11. Stockholders' Equity

Equity Incentive Plan

We maintain an equity incentive plan (EIP) under which we may grant stock options to employees and non-employees. The EIP provides for the issuance of up to 29.9 million shares of our common stock. As of December 31, 2013, there were 10.0 million shares remaining for issuance under the EIP, of which approximately 9.9 million were reserved for issuance in connection with options granted to our Chief Executive Officer (CEO). 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 options granted to our CEO, which vest immediately upon grant in accordance with the terms of her employment agreement. The exercise price of stock option awards granted under the EIP 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-pricing models, including the Black-Scholes-Merton model, require the use of judgment and subjective assumptions that can materially impact the estimation of fair value and share-based compensation.

Inputs included in estimating the fair value of a stock option include the price of our common stock, 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, requiring estimates, used in determining 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 the volatility of the price of our common stock 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 given stock option grant.

Expected term—The expected term reflects the estimated time period we expect an option grant to remain outstanding. We use historical data to develop this input.

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,

	2013			2012
Expected volatility		33.0	%		41.6	%
Risk-free interest rate		1.8	%		0.7	%
Expected term of options (in years)		5.0			5.0
Expected 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, 2013	4,551,050		$	38.95
Granted	1,000,000			113.08
Exercised	(797,613	)		30.12
Forfeited	(3,988	)		10.48
Outstanding and exercisable at December 31, 2013	4,749,449		$	56.06	5.7	$	270,801

The weighted average fair value of an employee stock option granted during each of the years in the three-year period ended December 31, 2013, was $36.10, $19.74 and none, respectively. The total fair value of vested employee stock options for each of the years in the three-year period ended December 31, 2013 was $36.1 million, $3.0 million and $1.6 million, respectively.

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

	Year Ended December 31,

	2013			2012			2011
Research and development	$	—		$	—		$	196
Selling, general and administrative		36,097			3,024			315


Share-based compensation expense before taxes		36,097			3,024			511
Related income tax benefit		(13,566	)		(1,115	)		(189	)


Share-based compensation expense, net of taxes	$	22,531		$	1,909		$	322




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

As of December 31, 2013, 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,

	2013		2012		2011
Number of options exercised		876,115		575,944		837,690
Cash received from options exercised	$	26,620	$	14,290	$	24,398
Total intrinsic value of options exercised	$	37,530	$	15,508	$	30,644
Tax benefits realized from options exercised	$	9,299	$	3,054	$	11,347

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. 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, which began in September 2012, occur in consecutive six-month periods commencing on September 5th and March 5th of each year. During the year ended December 31, 2013, we issued 55,070 shares of our common stock in exchange for $2.7 million in employee contributions. Eligible employees may contribute up to 15 percent of their base salary, subject to certain annual limitations as defined in the ESPP. The purchase price of the shares is equal to the lower of 85 percent of the closing price of our common stock on either the first or last trading day of a given offering period. In addition, the ESPP provides that no eligible employee may purchase more than 4,000 shares during any offering period. The ESPP has a 20-year term and limits the aggregate number of shares that can be issued to 3.0 million.

Related share-based compensation expense for years ended December 31, 2013, 2012 and 2011 was $802,800, $240,100 and none, respectively. We estimate the fair value of the option to purchase shares of our common stock under the ESPP using the same methodology that we employ in valuing our stock options and STAP awards.

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,

	2013		2012		2011
Numerator:
Income from continuing operations	$	174,560	$	304,442	$	217,243
Income from discontinued operations		—		—		625


Net income	$	174,560	$	304,442	$	217,868




Denominator:
Weighted average outstanding shares—basic		50,076		52,093		57,163
Effect of dilutive securities(1):
Convertible notes		1,736		218		569
Warrants		276		—		263
Stock options and employee stock purchase plan		1,143		969		1,400


Weighted average shares—diluted		53,231		53,280		59,395




Earnings per common share:
Basic
Continuing operations	$	3.49	$	5.84	$	3.80
Discontinued operations		0.00		0.00		0.01


Net income per basic common share	$	3.49	$	5.84	$	3.81




Diluted
Continuing operations	$	3.28	$	5.71	$	3.66
Discontinued operations		0.00		0.00		0.01


Net income per diluted common share	$	3.28	$	5.71	$	3.67




Stock options and warrants excluded from calculation(2)		11,210		11,862		16,299

(1): Calculated using the treasury stock method.
(2): Certain stock options and warrants have been excluded from the computation of diluted earnings per share because their impact would be anti-dilutive.

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 in July 2012. We acquired an aggregate of approximately 2.0 million shares of our common stock under the 2012 Repurchase Program, which was completed in November 2012.

In February 2013, our Board of Directors authorized a share repurchase program for up to $420.0 million in aggregate repurchases of our common stock in open market or privately negotiated transactions, at our discretion over a one-year period which began March 4, 2013 (the 2013 Repurchase Program). As of December 31, 2013, we have acquired 708,998 shares of our common stock at an aggregate cost of $42.4 million. On January 30, 2014, our Board of Directors authorized the extension of the 2013 Repurchase Program through March 3, 2015.

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, 2013, we have not issued any shares of our Series A Preferred Stock.