ArthroCare (NASDAQ: ARTC) Achieves 31% Revenue Growth in First Quarter; Achieving Traction in Spine
BY JOHN MCCORMICK, MAY 3, 2004
ArthroCare achieved total revenues of $34.3 million for 1Q:04 a 31% year over year increase compared to the $27.2 million achieved in 1Q:03. For the remainder of the year, the Company expects revenue to grow at 20% which would allow the company to achieve approximately $138 million of revenues for the year. Excluding charges related to the Parallax Medical acquisition, which was completed in January, earnings per share for the quarter were $0.11 per share compared to $0.03. ArthroCare expects to earn $0.52 to $0.56 per share this year.
The drivers of ArthroCare's revenue growth are unambiguously (i) spine and (ii) ear, nose and throat (ENT), which grew at 107% and 88% respectively on a year-over-year basis. Over half of this quarter's growth comes from these two increasingly important areas. This quarter, spine represented 16% of ArthroCare's product revenues and ENT, likewise, represented 16% of the Company's product revenues. While the sports medicine segment, which grew at 14% year over year, is by no means marginalized, the new data suggests that the company is starting to get traction in expanding its technology portfolio into other areas outside of the Company's traditional arthroscopy expertise.
We take a particular interest in ArthroCare's spine successes especially given the fact that the sequential growth in the spine revenues were considerable. According to our calculations, sequential growth in spine revenues were over 30% versus Sports Medicine and ENT which grew at approximately 13% and 7% respectively. That more than suggests ArthroCare's formation of a spine division in 1999 is beginning to pay off. The completion of the $28 million (plus earnouts) Parallax Medical acquisition in January added a component of the growth for this quarter, but it does not detract from the obvious that ArthroCare has considerable internal growth in spine (65.3% in 2003) and that its spine efforts are becoming a fait accompli. Parallax, which offers bone cement treatments for vertebral compression fractures, is expected to add $7-$8 million to the Company's revenues this year. Taking an optimistic point of view, ArthroCare could achieve as much as $30 million in spine revenues in 2004. To do that we would have to use an armchair forecasting approach and extrapolate prior growth trends in existing spine products and add in the Parallax acquisition which apparently has been fully integrated into the business. Some caveats could weigh down such an optimistic view here such as some private payor reimbursement challenges the Company faces and actually achieving cross selling synergies in the real world.
Other recent developments of interest include the addition of Dr. Barbara D. Boyan to the Board of Directors and achieving a permanent injunction against Smith & Nephew from selling surgical devices (the Saphyre, Control RF and ElectroBlade) that infringe ArthroCare's patents. On Tuesday night of last week, the court denied Smith & Nephew's motion for reconsideration of orders granting ArthroCare a permanent injunction. The court also denied Smith & Nephew's motion to stay, or delay, the injunction pending appeal. Although this looks like additional good news for ArthroCare, it ain't over 'til it's over and management is conservatively holding off on revising any earnings expectations as a result of the ruling.
