Stock-based Compensation Expense

9 Months Ended

Sep. 30, 2023

Stock-based Compensation Expense [Abstract]

9. Stock-based Compensation Expense

We measure stock-based compensation expense for equity-classified awards, principally related to stock options, RSUs, PRSUs and stock purchase rights under our ESPP based on the estimated fair value of the award on the date of grant. We recognize the value of the portion of the award that we ultimately expect to vest as stock-based compensation expense over the requisite service period in our condensed consolidated statements of operations. We reduce stock-based compensation expense for estimated forfeitures at the time of grant and revise in subsequent periods if actual forfeitures differ from those estimates. We use the Black-Scholes model to estimate the fair value of stock options granted and stock purchase rights under our ESPP.

On the grant date, we use our stock price and assumptions regarding a number of variables to determine the estimated fair value of stock-based payment awards. These variables include, but are not limited to, our expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors.

We recognize compensation expense for stock options, RSUs, PRSUs and stock purchase rights under the ESPP using the accelerated multiple-option approach. Under the accelerated multiple-option approach (also known as the graded-vesting method), we recognize compensation expense over the requisite service period for each separately vesting tranche of the award as though the award were in substance multiple awards, which results in the expense being front-loaded over the vesting period.

For the nine months ended September 30, 2023 and 2022, we used the following weighted-average assumptions in our Black-Scholes calculations:

Employee Stock Options:

	Nine Months Ended September 30,
	2023			2022
Risk-free interest rate		3.7	%		1.9	%
Dividend yield		0.0	%		0.0	%
Volatility		47.1	%		54.9	%
Expected life	6.3 years			6.3 years

Ionis Board of Director Stock Options:

	Nine Months Ended September 30,
	2023			2022
Risk-free interest rate		3.8	%		2.9	%
Dividend yield		0.0	%		0.0	%
Volatility		53.0	%		56.2	%
Expected life	7.7 years			7.4 years

ESPP:

	Nine Months Ended September 30,
	2023			2022
Risk-free interest rate		5.3	%		1.2	%
Dividend yield		0.0	%		0.0	%
Volatility		36.0	%		50.1	%
Expected life	6 months			6 months

RSUs:

The fair value of RSUs is based on the market price of our common stock on the date of grant. The RSUs we have granted to employees vest annually over a four-year period. The RSUs we granted to our board of directors prior to June 2020 vest annually over a four-year period. The RSUs we granted after June 2020 to our board of directors fully vest after one year. The weighted-average grant date fair value of RSUs granted to employees for the nine months ended September 30, 2023 and 2022 was $39.78 and $34.88 per share, respectively.

PRSUs:

Beginning in 2020, we added PRSU awards to the compensation for our Chief Executive Officer, Dr. Brett Monia. In 2022, we added PRSU awards to the compensation for our other Section 16 officers. Beginning in 2023, we added PRSU awards to the compensation for all executive officers.

Under the terms of the PRSUs we granted in 2020 through 2022, one third of the PRSUs may vest at the end of three separate performance periods spread over the three years following the date of grant (i.e., the one-year period commencing on the date of grant and ending on the first anniversary of the date of grant, the two-year period commencing on the date of grant and ending on the second anniversary of the date of grant and the three-year period commencing on the date of grant and ending on the third anniversary of the date of grant) based on our relative total shareholder return, or TSR, as compared to a peer group of companies, and as measured, in each case, at the end of the applicable performance period. Under the terms of the grants, no number of PRSUs is guaranteed to vest and the actual number of PRSUs that will vest at the end of each performance period may be anywhere from zero percentto 150 percent of the target number depending on our relative TSR.

Under the terms of the PRSUs we granted in 2023, 100 percent of the PRSUs may vest at the end of the three-year performance period based on our relative TSR as compared to a peer group of companies and as measured at the end of the performance period. Under the terms of the grants, no number of PRSUs is guaranteed to vest and the actual number of PRSUs that will vest at the end of each performance period may be anywhere from zero to 200 percent of the target number depending on our relative TSR.

We determined the fair value of the PRSUs using a Monte Carlo model because the performance target is based on our relative TSR, which represents a market condition. The weighted-average grant date fair value of PRSUs granted to our executive officers for the nine months ended September 30, 2023 and 2022 were $58.99 and $42.28 per share, respectively.

The following table summarizes stock-based compensation expense for the three and nine months ended September 30, 2023 and 2022 (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Cost of sales	$	118	$	163	$	355	$	376
Research, development and patent expense		18,727		17,733		57,543		55,315
Selling, general and administrative expense		7,119		5,941		21,575		18,884
Total stock-based compensation expense	$	25,964	$	23,837	$	79,473	$	74,575

As of September 30, 2023, total unrecognized estimated stock-based compensation expense related to non-vested stock options, RSUs and PRSUs was $44.1 million, $62.2 million and $7.3 million, respectively. Our actual expenses may differ from these estimates because we will adjust our unrecognized stock-based compensation expense for future forfeitures, including any PRSUs that do not vest. We expect to recognize the cost of stock-based compensation expense related to our non-vested stock options, RSUs and PRSUs over a weighted average amortization period of 1.2 years, 1.4 years and 1.7 years, respectively.