Stock Compensation

9 Months Ended

Sep. 30, 2022

Share-Based Payment Arrangement [Abstract]

We recorded $45.4 million and $135.7 million of stock compensation expense on our condensed consolidated statements of operations for the three and nine months ended September 30, 2022, respectively. We recorded $42.7 million and $134.8 million of stock compensation expense on our condensed consolidated statements of operations for the three and nine months ended September 30, 2021, respectively. Stock compensation expense included within our condensed consolidated statements of operations included research and development expense of $25.8 million, $80.2 million, $26.3 million and $84.2 million for the three and nine months ended September 30, 2022 and 2021, respectively. Stock compensation expense included within our condensed consolidated statements of operations also included selling, general and administrative expense of $18.9 million, $53.5 million, $15.9 million and $49.5 million for the three and nine months ended September 30, 2022 and 2021, respectively. Stock compensation expense included within our condensed consolidated statements of operations also included cost of product revenues of $0.7 million, $2.0 million, $0.5 million and $1.1 million, respectively, for the three and nine months ended September 30, 2022 and 2021.

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,
	2022			2021			2022			2021			2022			2021			2022			2021
Average risk-free interest rates	2.90		%	0.76		%	2.03		%	0.60		%	4.22		%	0.28		%	3.44		%	0.22		%
Average expected life (in years)	5.17			5.16			4.88			5.00			0.50			0.50			0.50			0.50
Volatility	35		%	38		%	36		%	39		%	31		%	25		%	27		%	31		%
Weighted-average fair value (in dollars)	$	27.57		$	28.84		$	25.96		$	29.32		$	16.46		$	18.20		$	15.38		$	18.82

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 Stock Incentive Plan (the “2010 Stock Plan”) was as follows:


	Shares Subject to Outstanding Options
	Shares	Weighted Average Exercise Price
Balance at December 31, 2021	12,763,460	$	88.39
Options granted	1,755,963	$	75.32
Options exercised	(477,371)	$	66.69
Options cancelled	(989,465)	$	88.60
Balance at September 30, 2022	13,052,587	$	87.41

Our annual stock option grants 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.

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, 2021	3,966,888	$	84.91
RSUs granted	2,473,892	77.14
PSUs granted	154,685	77.67
RSUs released	(845,095)	87.06
PSUs released	(184,401)	69.25
RSUs cancelled	(337,265)	83.94
PSUs cancelled	(1,720)	65.76
Balance at September 30, 2022	5,226,984	$	81.29

RSUs and PSUs are granted 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 in connection with our annual equity awards will vest 25% annually over four years, while each RSU granted as outstanding merit awards or as part of retention award programs will vest in a single installment at the end of four years.

We grant PSUs with performance and/or service-based milestones with graded and/or cliff vesting over three to four years. The shares of our common stock into which each PSU may convert is subject to a multiplier based on the level at which the financial, developmental and market performance conditions are achieved over the service period. Compensation expense for PSUs with financial and developmental performance conditions is recorded over the estimated service period for each milestone when the performance conditions are deemed probable of achievement. For PSUs containing performance conditions which were not deemed probable of achievement, no stock compensation expense is recorded. Compensation expense for PSUs with market performance conditions is calculated using a Monte Carlo simulation model as of the date of grant and recorded over the requisite service period. For the three and nine months ended September 30, 2022 we recorded $3.2 million and $5.1 million, respectively, of stock compensation expense for PSUs on our condensed consolidated statements of operations. For the three and nine months ended September 30, 2021 we recorded $1.7 million and $5.0 million of stock compensation expense for PSUs on our condensed consolidated statements of operations.

The following table summarizes our shares available for grant under the 2010 Stock Plan. Each RSU and PSU grant reduces the available share pool by 2 shares.


			Shares Available for Grant
Balance at December 31, 2021			10,113,298
Options, RSUs and PSUs granted			(7,013,475)
Options, RSUs and PSUs cancelled			1,680,482
Balance at September 30, 2022			4,780,305

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 September 30, 2022, was $51.2 million, which is expected to be recognized over the weighted average period of approximately 1.1 years. Total compensation cost of RSUs granted but not yet vested, as of September 30, 2022, was $235.5 million, which is expected to be recognized over the weighted average period of approximately 2.0 years. Total compensation cost of PSUs granted but not yet vested, as of September 30, 2022, was $19.6 million, which is expected to be recognized over the weighted average period of 2.2 years, should the underlying performance conditions be deemed probable of achievement.