I. Equity-Based Compensation

We currently maintain several equity compensation plans, including our Second Amended and Restated 2007 Equity Incentive Plan, or the 2007 Plan, our Amended and Restated 2000 Stock Plan, or the 2000 Plan, and our 2010 Employee Stock Purchase Plan, or the 2010 ESPP. During 2012, we also granted equity to our chief executive officer through an inducement grant that was outside of these plans.

Second Amended and Restated 2007 Equity Incentive Plan

Our 2007 Plan was originally approved by our stockholders in November 2007. In each of May 2009 and May 2010, our stockholders approved proposals to amend and restate our 2007 Plan to, among other things, increase the number of shares authorized for issuance thereunder by 600,000 and 800,000 shares, respectively. In addition, the amendment approved by our stockholders in May 2009 replaced a limitation on the number of shares in the aggregate which could be issued under the 2007 Plan with respect to restricted stock units, restricted stock, stock and similar equity interests in our company with a fungible share reserve whereby the number of shares available for issuance under the 2007 Plan is reduced by one share of our common stock issued pursuant to an option or stock appreciation right and by 1.5 shares for each share of our common stock issued pursuant to a restricted stock unit award or other similar equity-based award.

The 2007 Plan provides for the grant of stock options, restricted stock units, restricted stock, stock, and other equity interests in our company to employees, officers, directors, consultants, and advisors of our company and our subsidiaries. We generally issue common stock from previously authorized but unissued shares to satisfy option exercises and restricted stock awards. The terms and conditions of each such grant, including, but not limited to, the number of shares, the exercise price, term of the option/award and vesting requirements, are determined by our Board of Directors, or Board, or the Compensation Committee of our Board. Our Board may award stock options in the form of nonqualified stock options or incentive stock options, or ISOs. ISOs may be granted at an exercise price no less than fair market value of a share of our common stock on the date of grant, as determined by our Board or the Compensation Committee of our Board, subject to certain limitations.

Our Board establishes the vesting schedule for stock options and the method of payment for the exercise price. In general, our equity-based awards are subject to three or four year vesting. Our standard stock option agreement allows for payment of the exercise price for vested stock options either through cash remittance of the exercise price to us in exchange for newly issued shares, or through a non-cash exchange of previously issued shares held by the recipient equal in value to the exercise price in exchange for newly issued shares. The latter method results in no cash being received by us, but also results in a lower number of total shares subsequently being outstanding (as compared to a cash exercise), as a direct result of previously issued shares being exchanged in return for the issuance of new shares. Shares returned to us in this manner are retired. In addition, under the 2007 Plan, participants may satisfy their tax obligations related to restricted stock unit vesting in whole or in part by transferring shares of common stock to us. Shares returned to us in this manner are retired.

As of December 31, 2012, we have granted options and restricted stock units covering 5,283,775 shares of common stock under our 2007 Plan, of which 2,273,686 stock options and 615,430 restricted stock units have expired or terminated, and of which 38,338 options have been exercised and 347,725 shares of common stock have been issued pursuant to restricted stock units that became fully vested. The number of options and restricted stock units outstanding under this plan as of December 31, 2012 was 1,734,920 and 273,676, respectively. The remaining number of shares available for future grants as of December 31, 2012 was 1,513,918, not including shares subject to outstanding awards under the 2000 Plan, which will be added to the total number of shares available for issuance under the 2007 Plan to the extent that such awards expire or terminate for any reason prior to exercise. All outstanding stock options granted under our 2007 Plan have an exercise price equal to the closing price of a share of our common stock on the grant date and have either a seven or ten-year term.

Amended and Restated 2000 Stock Plan

Our 2000 Plan provided for the grant of options and other equity-based awards to our directors, officers, employees and consultants. The terms and conditions of each such grant, including, but not limited to, the number of shares, the exercise price, term of the option/award and vesting requirements, were determined by our Board or the Compensation Committee of our Board. As of December 31, 2012, we have granted stock options and restricted stock units covering 2,182,700 shares of common stock under the 2000 Plan, of which 946,977 stock options and 1,500 restricted stock units have expired or terminated, and of which 1,036,570 stock options have been exercised and 42,500 shares of common stock have been issued pursuant to restricted stock units that became fully vested. The remaining number of shares underlying outstanding stock options which were issued pursuant to our 2000 Plan as of December 31, 2012 was 155,153. There were no remaining restricted stock units which were issued pursuant to our 2000 Plan as of December 31, 2012. All outstanding stock options granted under the 2000 Plan have an exercise price equal to the closing price of our common stock on the grant date and have a ten year term. In November 2007, the 2000 Plan was succeeded by our 2007 Plan and, accordingly, no further grants may be made under this plan. Any shares that remained available for issuance under the 2000 Plan as of the date of adoption of the 2007 Plan are included in the number of shares that may be issued under the 2007 Plan. Any shares subject to outstanding awards granted under the 2000 Plan that expire or terminate for any reason prior to exercise will be added to the total number of shares available for issuance under the 2007 Plan.

Other Equity Compensation Grants

In May 2012, in connection with his entry into an employment agreement as our President and Chief Executive Officer, our Board granted William Heiden an option to purchase 300,000 shares of our common stock at an exercise price equal to the fair market value of a share of our common stock on the date of grant. The option will be exercisable in four equal annual installments beginning on the first anniversary of the grant date. Mr. Heiden was also granted 100,000 restricted stock units, which will vest in four equal annual installments beginning on the first anniversary of the grant date. The foregoing grants were made pursuant to an inducement grant outside of our 2007 Plan as permitted under the NASDAQ Global Market rules. We assessed the terms of these awards to Mr. Heiden and determined there was no possibility that we would have to settle these awards in cash and therefore, equity accounting was applied. In July 2012, we filed a Form S-8 registration statement with the Securities and Exchange Commission with respect to these equity compensation grants.

Equity-based compensation expense

Equity-based compensation expense, excluding amounts that have been capitalized into inventory, for the years ended December 31, 2012, 2011 and 2010 consisted of the following (in thousands):

	Years Ended December 31,

	2012		2011		2010
Cost of product sales	$	225	$	616	$	441
Research and development		1,994		1,874		3,508
Selling, general and administrative		4,805		7,548		10,574

Total equity-based compensation expense	$	7,024	$	10,038	$	14,523

We reduce the compensation expense being recognized to account for estimated forfeitures, which we estimate based primarily on historical experience, adjusted for unusual events such as the corporate restructurings in 2012, 2011 and 2010, which resulted in higher than expected turnover and forfeitures in those years. Under current accounting guidance, forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

In addition, during 2011, we reduced our equity-based compensation expense by approximately $0.7 million to reflect the modification of the terms of certain of our former chief executive officer's outstanding equity awards pursuant to his November 2011 separation agreement.

Due to the uncertainty surrounding the realization of the favorable tax attributes in future tax returns associated with operating losses we incurred in the past, we have not recognized any excess tax benefits from the exercise of options. Accordingly, there was no impact recorded in cash flows from financing activities or cash flows from operating activities as reported in the accompanying consolidated statements of cash flows.

The following table summarizes the weighted average assumptions we utilized for purposes of valuing grants of options to our employees and non-employee directors:

	Years Ended December 31,

	2012				2011				2010
	Employees		Non-Employee Directors		Employees		Non-Employee Directors		Employees		Non-Employee Directors
Risk free interest rate (%)		0.66		0.68		1.67		1.36		2.47		1.61
Expected volatility (%)		57		56		51		51		58		53
Expected option term (years)		4.66		4.00		5.50		4.00		5.50		4.00
Dividend yield		none		none		none		none		none		none

Risk free interest rates utilized are based upon published U.S. Treasury yields at the date of the grant for the expected option term. We estimate our expected stock price volatility by basing it on a blend of the historical volatility of our own common stock price and the historical volatility of other similar companies over the prior period equivalent to our expected option term to better reflect expected future volatility. To compute the expected option term, we estimate the calculated historical term of stock options.

The following table summarizes details regarding our stock option plans and any grants outside of the plans under an inducement grant for the year ended December 31, 2012 (excluding restricted stock units, which are presented separately below):

	December 31, 2012

	Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value ($ in millions)
Outstanding at beginning of year		1,817,027		$	35.16
Granted		1,500,800			14.72
Exercised		(9,188	)		10.65
Expired and/or forfeited		(1,118,566	)		31.60

Outstanding at end of year		2,190,073		$	23.07		6.7	$	0.6

Outstanding at end of year—vested and unvested expected to vest		1,981,028		$	23.82		6.7	$	0.6

Exercisable at end of year		729,294		$	36.59		6.0	$	0.1

The weighted average grant date fair value of stock options granted during the years ended December 31, 2012, 2011 and 2010 was $6.90, $7.40, and $18.57, respectively. A total of 336,443 stock options vested during the year ended December 31, 2012. The total grant date fair value of options that vested during the years ended December 31, 2012, 2011 and 2010 was $5.5 million, $9.8 million, and $12.0 million, respectively. The aggregate intrinsic value of options exercised during the years ended December 31, 2012, 2011 and 2010, excluding purchases made pursuant to our employee stock purchase plans, measured as of the exercise date, was approximately $0.1 million, $0.1 million, and $1.1 million, respectively. The intrinsic value of a stock option is the amount by which the fair market value of the underlying stock exceeds the exercise price of the common stock option on the last trading day of each year.

In the year ended December 31, 2012, we issued an aggregate of 247,050 restricted stock units to our employees and directors. In general, these grants vest on an annual basis over a three or four year period. The estimated fair value of restricted stock units granted was determined at the grant date based upon the quoted market price per share on the date of the grant. The estimated fair value of restricted stock unit awards issued during 2012 was approximately $3.9 million.

The following table summarizes details regarding restricted stock units granted under our equity incentive plans for the year ended December 31, 2012 and our May 2012 grant to our chief executive officer:

	December 31, 2012

	Unvested Restricted Stock Units			Weighted Average Grant Date Fair Value
Outstanding at beginning of year		669,009		$	21.16
Granted		247,050			15.64
Vested		(171,182	)		20.59
Forfeited		(371,201	)		21.91

Outstanding at end of year		373,676		$	17.02

Outstanding at end of year and expected to vest		295,916		$	16.54

At December 31, 2012, the amount of unrecorded equity-based compensation expense, net of forfeitures, attributable to future periods was approximately $11.9 million. Of this amount, $8.2 million was associated with stock options and is expected to be amortized on a straight-line basis to expense over a weighted average period of approximately 3.1 years, and $3.7 million was associated with restricted stock units and is expected to be amortized to on a straight-line basis to expense over a weighted average period of approximately 2.9 years. Such amounts will be amortized primarily to research and development or selling, general and administrative expense. These future estimates are subject to change based upon a variety of future events, which include, but are not limited to, changes in estimated forfeiture rates, employee turnover, and the issuance of new stock options and other equity-based awards.

2010 Employee Stock Purchase Plan

In May 2010, our stockholders approved our 2010 ESPP as the successor to and continuation of the 2006 Employee Stock Purchase Plan, or 2006 ESPP. The 2010 ESPP authorizes the issuance of up to 100,000 shares of our common stock to eligible employees. Currently, eligible employees may purchase shares (subject to certain plan and/or income tax limitations) in semi-annual offerings through payroll deductions of up to an annual maximum of 10% of the employee's total compensation, as defined by our Board. The purchase price per share is the lesser of 85% of the fair market value of our common stock on the first or last day of the plan period. During 2012, we issued 23,025 shares under our 2010 ESPP.

The assumptions used for awards granted under our employee stock purchase plans were as follows:

	Years Ended December 31,

	2012		2011		2010
Risk free interest rate (%)		0.12		0.09		0.22
Expected volatility (%)		43		37		42
Expected option term (years)		0.5		0.5		0.5
Dividend yield		none		none		none

The weighted average fair value for purchase rights granted under our 2010 ESPP and our 2006 ESPP, during the years ended December 31, 2012, 2011 and 2010 was $4.48, $5.01, and $13.66, respectively, and was estimated using the Black-Scholes option-pricing model.