While the population of the U.S. is getting older — along with that of most of the developed world — most refuse to admit it. They are convinced that they can still run three miles a day or play six sets of tennis, just the way they used to.

In the process, people do themselves enormous amounts of harm. Visit your local tennis club and check out the knee braces propping up aging doubles players, or note the back supports bulging out from beneath the classy golf shirts at the links.

In looking for a way to profit from this trend, we came across ArthroCare (ARTC $39.65). Founded 10 years ago, the company manufactures and promotes devices used in myriad surgical procedures involving shoulders (Know anyone with a torn rotator cuff?), knees (Know anyone without a bad knee or two?), hips, and so forth. The company invented a technology called coblation, which has become the critical element in an increasing number of surgeries each year.

Based on radio frequency energy, coblation allows arthroscopic and other surgeries to be performed with less distress to the patient.The surgeon has better control over the procedure, resulting in less damage to healthy tissue and faster recovery times.The technique has been used in more than 4 million procedures in the past 10 years and is quickly becoming the standard of care in a number of fields. The patented technology has been defended vigorously by management, and is now licensed by a number of other companies.

The company’s strategy is to target big markets and to employ their direct sales force to sell their devices. One of ArthroCare’s earliest markets was shoulder surgeries, where it now accounts for more than half the 1 million surgeries done each year in America and Western Europe. It is also strong in knee procedures. This is important not only for the revenues produced but because its reputation has been enhanced through endorsement by knee surgeons, considered “spokesdoctors” by ArthroCare’s management.

The company is targeting tendon injuries as a large potential new market. More than 100 million people annually suffer tendon strain, mostly in the course of exercising. While most tendon problems tend to resolve themselves over time, millions do not recover, instead developing a more permanent problem called tendonosis. ArthroCare is working on a new approach, using coblation to “provocatively injure the damaged tendon,” and to stimulate the healing process.

Resolving hip problems presents another big new market. Hip replacement is a fast-growing field, involving substantial expense as well as downtime and discomfort to the patient. ArthroCare’s management thinks its devices may ultimately allow doctors to repair damage to some hips, reducing the need to replace the entire joint. Other promising new markets are ankles and elbows.

ArthroCare’s management has emphasized growth from within, and certainly they seem to have many opportunities on their plate. An analyst at Needham who is recommending the stock, Edward Shenkan, says management has estimated that the addressable sports medicine market is $2.5 billion a year. He estimates their sports medicine revenues this year at about $170 million.

The company has two other divisions — Ear, Nose, and Throat and Spine. Mr. Shenkan estimates revenues from these segments at $58 million and $26 million, respectively. Both areas also have promising growth prospects.

Management has also made a number of acquisitions aimed at leveraging the sales force. Management looks for companies with complementary products, such as an outfit called Applied Therapeutics, which makes woundcare products for the ENT market.This company was bought for $10 million cash and an earn-out a year ago, and appears typical of ArthroCare’s acquisition strategy. The purchase in November 2004 of Opus Medical, a maker of suturing and bone anchoring devices used in arthroscopic surgery, also targeted a complementary product.

ArthroCare is by no means an “undiscovered” company. The stock is selling at 33 times this year’s consensus expected earnings of $1.19, and at nearly 26 times next year’s $1.55 estimate. It is up 11% in the past year, in a near-stagnant market, and according to Thompson/FirstCall is followed by nine analysts, most of whom are recommending the shares.

It is a small company, with the vulnerabilities that attach to modest size. It faces significant competition, and the possibility of other companies coming along with newer technologies. Moreover, the company began life in California, epicenter of the options backdating scandal. Its possible exposure to this governance issue is impossible to know for certain.

Still, watching the Baby Boomers punish themselves on the tennis courts inspires some confidence in the concept.

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