ArthroCare’s Device Sales Relationship PT II

Analysts are wondering how much Arthrocare has relied on DiscoCare for its recent boom and whether that growth will prove sustainable in the end.

Ever since it first surfaced two years ago, DiscoCare has boasted an uncanny ability to secure reimbursement for Arthrocare’s SpineWands. With health insurers reluctant to cover the devices, which are used to perform investigational plasma disc decompression (PDD) surgeries, DiscoCare often turns to other sources for payment. Insurers covering injured workers and car-wreck victims have emerged as key targets.

From the start, Arthrocare has stood firmly behind DiscoCare. Ultimately, late last year, Arthrocare purchased DiscoCare outright.

Critics immediately questioned Arthrocare’s motives, however. Today, they believe that the company tried to accomplish two goals when it bought DiscoCare:

For starters, they feel that Arthrocare hoped to cover up DiscoCare’s escalating problems. While car insurers originally covered high-priced PDD surgeries for victims of traffic accidents, they have recently started to fight back — and win — in court. Knowing this, critics say, Arthrocare used DiscoCare to artificially inflate its spine sales while it still could.

They point to the company’s own financial statements as evidence, focusing on reports covering the second half of 2007 in particular. Those documents capture the changes that occurred after Arthrocare’s fourth-quarter purchase of DiscoCare.

According to Arthrocare’s cash flow statements, the company’s accounts receivable balance jumped by $11.8 million during the final three months of last year. According to the company’s balance sheets, however, receivables declined by $1.73 million during that time frame.

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