8.	STOCK INCENTIVE PLANS

Stock Plans

In June 2009, the Company’s stockholders approved an amendment and restatement of the Company’s 2004 Stock Incentive Plan (the “Amended and Restated 2004 Plan”), which replaced the Company’s 2004 Stock Incentive Plan, as amended (the “2004 Plan”). At December 31, 2010, the Amended and Restated 2004 Plan provided for the granting of stock options to purchase up to 12,366,485 shares of common stock. Prior to the adoption of the Amended and Restated 2004 Plan, the Company was authorized to grant both stock options and restricted stock awards under the 2004 Plan. As of the effective date of the Amended and Restated 2004 Plan, the Company may only grant stock options under the Amended and Restated 2004 Plan, provided that the terms and conditions of any restricted stock awards outstanding under the 2004 Plan will continue to be governed by the Amended and Restated 2004 Plan.

In June 2009, the Company’s stockholders also approved the Company’s 2009 Stock Incentive Plan (the “2009 Plan”). The 2009 Plan provides for the granting of stock options, restricted stock awards and units, stock appreciation rights and other stock-based awards to purchase up to 2,200,000 shares of common stock. The 2009 Plan has a fungible share pool. Any award that is not a full value award shall be counted against the authorized share limits specified in the 2009 Plan as one share for each share of common stock subject to award, and all full value awards, defined in the 2009 Plan as restricted stock awards or other stock-based awards, shall be counted as one and a half shares for each one share of common stock subject to such full value award. In addition, the 2009 Plan includes a non-employee director stock option program under which each eligible non-employee director is entitled to (1) a grant of an option to purchase 30,000 shares of common stock upon his or her initial appointment to the Board of Directors, or such other amount as the Board of Directors deems appropriate, and (2) a subsequent annual grant of an option to purchase 15,000 shares of common stock based on continued service, made on the date of each annual meeting of stockholders, provided the non-employee director has served as a director for at least six months and is serving as a director immediately prior to and following such annual meeting. The chairman of the audit committee will receive an additional annual grant of an option to purchase 10,000 shares of common stock based on continued service and the chairman of the science and technology committee will receive an additional annual grant of an option to purchase 15,000 shares of common stock based on continued service. Stock options granted by the Company to non-employee directors upon their appointment to the Board of Directors vest as to one-third of such shares on each of the first, second and third anniversaries of the date of grant, and those granted at each year’s annual meeting at which they serve as a director vest in full on the first anniversary of the date of grant.

At December 31, 2012, an aggregate of 815,916 shares of common stock were reserved for issuance under the Company’s stock plans, including 541,806 shares of common stock available for equity awards and 274,110 shares available for future grant under the Company’s 2004 Employee Stock Purchase Plan (the “2004 Purchase Plan”). Each option shall expire within ten years of issuance. Stock options granted by the Company to employees generally vest as to 25% of the shares on the first anniversary of the grant date and 6.25% of the shares at the end of each successive three-month period until fully vested.

Stock-Based Compensation

The Company recorded $9.0 million, $14.8 million and $18.7 million of stock-based compensation expense for the years ended December 31, 2012, 2011 and 2010, respectively, related to employee stock options and the 2004 Purchase Plan.

The Company accounts for non-employee grants as an expense over the vesting period of the underlying stock options. At the end of each financial reporting period prior to vesting, the Company re-measures the value of these stock options (as calculated using the Black-Scholes option-pricing model) using the then-current fair value of the Company’s common stock. The Company recognized $1.0 million, $0.4 million and $0.3 million of non-employee stock-based compensation expense for the years ended December 31, 2012, 2011 and 2010, respectively.

In connection with the establishment of Regulus, the Company granted stock options to the members of Regulus’ scientific advisory board and board of directors and certain Regulus employees. In addition to the total stock-based compensation expense stated above, the Company recorded $0.3 million, $0.4 million and $0.3 million of stock-based compensation expense related to these stock option grants in equity in loss of joint venture (Regulus Therapeutics Inc.) in its consolidated statements of comprehensive loss for the years ended December 31, 2012, 2011 and 2010, respectively.

In October 2010, the Company granted 113,370 shares of restricted stock of the Company to certain employees. These restricted stock awards were valued at $1.4 million on the grant date. These restricted stock awards vest ratably over an approximate three-year period. In May 2011, the Company granted an aggregate of 229,806 shares of performance-based restricted stock awards to its employees, excluding the Company’s leadership team. These restricted stock awards were valued at $2.3 million on the grant date and have a term of five years. The vesting of these awards is predicated on the Company’s achievement of certain clinical development goals. In January 2012, as part of its post-restructuring retention program, the Company granted an aggregate of 513,082 shares of restricted stock to its retained employees, excluding the Company’s chief executive officer and president and chief operating officer. These restricted stock awards were valued at $5.3 million on the grant date and vest in full on the second anniversary of the grant date. The Company recognized an aggregate of $2.4 million, $1.5 million and $0.1 million of stock-based compensation expense related to all of these restricted stock awards for the years ended December 31, 2012, 2011 and 2010, respectively.

Total compensation cost for all stock-based awards for the years ended December 31, 2012, 2011 and 2010 was $12.7 million, $17.1 million and $19.4 million, respectively. No amounts relating to the stock-based compensation have been capitalized.

Valuation Assumptions for Stock Options

The fair value of stock options at date of grant, based on the following assumptions, was estimated using the Black-Scholes option-pricing model. The Company’s expected stock-price volatility assumption for 2012 and 2011 is based on the historical volatility of the Company’s publicly traded stock. The expected life assumption for 2012 and 2011 is based on the Company’s historical data. The Company’s expected stock-price volatility assumption for 2010 is based on a combination of implied volatilities of its publicly traded stock option prices as well as the historical volatility of the Company’s publicly traded stock. The expected life assumption for 2010 is based on the equal weighting of the Company’s historical data and the historical data of the Company’s pharmaceutical and biotechnology peers. The dividend yield assumption is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends. The risk-free interest rate used for each grant is equal to the zero coupon rate for instruments with a similar expected life. The Company currently expects, based on an analysis of its historical forfeitures, excluding the impact of its corporate restructurings, that approximately 67% of its stock options will actually vest, and therefore has applied an annual forfeiture rate of 9.5% to all unvested employee stock options at December 31, 2012. The Company will record additional expense if the actual forfeitures are lower than estimated and will record a recovery of prior expense if the actual forfeitures are higher than estimated.


	2012			2011			2010
Risk-free interest rate		0.8-1.0	%		1.2-2.6	%		1.6-2.9	%
Expected dividend yield		—			—			—
Expected option life		5.6-5.9 years			5.8-5.9 years			5.9-6.1 years
Expected volatility		57	%		55-57	%		53-55	%

At December 31, 2012, there was $14.7 million of unearned compensation expense remaining related to unvested employee stock options to be recognized as expense over a weighted-average period of approximately 2.6 years.

Stock Option Activity

The following table summarizes the activity of the Company’s stock option plans:


	Number of Options			Weighted Average Exercise Price
Outstanding, December 31, 2011		9,778,539		$	15.53
Granted		1,233,086		$	17.02
Exercised		(661,909	)	$	9.67
Cancelled		(1,418,133	)	$	18.47

Outstanding, December 31, 2012		8,931,583		$	15.71

Exercisable at December 31, 2010		4,983,088		$	18.60
Exercisable at December 31, 2011		6,033,858		$	18.13
Exercisable at December 31, 2012		5,885,363		$	17.20

The weighted average remaining contractual life for stock options outstanding and stock options exercisable at December 31, 2012 was 6.4 years and 5.2 years, respectively.

The aggregate intrinsic value of stock options outstanding at December 31, 2012 was $41.8 million, of which $24.9 million related to exercisable stock options. The intrinsic value of stock options exercised was $4.8 million, $40,000 and $1.8 million for the years ended December 31, 2012, 2011 and 2010, respectively. The weighted average fair value of stock options granted was $8.68, $7.68 and $5.98 per share for the years ended December 31, 2012, 2011 and 2010, respectively.

The aggregate intrinsic value of stock options expected to vest at December 31, 2012 was $14.7 million. The weighted average fair value of stock options expected to vest was $5.56. The weighted average remaining contractual life for stock options expected to vest was 8.8 years and the weighted average exercise price for these stock options was $12.82 per share at December 31, 2012.

Restricted Stock Awards

The following table summarizes the activity of the Company’s restricted stock awards:


	Number of Awards			Weighted Average Grant Date Fair Value
Unvested at December 31, 2011		312,482		$	10.68
Granted		513,082		$	10.49
Vested		(141,740	)	$	10.42
Forfeited		(80,064	)	$	5.94

Unvested at December 31, 2012		603,760		$	9.37

The total fair value of restricted stock awards that vested during the years ended December 31, 2012, 2011 and 2010 was $1.5 million, $0.5 million and zero, respectively. At December 31, 2012, there remained $2.8 million of unearned compensation expense related to unvested restricted stock awards to be recognized as expense over a weighted-average period of approximately one year.

Employee Stock Purchase Plan

In 2004, the Company adopted the 2004 Purchase Plan with 315,789 shares authorized for issuance. In June 2010, the Company’s stockholders approved an amendment to the 2004 Purchase Plan, which increased the shares authorized for issuance from 315,789 shares to 715,789 shares. Under the 2004 Purchase Plan, each offering period is six months, at the end of which employees may purchase shares of common stock through payroll deductions made over the term of the offering. The per-share purchase price at the end of each offering period is equal to the lesser of 85% of the closing price of the common stock at the beginning or end of the offering period. The Company issued 73,590, 79,038 and 72,674 shares during the years ended December 31, 2012, 2011 and 2010, respectively, and at December 31, 2012, 274,110 shares were available for issuance under the 2004 Purchase Plan.

The weighted average fair value of stock purchase rights granted as part of the 2004 Purchase Plan was $2.82, $3.46 and $5.12 per share for the years ended December 31, 2012, 2011 and 2010, respectively. The fair value was estimated using the Black-Scholes option-pricing model. The Company used a weighted-average stock-price volatility of 57%, expected option life assumption of six months and a risk-free interest rate of 0.1%. The Company recorded $0.2 million, $0.3 million and $0.3 million of stock-based compensation expense for the years ended December 31, 2012, 2011 and 2010, respectively, related to the 2004 Purchase Plan.