Share Tracking Award Plans

9 Months Ended

Sep. 30, 2011

Share Tracking Award Plans

Share Tracking Award Plans

8. Share Tracking Award Plans

We maintain the United Therapeutics Corporation Share Tracking Awards Plan, adopted in June 2008 (the 2008 STAP), under which we grant long-term, equity-based compensation to eligible participants. Share tracking awards convey the right to receive in cash an amount equal to the appreciation of our common stock, which is calculated as the positive difference between the closing price of our common stock on the date of exercise and the date of grant. Outstanding awards generally vest in equal increments on each anniversary of the date of grant over a three- or four-year period and expire on the tenth anniversary of the date of grant. On March 15, 2011, our Board of Directors approved the United Therapeutics Corporation 2011 Share Tracking Awards Plan (the 2011 STAP), pursuant to which up to 2,000,000 share tracking awards may be granted under provisions substantially similar to those of the 2008 STAP.  We refer to the 2008 STAP and the 2011 STAP collectively as the “STAP,” and awards granted under either of these plans as “awards.”

We account for outstanding awards as a liability because they are required to be settled in cash. Accordingly, we estimate the fair value of outstanding awards at each financial reporting date using the Black-Scholes-Merton valuation model until settlement occurs or awards are otherwise no longer outstanding. Changes in the fair value of outstanding awards are recognized as an adjustment to compensation expense on our consolidated statements of operations. The STAP liability balance was $58.5 million and $125.6 million at September 30, 2011 and December 31, 2010, respectively, and has been included within other current liabilities on our consolidated balance sheets.

In estimating the fair value of STAP awards, we are required to use inputs that materially impact the determination of fair value and the amount of compensation expense to be recognized. These inputs include the expected volatility of the price of our common stock, the risk-free interest rate, the expected term of awards, the expected forfeiture rate and the expected dividend yield.

The table below presents the assumptions used to measure the fair value of awards at September 30, 2011 and 2010:

	September 30, 2011		September 30, 2010
Expected volatility	46.6	%	45.7	%
Risk-free interest rate	0.6	%	1.2	%
Expected term of awards (in years)	4.1		4.7
Expected forfeiture rate	6.8	%	5.5	%
Expected dividend yield	0.0	%	0.0	%

A summary of the activity and status of the awards for the nine-month period ended September 30, 2011 is presented below:

	Number of Awards		Weighted- Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in Thousands)
Outstanding at January 1, 2011	7,380,480		$	39.91
Granted	1,584,131		65.02
Exercised	(821,117	)	29.92
Forfeited	(312,003	)	45.51
Outstanding at September 30, 2011	7,831,491		$	45.81	7.8	$	26,444
Exercisable at September 30, 2011	3,756,037		$	36.07	7.5	$	23,412
Expected to vest at September 30, 2011	3,474,099		$	53.72	8.7	$	2,809

The weighted average fair value of awards granted during the nine-month periods ended September 30, 2011 and 2010 was $28.03 and $26.23, respectively.

Share-based compensation (benefit) expense related to the STAP is as follows (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Research and development	$	(22,969	)	$	13,449		$	(17,877	)	$	23,173
Selling, general and administrative	(24,143		)	15,558			(20,031		)	25,899
Cost of product sales	(529		)	—			(529		)	—
Share-based compensation (benefit) expense before taxes (1)	(47,641		)	29,007			(38,437		)	49,072
Related income tax expense (benefit)	17,613			(10,725		)	14,210			(18,141		)
Share-based compensation (benefit) expense, net of taxes	$	(30,028	)	$	18,282		$	(24,227	)	$	30,931
Share-based compensation capitalized as part of inventory	$	(812	)	$	1,171		$	(458	)	$	1,710

(1)Share-based compensation benefit for the three- and nine-month periods ended September 30, 2011 resulted from the decrease in the fair value of awards as a result of the decline in the price of our common stock at September 30, 2011.

Cash paid to settle awards exercised during the nine-month periods ended September 30, 2011 and 2010, was $27.9 million and $16.9 million, respectively.