Stock-Based Compensation

12 Months Ended

Dec. 31, 2018

The Company’s current equity compensation plan, the 2017 Incentive Plan, was approved by shareholders at the Company’s Annual Meeting of Shareholders on May 18, 2017. The 2017 Incentive Plan is administered by the Compensation Committee and the Board of Directors of the Company. Under the terms of the 2017 Incentive Plan, the Company is authorized to grant a variety of incentive awards based on its common stock, including stock options (both incentive stock options and non-qualified stock options), RSUs, performance options/shares and other stock awards, as well as pay incentive bonuses to eligible employees and non-employee directors. On May 18, 2017, upon the approval of the 2017 Incentive Plan by shareholders, 5,000,000 shares were authorized for issuance thereunder, plus any shares subject to then-outstanding awards under the 2015 Incentive Plan and the 2013 Incentive Plan that subsequently were canceled, terminated unearned, expired, were forfeited, lapsed for any reason or were settled in cash without the delivery of shares. As of December 31, 2018, 3,622,830 shares remained for future issuance under the 2017 Incentive Plan. The 2017 Incentive Plan will terminate on April 3, 2027 unless it is extended or terminated earlier pursuant to its terms. In addition, from time to time, the Company makes inducement grants of stock options. These awards are made pursuant to the Nasdaq inducement grant exception as a component of new hires’ employment compensation in connection with the Company’s equity grant program. During the twelve months ended December 31, 2018 and 2017, the Company granted inducement stock options covering 295,720 and 266,230, respectively, shares of the Company's common stock to new employees.

Stock Options—The Company calculates the fair value of stock options granted using the Black-Scholes valuation model. The following table summarizes the grant date fair value and assumptions used in determining the fair value of all stock options granted, including grants of inducement options, during the years ended December 31, 2018, 2017 and 2016.



	2018	2017	2016
Volatility	66% - 68%	71% - 79%	74% - 77%
Risk-free interest rate	2.25% - 2.96%	1.73% - 2.13%	1.00% - 1.90%
Dividend yield	0.0%	0.0%	0.0%
Expected option term (in years)	5.09	6.25	6.25
Weighted average fair value of stock options granted	$16.03	$10.52	$8.77

For the years ended December 31, 2018, 2017 and 2016, the volatility factor was based on the Company’s historical volatility during the expected option term. Estimated forfeitures were based on the actual percentage of option forfeitures since the closing of the Company’s merger with Transave, Inc. in December 2010 for the year ended 2016. Beginning with the year ended December 31, 2017, estimated forfeitures were based on the actual percentage of option forfeitures over the expected option term.

From time to time, the Company grants performance-condition options to certain employees. Vesting of these options is subject to the Company achieving certain performance criteria established at the date of grant and the individuals fulfilling a service condition (continued employment). As a result of the FDA approval of ARIKAYCE in September 2018, the vesting of performance options totaling $1.1 million was recorded as non-cash compensation expense in the third quarter of 2018.

The following table summarizes stock option activity for stock options granted for the years ended December 31, 2018, 2017 and 2016 as follows:



	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life in Years	Aggregate Intrinsic Value (in '000)
Options outstanding at January 1, 2016	5,273,722		$	13.64
Granted	2,532,675		$	12.96
Exercised	(162,340	)	$	6.68
Forfeited and expired	(527,351	)	$	17.08
Options outstanding at December 31, 2016	7,116,706		$	13.30
Vested and expected to vest at December 31, 2016	6,850,658		$	13.25
Exercisable at December 31, 2016	3,113,998		$	11.28
Options outstanding at December 31, 2016	7,116,706		$	13.30
Granted	2,284,710		$	15.92
Exercised	(378,275	)	$	9.08
Forfeited and expired	(414,220	)	$	15.50
Options outstanding at December 31, 2017	8,608,921		$	14.08
Vested and expected to vest at December 31, 2017	8,325,255		$	14.03
Exercisable at December 31, 2017	4,229,478		$	12.71
Options outstanding at December 31, 2017	8,608,921		$	14.08
Granted	1,755,600		$	27.63
Exercised	(494,351	)	$	14.46
Forfeited and expired	(488,440	)	$	19.79
Options outstanding at December 31, 2018	9,381,730		$	16.30	6.69	$	13,052
Vested and expected to vest at December 31, 2018	8,693,635		$	15.90	6.51	$	12,926
Exercisable at December 31, 2018	5,649,698		$	13.45	5.58	$	12,181

The total intrinsic value of stock options exercised during the years ended December 31, 2018, 2017 and 2016 was $5.6 million, $4.3 million and $1.0 million, respectively.

As of December 31, 2018, there was $29.7 million of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted average period of 2.4 years. The following table summarizes the range of exercise prices and the number of stock options outstanding and exercisable as of December 31, 2018:



Outstanding as of December 31, 2018								Exercisable as of December 31, 2018
Range of Exercise Prices				Number of Options	Weighted Average Remaining Contractual Term (in years)	Weighted Average Exercise Price		Number of Options	Weighted Average Exercise Price
$	3.03	$	4.55	960,038	3.62	$	3.60	960,038	$	3.60
$	6.90	$	6.90	120,403	4.13	$	6.90	120,403	$	6.90
$	6.96	$	10.85	953,089	6.85	$	10.76	604,037	$	10.71
$	11.14	$	12.58	947,839	4.72	$	12.17	887,207	$	12.18
$	12.66	$	13.94	967,420	7.31	$	13.62	455,114	$	13.59
$	14.24	$	16.07	1,142,513	5.76	$	15.31	782,818	$	15.22
$	16.09	$	17.16	1,380,220	7.58	$	16.69	687,691	$	16.57
$	17.24	$	22.76	1,387,909	6.51	$	21.04	1,081,677	$	21.31
$	22.84	$	30.46	1,355,366	8.37	$	28.54	57,644	$	25.41
$	30.86	$	32.46	166,933	8.60	$	31.20	13,069	$	31.57

Restricted Stock and Restricted Stock Units—The Company may grant Restricted Stock (RS) and Restricted Stock Units (RSUs) to employees and non-employee directors. Each share of RS vests upon and each RSU represents a right to receive one share of the Company's common stock upon the completion of a specific period of continued service.

RS and RSU awards granted are valued at the market price of the Company's common stock on the date of grant. The Company recognizes noncash compensation expense for the fair values of these RS and RSUs on a straight-line basis over the requisite service period of these awards.

The following table summarizes RSU awards granted during the years ended December 31, 2018, 2017 and 2016:



	Number of RSUs		Weighted Average Grant Price
Outstanding at January 1, 2016	43,554		$	19.47
Granted	89,194		$	10.85
Released	(43,554	)	$	16.07
Forfeited	—		$	—
Outstanding at December 31, 2016	89,194		$	10.85
Granted	46,914		$	17.16
Released	(89,194	)	$	10.85
Forfeited	—		$	—
Outstanding at December 31, 2017	46,914		$	17.16
Granted	253,586		$	29.16
Released	(51,992	)	$	18.46
Forfeited	(20,682	)	$	29.05
Outstanding at December 31, 2018	227,826		$	29.14

As of December 31, 2018, there was $3.4 million of unrecognized compensation expense related to unvested awards, which is expected to be recognized over a weighted average period of 2.8 years.

The following table summarizes the stock-based compensation recorded in the consolidated statements of comprehensive loss related to stock options and RSUs during the years ended December 31, 2018, 2017 and 2016 (in millions):



	2018		2017		2016
Research and development expenses	$	9.4	$	6.5	$	6.2
Selling, general and administrative expenses	16.8		11.6		11.8
Total (1)	$	26.2	$	18.1	$	18.0

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(1)	Includes $0.0 million, $0.0 million and $1.7 million for the years ended December 31, 2018, 2017 and 2016, respectively, for the remeasurement of certain stock options and RSUs that occurred during May 2013.

Employee Stock Purchase Plan - On May 15, 2018, the Company's shareholders approved the Company’s 2018 Employee Stock Purchase Plan (ESPP). As part of the ESPP, eligible employees may acquire an ownership interest in the Company by purchasing common stock, at a discount, through payroll deductions. The ESPP is compensatory under GAAP and the Company recorded stock compensation expense of $0.9 million in 2018.