Lilly's Icos offer may be low as profit projections better than expected

News that Icos sales and profits are solidly beating the company's own forecasts may pressure Eli Lilly to sweeten its $32-per-share buyout offer just days before shareholders vote on the deal.

Paul Latta, an analyst with McAdams Wright Ragen in Seattle, said the Bothell biotech company's updated financial guidance Thursday was far better than he and other analysts expected. It is now likely, he said, that Lilly will increase its bid because Icos is clearly worth more than when the deal was struck in October.

"Lilly's only real option is to wait until the final hour and raise the price," Latta said.

Lehman Brothers, in a research note, raised its price target for Icos to $34.

A spokesman for Lilly declined to comment.

Thursday's announcement was an eye-opener for investors, who will vote Tuesday. The low-end estimate of Icos' 2006 profits more than tripled.

Icos said it now expects Cialis will record $955 million to $965 million in worldwide sales for 2006, compared with its previous estimate of $920 million to $950 million for the year.

The strong sales translate into expected profits for Icos of $21 million to $25 million for the year, surpassing the company's previous estimate of $6 million to $15 million. The previous sales and earnings guidance was issued in August.

Future profit projections were also upgraded. Icos said it expects to earn $52 million to $63 million in profits next year, compared with previous guidance of $35 million to $45 million. Worldwide sales of Cialis next year are expected to reach between $1.1 billion and $1.15 billion.

Following the company's announcement, Icos stock rose 68 cents to close at $33.25 a share on its heaviest trading volume in two months.

HealthCor Management, a New York hedge fund that has argued Icos is worth at least $40 a share, wagered Thursday that Lilly will have to raise the bid. HealthCor disclosed in a regulatory filing that it bought another 560,000 shares at prices of $32.25 and $33.08, lifting its stake to 6 percent.

John Schroer, a member of the investment team at HealthCor, said the raised projections should make it easier for Lilly shareholders to justify a higher offer. "We view it as highly unlikely Lilly will walk away. Lilly wants full control of Cialis, and it needs it. The multiple positive earnings revisions are evidence of the value of Icos," he said in an interview.

Even before the new profit guidance, a leading proxy advisory firm, Institutional Shareholder Services, argued that the $32 offer is too low.

Icos has said in its proxy filings that stockholders can change their votes at any time before they are counted at the shareholder meeting.

In Thursday's statement, Icos also confirmed it has made progress in extending the possible commercial reach of Cialis. It has submitted a new drug application to the Food and Drug Administration for a lower-dose, once-a-day formulation of Cialis for impotence, which could enable a man to always be ready for intercourse. The drug is also being tested in patients with enlarged prostates, and in pulmonary arterial hypertension.

Icos also confirmed it has made progress with drugs other than Cialis, as first reported in The Seattle Times last week. The company said it has begun a clinical trial of a drug for psoriasis, and expects to begin another trial of a cancer drug by the end of 2006 or early 2007. The company had not previously disclosed those new developments to shareholders.

In a statement, Icos said, "In light of the pending merger with Lilly, Icos believes it is important to update its shareholders on the expected financial performance of Lilly Icos and the company."

The company chose not to disclose so much information in October, which upset many shareholders. The deal was struck on Oct. 16, two days before the Cialis joint venture reported surprising news that quarterly profits had quadrupled.

A week ago, Eli Lilly chief executive Sidney Taurel touted Cialis' future at an investor meeting. He said it has surpassed Pfizer's Viagra as the No. 1 impotence drug in 17 countries, is patented until 2017, and is growing faster than its rivals. The drug will help Lilly boost its profits by 2008, he said.

In an interview on CNBC the same day, Taurel said $32 a share was a "full and fair" offer for Icos, and he had no intention of going higher.

The Icos shareholders meeting, where the votes will be counted, is at 11 a.m. Tuesday at Icos headquarters, 22021 20th Ave. SE in Bothell.

As the Lilly offer stands right now, said Latta, "It will be close."

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