Stock-Based Compensation

6 Months Ended

Jun. 30, 2012

Stock-Based Compensation

Stock-Based Compensation

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 Company expects the actual number to be added to the 2012 Plan share reserve to be less. Upon adoption of the 2012 Plan the Company reserved 6,500,000 shares of common stock for issuance under the 2012 Plan. The 2012 Plan reserve was also reduced by the number of stock awards granted under the 2004 Plan on or after January 1, 2012. 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 June 30, 2012, total shares remaining available for issuance under the 2012 Plan were 5,037,262.

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

As of June 30, 2012, a total of 2,025,000 shares of common stock were approved and authorized for issuance under the ESPP. Through June 30, 2012, the Company issued 1,548,023 shares under the ESPP at an average price of $10.53 per share. As of June 30, 2012, total shares remaining available for issuance under the ESPP were 476,977.

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 June 30,				Six Months Ended June 30,
(in thousands)	2012		2011		2012		2011
Research and development	$	3,541	$	3,379	$	7,070	$	6,511
General and administrative	2,438		2,896		5,144		5,305
Total stock-based compensation expense	$	5,979	$	6,275	$	12,214	$	11,816

As of June 30, 2012, unrecognized compensation expense, net of expected forfeitures, was as follows: $6.8 million related to unvested stock options; $19.8 million related to unvested RSUs; and $27.1 million related to unvested RSAs (excludes performance-contingent RSAs).

Compensation Awards

The Company granted the following compensation awards:

	Six Months Ended June 30, 2012			Six Months Ended June 30, 2011
	Number of Compensation Awards Granted	Weighted- Average Exercise Price/Fair Value		Number of Compensation Awards Granted	Weighted- Average Exercise Price/Fair Value
2004 and 2012 Plans
Stock options	198,000	$	20.01	307,500	$	24.56
RSUs time-based	528,381	18.45		465,000	25.03
RSAs time-based	402,500	18.11		1,148,000	24.70
RSAs performance-contingent(1)	44,500	18.11		1,290,000	24.73

(1)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 grants 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 June 30, 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 February 2012, the Compensation Committee of the Company’s Board of Directors approved the grant of 44,500 performance-contingent RSAs to senior management. These grants are subject to forfeiture unless one of three possible performance goals is achieved by December 31, 2013. As of June 30, 2012, the Company had determined that the achievement of one of three possible performance conditions was not probable and, as a result, no compensation expense has been recognized.

Valuation Assumptions

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Employee stock options
Risk-free interest rate	0.74%-1.10		%	1.94%-2.57		%	0.74%-1.17		%	1.94%-2.57		%
Expected term (in years)	5-6			5-6			5-6			5-6
Volatility	55%-60		%	53%-55		%	55%-60		%	49%-55		%
Dividend yield	—		%	—		%	—		%	—		%
Weighted-average estimated fair value of stock options granted	$	11.11		$	13.09		$	10.37		$	12.41

The range of weighted-average assumptions used to estimate the fair value of employee stock purchase plan awards was as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
Employee stock purchase plan issuances
Risk-free interest rate	0.15%-0.29		%	0.07%-0.54		%	0.15%-0.29		%	0.07%-0.54		%
Expected term (in years)	0.5-2.0			0.5-2.0			0.5-2.0			0.5-2.0
Volatility	55%-64		%	48%-50		%	55%-64		%	48%-50		%
Dividend yield	—		%	—		%	—		%	—		%
Weighted-average estimated fair value of ESPP issuances	$	9.00		$	9.25		$	9.00		$	9.25

Stockholders’ Equity

For the six months ended June 30, 2012, approximately 349,538 shares were exercised at a weighted-average exercise price of $7.99 per share, for total cash proceeds of approximately $2,792,007.