When the FDA Freaks Out About a Drug, So Does the Stock Market

Turns out, when the Food and Drug Administration (FDA) releases an official warning about a drug, it's not very good for the company's stock price. Who knew? A new National Bureau of Economic Research working paper quantifies the extent to which FDA bureaucrats hold drug company stock prices in the palms of their hands:

We find firms targeted by an advisory have average stock price declines of 3% in three days and 11% in five days following the advisory release, and in turn appear to decrease total physician-directed promotion spending, journals ads and detailing visits significantly six months following the advisory release; the provision of free samples is unaffected. We find no changes among therapeutic substitutes unaffected by the advisory.

Another post-warning effect, drug companies stop touting their products to physicians as much:

In response to FDA-required labeling changes, firms appear to decrease drug-specific promotion to physicians.

Read more on the potential negative side effects of the FDA's black box warnings.

Via the Freakonomics blog.