ArthroCare's First Quarter 2007 Results Exceed Consensus Estimates

Spine Business Growth Highlights Record Quarterly Results

AUSTIN, Texas--(BUSINESS WIRE)--April 26, 2007--ArthroCare Corp. (Nasdaq:ARTC), a leader in developing state-of-the-art, minimally invasive surgical products, announced that for the first quarter ended March 31, 2007, total revenues grew 18 percent to $73.7 million, compared with $62.5 million in the prior year's quarter and consensus estimates for revenues of $73.1 million. Excluding sales of products discontinued in 2006, total revenues grew approximately 20 percent.

ArthroCare's net income of $7.1 million, or $0.25 per share, for the first quarter of 2007, was above consensus earnings estimates of $0.23 per share. Quarterly performance highlights include significant revenue increases in the Company's three major business units, the launch of a key new product in the Company's Sports Medicine division, and continued investments in sales and marketing.

"This was a pivotal quarter for ArthroCare with important developments in each of our business units," noted Mike Baker, CEO of ArthroCare. "Our rapidly growing Spine business continued to demonstrate strong revenue growth based upon an expanding customer base and improvements in reimbursement. In our Sports Medicine business, we successfully launched a major new Opus non-metallic anchor and we believe we are on track to introduce several more key products in the second quarter. Our international revenue growth was driven by Sports Medicine Coblation products and a strong increase in United Kingdom tonsillectomy revenues."

REVENUE

In addition to first quarter product sales of $71.0 million, license fees, royalties and other revenue were $2.7 million in the first quarter of 2007, which represents four percent of total revenue, compared to $2.2 million, or four percent of total first quarter 2006 revenue. International product sales increased 22 percent over 2006, led by Sports Medicine Coblation products and ENT sales in the United Kingdom. In total, international product sales represented 21 percent of product sales during the quarter.

BUSINESS UNIT PERFORMANCE

The Sports Medicine business unit produced sales growth of 8 percent during the quarter ended March 31, 2007 compared with the same period of 2006, and represented 62 percent of total product sales. Excluding the impact of the product line discontinued in July 2006, Sports Medicine sales increased 11 percent over the first quarter of 2006.

Sales in the Spine business unit during the first quarter of 2007 grew 58 percent compared to the same period in 2006, with spine sales representing 14 percent of product sales in the first quarter of 2007.

The first quarter increase in ENT product sales over the comparable period of last year was 28 percent, with ENT sales representing 24 percent of product sales during the quarter.

OPERATIONS

Product margin was 71 percent in the first quarter of 2007, consistent with product margin of 71 percent in the first quarter of 2006. Operating expenses were $44.0 million in the first quarter 2007, or approximately 60 percent of total revenue, compared to $35.0 million, or 56 percent of total revenue in the first quarter of 2006. This increase is primarily a result of increased sales and marketing expenses due to additions to our direct sales force and new product launches in the first quarter of 2007.

BALANCE SHEET

Cash, cash equivalents and short-term investments increased $10.9 million to $41.7 million as of March 31, 2007, compared to $30.8 million at December 31, 2006. Inventories decreased to $50.0 million from $51.5 million at December 31, 2006, while accounts receivable were $61.9 million at both March 31, 2007 and December 31, 2006 despite a 6 percent growth in sales for the quarter.

BUSINESS OUTLOOK

The following statements are based on current expectations on April 26, 2007. These statements are forward-looking, and actual results may differ materially. These statements do not include the potential impact of any new businesses or license agreements the Company may enter into in future periods.

ArthroCare's business outlook for fiscal 2007 is as follows:

• The Company expects total revenue growth of 20 percent.
• The Company expects the Sports Medicine business unit to achieve revenue growth in the low teens.
• ENT business unit revenue growth is expected to be at least 30 percent.
• Spine business unit revenue growth is anticipated to be at least 50 percent.
• The Company anticipates sequential improvement in quarterly revenue growth rates.
• The Company expects earnings per share growth greater than revenue growth. GAAP diluted EPS is forecasted to be in the range of $1.40 to $1.50.
• The Company expects further improvement in both product and operating margins and for earnings to continue to grow faster than revenue.