9.Stockholders’ Equity

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 common share comprised the following (in millions, except per share amounts):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Numerator:
Net income	$	161.8	$	464.4	$	603.4	$	547.0

Denominator:
Weighted average outstanding shares — basic	43.2		45.5		44.3		46.1
Effect of dilutive securities(1):
Warrants	2.3		3.0		2.3		3.1
Stock options, restricted stock units and employee stock purchase plan	0.7		1.2		0.7		1.4
Convertible notes	—		0.5		—		1.1

Weighted average shares — diluted(2)	46.2		50.2		47.3		51.7

Earnings per common share:
Basic	$	3.75	$	10.20	$	13.62	$	11.86
Diluted	$	3.50	$	9.24	$	12.76	$	10.58

Stock options and warrants excluded from calculation(2)	5.3		3.0		5.3		4.1

(1)

Calculated using the treasury stock method.

(2)

Certain convertible notes, 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 were 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.

Equity Incentive Plans

As of September 30, 2016, 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). 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. As a result of the approval of the 2015 Plan, no further awards will be granted under the 1999 Plan.

Although the terms of the 1999 Plan and the 2015 Plan contemplate a variety of awards, through May 2016, all awards granted under these plans were in the form of stock options. In June 2016, we began issuing awards under the 2015 Plan to non-employee directors in the form of restricted stock units because the non-employee director compensation program had been amended to permit directors to elect to receive initial and annual equity grants in the form of stock options, restricted stock units, or a combination of both. Each restricted stock unit entitles the director to receive one share of our common stock upon vesting, subject to the director’s election to defer receipt of shares to a later date.

We estimate the fair value of stock options using the Black-Scholes-Merton valuation model, which requires us to make certain assumptions that can materially impact the estimation of fair value and related compensation expense. The assumptions used to estimate fair value include the price of our common stock, the expected volatility of our common stock, the risk-free interest rate, the expected term of stock option awards and the expected dividend yield. We measure the fair value of restricted stock units using the stock price on the date of grant. We did not grant any awards under the 1999 Plan during the nine-month periods ended September 30, 2016 and September 30, 2015. During the nine-months ended September 30, 2016 and September 30, 2015, we granted 1.6 million and 0.2 million stock options under the 2015 Plan with a weighted average grant date fair value of $42.54 and $60.77, respectively. These stock options have an aggregate grant date fair value of $69.1 million and $9.9 million, respectively. During the nine-months ended September 30, 2016, we granted 20,960 restricted stock units under the 2015 Plan with a weighted average grant date fair value $101.80. The restricted stock units have an aggregate grant date fair value of $2.1 million. Share-based compensation expense is recorded ratably over the vesting period of the stock option or restricted stock unit.

The table below includes the weighted-average assumptions used to measure the fair value of the stock options granted during the nine-month period ended September 30, 2016:

	September 30, 2016		September 30, 2015
Expected volatility	34.8	%	33.1	%
Risk-free interest rate	1.6	%	2.0	%
Expected term of awards (in years)	5.8		5.8
Expected forfeiture rate	5.4	%	1.0	%
Expected dividend yield	0.0	%	0.0	%

A summary of the activity and status of stock options under our equity incentive plans during the nine-month period ended September 30, 2016 is presented below:

	Number of Options		Weighted- Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in millions)
Outstanding at January 1, 2016	3,247,438		$	93.09
Granted	1,625,552		119.33
Exercised	(196,984	)	31.73
Forfeited	(165,492	)	120.78

Outstanding at September 30, 2016	4,510,514		$	104.21	7.2	$	83.3

Exercisable at September 30, 2016	3,278,204		$	98.49	6.3	$	81.9

Expected to vest as of September 30, 2016	1,152,335		$	119.30	9.5	$	1.4

The total fair value of employee stock options that vested during the nine months ended September 30, 2016 was $19.9 million.

Stock option exercise data is summarized below (dollars in millions):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Number of options exercised	42,443		210,256		196,984		807,755
Cash received	$	1.2	$	8.6	$	6.2	$	33.0
Total intrinsic value of options exercised	$	3.9	$	25.3	$	17.3	$	101.1

Total share-based compensation expense relating to stock options and restricted stock units is as follows (in millions):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Cost of product sales	$	0.1		$	—		$	0.3		$	—
Research and development	0.5			—			1.0			—
Selling, general and administrative	3.2			2.5			21.0			2.5

Share-based compensation expense before taxes	3.8			2.5			22.3			2.5
Related income tax benefit	(1.4		)	(0.9		)	(8.2		)	(0.9		)

Share-based compensation expense, net of taxes	$	2.4		$	1.6		$	14.1		$	1.6

Selling, general and administrative expense for the nine-month period ended September 30, 2016 includes approximately $9.8 million of costs related to the accelerated vesting of stock options associated with the departure of a company officer during the second quarter of 2016.

As of September 30, 2016, unrecognized compensation cost was $44.1 million, which includes $2.3 million related to the grant of stock options and restricted stock units to non-employee directors in June 2016 and $41.7 million related to unvested stock options awarded to employees. Unvested outstanding stock options and restricted stock units as of September 30, 2016 had a weighted average remaining vesting period of 3.3 years.

Share Repurchases

In October 2015, our Board of Directors authorized the repurchase of up to $500.0 million of our common stock in open market or privately negotiated transactions, or otherwise, at our discretion. This repurchase program is effective from January 1, 2016 through December 31, 2016. The specific timing, amount and other terms of any repurchases will depend on market conditions, corporate and regulatory requirements and other factors. During the three and nine months ended September 30, 2016, we acquired approximately 1.1 million and 3.3 million shares, respectively, of our common stock at an aggregate cost of $135.8 million and $395.5 million, respectively, under this repurchase program.