Lilly Doesn't Like Sharing Profits

Oh, the headlines I had thought up for this article. Since The Motley Fool is a family site, I won't use any of them . but with the announcement today that pharmaceutical company Eli Lilly (NYSE:LLY) plans to acquire ICOS Corporation (NASDAQ:ICOS), which is its partner in the erectile-dysfunction drug Cialis, it's easy to imagine the type of jokes I could have made.

Lilly and ICOS brought Cialis to the market in 2003. As anyone who watches enough television knows, the drug has been fiercely competing with Pfizer's (NYSE:PFE) Viagra, as well as Levitra from Bayer (NYSE:BAY), GlaxoSmithKline (NYSE:GSK), and Schering-Plough (NYSE:SGP), in a huge marketing battle. There is room in the market for all three of these drugs, though, since the size of the erectile dysfunction market is huge. An estimated 18 million men aged 40 to 70 in the U.S. alone are affected by impotence, according to projections based on the Massachusetts Male Aging Study.

Its sales growth clearly exhibits the huge market potential of Cialis and the male sexual dysfunction drugs. Even facing the sales and marketing muscle of Pfizer, sales of Cialis are accelerating if you ignore the most recent quarter's growth (which was still quite good).

The terms of the acquisition call for Lilly to pay about $2.1 billion in cash for ICOS, which represents $32 a share and an 18% premium to the closing price of ICOS shares yesterday.

The acquisition is more about Lilly's outlook on the future of Cialis than any special affinity for ICOS, since ICOS has no other drugs in clinical development. Lilly and ICOS expect sales of Cialis to be in the range of $920 million to $950 million for 2006 and income from the two companies' joint venture to be $265 million to $285 million for the year. So Lilly is getting a fairly good deal, since it will be able to capture all the Cialis profits, plus it will now get all the potential upside from additional approvals for Cialis in new indications.

With more than $4.5 billion in cash and short-term investments, Lilly can easily afford to pay for this acquisition without any additional financing. If Lilly can keep growing Cialis sales at such a high rate, then this deal will be worth every penny of its $2.1 billion cost. All in all, it's a smart deal on Lilly's part.

Eli Lilly and GlaxoSmithKline areMotley Fool Income Investorpicks. For more great companies that pay great dividends, take a 30-day free trial of the newsletter.

Fool contributor Brian Lawler has a juvenile sense of humor, but does not own shares of any company mentioned in this article. The Fool'sdisclosure policy is no joke.