[Federal Register Volume 63, Number 201 (Monday, October 19, 1998)]
[Notices]
[Pages 55891-55900]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-27890]


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DEPARTMENT OF JUSTICE

Drug Enforcement Administration
[Docket No. 95-47]


Roxane Laboratories, Inc.; Intent To Allow the Importation of a 
Schedule II Substance, Grant of Registration To Import a Schedule II 
Substance

I. Introduction

A. History

    On February 15, 1995, Roxane Laboratories, Inc. (hereinafter 
Roxane) applied to the Drug Enforcement Administration (DEA) for 
registration as an importer of the Schedule II substance cocaine 
pursuant to 21 U.S.C. 958(i)(1993). On June 8, 1995, DEA published 
notice of this application in the Federal Register, 60 FR 30,320 
(1995). This notice advised that any manufacturer holding or applying 
for registration as a manufacturer of this basic class of controlled 
substance could file written comments or objections to the application 
and could also file a written request for a hearing on the application 
in accordance with 21 CFR 1301.43.\1\
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    \1\ Subsequent to the hearing in this matter, DEA's Federal 
regulation citations were changed by final order. 65 FR 13,938 
(March 24, 1997). Regulatory citations in the record and in the 
Administrative Law Judge's Opinion and Recommended Ruling, Findings 
of Fact, Conclusion of Law and Decision use the previous numbering 
system. This decision uses the current numbering system.
---------------------------------------------------------------------------

    In response to this publication, Stepan and Noramco submitted 
written comments, and by letter dated July 7, 1995, Mallinckrodt 
Chemical, Inc. (hereinafter Mallinckrodt) file a timely request for a 
hearing. Following prehearing procedures, a hearing was held in 
Arlington, Virginia, on February 5 through 9 and March 4 through 7, 
1996, before Chief Administrative Law Judge Mary Ellen Bittner. Roxane, 
Mallinckrodt and DEA all participated in the hearing and were 
represented by counsel. At the hearing, all parties called witnesses to 
testify and introduced documentary evidence. After the hearing, all 
parties filed proposed findings of fact and conclusions of law and 
briefs. Roxane filed a rejoinder brief. On September 23, 1997, Judge 
Bittner issued her Opinion and Recommended Ruling, Findings of Fact, 
Conclusions of Law and Decision, recommending that the Acting Deputy 
Administrator issue a regulation permitting the importation of bulk 
cocaine by hydrochloride and that he grant Roxane's application for 
registration as an importer of bulk cocaine hydrochloride. On November 
7,

[[Page 55892]]

1997, Mallinckrodt and Romaine filed exceptions to the findings of fact 
and conclusions of law of the Administrative Law Judge.
    On December 10, 1997, the Administrative Law Judge certified and 
transmitted the record to the Acting Deputy Administrator of DEA. The 
record included the Opinion and Recommended Ruling, Findings of Fact, 
Conclusions of Law and Decision of the Administrative Law Judge, the 
findings of fact and conclusions of law proposed by all parties, the 
exceptions filed by the parties, motions filed by all counsel, all the 
exhibits and affidavits, and all of the transcripts of the hearing 
sessions.

B. Regulatory Context

    In accordance with the DEA Statement of Policy and Interpretation 
on registration of importers, 40 FR 43,745 (1975), the Acting Deputy 
Administrator will not grant Roxane's application unless Roxane 
establishes that the requirements of 21 U.S.C. 958(a) and 823(a) and of 
21 CFR 1301.34(b)-(f) are met. Also, because DEA will not maintain a 
``contingency reserve'' of registrants, Roxane must establish that 
cocaine may be imported pursuant to 21 U.S.C. 952(a)(2)(B), as a 
prerequisite to its registration as an importer of cocaine 
hydrochloride. As a result, this proceeding is inherently a combined 
rulemaking on whether the Schedule II controlled substance cocaine 
hydrochoride may lawfully be imported into the United States pursuant 
to 21 U.S.C. 952, and an adjudication on Roxane's application for 
registration as an importer of cocaine pursuant to 21 U.S.C. 958(a).

C. The Record

    In the adjudication, the Acting Deputy Administrator will issue his 
final order based on the record made before the Administrative Law 
Judge. However, there is not requirement that the decision regarding 
the issuance of a regulation to allow the importation of a cocaine 
hydrochloride be made on the record. Hence, in the rulemaking the 
Acting Deputy Administrator may consider information or submission in 
addition to those contained in the record created by the Administrative 
Law Judge. After the hearing, Mallinckrodt and Roxane filed separate 
motions to reopen the record and introduce additional evidence, which 
the Administrative Law Judge denied. The Acting Deputy Administrator 
had reviewed the record, and makes the following decision regarding 
these motions.
    In the adjudication, the Acting Deputy Administrator has the 
authority to request that the Administrative Law Judge reopen the 
record and admit evidence that was not introduced in the hearing. 
However, the standard for doing so is that the party seeking to 
introduce such evidence must show that the new evidence was previously 
unavailable and is material and relevant to the matters in dispute. 
Immigration and Naturalization Service v. Abudu, 485 U.S. 94 (1988); 
Robert M. Golden, M.D., 61 FR 24,808, 24,812 (1996). The only 
information sought to be introduced after the hearing that is relevant 
to the issues to be resolved in the adjudication aspect of this case is 
the information regarding whether Germany has used seized materials in 
manufacturing cocaine hydrochloride that Roxane sought to introduce by 
its motion dated May 29, 1996. However, the issue raised by 
Mallinckrodt in these proceedings is limited to whether the bulk 
cocaine hydrochloride that Roxane will import into the United States is 
manufactured from seized materials. Therefore, the Acting Deputy 
Administrator finds that evidence regarding Germany's use of seized 
materials in general is irrelevant to these proceedings. The Acting 
Deputy Administrator also agrees with the Administrative Law Judge's 
finding that this information could have been obtained by Roxane 
earlier in the proceedings if Roxane had exercised due diligence. For 
these reasons, the Acting Deputy Administrator finds that Roxane has 
failed to make the requisite showing for reopening the record.
    The general purpose of the rulemaking procedure is to gather 
information, and when making a rule the agency wants to have access to 
as much information as possible. As a result, the informal rulemaking 
proceeding does not end with the same degree of finality as does a 
formal adjudication. Charles H. Koch, Jr., Administrative Law and 
Practice, Sec. 4.84 (1985). The agency may want to consider information 
obtained after the close of the comment period, and the courts have 
generally supported this practice. See Sierra Club v. Costle, 657 F.2d 
198 (D.C. Cir. 1981); Hoffman-La Roche, Inc. v. Kleindienst, 478 F.2d 
1, 13-15 (3d Cir. 1973). Nonetheless, at some point the agency must 
make a decision, and it is free to ignore comments that were filed 
late. Personal Watercraft Industry Ass'n, et al. v. Dept. of Commerce, 
48 F.3d 540, 542-43 (D.C. Cir. 1995). In this case, the most logical 
point to close the rulemaking record is December 10, 1997, when the 
record was transmitted from the Administrative Law Judge to the Acting 
Deputy Administrator for a final decision. By this date, interested 
persons wishing to make comments on whether the importation of cocaine 
hydrochloride should be permitted pursuant to 21 U.S.C. 952(a)(2)(B) 
had more than two years to submit comments to this agency. Furthermore, 
it was at this point in the proceeding that the Acting Deputy 
Administrator began his final review of the record.
    The only information received prior to December 10, 1997 that is 
relevant to the rulemaking aspects of this case and was excluded by the 
Administrative Law Judge is the information Mallinckrodt sought to 
introduce regarding its cocaine sales and pricing for fiscal years 1996 
and 1997, the rebuttal evidence offered by Roxane, and the comments 
submitted by Noramco, Inc. For the foregoing reasons, the Acting Deputy 
Administrator has included this information in the record on which he 
relied in making a final determination on the rulemaking aspect of this 
case. The comments of Mallinckrodt and Roxane that were submitted to 
the Acting Deputy Administrator subsequent to December 10, 1997 were 
not included in the rulemaking record.

D. The Protective Order

    On December 1, 1995, the Administrative Law Judge issued a 
Protective Order which limited access to any information introduced in 
the hearing that was designated ``Confidential and Protected''. Both 
Mallinckrodt and Roxane filed Motions to Add to the Confidential and 
Protected Designations in this matter after the Administrative Law 
Judge certified and transmitted the record to the Acting Deputy 
Administrator. All parties to the proceeding were provided with copies 
of these motions and had ample time to make their objections known. 
However, no party has objected to Mallinckrodt's and Roxane's motions, 
and the subject matter of those items sought to be designated as 
Confidential and Protected is within the scope of original Protective 
Order issued February 5, 1996. Therefore, Mallinckrodt's and Roxane's 
filings, both dated December 29, 1997, are granted. However, as the 
parties were informed in the original Protective Order, this agency is 
bound by the provisions of the Freedom of Information Act, 5 U.S.C. 
552(b), and pursuant to the Protective Order, ``the DEA will afford the 
producing party sufficient advance notice prior to any such disclosure 
to allow that party to pursue appropriate remedies to preserve the 
information's protected status.''

[[Page 55893]]

    The Acting Deputy Administrator has carefully reviewed the entire 
record in this matter, as defined above, and here-by issues this final 
rule as prescribed by 21 CFR 1316.67, and final order as prescribed by 
Sec. 1301.46, based upon the following findings and conclusions. The 
Acting Deputy Administrator adopts the Findings of Fact, Conclusions of 
Law, and Recommended Ruling of the Administrative Law judge, with 
specifically noted exceptions, and his adoption is in no manner 
diminished by any recitation of facts, issues and conclusions herein, 
or of any failure to mention a matter of fact or law. Further, all 
exceptions to the Administrative Law Judge's decision have been 
considered by the Acting Deputy Administrator.

II. Rulemaking

A. Threshold Issues

    As stated above, Roxane cannot be registered as an importer of 
cocaine hydrochloride pursuant to 21 U.S.C. 958(a) and 823(a) and 21 
CFR 1301.34(b)-(f) unless the Acting Deputy Administrator finds that 
cocaine hydrochloride may be imported pursuant to 21 U.S.C. 
952(a)(2)(B). Because Roxane is the proponent of the issuance of such a 
rule, it must establish by a preponderance of the credible evidence 
that such a rule can be issued.
    Section 952(a) of the Controlled Substances Act prohibits the 
importation of cocaine hydrochloride into the United States, except in 
three narrow circumstances. Section 952(a)(2) allows for the 
importation of:

    [S]uch amount of any controlled substance in schedule I or II * 
* * that the Attorney General finds to be necessary to provide for 
the medical, scientific, or other legitimate needs of the United 
States-- (A) during an emergency in which domestic supplies of such 
substance or drug are found by the Attorney General to be 
inadequate, (B) In any case in which the Attorney General finds that 
competition among domestic manufacturers of the controlled substance 
is inadequate and will not be rendered adequate by the registration 
of additional manufacturers under section 823 of this title, or (C) 
in any case in which the Attorney General finds that such controlled 
substance is in limited quantities exclusively for scientific, 
analytical, or research uses.

    Roxane proposes that competition in the domestic cocaine 
hydrochloride manufacturing market is inadequate and therefore, the 
Acting Deputy Administrator should issue a rule allowing importation of 
cocaine hydrochloride pursuant to 21 U.S.C. 952(a)(2)(B).
    Mallinckrodt argues that the Acting Deputy Administrator cannot 
promulgate such a rule because importation of cocaine hydrochloride is 
not necessary, with the meaning of the statute, as Mallinckrodt is able 
to meet all the legitimate needs of the domestic market. Mallinckrodt 
also argues that Roxane has not carried its burden of establishing that 
there is inadequate competition in the domestic market or that the 
registration of additional manufacturers would not render competition 
adequate.
1. Relevance of Domestic Manufacturers Ability To Supply the Market
    Whether a finding that domestic manufacturers are unable to supply 
the legitimate market is a condition precedent to important pursuant 21 
U.S.C. 952(a)(2) is a threshold issue, as it is undisputed that 
Mallinckrodt is currently able to manufacture a sufficient amount of 
bulk cocaine hydrochloride to meet the legitimate needs of the United 
States.
    An extensive reading of the legislative history reveals that the 
protection of the American consumer was of primary importance to 
Congress, and such protection was its intent in drafting the inadequate 
competition exception to the general ban on importation of Schedule I 
and II controlled substances. The Acting Deputy Administrator finds 
that it would be inconsistent with Congress' intent to interpret the 
statue as Mallinckrodt suggests, as such an interpretation would 
prevent the agency from protecting the American consumer when a 
domestic manufacturer is able to meet the legitimate needs of the 
United States, even where an egregious state of inadequate competition 
results in a tremendous cost to the consumer.
    The Acting Deputy Administrator also agrees with the Administrative 
Law Judge that Mallinckrodt's interpretation of section 952(a)(2) would 
render the inadequate competition exception superfluous because a 
finding that domestic needs were not being met would constitute an 
emergency, in which case importation would be permitted pursuant to 21 
U.S.C. 952(a)(2)(A). The Acting Deputy Administrator also finds 
Mallinckrodt's reliance upon a Memorandum of Law issued by former 
Administrative Law Judge Francis L. Young to be misplaced. As 
Administrative Law Judge Bittner suggests, this Memorandum of Law was 
never incorporated into a final order, and therefore, is not precedent. 
Further, the Acting Deputy Administrator does not agree with 
Administrative Law Judge Young's analysis regarding the necessity of 
finding that domestic needs were not being met before importation could 
be permitted pursuant to 21 U.S.C. 952(a)(2)(B). Administrative Law 
Judge Young apparently believed that Congress did not intend the 
Controlled Substances Act to be a substitute for the antitrust laws. 
However, as previously stated, the legislative history as a whole 
indicates that it was the intent of Congress to combine the Attorney 
General's antitrust responsibilities with those designed to control the 
illicit drug market, for the protection of the consumer who has a 
therapeutic need for these substance.
2. Treaty Obligations
    Mallinckrodt also argues that as long as it is able to supply the 
domestic market, issuing a regulation which allows the importation of 
cocaine hydrochloride would be a violation of this country's 
obligations under the Multilateral Single Convention on Narcotic Drugs 
of 1961. However, the Acting Deputy Administrator finds that as long as 
the amounts imported and manufactured are controlled through the import 
permit procedures and the quota system to avoid an excess supply of 
cocaine hydrochloride that would require warehousing, this country's 
obligations under the treaty will be satisfied.
    For the foregoing reasons, the Acting Deputy Administrator agrees 
with the finding of the Administrative Law Judge that there is no 
requirement in the statute that the agency may not permit importation 
of cocaine hydrochloride because Mallinckrodt is able to supply the 
licit domestic market. Rather, if the Acting Deputy Administrator finds 
that importation is permitted pursuant to 21 U.S.C. 952(a)(2)(B), the 
specific amounts to be imported will be determined through the import 
permit procedures of 21 CFR 1312.11-.19.
3. Level of Production at Which To Analyze Competition
    Federal regulations specify the factors that must be considered 
when making the determination whether competition is inadequate within 
the meaning of the statute. See 21 CFR 1301.34(d), (e) and (f). 
However, before turning to those factors, it must be determined at 
which level of production competition is to be analyzed. Mallinckrodt 
asserts that any analysis of the degree of competition among domestic 
manufacturers of cocaine must include dosage form manufacturers, such 
as Roxane. Roxane, on the other hand, argues that competition must be 
reviewed only at the level of production at which it is alleged to be 
inadequate. In this case, it is alleged that competition is inadequate 
at the level of where bulk cocaine hydrochloride is manufactured.

[[Page 55894]]

    The Acting Deputy Administrator finds unpersuasive the testimony of 
Walter Vandaele, Ph.D., an economic expert, that competition should be 
analyzed at the level of dosage form manufacturers because it is at 
that level where cocaine competes with other products. Dosage form 
manufacturers do not manufacture cocaine; they purchase it in bulk from 
Mallinckrodt, package it in a variety of forms, and market it to the 
consumer. Dr. Vandaele offers no further explanation of this statement, 
and it seems disingenuous as the statute requires that competition 
among manufacturers, not between products, be analyzed. The Acting 
Deputy Administrator does find persuasive the testimony of another 
economic expert, Keith Leffler, Ph.D., that inadequate competition at 
the bulk cocaine stage of production affects all levels of production. 
At a minimum, it is clear that the pricing effects of inadequate 
competition at the bulk cocaine level will affect the minimum price 
that the dosage form manufacturers can charge for their cocaine 
products. As a result, no degree of competition among the dosage form 
manufacturers will protect the consumer from the pricing effects of 
inadequate competition among the bulk cocaine manufacturers. Therefore, 
the Acting Deputy Administrator finds that the appropriate level of 
production at which to measure the adequacy of competition is that 
level where bulk cocaine is manufactured.

B. Adequacy of Competition

1. Scope of Market in Which Competition To Be Analyzed
    In turning to the factors of 21 U.S.C. 1301.34 that are to be 
considered in analyzing competition, it seems most appropriate to begin 
with 21 U.S.C. 1304.34(e). This section provides that in determining 
the scope of the market in which the degree of competition is to be 
analyzed, the Acting Deputy Administrator must consider substitute 
products which are reasonably interchangeable with cocaine in terms of 
price, quality and use. There is a considerable amount of disagreement 
between the parties as to whether any such substitutes exist, and a 
significant amount of the evidence and testimony was directed toward 
this issue.
    It is undisputed in the record that no single drug produced by any 
manufacturer can duplicate the vasoconstrictive and anesthetic effects 
of cocaine. All parties agree that cocaine is pharmacologically unique.
    Nonetheless, Mallinckrodt asserts that there are four products 
which are substitutes for cocaine, within the meaning of 21 U.S.C. 
1304.34(e). These products, according to Mallinckrodt, are the 
following combinations of drugs: lidocaine-adrenaline-tetracaine; 
oxymetazoline-lidocaine; xylometazoline-lidocaine; and lidocaine-
phenylephrine. However, no pharmaceutical company or manufacturer of 
pharmaceutical drugs manufactures a combination of these drugs in a 
single product. Rather, it is up to the consumer to formulate a 
solution, using two or more of these drugs, to emulate the effects of 
cocaine. In fact, the record reveals that at one hospital, the pharmacy 
refuses to mix such formulas for different practitioners in the 
operating room because it is time-consuming and it increases the 
hospital's liability. For these reasons, the Acting Deputy 
Administrator finds that none of the combinations of drugs that have 
been promoted as substitutes for cocaine are ``products'' within the 
meaning of 21 U.S.C. 1304.34(e).
    However, assuming that these drug combination are products for 
purposes of the regulation, it is also clear from the record that 
Mallinckrodt's assertion that these combinations have the same effects 
as cocaine is only correct to a limited extent. The medical literature 
submitted by Mallinckrodt does support its assertion that the consumer 
is looking to replace cocaine. Nonetheless, this literature also 
demonstrates that although these alternatives may be replacing cocaine 
with respect to some procedures, the evidence does not support a 
finding that there are alternatives to cocaine when performing all 
procedures with a local anesthetic and vasoconstrictor. Most notably, 
there is no evidence that the medical profession views these 
alternatives to cocaine as viable options when performing procedures 
that cause deep periosteal pain or are relatively long in duration.
    In this regard, the Acting Deputy Administrator find particularly 
persuasive Mallinckrodt's exhibit that reports the results of an 
intensive program aimed at reducing the use of cocaine solution at the 
Medical Center Hospital of Vermont. See Mallinckrodt Exhibit 105. 
Mallinckrodt and its experts refer to the results of this effort often, 
asserting that the resulting sixty six percent reduction in the use of 
cocaine is strong evidence that a lidocaine-phenylephrine solution is a 
substitute for cocaine. However, the article detailing the results of 
this study reports that despite this intense effort to eliminate the 
use of cocaine, the otolaryngology department only used the lidocaine-
phenylephrine solutions for examinations, minor procedures and minor 
trauma, and reserved cocaine for major trauma and surgical procedures. 
Therefore, while this study indicates that some combinations of drugs 
that consumer have formulated have replaced cocaine in some 
applications, it also further supports the finding that the medical 
profession does not consider these combinations to be substitutes for 
cocaine in all procedures where the use of a topical anesthetic and 
vasoconstrictor is indicated.
    A significant amount of the evidence and argument also related to 
whether or not any of the drug combinations were economic substitutes 
for cocaine. The Administrative Law Judge found this issue particularly 
important, as she found that although there are alternatives to 
cocaine, these alternatives are not substitute products within the 
meaning of the statute because they are not economic substitutes for 
cocaine, and more importantly, because there is no quantitative 
evidence that these alternatives have impacted on the market for 
cocaine. Mallinckrodt contends that this finding of the Administrative 
Law Judge is erroneous, as it limits the term ``substitute'' in a way 
that is not supported by the plain language of the regulation or the 
relevant case law. Mallinckrodt argues that the most important factor 
in determining whether or not two products are substitutes for each 
other is whether the products are used interchangeably by the 
consumers.
    The Acting Deputy Administrator finds that language of 21 CFR 
Sec. 1304.34(e) is not so limiting as to require that products be 
economic substitutes that impact on the relevant market to be 
considered substitutes, but evidence of this nature is relevant. The 
statute clearly states that products are substitutes if they are 
reasonably interchangeable in terms of price, quality and use. If 
products are interchangeable in this manner, it logically follows that 
temporary fluctuations in the price, quality or availability of one 
product will temporarily impact on the market for the other product.
    However, the Acting Deputy Administrator finds that the 
combinations of various drugs that are being promoted as substitutes 
for cocaine are not being used interchangeably with cocaine by the 
consumer. The medical evidence in the record indicates that cocaine is 
being permanently replaced by certain combinations of drugs with 
respect to certain procedures. There is no shifting back and forth 
between products. Mallinckrodt's own medical experts

[[Page 55895]]

testified that there has been a ``conversion'' to these alternative 
drug combinations, and they could conceive of no reason why they would 
return to using cocaine.
    The word ``interchangeable'' is a term of art in the field of 
antitrust law. Where products are interchangeable, consumers shift back 
and forth between them based upon a variety of economic and quality 
based factors. The Acting Deputy Administrator agrees with Roxane that 
it is exactly this type of dynamic shifting between products that 
indicates that they are reasonably interchangeable. Furthermore, the 
case law that the parties rely on, as well as the Department of Justice 
and FTC Merger Guidelines (1992), contemplate this type of shifting of 
demand in response to changes in the competitiveness of any given 
product in the relevant market. The Acting Deputy Administrator finds 
that the record establishes that there is no such shifting of demand 
between cocaine and the drug combinations promoted as being substitutes 
for it.
    For the foregoing reasons, the Acting Deputy Administrator finds 
that none of the drug combinations offered as alternatives to cocaine 
are ``products'' within the meaning of 21 U.S.C. 1304.34(e). However, 
even if these drug combinations are ``products'' within the meaning of 
the regulation, they are not reasonably interchangeable with cocaine in 
terms of price, quality or use, and thus do not quality as 
``substitutes''. Having found that the relevant market for the purposes 
of 21 CFR 1304.34(e) is limited to cocaine, the Acting Deputy 
Administrator will confine has analysis of competition to the 
manufacturers of cocaine hydrochloride in bulk form.
2.21 CFR 1304.34(f)
    Having determined the parameters within which competition is to 
analyzed, it is now appropriate to turn to that analysis. At the 
outset, the Acting Deputy Administrator questions whether competition 
can ever be considered adequate under 21 U.S.C. 952(a)(2)(B) when less 
than two firms manufacture the product in question. The Acting Deputy 
Administrator acknowledges that 21 CFR 1304.34(f) directs that ``the 
fact that the number of existing manufacturers is small shall not 
demonstrate, in and of itself, that adequate competition among them 
does not exist''. It is also noted that with no discussion, the 
Administrative Law Judge found that this section clearly prohibited a 
finding that competition is inadequate based solely on the fact that 
there is only one domestic manufacturer or bulk cocaine hydrochloride. 
However, the Acting Deputy Administrator notes that 21 U.S.C. 
952(a)(2)(B) and 21 CFR 1304.34(f) clearly contemplate that there are 
at least two manufacturers of the controlled substance in question. 
Both provisions use plural language when referring to a relationship 
between manufacturers. Furthermore, the word ``competition'' is defined 
as being ``a struggle between rivals for the same trade at the same 
time''. Black's Law Dictionary 284 (Th ed. 1990). It is a ``contest 
between two rivals''. Id. (emphasis added).

3. The Factors of 21 CFR 1304.34(d)

    Nonetheless, proceeding on the assumption that competition can 
exist for the purposes of 21 U.S.C. 952(a)(2)(B) when there is only one 
manufacturer, the Acting Deputy Administrator will analyze the adequacy 
of competition in the relevant market by considering the five factors 
enumerated in 21 CFR 1304.34(d).
    a. 21 CFR 1304.34(d)(1): Price Rigidity. Title 21 of the CFR 
1304.34(d)(1), directs the Acting Deputy Administrator to consider the 
``extent of price rigidity in light of changes in (i) raw materials and 
other costs and (ii) conditions of supply and demand'' in determining 
the adequacy of competition. The only evidence in the record regarding 
Mallinckrodt's total actual costs are estimates prepared by Professor 
Leffler. Professor Leffler calculated ``upper bound'' and ``lower 
bound'' costs for Mallinckrodt. The ``lower bound'' costs were based 
upon Mallinckrodt's statement that the price it paid for crude cocaine 
was more than the price that Roxane's supplier (hereinafter Exporter) 
had committee to selling bulk cocaine hydrochloride to Roxane for 
importation. The ``upper bound'' costs were based upon the assumption 
that Mallinckrodt's crude cocaine costs equaled approximately eighty 
percent of its price. Professor Leffler based this assumption on his 
knowledge of profits in the pharmaceutical industry and that Roxane's 
profit as a percentage of total sales equaled approximately twenty 
percent. The remaining twenty percent represents Mallinckrodt's other 
costs, and its profit.
    Using this methodology, Professor Leffler obtained an ``upper 
bound'' and ``lower bound'' estimate for the price Mallinckrodt paid 
for crude cocaine in 1983. Then, using Mallinckrodt's index of its cost 
for crude cocaine between 1983 and 1995, Professor Leffler obtained an 
estimate for the price Mallinckrodt paid for crude cocaine in 
subsequent years, ending in 1995. Professor Leffler than analyzed the 
available data to obtain estimates for all other costs Mallinckrodt 
would incur in its production and sale of bulk cocaine. In making this 
analysis, Professor Leffler assumed that in 1983, Mallinckrodt earned a 
ten percent profit rate on sales, a conservative figure that he arrived 
at based upon his knowledge of the generic drug business. He then 
inflated the estimates of these other costs over the subsequent years 
by using a price index for medical and botanical chemicals.
    Professor Leffler's ``upper bound'' estimates reveal that between 
1983 and 1995, the total costs incurred by Mallinckrodt in 
manufacturing crude cocaine rose 643 percent. Over the same period, 
Mallinckrodt's prices rose 2355 percent, resulting in a 30,796 percent 
increase in profit.
    Professor Leffler's ``lower bound'' estimates demonstrate that 
between 1983 and 1995, the total cost incurred by Mallinckrodt in 
manufacturing crude cocaine rose at a rate of 359 percent. Over this 
same period, Mallinckrodt's prices rose 2355 percent, resulting in a 
35,216 percent increase in profit.
    The estimated costs and profits of Mallinckrodt, testified to by 
Professor Leffler, were not rebutted by Mallinckrodt. Mallinckrodt 
offered no cost or profit evidence into the record, other than the 
index of its cost for crude cocaine that Professor Leffler used in 
making his calculations. Upon motion of Roxane, the Administrative Law 
Judge drew and adverse inference that Mallinckrodt's costs and profits 
were at the midpoint of the range calculated by Professor Leffler in 
his ``lower bound'' and ``upper bound'' cost estimates, because 
Mallinckrodt refused to provide information regarding its costs and 
profits. The Acting Deputy Administrator has reviewed all arguments of 
the parties regarding the drawing of these adverse inferences and 
agrees with the findings of the Administrative Law Judge with respect 
to this issue. However, even if the drawing of these adverse inferences 
were improper, the Acting Deputy Administrator finds that Mallinckrodt 
has offered no credible evidence to rebut this testimony of Professor 
Leffler. Therefore, even without the adverse inferences, the Acting 
Deputy Administrator finds that the record establishes that between the 
years 1983 and 1995, Mallinckrodt's costs increased no more than 643 
percent. During this same period, Mallinckrodt's prices increased 2,355 
percent, resulting in a profit increase of no less than 30,796 percent.

[[Page 55896]]

    Based upon this evidence, the Acting Deputy Administrator finds 
that Mallinckrodt's prices are rigid in light of changes in its costs.
    Section 1304.34(d)(1) requires that prices be analyzed not only in 
light of changes in costs, but also in light of changes in supply and 
demand. The evidence in the record clearly supports a finding that 
there was a period in the late of 1980's when the demand for licit 
cocaine exceeded the supply. However, there is no evidence that this 
shortage continued after 1990. Rather, the evidence suggests, and 
Mallinckrodt has repeatedly argued, that the legitimate demand for 
cocaine has steadily declined. The United Nations International 
Narcotics Control Board's (UN) statistics reveal that legitimate 
consumption of cocaine in the United States declined approximately 36 
percent from 1988 to 1995, and 13.5 percent between 1990 and 1995. 
Mallinckrodt's own witness testified that the United States' licit 
cocaine consumption declined from 500 kilograms to 300 kilograms 
between 1988 and 1995. In the face of this significant decline in 
legitimate demand for cocaine, Mallinckrodt's continued to increase its 
prices despite the end of the cocaine supply shortage of the late 
1980's.
    After the hearing before the Administrative Law Judge concluded on 
March 7, 1996, Mallinckrodt sought to introduce additional evidence 
regarding its sales and pricing of cocaine for fiscal year 1996 and 
1997. The Administrative Law Judge declined to reopen the record to 
admit this evidence. However, as explained above, the Acting Deputy 
Administrator has decided that this information would be included in 
the rulemaking record.
    Mallinckrodt's additional evidence demonstrates that in fiscal year 
1996, its total sales of bulk cocaine declined 29% from 1995, resulting 
in a price decrease 12.9%. For fiscal year 1997, Mallinckrodt states 
that its total sales of bulk cocaine declined 36% from 1996, resulting 
in a price decrease of 16%. Mallinckrodt argues that it decreased its 
prices in 1996 and 1997 because of a decline in the legitimate demand 
for cocaine. The Acting Deputy Administrator finds this argument 
unpersuasive. As previously noted, the evidence received during the 
hearing revealed that the legitimate demand for cocaine has declined 
steadily since at least 1986. In the face of this decade-long decline 
in demand, Mallinckrodt took no action to reduce it prices. To the 
contrary, it drastically increased its prices, resulting in an 
extraordinary increase in profits. As decreasing demand did not impact 
on Mallinckrodt's pricing for the five years prior to the hearing on 
Roxane's application to be registered as an importer of cocaine, the 
Acting Deputy Administrator finds it more likely that Roxane's 
application, not the continued decline in the legitimate demand for 
cocaine, was the major impetus behind Mallinckrodt's decision to 
decrease its prices in 1996 and 1997.
    Furthermore, Mallinckrodt would not sell cocaine at a loss. 
Therefore, the Acting Deputy Administrator also finds that the fact 
that Mallinckrodt is able to reduce its price for cocaine 27%, when 
there is no indication of decling costs, is further evidence that the 
overwhelming percentage of Mallinckrodt's price is profit.
    Based upon the foregoing, the Acting Deputy Administrator finds 
that the evidence, when analyzed within the context of 21 CFR 
1304.34(d)(1), heavily favors a finding that there is inadequate 
competition among the domestic manufacturers of bulk cocaine.
    b.21 CFR 1304.34(d)(2): Shifting Market Share. Section 
1304.34(d)(2) requires that the Acting Deputy Administrator consider 
``[t]he extent of service and quality competition among the domestic 
manufacturers for share of the domestic market including (i) shifts in 
market shares and (ii) shifts in individual customers among domestic 
manufacturers.'' It is undisputed in the record that Mallinckrodt is 
the only domestic manufacturer of bulk cocaine. Hence, its share of the 
market has been one hundred percent since it entered the bulk cocaine 
market in 1983, and there has been no shifting of market share of 
individual customers.
    Based upon the foregoing, the Acting Deputy Administrator finds 
that the evidence, when analyzed within the context of 21 CFR 
1304.34(d)(2), favors a finding that there is inadequate competition 
among the domestic manufacturers of bulk cocaine.
    c.21 CFR 1304.34(d)(3): Price Differentials: Section 1304.34(d)(3) 
requires that the Acting Deputy Administrator consider:

    The existence of substantial differentials between (i) domestic 
prices and (ii) the higher of prices generally prevailing in foreign 
markets or the prices at which the applicant for registration to 
import is committed to undertake to provide such products in the 
demos tic market in conformity with the Act. In determining the 
existence of substantial differentials hereunder, appropriate 
consideration should be given to any additional costs imposed on 
domestic manufacturers by the requirements of the Act and such other 
cost-related and other factors as the Administrator may deem 
relevant. In no event shall an importer's offering prices in the 
United States be considered if they are lower than those prevailing 
the foreign market or markets from which the importer is obtaining 
his supply.

    The parties disagree as to whether Roxane could establish the 
``prevailing prices'' in foreign markets without offering evidence of 
prices charged by more than one manufacturer of bulk cocaine in these 
markets. Mallinckrodt argues that because Roxane only provided evidence 
of the prices that Exporter charged in foreign markets, it failed to 
establish ``prevailing prices''. Roaxane argues that Exporter has 
competition from other manufacturers in the foreign markets and 
therefore, as testified to by its witness, its pricing must be 
comparable to that of the other manufacturers.
    The record establishes that there is competition among 
manufacturers of bulk cocaine in these foreign markets. Roxane's 
witness, an officer of Exporter, testified that because of this 
competition, the price charged by Exporter for bulk cocaine in the 
relevant foreign markets is comparable to the price charged by other 
manufacturers of bulk cocaine. This is logical, and no evidence was 
submitted to rebut this statement. Therefore, after careful review of 
both arguments, the Acting Deputy Administrator agrees with the 
conclusion of the Administrative Law Judge and finds that the prices 
charged by Exporter in other countries are those generally prevailing 
in the countries in which it markets bulk cocaine.
    Having determined that Roxane can establish prevailing prices by 
presenting evidence regarding one manufacturer's prices, it must now be 
determined if those prices, or the price at which Exporter has offered 
to sell Roxane bulk cocaine, is the appropriate one to compare with the 
domestic price of $31,000/kilogram of bulk cocaine. Roxane argues that 
it does not intend to ``offer'' bulk cocaine in the domestic market and 
therefore, the only comparison possible under 21 U.S.C. 1304.34(d)(3) 
is between the domestic price and the prices generally prevailing in 
the foreign market. The Acting Deputy Administrator finds Roxane's 
argument to have merit, and will compare domestic prices with those 
prices generally prevailing in foreign markets.
    Two witnesses employed by Exporter testified to its prices for bulk 
cocaine in several countries. However, the prices testified to by one 
witness are higher than the prices testified to by the other witness. 
The difference is attributed to the fact that the first witness' 
figures were calculated using the sales of smaller size packages of 
cocaine, i.e.,

[[Page 55897]]

one, five and twenty-five grams, which are offered for sale at a higher 
price per kilogram than the larger packages. The second witness 
testified that his figure represented the average price per kilogram 
for cocaine sold in packages of one hundred grams or greater. No 
evidence was presented to rebut either the price testimony of these 
witnesses, or their testimony explaining the differences in those 
prices. As Roxane seeks to import bulk cocaine in one kilogram 
quantities, the Acting Deputy Administrator finds that it is most 
appropriate to use the schedule of prices for a kilogram of cocaine 
that was prepared using only the sales of cocaine in packages of one 
hundred grams or greater.
    Using that schedule, the record establishes that the prevailing 
prices in foreign markets are between thirteen and twenty two percent 
of the domestic price for a kilogram of cocaine. Based upon these 
figures, the Acting Deputy Administrator finds that there is a 
substantial differential between the prices generally prevailing in the 
foreign markets and the domestic price. Alternatively, even if the 
Acting Deputy Administrator compared the price at which Exporter was 
committed to providing Roxane with bulk cocaine with domestic prices, 
he would still find a substantial differential existed between the two 
prices.
    The significance of this substantial differential must be viewed in 
light of any additional costs imposed upon domestic manufacturers by 
the requirements of the Controlled Substances Act. Mallinckrodt, the 
only domestic manufacturer of bulk cocaine, had ample opportunity to 
provide evidence regarding costs which would mitigate the substantial 
differential between its prices and those generally prevailing in 
foreign markets, but no such evidence was submitted. Therefore, the 
Acting Deputy Administrator finds that based upon the record, the 
domestic manufacturer of cocaine does not incur any costs in complying 
with the Controlled Substances Act that would explain the extraordinary 
differential between its prices and those prevailing in foreign 
markets.
    Mallinckrodt argues that it should not be penalized for refusing to 
disclose its confidential cost data, particularly when Exporter was not 
compelled to produce such information. However, the regulation 
specifically states that the domestic manufacturers' prices should be 
credited with regulatory or other costs when determining the 
significance of a substantial price differential. The costs of the 
foreign manufacturer would only be relevant to this analysis if the 
domestic manufacturers offered evidence of such costs. It would then be 
incumbent upon the foreign manufacturer to provide such cost data if it 
wanted to rebut this evidence, or mitigate its significance, by showing 
that it incurred similar costs.
    Therefore, based upon the foregoing, the Acting Deputy 
Administrator finds that the evidence, when analyzed within the context 
of 21 CFR 1304.34(d)(3), favors a finding that there is inadequate 
competition among the domestic manufacturers of bulk cocaine.
    d. 21 CFR 1304.34(d)(4): Competitive Restraints. Section 
1304.34(d)(4) requires that the Acting Deputy Administrator consider 
``[t]he existence of competitive restraints imposed upon domestic 
manufacturers by governmental regulations'' when analyzing the state of 
competition in the domestic market. The only such competitive restraint 
on domestic manufacturers of bulk cocaine is the general prohibition 
against importing coca paste contained in 21 U.S.C. 952(a). 
Mallinckrodt argues that this prohibition requires it to obtain its raw 
materials from Stepan, whose price for coca paste is greater than the 
price that Exporter has committed itself to providing Roxane with bulk 
cocaine. However, there is nothing in the record to suggest that 
Mallinckrodt could not file an application for registration to import 
coca paste pursuant to 21 U.S.C. 952(a)(2)(B).
    Based upon the foregoing, the Acting Deputy Administrator finds 
that the evidence, when analyzed within the context of 21 CFR 
1304.34(d)(4), favors a finding that there is inadequate competition 
among the domestic manufacturers of bulk cocaine.
    e. 21 CFR 1304.34(d)(5): Other Relevant Factors. Finally, 21 CFR 
1304.34(d)(5) provides that the Acting Deputy Administrator shall 
consider ``[s]uch other factors may be relevant to the determinations 
under this paragraph''. A review of the record reveals that there are 
several additional issues that need to be addressed.
    First, Mallinckrodt has strenuously argued that the determination 
as to whether competition is adequate requires a balancing between the 
risks of diversion and the benefits of competition. In support of this 
argument, Mallinckrodt's economic expert testified that ``the adequate 
level of competition must represent an optimal balancing between the 
price reduction benefits of competition to patients and the diversion 
cost of competition to society, such that the public interest is 
maximized.''
    It is reasonable to infer from an extensive review of the 
legislative history that Congress has already factored the risk of 
diversion into the statute by prohibiting the importation of certain 
controlled substances, except in very narrowly defined circumstances. 
One of the exceptions, of course, is where competition is inadequate 
among the domestic manufacturers of a particular controlled substance. 
Furthermore, where the risk of diversion is a relevant factor, it is 
specifically mentioned in the Controlled Substances Act and the 
regulations promulgating it. For example, 21 U.S.C. 823(a), and 21 CFR 
1304.34(b)(1) and (5)(c) clearly mandate that the risk of diversion be 
considered in determining the ``public interest''. For these reasons, 
the Acting Deputy Administrator finds that Congress did not intend for 
the risk of diversion to be a factor in determining the adequacy of 
competition for purposes of 21 U.S.C. 952(a)(2)(B).
    It has also been argued that allowing importation in this case 
would frustrate longstanding U.S. policy against the importation of 
finished controlled substances. In furthering this argument, the 
following passage from a Department of State monograph by Donald E. 
Miller, entitled ``Licit Narcotics Production and Its Ramifications for 
Foreign Policy'', dated August 1, 1980 was cited:

    The U.S. has been a traditional ``manufacturing'' country for 
about 75 years, whereby finished narcotics are manufactured by U.S. 
companies from imported raw materials. Economic and industrial 
patterns have developed in accordance with that practice, 
substantial funds, equipment and personnel have been committed by 
U.S. companies, and there is no good reason why the U.S. should 
jeopardize its industrial capability and financial interests.

Id. at 56.
    Testimony of this nature by former and present employees of this 
agency was also offered to evidence this policy against the importation 
of finished narcotics.
    At the outset, the Acting Deputy Administrator finds the reliance 
upon Mr. Miller's monograph as evidence of this policy to be misplaced. 
Mr. Miller was presenting an argument against amending 21 U.S.C. 952(a) 
to allow the importation of finished narcotics without having to make a 
showing that there is either an emergency situation or that competition 
among domestic manufacturers is inadequate.
    Nonetheless, it is clear that Congress intended there to be a 
preference for the domestic manufacture of Schedule II controlled 
substances. This preference is embodied in the prohibition against

[[Page 55898]]

the importation of these substances contained in 21 U.S.C. 952(a)(1). 
It is equally clear, however, that Congress did not want to completely 
preclude the importation of these substances. Rather, it provided in 21 
U.S.C. 952(a)(2) that under certain conditions, importation would be 
allowed. To argue that a policy against the importation of finished 
narcotics should take precedence over the statute is a request that 
this agency ignore the law. For this reason, the Acting Deputy 
Administrator finds that the preference for the domestic manufacture of 
Schedule II controlled substances is overcome if importation is 
warranted under 21 U.S.C. 952(a)(2).
    It was also argued that allowing Roxane to import bulk cocaine 
would cause Mallinckrodt to exit the market, which would thwart this 
preference for the domestic manufacture of controlled substances. The 
Acting Deputy Administrator finds this argument unpersuasive. As 
already discussed, the Acting Deputy Administrator believes that this 
preference must give way when the conditions of 21 U.S.C. 952(a)(2)(B) 
are satisfied. Further, the evidence suggests that there is a 
significant amount of room for Mallinckrodt to reduce its prices and 
still make a profit. Finally, as mentioned earlier in this decision, 
there is nothing preventing Mallinckrodt from applying to be registered 
to import coca paste pursuant to 21 U.S.C. 952(a)(2)(B).
    Based upon the foregoing, the Acting Deputy Administrator finds 
that none of these additional issues, considered pursuant to 21 CFR 
1304.34(d)(5), warrant precluding the importation of bulk cocaine 
pursuant to 21 U.S.C. 952(a)(2)(B) if competition is deemed to be 
inadequate.

C. Decision Regarding the Adequacy of Competition Among the Domestic 
Manufacturers of Bulk Cocaine

    The Acting Deputy Administrator has reviewed the entire record 
within the context of 21 CFR 1304 (d), (e) and (f), and has made the 
findings discussed above. As a result of these findings, the Acting 
Deputy Administrator concludes that competition among the domestic 
manufacturers of cocaine is inadequate.

D. Can Competition Be Rendered Adequate by Registering Additional 
Domestic Manufacturers of Bulk Cocaine

    Mallinckrodt has argued that even if competition is found to be 
inadequate, it could be rendered adequate by the registration of 
additional domestic manufacturers because the process, equipment and 
raw materials are readily available, there are no regulatory barriers 
to entry, and there are numerous possible entrants.
    Roxane argued that competition cannot be rendered adequate by the 
registration of additional domestic manufacturers because there are not 
current manufacturers of bulk cocaine other than Mallinckrodt, no other 
companies have ``formally'' applied for registration as manufacturers 
of bulk cocaine, and other producers of bulk narcotics have expressed 
no interest in becoming registered. Roxane further argues that DEA's 
prior interpretation of 21 U.S.C. 952(a)(2)(B) is that ``an importer 
need only address a current manufacturer's competition and that of any 
applicants to manufacture which have formally applied for 
registration''.
    At the outset, the Acting Deputy Administrator believes that he is 
not only bound by the prior interpretation of this section by this 
agency, but that it is also the most reasonable interpretation. Besides 
Mallinckrodt, there is only one additional manufacturer registered to 
manufacture cocaine. However, the record indicates that this 
manufacturer is bankrupt and is not likely to manufacture cocaine in 
competition with Mallinckrodt.
    Even if the Acting Deputy Administrator were to consider potential 
applicants as candidates for the manufacturing of bulk cocaine, the 
barriers to entry would preclude them from actually competing with 
Mallinckrodt. The Acting Deputy Administrator finds persuasive 
Professor Leffler's testimony that the necessary investment of several 
million dollars in manufacturing equipment and storage facilities would 
be a sufficient barrier in and of itself to the entry of a rational 
manufacturer into what Mallinckrodt has described as being a ``flat to 
declining market''. Furthermore, the evidence in the record clearly 
establishes that the manufacture and sale of bulk cocaine has been 
extremely profitable for Mallinckrodt. Despite the prospect of these 
tremendous profits, no other manufacturer has entered the market. This 
is further evidence that substantial barriers to their entry exist.
    For the foregoing reasons, the Acting Deputy Administrator finds 
that the registration of additional manufacturers will not render 
competition in the domestic manufacturing market for bulk cocaine 
adequate.

III. The Adjudication

A. Introduction

    Having determined that market conditions warrant the importation of 
cocaine hydrochloride pursuant to 21 U.S.C. 952(a)(2)(B), the remaining 
issue is whether Roxane's application for registration as an importer 
of cocaine hydrochloride should be granted. The Controlled Substances 
Act provides that the Acting Deputy Administrator shall register an 
applicant to import a schedule II substance if it is determined that 
such registration is in the public interest. 21 U.S.C. 958(a); 21 CFR 
1304.34(b). In determining the public interest, the Acting Deputy 
Administrator must consider the factors listed in 21 U.S.C. 823(a)(1)-
(6) and 21 CFR 1304.34(b)(1)-(5).

B. Public Interest Determination

1. Risk of Diversion v. Benefits of Competition
    Pursuant to 21 U.S.C. 823(a)(1) and 21 CFR 1304.34(b)(1), the 
Acting Deputy Administrator is required to consider:

    (M)aintenance of effective controls against diversion of 
particular controlled substances * * *, by limiting the importation 
and bulk manufacture of such controlled substances to a number of 
establishments which can produce an adequate and uninterrupted 
supply of these substances under adequately competitive conditions 
for legitimate medical, scientific, research, and industrial 
purposes.

    a. Adequacy of Competition. Consistent with his conclusion in the 
rulemaking aspect of this case, the Acting Deputy Administrator finds 
that the number of domestic manufacturers of bulk cocaine is 
insufficient to produce bulk cocaine under adequately competitive 
conditions, and cannot be rendered adequate by the registration of 
additional manufacturers. Therefore, the registration of an importer of 
cocaine is warranted under 21 U.S.C. 823(a)(1) and 21 CFR 
1304.34(b)(1), if it is found that the applicant for registration will 
maintain effective controls against diversion.
    b. Maintenance of Effective Controls Against Diversion. In making 
this determination, the Acting Deputy Administrator must consider 
whether the applicant complies with ``security requirements of 21 CFR 
1301.71-1301.76''. and employs ``security procedures to guard against 
in-transit losses within and without the jurisdiction of the United 
States''. 21 CFR 1304.34(c).
    The Government and Roxane both presented evidence that Roxane 
complies with the security requirements of 21 CFR 1301.71-1391,76. This 
evidence is credible and was unrebutted in the hearing. Therefore, the 
Acting Deputy Administrator finds that Roxane is in compliance with 
these security requirements. The Acting Deputy

[[Page 55899]]

Administrators agrees with the finding of the Administrative Law Judge 
that the current system of importing coca leaves for processing into 
cocaine in the United States is less susceptible to diversion that the 
importation of cocaine. However, the record establishes that Roxane and 
Exporter intend to employ security procedures sufficient to guard 
against in-transit losses.
    Roxane and Exporter presented evidence of two plans that developed 
for transporting cocaine hydrochloride from Exporter's country to the 
United Stats. One method would utilize an established international 
delivery service, which would transport the cocaine from an airport in 
Exporter's country to an airport in the United States. Once in the 
United States, the cocaine would be transported by air to the airport 
closest to Roxane's facilities. The delivery service would then 
transport the cocaine by truck to Roxane's facilities. Utilizing this 
method, it would take approximately three days to transport the cocaine 
from Exporter to Roxane, including time for the package to clear U.S. 
Customs and possibly be subjected to inspection by the Food and Drug 
Administration.
    In the second plan, Exporter will transport the cocaine from its 
facilities to the nearest international airport, under armed guard. 
Exporter's personnel will remain with the cocaine to witness its 
loading onto the aircraft and the taxiing of the aircraft away from the 
terminal. The aircraft will fly directly to one of three airports 
within driving distance of Roxane's facilities. The cocaine will be met 
by Roxane's personnel and be accompanied by them to U.S. Customs. This 
personnel will then witness the loading of the cocaine onto a truck, 
for nonstop transportation to Roxane's facilities. Utilizing this 
method, it would take approximately eighteen hours to transport the 
cocaine from Exporter to Roxane. This is Roxane and Exporter's 
preferred method of transportation.
    In addition to the transportation plans, Roxane presented 
unrebutted evidence that there will be only one shipment a year, and 
this shipment will be scheduled to avoid having the cocaine in transit 
over a weekend or holiday. Further, packaging of the cocaine will be 
done in compliance with the agency's requirements.
    Finally, both Roxane and Exporter have a vast amount of experience 
in dealing with controlled substances and preventing their diversion, 
and have excellent records of performance in this regard. Also, they 
are committed to working with this agency in implementing a plan which 
will minimize the risk of diversion while the cocaine is transit. For 
these reasons, the Acting Deputy Administrator finds that although no 
final plan has been settled upon for transporting the cocaine from 
Exporter to Roxane, Roxane and Exporter are committed to employing 
security procedures to guard against diversion of the cocaine shipments 
within and without of the jurisdiction of the United States.
2. Compliance With Applicable State and Local Law
    Pursuant to 21 U.S.C. 823(a)(2) and 21 CFR 1304.34(b)(2), the 
Acting Deputy Administrator must consider whether the applicant for 
registration as an importer is in ``[c]ompliance with applicable State 
and local law'' in determining if granting the application will be in 
the public interest. Roxane officials testified that it is in 
compliance with all applicable laws, and no evidence was presented to 
rebut this testimony. Therefore, the Acting Deputy Administrator finds 
that Roxane has carried its burden with respect to this factor.
3. Promotion of Technical Advances
    The Acting Deputy Administrator is required to consider the 
applicant's ``promotion of technical advances in the art of 
manufacturing these substances and the development of new substances'' 
in determining the public interest, pursuant to 21 U.S.C. 823(a)(3) and 
21 CFR 1304.34(a)(3). Roxane put on uncontested evidence that it was 
the first manufacturer to market cocaine in a premixed topical 
solution. Prior to this, cocaine was marketed in flake and powder form, 
and the consumers were required to formulate their own solutions. 
Roxane's introduction of cocaine in premixed topical solutions provided 
the consumer with a more consistent quality in the product, and lowered 
the amount of waste and risk of diversion. For this reason, the Acting 
Deputy Administrator finds that Roxane has also carried its burden with 
respect to this factor.
4. Prior Conviction Record of Applicant
    In determining the public interest, the Acting Deputy Administrator 
is required to consider the prior conviction record of the applicant 
for registration ``under Federal and State laws relating to the 
manufacture, distribution, or dispensing of such substances''. It is 
undisputed in the record that Roxane has no such convictions, and 
therefore, the Acting Deputy Administrator finds that Roxane has 
carried its burden with respect to this factor.
5. Past Experience in the Manufacture of Controlled Substances and 
Controls Against Diversion
    The record indicates that Roxane has been in the business of 
manufacturing controlled substances for years, and has an exceptional 
record for maintaining effective controls against the diversion of 
these substances, above and beyond what is required by law. Roxane's 
record in this regard is sufficient to find that it has met its burden 
with respect to this factor, despite Mallinckrodt's argument that 
Roxane has no experience in handling the international shipment of bulk 
cocaine.
6. Other Factors Relevant to Public Health and Safety
    The only remaining issue in the determination as to whether 
granting Roxane's application to be registered as an importer of 
cocaine would be in the public interest is whether Exporter will be 
manufacturing the cocaine it will sell to Roxane from seized materials. 
This agency has a policy against the introduction of seized materials 
into the licit narcotics market, and the issue is one which must be 
given serious consideration.
    A report from the United Nations stated that coca paste imported to 
Exporter's country from Peru in 1992 and 1993 was manufactured from 
seized materials. In the hearing, Mallinckrodt argued that this report 
illustrates that there is a serious risk that Roxane will be importing 
cocaine manufactured from seized materials. Therefore, granting 
Roxane's application to be registered as an importer of cocaine would 
be contrary to the public interest and violate long-standing policy 
against the use of seized materials for licit consumption.
    In response, Roxane offered a letter that Exporter obtained from 
its supplier of coca paste regarding this issue. In this letter, 
Exporter's supplier certifies that it will provide Exporter with coca 
paste manufactured from coca leaves that are legally cultivated. 
However, the Acting Deputy Administrator agrees with the Administrative 
Law Judge that this letter is not sufficient to establish that all 
crude cocaine supplied to Exporter will be manufactured from legally 
cultivated materials.
    Nonetheless, there is evidence in the record that a comprehensive 
forensic analysis can determine if cocaine is lawfully manufactured. 
Mallinckrodt argues that even if Roxane can determine if a certain 
shipment of cocaine is illicit, it cannot identify unknown impurities 
and eliminate them. However, as the Administrative

[[Page 55900]]

Law Judge suggests, this agency will require Roxane to certify that the 
cocaine it seeks to import is licit as a part of the import permit 
process. Therefore, the Acting Deputy Administrator finds that since 
chemical analysis can differentiate between licit and illicit cocaine, 
this agency will be able to prevent the introduction of cocaine 
manufactured from illicit materials into the licit domestic market for 
cocaine.
    For the above-stated reasons, The Acting Deputy Administrator finds 
that granting Roxane's application to be registered as an importer of 
cocaine will not violate this agency's policy against the use of seized 
materials to satisfy the legitimate market for narcotics in this 
country.
7. Conclusion
    Based upon the foregoing, the Acting Deputy Administrator finds 
that it is in the public interest, as defined by 21 U.S.C. 823 (a)(1)-
(6) and 21 CFR 1304.34(b)(1)-(5), to grant Roxane's application to be 
registered as an importer of cocaine hydrochloride.

IV. Conclusion

    As stated above, the Acting Deputy Administrator has determined 
that competition among the domestic manufacturers of bulk cocaine 
hydrochloride is inadequate, and will not be rendered adequate by 
registering additional domestic manufacturers under 21 U.S.C. 823. 
Therefore, the importation of cocaine hydrochloride, a Schedule II 
controlled substance, is hereby permitted, in amounts to be determined 
through the import permit procedures of 21 CFR part 1312.
    Furthermore, the Acting Deputy Administrator has determined that 
Roxane's application to be registered as an importer of cocaine 
hydrochloride is in the public interest. As a result, the application 
is hereby granted. This decision is effective November 18, 1998.

    Dated: October 6, 1998.
Donnie R. Marshall,
Acting Deputy Administrator.
[FR Doc. 98-27890 Filed 10-16-98; 8:45 am]
BILLING CODE 4410-09-M