(FORTUNE Magazine) – IN THE ANNALS OF MEDICINE, 2004 WILL GO ON RECORD AS one of the most painful in the history of Big Pharma. The latest chapter began with Merck's Sept. 30 Vioxx recall. Then it was rival Pfizer's turn: In mid-October, the company announced that painkiller Bextra led to an increased risk of heart attack or stroke in some patients. By late December, Pfizer had released similar concerns about Celebrex, and even Bayer's over-the-counter Aleve was being flagged for possible dangers. During the three months of turmoil, critics lambasted drugmakers, for instance blaming Merck's Vioxx for as many as 100,000 heart attacks and strokes. Hungry class-action law firms furiously filed suit (Merck alone has been hit with more than 900 plaintiffs lawsuits and two class-action suits). Investors, too, are hurting. The Amex Pharmaceutical index fell 6% over the last year (by comparison the S&P 500 was up 10%). Even the Dow's heady rise of 5% in 2004 was slowed somewhat by Merck and Pfizer, each of whose shares fell 28%. The immediate effect of the Great Drug Scare of 2004 is obvious: Future sales of the entire $5.3 billion class of COX-2 pain remedies have been torpedoed. But the wider fallout--affecting everyone from Madison Avenue to the media world--is beginning, and we're likely to see big changes in the way medicines are regulated, sold, and researched. Here's how.

•The FDA. The agency has been in a tailspin since Vioxx's withdrawal, and Congress is looking into whether FDA officials should have picked up on persistent warning signs that Merck's drug posed dangers. To make matters worse, top FDA safety official Dr. David Graham has become the agency's most vocal enemy, claiming he and his colleagues in the FDA's safety arm are often marginalized and silenced when they locate dangers in popular medicines. In an internal survey, roughly two-thirds of the agency's scientists say they aren't fully confident of the agency's ability to monitor drug safety, and one-third express doubts about the drug approval process. Standard & Poor's analyst Herman Saftlas believes regulators will ask drug companies to conduct more clinical trials of their medicines over a longer period of time and in a broader population of patients, so as to better detect possible side effects. This would lengthen the average 24-month FDA review time for drugs. And there's the catch. Tighter FDA scrutiny shortens the amount of time a marketed medicine remains under patent protection. According to a Merrill Lynch analysis of FDA procedures, each month the average drug spends under review represents $41.7 million in lost revenue. The upshot: A tougher FDA could place upward pressure on drug prices if companies decide to make up for lost market time.

•Advertising and Marketing. As news settled in about Pfizer's Celebrex, the company reached an agreement with the FDA to pull its print, radio, and television advertising for the drug. Pfizer won't disclose how much advertising it withdrew, but in all of 2003, Pfizer spent $86.8 million on Celebrex's direct-to-consumer advertising campaign. The company laid out $71 million in the first nine months of 2004, a 55% increase over the same period a year ago, according to market research firm Verispan. Pfizer CEO Hank McKinnell is now rethinking his company's approach. Although many drug ads seem infamously laden with information about side effects, McKinnell believes ads--especially those on television--still aren't communicating the notion that consumers should engage in their own cost-benefit analysis with a doctor before taking a drug. "I'm beginning to think direct-to-consumer ads are part of the problem," McKinnell told FORTUNE. "By having them on television without a very strong message that the doctor needs to determine safety, we've left this impression that all drugs are safe. In fact, no drug is safe. We've not done a good enough job communicating that." McKinnell isn't averse to advertising, but he does believe serious change is necessary. "I see a role for direct-to-consumer advertising, but there are unintended consequences that we're all going to have to deal with," he says. Pfizer isn't the only company grappling with such issues. In the immediate future, that may mean companies will muzzle their media messages, not just to avoid confusing consumers, but to escape a more rigorous regulatory environment, says Michael Nathanson, an analyst at Sanford Bernstein. Nathanson believes the drug industry's recent problems "could usher in a new era of reduced direct-to-consumer advertising spending." Whatever the case, the change will have enormous effects in the media industry, which garners roughly 6% of its revenues from drug companies. Pharmaceutical advertising as we know it began in 1997, after the FDA relaxed its rules governing media representations of drugs. Since then drug ad outlays have grown an average of 22% annually. That's compared with a sluggish overall ad market which has grown an average of just 5% a year over the same period. In the past seven years drugs have surpassed apparel and computers to become the tenth-largest category of advertised products in the U.S. In 2003, the industry spent $3.3 billion plying its wares in print and on the airwaves, up from $1 billion in 1997.

•Blockbusters. As Big Pharma adjusts to its new atmosphere, one fundamental problem remains: the business's insatiable appetite for blockbuster drugs, medicines that serve vast swaths of the population and garner billions of dollars in annual revenue. In part, the problems Merck encountered with Vioxx as well as those Pfizer confronts with Celebrex are related to the blockbuster model. The FDA can force companies to engage in longer, broader clinical studies. But even so, no amount of clinical research can predict all the possible side effects once a drug is prescribed to millions of patients. Companies will someday be able to target patients based on their DNA, creating "personalized" drugs that, in theory, would contain better side-effect profiles. BiDil--a hypertension remedy recently submitted to the FDA that would be marketed exclusively to blacks--is one example of the industry's future. This new science, however, is still in its infancy and has not yet been a fertile source of new drugs. So, for now, Big Pharma is shackled to the blockbuster, even with all its potential problems. In that regard, the drug industry's recent pains aren't likely to abate anytime soon.