Healthcare Equipment and Supplies: Investing Essentials

With healthcare among the world's fastest growing industries, it only makes sense to presume that companies that supply diagnostic, monitoring, and treatment equipment and supplies would thrive. However, you first have to understand how this sector works before you have any chance of succeeding in it as an investor.

Aug 12, 2014 at 2:26PM

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Source: Adrian Clark, Flickr

Think of medical care as a supply chain that flows from a starting point of insurers and information technology companies behind the scenes to the point-of-service provider, your physician. In between, there are a number of important facilitators, one of which is the healthcare equipment and supplies industry.

Given the fact that healthcare is among the fastest growing industries, the vital role healthcare equipment and supply companies could play in the coming years might make them attractive investment opportunities.

But this only holds true if you understand the basics of the sector with regard to how it works, its history and evolution, and what advantages and headwinds you might face as an investor. Let's have a closer look.

What are healthcare equipment and supplies?

Healthcare equipment and supplies are used by physicians and other medical personnel to help aid in patient diagnosis, monitoring, and treatment.

Examples of diagnostic equipment would be MRIs and CT scans, which afford physicians the possibility of formulating diagnoses and plans of treatment for diseases and disorders without the need for exploratory surgery.

Equipment which constantly measures blood pressure, oxygen level, and other vital signs are good examples of healthcare monitoring equipment. Physicians need to be able to understand how a patient is responding to treatment, thus monitoring equipment plays a vital role in this respect.

Lastly, examples of treatment-based supplies include surgical masks, IV lines, needles, and a range of products used to stave off the spread of disease and to facilitate treatment of a patient.

What is the history of healthcare equipment and supplies?

While you may find rudimentary medical tools strewn throughout past civilizations, the birth of modern medical equipment and supplies can trace their roots back to the early 1800s when doctors and scientists used thermometers and microscopes in order to form a patient diagnosis. The invention of the stethoscope -- which is an iconic medical symbol today -- in 1816 was another key step to improving diagnostic care.

The X-ray, which was used both for diagnosis and to irradiate cancer, was invented in 1895. Until the development of MRIs and CT scans in the back half of the 20th century, X-rays would remain the primary imaging device for physicians. The middle of the last century also witnessed the development of pacemakers and ventilators meant to assist the human body.

Nowadays, advances in computerized technology allow physicians to form diagnoses, monitor patients, and even deliver medicine intravenously with ease. This is no way means that healthcare equipment is perfect and can replace human intuition when it comes to diagnostics, but it has heightened the ability to personalize patient care and improve quality of life.

How many healthcare equipment and supplies companies are there?

According to SelectUSA, there are more than 6,500 medical device companies alone in the U.S., though most are quite small and relatively few are publicly traded. Keep in mind medical devices encompass a number of the technological discoveries we noted above, but fail to include supplies such as gloves and surgical masks, for instance. The implication here is that there are thousands upon thousands of healthcare equipment and supply companies around the globe clamoring for a piece of a huge market.

Why invest in the healthcare equipment and supplies industry?

Now that we have a better understanding of what the healthcare equipment and supply industry is, how it evolved, and how large it is, let's take a closer look at why investing in this sector could be a smart move.

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Source: Isafmedia, Flickr

The primary allure of this industry is that it's a numbers game that is working in businesses' favor. The global population is increasing, global life expectancy is heading higher, access to medical care is improving in most countries, and in the U.S. the number of uninsured patients has declined due to sweeping healthcare reform, a la the Affordable Care Act. All of this would portend that the need for medical care, and the equipment and supplies which make administering care possible, will only increase over the coming decades as more people visit clinics and hospitals.

Investors should also consider that healthcare equipment and supply companies' products are often essentially basic-needs goods, which are mostly resistant to economic downturns. Although some patients will hold off on elective procedures and doctor visits when the U.S. economy is contracting, the vast majority of people who receive medical care can't wait to receive it. This consistent demand can help lead to fairly predictable cash flow and growth potential.

Yet, headwinds exist that investors in this sector need to also be aware of. Competition among healthcare equipment and supply companies is fierce, and quite a bit of healthcare equipment and supplies are mass-produced and commoditized, which can put pressure on equipment pricing and ultimately company margins.

The reality of this industry is one in which investors can usually sleep at night since share price volatility is below average. But it's also an industry where growth potential is usually subdued . 

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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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 don't 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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