Genentech: Investors: GAAP vs. Non-GAAP Q3 2006

Revenues:
GENENTECH, INC. CONSOLIDATED STATEMENTS OF INCOME (In millions, except per share amounts) (Unaudited)
		Three Months Ended September 30,		Nine Months Ended September 30,

		2006	2005	2006	2005

	Product sales	$ 1,941	$ 1,451	$ 5,395	$ 3,911
	Royalties	364	238	966	670
	Contract revenue	79	63	208	159
Total operating revenues		2,384	1,752	6,569	4,740

Costs and expenses:
	Cost of sales⁽¹⁾	297	236	843	766
	Research and development (includes employee stock-based compensation expense: three months–2006–$35; 2005–$0; nine months–2006–$101; 2005–$0)	454	329	1,218	850
	Marketing, general and administrative⁽¹⁾ (includes employee stock-based compensation expense: three months–2006–$41; 2005–$0; nine months–2006–$124; 2005–$0)	501	343	1,414	1,006
	Collaboration profit sharing	250	220	735	595
	Recurring charges related to redemption	26	27	79	96
	Special items: litigation-related	13	14	40	44
Total costs and expenses		1,541	1,169	4,329	3,357

Operating income		843	583	2,240	1,383

Other income (expense):
	Interest and other income, net⁽²⁾	74	42	249	98
	Interest expense	(19)	(20)	(56)	(27)
Total other income, net		55	22	193	71

Income before taxes		898	605	2,433	1,454
Income tax provision		330	246	914	514
Net income		$ 568	$ 359	$ 1,519	$ 940

Earnings per share:
	Basic	$ 0.54	$ 0.34	$ 1.44	$ 0.89
	Diluted	$ 0.53	$ 0.33	$ 1.41	$ 0.87

Weighted average shares used to compute earnings per share:
	Basic	1,053	1,061	1,053	1,055
	Diluted	1,072	1,087	1,074	1,081

(1) Certain minor amounts for the prior year have been reclassified to conform to the presentation in our December 31, 2005 Form 10-K.

(2) "Interest and other income, net" includes interest income, net realized gains from the sale of certain biotechnology equity securities and write-downs for other-than-temporary impairments in the fair value of certain biotechnology debt and equity securities. For further detail, refer to our web site at www.gene.com.

Net income in the three and nine months ended September 30, 2006 includes employee stock-based compensation expense of $46 million and $141 million, net of tax, respectively, due to our adoption of Statement of Financial Accounting Standards No. 123(R) (or "FAS 123R") on a modified prospective basis on January 1, 2006. No employee stock-based compensation expense was recognized in GAAP-reported amounts in any period prior to January 1, 2006. Based on the pro forma application of FAS 123 for the calculation of employee stock-based compensation prior to January 1, 2006 (as previously disclosed in our financial statement footnotes of our Form 10-Q for the quarter ended September 30, 2005), pro forma employee stock-based compensation expense in the third quarter of 2005 was $43 million, net of tax, (or $0.04 per diluted share), and the resulting pro forma GAAP net income was $316 million (or $0.29 per diluted share), and pro forma employee stock-based compensation expense in the nine months ended September 30, 2005 was $126 million, net of tax, (or $0.12 per diluted share), and the resulting net income was $814 million (or $0.75 per diluted share).

Non-GAAP earnings per share:
GENENTECH, INC. RECONCILIATION OF GAAP to NON-GAAP NET INCOME (In millions, except per share amounts) (Unaudited)
		Three Months Ended September 30,		Nine Months Ended September 30,

		2006	2005	2006	2005

GAAP net income		$ 568	$ 359	$ 1,519	$ 940

Employee stock-based compensation expense under FAS 123R⁽¹⁾ included in the following operating expenses:
	Research and development	35	-	101	-
	Marketing, general and administrative	41	-	124	-
Recurring charges related to redemption⁽²⁾		26	27	79	96
Special items: litigation-related⁽³⁾		13	14	40	44
Income tax effect⁽⁴⁾		(46)	(16)	(132)	(56)
Non-GAAP net income		$ 637	$ 384	$ 1,731	$ 1,024

	Diluted	$ 0.59	$ 0.35	$ 1.61	$ 0.95

Non-GAAP weighted average shares used to compute earnings per share:
	Diluted	1,072	1,087	1,074	1,081

(1) Represents employee stock-based compensation expense associated with Genentech's adoption of FAS 123R on January 1, 2006. In the three and nine months ended September 30, 2006, the employee stock-based compensation expense was allocated to the research and development and marketing, general and administrative expense lines in the income statement.

(2) Represents the amortization of other intangible assets related to the 1999 redemption of Genentech's Special Common Stock.

(3) Includes accrued interest and bond costs in the third quarters and first nine months of 2006 and 2005 related to the City of Hope trial judgment and amounts paid in the second quarter of 2005 related to a litigation settlement, net of amounts received in the first quarter of 2005 on a separate litigation matter.

(4) Reflects the income tax benefit on employee stock-based compensation expense under FAS 123R, recurring charges related to redemption, and litigation-related special items.

2006 Reconciliation of GAAP and Non-GAAP EPS Estimates
Our 2006 non-GAAP EPS estimate does not include the effects of: (i) recurring amortization charges related to the 1999 redemption of our stock by Roche, which are estimated to be approximately $105 million on a pretax basis in 2006, (ii) litigation-related special items for accrued interest and associated bond costs on the City of Hope judgment and net amounts paid on other litigation settlements, which are currently estimated to be approximately $53 million on a pretax basis in 2006, (iii) income tax effect of $63 million on recurring charges related to redemption and litigation-related special items, and (iv) employee stock-based compensation expense associated with our adoption of FAS 123R on January 1, 2006, which we expect the net of tax diluted EPS impact to be in the range of $0.17 to $0.18 per share for 2006.

Our 2006 GAAP EPS would include the items listed above as well as any other potential special charges related to existing or future litigation or its resolution, or changes in accounting principles, all of which may be significant. The statements regarding the amounts relating to the 1999 Roche redemption of our stock, litigation-related special items and employee stock-based compensation expense are forward-looking and such statements are predictions and involve risks and uncertainties such that actual results may differ materially. The amounts identified above could be affected by a number of factors, including a re-valuation of certain intangible assets, greater than expected litigation-related costs, the number of options granted to employees, our stock price and certain valuation assumptions concerning our stock. We disclaim, and do not undertake, any obligation to update or revise any of these forward-looking statements.

Selected consolidated balance sheet data:
GENENTECH, INC. SELECTED CONSOLIDATED FINANCIAL DATA (In millions) (Unaudited)
		September 30, 2006	December 31, 2005

Cash, cash equivalents and short-term investments		$ 2,103	$ 2,365
Accounts receivable - product sales, net		790	554
Accounts receivable - royalties, net		415	297
Accounts receivable - other, net⁽¹⁾		234	199
Inventories		1,063	703
Long-term marketable debt and equity securities		1,787	1,449
Property, plant and equipment, net		4,047	3,349
Goodwill		1,315	1,315
Other intangible assets		499	574
Other long-term assets⁽¹⁾		1,299	1,074
Total assets		13,852	12,147
Total current liabilities		1,805	1,660
Long-term debt⁽²⁾		2,164	2,083
Total liabilities		4,962	4,677
Total stockholders' equity		8,890	7,470


		Nine Months Ended September 30,
		2006	2005

Selected consolidated cash flow data:
Capital expenditures⁽²⁾		$ 888	$ 1,107

Total GAAP⁽³⁾ depreciation and amortization expense		298	276
	Less: redemption related amortization expense⁽⁴⁾	(79)	(96)
Non-GAAP⁽⁵⁾ depreciation and amortization expense		$ 219	$ 180

(1) Certain reclassifications have been made at December 31, 2005 to conform to the September 30, 2006 presentation.

(2) Capital expenditures exclude approximately $158 million at September 30, 2006, and $94 million at December 31, 2005 and September 30, 2005 in capitalized costs related to our accounting for a construction project of which we are considered to be the owner during the construction period. We have recognized a related amount as a construction financing obligation in long-term debt.

(3) Reflects operating results in accordance with U.S. generally accepted accounting principles (or "GAAP").

(4) Represents the amortization of other intangible assets related to the 1999 redemption of Genentech's stock.

(5) Non-GAAP amounts exclude amortization of other intangible assets related to the 1999 redemption of Genentech's stock.

Net U.S. Product Sales
GENENTECH, INC. NET PRODUCT SALES DETAIL (In millions) (Unaudited)
			Three Months Ended September 30,		Nine Months Ended September 30,

			2006	2005	2006	2005
	Rituxan		$ 509	$ 456	$ 1,511	$ 1,347
	Avastin		435	325	1,256	774
	Herceptin		302	215	912	497
	Tarceva		100	73	296	191
	Nutropin products		92	89	277	276
	Xolair		107	82	307	227
	Thrombolytics		60	58	181	160
	Pulmozyme		50	47	146	137
	Raptiva		23	21	66	59
	Lucentis		153	-	163	-
		Total U.S. product sales	$ 1,830	$ 1,365	$ 5,116	$ 3,668

Net product sales to collaborators			111	86	280	243
		Total Product Sales	$ 1,941	$ 1,451	$ 5,395	$ 3,911

The values shown above are exact, which may lead to the appearance of footing errors.