Stock-based Compensation Expense

12 Months Ended

Dec. 31, 2011

Stock-based Compensation Expense

Stock-based Compensation Expense

M. Stock-based Compensation Expense

        The Company recognizes share-based payments to employees as compensation expense using the fair value method. The fair value of stock options and shares purchased pursuant to the ESPP is calculated using the Black-Scholes option pricing model. The fair value of restricted stock and restricted stock units typically is based on the intrinsic value on the date of grant. Stock-based compensation, measured at the grant date based on the fair value of the award, is typically recognized as expense ratably over the service period. The expense recognized over the service period includes an estimate of awards that will be forfeited.

        The effect of stock-based compensation expense during the three years ended December 31, 2011 was as follows:

	2011		2010		2009
	(in thousands)
Stock-based compensation expense by line item:
Research and development expenses	$	75,574	$	65,198	$	64,128
Sales, general and administrative expenses		42,652		25,926		22,594
Total stock-based compensation expense included in costs and expenses	$	118,226	$	91,124	$	86,722

        During 2011, the Company capitalized $1.0 million of stock-based compensation expense to inventories, all of which was attributable to employees who supported the Company's manufacturing operations related to INCIVEK.

        The stock-based compensation expense by type of award during the three years ended December 31, 2011 was as follows:

	2011			2010		2009
	(in thousands)
Stock-based compensation expense by type of award:
Stock options	$	83,098		$	64,005	$	63,397
Restricted stock and restricted stock units		30,708			22,960		18,983
ESPP share issuances		5,462			4,159		4,342
Less stock-based compensation expense capitalized to inventories		(1,042	)		—		—
Total stock-based compensation expense included in costs and expenses	$	118,226		$	91,124	$	86,722

        The stock-based compensation expense related to stock options for 2009 included $12.7 million related to stock options that were accelerated and modified in connection with transition and severance arrangements with certain of the Company's former executive officers. The stock-based compensation expense related to restricted stock for 2009 included $2.2 million related to accelerated vesting of restricted stock awards in connection with transition and severance arrangements with certain of the Company's former executive officers.

        The following table sets forth the Company's unrecognized stock-based compensation expense, net of estimated forfeitures, as of December 31, 2011 by type of award and the weighted-average period over which that expense is expected to be recognized:

	As of December 31, 2011
	Unrecognized Expense Net of Estimated Forfeitures		Weighted-average Recognition Period
	(in thousands)		(in years)
Type of award:
Stock options	$	139,165		2.73
Restricted stock and restricted stock units		44,744		2.25
ESPP share issuances		5,128		0.65

Stock Options

        The Company issues stock options with service conditions, which are generally the vesting periods of the awards. In 2009, the Company also issued, to certain members of senior management, stock options that vest upon the earlier of the satisfaction of (1) performance conditions or (2) a service condition. If the Company estimates that it is probable that a performance condition will be met over a period shorter than the vesting period, the Company recognizes stock-based compensation expense related to the shares that would vest upon the performance condition over an implicit service period equal to the period that the Company estimates will be required to meet the performance condition. The Company uses the Black-Scholes option pricing model to estimate the fair value of stock options at the grant date. The Black-Scholes option pricing model uses the option exercise price as well as estimates and assumptions related to the expected price volatility of the Company's stock, the rate of return on risk-free investments, the expected period during which the options will be outstanding, and the expected dividend yield for the Company's stock to estimate the fair value of a stock option on the grant date. The options granted during 2011, 2010 and 2009 had a weighted-average grant-date fair value per share of $20.88, $18.52 and $19.11, respectively.

        The fair value of each option granted during 2011, 2010 and 2009 was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

	2011			2010			2009
Expected stock price volatility		49.53	%		52.17	%		57.77	%
Risk-free interest rate		2.09	%		2.44	%		2.85	%
Expected term of options		5.74 years			5.71 years			6.31 years
Expected annual dividends		—			—			—

        The weighted-average valuation assumptions were determined as follows:

• •

  Expected stock price volatility:  Options to purchase the Company's stock with remaining terms of greater than one year are regularly traded in the market. Expected stock price volatility is calculated using the trailing one month average of daily implied volatilities prior to grant date.

  •

  Risk-free interest rate:  The Company bases the risk-free interest rate on the interest rate payable on U.S. Treasury securities in effect at the time of grant for a period that is commensurate with the assumed expected option term.

  •

  Expected term of options:  The expected term of options represents the period of time options are expected to be outstanding. The Company uses historical data to estimate employee exercise and post-vest termination behavior. The Company believes that all groups of employees exhibit similar exercise and post-vest termination behavior and therefore does not stratify employees into multiple groups in determining the expected term of options.

  •

  Expected annual dividends:  The estimate for annual dividends is $0.00 because the Company has not historically paid, and does not intend for the foreseeable future to pay, a dividend.

Restricted Stock and Restricted Stock Units

        The Company issues restricted stock and restricted stock units with service conditions, which are generally the vesting periods of the awards. The Company also issues, to certain members of senior management, restricted stock and restricted stock units that vest upon the earlier of the satisfaction of (i) a market or performance condition or (ii) a service condition.

Employee Stock Purchase Plan

        The weighted-average fair value of each purchase right granted during 2011, 2010 and 2009 was $9.80, $10.19 and $11.31, respectively. The following table reflects the weighted-average assumptions used in the Black-Scholes option pricing model for 2011, 2010 and 2009:

	2011			2010			2009
Expected stock price volatility		51.32	%		43.92	%		54.22	%
Risk-free interest rate		0.08	%		0.24	%		0.39	%
Expected term		0.72 years			0.71 years			0.76 years
Expected annual dividends		—			—			—

        The expected stock price volatility for ESPP offerings is based on implied volatility. The Company bases the risk-free interest rate on the interest rate payable on U.S. Treasury securities in effect at the time of grant for a period that is commensurate with the assumed expected term. The expected term represents purchases and purchase periods that take place within the offering period. The expected annual dividends estimate is $0.00 because the Company has not historically paid, and does not for the foreseeable future intend to pay, a dividend.