FAIR VALUE MEASUREMENTS

We record fair values at an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement determined based on assumptions that market participants would use in pricing an asset or liability. We utilize a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

A summary of our investments classified as available for sale and carried at fair value, is as follows:



	As of June 30, 2017
(In thousands)	Amortized Cost		Gross unrealized gains in Accumulated OCI		Gross unrealized losses in Accumulated OCI			Fair value
Common stock investments, available for sale	$	2,815	$	1,152	$	(182	)	$	3,785
Total assets	$	2,815	$	1,152	$	(182	)	$	3,785



	As of December 31, 2016
(In thousands)	Amortized Cost		Gross unrealized gains in Accumulated OCI		Gross unrealized losses in Accumulated OCI			Fair value
Common stock investments, available for sale	$	3,409	$	1,313	$	(194	)	$	4,528
Total assets	$	3,409	$	1,313	$	(194	)	$	4,528

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 June 30, 2017, we have money market funds that qualify as cash equivalents, forward foreign currency exchange contracts for inventory purchases (refer to Note 9) and contingent consideration related to the acquisitions of CURNA, OPKO Diagnostics, OPKO Health Europe, and OPKO Renal that are required to be measured at fair value on a recurring basis. In addition, in connection with our investment and our consulting agreements with Neovasc and BioCardia, we record the related Neovasc and BioCardia options at fair value as well as the warrants from COCP, Sevion, MabVax, InCellDx, Inc., Xenetic and RXi.

Our financial assets and liabilities measured at fair value on a recurring basis are as follows:



	Fair value measurements as of June 30, 2017
(In thousands)	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Assets:
Money market funds	$	13,320	$	—	$	—	$	13,320
Common stock investments, available for sale	3,785		—		—		3,785
Common stock options/warrants	—		3,537		—		3,537
Forward contracts	—		17		—		17
Total assets	$	17,105	$	3,554	$	—	$	20,659
Liabilities:
Embedded conversion option	$	—	$	—	$	6,722	$	6,722
Contingent consideration	—		—		51,515		51,515
Total liabilities	$	—	$	—	$	58,237	$	58,237



	Fair value measurements as of December 31, 2016
(In thousands)	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Assets:
Money market funds	$	5,314	$	—	$	—	$	5,314
Common stock investments, available for sale	4,528		—		—		4,528
Common stock options/warrants	—		4,017		—		4,017
Forward contracts	—		39		—		39
Total assets	$	9,842	$	4,056	$	—	$	13,898
Liabilities:
Embedded conversion option	$	—	$	—	$	16,736	$	16,736
Contingent consideration	—		—		45,076		45,076
Total liabilities	$	—	$	—	$	61,812	$	61,812

The carrying amount and estimated fair value of our 2033 Senior Notes without the embedded conversion option, as well as the applicable fair value hierarchy tiers, are contained in the table below. The fair value of the 2033 Senior Notes is determined using a binomial lattice approach in order to estimate the fair value of the embedded derivative in the 2033 Senior Notes. Refer to Note 6.



	June 30, 2017
(In thousands)	Carrying Value		Total Fair Value		Level 1		Level 2		Level 3
2033 Senior Notes	$	28,036	$	29,804	$	—	$	—	$	29,804

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 June 30, 2017 and December 31, 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.

The following table reconciles the beginning and ending balances of our Level 3 assets and liabilities as of June 30, 2017:



	June 30, 2017
(In thousands)	Contingent consideration			Embedded conversion option
Balance at December 31, 2016	$	45,076		$	16,736
Total losses for the period:
Included in results of operations	6,738			(10,014		)
Foreign currency impact	4			—
Payments	(303		)	—
Balance at June 30, 2017	$	51,515		$	6,722

The estimated fair values of our financial instruments have been determined by using available market information and what we believe to be appropriate valuation methodologies. We use the following methods and assumptions in estimating fair value:

Contingent consideration – We estimate the fair value of the contingent consideration utilizing a discounted cash flow model for the expected payments based on estimated timing and expected revenues. We use several discount rates depending on each type of contingent consideration related to OPKO Diagnostics, CURNA, OPKO Health Europe and OPKO Renal transactions. If estimated future sales were to decrease by 10%, the contingent consideration related to OPKO Renal, which represents the majority of our contingent consideration liability, would decrease by $3.0 million. As of June 30, 2017, of the $51.5 million of contingent consideration, $5.1 million is recorded in Accrued expenses and $46.4 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.

Embedded conversion option – We estimate the fair value of the embedded conversion option related to the 2033 Senior Notes using a binomial lattice model. Refer to Note 6 for detail description of the binomial lattice model and the fair value assumptions used.