Note 10—Stock-Based Compensation

Stock Options

Our 2008 Equity Incentive Plan, or 2008 Plan, provides for the grant of incentive and nonstatutory stock options, restricted stock, stock appreciation rights, performance units and performance shares to employees, directors and consultants and subsidiary corporations’ employees and consultants. The 2008 Plan also allows any shares returned under our Amended and Restated 1998 Stock Option Plan, or 1998 Plan, as a result of cancellation of options or repurchase of shares issued pursuant to the 1998 Plan, to be issued under the 2008 Plan subject to a maximum limit of 3,084,848 shares. As of December 31, 2011 and 2010, a total of 365,377 and 357,135 shares, respectively, have been reserved under the 2008 Plan as a result of the cancellation of options or repurchase of shares under the 1998 Plan. In addition, the 2008 Plan provides for annual increases in the number of shares available for issuance thereunder on the first day of each fiscal year, beginning with the 2010 fiscal year, equal to the lesser of:

•

five percent of the outstanding shares of our common stock on the last day of the immediately preceding fiscal year;

•

1,785,714 shares; or

•

such other amount as our board of directors may determine.

On January 1, 2012 and 2011, in accordance with the 2008 Plan annual increase provisions, the authorized shares in the 2008 Plan increased by 1,121,511 and 1,096,041 shares, respectively. As of December 31, 2011, a total of 3,418,873 shares were reserved for issuance under the 2008 Plan. Options are granted with exercise prices equal to the closing fair market value of the common stock on the date of the grant. The terms of options may not exceed ten years. Generally, options vest over a four-year period, but may be granted with different vesting terms.

Compensation cost for stock options granted to employees is based on the grant-date fair value and is recognized over the vesting period of the applicable option on a straight-line basis. As stock-based compensation expense is based on options ultimately expected to vest, the expense has been reduced for estimated forfeitures. The fair value of each employee option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions during the years ended:


	December 31,
	2011			2010			2009
Estimated weighted-average fair value	$	3.31		$	4.34		$	7.47
Weighted-Average Assumptions
Expected volatility (A)		83	%		77	%		76	%
Expected term, in years (B)		5.73			6.08			6.08
Risk-free interest rate (C)		1.97	%		2.55	%		2.63	%
Expected dividend yield (D)		0	%		0	%		0	%

(A)

Expected Volatility. Because of our limited trading history, the expected volatility rate used to value stock option grants is based on volatilities of a peer group of similar companies whose share prices are publicly available. The peer group was developed based on companies in the pharmaceutical and biotechnology industry in a similar stage of development.

(B)	Expected Term. We elected to utilize the “simplified” method for “plain vanilla” options to value stock option grants. Under this approach, the weighted-average expected life is presumed to be the average of the vesting term and the contractual term of the option.

(C)	Risk-free Interest Rate. The risk-free interest rate assumption was based on zero-coupon U.S. Treasury instruments that had terms consistent with the expected term of our stock option grants.

(D)	Expected Dividend Yield. We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future.

Stock-based compensation guidance requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from estimates. We estimate forfeitures based on our historical experience; separate groups of employees that have similar historical forfeiture behavior are considered separately for expense recognition.

Stock options granted to non-employees are accounted for using the fair value approach. The fair value of non-employee option grants are estimated using the Black-Scholes option-pricing model and are re-measured over the vesting term as earned. The estimated fair value is charged to expense over the applicable service period. During the years ended December 31, 2011, 2010 and 2009, we granted to non-employees options to purchase 15,000, 9,600 and 0 shares of common stock, respectively.

Stock-Based Compensation Summary. Stock-based compensation expense includes amortization of stock options granted to employees and non-employees’ and has been reported in our consolidated statements of operations as follows:


	Year Ended December 31,
	2011		2010		2009
	(in thousands)
Research and development	$	819	$	971	$	879
General and administrative		1,108		1,207		615

Total	$	1,927	$	2,178	$	1,494

In connection with the non-employee options, we recognized expense of $62,000, $139,000 and $31,000 during the years ended December 31, 2011, 2010 and 2009, respectively.

Stock option activity and related information is as follows:


	Options Outstanding			Weighted- Average Exercise Price per Share		Remaining Contractual Life (in years)		Aggregate Intrinsic Value (in thousands)
Balance at December 31, 2010		3,589,292		$	3.09
Granted		75,400			5.34
Exercised		(509,398	)		1.17
Forfeited		(148,727	)		6.11

Balance at December 31, 2011		3,006,567		$	3.32		6.35	$	4,960

Vested and expected to vest at December 31, 2011		2,947,509		$	3.26		6.31	$	4,960

Exercisable at December 31, 2011		2,379,046		$	2.47		5.82	$	4,960

The total intrinsic value of options exercised during the years ended December 31, 2011, 2010, and 2009 was $2.1 million, $1.4 million and $177,000, respectively.

Information about stock options outstanding and exercisable is as follows:


	December 31, 2011
	Options Outstanding						Options Exercisable
Range of Exercise Price	Number of Options		Weighted- Average Remaining Contractual Life (Years)		Weighted- Average Exercise Price		Number of Options		Weighted- Average Exercise Price
$0.78-3.95		1,832,460		5.10	$	1.24		1,822,041	$	1.23
$4.53-$7.01		953,183		8.31		6.14		473,245		6.18
$7.30-9.80		204,855		8.46		8.04		70,856		7.82
$10.63-13.49		16,069		6.17		12.66		12,904		12.61

$0.78-13.49		3,006,567		6.35	$	3.32		2,379,046	$	2.47

At December 31, 2011 there were 627,521 unvested options outstanding that will vest over a weighted-average period of 2.2 years. Excluding non-employee stock options, the total estimated compensation expense to be recognized in connection with these shares is $2.3 million.