The big three US distributors - Cardinal Health, McKesson and AmerisourceBergen - are heading into their seasonal year-end inventory ramp-up with less cash and tougher credit market conditions relative to prior years, according to Moody’s Investors Service.

“Tightening liquidity in the marketplace may reduce borrowing capabilities for wholesalers,” Diana Lee, Moody’s vice president and senior credit officer, in a statement. “All three companies currently maintain sufficient liquidity, but if liquidity cushions materially erode, drug distributor ratings could come under pressure.”

And she offers this background: The distributors benefited from reduced working capital requirements in recent years by shifting from a business model that relied on stockpiling inventory to a “fee-for-service” model that aims to reduce inventory on hand to a minimum. Transition to the fee-for-service model brought on a one-time surge of cash as inventories were reduced. But after peaking in 2005-2006, cash and short-term investments for all three distributors have dropped significantly.

Now, though, the “pendulum is beginning to swing the other way,” and with lower cash balances on hand, distributors will have to borrow more, especially at peak periods, to fund working capital. But with borrowing more difficult, or at least costly, access to commercial paper has become more difficult, and borrowing against accounts receivable is likely to be higher than in the past, raising the cost of capital with the potential to reduce profitability.