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

Business Wire, April 21, 2008

Revenue and Profit Exceed Consensus; Company Raises Guidance

AUSTIN, Texas -- 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[TM] 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([R]) 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([R]) and Cavity SpineWand([R]) 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