10. Stockholders' Equity

Equity Incentive Plan

We maintain an equity incentive plan (EIP) under which we may grant stock options. The EIP provides for the issuance of up to 29.9 million shares of our common stock. As of December 31, 2012, there were 11.0 million shares remaining for issuance under the EIP, of which approximately 10.9 million were reserved for issuance to our Chief Executive Officer. If granted, options awarded under the EIP are nontransferable, carry a maximum contractual term of ten years and typically vest in equal annual increments over a maximum period of three years, except for awards to our CEO, which vest immediately upon grant in accordance with the terms of her employment agreement. The exercise price of related stock-option awards can be no less than the fair market value of our common stock on the date of grant. Historically, we have issued new shares of our common stock upon the exercise of options.

Employee Stock Options

We estimate the fair value of stock options using the Black-Scholes-Merton valuation model. Option valuation models, including Black-Scholes-Merton, require the input of highly subjective assumptions that can materially impact the estimation of fair value and related compensation expense. These assumptions include the expected volatility of our common stock, risk-free interest rate, the expected term of stock option awards, expected forfeiture rate and the expected dividend yield.

A description of the key inputs used in estimating the fair value of stock options is provided below:

Expected volatility—Volatility is a measure of the amount the price of our common stock has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. We use historical volatility based on weekly price observations of our common stock during the period immediately preceding a stock option grant that is equal to the expected term of the grant (up to a maximum of five years). We believe volatility in the price of our common stock as measured over the preceding five years provides a reliable projection of future long-term volatility.

Risk-free interest rate—The risk-free interest rate is the average interest rate consistent with the yield available on a U.S. Treasury note with a term equal to the expected term of a stock option grant.

Expected term—The expected term reflects an estimation of the time period we expect an option grant to remain outstanding. We use the simplified method in developing an estimate of the expected term.

Expected forfeiture rate—The expected forfeiture rate is the estimated percentage of options granted that are expected to be forfeited or canceled on an annual basis prior to becoming fully vested. We derive our estimate based on historical forfeiture experience for similar classes of employees.

Expected dividend yield—We do not pay dividends on our common stock and do not expect to do so in the future. Therefore, the dividend yield is assumed to be zero.

The following weighted-average assumptions were used in estimating the fair value of stock options granted to employees (we did not grant any stock options during the year ended December 31, 2011):

	Year Ended December 31,

	2012			2010
Expected volatility		41.6	%		45.4	%
Risk-free interest rate		0.7	%		2.1	%
Expected term of options (in years)		5.0			5.1
Forfeiture rate		0.0	%		0.0	%
Expected dividend yield		0.0	%		0.0	%

A summary of the status and activity of employee stock options is presented below:

			Weighted- Average Exercise Price			Aggregate Intrinsic Value (in 000s)

Outstanding at January 1, 2012	4,923,377		$	36.98
Granted	153,225			53.42
Exercised	(519,552	)		24.89
Forfeited	(6,000	)		7.58

Outstanding and exercisable at December 31, 2012	4,551,050		$	38.95	5.2	$	71,162

The weighted average fair value of employee stock options granted during the years ended December 31, 2012, 2011 and 2010, was $19.74, none and $26.14, respectively. The total fair value of vested employee stock options was $3.0 million, $1.6 million and $29.0 million for the years ended December 31, 2012, 2011 and 2010, respectively.

Total share-based compensation expense relating to employee stock options is as follows (in thousands):

	Year Ended December 31,

	2012			2011			2010
Research and development	$	—		$	196		$	3,087
Selling, general and administrative		3,024			315			19,265

Share-based compensation expense before taxes		3,024			511			22,352
Related income tax benefit		(1,115	)		(189	)		(8,226	)

Share-based compensation expense, net of taxes	$	1,909		$	322		$	14,126

Share-based compensation capitalized as part of inventory	$	—		$	15		$	290

As of December 31, 2012, all employee stock options were fully vested; consequently, there were no amounts of unrecognized compensation cost remaining.

Employee and non-employee stock option exercise data is summarized below (dollars in thousands):

	Year Ended December 31,

	2012		2011		2010
Number of options exercised		575,944		837,690		3,335,114
Cash received from options exercised	$	14,290	$	24,398	$	85,427
Total intrinsic value of options exercised	$	15,508	$	30,644	$	102,905
Tax benefits realized from options exercised	$	3,054	$	11,347	$	23,826

Employee Stock Purchase Plan

In June 2012, our shareholders approved the United Therapeutics Corporation Employee Stock Purchase Plan (ESPP), which has been structured to comply with Section 423 of the Internal Revenue Code of 1986. The ESPP provides eligible employees the right to purchase shares of our common stock at a discount through elective accumulated payroll deductions at the end of each offering period. Offering periods occur in consecutive six-month periods commencing on September 5th and March 5th of each year. The initial six-month offering period began on September 5, 2012. Eligible employees may contribute up to 15 percent of their base salary, subject to certain annual limitations as defined in the ESPP, to purchase shares of our common stock. The purchase price of the shares is equal to 85 percent of the closing price of our common stock on either the first or last trading day of a given offering period, whichever is lower. In addition, the ESPP provides that no eligible employee may purchase more than 4,000 shares of our common stock during any offering period. The ESPP has a twenty-year term and limits the aggregate number of shares that can be issued to 3.0 million.

Related share-based compensation expense for the year ended December 31, 2012 was $240,100. We estimate the fair value of the shares of our common stock to be purchased under the ESPP using the Black-Scholes-Merton model, which requires us to make subjective judgments in developing inputs that could materially impact share-based compensation expense.

The weighted average assumptions used to estimate the fair value of the shares to be purchased under our ESPP are as follows:



Expected volatility	29.0	%
Risk-free interest rate	0.1	%
Expected term (in years)	0.5
Expected dividend yield	0.0	%
Expected forfeiture rate	4.6	%

Earnings per Share

The components of basic and diluted earnings per share are as follows (in thousands, except per share amounts):

	Year Ended December 31,

	2012		2011		2010
Numerator:
Income from continuing operations	$	304,442	$	217,243	$	111,206
Income (loss) from discontinued operations		—		625		(5,290	)

Net income	$	304,442	$	217,868	$	105,916

Denominator:
Weighted average outstanding shares—basic		52,093		57,163		56,142
Effect of dilutive securities(1):
Convertible Senior Notes		218		569		2,131
Warrants		—		263		—
Stock options		969		1,400		1,243

Weighted average shares—diluted		53,280		59,395		59,516

Earnings per common share:
Basic
Continuing operations	$	5.84	$	3.80	$	1.98
Discontinued operations	$	0.00	$	0.01	$	(0.09	)

Net income per basic common share	$	5.84	$	3.81	$	1.89

Diluted
Continuing operations	$	5.71	$	3.66	$	1.87
Discontinued operations	$	0.00	$	0.01	$	(0.09	)

Net income per diluted common share	$	5.71	$	3.67	$	1.78

Stock options and warrants excluded from calculation(2)		11,862		16,299		13,532

(1): Calculated using the treasury stock method.
(2): Certain stock options and shares associated with our convertible senior notes, convertible note hedge and warrants have been excluded from the calculation as their impact would be antidilutive.

Share Repurchases

In October 2011, our Board of Directors approved a share repurchase program authorizing up to $300.0 million in aggregate repurchases of our common stock at our discretion, over a two-year period ending in October 2013 (Repurchase Program). In connection with the Repurchase Program, we paid $212.0 million for an accelerated share repurchase agreement (ASR) entered into with DB London in October 2011, under which we repurchased approximately 4.7 million shares of our common stock in October 2011. In May 2012, we completed the Repurchase Program by acquiring approximately 2.0 million shares of our common stock at an aggregate cost of $88.0 million.

In June 2012, our Board of Directors authorized the repurchase of up to an additional $100.0 million of our common stock (2012 Repurchase Program). The 2012 Repurchase Program became effective for a one-year period beginning July 31, 2012. In November 2012, we completed the 2012 Repurchase Program by acquiring approximately 2.0 million shares of our common stock at an aggregate cost of $100.0 million.

On February 4, 2013, we announced that our Board of Directors authorized a new share repurchase program for up to $420.0 million in aggregate repurchases of our common stock in open market or privately negotiated transactions from time to time at our discretion. The repurchase authorization will become effective over a one-year period beginning on March 4, 2013.

Shareholder Rights Plan

In June 2008, we entered into an Amended and Restated Rights Agreement with The Bank of New York as Rights Agent (the Plan), which amended and restated our original Rights Agreement dated December 17, 2000. The Plan, as amended and restated, extended the expiration date of the Preferred Share Purchase Rights (Rights) from December 29, 2010 to June 26, 2018, and increased the purchase price of each Right from $64.75 to $400.00, respectively. Each Right entitles holders to purchase one one-thousandth of a share of our Series A Junior Participating Preferred Stock. Rights are exercisable only upon our acquisition by another company, or commencement of a tender offer that would result in ownership of 15 percent or more of the outstanding shares of our voting stock by a person or group (as defined under the Plan) without our prior express written consent. As of December 31, 2012, we have not issued any shares of our Series A Preferred Stock.