Share Tracking Award Plans

9 Months Ended

Sep. 30, 2012

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 (2008 STAP) and the United Therapeutics Corporation 2011 Share Tracking Awards Plan, adopted in March 2011 (2011 STAP).  In February 2012, our Board of Directors amended the 2011 STAP to increase the total number of awards available for grant under the 2011 STAP by 2.0 million and concurrently amended the 2008 STAP to cancel the approximately 400,000 remaining awards available for future grants. In October 2012, we amended the 2011 STAP again to increase the number of awards available for grant by 1.8 million. We refer to the 2008 STAP and the 2011 STAP collectively as the “STAP,” and awards granted and/or outstanding under either of these plans as “STAP awards.”

Under the STAP, we grant long-term, equity-based compensation to eligible participants. STAP 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. STAP awards generally vest in equal increments on each anniversary of the date of grant over a four-year period and expire on the tenth anniversary of the date of grant.

We account for outstanding STAP awards as a liability because they are required to be settled in cash. Accordingly, we estimate the fair value of outstanding STAP 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 STAP awards are recognized as adjustments to compensation expense on our consolidated statements of operations. The STAP liability balance was $88.7 million and $79.9 million at September 30, 2012 and December 31, 2011, 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 (benefit) 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 STAP awards, the expected forfeiture rate and the expected dividend yield.

The table below presents the assumptions used to measure the fair value of STAP awards at September 30, 2012 and 2011:

	September 30, 2012		September 30, 2011
Expected volatility	35.8	%	46.6	%
Risk-free interest rate	0.5	%	0.6	%
Expected term of awards (in years)	3.9		4.1
Expected forfeiture rate	7.0	%	6.8	%
Expected dividend yield	0.0	%	0.0	%

A summary of the activity and status of STAP awards for the nine-month period ended September 30, 2012 is presented below:

	Number of Awards		Weighted- Average Exercise Price		Weighted Average Remaining Contractual Term (in Years)	Aggregate Intrinsic Value (in Thousands)
Outstanding at January 1, 2012	7,795,000		$	45.90
Granted	1,833,353		48.01
Exercised	(1,190,869	)	29.02
Forfeited	(246,961	)	53.89
Outstanding at September 30, 2012	8,190,523		$	48.59	7.5	$	75,018
Exercisable at September 30, 2012	4,278,314		$	42.96	6.9	$	58,512
Expected to vest at September 30, 2012	3,311,741		$	53.59	8.8	$	15,391

The weighted average fair value of STAP awards granted during the nine-month periods ended September 30, 2012 and 2011 was $21.26 and $28.03, respectively.

Share-based compensation expense (benefit) recognized in connection with the STAP is as follows (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Research and development	$	11,790		$	(22,969	)	$	14,932		$	(17,877	)
Selling, general and administrative	14,404			(24,143		)	18,061			(20,031		)
Cost of product sales	865			(529		)	1,143			(529		)
Share-based compensation expense (benefit) before taxes	27,059			(47,641		)	34,136			(38,437		)
Related income tax (benefit) expense	(9,909		)	17,613			(12,501		)	14,210
Share-based compensation expense (benefit), net of taxes (1)	$	17,150		$	(30,028	)	$	21,635		$	(24,227	)
Share-based compensation capitalized as part of inventory	$	462		$	(812	)	$	608		$	(458	)

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

Cash paid to settle STAP awards exercised during the nine-month periods ended September 30, 2012 and 2011, was $25.7 million and $27.9 million, respectively.