8. STOCK COMPENSATION

The Company’s equity incentive plans allow for the granting of a variety of stock awards. To date, the Company has granted stock options, restricted stock awards, RSUs and SARs. During the nine months ended September 30, 2013 there were no grants, exercises or cancelations of SARs.

Stock-based compensation costs are based on the fair value calculated utilizing the Black-Scholes-Merton option pricing model on the date of grant. The fair value of stock awards, with consideration given to estimated forfeitures, is recognized as compensation expense on a straight-line basis over the vesting period of the grants.

In June 2013, the Company’s stockholders approved an additional 3.6 million shares of common stock available for grants under the Amended and Restated 2011 Equity Incentive Plan (the 2011 Plan) and stockholders approved the 2013 Employee Stock Purchase Plan (ESPP) with 250,000 shares of common stock available to be issued. As of September 30, 2013, 2,950,714 shares of common stock remain available for future grants under the 2011 Plan and 250,000 shares are available to be issued under the ESPP.

Stock Options

In general, stock options granted 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 generally vest over a four year period, with one-fourth of the underlying shares vesting after one year and the remaining underlying shares vesting pro-ratably on a monthly basis thereafter, such that the underlying shares will be fully vested after four years.

In June 2013, the Company granted 459,500 stock options with performance-based vesting criteria. The performance criteria are based upon the achievement of certain clinical and regulatory milestones. As of September 30, 2013, the achievement of these performance criteria is not probable and accordingly the Company has not recognized any expense related to these options.

A summary of the Company’s stock option activity with respect to the nine months ended September 30, 2013 follows:


Stock Options	Underlying Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at December 31, 2012		2,522,522		$	11.76
Granted		2,063,396			34.86
Exercised		(196,012	)		8.51
Canceled		(239,072	)		11.51

Outstanding at September 30, 2013		4,150,834		$	23.37		8.71	$	99,056,000


Vested at September 30, 2013 and expected to vest		3,395,249		$	21.29		8.53	$	88,063,000
Exercisable at September 30, 2013		891,157		$	11.60		6.95	$	31,748,000

The weighted-average fair value per share of stock-based awards granted to employees during the three months ended September 30, 2013 and 2012 was $26.92 and $7.09, respectively, and during the nine months ended September 30, 2013 and 2012 was $23.25 and $6.52, respectively. During the nine months ended September 30, 2013 and 2012, the total intrinsic value of stock options exercised was $5.1 million and $1.0 million, respectively. During the nine months ended September 30, 2013 and 2012, the total grant date fair value of stock options that vested was $3.0 million and $3.2 million, respectively.

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


	Three and Nine months ended September 30,
	2013	2012
Risk-free interest rate	0.7% - 1.4%	0.6% - 1.1%
Expected dividend yield	0%	0%
Expected lives	4.9-5.0 years	5.1-5.3 years
Expected volatility	80.0% - 88.9.%	79.7% - 94.8%

(1)

For the three and nine months ended September 30, 2013, expected volatility was estimated using a blend of calculated volatility of the Company’s common stock over a historical period and implied volatility in exchange-traded options associated with the Company’s common stock. Prior to January 1, 2013, expected volatility was estimated using calculated volatility of the Company’s common stock over a historical period commensurate with the expected term of the option.

Restricted Stock Awards (RSA)

In June 2013, the Company granted 6,000 shares of RSAs to members of its board of directors. These shares vest on the first anniversary of the grant and have a grant date fair value of $34.92 per share. The weighted-average grant-date fair value of RSAs is based on the market price of the Company’s common stock on the date of grant. The following table sets forth RSA activity for the period shown:


	Nine months ended September 30, 2013
	Shares			Weighted Average Grant Date Fair Value per Share
Restricted Stock Awards, beginning of period		4,998		$	10.08
Granted		6,000			34.92
Vested		(4,998	)		10.08

Restricted Stock Awards, end of period		6,000			34.92

Restricted Stock Units (RSU)

In April 2012, the Company granted 32,377 shares of RSUs to employees in lieu of cash for a portion of the 2012 bonus. In addition, in August 2012, 7,500 RSUs were granted to an officer of the Company. The remaining RSUs at September 30, 2013 will vest by April 2014. The following table sets forth RSU activity for the period shown:


	Nine months ended September 30,
	2013
	Shares			Weighted Average Grant Date Fair Value per Share
Restricted Stock Units, beginning of period		38,260		$	6.32
Granted		—			—
Vested		(24,858	)		6.81
Canceled		(374	)		5.40

Restricted Stock Units, end of period		13,028		$	5.40

Employee Stock Purchase Plan (ESPP)

Under the Company’s ESPP, participating employees purchase common stock through payroll deductions. The purchase price is equal to 85% of the lower of the closing price of the Company’s common stock on the first business day and the last business day of the relevant plan period. The initial 26-month award period will end on August 31, 2015. Each subsequent offering period will begin on March 1 or September 1.

For the three and nine months ended September 30, 2013, the fair value of stock purchase rights ranges from $16.12 to $24.65 per share on 59,563 shares estimated to be purchased during the initial award period. The fair value was estimated using the Black-Scholes-Merton option-pricing model. The Company used a weighted-average stock-price volatility ranging from 84% to 98%, expected option life assumption from 0.7 to 2.2 years and a risk-free interest rate from 0.1% to 0.4%. The Company recorded $0.3 million of stock-based compensation expense for the three and nine months ended September 30, 2013 related to the ESPP.

Stock-based Compensation Expense

A summary of the stock-based compensation expense, including stock options, RSAs, RSUs, SARs, and ESPP rights recognized in the condensed consolidated statements of operations and comprehensive income (loss) is as follows:


	Three Months Ended				Nine months Ended
	September 30, 2013		September 30, 2012		September 30, 2013		September 30, 2012
	(in thousands)				(in thousands)
Research and development	$	1,155	$	271	$	2,409	$	783
General and administrative		2,332		421		5,067		1,057

Total	$	3,487	$	692	$	7,476	$	1,840

As of September 30, 2013, there was $49.6 million of unrecognized compensation cost related to non-vested share-based compensation arrangements outstanding including stock options, RSAs, RSUs, SARs and ESPP rights. These costs are expected to be recognized over a weighted-average period of 3.2 years.