STOCKHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION EXPENSE

Share-based Compensation Plans

The Company has a share-based compensation program, most recently, the 2000 Amended and Restated Equity Incentive Plan (the “Plan”), that provides the Board of Directors broad discretion in creating equity incentives for employees, officers, directors and consultants. This program includes incentive and non-qualified stock options and non-vested stock awards (also known as restricted stock) granted under various stock plans. As of September 30, 2013, the Company had approximately 5.6 million shares of common stock reserved for future issuance under share-based compensation plans including 2.0 million shares of common stock authorized for issuance under the Company’s 2012 Inducement Plan that was adopted by the Board of Directors in June 2012. New shares are issued as a result of stock option exercises, restricted stock units vesting and restricted stock award grants.

The Company recognized share-based compensation expense as follows (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Costs of product sales	$	223	$	403	$	651	$	1,114
Research and development	340		307		906		980
Selling, general and administrative	1,436		1,549		3,552		12,763
Total share-based compensation expense	$	1,999	$	2,259	$	5,109	$	14,857

As of September 30, 2013, $10.9 million of total unrecognized share-based compensation expense related to non-vested awards is expected to be recognized over the respective vesting terms of each award through 2017. The weighted‑average terms of the unrecognized share-based compensation expense are 2.6 years for stock options and 2.2 years for restricted stock.

Stock Options

The fair value of options was estimated at the date of grant using the Black Scholes Merton option pricing model with the following weighted‑average assumptions:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Risk free interest rate	1.4	%	0.6	%	1.0	%	0.6	%
Expected dividend yield	0.0	%	0.0	%	0.0	%	0.0	%
Expected volatility	68	%	67	%	68	%	67	%
Expected option term (in years)	4.6		4.6		4.6		4.6

The risk free interest rate for periods within the contractual life of the Company’s stock options is based on the U.S. Treasury yield curve in effect at the time of grant. The expected term is derived from an analysis of the Company’s historical exercise trends over 10 years. The expected volatility is based on a blend of historical and market‑based implied volatility. Using the assumptions above, the weighted‑average grant date fair value of options granted during the three months ended September 30, 2013 and 2012, was $2.90 and $2.11, respectively, and during the nine months ended September 30, 2013 and 2012, was $2.24 and $2.19, respectively.

Performance-Based Awards

In 2011, the Compensation Committee of the Company’s Board of Directors approved a grant of performance-based restricted stock units (“PRSUs”) under the Plan to the Company’s Chief Executive Officer (“CEO”) that is earned annually in four equal tranches based on his performance in the applicable fiscal year (the “Performance Period”). The PRSUs entitle the CEO to receive a certain number of shares of the Company’s common stock based on the Company’s satisfaction of certain financial and strategic performance goals as set and approved by the Board of Directors annually during the first quarter of the Company’s fiscal year. Based on the achievement of the performance conditions during each Performance Period, the final settlement of the PRSU award will vest twelve months following the end of each Performance Period. The PRSU award will be forfeited if the performance goals are not met or if the executive officer is no longer employed at the vest date.

The number of shares underlying the PRSUs that were granted to the CEO during 2011 totaled 0.2 million shares. As of September 30, 2013, performance conditions pertaining to 0.1 million shares of the PRSUs were achieved. The Company expects that an additional 40,900 shares of the PRSUs, with a grant date fair value of $4.67 per PRSU, will vest with respect to the Performance Period ending December 31, 2013 and the fair value of such PRSU’s is being amortized on a straight-line basis over the related service period. The total compensation cost related to PRSUs granted but not yet recognized was $0.1 million as of September 30, 2013.

During July 2012, the Compensation Committee granted certain PRSUs following the acquisition of eBioscience referred to as an Acquisition Performance Share Program (the “Program”). The purpose of the Program is to align key management and senior leadership with stockholders’ interests and to retain key employees. The measurement periods for the Program are the twelve month periods ended June 30, 2013 and June 30, 2014, respectively. Members of eBioscience management and other key employees are participating in the Program. Awards granted under the Program are granted in the form of performance shares pursuant to the terms of the Company’s 2012 Inducement Plan. If pre-determined eBioscience specific performance goals are met, shares of stock will be granted to the recipient, vesting one month following the performance period representing the date of certification of achievement, contingent upon the recipient’s continued service to the Company.

In 2012, the Company awarded 0.9 million PRSUs under the Program at a grant date fair value of $4.16 per PRSU and expects 34% of the PRSUs will vest. The fair value of the PRSUs is being amortized on a straight-line basis over the related service period. The total compensation cost related to PRSUs granted but not yet recognized was approximately $0.2 million as of September 30, 2013.

During the first quarter of 2013, the Compensation Committee granted certain PRSUs following the most recent restructuring referred to as the 2013 Program. The purpose of the 2013 Program is to retain key employees. The measurement period for the 2013 Program is the twelve month period ended December 31, 2013 and the awards granted under the 2013 Program are granted in the form of performance shares pursuant to the terms of our 2000 Plan. Dependent on the level of achievement of pre-determined financial performance goals, shares of stock will vest in equal installments over two or four years. The level of achievement of financial performance will be assessed during the first quarter of fiscal 2014 after which the share of stock will be issued to the participants, contingent upon the recipient’s continued service to the Company.

In 2013, the Company awarded 0.3 million PRSUs under the 2013 Program at a grant date fair value of $3.84 per PRSU and does not expect these PRSUs will vest.

During the third quarter of 2013, the Compensation Committee granted certain PRSUs associated with product launch and promotion initiative referred to as the 2013 Product Initiative Program. The purpose of the 2013 Product Initiative Program is to incentivize specific employees to sell specific products. The measurement period for the 2013 Product Initiative Program is the six month period ended December 31, 2013 and the awards granted under the 2013 Product Initiative Program are granted in the form of performance shares pursuant to the terms of our 2000 Plan. Dependent on the level of achievement of pre-determined financial performance goals, shares of stock will vest in equal installments over eight to twelve months. The level of achievement of financial performance will be assessed during the first quarter of fiscal 2014 after which the share of stock will be issued to the participants, contingent upon the recipient’s continued service to the Company.

In 2013, the Company awarded 0.1 million PRSUs under the 2013 Product Initiative Program at a grant date fair value of $5.51 per PRSU and expects 100% of the PRSUs will vest. The fair value of the PRSUs is being amortized on a straight-line basis over the related service period. The total compensation cost related to PRSUs granted but not yet recognized was approximately $0.7 million as of September 30, 2013.

Employee Stock Purchase Plan

In August 2011, the Company’s Board of Directors adopted the 2011 Employee Stock Purchase Plan (“ESPP”) that was approved by the Company’s stockholders on May 11, 2012. The ESPP reserved a total of 7.0 million shares of the Company’s common stock for issuance under the plan and permits eligible employees to purchase common stock at a discount through payroll deductions.

The price at which stock is purchased under the ESPP is equal to 85% of the fair market value of the common stock on the first day of the offering period or the last day of the purchase period, whichever is lower. The offering periods are 12 months and include two 6 month purchase periods that result in a look-back for determining the purchase price of up to 12 months. Employees can invest up to 15% of their gross compensation through payroll deductions. In no event would an employee be permitted to purchase more than 750 shares of common stock during any six-month purchase period. The initial offering period commenced in November 2011. As of September 30, 2013, there were 296 participants in the plan. Included in total share-based compensation cost for the three and nine months ended September 30, 2013 was $0.1 million and $0.4 million, respectively, related to the ESPP. Included in total share-based compensation cost for the three and nine months ended September 30, 2012 was $0.1 million and $0.5 million, respectively, related to the ESPP.

During the three and nine months ended September 30, 2013 and 2012, the fair value of shares under the ESPP was estimated using the following assumptions:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Risk free interest rate	0.1	%	0.1	%	0.1	%	0.1	%
Expected dividend yield	0.0	%	0.0	%	0.0	%	0.0	%
Expected volatility	52.6	%	67	%	52.6	%	67	%
Expected term (in years)	0.6		0.8		0.6		0.8