Mar. 20, 2009 (Investor's Business Daily) -- The ailing economy hasn't impaired the health of the nation's drug and medical supply distributors.

Sure, recession-ravaged Americans continue to scrimp on non-essential spending. And some might be tempted to cut back on medicines to save money.

But since medicines are essential, the recession's impact on the pharmaceutical field won't be as significant as on those where spending is more discretionary, says Diana Conmy, director of market insights for IMS Health.

Thanks to an aging population and new drugs coming to market, including higher-margin generic and specialty medicines, drug distributors have enjoyed solid gains.

"It's a very steady growth business," said analyst Jeff Jonas of Gabelli & Co. "It's become more difficult with the economy, but these companies are still managing to grow -- and grow margins by keeping tight control over their costs."

Many stocks listed in IBD's Medical-Drug Wholesalers group are having a nice run. Drug distributor McKesson (MCK) and animal health product distributor MWI Veterinary Supply (MWIV) have enjoyed double-digit earnings growth the past four quarters.

Drug distributor AmerisourceBergenABC has grown earnings at double-digit rates for three of the past four quarters. And PSS World Medical (PSSI), a distributor of medical supplies and equipment, has watched earnings grow in double digits for five of the past six quarters.

1. Business

Drug distributors move products from manufacturers to drugstore chains, independent and institutional pharmacies, hospitals and other outlets.

The industry is recovering from a tough stretch caused by a shift in the way it makes money.

Firms used to hold large amounts of inventory, profiting from manufacturers' price increases on that inventory. A few years ago, they moved to a fee-for-service model, in which manufacturers pay distributors based on the volume of drugs they move and on the services they provide.

The shift to the new model caused profit margins to shrink, Jonas says. The years 2005 and 2006 were the most difficult.

Now that players have adjusted to the new model, it's a more stable business and distributors are growing margins again, Jonas says.

In addition to logistics, distributors offer services such as contract management and credit management.

Drugmakers sell 70% to 80% of prescribed drugs through distributors, Jefferies analyst Richard Close wrote in a report.

Take AmerisourceBergen. The firm transfers pharmaceuticals from thousands of drugmakers to tens of thousands of pharmacies. It delivers products daily to pharmacies on a just-in-time basis.

Like its peers, AmerisourceBergen operates on thin margins -- roughly 1.2%, says spokesman Michael Kilpatric.

But with sales of more than $70 billion a year, it produces cash about equal to net income and uses the money for things such as acquisitions and stock buybacks .

The drug wholesaling group comprises a diverse group of players, though the three top companies -- No.