ArthroCare's stock was off almost 40% in midday training following an announcement this morning that the company would restate financials from 2006, 2007 and 1Q:08. The restatement stems from a number of issues, including how revenue from DiscoCare was classified, raised by the company's Audit Committee and will result in "material reductions in operating income and net income" for the affected periods.
The company expects a non-cash reduction in revenue of $4 to $7 million in 2006, $20 to $25 million in 2007 and $2 to $5 million in 1Q:08. ArthroCare did not discuss the extent to which this would affect company's profitability, though a $37 million reduction in revenue could, on a percentage basis, translate to a significant impact on their income statement.
Over the past eight months, ArthroCare's stock has declined in the face of very public accusations regarding their spine business and relationship with DiscoCare (even the New York Post got involved, though their story was eventually retracted.) This morning's announcement raises further questions about the company's business practices and internal controls, and today's drop in the stock price to a multi-year low seems to show that investors are intolerant of these latest blows to the company's credibility, especially since analysts and management have debated these accounting issues openly for months.
