11. Stockholders' Equity

Equity Incentive Plan

We maintain an equity incentive plan (EIP) under which we may grant stock options to employees and non-employees. The EIP provides for the issuance of up to 29.9 million shares of our common stock. As of December 31, 2014, there were 9.3 million shares remaining for issuance under the EIP, of which approximately 9.2 million were reserved for issuance in connection with options granted to our Chairman and Co-Chief Executive Officer, Dr. Rothblatt. If granted, options awarded under the EIP are nontransferable, carry a maximum contractual term of ten years and typically vest in equal annual increments over a maximum period of three years, except for options granted to Dr. Rothblatt, which vest immediately upon grant in accordance with the terms of her employment agreement. The exercise price of stock options granted under the EIP can be no less than the fair market value of our common stock on the date of grant. We issue new shares of our common stock upon the exercise of options.

Employee Stock Options

We estimate the fair value of stock options using the Black-Scholes-Merton valuation model. Option-pricing models, including the Black-Scholes-Merton model, require the use of judgment and subjective assumptions that can materially impact the estimation of fair value and share-based compensation.

Inputs included in estimating the fair value of a stock option include the price of our common stock, the expected volatility of our common stock, risk-free interest rate, the expected term of stock option awards, expected forfeiture rate and the expected dividend yield.

A description of the key inputs, requiring estimates, used in determining the fair value of stock options is provided below:

Expected volatility—Volatility is a measure of the amount the price of our common stock has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. We use historical volatility based on weekly price observations of our common stock during the period immediately preceding a stock option grant that is equal to the expected term of the grant (up to a maximum of five years). We believe the volatility of the price of our common stock measured over the preceding five years provides a reliable projection of future long-term volatility.

Risk-free interest rate—The risk-free interest rate is the average interest rate consistent with the yield available on a U.S. Treasury note with a term equal to the expected term of a given stock option grant.

Expected term—The expected term reflects the estimated time period we expect an option grant to remain outstanding. We use historical data to develop this input.

Expected forfeiture rate—The expected forfeiture rate is the estimated percentage of options granted that are expected to be forfeited or canceled on an annual basis prior to becoming fully vested. We derive our estimate based on historical forfeiture experience for similar classes of employees.

Expected dividend yield—We do not pay dividends on our common stock and do not expect to do so in the future. Therefore, the dividend yield is assumed to be zero.

The following weighted-average assumptions were used in estimating the fair value of stock options granted to employees:

	Year Ended December 31,
	2014			2013
Expected volatility		32.6	%		33.0	%
Risk-free interest rate		1.7	%		1.8	%
Expected term of options (in years)		5.0			5.0
Expected forfeiture rate		0.0	%		0.0	%
Expected dividend yield		0.0	%		0.0	%

A summary of the status and activity of employee stock options is presented below:

	Options			Weighted- Average Exercise Price		Weighted Average Remaining Contractual Term (in Years)		Aggregate Intrinsic Value (in 000s)
Outstanding at January 1, 2014		4,749,449		$	56.06
Granted		723,869			129.49
Exercised		(1,414,369	)		34.16
Forfeited		(4,178	)		34.35

Outstanding and exercisable at December 31, 2014		4,054,771		$	76.83		6.4	$	213,505

The weighted average fair value of an employee stock option granted during each of the years in the three-year period ended December 31, 2014, was $40.70, $36.10 and $19.74, respectively. The total fair value of vested employee stock options for each of the years in the three-year period ended December 31, 2014 was $29.5 million, $36.1 million and $3.0 million, respectively.

Total share-based compensation expense relating to employee stock options is as follows (in thousands):

	Year Ended December 31,
	2014			2013			2012
Selling, general and administrative	$	29,460		$	36,097		$	3,024
Related income tax benefit		(10,429	)		(13,566	)		(1,115	)

Share-based compensation expense, net of taxes	$	19,031		$	22,531		$	1,909

As of December 31, 2014, all employee stock options were fully vested; consequently, there were no amounts of unrecognized compensation cost remaining.

Employee and non-employee stock option exercise data is summarized below (dollars in thousands):

	Year Ended December 31,
	2014		2013		2012
Number of options exercised		1,462,369		876,115		575,944
Cash received from options exercised	$	50,168	$	26,620	$	14,290
Total intrinsic value of options exercised	$	108,425	$	37,530	$	15,508
Tax benefits realized from options exercised	$	30,845	$	9,299	$	3,054

Employee Stock Purchase Plan

In June 2012, our shareholders approved the United Therapeutics Corporation Employee Stock Purchase Plan (ESPP), which has been structured to comply with Section 423 of the Internal Revenue Code. The ESPP provides eligible employees the right to purchase shares of our common stock at a discount through elective accumulated payroll deductions at the end of each offering period. Offering periods, which began in September 2012, occur in consecutive six-month periods commencing on September 5th and March 5th of each year. During the year ended December 31, 2014, we issued 45,657 shares of our common stock in exchange for $3.3 million in employee contributions. Eligible employees may contribute up to 15 percent of their base salary, subject to certain annual limitations as defined in the ESPP. The purchase price of the shares is equal to the lower of 85 percent of the closing price of our common stock on either the first or last trading day of a given offering period. In addition, the ESPP provides that no eligible employee may purchase more than 4,000 shares during any offering period. The ESPP has a 20-year term and limits the aggregate number of shares that can be issued to 3.0 million.

Related share-based compensation expense for years ended December 31, 2014, 2013 and 2012 was $1.1 million, $803,000 and $240,000, respectively. We estimate the fair value of the option to purchase shares of our common stock under the ESPP using the same methodology that we employ in valuing our stock options and STAP awards.

Earnings per Share

The components of basic and diluted earnings per share are as follows (in thousands, except per share amounts):

	Year Ended December 31,
	2014		2013		2012
Numerator:
Net income	$	340,074	$	174,560	$	304,442


Denominator:
Weighted average outstanding shares—basic		48,176		50,076		52,093
Effect of dilutive securities(1):
Convertible notes		2,630		1,736		218
Warrants		1,910		276		—
Stock options and employee stock purchase plan		1,439		1,143		969

Weighted average shares—diluted		54,155		53,231		53,280


Earnings per common share:
Basic	$	7.06	$	3.49	$	5.84


Diluted	$	6.28	$	3.28	$	5.71


Stock options and warrants excluded from calculation(2)		9,273		11,210		11,862

(1)	Calculated using the treasury stock method.
(2)	Certain stock options and warrants have been excluded from the computation of diluted earnings per share because their impact would be anti-dilutive.

Share Repurchases

During the year ended December 31, 2012, we repurchased approximately 4.0 million shares of our common stock for $188.0 million.

In February 2013, our Board of Directors authorized a share repurchase program for up to $420.0 million in aggregate repurchases of our common stock. We completed this repurchase program during the quarter ended June 30, 2014 and acquired 4.6 million shares of our common stock in the aggregate under the program.

In June 2014, our Board of Directors authorized the repurchase of up to an additional $500.0 million of our common stock in open market or privately negotiated transactions, at our discretion (the 2014 Repurchase Program). This program became effective on August 1, 2014, and will remain open for up to one year. During the year ended December 31, 2014, we acquired 887,114 shares of our common stock at an aggregate cost of $105.5 million under the 2014 Repurchase Program.

Shareholder Rights Plan

In June 2008, we entered into an Amended and Restated Rights Agreement with The Bank of New York as Rights Agent (the Plan), which amended and restated our original Rights Agreement dated December 17, 2000. The Plan, as amended and restated, extended the expiration date of the Preferred Share Purchase Rights (Rights) from December 29, 2010 to June 26, 2018, and increased the purchase price of each Right from $64.75 to $400.00, respectively. Each Right entitles holders to purchase one one-thousandth of a share of our Series A Junior Participating Preferred Stock. Rights are exercisable only upon our acquisition by another company, or commencement of a tender offer that would result in ownership of 15 percent or more of the outstanding shares of our voting stock by a person or group (as defined under the Plan) without our prior express written consent. As of December 31, 2014, we have not issued any shares of our Series A Preferred Stock.