10. Stock compensation

We recorded $40.6 million and $36.2 million, respectively, of stock compensation expense on the condensed consolidated statements of operations for the three months ended March 31, 2019 and 2018. For the three months ended March 31, 2019, we capitalized $0.1 million of stock compensation expense as part of the cost of an asset. Stock compensation expense included within our condensed consolidated statements of operations included research and development expense of $27.4 million and $24.2 million, respectively, for the three months ended March 31, 2019 and 2018. Stock compensation expense included within our condensed consolidated statements of operations also included selling, general and administrative expense of $13.0 million and $12.0 million for the three months ended March 31, 2019 and 2018, respectively. Stock compensation expense included within our condensed consolidated statements of operations also included cost of product revenues of $0.2 million for the three months ended March 31, 2019.

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 March 31,
	2019		2018		2019		2018
Average risk-free interest rates	2.51	%	2.42	%	2.27	%	2.26	%
Average expected life (in years)	5.33		5.53		0.25		0.25
Volatility	45	%	45	%	34	%	36	%
Weighted-average fair value (in dollars)	31.50		41.59		13.31		18.17

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 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, 2018	6,477,577	12,285,159	$	74.39
Options granted	(2,271,592)	2,271,592	$	72.81
Options exercised	—	(849,870)	$	25.38
Options cancelled	315,321	(315,321)	$	89.29
Balance at March 31, 2019	4,521,306	13,391,560	$	76.88

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 award and PSU 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, 2018	545,751	2,043,337	$	80.35
RSUs granted	(165,251)	165,251	$	73.69
PSUs achieved	(44,940)	44,940	$	65.76
RSUs cancelled	55,591	(55,591)	$	89.46
PSUs cancelled	9,889	(9,889)	$	67.32
RSUs released	—	(213,604)	$	89.38
Balance at March 31, 2019	401,040	1,974,444	$	78.29

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 March 31, 2019, a cumulative total of 333,334 RSUs granted to Mr. Hoppenot had vested and were released, leaving 66,666 RSUs outstanding.

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. For one of the 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 are subject to a multiplier of up to 267% based on the level at which the performance conditions are achieved. 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 March 31, 2019, 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 March 31, 2019, 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.

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 March 31, 2019, was $133.9 million, which is expected to be recognized over the weighted average period of approximately 1.7 years. Total compensation cost of RSUs granted but not yet vested, as of March 31, 2019, was $59.6 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 March 31, 2019, was $27.7 million, which is expected to be recognized over the weighted average period of 2.7 years, should the underlying performance conditions be deemed probable of achievement.