Buyout rumors propel ICOS stock gains

Published 9:00 pm Saturday, October 1, 2005

BOTHELL – Rumors of an impending buyout of ICOS Corp., Washington’s largest biotechnology firm, gained steam last week and helped propel the stock to a big one-day gain.

Lost amid the speculation, however, was how much truth there might be behind the rumors, and whether it even makes sense for another company to acquire ICOS, Snohomish County’s second largest publicly traded company.

Acquisitions are common in the biotech world, as evidenced by the buyout of Seattle’s Immunex Corp., which had been the state’s largest such firm, by Amgen in 2002.

ICOS seems to have a ready-made buyer in Eli Lilly &Co. The Indianapolis, Ind., company is among the world’s largest pharmaceutical firms and is ICOS’ marketing and manufacturing partner for Cialis, the big-selling erectile dysfunction drug.

ICOS, for one, isn’t publicly fueling any of the rumors.

“It is our practice not to comment on questions relating to mergers and acquisitions,” spokeswoman Lacy Fitzpatrick said Thursday.

Paul Latta, an analyst who tracks ICOS at Seattle’s McAdams Wright Ragen, said there are no concrete signs of an impending merger or acquisition involving ICOS. But the possibility of that is intriguing, he added.

“It sort of looks like something’s brewing, but who knows,” Latta said.

An appearance Thursday on CNBC by Sidney Taurel, chief executive officer at Eli Lilly, helped touch off the speculation. After noting that ICOS directors recently approved a severance plan that gives executives bonuses if the company changes hands, a CNBC reporter asked Taurel if he was interested in buying the company.

Taurel didn’t really answer the question, but that was enough to fuel trading of ICOS stock. After being up as much as 11 percent Thursday, shares closed at $27.55, up nearly 9 percent for the day.

The buyout speculation got another mention on CNBC and elicited a reaction from a Credit Suisse First Boston analyst. They said they see “ICOS as a much more likely acquisition target in the near term, based upon financial attractiveness.”

The analyst added that Lilly might offer as much as $39 to $41 a share for ICOS.

Less than two months ago, however, Morgan Stanley analysts said ICOS wasn’t that attractive.

“We ran a ‘back of the envelope’ calculation of what a stripped-down ICOS could be worth to an acquirer and found the valuation does not appear to offer a compelling takeout opportunity,” the firm said in a research note published on Forbes.com.

It estimated ICOS might fetch an offer of $1.5 billion, less than the $1.7 billion market value of the company’s stock shares.

Latta sees upsides and downsides to a possible acquisition of ICOS. One big factor is that the company, which marked 15 years in business last week, has struggled to develop a second marketable drug after Cialis.

“It is a bit of a one-drug company right now,” he said. “But that’s worked in the past with other companies.”

And Cialis is selling well: Annual worldwide sales could top $1 billion in the next two years.

Even without developing other drugs, Cialis’ active ingredient has shown signs of working as a treatment for prostate and lung conditions. If its effectiveness against a common prostate condition in older men pans out, sales of the drug could dramatically increase, Latta said.

That would certainly push the stock, which he sees as undervalued, well above where it is now.

There’s also the fact that ICOS, if purchased, would no longer be led locally. On the other hand, that doesn’t mean the company wouldn’t keep a big presence in Snohomish County. Since Amgen purchased Immunex, for example, it actually has added jobs in Seattle.

Reporter Eric Fetters: 425-339-3453 or fetters@heraldnet.com.