8. Stock-Based Compensation

Equity Incentive Plans

In May 2012, the Company adopted the 2012 Equity Incentive Plan (2012 Plan). The number of shares of the Company's common stock available for issuance under the 2012 Plan is equal to 6,500,000 shares plus up to 12,667,411 additional shares that may be added to the 2012 Plan in connection with the forfeiture, repurchase, cash settlement or termination of awards outstanding under the 2004 Equity Incentive Plan (2004 Plan), the 2008 New Employee Equity Incentive Plan, the 1997 Stock Plan and the Long-Term Stock Option Plan (collectively, the "Prior Plans") as of December 31, 2011. While a maximum of 12,667,411 shares could be added to the 2012 Plan from the Prior Plans, since this assumes that all the awards outstanding on December 31, 2011 will be forfeited, repurchased, cash settled or terminated, the actual number to be added to the 2012 Plan share reserve may be less. The Company reserved 6,500,000 shares of common stock for issuance under the 2012 Plan. No additional awards have been or will be made after May 15, 2012 under the 2004 Plan. Stock options and SARs will reduce the 2012 Plan reserve by one share for every share granted, and stock awards other than options and SARs granted will reduce the 2012 Plan share reserve by 1.45 shares for every share granted. The 2012 Plan share reserve was also reduced by the number of stock awards granted under the 2004 Plan on or after January 1, 2012, using the same ratios described. As of December 31, 2012, approximately 5,023,370 shares remained available for issuance under the 2012 Plan.

The 2012 Plan provides for the grant of incentive stock options, nonstatutory stock options, restricted stock awards, stock unit awards and stock appreciation rights ("SARs") to employees, non-employee directors and consultants of the Company. Stock options may be granted with an exercise price not less than the fair market value of the common stock on the grant date. Stock options granted to employees generally have a maximum term of 10 years and vest over a four year period from the date of grant; 25% vest at the end of one year, and 75% vest monthly over the remaining three years. The Company may grant options with different vesting terms from time to time. Unless an employee's termination of service is due to disability or death, upon termination of service, any unexercised vested options will be forfeited at the end of three months or the expiration of the option, whichever is earlier.

Employee Stock Purchase Plan

Under the 2004 Employee Stock Purchase Plan (ESPP), the Company's non-officer employees may purchase common stock through payroll deductions at a price equal to 85 percent of the lower of the fair market value of the stock at the beginning of the offering period or at the end of each applicable purchase period. The ESPP provides for consecutive and overlapping offering periods of 24 months in duration, with each offering period composed of four consecutive six-month purchase periods. The purchase periods end on either May 15^th or November 15^th. ESPP contributions are limited to a maximum of 15 percent of an employee's eligible compensation.

The Company's ESPP plan also includes a feature that provides for a new offering period to begin when the fair market value of the Company's common stock on any purchase date during an offering period falls below the fair market value of the Company's common stock on the first day of such offering period. This feature is called a reset. The Company had resets for new twenty-four month offering periods starting on May 16, 2008, November 16, 2008, May 16, 2010, November 16, 2011, May 16, 2012 and November 16, 2012. The Company applied modification accounting to determine the incremental fair value associated with the ESPP resets and recognized the related incremental stock- based compensation expense.

As of December 31, 2012, a total of 2,025,000 shares of common stock were approved and authorized for issuance under the ESPP. Through December 31, 2012, the Company had issued 1,601,425 shares under the ESPP at an average price of $10.75 per share. As of December 31, 2012, total shares remaining available for issuance under the ESPP were 423,575.

Performance-Contingent Restricted Stock Awards

In 2012, the Compensation Committee of the Company's Board of Directors approved the grant of 44,500 performance-contingent RSAs to senior management. These awards have dual triggers of vesting based upon the achievement of one of three possible performance goals by December 31, 2013, as well as a requirement for continued employment through early 2016. As of December 31, 2012, one of the performance goals had been deemed achieved and time-based vesting commenced with respect to these awards. As a result, compensation expense of $0.4 million was recognized in 2012, and the remaining unrecognized expense will be recognized over the remaining vesting period using the graded vesting expense attribution method.

In 2011, the Compensation Committee of the Company's Board of Directors approved the grant of 1,290,000 performance-contingent RSAs to senior management. These awards have dual triggers of vesting based upon the achievement of certain performance conditions over a six-year timeframe from 2011-2016 and continued employment, both of which must be satisfied in order for the RSAs to vest. Expense associated with these RSAs would be recognized, if at all, during these years depending on the probability of meeting the performance conditions. The maximum potential expense associated with the RSAs could be up to approximately $31.9 million (allocated as $6.3 million for research and development expense and $25.6 million for general and administrative expense) if all of the performance conditions are achieved on time. As of December 31, 2012, the Company had determined that the achievement of the requisite performance conditions was not probable and, as a result, no compensation expense has been recognized. As the RSAs are dependent upon the achievement of certain performance conditions, the expense associated with the RSAs may vary significantly from period to period.

In 2011, the Compensation Committee of the Company's Board of Directors approved the grant of a 25,000 performance-contingent RSA to a non-executive officer that has dual triggers of vesting based upon the achievement of a performance condition over a timeframe from 2012-2013 and continued employment through 2014, both of which must be satisfied in order for the award to vest in full. The maximum potential expense associated with this award is approximately $475,000, which would be recognized in increments based on the achievement of the performance condition. As of December 31, 2012, the Company had determined that the achievement of the requisite performance condition was not probable and, as a result, no compensation expense has been recognized. As the vesting of the RSAs is contingent upon the achievement of the performance condition, the expense associated with the RSA may vary significantly from period to period.

Performance-Contingent Restricted Stock Units

In 2010, the Compensation Committee of the Company's Board of Directors approved the grant of 210,000 performance-contingent RSUs to senior management. These awards have dual triggers of vesting based upon the successful achievement of certain corporate operating milestones during 2010 and 2011, as well as a requirement for continued employment through early 2014. As of February 11, 2011, both performance milestones had been deemed achieved, and time-based vesting commenced with respect to all of the performance-contingent RSU shares. As a result, compensation expense was $0.3 million in 2012 and $ 1.3 million in 2011, and the remaining unrecognized expense will be recognized over the remaining vesting period using the graded vesting expense attribution method.

Director Compensation Program

Non-employee directors of the Company receive compensation for services provided as a director. Each member of the Company's Board who is not an employee receives an annual retainer as well as a fee for each board and committee meeting attended. Commencing on April 27, 2011, chairpersons of the various committees of the Board, the Audit Committee, the Compensation Committee, Nominating/Corporate Governance Committee and the Science and Technology Advisory Committee receives a fixed retainer. The lead independent director also receives a fixed retainer.

Each of the Company's independent directors receives periodic automatic grants of equity awards under a program implemented under the 2004 Plan. These grants are non-discretionary. Only independent directors of the Company or affiliates of such directors are eligible to receive automatic grants under the 2004 Plan. Under the program, as amended in July 2010, each individual who first becomes an independent director will, on the date such individual joins the Board, automatically be granted (i) a one-time grant of RSUs covering 6,000 shares of the Company's common stock and (ii) a one-time nonstatutory stock option grant covering 6,000 shares of the Company's common stock.

These initial equity grants vest monthly over the director's first two years of service. In addition, on the date of joining the Board, the new director will also receive the standard annual equity awards (if joining on the date of the Company's Annual Meeting of Stockholders) or pro-rated annual equity awards (if joining on any other date). The pro-ration is based upon the number of months of service the new board member will provide during the 12-month period ending on the one-year anniversary of the most recent annual meeting of stockholders. Annually, upon his or her re-election to the Board at the Annual Meeting of Stockholders, each independent director is automatically granted both an RSU covering 6,000 shares of the Company's common stock and a nonstatutory stock option covering 6,000 shares of the Company's common stock. These standard annual equity awards vest monthly over the twelve month period of service following the date of grant. In addition, all automatic equity awards vest in full if the Company is subject to a change in control or the Board member dies while in service.

Stock-Based Compensation Expense

The allocation of stock-based compensation expense included in the consolidated statements of operations was as follows:

	Year Ended December 31,

(in thousands)	2012		2011		2010
Research and development	$	13,667	$	13,422	$	10,322
General and administrative		10,116		11,494		8,687

Total stock-based compensation expense	$	23,783	$	24,916	$	19,009

Stock-based compensation expense included in the consolidated statements of operations by award type was as follows:

	Year Ended December 31,

(in thousands)	2012		2011		2010
Employee stock options	$	3,417	$	4,528	$	7,003
Employee RSUs		11,546		13,290		9,783
Employee RSAs		7,968		5,498		398
Non-employee options and RSUs		—		307		1,186
ESPP		852		1,293		639

Total stock-based compensation expense	$	23,783	$	24,916	$	19,009

Total stock-based compensation expense capitalized to inventory was $0.4 million for the year ended December 31, 2012, and none for each of the years ended December 31, 2011 and 2010.

In connection with the retirement of the Company's former chairman of the Board of Directors in April 2010, the Company entered into a consulting agreement that provided for, among other things, the acceleration of an RSU that was scheduled to vest through April 2012 and an extension of the period of time in which vested stock options may be exercised until to the stated expiration date of the stock options. As a result of the stock option modification, the Company recorded an expense of $0.9 million in June 2010.

As of December 31, 2012, the unrecognized stock-based compensation cost, net of expected forfeitures, and the estimated weighted-average amortization period, using the straight-line attribution method, was as follows:

(in thousands, except amortization period)	Unrecognized Compensation Cost

Stock options	$	6,442	2.6
RSUs		14,027	2.1
RSAs		23,525	3.5

Total unrecognized stock-based compensation expense	$	43,994

Compensation Awards

The following table summarizes equity award activity under the 2008 Plan and the 2004 Plan, and related information:

(in thousands, except per share data)			Weighted- average Exercise Price of Outstanding Options				Weighted- average Fair Value per Share at Grant				Weighted- average Fair Value per Share at Grant

Balance at December 31, 2009	8,414		$	16.63	2,042		$	14.15	57		$	25.87
Granted	321			14.90	1,170			10.55	—			—
Exercised	(784	)		9.60	—			—	—			—
Released RSUs/RSAs	—			—	(657	)		13.20	(24	)		25.55
Forfeited	(297	)		26.17	(658	)		26.26	—			—

Balance at December 31, 2010	7,654			16.91	1,897			12.45	33			26.10
Granted	629			21.98	471			24.96	2,483			24.61
Exercised	(1,265	)		8.87	—			—	—			—
Released RSUs/RSAs	—			—	(797	)		13.89	(74	)		24.96
Forfeited	(127	)		29.15	(29	)		15.35	—			—

Balance at December 31, 2011	6,891			18.62	1,542			15.47	2,442			24.62
Granted	335			21.91	528			18.45	447			18.11
Exercised	(947	)		7.98	—			—	—			—
Released RSUs/RSAs	—			—	(752	)		14.19	(388	)		24.77
Forfeited	(159	)		24.43	(78	)		18.48	—			—

Balance at December 31, 2012	6,120			20.30	1,240			17.32	2,501			23.43

As of December 31, 2012, the aggregate intrinsic value of the options outstanding was $30.0 million and the aggregate intrinsic value of the options exercisable was $28.1 million.

The total intrinsic value of the options exercised was $15.2 million in 2012, $17.1 million in 2011, and $7.2 million in 2010. The total estimated fair value of options vested was $4.1 million in 2012, $6.4 million in 2011, and $8.2 million in 2010.

Valuation Assumptions

The Company based the range of weighted-average estimated values of employee stock option grants and rights granted under the employee stock purchase plan, as well as the weighted-average assumptions used in calculating these values, on estimates at the date of grant, as follows:

	Year Ended December 31,

	2012	2011	2010
*Employee stock options*
Risk-free interest rate	0.74% - 1.17%	1.10% - 2.57%	1.11% - 2.82%
Expected life (in years)	5 - 6	5 - 6	5 - 6
Volatility	55% - 60%	49% - 55%	48% - 52%
Dividend yield	—%	—%	—%
Weighted-average estimated fair value of stock options granted	$11.50	$11.11	$7.41
*Employee stock purchase plan issuances*
Risk-free interest rate	0.14% - 0.29%	0.05% - 0.54%	0.19% - 0.79%
Expected life (in years)	0.5 - 2	0.5 - 2	0.5 - 2
Volatility	51% - 64%	48% - 59%	50% - 69%
Dividend yield	—%	—%	—%
Weighted-average estimated fair value of ESPP issuances	$8.07	$9.46	$7.63

Range of Stock Option Exercise Prices

As of December 31, 2012, all outstanding options to purchase common stock of the Company are summarized in the following table (in thousands, except years and per share data):

	Options Outstanding						Options Exercisable

Range of Exercise Prices	Number Outstanding		Weighted- average Remaining Contractual Life in Years		Weighted- average Exercise Prices		Options Exercisable		Weighted- average Remaining Contractual Life in Years		Weighted- average Exercise Price
$3.10		191		0.8	$	3.10		191		0.8	$	3.10
$6.15 - $6.70		25		5.9		6.15		25		5.9		6.15
$9.69		1,140		1.3		9.69		1,140		1.3		9.69
$9.70 - $16.00		839		4.1		14.71		768		3.8		14.87
$16.01 - $19.80		1,228		4.5		18.17		956		3.3		18.13
$19.81 - $24.71		594		7.2		22.16		316		5.7		22.38
$24.72 - $29.70		1,124		4.1		28.29		1,038		3.6		28.42
$29.71 - $35.46		979		4.1		33.52		979		4.1		33.52

Total		6,120		3.8		20.30		5,413		3.2		20.31