Major investor says Icos price tag is too cheap

A New York-based hedge fund that owns a 5 percent stake in Icos said today it opposes the biotech company's sale to Eli Lilly at $32 a share.

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

HealthCor, which has $1.5 billion in assets, outlined its case in a letter to the Icos board of directors that was disclosed in a filing Thursday with the Securities and Exchange Commission.

HealthCor's stake of 3.3 million shares makes it the fifth-largest shareholder in Icos. The largest shareholders are Wellington Management, PrimeCap Management, Bill Gates, and Capital Research and Management.

In its letter, HealthCor listed multiple reasons for opposing the deal. The fund's complaints include:

• Two days after the takeover was announced, Icos and Lilly said third-quarter profits of the Cialis joint venture quadrupled. That news would have boosted Icos' share price, HealthCor says.

• According to the merger proxy statement, Eli Lilly insisted that Icos not solicit any competitive bids.

• 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 were awarded a combined $68 million in cash payouts for closing the deal.

• HealthCor also claims the financial analysis done for Icos by Merrill Lynch is flawed. The Merrill Lynch opinion cited 16 other comparable biotech takeovers of the past five years, and stated the average premium paid for companies was 25 percent to 45 percent over the trailing 30-day average stock price. HealthCor, in its own analysis of those transactions with different time frames, found average premiums of 42 percent over the prior day's stock price.

The sale price of Icos represented an 18 percent premium over the prior day's closing price of $27.12.

"We very effectively have been able to demonstrate that Icos is worth substantially more than the $32 bid that Eli Lilly has put forth," said John Schroer, a member of the investment team at HealthCor.

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