ArthroCare shares flat on DoJ overhang despite swings to Q4, 2012 black


Investors stayed on the sidelines last week on shares of ArthroCare (NSDQ:ARTC), despite its return to black ink for both the 4th quarter and full year, as they awaited more information on pending U.S. Justice Dept. investigations.

The Austin, Texas based medical device company last month agreed to extend the statute of limitations on a DoJ probe into its spinal business that dates back to 2008. The surgical instruments maker is also facing a federal look at possible False Care Act violations.

ArthroCare reported profits of $11.3 million, or 30¢ per share, on a sales increase of 4.9% of $96.9 million for the 3 months ended Dec. 31, 2012, compared with losses of $29.8 million, or 36¢ per share, during Q4 2011.

For the full year, ArthroCare logged profits of $47.1 million, or $1.25 per share, on sales of $368.5 million, compared with losses of $533,000, or 16¢ per share, during 2011. That amounts to top-line growth of 3.8% year-on-year.

President & CEO David Fitzgerald has said the new deal could herald a resolution of the probe. Last week, during a conference call with investors to discuss quarterly and year-end results, CFO Todd Newton said ArthroCare is hoping to put the spinal business investigation to bed by the time the extension deal lapses March 1.

"We are hopeful and optimistic that the investigation concerning the company can be completed within the revised term of the tolling agreement. However, the government has not given us any assurances that this will happen," Newton said. "We also believe that the company to date has provided the government with the fullest cooperation possible including offering the government our view of an acceptable framework for resolving the investigation. We have not however, received any proposal from the government.

"As a result, although we believe the DOJ investigation is at a very advanced stage, as evidenced by the tolling agreement and decision made by DOJ in mid 2012 to indict 2 former officers of the company, we still cannot predict the ultimate outcome from the investigation and we are unable to estimate any potential liability the company may incur."

There was no new detail on the FCA investigation, Newton said.

Fitzgerald told analysts on the call that ArthroCare is looking for 2013 to be similar to 2012, with "a soft if any increase in a number of underlining arthroscopic shoulder repairs or tonsillectomy procedures performed in our major markets."

"Overall the analysts covering ArthroCare are escalating 2013 top-line growth at a rate ranging from 2% to 4.5% and we are comfortable with that range," he said, adding that the medical device tax will lower operating income by about $3.5 million, or a 1% reduction in adjusted operating margin.

ARTC shares closed Feb. 15 at $36.32, down 0.1% on the day and 0.1% since its Feb. 13 earnings release.

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