Share-Based Compensation Plans - Note 12

12 Months Ended

Dec. 31, 2013

Share-Based Compensation Plans

(12) Share-Based Compensation Plans

As of December 31, 2013, the Company has four equity incentive plans: the 1994 Nonemployee Directors' Stock Option Plan (the Directors' Plan), the 1998 Stock Option Plan (the 1998 Plan), the 2005 Omnibus Incentive Plan (the 2005 Plan), and the Employee Stock Purchase Plan ("ESPP"). These plans provide that in the event of certain change in control transactions, including a merger or consolidation in which the Company is not the surviving corporation or a reorganization in which more than fifty-percent (50%) of the shares of the Company's common stock entitled to vote are exchanged, all outstanding, unvested equity awards under these plans will vest, and in the case of stock options, will become immediately exercisable.

As of December 31, 2013, there are no shares reserved for future grant under the Directors' Plan and the 1998 Plan. As of December 31, 2013, there are 4,497,990 shares reserved for future grant under the 2005 Plan. The Company's 2005 Plan provides for the grant of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, deferred stock units, performance shares, cash-based awards and other stock-based awards. Under the Company's 2005 Plan, the exercise price of stock options, the grant price of stock appreciation rights and the initial value of performance awards, must be equal to at least 100% of the fair market value of the Company's common stock on the date of grant. Stock options generally vest 28% after year one and 2% per month thereafter or 25% after year one and 6.25% every three months thereafter. Under the Company's 1998 Plan, the exercise price of options is not less than the fair market value of the Company's common stock on the date of grant. The number of shares, terms, and exercise period are determined by the board of directors on a grant-by-grant basis, and the exercise period does not extend beyond ten years from the date of the grant. Stock options generally vest 28% after one year and 2% or 3% per month thereafter or 25% after year one and 6.25% every three months thereafter.

During the year ended December 31, 2010, the Company's Board of Directors awarded a total of 1,130,700 performance condition options to certain of the Company's employees. Vesting of these options are subject to the Company achieving certain performance criteria established at the grant date and the individuals fulfilling a service condition (continued employment). As of December 31, 2013, the performance criteria of 825,340 of these options had been satisfied and these options will become exercisable based on the following vesting schedule: 25% on each of the first four anniversaries of the date of grant, which was February 20, 2010 (the date of grant). The Company recognized $277,000, $1.1 million and $153,000 of compensation expense during the years ended December 31, 2013, 2012 and 2011, respectively, related to these options. The next performance criteria is the acceptance of the BLA filing for Natpara by the FDA. The BLA was accepted by the FDA in January 2014 and will trigger approximately $111,000 of compensation expense related to these options being recognized in the first quarter of 2014.

The Company utilized the Black-Scholes option pricing model to determine the grant date fair value of the awards. As of December 31, 2013, except for the 825,340 options discussed above, the Company does not believe that the achievement of the performance criteria for the other options is probable and therefore has not recognized any compensation expense related to those options during the years ended December 31, 2013, 2012 and 2011, respectively. Compensation expense will be recognized only once the performance condition is probable of being achieved and then only the cumulative amount related to the service condition that has been fulfilled.

On May 19, 2010, the shareholders approved an ESPP whereby qualified employees are allowed to purchase limited amounts of the Company's common stock at the lesser of 85% of the market price at the beginning or end of the offering period. The shareholders have authorized 500,000 shares for purchase by employees. During the years ended December 31, 2013, 2012 and 2011, employees purchased 72,937, 45,553 and 37,065 shares, respectively, under the ESPP. The Company has 329,585 shares available for future purchase as of December 31, 2013.

The Company estimates expected volatility considering implied volatility based on market-traded options on the Company's common stock and historical volatility of the Company's common stock over the expected life of the options. In estimating volatility for the years ended December 31, 2013, 2012 and 2011 the Company weighted implied volatility at zero percent and historical volatility at 100%. The Company recognizes compensation cost for awards on a straight-line basis over the requisite service period for the entire award. Additionally, the Company's policy is to issue new shares of common stock to satisfy stock option exercises, ESPP purchases or grants of restricted shares or deferred stock units.

The compensation expense related to stock options, ESPP purchases, restricted shares and deferred stock units are recorded in expense categories based on where other compensation cost is recorded for employees receiving the awards.

The following table summarizes the effect of compensation cost arising from share-based payment arrangements in the Company's Statements of Operations for the years ended December 31, 2013, 2012 and 2011 for the Company's stock option plans, the ESPP and other share-based awards (in thousands):

		Years ended December 31,
		2013		2012		2011
Research and development	$	4,107	$	3,343	$	1,544
Selling, general and administrative		5,330		4,205		2,556
Amounts charged against income, before
income tax expense	$	9,437	$	7,548	$	4,100

The fair value of each option award is estimated, on the date of grant using the Black-Scholes option-pricing valuation model, which incorporates ranges of assumptions for inputs as shown in the following table. The assumptions are as follows:

• The expected volatility is a blend of implied volatility based on market-traded options on the Company's common stock and historical volatility of the Company's stock over the expected term of the options.

• The Company uses historical data to estimate the expected term of the option; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of options granted represents the period of time the options are expected to be outstanding.

• The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the expected term of the option.

• The expected dividend yield is based on the Company's current dividend yield as the best estimate of projected dividend yield for periods within the expected term of the option.

	Years ended December 31,
	2013	2012	2011
Dividend yield	—	—	—
Expected volatility	59.15% - 60.69%	61.22% - 67.58%	60.5% - 67.8%
Risk-free interest rate	0.7% - 3.7%	0.6% - 1.1%	0.9% - 3.0%
Expected term (in years)	5.2 - 6.0	5.1 - 5.9	4.8 - 5.9

A summary of activity related to aggregate stock options under all plans is indicated in the following table (in thousands, except per share amounts):

	Year ended December 31, 2013
			Weighted	Weighted
	Number		average	average remaining		Aggregate
	of		exercise	contractual		intrinsic
	options		price	term		value
	(in thousands)			(in years)		(in thousands)
Options outstanding at beginning
of year	7,390	$	6.75
Options granted	2,178		10.69
Options exercised	2,522		5.76
Options forfeited/expired	390		13.29
Options outstanding at end of year	6,656		8.03	7.49	$	148,651
Vested and expected to vest	6,264		7.87	7.40	$	140,880
Options exercisable at end of year	2,690	$	6.69	6.05	$	63,690

The weighted-average grant-date fair value of options granted during the years ended December 31, 2013, 2012 and 2011 was $5.66, $4.46 and $4.57, respectively. The intrinsic value for stock options is defined as the difference between the current market value and the grant price. The total intrinsic value of stock options exercised during the years ended December 31, 2013, 2012 and 2011 was $33.4 million, $2.0 million and $1.0 million, respectively.

Restricted stock, restricted stock units and deferred stock unit grants consist of the Company's common stock. The fair value of each restricted stock grant, restricted stock unit and deferred stock unit is equal to the market price of the Company's stock at the date of grant. Restricted stock and restricted stock unit grants are time vested. During the years ended December 31, 2013, 2012 and 2011, the Company granted 35,097, 20,334 and 64,792 deferred stock units, respectively, to directors for services, which did not contain any vesting restrictions. During the years ended December 31, 2013, 2012 and 2011, the Company granted 75,940, 106,575 and 0 restricted stock units, respectively, to directors for services, which vest over one year. At December 31, 2013, there are 642,506 deferred stock units outstanding. During the years ended December 31, 2013, 2012 and 2011 the Company granted to employees 458,719, 307,720 and 10,000 shares of restricted stock, respectively, which will vest over a period of one to three years.

A summary of activity related to aggregate restricted stock, restricted stock units and deferred stock units as of December 31, 2013, is indicated in the following table (shares in thousands):

	Number of		Weighted-average
	shares		grant date fair value
Nonvested at beginning of year	505	$	6.96
Granted	570		9.18
Vested	(318)		6.37
Forfeited	(5)		8.21
Nonvested at December 31, 2013	752	$	8.89

As of December 31, 2013, there was $17.0 million of total unrecognized compensation cost related to all unvested share-based compensation arrangements that is expected to be recognized over a weighted-average period of 2.55 years.