Regulating the Drug Pushers

Quick, can you tell me what the side effects of Eli Lilly's (NYSE: LLY  ) impotence drug Cialis are? Probably not, but I bet you know that it'll make your spouse smile.

The FDA plans to run a study to see whether positive images and statements are causing viewers to ignore the warnings about potential side effects. It needs to run a study to figure this out? Of course happy families frolicking in the park are helping viewers to ignore the fast-talking guy at the end of the advertisement.

The announcement follows a New England Journal of Medicine study published last week, suggesting that FDA regulation of the advertisements is on the decline. According to the article, the number of regulatory actions dropped from 142 in 1997 to only 21 in 2006. While I guess it's possible that the pharmaceutical industry is doing a better job at regulating itself, it seems more likely that the FDA is understaffed for the increasing number of direct-to-consumer (DTC) advertisements. Spending on DTC ads increased 330% from 1996 to 2005.

The FDA hasn't been completely negligent when it comes to advertisements. Just this month, Pfizer (NYSE: PFE  ) received a warning letter from the FDA regarding a misleading advertisement in a professional journal. The agency took exception to the ad's failure to include some of the side effects of its schizophrenia drug Geodon. The FDA was also none too pleased with Pfizer's claims that Geodon has "proven advantages" over the intramuscular version of Johnson & Johnson (NYSE: JNJ  ) subsidiary Ortho-McNeil's antipsychotic haldol -- advantages the agency says weren't proven in clinical trials.

In the future, misleading ads might cost pharmaceutical companies more than just the expense of redoing the ads. The PDUFA reauthorization bill that comes out of Congress' conference committee may give the FDA the ability to levy fines up to $250,000 for false or misleading advertisements.

In an effort to be proactive, the industry's trade group -- whose membership includes Merck (NYSE: MRK  ) , Wyeth (NYSE: WYE  ) , and Pfizer, as well as most other pharmaceutical companies -- recently proposed that companies pay the FDA $80,000 to review each ad. House lawmakers rejected the idea, because having companies pay for the review would create a conflict of interest. Hello? What do they think the PDUFA is? Paying the government for oversight is pretty common in the U.S. The building permit fees I paid so that the inspector could check out my construction job haven't seemed to put him on my side.

Changes to the oversight of advertisements are certainly something for investors to keep an eye on. Any increased regulation by the FDA will likely have a negative effect on drug companies. Sales of blockbuster-status drugs will be hurt most by restrictions placed on drug companies, but even the lowly oncology drugs, which get some advertisements in professional journals, might be affected.

Johnson & Johnson and Eli Lilly are Income Investor selections. Pfizer is a pick of the Inside Value team. Not sure which newsletter to pick? Click here to take a free 30-day test drive of any of our newsletters.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool's disclosure policy has zero side effects.


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