[Federal Register Volume 68, Number 28 (Tuesday, February 11, 2003)]
[Notices]
[Pages 6947-6952]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-3299]


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DEPARTMENT OF JUSTICE

Drug Enforcement Administration


Penick Corporation, Inc., Grant Registration to Import Schedule 
II Substances

I. Background

    On April 11, 2000, Penick Corporation, Inc. (Penick) applied to the 
Drug Enforcement Administration (DEA) for registration under 21 U.S.C. 
Sec.  958(i) as an importer of coca leaves, raw opium, poppy straw, and 
poppy straw concentrate (narcotic raw materials or NRMs), all Schedule 
II controlled substances. On the same day, Penick also applied with DEA 
for registration as a manufacturer of a number of Schedule II 
controlled substances, including oxycodone, hydrcodone, morphine, 
hydromorphone and codeine. Pursuant to 21 CFR 1301.34(a), Mallinckrodt, 
Inc. (Mallinckrodt), and Normaco of Delaware, Inc. (Normaco), requested 
a hearing on Penick's application for registration as an importer of 
raw opium and concentrate of poppy straw (CPS). A hearing was held in 
Arlington, Virginia, on July 9 through 13 and August 13 through 15, 
2001, with Penick, Noramco, Mallinckrodt and the Government 
participating and represented by counsel. All parties called witnesses 
to testify and introduced documentary evidence. After the hearing, all 
parties filed proposed findings of fact, conclusions of law, and 
argument. Penick, Moramco, and Mallinckrodt filed reply briefs.

[[Page 6948]]

    On May 29, 2002, the Administrative Law Judge (ALJ) filed her 
Opinion and Recommended Ruling, Findings of Fact, Conclusions of Law 
and Decision of the Administrative Law Judge. The ALJ recommended that 
Penick's Application be granted. Mallinckrodt and Noramco filed 
exceptions to the ALJ's recommended decision. Penick filed a response 
to the exceptions filed by Mallinckrodt and Noramco. After considering 
all of the evidence and post hearing submissions, the Deputy 
Administrator adopts the Filings of Fact, Conclusions of Law, and 
Decision of the Administrative Law Judge in their entirety. They are 
incorporated into this final order as through they were set forth at 
length herein. The adoption of the ALJ's opinion 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.

II. Preliminary Matters

A. Regulatory Context

    Because Penick is applying for both a renewal of its registration 
and permission to import, this proceeding is a combined adjudication 
and rulemaking. The rulemaking determines whether Penick may lawfully 
import into the United States the Schedule II controlled substances raw 
opium and CPS pursuant to 21 U.S.C. Sec.  952(a). Penick has the burden 
of proof, and must establish by a preponderance of the evidence that 
such a rule can be issued. In order to do this, Penick must show by a 
preponderance of the evidence that the raw opium and CPS that it 
intends to import are ``necessary'' to provide for medical, scientific 
or other legitimate purposes.
    The adjudication determines whether DEA should grant Penick's 
application for registration as an importer of the Schedule II 
controlled substances raw opium and CPS. In accordance with the DEA 
Statement of Policy and Interpretation on Registration of Importers, 40 
FR 43,745 (1975), the Deputy Administrator will not grant Penick's 
application unless Penick establishes that the requirements of 21 
U.S.C. Sec.  958(a) and Sec.  823(a) and 21 CFR 301.34(b)(1)-(7) are 
met to show that Penick's registration to import is in the public 
interest. DEA has the discretion to determine the weight assigned to 
each of the factors that must be considered to determine whether 
Penick's registration to import will granted. MD Pharmaceutical, Inc. 
v. DEA, No. 95-1267, 1996 U.S. App. LEXIS 1229 (D.C. Cir. 1996) 
(unpublished opinion.)

B. The Right to a Hearing

    On December 19, 2000, Penick filed various motions requesting inter 
alia, that the objections to their registration be struck and that 
their application be summarily granted. As the basis for Penick's 
Motions, Penick asserted that because Organichem, Mallinckrodt, and 
Normaco are not bulk manufactures of the substances that Penick seeks 
to import, none of them had standing to object, comment upon, or 
request a hearing on Penick's application. Penick further asserted that 
none of the objecting manufactures had prudential standing to comment, 
object or request a hearing.
    After a thorough review of the relevant parts of the Controlled 
Substances Act (CSA), the implementing regulations and the CSAS's 
legislative history, the ALJ found that the objecting manufacturers had 
standing to challenger DEA's action if it granted Penick's application. 
The ALJ also found that the CSA and its regulation do not expressly 
grant a right to hearing to importers of NRMs upon the application of 
another manufacture to import the same substance. She concluded, 
however, that DEA has the discretionary authority to afford that 
hearing right and that it has done so in other proceedings as well as 
the instant matter. On that basis, the ALJ denied the motion to strike. 
With respect to Penick's motion for an order, the ALJ determined that 
she has no jurisdiction over Penick's application to import coca leaves 
or poppy straw, which was not part of the hearing. Accordingly, the ALJ 
denied the Motion for an Order. The Deputy Administrator adopts the 
well-reasoned ruling of the ALJ in denying Penick's motions.

C. Designations of Confidentiality

    Pursuant to a Protective Order issued by the Administrative Law 
Judge on April 26, 2001, and a Revised Protective Order issued on May 
24, 2002, the parties filed various motions, both before and after the 
hearing, for the designation of certain testimony and exhibits as 
``confidential'' and ``highly confidential.'' Some of the parties 
objected to the requests for confidentiality filed by other parties. 
After the hearing, the parties were provided an opportunity to file by 
motion requests for specifying such confidential material within the 
transcript. The Deputy Administrator has reviewed the pleadings on this 
issue, and hereby concurs with the Administrative Law Judge's orders on 
designations of confidentiality.

D. Motion To Reopen Record

    On December 5, 2001, Normaco filed a letter asserting that Penick 
had changed its position with respect to the standard for registering 
applicants to import in a letter commenting on another manufacturers's 
application to import. Noramco moved to reopen the record in order for 
the ALJ to consider this letter. The ALJ concluded that no useful 
purpose would be served by considering Pencik's purported change of 
position, and denied Normaco's request. The Deputy Administrator 
concurs with the ALJ's decision denying the motion.

III. Final Order

    The Deputy Administrator has carefully reviewed the entire record 
in this matter, as defined above, and hereby issues this final rule and 
final order prescribed by 21 CFR 1316.67 and 21 CFR 1301.46, based upon 
the following findings and conclusions.

A. The Rulemaking

    As explained above, Penick cannot be registered as an importer of 
NRMs unless the Deputy Administrator finds that Penick will be allowed 
to import NRMs pursuant to 21 U.S.C. 952(a)(1). Because Penick is the 
proponent of such a rule, it must establish by a preponderance of the 
evidence that such a rule can be issued.
    21 U.S.C. 952(a)(1) makes it unlawful to import controlled 
substances in Schedule I or II except ``such amounts of crude opium, 
poppy straw, concentrate of poppy straw and coca leaves as the Attorney 
General finds to be necessary to provide for medical scientific or 
other legitimate purposes.'' Whether Penick's importation of opium and 
CPS is ``necessary'' was not highly disputed at the hearing of this 
matter.
    The ALJ found that it is undisputed that Penick seeks to import 
narcotic raw materials for legitimate uses. She also noted that the 
actual amounts of NRMs necessary for those uses is made in subsequent 
proceedings to establish quotas pursuant to 21 U.S.C. 826 and to grant 
permits to import pursuant to 21 CFR Part 1312, which are not part of 
this case. Accordingly, the Deputy Administrator adopts the ALJ's 
ruling and finds that Penick shall be permitted to import raw opium and 
CPS.

B. The Adjudication

    Longstanding Federal policy prohibits the cultivation of the opium 
poppy in the United States, and also generally prohibits the 
importation of bulk narcotic alkaloids such as morphine and codeine. 
The NRMs raw opium and CPS therefore must be imported into the

[[Page 6949]]

United States for purposes of extracting morphine and codeine for 
pharmaceutical use. Following the extraction of these alkaloids, the 
manufacturers convert them into active pharmaceutical ingredients 
(APIs), such as oxycodone and hydrocodone. These APIs are then sold to 
other manufacturers to produce either dosage formulations or other 
APIs. The formulated drugs are then sold to drug wholesalers or 
directly to health care entities.
    Noramco and Mallinckrodt are the only companies registered with DEA 
as importers of NRMs and bulk manufacturers of codeine and morphine. 
Penick has applied with DEA to be registered as an importer of NRMs, so 
that the company can manufacture its own codeine and morphine. Noramco 
and Mallinckrodt oppose Penick's application.
    Any company that wishes to import NRMs must comply with the ``80-20 
rule,'' which requires that 80 percent of the NRMs imported into the 
United States have their original source as Turkey and India. The 
remaining 20 percent must come from Yugoslavia, France, Poland, 
Hungary, or Australia. 21 CFR 1312.13(f).
    Pursuant to 21 U.S.C. Sec. Sec.  958a and 823(a), DEA is required 
to register Penick as an importer of Schedule I and II substances if 
the registration is ``consistent with the public interest and with 
United States obligations under international treaties, conventions, or 
protocols in effect on May 1, 1971.'' In determining the public 
interest, DEA must consider the factors enumerated at U.S.C. 823(a)(1)-
(6) and 21 CFR 1301.34(b)(1)-(7), some of which are identical. 
Accordingly, the Deputy Administrator will first consider United States 
obligations under international treaties, then each of the factors 
delineated in 21 U.S.C. 823(a) and 21 CFR 1301.34(b)(1)-(7), as 
follows.\1\
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    \1\ In this proceeding, Penick, as the applicant, has the burden 
of proof of showing that the public interest will be served by its 
registration to import NRMs. 21 CFR Sec. Sec.  1301.44(c). Noramco 
and Mallinckrodt, however, have the burden of proving any 
propositions of fact or law asserted by them in the hearing. Id.; 
Roxane, 63 FR 55,891 (DEA 1998).
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1. Treaty Obligations
    As the ALJ found, there is no evidence that the importation of NRMs 
by Penick would be inconsistent with United States obligations under 
international treaties, conventions or protocols. Under the United 
Nations Single Convention on Narcotic Drugs of 1961, as amended by the 
1972 Protocol (collectively, the Single Convention), the United States 
is obligated to take all necessary measures to ensure that the 
international movement of narcotics is limited to legitimate medical 
and scientific needs. Peter B. Bensinger, former Administrator of DEA, 
and Chuck Koczwara, Mallinckrodt's Director of Purchasing and Strategic 
Procurement, both testified that the primary goals of the Single 
Convention are to limit the manufacture, trade, and consumption of 
narcotic drugs to legitimate medical and scientific purposes; and 
ensuring availability of these drugs for medical use. Peter B. 
Bensinger also testified that any new registrant represents a potential 
for diversion, and that inasmuch as it is impossible to reduce the risk 
of diversion to zero, it is in the public interest to limit access to 
NRMs to a much smaller number of companies than would be appropriate in 
a free market.
    The ALJ found, however, as explained below in consideration of the 
possibility of diversion of controlled substances, there is no evidence 
that entry of Penick into the market for importation of NRMs would 
result in significant diversion or contravene the Single Convention.
2. Maintenance of Effective Controls Against Diversion of Particular 
Controlled Substances and any Controlled Substance in Schedule I or II 
Compounded Therefrom Into Other Than Legitimate, Medical, Scientific, 
Research or Industrial Channels, by Limiting the Importation of 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. Diversion
    The ALJ found that there is no evidence that specific activities 
involving Penick's importation of NRMs would increase diversion of 
those substances. John McRoberts, Penick's Vice President of 
Operations, testified extensively about Penick's internal security 
measures. The DEA Diversion Investigator (DI) who conducted the 
investigation of Penick's application testified favorably about 
Penick's security for shipments of NRMs from India and Turkey and 
Penick's distribution of its products via common carriers. The DI 
further testified that Penick's security systems and employee 
screenings met the requirements of DEA regulations. Neither Noramco nor 
Mallinckrodt adduced evidence that Penick's security arrangements were 
faulty.
    Noramco Vice President Michael Kindergan testified that Penick's 
use of inefficient technology would increase the likelihood of 
diversion of opium in India because it would cause an increase in 
demand and in cultivation and production. Mr. Kindergan stated further 
that he believes that DEA personnel involved in investigating Penick's 
application focus on security within the manufacturing plant. Noramco 
does not claim that diversion from Penick's facility is likely; indeed, 
the manufacturing plant is probably the ``area of least exposure.'' 
However, because of the 80/20 rule, any new production of morphine will 
come from India, and in taking any action DEA should also consider that 
action's impact on the NRM market and on diversion at the grower level.
    As the ALJ noted, however, there is nothing in the Single 
Convention treaty that would require a government agency to consider 
the impact on overseas diversion of NRMs. Accordingly, the ALJ found 
that DEA is not required to consider the impact on diversion in India 
in assessing Penick's application, a conclusion with which the Deputy 
Administrator agrees. Moreover, the Deputy Administrator found that 
even if the registration of Penick were to cause diversion of NRMs 
overseas, there is nothing in the Single Convention or DEA regulations 
that would require DEA to limit registration to import NRMs to only two 
companies, regardless of the adequacy of competition. Accordingly, the 
Deputy Administrator finds that this factor weighs in favor of Penick.
b. Adequate Competition
    The issue of whether there is adequate competition in the NRM 
processing market was highly disputed. The ALJ conducted a thorough 
review of the evidence offered by the parties in coming to her 
conclusions. Under 21 CFR 1301.34(d), the Deputy Administrator is 
obligated to consider the following factors in determining whether 
competition is adequate.
    (1) The extent of price rigidity in light of changes in raw 
materials and other costs and conditions of supply and demand.
    (2) The extent of service and quality competition among the 
domestic manufacturers for shares of the domestic market including (i) 
shifts in market shares and (ii) shifts in individual customers among 
domestic manufacturers.
    (3) The existence of substantial differentials between domestic 
prices

[[Page 6950]]

and 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 domestic 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 manufactures by the 
requirement of the Act and such other cost-related and other factors as 
the Administrator may deem relevant. In no event should an importer's 
offering prices in the United States be considered if they are lower 
than those prevailing in the foreign market or markets from which the 
importer is obtaining his/her supply.
    (4) The existence of competitive restraints imposed upon domestic 
manufacturers by governmental regulations and
    (5) Such other factors as may be relevant to the determinations 
required under this paragraph.
    Michael I. Cragg, Ph.D. testified on behalf of Penick. Dr. Cragg 
concluded that Penick's reentry into the market will result in lower 
prices and a more reliable supply of narcotic products. Dr. Cragg 
relied upon theories of competition presented in economics literature 
to support the proposition that prices fall as the number of 
competitors increases. Dr. Cragg also testified that based upon the 
criteria used by the United States Department of Justice, competition 
in the narcotics industry is limited and Penick's reentry will increase 
competition. He found that at the critical stage of the production 
chain, competition is especially inadequate in the market for semi-
processed APIs as there are only two importers and producers of semi-
processed APIs, Johnson & Johnson and Mallinckrodt. Dr. Cragg explained 
that this situation creates a competitive bottleneck that affects all 
levels of the production chain. Despite this level of concentration, 
there has been no significant entry into the API market in the last 
decade. Furthermore, no entry has occurred despite the 150 percent 
increase in the size of the narcotics finished goods market from 1995 
to 2000 and an almost five-fold increase in API revenues over that same 
period.
    Dr. Cragg further testified that during this period of static 
duopoly, the prices of narcotic APIs have risen faster than when there 
were more competitors. From 1995 to 2000 estimated profits for narcotic 
APIs grew from $26 million to $246 million--a growth rate of 57 percent 
annually. Dr. Cragg concluded that these returns arose because revenues 
were growing faster than costs during the period when the number of 
importers was limited to only two. With respect to Penick's reentry 
into the NRM and API markets, Dr. Cragg expected such entry to raise 
the level of competition in the API market and lead to lower API 
prices.
    Mark A. King, a consultant, testified on behalf of Noramco. He 
testified that Dr. Cragg's conclusions were incorrect, because they 
were based largely upon (1) a failure to consider structural factors 
inherent in the narcotic market as a whole; and (2) inaccurate data for 
NRM and API prices, and/or (3) selective application of general free 
market economic theories to one of the world's most highly regulated 
industries. Mr. King argued, in part, that NRM price increases have 
consistently outstripped the prices charged for narcotic APIs by 
Noramco during the period from 1995 to 2000; therefore, the value-added 
margins of narcotic APIs produced have declined, not increased. Mr. 
King also testified that Dr. Cragg's analysis was faulty because (1) he 
relied on Mallinckrodt's list prices in place of actual prices, (2) 
that U.S. API prices are driven not by industry concentration, but by 
DEA's policy of prohibiting the domestic cultivation and processing of 
opium poppies and (3) there is no persuasive evidence that Noramco or 
Mallinckrodt have been able to exert inordinate power over purchasers 
of APIs.
    Walter H.A. Vandaele, Ph.D. testified on behalf of Mallinckrodt. 
Dr. Vandaele concluded generally that there is considerable competition 
between Mallinckrodt and Noramco in the bulk narcotic API market. Dr. 
Vandaele argued that significant discounting of list price and frequent 
switching by large customers from one bulk supplier to another evidence 
a significant degree of competition in the current market. Significant 
increases in bulk API prices reflect higher marginal costs of supplying 
increased demand in the face of tight supplies of raw material. Bulk 
suppliers' partial downstream integration into finished products 
provides no increase in their ability to price anti-competitively. Dr. 
Vandaele further argued that Penick's entry as an NRM importer and bulk 
API supplier would provide an insignificant impact on the level of 
competition in either the bulk API market or the narcotic finished 
product market, and no measurable impact on consumer prices.
    The Deputy Administrator agrees with the ALJ that Penick has 
demonstrated that the opiate API market was not operating under 
``adequately competitive conditions'' as of the date of the hearing. As 
the ALJ noted, it is undisputed that prices of APIs increased 
substantially during the 1990s. With respect to the other factors 
listed in 21 CFR 1301.34(d), The Deputy Administrator also agrees with 
the ALJ that the customer switches referenced in the records do not 
demonstrate strong competition. With respect to the other factors 
listed, the Deputy Administrator agrees with the ALJ that they are not 
relevant in this case or the record is not sufficient to warrant a 
finding. Having found that the market is not adequately competitive, 
the Deputy Administrator concludes that this factor weights in favor of 
granting Penick's application, even though Noramco and Mallinckrodt are 
capable of maintaining an adequate and uninterrupted supply.
3. Compliance with Applicable State and Local Law;
    Penick adduced evidence that it was substantially in compliance 
with state and local law, and Noramco and Mallinckrodt did not produce 
evidence to the contrary. The Deputy Administrator therefore finds that 
this factor weighs in favor of granting Penick's application.
4. Promotion of Technical Advances in the Art of Manufacturing these 
Substances and the Development of new Substances.
    The evidence showed that Penick has patented processes to produce 
oxycodone and narcotic antagonists from morphine or codeine instead of 
thebaine, and has invented processes to produce hydrocodone and 
hydromorphone. There was also evidence that Penick has a more efficient 
process to produce oxycodone from thebaine in that Penick is able to 
utilize both opium and CPS as the raw materials for producing various 
opiate APIs. There was further evidence that Penick plans to upgrade 
its facilities and has committed at least $30 million to the projects.
    Noramco adduced evidence, on the other hand, that Penick's proposed 
technology for producing oxycodone is not as efficient as Noramco's 
technology, and both Noramco and Mallinckrodt emphasized that Penick's 
proposed processes have not been tested in commercial production. 
Noramco also claimed that Penick had not demonstrated the necessary 
commitment of resources to adequately upgrade its operation.
    While there is controversy over the quality of Penick's proposed 
technology that cannot be resolved by the record in this matter, The 
Deputy Administrator concludes that Penick's patents and

[[Page 6951]]

development of manufacturing processes promote technical advances in 
the manufacture of controlled substances. Therefore this factor weighs 
in favor of granting Penick's application.
5. Prior Conviction Record of Applicant under Federal and State Laws 
Relating to the Manufacture, Distribution, or Dispensing of such 
Substances;
    It is undisputed that neither Penick nor any of its officer, 
agents, or key employees has been convicted of any Federal or State law 
relating to the manufacture, distribution, or dispensing of controlled 
substances. The Deputy Administrator therefore concludes that this 
factor weighs in favor of granting Penick's application.
6. Past Experience in the Manufacture of Controlled Substances and the 
Existence in the Establishment of Effective Controls Against Diversion.
    The evidence showed that Penick manufactured narcotics from 1947 
until sometime in the 1990s. Although Mallinckrodt and Noramco asserted 
that regulatory requirements have changed since Penick exited the 
market, they adduced no evidence that Penick would be unable to comply 
with current or future requirements.
    Penick presented evidence of its security systems and procedures, 
and Noramco and Mallinckrodt acknowledge that there is little 
likelihood of diversion from Penick's plant. The Deputy Administrator 
therefore concludes that this factor weighs in favor of granting 
Penick's application.
7. Such other Factors as may be Relevant to and Consistent with the 
Public Health and Safety.
    The ALJ found three factors relevant to the public health and 
safety:
    a. Diversion of Opium: Both Noramco and Mallinckrodt asserted that 
Penick's importation of NRMs would be likely to result in increased 
diversion of opium in India. The ALJ found that DEA is not required to 
consider the impact on diversion in India in assessing Penick's 
application. She also found that such claims were speculative at best. 
The Deputy Administrator agrees that this consideration need not be 
addressed under this factor. The Deputy Administrator also finds, 
however, that nothing in the Single Treaty or DEA regulations requires 
DEA to attempt to eliminate diversion by limiting the licensing of NRM 
importers to two companies, despite the absence of competition.
    b. Waste of Narcotic Raw Materials: Noramco and Mallinckrodt also 
asserted that Penick's unproven technology will result in the waste of 
scarce NRMs. The ALJ found these assertions speculative because Penick 
could not begin its scaling up of operations until it obtained a 
registration to manufacture Schedule II controlled substances. The 
Deputy Administrator agrees with the ALJ that these contentions are too 
speculative to warrant consideration.
    c. Compliance with Federal Statutes and Regulations: Although DEA 
found Penick to have committed numerous record keeping violations in a 
1988 investigation, with Penick paying $40,000 to settle a consequent 
civil action, the DI testified that subsequent DEA regulatory 
investigations indicated that Penick was substantially in compliance 
with DEA requirements. With respect to FDA regulations, Penick has not 
been cited for any deficiencies since a 1993 warning letter. With 
respect to EPA requirements, the evidence showed that Penick hold the 
requisite permits and is operating within them and that any remediation 
issues with the New Jersey Department of Environmental Protection are 
the responsibility of Bestfoods rather than of Penick.

C. Exceptions

    Both Noramco and Mallinckrodt filed exceptions to the 
Administrative Law Judge's Recommended Ruling, Findings of Fact, 
Conclusions of Law and Decision. Penick responded to those exceptions. 
Having considered the record in its entirety, including the parties' 
exceptions and responses, the Deputy Administrator finds no merit in 
Noramco and Mallinckrodt's exceptions, all of which concerned matters 
that were addressed at length at the hearing. The exceptions were 
extensive and are part of the record. Only some of the exceptions merit 
further discussion, and they will not be restated at length herein.
    In its exceptions, Noramco contends that the ALJ failed to give 
consideration to the risk of diversion both inside and outside the 
United States, (2) securing an adequate supply to meet the needs of the 
medical community and (3) ensuring that the prices consumers pay for 
pain medication and narcotic APIs are reasonable and not inflated.
    With regard to diversion within the United States, Noramco urges 
consideration of Penick's compliance history. At the hearing, however, 
the ALJ considered Penick's compliance history and did not find it 
evidence of the possibility of increased diversion. The DI testified 
that although a 1988 DEA investigation revealed numerous record keeping 
violations, requiring Penick to pay $40,000 to settle a civil action, 
inspections since 1994 have shown Penick to be substantially in 
compliance with record keeping requirements. In May 1990 the FDA found 
three deficiencies. Penick promised to correct two of them and to make 
some corrections to the third. Pursuant to an anonymous compliant that 
Penick was making narcotics and antibiotics in an unsanitary manner, 
FDA investigators conducted another inspection in June 1991; the 
inspectors found no problems. The FDA inspected Penick again in January 
and February 1993 and raised a number of concerns. A warning letter was 
issued to Penick in March 1993 alleging various deficiencies in 
Penick's validation processes and record keeping and a lack of 
sufficient quality control personnel. Following correspondence between 
the FDA and Penick, the FDA inspected again in September 1993 and found 
that Penick has corrected the deficiencies. Penick underwent another 
FDA inspection in August 1996 and no deficiencies were found. Thus, 
while Penick has regulatory problems in 1988, it has been substantially 
in compliance with DEA regulations since 1994. The 1988 violations, and 
the apparently minor problems with FDA regulatory compliance on a few 
occasions in the 90s, do not rise to a level that would warrant a 
denial of Penick's registration based on the possibility of increased 
diversion.
    Noramco also argues that registration of any new participants 
increases the risk of diversion, and that the ALJ correctly determined 
that Noramco and Mallinckrodt have the means and capacity to produce an 
adequate and uninterrupted supply of APIs. As these issues were 
adequately discussed in the ALJ's recommended decision, there is not 
need for further discussion here.
    Noramco also contends that competition is adequate in the active 
pharmaceutical ingredient market, citing the ALJ's statement that she 
did expect Penick's entry into the market to have a significant impact 
on the prices that consumers pay for opiate drugs. Noramco fails to 
note, however, that despite conclusion, the ALJ also concluded that 
Penick has demonstrated that the opiate active pharmaceutical 
ingredient market was not operating under ``adequately competitive 
conditions.''
    Mallinckrodt also filed exceptions to the ALJ's opinion and 
recommended ruling. In its first exception, Mallinckrodt argues that 
the ALJ erred in finding that competition was inadequate. The Deputy 
Administrator finds, however, that all of

[[Page 6952]]

Mallinckrodt's arguments in this regard were thoroughly considered by 
the ALJ at the hearing and in her opinion and recommended ruling. 
Accordingly, the exception does not warrant consideration.
    Mallinckrodt further argues that it is not in the public interest 
to register Penick when supply is adequate. Mallinckrodt contends that 
the ALJ failed to take into account the large investments of Noramco 
and Mallinckrodt, versus the lesser amount of investment by Penick. 
Mallinckrodt fails to provide a reasonable explanation, however, of how 
the size of the parties' investments would effect the adequacy of 
supply.
    Mallinckrodt also contends that Penick's technology does not 
support its registration. It asserts that there is no evidence that 
Penick has an efficient technology for producing hydrocodone and that 
Penick's method of making oxycodone is outdated. As the ALJ noted, 
however, there is clearly some controversy over the quality of Penick's 
proposed technology, a controversy that the ALJ concluded the record 
was not sufficient to resolve. The ALJ concluded, however, that 
Penick's patents and development of processes promote technical 
advances in the manufacture of controlled substances. Under 21 U.S.C. 
823(a)(3), that factor, along with the development of new substances, 
is all that is to be considered. Accordingly, the Deputy Administrator 
agrees with the ALJ and concludes that this factor weighs in favor of 
granting Penick's registration.
    Mallinckrodt argues further that the ALJ erred in not considering 
the impact on diversion in the overseas NRM market. Mallinckrodt 
contends that in later cases, DEA has taken the position that such 
issues are relevant. This issue has been fully discussed in the ALJ's 
recommended decision and hereinabove. Moreover, the Deputy 
Administrator finds that even if the possibility of increased diversion 
overseas were taken into account, Noramco and Mallinckrodt's arguments 
in this regard are too speculative to warrant serious consideration.
    Finally, Mallinckrodt argues that at a minimum, the ALJ should have 
recommended that conditions be placed on Penick's registration. Having 
reviewed the record in it's entity, the Deputy Administrator concludes 
that the evidence showed that Penick does not intend to use its 
registration as a ``shelf registration.'' There is sufficient evidence, 
and no controverting evidence, that Penick had made concrete plans to 
upgrade and expand its controlled substance manufacturing facilities 
once it is clear that Penick will receive requisite DEA registrations.

IV. Conclusion

    Based upon the foregoing, the Deputy Administrator finds that it is 
in the public interest, as defined by 21 U.S.C. 823(a)(1)-(6) and 21 
CFR 1301.34(b)(1)-(7), to grant Penick's application to be registered 
as an importer of NRMs. In light of Penick's long experience in 
manufacturing bulk pharmaceuticals, including opiates, it is not 
necessary to grant a conditional application. This decision is 
effective March 13, 2003.

    Dated: January 29, 2003.
John B. Brown, III,
Deputy Administrator.
[FR Doc. 03-3299 Filed 2-10-03; 8:45 am]
BILLING CODE 4410-09-M