Medical Equipment Wholesale: Investing Essentials

Increasing health-care utilization tied to reform and an aging America supports sales growth for medical equipment wholesalers.

Aug 5, 2014 at 5:00PM

In many industries, some of the most successful businesses are the ones that sit in between manufacturers and consumers. These wholesalers and distributors help keep prices low by leveraging the purchasing power of many consumers while providing one-stop-shopping simplicity.

In health care, these go-between companies operate within the medical equipment wholesale market, and that market is likely to see sales grow as demand picks up thanks to an aging and increasingly insured America. So let's learn more about the industry and see whether it makes sense to invest in some of these medical equipment wholesalers.

Henry Schein

Source: Henry Schein,

What do medical equipment wholesalers do?

Medical equipment wholesalers rely on breadth and depth. The products these companies sell span the alphabet from anatomical charts to X-ray film. Industry leader Henry Schein, for example, markets 200,000 products, including bedpans, gloves, and syringes, to name but a few.

Medical equipment wholesalers' appeal to medical equipment manufacturers stems from large, well-trained marketing teams that have spent decades building relationships with physicians and hospital buyers. Major hospital supplier Owens & Minor, for example, employs more than 5,100 people and operates over 50 distribution centers.

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Source: Owens & Minor.

By relying on medical equipment wholesalers to distribute and market their goods, equipment manufacturers can spend money developing new products rather than staffing sales teams and worrying about supply chain management.

Meanwhile, medical equipment wholesalers' ability to offer quick and educated insight into the differences between product lines makes life easier for time-strapped physicians and hospitals. As a result, the number of customers relying on the equipment wholesaler industry total in the hundreds of thousands.

What moves the medical equipment wholesaler industry?

Although medical care is often non-discretionary, demand for medical equipment does slow during recessions, as patients hold off on elective procedures and providers and hospitals ratchet down their budgets.

That said, the industry is somewhat more immune to economic cycles than non-health-care-related industries are, thanks to demand for medical equipment that is disposable, such as gloves, or necessary for common procedures, such as needles for blood transfusions.

As a result, the industry is most affected by overall health-care utilization, and that utilization is heading higher in the wake of government reform that's boosting the number of insured people through private health-care insurance and, in many states, expanded government programs such as Medicaid.

In addition to government reform-driven increases in health-care utilization, an overall aging America offers sales growth for medical equipment wholesalers, too. The number of health-care visits and procedures climbs as we age, and the over-65 population is going to be the fastest-growing segment of our population between 2020 and 2030. As a result, the Census estimates that the number of people age 65 or older will double to more than 80 million by 2050.

While the graying of America means that medical equipment wholesalers have a lot going for them that's encouraging to investors, the industry does have one notable drawback. Since the industry buys goods from companies eager to sell them for top dollar and sells those goods to consumers who want to buy them cheaply, the industry's margins are thin.

Why invest in medical equipment wholesalers?

The most important reason to consider medical equipment wholesalers is that global demographics support demand for the products they sell for the foreseeable future. Companies in the industry fall more in the steady-Eddy camp than anything else, but there are concerns that investors need to consider, including pricing pressure from healthcare providers hoping to shave expenses so as to boost their own bottom lines.

 

Todd Campbell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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