6. Share-Based Payments

2004 Stock Incentive Plan

The Company’s 2004 Stock Incentive Plan, as amended, allows for the granting of incentive and nonstatutory stock options, restricted stock awards, stock appreciation rights and other share-based awards to employees, officers, directors, consultants and advisors. At December 31, 2012, the Company was authorized to issue up to 15,343,534 shares of common stock with annual increases (to be added on the first day of the Company’s fiscal years during the period beginning in fiscal year 2005 and ending on the second day of fiscal year 2013) equal to the lowest of (i) 1,974,393 shares, (ii) 5% of the then outstanding number of common shares or (iii) such other amount as the Board of Directors may authorize. At March 31, 2013, the Company had 5,034,813 shares available for grant under the 2004 Stock Incentive Plan.

Share-Based Compensation Expense

Total compensation cost for all share-based payment arrangements, including employee, director and consultant stock options, restricted stock and the Company’s employee stock purchase plan for the three months ended March 31, 2013 and 2012 was $2.9 million and $3.3 million, respectively.

Share-based compensation expense related to outstanding employee stock option grants and the Company’s employee stock purchase plan was $1.9 million and $1.8 million for the three months ended March 31, 2013 and 2012, respectively. During the three months ended March 31, 2013, the Company granted 1,128,646 stock options, of which 1,025,771 were granted in connection with annual merit awards and 102,875 were granted to new hires. The average grant date fair value of options granted was calculated using the Black-Scholes-Merton option-pricing model and the weighted average assumptions noted in the table below. The weighted average grant date fair value of option awards granted during the three months ended March 31, 2013 and 2012 was $7.21 and $9.37 per option, respectively.

The following tables summarize the weighted average assumptions the Company used in its fair value calculations at the date of grant:

	Weighted Average Assumptions
	Stock Options				Employee Stock Purchase Plan
	For the Three Months Ended March 31, 2013		For the Three Months Ended March 31, 2012		For the Three Months Ended March 31, 2013		For the Three Months Ended March 31, 2012
Expected volatility	62	%	65	%	64	%	66	%
Expected dividends	—		—		—		—
Expected life (years)	6.2		6.5		0.5		0.5
Risk-free interest rate	1.4	%	1.4	%	0.1	%	0.1	%

At March 31, 2013, the total remaining unrecognized compensation cost related to nonvested stock option awards amounted to $15.7 million, including estimated forfeitures, which will be recognized over the weighted average remaining requisite service period of 3 years.

During the three months ended March 31, 2013, holders of options issued under the Company’s stock plans exercised their right to acquire an aggregate of 51,749 shares of common stock. Additionally, during the three months ended March 31, 2013, the Company issued 38,626 shares of common stock to employees under the Company’s employee stock purchase plan.

Restricted Stock Awards

The Company has also made awards of restricted common stock to employees, officers and directors. During the three months ended March 31, 2013, the Company awarded 140,300 shares of time-based restricted common stock to its officers in connection with its annual merit grant, 5,000 shares of time-based restricted common stock to a newly hired employee and 1,680 shares of performance-based restricted common stock to a newly hired employee. The time-based restricted common stock fully vests over the four years following the grant date. The performance condition that triggers vesting of the performance-based awards is the approval in the United States from the FDA for M356, the Company’s second major generic program, provided that approval occurs on or before March 28, 2015. The Company has granted 856,510 shares of restricted common stock tied to this M356 performance condition to its employees and officers that remain unvested at March 31, 2013. The awards of restricted common stock are generally forfeited if the employment relationship terminates with the Company prior to vesting.

The value of restricted stock awards is recognized as compensation cost in the Company’s consolidated statements of comprehensive loss over each award’s explicit or implicit service period. The Company estimates an award’s implicit service period based on its best estimate of the period over which an award’s vesting conditions will be achieved. The Company reevaluates these estimates on a quarterly basis and will recognize any remaining unrecognized compensation as of the date of an estimate revision over the revised remaining implicit service period. In March 2013, the Company revised the implicit service period for certain performance-based restricted stock awards due to a change in the expected vesting date. As a result of this change in estimate, the Company’s net loss for the three months ended March 31, 2013 was $0.5 million less than had the estimate remained unchanged. The impact of this change in estimate on the Company’s net loss per share for the three months ended March 31, 2013 was immaterial.

The Company recorded share-based compensation expense related to outstanding restricted stock awards, including the performance-based shares, because the Company determined that it was probable the performance condition would be achieved, of $0.9 million and $1.4 million for the three months ended March 31, 2013 and 2012, respectively. As of March 31, 2013, the total remaining unrecognized compensation cost related to nonvested restricted stock awards amounted to $8.5 million, which is expected to be recognized over the weighted average remaining requisite service period of 1.9 years.

A summary of the status of nonvested shares of restricted stock as of March 31, 2013 and the changes during the three months then ended are presented below (in thousands, except fair values):

	Number of Shares		Weighted Average Grant Date Fair Value
Nonvested at January 1, 2013	1,137		$	14.61
Granted	146		12.58
Vested	(58	)	14.39
Forfeited	(21	)	14.60

Nonvested at March 31, 2013	1,204		$	14.37

Nonvested shares of restricted stock that have time-based or performance-based vesting schedules as of March 31, 2013 are summarized below:

Vesting Schedule		Nonvested Shares
Time-based		347
Performance-based		857

Nonvested at March 31, 2013		1,204