ArthroCare
| Company type | Public |
|---|---|
| Industry | Medical devices |
| Founded | 1993 |
| Founder | Hira V. Thapliyal, Philip E. Eggers |
| Fate | Acquired by Smith & Nephew |
| Headquarters | Austin, Texas , United States |
| Products | Radiofrequency-driven Coblation systems for soft-tissue surgical procedures |
ArthroCare Corporation was a United States-based medical device firm recognized for its development and commercialization of radiofrequency-driven Coblation systems, which are utilized in soft-tissue surgical procedures within the fields of sports medicine and otolaryngology. The company, headquartered in Austin, Texas, was purchased by Smith & Nephew in May 2014 for an enterprise value close to $1.5 billion.
History
Established in 1993 by engineers Hira V. Thapliyal and Philip E. Eggers, ArthroCare initially concentrated on the application of controlled radiofrequency energy for the removal of surgical tissue. The company launched its initial public offering in February 1996, issuing 2.2 million shares at $14 per share on the NASDAQ exchange under the ticker symbol ARTC.
By the middle of the 2000s, ArthroCare had structured its operations into three primary divisions: Sports Medicine, Spine, and ENT. These units marketed disposable instruments based on the company's proprietary Coblation technology.
In July 2008, ArthroCare disclosed a restatement of its financial results covering 2006 through 2007 and the first quarter of 2008 due to issues with revenue recognition linked to distributor sales. This announcement led to a significant drop in its stock price. The restatement process was finalized with the submission of the 2008 Form 10-K in November 2009.
Acquisition by Smith & Nephew
On February 3, 2014, Smith & Nephew announced an agreement to acquire ArthroCare at a price of $48.25 per share in cash, valuing the transaction at approximately $1.7 billion in equity and $1.5 billion in enterprise terms. The acquisition was motivated by the synergy between their respective offerings in sports medicine and ENT sectors. The deal was completed on May 29, 2014, following regulatory antitrust approvals. Prior to this acquisition, Smith & Nephew had licensed ArthroCare’s RF Coblation technology; purchasing ArthroCare eliminated future royalty obligations.
Technology
The cornerstone of ArthroCare's product line was its Coblation technology, which employs radiofrequency energy transmitted through a conductive medium to create a focused plasma field that removes soft tissue at temperatures lower than those used in conventional electrocautery methods. Clinical evaluations comparing Coblation with electrocautery or cold techniques in ENT surgeries have produced varied but frequently positive findings concerning pain management and bleeding control, contingent upon study methodologies and patient demographics.
Legal issues
In February 2011, the U.S. Securities and Exchange Commission reached a settlement with ArthroCare over cease-and-desist orders involving violations related to financial reporting practices, record-keeping, and internal control deficiencies associated with prior revenue recognition errors. Subsequently, in June 2011, the SEC filed charges against former executives John Raffle and David Applegate for engaging in channel-stuffing tactics that artificially boosted sales and earnings from 2006 through early 2008.
In April 2012, the SEC initiated a Sarbanes-Oxley Section 304 "clawback" lawsuit seeking repayment of incentive bonuses and stock gains from CEO Michael A. Baker and former CFO Michael T. Gluk during intervals when financial statements were misstated; however, no personal misconduct was alleged.
In August 2012, the U.S. Department of Justice arrested Raffle and Applegate on charges related to securities fraud involving distributor sales practices. ArthroCare entered into a deferred prosecution agreement with the DOJ and agreed to pay a $30 million fine to settle corporate criminal allegations.
Both Baker and Gluk were found guilty at trial in 2014; nevertheless, their convictions were overturned by the Fifth Circuit Court in 2016 due to evidentiary issues, prompting an order for a new trial. During the retrial in 2017, Baker was again convicted on counts including conspiracy, wire fraud, securities fraud, and making false statements; he received a 20-year prison sentence that was upheld by the Fifth Circuit in 2019.
ArthroCare resolved combined shareholder class action lawsuits connected to its financial restatement by agreeing to a $74 million settlement, which received final approval in June 2012 from the U.S. District Court for the Western District of Texas.