Monday, April 06, 2009

FDA to Search Engines: You Lose!

The Food and Drug Administration brought out the paddywagon last week, issuing 14 warning letters all circling around the same theme: It's still an ad, even if you have to click on it.

The agency requires direct-to-consumer advertisements to include side effect information if they indicate what the drug is used for. But "sponsored links" that you get in the results of an internet search for a disease or drug name don't contain warning information, and the FDA wants the drugmakers to stop making claims in those advertisements.

Pretty much all the major drugmakers -- Johnson & Johnson (NYSE: JNJ), Eli Lilly, and Merck (NYSE: MRK) just to name a few -- got letters covering a whopping 48 different drugs. Warning letters generally aren't a major issue; they're kind of like parents asking their kids to clean up their room: Fix the problem, and there's no major harm done.

Avoiding "sponsored links" will change the way drugmakers advertise, but I'm not convinced it'll be a major problem for sales. I imagine that most of the advertisements were effective for increasing brand recognition -- or convincing patients to switch from, say, Pfizer's (NYSE: PFE) Rebif to Biogen Idec (Nasdaq: BIIB) and Elan's Tysabri -- rather than convincing patients to start treating a medical issue that they wouldn't have treated without the advertisements. It's one less tool in the arsenal, but all the companies are on a level playing field, and cumulative sales shouldn't be hurt that much.

The bigger losers in the FDA crackdown are Google (Nasdaq: GOOG), Yahoo! (Nasdaq: YHOO), and Microsoft (Nasdaq: MSFT). These companies' search engines have had a hard time wooing drug companies to the internet, and this rule clarification just made that task more difficult. There are ways around the rules -- advertisements for non-branded consumer-information websites, for instance -- but the search engines are likely to take a hit because of the agency's cleanout.

One has to wonder why the FDA picked now to issue the warnings, since the drugmakers have been advertising like this for quite a while. If the new administration has decided to be generally tougher on pharmaceutical companies, that's certainly bad news for the industry, and a trend worth watching for investors.

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