Stock compensation

6 Months Ended

Jun. 30, 2020

Stock compensation

Stock compensation

10.     Stock compensation

We recorded $46.3 million and $88.8 million of stock compensation expense on our condensed consolidated statements of operations for the three and six months ended June 30, 2020, respectively. We recorded $40.6 million and $81.2 million of stock compensation expense on our condensed consolidated statements of operations for the three and six months ended June 30, 2019, respectively. Stock compensation expense included within our condensed consolidated statements of operations included research and development expense of $32.5 million, $61.2 million, $27.6 million and $55.0 million for the three and six months ended June 30, 2020 and 2019, respectively. Stock compensation expense included within our condensed consolidated statements of operations also included selling, general and administrative expense of $13.6 million, $27.1 million, $12.8 million and $25.8 million for the three and six months ended June 30, 2020

and 2019, respectively. Stock compensation expense included within our condensed consolidated statements of operations also included cost of product revenues of $0.2 million, $0.5 million, $0.2 million and $0.4 million, respectively, for the three and six months ended June 30, 2020. For the three and six months ended June 30, 2020 and 2019, we capitalized $0.1 million, $0.3 million, $0.1 million and $0.2 million, respectively, of stock compensation expense as part of the cost of an asset.

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 Six Months Ended				For the Three Months Ended				For the Six Months Ended
	June 30,								June 30,
	2020		2019		2020		2019		2020		2019		2020		2019
Average risk-free interest rates	0.33	%	2.26	%	1.32	%	2.49	%	0.16	%	1.75	%	0.19	%	2.10	%
Average expected life (in years)	5.48		5.55		4.80		5.34		0.50		0.50		0.50		0.50
Volatility	39	%	39	%	40	%	45	%	38	%	37	%	48	%	34	%
Weighted-average fair value (in dollars)	34.13		30.92		29.49		31.47		19.50		13.11		17.47		13.69

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. Nonemployee awards are measured on the grant date by estimating the fair value of the equity instruments to be issued using the expected term, similar to our employee awards.

Option activity under our 2010 Amended and Restated Stock Incentive Plan (the “2010 Stock Plan”) was as follows:

	Shares Subject to
	Outstanding Options
		Weighted Average
	Shares	Exercise Price
Balance at December 31, 2019	12,632,657	$	81.42
Options granted	1,123,442	$	83.01
Options exercised	(1,602,004)	$	49.13
Options cancelled	(274,941)	$	93.91
Balance at June 30, 2020	11,879,154	$	85.63

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.  

Restricted stock unit (“RSU”) and performance share (“PSU”) award activity under the 2010 Stock Plan was as follows:

	Shares Subject to
	Outstanding Awards
	Shares	Grant Date Value
Balance at December 31, 2019	2,602,376	$	79.69
RSUs granted	415,017	$	81.56
RSUs released	(92,818)	$	85.93
RSUs cancelled	(62,956)	$	80.10
PSUs cancelled	(142,250)	$	68.79
Balance at June 30, 2020	2,719,369	$	80.33

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.

In June 2018, we granted 190,000 RSUs and 446,500 PSUs under long term incentive plans with performance and/or service-based milestones with graded and/or cliff vesting over three to four years. In April 2019, we granted an additional 100,000 PSUs under one of the existing long term incentive plans with performance based milestones and cliff vesting. For one of the existing long term incentive plans, under which 106,500 PSUs were granted, the actual number of shares of our common stock into which each PSU may convert was subject to a multiplier of up to 267% based on the level at which the performance conditions were achieved. The actual number of shares of our common stock into which each PSU will convert is at a multiplier of 142% based on the performance conditions being achieved as of March 31, 2019 and will continue to vest through June 2022.  For an existing long term incentive plan, under which 150,000 PSUs were granted, the actual number of shares of our common stock into which each PSU may convert was subject to a multiplier of up to 100% if all performance conditions were achieved or 0% if no performance conditions were achieved. The actual number of shares of our common stock into which each PSU will convert is at a multiplier of 100% based on the performance conditions being achieved as of December 31, 2019 and will cliff vest in June 2021.

Compensation expense for the performance-based awards is recorded over the estimated service period for each milestone when the performance conditions are deemed probable of achievement. For the period ended June 30, 2020, the stock compensation expense recorded during the period was for service-based awards and performance conditions deemed probable of achievement and/or achieved. For PSUs containing performance conditions which were not deemed probable of achievement at June 30, 2020, no stock compensation expense was recognized.

In July 2018, we granted 77,243 PSUs to executives with performance milestones and graded vesting over four years.  The shares of our common stock into which each PSU may convert is subject to a multiplier up to 150% based on the level at which the performance condition is achieved. Compensation expense for the performance-based awards is recorded over the estimated service period when the performance condition is deemed probable of achievement. The actual number of shares of our common stock into which each PSU converted was at a multiplier of 83% based on the performance condition being achieved as of December 31, 2018. These PSUs will continue to vest through July 2022.

In July 2019, we granted 86,975 PSUs to executives with a performance milestone and graded vesting over four years.  The shares of our common stock into which each PSU may convert is subject to a multiplier up to 125% based on the level at which the performance condition is achieved. Compensation expense for the performance-based awards is recorded over the estimated service period when the performance condition is deemed probable of achievement. The actual number of shares of our common stock into which each PSU will convert is at a multiplier of 101.8% based on the performance condition being achieved as of December 31, 2019.  These PSUs will continue to vest through July 2023.

The following table summarizes our shares available for grant under the 2010 Stock Plan:

	Shares Available
	for Grant
Balance at December 31, 2019	9,882,122
Options, RSUs and PSUs granted	(1,953,476)
Options, RSUs and PSUs cancelled	506,744
Balance at June 30, 2020	8,435,390

Based on our historical experience of employee turnover, we have assumed an annualized forfeiture rate of 5% for our options, RSUs and PSUs. 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 June 30, 2020, was $79.9 million, which is expected to be recognized over the weighted average period of approximately 1.3 years. Total compensation cost of RSUs granted but not yet vested, as of June 30, 2020, was $77.9 million, which is expected to be recognized over the weighted average period of approximately 1.6 years.  Total compensation cost of PSUs granted but not yet vested, as of June 30, 2020, was $21.4 million, which is expected to be recognized over the weighted average period of 1.5 years, should the underlying performance conditions be deemed probable of achievement.