Arthrocare

Arthrocare Was an IPO in February 1996 a sensible financing choice for ArthroCare, given its stage of development? NO, IPOs are best for predictable companies. Also, it is not a good idea to take a capital intensive company public.

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Background Arthrocare was started to pursue the Orthopedics opportunity. The company had raised financings in form of convertible preferred stock

o They could raise 10-15 MM in private capital – but they needed more to realize the long term strategy • Why IPO o Prospectus – AC believed that true technology platform – Arthroscopy – will be the main driver of company’s growth. o It needed more money to continue R&D efforts for developing the core technology. o It needed $10-20MM for pursuing the minimal strategy of simply proceeding with the knee product and distributing it with third party o Needed 20-40MM to include developing other applications and building a distribution network. o The company chose IPO because it believed it was cheaper to raise money through IPO compared to VCs. The public equity is less expensive money and Arthrocare thought they could get sufficient capital to fund their aggressive growth strategy o The market was going thru a cycle-AC went public near the peak of the cycle that started in the summer of 1995. People were willing to buy stock in companies that had not established their sales or earnings models. • Valuation o For companies that went through this cycle was based on projected 1999 or 2000 earnings. • Problems o The business model in orthopedics was still not proven o The company was going public relatively early o First six months – did AC price dipped just because of market conditions? ? Controller had projected price of 8500 in earnings model – but it was selling for 3500-4000 on average for initial stock orders. The sales were at or near cost. ? Did this trigger the drop in price – Analyst estimates of R&D costs associated with moving the technology to additional applications? The...