Stock-Based Compensation

9 Months Ended

Sep. 30, 2011

Disclosure of Share-based Compensation Arrangements by Share-based Payment Award

Stock-Based Compensation

The Company recorded $1.4 million and $1.3 million of stock-based compensation expense for the three months ended September 30, 2011 and 2010, respectively, and $4.4 million and $4.0 million of stock-based compensation expense for the nine months ended September 30, 2011 and 2010, respectively. The Company utilized the Black-Scholes valuation model for estimating the fair value of the stock compensation granted, with the following weighted-average assumptions for options granted in the nine months ended September 30, 2011 and 2010:



	Expected Volatility		Risk-free Interest Rate		Expected Term	Dividend Rate
September 30, 2011:
Employees	88	%	2.2	%	5	0%
Officers and non-employee directors	78	%	3.2	%	8	0%
September 30, 2010:
Employees	86	%	2.3	%	5	0%
Officers and non-employee directors	80	%	3.3	%	8	0%

The following is a summary of option activity under Lexicon’s stock-based compensation for the nine months ended September 30, 2011:



	Options		Weighted Average Exercise Price
	(in thousands)
Outstanding at December 31, 2010	19,598		$	3.46
Granted	2,972		1.80
Exercised	(130	)	1.46
Expired	(1,512	)	8.95
Forfeited	(277	)	1.78
Outstanding at September 30, 2011	20,651		2.85
Exercisable at September 30, 2011	13,375		$	3.44

During the nine months ended September 30, 2011, Lexicon granted its officers 200,277 shares of stock bonus awards in lieu of cash bonus awards. The stock bonus awards had a weighted average grant date fair value of $1.81 per share and vested immediately.

During the nine months ended September 30, 2011, Lexicon granted its employees restricted stock units in lieu of or in addition to annual stock option awards. These restricted stock units vest in four annual installments. The following is a summary of restricted stock units activity under Lexicon’s stock-based compensation plans for the nine months ended September 30, 2011:



	Shares		Weighted Average Grant Date Fair Value
	(in thousands)
Outstanding at December 31, 2010	—		$	—
Granted	2,196		1.81
Forfeited	(28	)	1.81
Nonvested at September 30, 2011	2,168		$	1.81

During 2010, Lexicon granted certain employees restricted stock units with a performance condition. The shares subject to the restricted stock units granted in 2010 vest upon the dosing of the first patient in a pivotal human clinical trial in any country, the results of which could be used to establish safety and efficacy of a pharmaceutical product discovered or developed by Lexicon as a basis for a New Drug Application. Stock-based compensation expense for awards with performance conditions is recognized over the period from the date the performance condition is determined to be probable of occurring through the time the applicable condition is met. The following is a summary of performance-based restricted stock units activity under Lexicon's stock-based compensation plans for the nine months ended September 30, 2011:



	Shares		Weighted Average Grant Date Fair Value
	(in thousands)
Outstanding at December 31, 2010	361		$	1.90
Forfeited	(11	)	1.90
Nonvested at September 30, 2011	350		$	1.90

- Definition

Tabular disclosure of components of a stock option or other award plan under which equity-based compensation is awarded to employees, typically comprised of the amount of unearned compensation (deferred compensation cost), compensation expense, and changes in the quantity and fair value of the shares (or other type of equity) granted, exercised, forfeited, and issued and outstanding pertaining to that plan. Disclosure may also include nature and general terms of such arrangements that existed during the period and potential effects of those arrangements on shareholders, effect of compensation cost arising from equity-based payment arrangements on the income statement, method of estimating the fair value of the goods or services received, or the fair value of the equity instruments granted, during the period, cash flow effects resulting from equity-based payment arrangements and, for registrants that accelerate vesting of out of the money share options, reasons for the decision to accelerate.

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