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The Medical Supplies Industry is essentially a growth industry. Value Line divides the group into Medical Supplies Invasive and Medical Supplies Non Invasive. Although many of these businesses have been around for quite some time, they are constantly seeking avenues of expansion, such as new products with next-generation technologies and overseas markets. Medical Supplies companies manufacture and distribute a broad range of items, from surgical and dental instruments to elective laser surgery equipment to orthopedic products. The two major classes of customers served are hospitals and doctors offices.

There are several strategies for members of this industry to optimize profits. Companies that supply low-tech items, such as surgical gloves and syringes, do not require substantial amounts of capital outlays. Profitability is dependent upon procedure volume, particularly in hospitals. Those with highly complex operations, including orthopedic and interventional cardiology device manufacturers, require extensive capital spending, and cash generation is vital to survival. Their products are high-tech, and ample research and development spending is needed to maintain a steady rollout of new offerings.

The Medical Supplies Industry is competitive. Primary drivers of demand are demographics and advanced, effective products. Large companies strive to manufacture and distribute top-quality products across a broad territory. Their smaller peers are more likely to specialize in a particular market segment, thereby optimizing operating potential. Typically, the stocks of the bigger players in this sector offer investors solid long-term growth and income potential. Small companies often rely on one or just a few very complex or specialized product lines, and their shares usually appeal to venturesome, risk-tolerant market participants seeking above-average appreciation potential.

Top- and Bottom-Line Influences

Medical Supplies companies are fairly well insulated from negative macroeconomic factors, since the need for treatments is rather constant. But, they are by no means immune to harsh cyclical downturns. In challenging periods, hospitals will attempt to delay purchases of the most expensive capital equipment. Too, during times of high unemployment, patients, with limited disposable income and dealing with rising health insurance costs or loss of coverage, might put off treatment for as long as possible. Those companies providing products and services for elective surgeries (e.g., laser, cosmetic) are vulnerable. Reduced procedure volume can hit top and bottom lines particularly hard. Too, manufacturers of orthopedic equipment often suffer in a weak economic climate.

Intense competition can significantly pressure operating performance, as well. This is evident, for example, in the ICD (implantable cardioverter defibrillator) and stent segments. Products that are not protected by patents are open to competition. Barriers to market entry can be somewhat easy to overcome. Commonly, competitors will develop improvements to items already on the market. Faced with more competition, companies will frequently cut prices on legacy products to hold on to business share and support production volume and net profit. Also, they might boost R&D spending to overcome any technology shortcomings.

Product recalls are difficult to avoid and can have a substantial impact on results. When products cause patient injuries or fatalities, companies will voluntarily pull them from the market or regulators may compel a suspension of sales. Not only are sales and earnings affected in the short run, as companies act to resolve the problem, but operations could suffer for an extended period because of the wariness of hospitals, doctors and patients to return to a previously recalled offering. Companies endeavor to limit the number of recalls to protect their reputations.

Product development and market expansion, most notably in developing nations, are major facilitators of sales and net-income growth for these companies. Acquisitions provide a means to this end. A business purchase will allow a company to better penetrate the global market, eliminate a competitor, bring a new technology in house, and/or enlarge the customer base.

Regulatory Considerations

The U.S. Food and Drug Administration (FDA) is the primary regulator of the Medical Supplies Industry in The United States. An FDA branch, the Center for Devices and Radiological Health, has responsibility for devices. Product approval depends, in part, on the level of risk, I, II or III. Level I is perceived as having the least risk, and such products do not require FDA approval. Levels II and III pose greater risk and require pre-clinical testing, which, alone, can take three to six months. Products sold overseas may be subject to additional oversight. In Europe, a key market, sanctioned independent organizations review products, determining their efficacy, and make recommendations. Frequently, the FDA and foreign regulatory boards will update and alter approval guidelines, creating a measure of uncertainty; further review and testing is sometimes ordered.

Additionally, changes in healthcare legislation, related to Medicare reimbursements and excise taxes, for example, can influence the operating strategy and performance of Medical Supplies companies.

Companies that succeed in this diverse, competitive industry are able to keep pace with developing technologies and accurately anticipate the needs of hospitals, doctors and patients. They are also able to properly allocate cash among R&D, ongoing-operation maintenance, and expansion efforts in a way that maximizes long-term sales and earnings results.