Originally Published MX November/December 2005
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Like all executives, ArthroCare president and CEO Michael A. Baker enjoys happy investor conference calls. And, thanks to conservative revenue guidance and a careful acquisition strategy, the company has hosted an ongoing string of such calls over the past few years.
ArthroCare Corp. (Austin, TX) was founded in 1993, made its initial public offering in 1996, and has been growing ever since. Since the late 1990s, the company has reported average year-over-year revenue growth of more than 25%, which in 2002 earned it a spot on Fortune magazine's annual list of the 100 fastest-growing companies.
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| Share price for ArthroCare Corp., from October 2003 through October 2005, versus the S&P 500 index. (click to enlarge) |
In 1999, the company reported annual revenue of $49.1 million. This year, a handful of acquisitions and business-unit expansions later, the company expects to turn in revenues of between $210 million and $215 million. Should the company meet its annual guidance, 2005 revenues would represent 36% growth over 2004's $154.1 million. The company expects growth to continue in 2006 with revenues of between $255 million and $265 million.
ArthroCare's share price has risen steadily over the past two years, after bottoming out at less than $9 in the spring of 2003. At press time, ArthroCare's share price was up more than 40% over the previous year to $39.02. Despite increased revenues for the company during that time, its net earnings have reflected ArthroCare's acquisitions activity. The company reported net income of $1.1 million on revenues of $88.8 million in fiscal 2002, compared with a net loss of $26.2 million in fiscal 2004. Excluding the impact of ArthroCare's acquisition of Opus Medical, the company would have turned in net income of $13 million last year.
The company's sports medicine business unit, which represents its arthroscopy products, by far dominates the company's other units in terms of revenue generation. In recent years, however, the unit's prominence has slowly begun to wane as the company's spinal unit and ear, nose, and throat (ENT) business have started to account for a bigger piece of the pie.
In 2001, ArthroCare's arthroscopy revenue accounted for 83% of the company's overall product sales, with the spinal and ENT units contributing 6 and 9% respectively. In 2004, this ratio had shifted, with sports medicine accounting for 66% of product sales, and the spine and ENT units contributing 11 and 19% respectively.
This shift among business units is expected to continue. And although the spine business is currently the company's smallest and slowest-growing unit, Baker says he would not be surprised to look back in three to five years and see it as the biggest and most profitable unit within ArthroCare.
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