Whether you realize it or not, cutting-edge medical-diagnostic equipment is reshaping medicine by helping physicians make treatments more targeted and personalized for each patient. Compounded with technological improvements and advancing medical-care knowledge, the potential for investors to make a tidy profit within the sector would appear to be increasing.

But, like with any sector, medical diagnostic equipment makers aren't all going to be winners. Before you consider investing in this complex industry, you first have to understand what makes it tick. To that end, let's take a deeper dive into the evolution of the medical diagnostic equipment industry and examine what advantages it may hold for investors.

What is the medical diagnostic equipment industry?

In its simplest form, medical diagnostic equipment helps physicians form a diagnosis and treatment plan for a patient. Medical diagnostic equipment comes in a number of forms, from stethoscopes to highly complex equipment, such as MRIs.

In addition to equipment you'd find in outpatient clinics and hospitals, this industry also includes over-the-counter devices, such as glucose monitors and saliva-based diagnostic tests.

What is the history behind the medical diagnostic equipment industry?

While doctors have been administering diagnoses for centuries, the actual birth of what might be deemed the modern medical diagnostic equipment industry took shape last century. For instance, the early 1900s saw the invention of the first electrocardiograph, which measured electrical activity associated with a patient's heart. 


Source: Liz West, Flickr

But more sophisticated technology emerged in the 1970s with the advent of the CT scan, MRI, ultrasound, and PET scan, which greatly transformed what physicians and surgeons could do without the need for radical or exploratory surgeries. This technology allowed for quicker and more accurate diagnoses.

How many medical diagnostic equipment companies are there?

In terms of publicly traded companies that you can invest in there are a few dozen, which manufacture a number of medical diagnostic tools. Chances are that this figure is only going to rise in future years, especially within the United States, as the Affordable Care Act brings an influx of newly insured members into the health-care system. One possible outcome of individuals obtaining insurance for the first time that more people could begin seeking out preventative care. These preventative care visits offer the possibility of increased medical diagnostic equipment usage and/or purchases by hospitals and clinics.

Source: Biswarup Ganguly, Wikimedia Commons

Why investing in medical diagnostic equipment companies?

Possibly the biggest advantage of being an investor in medical diagnostic equipment manufacturers is the ability to invest in cutting-edge technologies that have game-changing potential. Genome sequencing, for instance, is getting cheaper and faster as time goes on. Although a majority of drug developers haven't been able to harness this technology as of yet, it's possible that as time progresses genome analyzing tools could allow physicians to optimally treat a number of diseases, utilizing a single test.

Another advantage is that the medical diagnostic equipment sector is a numbers game -- and the deck would appear to be stacked in investors' favor. The potential pool of patients that could benefit from diagnostic advances, such as over-the-counter hepatitis C tests or early cancer-detection screening, is only expected to grow as access to health insurance becomes both more accessible and required as mandated by the Affordable Care Act. In addition, an aging and retiring baby boomer population could create an influx of personalized care needs in the coming decades.

Of course, there are also three factors investors would be wise to consider with the medical diagnostic sector. First, technological improvements do often push product costs lower over time -- we've seen the cost of sequencing a human genome drop from more than $10 million to $1,000 -- and could adversely impact margins and profitability. However, this should also increase the adoption of this technology and help develop new applications in the field of personalized medicine. Second, competition among medical diagnostic device makers can be fierce, which can also eat into margins and profitability. Finally, select diagnostic developers tend to be reliant on government-sponsored Medicare or Medicaid, and the Centers for Medicare and Medicaid Services, which sets Medicare and Medicaid reimbursement rates each year, has implied that reimbursement rates are likely to be on a long-term downtrend vis-a-vis the Affordable Care Act.

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.

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