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,
	2017		2016		2017		2016
Numerator:
Net income	$	276.3	$	161.8	$	398.9	$	603.4

Denominator:
Weighted average outstanding shares — basic	43.4		43.2		44.3		44.3
Effect of dilutive securities(1):
Warrants	—		2.3		0.1		2.3
Stock options, restricted stock units and employee stock purchase plan	0.7		0.7		0.8		0.7

Weighted average shares — diluted(2)	44.1		46.2		45.2		47.3

Net income per common share:
Basic	$	6.37	$	3.75	$	9.00	$	13.62
Diluted	$	6.27	$	3.50	$	8.83	$	12.76

Stock options, convertible notes and warrants excluded from calculation(2)	3.7		5.3		3.1		5.3

(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- and nine-month periods ended September 30, 2017 and September 30, 2016. Additionally, certain convertible notes were excluded for the three- and nine-month periods ended September 30, 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 September 30, 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. The 2015 Plan is a broad-based stock incentive plan enabling us to grant stock options and other forms of equity compensation to our employees and non-employee directors. As a result of the approval of the 2015 Plan, no further awards will be granted under the 1999 Plan. During the nine-month periods ended September 30, 2017 and September 30, 2016, we granted 2.0 million and 1.6 million stock options under the 2015 Plan, respectively.

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 decreased retained earnings by $0.4 million, net of tax. 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. During 2017, we have granted 0.9 million stock options with performance vesting conditions with a total grant date fair value of $53.9 million based on achievement of target performance levels. During the three-and nine-month periods ended September 30, 2017, we recorded $5.7 million and $11.2 million, respectively, of share-based compensation expense related to these awards.

The table below includes the weighted-average assumptions used to measure the fair value of all stock options (including both time-vesting and performance-vesting awards) granted during the nine-month periods ended September 30, 2017 and September 30, 2016:

	September 30, 2017		September 30, 2016
Expected volatility	35.7	%	34.8	%
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 nine-month period ended September 30, 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	1,958,843		145.72
Exercised	(428,541	)	89.17
Forfeited/canceled	(64,586	)	132.86

Outstanding at September 30, 2017	5,925,007		$	119.28	7.3	$	64.4

Exercisable at September 30, 2017	3,114,975		$	102.70	5.7	$	63.8

Unvested as of September 30, 2017	2,810,032		$	137.66	9.1	$	0.6

The weighted average fair value of a stock option granted during each of the nine-month periods ended September 30, 2017 and September 30, 2016, was $56.07 and $42.55, respectively. These stock options have an aggregate grant date fair value of $109.8 million and $69.2 million, respectively. The total fair value of stock options that vested during the nine-month periods ended September 30, 2017 and September 30, 2016 was $13.1 million and $19.9 million, respectively.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Number of options exercised	40,565		42,443		428,541		196,984
Cash received	$	1.6	$	1.2	$	38.2	$	6.2
Total intrinsic value of options exercised	$	3.5	$	3.9	$	27.0	$	17.3

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Cost of product sales	$	0.4		$	0.1		$	0.9		$	0.3
Research and development	1.0			0.5			2.6			1.0
Selling, general and administrative	11.7			2.7			26.4			20.4

Share-based compensation expense before taxes	13.1			3.3			29.9			21.7
Related income tax benefit	(4.8		)	(1.1		)	(11.0		)	(7.9		)

Share-based compensation expense, net of taxes	$	8.3		$	2.2		$	18.9		$	13.8

As of September 30, 2017, unrecognized compensation cost was $114.5 million. Unvested outstanding stock options as of September 30, 2017 had a weighted average remaining vesting period of 2.6 years.

Restricted Stock Units

In June 2016, we began issuing restricted stock units under the 2015 Plan to our non-employee directors. In October 2017, we also began issuing restricted stock units to employees. Over time, we expect to increase the percentage of our equity awards made to employees in the form of restricted stock units, instead of stock options. Each restricted stock unit entitles the recipient to receive one share of our common stock upon vesting. 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 vesting period. During the nine months ended September 30, 2017, we granted 17,820 restricted stock units under the 2015 Plan with a weighted average grant date fair value of $132.30. These restricted stock units had an aggregate grant date fair value of $2.4 million. We recorded $1.6 million and $0.6 million in share-based compensation expense related to restricted stock units for the nine-month periods ended September 30, 2017 and September 30, 2016, respectively. The share-based compensation expense related to restricted stock units granted to non-employee directors is reflected in selling, general and administrative expense on our statements of operations.

As of September 30, 2017, unrecognized compensation cost related to the grant of restricted stock units was $1.7 million. Unvested outstanding restricted stock units as of September 30, 2017 had a weighted average remaining vesting period of 0.7 years.

Share Repurchase

In April 2017, our Board of Directors approved a share repurchase program authorizing up to $250.0 million in aggregate repurchases of our common stock. Pursuant to this authorization, in May 2017, we paid $250.0 million to enter into an accelerated share repurchase agreement (ASR) with Citibank, N.A. (Citibank). Pursuant to the terms of the ASR, in June 2017, Citibank delivered to us approximately 1.7 million shares of our common stock, representing the minimum number of shares we were entitled to receive under the ASR. The ASR was originally scheduled to terminate during the fourth quarter of 2017; however, in September 2017, Citibank notified us of its election to accelerate the termination date of the contract to September 8, 2017. Upon termination of the ASR, Citibank delivered to us approximately 0.3 million additional shares of our common stock. The ASR was accounted for as an equity transaction and the shares we repurchased under the ASR were included in treasury stock when the shares were received.