The Coming Great Pharma Panic

If you thought the shares of your pharmaceutical stocks were already volatile, get ready for some real stomach-churning dives now. The Food and Drug Administration is publishing a well-intentioned but potentially misleading list of drugs that are potentially unsafe.

On the surface, it sounds like a good idea: letting the public know at the earliest stages of the process that a drug may have some serious side effects or other troubles. Unfortunately, the agency is only giving out partial information, a solution that may be almost as bad -- if not worse -- than no information at all.

Using the Adverse Event Reporting System, the FDA is publishing a quarterly list of drugs that it receives complaints about from companies, doctors, and patients. The list, issued under the Food and Drug Administration Amendments Act of 2007, is a reaction to how the agency was criticized for handling the alleged increased risks associated with Merck's (NYSE: MRK) Vioxx, and the delays in acknowledging the potential for suicide in children prescribed antidepressants like Pfizer's (NYSE: PFE) Zoloft.

Yet such reactions are rarely the best solution, regardless of the intentions behind them. Consider the first list published on Friday, which itemized 20 different drugs. It contains a few drugs that investors, patients, doctors, and companies already knew were under investigation, including Remicade from Johnson & Johnson (NYSE: JNJ) and Schering-Plough (NYSE: SGP).

But investors may have been surprised to see skin-cancer warnings for Tysbari, from Biogen Idec (Nasdaq: BIIB) and Elan (NYSE: ELN). The FDA is working with the two companies on labeling issues, but that's for an unrelated complication. One report says that while some medical journals had reported cases of melanoma in patients taking Tysabri, no one seems to have known that the FDA was investigating that question.

Therein lies the danger. The FDA's providing only a listing of the drug and the potential problem -- no numbers on how many reports, no indication of sources (patients? companies?), no statement of what action it's currently taking with the report. Without such context, the agency runs the risk of alarming patients.

Even the agency recognizes this danger, because it states that simply because a drug is on the list "does not mean that FDA has concluded that the drug has the listed risk, or that FDA has identified a causal relationship between the drug and the listed risk."

The FDA cautions patients not to stop taking the drugs, and doctors not to stop prescribing them. However, patients could become overly concerned about health risks, and doctors could be worried about potential malpractice suits. After all, would you really want to take a drug -- for example, Suprane by Baxter (NYSE: BAX) -- when it's listed alongside "cardiac arrest"? Too little information is dangerous.

For investors, the sudden appearance of drugs on this list, especially with no prior public information about any FDA investigation, increases the downside risk of investing in this space. While the agency gave the drugmakers a heads-up -- some company's reported only receiving that notice late Thursday -- the potential for surprise and uncertainty is high.

The list can be a positive public service announcement, but only if it includes more information to let patients, doctors, and investors make more informed decisions. As it is, currently, it amounts to little more than possibly crying wolf. The public and the markets may end up overreacting to the list and panic -- or worse, from a public health standpoint, ignore it altogether.

How do you think the FDA should handle letting people know about safety issues? Take a moment to participate in our poll below.