As Pfizer's ( PFE) Celebrex safety hiccup was unfolding Friday, I had a running conversation with a fund manager. Over the course of several phone calls and instant messages, this fund manager vented his frustration, arguing that from a medical and scientific standpoint, the Celebrex scare was overblown.

At the proper (low) dosages, Celebrex wasn't causing an increased risk of heart attack or stroke, he argued. And he felt that as long as Pfizer kept the drug on the market (which he was confident would happen), doctors would continue to prescribe it to their patients.

This fund manager is a smart guy, but he's in the dark about what's really going on with Pfizer right now. There is a public hysteria over Celebrex and the entire class of so-called COX-2 inhibitors . People are scared that if they pop a Celebrex, a Vioxx or a Bextra in their mouths, they're going to keel over from a heart attack! Blame the media or the tort lawyers for inciting this fear -- it doesn't matter. Because right now, as far as Wall Street is concerned, Celebrex sales are balanced precariously on a cliff whether or not the drug is ultimately pulled from the market. (Can you imagine a doctor prescribing Celebrex these days?)

Jim Cramer gets it when he asked on Monday why, according to Pfizer, is Celebrex safe enough to sell to the public, but not safe enough to advertise on television? The Food and Drug Administration -- already under withering criticism for what it did, or didn't do, about Merck's ( MRK) Vioxx safety problem -- doesn't seem to be in a position to go easy on Pfizer.

In public comments Friday, FDA interim chief Les Crawford said the agency is concerned about the safety of the entire COX-2 drug class, adding that the FDA is recommending that doctors seek alternative therapies to Celebrex for their patients. This doesn't exactly sound like a guy who's looking for a top spot on Pfizer CEO Hank McKinnell's Christmas card list.

My colleague Paul Kedrosky also gets it when he pointed out this weekend that the Celebrex dust-up is one more reason to nail shut the coffin on the lucrative days of megablockbuster drugs. The future of drug development lies in pharmacogenomics -- a big word that essentially means targeted, personalized medicines.

Instead of developing one drug that treats 20 million people relatively poorly and with a lot of side-effects, why not apply the genetics of disease --and the way different people respond to disease -- to discover dozens of drugs that treat smaller patient populations well and with fewer side-effects? Sure, the golden era of personalized medicine has yet to arrive, but Genentech's ( DNA) breast cancer drug Herceptin is proof that such a model can be successful and profitable.

The biotech sector understands this, and my guess is that Big Pharma will follow. (This is a good reason for long-term investors to like the biotech sector.)

The FDA has more than Celebrex on its mind: The agency also must figure out what to do with AstraZeneca's ( AZN) lung cancer drug Iressa. On Friday, AstraZeneca said results from a large phase III study showed that Iressa does not confer a survival benefit to patients with advanced non-small-cell lung cancer.

The FDA approved Iressa in 2003 under a program that allows drugs for serious, life-threatening diseases like cancer to be approved based on certain surrogate markers for clinical benefit. In this case, AstraZeneca had data showing that Iressa shrank tumors in patients with advanced non-small-cell lung cancer who had essentially run out of other treatment options.

Under the so-called subpart H regulatory guidelines, the FDA approved Iressa with the condition that AstraZeneca would run another clinical study to show that Iressa's ability to shrink tumors would lead to improved survival, which is the gold standard in cancer drug efficacy.

AstraZeneca ran that confirmatory study, and it failed. Now, the FDA has to decide whether to pull Iressa off the market. Regardless of what happens, Iressa is finished in the U.S. AstraZeneca has already said it will stop marketing the drug here and, in fact, will be telling doctors about Tarceva, a similar lung cancer drug from OSI Pharmaceuticals ( OSIP) and Genentech that does help patients live longer.

The Iressa mess could have been avoided back in 2003 if AstraZeneca had conducted a randomized, controlled study of the drug, such as comparing Iressa with a placebo or best supportive care to see if the drug improved survival. If that study had been conducted and the results had turned out as those released Friday, the FDA probably wouldn't have approved Iressa, and therefore, wouldn't be facing a difficult decision today. AstraZeneca could have put together a controlled study of Iressa; after all, that's exactly what OSI and Genentech did.

My point here is not to be a Monday morning quarterback. Instead, looking ahead, I think that some top FDA officials will use the Iressa situation to argue even more strongly against the use of single-arm, uncontrolled studies as the basis for future drug approvals. While everyone wants to see the FDA work quickly to approve life-saving drugs, we should also be concerned when the agency approves drugs that turn out to be nothing more than expensive placebos, and often with dangerous side-effects, to boot.

The only way to really tell the difference between a safe and effective drug and a placebo is to test the drug in a rigorous, controlled study. This is another reason to doubt Celgene's ( CELG) current plans to seek FDA approval of Revlimid for myelodysplastic syndrome (MDS). Celgene's Revlimid data in MDS are all from single-arm studies, which means there isn't any way for the FDA to determine if the safety problems that have cropped up are tied to the drug or to patient co-morbidities.

I'm singling out Celgene here, but the company is certainly not alone. In my opinion, Iressa's recent failure will have long-term effects on how the FDA reviews and approves drugs.

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