NOTE 9. SHARE-BASED COMPENSATION

Share-Based Compensation Plans. In May 2011, the Company adopted the Neurocrine Biosciences, Inc. 2011 Equity Incentive Plan (the 2011 Plan) pursuant to which 17.0 million shares of Company common stock are authorized for issuance. The 2011 Plan provides for the grant of stock options that qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended (the Code), nonstatutory stock options, restricted stock awards, restricted stock unit awards (RSUs), stock appreciation rights, performance stock awards, performance-based restricted stock units (PRSUs) and other forms of equity compensation.

The Company also issues stock options under the Neurocrine Biosciences, Inc. Inducement Plan (Inducement Plan) to certain employees. During 2017 and 2015, 410,000 and 120,000 stock options, respectively, and during 2017 and 2015, 12,500 and 50,000 RSUs, respectively, were granted pursuant to the Inducement Plan. The Company did not grant any options or RSUs pursuant to the Inducement Plan during 2016. These stock option grants have a four year vesting period and the RSUs have a three year cliff vesting period. The Company currently has approximately 0.4 million in stock options and RSUs outstanding under this Inducement Plan.

As of December 31, 2017, approximately 6.3 million shares of common stock remained available for the future grant of awards under the 2011 Plan. Only share awards made under the 2011 Plan that are subsequently cancelled due to forfeiture or expiration are returned to the share pool available for future grants.

The Company issues new shares upon the exercise of stock options, the issuance of stock bonus awards and vesting of RSUs and PRSUs, and has 14.1 million shares of common stock reserved for such issuance as of December 31, 2017.

Vesting Provisions of Share-Based Compensation. Stock options generally have terms from seven to ten years from the date of grant, and generally vest over a three to four-year period. The maximum contractual term for all options granted from the 2011 Plan is ten years. RSUs granted under the 2011 Plan generally have vesting periods of four years. PRSUs granted under the 2011 Plan vest based on the achievement of certain pre-defined Company-specific performance criteria and expire four to five years from the grant date.

Share-Based Compensation. The compensation cost that has been included in the statement of comprehensive loss for all share-based compensation arrangements is as follows (in thousands):


	Years Ended December 31,
	2017		2016		2015
Sales, general and administrative expense	$	27,951	$	16,770	$	15,281
Research and development expense		14,571		11,694		13,111

Share-based compensation expense	$	42,522	$	28,464	$	28,392

Authoritative guidance requires that cash flows resulting from tax deductions in excess of the cumulative compensation cost recognized for options exercised be classified as cash inflows provided by financing activities and cash outflows used in operating activities. Due to the Company’s net tax loss position, no tax benefits have been recognized in the consolidated statements of cash flows.

Stock Options. The exercise price of all options granted during the years ended December 31, 2017, 2016 and 2015 was equal to the closing price of the Company’s common stock on the date of grant. The estimated fair value of each option award granted was determined on the date of grant using the Black-Scholes option-pricing valuation model with the following weighted-average assumptions for option grants during the three years ended December 31, 2017:


	Years Ended December 31,
	2017			2016			2015
Risk-free interest rate		2.0	%		1.4	%		1.7	%
Expected volatility of common stock		58	%		60	%		66	%
Dividend yield		0.0	%		0.0	%		0.0	%
Expected option term		5.7 years			5.6 years			6.6 years

The Company estimates the fair value of stock options using a Black-Scholes option-pricing model on the date of grant. The fair value of equity instruments are recognized and amortized on a straight-line basis over the requisite service period. The Black-Scholes option-pricing model incorporates various and highly sensitive assumptions including expected volatility, expected term and interest rates. The expected volatility is based on the historical volatility of the Company’s common stock over the most recent period commensurate with the estimated expected term of the Company’s stock options. The expected option term is estimated based on historical experience as well as the status of the employee. For example, directors and officers have a longer expected option term than all other employees. The risk-free rate for periods within the contractual life of the option is based upon observed interest rates appropriate for the expected term of the Company’s employee stock options. The Company has never declared or paid dividends and has no plans to do so in the foreseeable future.

The Company’s determination of fair value is affected by the Company’s stock price as well as a number of assumptions that require judgment. The weighted-average fair values of options granted during the years ended December 31, 2017, 2016 and 2015, estimated as of the grant date using the Black-Scholes option valuation model, were $25.11, $21.49 and $23.24, respectively.

A summary of the status of the Company’s stock options as of December 31, 2017, 2016 and 2015 and of changes in options outstanding under the plans during the three years ended December 31, 2017 is as follows (in thousands, except for weighted average exercise price data):


	2017					2016					2015
	Options			Weighted Average Exercise Price		Options			Weighted Average Exercise Price		Options			Weighted Average Exercise Price
Outstanding at January 1		6,112		$	20.01		5,507		$	15.63		5,750		$	9.31
Granted		1,807			46.55		1,077			40.19		1,159			37.21
Exercised		(1,353	)		10.41		(341	)		7.60		(1,315	)		5.01
Canceled		(210	)		43.05		(131	)		34.35		(87	)		46.08

Outstanding at December 31		6,356		$	28.83		6,112		$	20.01		5,507		$	15.63

Options outstanding at December 31, 2017 have a weighted average remaining contractual term of 6.7 years.

For the year ended December 31, 2017, 2016 and 2015 share-based compensation expense related to stock options was $28.2 million, $18.4 million and $13.6 million, respectively. As of December 31, 2017, there was approximately $44.0 million of unamortized compensation cost related to stock options, which is expected to be recognized over a weighted average remaining vesting period of approximately 2.7 years. As of December 31, 2017, there were approximately 4.2 million options exercisable with a weighted average exercise price of $21.22 and a weighted-average remaining contractual term of 5.7 years. The total intrinsic value, which is the amount by which the exercise price was exceeded by the sale price of the Company’s common stock on the date of sale, of stock option exercises during the years ended December 31, 2017, 2016, and 2015 was $61.4 million, $13.2 million and $43.6 million, respectively. As of December 31, 2017, the total intrinsic value of options outstanding and exercisable was $309.9 million and $234.9 million, respectively. Cash received from stock option exercises for the years ended December 31, 2017, 2016 and 2015 was $13.9 million, $2.4 million and $6.3 million, respectively.

Restricted Stock Units. The fair value of RSUs is based on the closing sale price of the Company’s common stock on the date of issuance. For the year ended December 31, 2017, 2016 and 2015, share-based compensation expense related to RSUs was $13.9 million, $8.3 million, and $6.0 million, respectively. As of December 31, 2017, there was approximately $30.0 million of unamortized compensation cost related to RSUs, which is expected to be recognized over a weighted average remaining vesting period of approximately 2.7 years.

The total intrinsic value of RSUs converted into common shares during the years ended December 31, 2017, 2016 and 2015 was $14.9 million, $12.2 million, and $5.7 million, respectively. The RSUs, at the election of eligible employees, may be subject to deferred delivery arrangement. The total intrinsic value of RSUs outstanding at December 31, 2017 was $83.8 million based on the Company’s closing stock price on that date.

A summary of the status of the Company’s RSUs as of December 31, 2017, 2016 and 2015 and of changes in RSUs outstanding under the plans for the three years ended December 31, 2017 is as follows (in thousands, except for weighted average grant date fair value per unit):


	2017					2016					2015
	Number of Units			Weighted Average Grant Date Fair Value per Unit		Number of Units			Weighted Average Grant Date Fair Value per Unit		Number of Units			Weighted Average Grant Date Fair Value per Unit
Outstanding at January 1		883		$	29.33		910		$	24.23		669		$	15.01
Granted		588			47.21		326			36.73		448			33.62
Cancelled		(41	)		40.62		(69	)		32.50		(16	)		20.83
Converted into common shares		(350	)		24.19		(284	)		20.71		(191	)		14.24

Outstanding at December 31		1,080		$	40.30		883		$	29.33		910		$	24.23

Performance-Based Restricted Stock Units. During the years ended December 31, 2016 and 2015, the Company granted approximately 230,000 and 50,000 PRSUs, respectively, that vest based on the achievement of certain pre-defined Company-specific performance criteria and expire approximately four to five years from the grant date. No PRSUs were granted during the year ended December 31, 2017. The fair value of PRSUs is estimated based on the closing sale price of the Company’s common stock on the date of grant. Expense recognition for PRSUs commences when attainment of the performance based criteria is determined to be probable. During 2017, 2016 and 2015, the Company recognized approximately $0.4 million, $1.8 million and $8.8 million in expense related to PRSUs. At December 31, 2017, the total unrecognized estimated compensation expense related to these PRSUs was $7.5 million. The total intrinsic value of PRSUs converted into common shares during the year ended December 31, 2017 and 2015 was $8.8 million and $14.9 million, respectively. No PRSUs were converted into common shares during 2016. The total intrinsic value of PRSUs outstanding at December 31, 2017 was $16.3 million based on the Company’s closing stock price on that date.