Stock-Based Compensation

12 Months Ended

Dec. 31, 2018

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Summary of Equity Incentive Plans

2006 Plan

The Company granted options under its 2006 Equity Incentive Award Plan, as amended (2006 Plan) until November 2010 upon adoption of the 2010 Plan (discussed below), which serves as the successor plan to the 2006 Plan. While no further grants may be made from the 2006 Plan, it continues to govern the terms of options that remain outstanding under the 2006 Plan. The 2006 Plan provided for the granting of incentive stock options, non-qualified stock options and rights to purchase restricted stock to eligible recipients. Stock options granted pursuant to the 2006 Plan had a contractual term of ten years and generally vest over four years.

2010 Plan

The Company’s 2010 Equity Incentive Award Plan, which was amended in June 2012 (2010 Plan), became effective immediately prior to the completion of the Company’s initial public offering in November 2010. The 2010 Plan provides for the granting of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock units and rights to purchase restricted stock to eligible recipients. Service-based options granted pursuant to the 2010 Plan has a contractual term of ten years and generally vest over four years. Performance-based awards are subject to the employee’s continued service and become vested based on the completion of the applicable performance conditions. As amended in June 2012, the initial 280,459 shares reserved for issuance under the 2010 Plan was increased to 1,162,500 shares, plus any shares related to outstanding options granted under the 2006 Plan that are subsequently repurchased, forfeited, expire or are canceled. In addition, the 2010 Plan’s evergreen provision was also amended such that, commencing on January 1, 2013, and on each January 1 through and including January 1, 2020, the aggregate number of shares available for issuance under the 2010 Plan shall be increased by that number of shares of the Company’s common stock equal to the lower of:

•4% of the Company’s outstanding common stock on the applicable January 1; or

•an amount determined by the board of directors.

In March 2018, the Board approved an amendment and restatement of its non-employee director compensation policy. Under the amended and restated compensation policy, any non-employee director who is first elected to the board of directors is granted an option to purchase 20,000 shares of our common stock on the date of his or her initial election to the board of directors. In addition, on the date of each of the Company’s Annual Meeting of Stockholders, each non-employee director is eligible to receive an option to purchase 15,000 shares of common stock.

As of December 31, 2018 and 2017, 1,550,351 and 756,524 shares of common stock were available for future issuance under the 2010 Plan, respectively.

Inducement Plan

In December 2013, the Company’s board of directors (Board) adopted the Employment Inducement Equity Incentive Award Plan (Inducement Plan). The terms of the Inducement Plan are substantially similar to the terms of the 2010 Plan with two principal exceptions: (1) incentive stock options may not be granted under the Inducement Plan; and (2) the annual compensation paid by the Company to specified executives will be deductible only to the extent that it does not exceed $1.0 million, as the conditions of Section 162(m) of the Code applicable at the time will not be met. The Inducement Plan was adopted by the board of directors without stockholder approval pursuant to Rule 5635(c)(4) of the Nasdaq Listing Rules.

The Company has initially reserved 337,500 shares of the Company’s common stock for issuance pursuant to awards granted under the Inducement Plan, which was subsequently increased to 637,500 shares in May 2018. In accordance with Rule 5635(c)(4) of the Nasdaq Listing Rules, awards under the Inducement Plan may only be made to an employee who has not previously been an employee or member of the board of directors of the Company or any parent or subsidiary, or following a bona fide period of non-employment by the Company or a parent or subsidiary, if he or she is granted such award in connection with his or her commencement of employment with the Company or a subsidiary and such grant is an inducement material to his or her entering into employment with the Company or such subsidiary. As of December 31, 2018 and 2017, there were 118,325 and 102,276 shares of common stock available for future issuance under the Inducement Plan, respectively.

2010 ESPP

In November 2010, the Board adopted the 2010 Employee Stock Purchase Plan (2010 ESPP), which allows employees to purchase shares of the Company’s common stock during specified offering periods at a discount to the fair market value at the time of purchase. The ESPP is implemented by overlapping, twelve-month offering periods and each offering period may contain up to two purchase periods of six months each. At any one time, there may be up to two offering periods under the ESPP. In general, a new twelve-month offering period commences on each June 1 and December 1 of a calendar year.

Stock may be purchased under the ESPP at a price equal to 85% of the fair market value of the Company’s stock on either the date of purchase or the first day of an offering period, whichever is lower. Eligible employees may elect to withhold up to 20% of their compensation through payroll deductions during an offering period for the purchase of stock. The ESPP contains a reset provision whereby if the price of the Company’s common stock on the first day of a new offering period is less than the price on the first day of any preceding offering period, all participants in the preceding offering period with higher first day price will be automatically withdrawn from such offering periods and re-enrolled in the new offering period. The reset feature, when triggered, will be accounted for as a modification to the original offering period, resulting in incremental expense to be recognized over the twelve-month period of the new offering.

The ESPP limits the maximum number of shares that may be purchased by any one participant in an offering period to 2,500 shares. In addition, the Code limits purchases under an ESPP to $25,000 worth of stock in any one calendar year, valued as of the first day of the offering period. As of December 31, 2018 and 2017, there were 15,243 and 16,672 shares of common stock available for issuance under the 2010 ESPP, respectively.

Equity Incentive Plan Activity

The following sections summarize activity under the Company’s equity incentive plans.

Stock Options

The following table summarizes the Company’s stock option activity for 2018:


	Shares (in thousands)	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)	Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2017	3,392	$	14.41
Granted	889	$	43.19
Exercised	(434)	$	16.84
Canceled	(103)	$	24.16
Outstanding at December 31, 2018	3,744	$	20.69	6.9	$	64,906
Exercisable at December 31, 2018	2,415	$	16.66	6.0	$	48,735

The total intrinsic value of options exercised in 2018, 2017 and 2016 was $11.8 million, $14.3 million and $24,000, respectively.

Restricted Stock Units (RSUs)

The following table summarizes the Company’s restricted stock unit activity for 2018:


	Shares (in thousands)	Weighted Average Fair Value per Share at Grant Date
Nonvested at December 31, 2017	259	$	10.43
Granted	146	$	42.76
Vested	(98)	$	10.74
Canceled	(18)	$	27.89
Nonvested at December 31, 2018	289	$	25.56

The total intrinsic value of RSUs vested in 2018 was $4.2 million. No RSUs vested in 2017 and 2016. As of December 31, 2018, outstanding RSUs included approximately 154,000 shares granted in March 2017 to employees and executives that are performance-based. These performance-based awards vest upon FDA approval of the Company’s NDA for Fintepla, provided such approval occurs within five years following the grant date. Due to the uncertainties associated with the FDA approval process, approval is not yet probable, as such term is used for accounting purposes, prior to the occurrence of the event. Accordingly, no compensation expense has been recognized to date. As of December 31, 2018, total unrecognized compensation costs related to such awards were $1.6 million.

As of December 31, 2018, nonvested restricted stock units outstanding not subject to a performance condition had a weighted average remaining contractual term of 1.7 years with an intrinsic value of $4.9 million.

Employee Stock Purchase Plan

Shares purchased by employees under the 2010 ESPP were 32,679 shares, 35,934 shares and 35,164 shares in 2018, 2017 and 2016, respectively. As of December 31, 2018 and 2017, 15,243 shares and 16,672 shares of common stock were reserved for issuance under the 2010 ESPP, respectively.

Valuation of Equity Awards

The Company used the Black-Scholes option-pricing model for determining the estimated fair value and stock-based compensation related to stock options and ESPP purchase rights granted. A summary of the assumptions used to estimate the fair values for the periods presented is as follows:

Year Ended December 31,

2018

2017

2016

Stock Options

Risk free interest rate

2.3% to 3.0%

1.8% to 2.3%

1.1% to 2.1%

Expected term

5.3 to 6.1 years

5.1 to 6.1 years

Expected volatility

80.1% to 85.2%

75.1% to 85.8%

76.5% to 78.1%

Expected dividend yield

—%

Weighted-average fair value of option on grant date

$30.87

$7.43

$6.69

Employee Stock Purchase Plan

Risk free interest rate

2.1% to 2.7%

1.1% to 1.6%

0.5% to 0.8%

Expected term

0.5 to 1.0 years

Expected volatility

44.7% to 113.1%

54.8% to 152.8%

59.5% to 71.3%

Expected dividend yield

—%

Performance Stock Options

In October 2015, the Company granted employees certain performance-based stock options for retention purposes. The stock options would vest upon satisfaction of a specified regulatory milestone within three years of the date of grant. In 2017, management determined the achievement of the performance condition was no longer probable and the cumulative compensation expense previously recognized of $0.7 million was reversed. In September 2018, these awards were modified to allow for 90% of such options outstanding at the modification date to vest immediately. The remaining 10% of the awards were canceled in October 2018 since the performance condition was not met. This improbable to probable modification resulted in the calculation and recognition of incremental stock-based compensation expense of $3.5 million in 2018. The Company estimated the fair value of the modified stock options using the Black-Scholes model based on the following key assumptions:


Modification of Stock Options
Exercise price	$	13.32
Common stock price on date of modification	$	49.60
Expected term	3.5 years
Expected volatility	79.9%
Expected dividend yield	—%

Stock-Based Compensation Expense

The following table summarizes the components of total stock-based compensation expense included in the consolidated statements of operations for the periods presented (in thousands):


	Year Ended December 31,
	2018		2017		2016
Cost of contract manufacturing	$	—	$	71	$	386
Research and development	6,317		1,933		1,924
Selling, general and administrative	9,175		4,151		5,043
Total	$	15,492	$	6,155	$	7,353

As of December 31, 2018, there was approximately $29.6 million of total unrecognized compensation costs related to outstanding equity awards scheduled to be recognized over a weighted average period of 2.6 years.