HealthCor Management PX14A6G Letter to shareholders

ICOS Corporation AnalysisMaterials Prepared For ISS
November 28, 2006

This analysis is being provided at the unsolicited request of Institutional Shareholder Services

for additional information regarding HealthCor's previously announced intention to vote

against the proposed acquisition of ICOS Corporation by Eli Lilly.  In agreeing to meet with ISS,

HealthCor is not engaging in a proxy solicitation within the meaning of

Rule 14a-1(l) under the Securities Exchange Act of 1934.

1

Table of Contents

Executive Summary

ICOS Corporation

Erectile Dysfunction Market

Valuation Considerations

Dissenters’ Rights

Broker Models

HealthCor 13D Filings

2

Executive Summary

As filed with the SEC, HealthCor Management owns over 3.3MM shares of ICOS
(>5%) and we intend to vote against the proposed acquisition of ICOS by Eli Lilly

We believe that the earnings power of the Lilly ICOS JV is greater than the public
markets had discounted on October 16, 2006

Included in ICOS Proxy statement – ICOS acknowledges that its internal
expectation for EPS in 2007 exceeds the consensus Wall Street estimates by at
least 22%

This transaction was announced three days before LLY-ICOS earnings which were
significantly above expectations

Furthermore – we believe that other compelling evidence is the material earnings
accretion being forecast for the shareholders of Eli Lilly by Wall Street analysts (see
Appendix, Nov. 2 13D letter, exhibit B for detail)

Finally – we are very troubled by the “Amended and Restated Change in Control and
Severance Agreement”  - which effectively provides greater financial gains for senior
management as a result of the anticipated sale of the Company

3

Executive Summary

ICOS
Share
Price

4

Table of Contents

Executive Summary

ICOS Corporation

Erectile Dysfunction Market

Valuation Considerations

Dissenters’ Rights

Broker Models

HealthCor 13D Filings

5

ICOS Overview

ICOS Corporation is a biotechnology
company whose primary asset is its
50% of the joint venture profits from
Lilly ICOS

Lilly ICOS markets and sells the
erectile dysfunction drug Cialis

Total Cialis sales were $746.6M in
2005 and are forecast by Wall Street
analysts to grow by 27% to
approximately $950M in 2006

Cialis’ gross margins are
approximately 92%

ICOS does have other research
programs which have provided a
negative drain on earnings –
nonetheless the company is now
profitable

6

Lilly ICOS Net Income Forecasts

2006

2007

2008

UBS

292.9

400.9

522.2

Growth

36.9%

30.2%

Morgan Stanley

293.8

318.2

428.6

Growth

8.3%

34.7%

Cowen

274.4

376.5

489.2

Growth

37.2%

29.9%

Mean

287.0

365.2

480.0

Growth

27.2%

31.4%

50% Share to ICOS

143.5

182.6

240.0

Shares Outstanding

65.5

65.5

65.5

EPS Contribution from JV

2.19

2.79

3.66

Growth

27.2%

31.4%

Lilly offer Price

32.0

32.0

32.0

Offer Price / JV EPS

14.6x

11.5x

8.7x

ICOS 3Q 2006 Results

7

ICOS Q3 EPS of .15
were much higher
than consensus EPS
of .07 due to
leverage at the JV
level

Sep

Sep

3Q06

3Q06

Difference

E

A

CIALIS

Lilly ICOS (US)

95.3

94.9

(0.4)

Lilly ICOS (Rest of North America)

17.9

20.2

2.3

Lilly ICOS (North America)

114.2

115.2

1.0

Lilly ICOS (Europe)

72.9

75.4

2.6

Lilly ICOS (North America & Europe)

187.7

190.6

2.9

Lilly Territories (ROW)

52.7

55.0

2.3

TOTAL CIALIS SALES

240.5

245.6

5.2

Collaboration Revenues

17.1

16.4

(0.7)

Licenses of technology

-

Contract manufacturing

4.2

4.3

0.0

Co-promotion services

0.7

-

(0.7)

TOTAL REVENUES

21.5

20.6

(0.8)

FC SALES (10/24/06)

21.0

(0.3)

R&D

25.9

25.3

(0.6)

Sales and Marketing

13.8

13.2

(0.6)

General and Administrative

8.4

8.1

(0.3)

Total - S&M / G&A

21.1

21.3

0.2

Cost of manufacturing

3.1

4.6

1.6

Stock compensation expense

7.3

(7.3)

TOTAL OPERATING EXPENSES

49.7

51.3

1.5

OPERATING INCOME/(LOSS)

(28.3)

(30.6)

(2.4)

Equity in Profits/(Losses) of Affiliates

34.7

40.0

5.2

Gain on sale of partnership interests

-

Interest expense

(1.5)

(1.7)

(0.2)

Interest and other income

2.2

2.3

0.1

TOTAL INTEREST & OTHER INCOME

0.1

0.6

0.5

INCOME/(LOSS) BEFORE INCOME TAXES

6.6

9.9

3.4

Income Taxes Provision/(Gain)

0.5

0.2

(0.2)

Tax Rate

5.0%

2.2%

NET INCOME/(LOSS)

6.3

9.7

3.4

FD Shares Out

65.1

65.2

Stock Option Expense (Tax Adjusted)

7.5

(7.5)

Diluted EPS

0.17

0.15

(0.02)

Diluted EPS (with stock options expense)

0.05

0.15

0.10

FC EPS (10/24/06)

0.07

0.08

Cialis Additional Clinical Trial Programs

Hypertension – Positive Phase II data released on Q3 2006 earnings call – Market is
in excess of $15B according to ICOS

Benign Prostatic Hyperplasia – Phase IIb program initiated in Q3 2006 – GSK’s
Avodart is expected to generate ~ $300M in revenue in 2006

Pulmonary Arterial Hypertension – patient enrollment progressing on schedule –
Revatio (Viagra) already approved - $250M+ opportunity

400 patient phase III study

Once a day treatment for ED – expects to file an expanded indication – regulatory
filings occurred in the US and Canada in mid-2006

8

ICOS Shareholders – As Reported by Bloomberg

9

ICOS Shareholders - According to Proxy - As of October 30

10

Excessive ICOS Executive Compensation from Transaction

11

Table of Contents

Executive Summary

ICOS Corporation

Erectile Dysfunction Market

Valuation Considerations

Dissenters’ Rights

Broker Models

HealthCor 13D Filings

12

Erectile Dysfunction Market Overview

In November of 2003, FDA approved LLY-ICOS’ PDE-5 inhibitor Cialis for
erectile dysfunction

Since then prescriptions have steadily grown and the drug continues to take
market share from Viagra

Cialis is differentiated from its competing PDE-5 inhibitors, Viagra and
Levitra, by its extended 36-hour duration of action and lack of food effects

Both are mentioned in its label

Viagra, the current market leader, recorded over $1.6BN in revenue in
2005

13

Erectile Dysfunction Prescriptions Continue to Grow AND Cialis
continues to Gain market share

14

Erectile Dysfunction Prescriptions Continue to Grow AND Cialis
continues to Gain market share

Source: IMS

15

Table of Contents

Executive Summary

ICOS Corporation

Erectile Dysfunction Market

Valuation Considerations

Dissenters’ Rights

Broker Models

HealthCor 13D Filings

16

Large Cap Biotech Trading Comps

17

Biotech Comps - Source - Factset

11/21/06

2006E

EV /

EV /

2006

2007

2008

Company

Ticker

Price

Mkt Cap

EV

LTM Sales

EBITDA

LTM Sales

2006 EBITDA

CY 06 EPS

CY 07 EPS

CY 08 EPS

PE

PE

PE

GENENTECH INC

DNA

80.36

$         

84,699.5

89,030.2

6,972.1

3,327.6

12.8x

26.8x

2.16

2.66

3.28

37.2x

30.2x

24.5x

AMGEN INC

AMGN

72.98

$         

85,132.5

88,357.5

13,704.0

6,170.5

6.4x

14.3x

3.93

4.41

4.99

18.6x

16.5x

14.6x

CELGENE CORP

CELG

56.07

$         

20,882.8

19,288.9

773.3

223.8

24.9x

86.2x

0.53

1.07

1.62

105.8x

52.4x

34.6x

GENZYME CORP

GENZ

66.05

$         

17,361.6

17,229.9

3,045.3

808.0

5.7x

21.3x

2.74

3.14

3.64

24.1x

21.0x

18.1x

BIOGEN IDEC INC

BIIB

51.00

$         

17,193.5

16,577.5

2,607.6

1,339.4

6.4x

12.4x

2.22

2.54

2.89

23.0x

20.1x

17.6x

SEPRACOR INC

SEPR

55.28

$         

6,056.1

6,393.6

1,150.5

169.4

5.6x

37.7x

1.31

2.18

3.10

42.2x

25.4x

17.8x

GILEAD SCIENCES INC

GILD

67.51

$         

31,042.9

29,549.1

2,736.2

1,584.7

10.8x

18.6x

2.38

2.55

2.90

28.4x

26.5x

23.3x

MEDIMMUNE INC

MEDI

33.11

$         

7,920.1

8,362.2

1,240.1

125.7

6.7x

66.5x

0.19

0.85

1.22

174.3x

39.0x

27.1x

MILLENNIUM PHARMACEUTICALS

MLNM

11.26

$         

3,558.5

3,098.9

383.1

80.0

8.1x

38.7x

0.11

0.13

0.24

102.4x

86.6x

46.9x

OSI PHARMACEUTICALS INC

OSIP

37.74

$         

2,161.1

2,225.5

366.1

(3.7)

6.1x

-596.6x

(0.51)

0.32

1.04

-74.0x

117.9x

36.3x

IMCLONE SYSTEMS INC

IMCL

31.66

$         

2,681.8

2,280.6

644.7

309.1

3.5x

7.4x

2.94

1.48

1.43

10.8x

21.4x

22.1x

Mean

8.8x

-24.2x

44.8x

41.5x

25.7x

Median

6.4x

21.3x

28.4x

26.5x

23.3x

Max

24.9x

86.2x

174.3x

117.9x

46.9x

Min

3.5x

-596.6x

-74.0x

16.5x

14.6x

ICOS CORP

ICOS

32.46

$         

2,127.7

2,299.5

76.7

NA

30.0x

NA

0.29

0.65

1.25

111.9x

49.9x

26.0x

Selected Merger Transaction Analysis

The premium being offered to ICOS shareholders is significantly below
that offered in comparable transactions

Since the LLY / ICOS transaction was announced – a number of
acquisitions have been announced all w / takeover premiums far higher
than that offered to ICOS shareholders

18

Table of Contents

Executive Summary

ICOS Corporation

Erectile Dysfunction Market

Valuation Consideration

Dissenters’ Rights

Broker Models

HealthCor 13D Filings

19

Dissenters’ Rights

20

The following is a summary of the process

shareholders

will need to follow if

they

wish

to assert its rights under Washington State’s dissenters’ rights statute:

1.

Notice of intent to demand payment

: Anytime before the special shareholder meeting on

December

19, 2006, we must deliver a notice stating we intend to demand payment of

what we believe to be the fair market value of our shares if the merger is approved.

2.

Shareholder vote

: We must not vote in favor of the merger in order to assert our

dissenters’ righ

ts.

3.

Notice from company

: If the merger is approved at the special meeting (approval requires

the affirmative vote of the majority of the outstanding shares entitled to vote), within 10

days afterwards, the company must send dissenters a notice stating wher

e a payment

demand must be submitted.

4.

Payment demand

: After receiving the company’s notice, we must submit a payment

demand to the company.   The payment demand must be received by the company not

fewer than 30 nor more than 60 days after company’s notice

to us is delivered.

5.

Payment by company

: Within 30 days of the later of the effective date of the merger, or

the date our payment demand is received by the company, the company must pay us

what it estimates the fair value of the shares to be plus accrued

interest.  The payment

needs to be accompanied by certain company financial statements and an explanation of

how the shares’ fair value was determined.

6.

Shareholder dissatisfaction with payment

: If we believe the company’s payment is

inadequate, within 30 d

ays of the payment, we must deliver a notice to the company

setting forth our estimate of fair value and demand payment of that estimate less

whatever has been paid.

7.

Court action

: If our demand remains unsettled, the company must initiate a proceeding

wit

hin 60 days after receipt of our notice stating the company’s payment was inadequate

by petitioning the superior court of the county in which the company’s principal office is

located, to determine the fair value of the shares.  If the company does not do

so, it must

pay each dissenter whose demand is unsettled the amount demanded.  The court shall

have the power to appoint one or more appraisers to receive evidence and recommend a

decision as to fair value.

8.

Withdrawal of demand

:  Under the terms of the mer

ger agreement, at any point prior to

the closing of the merger, we may withdraw our payment demand and instead receive the

merger consideration to which we would otherwise be entitled.

Table of Contents

Executive Summary

ICOS Corporation

Erectile Dysfunction Market

Valuation Consideration

Dissenters’ Rights

Broker Models

HealthCor 13D Filings

21

Broker JV Model 1 – Cowen

22

Broker Full P&L Model 1 – Cowen

23

Broker JV Model 2 – UBS

24

Broker Full P&L Model 2 – UBS

25

Broker JV Model 3 – Morgan Stanley

26

Broker Full P&L Model 3 – Morgan Stanley

27

Table of Contents

Executive Summary

ICOS Corporation

Erectile Dysfunction Market

Valuation Consideration

Dissenters’ Rights

Broker Models

HealthCor 13D Filings

28