11. Stockholders' Equity

Equity Incentive Plans

As of December 31, 2015, we have two shareholder-approved equity incentive plans: the United Therapeutics Corporation Amended and Restated Equity Incentive Plan (the 1999 Plan) and the United Therapeutics Corporation 2015 Stock Incentive Plan (the 2015 Plan). Although the terms of the 1999 Plan and the 2015 Plan contemplate a variety of awards, to date all awards granted under these plans have been in the form of stock options. The 2015 Plan was approved by our shareholders in June 2015 and provides for the issuance of up to 6,150,000 shares of our common stock pursuant to awards granted under the 2015 Plan. During the year ended December 31, 2015, we granted zero stock options under the 1999 plan and 172,250 stock options under the 2015 Plan. During the year ended December 31, 2014, we granted 723,869 stock options under the 1999 Plan. No further awards will be granted under the 1999 Plan.

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:

	Year Ended December 31,
	2015		2014
Expected volatility		33.1%		32.6%
Risk-free interest rate		2.0%		1.7%
Expected term of options (in years)		5.8		5.0
Expected forfeiture rate		1.5%		0.0%
Expected dividend yield		0.0%		0.0%

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

	Options			Weighted- Average Exercise Price		Weighted Average Remaining Contractual Term (in Years)		Aggregate Intrinsic Value (in 000s)
Outstanding at January 1, 2015		4,054,771		$	76.83
Granted		172,250			173.25
Exercised		(984,583	)		39.90
Forfeited		—			—

Outstanding at December 31, 2015		3,242,438		$	93.17		6.6	$	208,643


Exercisable at December 31, 2015		3,070,188		$	88.68		6.4	$	208,559


Expected to vest at December 31, 2015		169,737		$	173.53		9.5	$	73

The weighted average fair value of an employee stock option granted during each of the years in the three-year period ended December 31, 2015, was $60.70, $40.70 and $36.10, respectively. The total fair value of employee stock options that vested for each of the years in the three-year period ended December 31, 2015 was $0.0 million, $29.5 million and $36.1 million, respectively.

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

	Year Ended December 31,
	2015			2014			2013
Research and development	$	3		$	—		$	—
Selling, general and administrative		4,894			29,460			36,097
Related income tax benefit		(1,847	)		(10,429	)		(13,566	)

Share-based compensation expense, net of taxes	$	3,050		$	19,031		$	22,531

As of December 31, 2015, the unrecognized compensation cost was $5.4 million. As of December 31, 2014, 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,
	2015		2014		2013
Number of options exercised		985,583		1,462,369		876,115
Cash received from options exercised	$	39,311	$	50,168	$	26,619
Total intrinsic value of options exercised	$	120,319	$	108,425	$	37,530
Tax benefits realized from options exercised	$	37,426	$	30,845	$	9,299

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. 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.

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 Common Share

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period, adjusted for the potential dilutive effect of other securities if such securities were converted or exercised.

The components of basic and diluted earnings per share comprised the following (in thousands, except per share amounts):

	Year Ended December 31,
	2015		2014		2013
Numerator:
Net income	$	651,639	$	340,074	$	174,560


Denominator:
Weighted average outstanding shares—basic		46,000		48,176		50,076
Effect of dilutive securities(1):
Convertible notes		915		2,630		1,736
Warrants		3,009		1,910		276
Stock options and employee stock purchase plan		1,297		1,439		1,143

Weighted average shares—diluted		51,221		54,155		53,231


Earnings per common share:
Basic	$	14.17	$	7.06	$	3.49


Diluted	$	12.72	$	6.28	$	3.28


Stock options and warrants excluded from calculation(2)		3,800		9,273		11,210


(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. Under our convertible note hedge agreement, we are entitled to receive shares required to be issued to investors upon conversion of our Convertible Notes. Since related shares used to compute dilutive earnings per share would be anti-dilutive, they have been excluded from the calculation above.

Share Repurchases

In June 2014, our Board of Directors authorized the repurchase of up to $500.0 million of our common stock. This program became effective on August 1, 2014, and remained open for one year. During the years ended December 31, 2015, and 2014, we repurchased 2,368,645 and 887,114 shares of our common stock, respectively, at an aggregate cost of $394.5 million and $105.5 million, respectively, under this repurchase program. We completed this repurchase program during the quarter ended September 30, 2015.

In October 2015, our Board of Directors authorized a new program for the repurchase of up to $500.0 million of our common stock in open or privately negotiated transactions, at our discretion. This program is effective from January 1, 2016 through December 31, 2016. During the month ended January 31, 2016, we repurchased approximately 280,000 shares of our common stock at an aggregate cost of $37.8 million.

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, 2015, we have not issued any shares of our Series A Preferred Stock.