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Stock Compensation | 3 Months Ended
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Mar. 31, 2023
Share-Based Payment Arrangement [Abstract] |
Stock Compensation | Note 10. Stock Compensation We recorded $53.4 million and $43.8 million of stock compensation expense on our condensed consolidated statements of operations for the three months ended March 31, 2023 and 2022, respectively. Stock compensation expense included within our condensed consolidated statements of operations included research and development expense of $31.0 million and $26.3 million for the three months ended March 31, 2023 and 2022, respectively. Stock compensation expense included within our condensed consolidated statements of operations also included selling, general and administrative expense of $21.6 million and $16.9 million for the three months ended March 31, 2023 and 2022, respectively. Stock compensation expense included within our condensed consolidated statements of operations also included cost of product revenues of $0.8 million and $0.6 million for the three months ended March 31, 2023 and 2022, 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 Three Months Ended
|  |  |  |  | March 31, |  |  |  |  |  | March 31,
|  |  |  |  | 2023 |  | 2022 |  |  |  |  |  | 2023 |  | 2022
Average risk-free interest rates |  |  |  |  | 3.72 | % |  | 1.47 | % |  |  |  |  |  | 4.06 | % |  | 2.28 | %
Average expected life (in years) |  |  |  |  | 4.73 |  | 4.66 |  |  |  |  |  | 0.50 |  | 0.50
Volatility |  |  |  |  | 33 | % |  | 38 | % |  |  |  |  |  | 22 | % |  | 24 | %
Weighted-average fair value (in dollars) |  |  |  |  | $ | 28.24 |  |  | $ | 25.15 |  |  |  |  |  |  | $ | 13.70 |  |  | $ | 13.76 |
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, 2022 | 12,650,359 |  | $ | 87.25 |
Options granted | 521,152 |  | $ | 83.07 |
Options exercised | (207,650) |  | $ | 67.37 |
Options cancelled | (544,806) |  | $ | 95.30 |
Balance at March 31, 2023 | 12,419,055 |  | $ | 87.06 |
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, 2022 | 5,187,592 |  | $ | 81.24 |
RSUs granted | 577,956 |  | $ | 83.12 |
RSUs released | (140,791) |  | $ | 78.04 |
RSUs cancelled | (73,338) |  | $ | 81.34 |
PSUs cancelled | (971) |  | $ | 106.47 |
Balance at March 31, 2023 | 5,550,448 |  | $ | 81.52 |
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 months ended March 31, 2023 and 2022, we recorded $6.5 million and $1.8 million, respectively, 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, 2022 | 5,056,370
Options, RSUs and PSUs granted | (1,677,064)
Options, RSUs and PSUs cancelled | 692,169
Balance at March 31, 2023 | 4,071,475
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, 2023, was $42.3 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 March 31, 2023, was $202.8 million, which is expected to be recognized over the weighted average period of approximately 1.8 years. Total compensation cost of PSUs granted but not yet vested, as of March 31, 2023, was $24.1 million, which is expected to be recognized over the weighted average period of 1.7 years, should the underlying performance conditions be deemed probable of achievement.

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