Stock-based Compensation Expense

12 Months Ended

Dec. 31, 2019

Share-based Payment Arrangement [Abstract]

Stock-based Compensation Expense

Stock-based Compensation Expense

The Company recognizes share-based payments to employees as compensation expense using the fair value method. The fair value of stock options and shares purchased pursuant to the ESPP is calculated using the Black-Scholes option pricing model. The fair value of restricted stock and restricted stock units, including PSUs, is based on the intrinsic value on the date of grant. Stock-based compensation, measured at the grant date based on the fair value of the award, is typically recognized as expense ratably over the requisite service period.

The effect of stock-based compensation expense during the three years ended December 31, 2019 was as follows:

	2019			2018		2017
	(in thousands)
Stock-based compensation expense by line item:
Cost of sales	$	5,575		$	4,543	$	2,500
Research and development expenses	224,558			203,112		181,900
Sales, general and administrative expenses	130,356			117,392		108,836
Total stock-based compensation expense included in costs and expenses	360,489			325,047		293,236
Income tax effect	(124,225		)	—		—
Total stock-based compensation included in costs and expenses, net of tax	$	236,264		$	325,047	$	293,236

The Company maintained a valuation allowance on the majority of its NOLs and other deferred tax assets until December 31, 2018. Therefore, there was no “Income tax effect” of stock-based compensation expense for the years ended December 31, 2018 and 2017.

The stock-based compensation expense by type of award during the three years ended December 31, 2019 was as follows:

	2019			2018			2017
	(in thousands)
Stock-based compensation expense by type of award:
Restricted stock and restricted stock units (including PSUs)	$	254,276		$	207,845		$	181,258
Stock options	96,737			107,854			105,367
ESPP share issuances	11,196			9,933			9,017
Stock-based compensation expense related to inventories	(1,720		)	(585		)	(2,406		)
Total stock-based compensation expense included in costs and expenses	$	360,489		$	325,047		$	293,236

The Company capitalizes stock-based compensation expense to inventories, all of which is attributable to employees who support the Company’s manufacturing operations for the Company’s products.

The following table sets forth the Company’s unrecognized stock-based compensation expense as of December 31, 2019, by type of award and the weighted-average period over which that expense is expected to be recognized:

	As of December 31, 2019
	Unrecognized Expense		Weighted-average Recognition Period
	(in thousands)		(in years)
Type of award:
Restricted stock and restricted stock units (including PSUs)	$	374,185	2.05
Stock options	$	130,153	2.50
ESPP share issuances	$	4,724	0.55

Stock Options

The Company issues stock options with service conditions, which are generally the vesting periods of the awards. The Company uses the Black-Scholes option pricing model to estimate the fair value of stock options at the grant date. The Black-Scholes option pricing model uses the option exercise price as well as estimates and assumptions related to the expected price volatility of the Company’s stock, the rate of return on risk-free investments, the expected period during which the options will be outstanding, and the expected dividend yield for the Company’s stock to estimate the fair value of a stock option on the grant date. The options granted during 2019, 2018 and 2017 had a weighted-average grant-date fair value per share of $61.32, $60.83 and $43.27, respectively.

The fair value of each option granted during 2019, 2018 and 2017 was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

	2019		2018		2017
Expected stock price volatility	36.99	%	40.50	%	45.31	%
Risk-free interest rate	2.32	%	2.61	%	1.94	%
Expected term of options (in years)	4.27		4.55		4.68
Expected annual dividends	—		—		—

The weighted-average valuation assumptions were determined as follows:

• Expected stock price volatility: Expected stock price volatility is calculated using the trailing one month average of daily implied volatilities prior to the grant date. Implied volatility is based on options to purchase the Company’s stock with remaining terms of greater than one year that are regularly traded in the market.

• Risk-free interest rate: The Company bases the risk-free interest rate on the interest rate payable on U.S. Treasury securities in effect at the time of grant for a period that is commensurate with the assumed expected option term.

• Expected term of options: The expected term of options represents the period of time options are expected to be outstanding. The Company uses historical data to estimate employee exercise and post-vest termination behavior. The Company believes that all groups of employees exhibit similar exercise and post-vest termination behavior and therefore does not stratify employees into multiple groups in determining the expected term of options.

• Expected annual dividends: The estimate for annual dividends is $0.00 because the Company has not historically paid, and does not intend for the foreseeable future to pay, a dividend.

Restricted Stock, Restricted Stock Units and Performance-based Restricted Stock Units

The Company awards restricted stock and restricted stock units with service conditions, which are generally the vesting periods of the awards.

The Company grants PSUs to certain members of senior management. Half of the PSUs contain financial goals as the performance metric and the other half contain non-financial goals. A target number of shares is established for each award, however the actual number of shares that are issued when an award vests may range from zero to 200% of the target amount depending upon the level of achievement of the applicable performance metric. The financial-based PSUs vest in three equal installments over a three-year period and are expensed ratably over that same period based upon an assessment of the likely level of achievement. The non-financial based PSUs cliff vest at the end of the three-year performance period and are expensed on a straight-line basis over that same period based upon an assessment of the likely level of achievement.

Prior to 2017, the Company also awarded, to certain members of senior management, on an annual basis, restricted stock and restricted stock units that vested upon the earlier of the satisfaction of (i) a performance condition or (ii) a service condition.

Employee Stock Purchase Plan

The weighted-average fair value of each purchase right granted during 2019, 2018 and 2017 was $47.79, $44.04 and $35.90, respectively. The following table reflects the weighted-average assumptions used in the Black-Scholes option pricing model for 2019, 2018 and 2017:

	2019		2018		2017
Expected stock price volatility	33.43	%	36.51	%	39.09	%
Risk-free interest rate	2.08	%	2.36	%	1.24	%
Expected term (in years)	0.74		0.75		0.75
Expected annual dividends	—		—		—

The expected stock price volatility for ESPP offerings is based on implied volatility. The Company bases the risk-free interest rate on the interest rate payable on U.S. Treasury securities in effect at the time of grant for a period that is commensurate with the assumed expected term. The expected term represents purchases and purchase periods that take place within the offering period. The expected annual dividends estimate is $0.00 because the Company has not historically paid, and does not for the foreseeable future intend to pay, a dividend.