10. Stock compensation

We recorded $26.5 million and $68.6 million of stock compensation expense on our condensed consolidated statements of operations for the three and nine months ended September 30, 2016, respectively. We recorded $17.6 million and $52.8 million of stock compensation expense on our condensed consolidated statements of operations for the three and nine months ended September 30, 2015, respectively. Stock compensation expense included within our condensed consolidated statements of operations included research and development expense of $16.2 million, $42.8 million, $10.0 million and $30.4 million for the three and nine months ended September 30, 2016 and 2015, respectively. Stock compensation expense included within our condensed consolidated statements of operations also included selling, general and administrative expense of $10.3 million, $25.8 million, $7.6 million and $22.4 million for the three and nine months ended September 30, 2016 and 2015, respectively.

We utilized the Black-Scholes valuation model for estimating the fair value of the stock compensation granted, with the following weighted-average assumptions:



	Employee Stock Options								Employee Stock Purchase Plan
	For the Three Months Ended				For the Nine Months Ended				For the Three Months Ended				For the Nine Months Ended
	September 30,								September 30,
	2016		2015		2016		2015		2016		2015		2016		2015
Average risk-free interest rates	1.05	%	1.22	%	1.31	%	1.35	%	0.77	%	0.64	%	0.77	%	0.64	%
Average expected life (in years)	4.96		4.44		4.99		5.04		0.50		0.50		0.50		0.50
Volatility	50	%	47	%	50	%	50	%	38	%	51	%	48	%	51	%
Weighted-average fair value (in dollars)	36.66		46.08		39.29		34.29		18.33		13.45		18.94		13.45

The risk-free interest rate is derived from the U.S. Federal Reserve rate in effect at the time of grant. The expected life calculation is based on the observed and expected time to the exercise of options by our employees based on historical exercise patterns for similar type options. Expected volatility is based on the historical volatility of our common stock over the period commensurate with the expected life of the options. A dividend yield of zero is assumed based on the fact that we have never paid cash dividends and have no present intention to pay cash dividends.

Option activity under the 2010 Stock Plan was as follows:


		Shares Subject to
		Outstanding Options
	Shares Available		Weighted Average
	for Grant	Shares	Exercise Price
Balance at December 31, 2015	3,846,717	11,052,279	$	33.55
Additional authorization	5,000,000	—		—
Options granted	(2,606,079)	2,606,079	$	89.53
Options exercised	—	(1,524,934)	$	19.16
Options cancelled	164,542	(156,555)	$	77.13
Options expired	(1,834)	(7,987)	$	39.67
Balance at September 30, 2016	6,403,346	11,968,882	$	46.99

In July 2016, we revised the terms of our annual stock option grants to provide that new option grants would generally have a 10-year term and vest over four years, with 25% vesting after one year and the remainder vesting in 36 equal monthly installments. Previously, our option grants generally had 7-year terms and vested over three years, with 33% vesting after one year and the remainder vesting in 24 equal monthly installments.

RSU and PSU award activity under the 2010 Stock Plan was as follows:


		Shares Subject to
	Shares Available	Outstanding Awards
	for Grant	Shares	Grant Date Value
Balance at December 31, 2015	834,433	565,567		—
Additional authorization	1,000,000	—		—
RSUs granted	(708,426)	708,426	$	85.28
RSUs cancelled	32,880	(32,880)	$	73.38
PSUs cancelled	1,948	(1,948)	$	64.55
RSUs released	—	(7,278)	$	78.49
Balance at September 30, 2016	1,160,835	1,231,887		—

In January 2014, we began granting RSUs and PSUs to our employees at the share price on the date of grant. Each RSU represents the right to acquire one share of our common stock. Each RSU granted prior to July 2016 was subject to cliff vesting after three years. In July 2016, we revised the terms of our RSU grants to provide that the awards will vest 25% annually over four years.

Also, in January 2014, Hervé Hoppenot, our President and Chief Executive Officer, was granted a one-time grant of 400,000 RSUs outside of our 2010 Stock Incentive Plan. Vesting of the RSUs will be subject to Mr. Hoppenot’s continued employment on the applicable vesting dates, with one-sixth of the RSUs vesting at the end of each of the calendar years 2014 through 2019, subject to earlier acceleration of vesting upon the occurrence of certain events in accordance with the terms of his employment agreement. As of September 30, 2016, a total of 133,333 RSUs granted to Mr. Hoppenot vested and were released leaving 266,667 RSUs outstanding.

At September 30, 2016, we have only recognized stock compensation expense relating to performance conditions of the outstanding PSUs that are deemed probable of achievement at that date. For PSUs containing performance conditions which have not been deemed probable of achievement at September 30, 2016, no stock compensation expense has been recognized for these awards. The actual number of shares of our common stock into which each PSU may convert are subject to a multiplier of up to 125% based on the level at which the performance conditions are achieved.

Based on our historical experience of employee turnover, we have assumed an annualized forfeiture rate of 5% for our options, PSUs and RSUs. Under the true-up provisions of the stock compensation guidance, we will record additional expense if the actual forfeiture rate is lower than we estimated, and will record a recovery of prior expense if the actual forfeiture is higher than we estimated.

Total compensation cost of options granted but not yet vested, as of September 30, 2016, was $76.0 million, which is expected to be recognized over the weighted average period of approximately 3.1 years. Total compensation cost of RSUs granted but not yet vested, as of September 30, 2016, was $58.0 million, which is expected to be recognized over the weighted average period of approximately 3.2 years. Total compensation cost of PSUs granted but not yet vested, as of September 30, 2016, was $0.3 million, which is expected to be recognized over the weighted average period of approximately 3.0 years, should the underlying performance conditions be deemed probable of achievement.