Stock Compensation

9 Months Ended

Sep. 30, 2011

Stock Compensation [Abstract]

Stock Compensation

Note 6. Stock Compensation

Stock Options

The Company previously sponsored a 2002 Equity Incentive Plan (the "2002 Plan") pursuant to which it issued options to purchase its common stock to the Company's employees, directors and service providers. In June 2011, the 2002 Plan was replaced by the 2011 Equity Incentive Plan (the "2011 Plan" and, together with the 2002 Plan, the "Plans") following approval by the Company's shareholders. There will be no further grants under the 2002 Plan, but awards previously granted pursuant to the 2002 Plan will continue to be governed by its terms. The 2011 Plan allows for the grant of stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance shares and performance units.

In general, stock options granted under the 2002 Plan prior to December 31, 2010 vest over a three year period, with one-third of the underlying shares vesting on each anniversary of grant, and have a ten year term. Beginning in January 2011, stock options granted under the 2002 Plan vest over a four year period, with one-fourth of the underlying shares vesting on the first anniversary of the grant and 1/48^th of the underlying shares vesting monthly thereafter, such that the underlying shares will be fully vested on the fourth anniversary of the grant. As of September 30, 2011, no shares of common stock remain available for future grant under the 2002 Plan.

In general, stock options granted under the 2011 Plan vest over a four year period, with one-fourth of the underlying shares vesting on the first anniversary of the grant and 1/48th of the underlying shares vesting monthly thereafter, such that the underlying shares will be fully vested on the fourth anniversary of the grant. The maximum aggregate number of shares that may be issued under the 2011 Plan is 15,072,457, including 2,072,457 shares reserved but not issued under the 2002 Plan. In addition, shares subject to outstanding awards under the 2002 Plan that expire or otherwise terminate without having been exercised in full, or are forfeited to or repurchased by the Company, will be available for issuance under the 2011 Plan, up to a maximum of 11,086,073 shares. As of September 30, 2011, 11,213,246 shares of common stock remain available for future grant under the 2011 Plan.

A summary of the Company's stock option activity with respect to the nine months ended September 30, 2011 follows:

Stock Options	Underlying Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at December 31, 2010		8,490,055		$	2.14
Granted		8,577,250			1.62
Exercised		(151,743	)		1.09
Canceled or expired		(1,338,413	)		2.25
Outstanding at September 30, 2011		15,577,149		$	1.85		7.33	$	184,000
Vested at September 30, 2011 and expected to vest		14,873,507		$	1.87		7.21	$	183,000
Exercisable at September 30, 2011		5,611,896		$	2.31		3.58	$	120,000

The weighted-average fair value per share of stock-based awards, including stock options and restricted stock grants, granted to employees during the three months ended September 30, 2011 and 2010 was $0.79 and $1.36, respectively, and during the nine months ended September 30, 2011 and 2010 was $1.09 and $1.10, respectively. During the nine months ended September 30, 2011 and 2010, the total intrinsic value of stock options exercised was $82,000 and $955,000 respectively, and the total grant date fair value of stock options that vested was $2,300,000 and $2,555,000, respectively.

Valuation Assumptions

Stock-based compensation costs are based on the fair value calculated from the Black-Scholes option-pricing model on the date of grant for stock options. The fair value of stock grants is amortized as compensation expense on a straight-line basis over the vesting period of the grants.

The fair values of stock options granted during the periods presented were measured on the date of grant using the Black-Scholes option-pricing model, with the following assumptions:

	Three and Nine Months Ended September 30,
	2011			2010
Risk-free interest rate		1.1%-2.4	%		1.4%-2.4	%
Expected dividend yield		0	%		0	%
Expected lives		5.4-5.5 years			5.3-5.5 years
Expected volatility		78.2%-81.6	%		83.3%-85.2	%

The risk-free interest rate is estimated using an average of treasury bill interest rates at the time of grant that correlate to the prevailing interest rates for a period commensurate with the expected life. The expected dividend yield is zero as the Company has not paid any dividends to date and does not expect to pay dividends in the future. The expected lives are estimated using expected and historical exercise behavior. The expected volatility is estimated using historical calculated volatility of the Company's common stock over a period commensurate with the expected life. The amounts estimated according to the Black-Scholes option pricing model may not be indicative of the actual values realized upon the exercise of these options by the holders.

The Company is required to estimate potential forfeiture of stock grants and adjust compensation cost recorded accordingly. The estimate of forfeitures is adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures are recognized through a cumulative catch-up in the period of change and impact the amount of stock compensation expense to be recognized in future periods.

Stock-based Compensation Expense

The amount of stock-based compensation expense recognized in the three months ended September 30, 2011 and 2010 was $592,000 and $509,000, respectively. For the nine months ended September 30, 2011 and 2010, stock-based compensation expense recognized was $2,454,000 and $2,540,000, respectively. A summary of the stock-based compensation expense recognized in the statements of operations is as follows:

	Three Months Ended				Nine Months Ended
	September 30, 2011		September 30, 2010		September 30, 2011		September 30, 2010
	(in thousands)				(in thousands)
Research and development	$	266	$	250	$	998	$	665
General and administrative		326		259		1,456		1,875
Total	$	592	$	509	$	2,454	$	2,540

As of September 30, 2011, there was $9.2 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted, including stock options and restricted stock. These costs are expected to be recognized over a weighted-average period of 3.2 years.

During the nine months ended September 30, 2011, in connection with their appointments as officers of the Company, Ms. Effie Toshav, Dr. Peter Linsley and Dr. Edward Kaye were granted options to purchase 650,000, 800,000 and 850,000 shares, respectively, of the Company's common stock at exercise prices of $2.58, $1.76, and $1.38, respectively. These options were granted outside of the Plans and have vesting schedules consistent with the customary schedule under the 2011 Plan. The shares underlying these options are included in the summary stock compensation table noted above in this Note 6.

Paul Medeiros, the Company's former Senior Vice President of Business Development and Chief Business Officer, ceased to be an employee of the Company effective June 1, 2011. Pursuant to the terms of his employment agreement and a separation and release agreement that the Company entered into with Mr. Medeiros in connection with the termination of his employment, Mr. Medeiros received 12 months of his base compensation in a lump sum (an amount equal to $321,300) and all of his unvested stock options vested on June 1, 2011 and will be exercisable for a period of 180 days following June 1, 2011. During the nine months ending September 30, 2011, the Company paid his cash severance and recorded a charge of $288,000 for the stock compensation expense.

Dr. Stephen Shrewsbury, the Company's former Senior Vice President and Chief Medical Officer, ceased to be an employee of the Company effective August 1, 2011. Pursuant to the terms of his employment agreement and a separation and release agreement that the Company entered into with Dr. Shrewsbury in connection with the termination of his employment, Dr. Shrewsbury received 12 months of his base compensation in a lump sum (an amount equal to $319,300) and all of his unvested stock options vested on August 1, 2011 and will be exercisable for a period of 180 days following August 1, 2011. During the nine months ending September 30, 2011, the Company paid his cash severance and recorded a charge of $288,000 for the stock compensation expense.

J. David Boyle II, the Company's former Senior Vice President and Chief Financial Officer, ceased to be an employee of the Company effective July 24, 2011, the expiration date of his employment agreement. Pursuant to the terms of a separation agreement and release that the Company entered into with Mr. Boyle in connection with his separation from employment, Mr. Boyle received a lump sum payment equal to $113,507, the vesting of 116,666 shares subject to Mr. Boyle's August 2008 option grant was accelerated and the post-separation exercise period for options to purchase up to 593,333 shares of the Company's common stock was extended until December 30, 2011. During the nine months ending September 30, 2011, the Company paid his cash severance and recorded a decrease of $25,000 for the stock compensation expense.