The pain just got a little worse for drug distributors.

New York Attorney General Eliot Spitzer has subpoenaed at least two of the big distributors --


(ABC) - Get Report


Cardinal Health

(CAH) - Get Report

-- in a probe of the "secondary" market where counterfeit drugs are sometimes sold. The other major distributor,


(MCK) - Get Report

, has yet to disclose whether it is part of that investigation as well. It declined to comment Friday.

The industry's big three, as they are known, were already hurting because of radical changes in their business model.

Spitzer's investigation comes two years after a similar probe in Florida, where prosecutors uncovered a multimillion-dollar scheme involving counterfeit drugs for serious conditions such as cancer and AIDS. Thus, Spitzer's interest in the secondary drug market came as little surprise to some.

Lehman Brothers analyst Lawrence Marsh was among those who seemed to shrug off the Spitzer probe. By now, he noted, the big drug distributors have already scaled back their dependence on the so-called gray drug market.

Drug "manufacturers have tightened control of the supply chain, in part due to public and regulatory concerns," wrote Marsh, who has a neutral view on the sector. "In turn, these moves have caused the secondary market to significantly decrease in size."

AmerisourceBergen specifically downplayed its own exposure. The company said that it purchases less than 0.5% of its pharmaceuticals from secondary sources. Moreover, the company said that it conducts business with fewer than 20 alternative wholesalers and requires all to comply with its "product integrity program."

Investors seemed mostly reassured. The company's stock slipped just 29 cents to $58.91 on Friday morning. Shares of Cardinal -- which offered fewer details -- took a harder hit, falling $1.18 to $55.65. McKesson dropped 66 cents to $38.30.

Risky Business

Meanwhile, Morgan Stanley analyst David Teal continued to offer words of caution about the group.

Teal said the Spitzer probe does not "of and by itself" further threaten the industry. But he stopped well short of dismissing it altogether. He believes that even AmerisourceBergen enjoys a significant boost to earnings as a result of its business in the secondary drug market.

The investigation, he wrote, highlights that market as "a persistent source of outsized profits for drug distributors, and a driver of earnings likely to remain under intense pressure and increased scrutiny in the quarters ahead."

The distributors were struggling to meet profit goals already. They are attempting to shift toward a business model that requires drug manufacturers to directly pay them for their services. In the past, the companies have always relied on indirect compensation from manufacturers -- such as discounts and rebates -- to achieve their profitability.

The distributors also engaged in controversial "speculative" drug buying under the old arrangements. Before, they would routinely buy more inventory than necessary on the speculation that drug prices would rise and make the supplies worth more in the future. They tended to win that bet, because of the steady inflation of drug prices, and even helped out manufacturers in the process. But the practice has fallen out of favor because of a regulatory crackdown.

Marsh believes that a recent

New York Times

article about drug speculating may have actually led to Spitzer's latest probe.

"Ostensibly, the visibility of the article and some would say the dramatic language within the article could have catalyzed the attorney general's office to look at the business in greater detail," he wrote.

Florida Sting

The Florida probe led to 19 arrests and a call for stricter laws.

In that case, the

Tallahassee Democrat

reported, state prosecutors spent 18 months investigating more than 50 wholesalers suspected of selling counterfeit drugs. They determined that some of the companies were selling little more than water to drugstores -- including Eckerd and



-- that thought they were buying expensive autoimmune treatments instead. In one transaction, the


reported, the criminals pocketed $28 million for a single shipment of the counterfeit supplies.

Following the investigation, the newspaper said, Gov. Jeb Bush signed a law increasing the maximum punishment for drug counterfeiters from five years in prison to life. He also called for drug wholesalers to carry "pedigree papers" that show that their drugs are real.

But Marsh noted on Friday that the pedigree requirement has yet to take effect and raised questions about whether it ever will.

"The industry has said that the requirement of paper pedigrees would be prohibitively expensive and is unnecessary," Marsh wrote. So "there is some concern that the law could be weakened."

In the meantime, another analyst -- Eric Coldwell of Baird -- fails to see another crackdown on the way. He reiterated his buy rating on AmerisourceBergen, because he sees little more than headline risk resulting from the latest regulatory probe.

"Companies the size of AmerisourceBergen frequently receive requests for information from multiple regulatory authorities," he wrote on Friday. And "we find it difficult to envision what could come out of the New York attorney general's information request that would have a material impact on ABC's operations."