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 March 31,
	2017		2016
Numerator:
Net income	$	178.6	$	235.5

Denominator:
Weighted average outstanding shares — basic	44.5		45.4
Effect of dilutive securities(1):
Warrants	0.3		2.4
Stock options, restricted stock units and employee stock purchase plan	1.1		0.8
Convertible notes	—		0.1

Weighted average shares — diluted(2)	45.9		48.7

Earnings per common share:
Basic	$	4.01	$	5.19
Diluted	$	3.89	$	4.84

Stock options, convertible notes and warrants excluded from calculation(2)	1.8		4.1

(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 for the three-month periods ended March 31, 2017. Additionally, certain convertible notes were excluded for the three-month periods ended March 31, 2016. 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 March 31, 2017, 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. During the three-month periods ended March 31, 2017 and March 31, 2016, we granted 1.9 million and 1.5 million stock options under the 2015 Plan, respectively.

Employee Stock Options

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. As a result of the adoption of ASU 2016-09, we established an accounting policy election to account for forfeitures of share-based awards when they occur. Upon adoption, we recognized a cumulative-effect adjustment for the removal of the forfeiture estimate with respect to awards that were continuing to vest as of January 1, 2017. The adjustment resulted in a decrease to retained earnings of $0.4 million, which is net of a $0.2 million tax benefit. Refer to Note 2—Basis of Presentation—Recently Issued Accounting Standards.

In March 2017, we began issuing stock options with performance conditions under the 2015 Plan to certain executives. The awards have vesting conditions tied to the achievement of specified performance conditions. The performance conditions have target performance levels that span from one to three years. Upon the conclusion of the performance period, the performance level achieved will be measured and the ultimate number of shares that may vest will be determined. Share-based compensation expense for these awards is recorded ratably over their vesting period, depending on the specific terms of the award and achievement of the specified performance conditions. In total, we granted 0.9 million stock options with performance conditions, with a total grant date fair value of $53.9 million based on achievement of the target performance level. We recorded $0.7 million in share-based compensation expense related to these awards for the three-month period ended March 31, 2017.

The table below includes the weighted-average assumptions used to measure the fair value of the stock options granted during the three-month periods ended March 31, 2017 and March 31, 2016:

	March 31, 2017		March 31, 2016
Expected volatility	35.7	%	34.7	%
Risk-free interest rate	2.2	%	1.6	%
Expected term of awards (in years)	6.1		5.8
Expected dividend yield	0.0	%	0.0	%

A summary of the activity and status of stock options under our equity incentive plans during the three-month period ended March 31, 2017 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, 2017	4,459,291		$	104.97
Granted	1,906,683		146.15
Exercised	(334,065	)	98.69
Forfeited/canceled	(38,069	)	129.57

Outstanding at March 31, 2017	5,993,840		$	118.26	7.7	$	129.5

Exercisable at March 31, 2017	3,154,307		$	101.23	6.0	$	113.9

Unvested as of March 31, 2017	2,839,533		$	137.19	9.6	$	15.6

The weighted average fair value of a stock option granted during each of the three-month periods ended March 31, 2017 and March 31, 2016, was $56.28 and $42.84, respectively. These stock options have an aggregate grant date fair value of $107.3 million and $62.8 million, respectively. The total fair value of employee stock options that vested during the three-month period ended March 31, 2017 was $11.0 million. No stock options vested during the three-month period ended March 31, 2016.

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

	Three Months Ended March 31,
	2017		2016
Number of options exercised	334,065		81,105
Cash received	$	33.0	$	2.6
Total intrinsic value of options exercised	$	20.3	$	7.6

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

	Three Months Ended March 31,
	2017			2016
Cost of product sales	$	0.2		$	0.1
Research and development	0.5			0.1
Selling, general and administrative	3.9			2.9

Share-based compensation expense before taxes	4.6			3.1
Related income tax benefit	(1.7		)	(1.1		)

Share-based compensation expense, net of taxes	$	2.9		$	2.0

As of March 31, 2017, unrecognized compensation cost was $124.0 million. Unvested outstanding stock options as of March 31, 2017 had a weighted average remaining vesting period of 3.1 years.

Restricted Stock Units

In June 2016, we began issuing restricted stock units under the 2015 Plan to our non-employee directors. 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 measure the fair value of restricted stock units using the stock price on the date of grant. Share-based compensation expense for the restricted stock units is recorded ratably over their one year vesting period. We recorded $0.5 million in share-based compensation expense for the three-month period ended March 31, 2017 related to restricted stock units. The share-based compensation expense related to restricted stock units granted is reflected in selling, general and administrative expense on our statements of operations.

As of March 31, 2017, unrecognized compensation cost related to the grant of restricted stock units was $0.5 million. Unvested outstanding restricted stock units as of March 31, 2017 had a weighted average remaining vesting period of 0.2 years.