Unassociated Document

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PqjqBKDXae5I30jyZzOIa4iN37qeTGLOnIBMmsDdB8RO/uEQz5YU8Mti6M5txXgE oqKdyRoJcCYS5O3z6b4z5A== 0001144204-06-044914.txt : 20061102 0001144204-06-044914.hdr.sgml : 20061102 20061102133316 ACCESSION NUMBER: 0001144204-06-044914 CONFORMED SUBMISSION TYPE: SC 13D PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 20061102 DATE AS OF CHANGE: 20061102 GROUP MEMBERS: ARTHUR COHEN GROUP MEMBERS: HEALTHCOR ASSOCIATES, LLC GROUP MEMBERS: JOSEPH HEALEY SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: ICOS CORP CENTRAL INDEX KEY: 0000874294 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 911463450 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D SEC ACT: 1934 Act SEC FILE NUMBER: 005-48079 FILM NUMBER: 061181794 BUSINESS ADDRESS: STREET 1: 22021-20TH AVENUE S.E., CITY: BOTHELL STATE: WA ZIP: 98021 BUSINESS PHONE: 2064851900 MAIL ADDRESS: STREET 1: 22021 20TH AVE SE CITY: BOTHELL STATE: WA ZIP: 98021 FORMER COMPANY: FORMER CONFORMED NAME: ICOS CORP / DE DATE OF NAME CHANGE: 20050927 FORMER COMPANY: FORMER CONFORMED NAME: ICOS CORP DATE OF NAME CHANGE: 20050927 FORMER COMPANY: FORMER CONFORMED NAME: ICOS CORP / DE DATE OF NAME CHANGE: 19930328 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: HealthCor Management, L.P. CENTRAL INDEX KEY: 0001343781 IRS NUMBER: 202893581 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D BUSINESS ADDRESS: STREET 1: 152 WEST 57TH STREET, 47TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 212-622-7888 MAIL ADDRESS: STREET 1: 152 WEST 57TH STREET, 47TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10019 SC 13D 1 v056258_sch13d.htm Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 13D

Under the Securities Exchange Act of 1934

ICOS Corporation

(Name of Issuer)

Common Stock, $.01 par value

(Title of Class of Securities)

449295104

(CUSIP Number)

HealthCor Management, L.P.

Carnegie Hall Tower

152 West 57th Street, 47^th Floor

New York, New York 10019

Attention: Mr. Steven J. Musumeci

212-622-7888

(Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications)

November 1, 2006

(Date of Event which requires Filing of this Statement)

If the filing person has previously filed a statement on Schedule 13G to report the acquisition which is the subject of this Schedule 13D, and is filing this schedule because of §§ 240.13d-1(e), 240.13d-1(f) or 240.13d-1(g), check the following box. o.

CUSIP No. 449295104

1	NAME OF REPORTING PERSON I.R.S. IDENTIFICATION NO. OF ABOVE PERSON (entities only) HealthCor Management, L.P. 20-2893681

2	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) ࿇ (b) x

3	SEC USE ONLY

4	SOURCE OF FUNDS (See Instructions) WC

5	CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(E) ࿇

6	CITIZENSHIP OR PLACE OF ORGANIZATION Delaware

NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH		7	SOLE VOTING POWER 0
		8	SHARED VOTING POWER 3,300,000
		9	SOLE DISPOSITIVE POWER 0
		10	SHARED DISPOSITIVE POWER 3,300,000

11	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 3,300,000

12	CHECK IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES (See Instructions) ࿇

13	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 5.03%

14	TYPE OF REPORTING PERSON (See Instructions) PN

CUSIP No. 449295104

1	NAME OF REPORTING PERSON I.R.S. IDENTIFICATION NO. OF ABOVE PERSON (entities only) HealthCor Associates, LLC 20-2891849

2	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) ࿇ (b) x

3	SEC USE ONLY

4	SOURCE OF FUNDS (See Instructions) AF

5	CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(E) ࿇

6	CITIZENSHIP OR PLACE OF ORGANIZATION Delaware

NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH		7	SOLE VOTING POWER 0
		8	SHARED VOTING POWER 3,300,000
		9	SOLE DISPOSITIVE POWER 0
		10	SHARED DISPOSITIVE POWER 3,300,000

11	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 3,300,000

12	CHECK IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES (See Instructions) ࿇

13	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 5.03%

14	TYPE OF REPORTING PERSON (See Instructions) OO - limited liability company

CUSIP No. 449295104

1	NAME OF REPORTING PERSON I.R.S. IDENTIFICATION NO. OF ABOVE PERSON (entities only) Arthur Cohen

2	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) ࿇ (b) x

3	SEC USE ONLY

4	SOURCE OF FUNDS (See Instructions) AF

5	CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(E) ࿇

6	CITIZENSHIP OR PLACE OF ORGANIZATION United States

NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH		7	SOLE VOTING POWER 0
		8	SHARED VOTING POWER 3,300,000
		9	SOLE DISPOSITIVE POWER 0
		10	SHARED DISPOSITIVE POWER 3,300,000

11	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 3,300,000

12	CHECK IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES (See Instructions) ࿇

13	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 5.03%

14	TYPE OF REPORTING PERSON (See Instructions) IN

CUSIP No. 449295104

1	NAME OF REPORTING PERSON I.R.S. IDENTIFICATION NO. OF ABOVE PERSON (entities only) Joseph Healey

2	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) ࿇ (b) x

3	SEC USE ONLY

4	SOURCE OF FUNDS (See Instructions) AF

5	CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(E) ࿇

6	CITIZENSHIP OR PLACE OF ORGANIZATION United States

NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH		7	SOLE VOTING POWER 0
		8	SHARED VOTING POWER 3,300,000
		9	SOLE DISPOSITIVE POWER 0
		10	SHARED DISPOSITIVE POWER 3,300,000

11	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 3,300,000

12	CHECK IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES (See Instructions) ࿇

13	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 5.03%

14	TYPE OF REPORTING PERSON (See Instructions) IN

Information contained in this Statement is as of the date hereof, unless otherwise expressly provided herein.

Item 1. Security and Issuer.

Title of Class of Securities:

Common Stock $.01 par value per share (the "Common Stock")

Name and Address of Principal Executive Offices of Issuer:

ICOS Corporation (the "Company" or the "Issuer")

22021 20th Avenue S.E.

Bothell, WA 98021

Item 2. Identity and Background.

This statement is being filed by (i) HealthCor Management, L.P., a Delaware limited partnership; Carnegie Hall Tower, 152 West 57th Street, 47^th Floor, New York, New York 10019 (“HealthCor Management”); (ii) HealthCor Associates, LLC, a Delaware limited liability company; Carnegie Hall Tower, 152 West 57th Street, 47^th Floor, New York, New York 10019 (“HealthCor Associates”); (iii) Joseph Healey; Carnegie Hall Tower, 152 West 57th Street, 47th Floor, New York, New York 10019; and (iv) Arthur Cohen, 12 South Main Street, #203 Norwalk, CT 06854 (collectively, the “HealthCor Group”). Both Mr. Healey and Mr. Cohen are United States citizens.

HealthCor Associates is the general partner of HealthCor Management and Messrs. Healey and Cohen are the managing members of HealthCor Associates. The principal business of the HealthCor Group is the providing of investment advisory services to certain private investment funds.

During the last five years, no member of the HealthCor Group has been (i) convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors), or (ii) a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws or finding any violation with respect to such laws.

Item 3. Source and Amount of Funds or Other Consideration.

The shares of Common Stock of the Issuer were paid for from the working capital of HealthCor Management. The working capital of HealthCor Management consists of funds maintained in private investment funds managed by HealthCor Management which, in turn, consists of capital contributions from investors in such funds and the capital appreciation thereon. The principal purpose of such private investment funds is the buying and selling of securities and interests in domestic and foreign securities, and a variety of equity or equity-related instruments, including, without limitation, swaps, options, futures and forward contracts.

Item 4. Purpose of Transaction.

The shares of Common Stock reported in Item 5 were initially acquired for investment purposes, without the intention of changing or influencing control of the Issuer or as a participant in any transaction having that purpose or effect. However, the HealthCor Group has recommended, and from time-to-time, may continue to recommend to the Issuer’s management various strategies for increasing shareholders’ value.

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”). A copy of the November 2, 2006 Letter is attached hereto as Exhibit 1.

The HealthCor Group will also continue to evaluate on an ongoing basis the Issuer’s financial condition, business, operations and prospects, the market price for the shares of Common Stock, conditions in the securities markets generally, general economic conditions, conditions affecting the Issuer’s operations and other factors, specifically management’s ability to maximize shareholder value. In particular, the HealthCor Group may purchase shares of Common Stock, or may sell or otherwise dispose of all or a portion of the shares of Common Stock, in public and private transactions and/or may enter into negotiated derivative transactions to hedge the market risk of some or all positions in, or to obtain greater exposure to, the shares of the Common Stock. Any such transactions may be effected at any time or from time to time, subject to any applicable limitations imposed on the sale of shares of the Common Stock by the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and applicable state securities or “blue sky” laws. In addition, the HealthCor Group may seek to influence the policies, procedures, goals and strategic plans of the Issuer through direct communication with the Issuer’s management or otherwise. The HealthCor Group may also engage in discussions with other investors and other potential acquirers of the Company.

The HealthCor Group reserves the right to change its plans and intentions at any time as it deems appropriate with respect to all matters referred to in this Item 4.

Except as otherwise set forth above, no member of the HealthCor Group has any plans to effect any of the transactions required to be described in Item 4 of Schedule 13D.

Item 5. Interest in Securities of the Issuer.

(a) - (b) As of November 1, 2006, the HealthCor Group beneficially owned in the aggregate 3,300,000 shares of Common Stock which represents approximately 5.03% of the Company's Common Stock based upon 65,547,192 shares of Common Stock of the Company issued and outstanding as of October 30, 2006 as reported in the Company's Preliminary Proxy Statement filed under Schedule 14A on November 1, 2006. HealthCor Management is the investment manager to certain private investment funds which hold the Common Stock reported herein and by virtue of such status may be deemed to be the beneficial owner of 3,300,000 shares of Common Stock of the Issuer. HealthCor Associates and Messrs. Cohen and Healey have voting and investment power with respect to the Common Stock reported herein, and therefore may each be deemed to be the beneficial owners of such Common Stock and, together with HealthCor Management, comprise a “group” within the meaning of Section 13(d)(3) of the Exchange Act. The HealthCor Group may not be able to vote certain shares of Common Stock on the proposed transaction if those shares were aquired after the record date for the shareholders meeting at which such transaction shall be voted upon; the HealthCor Group may attempt to obtain proxies for any such shares from their holders in order to vote them.

The filing of this Statement and any future amendment by the HealthCor Group, and the inclusion of information herein or therein with respect to HealthCor Associates and Messrs. Cohen and Healey, shall not be considered an admission that any of such persons, for the purpose of Section 16(b) of the Exchange Act, are the beneficial owners of any shares in which such persons do not have a pecuniary interest. HealthCor Associates and Messrs. Cohen and Healey disclaim any beneficial ownership of the shares covered by this Statement.

(c) The HealthCor Group has made the following open-market purchases of shares of Common Stock during the last 60 days as follows:

Date	Number of Shares		Price Per Share
09/28/06		100,000		24.8191
09/29/06		100,000		25.0890
10/02/06		150,000		25.0697
10/03/06		100,000		25.1810
10/04/06		100,000		25.8861
10/05/06		100,000		26.2684
10/06/06		50,000		26.5271
10/12/06		50,000		26.5094
10/17/06		700,000		31.6650
10/17/06		190,000		31.6943
10/18/06		150,000		31.5180
10/19/06		150,000		31.5497
10/20/06		100,000		31.5460
10/23/06		20,000		31.6297
10/23/06		130,000		31.6132
10/23/06		200,000		31.6056
10/24/06		100,000		31.5820
10/25/06		100,000		31.5820
10/26/06		100,000		31.5902
10/30/06		25,000		31.6500
10/31/06		100,000		31.7230
10/31/06		185,000		31.7126
11/01/06		300,000		31.6608

(d) No person, other than HealthCor Management, has the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, such shares of Common Stock.

(e) Not applicable.

Item 6. Contracts, Arrangements, Understandings or Relationships with respect to Securities of the Issuer.

To the best knowledge of the HealthCor Group, there are no contracts, arrangements, understandings or relationships (legal or otherwise) among the HealthCor Group, and any other person, with respect to any securities of the Issuer, including, but not limited to, transfer or voting of any of the securities, finder’s fees, joint ventures, loan or option arrangements, puts or calls, guarantees of profits, divisions of profits or loss, or the giving or withholding of proxies.

Item 7. Material to be Filed as Exhibits.

Exhibit 1.

Letter sent by HealthCor Management, L.P. to the Board of Directors of ICOS Corporation dated November 2, 2006.

Exhibit 2.

Joint Filing Agreement, dated as of November 2, 2006 among HealthCor Management, L.P., HealthCor Associates, LLC, Joseph Healey and Arthur Cohen.

SIGNATURE

After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct.

Date: November 2, 2006


	HealthCor Management, L.P.

	By:	HealthCor Associates, LLC, general partner of HealthCor Management, L.P.

	By:	/s/ Arthur Cohen
		Name: Arthur Cohen Title: Manager


	By:	/s/ Joseph Healey
		Name: Joseph Healey Title: Manager


	HealthCor Associates, LLC

	By:	/s/ Arthur Cohen
		Name: Arthur Cohen Title: Manager


	By:	/s/ Joseph Healey
		Name: Joseph Healey Title: Manager


		/s/ Joseph Healey
		Joseph Healey, Individually


		/s/ Arthur Cohen
		Arthur Cohen, Individually

EXHIBIT INDEX

Exhibit 1.

Letter sent by HealthCor Management, L.P. to the Board of Directors of ICOS Corporation dated November 2, 2006.

Exhibit 2.

Joint Filing Agreement, dated as of November 2, 2006 among HealthCor Management, L.P., HealthCor Associates, LLC, Joseph Healey and Arthur Cohen.

EX-1 2 v056258_ex1.htm Unassociated Document

[HealthCor Logo]

November 2, 2006

ICOS Corporation

22021 20^th Avenue S.E.

Bothell, WA 98021

Attn:

Board of Directors

Paul N. Clark

James L. Ferguson

Robert J. Herbold

Jack W. Schuler

Vaughn D. Bryson

Gary L. Wilcox

Teresa Beck

Robert W. Pangia

David V. Milligan

Dear Gentlemen:

HealthCor Management, L.P. is the investment advisor to private investment funds that currently own 3,300,000 shares of ICOS Corporation (“ICOS” or the “Company”). This represents more than 5% of all ICOS common shares outstanding.¹

We intend to vote against the proposed acquisition of ICOS by Eli Lilly & Company (“Eli Lilly”) at the upcoming shareholder meeting that was announced in the Schedule 14A Proxy Statement filed with the Securities and Exchange Commission (“SEC”) on November 1, 2006 (the “Proxy Statement”). We believe that ICOS’ actual value is well in excess of $40 per share.

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.

¹ Based upon 65,547,192 shares of the Company’s common stock outstanding as of October 30, 2006 as reported in the Company’s Schedule 14A Proxy Statement filed with the Securities and Exchange Commission on November 1, 2006.

Specifically, the current proposed transaction price of $32 per share values ICOS at approximately $2.0B² . By applying any number of industry accepted valuation methodologies, we calculate a value of ICOS that is well in excess of $40 per share. [See Exhibit A attached hereto].

Although the proposed purchase price represents a premium over the recently depressed share price, the proposed purchase price represents a:

zero premium over the ICOS stock price from one year and two years ago;

30% discount from ICOS share prices seen three years ago;

50% discount from ICOS share prices seen five years ago; and

30% discount from June 1999 when Paul Clark joined ICOS as President and Chief Executive Officer.

Recent steps by Lilly ICOS LLC to control spending and manage towards profitability have begun to result in material financial benefits. The Erectile Dysfunction market prescription volumes are reaccelerating and Cialis is a primary beneficiary. Ongoing clinical trials of Cialis in additional therapeutic indications are expected to yield data that could significantly expand the commercial prospects for Cialis. 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.

Eli Lilly, through its 50% ownership of Lilly ICOS LLC, has access to and is in possession of material, non-public clinical and financial results and projections of the joint venture. By announcing its’ offer for ICOS on October 17, 2006, two days prior to the joint venture reporting positive financial results, Eli Lilly was able to unfairly justify its purchase premium. Had the positive financial results been adequately disseminated in the market, ICOS’ share price would have increased and much of the perceived premium would have been eliminated. Furthermore, the announcement of the acquisition resulted in a large number of shares changing hands. Merger arbitrageurs accumulated substantial numbers of shares while other investors sold. This undermines the ability of the market to adequately reflect positive developments in the financial performance of ICOS.

Our assertion that the earnings power of the Lilly ICOS LLC is greater than the public markets had discounted on October 16, 2006 is supported not only by the better than expected earnings report issued on October 19, 2006, but also by the internal earnings projection by ICOS’ management itself. Included in the Proxy Statement section entitled “Fairness Opinion,”³ ICOS’ management acknowledges that its internal expectation for EPS in 2007 exceeds the consensus Wall Street estimates by at least 22%. Furthermore, the earnings assumptions of ICOS’ senior management for 2008 - 2010 are above consensus estimates by an even greater amount.

² Calculated by multiplying the purchase price of $32 per share by 65,547,192 shares outstanding; addition of $131,709,000 cash, investments and receivable from Lilly ICOS LLC; subtraction of $278,650,000 in convertible debt; addition of $250,000,000 NPV of net operating losses.

³ Proxy Statement - Section “Opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated”.

We have reviewed in detail the assumptions and conclusions of the “Fairness Opinion” rendered in the Proxy Statement. We cannot help but agree it is an “opinion,” but it is far from “fair” for ICOS shareholders. Using the same companies used by Merrill Lynch, Pierce, Fenner & Smith (“Merrill”) in determination of fair value, we calculate prices significantly higher than the current purchase price. We believe the “Fairness Opinion” is flawed in its approach to valuation and, sadly, in its most basic financial calculations.

The “Fairness Opinion” makes use of a one year forward looking P/E ratio. We believe this is short-sighted and inappropriate to determine the value for a company such as ICOS. ICOS is just starting to turn profitable and the use of a P/E based valuation underestimates the value of the Company’s share price. Additionally, forward looking P/E ratios are used to calculate public market valuations, not private market valuations. Unless Merrill is suggesting that each company in its comparable universe is already valued at private market levels, we believe the use of this methodology is misleading. Merrill should have used forward P/E ratios for transactions of a similar type (i.e., change in control transactions) using the total consideration price. Alternatively, Merrill could have used the public market forward P/E ratios as a starting point onto which a transaction premium would logically be added.

A more appropriate valuation metric for ICOS is Price to Forward Revenues for both one and two years. This is a metric that the “Fairness Opinion” failed to incorporate. We have used these metrics and applied precedent transaction terms to generate fair value that is significantly above $40 per share.

The “Fairness Opinion” makes use of technical analysis. This is a useless analysis for determining private market value.

The “Fairness Opinion” makes use of Wall Street analysts’ target prices for ICOS. Again, this is not appropriate as it is a public market target price and not a private market valuation. These target prices are based on consensus estimates while the Proxy Statement reveals management expectations meaningfully above these estimates. Additionally, the target prices are discounted back by 15%, an aggressive discount rate given the high degree of predictability of the forecasts. If the analysts were asked to generate a private market value using the Company’s own earnings projections, significantly higher price targets would result.

The “Fairness Opinion” makes use of historical premiums paid on sixteen similar transactions. It calculates an average premium of 25% - 45%. We have reviewed each of the sixteen transactions referenced in the “Fairness Opinion” and find the average premium paid in such transactions to be 42% above the closing price of the target company from the previous day. Additionally, we have found an average purchase premium of 40.5% above the average closing price of the target company in such transactions for the previous month. There was only one transaction of the sixteen where the premium paid was below 25% for both the one day and the one month measurement periods. We find the 25% - 45% premium range calculated in the “Fairness Opinion” as a clear intent to distort the typical premium paid.

The “Fairness Opinion” uses the average closing price for one month and three months of October 3, 2006. The transaction was announced on October 17, 2006. Using a benchmark date two full weeks before the deal is announced is both arbitrary and in our opinion, does not make any sense. Not only does the “Fairness Opinion” miscalculate the average premium, it applies the miscalculated premium to the wrong dates. (ICOS’ closing share price on October 16, 2006 was $27.12. The “Fairness Opinion” used the closing price on October 3, 2006 of $25.36. The average closing price of ICOS’ shares for the month ending October 16, 2006 is $25.45. The “Fairness Opinion” used an average closing price for the month ended October 3, 2006 of $24.52.)

Using the same methodology put forth in the “Fairness Opinion” and the same benchmark transactions but applying to stock prices from the correct dates, we again calculate a value of ICOS 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 ICOS⁴ . This opportunistic approach is confirmed by Eli Lilly’s actions during the courting process:⁴

Eli Lilly has insisted that ICOS not solicit or even encourage other bidders for ICOS. This would result in market forces determining value of ICOS which is not in the best interest of Eli Lilly;

Eli Lilly refused to waive restrictions on transfer of ownership of Lilly ICOS LLC in the event a third party submitted a bid. This effectively blocks competitive bidding; and

Eli Lilly insisted that ICOS pay Eli Lilly a $55 million break up fee in the event the deal does not go through while Eli Lilly would owe ICOS nothing.

Other compelling evidence that ICOS is being undervalued in this transaction is the material earnings accretion being forecast for the shareholders of Eli Lilly by respected financial analysts. [See Exhibit B attached hereto]. This value accretion for Eli Lilly shareholders is a direct wealth transfer from the shareholders 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, 2006.⁵ 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.

⁴ Proxy Statement - Section “Background of the Merger”

⁵ Proxy Statement - Section “Background of the Merger”

⁶ As reported in the Company’s Form 8-K filed with the SEC on October 20, 2006.

These changes result in ADDITIONAL COMPENSATION for senior executives in excess of $13.6 million⁶ 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.

We feel the previous “Change in Control Severance Agreement” that was established in July 2005 (curiously, weeks after the first Eli Lilly offer to purchase ICOS⁷ ) is more than generous and the Amendment (curiously, effective the day that the ICOS purchase by Eli Lilly was announced) is egregious.

We also believe that the Amendment as well as the Special Bonus Plan would be unnecessary had ICOS management and the Board of Directors fulfilled their fiduciary obligation and maximized value for ALL shareholders.

In light of the scrutiny of Corporate America’s executive compensation and in consideration of the meager premium offered to shareholders in the proposed acquisition, we find the actions of the Board of Directors and executive management of ICOS not only disturbing but indefensible.

	Sincerely, HealthCor Management, L.P.

	/s/ Joseph P. Healey		/s/ Arthur B. Cohen
	Joseph P. Healey		Arthur B. Cohen
	Portfolio Manager		Portfolio Manager
	(212) 622-7880		(212) 622-7881

⁷As reported in the Company’s Form 8-K filed with the SEC on October 20, 2006.

⁸ Proxy Statement - Section “Background of the Merger”

Exhibit A

Valuation Analysis of Proposed ICOS Acquisition:

Eli Lilly’s Initial Purchase Price:	$32 per share
Fully Diluted Shares Outstanding:	65,547,192
Approximate Consideration for ICOS	$2.0B

	Consensus Estimates⁸		Multiple

2007 Revenue	$	623.9m		3.35 X
2008 Revenue	$	693.2m		3.02 X

2007 Fully Diluted EPS	$	1.09		29.4 X
2008 Fully Diluted EPS	$	1.60		20.0 X

Precedent Transactions⁹ ^{Sourced Transactions: Chiron, Vicuron, Bone Care, Transkaryotic, Cor
Therapeutics, Aviron, Alza, Serono, ID Biomedical, Biogen, Aventis, Sangstat,
Pharmacia, Pathogenesis}:

	Average		Implied ICOS Value

1 Year Forward Revenue Multiple		5.6 X	$	53.76
2 Year Forward Revenue Multiple		5.1 X	$	54.40

1 Year Forward P/E Ratio		33.0 X	$	36.00
2 Year Forward P/E Ratio		28.4 X	$	45.44

Average:			$	47.40

⁹ Calculated after LLY ICOS LLC reported 3^rd quarter 2006 financial results. Sources: Merrill Lynch, Cowen & Co, Morgan Stanley, Thomas Weisel Partners, UBS. Includes ICOS revenue plus ICOS share of Lilly ICOS LLC Revenues

¹⁰ Sourced Transactions: Chiron, Vicuron, Bone Care, Transkaryotic, Cor Therapeutics, Aviron, Alza, Serono, ID Biomedical, Biogen, Aventis, Sangstat, Pharmacia, Pathogenesis

Exhibit B

Eli Lilly and Company Earnings Accretion:

The average Wall Street analyst increased their projected EPS for Eli Lilly and Company (“Eli Lilly”) by $0.06 in 2008 and $0.12 in 2009. These are independent financial analysts. Eli Lilly has 1,084 million shares outstanding¹⁰ . This implies accretion to Eli Lilly’s’ Net Income of approximately $65m in 2008 and $130m in 2009.

We use very conservative cost of borrowing assumptions for Eli Lilly of 8% (Note: Eli Lilly debt is currently trading below 6% yield) and a marginal tax rate of 35% (Note: Eli Lilly reported a 21% corporate tax rate for the 3^rd quarter 2006). We calculate Eli Lilly and Company could pay $50 per share of ICOS, funded by 8% debt, and still make the transaction mildly accretive in 2008 and 2009. Clearly, the shareholders that are benefiting from this transaction at the proposed price are the Eli Lilly holders.

“We expect the deal to be dilutive ($0.03) in 07, but accretive in 08, 09 & 10 by $0.04, $0.16 & $0.27. Our 06-09/06-11 EPS CAGRs increase by 130bps/80bpts to 13%/10%”

-Bear Stearns October 18^th, 2006

“We estimate that the ICOS acquisition will be roughly $0.05 accretive in 2008, and we are increasing our '08 EPS forecast from $3.75 (+12%) to $3.80. EPS growth in 2008 should increase to 16% due, in part, to the lower 2007 earnings base. The addition of Cialis JV revenues to the top line will add 2pps to our 2008 sales growth forecast of 4%. Our 2008 EPS forecast assumes approx. $335MM in cost-rationalization and tax synergies offset by estimated annual amortization of intangibles of $91MM.”

- Leerink Swann October 18^th, 2006

“We are publishing our new estimates to include the ICOS merger. We expect the transaction to be accretive in 2008, in-line with guidance. Importantly, guidance for accretion includes the amortization of intangibles, which is frequently excluded from adjusted EPS guidance. Our new 2007-2010 estimates are $3.42, $3.90, $4.43, and $4.93 (from $3.48, $3.85, $4.32, and $4.80).”

- Goldman Sachs October 18^th, 2006

“We have lowered our 2007 EPS estimate to $3.47 (+8%) from $3.49 and raised our 2008 EPS forecast to $3.89 (+12%) from $3.84.”

- Prudential Equity Group October 18^th, 2006

¹¹ As reported in the Company’s Form 10-Q for the quarterly period ended June 30, 2006 filed with the SEC on August 4, 2006

“By our calculation, the dilution, excluding charges, could be about $0.05 on our base EPS forecast of $3.37. Obviously, rationalizing the joint venture, and cost savings across the 700 employees of ICOS will allow for potential accretion in 2008 and beyond. Further development of Cialis in BPH is in Phase II, in PAH is in Ph. III, and a once daily filing is expected in the US by year end 2006.”

- Deutsche Bank October 18^th, 2006

“This proposed transaction could expand Lilly’s multiples, assuming they are able to translate the revenue into incremental profit. Such leverage may come in a variety of forms including cost reductions and NOL's. The growth rate of Cialis is higher than the Lilly corporate growth rate. Further, we estimate the true gross margin of Cialis is higher than the Lilly corporate gross margin. With 700 employees at ICOS, one might speculate that the majority of the 160 sales reps could be eliminated (including the additional 40 contract reps). The net operating loss carry forwards not only may offset higher interest expense, but also may improve earnings per share.”

- Lehman Brothers October 18^th, 2006

EX-2 3 v056258_ex2.htm Unassociated Document

Exhibit 2

AGREEMENT OF JOINT FILING

The undersigned acknowledge and agree that the foregoing statement on Schedule 13D is filed on behalf of each of the undersigned and that all subsequent amendments to this statement on Schedule 13D shall be filed on behalf of each of the undersigned without the necessity of filing additional joint acquisition statements. The undersigned acknowledge that each shall be responsible for the timely filing of such amendments, and for the completeness and accuracy of the information concerning him or it contained therein, but shall not be responsible for the completeness and accuracy of the information concerning the others, except to the extent that he or it knows or has reason to believe that such information is inaccurate.

Date: November 2, 2006


	HealthCor Management, L.P.

	By:	HealthCor Associates, LLC, general partner of HealthCor Management, L.P.



		By:	/s/ Arthur Cohen
			Name: Arthur Cohen Title: Manager


		By:	/s/ Joseph Healey
			Name: Joseph Healey Title: Manager



	HealthCor Associates, LLC

	By:	/s/ Arthur Cohen
		Name: Arthur Cohen Title: Manager

	By:	/s/ Joseph Healey
		Name: Joseph Healey Title: Manager


	/s/ Joseph Healey
	Joseph Healey, Individually


	/s/ Arthur Cohen
	Arthur Cohen, Individually

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