Eli Lilly and Co. increased its bid for Icos 6% from $2.1 billion to $2.3 billion after a complaints from at least one Icos shareholder that the initial bid was not high enough. The Indianapolis-based drug manufacturer raised its offer from $32 a share to $34 after major Icos shareholder, HealthCor, argued that the company was worth over $40 a share. However, Lilly calls its latest bid its "best and final offer." The two companies have a joint venture in Cialis, a drug which treats erectile dysfunction. Lilly believes that the acquisition will cut costs. "We are confident that Icos shareholders will recognize the substantial value and the certainty that Lilly is offering," said Sidney Taurel, Lilly's CEO. Shares of Icos rose 47 cents to $33.82 in mid-morning trading on Nasdaq. Lilly's shares dropped 79 cents, or 1.4 percent, to $53.77 on the New York Stock Exchange.
• Sources: Reuters, New York Times, TheStreet.com,
• Related commentary: Eli Lilly ICOS Buyout Is Not Arm's Length, ICOS Shareholders to Board: Eli Lilly Bid Is at a Discount, Not a Premium, Wall Street Unhappy with Lilly's Forecast for 2007,
• Potentially impacted stocks and ETFs: Eli Lilly (LLY), ICOS Corp. (ICOS). Competitors: Merck & Co. (MRK), Pfizer (PFE), GlaxoSmithKline (GSK), Bristol Myers Squibb (BMY), Wyeth (WYE), Schering-Plough Corporation (SGP). ETFs: iShares Dow Jones US Pharmaceutical Indx (IHE), Pharmaceutical HOLDRS (PPH), SPDR Pharmaceuticals (XPH), Vanguard Health Care (VHT)

After meeting with analysts in New York yesterday to describe its forward strategy and forecasts, shares of drugmaker Eli Lilly dropped 1.6%. Analysts looking at the short-term projection laid out were unhappy to discover the company's pending acquisition of biotech drugmaker ICOS Corp. (producer of Cialis) would shave a greater-than-expected 10 cents off of earnings in 2007. Expected earnings-per-share were are the $3.25-$3.35 range - a gain of just 5%; Thomson Financial had the consensus for 2007 at $3.39 while UBS analyst Roopesh Patel viewed the guidance as "a bit disappointing,'' after predicting the ICOS acquisition would lower EPS by just three cents. Going forward, Lilly expects to introduce at least one major drug a year through 2010 and two a year after that. The company also expects earnings growth of high single to low upper digits growth after FY 2007.
• Sources: Bloomberg, Business Week, MSNBC, Washington Post
• Related commentary: Searching for Value Investments in the Drug Stock Universe, Eli Lilly ICOS Buyout Is Not Arm's Length, ICOS Shareholders to Board: Eli Lilly Bid Is at a Discount, Not a Premium
• Potentially impacted stocks and ETFs: Eli Lilly (LLY), ICOS Corp. (ICOS). Competitors: Merck & Co. (MRK), Pfizer (PFE), GlaxoSmithKline (GSK), Bristol Myers Squibb (BMY), Wyeth (WYE), Schering-Plough Corporation (SGP), ETFs: iShares Dow Jones US Pharmaceutical Indx (IHE), Pharmaceutical HOLDRS (PPH), SPDR Pharmaceuticals (XPH), Vanguard Health Care (VHT)

The acquisition has not occurred in a market-based, competitive bid process. Therefore, in making its determination of fair value, we believe the Board of Directors must rely upon market-based comparables of similar transactions. We have clearly shown, in our initial communication to you, the flaws and distortions that are contained within the 'Fairness Opinion' provided by Merrill Lynch. Without a competitive bid and without a 'Fairness Opinion' that can be relied upon, the Board of Directors of ICOS is 'flying blind' while trying to assess appropriate value."

In the letter, the firm noted the 101.6% premium Merck (MRK) paid for Sirna Therapeutics Inc. (RNAI); the 55.7% premium Abbott Laboratories (ABT) paid for KOS Pharmaceuticals Inc. (KOSP); and the 46.6% premium Genentech Inc. (DNA) paid for Tanox Inc. (TNOX). The firm compares this to the 18.2% premium Eli Lilly paid for ICOS.

In a letter sent to the ICOS board of director the group said, "It is our belief that the market would have continued to recognize these positive clinical and financial developments at ICOS and rewarded ICOS shareholders with a stock price far in excess of $40 within twelve months without an announced transaction. THE BOARD OF DIRECTORS IS SELLING ICOS FOR A DISCOUNT BID, NOT A PREMIUM."

A Copy of the Letter: