Anthrocare

ArthroCare

Overview

ArthroCare is a medical devices company that has been public for approximately six months. The founder and CEO, Dr. Thapliyal, is contemplating a series of decisions that have implications for the long-term competitive position of the company, as well as for its near-term earnings performance.

IPO vs. Alternative Financing

ArthroCare was founded in 1992 by two bright professionals in the medical device business, Dr. Thapliyal and Eggers. The company has developed a core technology platform that simplifies the removal of soft tissue from the human body. This cutting-edge technology has broad patent protection and sees diverse applications in multiple fields of medicine, including orthopedics, urology, gynecology, dermatology, and periodontics.

Medical devices are subject to stringent FDA regulations and approval processes, which can take up to 5 years to complete. Even though Class II devices are subject to a lower level of regulation, it still took in general from 4 to 12 months to obtain the 510(k) clearance from the FDA. Giving this time-consuming process, at the time of IPO, ArthroCare only launched ArthroWand, a medical device product targeted at Orthopedics market. Applications in other fields such as urology and gynecology either filed for 510(k) shortly before the IPO, or are still in the pipeline. None of these new products/ applications would be launched before the second half year of 1997. So timing is a very critical to the success of the company.

In addition to that, developing a medical device company is very capital-intensive, given the significant R&D costs at the early stage of the company. Prior to the IPO, ArthroCare raised 4 rounds of financings, all in the form of a convertible preferred stock and with VC firms.

Taking into account both of these constraints, we think that the IPO in February 1996 was done a little too early for ArthroCare. The IPO was done at a good time in the sense that the market was optimistic about...