ArthroCare's First Quarter Product Sales Increases 25 Percent, Net Income Increases 30 Percent

ArthroCare Corp. (Nasdaq: ARTC), a leader in developing state-of-the-art, minimally invasive surgical products, reported earnings results for the quarter ended March 31, 2008 with revenue increasing 23 percent, reaching $91.0 million compared with $73.7 million in the prior year quarter. Net income increased 30 percent to $9.3 million, or $0.34 per share, compared with $7.1 million, or $0.25 per share a year ago. Earnings per share exceeded the high end of the company’s prior guidance by $0.02. Results were driven by better than anticipated results in the company’s largest business, sports medicine, as well as increased market traction in the company’s ENT business. The company’s operating profit also showed significant increases. "This quarter’s results again demonstrate the potential of our core platform technology strategy to create value. The significant and sustained investment in R&D that we’re making to execute this strategy is generating a stream of innovative new products. These new products allow us to drive rapid growth and because our approach is platform-driven, we are not overly dependent on any one product or market for our growth,” noted Mike Baker, CEO of ArthroCare. REVENUE First quarter of 2008 product sales of $88.5 million increased 25 percent from $71.0 million in the first quarter of 2007. Royalties, fees, and other revenue was $2.5 million in the first quarter of 2008 compared with $2.7 million in the first quarter of 2007 and represented three percent of total revenue for the first quarter of 2008 and four percent of total revenue for the first quarter of 2007. International product sales increased 31 percent in the first quarter over the first quarter of 2007, led by the sale of sports medicine products in the Company’s direct distribution markets and ENT sales in the United Kingdom. BUSINESS UNIT PERFORMANCE The sports medicine business unit produced sales growth of 25 percent during the quarter ended March 31, 2008 compared with the same period of 2007, and represented 62 percent of total product sales. This reflects strong growth in excess of 20 percent in all sports medicine product families. The company expects to drive continued sports medicine growth through the introduction of the new Quantum™ controller and associated new product launches, increased physician training and publication of scientific data, including introduction of ArthroCare’s new Mobile Surgical Skills Center, publication of encouraging preliminary results on early stage clinical and pre-clinical research work for treating diabetic foot ulcers and the expected launch of several new Coblation® wands. Sales in the spine business unit during the first quarter of 2008 grew 24 percent compared to the same period in 2007, with spine sales representing 14 percent of product sales in the first quarter of 2008. The company expects spine revenue growth to accelerate throughout 2008 as the recently launched MD SpineWand® and Cavity SpineWand® sales accelerate. The first quarter increase in ENT product sales over the comparable period of last year was 23 percent, with ENT sales representing 24 percent of product sales during the quarter. This increase was driven, in part, by a strong increase in overseas tonsillectomy sales. The company anticipates that ENT growth will be driven by continued traction overseas and additional market uptake of new indications such as sinus and pediatric turbinates. MARGINS AND EARNINGS Product margin was 71 percent in the first quarter of 2008, consistent with product margin of 71 percent in the first quarter of 2007. Operating expenses were $52.8 million in the first quarter 2008, or approximately 58 percent of total revenue compared to $44.0 million, or 60 percent of total revenue in the first quarter of 2007. Accordingly, operating profit margin in the first quarter of 2008 improved two points to 14 percent from 12 percent in the first quarter of 2007. Other expense of $0.2 million increased $0.5 million over $0.3 million of other income in the first quarter of 2007 due primarily to interest expense associated with $60 million in borrowings under the company’s revolving credit facility. The company’s tax rate for the quarter was 25 percent vs. 23 percent in the first quarter of 2007. Finally, earnings per share of $0.34 increased 36 percent over the first quarter of 2007 earnings per share of $0.25. BALANCE SHEET Cash, cash equivalents and short-term investments decreased $10.1 million to $33.2 million as of March 31, 2008, compared to $43.3 million at December 31, 2007. The decrease was driven primarily by cash paid to complete the company’s share repurchase program initiated in the fourth quarter of 2007. Inventories decreased to $57.2 million from $61.8 million at December 31, 2007. Accounts receivable was approximately $80.5 million at March 31, 2008 compared to $69.9 million at December 31, 2007. RECENT CORPORATE DEVELOPMENTS The Board of Directors initiated a review of strategic alternatives with its financial advisors, Goldman Sachs. The Company intends to update investors when the process is complete and only when the process is complete. The company announced on March 25, 2008 it had been notified by the Nasdaq Stock Exchange that its review of DiscoCare, Inc. has been closed with no further action expected. BUSINESS OUTLOOK The following statements are based on current expectations on April 21, 2008. These statements are forward-looking, and actual results may differ materially. These statements do not include the potential impact of any new businesses or license agreements the Company may enter into in future periods. ArthroCare’s business outlook for fiscal 2008 and for the second quarter of 2008 is as follows: The Company reiterates that it expects total annual revenue growth of at least 20 percent. For 2008, the Company anticipates operating margin improvement of at least 2.5 points. The company expects the Corporate tax rate to be 24 percent for the year. The Company expects net income per share growth greater than revenue growth. GAAP diluted net income per share for 2008 is forecast to be in the range of $1.95 to $2.00. For the second quarter, the Company expects revenues and earnings in line with the current analyst consensus. ArthroCare’s preliminary business outlook for fiscal 2009 is as follows: The company expects total revenue growth of at least 20 percent. The company expects earnings per share growth in excess of 35 percent. CONFERENCE CALL ArthroCare will hold a conference call with the financial community to discuss these results at 4:30 p.m. ET/1:30 p.m. PT today. A live webcast of the call will be available on ArthroCare’s Web site at www.arthrocare.com. A telephonic replay of the conference call can be accessed by dialing 800-633-8284 and entering pass code number 21380945. ABOUT ARTHROCARE Founded in 1993, ArthroCare Corp. (www.arthrocare.com) is a highly innovative, multi-business medical device company that develops, manufactures and markets minimally invasive surgical products. With these products, ArthroCare targets a multi-billion Dollar market opportunity across several medical specialties, significantly improving existing surgical procedures and enabling new, minimally invasive procedures. Many of ArthroCare’s products are based on its patented Coblation technology, which uses low-temperature radiofrequency energy to gently and precisely dissolve rather than burn soft tissue — minimizing damage to healthy tissue. Used in more than four million surgeries worldwide, Coblation-based devices have been developed and marketed for sports medicine; spine/neurologic; ear, nose and throat (ENT); cosmetic; urologic and gynecologic procedures. ArthroCare also has added a number of novel technologies to its portfolio, including Opus Medical sports medicine, Parallax spine and Applied Therapeutics ENT products, to complement Coblation within key indications. SAFE HARBOR STATEMENTS Except for historical information, this press release includes forward-looking statements. These statements include, but are not limited to, the Company's stated business outlook for fiscal 2008, continued strength of the Company's fundamental position, the strength of the Company's technology, the Company's belief that strategic moves will enhance achievement of the Company's long term potential, the potential and expected rate of growth of new businesses, continued success of product diversification efforts, and other statements that involve risks and uncertainties. These risks and uncertainties include, but are not limited to the uncertainty of success of the Company's non-arthroscopic products, competitive risk, uncertainty of the success of strategic business alliances, uncertainty over reimbursement, need for governmental clearances or approvals before selling products, the uncertainty of protecting the Company's patent position, and any changes in financial results from completion of year-end audit activities. These and other risks and uncertainties are detailed from time to time in the Company's Securities and Exchange Commission filings, including ArthroCare's Form 10-K for the year ended December 31, 2007. Forward-looking statements are indicated by words or phrases such as "anticipates," "estimates," "projects," "believes," "intends," "expects," and similar words and phrases. Actual results may differ materially from management expectations. ARTHROCARE CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)             Three Months Ended March 31,   March 31,   2008 2007 Variance   Revenues: Product sales $ 88,492 $ 71,001 $ 17,491 Royalties, fees and other 2,543 2,742 (199) Total revenues 91,035 73,743 17,292   Cost of product sales 25,705 20,756 (4,949)   Gross profit 65,330 52,987 12,343 Product margin 71.0% 70.8% Gross margin 71.8% 71.9%   Operating expenses: Research and development 7,727 6,464 (1,263) Sales and marketing 35,237 29,494 (5,743) General and administrative 7,604 6,180 (1,424) Amortization of intangible assets 2,214 1,911 (303) Total operating expenses 52,782 44,049 (8,733)   Income from operations 12,548 8,938 3,610 Interest and other income (expense), net (158) 330 (488) Income before income tax provision 12,390 9,268 3,122   Income tax provision 3,126 2,132 (994)   Net income $ 9,264 $ 7,136 $ 2,128   Basic net income per share $ 0.35 $ 0.26 $ 0.09   Shares used in computing basic net income per share 26,516 27,164   Diluted net income per share $ 0.34 $ 0.25 $ 0.09   Shares used in computing diluted net income per share 27,391   28,177     ARTHROCARE CORPORATION UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)     March 31, December 31, ASSETS 2008 2007 Current assets: Cash and cash equivalents $ 32,125 $ 39,375 Short-term investments 1,043 3,875 Accounts receivable, net 80,483 69,924 Inventories, net 57,206 61,776 Deferred tax assets 10,406 10,406 Prepaid expenses and other current assets 4,851 5,164 Total current assets 186,114 190,520   Property and equipment, net 45,239 43,405 Intangible assets, net 35,946 37,705 Goodwill 166,710 166,771 Deferred tax assets 4,940 4,940 Other assets 6,643 6,727   Total assets $ 445,592 $ 450,068   LIABILITIES AND STOCKHOLDERS' EQUITY   Current liabilities: Accounts payable $ 13,626 $ 15,876 Accrued liabilities 11,197 12,909 Accrued compensation 8,562 12,727 Tax liabilities 811 660 Total current liabilities 34,196 42,172   Notes payable 60,000 60,000 Deferred tax liabilities 383 383 Other non-current liabilities 6,981 7,010 Total liabilities 101,560 109,565     Total stockholders' equity 344,032 340,503   Total liabilities and stockholders' equity $ 445,592 $ 450,068