15. Income taxes

Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. A valuation allowance is established when uncertainty exists as to whether all or a portion of the net deferred tax assets will be realized. Components of the net deferred tax asset as of December 31, 2011 and 2012 are approximately as follows (in thousands):


	December 31,
	2011			2012
Deferred tax assets:
Net operating loss carryforwards	$	557,427		$	609,471
Research and development credits		59,848			65,315
Capitalized research		32,440			31,490
Accrued expenses		2,827			2,922
Non-qualified stock option expense		27,964			30,928
Depreciation		8,906			10,025

Total net deferred tax assets		689,412			750,151
Valuation allowance		(689,412	)		(750,151	)

Net deferred tax assets	$	—		$	—

The Company’s net deferred tax assets as of December 31, 2011, consist of $718.2 million of gross deferred tax assets and $28.8 million of gross deferred tax liabilities. The Company’s net deferred tax assets as of December 31, 2012, consist of $784.6 million of gross deferred tax assets and $34.4 million of gross deferred tax liabilities.

The Company’s effective income tax rate differs from the statutory federal income tax rate as follows for the years ended December 31, 2010, 2011 and 2012:


	December 31,
	2010			2011			2012
Federal tax benefit rate		35.0	%		35.0	%		35.0	%
State tax benefit, net of federal benefit		—			—			—
Permanent items		—			—			—
Intercompany transfer of intellectual property		(5.0	)		(5.0	)		(4.0	)
Valuation allowance		(30.0	)		(30.0	)		(31.0	)

Effective income tax rate		0.0	%		0.0	%		0.0	%

As required by ASC 740 Income Taxes (“ASC 740”), management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. Management has concluded, in accordance with the applicable accounting standards, that it is more likely than not that the Company may not realize the benefit of its deferred tax assets due to net losses since inception. Accordingly, the net deferred tax assets have been fully reserved. Management reevaluates the positive and negative evidence on an annual basis. During the years ended December 31, 2010, 2011 and 2012, the change in the valuation allowance was $56.5 million, $57.2 million and $60.7 million, respectively, for income taxes.

At December 31, 2012, the Company had federal and state net operating loss carryforwards of approximately $1.6 billion and $1.1 billion available, respectively, to reduce future taxable income and which will expire at various dates beginning in 2013 and 2014, respectively. As a result of the Company’s initial public offering, an ownership change within the meaning of Internal Revenue Code Section 382 occurred in August 2004. As a result, federal net operating loss and credit carry forwards of approximately $216.0 million are subject to an annual use limitation of approximately $13.0 million. The annual limitation is cumulative and therefore, if not fully utilized in a year can be utilized in future years in addition to the Section 382 limitation for those years. The federal net operating losses generated subsequent to the Company’s initial public offering in August 2004 are currently not subject to any such limitation as there have been no ownership changes since August 2004 within the meaning of Internal Revenue Code Section 382. At December 31, 2012, the Company had research and development credits of $77.4 million that expire at various dates through 2033.

The Company has evaluated the impact of ASC 740 on its financial statements, which was effective beginning January 1, 2007. The evaluation of a tax position in accordance with this guidance is a two-step process. The first step is recognition: the enterprise determines whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, the enterprise should presume that the position will be examined by the appropriate taxing authority that would have full knowledge of all relevant information. The second step is measurement: a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position. Therefore, no liabilities for uncertain income tax positions have been recorded. Tax years since 1993 remain subject to examination by the major tax jurisdictions in which the Company is subject to tax.