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Decatur’s Letco battles foreign competitors with low-cost imports
Economic discussions tend to categorize U.S. companies as either exporters or importers, but Letco Medical in Decatur is a reminder that most companies are both.
As a distributor of pharmaceutical compounding supplies and drugs — one portion of its business — Letco has both roles. It imports many of its supplies and bulk pharmaceutical ingredients from companies abroad, including China, Israel and France.
When those imports are priced low, Letco benefits because it obtains the products it distributes at a lower cost.
At the same time, however, low-cost imports enhance the ability of foreign companies to sell direct to the ultimate customer, the compounding pharmacies that prepare custom-made medications.
Letco and its 46 employees battle foreign competitors — while enjoying low-priced imports — by focusing on customer service.
“We work closely with the customers to come up with packages that we call our market basket,” said Chuck Makarov, president and chief executive officer of Letco Medical.
“They can buy bundles of supplies at one time and reduce their freight cost. We focus on what our customers need, including quick turnaround time. We make sure their needs are met and try to be a one-stop shop for them.”
Most of its customers for compounding supplies are domestic, but Letco exports to Australia and Germany. It is pursuing an export market in Canada.
Its status as an importer also makes Letco vulnerable to a weakening dollar. As the value of the U.S. dollar drops relative to other currencies, the price of imports rises.
“We have seen an increase in costs as the dollar has devalued, absolutely,” said Makarov.
In theory, a weakening dollar should trigger more domestic consumption. If Letco can purchase bulk acetaminophen at a lower cost from U.S. producers than from foreign producers, it will buy American. Fluctuating currency values thus serve as a self-correcting mechanism to trade imbalances between nations.
The problem with the theory is it does not translate well into real life.
When American producers cannot profitably compete in the production of a commodity like acetaminophen, they shift resources to other uses. If lower overseas labor costs and a relatively strong U.S. dollar give foreign competitors the advantage, over time U.S. manufacturers will exit the market.
“Our choices are limited in the U.S.,” Makarov said of drug producers. “We have a lot more choices of foreign manufacturers.”
As the U.S. dollar dives, the equation changes. Letco is actively looking for domestic manufacturers that can undersell its foreign suppliers, but there are not many. U.S. manufacturers abandoned the unprofitable markets, and they are unlikely to make the investments to re-enter unless they are sure domestic demand will continue.
With the Federal Reserve looking for ways to increase the value of the dollar, the expectation of continued domestic demand is far from a sure bet.
“Weakening of the currency will improve your trade balance, but it takes awhile for the trade flow to change,” said economics professor Bill Wilkes of Athens State University. “It takes awhile for domestic manufacturers to adjust.”
In the short term, therefore, a weakening dollar increases the cost of imports for distributors and consumers without benefiting domestic manufacturers.
While Letco must keep a wary eye on foreign competition in the pharmacy supplies portion of its business, it is effectively immune from international pressures when it comes to another portion of its business.
“We re-pack bulk after-pharmaceutical ingredients and sell them to pharmacies,” Makarov explained. “The pharmacies use those in compounding.”
Letco supplies the repackaged drugs to compounding pharmacies — such as Pill Box and Personal Touch in Decatur — in powder or liquid form. The pharmacists use the drugs to prepare drug blends personalized for patients.
“Let’s say you have a child that can’t take pills. A compounding pharmacist will make a lollipop that has a suspension in it for whatever the medication is the child needs,” Makarov said.
Many veterinarians also purchase repackaged drugs from Letco for compounding.
The company sells respiratory drugs used in nebulizers for chronic obstructive pulmonary disease and oxygen therapy.
Drug Enforcement Agency regulations allow import of bulk drugs, typically in 50-kilo drums, but preclude most foreign competition in repackaging.
The cost of entering the drug-compounding business limits foreign and domestic competition. Letco must repackage drugs in a sterile environment, and it has 10 expensive “clean rooms” at its Decatur facility for the task.
“It’s a very specialized market,” Makarov said, which tends to reduce competitive pressures.
The focus on drug compounding — both in distributing supplies and in selling the medications — has been a profitable one for Letco, which Michigan-based Harvard Drug Group bought from the Letson family in June 2007.
Since January 2008, said Makarov, sales of compounding supplies and ingredients have increased almost 600 percent — from $300,000 per month to $1.6 million.
The reason, he said, is high co-pays and the increased cost of standardized medications have created a market opening for compounded medications. They are more expensive, but the gap is narrowing.
“Instead of paying the co-pay, you can pay a compounding pharmacist to get you specialized medication,” Makarov said.
“As you see insurance costs continuing to rise, you’ll see more and more people using these compounding pharmacists. Why take something out of a bottle when you can get something that’s made for you, at the levels you need it, for basically the same price as your co-pay?”
Letco cannot ignore foreign competition, but the combination of customer service and Drug Enforcement Administration regulations has so far been a prescription for success.
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