ICOS Corp. (NDAQ:ICOS) has at least one party that is now opposed to its merger plans with Eli Lilly and Company (NYSE:LLY). Five percent holder HealthCor Management said in a 13D filing with the SEC yesterday that it would oppose the merger, stating that they thought the buyout price significantly undervalued ICOS shares. In a letter to the company, they make several valid points regarding the company's relationship to LLY and why the merger is bad news for investors:

"On October 17, 2006, the Company announced that it had entered into a merger agreement whereby it would be acquired by Eli Lilly and Company ('Eli Lilly') and on November 1, 2006, the Company filed a preliminary proxy statement with the Securities and Exchange Commission whereby the Company’s management recommended that the Company’s shareholders vote to approve the merger with a consideration of $32 per share of Common Stock. After reviewing the terms of the merger and the financial condition of the Company, the HealthCor Group, as of the date hereof, has determined that it intends to vote against the merger as it does not believe the consideration offered adequately compensates the Company’s shareholders for their interest in the Company. On November 2, 2006, HealthCor Management mailed via overnight delivery service (and by facsimile transmission) a letter to the Board of Directors of the Company explaining its reasoning for not supporting the merger with Eli Lilly (the 'November 2, 2006 Letter').

The proposal by Eli Lilly to acquire the outstanding shares of ICOS for $32 per share does not fully compensate the shareholders of ICOS for its 50% share of Lilly ICOS LLC, future clinical opportunities for Cialis and other Company assets of value. Specifically, the current proposed transaction price of $32 per share values ICOS at approximately $2.0B . By applying any number of industry accepted valuation methodologies, we calculate a value of ICOS that is well in excess of $40 per share. Clearly, Eli Lilly is attempting to purchase the ICOS assets at bargain prices. Twice in the last two years, the ICOS share price has suffered short-term downward price movements. Both times, Eli Lilly has approached ICOS in an attempt to purchase the assets of Lilly ICOS LLC as well as the whole of ICOS.

We are also very troubled by the 'Amended and Restated Change in Control Severance Agreement' (the 'Amendment') as well as the 'ICOS Corporation Retention, Sale and Special Recognition Bonus Plan' (the 'Special Bonus Plan') filed with the SEC on October 20, 2006. This 'Amendment' and 'Special Bonus Plan' effectively provides greater financial gains for senior management as a result of the anticipated sale of the Company, to which management was not previously entitled.

These changes result in ADDITIONAL COMPENSATION  for senior executives in excess of $13.6 million simply for completing the transaction. Specifically, Paul N. Clark, Chief Executive Officer, will receive a minimum of $4.3 million of additional new benefits bringing the already handsome sum he will receive to more than $30 million. Similarly, other senior executives will receive substantial financial benefits on top of the amounts they are scheduled to receive. We cannot imagine how the Compensation Committee could have possibly justified this audacious hand-out or how the Board of Directors failed to stop it. We remain confused as to how the Board of Directors of ICOS can so generously calculate the value of management performance yet simultaneously so conservatively undervalue the assets of the Company that is being managed by this same group." (Read More)

Clearly there is a lot going on here. Eli Lilly controls 50% of the company, which to date has been a joint venture. LLY has also attempted to buy the company several times in the past when share prices were depressed. Now, they are offering management more than $30 million to go through with the transaction while again failing to solicit other bids for the company or consider whether the buyout price is sufficient for investors (some of which are sitting on a 30% loss). If HealthCor is successful in raising awareness of these issues and is able to derail this merger, ICOS may be a stock worth watching.

Related Companies
Pfizer, Inc. (PFE)
NexMed Inc. (NEXM)
VIVUS Inc. (VVUS)