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Wednesday, October 18, 2006 - Page updated at 12:00 AM

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Icos sale a blow to local biotech

Seattle Times business reporter

Notable local biotechs acquired


Year is when transaction was completed

2006/07: Icos, $2.1 billion, by Eli Lilly.

Developed the impotence drug Cialis.

2006: Corus Pharma, $365 million, by Gilead Sciences.

Developing Cayston, an inhalable antibiotic for cystic fibrosis.

2005: Corixa, $300 million, by GlaxoSmithKline.

Developed cancer drug Bexxar and vaccine boosters.

2002: Immunex, $10 billion, by Amgen.

Developed Enbrel, a blockbuster for autoimmune diseases.

2001: Rosetta Inpharmatics, $620 million, by Merck.

Made tools, software for analyzing gene functions.

2000: PathoGenesis, $700 million, by Chiron (now Novartis).

Developed Tobi, an inhalable antibiotic for cystic fibrosis

Source: Seattle Times research

When the region's flagship biotech company, Immunex, was sold five years ago, Icos was the logical heir apparent in an industry the Northwest was keen to embrace. It had a potential hit drug for erectile dysfunction on the cusp of government approval and a bright future with eight other drugs in human testing.

The impotence drug, Cialis, did become a blockbuster. But that alone wasn't enough to sustain Icos as an independent, growing company based in Bothell.

Tuesday, the state's largest biotech company agreed to be taken over by longtime partner Eli Lilly for $2.1 billion in cash, or $32 a share.

The takeover means the Northwest will lose many of the jobs at Icos — the sort of high-skilled, high-paying jobs that local officials have touted in recent years as the reason to cultivate the biotech industry.

Icos has 700 employees, 500 of them in Washington state.

Eli Lilly Chief Executive Sidney Taurel didn't mince words on a conference call with analysts: "We expect a significant number of jobs to be eliminated at Icos," he said, adding that cuts would be made quickly to boost Lilly's profits by 2008.

Taurel didn't give specifics but made clear his company is buying Icos for its 50 percent stake in Cialis, and little else. "The main value at Icos is the value of the [Cialis] joint venture," Taurel said.

The end for Icos, founded in 1990 with great fanfare and an investment by Bill Gates, is expected to be finalized later this year or early 2007, after clearance from regulators and Icos shareholders.

The buyout represents another body blow to a regional biotech industry that has struggled in recent years.

Seattle's pioneering company, Immunex, developed a hit rheumatoid-arthritis drug, but after failing to manufacture enough to meet patient demand it agreed in 2001 to be taken over by Amgen for $10 billion.

After initially cutting more than 400 Immunex jobs, Amgen has recently been expanding its research center along Elliott Bay.

Success breeds sale

Other Seattle biotech companies that developed successful products — PathoGenesis and Rosetta Inpharmatics — also ended up being sold to bigger companies and becoming branch operations.

"This could have put Seattle on the map," said Charles Hill, a University of Washington business professor and former Icos shareholder. "If Icos had made it, it would have made us a center for the industry. It's a huge loss for the region and a huge missed opportunity."

Icos Chief Executive Paul Clark disagreed, pointing to the $2 billion price tag Lilly is paying as proof Icos was able to build a "top-tier" biotech company in market value. That price ranks Icos among the top 15 most valuable biotech companies in the country, according to Bloomberg data.

With the elimination of Icos, the region will have just one biotech company ranked in the nation's top 25 in stock-market value — ZymoGenetics, at $1.2 billion.

Clark conceded in an interview that the sale is a setback for the local industry. But he said Icos' 16-year run shows the region is a fertile place to build valuable new biotechs. He said Icos will go down as a "good success story."

"We're very proud of what we accomplished, but at the end of the day it was our responsibility as a board to look at this from the shareholders' standpoint, and this offer was too good to pass up."

Icos shareholders, who saw their stock reach an all-time high at $70 a share five years ago, have suffered in recent years because of failures of products other than Cialis, and slower-than-expected growth in the market for erectile-dysfunction drugs.

Investors will get an 18 percent premium over Monday's close. On Tuesday, the stock rose 17 percent to $31.50, approaching Lilly's buyout price.

Much higher offer

Clark said the price is 66 percent higher than an offer Lilly made to Icos' board in May.

Since 1998, the two companies have worked closely in a 50-50 joint venture to develop and market Cialis. The drug was approved in Europe in November 2002 and the U.S. in November 2003.

Cialis recorded $747 million in worldwide sales in 2005 and is expected to reach $920 million to $950 million this year. Cialis is marketed as a longer-lasting alternative to the original Viagra but remains a distant second, with about 26 percent market share in the U.S., according to IMS Health.

Despite the drug's success, Icos stock has been in decline since Cialis won regulatory approval. Paul Latta, an analyst with McAdams Wright Ragen in Seattle, said some investors were taken aback by the huge amount of money the company needed to spend on marketing to compete with Viagra.

Investors have seen little else from Icos labs in recent years, though Icos used to claim its labs were some of the most productive in the industry.

In his 2001 letter to stockholders, Clark wrote that "one product, no matter how attractive, is not sufficient to sustain a long-term, growth-oriented company. We believe that a strong pipeline is absolutely essential. With eight products in the clinic, we have a pipeline of breadth and depth."

But eventually, the other drugs failed or were transferred to partners. Since 2000, two Icos drug candidates, Pafase for severe sepsis and LeukArrest for stroke, reached the final and most expensive stage of testing before they were deemed ineffective and dropped.

After the string of failures, Icos scaled back its research and development spending to focus more on expanding uses of Cialis. In August, it reported its first-ever quarterly profit with standard accounting and said it expected 2006 to be the first profitable year in its 16-year history.

It told investors to expect Cialis sales to eclipse $1 billion in 2007 and for its profits to widen to a range of $85 million to $100 million by 2008.

Other than Cialis, it has no other drugs in human testing.

Rumors of a sale to Lilly have circulated for years, but Clark said the sale made more sense now than two years ago because Icos is turning profitable, and will no longer be a drag on Lilly's earnings.

By the same token, turning profitable meant Icos reached a point where Wall Street expects more and more profits, making it more difficult to invest heavily in research and development of other products for the future.

From Lilly's standpoint, Taurel said Cialis sales are growing faster than its other products and it wanted full ownership, instead of just half.

Icos, founded by biotech pioneers George Rathmann, Christopher Henney and Robert Nowinski, received $33 million in venture capital when it started in 1990, the largest sum ever for a biotech startup at the time.

Bill Gates was an original investor and served on the board until 2005. He is still one of the largest shareholders, with an 8 percent stake.

Pat Gray, one of Icos' original scientists in 1990 and now a consultant to venture-capital firm Arch Venture Partners, said many talented scientists are left at Icos, but he's not sure if they will find work with other local companies.

Icos will go down as a "winner" because of Cialis, Gray said, but not as big as it could have been.

"I don't think [Clark] had the commitment to research that you need; he was a little short-sighted," Gray said. "It takes so long for the drug-development process to work, you have to support it now so that seven years later you can continue to move things along."

Luke Timmerman: 206-515-5644 or ltimmerman@seattletimes.com

Copyright © 2006 The Seattle Times Company

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