The wholesale distribution business for pharmaceuticals is a brutal business with razor-thin margins -- and home to front-page indictments and SEC and state investigations. This is also an industry in transition from a "buy-and-hold" to a "fee-for-service" business model.

Trying to make an honest living in this upheaval is Lilliputian D&K Healthcare Resources (NASDAQ:DKHR), with $2.5 billion in annual sales. When competitors such as McKesson (NYSE:MCK) and Cardinal Health (NYSE:CAH) have tens of billions in sales, you need to be nimble to not become toe jam for the giants in the forest.

D&K Healthcare announced shocking quarterly pre-earnings-release numbers today. Net sales in the national accounts "trade class" went from $128 million (27% of sales) a year ago to $38 million (5% of sales). Analysts, expecting earnings of $0.02 a share for the first quarter, are being told to expect a loss of up to $0.16.

What makes this picture particularly ugly is the company's 2.58 debt-to-equity ratio. This Lilliputian has two problems: A monster-sized debt and negative free cash flow before this news.

Wall Street punished the stock by sending it down 24% to a new 52-week low.

For investors looking for a bargain, consider last quarter's earnings report. National accounts were already trending down, while independent and regional pharmacy sales (which were 78% of sales) were up 24%. Regional sales is where the growth is, and the company expects those sales to be up 38% when it reports earnings at the end of this month.

While D&K Healthcare will not hit its earnings estimate of $0.65 to $0.80 a share for fiscal 2005 (which ends in June), the entire industry believes that the fee-for-service model will rescue margins from further erosion. For those willing to overlook a very large debt, the company's growing overall sales and favorable industry outlook are worth considering.

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Fool contributor W.D. Crotty does not own stock in any of the companies mentioned.