Stock-Based Compensation and Stockholders' Net Capital Deficiency

9 Months Ended

Sep. 30, 2011

Stock-Based Compensation and Stockholders' Net Capital Deficiency

Stock-Based Compensation and Stockholders' Net Capital Deficiency

10. Stock-Based Compensation and Stockholders’ Net Capital Deficiency

Equity Incentive Plan

The 2004 Plan provides for the granting of stock options, stock appreciation rights, RSUs and RSAs to employees, officers, directors and consultants of the Company. Stock options may be granted with an exercise price not less than 100% of the fair market value of the common stock on the date of grant. As of September 30, 2011, total shares remaining available for issuance under the 2004 Plan were 2,123,027.

Employee Stock Purchase Plan

As of September 30, 2011, a total of 2,025,000 shares of common stock were approved and authorized for issuance under the Employee Stock Purchase Plan (ESPP).

Stock-Based Compensation Expense

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

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2011		2010		2011		2010
Research and development	$	3,510	$	2,564	$	10,021	$	7,709
General and administrative	3,380		1,933		8,685		6,607
Total	$	6,890	$	4,497	$	18,706	$	14,316

As of September 30, 2011, unrecognized compensation expense was as follows: $7.9 million related to unvested stock options; $21.2 million related to unvested RSUs; and $25.2 million related to unvested RSAs.

Compensation Awards

The Company granted the following compensation awards:

	Nine Months Ended September 30, 2011			Nine Months Ended September 30, 2010
	Number of Compensation Awards Granted	Weighted Average Exercise Price/Fair Value		Number of Compensation Awards Granted	Weighted Average Exercise Price/ Fair Value
2004 Plan
Stock options	582,250	$	22.06	167,000	$	15.95
RSUs time-based	465,000	25.03		945,542	10.48
RSAs time-based	1,168,000	24.59		—	—
RSUs performance-contingent(1)	—	—		210,000	10.12
RSAs performance-contingent(2)	1,315,000	24.26		—	—
2008 Plan
Stock options	—	$	—	110,000	$	10.95

(1) These performance-contingent RSUs awarded to senior management in 2010 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 had commenced with respect to all of the performance-contingent RSU shares.

(2) During the first quarter of 2011, the Company granted special long-term retention and incentive equity awards to executive officers and certain employees. The vesting of these awards is tied to the achievement of certain performance targets over a six-year timeframe from 2011 through December 31, 2016 and continued employment, both of which must be satisfied in order for vesting to occur. The maximum potential expense associated with this program is $31.9 million, which if achieved would be allocated as $6.3 million for research and development expense and $25.6 million for general and administrative expense and recognized in increments based on achievement of the performance conditions. During the third quarter of 2011, the Company granted an incentive equity award to a non-executive officer that has dual triggers of vesting based upon the achievement of a performance target over a timeframe from 2011-2013 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 if achieved would be allocated to research and development expense and recognized in increments based on achievement of the performance conditions. As of September 30, 2011, the Company determined that the achievement of the performance conditions under these awards was not probable, and as a result, no compensation expense has been recognized. Management believes that the likelihood of achieving all of the performance targets under these awards is remote.

Valuation Assumptions

The range of weighted average assumptions used to estimate the fair value of stock options granted was as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Employee stock options
Risk-free interest rate	1.20%-2.17		%	2.00%-2.12		%	1.20%-2.57		%	2.00%-2.82		%
Expected term (in years)	6			6			5-6			5-6
Volatility	0.53			0.49			0.49-0.55			0.48-0.52
Dividend yield	—		%	—		%	—		%	—		%
Weighted average estimated fair value of stock options granted	$	9.74		$	6.45		$	11.15		$	7.02

Stockholders’ net capital deficiency

For the nine months ended September 30, 2011, 1,141,544 shares were exercised at a weighted average exercise price of $8.89 per share for a total of $10.1 million.