13. Stock Compensation

ARIAD Stock Option and Stock Plans

The Company’s 2001 and 2006 stock option and stock plans (the “Plans”) provide for the awarding of nonqualified and incentive stock options, stock grants, restricted stock units, performance share units and other equity-based awards to officers, directors, employees and consultants of the Company. Stock options become exercisable as specified in the related option certificate, typically over a three or four-year period, and expire ten years from the date of grant. Stock grants, restricted stock units and performance share units provide the recipient with ownership of common stock subject to terms of vesting, any rights the Company may have to repurchase the shares granted or other restrictions. The 2001 Plan has no shares remaining available for grant, although existing stock options granted under this Plan remain outstanding. As of December 31, 2013, there were 8,079,200 shares available for awards under the 2006 Plan. The Company generally issues new shares upon the exercise or vesting of stock plan awards.

Employee Stock Purchase Plan

In 1997, the Company adopted the 1997 Employee Stock Purchase Plan (“ESPP”) and reserved 500,000 shares of common stock for issuance under this plan. In June 2008, the ESPP was amended to reserve an additional 500,000 shares of common stock for issuance, and in June 2009, the plan was further amended to reserve an additional 750,000 shares of common stock for issuance. Under this plan, substantially all of the Company’s employees may, through payroll withholdings, purchase shares of the Company’s common stock at a price of 85 percent of the lesser of the fair market value at the beginning or end of each three-month withholding period. In 2013, 2012 and 2011, 101,300, 66,531 and 87,331 shares of common stock were issued under the plan, respectively. Compensation cost is equal to the fair value of the discount on the date of grant and is recognized as compensation in the period of purchase.

Stock-Based Compensation

The Company’s statements of operations included total compensation cost from awards under the Plans and purchases under the ESPP for the years ended December 31, as follows:


*In thousands*	2013		2012		2011
Compensation cost from:
Stock options	$	16,364	$	10,626	$	2,893
Stock and stock units		18,458		9,467		4,601
Purchases of common stock at a discount		599		248		181

	$	35,421	$	20,341	$	7,675

Compensation cost included in:
Research and development expense	$	15,150	$	9,846	$	3,782
Selling, general and administrative expense		20,271		10,495		3,893

	$	35,421	$	20,341	$	7,675

Stock Options

Stock options are granted with an exercise price equal to the closing market price of the Company’s common stock on the date of grant. Stock options generally vest ratably over three or four years and have contractual terms of ten years. Stock options are valued using the Black-Scholes option valuation model and compensation cost is recognized based on such fair value over the period of vesting on a straight-line basis.

The following table summarizes information about stock options as of and for the years ended December 31 as follows:


*In thousands, except per share amounts*	2013		2012		2011
Weighted average fair value of options granted, per share	$	8.38	$	13.04	$	5.80
Total cash received from exercises of stock options		4,847		9,677		4,648
Total intrinsic value of stock options exercised		13,829		27,572		5,169

The weighted average fair value of options granted in the years ended December 31, 2013, 2012 and 2011, reflect the following weighted-average assumptions:


	2013			2012			2011
Expected life of options granted (in years)		6.9			7.1			7.5
Expected volatility		76	%		76	%		75	%
Risk-free rate		1.74	%		1.32	%		2.53	%
Expected dividends		0	%		0	%		0	%

The expected life assumption is based on an analysis of historical behavior of participants related to options awarded over time. The expected volatility assumption is based on an average of the historical volatility and the implied volatility of the Company’s common stock, derived from an analysis of historical traded and quoted options on the Company’s common stock. The risk-free rate is based on the forward U.S. Treasury yield curve. The expected dividends reflect the Company’s current and expected future policy for dividends on its common stock.

Stock option activity under the Company’s stock plans for the year ended December 31, 2013 was as follows:


	Number of Shares			Weighted Average Exercise Price Per Share
Options outstanding, January 1, 2013		8,228,334		$	10.20
Granted		4,732,275		$	13.10
Forfeited		(1,597,853	)	$	17.92
Exercised		(983,088	)	$	4.93

Options outstanding, December 31, 2013		10,379,668		$	10.83

The following table summarizes information about stock options outstanding as of December 31, 2013:


	Options Outstanding		Options Exercisable		Options Vested and Expected To Vest
Number of options		10,379,668		4,489,008		10,188,693
Weighted average exercise price per share	$	10.83	$	7.86	$	10.73
Aggregate intrinsic value (in 000’s)	$	11,240	$	6,886	$	11,217
Weighted average remaining contractual term (years)		6.98		4.18		6.94

Options expected to vest consist of options scheduled to vest in the future less expected forfeitures.

At December 31, 2013, total unrecognized compensation cost related to non-vested stock options outstanding amounted to $39.0 million. That cost is expected to be recognized over a weighted-average period of 2.6 years.

Stock and Stock Unit Grants

Stock and stock unit grants carry restrictions as to resale for periods of time or vesting provisions over time are based on the achievement of performance measures as specified in the grant. Stock and stock unit grants are valued at the closing market price of the Company’s common stock on the date of grant and compensation expense is recognized over the requisite service period, vesting period or period during which restrictions remain on the common stock or stock units granted.

Stock and stock unit activity under the Company’s stock plans for the year ended December 31, 2013 was as follows:


	Number of Shares			Weighted Average Grant Date Fair Value
Outstanding, January 1, 2013		1,903,445		$	9.55
Granted / awarded		1,798,448		$	15.24
Forfeited		(209,986	)	$	16.05
Vested or restrictions lapsed		(1,444,307	)	$	9.12

Outstanding, December 31, 2013		2,047,600		$	14.18

The total fair value of stock and stock unit awards that vested in 2013, 2012 and 2011 was $25.5 million, $27.8 million and $8.0 million, respectively. The total unrecognized compensation expense for restricted shares or units that have been granted or are probable to be awarded was $18.6 million at December 31, 2013 and will be recognized over 1.9 years on a weighted average basis.

Included in stock and stock units outstanding in the above table are (i) 173,500 performance share units, awarded in April 2011, that vested in December 2013, one year after the FDA approval of Iclusig in December 2012, and (ii) performance share units awarded in March 2012 of which 274,400 vested upon the achievement of the performance condition, marketing authorization of Iclusig by the European Commission in July 2013, and 258,400 that will vest annually, in equal increments, over the next two years on the anniversary date of the achievement of the performance condition.

Stock and stock units outstanding above also include 333,000 performance share units awarded in 2013. The number of shares that may vest, if any, related to the 2013 performance share unit awards is dependent on the achievement, and timing of the achievement, of the performance criteria defined for the award. The compensation cost for such performance-based stock awards will be based on the awards that ultimately vest and the grant date fair value of those awards. The Company begins to recognize compensation expense related to performance share units when achievement of the performance condition is probable. In 2013, the Company concluded that it was probable that the performance condition related to the 2013 performance share unit awards would be met. The performance condition is based upon continued success in specific research and development initiatives. The total compensation expense for these performance share units may be up to 60% higher if the performance condition for this award is met prior to December 31, 2014.