer operating under Medicare Part D, will list that drug on its
formulary or will set a reimbursement level. PDPs are not required to make every FDA-approved drug available on
their formularies. If our drug products are not listed on sufficient number of PDP formularies or if the PDPs’ levels
of reimbursement are inadequate, our business, results of operations, and financial condition could be materially
adversely affected. Private health plans, such as managed care plans and pharmacy benefit management (PBM)
programs may also not include our products on formularies, use other techniques that may restrict access to our
products or set a lower reimbursement rate than anticipated.
Additionally, our failure to comply with applicable Medicare, Medicaid and other governmental payor rules
could result in our inability to participate in a governmental payor program, our returning funds already paid to us,
civil monetary penalties, criminal penalties and/or limitations on the operational function of our laboratory. If we
were unable to receive reimbursement under a governmental payor program, a substantial portion of our revenues
would be lost, which would adversely affect our results of operations and financial condition.
As we evolve from a company primarily involved in development to a company also involved in commercialization
of our pharmaceutical and diagnostic products as well as our laboratory testing services, we may encounter
difficulties in managing our growth and expanding our operations successfully.
As we advance our product candidates and expand our business, we will need to expand our development,
regulatory and commercial infrastructure. As our operations expand, we expect that we will need to manage
additional relationships with various third parties, collaborators and suppliers. Maintaining these relationships and
managing our future growth will impose significant added responsibilities on members of our management. We
must be able to: manage our development efforts and operations effectively; manage our clinical trials effectively;
hire, train and integrate additional management, administrative and sales and marketing personnel; improve our
managerial, development, operational and finance systems; implement and manage an effective marketing strategy;
and expand our facilities, all of which may impose a strain on our administrative and operational infrastructure.
Furthermore, we may acquire additional businesses, products or product candidates that complement or augment
our existing business. Integrating any newly acquired business or product could be expensive and time-consuming.
We may not be able to integrate any acquired business or product successfully or operate any acquired business
profitably. Our future financial performance will depend, in part, on our ability to manage any future growth
effectively and our ability to integrate any acquired businesses. We may not be able to accomplish these tasks, and
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our failure to accomplish any of them could prevent us from successfully growing our company, which would have
a material adverse effect on our business, results of operations and financial condition.
Our success is dependent to a significant degree upon the involvement and efforts of our Chairman and Chief
Executive Officer, Phillip Frost, M.D.
Our success is dependent to a significant degree upon the efforts of our Chairman and Chief Executive Officer,
Phillip Frost, M.D., who is essential to our business. The departure of our CEO for whatever reason or the inability
of our CEO to continue to serve in his present capacity could have a material adverse effect upon our business,
financial condition, and results of operations. Our CEO has a highly regarded reputation in the pharmaceutical and
medical industry and attracts business opportunities and assists both in negotiations with acquisition targets,
investment targets, and potential joint venture partners. Our CEO has also provided financing to the Company, both
in terms of a credit agreement and equity investments. If we lost his services, our relationships with acquisition and
investment targets, joint ventures, and investors may suffer and could cause a material adverse impact on our
operations, financial condition, and the value of our Common Stock.
If we fail to attract and retain key management and scientific personnel, we may be unable to successfully
operate our business and develop or commercialize our products and product candidates.
We will need to expand and effectively manage our managerial, operational, sales, financial, development, and
other resources in order to successfully operate our business and pursue our research, development, and
commercialization efforts for our products and product candidates. Our success depends on our continued ability to
attract, retain, and motivate highly qualified management and pre-clinical and clinical personnel. The loss of the
services or support of any of our senior management, particularly Dr. Phillip Frost, our Chairman of the Board and
CEO, could delay or prevent the development and commercialization of our products and product candidates.
If the FDA or other applicable regulatory authorities approve generic products that compete with any of our
products or product candidates, the sale of our products or product candidates may be adversely affected.
Once an NDA is approved, the product covered thereby becomes a “listed drug” which, in turn can be relied
upon by potential competitors in support of an approval of an abbreviated new drug application, or ANDA, or
505(b)(2) application. U.S. laws and other applicable policies provide incentives to manufacturers to create
modified, non-infringing versions of a drug to facilitate the approval of an ANDA or other application for a generic
substitute. These manufacturers might only be required to conduct a relatively inexpensive study to show that their
product has the same active ingredient(s), dosage form, strength, route of administration, and conditions of use, or
labeling, as our product or product candidate and that the generic product is bioequivalent to ours, meaning it is
absorbed in the body at the same rate and to the same extent as our product or product candidate. These generic
equivalents, which must meet the same quality standards as branded pharmaceuticals, would be significantly less
costly than ours to bring to market and companies that produce generic equivalents are generally able to offer their
products at lower prices. Thus, after the introduction of a generic competitor, a significant percentage of sales of
any branded product is typically lost to the generic product. Accordingly, competition from generic equivalents to
our products or product candidates would materially adversely impact our revenues, profitability and cash flows and
substantially limit our ability to obtain a return on the investments that we have made in our products and product
candidates.
In 2017, Congress reauthorized the Generic Drug User Fee Act (GDUFA). The generic drug user fee program,
established in 2012, is designed to speed the approval of new generic drugs. In addition, over the past few months,
FDA has used its regulatory authority to enact other programs to streamline the path to market for generic drugs. In
addition, a regulatory pathway for biosimilars was established in 2012 including a new user fee program to promote
the development of these products that show no clinically meaningful differences from innovator biologics. Though
they have their own statutory market pathway, like generic drugs, biosimilars can receive FDA approval by
providing less clinical data than the innovator product. Biosimilars are expected to be less expensive competitors to
innovator biologics reducing prices overall. We anticipate several new biosimilars reaching the market over the next
year.
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If we fail to acquire and develop other products or product candidates at all or on commercially reasonable
terms, we may be unable to diversify or grow our business.
We intend to continue to rely on acquisitions and in-licensing as a source of our products and product candidates
for development and commercialization. The success of this strategy depends upon our ability to identify, select,
and acquire pharmaceutical and diagnostic products, drug delivery technologies, and medical device product
candidates. Proposing, negotiating, and implementing an economically viable product acquisition or license is a
lengthy and complex process. We compete for partnering arrangements and license agreements with
pharmaceutical, biotechnology and medical device companies, and academic research institutions. Our competitors
may have stronger relationships with third parties with whom we are interested in collaborating and/or may have
more established histories of developing and commercializing products.
Most of our competitors also have substantially greater financial and other resources than us. As a result, our
competitors may have a competitive advantage in entering into partnering arrangements with such third parties, as
such partnering arrangements are often decided in an auction process in which the highest bidder wins. In addition,
even if we find promising products and product candidates, and generate interest in a partnering or strategic
arrangement to acquire such products or product candidates, we may not be able to acquire rights to additional
product candidates or approved products on terms that we find acceptable, or at all.
We expect that any product candidate to which we acquire rights will require additional development efforts
prior to commercial sale, including extensive clinical testing and approval or clearance by the FDA and other non-
U.S. regulatory authorities. All product candidates are subject to the risks of failure inherent in pharmaceutical,
diagnostic test or medical device product development, including the possibility that the product candidate will not
be shown to be sufficiently safe and effective for approval by regulatory authorities. Even if the product candidates
are approved or cleared for marketing, we cannot be sure that they would be capable of economically feasible
production or commercial success. If we fail to acquire or develop other product candidates that are capable of
economically feasible production and commercial success, our business, results of operations and financial condition
and cash flows may be materially adversely affected.
We rely on third parties to manufacture and supply our pharmaceutical and diagnostic products and product
candidates.
If our manufacturing partners are unable to produce our products in the amounts that we require, we may not be
able to establish a contract and obtain a sufficient alternative supply from another supplier on a timely basis and in
the quantities we require. We expect to continue to depend on third-party contract manufacturers for the foreseeable
future.
Our products and product candidates require precise, high quality manufacturing. Any of our contract
manufacturers will be subject to ongoing periodic unannounced inspection by the FDA and other non-U.S.
regulatory authorities to ensure strict compliance with QSR regulations for devices or cGMPs for drugs, and other
applicable government regulations and corresponding standards relating to matters such as testing, quality control,
and documentation procedures. If our contract manufacturers fail to achieve and maintain high manufacturing
standards in compliance with QSR or cGMPs, we may experience manufacturing errors resulting in patient injury or
death, product recalls or withdrawals, delays or interruptions of production or failures in product testing or delivery,
delay or prevention of filing or approval of marketing applications for our products, cost overruns, or other problems
that could seriously harm our business.
Any performance failure on the part of our contract manufacturers could delay clinical development or
regulatory approval or clearance of our product candidates or commercialization of our products and product
candidates, depriving us of potential product revenue and resulting in additional losses. In addition, our dependence
on a third party for manufacturing may adversely affect our future profit margins. Our ability to replace an existing
manufacturer may be difficult because the number of potential manufacturers is limited and the FDA must approve
any replacement manufacturer before it can begin manufacturing our products or product candidates. Such approval
would result in additional non-clinical testing and compliance inspections. It may be difficult or impossible for us to
identify and engage a replacement manufacturer on acceptable terms in a timely manner, or at all.
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Independent clinical investigators and contract research organizations that we engage to conduct our clinical
trials may not be diligent, careful or timely.
We depend on independent clinical investigators to conduct our clinical trials. Contract research organizations
may also assist us in the collection and analysis of data. These investigators and contract research organizations will
not be our employees, and we will not be able to control, other than by contract, the amount of resources, including
time, that they devote to products that we develop. If independent investigators fail to devote sufficient resources to
the development of product candidates or clinical trials, or if their performance is substandard, it will delay the
marketing approval or clearance and commercialization of any products that we develop. Further, the FDA requires
that we comply with standards, commonly referred to as good clinical practice, for conducting, recording and
reporting clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity,
and confidentiality of trial subjects are protected. If our independent clinical investigators and contract research
organizations fail to comply with good clinical practice, the results of our clinical trials could be called into question
and the clinical development of our product candidates could be delayed.
Failure of clinical investigators or contract research organizations to meet their obligations to us or comply with
federal regulations and good clinical practice procedures could adversely affect the clinical development of our
product candidates and harm our business, results of operations, and financial condition.
If the validity of an informed consent from a subject was to be challenged, it may negatively impact our product
development efforts.
We take steps to ensure that all clinical data and genetic and other biological samples are collected from subjects
who provide informed consent for the data and samples as required by applicable laws and we work to ensure that
the subjects from whom our data and samples are collected do not retain any proprietary or commercial rights to the
data or samples or any discoveries derived from them. However, because we may collect data and samples from
countries that are governed by a number of different regulatory regimes, there are many complex legal questions
relating to the adequacy of informed consent that we must continually address. The adequacy of any given subject’s
informed consent may be challenged in the future, and any given informed consent may prove unlawful or otherwise
inadequate for our purposes. Any findings against us, or our clinical collaborators, could obligate us to stop using
some of our clinical samples, which in turn may hinder our product development efforts. Such a result would also
likely involve legal challenges that may consume our management and financial resources.
Failure to timely or accurately bill and collect for our services could have a material adverse effect on our
revenues and our business.
Billing for laboratory testing services is extremely complicated and is subject to extensive and non-uniform rules
and administrative requirements. Depending on the billing arrangement and applicable law, we bill various payors,
such as patients, insurance companies, Medicare, Medicaid, physicians, hospitals and employer groups. Changes in
laws and regulations and payor practices increase the complexity and cost of our billing process. Additionally, in
the U.S., third-party payors generally require billing codes on claims for reimbursement that describe the services
provided. For laboratory services, the American Medical Association establishes most of the billing codes using a
data code set called Current Procedural Terminology, or CPT, codes and the World Health Organization establishes
diagnostic codes using a data set called International Statistical Classification of Diseases, or ICD-10, codes. Each
third-party payor generally develops payment amounts and coverage policies for their beneficiaries or members that
ties to the CPT code established for the laboratory test and the ICD-10 code selected by the ordering or performing
physician. Therefore, coverage and reimbursement may differ by payor even if the same billing code is reported for
claims filing purposes. For laboratory tests without a specific billing code, payors often review claims on a claim-
by-claim basis and there are increased uncertainties as to coverage and eligibility for reimbursement.
In addition to the items described above, third-party payers, including government programs, may decide to deny
payment or recoup payments for testing that they contend was improperly billed or not medically necessary, against
their coverage determinations, or for which they believe they have otherwise overpaid (including as a result of their
own error), and we may be required to refund payments already received. Our revenues may be subject to
retroactive adjustment as a result of these factors among others, including without limitation, differing
interpretations of billing and coding guidance and changes by government agencies and payors in interpretations,
requirements, and “conditions of participation” in various programs.
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We implemented a new billing system for our laboratory business in the third quarter of 2016. The adoption of
the new billing system, which replaced the old billing system, poses several challenges relating to, among other
things, training of personnel, communication of new rules and procedures, changes in corporate culture, migration of
data, and the potential instability of the new system. As an integral part of our billing compliance program, we
assess our billing and coding practices in the ordinary course of business, respond to payor audits on a routine basis,
and investigate reported failures or suspected failures to comply with federal and state healthcare reimbursement
requirements, as well as overpayment claims which may arise from time to time without fault on the part of the
Company. We have in the ordinary course of business been the subject of recoupments by payors and have from
time to time identified and reimbursed payors for overpayments.
Incorrect or incomplete documentation and billing information, as well as the other items described above,
among other factors, could result in non-payment for services rendered or having to pay back amounts incorrectly
billed and collected. Further, the failure to timely or correctly bill could lead to various penalties, including: (1)
exclusion from participation in CMS and other government programs; (2) asset forfeitures; (3) civil and criminal
fines and penalties; and (4) the loss of various licenses, certificates and authorizations necessary to operate our
business, any of which could have a material adverse effect on our results of operations or cash flows.
Failure in our information technology systems, including by cybersecurity attacks or other data security
incidents, could significantly increase testing turn-around time or billing processes and otherwise disrupt our
operations.
Our operations depend, in part, on the continued performance of our information technology systems. Our
information technology systems are potentially vulnerable to physical or electronic break-ins, computer viruses and
similar disruptions. In addition, we are in the process of integrating the information technology systems of our
subsidiaries, and we may experience system failures or interruptions as a result of this process. Sustained system
failures or interruption of our systems in one or more of our laboratory operations could disrupt our ability to
process laboratory requisitions, perform testing, provide test results in a timely manner and/or bill the appropriate
party. Failure of our information technology systems could adversely affect our business, profitability and financial
condition.
A successful cybersecurity attack or other data security incident could result in the misappropriation and/or loss
of confidential or personal information, create system interruptions, or deploy malicious software that attacks our
systems. It is possible that a cybersecurity attack might not be noticed for some period of time. The occurrence of a
cybersecurity attack or incident could result in business interruptions from the disruption of our information
technology systems, or negative publicity resulting in reputational damage with our customers, shareholders and
other stakeholders and/or increased costs to prevent, respond to or mitigate cybersecurity events. In addition, the
unauthorized dissemination of sensitive personal information or proprietary or confidential information could
expose us or other third-parties to regulatory fines or penalties, litigation and potential liability, or otherwise harm
our business.
Healthcare plans have taken steps to control the utilization and reimbursement of healthcare services, including
clinical test services.
We also face efforts by non-governmental third-party payors, including healthcare plans, to reduce utilization
and reimbursement for clinical testing services.
The healthcare industry has experienced a trend of consolidation among healthcare insurance plans, resulting in
fewer but larger insurance plans with significant bargaining power to negotiate fee arrangements with healthcare
providers, including clinical testing providers. These healthcare plans, and independent physician associations, may
demand that clinical testing providers accept discounted fee structures or assume all or a portion of the financial risk
associated with providing testing services to their members through capped payment arrangements. In addition,
some healthcare plans limit the laboratory network to only a single national or regional laboratory to obtain
improved fee-for-service pricing. There is also an increasing number of patients enrolling in consumer driven
products and high deductible plans that involve greater patient cost-sharing.
The increased consolidation among healthcare plans also has increased the potential adverse impact of ceasing to
be a contracted provider with any such insurer.
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We expect continuing efforts to limit the number of participating laboratories in payor networks, reduce
reimbursements, to impose more stringent cost controls and to reduce utilization of clinical test services. These
efforts, including future changes in third-party payor rules, practices and policies, or failing to become a contracted
provider or ceasing to be a contracted provider to a healthcare plan, may have a material adverse effect on our
business.
The success of our business may be dependent on the actions of our collaborative partners.
We have entered into and expect in the future to enter into collaborative arrangements with established multi-
national pharmaceutical, diagnostic, and medical device companies, which will finance or otherwise assist in the
development, manufacture and marketing of products incorporating our technology. We anticipate deriving some
revenues from research and development fees, license fees, milestone payments, and royalties from collaborative
partners. Our prospects, therefore, may depend to some extent upon our ability to attract and retain collaborative
partners and to develop technologies and products that meet the requirements of prospective collaborative partners.
In addition, our collaborative partners may have the right to abandon research projects, guide strategy regarding
prosecution of relevant patent applications and terminate applicable agreements, including funding obligations, prior
to or upon the expiration of the agreed-upon research terms. There can be no assurance that we will be successful in
establishing collaborative arrangements on acceptable terms or at all, that collaborative partners will not terminate
funding before completion of projects, that our collaborative arrangements will result in successful product
commercialization, or that we will derive any revenues from such arrangements. To the extent that we are unable to
develop and maintain collaborative arrangements, we would need substantial additional capital to undertake
research, development, and commercialization activities on our own.
If we are unable to obtain and enforce patent protection for our products, our business could be materially
harmed.
Our success depends, in part, on our ability to protect proprietary methods and technologies that we develop or
license under the patent and other intellectual property laws of the U.S. and other countries, so that we can prevent
others from unlawfully using our inventions and proprietary information. However, we may not hold proprietary
rights to some patents required for us to commercialize our products and product candidates. Because certain U.S.
patent applications are confidential, third parties may have filed patent applications for technology covered by our
pending patent applications without our being aware of those applications, and our patent applications may not have
priority over those applications. For this and other reasons, we or our third-party collaborators may be unable to
secure desired patent rights, thereby losing desired exclusivity. If licenses are not available to us on acceptable
terms, we may not be able to market the affected products or conduct the desired activities, unless we challenge the
validity, enforceability, or infringement of the third-party patent or otherwise circumvent the third-party patent.
Our strategy depends on our ability to rapidly identify and seek patent protection for our discoveries. In
addition, we will rely on third-party collaborators to file patent applications relating to proprietary technology that
we develop jointly during certain collaborations. The process of obtaining patent protection is expensive and time-
consuming. If our present or future collaborators fail to file and prosecute all necessary and desirable patent
applications at a reasonable cost and in a timely manner, our business will be adversely affected. Unauthorized
parties may be able to obtain and use information that we regard as proprietary.
The issuance of a patent does not guarantee that it is valid or enforceable. Any patents we have obtained, or
obtain in the future, may be challenged, invalidated, unenforceable, or circumvented. Moreover, the U.S. Patent and
Trademark Office (“USPTO”) may commence interference proceedings involving our patents or patent applications.
In addition, court decisions may introduce uncertainty in the enforceability or scope of patents owned by
biotechnology, pharmaceutical, and medical device companies. Any challenge to, finding of unenforceability or
invalidation or circumvention of, our patents or patent applications would be costly, would require significant time
and attention of our management, and could have a material adverse effect on our business, results of operations and
financial condition.
Our pending patent applications may not result in issued patents. The patent position of pharmaceutical,
biotechnology, diagnostic, and medical device companies, including ours, is generally uncertain and involves
complex legal and factual considerations. The standards that the USPTO and its foreign counterparts use to grant
patents are not always applied predictably or uniformly and can change. There is also no uniform, worldwide policy
regarding the subject matter and scope of claims granted or allowable in pharmaceutical, biotechnology, diagnostic,
or medical device patents. Accordingly, we do not know the degree of future protection for our proprietary rights or
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the breadth of claims that will be allowed in any patents issued to us or to others. The legal systems of certain
countries do not favor the aggressive enforcement of patents, and the laws of foreign countries may not protect our
rights to the same extent as the laws of the U.S. Therefore, the enforceability or scope of our owned or licensed
patents in the U.S. or in foreign countries cannot be predicted with certainty, and, as a result, any patents that we
own or license may not provide sufficient protection against competitors. We may not be able to obtain or maintain
patent protection for our pending patent applications, those we may file in the future, or those we may license from
third parties.
We cannot assure you that any patents that have issued, that may issue, or that may be licensed to us will be
enforceable or valid, or will not expire prior to the commercialization of our products and product candidates, thus
allowing others to more effectively compete with us. Therefore, any patents that we own or license may not
adequately protect our products and product candidates or our future products, which could have a material adverse
effect on our business, results of operations, and financial condition.
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.
In addition to patent protection, we also rely on other proprietary rights, including protection of trade secrets,
know-how, and confidential and proprietary information. To maintain the confidentiality of trade secrets and
proprietary information, we will seek to enter into confidentiality agreements with our employees, consultants, and
collaborators upon the commencement of their relationships with us. These agreements generally require that all
confidential information developed by the individual or made known to the individual by us during the course of the
individual’s relationship with us be kept confidential and not disclosed to third parties. Our agreements with
employees also generally provide that any inventions conceived by the individual in the course of rendering services
to us shall be our exclusive property.
However, we may not obtain these agreements in all circumstances, and individuals with whom we have these
agreements may not comply with their terms. In the event of unauthorized use or disclosure of our trade secrets or
proprietary information, these agreements, even if obtained, may not provide meaningful protection, particularly for
our trade secrets or other confidential information. To the extent that our employees, consultants, or contractors use
technology or know-how owned by third parties in their work for us, disputes may arise between us and those third
parties as to the rights in related inventions.
Adequate remedies may not exist in the event of unauthorized use or disclosure of our confidential information.
The disclosure of our trade secrets would impair our competitive position and may materially harm our business,
financial condition, and results of operations.
We will rely heavily on licenses from third parties. Failure to comply with the provisions of these licenses could
result in the loss of our rights under the license agreements.
Many of the patents and patent applications in our patent portfolio are not owned by us, but are licensed from
third parties. Such license agreements give us rights for the commercial exploitation of the patents resulting from
the respective patent applications, subject to certain provisions of the license agreements. Failure to comply with
these provisions could result in the loss of our rights under these license agreements. Our inability to rely on these
patents and patent applications, which are the basis of our technology, would have a material adverse effect on our
business, results of operations and financial condition.
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.
We have obtained licenses from, among others, INEOS Healthcare, the President and Fellows of Harvard
College, The Scripps Research Institute, Arctic Partners, TESARO, and Academia Sinica, among others, that are
necessary or useful for our business. In addition, we intend to enter into additional licenses of third-party
intellectual property in the future. We cannot guarantee that no third parties will step forward and assert
inventorship or ownership in our in-licensed patents. In some cases, we may rely on the assurances of our licensors
that all ownership rights have been secured and that all necessary agreements are intact or forthcoming.
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Our success will depend in part on our ability or the ability of our licensors to obtain, maintain, and enforce
patent protection for our licensed intellectual property and, in particular, those patents to which we have secured
exclusive rights in our field. We or our licensors may not successfully prosecute the patent applications which are
licensed to us. Even if patents issue in respect of these patent applications, we or our licensors may fail to maintain
these patents or may determine not to pursue litigation against other companies that are infringing these patents.
Without protection for the intellectual property we have licensed, other companies might be able to offer
substantially identical products for sale, which could adversely affect our competitive business position and harm
our business, results of operations and financial condition.
Our commercial success depends significantly on our ability to operate without infringing the patents and other
proprietary rights of third parties.
Other entities may have or obtain patents or proprietary rights that could limit our ability to develop,
manufacture, use, sell, offer for sale or import products, or impair our competitive position. In addition, other
entities may have or obtain patents or proprietary rights that cover our current research and preclinical studies. The
U.S. case law pertaining to statutory exemptions to patent infringement for those who are using third party patented
technology in the process of pursuing FDA regulatory approval changes over time. Lawsuits involving such
exemptions are very fact intensive and it is currently unclear under U.S. case law whether preclinical studies would
always qualify for such an exemption, and whether such exemptions would apply to research tools. To the extent
that our current research and preclinical studies may be covered by the patent rights of others, the risk of suit may
continue after such patents expire because the statute of limitations for patent infringement runs for six years. To
the extent that a third party develops and patents technology that covers our products, we may be required to obtain
licenses to that technology, which licenses may not be available or may not be available on commercially reasonable
terms, if at all. If licenses are not available to us on acceptable terms, we will not be able to market the affected
products or conduct the desired activities, unless we challenge the validity, enforceability or infringement of the
third-party patent, or circumvent the third-party patent, which would be costly and would require significant time
and attention of our management. Third parties may have or obtain by license or assignment valid and enforceable
patents or proprietary rights that could block us from developing products using our technology. Our failure to
obtain a license to any technology that we require may materially harm our business, financial condition, and results
of operations.
If we become involved in patent litigation or other proceedings related to a determination of rights, we could
incur substantial costs and expenses, substantial liability for damages or be required to stop our product
development and commercialization efforts.
Third parties may sue us for infringing their patent rights. Likewise, we may need to resort to litigation to
enforce a patent issued or licensed to us or to determine the scope and validity of proprietary rights of others. In
addition, a third-party may claim that we have improperly obtained or used its confidential or proprietary
information. Furthermore, in connection with our third-party license agreements, we generally have agreed to
indemnify the licensor for costs incurred in connection with litigation relating to intellectual property rights. The
cost to us of any litigation or other proceeding relating to intellectual property rights, even if resolved in our favor,
could be substantial, and the litigation would divert our management’s efforts. Some of our competitors may be
able to sustain the costs of complex patent litigation more effectively than we can because they have substantially
greater resources. Uncertainties resulting from the initiation and continuation of any litigation could limit our ability
to continue our operations. Our involvement in patent litigation and other proceedings could have a material
adverse effect on our business, results of operations, and financial condition.
If any parties successfully claim that our creation or use of proprietary technologies infringes upon their
intellectual property rights, we might be forced to pay damages, potentially including treble damages, if we are
found to have willfully infringed on such parties’ patent rights. In addition to any damages we might have to pay, a
court could require us to stop the infringing activity or obtain a license. Any license required under any patent may
not be made available on commercially acceptable terms, if at all. In addition, such licenses are likely to be non-
exclusive and, therefore, our competitors may have access to the same technology licensed to us. If we fail to obtain
a required license and are unable to design around a patent, we may be unable to effectively market some of our
technology and products, which could limit our ability to generate revenues or achieve profitability and possibly
prevent us from generating revenue sufficient to sustain our operations.
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We have faced, and may in the future face, intellectual property infringement claims that could be time-
consuming and costly to defend, and could result in our loss of significant rights and the assessment of treble
damages.
We may from time to time receive notices of claims of infringement and misappropriation or misuse of other
parties’ proprietary rights. Some of these additional claims may also lead to litigation. We cannot assure you that
we will prevail in such actions, or that other actions alleging misappropriation or misuse by us of third-party trade
secrets, infringement by us of third-party patents and trademarks or the validity of our patents, will not be asserted or
prosecuted against us.
We may also initiate claims to defend our intellectual property or to seek relief on allegations that we use, sell, or
offer to sell technology that incorporates third party intellectual property. Intellectual property litigation, regardless
of outcome, is expensive and time-consuming, could divert management’s attention from our business and have a
material negative effect on our business, operating results or financial condition. If there is a successful claim of
infringement against us, we may be required to pay substantial damages (including treble damages if we were to be
found to have willfully infringed a third party’s patent) to the party claiming infringement, develop non-infringing
technology, stop selling our tests or using technology that contains the allegedly infringing intellectual property or
enter into royalty or license agreements that may not be available on acceptable or commercially practical terms, if
at all. Our failure to develop non-infringing technologies or license the proprietary rights on a timely basis could
harm our business.
It is possible that a third party or patent office might take the position that one or more patents or patent
applications constitute prior art in the field of genomic-based diagnostics. In such a case, we might be required to
pay royalties, damages and costs to firms who own the rights to these patents, or we might be restricted from using
any of the inventions claimed in those patents.
We may become subject to product liability for our diagnostic tests, clinical trials, pharmaceutical products and
medical device products.
Our success depends on the market’s confidence that we can provide reliable, high-quality pharmaceuticals,
medical devices, and diagnostics tests. Our reputation and the public image of our products or technologies may be
impaired if our products fail to perform as expected or our products are perceived as difficult to use. Our products
are complex and may develop or contain undetected defects or errors. Furthermore, if product or future product
candidate harms people, or is alleged to be harmful, we may be subject to costly and damaging product liability
claims brought against us by clinical trial participants, consumers, health care providers, corporate partners or
others. We have product liability insurance covering commercial sales of current products and our ongoing clinical
trials. Any defects or errors could lead to the filing of product liability claims, which could be costly and time-
consuming to defend and result in substantial damages. If we experience a sustained material defect or error, this
could result in loss or delay of revenues, delayed market acceptance, damaged reputation, diversion of development
resources, legal claims, increased insurance costs or increased service and warranty costs, any of which could
materially harm our business. We cannot assure you that our product liability insurance would protect our assets
from the financial impact of defending a product liability claim. A product liability claim could have a serious
adverse effect on our business, financial condition and results of operations.
Adverse results in material litigation matters or governmental inquiries could have a material adverse effect upon
our business and financial condition.
We may from time to time become subject in the ordinary course of business to material legal action related to,
among other things, intellectual property disputes, professional liability, contractual and employee-related matters,
as well as inquiries from governmental agencies and Medicare or Medicaid carriers and other payors requesting
comment and information on allegations of billing irregularities and other matters that are brought to their attention
through billing audits, third parties or other sources. The health care industry is subject to substantial federal and
state government regulation and audit. Legal actions could result in substantial monetary damages as well as
damage to the Company’s reputation with customers, which could have a material adverse effect upon our results of
operations and financial position.
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RISKS RELATED TO REGULATORY COMPLIANCE
Our ability to successfully operate our laboratories and develop and commercialize certain of our diagnostic tests
and LDTs will depend on our ability to maintain required regulatory licensures and comply with all the CLIA
requirements.
In order to successfully operate our laboratory business and offer certain of our diagnostic tests and LDTs, we
must maintain our CLIA certification and comply with all the CLIA requirements. CLIA is designed to ensure the
quality and reliability of clinical laboratories by mandating specific standards in the areas of personnel
qualifications, administration and participation in proficiency testing, patient test management, quality control,
quality assurance and inspections. The sanction for failure to comply with CLIA requirements may be suspension,
revocation or limitation of a laboratory’s CLIA certificate, which is necessary to conduct business, as well as
significant fines and/or criminal penalties. Laboratories must undergo on-site surveys at least every two years,
which may be conducted by the Federal CLIA program or by a private CMS approved accrediting agency such as
CAP, among others. Our laboratories are also subject to regulation of laboratory operations under state clinical
laboratory laws as will be any new CLIA-certified laboratory that we establish or acquire. State clinical laboratory
laws may require that laboratories and/or laboratory personnel meet certain qualifications, specify certain quality
controls or require maintenance of certain records. Certain states, such as California, Florida, Maryland, New York,
Pennsylvania and Rhode Island, require that laboratories obtain licenses to test specimens from patients residing in
those states and additional states may require similar licenses in the future. If we are unable to obtain and maintain
licenses from states where required, we will not be able to process any samples from patients located in those states.
Only Washington and New York States are exempt under CLIA, as these states have established laboratory quality
standards at least as stringent as CLIA’s. Potential sanctions for violation of these statutes and regulations include
significant fines and the suspension or loss of various licenses, certificates and authorizations, which could adversely
affect our business and results of operations.
If we fail to comply with CLIA requirements, HHS or state agencies could require us to cease diagnostic testing.
Even if it were possible for us to bring our laboratories back into compliance after failure to comply with such
requirements, we could incur significant expenses and potentially lose revenues in doing so. Moreover, new
interpretations of current regulations or future changes in regulations under CLIA may make it difficult or
impossible for us to comply with the CLIA classification, which would significantly harm our business and
materially adversely affect our financial condition.
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.
The research, testing, manufacturing, labeling, approval, selling, marketing, and distribution of drug products,
diagnostic products, or medical devices are subject to extensive regulation by the FDA and other non-U.S.
regulatory authorities, which regulations differ from country to country. In general, we are not permitted to market
our product candidates in the U.S. until we receive approval of a Biologics License Application (BLA), an approval
of a NDA, a clearance letter under the premarket notification process, or 510(k) process, or an approval of a PMA
from the FDA. To date, we have only submitted one NDA which was approved in June 2016. We have not
received marketing approval or clearance for any of our diagnostic product candidates, other than a CE Mark for our
point-of-care PSA test and a CE Mark for our 4Kscore test. We submitted our PMA for the PSA test in
November 2017 and are actively engaged with FDA in the review of the PMA. Obtaining approval of a NDA or
PMA can be a lengthy, expensive, and uncertain process. With respect to medical devices, while the FDA reviews
and clears a premarket notification in as little as three months, there is no guarantee that our products will qualify for
this more expeditious regulatory process, which is reserved for Class I and II devices, nor is there any assurance that
even if a device is reviewed under the 510(k) process that the FDA will review it expeditiously or determine that the
device is substantially equivalent to a lawfully marketed non-PMA device. If the FDA fails to make this finding,
then we cannot market the device. In lieu of acting on a premarket notification, the FDA may seek additional
information or additional data which would further delay our ability to market the product. Furthermore, we are not
permitted to make changes to a device approved through the PMA or 510(k) which affects the safety or efficacy of
the device without first submitting a supplement application to the PMA and obtaining FDA approval or cleared
premarket notification for that supplement. In some cases, the FDA may require clinical trials to support a
supplement application. In addition, failure to comply with FDA, non-U.S. regulatory authorities, or other
applicable U.S. and non-U.S. regulatory requirements may, either before or after product approval or clearance, if
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any, subject our company to administrative or judicially imposed sanctions, including, but not limited to the
following:
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restrictions on the products, manufacturers, or manufacturing process;
adverse inspectional observations (Form 483), warning letters, or non-warning letters incorporating
inspectional observations;
civil and criminal penalties;
injunctions;
suspension or withdrawal of regulatory approvals or clearances;
product seizures, detentions, or import bans;
voluntary or mandatory product recalls and publicity requirements;
total or partial suspension of production;
imposition of restrictions on operations, including costly new manufacturing requirements; and
refusal to approve or clear pending NDAs or supplements to approved NDAs, applications or pre-
market notifications.
Regulatory approval of an NDA or NDA supplement, BLA, PMA, PMA supplement or clearance pursuant to a
pre-market notification is not guaranteed, and the approval or clearance process, as the case may be, is expensive
and may, especially in the case of an NDA or PMA application, take several years. The FDA also has substantial
discretion in the drug and medical device approval and clearance process. Failure can occur at any stage, and we
could encounter problems that cause us to abandon clinical trials or to repeat or perform additional pre-clinical
studies and clinical trials. The number of pre-clinical studies and clinical trials that will be required for FDA
approval or clearance varies depending on the drug or medical device candidate, the disease or condition that the
drug or medical device candidate is designed to address, and the regulations applicable to any particular drug or
medical device candidate. The FDA can delay, limit or deny approval or clearance of a drug or medical device
candidate for many reasons, including:
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a drug candidate may not be deemed safe or effective;
a medical device candidate may not be deemed to be substantially equivalent to a lawfully marketed
non-PMA device, in the case of a premarket notification;
the FDA may not find the data from pre-clinical studies and clinical trials sufficient;
the FDA may not approve our or our third-party manufacturer’s processes or facilities; or
the FDA may change its approval or clearance policies or adopt new regulations.
Beyond these risks, there is also a possibility that our licensees or collaborators could decide to discontinue a
study at any time for commercial, scientific or other reasons.
Regulation by governmental authorities in the U.S. and other countries may be a significant factor in how we
develop, test, produce and market our diagnostic test products. Diagnostic tests like ours may not fall squarely
within the regulatory approval process for pharmaceutical or device products as described above, and the regulatory
pathway is not as clear. It is possible that the diagnostic products developed by us or our collaborators will be
regulated as medical devices by the FDA and comparable agencies of other countries and require either PMA or
510(k) clearance from the FDA prior to marketing. Some companies that have successfully commercialized
diagnostic tests for various conditions and disease states have not sought clearance or approval for such tests through
the traditional 510(k) or PMA processes, and have instead utilized a process involving LDTs through a CLIA-
certified laboratory. CLIA is a federal law that regulates clinical laboratories that perform testing on specimens
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derived from humans for the purpose of providing information for diagnostic, preventative or treatment purpose. In
such instances, the CLIA lab is solely responsible for the development, validation and commercialization of the
assay.
Such LDT testing is currently under the purview of CMS and state agencies that provide oversight of the safe
and effective use of LDTs. However, the FDA has consistently asserted that it has the regulatory authority to
regulate LDTs despite historically exercising enforcement discretion. In furtherance of that position, the FDA
issued two draft guidance documents in October 2014: Framework for Regulatory Oversight of Laboratory
Developed Tests (the “Framework Guidance”); and (2) FDA Notification and Medical Device Reporting for
Laboratory Developed Tests (the “Notification Guidance”). The Framework Guidance outlines the FDA’s plan to
adopt over time a risk-based approach to regulating LDTs whereby different classifications of LDTs would be
subject to different levels of FDA oversight and enforcement, including, for example, prohibitions on adulteration
and misbranding, establishment registration and device listing, premarket notification, banned devices, records and
reports, good manufacturing practices, adverse event reporting, premarket review of safety, effectiveness, and
clinical validity, and quality system requirements. The Notification Guidance is intended to explain how clinical
laboratories should notify the FDA of the LDTs they develop and how to satisfy Medical Device Reporting
requirements. On January 13, 2017, the FDA published a synthesis of feedback on the Framework Guidance and
Notification Guidance titled, Discussion Paper on Laboratory Developed Tests (the “Discussion Paper”). The
Discussion Paper provided notice that the FDA would not issue a final guidance on the oversight of LDTs to allow
for further public discussion on appropriate oversight approach, and to give congressional authorizing committees
the opportunity to develop a legislative solution. The outcome and ultimate impact of such proposals on the
business is difficult to predict at this time. However, the FDA’s authority to regulate LDTs continues to be
challenged and the regulatory situation is fluid. The timeline and process for finalizing the draft guidance
documents is unknown. We will continue to monitor changes to all domestic and international LDT regulatory
policy so as to ensure compliance with the current regulatory scheme.
The terms of approvals and ongoing regulation of our products may limit how we manufacture and market our
products and product candidates, which could materially impair our ability to generate anticipated revenues.
We, our approved or cleared products, and the manufacturers of our products are subject to continual review.
Our approved or cleared products may only be promoted for its indicated uses. Marketing, labeling, packaging,
adverse event reporting, storage, advertising, and promotion for our approved products will be subject to extensive
regulatory requirements. We train our marketing and sales force against promoting our products for uses outside of
the cleared or approved indications for use, known as “off-label uses.” If the FDA determines that our promotional
materials or training constitute promotion of unsupported claims or an off-label use, it could request that we modify
our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance of an
untitled letter, a warning letter, injunction, seizure, civil fine or criminal penalties. It is also possible that other
federal, state or foreign enforcement authorities might take action if they consider our business activities to
constitute promotion of an off-label use, which could result in significant penalties, including, but not limited to,
criminal, civil and/or administrative penalties, damages, fines, disgorgement, exclusion from participation in
government healthcare programs, and the curtailment of our operations.
We and the manufacturers of our products are also required to comply with current Good Manufacturing
Practices (“cGMP”) regulations or the FDA’s QSR regulations, which include requirements relating to quality
control and quality assurance as well as the corresponding maintenance of records and documentation. Moreover,
device manufacturers are required to report adverse events by filing Medical Device Reports with the FDA, which
reports are publicly available.
Further, regulatory agencies must approve manufacturing facilities before they can be used to manufacture our
products, and these facilities are subject to ongoing regulatory inspection. If we fail to comply with the regulatory
requirements of the FDA and other non-U.S. regulatory authorities, or if previously unknown problems with our
products, manufacturers, or manufacturing processes are discovered, we could be subject to administrative or
judicially imposed sanctions. Furthermore, any limitation on indicated uses for a product or product candidate or
our ability to manufacture and promote a product or product candidate could significantly and adversely affect our
business, results of operations, and financial condition.
In addition, the FDA and other non-U.S. regulatory authorities may change their policies and additional
regulations may be enacted that could prevent or delay marketing approval or clearance of our product candidates.
We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or
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administrative action, either in the U.S. or abroad. If we are not able to maintain regulatory compliance, we would
likely not be permitted to market our products or product candidates and we may not achieve or sustain profitability,
which would materially impair our ability to generate anticipated revenues.
If we fail to comply with complex and rapidly evolving laws and regulations, we could suffer penalties, be
required to pay substantial damages or make significant changes to our operations.
We are subject to numerous federal and state regulations, including, but not limited to:
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federal and state laws applicable to billing and claims payment;
federal and state laboratory anti-mark-up laws;
federal and state anti-kickback laws;
physician self-referral law;
federal and state false claims laws;
federal self-referral and financial inducement prohibition laws, commonly known as the Stark Law,
and the state equivalents;
federal and state laws governing laboratory licensing and testing, including CLIA;
federal and state laws governing the development, use and distribution of LDTs;
• HIPAA, along with the revisions to HIPAA as a result of the HITECH Act, and analogous state laws
and non-US laws, including the General Data Protection Regulation;
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federal, state and foreign regulation of privacy, security, electronic transactions and identity theft;
federal, state and local laws governing the handling, transportation and disposal of medical and
hazardous waste;
• Occupational Safety and Health Administration rules and regulations;
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changes to laws, regulations and rules as a result of the implementation and/or repeal of part or all of
2010 Health Care Reform Legislation; and
changes to other federal, state and local laws, regulations and rules, including tax laws.
If we fail to comply with existing or future applicable laws and regulations, we could suffer civil or criminal
penalties, including the loss of our licenses to operate our laboratories and our ability to participate in federal and
state healthcare programs. Different interpretations and enforcement policies of existing statutes and regulations
applicable to our business could subject our current practices to allegations of impropriety or illegality, or could
require us to make significant changes to our operations. Under the FCA, whistleblower or qui tam provisions allow
a private individual to bring actions on behalf of the federal government alleging that the defendant has submitted a
false claim to the federal government, and to share in any monetary recovery. In recent years, the number of suits
brought by private individuals has increased dramatically and we may be subject to such suits. Violations of the
FCA could result in enormous economic liability and could have a material impact on the Company. As a result of
political, economic, and regulatory influences, the healthcare delivery industry in the U.S. is under intense scrutiny
and subject to fundamental changes. We cannot predict which reform proposals will be adopted, when they may be
adopted, or what impact they may have on us. The costs associated with complying with federal and state
regulations could be significant and the failure to comply with any such legal requirements could have a material
adverse effect on our financial condition, results of operations, and liquidity.
Tax reform may significantly affect the Company and its stockholders.
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (the “Tax Act”) that
significantly reforms the Internal Revenue Code of 1986, as amended (the “Code”). The Tax Act, among other
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things, includes changes to U.S. federal tax rates, including reduction of the corporate tax rate from a top marginal
rate of 35% to a flat rate of 21%, limitations of the tax deduction for interest expense to 30% of adjusted earnings
(except for certain small businesses), limitations of the deduction for net operating losses to 80% of current year
taxable income and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced
rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain
important exceptions), immediate deductions for certain new investments instead of deductions for depreciation
expense over time, modifying or repealing many business deductions and credits and putting into effect the
migration from a “worldwide” system of taxation to a territorial system. Notwithstanding the reduction in the
corporate income tax rate, the overall impact of the new federal tax law is uncertain and our business and financial
condition could be adversely affected. In addition, it is uncertain if and to what extent various states will adjust their
policies in response to the newly enacted federal tax law. The impact of this tax reform as well as other tax laws and
regulations in the U.S. or other countries where we do business on holders of our common stock and our operating
results and financial position is uncertain and could be adverse.
Failure to maintain the security of patient-related information or compliance with security requirements could
damage our reputation with customers, cause us to incur substantial additional costs and become subject to
litigation.
Pursuant to HIPAA, and certain similar state laws, we must comply with comprehensive privacy and security
standards with respect to the use and disclosure of protected health information. If the Company does not comply
with existing or new laws and regulations related to protecting privacy and security of personal or health
information, it could be subject to monetary fines, civil penalties, or criminal sanctions. Under the HITECH
amendments to HIPAA, HIPAA was expanded to require certain data breach notification, to extend certain HIPAA
privacy and security standards directly to business associates, to heighten penalties for noncompliance, and enhance
enforcement efforts.
The Company may also be required to comply with the data privacy and security laws of other countries in
which it operates or from which it receives data transfers. The European Union enacted the General Data Protection
Regulation (GDPR) to replace the current data protection directive, Directive 95/46/EC, which will take effect
May 25, 2018, and which has a broader application and enhanced penalties for noncompliance. The GDPR, which
is wide-ranging in scope, governs the collection and use of personal data in the EU and will impose operational
requirements for companies that receive or process personal data of residents of the European Union that are
different than those currently in place in the European Union. The GDPR will apply to our European operations and
possibly to our laboratory and clinical development operations. The Company is evaluating the scope of work
required to comply with the new EU regulations.
In March 2014, CareEvolve, BioReference’s wholly-owned connectivity subsidiary, became aware that there had
been a HIPAA breach with regard to one of its servers managed at an internet service provider site called XAND,
where the server was inadvertently configured so that it was accessible to the Internet for a brief period. Upon
becoming aware of the matter, CareEvolve immediately took the server offline and removed all indexed files that
could be located on the internet. In the meantime, an Internet data collection “robot” operated by Google, Inc. had
briefly acquired data from a server and made it available to Internet searches. To the best of our knowledge, there
were no known disclosures of this Patient Health Information (“PHI”) to unauthorized parties. BioReference self-
reported this incident to the appropriate government agency, the Office of Civil Rights (“OCR”). OCR notified
BioReference that it has initiated an investigation of the breach report, and the Company is awaiting further
discussion, investigation and action by OCR. Since March 2014, BioReference has taken meaningful steps to
further improve its HIPAA and cybersecurity platform, including engaging independent and specialized IT
consultants to conduct HIPAA and cybersecurity assessments, reviewing data security and internal safeguards, and
continuously implementing enhanced security measures to minimize the risk of similar occurrences in the future.
We have had other data and security breaches in the ordinary course and such breaches may continue to happen
from time to time despite our best efforts to prevent such breaches and safeguard private information. Some of these
other data and security breaches have been reported to OCR and we are awaiting discussion, investigation or action
by OCR. Any action by OCR may require us to pay fines or take remedial actions that may be expensive and
require the attention of management, any of which may have a material adverse effect on the Company and our
results of operations.
We have and will continue to receive certain personal and financial information about our clients and their
patients. In addition, we depend upon the secure transmission of confidential information over public networks.
While we take reasonable and prudent steps to protect this protected information, a compromise in our security
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systems that results in client or patient personal information being obtained by unauthorized persons or our failure to
comply with security requirements for financial transactions could adversely affect our reputation with our clients
and result in litigation against us or the imposition of penalties, all of which may adversely impact our results of
operations, financial condition and liquidity.
Failure to comply with environmental, health and safety laws and regulations, including the Federal
Occupational Safety and Health Administration Act, the Needlestick Safety and Prevention Act and the
Comprehensive Medical Waste Management Act, could result in fines and penalties and loss of licensure, and
have a material adverse effect upon our business.
We are subject to licensing and regulation under federal, state and local laws and regulations relating to the
protection of the environment and human health and safety, including laws and regulations relating to the handling,
transportation and disposal of medical specimens, infectious and hazardous waste and radioactive materials, as well
as regulations relating to the safety and health of laboratory employees. The Federal Occupational Safety and
Health Administration has established extensive requirements relating to workplace safety for health care
employers, including clinical laboratories, whose workers may be exposed to blood-borne pathogens such as HIV
and the hepatitis B virus. These requirements, among other things, require work practice controls, protective
clothing and equipment, training, medical follow-up, vaccinations and other measures designed to minimize
exposure to, and transmission of, blood-borne pathogens. In addition, the Needlestick Safety and Prevention Act
requires, among other things, that we include in our safety programs the evaluation and use of engineering controls
such as safety needles if found to be effective at reducing the risk of needlestick injuries in the workplace.
Waste management is subject to federal and state regulations governing the transportation and disposal of
medical waste including bodily fluids. Federal regulations require licensure of interstate transporters of medical
waste. In New Jersey, we are subject to the Comprehensive Medical Waste Management Act (“CMWMA”), which
requires us to register as a generator of special medical waste. All of our medical waste is disposed of by a licensed
interstate hauler. The hauler provides a manifest of the disposition of the waste products as well as a certificate of
incineration, which is retained by us. These records are audited by the State of New Jersey on a yearly basis. We
are also subject to the Federal Hazardous materials transportation law, 49 U.S.C. 5101 et seq., and the Hazardous
Materials Regulations (“HMR”), 49 CFR parts 171-180. The federal government has classified hazardous medical
waste as hazardous materials for the purpose of regulation. These regulations preempt state regulation, which must
be “substantively the same,” “the non-federal requirement must conform “in every significant respect to the federal
requirement. Editorial and other similar de minimis changes are permitted,” 49 CFR 107.202(d).
Failure to comply with such federal, state and local laws and regulations could subject us to denial of the right to
conduct business, fines, criminal penalties and/or other enforcement actions, any of which could have a material
adverse effect on our business. In addition, compliance with future legislation could impose additional requirements
us, which may be costly.
Our failure or the failure of third-party payors or physicians to comply with ICD-10-CM Code Set, and our
failure to comply with other emerging electronic transaction standards could adversely impact our business.
Compliance with the ICD-10-CM Code Set was required to be in place by October 1, 2015. The Company will
continue its assessment of information systems, applications and processes for compliance with these requirements.
Clinical laboratories are typically required to submit health care claims with diagnosis codes to third party payors.
The diagnosis codes must be obtained from the ordering physician for clinical laboratory testing and from the
interpreting pathologist for anatomic pathology services. Our failure or the failure of third party payors or
physicians to comply with these requirements could have an adverse impact on reimbursement, days sales and cash
collections.
Also, the failure of our IT systems to keep pace with technological advances may significantly reduce our
revenues or increase our expenses. Public and private initiatives to create healthcare information technology
(“HCIT”) standards and to mandate standardized clinical coding systems for the electronic exchange of clinical
information, including test orders and test results, could require costly modifications to our existing HCIT systems.
If we fail to adopt or delay in implementing HCIT standards, we could lose customers and business opportunities.
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Failure to comply with complex federal and state laws and regulations related to submission of claims for clinical
laboratory services could result in significant monetary damages and penalties and exclusion from the Medicare
and Medicaid programs.
We are subject to extensive federal and state laws and regulations relating to the submission of claims for
payment for clinical laboratory services, including those that relate to coverage of our services under Medicare,
Medicaid and other governmental health care programs, the amounts that may be billed for our services and to
whom claims for services may be submitted. These rules may also affect the Company in light of the practice
management products that we market, to the extent that these products are considered to affect the manner in which
our customers’ submit their own claims for services. Submission of our claims is particularly complex because we
provide both anatomic pathology services and clinical laboratory tests, which generally are paid using different
reimbursement principles. The clinical laboratory tests are often paid under a clinical laboratory fee schedule, and
the anatomic pathology services are often paid under a physician fee schedule.
Our failure to comply with applicable laws and regulations could result in our inability to receive payment for
our services or result in attempts by third-party payors, such as Medicare and Medicaid, to recover payments from
us that have already been made. Submission of claims in violation of certain statutory or regulatory requirements
can result in penalties, including substantial civil money penalties for each item or service billed to Medicare in
violation of the legal requirement, and exclusion from participation in Medicare and Medicaid. Government
authorities may also assert that violations of laws and regulations related to submission or causing the submission of
claims violate the federal False Claims Act (“FCA”) or other laws related to fraud and abuse, including submission
of claims for services that were not medically necessary. Under the FCA, whistleblower or qui tam provisions allow
a private individual to bring actions on behalf of the federal government alleging that the defendant has submitted a
false claim to the federal government, and to share in any monetary recovery. In recent years, the number of suits
brought by private individuals has increased dramatically and we may be subject to such suits. Violations of the
FCA could result in enormous economic liability. The FCA provides that all damages are trebled, and each false
claim submitted is subject to a penalty of up to $21,916. For example, we could be subject to FCA liability if it was
determined that the services we provided were not medically necessary and not reimbursable, particularly if it were
asserted that we contributed to the physician’s referrals of unnecessary services to us. It is also possible that the
government could attempt to hold us liable under fraud and abuse laws for improper claims submitted by an entity
for services that we performed if we were found to have knowingly participated in the arrangement that resulted in
submission of the improper claims.
Changes in regulation and policies, including increasing downward pressure on health care reimbursement, may
adversely affect reimbursement for diagnostic services and could have a material adverse impact on our business.
Reimbursement levels for health care services are subject to continuous and often unexpected changes in
policies, and we face a variety of efforts by government payors to reduce utilization and reimbursement for
diagnostic testing services. Changes in governmental reimbursement may result from statutory and regulatory
changes, retroactive rate adjustments, administrative rulings, competitive bidding initiatives, and other policy
changes.
The U.S. Congress has considered, at least yearly in conjunction with budgetary legislation, changes to one or
both of the Medicare fee schedules under which we receive reimbursement, which include the physician fee
schedule for anatomical pathology services, and the clinical laboratory fee schedule for our clinical laboratory
services. For example, currently there is no copayment or coinsurance required for clinical laboratory services,
although there is for our services that are paid under the physician fee schedule. However, Congress has
periodically considered imposing a 20 percent coinsurance on laboratory services. If enacted, this would require us
to attempt to collect this amount from patients, although in many cases the costs of collection would exceed the
amount actually received. In April 2015, changes to the physician fee schedule were enacted under the Medicare
Access and CHIP Reauthorization Act of 2015 (“MACRA”).
Our reimbursement for our pathology services is paid primarily under the physician fee schedule of Medicare
and Medicaid. Historically, the physician fee schedule was governed by a complex formula, referred to as the
Sustainable Growth Rate, or SGR. However, in April 2015, MACRA was passed, which permanently replaces the
SGR formula with a value-based payment system. The passage of MACRA also repealed the 21.1% reduction of
the physician fee schedule that was scheduled for April 1, 2015. Under MACRA, the physician fee schedule
conversion factor increases of 0.5% from July 1, 2015 to December 31, 2015, and 0.5% in each of years 2016-2019,
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followed by 0.0% updates for 2020-2025. Subsequent years will vary based on participation in alternative payment
models. Beginning in 2019, rates will also be adjusted under the new Merit-based Incentive Payment System.
The Center for Medicare and Medicaid Services (“CMS”) pays laboratories on the basis of a fee schedule that is
reviewed and re-calculated on an annual basis. CMS may change the fee schedule upward or downward on billing
codes that we submit for reimbursement on a regular basis. Our revenue and business may be adversely affected if
the reimbursement rates associated with such codes are reduced. Even when reimbursement rates are not reduced,
policy changes add to our costs by increasing the complexity and volume of administrative requirements. Medicaid
reimbursement, which varies by state, is also subject to administrative and billing requirements and budget
pressures. Recently, state budget pressures have caused states to consider several policy changes that may impact
our financial condition and results of operations, such as delaying payments, reducing reimbursement, restricting
coverage eligibility and service coverage, and imposing taxes on our services.
CMS has changed or discussed making changes to certain types of reimbursement which could affect our rate of
reimbursement. Certain cases are comprised of both a technical component (“TC”) and a professional component
(“PC”). In certain specified areas of testing, primarily in the area of anatomic pathology, CMS has determined that
some providers have over-utilized these testing procedures and CMS has introduced changes in reimbursement
policies to discourage over-utilization. We are always subject to review by CMS and cannot be certain that CMS
won’t interpret our practices differently than we do.
Third party payors are increasingly challenging established prices, and new products that are more expensive
than existing treatments may have difficulty finding ready acceptance unless there is a clear therapeutic benefit. On
April 1, 2014, the Protecting Access to Medicare Act of 2014 (“PAMA”) was enacted into law. Under PAMA,
Medicare payment for clinical diagnostic laboratory tests is established by calculating a weighted mean of private
payer rates. On November 17, 2017, CMS released the new clinical laboratory fee schedule which took effect on
January 1, 2018.The new Medicare rates are lower than rates paid in 2017 for many of our clinical diagnostic
laboratory tests. Even though the permitted annual decrease will be capped through 2023, the cap does not apply to
new tests or new advanced diagnostic tests. We cannot assure you that any of our products will be considered cost
effective, or that reimbursement will be available or sufficient to allow us to sell them competitively and profitably.
The federal government is faced with significant economic decisions in the coming years. Some solutions being
offered in the government could substantially change the way laboratory testing is reimbursed by government
entities. We cannot be certain what or how any such government changes may affect our business.
Medicare legislation and future legislative or regulatory reform of the health care system may affect our ability to
sell our products profitably.
In the U.S., there have been a number of legislative and regulatory initiatives, at both the federal and state
government levels, to change the healthcare system in ways that, if approved, could affect our ability to sell our
products and provide our laboratory services profitably. As such, we cannot assure you that reimbursement
payments under governmental and private third party payor programs will remain at levels comparable to present
levels or will be sufficient to cover the costs allocable to patients eligible for reimbursement under these programs.
Any changes that lower reimbursement rates under Medicare, Medicaid or private payor programs could negatively
affect our business.
Most significantly, on March 23, 2010, President Obama signed into law both the Affordable Care Act and the
reconciliation law known as Health Care and Education Affordability Reconciliation Act (the “Reconciliation Act”)
and, combined we refer to both Acts as the “2010 Health Care Reform Legislation.” The constitutionality of the
2010 Health Care Reform Legislation was confirmed on June 28, 2012 by the Supreme Court of the United States.
However, as discussed in further detail below, the current Presidential administration has attempted to repeal and
replace the 2010 Health Care Reform Legislation.
Beyond coverage and reimbursement changes, the 2010 Health Care Reform Legislation subjects manufacturers
of medical devices to an excise tax of 2.3% on certain U.S. sales of medical devices beginning in January 2013.
However, a two-year moratorium on the tax was issued on December 18, 2015. The moratorium was extended for
an additional two-year period on January 22, 2018. As such, the excise tax does not apply to sales in 2016 through
2019. The return of the tax in January 2020 will likely increase our expense in the future.
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Additionally, the 2010 Health Care Reform Legislation included significant fraud and abuse measures, including
(i) required disclosures under the Open Payments Program (which implements the requirements of the Physician
Payments Sunshine Act), which in conjunction with its implementing regulations, requires certain manufacturers of
certain drugs, biologics, and devices that are reimbursed by Medicare and Medicaid to report annually certain
payments or “transfers of value” provided to physicians and teaching hospitals and to report annually ownership and
investment interests held by physicians and their immediate family members during the preceding calendar year, (ii)
lower thresholds for violations, and (iii) increasing potential penalties for such violations. Federal funding available
for combating health care fraud and abuse generally has increased. Many of the laws and regulations applicable to
our business, particularly those relating to billing and reimbursement of tests and those relating to relationships with
physicians, hospitals and patients, contain language that has not been interpreted by courts. We must rely on our
interpretation of these laws and regulations based on the advice of our counsel and regulatory or law enforcement
authorities may not agree with our interpretation of these laws and regulations and may seek to enforce legal
remedies or penalties against us for violations. From time to time we may need to change our operations,
particularly pricing or billing practices, in response to changing interpretations of these laws and regulations or
regulatory or judicial determinations with respect to these laws and regulations. These occurrences, regardless of
their outcome, could damage our reputation and harm important business relationships that we have with healthcare
providers, payors and others. Furthermore, if a regulatory or judicial authority finds that we have not complied with
applicable laws and regulations, we could be required to refund amounts that were billed and collected in violation
of such laws and regulations. In addition, we may voluntarily refund amounts that were alleged to have been billed
and collected in violation of applicable laws and regulations. In either case, we could suffer civil and criminal
damages, fines and penalties, exclusion from participation in governmental healthcare programs and the loss of
licenses, certificates and authorizations necessary to operate our business, as well as incur liabilities from third-party
claims, all of which could harm our operating results and financial condition. Moreover, regardless of the outcome,
if we or physicians or other third parties with whom we do business are investigated by a regulatory or law
enforcement authority we could incur substantial costs, including legal fees, and our management may be required
to divert a substantial amount of time to an investigation.
0 (including the current Presidential administration), regulations under the 2010 Health Care Reform Legislation
were expected to continue being drafted, released and finalized throughout the next several years. In 2017, the
President and members of Congress sought to repeal and replace the 2010 Health Care Reform Legislation. It is
uncertain whether such repeal and replace legislation will be enacted into law, and if enacted, what the impact might
be on our business. It is also uncertain whether regulatory changes to the implementation of the 2010 Health Care
Reform Legislation will restrict patient access to affordable insurance and impact their access to novel, biosimilar
and complex generic products. The full effects of any repeal and replacement of the 2010 Health Care Reform
Legislation, or regulatory changes to its implementation, cannot be known until a new law is enacted or existing law
is implemented through regulations or guidance issued by the CMS and other federal and state health care agencies.
Because of the continued uncertainty about the implementation of the 2010 Health Care Reform Legislation,
including the potential for further legal challenges or repeal of that legislation, we cannot quantify or predict with
any certainty the likely impact of the 2010 Health Care Reform Legislation or its repeal on our business model,
prospects, financial condition or results of operations. We also anticipate that Congress, state legislatures, and third-
party payors may continue to review and assess alternative healthcare delivery and payment systems and may in the
future propose and adopt legislation or policy changes or implementations effecting additional fundamental changes
in the healthcare delivery system. In addition, litigation may prevent some or all of the legislation from taking
effect. We cannot assure you as to the ultimate content, timing, or effect of changes, nor is it possible at this time to
estimate the impact of any such potential legislation.
To enhance compliance with applicable health care laws, and mitigate potential liability in the event of
noncompliance, regulatory authorities, such as the United States Health and Human Services Department Office of
Inspector General (“OIG”), have recommended the adoption and implementation of a comprehensive health care
compliance program that generally contains the elements of an effective compliance and ethics program described in
Section 8B2.1 of the United States Sentencing Commission Guidelines Manual, and for many years the OIG has
made available a model compliance program targeted to the clinical laboratory industry. In addition, certain states,
such as New York, requires that health care providers, such as clinical laboratories, that engage in substantial
business under the state Medicaid program have a compliance program that generally adheres to the standards set
forth in the Model Compliance Program. Also, under the 2010 Health Care Reform Legislation, the U.S.
Department of Health and Human Services, or HHS, requires suppliers, such as the Company, to adopt, as a
condition of Medicare participation, compliance programs that meet a core set of requirements. While we have
adopted U.S. healthcare compliance and ethics programs that generally incorporate the OIG’s recommendations and
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train our employees in such compliance, having such a program can be no assurance that we will avoid any
compliance issues.
RISKS RELATED TO INTERNATIONAL OPERATIONS
Failure to obtain regulatory approval outside the U.S. will prevent us from marketing our products and product
candidates abroad.
We intend to market certain of our products and product candidates in non-U.S. markets. In order to market our
products and product candidates in the European Union and many other non-U.S. jurisdictions, we must obtain
separate regulatory approvals. We have had limited interactions with non-U.S. regulatory authorities, the approval
procedures vary among countries and can involve additional testing, and the time required to obtain approval may
differ from that required to obtain FDA approval or clearance. Approval or clearance by the FDA does not ensure
approval by regulatory authorities in other countries, and approval by one or more non-U.S. regulatory authority
does not ensure approval by other regulatory authorities in other countries or by the FDA. The non-U.S. regulatory
approval process may include all of the risks associated with obtaining FDA approval or clearance. We may not
obtain non-U.S. regulatory approvals on a timely basis, if at all. We may not be able to file for non-U.S. regulatory
approvals and may not receive necessary approvals to commercialize our products and product candidates in any
market, which would have a material adverse effect on our business, results of operations and financial condition.
Non-U.S. governments often impose strict price controls, which may adversely affect our future profitability.
We intend to seek approval to market certain of our products and product candidates in both the U.S. and in
non-U.S. jurisdictions. If we obtain approval in one or more non-U.S. jurisdictions, we will be subject to rules and
regulations in those jurisdictions relating to our product. In some countries, particularly countries of the European
Union, each of which has developed its own rules and regulations, pricing is subject to governmental control. In
these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of
marketing approval for a drug or medical device candidate. To obtain reimbursement or pricing approval in some
countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product and
product candidates to other available products. If reimbursement of our products and product candidates is
unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, we may be unable to generate
revenues and achieve or sustain profitability, which would have a material adverse effect on our business, results of
operations and financial condition.
Potential political, economic and military instability in the State of Israel, where we have office, laboratory and
manufacturing operations, may adversely affect our results of operations.
We maintain office, laboratory and manufacturing facilities in the State of Israel. Political, economic and
military conditions in Israel may directly affect our ability to conduct business. Since the State of Israel was
established in 1948, a number of armed conflicts have occurred between Israel and its neighbors. Any hostilities
involving Israel or the interruption or curtailment of trade between Israel and its present trading partners, or a
significant downturn in the economic or financial condition of Israel, could affect adversely our operations.
Ongoing and revived hostilities or other Israeli political or economic factors could harm our operations and product
development and cause our revenues to decrease.
Due to the international scope of our business activities, our results of operations may be significantly affected by
currency fluctuations.
We derive a significant portion of our consolidated net revenues from international sales, subjecting us to risks
relating to fluctuations in currency exchange rates. Currency variations can adversely affect margins on sales of our
products in countries outside of the U.S. and margins on sales of products that include components obtained from
suppliers located outside of the U.S. Through our subsidiaries, we operate in a wide variety of jurisdictions. Certain
countries in which we operate or may operate have experienced geopolitical instability, economic problems and
other uncertainties from time to time. To the extent that world events or economic conditions negatively affect our
future sales to customers in these and other regions of the world, or the collectability of receivables, our future
results of operations, liquidity and financial condition may be adversely affected. We may manage exposures
arising in the normal course of business related to fluctuations in foreign currency exchange rates by entering into
offsetting positions through the use of foreign exchange forward contracts. Certain firmly committed transactions
are hedged with foreign exchange forward contracts whereby exchange rates change, gains and losses on the
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exposed transactions are partially offset by gains and losses related to the hedging contracts. However, our
subsidiaries receive their income and pay their expenses primarily in their local currencies. To the extent that
transactions of these subsidiaries are settled in their local currencies, a devaluation of those currencies versus the
U.S. dollar could reduce the contribution from these subsidiaries to our consolidated results of operations as reported
in U.S. dollars. For financial reporting purposes, such depreciation will negatively affect our reported results of
operations since earnings denominated in foreign currencies would be converted to U.S. dollars at a decreased value.
While we have employed economic cash flow and fair value hedges to minimize the risks associated with these
exchange rate fluctuations, the hedging activities may be ineffective or may not offset more than a portion of the
adverse financial impact resulting from currency variations. Accordingly, we cannot assure you that fluctuations in
the values of the currencies of countries in which we operate will not materially adversely affect our future results of
operations.
We may be exposed to liabilities under the Foreign Corrupt Practices Act, and any determination that we violated
the Foreign Corrupt Practices Act could have a material adverse effect on our business.
We are subject to the Foreign Corrupt Practice Act (“FCPA”) and other laws that prohibit U.S. companies or
their agents and employees from providing anything of value to a foreign official or political party for the purposes
of influencing any act or decision of these individuals in their official capacity to help obtain or retain business,
direct business to any person or corporate entity or obtain any unfair advantage. We have operations and
agreements with third parties and we generate sales internationally. Our international activities create the risk of
unauthorized and illegal payments or offers of payments by our employees, consultants, sales agents or distributors,
even though they may not always be subject to our control. We discourage these practices by our employees and
agents. However, our existing safeguards and any future improvements may prove to be less than effective, and our
employees, consultants, sales agents or distributors may engage in conduct for which we might be held responsible.
Any failure by us to adopt appropriate compliance procedures and ensure that our employees and agents comply
with the FCPA and applicable laws and regulations in foreign jurisdictions could result in substantial penalties or
restrictions on our ability to conduct business in certain foreign jurisdictions.
Violations of the FCPA may result in severe criminal or civil sanctions, and we may be subject to other
liabilities, which could negatively affect our business, operating results and financial condition. In addition, the U.S.
government may seek to hold our Company liable for successor liability FCPA violations committed by companies
in which we invest or that we acquire.
We are subject to risks associated with doing business globally.
Our operations, both within and outside the U.S., are subject to risks inherent in conducting business globally
and under the laws, regulations and customs of various jurisdictions and geographies. These risks differ in some
respects from those associated with our U.S. business and our exposure to such risks may increase if our
international business continues to grow. These risks include fluctuations in currency exchange rates, changes in
exchange controls, loss of business in government tenders that are held annually in many cases, nationalization,
increasingly complex labor environments, expropriation and other governmental actions, changes in taxation,
including legislative changes in U.S. and international taxation of income earned outside of the U.S., importation
limitations, export control restrictions, violations of U.S. or local laws, including the FCPA, dependence on a few
government entities as customers, pricing restrictions, economic destabilization, political and economic instability,
disruption or destruction in a significant geographic region - due to the location of manufacturing facilities,
distribution facilities or customers - regardless of cause, including war, terrorism, riot, civil insurrection or social
unrest, or natural or man-made disasters, including famine, flood, fire, earthquake, storm or disease.
Our international business is subject to both U.S. and foreign laws and regulations, including, without limitation,
regulations relating to import-export controls, technology transfer restrictions, repatriation of earnings, data privacy
and protection, investment, exchange rates and controls, the FCPA and other anti-corruption laws, the anti-boycott
provisions of the U.S. Export Administration Act, labor and employment, works councils and other labor groups,
taxes, environment, security restrictions, intellectual property, changes in taxation, including legislative changes in
U.S. and international taxation of income earned outside of the U.S., handling of regulated substances, and other
commercial activities. Failure by us, our employees, affiliates, partners or others with whom we work to comply
with these laws and regulations could result in administrative, civil or criminal liabilities. New regulations and
requirements, or changes to existing ones in the various countries in which we operate can significantly increase our
costs and risks of doing business internationally. Failure to comply with the laws and regulations that affect our
global operations, could have an adverse effect on our business, financial condition or results of operations.
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Changes in regulations, political leadership and environment, or security risks may dramatically affect our ability
to conduct or continue to conduct business in international markets. Our international business may also be
impacted by changes in foreign national policies and priorities, which may be influenced by changes in the threat
environment, geopolitical uncertainties, government budgets, and economic and political factors more generally, any
of which could impact funding for programs or delay purchasing decisions or customer payments. We also could be
affected by the legal, regulatory and economic impacts of Britain’s exit from the European Union, the impact of
which is not known at this time. The occurrence and impact of these factors is difficult to predict, but one or more
of them could have a material adverse effect on our financial position, results of operations and/or cash flows.
RISKS RELATED TO ACQUISITIONS AND INVESTMENTS
Acquisitions, investments and strategic alliances that we have made or may make in the future may use
significant resources, result in disruptions to our business or distractions of our management, may not proceed as
planned, and could expose us to unforeseen liabilities. We intend to continue to expand our business through the
acquisition of, investments in and strategic alliances with companies, technologies, products and services.
Acquisitions, investments and strategic alliances involve a number of special problems and risks, including, but not
limited to:
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difficulty integrating acquired technologies, products, services, operations, and personnel with the
existing businesses;
diversion of management’s attention in connection with both negotiating the acquisitions and
integrating the businesses;
strain on managerial and operational resources as management tries to oversee larger operations and
investments;
difficulty implementing and maintaining effective internal control over financial reporting at
businesses that we acquire or invest in, particularly if they are not located near our existing
operations;
exposure to unforeseen liabilities of acquired companies or companies in which we invest;
potential costly and time-consuming litigation, including stockholder lawsuits;
potential issuance of securities to equity holders of the company being acquired with rights that are
superior to the rights of holders of our Common Stock, or which may have a dilutive effect on our
stockholders;
the need to incur additional debt or use cash; and
the requirement to record potentially significant additional future operating costs for the
amortization of intangible assets.
As a result of these or other problems and risks, businesses we acquire or invest in may not produce the
revenues, earnings, or business synergies that we anticipated, and acquired products, services, or technologies might
not perform as we expected. As a result, we may incur higher costs and realize lower revenues than we had
anticipated. We may not be able to successfully address these problems and we cannot assure you that the
acquisitions or investments will be successfully identified and completed or that, if completed, the acquired
businesses, investments, products, services, or technologies will generate sufficient revenue to offset the associated
costs or other negative effects on our business.
Any of these risks can be greater if an acquisition or investment is large relative to our size. Failure to manage
effectively our growth through acquisitions could adversely affect our growth prospects, business, results of
operations, financial condition and cash flows.
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We may fail to realize the anticipated benefits of the mergers with BioReference, Transition Therapeutics, and
other acquisitions.
The success of the mergers will depend on, among other things, our ability to combine our business with that of
BioReference and Transition in a manner that facilitates growth opportunities and realizes synergies and cost
savings. We believe that the mergers will provide an opportunity for revenue growth. However, we must
successfully combine our business with that of BioReference and Transition in a manner that permits these benefits
to be realized. In addition, we must achieve the anticipated growth and cost savings without adversely affecting
current revenues and investments in future growth. If we are not able to successfully achieve these objectives, the
anticipated benefits of the mergers may not be realized fully, or at all, or may take longer to realize than expected.
The failure to integrate successfully the business and operations of BioReference in the expected time frame may
adversely affect our future results.
Historically, we and BioReference have operated as independent companies. There can be no assurances that
our and BioReference’s businesses can be integrated successfully. It is possible that the integration process could
result in the loss of our or BioReference’s key employees, the loss of customers, the disruption of either company’s
or both companies’ ongoing businesses or in unexpected integration issues, higher than expected integration costs
and an overall post-completion integration process that takes longer than originally anticipated. Specifically, the
following issues, among others, must be addressed in integrating our operations with BioReference’s operations in
order to realize the anticipated benefits of the merger so we perform as expected:
•
•
•
•
•
•
combining the companies’ operations and corporate functions, as well as obtaining anticipated
synergies;
combining our business with BioReference’s business and meeting the capital requirements of the
combined company, in a manner that permits us to achieve the cost savings or revenue synergies
anticipated to result from the merger, the failure of which would result in the anticipated benefits of
the merger not being realized in the time frame currently anticipated or at all;
integrating the companies’ technologies;
integrating and unifying the offerings and services available to customers;
identifying and eliminating redundant and underperforming functions and assets;
harmonizing and/or addressing differences in the companies’ operating practices, employee
development and compensation programs, internal controls and other policies, procedures and
processes;
• maintaining existing agreements with customers, distributors, providers and vendors and avoiding
delays in entering into new agreements with prospective customers, distributors, providers and
vendors;
•
•
•
addressing possible differences in business backgrounds, corporate cultures and management
philosophies;
consolidating the companies’ administrative and information technology infrastructure;
coordinating distribution and marketing efforts;
• managing the movement of certain positions to different locations;
•
•
coordinating geographically dispersed organizations; and
effecting actions that may be required in connection with obtaining regulatory approvals.
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In addition, at times the attention of our management and resources may be focused on the integration of the
businesses of the two companies and diverted from day-to-day business operations, which may disrupt our ongoing
business.
Funding may not be available for us to continue to make acquisitions, investments and strategic alliances in
order to grow our business.
We have made and anticipate that we may continue to make acquisitions, investments and strategic alliances
with complementary businesses, technologies, products and services to expand our business. Our growth plans rely,
in part, on the successful completion of future acquisitions. At any particular time, we may need to raise substantial
additional capital or to issue additional equity to finance such acquisitions, investments, and strategic alliances.
There is no assurance that we will be able to secure additional funding on acceptable terms, or at all, or obtain the
stockholder approvals necessary to issue additional equity to finance such acquisitions, investments, and strategic
alliances. If we are unsuccessful in obtaining the financing, our business would be adversely impacted.
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.
We have a large amount of goodwill and other intangible assets and we are required to perform an annual, or in
certain situations a more frequent, assessment for possible impairment for accounting purposes. At December 31,
2017, we have goodwill and other intangible assets of $2.0 billion, or approximately 79% of our total assets. If we
do not achieve our planned operating results, we may be required to incur a non-cash impairment charge. Any
impairment charges in the future will adversely affect our results of operations. 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.
RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK
The market price of our Common Stock may fluctuate significantly.
The market price of our Common Stock may fluctuate significantly in response to numerous factors, some of
which are beyond our control, such as:
•
•
•
•
•
•
•
•
•
•
•
•
the announcement of new products or product enhancements by us or our competitors;
results of our clinical trials and other development efforts;
developments concerning intellectual property rights and regulatory approvals;
variations in our and our competitors’ results of operations;
changes in earnings estimates or recommendations by securities analysts, if our Common Stock is
covered by analysts;
developments in the biotechnology, pharmaceutical, diagnostic, and medical device industry;
the results of product liability or intellectual property lawsuits;
future issuances of our Common Stock or other securities, including debt;
purchases and sales of our Common Stock by our officers, directors or affiliates;
the addition or departure of key personnel;
announcements by us or our competitors of acquisitions, investments, or strategic alliances; and
general market conditions and other factors, including factors unrelated to our operating
performance.
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Further, the stock market in general, and the market for biotechnology, pharmaceutical, diagnostic, and medical
device companies in particular, has experienced extreme price and volume fluctuations in recent years. Continued
market fluctuations could result in extreme volatility in the price of our Common Stock, which could cause a decline
in the value of our Common Stock.
Directors, executive officers, principal stockholders and affiliated entities own a substantial amount of our
capital stock, and they may make decisions that you do not consider to be in the best interests of our stockholders.
As of February 26, 2018, our directors, executive officers, principal stockholders, and affiliated entities
beneficially owned, in the aggregate 41.13% of our outstanding voting securities. Frost Gamma Investments Trust
(“Gamma Trust”), of which Phillip Frost, M.D., the Company’s Chairman and CEO, is the sole trustee, is deemed to
beneficially own in the aggregate approximately 32.95% of our Common Stock as of February 27, 2018. As a
result, Dr. Frost acting with other members of management, would have the ability to significantly impact the
election of our Board of Directors, the adoption or amendment of provisions in the Company’s Certificate of
Incorporation, the approval of mergers and other significant corporate transactions, and the outcome of issues
requiring approval by our stockholders. This concentration of ownership may also have the effect of delaying or
preventing a change in control of our company that may be favored by other stockholders. This could prevent
transactions in which stockholders might otherwise recover a premium for their shares over current market prices.
A significant short position in our stock could have a substantial impact on the trading price of our stock.
Historically, there has been a significant “short” position in our common stock. As of February 15, 2018,
investors held a short position of approximately 57,503,433 million shares of our common stock which represented
approximately 10.3% of our outstanding common stock. The anticipated downward pressure on our stock price due
to actual or anticipated sales of our stock by some institutions or individuals who engage in short sales of our
common stock could cause our stock price to decline. Such stock price decrease could encourage further short-sales
that could place additional downward pressure on our stock price. This could lead to further increases in the already
large short position in our common stock and cause volatility in our stock price.
The volatility of our stock may cause the value of a stockholder’s investment to decline rapidly. Additionally, if
our stock price declines, it may be more difficult for us to raise capital and may have other adverse effects on our
business.
Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act,
including with respect to companies we acquire, could have a material adverse effect on our business and
operating results. In addition, current and potential stockholders could lose confidence in our financial
reporting, which could have a material adverse effect on the price of our Common Stock.
Section 404 of the Sarbanes-Oxley Act of 2002 requires annual management assessments of the effectiveness of
our internal control over financial reporting and a report by our independent registered public accounting firm on the
effectiveness of internal control over financial reporting as of year end. We are required to report, among other
things, control deficiencies that constitute material weaknesses or changes in internal control that, or that are
reasonably likely to, materially affect internal control over financial reporting. A “material weakness” is a
significant deficiency or combination of significant deficiencies that results in more than a remote likelihood that a
material misstatement of the annual or interim financial statements will not be prevented or detected.
We have identified and remediated control deficiencies in the past, and we cannot assure you that we will at all
times in the future be able to report that our internal controls are effective. In addition, material weaknesses in the
design and operation of the internal control over financial reporting of companies that we acquire could have a
material adverse effect on our business and operating results. Our acquisition of BioReference and Transition
Therapeutics and possible future acquisitions may increase this risk by expanding the scope and nature of operations
over which we must develop and maintain internal control over financial reporting. If we cannot provide reliable
financial reports or prevent fraud, our results of operation could be harmed. Our failure to maintain the effective
internal control over financial reporting could cause the cost related to remediation to increase and could cause our
stock price to decline. In addition, we may not be able to accurately report our financial results, may be subject to
regulatory sanction, and investors may lose confidence in our financial statements.
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Compliance with changing regulations concerning corporate governance and public disclosure may result in
additional expenses.
There have been changing laws, regulations, and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002, the Dodd-Frank Act, regulations promulgated by the
Securities and Exchange Commission and rules promulgated by the NYSE and the other national securities
exchanges. These new or changed laws, regulations, and standards are subject to varying interpretations in many
cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new
guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding
compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. As a
result, our efforts to comply with evolving laws, regulations, and standards are likely to continue to result in
increased general and administrative expenses and a diversion of management time and attention from revenue-
generating activities to compliance activities. Our board members, Chief Executive Officer, Chief Financial Officer,
and Principal Accounting Officer could face an increased risk of personal liability in connection with the
performance of their duties. As a result, we may have difficulty attracting and retaining qualified board members
and executive officers, which could harm our business. If our efforts to comply with new or changed laws,
regulations, and standards differ from the activities intended by regulatory or governing bodies, we could be subject
to liability under applicable laws or our reputation may be harmed, which could materially adversely affect our
business, results of operations and financial condition.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
Our principal corporate office is located at 4400 Biscayne Blvd, Miami, Florida. We lease this space from Frost
Real Estate Holdings, LLC (“Frost Real Estate”), an entity which is controlled by Dr. Phillip Frost, our Chairman of
the Board and Chief Executive Officer. Pursuant to the lease agreement with Frost Real Estate Holdings, we lease
approximately 29,500 square feet, which encompasses space for our corporate offices and administrative services.
Effective January 1, 2017, we entered into an amendment to our lease agreement with Frost Real-Estate Holdings.
The lease, as amended, is for a three-year term. The lease provides for payments of approximately $81 thousand per
month in the first year increasing annually to $86 thousand per month in the third year, plus applicable sale tax.
The table below summarizes certain information as to our significant physical properties as of December 31,
2017:
Location
Miami, FL
Segment and Purpose
Diagnostics & Pharmaceutical: Corporate Headquarters
Type of Occupancy
Leased
Elmwood Park, NJ
Gaithersburg, MD
Kiryat Gat, Israel
Woburn, MA
Nesher, Israel
Guadalajara, Mexico
Banyoles, Spain
Palol de Revardit, Spain
Barcelona, Spain
Waterford, Ireland
Santiago, Chile
Diagnostics: Main Laboratory
Diagnostics: Genetics Laboratory
Pharmaceutical: Research and Development, CTP
Diagnostics
Pharmaceuticals: API Manufacturing
Pharmaceuticals: Pharmaceutical Manufacturing
Pharmaceuticals: Pharmaceutical Manufacturing
Warehouse
Pharmaceuticals: Research and Development
Pharmaceuticals: Pharmaceutical Manufacturing
Pharmaceuticals: Office; Warehouse
Leased
Leased
Leased
Leased
Leased
Owned
Owned
Leased
Leased
Leased
Leased
ITEM 3. LEGAL PROCEEDINGS.
We are involved from time to time in various claims and legal actions arising in the ordinary course of business.
As previously reported, in April 2017, the Civil Division of the United States Attorney’s Office for the Southern
District of New York (the “SDNY”) informed BioReference that it believes that, from 2006 to the present,
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BioReference had, in violation of the False Claims Act, improperly billed Medicare and TRICARE (both are federal
government health care programs) for clinical laboratory services provided to hospital inpatient beneficiaries at
certain hospitals. BioReference is reviewing and assessing the allegations made by the SDNY, and, at this point,
BioReference has not determined whether there is any merit to the SDNY’s claims nor can it determine the extent of
any potential liability. While management cannot predict the outcome of these matters at this time, the ultimate
outcome could be material to our business, financial condition, results of operations, and cash flows.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our Common Stock is traded publicly on the NASDAQ Stock Market (“NASDAQ”) and the Tel Aviv Stock
Exchange under the symbol “OPK”. On June 24, 2016, we moved our stock exchange listing to NASDAQ from the
New York Stock Exchange (“NYSE”).
The following table sets forth for the periods indicated the high and low sales prices per share of our Common
Stock during each of the quarters set forth below as reported on the NASDAQ or NYSE, as applicable:
2017
First Quarter ....................................................... $
Second Quarter ..................................................
Third Quarter .....................................................
Fourth Quarter ...................................................
2016
First Quarter ....................................................... $
Second Quarter ..................................................
Third Quarter .....................................................
Fourth Quarter ...................................................
High
Low
9.55 $
8.04
7.24
7.08
11.85 $
11.39
11.31
12.15
7.13
5.99
5.85
4.50
7.12
8.71
8.91
8.92
As of February 20, 2018, there were approximately 620 holders of record of our Common Stock.
We have not declared or paid any cash dividends on our Common Stock. No cash dividends have been
previously paid on our Common Stock and none are anticipated in fiscal 2018.
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Stock Performance Graph
The following graph compares the five-year cumulative total return of our Common Stock with the S&P 500
Index and the NASDAQ Biotechnology Index. The graph assumes $100 invested on December 31, 2012 in our
Common Stock and in each of the foregoing indices. The stock price performance reflected in the graph below is
not necessarily indicative of future price performance.
OPKO Health, Inc. .............. $
S&P 500 ..............................
NASDAQ Biotechnology ....
12/31/2012 12/31/2013 12/31/2014 12/31/2015 12/31/2016 12/31/2017
100.00 $ 175.47 $ 207.69 $ 208.94 $ 193.35 $ 101.87
208.14
100.00
228.29
100.00
150.51
230.33
170.84
194.95
132.39
174.05
152.59
244.29
Recent Sales of Unregistered Securities
None.
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ITEM 6. SELECTED FINANCIAL DATA.
The following selected historical consolidated statement of operations data for the years ended December 31,
2017, 2016, 2015, 2014 and 2013 and the consolidated balance sheet data as of December 31, 2017, 2016, 2015,
2014 and 2013, below are derived from our audited consolidated financial statements and related notes thereto. This
data should be read in conjunction with our “Management’s Discussion and Analysis of Financial Condition and
Results of Operation” and our consolidated financial statements and the related notes thereto.
(In thousands, except share and per share information)
Statement of operations data:
Revenues ....................................................................... $ 1,067,503 $ 1,221,661 $
Costs and expenses:
2017
2016
For the years ended December 31,
2015
2014
2013
491,738 $
91,125 $
96,530
Cost of revenue ..........................................................
Operating expenses ....................................................
Total costs and expenses ...............................................
Operating loss ...............................................................
Other income and (expense), net...................................
Income tax benefit (provision) ......................................
Net loss .........................................................................
Net loss attributable to common shareholders .............. $
Loss per share, basic and diluted:
620,130
727,435
1,347,565
(280,062 )
4,518
(18,855 )
(308,870 )
(308,870 ) $
611,482
683,454
1,294,936
(73,275 )
(271 )
56,115
(25,083 )
(25,083 ) $
235,239
354,980
590,219
(98,481 )
(39,517 )
113,675
(31,428 )
(30,028 ) $
48,009
188,931
236,940
(145,815 )
(25,212 )
(24 )
(174,638 )
(171,666 ) $
48,860
127,302
176,162
(79,632 )
(24,586 )
(1,672 )
(117,346 )
(114,827 )
Net loss per share ...................................................... $
(0.55 ) $
(0.05 ) $
(0.06 ) $
(0.41 ) $
(0.32 )
Weighted average number of common shares
outstanding basic and diluted: ...................................
559,160,565
550,846,553
488,065,908
422,014,039
355,095,701
Balance sheet data:
Total assets ................................................................... $ 2,584,556 $ 2,766,619 $ 2,799,188 $ 1,267,664 $ 1,391,516
426,687
567,492 $
397,843 $
Long-term liabilities ..................................................... $
872,979
Total shareholders’ equity............................................. $ 1,885,378 $ 2,091,808 $ 1,979,794 $
348,812 $
835,741 $
411,515 $
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 (“PSLRA”), Section 27A of the Securities Act of 1933, as amended, (the
“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”),
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 contained in “Item
1A — Risk Factors” of this Annual Report on Form 10-K. 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
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.
OVERVIEW
We are a diversified healthcare company that seeks to establish industry-leading positions in large and rapidly
growing medical markets. Our diagnostics business includes BioReference Laboratories (“BioReference”), the
nation’s third-largest clinical laboratory with a core genetic testing business and an almost 400-person sales and
marketing team to drive growth and leverage new products, including the 4Kscore prostate cancer test and the
Claros 1 in-office immunoassay platform (in development). Our pharmaceutical business features Rayaldee, an
FDA-approved treatment for secondary hyperparathyroidism (“SHPT”) in adults with stage 3 or 4 chronic kidney
disease (“CKD”) and vitamin D insufficiency (launched in November 2016), and VARUBI™ for chemotherapy-
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induced nausea and vomiting (oral formulation launched by partner TESARO in November 2015 and IV
formulation launched in November 2017), OPK88004, a selective androgen receptor modulator being developed for
benign prostatic hyperplasia and other urologic and metabolic conditions, and OPK88003, a once or twice weekly
oxyntomodulin for type 2 diabetes and obesity which is a clinically advanced drug candidate among the new class of
GLP-1 glucagon receptor dual agonists (Phase 2b). Our pharmaceutical business also features hGH-CTP, a once-
weekly human growth hormone injection (in Phase 3 and partnered with Pfizer), and a once-daily Factor VIIa drug
for hemophilia (Phase 2a).
We operate established pharmaceutical platforms in Spain, Ireland, Chile and Mexico, which are generating
revenue and from which we expect to generate positive cash flow and facilitate future market entry for our products
currently in development. EirGen, our specialty pharmaceutical manufacturing and development site in Ireland, is
focused on the development and commercial supply of high potency, high barrier to entry pharmaceutical products.
In addition, we operate 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 products.
RECENT DEVELOPMENTS
On October 12, 2017, EirGen, our wholly-owned subsidiary, and Japan Tobacco Inc. (“JT”) entered into a
Development and License Agreement (the “JT Agreement”) granting JT the exclusive rights for the development
and commercialization of Rayaldee in Japan (the “JT Territory”). The license grant to JT covers the therapeutic and
preventative use of Rayaldee for (i) SHPT in non-dialysis and dialysis patients with CKD, (ii) rickets, and
(iii) osteomalacia (the “JT Initial Indications”), as well as such additional indications as may be added to the scope
of the license subject to the terms of the JT Agreement (the “JT Additional Indications”, and together with the JT
Initial Indications, the “JT Field”).
OPKO received an initial upfront payment of $6 million. OPKO will receive another $6 million upon the
initiation of OPKO’s planned phase 2 study for Rayaldee in dialysis patients in the U.S. OPKO is also eligible to
receive up to an additional aggregate amount of $31 million upon the achievement of certain regulatory and
development milestones by JT for Rayaldee in the JT Territory, and $75 million upon the achievement of certain
sales based milestones by JT in the JT Territory. OPKO will also receive tiered, double digit royalty payments at
rates ranging from low double digits to mid-teens on sales of Rayaldee within the JT Territory and in the JT Field.
JT will, at its sole cost and expense, be responsible for performing all development activities necessary to obtain all
regulatory approvals for Rayaldee in Japan and for all commercial activities pertaining to Rayaldee in Japan, except
for certain preclinical expenses which OPKO has agreed to reimburse JT up to a capped amount.
RESULTS OF OPERATIONS
For The Years Ended December 31, 2017 and December 31, 2016
Revenues
2017
(In thousands)
889,076 $ 1,012,129 $ (123,053 )
Revenue from services ............................................................... $
24,292
83,467
107,759
Revenue from products ..............................................................
126,065
70,668
Revenue from transfer of intellectual property and other ..........
(55,397 )
Total revenues ............................................................................ $ 1,067,503 $ 1,221,661 $ (154,158 )
Change
2016
For the years ended
December 31,
The decrease in Revenue from services is attributable to decreased reimbursement at BioReference’s GeneDx
division and decreased volume and overall reimbursement at BioReference. Revenue from services for the year
ended December 31, 2017 was also affected by adjustments to the estimated payment amounts from third-party
payors and claims of overpayment, including as a result of payor error. The increase in Revenue from products
principally reflects an increase in revenue from OPKO Chile, Spain and EirGen. Revenue from products in 2017
also reflects $9.1 million of revenue from sales of Rayaldee, which was launched in the U.S. in November 2016.
Revenue from transfer of intellectual property decreased as a result of $50.0 million of revenue from the initial
payment in the VFMCRP Agreement for the year ended December 31, 2016, which was partially offset by $10.0
million of revenue from a milestone payment from our licensee, TESARO, for the year ended December 31, 2017.
Revenue from transfer of intellectual property for the years ended December 31, 2017 and 2016 also reflects $57.8
million and $70.6 million, respectively, of revenue related to the Pfizer Transaction.
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Costs of revenue. Costs of revenue for the year ended December 31, 2017 increased $8.6 million compared to
the prior year. The decrease in cost of service revenue is attributable to decreased revenue at BioReference. The
increase in cost of product revenue is attributable to an increase in revenue at OPKO Chile, Spain and EirGen and to
cost of revenue related to sales of Rayaldee, which was launched in the U.S. in November 2016. Also included in
cost of product revenue for the year ended December 31, 2017 is $5.4 million of inventory obsolescence expense
related primarily to the launch of Rayaldee. Cost of revenue for the years ended December 31, 2017 and 2016 were
as follows:
Cost of Revenue
(In thousands)
Cost of service revenue ........................................................... $
Cost of product revenue ..........................................................
Total cost of revenue ............................................................... $
For the years ended
December 31,
Change
2017
558,953 $
61,177
620,130 $
2016
564,103 $
47,379
611,482 $
(5,150 )
13,798
8,648
Selling, general and administrative expenses. Selling, general and administrative expenses for the years ended
December 31, 2017 and 2016 were $521.0 million and $490.9 million, respectively. The increase in selling, general
and administrative expenses was primarily due to costs related to the launch of Rayaldee and increased selling,
general and administrative expenses at BioReference, which was partially offset by a decrease in severance costs.
Included in selling, general and administrative expenses for the years ended December 31, 2017 and 2016 are $5.8
million and $17.9 million, respectively, of net severance costs for certain BioReference executives. These severance
costs include $2.8 million and $8.9 million of expense related to the acceleration of stock option vesting for certain
BioReference executives in 2017 and 2016, respectively. Selling, general and administrative expenses for the year
ended December 31, 2017 also include $8.8 million of expense to write-off certain other current assets.
Selling, general and administrative expenses during the years ended December 31, 2017 and 2016, include
equity-based compensation expense of $21.2 million and $33.4 million, respectively, including the expense related
to the acceleration of stock option vesting for certain BioReference executives.
Research and development expenses. Research and development expenses for the years ended December 31,
2017 and 2016 were $125.2 million and $111.2 million, respectively. Research and development costs include
external and internal expenses, partially offset by third-party grants and funding 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. We track external research and development expenses by individual program for phase 3 clinical trials for
drug approval and PMAs for diagnostics tests, if any. Internal expenses include employee-related expenses
including salaries, benefits and equity-based compensation expense. Other internal research and development
expenses are incurred to support overall research and development activities and include expenses related to general
overhead and facilities.
The following table summarizes the components of our research and development expenses:
For the years ended December 31,
2017
2016
External expenses:
Phase 3 clinical trials .................................................................... $
Manufacturing expense for biological products ...........................
PMA studies .................................................................................
Earlier-stage programs .................................................................
Research and development employee-related expenses ....................
Other internal research and development expenses ..........................
Third-party grants and funding from collaboration agreements .......
15,339
47,737
1,089
7,620
29,970
24,680
(1,249 )
Total research and development expenses ................................. $ 125,186
$
12,161
35,985
—
6,297
28,676
30,752
(2,666 )
$ 111,205
The increase in research and development expenses is primarily due to an increase in research and development
expenses related to hGH-CTP, a long acting human growth hormone which was outlicensed to Pfizer in 2015, and to
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the acquisition of Transition Therapeutics in August 2016. In addition, during the years ended December 31, 2017
and 2016, we recorded, as an offset to research and development expenses, $1.2 million and $2.7 million,
respectively, related to research and development grants received from our collaboration and funding agreements.
Research and development expenses for the years ended December 31, 2017 and 2016 include equity-based
compensation expenses of $5.1 million and $7.5 million, respectively. We expect our research and development
expenses to increase as we continue to expand our research and development of potential future products.
Contingent consideration. Contingent consideration income (expense) for the years ended December 31, 2017
and 2016, were $3.4 million of income and $17.0 million of expense, respectively. The change in contingent
consideration income (expense) was attributable to contingent consideration for OPKO Renal during the year ended
December 31, 2017 due to changes in assumptions regarding the timing of achievement of future milestones of
Rayaldee. The contingent consideration liabilities of $41.4 million at December 31, 2017 relate to potential amounts
payable to former stockholders of CURNA, OPKO Diagnostics and OPKO Renal pursuant to our acquisition
agreements in January 2011, October 2011 and March 2013, respectively.
Amortization of intangible assets. Amortization of intangible assets was $84.7 million and $64.4 million,
respectively, for the years ended December 31, 2017 and 2016. Amortization expense reflects the amortization of
acquired intangible assets with defined useful lives. Amortization of intangible assets for the years ended
December 31, 2017 and 2016 includes $16.0 million and $8.0 million, respectively, of amortization expense related
to intangible assets for Rayaldee. Upon the FDA’s approval of Rayaldee in June 2016, we reclassified $187.6
million of IPR&D related to Rayaldee from In-process research and development to Intangible assets, net in our
Consolidated Balance Sheets and began to amortize that asset. Our indefinite lived IPR&D assets will not be
amortized until the underlying development programs are completed. Upon obtaining regulatory approval by the
U.S. FDA, the IPR&D assets will be accounted for as a finite-lived intangible asset and amortized on a straight-line
basis over its estimated useful life. Amortization of intangible assets for the year ended December 31, 2017 also
includes an impairment charge of $13.2 million to write our intangible asset for VARUBI™ down to its estimated
fair value.
Interest income. Interest income for the years ended December 31, 2017 and 2016, was not significant as our
cash investment strategy emphasizes the security of the principal invested and fulfillment of liquidity needs.
Interest expense. Interest expense for the years ended December 31, 2017 and 2016, was $6.6 million and $7.4
million, respectively. Interest expense is principally related to interest incurred on the 2033 Senior Notes including
amortization of related deferred financing costs and to the interest incurred on BioReference’s outstanding debt
under its credit facility.
Fair value changes of derivative instruments, net. Fair value changes of derivative instruments, net for the years
ended December 31, 2017 and 2016, were $0.1 million and $2.8 million of income, respectively. Fair value changes
of derivative instruments, net reflects non-cash income related to the changes in the fair value of the embedded
derivatives in the 2033 Senior Notes of $3.2 million and $7.0 million for the years ended December 31, 2017 and
2016, respectively. For the year ended December 31, 2017, we observed a decrease in the market price of our
Common Stock which resulted in the decrease in the estimated fair value of our embedded derivatives in the 2033
Senior Notes through the last valuation on February 1, 2017. Fair value changes of derivative instruments, net for
the year ended December 31, 2017 also reflects $2.9 million of expense related to the change in the fair value of
warrants and options to purchase additional shares of Neovasc, Inc. (“Neovasc”) and Xenetic Biosciences, Inc.
(“Xenetic”). Fair value changes of derivative instruments, net for the year ended December 31, 2016 also reflects
$4.2 million of expense related to the change in the fair value of warrants and options to purchase additional shares
of Neovasc, Cocrystal Pharma, Inc. (“Cocrystal”), ARNO Therapeutics, Inc. (“ARNO”) and MabVax Therapeutics
Holdings, Inc. (“MabVax”).
Other income and (expense), net. Other income and (expense), net for the years ended December 31, 2017 and
2016, were $10.5 million and $3.9 million of income, respectively. Other income for the year ended December 31,
2017 primarily consists of a $3.0 million gain on the sale of non-strategic assets at a wholly-owned BioReference
subsidiary, a $1.5 million gain on the sale of certain available for sale investments, a $2.5 million gain in connection
with the acquisition transaction between Eloxx Pharmaceuticals, Inc. and Sevion Therapeutics, Inc., and a $1.9
million gain in connection with the dilution of our equity method investment in VBI Vaccines Inc. (“VBI”). Other
income (expense), net for the year ended December 31, 2016 primarily consists of a $2.5 million gain recognized in
connection with the merger of SciVac Therapeutics Inc. (“STI”) and VBI, a $5.0 million gain recognized in
connection with the settlement of a legal matter and foreign currency transaction gains recognized during the period,
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which was partially offset by a $4.8 million other-than-temporary impairment charge to write our investments in
Xenetic, ARNO and RXi Pharmaceuticals Corporation (“RXi”) down to their respective fair values.
Income tax benefit (provision). Our income tax benefit (provision) for the years ended December 31, 2017 and
2016 was $(18.9) million, and $56.1 million, respectively. The change in income tax provision is primarily due to
the establishment of valuation allowance against certain U.S. and non-U.S. deferred tax assets. As of December 31,
2017, the Company determined that it is more likely than not that certain U.S. and non-U.S. deferred tax assets will
not be realized and recorded a valuation allowance of $28.7 million. On December 22, 2017, the Tax Act was
enacted into law and the new legislation reduced the corporate income tax rate from 35% to 21% which required us
to remeasure our U.S. deferred tax assets and liabilities and recognize the effect in the period of enactment, resulting
in $31.8 million of expense, with an equal offset to valuation allowance.
Loss from investments in investees. We have made investments in other early stage companies that we perceive
to have valuable proprietary technology and significant potential to create value for us as a shareholder or member.
We account for these investments under the equity method of accounting, resulting in the recording of our
proportionate share of their losses until our share of their loss exceeds our investment. Until the investees’
technologies are commercialized, if ever, we anticipate they will report a net loss. Loss from investments in
investees was $14.5 million and $7.7 million for the years ended December 31, 2017 and 2016, respectively. The
increase in Loss from investments in investees is attributable to losses recognized on our investment in
Pharmsynthez in 2017.
For The Years Ended December 31, 2016 and December 31, 2015
Revenues. Revenues for the year ended December 31, 2016 increased $729.9 million compared to the prior year.
Revenues for the years ended December 31, 2016 and 2015 were as follows:
Revenues
(In thousands)
Revenue from services ............................................................. $ 1,012,129 $
Revenue from products .............................................................
Revenue from transfer of intellectual property and other .........
Total revenues .......................................................................... $ 1,221,661 $
83,467
126,065
2016
2015
Change
329,739 $ 682,390
3,321
80,146
81,853
44,212
491,738 $ 729,923
For the years ended
December 31,
The increase in Revenue from services is attributable to the acquisition of BioReference in August 2015. The
increase in Revenue from products principally reflects an increase in revenue from EirGen, which we acquired in
May 2015, and an increase in revenue from OPKO Chile. Revenue from transfer of intellectual property for the year
ended December 31, 2016 principally reflects $50.0 million of revenue from the initial payment in the VFMCRP
Agreement and $70.6 million of revenue from the transfer of intellectual property related to the Pfizer Transaction.
Revenue from transfer of intellectual property for the year ended December 31, 2015 principally reflects $65.5
million of revenue from the transfer of intellectual property related to the Pfizer Transaction and $15.0 million of
revenue from a milestone payment from our licensee, TESARO, in the fourth quarter of 2015.
Costs of revenue. Costs of revenue for the year ended December 31, 2016 increased $376.2 million compared to
the prior year. Our acquisition of BioReference in August 2015 accounted for $375.9 million of the increase in cost
of service revenue. The increase in cost of product revenue is attributable to an increase in cost of revenue from
EirGen and OPKO Chile, which was partially offset by the deconsolidation of SciVac Therapeutics Inc. (“STI”) in
July 2015. Cost of revenue for the years ended December 31, 2016 and 2015 were as follows:
Cost of Revenue
(In thousands)
Cost of service revenue ............................................................ $
Cost of product revenue ............................................................
Total cost of revenue ................................................................ $
For the years ended
December 31,
2016
564,103 $
47,379
611,482 $
2015
Change
193,305 $ 370,798
5,445
41,934
235,239 $ 376,243
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Selling, general and administrative expenses. Selling, general and administrative expenses for the years ended
December 31, 2016 and 2015 were $490.9 million and $196.6 million, respectively. The increase in selling, general
and administrative expenses for the year ended December 31, 2016 was primarily due to the acquisition of
BioReference in August 2015, which accounted for $382.4 million of selling, general and administrative expenses in
the 2016 period compared to $118.1 million for the comparable period of 2015. In addition, the year ended
December 31, 2016 included costs related to the launch of Rayaldee. Included in selling, general and administrative
expenses for the year ended December 31, 2016 are $17.9 million of severance costs for certain BioReference
executives.
Selling, general and administrative expenses during the years ended December 31, 2016 and 2015, include
equity-based compensation expense of $33.4 million and $17.4 million, respectively. The increase in equity-based
compensation expense is due to additional options grants made in 2016 and $8.9 million of expense related to the
acceleration of stock option vesting for certain BioReference executives.
Research and development expenses. Research and development expenses for the years ended December 31,
2016 and 2015 were $111.2 million and $99.5 million, respectively. Research and development costs include
external and internal expenses, partially offset by third-party grants and funding 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. We track external research and development expenses by individual program for phase 3 clinical trials for
drug approval and PMA’s (pre-market approval) for diagnostics tests, if any. Internal expenses include employee-
related expenses including salaries, benefits and stock-based compensation expense. Other internal research and
development expenses are incurred to support overall research and development activities and include expenses
related to general overhead and facilities.
The following table summarizes the components of our research and development expenses:
For the years ended December 31,
2016
2015
External expenses:
Phase 3 clinical trials ..................................................................... $
Manufacturing expense for biological products .............................
Earlier-stage programs ...................................................................
Research and development employee-related expenses .....................
Other internal research and development expenses ............................
Third-party grants and funding from collaboration agreements .........
12,161
35,985
6,297
28,676
30,752
(2,666 )
Total research and development expenses ................................... $ 111,205
$
$
12,178
31,202
6,900
27,363
24,161
(2,316 )
99,488
The increase in research and development expenses during the year ended December 31, 2016, is due to an
increase in research and development expenses related to hGH-CTP, a long acting human growth hormone which
was outlicensed to Pfizer in 2015, and to an increase in research and development expenses for Factor VIIa-CTP.
Research and development expenses for the year ended December 31, 2016 also include $8.8 million from the
acquisitions of BioReference and EirGen in August 2015 and May 2015, respectively, compared to $4.1 million for
the comparable period of 2015. This was partially offset by decreased expenses incurred by OPKO Renal related to
the development of Rayaldee. In addition, during the years ended December 31, 2016 and 2015, we recorded, as an
offset to research and development expenses, $2.7 million and $2.3 million, respectively, related to research and
development grants received from our collaboration and funding agreements. Research and development expenses
for the year ended December 31, 2016 and 2015 include equity-based compensation expenses of $7.5 million and
$7.9 million, respectively. We expect our research and development expenses to increase as we continue to expand
our research and development of potential future products.
Contingent consideration. Contingent consideration expense for the years ended December 31, 2016 and 2015,
were $17.0 million and $5.1 million, respectively. The increase in contingent consideration is attributable to OPKO
Renal resulting from an increase in the fair value of our contingent obligations due to changes in assumptions
regarding the timing of successful achievement of future milestones driven by the FDA approval of Rayaldee in
June 2016. The contingent consideration liabilities at December 31, 2016 relate to potential amounts payable to
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former stockholders of CURNA, OPKO Diagnostics, OPKO Health Europe and OPKO Renal pursuant to our
acquisition agreements in January 2011, October 2011, August 2012 and March 2013, respectively.
Amortization of intangible assets. Amortization of intangible assets was $64.4 million and $28.0 million,
respectively, for the years ended December 31, 2016 and 2015. Amortization expense reflects the amortization of
acquired intangible assets with defined useful lives. Amortization of intangible assets for the year ended
December 31, 2016 also includes $8.0 million of amortization expense related to intangible assets for Rayaldee.
Upon the FDA’s approval of Rayaldee in June 2016, we reclassified $187.6 million of IPR&D related to Rayaldee
from In-process research and development to Intangible assets, net in our Consolidated Balance Sheet and began to
amortize that asset. Amortization of intangible assets for the year ended December 31, 2016 includes $43.2 million
and $2.5 million from BioReference and EirGen which we acquired in August 2015 and May 2015, respectively,
compared to $14.6 million and $1.7 million, respectively, for the comparable period of 2015.
Grant repayment. During the year ended December 31, 2015, we made a payment of $25.9 million to the Office
of the Chief Scientist of the Israeli Ministry of Economy (“OCS”) in connection with repayment obligations
resulting from grants previously made by the OCS to OPKO Biologics to support development of hGH-CTP and the
outlicense of the technology outside of Israel. We did not have any such activity for the year ended December 31,
2016.
Interest income. Interest income for the years ended December 31, 2016 and 2015, was not significant as our
cash investment strategy emphasizes the security of the principal invested and fulfillment of liquidity needs.
Interest expense. Interest expense for the years ended December 31, 2016 and 2015, was $7.4 million and $8.4
million, respectively. Interest expense is principally related to interest incurred on the 2033 Senior Notes including
amortization of related deferred financing costs and to the interest incurred on BioReference's outstanding debt
under its credit facility. The decrease in interest expense for the year ended December 31, 2016 is due to a decrease
in the average principal amount of the 2033 Senior Notes outstanding in 2016 compared to 2015. Interest expense
for the year ended December 31, 2015 also reflects a non-cash write-off of deferred financing costs of $1.0 million
as interest expense related to the exchange of $55.4 million principal of 2033 Senior Notes in 2015. This was
partially offset by interest incurred on BioReference’s outstanding debt under its credit facility for the year ended
December 31, 2016.
Fair value changes of derivative instruments, net. Fair value changes of derivative instruments, net for the years
ended December 31, 2016 and 2015, were $2.8 million of income and $39.1 million of expense, respectively. Fair
value changes of derivative instruments, net related to non-cash income (expense) reflects the changes in the fair
value of the embedded derivatives in the 2033 Senior Notes of $7.0 million of income and $36.6 million of expense
for the years ended December 31, 2016 and 2015, respectively. Fair value changes of derivative instruments, net for
the year ended December 31, 2016 also reflects $4.2 million of expense related to the change in the fair value of
warrants and options to purchase additional shares of Neovasc, Cocrystal, ARNO and MabVax.
Other income and (expense), net. Other income and (expense), net for the years ended December 31, 2016 and
2015, were $3.9 million and $7.7 million of income, respectively. Other income (expense), net for the year ended
December 31, 2016 primarily consists of a $2.5 million gain recognized in connection with the merger of STI and
VBI, a $5.0 million gain recognized in connection with the settlement of a legal matter and foreign currency
transaction gains recognized during the period, which was partially offset by a $4.8 million other-than-temporary
impairment charge to write our investments in Xenetic, ARNO and RXi down to their respective fair values. Other
income (expense), net for the year ended December 31, 2015 primarily consists of a $15.9 million gain recognized
on the deconsolidation of STI in 2015 which was partially offset by a $7.3 million other-than-temporary impairment
charge to write our investment in RXi down to its fair value.
Income tax benefit (provision). Our income tax benefit for the years ended December 31, 2016 and 2015 was
$56.1 million, and $113.7 million, respectively. The change in income taxes is primarily due to a $93.4 million
release of OPKO’s valuation allowance in 2015 on our U.S. deferred tax assets as a result of the merger with
BioReference and to changes in the geographic mix of revenues and expenses. In addition, income taxes in 2016
benefited from a favorable corporate tax rate reduction in Israel.
Loss from investments in investees. We have made investments in other early stage companies that we perceive
to have valuable proprietary technology and significant potential to create value for us as a shareholder or member.
We account for these investments under the equity method of accounting, resulting in the recording of our
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proportionate share of their losses until our share of their loss exceeds our investment. Until the investees’
technologies are commercialized, if ever, we anticipate they will continue to report a net loss. Loss from
investments in investees was $7.7 million and $7.1 million for the years ended December 31, 2016 and 2015,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2017, we had cash and cash equivalents of approximately $91.5 million. Cash used in
operations of $92.1 million during 2017 principally reflects expenses related to general and administrative activities
of our corporate operations, research and development activities and our launch activities related to Rayaldee. Cash
used in investing activities primarily reflects capital expenditures of $46.5 million. Cash provided by financing
activities primarily reflects net borrowings on lines of credit of $58.9 million. We have not generated sustained
positive cash flow sufficient to offset our operating and other expenses and our primary source of cash has been
from the public and private placement of stock, the issuance of the 2033 Senior Notes and credit facilities available
to us.
On October 12, 2017, EirGen, our wholly-owned subsidiary, and Japan Tobacco Inc. (“JT”) entered into a
Development and License Agreement (the “JT Agreement”) granting JT the exclusive rights for the development
and commercialization of Rayaldee in Japan (the “JT Territory”). The license grant to JT covers the therapeutic and
preventative use of Rayaldee for (i) SHPT in non-dialysis and dialysis patients with CKD, (ii) rickets, and
(iii) osteomalacia, as well as such additional indications as may be added to the scope of the license subject to the
terms of the JT Agreement. In connection with the transaction, OPKO received an initial upfront payment of $6
million, and OPKO will receive another $6 million upon the initiation of OPKO’s planned phase 2 study for
Rayaldee in dialysis patients in the U.S. OPKO is also eligible to receive up to an additional aggregate amount of
$31 million upon the achievement of certain regulatory and development milestones by JT for Rayaldee in the JT
Territory, and $75 million upon the achievement of certain sales based milestones by JT in the JT Territory. OPKO
will also receive tiered, double digit royalty payments at rates ranging from low double digits to mid-teens on sales
of Rayaldee within the JT Territory. JT will, at its sole cost and expense, be responsible for performing all
development activities necessary to obtain all regulatory approvals for Rayaldee in Japan and for all commercial
activities pertaining to Rayaldee in Japan, except for certain preclinical expenses which OPKO has agreed to
reimburse JT up to a capped amount.
In August 2017, we entered into a Commitment Letter (the “Commitment Letter”) with Veterans Accountable
Care Group, LLC (“VACG”) in connection with submission of a bid by its affiliate, the Veterans Accountable Care
Organization, LLC (“VACO”) in response to a request for proposal (“RFP”) from the Veterans Health
Administration (“VA”) regarding its Community Care Network. If VACO is successful in its bid, we will acquire a
fifteen percent (15%) membership interest in VACO. In addition, BioReference, our wholly-owned subsidiary, will
provide laboratory services for the Community Care Network, a region which currently includes approximately
2,133,000 veterans in the states of Massachusetts, Maine, New Hampshire, Vermont, New York, Pennsylvania, New
Jersey, Rhode Island, Connecticut, Maryland, Virginia, West Virginia, and North Carolina.
Pursuant to the Commitment Letter, we committed to provide, or to arrange from a third party lender, a line of
credit for VACG in the amount of $50.0 million (the “Facility”). Funds drawn under the Facility would be
contributed by VACG to VACO in order to satisfy the financial stability requirement of VACO in connection with
its submission of the RFP. VACG would not be permitted to draw down on the Facility unless and until the VHA
awards a contract to VACO. The Facility would have a maturity of five (5) years. Interest on the Facility would be
payable at a rate equal to six and one-half percent (6.5%) per annum, payable quarterly in arrears. The Facility is
subject to the negotiation of definitive documentation conditions customary for transactions of such type and
otherwise acceptable to VACG and the lender under the Facility.
We currently anticipate that a decision by the VHA with respect to the RFP will occur during 2018, although
there can be no assurance that a decision will be made by such time or that, if favorable, such decision will not be
challenged by participants in the RFP process or otherwise.
In November 2016, we launched commercial sales for Rayaldee in the U.S. market. The FDA approved
Rayaldee extended release capsules in June 2016 for the treatment of SHPT in adults with stage 3 or 4 CKD and
serum total 25-hydroxyvitamin D levels less than 30 ng/mL. We have a highly specialized sales and marketing team
dedicated to the launch and commercialization of Rayaldee, and we increased the sales and marketing team in the
second half of 2017 as market access improves and prescription trends increase.
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In August 2016, we completed the acquisition of Transition Therapeutics, a clinical stage biotechnology
company. Holders of Transition Therapeutics common stock received 6,431,899 shares of OPKO Common Stock.
The transaction was valued at approximately $58.5 million, based on a closing price per share of our Common Stock
of $9.10 as reported by NASDAQ on the closing date.
In May 2016, EirGen, our wholly-owned subsidiary, partnered with VFMCRP through a Development and
License Agreement for the development and commercialization of Rayaldee in Europe, Canada, Mexico, Australia,
South Korea and certain other international markets. The license to VFMCRP potentially covers all therapeutic and
prophylactic uses of the product in human patients, provided that initially the license is for the use of the product for
the treatment or prevention of SHPT related to patients with stage 3 or 4 chronic kidney disease and vitamin D
insufficiency/deficiency (“VFMCRP Initial Indication”). We received a non-refundable and non-creditable upfront
payment of $50 million and are eligible to receive up to an additional $232 million upon the achievement of certain
regulatory and sales-based milestones. In addition, we are eligible to receive tiered royalties on sales of the product
at percentage rates that range from the mid-teens to the mid-twenties or a minimum royalty, whichever is greater,
upon commencement of sales of the product.
As part of the arrangement, the companies will share responsibility for the conduct of trials specified within an
agreed-upon development plan, with each company leading certain activities within the plan. For the initial
development plan, the companies have agreed to certain cost sharing arrangements. VFMCRP will be responsible
for all other development costs that VFMCRP considers necessary to develop the product for the VFMCRP Initial
Indication in the VFMCRP Territory except as otherwise provided in the VFMCRP Agreement. EirGen also
granted to VFMCRP an option to acquire an exclusive license to use, import, offer for sale, sell, distribute and
commercialize the product in the United States for treatment of SHPT in dialysis patients with stage 5 CKD and
vitamin D insufficiency (the “Dialysis Indication”). Upon exercise of the Option, VFMCRP will reimburse EirGen
for all of the development costs incurred by EirGen with respect to the product for the Dialysis Indication in the
United States. VFMCRP would also pay EirGen up to an additional aggregate amount of $555 million upon the
achievement of certain milestones and would be obligated to pay royalties on sales of the product at percentage rates
that range from the mid-teens to the mid-twenties or a minimum royalty, whichever is greater, upon commencement
of sales of the product.
In January 2015, we partnered with Pfizer through a worldwide agreement for the development and
commercialization of our long-acting hGH-CTP for the treatment of GHD in adults and children, as well as for the
treatment of growth failure in children born SGA. Under the terms of the agreements with Pfizer, we received non-
refundable and non-creditable upfront payments of $295.0 million in 2015 and are eligible to receive up to an
additional $275 million upon the achievement of certain regulatory milestones. Pfizer received the exclusive license
to commercialize hGH-CTP worldwide. In addition, we are eligible to receive initial tiered royalty payments
associated with the commercialization of hGH-CTP for Adult GHD with percentage rates ranging from the high
teens to mid-twenties. Upon the launch of hGH-CTP for Pediatric GHD in certain major markets, the royalties will
transition to regional, tiered gross profit sharing for both hGH-CTP and Pfizer’s Genotropin®.
We will lead the clinical activities and will be responsible for funding the development programs for the key
indications, which includes Adult and Pediatric GHD and Pediatric SGA. Pfizer will be responsible for all
development costs for additional indications as well as all post-marketing studies. In addition, Pfizer will fund the
commercialization activities for all indications and lead the manufacturing activities covered by the global
development plan. In December 2016, we announced preliminary topline data from our Phase 3, double blind,
placebo controlled study of hGH-CTP in adults with GHD. Although there was no statistically significant difference
between hGH-CTP and placebo on the primary endpoint of change in trunk fat mass from baseline to 26 weeks,
after unblinding the study, we identified an exceptional value of trunk fat mass reduction in the placebo group that
may have affected the primary outcome.
We have completed post-hoc sensitivity analyses to evaluate the influence of outliers on the primary endpoint
results using multiple statistical approaches. Analyses that excluded outliers showed a statistically significant
difference between hGH-CTP and placebo on the change in trunk fat mass. Additional analyses that did not exclude
outliers showed mixed results. Following completion of the analyses, OPKO and Pfizer agreed that OPKO may
proceed to discuss a possible BLA submission with the FDA.
We are constructing a research, development and manufacturing center in Waterford, Ireland, for which we
expect to incur between $40 million and $45 million for the construction and validation of the facility. Construction
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of the facility began in the fourth quarter of 2016 with expected completion in 2019. Currently, we plan to fund the
project from cash on hand or from third party funding sources that may be available to us.
Our licensee, TESARO, received approval by the U.S. FDA in September 2015 for oral VARUBI™, a
neurokinin-1 receptor antagonist for the prevention of chemotherapy-induced nausea and vomiting. In
November 2015, TESARO announced the commercial launch of oral VARUBI™ in the United States. TESARO
launched its IV formulation of VARUBI™ (“VARUBI™ IV”) in November 2017. We received $30.0 million of
milestone payments from TESARO upon achievement of certain regulatory and commercial sale milestones, which
includes a $10.0 million milestone payment we received for the year ended December 31, 2017, and we are eligible
to receive additional commercial milestone payments of up to $85.0 million if specified levels of annual net sales are
achieved. TESARO is also obligated to pay us tiered royalties on annual net sales achieved in the United States and
Europe at percentage rates that range from the low double digits to the low twenties, and outside of the United States
and Europe at low double-digit percentage rates. In January 2018, the package insert for VARUBI™ was updated to
include mention of new adverse effects, including anaphylaxis, anaphylactic shock and other serious
hypersensitivity reactions which were reported following its introduction to the market in November 2017. In late
February 2018, TESARO announced it would suspend distribution of VARUBI™ IV, but would continue to support
the oral product.
In January 2013, we issued $175.0 million of the 2033 Senior Notes. The 2033 Senior Notes were sold in a
private placement in reliance on exemptions from registration under the Securities Act. At December 31, 2017,
$31.9 million principal amount of 2033 Senior Notes was outstanding.
In connection with our acquisitions of CURNA, OPKO Diagnostics and OPKO Renal, we agreed to pay future
consideration to the sellers upon the achievement of certain events, including up to an additional $19.1 million in
shares of our Common Stock to the former stockholders of OPKO Diagnostics upon and subject to the achievement
of certain milestones; and up to an additional $125.0 million in either shares of our Common Stock or cash, at our
option subject to the achievement of certain milestones, to the former shareholders of OPKO Renal.
During the year ended December 31, 2016, we also satisfied a $25.0 million contingent payment to the former
owners of OPKO Renal through the issuance of 2,611,648 shares of our common stock in 2016.
On November 5, 2015, BioReference and certain of its subsidiaries entered into a credit agreement with
JPMorgan Chase Bank, N.A. (“CB”), as lender and administrative agent, as amended (the “Credit Agreement”).
The Credit Agreement provides for a $175.0 million secured revolving credit facility and includes a $20.0 million
sub-facility for swingline loans and a $20.0 million sub-facility for the issuance of letters of credit. BioReference
may increase the credit facility to up to $275.0 million on a secured basis, subject to the satisfaction of specified
conditions. The Credit Agreement matures on November 5, 2020 and is guaranteed by all of BioReference’s
domestic subsidiaries. The Credit Agreement is also secured by substantially all assets of BioReference and its
domestic subsidiaries, as well as a non-recourse pledge by us of our equity interest in BioReference. Availability
under the Credit Agreement is based on a borrowing base comprised of eligible accounts receivables of
BioReference and certain of its subsidiaries, as specified therein.
On March 17, 2017, BioReference and certain of its subsidiaries entered into Amendment No. 3 to Credit
Agreement, which amended the Credit Agreement to permit BioReference and its subsidiaries to dividend cash to
the Company in the form of an intercompany loan, in an aggregate amount not to exceed $55.0 million. On
August 7, 2017, BioReference and certain of its subsidiaries entered into Amendment No. 4 to Credit Agreement,
which amended the Credit Agreement to permit BioReference and its subsidiaries to dividend cash to the Company
in the form of an additional intercompany loan, in an aggregate amount not to exceed $35.0 million. On
November 8, 2017, BioReference and certain of its subsidiaries entered into Amendment No. 5 to Credit Agreement,
which amended the Credit Agreement to, among other things, ease certain thresholds that require increased reporting
by BioReference and reduce the pro forma availability condition for BioReference to make certain cash dividends to
the Company. On December 22, 2017, BioReference and certain of its subsidiaries entered into Amendment No. 6
to Credit Agreement, which amended the Credit Agreement to, among other things, permit BioReference and its
subsidiaries to dividend cash to the Company in the form of intercompany loans, in an aggregate amount not to
exceed $45.0 million. The other terms of the Credit Agreement remain unchanged.
On February 28, 2018, BioReference and certain of its subsidiaries entered into Amendment No. 7 to the Credit
Agreement, which amended the Credit Agreement to permit BioReference and its subsidiaries to use cash on hand,
up to a maximum amount set forth in the amendment, to meet the availability requirements that otherwise would
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trigger (i) covenants that would require BioReference to maintain a minimum fixed charge coverage ratio and
provide certain increased reporting under the Credit Agreement and (ii) CB’s right, as agent for the lenders under the
Credit Agreement, to exercise sole dominion over funds held in certain accounts of BioReference. The other terms
of the Credit Agreement remain unchanged.
As of December 31, 2017, the total availability under our Credit Agreement with CB and our lines of credit with
financial institutions in Chile and Spain was $116.0 million, of which $114.7 million was used and outstanding as of
December 31, 2017. The weighted average interest rate on these lines of credit is approximately 4.2%. These lines
of credit are short-term and are used primarily as a source of working capital. The highest balance at any time
during the year ended December 31, 2017, was $115.1 million. We intend to continue to enter into these lines of
credit as needed. There is no assurance that these lines of credit or other funding sources will be available to us on
acceptable terms, or at all, in the future.
We expect to continue to incur substantial research and development expenses, including expenses related to the
hiring of personnel and additional clinical trials. We expect that selling, general and administrative expenses will
also increase as we expand our sales, marketing and administrative staff and add infrastructure.
We believe that the cash and cash equivalents on hand at December 31, 2017, the amounts available to be
borrowed under our lines of credit and the proceeds from the 5% Convertible Promissory Notes which we agreed to
issue in February 2018 are sufficient to meet our anticipated cash requirements for operations and debt service
beyond the next 12 months. We based this estimate on assumptions that may prove to be wrong or are subject to
change, and we may be required to use our available cash resources sooner than we currently expect. If we acquire
additional assets or companies, accelerate our product development programs or initiate additional clinical trials, we
will need additional funds. Our future cash requirements will depend on a number of factors, including our
relationship with Pfizer, success of the commercial success of Rayaldee, BioReference’s financial performance,
possible acquisitions, the continued progress of research and development of our product candidates, the timing and
outcome of clinical trials and regulatory approvals, the costs involved in preparing, filing, prosecuting, maintaining,
defending, and enforcing patent claims and other intellectual property rights, the status of competitive products, the
availability of financing, our success in developing markets for our product candidates and results of government
investigations, payor claims, and legal proceedings that may arise. If we are not able to secure additional funding
when needed, we may have to delay, reduce the scope of, or eliminate one or more of our clinical trials or research
and development programs or possible acquisitions.
The following table provides information as of December 31, 2017, with respect to the amounts and timing of
our known contractual obligation payments due by period.
2018
Contractual obligations
(In thousands)
Open purchase orders ........................................... $ 80,810 $
Operating leases ...................................................
Capital leases ........................................................
2033 Senior Notes ................................................
Deferred payments ...............................................
Mortgages and other debts payable ......................
Lines of credit ......................................................
Severance payments .............................................
Interest commitments ...........................................
Total ..................................................................... $ 125,777 $
19,059
3,521
—
5,000
1,632
10,511
4,224
1,020
2019
2020
2021
2022
Thereafter
1,312 $
15,166
3,029
31,850
5,000
415
—
—
212
38 $
9,360
2,440
—
—
415
104,152
—
39
56,984 $ 116,444 $
— $
6,079
1,586
—
—
415
—
—
23
8,103 $
— $
3,148
410
—
—
415
—
—
19
3,992 $
— $
Total
82,160
56,354
11,427
31,850
10,000
3,643
114,663
4,224
1,332
4,353 $ 315,653
3,542
441
—
—
351
—
—
19
The preceding table does not include information where the amounts of the obligations are not currently
determinable, including the following:
- Contractual obligations in connection with clinical trials, which span over two years, and that depend on
patient enrollment. The total amount of expenditures is dependent on the actual number of patients enrolled
and as such, the contracts do not specify the maximum amount we may owe.
- Product license agreements effective during the lesser of 15 years or patent expiration whereby payments and
amounts are determined by applying a royalty rate on uncapped future sales.
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- Contingent consideration that includes payments upon achievement of certain milestones including meeting
development milestones such as the completion of successful clinical trials, NDA approvals by the FDA and
revenue milestones upon the achievement of certain revenue targets all of which are anticipated to be paid
within the next seven years and are payable in either shares of our Common Stock or cash, at our option, and
that may aggregate up to $159.1 million.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Accounting estimates. The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could
differ significantly from these estimates.
Goodwill and intangible assets. Goodwill and other intangible assets, including IPR&D, acquired in business
combinations, licensing and other transactions at December 31, 2017 and 2016 was $2.0 billion and $2.1 billion,
respectively, representing approximately 79% and 76% of total assets, respectively.
Assets acquired and liabilities assumed in business combinations, licensing and other transactions are generally
recognized at the date of acquisition at their respective fair values. 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.” This method starts with a forecast of net cash flows, risk
adjusted for estimated probabilities of technical and regulatory success (for IPR&D) and adjusted to present value
using an appropriate discount rate that reflects the risk associated with the cash flow streams. All assets are valued
from a market participant view which might be different than our specific views. The valuation process is very
complex and requires significant input and judgment using internal and external sources. Although a valuation is
required to be finalized within a one-year period, it must consider all and only those facts and evidence which
existed at the acquisition date. The most complex and judgmental matters applicable to the valuation process are
summarized below:
• Unit of account – Most intangible assets are valued as single global assets rather than multiple assets
for each jurisdiction or indication after considering the development stage, expected levels of
incremental costs to obtain additional approvals, risks associated with further development, amount
and timing of benefits expected to be derived in the future, expected patent lives in various
jurisdictions and the intention to promote the asset as a global brand.
• Estimated useful life – The asset life expected to contribute meaningful cash flows is determined
after considering all pertinent matters associated with the asset, including expected regulatory
approval dates (if unapproved), exclusivity periods and other legal, regulatory or contractual
provisions as well as the effects of any obsolescence, demand, competition, and other economic
factors, including barriers to entry.
• Probability of Technical and Regulatory Success (“PTRS”) Rate – PTRS rates are determined based
upon industry averages considering the respective program’s development stage and disease
indication and adjusted for specific information or data known at the acquisition date. Subsequent
clinical results or other internal or external data obtained could alter the PTRS rate and materially
impact the estimated fair value of the intangible asset in subsequent periods leading to impairment
charges.
• Projections – Future revenues are estimated after considering many factors such as initial market
opportunity, pricing, sales trajectories to peak sales levels, competitive environment and product
evolution. Future costs and expenses are estimated after considering historical market trends, market
participant synergies and the timing and level of additional development costs to obtain the initial or
additional regulatory approvals, maintain or further enhance the product. We generally assume
initial positive cash flows to commence shortly after the receipt of expected regulatory approvals
which typically may not occur for a number of years. Actual cash flows attributed to the project are
likely to be different than those assumed since projections are subjected to multiple factors including
trial results and regulatory matters which could materially change the ultimate commercial success
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of the asset as well as significantly alter the costs to develop the respective asset into commercially
viable products.
• Tax rates – The expected future income is tax effected using a market participant tax rate. In
determining the tax rate, we consider the jurisdiction in which the intellectual property is held and
location of research and manufacturing infrastructure. We also consider that any repatriation of
earnings would likely have U.S. tax consequences.
• Discount rate – Discount rates are selected after considering the risks inherent in the future cash
flows; the assessment of the asset’s life cycle and the competitive trends impacting the asset,
including consideration of any technical, legal, regulatory, or economic barriers to entry, as well as
expected changes in standards of practice for indications addressed by the asset.
Goodwill was $717.1 million and $704.6 million, respectively, at December 31, 2017 and 2016. 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. Examples of qualitative
factors include our share price, our financial performance compared to budgets, long-term financial plans,
macroeconomic, industry and market conditions as well as the substantial excess of fair value over the carrying
value of net assets from the annual impairment test previously performed. No goodwill impairment was recorded
for the year ended December 31, 2017 and 2016 as a result of our testing.
The estimated fair value of a reporting unit is highly sensitive to changes in projections and assumptions;
therefore, in some instances, changes in these assumptions could potentially lead to impairment. We perform
sensitivity analyses around our assumptions in order to assess the reasonableness of the assumptions and the results
of our testing. Ultimately, future potential changes in these assumptions may impact the estimated fair value of a
reporting unit and cause the fair value of the reporting unit to be below its carrying value. We believe that our
estimates are consistent with assumptions that marketplace participants would use in their estimates of fair value.
However, if actual results are not consistent with our estimates and assumptions, we may be exposed to an
impairment charge that could be material.
Intangible assets, net were $1.3 billion and $1.4 billion, including IPR&D of $647.3 million and $644.7 million,
respectively, at December 31, 2017 and 2016. Intangible assets are tested for impairment whenever events or
changes in circumstances indicate that the carrying amount of such assets may not be recoverable, although IPR&D
is required to be tested at least annually until the project is completed or abandoned. Upon obtaining regulatory
approval, the IPR&D asset is then accounted for as a finite-lived intangible asset and amortized on a straight-line
basis over its estimated useful life. If the project is abandoned, the IPR&D asset is charged to expense.
IPR&D is tested for impairment 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 amount. If the carrying amount
of the IPR&D exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess.
Intangible assets with defined lives are tested for impairment by a comparison of the carrying amount of the asset to
its estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated undiscounted future cash flows, then an impairment charge is recognized for the amount
by which the carrying amount of the asset exceeds the fair value of the asset. We recorded an impairment charge of
$13.2 million in Amortization of intangible assets in our Consolidated Statement of Operations for the year ended
December 31, 2017 to write our intangible asset for VARUBI™ down to its estimated fair value as a result of our
testing. No intangible asset impairment was recorded for the year ended December 31, 2016 as a result of our
testing.
Intangible assets are highly vulnerable to impairment charges, particularly newly acquired assets for recently
launched products and IPR&D. These assets are initially measured at fair value and therefore any reduction in
expectations used in the valuations could potentially lead to impairment. Some of the more common potential risks
leading to impairment include competition, earlier than expected loss of exclusivity, pricing pressures, adverse
regulatory changes or clinical trial results, delay or failure to obtain regulatory approval and additional development
costs, inability to achieve expected synergies, higher operating costs, changes in tax laws and other macro-economic
changes.
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Considering the high risk nature of research and development and the industry’s success rate of bringing
developmental compounds to market, IPR&D impairment charges are likely to occur in future periods. IPR&D is
closely monitored and assessed each period for impairment indicators.
We amortize intangible assets with definite lives on a straight-line basis over their estimated useful lives, ranging
from 3 to 20 years. We use the straight-line method of amortization as there is no reliably determinable pattern in
which the economic benefits of our intangible assets are consumed or otherwise used up. Amortization expense was
$84.7 million and $64.4 million for the years ended December 31, 2017 and 2016, respectively.
Revenue recognition. Revenue for laboratory services is recognized at the time test results are reported, which
approximates when services are provided. Services are provided to patients covered by various third party payor
programs including various managed care organizations, as well as the Medicare and Medicaid programs. For the
year ended December 31, 2017, approximately 31% of our revenues from services were derived directly from the
Medicare and Medicaid programs. Billings for services under third-party payer programs are included in revenue
net of allowances for contractual discounts and allowances for differences between the amounts billed and estimated
program payment amounts.
The complexities and ambiguities of billing, reimbursement regulations and claims processing, as well as issues
unique to Medicare and Medicaid programs, require us to estimate the potential for retroactive adjustments in the
recognition of revenue in the period the related services are rendered. Actual amounts are adjusted in the period
those adjustments become known.
Third-party payers, including government programs, may decide to deny payment or recoup payments for testing
they contend were improperly billed or not medically necessary, against their coverage determinations, or for which
they believe they have otherwise overpaid (including as a result of their own error), and we may be required to
refund payments already received. Our revenues may be subject to retroactive adjustment as a result of these factors
among others, including without limitation, differing interpretations of billing and coding guidance and changes by
government agencies and payors in interpretations, requirements, and “conditions of participation” in various
programs. We have processed requests for recoupment from third-party payers in the ordinary course of our
business, and it is likely that we will continue to do so in the future. If a third-party payer denies payment for testing
or recoups money from us in a later period, reimbursement revenue for our testing could decline.
As an integral part of our billing compliance program, we periodically assess our billing and coding practices,
respond to payor audits on a routine basis, and investigate reported failures or suspected failures to comply with
federal and state healthcare reimbursement requirements, as well as overpayment claims which may arise from time
to time without fault on the part of the Company. We may have an obligation to reimburse Medicare, Medicaid, and
third party payers for overpayments regardless of fault. We have periodically identified and reported overpayments,
reimbursed payors for overpayments and taken appropriate corrective action.
We recognize revenue from product sales when persuasive evidence of an arrangement exists, delivery has
occurred, collectability is reasonably assured, and the price to the buyer is fixed or determinable, which is generally
when goods are shipped and title and risk of loss transfer to our customers. Our estimates for sales returns and
allowances are based upon the historical patterns of product returns and allowances taken, matched against the sales
from which they originated, and our evaluation of specific factors that may increase or decrease the risk of product
returns. Product revenues are recorded net of estimated rebates, chargebacks, discounts, co-pay assistance and other
deductions (collectively, “Sales Deductions”) as well as estimated product returns. Allowances are recorded as a
reduction of revenue at the time product revenues are recognized.
We launched Rayaldee in the U.S. through our dedicated renal sales force in November 2016. Rayaldee is
distributed in the U.S. principally through the retail pharmacy channel, which initiates with the largest wholesalers
in the U.S. (collectively, “Rayaldee Customers”). In addition to distribution agreements with Rayaldee Customers,
we have entered into arrangements with many healthcare providers and payers that provide for government-
mandated and/or privately-negotiated rebates, chargebacks and discounts with respect to the purchase of Rayaldee.
As of December 31, 2017, allowances for Sales Deductions and product returns related to sales of Rayaldee are
known or estimable utilizing historical information and market research projections. As a result, we recognize
revenue for shipments of Rayaldee at the time of delivery to Rayaldee Customers. For the year ended December 31,
2017, we recognized $9.1 million in net product revenue from sales of Rayaldee, including amounts previously
deferred. No revenue was recognized from sales of Rayaldee for the year ended December 31, 2016 as we lacked
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the experiential data which would allow us to estimate Sales Deductions and product returns. The related deferred
revenue balance as of December 31, 2016 was $1.6 million.
The following table presents an analysis of product sales allowances and accruals for the year ended
December 31, 2017:
(In thousands)
Balance at December 31, 2016 .......................................... $
Provision related to current period sales ..........................
Credits or payments made ...............................................
Balance at December 31, 2017 .......................................... $
rebates and fees Governmental
— $
— $
1,591
(1,358 )
233 $
1,332
(984 )
348 $
Chargebacks,
discounts,
Total gross Rayaldee sales .................................................
Provision for Rayaldee sales allowances and accruals
as a percentage of gross Rayaldee sales ..........................
Returns
— $
490
(53 )
437 $
Total
—
3,413
(2,395 )
1,018
$
12,482
27 %
Revenue from transfer of intellectual property includes revenue related to the sale, license or transfer of
intellectual property such as upfront license payments, license fees, milestone and royalty payments received
through our license, and collaboration and commercialization agreements. We analyze our multiple-element
arrangements to determine whether the elements can be separated and accounted for individually as separate units of
accounting.
Non-refundable license fees for the out-license of our technology are recognized depending on the provisions of
each agreement. We recognize non-refundable upfront license payments as revenue upon receipt if the license has
standalone value and qualifies for treatment as a separate unit of accounting under multiple-element arrangement
guidance. License fees with ongoing involvement or performance obligations that do not have standalone value are
recorded as deferred revenue, included in Accrued expenses or Other long-term liabilities, when received and
generally are recognized ratably over the period of such performance obligations only after both the license period
has commenced and we have delivered the technology.
The assessment of our obligations and related performance periods requires significant management judgment.
If an agreement contains research and development obligations, the relevant time period for the research and
development phase is based on management estimates and could vary depending on the outcome of clinical trials
and the regulatory approval process. Such changes could materially impact the revenue recognized, and as a result,
management reviews the estimates related to the relevant time period of research and development on a periodic
basis.
Revenue from milestone payments related to arrangements under which we have continuing performance
obligations are recognized as Revenue from transfer of intellectual property upon achievement of the milestone only
if all of the following conditions are met: the milestone payments are non-refundable; there was substantive
uncertainty at the date of entering into the arrangement that the milestone would be achieved; the milestone payment
is commensurate with either our performance to achieve the milestone or the enhancement of the value of the
delivered item by us; the milestone relates solely to past performance; and the amount of the milestone payment is
reasonable in relation to the effort expended or the risk associated with the achievement of the milestone. If any of
these conditions are not met, the milestone payments are not considered to be substantive and are, therefore,
deferred and recognized as Revenue from transfer of intellectual property over the term of the arrangement as we
complete our performance obligations.
Concentration of credit risk and allowance for doubtful accounts. Financial instruments that potentially subject
us to concentrations of credit risk consist primarily of accounts receivable. Substantially all of our accounts
receivable are with either companies in the health care industry or patients. However, credit risk is limited due to
the number of our clients as well as their dispersion across many different geographic regions.
While we have receivables due from federal and state governmental agencies, we do not believe that such
receivables represent a credit risk since the related healthcare programs are funded by federal and state governments,
and payment is primarily dependent upon submitting appropriate documentation. At December 31, 2017 and 2016,
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receivable balances (net of contractual adjustments) from Medicare and Medicaid in total were 16% and 23%,
respectively, of our consolidated Accounts receivable, net.
The portion of our accounts receivable due from individual patients comprises the largest portion of credit risk.
At December 31, 2017 and 2016, receivables due from patients represent approximately 3.2% and 4.1%,
respectively, of our consolidated Accounts receivable, net.
We assess the collectability of accounts receivable balances by considering factors such as historical collection
experience, customer credit worthiness, the age of accounts receivable balances, regulatory changes and current
economic conditions and trends that may affect a customer’s ability to pay. Actual results could differ from those
estimates. Our reported net income (loss) is directly affected by our estimate of the collectability of accounts
receivable. The allowance for doubtful accounts was $66.4 million and $36.3 million at December 31, 2017 and
2016, respectively.
Income taxes. Income taxes are accounted for under the asset-and-liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and the respective tax bases and for operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the
enactment date. We periodically evaluate the realizability of our net deferred tax assets. Our tax accruals are
analyzed periodically and adjustments are made as events occur to warrant such adjustment. Valuation allowances
on certain U.S. deferred tax assets and non-U.S. deferred tax assets are established, because realization of these tax
benefits through future taxable income does not meet the more-likely-than-not threshold.
On December 22, 2017, the 2017 Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law and the new
legislation contains several key tax provisions, including a reduction of the corporate income tax rate from 35% to
21% effective January 1, 2018 and a one-time mandatory transition tax on accumulated foreign earnings, among
others. We are required to recognize the effect of the tax law changes in the period of enactment, such as
remeasuring our U.S. deferred tax assets and liabilities, as well as reassessing the net realizability of our deferred tax
assets and liabilities. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax
Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allows us to record provisional amounts
during a measurement period not to extend beyond one year of the enactment date. Since the Tax Act was passed
late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation are expected over the next 12
months, our accounting of deferred tax re-measurements, the transition tax, and other items are provisional and may
materially change due to the forthcoming guidance and our ongoing analysis of final year-end data and tax positions.
We expect to complete our analysis within the measurement period in accordance with SAB 118.
We anticipate future impacts at a U.S. state and local tax level related to the Tax Act; however, statutory and
interpretive guidance is not available from applicable state and local tax authorities to reasonably estimate the
impact. Consequently, for those jurisdictions, we have not recorded provisional amounts and have continued to
apply ASC 740 based on the provisions of the tax laws that were in effect immediately prior to Tax Act enactment.
Equity-based compensation. We measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award. That cost is recognized in the Consolidated
Statement of Operations over the period during which an employee is required to provide service in exchange for the
award. We record excess tax benefits, realized from the exercise of stock options as cash flows from operations.
Equity-based compensation arrangements to non-employees are recorded at their fair value on the measurement
date. The measurement of equity-based compensation to non-employees is subject to periodic adjustment as the
underlying equity instruments vest. We estimate the grant-date fair value of our stock option grants using a
valuation model known as the Black-Scholes-Merton formula or the “Black-Scholes Model.” The Black-Scholes
Model requires the use of several variables to estimate the grant-date fair value of stock options including expected
term, expected volatility, expected dividends and risk-free interest rate. We perform analyses to calculate and select
the appropriate variable assumptions used in the Black-Scholes Model and to estimate forfeitures of equity-based
awards. We are required to adjust our forfeiture estimates on at least an annual basis based on the number of share-
based awards that ultimately vest. The selection of assumptions and estimated forfeiture rates is subject to
significant judgment and future changes to our assumptions and estimates which may have a material impact on our
Consolidated Financial Statements.
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Inventories. Inventories are valued at the lower of cost and 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 and net realizable value. Inventories at our diagnostics segment consist primarily of purchased
laboratory supplies, which is used in our testing laboratories. Inventory obsolescence for the years ended
December 31, 2017 and 2016 was $5.4 million and $0.0 million, respectively.
Pre-launch inventories. We may accumulate commercial quantities of certain product candidates prior to the
date we anticipate that such products will receive final U.S. FDA approval. The accumulation of such pre-launch
inventories involves the risk that such products may not be approved for marketing by the FDA on a timely basis, or
ever. This risk notwithstanding, we may accumulate pre-launch inventories of certain products when such action is
appropriate in relation to the commercial value of the product launch opportunity. In accordance with our policy,
this pre-launch inventory is expensed.
Contingent consideration. Each period we revalue the contingent consideration obligations associated with
certain prior acquisitions to their fair value and record increases in the fair value as contingent consideration expense
and decreases in the fair value as a reduction in contingent consideration expense. Changes in contingent
consideration result from changes in the assumptions regarding probabilities of successful achievement of related
milestones, the estimated timing in which the milestones are achieved and the discount rate used to estimate the fair
value of the liability. Contingent consideration may change significantly as our development programs progress,
revenue estimates evolve and additional data is obtained, impacting our assumptions. The assumptions used in
estimating fair value require significant judgment. The use of different assumptions and judgments could result in a
materially different estimate of fair value which may have a material impact on our results from operations and
financial position.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts
with Customers.” ASU 2014-09, as amended, clarifies the principles for recognizing revenue and develops a
common revenue standard for GAAP that removes inconsistencies and weaknesses in revenue requirements,
provides a more robust framework for addressing revenue issues, improves comparability of revenue recognition
practices across entities, industries, jurisdictions, and capital markets, provides more useful information to users of
financial statements through improved disclosure requirements and simplifies the preparation of financial statements
by reducing the number of requirements to which an entity must refer. ASU 2014-09 is effective for fiscal years,
and interim periods within those years, beginning after December 15, 2017. Companies can choose to apply the
ASU using either the full retrospective approach or a modified retrospective approach. We plan to adopt the ASU in
the first quarter of 2018 using the full retrospective approach.
We continue to assess the impact of this ASU on our financial condition, results of operations, cash flows and
disclosures. Our analysis includes reviewing current accounting policies and practices to identify potential
differences that would result from applying the requirements under this new standard. We have reviewed certain
contracts with its customers that we believe are representative of our revenue streams and continue to review
additional contracts across our global business units. ASU 2014-09 requires increased disclosure which in turn is
expected to require certain new processes. The determination of the impact of adoption of ASU 2014-09 on our
financial condition, results of operations, cash flows and disclosures is ongoing, and, as such, we are not able to
reasonably estimate the quantitative effect that the adoption of the new standard will have on our financial
statements. Based on our preliminary assessment of this ASU, for our diagnostics segment, we generally do not
expect any significant changes to the timing of revenue recognition or net income, but there will be a change in the
presentation in the Statement of Operations. Under the ASU, the majority of the amounts that were historically
classified as provision for bad debts, primarily related to patient responsibility, will be considered an implicit price
concession in determining net revenues. Accordingly, we will report uncollectible balances associated with
individual patients as a reduction of the transaction price and therefore as a reduction in net revenues when
historically these amounts were classified as provision for bad debts within Selling, general and administrative
expenses.
In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of
Inventory,” which changes the measurement principle for entities that do not measure inventory using the last-in,
first-out (“LIFO”) or retail inventory method from the lower of cost or market to lower of cost and net realizable
value. ASU 2015-11 was effective for fiscal years beginning after December 15, 2016, including interim periods
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within those fiscal years, with early adoption permitted. The adoption of ASU 2015-11 in the first quarter of 2017
did not have a significant impact on our Consolidated Financial Statements.
In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet
Classification of Deferred Taxes,” which requires deferred tax liabilities and assets to be classified as noncurrent in
a classified statement of financial position. The adoption of this ASU simplifies the presentation of deferred income
taxes and reduces complexity without decreasing the usefulness of information provided to users of financial
statements. We early adopted the provisions of this ASU prospectively in the fourth quarter of 2015, and did not
retrospectively adjust the prior periods. The adoption of ASU 2015-17 did not have a significant impact on our
Consolidated Financial Statements.
In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10),”
which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments.
The ASU requires equity investments (except those accounted for under the equity method of accounting or those
that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net
income. ASU 2016-01 will be effective for fiscal years beginning after December 15, 2017, including interim
periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact of this new
guidance on our Consolidated Financial Statements, but the primary effect will be the recognition of changes in the
fair value of our available for sale investments in net income.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which will require organizations
that lease assets with lease terms of more than 12 months to recognize assets and liabilities for the rights and
obligations created by those leases on their balance sheets. The ASU will also require new qualitative and
quantitative disclosures to help investors and other financial statement users better understand the amount, timing,
and uncertainty of cash flows arising from leases. ASU 2016-02 will be effective for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. We are
currently evaluating the impact of this new guidance on our Consolidated Financial Statements.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718),” which
simplifies several aspects of the accounting for share-based payment award transactions, including the income tax
consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows and
accounting for forfeitures. ASU 2016-09 was effective for fiscal years beginning after December 15, 2016,
including interim periods within those fiscal years, with early adoption permitted. We adopted this standard in the
first quarter of 2017. As required by ASU 2016-09, excess tax benefits are classified as an operating activity in our
Consolidated Statement of Cash Flows and we have applied this provision prospectively. In addition, we have
elected to estimate forfeitures over the course of a vesting period, rather than account for forfeitures as they occur.
We adjust our forfeiture estimates based on the number of share-based awards that ultimately vest on at least an
annual basis. As a result of the adoption of ASU 2016-09 in 2017, we recorded a cumulative-effect adjustment to
reduce our deferred tax liabilities and reduce our accumulated deficit by $31.7 million with respect to excess tax
benefits recognized in our Consolidated Balance Sheets.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230),” which addresses
the classification of eight specific cash flow issues with the objective of reducing the existing diversity in practice.
ASU 2016-15 will be effective for fiscal years beginning after December 15, 2017, including interim periods within
those fiscal years, with early adoption permitted. We are currently evaluating the impact of this new guidance on
our Consolidated Financial Statements.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350),” which
simplifies how an entity is required to test for goodwill impairment. ASU 2017-04 will be effective for annual or
interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted
after January 1, 2017. We are currently evaluating the impact of this new guidance on our Consolidated Financial
Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
In the normal course of doing business, we are exposed to the risks associated with foreign currency exchange
rates and changes in interest rates.
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Foreign Currency Exchange Rate Risk – We operate globally and, as such, we are subject to foreign exchange
risk in our commercial operations as portions of our revenues are exposed to changes in foreign currency exchange
rates, primarily the Chilean Peso, the Mexican Peso, the Euro and the New Israeli Shekel.
Although we do not speculate in the foreign exchange market, we may from time to time manage exposures that
arise in the normal course of business related to fluctuations in foreign currency exchange rates by entering into
offsetting positions through the use of foreign exchange forward contracts. Certain firmly committed transactions
may be hedged with foreign exchange forward contracts. As exchange rates change, gains and losses on the
exposed transactions are partially offset by gains and losses related to the hedging contracts. Both the exposed
transactions and the hedging contracts are translated and fair valued, respectively, at current spot rates, with gains
and losses included in earnings.
Our derivative activities, which consist of foreign exchange forward contracts, are initiated to economically
hedge forecasted cash flows that are exposed to foreign currency risk. The foreign exchange forward contracts
generally require us to exchange local currencies for foreign currencies based on pre-established exchange rates at
the contracts’ maturity dates. As exchange rates change, gains and losses on these contracts are generated based on
the change in the exchange rates that are recognized in the Consolidated Statements of Operations and offset the
impact of the change in exchange rates on the foreign currency cash flows that are hedged. If the counterparties to
the exchange contracts do not fulfill their obligations to deliver the contracted currencies, we could be at risk for
currency related fluctuations. Our foreign exchange forward contracts primarily hedge exchange rates on the
Chilean Peso to the U.S. dollar. If Chilean Pesos were to strengthen or weaken in relation to the U.S. dollar, our loss
or gain on hedged foreign currency cash-flows would be offset by the derivative contracts, with a net effect of zero.
We do not engage in trading market risk sensitive instruments or purchasing hedging instruments or “other than
trading” instruments that are likely to expose us to significant market risk, whether interest rate, foreign currency
exchange, commodity price, or equity price risk.
Interest Rate Risk – Our exposure to interest rate risk relates to our cash and investments and to our borrowings.
We maintain an investment portfolio of money market funds and marketable securities. The securities in our
investment portfolio are not leveraged, and are, due to their very short-term nature, subject to minimal interest rate
risk. We currently do not hedge interest rate exposure. Because of the short-term maturities of our investments, we
do not believe that a change in market interest rates would have a significant negative impact on the value of our
investment portfolio except for reduced income in a low interest rate environment.
At December 31, 2017, we had cash and cash equivalents of $91.5 million. The weighted average interest rate
related to our cash and cash equivalents for the year ended December 31, 2017 was less than 1%. As of
December 31, 2017, the principal outstanding balance under our Credit Agreement with JPMorgan Chase Bank,
N.A. and our Chilean and Spanish credit lines was $114.7 million in the aggregate at a weighted average interest
rate of approximately 4.2%.
Our $31.9 million aggregate principal amount of our 2033 Senior Notes has a fixed interest rate of 3.0%, and
therefore is not subject to fluctuations in market interest rates.
The primary objective of our investment activities is to preserve principal while at the same time maximizing
yields without significantly increasing risk. To achieve this objective, we may invest our excess cash in debt
instruments of the U.S. Government and its agencies, bank obligations, repurchase agreements and high-quality
corporate issuers, and money market funds that invest in such debt instruments, and, by policy, restrict our exposure
to any single corporate issuer by imposing concentration limits. To minimize the exposure due to adverse shifts in
interest rates, we maintain investments at an average maturity of generally less than three months.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reports of Independent Registered Certified Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
87
89
90
91
92
95
97 - 137
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Report of Independent Registered Certified Public Accounting Firm
To the Shareholders and the Board of Directors of OPKO Health, Inc. and subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of OPKO Health, Inc. and subsidiaries (the
Company) as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive
loss, equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes
and financial statements schedule included at Item 15(a)(1) (collectively referred to as the “consolidated financial
statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the
financial position of the Company at December 31, 2017 and 2016, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2017, in conformity with U.S generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on
criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (2013 Framework) and our report dated March 1, 2018 expressed an unqualified
opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test bases, evidence regarding the amounts and
disclosures in the financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2007.
Miami, Florida
March 1, 2018
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Report of Independent Registered Certified Public Accounting Firm
To the Shareholders and the Board of Directors of OPKO Health, Inc. and subsidiaries
Opinion on Internal Control over Financial Reporting
We have audited OPKO Health, Inc. and subsidiaries’ internal control over financial reporting as of December 31,
2017, based on criteria established in Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion,
OPKO Health, Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the 2017 consolidated financial statements of the Company and our report dated March 1, 2018
expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting
firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting
was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
/s/ Ernst & Young LLP
Miami, Florida
March 1, 2018
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ASSETS
Current assets:
OPKO Health, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
Cash and cash equivalents ................................................................................. $
Accounts receivable, net....................................................................................
Inventory, net ....................................................................................................
Other current assets and prepaid expenses ........................................................
Total current assets ........................................................................................
Property, plant and equipment, net ........................................................................
Intangible assets, net ..............................................................................................
In-process research and development ....................................................................
Goodwill ................................................................................................................
Investments ............................................................................................................
Other assets ...........................................................................................................
Total assets .......................................................................................................
$
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable .............................................................................................. $
Accrued expenses ..............................................................................................
Current portion of lines of credit and notes payable..........................................
Total current liabilities ...................................................................................
2033 Senior Notes, net of discount ........................................................................
Deferred tax liabilities, net ....................................................................................
Other long-term liabilities, principally deferred revenue, contingent
consideration and lines of credit ........................................................................
Total long-term liabilities ..............................................................................
Total liabilities ..................................................................................................
Equity:
Common Stock - $0.01 par value, 750,000,000 shares authorized;
560,023,745 and 558,576,051 shares issued at December 31, 2017
December 31,
2017
2016
91,499 $
165,516
49,333
37,113
343,461
146,557
683,835
647,347
717,099
40,642
5,615
2,584,556 $
168,733
220,284
47,228
47,356
483,601
122,831
763,976
644,713
704,603
41,139
5,756
2,766,619
74,307 $
215,102
11,926
301,335
29,160
148,729
219,954
397,843
699,178
53,360
197,955
11,981
263,296
43,701
165,331
202,483
411,515
674,811
and 2016, respectively ...................................................................................
5,600
5,586
Treasury Stock, at cost - 549,907 and 586,760 shares at
December 31, 2017 and 2016, respectively ...................................................
Additional paid-in capital ..................................................................................
Accumulated other comprehensive income (loss) .............................................
Accumulated deficit ..........................................................................................
Total shareholders’ equity .............................................................................
Total liabilities and equity ................................................................................ $
(1,791 )
2,889,256
(528 )
(1,007,159 )
1,885,378
2,584,556 $
(1,911 )
2,845,096
(27,009 )
(729,954 )
2,091,808
2,766,619
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements
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OPKO Health, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
For the years ended December 31,
2016
2015
2017
Revenues:
Revenue from services .............................................................. $
Revenue from products .............................................................
Revenue from transfer of intellectual property
889,076 $
107,759
1,012,129 $
83,467
and other ................................................................................
Total revenues .......................................................................
70,668
1,067,503
126,065
1,221,661
Costs and expenses:
Cost of service revenue .............................................................
Cost of product revenue ............................................................
Selling, general and administrative ...........................................
Research and development ........................................................
Contingent consideration ..........................................................
Amortization of intangible assets ..............................................
Grant repayment ........................................................................
Total costs and expenses ...............................................................
Operating loss ...............................................................................
Other income and (expense), net:
Interest income ..........................................................................
Interest expense .........................................................................
Fair value changes of derivative instruments, net .....................
Other income (expense), net .....................................................
Other income and (expense), net ..................................................
Loss before income taxes and investment losses ..........................
Income tax benefit (provision) ......................................................
Net loss before investment losses .................................................
Loss from investments in investees ..............................................
Net loss .........................................................................................
Less: Net loss attributable to noncontrolling interests .................
Net loss attributable to common shareholders .............................. $
Loss per share, basic and diluted:
558,953
61,177
520,994
125,186
(3,423 )
84,678
—
1,347,565
(280,062 )
610
(6,601 )
52
10,457
4,518
(275,544 )
(18,855 )
(294,399 )
(14,471 )
(308,870 )
—
(308,870 ) $
564,103
47,379
490,888
111,205
16,954
64,407
—
1,294,936
(73,275 )
478
(7,430 )
2,778
3,903
(271 )
(73,546 )
56,115
(17,431 )
(7,652 )
(25,083 )
—
(25,083 ) $
329,739
80,146
81,853
491,738
193,305
41,934
196,576
99,488
5,050
27,977
25,889
590,219
(98,481 )
255
(8,419 )
(39,083 )
7,730
(39,517 )
(137,998 )
113,675
(24,323 )
(7,105 )
(31,428 )
(1,400 )
(30,028 )
Net loss per share ...................................................................... $
(0.55 ) $
(0.05 ) $
(0.06 )
Weighted average number of common shares
outstanding, basic and diluted ................................................... 559,160,565
550,846,553
488,065,908
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements
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OPKO Health, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
Net loss .............................................................................................................. $ (308,870 ) $ (25,083 ) $ (31,428 )
Other comprehensive income (loss), net of tax:
For the years ended December 31,
2015
2016
2017
Change in foreign currency translation and other
comprehensive income (loss) ......................................................................
Available for sale investments:
Change in unrealized gain (loss), net of tax ............................................
Less: reclassification adjustments for losses
included in net loss, net of tax ...............................................................
22,724
(4,955 )
(15,074 )
3,790
(3,810 )
(2,378 )
Comprehensive loss
7,307
(41,573 )
(1,400 )
Comprehensive loss attributable to common shareholders ................................ $ (282,389 ) $ (29,555 ) $ (40,173 )
Less: Comprehensive loss attributable to noncontrolling interest ................
(33 )
(282,389 )
—
4,293
(29,555 )
—
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements
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OPKO Health, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except share and per share data)
For the years ended December 31, 2017, 2016, 2015
Common Stock
Treasury
Shares
Dollars
Shares
Dollars
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Loss
Accumulated
Deficit
Noncontrolling
Interests
(12,392 ) $
—
—
—
—
—
—
—
(674,843 ) $
—
—
—
—
—
—
—
(6,403 ) $
—
—
—
—
—
—
—
Total
835,741
26,074
25,920
33,596
950,010
120,299
1,812
20,112
—
—
(10,145 )
(22,537 ) $
(30,028 )
—
—
(704,871 ) $
—
(30,028 )
6,403
6,403
—
(10,145 )
— $ 1,979,794
2,420,487
Balance at December 31, 2014 ...................................... 433,421,677 $
—
Equity-based compensation expense..............................
Exercise of Common Stock options and warrants .......... 24,467,806
Issuance of Common Stock for
EirGen purchase ........................................................
Issuance of Common Stock for
BRL purchase ............................................................ 76,566,147
Issuance of Common Stock upon
exchange of 2033 Senior Notes .................................
Issuance of Treasury Stock in
connection with OPKO Health
Europe’s Contingent
Consideration .............................................................
Issuance of Common Stock for
OPKO Renal earnout .................................................
Net loss attributable to common
—
shareholders ...............................................................
—
Deconsolidation of SciVac ............................................
—
Other comprehensive loss ..............................................
Balance at December 31, 2015 ...................................... 546,188,516 $
1,194,337
8,118,062
—
4,334
—
245
24
766
81
—
12
—
—
—
5,462
(1,245,367 ) $
(4,051 ) $ 1,529,096 $
—
—
—
—
—
—
—
—
—
26,074
25,675
33,572
949,244
—
120,218
125,000
406
1,406
—
—
—
—
—
—
—
—
20,100
—
—
—
(1,120,367 ) $
(3,645 ) $ 2,705,385 $
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements
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OPKO Health, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except share and per share data)
For the years ended December 31, 2017, 2016, 2015 (continued)
Balance at December 31, 2015 ..........................................
Equity-based compensation expense..................................
Exercise of Common Stock options and warrants ..............
Issuance of Common Stock upon
exchange of 2033 Senior Notes .....................................
Issuance of Treasury Stock in
connection with OPKO Health
Europe’s Contingent
Consideration .................................................................
Issuance of Treasury Stock for investment in Xenetic
Issuance of Common Stock for
OPKO Renal earnout .....................................................
Issuance of Common Stock for
Transition Therapeutics purchase ..................................
Net loss attributable to common
shareholders ...................................................................
Other comprehensive loss ..................................................
Balance at December 31, 2016 ..........................................
Common Stock
Treasury
Shares
546,188,516 $
—
3,292,753
51,235
Dollars
5,462
—
33
1
Shares
(1,120,367 ) $
—
—
—
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Loss
Dollars
(3,645 ) $
—
—
2,705,385 $
42,693
8,575
(22,537 ) $
—
—
—
582
—
—
2,611,648
6,431,899
—
—
26
64
—
—
558,576,051 $
—
—
5,586
39,145
494,462
—
—
—
—
(586,760 ) $
127
1,607
—
—
—
—
(1,911 ) $
186
3,249
25,960
58,466
—
—
2,845,096 $
Accumulated
Deficit
(704,871 ) $
—
—
—
—
—
—
—
Total
1,979,794
42,693
8,608
583
313
4,856
25,986
58,530
—
—
—
—
—
—
(4,472 )
(27,009 ) $
(25,083 )
—
(729,954 ) $
(25,083 )
(4,472 )
2,091,808
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements
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OPKO Health, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except share and per share data)
For the years ended December 31, 2017, 2016, 2015 (continued)
Common Stock
Treasury
Shares
Dollars
Shares
Dollars
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Loss
Balance at December 31, 2016 ...........................................
Equity-based compensation expense ..................................
Exercise of Common Stock options and warrants ..............
Reclassification of embedded
derivatives to equity .......................................................
Issuance of Treasury Stock in
connection with OPKO Health
Europe’s Contingent
Consideration .................................................................
Adoption of ASU 2016-09 .................................................
Net loss attributable to common
shareholders ...................................................................
Other comprehensive loss ..................................................
Balance at December 31, 2017 ...........................................
558,576,051 $
—
1,447,694
—
—
—
—
—
560,023,745 $
5,586
—
14
—
—
—
—
—
5,600
(586,760 ) $
—
—
—
(1,911 ) $
—
—
2,845,096 $
28,307
2,118
(27,009 ) $
—
—
—
13,551
36,853
—
—
—
(549,907 ) $
120
—
—
—
(1,791 ) $
184
—
—
—
2,889,256 $
(528 ) $
(1,007,159 ) $
Accumulated
Deficit
(729,954 ) $
—
—
—
—
31,665
(308,870 )
—
—
—
—
—
26,481
Total
2,091,808
28,307
2,132
13,551
304
31,665
(308,870 )
26,481
1,885,378
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements
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OPKO Health, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the years ended December 31,
2016
2017
2015
Cash flows from operating activities:
Net loss ......................................................................................................................... $
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization ..................................................................................
Non-cash interest ......................................................................................................
Amortization of deferred financing costs ..................................................................
Losses from investments in investees .......................................................................
Equity-based compensation – employees and non-employees ..................................
Impairment of intangible assets ................................................................................
Revenue from receipt of equity .................................................................................
Realized loss (gain) on equity securities and disposal of fixed assets .......................
Loss (gain) on conversion of 3.00% convertible senior notes ...................................
Change in fair value of derivative instruments .........................................................
Change in fair value of contingent consideration ......................................................
Gain on deconsolidation of SciVac ...........................................................................
Deferred income tax provision (benefit) ...................................................................
Changes in assets and liabilities, net of the effects of acquisitions:
Accounts receivable, net ...........................................................................................
Inventory, net ............................................................................................................
Other current assets and prepaid expenses ................................................................
Other assets ...............................................................................................................
Accounts payable ......................................................................................................
Foreign currency measurement .................................................................................
Deferred revenue ......................................................................................................
Accrued expenses and other liabilities ......................................................................
Net cash provided by (used in) operating activities ......................................................
Cash flows from investing activities:
Investments in investees ...........................................................................................
Proceeds from sale of equity securities .....................................................................
Acquisition of businesses, net of cash acquired ........................................................
Acquisition of intangible assets ................................................................................
Purchase of marketable securities .............................................................................
Maturities of short-term marketable securities ..........................................................
Proceeds from the sale of property, plant and equipment .........................................
Capital expenditures .................................................................................................
Net cash used in investing activities .............................................................................
Cash flows from financing activities:
Proceeds from the exercise of Common Stock options and warrants........................
Cash from non-controlling interest ...........................................................................
Borrowings on lines of credit ....................................................................................
Repayments of lines of credit....................................................................................
Net cash provided by (used in) financing activities ......................................................
Effect of exchange rate changes on cash and cash equivalents .....................................
Net (decrease) increase in cash and cash equivalents ...................................................
Cash and cash equivalents at beginning of period ........................................................
Cash and cash equivalents at end of period................................................................... $
(308,870 ) $
(25,083 ) $
(31,428 )
102,093
2,575
224
14,471
28,307
13,194
—
(8,663 )
—
(52 )
(3,423 )
—
16,092
58,011
(3,539 )
10,171
(2,372 )
20,171
(255 )
(60,656 )
30,441
(92,080 )
(9,625 )
2,211
—
—
—
—
7,271
(46,524 )
(46,667 )
96,576
2,699
237
7,652
42,693
—
—
2,321
284
(2,778 )
16,954
—
(66,300 )
(25,637 )
(6,607 )
17,262
(1,899 )
(19,819 )
(376 )
(74,169 )
68,036
32,046
(14,424 )
—
15,878
(5,000 )
(15,644 )
15,634
1,401
(18,547 )
(20,702 )
42,248
2,612
1,212
7,105
26,074
—
(140 )
7,091
(943 )
39,083
5,050
(15,940 )
(123,536 )
(4,845 )
(4,953 )
(4,391 )
(305 )
(18,122 )
979
227,671
9,502
164,024
(4,375 )
—
(79,000 )
(5,000 )
—
—
—
(10,846 )
(99,221 )
2,132
—
92,421
(33,510 )
61,043
470
(77,234 )
168,733
91,499 $
8,576
—
22,407
(66,178 )
(35,195 )
(1,014 )
(24,865 )
193,598
168,733 $
25,921
100
261,339
(254,355 )
33,005
(1,117 )
96,691
96,907
193,598
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements
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OPKO Health, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands)
For the years ended December 31,
2016
2017
2015
SUPPLEMENTAL INFORMATION:
Interest paid .............................................................................................................. $
Income taxes paid, net of refunds ............................................................................. $
Non-cash financing:
Shares issued upon the conversion of:
1,313 $
5,416 $
2,890 $
(27,122 ) $
4,572
4,879
2033 Senior Notes ......................................................................................... $
Common Stock options and warrants, surrendered in net exercise ............... $
— $
1,546 $
583 $
350 $
120,299
14,369
Issuance of capital stock to acquire or contingent consideration settlement:
Transition Therapeutics, Inc. ......................................................................... $
BioReference Laboratories, Inc..................................................................... $
EirGen Pharma Limited ................................................................................ $
OPKO Renal ................................................................................................. $
OPKO Health Europe.................................................................................... $
Issuance of stock for investment in Xenetic ........................................................ $
— $
— $
— $
— $
303 $
— $
58,530 $
— $
— $
25,986 $
313 $
4,856 $
—
950,148
33,569
20,113
1,813
—
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements
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OPKO Health, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Business and Organization
We are a diversified healthcare company that seeks to establish industry-leading positions in large and rapidly
growing medical markets. Our diagnostics business includes BioReference Laboratories, Inc. (“BioReference”), the
nation’s third-largest clinical laboratory with a core genetic testing business and an almost 400-person sales and
marketing team to drive growth and leverage new products, including the 4Kscore prostate cancer test and the
Claros 1 in-office immunoassay platform (in development). Our pharmaceutical business features Rayaldee, an
FDA-approved treatment for secondary hyperparathyroidism (“SHPT”) in adults with stage 3 or 4 chronic kidney
disease (“CKD”) and vitamin D insufficiency, and VARUBI™ for chemotherapy-induced nausea and vomiting (oral
formulation launched by partner TESARO in November 2015 and IV formulation launched November 2017),
OPK88003, a once or twice weekly oxyntomodulin for type 2 diabetes and obesity which is a clinically advanced
drug candidate among the new class of GLP-1 glucagon receptor dual agonists (Phase 2b), and OPK88004, a
selective androgen receptor modulator being developed for benign prostatic hyperplasia and other urologic and
metabolic conditions. Our pharmaceutical business also features hGH-CTP, a once-weekly human growth hormone
injection (in Phase 3 and partnered with Pfizer), and a once-daily Factor VIIa drug for hemophilia (Phase 2a). We
are incorporated in Delaware and our principal executive offices are located in leased offices in Miami, Florida.
In August 2016, we completed the acquisition of Transition Therapeutics, Inc. (“Transition Therapeutics”), a
clinical stage biotechnology company developing OPK88003, a once or twice weekly oxyntomodulin for type 2
diabetes and obesity, and OPK88004, a selective androgen receptor modulator for androgen deficiency indications.
Holders of Transition Therapeutics common stock received 6,431,899 shares of OPKO Common Stock. The
transaction was valued at approximately $58.5 million, based on a closing price per share of our Common Stock of
$9.10 as reported by NASDAQ on the closing date.
Through BioReference, we provide laboratory testing services, primarily to customers in the larger metropolitan
areas across New York, New Jersey, Maryland, Pennsylvania, Delaware, Washington, DC, Florida, California,
Texas, Illinois and Massachusetts as well as to customers in a number of other states. We offer a comprehensive test
menu of clinical diagnostics for blood, urine, and tissue analysis. This includes hematology, clinical chemistry,
immunoassay, infectious diseases, serology, hormones, and toxicology assays, as well as Pap smear, anatomic
pathology (biopsies) and other types of tissue analysis. We market our laboratory testing services directly to
physicians, geneticists, hospitals, clinics, correctional and other health facilities.
We operate established pharmaceutical platforms in Ireland, Chile, Spain, and Mexico, which are generating
revenue and which we expect to facilitate future market entry for our products currently in development. In
addition, we have a development and commercial supply pharmaceutical company and a global supply chain
operation and holding company in Ireland. We own a specialty active pharmaceutical ingredients (“APIs”)
manufacturer in Israel, which we expect will facilitate the development of our pipeline of molecules and compounds
for our molecular diagnostic and therapeutic products.
Our research and development activities are primarily performed at facilities in Miramar, FL, Woburn, MA,
Waterford, Ireland, Kiryat Gat, Israel, and Barcelona, Spain.
Note 2 Summary of Significant Accounting Policies
Basis of presentation. The accompanying Consolidated Financial Statements have been prepared in accordance
with accounting principles generally accepted in the U.S. and with the instructions to Form 10-K and of Regulation
S-X.
Principles of consolidation. The accompanying Consolidated Financial Statements include the accounts of
OPKO Health, Inc. and of our wholly-owned subsidiaries. All intercompany accounts and transactions are
eliminated in consolidation.
Use of estimates. The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect the reported
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amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could
differ significantly from these estimates.
Cash and cash equivalents. Cash and cash equivalents include short-term, interest-bearing instruments with
original maturities of 90 days or less at the date of purchase. We also consider all highly liquid investments with
original maturities at the date of purchase of 90 days or less as cash equivalents. These investments include money
markets, bank deposits, certificates of deposit and U.S. treasury securities.
Inventories. Inventories are valued at the lower of cost and 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 and net realizable value. Inventories at our diagnostics segment consist primarily of purchased
laboratory supplies, which is used in our testing laboratories. Inventory obsolescence for the years ended
December 31, 2017 and 2016 was $5.4 million and $0.0 million, respectively.
Pre-launch inventories. We may accumulate commercial quantities of certain product candidates prior to the
date we anticipate that such products will receive final U.S. FDA approval. The accumulation of such pre-launch
inventories involves the risk that such products may not be approved for marketing by the FDA on a timely basis, or
ever. This risk notwithstanding, we may accumulate pre-launch inventories of certain products when such action is
appropriate in relation to the commercial value of the product launch opportunity. In accordance with our policy,
this pre-launch inventory is expensed.
Goodwill and intangible assets. Goodwill represents the difference between the purchase price and the
estimated fair value of the net assets acquired accounted for by the acquisition method of accounting and arose from
our acquisitions. Refer to Note 5. Goodwill, in-process research and development (“IPR&D”) and other intangible
assets acquired in business combinations, licensing and other transactions at December 31, 2017 and 2016, were
$2.0 billion and $2.1 billion, respectively.
Assets acquired and liabilities assumed in business combinations, licensing and other transactions are generally
recognized at the date of acquisition at their respective fair values. We determined the fair value of intangible
assets, including IPR&D, using the “income method.”
Goodwill is tested at least annually for impairment, or when events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable, by assessing qualitative factors or performing a quantitative
analysis in determining whether it is more likely than not that its fair value exceeds the carrying value.
Intangible assets are tested for impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable, although IPR&D is required to be tested at least annually
until the project is completed or abandoned. Upon obtaining regulatory approval, the IPR&D asset is then
accounted for as a finite-lived intangible asset and amortized on a straight-line basis over its estimated useful life. If
the project is abandoned, the IPR&D asset is charged to expense.
We recorded an impairment charge of $13.2 million in Amortization of intangible assets in our Consolidated
Statement of Operations for the year ended December 31, 2017 to write our intangible asset for VARUBI™ down to
its estimated fair value. No intangible asset impairment was recorded for the year ended December 31, 2016.
We reclassified $187.6 million of IPR&D related to Rayaldee from In-process research and development to
Intangible assets, net in our Consolidated Balance Sheets upon the FDA’s approval of Rayaldee in June 2016. The
assets are being amortized on a straight-line basis over their estimated useful life of approximately 12 years.
We amortize intangible assets with definite lives on a straight-line basis over their estimated useful lives, ranging
from 3 to 20 years. We use the straight-line method of amortization as there is no reliably determinable pattern in
which the economic benefits of our intangible assets are consumed or otherwise used up. Amortization expense was
$84.7 million, $64.4 million and $28.0 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Amortization expense from operations for our intangible assets is expected to be $66.9 million, $64.2 million, $58.2
million, $52.2 million and $51.9 million for the years ended December 31, 2018, 2019, 2020, 2021 and 2022,
respectively.
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Fair value measurements. The carrying amounts of our cash and cash equivalents, accounts receivable, accounts
payable and short-term debt approximate their fair value due to the short-term maturities of these instruments.
Investments that are considered available for sale as of December 31, 2017 and 2016 are carried at fair value. Our
debt under the credit agreement with JPMorgan Chase Bank, N.A. approximates fair value due to the variable rate of
interest.
In evaluating the fair value information, considerable judgment is required to interpret the market data used to
develop the estimates. The use of different market assumptions and/or different valuation techniques may have a
material effect on the estimated fair value amounts. Accordingly, the estimates of fair value presented herein may
not be indicative of the amounts that could be realized in a current market exchange. Refer to Note 17.
Contingent consideration. Each period we revalue the contingent consideration obligations associated with
certain prior acquisitions to their fair value and record increases in the fair value as contingent consideration expense
and decreases in the fair value as a reduction in contingent consideration expense. Changes in contingent
consideration result from changes in the assumptions regarding probabilities of successful achievement of related
milestones, the estimated timing in which the milestones are achieved and the discount rate used to estimate the fair
value of the liability. Contingent consideration may change significantly as our development programs progress,
revenue estimates evolve and additional data is obtained, impacting our assumptions. The assumptions used in
estimating fair value require significant judgment. The use of different assumptions and judgments could result in a
materially different estimate of fair value which may have a material impact on our results from operations and
financial position.
Derivative financial instruments. We record derivative financial instruments on our Consolidated Balance Sheet
at their fair value and recognize the changes in the fair value in our Consolidated Statement of Operations when they
occur, the only exception being derivatives that qualify as hedges. For the derivative instrument to qualify as a
hedge, we are required to meet strict hedge effectiveness and contemporaneous documentation requirements at the
initiation of the hedge and assess the hedge effectiveness on an ongoing basis over the life of the hedge. At
December 31, 2017 and 2016, our foreign currency forward contracts held to economically hedge inventory
purchases did not meet the documentation requirements to be designated as hedges. Accordingly, we recognize all
changes in the fair values of our derivatives instruments, net, in our Consolidated Statement of Operations. Refer to
Note 18.
Property, plant and equipment. Property, plant and equipment are recorded at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the assets and includes amortization expense for
assets capitalized under capital leases. The estimated useful lives by asset class are as follows: software - 3 years,
machinery, medical and other equipment - 5-8 years, furniture and fixtures - 5-12 years, leasehold improvements -
the lesser of their useful life or the lease term, buildings and improvements - 10-40 years, automobiles - 3-5 years.
Expenditures for repairs and maintenance are charged to expense as incurred. Depreciation expense was $30.6
million, $33.3 million and $14.2 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Assets held under capital leases are included within Property, plant and equipment, net in our Consolidated Balance
Sheets and are amortized over the shorter of their useful lives or the expected term of their related leases.
Impairment of long-lived assets. Long-lived assets, such as property and equipment, are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an
asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of
an asset exceeds its estimated future cash flows, then an impairment charge is recognized for the amount by which
the carrying amount of the asset exceeds the fair value of the asset.
Income taxes. Income taxes are accounted for under the asset-and-liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and the respective tax bases and for operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the
enactment date.
On December 22, 2017, the 2017 Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law and the new
legislation contains several key tax provisions, including a reduction of the corporate income tax rate from 35% to
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21% effective January 1, 2018, and a one-time mandatory transition tax on accumulated foreign earnings, among
others. The Tax Act required us to remeasure our U.S. deferred tax assets and liabilities and recognize the effect in
the period of enactment, which resulted in an income tax charge of $31.8 million for the year ended December 31,
2017, with an equal offset to valuation allowance. We are required to recognize the effect of the tax law changes in
the period of enactment, such as remeasuring our U.S. deferred tax assets and liabilities, as well as reassessing the
net realizability of our deferred tax assets and liabilities. In December 2017, the SEC staff issued Staff Accounting
Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allows us to
record provisional amounts during a measurement period not to extend beyond one year of the enactment date.
Since the Tax Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation
are expected over the next 12 months, our accounting of deferred tax re-measurements, the transition tax, and other
items are provisional and may materially change due to the forthcoming guidance and our ongoing analysis of final
year-end data and tax positions. We expect to complete our analysis within the measurement period in accordance
with SAB 118.
We anticipate future impacts at a U.S. state and local tax level related to the Tax Act; however, statutory and
interpretive guidance is not available from applicable state and local tax authorities to reasonably estimate the
impact. Consequently, for those jurisdictions, we have not recorded provisional amounts and have continued to
apply ASC 740 based on the provisions of the tax laws that were in effect immediately prior to Tax Act enactment.
We operate in various countries and tax jurisdictions globally. For the year ended December 31, 2017, the tax
rate differed from the U.S. federal statutory rate of 35% primarily due to the relative mix in earnings and losses in
the U.S. versus foreign tax jurisdictions, the establishment of a valuation allowance in the U.S. and operating results
in tax jurisdictions which do not result in a tax benefit.
Included in Other long-term liabilities is an accrual of $2.5 million related to uncertain tax positions involving
income recognition. We recognize that local tax law is inherently complex and the local taxing authorities may not
agree with certain tax positions taken. Consequently, it is reasonably possible that the ultimate resolution of tax
matters in any jurisdiction may be significantly more or less than estimated. We evaluated the estimated tax
exposure for a range of current likely outcomes to be from $0 to approximately $50.0 million and recorded our
accrual to reflect our best expectation of ultimate resolution.
Revenue recognition. Revenue for laboratory services is recognized at the time test results are reported, which
approximates when services are provided. Services are provided to patients covered by various third party payor
programs including various managed care organizations, as well as the Medicare and Medicaid programs. For the
year ended December 31, 2017, approximately 31% of our revenues from services were derived directly from the
Medicare and Medicaid programs. Billings for services under third-party payer programs are included in revenue
net of allowances for contractual discounts and allowances for differences between the amounts billed and estimated
program payment amounts.
The complexities and ambiguities of billing, reimbursement regulations and claims processing, as well as issues
unique to Medicare and Medicaid programs, require us to estimate the potential for retroactive adjustments in the
recognition of revenue in the period the related services are rendered. Adjustments to the estimated collection
amounts are recorded upon settlement as an adjustment to revenue.
We recognize revenue from product sales when persuasive evidence of an arrangement exists, delivery has
occurred, collectability is reasonably assured, and the price to the buyer is fixed or determinable, which is generally
when goods are shipped and title and risk of loss transfer to our customers. Our estimates for sales returns and
allowances are based upon the historical patterns of product returns and allowances taken, matched against the sales
from which they originated, and our evaluation of specific factors that may increase or decrease the risk of product
returns. Product revenues are recorded net of estimated rebates, chargebacks, discounts, co-pay assistance and other
deductions (collectively, “Sales Deductions”) as well as estimated product returns. Allowances are recorded as a
reduction of revenue at the time product revenues are recognized.
We launched Rayaldee in the U.S. through our dedicated renal sales force in November 2016. Rayaldee is
distributed in the U.S. principally through the retail pharmacy channel, which initiates with the largest wholesalers
in the U.S. (collectively, “Rayaldee Customers”). In addition to distribution agreements with Rayaldee Customers,
we have entered into arrangements with many healthcare providers and payers that provide for government-
mandated and/or privately-negotiated rebates, chargebacks and discounts with respect to the purchase of Rayaldee.
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As of December 31, 2017, allowances for Sales Deductions and product returns related to sales of Rayaldee are
known or estimable utilizing historical information and market research projections. As a result, we recognize
revenue for shipments of Rayaldee at the time of delivery to Rayaldee Customers. For the year ended December 31,
2017, we recognized $9.1 million in net product revenue from sales of Rayaldee, including amounts previously
deferred. No revenue was recognized from sales of Rayaldee for the year ended December 31, 2016 as we lacked
the experiential data which would allow us to estimate Sales Deductions and product returns. The related deferred
revenue balance as of December 31, 2016 was $1.6 million.
The following table presents an analysis of product sales allowances and accruals for the year ended
December 31, 2017:
(In thousands)
Balance at December 31, 2016 .......................................... $
Provision related to current period sales ..........................
Credits or payments made ...............................................
Balance at December 31, 2017 .......................................... $
rebates and fees Governmental
— $
— $
1,591
(1,358 )
233 $
1,332
(984 )
348 $
Chargebacks,
discounts,
Total gross Rayaldee sales .................................................
Provision for Rayaldee sales allowances and accruals as
a percentage of gross Rayaldee sales ..............................
Returns
— $
490
(53 )
437 $
Total
—
3,413
(2,395 )
1,018
$
12,482
27 %
Revenue from transfer of intellectual property includes revenue related to the sale, license or transfer of
intellectual property such as upfront license payments, license fees, milestone and royalty payments received
through our license, and collaboration and commercialization agreements. We analyze our multiple-element
arrangements to determine whether the elements can be separated and accounted for individually as separate units of
accounting.
Non-refundable license fees for the out-license of our technology are recognized depending on the provisions of
each agreement. We recognize non-refundable upfront license payments as revenue upon receipt if the license has
standalone value and qualifies for treatment as a separate unit of accounting under multiple-element arrangement
guidance. License fees with ongoing involvement or performance obligations that do not have standalone value are
recorded as deferred revenue, included in Accrued expenses or Other long-term liabilities, when received and
generally are recognized ratably over the period of such performance obligations only after both the license period
has commenced and we have delivered the technology.
The assessment of our obligations and related performance periods requires significant management judgment.
If an agreement contains research and development obligations, the relevant time period for the research and
development phase is based on management estimates and could vary depending on the outcome of clinical trials
and the regulatory approval process. Such changes could materially impact the revenue recognized, and as a result,
management reviews the estimates related to the relevant time period of research and development on a periodic
basis. For the years ended December 31, 2017, 2016 and 2015 we recorded $70.7 million, $126.1 million and $81.9
million of revenue from the transfer of intellectual property, respectively. For the year ended December 31, 2017,
revenue from the transfer of intellectual property included $57.8 million related to the Pfizer Transaction and $10.0
million related to a milestone payment that TESARO, Inc. (“TESARO”) paid us under our license agreement with
them. Refer to Note 14. For the year ended December 31, 2016, revenue from the transfer of intellectual property
included $50.0 million related to the VFMCRP Agreement and $70.6 million related to the Pfizer Transaction. For
the year ended December 31, 2015, revenue from the transfer of intellectual property included $15.0 million related
to a milestone payment that TESARO paid us under our license agreement with them and $65.5 million related to
the Pfizer Transaction.
Revenue from milestone payments related to arrangements under which we have continuing performance
obligations are recognized as Revenue from transfer of intellectual property upon achievement of the milestone only
if all of the following conditions are met: the milestone payments are non-refundable; there was substantive
uncertainty at the date of entering into the arrangement that the milestone would be achieved; the milestone payment
is commensurate with either our performance to achieve the milestone or the enhancement of the value of the
delivered item by us; the milestone relates solely to past performance; and the amount of the milestone payment is
reasonable in relation to the effort expended or the risk associated with the achievement of the milestone. If any of
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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 $105.2 million and
$162.4 million at December 31, 2017 and 2016, respectively. The deferred revenue balance at December 31, 2017
and 2016 relates primarily to the Pfizer Transaction. Refer to Note 14.
Concentration of credit risk and allowance for doubtful accounts. Financial instruments that potentially subject
us to concentrations of credit risk consist primarily of accounts receivable. Substantially all of our accounts
receivable are with either companies in the health care industry or patients. However, credit risk is limited due to
the number of our clients as well as their dispersion across many different geographic regions.
While we have receivables due from federal and state governmental agencies, we do not believe that such
receivables represent a credit risk since the related healthcare programs are funded by federal and state governments,
and payment is primarily dependent upon submitting appropriate documentation. At December 31, 2017 and 2016,
receivable balances (net of contractual adjustments) from Medicare and Medicaid in total were 16% and 23%,
respectively, of our consolidated Accounts receivable, net.
The portion of our accounts receivable due from individual patients comprises the largest portion of credit risk.
At December 31, 2017 and 2016, receivables due from patients represent approximately 3.2% and 4.1%,
respectively, of our consolidated Accounts receivable, net.
We assess the collectability of accounts receivable balances by considering factors such as historical collection
experience, customer credit worthiness, the age of accounts receivable balances, regulatory changes and current
economic conditions and trends that may affect a customer’s ability to pay. Actual results could differ from those
estimates. Our reported net income (loss) is directly affected by our estimate of the collectability of accounts
receivable. The allowance for doubtful accounts was $66.4 million and $36.3 million at December 31, 2017 and
2016, respectively. The provision for bad debts for the years ended December 31, 2017 and 2016 was $107.3
million and $83.5 million, respectively.
Equity-based compensation. We measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award. That cost is recognized in the Consolidated
Statement of Operations over the period during which an employee is required to provide service in exchange for the
award. We record excess tax benefits, realized from the exercise of stock options, as cash flows from operations.
Equity-based compensation arrangements to non-employees are recorded at their fair value on the measurement
date. The measurement of equity-based compensation to non-employees is subject to periodic adjustment as the
underlying equity instruments vest. During the years ended December 31, 2017, 2016 and 2015, we recorded $28.3
million, $42.7 million and $26.1 million, respectively, of equity-based compensation expense.
Research and development expenses. Research and development expenses include external and internal
expenses, partially offset by third-party grants and fundings arising from collaboration agreements. External
expenses include clinical and non-clinical activities performed by contract research organizations, lab services,
purchases of drug and diagnostic product materials and manufacturing development costs. Research and
development employee-related expenses include salaries, benefits and equity-based compensation expense. Other
internal research and development expenses are incurred to support overall research and development activities and
include expenses related to general overhead and facilities. We expense these costs in the period in which they are
incurred. We estimate our liabilities for research and development expenses in order to match the recognition of
expenses to the period in which the actual services are received. As such, accrued liabilities related to third party
research and development activities are recognized based upon our estimate of services received and degree of
completion of the services in accordance with the specific third party contract.
We record expense for in-process research and development projects acquired in asset acquisitions which have
not reached technological feasibility and which have no alternative future use. For in-process research and
development projects acquired in business combinations, the in-process research and development project is
capitalized and evaluated for impairment until the development process has been completed. Once the development
process has been completed the asset will be amortized over its remaining useful life.
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Segment reporting. Our chief operating decision-maker (“CODM”) is Phillip Frost, M.D., our Chairman and
Chief Executive Officer. Our CODM reviews our operating results and operating plans and makes resource
allocation decisions on a Company-wide or aggregate basis. We manage our operations in two reportable segments,
pharmaceutical and diagnostics. The pharmaceutical segment consists of our pharmaceutical operations we acquired
in Chile, Mexico, Ireland, Israel and Spain and our pharmaceutical research and development. The diagnostics
segment primarily consists of clinical laboratory operations we acquired through the acquisition of BioReference
and point-of-care operations. There are no significant inter-segment sales. We evaluate the performance of each
segment based on operating profit or loss. There is no inter-segment allocation of interest expense and income
taxes. Refer to Note 16.
Shipping and handling costs. We do not charge customers for shipping and handling costs. Shipping and
handling costs are classified as Cost of revenues in the Consolidated Statement of Operations.
Foreign currency translation. The financial statements of certain of our foreign operations are measured using
the local currency as the functional currency. The local currency assets and liabilities are generally translated at the
rate of exchange to the United States (“U.S.”) dollar on the balance sheet date and the local currency revenues and
expenses are translated at average rates of exchange to the U.S. dollar during the reporting periods. Foreign
currency transaction gains (losses) have been reflected as a component of Other income (expense), net within the
Consolidated Statement of Operations and foreign currency translation gains (losses) have been included as a
component of the Consolidated Statement of Comprehensive Loss. During the years ended December 31, 2017,
2016 and 2015, we recorded $1.4 million, $0.8 million and $(2.4) million, respectively of transaction gains (losses).
Variable interest entities. The consolidation of a variable interest entity (“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 4.
Investments. We have made strategic investments in development stage and emerging companies. We record
these investments as equity method investments or investments available for sale based on our percentage of
ownership and whether we have significant influence over the operations of the investees. Investments for which it
is not practical to estimate fair value and which we do not have significant influence are accounted for as cost
method investments. For investments classified under the equity method of accounting, we record our proportionate
share of their losses in Losses from investments in investees in our Consolidated Statement of Operations. Refer to
Note 4. For investments classified as available for sale, we record changes in their fair value as unrealized gain or
loss in Other comprehensive income (loss) based on their closing price per share at the end of each reporting period.
Refer to Note 4.
Recent accounting pronouncements. In May 2014, the FASB issued Accounting Standards Update (“ASU”) No.
2014-09, “Revenue from Contracts with Customers.” ASU 2014-09, as amended, clarifies the principles for
recognizing revenue and develops a common revenue standard for GAAP that removes inconsistencies and
weaknesses in revenue requirements, provides a more robust framework for addressing revenue issues, improves
comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets, provides
more useful information to users of financial statements through improved disclosure requirements and simplifies
the preparation of financial statements by reducing the number of requirements to which an entity must refer. ASU
2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017.
Companies can choose to apply the ASU using either the full retrospective approach or a modified retrospective
approach. We plan to adopt the ASU in the first quarter of 2018 using the full retrospective approach.
We continue to assess the impact of this ASU on our financial condition, results of operations, cash flows and
disclosures. Our analysis includes reviewing current accounting policies and practices to identify potential
differences that would result from applying the requirements under this new standard. We have reviewed certain
contracts with its customers that we believe are representative of our revenue streams and continue to review
additional contracts across our global business units. ASU 2014-09 requires increased disclosure which in turn is
expected to require certain new processes. The determination of the impact of adoption of ASU 2014-09 on our
financial condition, results of operations, cash flows and disclosures is ongoing, and, as such, we are not able to
reasonably estimate the quantitative effect that the adoption of the new standard will have on our financial
statements. Based on our preliminary assessment of this ASU, for our diagnostics segment, we generally do not
expect any significant changes to the timing of revenue recognition or net income, but there will be a change in the
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presentation in the Statement of Operations. Under the ASU, the majority of the amounts that were historically
classified as provision for bad debts, primarily related to patient responsibility, will be considered an implicit price
concession in determining net revenues. Accordingly, we will report uncollectible balances associated with
individual patients as a reduction of the transaction price and therefore as a reduction in net revenues when
historically these amounts were classified as provision for bad debts within Selling, general and administrative
expenses.
In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of
Inventory,” which changes the measurement principle for entities that do not measure inventory using the last-in,
first-out (“LIFO”) or retail inventory method from the lower of cost or market to lower of cost and net realizable
value. ASU 2015-11 was effective for fiscal years beginning after December 15, 2016, including interim periods
within those fiscal years, with early adoption permitted. The adoption of ASU 2015-11 in the first quarter of 2017
did not have a significant impact on our Consolidated Financial Statements.
In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet
Classification of Deferred Taxes,” which requires deferred tax liabilities and assets to be classified as noncurrent in
a classified statement of financial position. The adoption of this ASU simplifies the presentation of deferred income
taxes and reduces complexity without decreasing the usefulness of information provided to users of financial
statements. We early adopted the provisions of this ASU prospectively in the fourth quarter of 2015, and did not
retrospectively adjust the prior periods. The adoption of ASU 2015-17 did not have a significant impact on our
Consolidated Financial Statements.
In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10),”
which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments.
The ASU requires equity investments (except those accounted for under the equity method of accounting or those
that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net
income. ASU 2016-01 will be effective for fiscal years beginning after December 15, 2017, including interim
periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact of this new
guidance on our Consolidated Financial Statements, but the primary effect will be the recognition of changes in the
fair value of our available for sale investments in net income.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which will require organizations
that lease assets with lease terms of more than 12 months to recognize assets and liabilities for the rights and
obligations created by those leases on their balance sheets. The ASU will also require new qualitative and
quantitative disclosures to help investors and other financial statement users better understand the amount, timing,
and uncertainty of cash flows arising from leases. ASU 2016-02 will be effective for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. We are
currently evaluating the impact of this new guidance on our Consolidated Financial Statements.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718),” which
simplifies several aspects of the accounting for share-based payment award transactions, including the income tax
consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows and
accounting for forfeitures. ASU 2016-09 was effective for fiscal years beginning after December 15, 2016,
including interim periods within those fiscal years, with early adoption permitted. We adopted this standard in the
first quarter of 2017. As required by ASU 2016-09, excess tax benefits are classified as an operating activity in our
Consolidated Statement of Cash Flows and we have applied this provision prospectively. In addition, we have
elected to estimate forfeitures over the course of a vesting period, rather than account for forfeitures as they occur.
We adjust our forfeiture estimates based on the number of share-based awards that ultimately vest on at least an
annual basis. As a result of the adoption of ASU 2016-09 in 2017, we recorded a cumulative-effect adjustment to
reduce our deferred tax liabilities and reduce our accumulated deficit by $31.7 million with respect to excess tax
benefits recognized in our Consolidated Balance Sheets.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230),” which addresses
the classification of eight specific cash flow issues with the objective of reducing the existing diversity in practice.
ASU 2016-15 will be effective for fiscal years beginning after December 15, 2017, including interim periods within
those fiscal years, with early adoption permitted. We are currently evaluating the impact of this new guidance on
our Consolidated Financial Statements.
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In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350),” which
simplifies how an entity is required to test for goodwill impairment. ASU 2017-04 will be effective for annual or
interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted
after January 1, 2017. We are currently evaluating the impact of this new guidance on our Consolidated Financial
Statements.
Note 3 Loss Per Share
Basic loss per share is computed by dividing our net loss by the weighted average number of shares outstanding
during the period. For diluted earnings per share, the dilutive impact of stock options, warrants and, for the years
ended December 31, 2016 and 2015, conversion options of the 2033 Senior Notes is determined by applying the
“treasury stock” method. For the year ended December 31, 2017, the 2033 Senior Notes have been considered using
the “if converted” method. In the periods in which their effect would be antidilutive, no effect has been given to
outstanding options, warrants or the potentially dilutive shares issuable pursuant to the 2033 Senior Notes (defined
in Note 6) in the dilutive computation.
A total of 6,255,624, 9,494,999 and 14,269,717 potential shares of Common Stock have been excluded from the
calculation of diluted net loss per share for the years ended December 31, 2017, 2016 and 2015, respectively,
because their inclusion would be antidilutive. A full presentation of diluted earnings per share has not been
provided because the required adjustments to the numerator and denominator resulted in diluted earnings per share
equivalent to basic earnings per share.
During the year ended December 31, 2017, 1,720,649 Common Stock options and Common Stock warrants to
purchase shares of our Common Stock were exercised, resulting in the issuance of 1,447,792 shares of Common
Stock. Of the 1,720,649 Common Stock options and Common Stock warrants exercised, 272,857 shares of
Common Stock were surrendered in lieu of a cash payment via the net exercise feature of the agreements.
During the year ended December 31, 2016, 3,420,697 Common Stock options and Common Stock warrants to
purchase shares of our Common Stock were exercised, resulting in the issuance of 3,292,753 shares of Common
Stock. Of the 3,420,697 Common Stock options and Common Stock warrants exercised, 127,944 shares of
Common Stock were surrendered in lieu of a cash payment via the net exercise feature of the agreements.
During the year ended December 31, 2015, 25,686,153 Common Stock options and Common Stock warrants to
purchase shares of our Common Stock were exercised, resulting in the issuance of 24,466,106 shares of Common
Stock. Of the 25,686,153 Common Stock options and Common Stock warrants exercised, 1,220,047 shares of
Common Stock were surrendered in lieu of a cash payment via the net exercise feature of the agreements.
Note 4 Acquisitions, Investments, and Licenses
Transition Therapeutics acquisition
In August 2016, we completed the acquisition of Transition Therapeutics, a clinical stage biotechnology
company. Holders of Transition Therapeutics common stock received 6,431,899 shares of OPKO Common Stock.
The transaction was valued at approximately $58.5 million, based on a closing price per share of our Common Stock
of $9.10 as reported by NASDAQ on the closing date.
The following table summarizes the final purchase price allocation and the fair value of the net assets acquired
and liabilities assumed at the date of acquisition:
(In thousands)
Current assets
Transition
Therapeutics
Cash and cash equivalents ....................................................................................................... $
IPR&D assets ...........................................................................................................................
Goodwill ..................................................................................................................................
Other assets ..............................................................................................................................
Accounts payable and other liabilities .....................................................................................
Deferred tax liability ................................................................................................................
Total purchase price ............................................................................................................. $
15,878
41,000
3,453
634
(1,035 )
(1,400 )
58,530
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Goodwill from the acquisition of Transition Therapeutics principally relates to intangible assets that do not
qualify for separate recognition (for instance, Transition Therapeutics’ assembled workforce) and the deferred tax
liability generated as a result of the transaction. Goodwill is not tax deductible for income tax purposes and was
assigned to the pharmaceutical reporting segment.
Our IPR&D assets will not be amortized until the underlying development programs are completed. Upon
obtaining regulatory approval, the IPR&D assets are then accounted for as finite-lived intangible assets and
amortized on a straight-line basis over its estimated useful life.
Investments
The following table reflects the accounting method, carrying value and underlying equity in net assets of our
unconsolidated investments as of December 31, 2017:
(in thousands)
Investment type
Equity method investments
Variable interest entity, equity method
Available for sale investments
Cost method investment
Warrants and options
Total carrying value of investments
Investment
Carrying Value
$
Underlying Equity
in Net Assets
18,210
—
23,338 $
402
12,461
1,108
3,333
40,642
$
Equity method investments
Our equity method investments consist of investments in Pharmsynthez (ownership 9%), Cocrystal Pharma, Inc.
(“COCP”) (9%), Non-Invasive Monitoring Systems, Inc. (“NIMS”) (1%), Neovasc Inc. (5%), VBI Vaccines Inc.
(“VBI”) (10%), InCellDx, Inc. (29%), BioCardia, Inc. (“BioCardia”) (5%), and Xenetic Biosciences, Inc.
(“Xenetic”) (4%). The total assets, liabilities, and net losses of our equity method investees as of and for the year
ended December 31, 2017 were $396.3 million, $201.8 million, and $130.9 million, respectively. We have
determined that we and/or our related parties can significantly influence the success of our equity method
investments through our board representation and/or voting power. Accordingly, we account for our investment in
these entities under the equity method and record our proportionate share of their losses in Loss from investments in
investees in our Consolidated Statement of Operations. The aggregate value of our equity method investments
based on the quoted market price of their common stock and the number of shares held by us as of December 31,
2017 is $54.8 million.
Available for sale investments
Our available for sale investments consist of investments in RXi Pharmaceuticals Corporation (“RXi”)
(ownership 2%), ChromaDex Corporation (1%), MabVax Therapeutics Holdings, Inc. (“MabVax”) (2%) and Eloxx
Pharmaceuticals, Inc. (5%). We have determined that our ownership, along with that of our related parties, does not
provide us with significant influence over the operations of our available for sale investments. Accordingly, we
account for our investment in these entities as available for sale, and we record changes in these investments as an
unrealized gain or loss in Other comprehensive income (loss) each reporting period.
Based on our evaluation of the value of our investment in Xenetic, including Xenetic’s decreasing stock price
during the year ended December 31, 2017, we determined that the decline in fair value of our Xenetic common
shares was other-than-temporary and recorded an impairment charge of $0.6 million in Other income (expense), net
in our Consolidated Statement of Operations for the year ended December 31, 2017 to write our investment in
Xenetic down to its fair value as of December 31, 2017.
Based on our evaluation of the value of our investments in Xenetic, RXi and ARNO, including their decreasing
stock price during the year ended December 31, 2016, we determined that the decline in fair value of our common
shares in Xenetic, RXi and ARNO was other-than-temporary and recorded an impairment charge of $4.8 million in
Other income (expense), net in our Consolidated Statement of Operations for the year ended December 31, 2016 to
write our investments in Xenetic, RXi and ARNO down to their respective fair values as of December 31, 2016.
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In December 2017, Eloxx Pharmaceuticals Ltd. and Sevion Therapeutics, Inc. completed their acquisition
transaction. The company will be known as Eloxx Pharmaceuticals, Inc. (“Eloxx”) following completion of the
transaction. We recorded a $2.5 million gain in connection with the acquisition transaction in Other income
(expense), net in our Consolidated Statement of Operations for the year ended December 31, 2017. We account for
our investment in Eloxx as an available for sale investment.
Sales of investments
Gains included in earnings from sale of our investments for the year ended December 31, 2017, were $1.5
million and were recorded in Other income (expense), net in our Consolidated Statement of Operations. No gains
(losses) were recognized during the years ended December 31, 2016 and 2015. The cost of securities sold is based
on the specific identification method.
Warrants and options
In addition to our equity method investments and available for sale investments, we hold options to purchase 0.4
million additional shares of BioCardia, 0.1 million of which are vested as of December 31, 2017, and 1.0 million,
0.7 million, 0.5 million, 0.2 million and 4.9 million of warrants to purchase additional shares of COCP, InCellDx,
Inc., Xenetic, RXi and Neovasc, respectively. We recorded the changes in the fair value of the options and warrants
in Fair value changes of derivative instruments, net in our Consolidated Statement of Operations. We also recorded
the fair value of the options and warrants in Investments, net in our Consolidated Balance Sheet. See further
discussion of the Company’s options and warrants in Note 17 and Note 18.
Investments in variable interest entities
We have determined that we hold variable interests in Zebra Biologics, Inc. (“Zebra”). We made this
determination as a result of our assessment that Zebra does not have sufficient resources to carry out its principal
activities without additional financial support.
We own 1,260,000 shares of Zebra Series A-2 Preferred Stock and 900,000 shares of Zebra restricted common
stock (ownership 29% at December 31, 2017). Zebra is a privately held biotechnology company focused on the
discovery and development of biosuperior antibody therapeutics and complex drugs. Dr. Richard Lerner, M.D., a
member of our Board of Directors, is a founder of Zebra and, along with Dr. Frost, serves as a member of Zebra’s
Board of Directors.
In order to determine the primary beneficiary of Zebra, we evaluated our investment and our related parties’
investment, as well as our investment combined with the related party group’s investment to identify if we had the
power to direct the activities that most significantly impact the economic performance of Zebra. Based on the
capital structure, governing documents and overall business operations of Zebra, we determined that, while a VIE,
we do not have the power to direct the activities that most significantly impact Zebra’s economic performance and
have no obligation to fund expected losses. We did determine, however, that we can significantly influence the
success of Zebra through our board representation and voting power. Therefore, we have the ability to exercise
significant influence over Zebra’s operations and account for our investment in Zebra under the equity method.
Investment in SciVac
In June 2012, we acquired a 50% stock ownership in SciVac from FDS Pharma LLP (“FDS”). SciVac was a
privately-held Israeli company that produced a third-generation hepatitis B-vaccine. From November 2012 through
June 2015, we loaned to SciVac a combined $7.9 million for working capital purposes. We determined that we held
variable interests in SciVac based on our assessment that SciVac did not have sufficient resources to carry out its
principal activities without financial support. We had also determined we were the primary beneficiary of SciVac
through our representation on SciVac’s board of directors. As a result of this conclusion, we consolidated the results
of operations and financial position of SciVac through June 2015 and recorded a reduction of equity for the portion
of SciVac we do not own.
On July 9, 2015, SciVac Therapeutics Inc., formerly Levon Resources Ltd. (“STI”) completed a reverse takeover
transaction (the “Arrangement”) pursuant to which STI acquired all of the issued and outstanding securities of
SciVac. As a result of this transaction, OPKO’s ownership in STI decreased to 24.5%.
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Upon completion of the Arrangement, we determined that STI was not a VIE. We also determined that we do
not have the power to direct the activities that most significantly impact the economic performance of STI that
would require us to consolidate STI. We recorded a $15.9 million gain on the deconsolidation of SciVac in Other
income (expense), net in our Consolidated Statement of Operations for the year ended December 31, 2015. The
recognized gain was primarily due to the fair value of the retained interest in STI based on Levon’s cash
contribution of approximately $21.2 million under the Arrangement.
Following the deconsolidation, we account for our investment in STI under the equity method as we have
determined that we and/or our related parties can significantly influence STI through our voting power and board
representation. STI is considered a related party as a result of our board representation in STI and executive
management’s ownership interests in STI.
In May 2016, STI completed a merger transaction pursuant to which a wholly-owned subsidiary of STI merged
with and into VBI Vaccines Inc. with VBI Vaccines Inc. surviving the merger as a wholly-owned subsidiary of STI,
and STI changed its name to VBI Vaccines Inc. (“VBI”). We recorded a $2.5 million gain in connection with the
merger transaction in Other income (expense), net in our Consolidated Statement of Operations for the year ended
December 31, 2016. In June 2016, we invested an additional $5.7 million in VBI for 1,362,370 shares of its
common stock.
We account for our investment in VBI under the equity method as we have determined that we can significantly
influence VBI through our board representation.
Other
We recorded $8.8 million of expense in Selling, general and administrative expenses in our Consolidated
Statement of Operations for the year ended December 31, 2017 to write certain Other current assets from our
investees down to their estimated fair value.
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Note 5 Composition of Certain Financial Statement Captions
(In thousands)
Accounts receivable, net....................................................................
Accounts receivable .....................................................................
Less: allowance for doubtful accounts ...................................
$
$
Inventories, net
Consumable supplies ....................................................................
Finished products .........................................................................
Work in-process ...........................................................................
Raw materials ...............................................................................
Less: inventory reserve ..........................................................
$
$
Other current assets and prepaid expenses
Other receivables ..........................................................................
Taxes recoverable .........................................................................
Prepaid supplies ............................................................................
Prepaid insurance .........................................................................
Other .............................................................................................
$
$
Property, plant and equipment, net:
$
Machinery, medical and other equipment ....................................
Leasehold improvements ..............................................................
Furniture and fixtures ...................................................................
Automobiles and aircraft ..............................................................
Software .......................................................................................
Building ........................................................................................
Land ..............................................................................................
Construction in process ................................................................
Less: accumulated depreciation .............................................
$
Intangible assets, net:
$
Customer relationships .................................................................
Technologies ................................................................................
Trade names .................................................................................
Covenants not to compete ............................................................
Licenses ........................................................................................
Product registrations .....................................................................
Other .............................................................................................
Less: accumulated amortization .............................................
$
Accrued expenses:
$
Deferred revenue ..........................................................................
Employee benefits ........................................................................
Taxes payable ...............................................................................
Contingent consideration ..............................................................
Clinical trials ................................................................................
Capital leases short-term ..............................................................
Milestone payment .......................................................................
Professional fees ...........................................................................
109
For the years ended
2017
2016
231,940 $
(66,424 )
165,516 $
256,552
(36,268 )
220,284
21,546 $
21,012
5,873
7,467
(6,565 )
49,333 $
$
3,398
18,138
8,207
3,532
3,838
37,113 $
$
112,961
34,121
11,540
11,137
12,469
8,227
2,552
39,397
(85,847 )
146,557
$
448,345 $
340,921
50,553
16,372
10,305
10,475
5,799
(198,935 )
683,835 $
46,189 $
50,377
4,609
11,750
12,191
3,399
4,868
2,355
23,448
16,143
3,896
4,686
(945 )
47,228
13,021
16,187
6,952
3,688
7,508
47,356
100,100
30,122
11,247
13,342
10,990
5,696
2,264
5,848
(56,778 )
122,831
443,560
340,397
50,442
16,348
23,506
7,641
5,289
(123,207 )
763,976
73,434
43,792
4,430
259
5,935
3,025
4,865
4,035
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(In thousands)
Other .............................................................................................
$
Other long-term liabilities:
Deferred revenue ..........................................................................
Line of credit ................................................................................
Contingent consideration ..............................................................
Capital leases long-term ...............................................................
Mortgages and other debts payable ..............................................
Other .............................................................................................
$
$
For the years ended
2017
79,364
215,102 $
2016
58,180
197,955
58,989 $
104,152
29,603
7,786
1,567
17,857
219,954 $
89,016
38,809
44,817
7,216
717
21,908
202,483
The following table summarizes the fair values assigned to our major intangible asset classes upon each
acquisition:
In-process
research and
development
Customer
relationships
Product
registrations
Covenants
not to
compete
Trade
names
Technologies
$
100,600 $
— $
389,800 $
Total
identified
intangible
assets
Other
Goodwill
— $ 545,250 $ 401,821
4,827
290
83,373
3,919
11,623
—
10,290
38,634
18,800
— $
—
—
—
7,750 $
—
—
1,500
47,100 $
—
—
400
—
—
2,700
10,000
560
—
—
—
590,200
—
—
34,155
14,200
—
3,945
44,400
—
—
—
—
5,829
—
—
—
—
1,032
—
—
590,200
10,806
139,784
5,441
—
—
44,400
17,977
3,017
1,370
—
1,459
—
191,530
436
3,860
—
2,930
—
—
187
6,900
—
349
1,830
—
—
70
210
8,378
14,030
191,740
8,062
29,629
2,411
—
41,000
—
—
—
—
—
41,000
3,453
8-12 years
Indefinite
6-20 years
9 years
5 years
4-5 years 3-10 years
Indefinite
(In thousands)
BioReference .....
CURNA .............
EirGen ...............
FineTech ............
OPKO
Biologics ..........
OPKO Chile ......
OPKO
Diagnostics.......
OPKO Health
Europe ..............
OPKO Lab .........
OPKO Renal......
Transition
Therapeutics .....
Weighted
average
amortization
period ...............
All of the intangible assets and goodwill acquired relate to our acquisitions of principally OPKO Renal, OPKO
Biologics, EirGen and BioReference. We do not anticipate capitalizing the cost of product registration renewals,
rather we expect to expense these costs, as incurred. Our goodwill is not tax deductible for income tax purposes in
any jurisdiction we operate in.
The changes in value of the intangible assets and goodwill during 2017 are primarily due to foreign currency
fluctuations between the Chilean Peso, the Euro and the Shekel against the U.S. dollar. For the year ended
December 31, 2016, we reclassified $187.6 million of IPR&D related to Rayaldee from In-process research and
development to Intangible assets, net in our Consolidated Balance Sheet upon the FDA’s approval of Rayaldee in
June 2016. In addition, we made certain purchase price allocation adjustments related to the BioReference
acquisition during the year ended December 31, 2016.
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The following table reflects the changes in the allowance for doubtful accounts, provision for inventory reserve
and tax valuation allowance accounts:
(In thousands)
2017
Beginning
balance
Charged
to
expense
Written-off
Charged
to other
Ending
balance
Allowance for doubtful accounts ............ $
Inventory reserve .................................... $
Tax valuation allowance ......................... $
(36,268 )
(945 )
(55,415 )
(107,256 )
(5,390 )
(82,358 )
2016
Allowance for doubtful accounts ............ $
Inventory reserve .................................... $
Tax valuation allowance ......................... $
(25,168 )
(1,051 )
(42,147 )
(83,463 )
(20 )
7,726
77,047
(230 )
—
68,840
296
—
53 $
— $
(66,424 )
(6,565 )
(4,289 ) $ (142,062 )
3,523 $
(170 ) $
(20,994 ) $
(36,268 )
(945 )
(55,415 )
The following table summarizes the changes in Goodwill during the years ended December 31, 2017 and 2016.
2017
2016
Balance at
January 1
Purchase
accounting
adjustments
Foreign
exchange
and other
Balance at
December 31
Balance
at
January 1
Purchase
accounting
adjustments
Foreign
exchange
Balance at
December 31
(In thousands)
Pharmaceuticals
CURNA ........................ $ 4,827 $
EirGen .......................... 78,358
FineTech ....................... 11,698
OPKO Biologics ........... 139,784
4,785
OPKO Chile ..................
OPKO Health
Europe.......................
OPKO Renal .................
Transition
Therapeutics ..............
6,936
2,069
3,360
— $
—
—
—
—
—
—
—
— $
10,868
—
—
418
$
4,827 $
89,226
11,698
139,784
5,203
4,827
81,139
11,698
139,784
4,517
— $
—
—
—
—
—
—
— $
(2,781 )
—
—
268
(255 )
—
7,898
2,069
7,191
2,069
962
—
248
3,608
—
3,453
(93 )
Diagnostics
BioReference................ 401,821
OPKO Diagnostics ....... 17,977
OPKO Lab ................... 32,988
$ 704,603 $
—
—
—
— $ 12,496 $
—
—
—
441,158
401,821
17,977
17,977
32,988
32,988
717,099 $ 743,348
(39,337 )
—
—
—
—
—
$
(35,884 ) $ (2,861 ) $
4,827
78,358
11,698
139,784
4,785
6,936
2,069
3,360
401,821
17,977
32,988
704,603
Note 6 Debt
In January 2013, we entered into note purchase agreements (the “2033 Senior Notes”) with qualified institutional
buyers and accredited investors (collectively, the “Purchasers”) in a private placement in reliance on exemptions
from registration under the Securities Act of 1933, as amended (the “Securities Act”). The 2033 Senior Notes were
issued on January 30, 2013. The 2033 Senior Notes, which totaled $175.0 million in original principal amount, bear
interest at the rate of 3.0% per year, payable semiannually on February 1 and August 1 of each year. The 2033
Senior Notes will mature on February 1, 2033, unless earlier repurchased, redeemed or converted. Upon a
fundamental change as defined in the Indenture, dated as of January 30, 2013, by and between the Company and
Wells Fargo Bank N.A., as trustee, governing the 2033 Senior Notes (the “Indenture”), subject to certain exceptions,
the holders may require us to repurchase all or any portion of their 2033 Senior Notes for cash at a repurchase price
equal to 100% of the principal amount of the 2033 Senior Notes being repurchased, plus any accrued and unpaid
interest to but not including the fundamental change repurchase date.
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The following table sets forth information related to the 2033 Senior Notes which is included in our
Consolidated Balance Sheet as of December 31, 2017:
(In thousands)
Balance at December 31, 2016 ........................................ $
Amortization of debt discount ........................................
Embedded
conversion
option
16,736 $
2033 Senior
Notes
31,850 $
Discount
Debt
Issuance
Cost
Total
(4,612 ) $
(273 ) $ 43,701
and debt issuance costs
Change in fair value of embedded derivative ..................
Reclassification of embedded derivatives to equity .........
Balance at December 31, 2017 ........................................ $
—
(3,185 )
(13,551 )
— $
—
—
—
31,850 $
2,047
—
—
(2,565 ) $
148
—
—
2,195
(3,185 )
(13,551 )
(125 ) $ 29,160
The following table sets forth information related to the 2033 Senior Notes which is included in our
Consolidated Balance Sheet as of December 31, 2016:
(In thousands)
Balance at December 31, 2015 ....................................... $
Amortization of debt discount
Embedded
conversion
option
23,737 $
2033 Senior
Notes
32,200 $
Discount
Debt
Issuance
Cost
Total
(6,525 ) $
(426 ) $ 48,986
and debt issuance costs ................................................
Change in fair value of embedded derivative .................
Conversion ......................................................................
Balance at December 31, 2016 ....................................... $
—
(7,001 )
—
16,736 $
—
—
(350 )
31,850 $
1,913
—
—
(4,612 ) $
153
—
—
2,066
(7,001 )
(350 )
(273 ) $ 43,701
The 2033 Senior Notes will be convertible at any time on or after November 1, 2032, through the second
scheduled trading day immediately preceding the maturity date, at the option of the holders. Additionally, holders
may convert their 2033 Senior Notes prior to the close of business on the scheduled trading day immediately
preceding November 1, 2032, under the following circumstances: (1) conversion based upon satisfaction of the
trading price condition relating to the 2033 Senior Notes; (2) conversion based on the Common Stock price;
(3) conversion based upon the occurrence of specified corporate events; or (4) if we call the 2033 Senior Notes for
redemption. The 2033 Senior Notes will be convertible into cash, shares of our Common Stock, or a combination of
cash and shares of Common Stock, at our election unless we have made an irrevocable election of net share
settlement. The initial conversion rate for the 2033 Senior Notes will be 141.48 shares of Common Stock per
$1,000 principal amount of 2033 Senior Notes (equivalent to an initial conversion price of approximately $7.07 per
share of Common Stock), and will be subject to adjustment upon the occurrence of certain events. In addition, we
will, in certain circumstances, increase the conversion rate for holders who convert their 2033 Senior Notes in
connection with a make-whole fundamental change (as defined in the Indenture) and holders who convert upon the
occurrence of certain specific events prior to February 1, 2017 (other than in connection with a make-whole
fundamental change). Holders of the 2033 Senior Notes may require us to repurchase the 2033 Senior Notes for
100% of their principal amount, plus accrued and unpaid interest, on February 1, 2019, February 1, 2023 and
February 1, 2028, or following the occurrence of a fundamental change as defined in the indenture governing the
2033 Senior Notes.
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 determined that
these specific terms were considered to be embedded derivatives. Embedded derivatives are required to be
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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 concluded that the embedded derivatives within the 2033 Senior Notes meet these criteria for periods prior to
February 1, 2017 and, as such, were valued separate and apart from the 2033 Senior Notes and recorded at fair value
each reporting period.
For accounting and financial reporting purposes, prior to 2017 we combined these embedded derivatives and
valued them together as one unit of accounting.
On February 1, 2017, certain terms of the embedded derivatives expired pursuant to the original agreement and
we determined that the embedded derivatives no longer met the criteria to be separated from the host contract and,
as a result, the embedded derivatives are no longer required to be valued separate and apart from the 2033 Senior
Notes and are not required to be measured at fair value subsequent to February 1, 2017.
The change in derivative income for the period from January 1, 2017 to February 1, 2017 related to the
embedded derivatives was $3.2 million and the fair value at that date was $13.6 million. As the embedded
derivatives are no longer required to be accounted for separately each period, the embedded derivative fair value of
$13.6 million as of February 1, 2017 was reclassified to additional paid in capital.
From 2013 to 2016, holders of the 2033 Senior Notes converted 143.2 million in aggregate principal amount into
an aggregate of 21,539,873 shares of the Company’s Common Stock.
On April 1, 2015, we initially announced that our 2033 Senior Notes were convertible through June 2015 by
holders of such notes. This conversion right was triggered because the closing price per share of our Common Stock
exceeded $9.19, or 130% of the initial conversion price of $7.07, for at least 20 of 30 consecutive trading days
during the applicable measurement period. We have elected to satisfy our conversion obligation under the 2033
Senior Notes in shares of our Common Stock. Our 2033 Senior Notes continued to be convertible by holders of
such notes for the remainder of 2015, 2016 and the first quarter of 2017. They may become convertible again if one
or more of the conversion conditions specified in the Indenture is satisfied during future measurement periods.
Pursuant to the Indenture, a holder who elects to convert the 2033 Senior Notes will receive 141.4827 shares of our
Common Stock plus such number of additional shares as is applicable on the conversion date per $1,000 principal
amount of 2033 Senior Notes based on the early conversion provisions in the Indenture.
Through February 1, 2017, we used a binomial lattice model in order to estimate the fair value of the embedded
derivative in the 2033 Senior Notes. A binomial lattice model generates two probable outcomes — one up and
another down —arising at each point in time, starting from the date of valuation until the maturity date. A lattice
model was initially used to determine if the 2033 Senior Notes would be converted, called or held at each decision
point. Within the lattice model, the following assumptions are made: (i) the 2033 Senior Notes will be converted
early if the conversion value is greater than the holding value; or (ii) the 2033 Senior Notes will be called if the
holding value is greater than both (a) the redemption price (as defined in the Indenture) and (b) the conversion value
plus the coupon make-whole payment at the time. If the 2033 Senior Notes are called, then the holders will
maximize their value by finding the optimal decision between (1) redeeming at the redemption price and (2)
converting the 2033 Senior Notes.
Using this lattice model, we valued the embedded derivatives using the “with-and-without method,” where the
value of the 2033 Senior Notes including the embedded derivatives is defined as the “with,” and the value of the
2033 Senior Notes excluding the embedded derivatives is defined as the “without.” This method estimates the value
of the embedded derivatives by looking at the difference in the values between the 2033 Senior Notes with the
embedded derivatives and the value of the 2033 Senior Notes without the embedded derivatives.
The lattice model requires the following inputs: (i) price of our Common Stock; (ii) Conversion Rate (as defined
in the Indenture); (iii) Conversion Price (as defined in the Indenture); (iv) maturity date; (v) risk-free interest rate;
(vi) estimated stock volatility; and (vii) estimated credit spread for the Company.
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The following table sets forth the inputs to the lattice model used to value the embedded derivative:
Stock price .....................................................
Conversion Rate ............................................
Conversion Price ...........................................
Maturity date ................................................. February 1, 2033
Risk-free interest rate ....................................
Estimated stock volatility ..............................
Estimated credit spread ................................. 761 basis points
February 1, 2017 December 31, 2016 December 31, 2015
$9.30
141.4827
$7.07
February 1, 2033
1.22%
47%
765 basis points
$10.05
141.4827
$7.07
February 1, 2033
1.33%
50%
1,142 basis points
$8.63
141.4827
$7.07
1.22%
49%
On November 5, 2015, BioReference and certain of its subsidiaries entered into a credit agreement with
JPMorgan Chase Bank, N.A. (“CB”), as lender and administrative agent, as amended (the “Credit Agreement”),
which replaced BioReference’s prior credit facility. The Credit Agreement provides for a $175.0 million secured
revolving credit facility and includes a $20.0 million sub-facility for swingline loans and a $20.0 million sub-facility
for the issuance of letters of credit. BioReference may increase the credit facility to up to $275.0 million on a
secured basis, subject to the satisfaction of specified conditions. The Credit Agreement matures on November 5,
2020 and is guaranteed by all of BioReference’s domestic subsidiaries. The Credit Agreement is also secured by
substantially all assets of BioReference and its domestic subsidiaries, as well as a non-recourse pledge by us of our
equity interest in BioReference. Availability under the Credit Agreement is based on a borrowing base comprised of
eligible accounts receivables of BioReference and certain of its subsidiaries, as specified therein. As of
December 31, 2017, the total availability under our Credit Agreement with CB was $104.2 million. Principal under
the Credit Agreement is due upon maturity on November 5, 2020.
At BioReference’s option, borrowings under the Credit Agreement (other than swingline loans) will bear interest
at (i) the CB floating rate (defined as the higher of (a) the prime rate and (b) the LIBOR rate (adjusted for statutory
reserve requirements for Eurocurrency liabilities) for an interest period of one month plus 2.50%) plus an applicable
margin of 0.35% for the first 12 months and 0.50% thereafter or (ii) the LIBOR rate (adjusted for statutory reserve
requirements for Eurocurrency liabilities) plus an applicable margin of 1.35% for the first 12 months and 1.50%
thereafter. Swingline loans will bear interest at the CB floating rate plus the applicable margin. The Credit
Agreement also calls for other customary fees and charges, including an unused commitment fee of 0.50% of the
lending commitments.
On March 17, 2017, BioReference and certain of its subsidiaries entered into Amendment No. 3 to Credit
Agreement, which amended the Credit Agreement to permit BioReference and its subsidiaries to dividend cash to
the Company in the form of an intercompany loan, in an aggregate amount not to exceed $55.0 million. On
August 7, 2017, BioReference and certain of its subsidiaries entered into Amendment No. 4 to Credit Agreement,
which amended the Credit Agreement to permit BioReference and its subsidiaries to dividend cash to the Company
in the form of an additional intercompany loan, in an aggregate amount not to exceed $35.0 million. On
November 8, 2017, BioReference and certain of its subsidiaries entered into Amendment No. 5 to Credit Agreement,
which amended the Credit Agreement to, among other things, ease certain thresholds that require increased reporting
by BioReference and reduce the pro forma availability condition for BioReference to make certain cash dividends to
the Company. On December 22, 2017, BioReference and certain of its subsidiaries entered into Amendment No. 6
to Credit Agreement, which amended the Credit Agreement to, among other things, permit BioReference and its
subsidiaries to dividend cash to the Company in the form of intercompany loans, in an aggregate amount not to
exceed $45.0 million. The other terms of the Credit Agreement remain unchanged.
The Credit Agreement contains customary covenants and restrictions, including, without limitation, covenants
that require BioReference and its subsidiaries to maintain a minimum fixed charge coverage ratio if availability
under the new credit facility falls below a specified amount and to comply with laws and restrictions on the ability
of BioReference and its subsidiaries to incur additional indebtedness or to pay dividends and make certain other
distributions to the Company, subject to certain exceptions as specified therein. Failure to comply with these
covenants would constitute an event of default under the Credit Agreement, notwithstanding the ability of
BioReference to meet its debt service obligations. The Credit Agreement also includes various customary remedies
for the lenders following an event of default, including the acceleration of repayment of outstanding amounts under
the Credit Agreement and execution upon the collateral securing obligations under the Credit Agreement.
Substantially all the assets of BioReference and its subsidiaries are restricted from sale, transfer, lease, disposal or
distributions to the Company, subject to certain exceptions. BioReference and its subsidiaries net assets as of
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December 31, 2017 were approximately $0.9 billion, which includes goodwill of $401.8 million and intangible
assets of $446.5 million.
In addition to the Credit Agreement with CB, we have line of credit agreements with eleven other financial
institutions as of December 31, 2017 and ten other financial institutions as of December 31, 2016 in United States,
Chile and Spain. These lines of credit are used primarily as a source of working capital for inventory purchases.
The following table summarizes the amounts outstanding under the BioReference, Chilean and Spanish lines of
credit:
(Dollars in thousands)
Interest rate on
borrowings at
Lender
December 31, 2017
JP Morgan Chase .............................
Itau Bank ..........................................
Bank of Chile ...................................
BICE Bank .......................................
BBVA Bank .....................................
Security Bank ...................................
Estado Bank .....................................
Santander Bank ................................
Scotiabank ........................................
Corpbanca ........................................
Banco Bilbao Vizcaya .....................
Santander Bank ................................
3.27%
5.50%
6.60%
5.50%
5.50%
5.50%
5.50%
5.50%
5.00%
5.00%
2.90%
2.67%
Balance Outstanding
December 31,
2017
December 31,
2016
Credit line
capacity
$
175,000 $
104,152 $
38,809
1,810
3,800
2,500
3,250
501
3,500
4,500
1,800
—
300
359
446
1,598
1,819
1,665
501
2,111
1,988
384
—
—
—
419
1,619
1,538
1,063
—
1,870
1,196
789
18
—
—
Total .........................................
$
197,320 $
114,664 $
47,321
At December 31, 2017 and 2016, the weighted average interest rate on our lines of credit was approximately
4.2% and 4.7%, respectively.
At December 31, 2017 and 2016, we had notes payable and other debt (excluding the 2033 Senior Notes, the
Credit Agreement and amounts outstanding under lines of credit) as follows:
(In thousands)
Current portion of notes payable .............................................. $
Other long-term liabilities ........................................................
Total ..................................................................................... $
December 31,
2017
December 31,
2016
1,632 $
2,011
3,643 $
3,681
2,090
5,771
The notes and other debt mature at various dates ranging from 2017 through 2024 bearing variable interest rates
from 1.8% up to 6.3%. The weighted average interest rate on the notes and other debt at December 31, 2017 and
2016, was 3.0% and 3.2%, respectively. The notes are secured by our office space in Barcelona.
Note 7 Shareholders’ Equity
Our authorized capital stock consists of 750,000,000 shares of Common Stock, par value $0.01 per share, and
10,000,000 shares of Preferred Stock, par value $0.01 per share.
Common Stock
Subject to the rights of the holders of any shares of Preferred Stock currently outstanding or which may be issued
in the future, the holders of the Common Stock are entitled to receive dividends from our funds legally available
when, as and if declared by our Board of Directors, and are entitled to share ratably in all of our assets available for
distribution to holders of Common Stock upon the liquidation, dissolution or winding-up of our affairs subject to the
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liquidation preference, if any, of any then outstanding shares of Preferred Stock. Holders of our Common Stock do
not have any preemptive, subscription, redemption or conversion rights. Holders of our Common Stock are entitled
to one vote per share on all matters which they are entitled to vote upon at meetings of stockholders or upon actions
taken by written consent pursuant to Delaware corporate law. The holders of our Common Stock do not have
cumulative voting rights, which means that the holders of a plurality of the outstanding shares can elect all of our
directors. All of the shares of our Common Stock currently issued and outstanding are fully-paid and nonassessable.
No dividends have been paid to holders of our Common Stock since our incorporation, and no cash dividends are
anticipated to be declared or paid on our Common Stock in the reasonably foreseeable future.
In addition to our equity-based compensation plans, we have issued warrants to purchase our Common Stock.
Refer to Note 9 for additional information on our share-based compensation plans. The table below provides
additional information for warrants outstanding as of December 31, 2017.
Weighted
average
exercise
price
Number of
warrants
Expiration date
Outstanding at December 31, 2016 .......................................
Exercised ................................................................................
Expired ...................................................................................
Outstanding and Exercisable at December 31, 2017 .............
639,598 $
(416,295 )
(223,303 )
— $
Various from
January 2017 through
March 2017
0.86
0.86
0.86
—
Of the 416,295 Common Stock warrants exercised, 6,895 shares were surrendered in lieu of a cash payment via
the net exercise feature of the warrant agreements.
Preferred Stock
Under our certificate of incorporation, our Board of Directors has the authority, without further action by
stockholders, to designate up to 10 million shares of Preferred Stock in one or more series and to fix or alter, from
time to time, the designations, powers and rights of each series of Preferred Stock and the qualifications, limitations
or restrictions of any series of Preferred Stock, including dividend rights, dividend rate, conversion rights, voting
rights, rights and terms of redemption (including sinking fund provisions), redemption price or prices, and the
liquidation preference of any wholly issued series of Preferred Stock, any or all of which may be greater than the
rights of the Common Stock, and to establish the number of shares constituting any such series.
Of the authorized Preferred Stock, 4,000,000 shares, 500,000 shares and 2,000,000 shares were designated
Series A Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, respectively. As of December 31,
2017 and 2016, there were no shares of Series A Preferred Stock, Series C Preferred Stock or Series D Preferred
Stock issued or outstanding.
Note 8 Accumulated Other Comprehensive Income (Loss)
For the year ended December 31, 2017, changes in Accumulated other comprehensive income (loss), net of tax,
were as follows:
(In thousands)
Balance at December 31, 2016 ..................................................................... $
Other comprehensive income (loss) before reclassifications ....................
Reclassification adjustments for losses included in net loss,
net of tax ................................................................................................
Net other comprehensive income (loss)........................................................
Balance at December 31, 2017 ..................................................................... $
Foreign
currency
translation
Unrealized
gain (loss) in
Accumulated
OCI
(28,128 ) $
22,724
1,119 $
3,790
Total
(27,009 )
26,514
—
22,724
(5,404 ) $
(33 )
3,757
4,876 $
(33 )
26,481
(528 )
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Amounts reclassified from Accumulated other comprehensive income (loss) for the year ended December 31,
2017 includes an other-than-temporary impairment charge on our investment in Xenetic as discussed in Note 4.
Amounts reclassified for our available for sale investments were based on the specific identification method.
For the year ended December 31, 2016, changes in Accumulated other comprehensive income, net of tax, were
as follows:
(In thousands)
Balance at December 31, 2015 ...............................................................
Other comprehensive income (loss) before reclassifications ..............
Reclassification adjustments for losses included in net loss,
$
net of tax ..........................................................................................
Net other comprehensive income (loss) ..................................................
Balance at December 31, 2016 ...............................................................
$
Foreign
currency
translation
Unrealized
gain (loss) in
Accumulated
OCI
(23,174 ) $
(4,954 )
637 $
(3,811 )
Total
(22,537 )
(8,765 )
—
(4,954 )
(28,128 ) $
4,293
482
1,119 $
4,293
(4,472 )
(27,009 )
Amounts reclassified from Accumulated other comprehensive income (loss) for the year ended December 31,
2016 includes an other-than-temporary impairment charges on our investments in Xenetic, ARNO and RXi as
discussed in Note 4. Amounts reclassified for our available for sale investments were based on the specific
identification method.
Note 9 Equity-Based Compensation
We maintain six equity-based incentive compensation plans, the 2016 Equity Incentive Plan, the Acuity
Pharmaceuticals, Inc. 2003 Equity Incentive Plan, the 2007 Equity Incentive Plan, the 2000 Stock Option Plan, the
Modigene Inc. 2005 Stock Incentive Plan and the Modigene Inc. 2007 Equity Incentive Plan that provide for grants
of stock options and restricted stock to our directors, officers, key employees and certain outside consultants. Equity
awards granted under our 2016 Equity Incentive Plan are exercisable for a period of up to 10 years from the date of
grant. Equity awards granted under our 2007 Equity Incentive Plan are exercisable for a period of either 7 years or
10 years from the date of grant. Equity awards granted under our 2000 Stock Option Plan, 2003 Equity Incentive
Plan and the two Modigene Plans are exercisable for a period of up to 10 years from date of grant. Vesting periods
range from immediate to 5 years.
We classify the cash flows resulting from the tax benefit that arises when the tax deductions exceed the
compensation cost recognized for those equity awards (excess tax benefits) as cash flows from operations. There
were no excess tax benefits for the years ended December 31, 2017, 2016, and 2015.
Equity-based compensation arrangements to non-employees are accounted for at their fair value on the
measurement date. The measurement of equity-based compensation to non-employees is subject to periodic
adjustment over the vesting period of the equity instruments.
Valuation and Expense Information
We recorded equity-based compensation expense of $28.3 million, $42.7 million and $26.1 million for the years
ended December 31, 2017, 2016, and 2015, respectively, all of which were reflected as operating expenses. Of the
$28.3 million of equity based compensation expense recorded in the year ended December 31, 2017, $21.2 million
was recorded as selling, general and administrative expenses, $5.1 million was recorded as research and
development expenses and $2.0 million was recorded as a cost of revenue. Of the $42.7 million of equity based
compensation expense recorded in the year ended December 31, 2016, $33.4 million was recorded as selling,
general and administrative expense, $7.5 million was recorded as research and development expenses and $1.8
million was recorded as a cost of revenue. Of the $26.1 million of equity based compensation expense recorded in
the year ended December 31, 2015, $17.4 million was recorded as selling, general and administrative expense, $7.9
million was recorded as research and development expenses and 0.8 million was recorded as cost of revenue.
We estimate forfeitures of stock options and recognize compensation cost only for those awards expected to vest.
Forfeiture rates are determined for all employees and non-employee directors based on historical experience and our
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estimate of future vesting. Estimated forfeiture rates are adjusted from time to time based on actual forfeiture
experience.
As of December 31, 2017, there was $40.4 million of unrecognized compensation cost related to the stock
options granted under our equity-based incentive compensation plans. Such cost is expected to be recognized over a
weighted-average period of approximately 3.0 years.
Stock Options
We estimate the fair value of each stock option on the date of grant using the Black-Scholes-Merton Model
option-pricing formula and amortize the fair value to expense over the stock option’s vesting period using the
straight-line attribution approach for employees and non-employee directors, and for awards issued to non-
employees we recognize compensation expense on a graded basis, with most of the compensation expense being
recorded during the initial periods of vesting. We apply the following assumptions in our Black-Scholes-Merton
Model option-pricing formula:
Year Ended
December 31,
2017
3.0 - 10.0
Expected term (in years) .........
Risk-free interest rate .............. 1.32% - 2.41%
Expected volatility ..................
Expected dividend yield ..........
38% - 55%
0%
Year Ended
December 31,
2016
1.0 - 10.0
0.71% - 2.51%
38% - 64%
0%
Year Ended
December 31,
2015
1.0 - 10.0
0.26% - 2.42%
32% - 64%
0%
Expected Term: For the expected term of options granted to employees and non-employee directors, we used an
estimate of the expected option life based on historical experience. The expected term of stock options issued to
non-employee consultants is the remaining contractual life of the options issued.
Risk-Free Interest Rate: The risk-free interest rate is based on the rates paid on securities issued by the U.S.
Treasury with a term approximating the expected life of the option.
Expected Volatility: The expected volatility for stock options was based on the historical volatility of our
Common Stock.
Expected Dividend Yield: We do not intend to pay dividends on Common Stock for the foreseeable future.
Accordingly, we used a dividend yield of zero in the assumptions.
We maintain incentive stock plans that provide for the grants of stock options to our directors, officers,
employees and non-employee consultants. As of December 31, 2017, there were 28,901,409 shares of Common
Stock reserved for issuance under our 2016 Equity Incentive Plan and our 2007 Equity Incentive Plan. We intend to
issue new shares upon the exercise of stock options. Stock options granted under these plans have been granted at
an option price equal to the closing market value of the stock on the date of the grant. Stock options granted under
these plans to employees typically become exercisable over four years in equal annual installments after the date of
grant, and stock options granted to non-employee directors become exercisable in full one-year after the grant date,
subject to, in each case, continuous service with us during the applicable vesting period. We assumed stock options
to grant Common Stock as part of the mergers with Acuity Pharmaceuticals, Inc., Froptix, Inc., OPKO Biologics and
BioReference, which reflected various vesting schedules, including monthly vesting to employees and non-
employee consultants.
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A summary of option activity under our stock option plans as of December 31, 2017, and the changes during the
year is presented below:
Weighted
average
exercise
price
Weighted
average
remaining
contractual
term (years)
Aggregate
intrinsic value
(in thousands)
32,984
6.79 $
Options
Outstanding at December 31, 2016..........................................
Granted ....................................................................................
Exercised .................................................................................
Forfeited ..................................................................................
Expired ....................................................................................
Outstanding at December 31, 2017..........................................
Vested and expected to vest at December 31, 2017 .................
Exercisable at December 31, 2017 ..........................................
Number of
options
34,640,514 $
2,131,500 $
(1,298,704 ) $
(2,735,813 ) $
(1,438,112 ) $
31,299,385 $
29,484,888 $
18,697,466 $
10.18
7.50
3.01
11.75
11.84
10.08
10.04
9.59
6.37 $
6.27 $
5.26 $
1,886
1,886
1,886
The total intrinsic value of stock options exercised for the years ended December 31, 2017, 2016, and 2015 was
$6.4 million, $9.9 million and $69.9 million, respectively.
The weighted average grant date fair value of stock options granted for the years ended December 31, 2017,
2016, and 2015 was $4.50, $4.78, and $5.00, respectively. The total fair value of stock options vested during the
years ended December 31, 2017, 2016, and 2015 was $34 million, $30.2 million and $13.3 million, respectively.
Note 10 Income Taxes
We operate and are required to file tax returns in the U.S. and various foreign jurisdictions.
The benefit (provision) for incomes taxes consists of the following:
(In thousands)
Current
For the years ended December 31,
2016
2017
2015
Federal ............................................. $
State .................................................
Foreign .............................................
Deferred
Federal .............................................
State .................................................
Foreign .............................................
Total, net ..........................................
$
2,398 $
(1,737 )
(3,424 )
(2,763 )
(10,759 )
(2,738 )
(2,595 )
(16,092 )
(18,855 ) $
— $
(2,931 )
(2,438 )
(5,369 )
25,739
10,657
25,088
61,484
56,115 $
430
(2,157 )
(8,134 )
(9,861 )
109,286
12,327
1,923
123,536
113,675
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Deferred income tax assets and liabilities as of December 31, 2017 and 2016 are comprised of the following:
(In thousands)
Deferred income tax assets:
December 31,
2017
December 31,
2016
Federal net operating loss ........................................ $
State net operating loss ............................................
Foreign net operating loss ........................................
Research and development expense .........................
Tax credits ...............................................................
Stock options ...........................................................
Accruals ...................................................................
Equity investments ...................................................
Bad debts .................................................................
Lease liability...........................................................
Foreign credits .........................................................
Available for sale securities .....................................
Other ........................................................................
Deferred income tax assets .............................................
Deferred income tax liabilities:
Intangible assets ........................................................
Fixed assets ...............................................................
Other .........................................................................
Deferred income tax liabilities ........................................
Net deferred income tax liabilities ..................................
Valuation allowance........................................................
Net deferred income tax liabilities .................................. $
79,356 $
46,571
35,710
4,038
20,040
28,830
5,719
8,454
20,302
2,205
11,113
2,406
17,448
282,192
76,792
36,285
32,895
3,246
20,894
36,485
8,306
7,011
14,283
3,233
10,253
4,792
7,795
262,270
(280,962 )
(5,572 )
(2,325 )
(288,859 )
(6,667 )
(142,062 )
(148,729 ) $
(354,043 )
(13,710 )
(2,121 )
(369,874 )
(107,604 )
(55,415 )
(163,019 )
As of December 31, 2017, we have federal, state and foreign net operating loss carryforwards of approximately
$488.7 million, $602.9 million and $146.9 million, respectively, that expire at various dates through 2037. Included
in the foreign net operating losses is $95.8 million related to OPKO Biologics. As of December 31, 2017, we have
research and development tax credit carryforwards of approximately $20.0 million that expire in varying amounts
through 2037. As of each reporting date, management considers new evidence, both positive and negative, that
could affect its view of the future realization of deferred tax assets. The Company has evaluated realization of its
U.S. and non-U.S. deferred tax assets and has determined that certain deferred tax assets, primarily those generated
in 2017, will more likely than not be unrealized. As a result, a valuation allowance of $82.4 million was recorded as
of December 31, 2017.
Under Section 382 of the Internal Revenue Code of 1986, as amended, certain significant changes in ownership
may restrict the future utilization of our income tax loss carryforwards and income tax credit carryforwards in the
U.S. The annual limitation is equal to the value of our stock immediately before the ownership change, multiplied
by the long-term tax-exempt rate (i.e., the highest of the adjusted federal long-term rates in effect for any month in
the three-calendar-month period ending with the calendar month in which the change date occurs). This limitation
may be increased under the IRC Section 338 Approach (IRS approved methodology for determining recognized
Built-In Gain). As a result, federal net operating losses and tax credits may expire before we are able to fully utilize
them.
During 2008, we conducted a study to determine the impact of the various ownership changes that occurred
during 2007 and 2008. As a result, we have concluded that the annual utilization of our net operating loss
carryforwards (“NOLs”) and tax credits is subject to a limitation pursuant to Internal Revenue Code Section 382.
Under the tax law, such NOLs and tax credits are subject to expiration from 15 to 20 years after they were
generated. As a result of the annual limitation that may be imposed on such tax attributes and the statutory
expiration period, some of these tax attributes may expire prior to our being able to use them. There is no current
impact on these financial statements as a result of the annual limitation. This study did not conclude whether
OPKO’s predecessor, eXegenics, pre-merger NOLs were limited under Section 382. As such, of the $488.7 million
of federal net operating loss carryforwards, at least approximately $53.4 million may not be able to be utilized.
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Tax Cuts and Jobs Act
On December 22, 2017, the Tax Act was signed into law making significant changes to the Internal Revenue
Code. Changes include, but are not limited to, a federal corporate tax rate decrease from 35% to 21%, effective for
tax years beginning January 1, 2018, the transition of U.S. international taxation from a worldwide tax system to a
territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign
earnings.
In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting
Implications of the Tax Cuts and Jobs Act (SAB118), which allows us to record provisional amounts during a
measurement period not to extend beyond one year of the enactment date. Since the Tax Act was passed late in the
fourth quarter of 2017, and ongoing guidance and accounting interpretation are expected over the next 12 months,
our accounting of deferred tax re-measurements, the transition tax, and other items are provisional and may
materially change due to the forthcoming guidance and our ongoing analysis of final year end data and tax positions.
We expect to complete our analysis within the measurement period in accordance with SAB 118.
As a result of changes made by the Tax Cuts and Jobs Act, starting with compensation paid in 2018, Section
162(m) will limit us from deducting compensation, including performance-based compensation, in excess of $1.0
million paid to anyone who, starting in 2018, serves as the Chief Executive Officer or Chief Financial Officer, or
who is among the three most highly compensated executive officers for any fiscal year. Because many different
factors influence a well-rounded, comprehensive executive compensation program, and as a result of the changes
made to Code Section 162(m) by the Tax Cuts and Jobs Act, some of the compensation we provide to our executive
officers may not be deductible as a result of Code Section 162(m) if our Committee believes it will contribute to the
achievement of our business objectives.
We anticipate future impacts at a U.S. state and local tax level related to the Tax Act; however, statutory and
interpretive guidance is not available from applicable state and local tax authorities to reasonably estimate the
impact. Consequently, we have not recorded provisional amounts and have continued to apply ASC 740 based on
the provisions of the tax laws that were in effect immediately prior to Tax Act enactment.
The Tax Act affects the tax treatment of foreign earnings and profits (“E&P”) and results in a one-time transition
tax on our post-1986 foreign E&P that we previously deferred from U.S. income tax expense. We have
provisionally determined that we will not owe any transition tax and we have not provided for additional income
taxes on any remaining undistributed foreign E&P not subject to the transition tax, or any outside tax basis
differences inherent in our foreign subsidiaries.
Uncertain Income Tax Positions
We file federal income tax returns in the U.S. and various foreign jurisdictions, as well as with various U.S.
states and the Ontario, Quebec and Nova Scotia provinces in Canada. We are subject to routine tax audits in all
jurisdictions for which we file tax returns. Tax audits by their very nature are often complex and can require several
years to complete. It is reasonably possible that some audits will close within the next twelve months, which we do
not believe would result in a material change to our accrued uncertain tax positions.
U.S. Federal: Under the tax statute of limitations applicable to the Internal Revenue Code, we are no longer
subject to U.S. federal income tax examinations by the Internal Revenue Service for years before 2014. However,
because we are carrying forward income tax attributes, such as net operating losses and tax credits from 2014 and
earlier tax years, these attributes can still be audited when utilized on returns filed in the future.
State: Under the statute of limitations applicable to most state income tax laws, we are no longer subject to state
income tax examinations by tax authorities for years before 2014 in states in which we have filed income tax
returns. Certain states may take the position that we are subject to income tax in such states even though we have
not filed income tax returns in such states and, depending on the varying state income tax statutes and administrative
practices, the statute of limitations in such states may extend to years before 2014.
Foreign: Under the statute of limitations applicable to our foreign operations, we are generally no longer subject
to tax examination for years before 2012 in jurisdictions where we have filed income tax returns.
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Unrecognized Tax Benefits
As of December 31, 2017, 2016, and 2015, the total amount of gross unrecognized tax benefits was
approximately $21.3 million, $27.5 million, and $8.6 million, respectively. As of December 31, 2017, the total
gross unrecognized tax benefit of $21.3 million consisted of increases of $0.0 million as a result of current year
activity, and decreases of $4.5 million as a result of the lapse of statutes of limitations. As of December 31, 2017,
the total amount of unrecognized tax benefits that, if recognized, would affect our effective income tax rate was
$(12.4) million. We account for any applicable interest and penalties on uncertain tax positions as a component of
income tax expense and we recognized $0.4 million and $0.1 million of interest expense for the years ended
December 31, 2017 and 2016, respectively. As of December 31, 2016 and 2015, $6.1 million and $0.7 million of
the unrecognized tax benefits, if recognized, would have affected our effective income tax rate. We believe it is
reasonably possible that approximately $4.6 million of unrecognized tax benefits may be recognized within the next
twelve months.
The following summarizes the changes in our gross unrecognized income tax benefits.
(In thousands)
Unrecognized tax benefits at beginning of period .................. $
Gross increases – tax positions in prior period .......................
Gross increases – tax positions in current period ....................
Gross decreases – tax positions in prior period.......................
Lapse of Statute of Limitations ...............................................
Unrecognized tax benefits at end of period ............................ $
Other Income Tax Disclosures
For the years ended December 31,
2016
2017
2015
27,545 $
44
—
(1,724 )
(4,518 )
21,347 $
8,595 $
1,443
18,472
(671 )
(294 )
27,545 $
5,890
955
2,543
(176 )
(617 )
8,595
The significant elements contributing to the difference between the federal statutory tax rate and the effective tax
rate are as follows:
For the years ended December 31,
2016
2017
2015
Federal statutory rate
State income taxes, net of federal benefit
Foreign income tax
Research and development tax credits
Non-Deductible components of Convertible Debt
Valuation allowance
Rate change effect
Non-deductible items
Other
Total
35.0 %
5.1 %
(5.2 )%
0.6 %
0.1 %
(28.4 )%
(10.8 )%
(1.9 )%
(1.0 )%
(6.5 )%
35.0 %
5.2 %
1.2 %
5.4 %
2.2 %
9.5 %
21.2 %
(1.9 )%
(8.7 )%
69.1 %
35.0 %
2.8 %
(7.8 )%
— %
(9.4 )%
61.1 %
— %
(0.7 )%
(1.0 )%
80.0 %
The following table reconciles our losses before income taxes between U.S. and foreign jurisdictions:
(In thousands)
Pre-tax income (loss):
For the years ended December 31,
2016
2015
2017
U.S. ........................................................................... $
Foreign ......................................................................
Total....................................................................... $
(247,938 )
(42,077 )
(290,015 )
$ (92,175 )
10,977
$ (81,198 )
$
$
(113,612 )
(30,091 )
(143,703 )
We intend to indefinitely reinvest the earnings from our foreign subsidiaries, primarily for purposes of
continuing significant research and development activities related to intellectual property owned and developed by
our foreign subsidiaries. The accumulated earnings are the most significant component of the basis difference which
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is indefinitely reinvested. Determination of the amount of unrecognized deferred tax liability on these undistributed
earnings is not practicable because of the complexities of the hypothetical calculation.
Note 11 Related Party Transactions
We hold investments in Zebra (ownership 29%), Neovasc (5%), ChromaDex Corporation (1%), MabVax (2%),
COCP (9%), NIMS 1% and BioCardia (5%). These investments were considered related party transactions as a
result of our executive management’s ownership interests and/or board representation in these entities. See further
discussion of our investments in Note 4.
In December 2017, Sevion and Eloxx completed their acquisition transaction, and the combined company is
known as Eloxx Pharmaceuticals, Inc. following completion of the transaction. Subsequent to the acquisition
transaction in December 2017, Eloxx Pharmaceuticals, Inc. is not a related party of OPKO. In June 2017, we
invested $1.5 million in Eloxx for 99,915 Preferred C Shares and in July 2017, we invested an additional $1.5
million in Sevion for 10,000,000 shares of Sevion common stock. An entity controlled by Dr. Frost also made an
investment in Eloxx. Previously, in November 2016, we made a $0.2 million loan to Sevion, and in February 2017,
we entered into an agreement with Sevion pursuant to which we delivered $0.3 million cash to Sevion in exchange
for a promissory note. The loan and promissory note were converted into 4.1 million shares of Sevion common
stock in August 2017. In September 2017, we converted 66,667 shares of Series C Preferred Stock of Sevion into
1,250,006 shares of common stock. The agreements with Sevion were considered related party transactions as a
result of our executive management’s ownership interests and board representation in Sevion. Steve Rubin, a
member of our Board of Directors and Executive Vice President, serves as a director of Eloxx.
In November 2017, we invested an additional $3.0 million in Neovasc for 2,054,794 shares of its common stock,
2,054,794 Series A warrants, 2,054,794 Series B warrants and 822,192 Series C warrants.
In July 2017, we invested an additional $0.1 million in MabVax for 152,143 shares of common stock and in
May 2017, we invested an additional $0.5 million in MabVax for 285,714 shares of Series G Preferred Stock and
322,820 shares of Series I Preferred Stock. We had also invested an additional $1.0 million in MabVax in
August 2016 for 207,900 shares of its common stock and warrants to purchase 415,800 shares of its common stock.
In April 2017, we invested an additional $1.0 million in COCP for 4,166,667 shares of its common stock, and in
August 2016, we had invested an additional $2.0 million in COCP for 4,878,050 shares of its common stock.
In January 2016, we invested an additional $0.3 million in ARNO for 714,285 shares of its common stock, and
in August 2016, we had invested an additional $0.3 million in ARNO for 714,285 shares of its common stock and
warrants to purchase 357,142 shares of its common stock.
In October 2016, we entered into a consulting agreement to provide strategic advisory services to BioCardia. In
connection with the consulting agreement, BioCardia granted us 418,977 common stock options, after adjusting for
a 1-for-12 reverse stock split in 2017. In December 2016, we purchased 1,602,564 shares of BioCardia, after
adjusting for the reverse stock split, from Dr. Frost for $2.5 million. We have also purchased shares of BioCardia in
the open market. BioCardia is a related party as a result of our executive management’s ownership interest and
board representation in BioCardia and its predecessor, Tiger X Medical, Inc. In October 2016, BioCardia completed
its merger with Tiger X Medical, Inc., to which Tiger X Medical, Inc. was the surviving entity and the name of the
issuer was changed to BioCardia.
In November 2016, we entered into a Pledge Agreement with the Museum of Science, Inc. and the Museum of
Science Endowment Fund, Inc. pursuant to which we will contribute an aggregate of $1.0 million over a four-year
period for constructing, equipping and the general operation of the Frost Science Museum. Dr. Frost and Mr.
Pfenniger serve on the Board of Trustees of the Frost Science Museum and Mr. Pfenniger is the Vice Chairman of
the Board of Trustees.
We lease office space from Frost Real Estate Holdings, LLC (“Frost Holdings”) in Miami, Florida, where our
principal executive offices are located. Effective January 1, 2017, we entered into an amendment to our lease
agreement with Frost Holdings. The lease, as amended, is for approximately 29,500 square feet of space. The lease
provides for payments of approximately $81 thousand per month in the first year increasing annually to $86
thousand per month in the third year, plus applicable sales tax. The rent is inclusive of operating expenses, property
taxes and parking.
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Our wholly-owned subsidiary, BioReference, purchases and uses certain products acquired from InCellDx, Inc.,
a company in which we hold a 29% minority interest.
We reimburse Dr. Frost for Company-related use by Dr. Frost and our other executives of an airplane owned by
a company that is beneficially owned by Dr. Frost. We reimburse Dr. Frost for out-of-pocket operating costs for the
use of the airplane by Dr. Frost or Company executives for Company-related business. We do not reimburse
Dr. Frost for personal use of the airplane by Dr. Frost or any other executive. For the years ended December 31,
2017, 2016, and 2015, we recognized approximately $361 thousand, $298 thousand, and $595 thousand,
respectively, for Company-related travel by Dr. Frost and other OPKO executives.
Note 12 Employee Benefit Plans
Effective January 1, 2007, the OPKO Health Savings and Retirement Plan (the “Plan”) permits employees to
contribute up to 100% of qualified pre-tax annual compensation up to annual statutory limitations. The
discretionary company match for employee contributions to the Plan is 100% up to the first 4% of the participant’s
earnings contributed to the Plan. Effective January 1, 2017, employees of BioReference and its subsidiaries are
eligible for participation in the Plan. Our matching contributions to our plans, including predecessor plans for
BioReference, were approximately $8.4 million, $3.5 million and $3.1 million for the years ended December 31,
2017, 2016, and 2015 respectively.
Note 13 Commitments and Contingencies
In connection with our acquisitions of CURNA, OPKO Diagnostics and OPKO Renal, we agreed to pay future
consideration to the sellers upon the achievement of certain events. As a result, as of December 31, 2017, we have
recorded $41.4 million as contingent consideration, with $11.8 million recorded within Accrued expenses and $29.6
million recorded within Other long-term liabilities in the accompanying Consolidated Balance Sheets. Refer to Note
5. During the year ended December 31, 2016, we satisfied a $25.0 million contingent payment to the former owners
of OPKO Renal through the issuance of 2,611,648 shares of our Common Stock.
In August 2017, we entered into a Commitment Letter (the “Commitment Letter”) with Veterans Accountable
Care Group, LLC (“VACG”) in connection with submission of a bid by its affiliate, the Veterans Accountable Care
Organization, LLC (“VACO”) in response to a request for proposal (“RFP”) from the Veterans Health
Administration (“VA”) regarding its Community Care Network. If VACO is successful in its bid, we will acquire a
fifteen percent (15%) membership interest in VACO. In addition, BioReference, our wholly-owned subsidiary, will
provide laboratory services for the Community Care Network, a region which currently includes approximately
2,133,000 veterans in the states of Massachusetts, Maine, New Hampshire, Vermont, New York, Pennsylvania, New
Jersey, Rhode Island, Connecticut, Maryland, Virginia, West Virginia, and North Carolina.
Pursuant to the Commitment Letter, we committed to provide, or to arrange from a third party lender, a line of
credit for VACG in the amount of $50.0 million (the “Facility”). Funds drawn under the Facility would be
contributed by VACG to VACO in order to satisfy the financial stability requirement of VACO in connection with
its submission of the RFP. VACG would not be permitted to draw down on the Facility unless and until the VHA
awards a contract to VACO. The Facility would have a maturity of five (5) years. Interest on the Facility would be
payable at a rate equal to six and one-half percent (6.5%) per annum, payable quarterly in arrears. The Facility is
subject to the negotiation of definitive documentation conditions customary for transactions of such type and
otherwise acceptable to VACG and the lender under the Facility.
We currently anticipate that a decision by the VHA with respect to the RFP will occur during 2018, although
there can be no assurance that a decision will be made by such time or that, if favorable, such decision will not be
challenged by participants in the RFP process or otherwise.
We accrue a liability for legal contingencies when we believe that it is both probable that a liability has been
incurred and that we can reasonably estimate the amount of the loss. We review established accruals and adjust
them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel and other relevant information. To
the extent new information is obtained and our views on the probable outcomes of claims, suits, assessments,
investigations or legal proceedings change, changes in our accrued liabilities would be recorded in the period in
which such determination is made. For the matters referenced in the paragraph below, the amount of liability is not
probable or the amount cannot be reasonably estimated; and, therefore, accruals have not been made. In addition, in
accordance with the relevant authoritative guidance, for matters which the likelihood of material loss is at least
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reasonably possible, we provide disclosure of the possible loss or range of loss; however, if a reasonable estimate
cannot be made, we will provide disclosure to that effect.
From time to time, we may receive inquiries, document requests, or subpoenas from the Department of Justice,
the Office of Inspector General and Office for Civil Rights (“OCR”) of the Department of Health and Human
Services, the Centers for Medicare and Medicaid Services, various payors and fiscal intermediaries, and other state
and federal regulators regarding investigations, audits and reviews. In addition to the matters discussed in this note,
we are currently responding to subpoenas or document requests for various matters relating to our laboratory
operations. Some pending or threatened proceedings against us may involve potentially substantial amounts as well
as the possibility of civil, criminal, or administrative fines, penalties, or other sanctions, which could be material.
Settlements of suits involving the types of issues that we routinely confront may require monetary payments as well
as corporate integrity agreements. Additionally, qui tam or “whistleblower” actions initiated under the civil False
Claims Act may be pending but placed under seal by the court to comply with the False Claims Act’s requirements
for filing such suits. Also, from time to time, we may detect issues of non-compliance with federal healthcare laws
pertaining to claims submission and reimbursement practices and/or financial relationships with physicians, among
other things. We may avail ourselves of various mechanisms to address these issues, including participation in
voluntary disclosure protocols. Participating in voluntary disclosure protocols can have the potential for significant
settlement obligations or even enforcement action. The Company generally has cooperated, and intends to continue
to cooperate, with appropriate regulatory authorities as and when investigations, audits and inquiries arise.
We are a party to other litigation in the ordinary course of business. We do not believe that any such litigation
will have a material adverse effect on our business, financial condition, results of operations or cash flows.
In April 2017, the Civil Division of the United States Attorney’s Office for the Southern District of New York
(the “SDNY”) informed BioReference that it believes that, from 2006 to the present, BioReference had, in violation
of the False Claims Act, improperly billed Medicare and TRICARE (both are federal government healthcare
programs) for clinical laboratory services provided to hospital inpatient beneficiaries at certain hospitals.
BioReference is reviewing and assessing the allegations made by the SDNY, and, at this point, BioReference has not
determined whether there is any merit to the SDNY’s claims nor can it determine the extent of any potential
liability. While management cannot predict the outcome of these matters at this time, the ultimate outcome could be
material to our business, financial condition, results of operations, and cash flows.
We expect to continue to incur substantial research and development expenses, including expenses related to the
hiring of personnel and additional clinical trials. We expect that selling, general and administrative expenses will
also increase as we expand our sales, marketing and administrative staff and add infrastructure, particularly as it
relates to the launch of Rayaldee. We do not anticipate that we will generate substantial revenue from the sale of
proprietary pharmaceutical products or certain of our diagnostic products for some time and we have generated only
limited revenue from our pharmaceutical operations in Chile, Mexico, Israel, Spain, and Ireland, and from sale of
the 4Kscore test. If we acquire additional assets or companies, accelerate our product development programs or
initiate additional clinical trials, we will need additional funds. If we are not able to secure additional funding when
needed, we may have to delay, reduce the scope of, or eliminate one or more of our clinical trials or research and
development programs or possible acquisitions.
We have employment agreements with certain executives of BioReference which provide for compensation and
certain other benefits and for severance payments under certain circumstances. During the years ended
December 31, 2017 and 2016, we recognized $5.8 million and $17.9 million, respectively, of severance costs
pursuant to these employment agreements as a component of Selling, general and administrative expense.
At December 31, 2017, we were committed to make future purchases for inventory and other items in 2018 that
occur in the ordinary course of business under various purchase arrangements with fixed purchase provisions
aggregating $82.2 million.
Note 14 Strategic Alliances
Japan Tobacco Inc.
On October 12, 2017, EirGen, our wholly-owned subsidiary, and Japan Tobacco Inc. (“JT”) entered into a
Development and License Agreement (the “JT Agreement”) granting JT the exclusive rights for the development
and commercialization of Rayaldee in Japan (the “JT Territory”). The license grant to JT covers the therapeutic and
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preventative use of the product for (i) SHPT in non-dialysis and dialysis patients with CKD, (ii) rickets, and
(iii) osteomalacia (the “Initial Indications”), as well as such additional indications as may be added to the scope of
the license subject to the terms of the JT Agreement (the JT Additional Indications” and together with the JT Initial
Indications, the “JT Field”).
In connection with the license, OPKO received an initial upfront payment of $6 million (“JT Upfront Payment”).
OPKO will receive another $6 million upon the initiation of OPKO’s planned phase 2 study for Rayaldee in dialysis
patients in the U.S. OPKO is also eligible to receive up to an additional aggregate amount of $31 million upon the
achievement of certain regulatory and development milestones by JT for Rayaldee in the JT Territory, and $75
million upon the achievement of certain sales based milestones by JT in the JT Territory. OPKO will also receive
tiered, double digit royalty payments at rates ranging from low double digits to mid-teens on net sales of Rayaldee
within the JT Territory. JT will, at its sole cost and expense, be responsible for performing all development
activities necessary to obtain all regulatory approvals for Rayaldee in Japan and for all commercial activities
pertaining to Rayaldee in Japan, except for certain preclinical expenses which OPKO has agreed to reimburse JT up
to a capped amount (“Preclinical Expenses”).
For revenue recognition purposes, we evaluated the JT Agreement to determine whether there were multiple
deliverables in the arrangement. The JT Agreement provides for the following: (1) an exclusive license in the JT
Territory in the JT Field for the development and commercialization of Rayaldee; and (2) upon JT’s request, EirGen
will supply products to support the development, sale and commercialization of the products to JT in the JT
Territory (the “JT Manufacturing Services”). We determined that the license granted to JT, as well as our obligation
to provide additional license materials and development services, will be accounted for as a single unit of account.
This determination was made because the additional license materials and development services to be provided by
us are essential to the overall arrangement. We concluded the JT Manufacturing Services were a contingent
deliverable dependent on the future regulatory and commercial action by JT.
We are recognizing the non-refundable $6 million upfront payment, net of the Preclinical Expenses, on a
straight-line basis over the performance period as Revenue from transfer of intellectual property in our Consolidated
Statement of Operations. The performance period over which the revenue will be recognized is expected to
continue from the fourth quarter of 2017 through 2021, when we anticipate completing the various services that are
specified in the JT Agreement and our performance obligations are completed. The additional $6 million we will
receive upon the initiation of our planned phase 2 study for Rayaldee in dialysis patients in the U.S. will be
recognized on a straight-line basis over the remaining performance period when received. Revenues related to the
JT Manufacturing Services will be recognized as product is sold to JT.
We are also eligible to receive up to $31 million in regulatory and development milestones and $75 million in
sales milestones. Payments received for regulatory, development and sales milestones are non-refundable. The
milestones are payable if and when the associated milestone is achieved and will be recognized as revenue in the
period in which the associated milestone is achieved, assuming all other revenue recognition criteria are met. To
date, no revenue has been recognized related to the achievement of the milestones.
Vifor Fresenius Medical Care Renal Pharma Ltd
We plan to develop a portfolio of product candidates through a combination of internal development and
external partnerships. In May 2016, EirGen, our wholly-owned subsidiary, and Vifor Fresenius Medical Care Renal
Pharma Ltd (“VFMCRP”), entered into a Development and License Agreement (the “VFMCRP Agreement”) for the
development and commercialization of Rayaldee (the “Product”) worldwide, except for (i) the United States, (ii) any
country in Central America or South America (excluding Mexico), (iii) Russia, (iv) China, (v) Japan, (vi) Ukraine,
(vii) Belorussia, (viii) Azerbaijan, (ix) Kazakhstan, and (x) Taiwan (the “VFMCRP Territory”). The license to
VFMCRP potentially covers all therapeutic and prophylactic uses of the Product in human patients (the “VFMCRP
Field”), provided that initially the license is for the use of the Product for the treatment or prevention of SHPT
related to patients with stage 3 or 4 chronic kidney disease and vitamin D insufficiency/deficiency (the “VFMCRP
Initial Indication”).
Under the terms of the VFMCRP Agreement, EirGen granted to VFMCRP an exclusive license in the VFMCRP
Territory in the VFMCRP Field to use certain EirGen patents and technology to make, have made, use, sell, offer for
sale, and import Products and to develop, commercialize, have commercialized, and otherwise exploit the Product.
EirGen received a non-refundable and non-creditable initial payment of $50 million. EirGen is also eligible to
receive up to an additional $37 million in regulatory milestones (“Regulatory Milestones”) and $195 million in
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launch and sales-based milestones (“Sales Milestones”), and will receive tiered royalties on sales of the product at
percentage rates that range from the mid-teens to the mid-twenties or a minimum royalty, whichever is greater, upon
the commencement of sales of the Product within the VFMCRP Territory and in the VFMCRP Field.
As part of the arrangement, the companies will share responsibility for the conduct of trials specified within an
agreed-upon development plan, with each company leading certain activities within the plan. EirGen will lead the
manufacturing activities within and outside the VFMCRP Territory and the commercialization activities outside the
VFMCRP Territory and outside the VFMCRP Field in the VFMCRP Territory and VFMCRP will lead the
commercialization activities in the VFMCRP Territory and the VFMCRP Field. For the initial development plan,
the companies have agreed to certain cost sharing arrangements. VFMCRP will be responsible for all other
development costs that VFMCRP considers necessary to develop the Product for the use of the Product for the
VFMCRP Initial Indication in the VFMCRP Territory in the VFMCRP Field except as otherwise provided in the
VFMCRP Agreement.
The VFMCRP Agreement will remain in effect with respect to the Product in each country of the VFMCRP
Territory, on a country by country basis, until the date on which VFMCRP shall have no further payment obligations
to EirGen under the terms of the VFMCRP Agreement, unless earlier terminated pursuant to the VFMCRP
Agreement. VFMCRP’s royalty obligations expire on a country-by-country and product-by-product basis on the
later of (i) expiration of the last to expire valid claim covering the Product sold in such country, (ii) expiration of all
regulatory and data exclusivity applicable to the Product in the country of sale, and (iii) ten (10) years after the
Product first commercial sale in such country. In addition to termination rights for material breach and bankruptcy,
VFMCRP is permitted to terminate the VFMCRP Agreement in its entirety, or with respect to one or more countries
in the VFMCRP Territory, after a specified notice period, provided that VFMCRP shall not have the right to
terminate the VFMCRP Agreement with respect to certain major countries without terminating the entire VFMCRP
Agreement. If the VFMCRP Agreement is terminated by EirGen or VFMCRP, provision has been made for
transition of product and product responsibilities to EirGen.
In connection with the VFMCRP Agreement, the parties entered into a letter agreement (the “Letter
Agreement”) pursuant to which EirGen granted to VFMCRP an exclusive option (the “Option”) to acquire an
exclusive license under certain EirGen patents and technology to use, import, offer for sale, sell, distribute and
commercialize the Product in the United States solely for the treatment of secondary hyperparathyroidism in
dialysis patients with chronic kidney disease and vitamin D insufficiency (the “Dialysis Indication”). Upon exercise
of the Option, VFMCRP will reimburse EirGen for all of the development costs incurred by EirGen with respect to
the Product for the Dialysis Indication in the United States. VFMCRP would also pay EirGen up to an additional
aggregate amount of $555 million upon the achievement of certain milestones and would be obligated to pay
royalties at percentage rates that range from the mid-teens to the mid-twenties on sales of the Product in the United
States for the Dialysis Indication.
The Option is exercisable until the earlier of (i) the date that EirGen submits a new drug application or
supplemental new drug application or their then equivalents to the U.S. Food and Drug Administration for the
Product for the Dialysis Indication in the United States, (ii) the parties mutually agree to discontinue development of
Product for the Dialysis Indication, or (iii) VFMCRP provides notice to OPKO that it has elected not to exercise the
Option.
OPKO has guaranteed the performance of certain of EirGen’s obligations under the VFMCRP Agreement and
the Letter Agreement.
For revenue recognition purposes, we evaluated the various agreements with VFMCRP to determine whether
there were multiple deliverables in the arrangement. The VFMCRP Agreement provides for the following: (1) an
exclusive license in the VFMCRP Territory in the VFMCRP Field to use certain patents and technology to make,
have made, use, sell, offer for sale, and import Products and to develop, commercialize, have commercialized, and
otherwise exploit the Product; (2) EirGen will supply Products to support the development, sale and
commercialization of the Products to VFMCRP in the VFMCRP Territory (the “Manufacturing Services”); and (3)
the Option to acquire an exclusive license under certain EirGen patents and technology to use, import, offer for sale,
sell, distribute and commercialize the Product in the United States solely for the Dialysis Indication. Based on our
evaluation, the exclusive license is the only deliverable at the outset of the arrangement. We concluded the
Manufacturing Services were a contingent deliverable dependent on the future regulatory and commercial action by
VFMCRP and the Option was substantive and not considered a deliverable under the license arrangement.
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We recognized the $50.0 million upfront license payment in Revenue from transfer of intellectual property in our
Consolidated Statement of Operations for the year ended December 31, 2016. Revenues related to the
Manufacturing Services will be recognized as Product is sold to VFMCRP. No revenue related to the Option will be
recognized unless and until VFMCRP exercises its Option under the Letter Agreement.
We determined that the cost sharing arrangement for development of the Dialysis Indication is not a deliverable
in the VFMCRP Agreement. Payments for the Dialysis Indication will be recorded as Research and development
expense as incurred.
EirGen is also eligible to receive up to an additional $37 million in Regulatory Milestones and $195 million in
Sales Milestones. Payments received for Regulatory Milestones and Sales Milestones are non-refundable. The
Regulatory Milestones are payable if and when VFMCRP obtains approval from certain regulatory authorities and
will be recognized as revenue in the period in which the associated milestone is achieved, assuming all other
revenue recognition criteria are met. We account for the Sales Milestones as royalties and Sales Milestones
payments which will be recognized as revenue in full in the period in which the associated milestone is achieved,
assuming all other revenue recognition criteria are met. To date, no revenue has been recognized related to the
achievement of the milestones.
Pfizer Inc.
In December 2014, we entered into an exclusive worldwide agreement with Pfizer Inc. (“Pfizer”) for the
development and commercialization of our long-acting hGH-CTP for the treatment of growth hormone deficiency
(“GHD”) in adults and children, as well as for the treatment of growth failure in children born small for gestational
age (“SGA”) (the “Pfizer Transaction”).
The Pfizer Transaction closed in January 2015 following the termination of the waiting period under the Hart-
Scott-Rodino Act. Under the terms of the Pfizer Transaction, we received non-refundable and non-creditable
upfront payments of $295.0 million and are eligible to receive up to an additional $275.0 million upon the
achievement of certain regulatory milestones. Pfizer received the exclusive license to commercialize hGH-CTP
worldwide. In addition, we are eligible to receive initial tiered royalty payments associated with the
commercialization of hGH-CTP for Adult GHD with percentage rates ranging from the high teens to mid-twenties.
Upon the launch of hGH-CTP for Pediatric GHD in certain major markets, the royalties will transition to regional,
tiered gross profit sharing for both hGH-CTP and Pfizer’s Genotropin®.
The agreement with Pfizer will remain in effect until the last sale of the licensed product, unless earlier
terminated as permitted under the agreement. In addition to termination rights for material breach and bankruptcy,
Pfizer is permitted to terminate the Agreement in its entirety, or with respect to one or more world regions, without
cause after a specified notice period. If the Agreement is terminated by us for Pfizer’s uncured material breach, or
by Pfizer without cause, provision has been made for transition of product and product responsibilities to us for the
terminated regions, as well as continued supply of product by Pfizer or transfer of supply to us in order to support
the terminated regions.
We will lead the clinical activities and will be responsible for funding the development programs for the key
indications, which includes Adult and Pediatric GHD and Pediatric SGA. Pfizer will be responsible for all
development costs for additional indications as well as all post-marketing studies. In addition, Pfizer will fund the
commercialization activities for all indications and lead the manufacturing activities covered by the global
development plan.
For revenue recognition purposes, we viewed the Pfizer Transaction as a multiple-element arrangement.
Multiple-element arrangements are analyzed to determine whether the various performance obligations, or elements,
can be separated or whether they must be accounted for as a single unit of accounting. We evaluated whether a
delivered element under an arrangement has standalone value and qualifies for treatment as a separate unit of
accounting. Deliverables that do not meet these criteria are not evaluated separately for the purpose of revenue
recognition. For a single unit of accounting, payments received are recognized in a manner consistent with the final
deliverable. We determined that the deliverables under the Pfizer Transaction, including the licenses granted to
Pfizer, as well as our obligations to provide various research and development services, will be accounted for as a
single unit of account. This determination was made because the ongoing research and development services to be
provided by us are essential to the overall arrangement as we have significant knowledge and technical know-how
that is important to realizing the value of the licenses granted. The performance period over which the revenue will
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be recognized is expected to continue from the first quarter of 2015 through 2020, when we anticipate completing
the various research and development services that are specified in the Pfizer Transaction and our performance
obligations are completed. We will continue to review the timing of when our research and development services
will be completed in order to assess that the estimated performance period over which the revenue is to be
recognized is appropriate. Any significant changes in the timing of the performance period will result in a change in
the revenue recognition period. We increased the expected performance period over which the revenue will be
recognized in 2017 by approximately one year.
We are recognizing the non-refundable $295.0 million upfront payments on a straight-line basis over the
performance period. We recognized $57.8 million of revenue related to the Pfizer Transaction in Revenue from
transfer of intellectual property in our Consolidated Statement of Operations during the year ended December 31,
2017, and had deferred revenue related to the Pfizer Transaction of $101.1 million at December 31, 2017. As of
December 31, 2017, $44.9 million of deferred revenue related to the Pfizer Transaction was classified in Accrued
expenses and $56.2 million was classified in Other long-term liabilities in our Consolidated Balance Sheet. During
the year ended December 31, 2017, we incurred $47.7 million in research and development expenses related to
hGH-CTP, respectively.
The Pfizer Transaction includes milestone payments of $275.0 million upon the achievement of certain
milestones. The milestones range from $20.0 million to $90.0 million each and are based on achievement of
regulatory approval in the U.S. and regulatory approval and price approval in other major markets.
We evaluated each of these milestone payments and believe that all of the milestones are substantive as (i) there
is substantive uncertainty at the close of the Pfizer Transaction that the milestones would be achieved as approval
from a regulatory authority must be received to achieve the milestones which would be commensurate with the
enhancement of value of the underlying intellectual property, (ii) the milestones relate solely to past performance
and (iii) the amount of the milestone is reasonable in relation to the effort expended and the risk associated with the
achievement of the milestone.
The milestone payments will be recognized as revenue in full in the period in which the associated milestone is
achieved, assuming all other revenue recognition criteria are met. To date, no revenue has been recognized related
to the achievement of the milestones.
In 2015, we made a payment of $25.9 million to the Office of the Chief Scientist of the Israeli Ministry of
Economy (“OCS”) in connection with repayment obligations resulting from grants previously made by the OCS to
OPKO Biologics to support development of hGH-CTP and the outlicense of the technology outside of Israel. We
recognized the $25.9 million payment in Grant repayment expense in our Consolidated Statement of Operations
during the year ended December 31, 2015.
TESARO
In November 2009, we entered into an asset purchase agreement (the “NK-1 Agreement”) under which we
acquired VARUBI™ (rolapitant) and other neurokinin-1 (“NK-1”) assets from Merck. In December 2010, we
entered into an exclusive license agreement with TESARO, in which we out-licensed the development, manufacture,
commercialization and distribution of our lead NK-1 candidate, VARUBI™ (the “TESARO License”). Under the
terms of the license, we received a $6.0 million upfront payment from TESARO and we received $30.0 million of
milestone payments from TESARO upon achievement of certain regulatory and commercial sale milestones and we
are eligible to receive additional commercial milestone payments of up to $85.0 million if specified levels of annual
net sales are achieved. During the years ended December 31, 2017, 2016 and 2015, $10.0 million, $0.0 million and
$15.0 million of revenue, respectively, was recognized related to the achievement of the milestones under the
TESARO License. TESARO is also obligated to pay us tiered royalties on annual net sales achieved in the United
States and Europe at percentage rates that range from the low double digits to the low twenties, and outside of the
United States and Europe at low double-digit percentage rates. TESARO assumed responsibility for clinical
development and commercialization of licensed products at its expense. Under the NK-1 Agreement, we will
continue to receive royalties on a country-by-country and product-by-product basis until the later of the date that all
of the patent rights licensed from us and covering VARUBI™ expire, are invalidated or are not enforceable and 12
years from the first commercial sale of the product.
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If TESARO elects to develop and commercialize VARUBI™ in Japan through a third-party licensee, TESARO
will share equally with us all amounts it receives in connection with such activities, subject to certain exceptions and
deductions.
The term of the license will remain in force until the expiration of the royalty term in each country, unless we
terminate the license earlier for TESARO’s material breach of the license or bankruptcy. TESARO has a right to
terminate the license at any time during the term for any reason on three months’ written notice.
Pharmsynthez
In April 2013, we entered into a series of concurrent transactions with Pharmsynthez, a Russian pharmaceutical
company traded on the Moscow Stock Exchange pursuant to which we acquired an equity method investment in
Pharmsynthez (ownership 9%). We also granted rights to certain technologies in the Russian Federation, Ukraine,
Belarus, Azerbaijan and Kazakhstan (the “Pharmsynthez Territories”) to Pharmsynthez and agreed to perform
certain development activities. We will receive from Pharmsynthez royalties on net sales of products incorporating
the technologies in the Pharmsynthez Territories, as well as a percentage of any sublicense income from third parties
for the technologies in the Pharmsynthez Territories.
RXi Pharmaceuticals Corporation
In March 2013, we completed the sale to RXi of substantially all of our assets in the field of RNA interference
(the “RNAi Assets”) (collectively, the “Asset Purchase Agreement”). Pursuant to the Asset Purchase Agreement,
RXi will be required to pay us up to $50.0 million in milestone payments upon the successful development and
commercialization of each drug developed by RXi, certain of its affiliates or any of its or their licensees or
sublicensees utilizing patents included within the RNAi Assets (each, a “Qualified Drug”). In addition, RXi will
also be required to pay us royalties equal to: (a) a mid single-digit percentage of “Net Sales” (as defined in the
Asset Purchase Agreement) with respect to each Qualified Drug sold for an ophthalmologic use during the
applicable “Royalty Period” (as defined in the Asset Purchase Agreement); and (b) a low single-digit percentage of
net sales with respect to each Qualified Drug sold for a non-ophthalmologic use during the applicable Royalty
Period.
Other
We have completed strategic deals with numerous institutions and commercial partners. In connection with
these agreements, upon the achievement of certain milestones we are obligated to make certain payments and have
royalty obligations upon sales of products developed under the license agreements. At this time, we are unable to
estimate the timing and amounts of payments as the obligations are based on future development of the licensed
products.
Note 15 Leases
Operating leases
We conduct certain of our operations under operating lease agreements. Rent expense under operating leases
was approximately $18.9 million, $18.8 million, and $7.8 million for the years ended December 31, 2017, 2016, and
2015, respectively.
As of December 31, 2017, the aggregate future minimum lease payments under all non-cancelable operating
leases with initial or remaining lease terms in excess of one year are as follows:
Year Ending
2018 ........................................................................... $
2019 ...........................................................................
2020 ...........................................................................
2021 ...........................................................................
2022 ...........................................................................
Thereafter...................................................................
Total minimum operating lease commitments ........... $
(In thousands)
19,059
15,166
9,360
6,079
3,148
3,542
56,354
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Capital leases
We acquired various assets under capital leases in connection with our acquisition of BioReference in 2015.
Capital leases are included within Property, plant and equipment, net in our Consolidated Balance Sheet with
imputed interest rates of approximately 2% as follows:
Capital leases
Automobiles ................................................................................ $
Less: Accumulated Depreciation ...............................................
Net capital leases in Property, plant and equipment ................... $
Year ended
December 31,
2017
11,137
(4,366 )
6,771
As of December 31, 2017, the aggregate future minimum lease payments under all non-cancelable capital leases
with initial or remaining lease terms in excess of one year are as follows:
Year Ending
2018 ............................................................................................ $
2019 ............................................................................................
2020 ............................................................................................
2021 ............................................................................................
2022 ............................................................................................
Thereafter ...................................................................................
Total minimum capital lease commitments ................................
Less: Amounts representing interest ..........................................
Net capital liability ..................................................................... $
(In thousands)
3,521
3,029
2,440
1,586
410
441
11,427
242
11,185
Current ........................................................................................ $
Long-term ................................................................................... $
3,399
7,786
Note 16 Segments
We manage our operations in two reportable segments, pharmaceutical and diagnostics. The pharmaceutical
segment consists of our pharmaceutical operations we acquired in Chile, Mexico, Ireland, Israel and Spain and our
pharmaceutical research and development. The diagnostics segment primarily consists of our clinical laboratory
operations we acquired through the acquisitions of BioReference and OPKO Lab and our point-of-care operations.
There are no significant inter-segment sales. We evaluate the performance of each segment based on operating
profit or loss. There is no inter-segment allocation of interest expense and income taxes.
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Information regarding our operations and assets for our operating segments and the unallocated corporate
operations as well as geographic information are as follows:
(In thousands)
Revenue from services:
For the years ended December 31,
2016
2017
2015
Pharmaceutical ................................................................................. $
Diagnostics .......................................................................................
Corporate ..........................................................................................
$
— $
— $
889,076
—
1,012,129
—
889,076 $
1,012,129 $
Revenue from products:
Pharmaceutical ................................................................................. $
Diagnostics .......................................................................................
Corporate ..........................................................................................
$
Revenue from transfer of intellectual property:
Pharmaceutical ................................................................................. $
Diagnostics .......................................................................................
Corporate ..........................................................................................
$
Operating loss:
Pharmaceutical ................................................................................. $
Diagnostics .......................................................................................
Corporate ..........................................................................................
Less: Operating loss attributable to noncontrolling interests ...........
$
Depreciation and amortization:
Pharmaceutical ................................................................................. $
Diagnostics .......................................................................................
Corporate ..........................................................................................
$
Income (loss) from investment in investees:
Pharmaceutical ................................................................................. $
Diagnostics .......................................................................................
Corporate ..........................................................................................
$
Revenues:
107,759 $
—
—
107,759 $
70,668 $
—
—
70,668 $
(87,907 ) $
(136,540 )
(55,615 )
—
(280,062 ) $
27,513 $
74,442
138
102,093 $
(12,646 ) $
(1,825 )
—
(14,471 ) $
83,467 $
—
—
83,467 $
126,065 $
—
—
126,065 $
(9,841 ) $
(3,393 )
(60,041 )
—
(73,275 ) $
18,254 $
78,233
89
96,576 $
(7,665 ) $
13
—
(7,652 ) $
United States .................................................................................... $
Ireland...............................................................................................
Chile .................................................................................................
Spain .................................................................................................
Israel .................................................................................................
Mexico ..............................................................................................
Other .................................................................................................
$
908,971 $
77,285
44,286
18,285
13,951
4,605
120
1,067,503 $
1,014,389 $
137,785
35,364
15,812
15,317
2,988
6
1,221,661 $
—
329,599
140
329,739
80,146
—
—
80,146
81,853
—
—
81,853
(40,395 )
(10,294 )
(46,512 )
(1,280 )
(98,481 )
10,245
31,918
85
42,248
(7,105 )
—
—
(7,105 )
344,464
78,989
29,885
16,622
18,107
3,671
—
491,738
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(In thousands)
Assets:
December 31,
2017
December 31,
2016
Pharmaceutical ........................................................................... $
Diagnostics .................................................................................
Corporate ....................................................................................
$
1,282,564 $
1,241,388
60,604
2,584,556 $
1,294,916
1,408,522
63,181
2,766,619
Goodwill:
Pharmaceutical ........................................................................... $
Diagnostics .................................................................................
Corporate ....................................................................................
$
264,313 $
452,786
—
717,099 $
251,817
452,786
—
704,603
During the year ended December 31, 2017, two customers represented more than 10% of our total consolidated
revenue. During the year ended December 31, 2016, no customer represented more than 10% of our total
consolidated revenue. During the year ended December 31, 2015, revenue recognized under the Pfizer Transaction
represented 13% of our total consolidated revenue. As of December 31, 2017, no customer represented more than
10% of our accounts receivable balance. As of December 31, 2016, one customer represented more than 10% of our
accounts receivable balance.
The following table reconciles our Property, plant and equipment, net between U.S. and foreign jurisdictions:
(In thousands)
PP&E:
December 31,
2017
December 31,
2016
U.S. ............................................................................................. $
Foreign ........................................................................................
Total ........................................................................................ $
89,114 $
57,443
146,557 $
100,716
22,115
122,831
Note 17 Fair Value Measurements
We record fair values at an exit price, representing the amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based
measurement determined based on assumptions that market participants would use in pricing an asset or liability.
We utilize a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers
include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs
other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as
unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own
assumptions.
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A summary of our investments classified as available for sale and carried at fair value, is as follows:
As of December 31, 2017
Gross
unrealized
gains in
Accumulated
OCI
Gross
unrealized
losses in
Accumulated
OCI
Fair
value
Amortized
Cost
7,585 $
5,075 $
(199 ) $
12,461
As of December 31, 2016
Gross
unrealized
gains in
Accumulated
OCI
Gross
unrealized
losses in
Accumulated
OCI
Fair
value
Amortized
Cost
3,409 $
1,313 $
(194 ) $
4,528
(In thousands)
Common stock investments,
available for sale .............................
$
(In thousands)
Common stock investments,
available for sale .............................
$
Any future fluctuation in fair value related to our available for sale investments that is judged to be temporary,
and any recoveries of previous temporary write-downs, will be recorded in Accumulated other comprehensive
income (loss). If we determine that any future valuation adjustment was other-than-temporary, we will record a loss
during the period such determination is made.
As of December 31, 2017, we have money market funds that qualify as cash equivalents, forward foreign
currency exchange contracts for inventory purchases (Refer to Note 18) and contingent consideration related to the
acquisitions of CURNA, OPKO Diagnostics 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 BioCardia, we
record the related BioCardia options at fair value as well as the warrants from COCP, InCellDx, Inc., Xenetic, RXi
and Neovasc.
Our financial assets and liabilities measured at fair value on a recurring basis are as follows:
Fair value measurements as of December 31, 2017
Quoted
prices in
active
markets for
identical
t
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Total
107
$
—
$
—
$
107
12,461
—
12,568
—
—
—
$
$
$
—
3,333
3,333
317
—
317
$
$
$
—
—
—
—
41,353
41,353
$
$
12,461
3,333
15,901
317
41,353
41,670
(In thousands)
Assets:
Money market funds ............................. $
Common stock investments,
available for sale ...............................
Common stock options/warrants ..........
Total assets ............................................... $
Liabilities:
Forward Contracts ................................
Contingent consideration: ..................... $
Total liabilities ......................................... $
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Fair value measurements as of December 31, 2016
Quoted
prices in
active
markets for
identical
assets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Total
5,314
$
— $
—
$
5,314
4,528
—
—
9,842
—
—
—
$
$
$
—
4,017
39
4,056 $
—
—
—
—
— $
—
— $
16,736
45,076
61,812
$
$
$
4,528
4,017
39
13,898
16,736
45,076
61,812
(In thousands)
Assets:
Money market funds ............................ $
Common stock investments,
available for sale ...............................
Common stock options/warrants ..........
Forward contracts .................................
Total assets ............................................... $
Liabilities:
Embedded conversion option ............... $
Contingent consideration: ....................
Total liabilities ......................................... $
The carrying amount and estimated fair value of our 2033 Senior Notes with the embedded conversion option, as
well as the applicable fair value hierarchy tiers, are contained in the table below. The fair value of the 2033 Senior
Notes is determined using a binomial lattice approach in order to estimate the fair value of the embedded derivative
in the 2033 Senior Notes. Refer to Note 6.
(In thousands)
2033 Senior Notes
(In thousands)
2033 Senior Notes
Carrying
Total
December 31, 2017
Level 1
Level 2
Level 3
$
29,160 $
32,968 $
— $
— $
32,968
December 31, 2016
Carrying
Value
Total
Fair Value
Level 1
Level 2
Level 3
$
26,965 $
45,205 $
— $
— $
45,205
There have been no transfers between Level 1 and Level 2 and no transfers to or from Level 3 of the fair value
hierarchy.
As of December 31, 2017 and 2016, the carrying value of our other financial instrument assets and liabilities
approximates their fair value due to their short-term nature or variable rate of interest.
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The following tables reconcile the beginning and ending balances of our Level 3 assets and liabilities as of
December 31, 2017 and 2016:
December 31, 2017
(In thousands)
Balance at December 31, 2016 .............................................. $
Contingent
consideration
45,076
Total losses (gains) for the period:
Embedded
conversion
option
$
16,736
Included in results of operations .....................................
Foreign currency impact .................................................
Payments .............................................................................
Reclassification of embedded derivatives to equity ............
Balance at December 31, 2017 .............................................. $
(3,423 )
3
(303 )
—
41,353
$
(3,185 )
—
—
(13,551 )
—
December 31, 2016
(In thousands)
Balance at December 31, 2015 .............................................. $
Total losses (gains) for the period: ......................................
Included in results of operations .....................................
Foreign currency impact .................................................
Payments .............................................................................
Balance at December 31, 2016 .............................................. $
Contingent
consideration
54,422
Embedded
conversion
option
$
23,737
16,954
(1 )
(26,299 )
45,076
$
(7,001 )
—
—
16,736
The estimated fair values of our financial instruments have been determined by using available market
information and what we believe to be appropriate valuation methodologies. We use the following methods and
assumptions in estimating fair value:
Contingent consideration – We estimate the fair value of the contingent consideration utilizing a discounted cash
flow model for the expected payments based on estimated timing and expected revenues. We use several discount
rates depending on each type of contingent consideration related to OPKO Diagnostics, CURNA and OPKO Renal
transactions. If estimated future sales were to decrease by 10%, the contingent consideration related to OPKO
Renal, which represents the majority of our contingent consideration liability, would decrease by $2.1 million. As
of December 31, 2017, of the $41.4 million of contingent consideration, $11.8 million is recorded in Accrued
expenses and $29.6 million is recorded in Other long-term liabilities. As of December 31, 2016, of the $45.1
million of contingent consideration, $0.3 million is recorded in Accrued expenses and $44.8 million is recorded in
Other long-term liabilities.
Note 18 Derivative Contracts
The following table summarizes the fair values and the presentation of our derivative financial instruments in the
Consolidated Balance Sheets:
(In thousands)
Derivative financial instruments:
Balance Sheet Component
December 31,
2017
December 31,
2016
Common stock options/warrants ................ Investments, net
Embedded conversion option ..................... 2033 Senior Notes, net of discount
Forward contracts ....................................... Unrealized gains on forward contracts are
$
$
$
3,333 $
— $
(317 ) $
4,017
16,736
39
recorded in Other current assets and prepaid
expenses. Unrealized (losses) on forward
contracts are recorded in Accrued expenses.
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We enter into foreign currency forward exchange contracts to cover the risk of exposure to exchange rate
differences arising from inventory purchases on letters of credit. Under these forward contracts, for any rate above
or below the fixed rate, we receive or pay the difference between the spot rate and the fixed rate for the given
amount at the settlement date.
To qualify the derivative instrument as a hedge, we are required to meet strict hedge effectiveness and
contemporaneous documentation requirements at the initiation of the hedge and assess the hedge effectiveness on an
ongoing basis over the life of the hedge. At December 31, 2017 and 2016, our derivative financial instruments do
not meet the documentation requirements to be designated as hedges. Accordingly, we recognize the changes in
Fair value of derivative instruments, net in our Consolidated Statement of Operations. The following table
summarizes the losses and gains recorded for the years ended December 31, 2017, 2016 and 2015:
(In thousands)
Derivative gain (loss):
For the years ended December 31,
2016
2017
2015
Common stock options/warrants ......................... $
2033 Senior Notes ...............................................
Forward contracts ................................................ $
Total ................................................................. $
(2,533 ) $
3,185
(600 ) $
52 $
(4,262 ) $
7,001
39 $
2,778 $
(2,854 )
(36,588 )
359
(39,083 )
Note 19 Selected Quarterly Financial Data (Unaudited)
For the 2017 Quarters Ended
March 31
June 30
(In thousands, except per share data)
Total revenues ......................................................................
Total costs and expenses ......................................................
Net income (loss) .................................................................
Net income (loss) attributable to common shareholders ......
Earnings (loss) per share, basic ............................................
Earnings (loss) per share, diluted .........................................
(In thousands, except per share data)
Total revenues ......................................................................
Total costs and expenses ......................................................
Net income (loss) .................................................................
Net income (loss) attributable to common shareholders ......
Earnings (loss) per share, basic ............................................
Earnings (loss) per share, diluted .........................................
Note 20 Subsequent Events
$
$
$
$
$
$
296,096 $
337,803
(30,995 )
(30,995 )
(0.06 ) $
(0.06 ) $
291,037 $
318,555
(11,978 )
(11,978 )
(0.02 ) $
(0.02 ) $
263,495 $
321,785
(46,442 )
(46,442 )
September 30 December 31
193,699
347,321
(213,905 )
(213,905 )
(0.38 )
(0.38 )
(0.08 ) $
(0.08 ) $
314,213 $
340,656
(17,528 )
(17,528 )
(0.03 ) $
(0.04 ) $
298,035 $
321,658
(14,977 )
(14,977 )
September 30 December 31
275,489
325,889
(13,661 )
(13,661 )
(0.02 )
(0.04 )
(0.03 ) $
(0.03 ) $
357,100 $
328,834
15,533
15,533
0.03 $
0.02 $
For the 2016 Quarters Ended
March 31
June 30
On February 28, 2018, BioReference and certain of its subsidiaries entered into Amendment No. 7 to the Credit
Agreement with JPMorgan Chase Bank, N.A. (“CB”), which amended the Credit Agreement to permit
BioReference and its subsidiaries to use cash on hand, up to a maximum amount set forth in the amendment, to meet
the availability requirements that otherwise would trigger (i) covenants that would require BioReference to maintain
a minimum fixed charge coverage ratio and provide certain increased reporting under the Credit Agreement and (ii)
CB’s right, as agent for the lenders under the Credit Agreement, to exercise sole dominion over funds held in certain
accounts of BioReference. The other terms of the Credit Agreement remain unchanged.
On February 27, 2018, we agreed to issue a series of 5% Convertible Promissory Notes (the “Notes”) in the
aggregate principal amount of $55.0 million. The Notes mature five (5) years from the date of issuance. Each
holder of a Note has the option, from time to time, to convert all or any portion of the outstanding principal balance
of such Note, together with accrued and unpaid interest thereon, into shares of our common stock, par value $0.01
per share (“Common Stock”), at a conversion price of $5.00 per share of Common Stock (the “Shares”). We may
redeem all or any part of the then issued and outstanding Notes, together with accrued and unpaid interest thereon,
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pro ratably among the holders, upon no fewer than 30 days, and no more than 60 days, notice to the holders. The
Notes contain customary events of default and representations and warranties of OPKO. We intend to use the
proceeds of the Notes for general corporate purposes.
The issuance of the Notes and the issuance of the Shares, if any, upon conversion thereof was not, and will not
be, respectively, registered under the Securities Act of 1933, as amended, pursuant to the exemption provided by
Section 4(a)(2) thereof, and we have not agreed to register the Shares if or when such Shares are issued.
Purchasers of the Notes include an affiliate of Dr. Phillip Frost, M.D., our Chairman and Chief Executive
Officer, and Dr. Jane H. Hsiao, Ph.D., MBA, our Vice-Chairman and Chief Technical Officer.
We have reviewed all subsequent events and transactions that occurred after the date of our December 31, 2017
Consolidated Balance Sheet date, through the time of filing this Annual Report on Form 10-K.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, have
evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 31, 2017.
Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission.
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the company’s management, including its principal executive and principal
financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation,
management concluded that our disclosure controls and procedures were effective as of December 31, 2017.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended. Our internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. All internal control systems, no matter how well
designed, have inherent limitations. Therefore, even those systems determined effective could provide only
reasonable assurance with respect to financial statement preparation and presentation.
Our management conducted an evaluation of the effectiveness of our internal control over financial reporting as
of December 31, 2017, based on the framework in the Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the “2013 Internal Control-Integrated
Framework”). Based on our evaluation under the 2013 Internal Control-Integrated Framework, our management
concluded that our internal control over financial reporting was effective as of December 31, 2017.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2017 has been
audited by Ernst & Young LLP, our independent registered public accounting firm, who also audited our
Consolidated Financial Statements included in this Annual Report on Form 10-K, as stated in their report which
appears with our accompanying Consolidated Financial Statements.
Changes to the Company’s Internal Control Over Financial Reporting
In connection with the acquisition of Transition Therapeutics in August 2016, we began implementing standards
and procedures at Transition Therapeutics, including establishing controls over accounting systems and establishing
controls over the preparation of financial statements in accordance with generally accepted accounting principles to
ensure that we have in place appropriate internal control over financial reporting at Transition Therapeutics. We are
continuing to integrate the acquired operations of Transition Therapeutics into our overall internal control over
financial reporting process.
We are implementing new controls as part of our effort to adopt Accounting Standards Update (“ASU”) No.
2014-09, “Revenue from Contracts with Customers.” The adoption of the ASU is requiring the implementation of
new accounting processes which necessitates changes to our internal controls over financial reporting.
We are in the process of implementing a new comprehensive enterprise resource planning (“ERP”) system on a
company-wide basis, which is one of the systems used for financial reporting. The implementation of the ERP
system involves changes to our financial systems and other systems and accordingly, necessitated changes to our
internal controls over financial reporting.
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These changes to the Company’s internal control over financial reporting that occurred during the most recent
quarter ended December 31, 2017 have materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
On February 28, 2018, BioReference and certain of its subsidiaries entered into Amendment No. 7 to the Credit
Agreement with JPMorgan Chase Bank, N.A. (“CB”), which amended the Credit Agreement to permit
BioReference and its subsidiaries to use cash on hand, up to a maximum amount set forth in the amendment, to meet
the availability requirements that otherwise would trigger (i) covenants that would require BioReference to maintain
a minimum fixed charge coverage ratio and provide certain increased reporting under the Credit Agreement and (ii)
CB’s right, as agent for the lenders under the Credit Agreement, to exercise sole dominion over funds held in certain
accounts of BioReference. The other terms of the Credit Agreement remain unchanged.
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PART III
The information required in Items 10 (Directors, Executive Officers and Corporate Governance), Item 11
(Executive Compensation), Item 12 (Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters), Item 13 (Certain Relationships and Related Transactions, and Director
Independence), and Item 14 (Principal Accounting Fees and Services) is incorporated by reference to the
Company’s definitive proxy statement for the 2018 Annual Meeting of Stockholders to be filed with the Securities
and Exchange Commission within 120 days of December 31, 2017.
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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) (1) Financial Statements: See Part II, Item 8 of this report.
PART IV
Schedule I - Condensed Financial Information of Registrant. Additionally, the financial statement
schedule entitled “Schedule II – Valuation and Qualifying Accounts” has been omitted since the
information required is included in the consolidated financial statements and notes thereto. Other
schedules are omitted because they are not required.
(2) Exhibits: See below.
Exhibit
Number
1.1(12)
Underwriting Agreement, dated March 9, 2011, by and among OPKO Health, Inc., Jefferies & Company,
Inc. and J.P. Morgan Securities LLC, as representatives for the underwriters named therein.
Description
2.1(1)
Merger Agreement and Plan of Reorganization, dated as of March 27, 2007, by and among Acuity
Pharmaceuticals, Inc., Froptix Corporation, eXegenics Inc., e-Acquisition Company I-A, LLC, and e-
Acquisition Company II-B, LLC.
2.2(3)+
Securities Purchase Agreement, dated May 2, 2008, by and among Vidus Ocular, Inc., OPKO
Instrumentation, LLC, OPKO Health, Inc., and the individual sellers and noteholders named therein.
2.3(9)
Purchase Agreement, dated February 17, 2010, by and among Ignacio Levy García and José de Jesús
Levy García, Inmobiliaria Chapalita, S.A. de C.V., Pharmacos Exakta, S.A. de C.V., OPKO Health, Inc.,
OPKO Health Mexicana S. de R.L. de C.V., and OPKO Manufacturing Facilities S. de R.L. de C.V.
2.4(14)+
Agreement and Plan of Merger, dated January 28, 2011, by and among CURNA, Inc., KUR, LLC, OPKO
Pharmaceuticals, LLC, OPKO CURNA, LLC, and certain individuals named therein.
2.5(15)
Agreement and Plan of Merger, dated October 13, 2011, by and among OPKO Health, Inc., Claros
Merger Subsidiary, LLC, Claros Diagnostics, Inc., and Ellen Baron, Marc Goldberg and Michael
Magliochetti on behalf of the Shareholder Representative Committee.
2.6(17)+
Stock Purchase Agreement, dated December 20, 2011, by and among FineTech Pharmaceutical Ltd., Arie
Gutman, OPKO Holdings Israel Ltd, and OPKO Health, Inc.
2.7(18)
Purchase Agreement, dated January 20, 2012, by and among OPKO Health, Inc., OPKO Chile S.A.,
Samuel Alexandre Arama, Inversiones SVJV Limitada, Bruno Sergiani, Inversiones BS Limitada, Pierre-
Yves LeGoff, and Inversiones PYTT Limitada.
2.8(19)+
Stock Purchase Agreement, dated August 2, 2012, by and among Farmadiet Group Holding, S.L., the
Sellers party thereto, OPKO Health, Inc., and Shebeli XXI, S.L.U.
2.9(21)+
Agreement and Plan of Merger, dated October 18, 2012, by and among Prost-Data, Inc. d/b/a OurLab,
Our Labs, Endo Labs and Gold Lab, Jonathan Oppenheimer, M.D., OPKO Health, Inc., OPKO
Laboratories Inc., and OPKO Labs, LLC.
2.10(22)+
Share Purchase Agreement, dated January 8, 2013, by among Cytochroma Inc., Cytochroma Holdings
ULC, Cytochroma Canada Inc., Cytochroma Development Inc., Proventiv Therapeutics, LLC,
Cytochroma Cayman Islands, Ltd., OPKO Health, Inc., and OPKO IP Holdings, Inc.
2.11(23)
Asset Purchase Agreement, dated March 1, 2013, by and between RXi Pharmaceuticals Corporation and
OPKO Health, Inc.
2.12(24)
Agreement and Plan of Merger, dated April 23, 2013, by and among OPKO Health, Inc., POM
Acquisition Inc., and PROLOR Biotech, Inc.
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2.13(27)+
Agreement for the Sale and Purchase of Shares in EirGen Pharma Limited, dated May 5, 2015 by and
among OPKO Ireland Limited, OPKO Health, Inc. and the Sellers named therein.
2.14(27)+
Form of Additional Agreement for the Sale and Purchase of Shares in EirGen Pharma Limited, dated
May 5, 2015 by and among OPKO Ireland Limited and the Sellers named therein.
2.15(28)+
Agreement and Plan of Merger by and among the Company, Bamboo Acquisition, Inc. and BioReference
Laboratories, Inc. dated as of June 3, 2015.
2.16(31)
Arrangement Agreement by and among the Company, OPKO Global Holdings, Inc. and Transition
Therapeutics Inc. dated as of June 29, 2016.
3.1(26)
Amended and Restated Certificate of Incorporation, as amended.
3.2(2)
3.3(7)
4.1(1)
4.2(7)
4.3(25)
Amended and Restated Bylaws.
Certificate of Designation of Series D Preferred Stock.
Form of Common Stock Warrant.
Form of Common Stock Warrant.
Indenture, dated January 30, 2013, between OPKO Health, Inc. and Wells Fargo Bank, National
Association.
10.1(1)
Form of Lockup Agreement.
10.2(2)
Stock Purchase Agreement, dated December 4, 2007, by and between OPKO Health, Inc. and the members
10.3(3)
10.4(3)
10.5(4)
of The Frost Group, LLC.
Form of Director Indemnification Agreement.
Form of Officer Indemnification Agreement.
Stock Purchase Agreement, dated August 8, 2008 by and between OPKO Health, Inc. and the Purchasers
named therein.
10.6(5)
Stock Purchase Agreement, dated February 23, 2009 by and between OPKO Health, Inc. and Frost
Gamma Investments Trust.
10.7(6)
Form of Stock Purchase Agreement for transactions between OPKO Health, Inc. and Nora Real Estate
SA., Vector Group Ltd., Oracle Partners LP, Oracle Institutional Partners, LP., Chung Chia Company
Limited, Gold Sino Assets Limited, and Grandtime Associates Limited.
10.8(6)
Stock Purchase Agreement, dated June 10, 2009, by and among OPKO Health, Inc. and Sorrento
Therapeutics, Inc.
10.9(7)
Form of Securities Purchase Agreement for Series D Preferred Stock.
10.10(8)*
Form of Restricted Share Award Agreement for Directors.
10.11(8)
Cocrystal Discovery, Inc. Agreements.
10.12(11)
Stock Purchase Agreement, dated October 1, 2009, by and among the Laboratoria Volta S.A., Farmacias
Ahumada S.A., FASA Chile S.A., OPKO Chile Limitada and Inversones OPKO Limitada, subsidiaries of
OPKO Health, Inc.
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10.13(10)+ Asset Purchase Agreement, dated October 12, 2009, by and between OPKO Health, Inc. and Schering
Corporation.
10.14(10)
Letter Agreement, dated June 29, 2010, by and between OPKO Health, Inc. and Schering Corporation.
10.15(16)+ Exclusive License Agreement by and between TESARO, Inc. and OPKO Health, Inc. dated December 10,
2010.
10.16(13)
Third Amended and Restated Subordinated Note and Security Agreement, dated February 22, 2011,
between OPKO Health, Inc. and The Frost Group, LLC.
10.17(15)+ Asset Purchase Agreement dated September 21, 2011, by and among Optos plc, Optos Inc., OPKO Health,
Inc., OPKO Instrumentation, LLC, Ophthalmic Technologies, Inc., and OTI (UK) Limited.
10.18(20)
Form of Note Purchase Agreement, dated as of January 25, 2013, by and among OPKO Health, Inc. and
each purchaser a party thereto.
10.19(29)+ Development and Commercialization License Agreement by and between OPKO Ireland, Ltd., a
subsidiary of OPKO Health, Inc., and Pfizer, Inc. dated December 13, 2014.
10.22(34)
Development and License Agreement between OPKO Health, Inc. and Vifor Fresenius Medical Care
Renal Pharma Ltd., dated May 8, 2016.
10.23(35)
Amendment No. 3 to Credit Agreement, dated as of March 17, 2017, among BioReference Laboratories,
Inc. and certain of its subsidiaries and JPMorgan Chase Bank, N.A.
10.24(36)
Amendment No. 4 to Credit Agreement, dated as of August 7, 2017, among BioReference Laboratories,
Inc. and certain of its subsidiaries and JPMorgan Chase Bank, N.A.
10.25(36)
Commitment Letter by and between OPKO Health, Inc. and Veterans Accountable Care Group, LLC,
dated August 15, 2017
10.26+**
Development and License Agreement by and between EirGen Pharma Limited, a subsidiary of OPKO
Health, Inc., and Japan Tobacco Inc., dated October 12, 2017.
10.27**
Amendment No. 5 to Credit Agreement, dated as of November 8, 2017, among BioReference
Laboratories, Inc. and certain of its subsidiaries and JPMorgan Chase Bank, N.A.
10.28**
Amendment No. 6 to Credit Agreement, dated as of December 22, 2017, among BioReference
Laboratories, Inc. and certain of its subsidiaries and JPMorgan Chase Bank, N.A.
10.29**
Form of 5% Convertible Promissory Note dated February 27, 2018.
21
Subsidiaries of the Company.
23.1
Consent of Ernst & Young LLP.
31.1
31.2
Certification by Phillip Frost, Chief Executive Officer, pursuant to Rule 13a-14(a) and 15d-14(a) of the
Securities and Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 for the year ended December 31, 2017.
Certification by Adam Logal, Chief Financial Officer, pursuant to Rule 13a-14(a) and 15d-14(a) of the
Securities and Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 for the year ended December 31, 2017.
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32.1
32.2
Certification by Phillip Frost, Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the year ended December 31, 2017.
Certification by Adam Logal, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the year ended December 31, 2017.
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
*
**
+
Denotes management contract or compensatory plan or arrangement.
Filed herewith
Certain confidential material contained in the document has been omitted and filed separately with the Securities and Exchange
Commission.
(1) Filed with the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 2, 2007,
and incorporated herein by reference.
(2) Filed with the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2008
and incorporated herein by reference.
(3) Filed with the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 8,
2008 for the Company’s three-month period ended June 30, 2008, and incorporated herein by reference.
(4) Filed with the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on
November 12, 2008 for the Company’s three-month period ended September 30, 2008, and incorporated herein by reference.
(5) Filed with the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 8, 2009
for the Company’s three-month period ended March 31, 2009, and incorporated herein by reference.
(6) Filed with the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 7,
2009 for the Company’s three-month period ended June 30, 2009, and incorporated herein by reference.
(7) Filed with the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 24,
2009, and incorporated herein by reference.
(8) Filed with the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9,
2009 for the Company’s three-month period ended September 30, 2009, and incorporated herein by reference.
(9) Filed with the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 10,
2010 for the Company’s three-month period ended March 31, 2010, and incorporated herein by reference.
(10) Filed with the Company’s Amendment to Annual Report on Form 10-K filed with the Securities and Exchange Commission on
February 3, 2011.
(11) Filed with the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 17,
2010.
(12) Filed with the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 10, 2011,
and incorporated herein by reference.
(13) Filed with the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on
May 10, 2011 for the Company’s three-month period ended March 31, 2011, and incorporated herein by reference.
(14) Filed with the Company’s Quarterly Report on Form 10-Q/A filed with the Securities and Exchange Commission
on July 5, 2011, and incorporated herein by reference.
(15) Filed with the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on
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November 9, 2011 for the Company’s three-month period ended September 30, 2011, and incorporated herein by
reference.
(16) Filed with the Company’s Annual Report on Form 10-K/A filed with the Securities and Exchange Commission on
July 28, 2011.
(17) Filed with the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on
March 15, 2012.
(18) Filed with the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on
May 10, 2012 for the Company’s three-month period ended March 31, 2012, and incorporated herein by reference.
(19) Filed with the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on
November 9, 2012 for the Company’s three-month period ended September 30, 2012, and incorporated herein by
reference.
(20) Filed with the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on
January 29, 2013, and incorporated herein by reference.
(21) Filed with the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on
March 18, 2013.
(22) Filed with the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on
May 10, 2013 for the Company’s three-month period ended March 31, 2013, and incorporated herein by reference.
(23) Filed with the Company’s Schedule 13D filed with the Securities and Exchange Commission on March 22, 2013,
and incorporated herein by reference.
(24) Filed as Annex A to the Company’s Preliminary Joint Proxy Statement/Prospectus, Form S-4, with the Securities
Exchange Commission on June 27, 2013, as amended, and incorporated herein by reference.
(25) Filed with the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on
February 5, 2013, and incorporated herein by reference.
(26) Filed with the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on
November 12, 2013 for the Company’s three month period ended September 30, 2013, and incorporated herein by
reference.
(27) Filed with the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on
August 5, 2015 for the Company’s three month period ended June 30, 2015, and incorporated herein by reference.
(28) Filed with the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on
June 4, 2015, and incorporated herein by reference.
(29) Filed with the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on
February 27, 2015, and incorporated herein by reference.
(30) Filed under Part II, Item 8, of the BioReference Laboratories, Inc. Form 10-K filed with the Securities and
Exchange Commission on January 13, 2015 (File No. 0-15266), and incorporated herein by reference.
(31) Filed with the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on
June 30, 2016 and incorporated herein by reference.
(32) Filed with the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on
February 29, 2016, and incorporated herein by reference.
(33) Filed with the Company’s Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange
Commission on March 25, 2016, and incorporated herein by reference.
(34) Filed with the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on
August 8, 2016 for the Company’s three month period ended June 30, 2016, and incorporated herein by reference.
(35) Filed with the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on
March 23, 2017 and incorporated herein by reference.
(36) Filed with the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on
November 8, 2017 and incorporated herein by reference.
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Schedule I - Condensed Financial Information of Registrant
OPKO Health, Inc.
PARENT COMPANY CONDENSED BALANCE SHEETS
(In thousands, except share and per share data)
December 31,
2017
2016
ASSETS
Current assets:
21,385
Cash and cash equivalents .................................................................................. $
4,586
Other current assets and prepaid expenses .........................................................
25,971
Total current assets .........................................................................................
Property, plant and equipment, net ........................................................................
150
Investments ............................................................................................................ 1,893,371
146
Other assets ............................................................................................................
Total assets ......................................................................................................... $ 1,919,638
$
15,744
12,446
28,190
503
2,114,473
176
$ 2,143,342
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable ............................................................................................... $
Accrued expenses ...............................................................................................
Current portion of notes payable ........................................................................
Total current liabilities....................................................................................
2033 Senior Notes, net of discount ........................................................................
Deferred tax liabilities, net.....................................................................................
Total long-term liabilities ...............................................................................
Total liabilities ...................................................................................................
$
1,077
3,023
521
4,621
29,160
479
29,639
34,260
1,070
5,769
522
7,361
43,701
472
44,173
51,534
Equity:
Common Stock - $0.01 par value, 750,000,000 shares authorized;
560,023,745 and 558,576,051 shares issued at December 31, 2017
and 2016, respectively .................................................................................
5,600
5,586
Treasury Stock, at cost - 549,907 and 586,760 shares at
December 31, 2017 and 2016, respectively ....................................................
(1,791 )
Additional paid-in capital ................................................................................... 2,889,256
(528 )
Accumulated other comprehensive income (loss) ..............................................
Accumulated deficit ........................................................................................... (1,007,159 )
Total shareholders’ equity .............................................................................. 1,885,378
Total liabilities and equity................................................................................. $ 1,919,638
(1,911 )
2,845,096
(27,009 )
(729,954 )
2,091,808
$ 2,143,342
The accompanying Notes to Parent Company Condensed Financial Statements are an integral part of these statements
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OPKO Health, Inc.
PARENT COMPANY CONDENSED STATEMENTS OF INCOME
(In thousands)
For the years ended December 31,
2015
2016
2017
Revenues:
Revenue from products ........................................................................... $
Revenue from transfer of intellectual property and other ........................
Total revenues .....................................................................................
— $
1,069
1,069
— $
—
—
140
154
294
Costs and expenses:
Costs of revenue ......................................................................................
Selling, general and administrative .........................................................
Research and development ......................................................................
Total costs and expenses .............................................................................
Operating loss..............................................................................................
Other income and (expense), net:
1,438
57,410
4,426
63,274
(62,205 )
875
60,819
3,791
65,485
(65,485 )
Interest income ........................................................................................
260
Interest expense .......................................................................................
(4,426 )
Fair value changes of derivative instruments, net ...................................
652
Other income (expense), net ....................................................................
5,177
Other income and (expense), net .................................................................
1,663
Loss before income taxes and investment losses.........................................
(60,542 )
Income tax benefit (provision) ....................................................................
(247 )
Net loss before investment losses ................................................................
(60,789 )
(12,646 )
Loss from investments in investees .............................................................
Net income (loss) from subsidiaries, net of taxes ........................................ (235,435 )
Net loss attributable to common shareholders ............................................. $ (308,870 ) $
440
(3,585 )
2,738
(2,387 )
(2,794 )
(68,279 )
(686 )
(68,965 )
(7,665 )
51,547
(25,083 ) $
798
47,708
8,496
57,002
(56,708 )
5
(5,347 )
(39,442 )
2,141
(42,643 )
(99,351 )
—
(99,351 )
(7,105 )
76,428
(30,028 )
The accompanying Notes to Parent Company Condensed Financial Statements are an integral part of these statements
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OPKO Health, Inc.
PARENT COMPANY CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Net loss ................................................................................................ $ (308,870 ) $ (25,083 ) $
Other comprehensive income (loss), net of tax:
For the years ended December 31,
2015
2016
2017
(30,028 )
Change in foreign currency translation and other
comprehensive income (loss) .......................................................
22,724
(4,955 )
(15,074 )
Available for sale investments:
Change in unrealized gain (loss), net of tax ...............................
Less: reclassification adjustments for losses included
3,790
(3,810 )
(2,378 )
in net loss, net of tax ...............................................................
(33 )
4,293
Comprehensive loss attributable to common shareholders .................. $ (282,389 ) $ (29,555 ) $
7,307
(40,173 )
The accompanying Notes to Parent Company Condensed Financial Statements are an integral part of these statements
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OPKO Health, Inc.
PARENT COMPANY CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
For the years ended December 31,
2016
2017
2015
Cash flows from operating activities:
Net loss .....................................................................................................................
Adjustments to reconcile net loss to net cash used in operating activities:
$ (308,870 ) $ (25,083 ) $ (30,028 )
Depreciation and amortization ..............................................................................
Non-cash interest...................................................................................................
Amortization of deferred financing costs ..............................................................
Losses from investments in investees ...................................................................
(Income) loss from subsidiaries ............................................................................
Equity-based compensation – employees and non-employees..............................
Realized loss (gain) on equity securities and disposal of fixed assets ...................
Loss (gain) on conversion of 3.00% convertible senior notes ...............................
Change in fair value of derivative instruments .....................................................
Gain on deconsolidation of SciVac .......................................................................
Changes in other assets and liabilities ...................................................................
Net cash used in operating activities.........................................................................
Cash flows from investing activities:
Investments in investees ........................................................................................
Subsidiary financing .............................................................................................
Proceeds from sale of equity securities .................................................................
Acquisition of businesses, net of cash acquired ....................................................
Capital expenditures ..............................................................................................
Net cash provided by (used in) investing activities ..................................................
Cash flows from financing activities:
138
2,049
574
12,646
235,435
28,308
(652 )
—
(4,953 )
—
4,258
(31,067 )
(9,625 )
41,990
2,211
—
—
34,576
89
1,866
149
7,665
(51,546 )
42,693
(2,738 )
284
2,347
—
(6,844 )
(31,118 )
(14,424 )
(44,569 )
—
—
(368 )
(59,361 )
85
2,612
1,212
7,105
(76,428 )
26,074
7,091
(943 )
39,442
(15,940 )
(15,640 )
(55,358 )
(4,375 )
62,471
—
(138 )
(92 )
57,866
Proceeds from the exercise of Common Stock options and warrants ...................
Net cash provided by financing activities .................................................................
Net increase (decrease) in cash and cash equivalents ...............................................
Cash and cash equivalents at beginning of period ....................................................
Cash and cash equivalents at end of period ..............................................................
2,132
2,132
5,641
15,744
$ 21,385 $
8,576
8,576
(81,903 )
97,647
15,744 $
25,921
25,921
28,429
69,218
97,647
SUPPLEMENTAL INFORMATION:
Interest paid ...........................................................................................................
Income taxes paid, net of refunds .........................................................................
Non-cash financing:
$
$
956 $
327 $
966 $
— $
2,175
—
Shares issued upon the conversion of:
2033 Senior Notes ..........................................................................................
Common Stock options and warrants, surrendered in net exercise ................
$
$
— $
1,546 $
583 $ 120,299
14,369
350 $
Issuance of capital stock to acquire or contingent consideration settlement:
Transition Therapeutics, Inc. .........................................................................
BioReference Laboratories, Inc. ....................................................................
EirGen Pharma Limited .................................................................................
OPKO Renal ..................................................................................................
OPKO Health Europe ....................................................................................
Issuance of stock for investment in Xenetic ......................................................
$
$
$
$
$
$
— $
— $
— $
— $
303 $
— $
58,530 $
—
— $ 950,148
33,569
— $
20,113
25,986 $
1,813
313 $
—
4,856 $
The accompanying Notes to Parent Company Condensed Financial Statements are an integral part of these statements
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OPKO Health, Inc.
Notes to Parent Company Condensed Financial Statements
Note 1 Organization and Basis of Presentation
We are a diversified healthcare company that seeks to establish industry-leading positions in large and rapidly
growing medical markets. The parent company condensed financial statements included in this Schedule I represent
the financial statements of OPKO Health, Inc., the parent company (or “OPKO”), on a stand-alone basis and do not
include results of operations from our consolidated subsidiaries. The Parent Company Condensed Financial
Statements should be read in conjunction with our audited consolidated financial statements included in Item 8 of
Part II of this Form 10-K. As of December 31, 2017 and 2016, approximately $1.9 billion and $2.1 billion,
respectively, of our Investments, net have not been eliminated in the parent company condensed financial
statements.
The Parent Company Condensed Financial Statements included herein have been prepared in accordance with
Rule 12-04, Schedule I of Regulation S-X, as substantially all the assets of BioReference, a wholly-owned
subsidiary, and its subsidiaries are restricted from sale, transfer, lease, disposal or distributions to OPKO under the
credit agreement with JPMorgan Chase Bank, N.A. (the “Credit Agreement”), subject to certain exceptions.
BioReference and its subsidiaries’ net assets as of December 31, 2017 were approximately $0.9 billion, which
includes goodwill of $401.8 million and intangible assets of $446.5 million. BioReference’s restricted net assets
exceeds 25% of OPKO’s consolidated net assets of $2.6 billion as of December 31, 2017.
Note 2 Debt
In January 2013, we entered into note purchase agreements (the “2033 Senior Notes”) with qualified institutional
buyers and accredited investors (collectively, the “Purchasers”) in a private placement in reliance on exemptions
from registration under the Securities Act of 1933, as amended (the “Securities Act”). The 2033 Senior Notes were
issued on January 30, 2013. The 2033 Senior Notes, which totaled $175.0 million in original principal amount, bear
interest at the rate of 3.00% per year, payable semiannually on February 1 and August 1 of each year. The 2033
Senior Notes will mature on February 1, 2033, unless earlier repurchased, redeemed or converted. Upon a
fundamental change as defined in the Indenture, dated as of January 30, 2013, by and between the Company and
Wells Fargo Bank N.A., as trustee, governing the 2033 Senior Notes (the “Indenture”), subject to certain exceptions,
the holders may require us to repurchase all or any portion of their 2033 Senior Notes for cash at a repurchase price
equal to 100% of the principal amount of the 2033 Senior Notes being repurchased, plus any accrued and unpaid
interest to but not including the fundamental change repurchase date.
The following table sets forth information related to the 2033 Senior Notes which is included our Condensed
Balance Sheets as of December 31, 2017:
(In thousands)
Balance at December 31, 2016 ..............................................
Amortization of debt discount and debt issuance costs .........
Change in fair value of embedded derivative ........................
Reclassification of embedded derivatives to equity ...............
Balance at December 31, 2017 ..............................................
$
$
Embedded
conversion
option
2033
Senior
Notes
Debt
Issuance
Cost
Total
Discount
16,736 $ 31,850 $
—
(3,185 )
(13,551 )
—
—
—
— $ 31,850 $
(4,612 ) $
2,047
—
—
(2,565 ) $
(273 ) $ 43,701
2,195
148
(3,185 )
—
(13,551 )
—
(125 ) $ 29,160
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The following table sets forth information related to the 2033 Senior Notes which is included our Condensed
Balance Sheets as of December 31, 2016:
(In thousands)
Balance at December 31, 2015 ..............................................
Amortization of debt discount and debt issuance costs .........
Change in fair value of embedded derivative ........................
Conversion .............................................................................
Balance at December 31, 2016 ..............................................
$
$
Embedded
conversion
option
2033
Senior
Notes
Debt
Issuance
Cost
Total
Discount
23,737 $ 32,200 $
—
(7,001 )
—
—
—
(350 )
16,736 $ 31,850 $
(6,525 ) $
1,913
—
—
(4,612 ) $
(426 ) $ 48,986
2,066
153
—
(7,001 )
—
(350 )
(273 ) $ 43,701
The 2033 Senior Notes will be convertible at any time on or after November 1, 2032, through the second
scheduled trading day immediately preceding the maturity date, at the option of the holders. Additionally, holders
may convert their 2033 Senior Notes prior to the close of business on the scheduled trading day immediately
preceding November 1, 2032, under the following circumstances: (1) conversion based upon satisfaction of the
trading price condition relating to the 2033 Senior Notes; (2) conversion based on the Common Stock price;
(3) conversion based upon the occurrence of specified corporate events; or (4) if we call the 2033 Senior Notes for
redemption. The 2033 Senior Notes will be convertible into cash, shares of our Common Stock, or a combination of
cash and shares of Common Stock, at our election unless we have made an irrevocable election of net share
settlement. The initial conversion rate for the 2033 Senior Notes will be 141.48 shares of Common Stock per
$1,000 principal amount of 2033 Senior Notes (equivalent to an initial conversion price of approximately $7.07 per
share of Common Stock), and will be subject to adjustment upon the occurrence of certain events. In addition, we
will, in certain circumstances, increase the conversion rate for holders who convert their 2033 Senior Notes in
connection with a make-whole fundamental change (as defined in the Indenture) and holders who convert upon the
occurrence of certain specific events prior to February 1, 2017 (other than in connection with a make-whole
fundamental change). Holders of the 2033 Senior Notes may require us to repurchase the 2033 Senior Notes for
100% of their principal amount, plus accrued and unpaid interest, on February 1, 2019, February 1, 2023 and
February 1, 2028, or following the occurrence of a fundamental change as defined in the indenture governing the
2033 Senior Notes.
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 determined that
these specific terms were considered to be embedded derivatives. Embedded derivatives are required to be
separated from the host contract, the 2033 Senior Notes, and carried at fair value when: (a) the embedded derivative
possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host
contract; and (b) a separate, stand-alone instrument with the same terms would qualify as a derivative instrument.
We concluded that the embedded derivatives within the 2033 Senior Notes meet these criteria for periods prior to
February 1, 2017 and, as such, were valued separate and apart from the 2033 Senior Notes and recorded at fair value
each reporting period.
For accounting and financial reporting purposes, prior to 2017 we combined these embedded derivatives and
valued them together as one unit of accounting.
On February 1, 2017, certain terms of the embedded derivatives expired pursuant to the original agreement and
we determined that the embedded derivatives no longer met the criteria to be separated from the host contract and,
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as a result, the embedded derivatives are no longer required to be valued separate and apart from the 2033 Senior
Notes and are not required to be measured at fair value subsequent to February 1, 2017.
The change in derivative income for the period from January 1, 2017 to February 1, 2017 related to the
embedded derivatives was $3.2 million and the fair value at that date was $13.6 million. As the embedded
derivatives are no longer required to be accounted for separately each period, the embedded derivative fair value of
$13.6 million as of February 1, 2017 was reclassified to additional paid in capital.
From 2013 to 2016, holders of the 2033 Senior Notes converted 143.2 million in aggregate principal amount into
an aggregate of 21,539,873 shares of the Company’s Common Stock
On April 1, 2015, we initially announced that our 2033 Senior Notes were convertible through June 2015 by
holders of such notes. This conversion right was triggered because the closing price per share of our Common Stock
exceeded $9.19, or 130% of the initial conversion price of $7.07, for at least 20 of 30 consecutive trading days
during the applicable measurement period. We have elected to satisfy our conversion obligation under the 2033
Senior Notes in shares of our Common Stock. Our 2033 Senior Notes continued to be convertible by holders of
such notes for the remainder of 2015, 2016 and the first quarter of 2017. They may become convertible again if one
or more of the conversion conditions specified in the Indenture is satisfied during future measurement periods.
Pursuant to the Indenture, a holder who elects to convert the 2033 Senior Notes will receive 141.4827 shares of our
Common Stock plus such number of additional shares as is applicable on the conversion date per $1,000 principal
amount of 2033 Senior Notes based on the early conversion provisions in the Indenture.
In November 2015, BioReference and certain of its subsidiaries entered into the Credit Agreement with
JPMorgan Chase Bank, which provides for a $175.0 million secured revolving credit facility and includes a $20.0
million sub-facility for swingline loans and a $20.0 million sub-facility for the issuance of letters of credit. The
Credit Agreement matures on November 5, 2020 and is secured by substantially all assets of BioReference and its
domestic subsidiaries, as well as a non-recourse pledge by us of our equity interest in BioReference.
Note 3 Commitments and Contingencies
We have no significant direct commitments and contingencies, but our subsidiaries do. See Note 13 of our
Consolidated Financial Statements in Item 8 of Part II of this Form 10-K.
Note 4 Dividends
We did not receive any dividend payments from our consolidated subsidiaries for the years ended December 31,
2017, 2016 and 2015.
Note 5 Income Taxes
The Parent Company Condensed Financial Statements recognize the current and deferred income tax
consequences that result from our activities during the current and preceding periods pursuant to the provisions of
Accounting Standards Codification Topic 740, Income Taxes (ASC 740), as if we were a separate taxpayer rather
than a member of the consolidated income tax return group. The tax expense and benefit recorded in OPKO’s
consolidated financial statements was the result of activity at the subsidiaries and therefore all tax benefit and
expense was reported in the Net income (loss) from subsidiaries, net of taxes line in the Condensed Statement of
Income.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 1, 2018
OPKO HEALTH, INC.
By:
/s/ Phillip Frost, M.D.
Phillip Frost, M.D.
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Phillip Frost, M.D.
Phillip Frost, M.D.
Chairman of the Board and Chief Executive
Officer
(Principal Executive Officer)
March 1, 2018
/s/ Jane H. Hsiao, Ph.D., MBA
Vice Chairman and Chief Technical Officer
March 1, 2018
Jane H. Hsiao, Ph.D., MBA
/s/ Steven D. Rubin
Steven D. Rubin
/s/ Adam Logal
Adam Logal
/s/ Richard Krasno, Ph.D.
Richard Krasno, Ph.D.
/s/ Richard A. Lerner, M.D.
Richard A. Lerner, M.D.
/s/ John A. Paganelli
John A. Paganelli
/s/ Richard C. Pfenniger, Jr.
Richard C. Pfenniger, Jr.
Director and Executive Vice President –
Administration
March 1, 2018
Senior Vice President, Chief Financial Officer,
Chief Accounting Officer and Treasurer
(Principal Financial Officer)
March 1, 2018
Director
March 1, 2018
Director
March 1, 2018
Director
March 1, 2018
Director
March 1, 2018
/s/ Alice Lin-Tsing Yu, M.D., Ph.D.
Alice Lin-Tsing Yu, M.D., Ph.D.
Director
March 1, 2018
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Exhibit
Number
21
Subsidiaries of the Company.
23.1
Consent of Ernst & Young LLP.
EXHIBIT INDEX
Description
31.1
31.2
32.1
32.2
Certification by Phillip Frost, Chief Executive Officer, pursuant to Rule 13a-14(a) and 15d-14(a) of the
Securities and Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 for the year ended December 31, 2017.
Certification by Adam Logal, Chief Financial Officer, pursuant to Rule 13a-14(a) and 15d-14(a) of the
Securities and Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 for the year ended December 31, 2017.
Certification by Phillip Frost, Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the year ended December 31, 2017.
Certification by Adam Logal, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the year ended December 31, 2017.
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
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SUBSIDIARIES OF OPKO HEALTH, INC.
Exhibit 21
NAME
OPKO Instrumentation, LLC
OPKO Pharmaceuticals, LLC
OPKO Diagnostics, LLC
OPKO Chile, S.A.
Arama Natural Products Distribuidora, Ltda
Pharmacos Exakta S.A. de C.V.
FineTech Pharmaceutical Ltd
Farmadiet Group Holdings, S.C.
OPKO Biologics, Ltd
OPKO Ireland Global Holdings, Ltd
OPKO Ireland, Ltd
OPKO Canada Corp, ULC
OPKO Renal, LLC
Curna, Inc.
BioReference Laboratories, Inc.
GeneDX, Inc.
Genome Diagnostics, Ltd
EirGen Pharma Limited
Transition Therapeutics, Inc.
JURISDICTION OF INCORPORATION
Delaware
Delaware
Delaware
Chile
Chile
Mexico
Israel
Spain
Israel
Ireland
Ireland
Canada
Canada
Delaware
New Jersey
New Jersey
Canada
Ireland
Canada
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Consent of Independent Registered Certified Public Accounting Firm
We consent to the incorporation by reference in the following Registration Statements:
Exhibit 23.1
1. Registration Statement (Form S-8 No. 333-211209) pertaining to the 2016 Equity Incentive Plan of
OPKO Health, Inc. and subsidiaries,
2. Registration Statement (Form S-8 No. 333-144040) pertaining to the 2007 Equity Incentive Plan of
OPKO Health, Inc. and subsidiaries,
3. Registration Statement (Form S-8 No. 333-190899) pertaining to the 2005 Stock Incentive Plan and
2007 Equity Incentive Plan of PROLOR Biotech, Inc. (formerly Modigene Inc.),
4. Registration Statement (Form S-8 No. 333-190900) pertaining to the 2007 Equity Incentive Plan of
OPKO Health, Inc. and subsidiaries, and
5. Registration Statement (Form S-8 No. 333-206489) pertaining to the 2003 Employee Incentive Stock
Option Plan of BioReference Laboratories, Inc.
of our reports dated March 1, 2018, with respect to the consolidated financial statements and schedule of OPKO
Health, Inc. and subsidiaries and the effectiveness of internal control over financial reporting of OPKO Health, Inc.
and subsidiaries included in this Annual Report (Form 10-K) of OPKO Health, Inc. and subsidiaries for the year
ended December 31, 2017.
/s/ Ernst & Young LLP
Miami, Florida
March 1, 2018
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I, Phillip Frost, certify that:
CERTIFICATIONS
(1)
I have reviewed this Annual Report on Form 10-K of OPKO Health, Inc.;
Exhibit 31.1
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
(4)
(The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
(a) (a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) (b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
(5) The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
(a) (All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 1, 2018
/s/ Phillip Frost, M.D.
Phillip Frost, M.D.
Chief Executive Officer
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I, Adam Logal, certify that:
CERTIFICATIONS
(1)
I have reviewed this Annual Report on Form 10-K of OPKO Health, Inc.;
Exhibit 31.2
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
(4) The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
(5) The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 1, 2018
/s/ Adam Logal
Adam Logal
Senior Vice President, Chief Financial Officer,
Chief Accounting Officer and Treasurer
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Exhibit 32.1
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant section 906 of the Sarbanes-Oxley Act of 2002, I,
Phillip Frost, Chief Executive Officer of OPKO Health, Inc. (the “Company”), hereby certify that:
The Annual Report on Form 10-K for the year ended December 31, 2017 (the “Form 10-K”) of the
Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934, and the information contained in the Form 10-K fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Date: March 1, 2018
/s/ Phillip Frost, M.D.
Phillip Frost, M.D.
Chief Executive Officer
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Exhibit 32.2
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant section 906 of the Sarbanes-Oxley Act of 2002, I,
Adam Logal, Chief Financial Officer of OPKO Health, Inc. (the “Company”), hereby certify that:
The Annual Report on Form 10-K for the year ended December 31, 2017 (the “Form 10-K”) of the
Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934, and the information contained in the Form 10-K fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Date: March 1, 2018
/s/ Adam Logal
Adam Logal
Senior Vice President, Chief Financial Officer
Chief Accounting Officer and Treasurer
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OPKO Health, I nc. Board of Directors
Phillip Frost, M.D.
Chairman & Chief Executive Officer
OPKO Health, Inc.
Jane H. Hsiao, Ph.D., MBA
Vice Chairman &
Chief Technical Officer
OPKO Health, Inc.
Steven D. Rubin
Executive Vice President — Administration
OPKO Health, Inc.
Robert S. Fishel, M.D.
Chief Executive Officer & President
Florida Electrophysiology Associates
Richard M. Krasno, Ph.D.
Lead Independent Director of
Ladenburg Thalmann Financial Services Inc.
Richard A. Lerner, M.D.
Institute Professor
The Scripps Research Institute
John Paganelli
Chairman of the Board
Pharos Systems International
Richard C. Pfenniger, Jr.
Former Chairman, Chief Executive Officer and President
Continucare Corporation
Alice Lin-Tsing Yu, M.D., Ph.D.
Distinguished Chair Professor and Co-Director
The Institute of Stem Cell & Translational Cancer
Research, Chang Gung Memorial Hospital
OPKO Health, I nc. Executive Officers
Phillip Frost, M.D.
Chief Executive Officer & Chairman of the Board
Steven D. Rubin
Executive Vice President — Administration
Jane H. Hsiao, Ph.D., MBA
Vice Chairman & Chief Technical Officer
Adam Logal
Senior Vice President, Chief Financial Officer
Chief Accounting Officer and Treasurer
STOCK AND I NVESTOR I NFORM ATI ON
Corporate Headquarters —
OPKO Health, Inc.
4400 Biscayne Boulevard
Miami, FL 33137
Telephone: (305) 575-4100
I ndependent Auditors—
Ernst & Young, LLP
201 South Biscayne Blvd.
Suite 3000
Miami, FL 33131
Common Stock I nformation —
OPKO Health, Inc. Common Stock, par value $.01, is listed on
the NASDAQ Global Select Market under the symbol “ OPK” .
Stockholder Service— Stockholders desiring to change the
name, address, or ownership of stock, report lost certificates,
or consolidate accounts should contact the Transfer Agent &
Registrar:
American Stock Transfer & Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
Telephone:800.937.5449 (Domestic)
718.921.8124 (International)
Annual Report on Form 10-K —
Stockholders may obtain a copy of OPKO Health, Inc.’ s Annual Report on Form 10-K for the year ended December 31, 2017,
including the financial statements and the financial statement schedules, without charge by sending a request in writing to
Investor Relations at OPKO’ s headquarters, 4400 Biscayne Blvd, Miami, Florida 33137.
Except for the historical matters contained herein, statements made in this report are forward looking and are made pursuant to
the safe harbor provisions of the Securities Litigation Reform Act of 1995. Investors are cautioned that forward looking
statements involve risks and uncertainties that may affect OPKO’ s business and prospects, including economic, competitive,
governmental, technological, and other factors discussed in this report and in OPKO’ s filings with the Securities and Exchange
Commission, including without limitation, the Annual Report on Form 10-K filed with the SEC on March 1, 2018.
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