Something is rotten in the state of Denmark - William Shakespeare
Last week Arthrocare announced its quarterly results. They led with a PR touting surprisingly high year-over-year growth numbers. Notably, the announcement was in the form of an 8-K – only including the numbers the company wanted investors to see. All the financial details provided by a 10-Q, such as divisional breakout of revenues, cash flow, receivables aging, etc. are still AWOL.
Even within the bounds of the company’s carefully orchestrated quarterly release, there was one item that stood out like a sore thumb. Beyond the sequential decrease in revenue on the recently touted spine business (down 500k), was the cold fact that the rate of growth in receivables outstripped that of revenues by almost 300%. This should have been the first red flag to investors that something was not kosher in the world of Arthrocare.
While management is spending their time avoiding depositions and dodging subpoenas, it appears to us that there are ominous signs that someone at Arthrocare has been busy stuffing a channel.
In the recent earnings release, investors took notice of the claimed 25% growth in sports medicine sales, but they failed to notice that sequentially it only increased 4%. The actual big jump in sports medicine took place in Q4 of 07, when sports medicine went up 100% on an annual basis. This is a highly competitive sector with many competitors, none of which are able to show more than single digit growth.
On May 1, 2008 Arthrocare announced the acquisition of Ortoconcept of Scandinavia. How does one say Discocare in Danish? While we are still waiting for the financials of Discocare, which were promised to investors but never delivered, Citron Research is proud to present the financials of Ortoconcept.
Does this sound like a company who has had its channel stuffed? Let us keep one thing in mind, as it appears in the company’s website, they distribute only products for Arthrocare Sports Medicine.
All of these numbers were obtained by Dun and Bradstreet Denmark. This is the company’s disclosure to D&B. The following numbers represent the change in 2006-2007 (We are left to imagine what 2008 looks like.)(.pdf)
- Sales grew slightly more than 2% while inventories ballooned over 340%.
- Accounts Receivable were up by 5% but Accounts Payable grew over 120%
- Total Liabilities grew over 110%
- Inventory was over 3 years of sales for an industry whose product cycles are 6-9 months.
Citron first lifted the veil on Discocare, which is now the subject of an intensifying civil litigation onslaught. Then DRS seemed to creep out of the corners of Sanford, Florida. Now we introduce Ortoconcept…..we are certain to see more cockroaches in this house.
As if it wasn’t bad enough ...
On May 1, 2008 Arthrocare’s huge competitor Smith & Nephew (SNN) saw its stock drop 12% on lowered earnings based upon “unacceptable business practices of an acquired company in Switzerland."
Considering Arthrocare has the nefarious DRS and Discocare divisions that are diverting money to doctors on a quarterly basis, it seems unlikely that any other medical device maker would want to put their head in the mouth of this lion.
In David Einhorn’s new book Fooling Some of the People All of the Time, he writes, “Warren Buffett once told me about the difficulty of shorting the stocks of companies run by crooks, because they’ll fight dirty to save themselves. The crook’s life depends on it… ” Buffet said. While I am not calling Mr. Baker an outright crook, his consistent dishonesty to Wall St. cannot be ignored
In upcoming reports, Citron will explain the “rebate” “carve-out” kick back schemes that Arthrocare is employing in their sports medicine division. So complete is Arthrocare’s deception that even knowledgeable investment analysts and investors are finding it difficult to ascertain the true operating condition of this company.
Disclosure: Author is short ARTC.