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Originally published Friday, November 3, 2006 at 12:00 AM

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Key Icos investor opposes sale, says share price is too low

A New York-based hedge fund that owns a 5 percent stake in Icos said Thursday it will oppose the company's sale to Eli Lilly because the...

Seattle Times business reporter

A New York-based hedge fund that owns a 5 percent stake in Icos said Thursday it will oppose the company's sale to Eli Lilly because the $32 price is too low, and called the handling of the deal by the Icos board and management "not only disturbing but indefensible."

HealthCor Management said it is mounting a fight to get at least $40 a share for Icos, the developer of the impotence drug Cialis.

The fund, which has $1.5 billion in assets, made its case in a letter to the Icos board that was disclosed in a filing with the Securities and Exchange Commission.

HealthCor's stake of 3.3 million shares — which it built from Sept. 28 to Nov. 1 — makes it one of the largest shareholders in Icos.

Christopher Raymond, a biotech analyst with Robert W. Baird in Chicago who doesn't own Icos shares, said he thinks HealthCor has a good chance to get its way.

"When this deal was announced, I was surprised the premium was so thin — 18 percent is as low as I have seen in biotech," Raymond said.

In its letter, HealthCor listed multiple arguments against the proposed $2.1 billion sale, which Icos hopes to close by year-end. The fund's complaints include:

• The deal was struck two days before Icos and Lilly disclosed that third-quarter profit of the Cialis joint venture had quadrupled. That news would have boosted Icos' share price, HealthCor says.

• Eli Lilly insisted that Icos not solicit any competitive bids.

• Cialis prescriptions are increasing, and other potential uses of the drug could greatly increase its sales potential and the value of Icos.

• Icos agreed it will pay Lilly a $55 million break-up fee if the deal fails to close, but there is no break-up fee if Lilly walks away from the sale.

• Icos senior managers get a combined $68 million in cash payouts if the company is sold, which gave managers strong incentive to sell.


"We cannot imagine how the compensation committee could have possibly justified this audacious handout or how the board of directors failed to stop it," HealthCor wrote.

• Lilly's price for Icos, announced Oct. 16, represents a premium of 18 percent over the previous day's closing price, much lower than standard practice in biotechnology, according to an analysis by HealthCor. Its analysis looked at the 16 comparable biotech takeovers of the past five years, and found that the average premium was 42 percent.

Icos' financial advisers, Merrill Lynch, looked at the same acquisitions but performed a different analysis, looking at the trailing 30-day stock-price average.

That analysis used Oct. 3 as the ending date, rather than Oct. 16, the day before the deal was announced. Because Icos shares were lower Oct. 3, it made Lilly's premium appear richer.

HealthCor said Merrill's choice of Oct. 3 appears arbitrary, and "does not make any sense."

"Clearly, Eli Lilly is attempting to purchase the Icos assets at bargain prices," HealthCor wrote.

After HealthCor declared its opposition to the sale, Icos stock rose 3 percent Thursday to close at $32.60 a share.

John Schroer, a member of HealthCor's investment team, said he interpreted the increase as a sign of support in the marketplace for his firm's view.

Also Thursday, investment fund Gamco Investors, formerly known as Gabelli Funds, disclosed it has acquired a 5.8 percent stake since the sale was announced Oct. 17. The other top Icos shareholders are Wellington Management, PrimeCap Management, Bill Gates, and Capital Research and Management.

There is recent precedent for a successful proxy battle in biotech.

In April, after Swiss pharmaceutical company Novartis had initially offered $40 a share for Chiron, it raised its bid to $48. ValueAct Capital, a San Francisco hedge fund, led the push for the higher bid.

Lacy Fitzpatrick, an Icos spokeswoman, said the board reviewed the sale carefully, and "We continue to believe this is a very positive transaction for shareholders."

Fitzpatrick said Chief Executive Paul Clark and Chief Financial Officer Mike Stein placed calls to the top 10 shareholders the day the sale was announced, and received "very positive" feedback. She would not say how many shareholder votes support the sale.

HealthCor was formed in 2005 by several health-investment managers who left SAC Capital, the powerful Connecticut-based hedge fund run by billionaire Steven A. Cohen. Schroer said many people at HealthCor have experience in proxy fights, though he has not personally led one before.

There are several possible outcomes to such a proxy fight. Icos and Lilly could push forward and seek a favorable shareholder vote; Lilly could raise its offer; or another corporate suitor could come along with its own offer — though that's unlikely since Lilly is half-owner of the joint venture that sells Cialis.

"It is not our goal to make this adversarial between the board and shareholders, but at the same time, if they don't look out for us, we'll look out for ourselves," Schroer said.

Luke Timmerman: 206-515-5644 or

Dollar figures in thousands, except per share; parentheses denote losses.
Sept. 30 %
3rd QTR 2006 2005 CHG
Profit $9,719 ($11,454)
Per share 0.15 (0.18)
Revenue 20,640 20,766 -0.6
9 MO. 2006 2005 CHG
Profit $15,141 ($104,041)
Per share 0.23 (1.26)
Revenue 57,915 52,638 +10.0

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