Share Tracking Award Plans

6 Months Ended

Jun. 30, 2013

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). 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.” 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. In February 2012, the 2008 STAP was amended to cancel any remaining awards available for future grants. In February 2013, our Board of Directors approved an additional 1.4 million awards available for grant under the 2011 STAP.

 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 $109.7 million and $75.4 million at June 30, 2013 and December 31, 2012, 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 discloses the assumptions used to measure the fair value of STAP awards:

	June 30, 2013		June 30, 2012
Expected volatility	34.1	%	36.0	%
Risk-free interest rate	1.1	%	0.6	%
Expected term of awards (in years)	4.3		4.0
Expected forfeiture rate	9.4	%	6.9	%
Expected dividend yield	0.0	%	0.0	%

A summary of the activity and status of STAP awards 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, 2013	7,962,375		$	49.00
Granted	3,303,094		57.11
Exercised	(1,103,444	)	40.87
Forfeited	(85,909	)	54.71
Outstanding at June 30, 2013	10,076,116		$	52.50	7.7	$	134,500
Exercisable at June 30, 2013	3,980,411		$	47.07	6.7	$	74,693
Expected to vest at June 30, 2013	5,196,964		$	55.47	8.9	$	53,854

The weighted average fair value of STAP awards granted during the six-month periods ended June 30, 2013 and 2012 was $24.58 and $21.07, respectively.

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Research and development	$	14,069		$	4,221		$	27,564		$	3,143
Selling, general and administrative	14,831			4,564			29,761			3,657
Cost of product sales	239			324			1,317			278
Share-based compensation expense before taxes	29,139			9,109			58,642			7,078
Related income tax (benefit) expense	(9,674		)	(3,360		)	(19,469		)	(2,611		)
Share-based compensation expense, net of taxes	$	19,465		$	5,749		$	39,173		$	4,467
Share-based compensation capitalized as part of inventory	$	53		$	154		$	323		$	146

Cash paid to settle STAP awards exercised during the six-month periods ended June 30, 2013 and 2012, was $24.5 million and $8.9 million, respectively.