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Federal Register Notices > Notices of Registration - 2003 > Penick Corporation, Inc., Grant Registration to Import Schedule II Substances Notices of Registration - 2003[Federal Register: February 11, 2003 (Volume 68,
Number 28)] 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 [[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 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 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\
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.
[[Page 6950]]
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 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 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, [FR Doc. 03-3299 Filed 2-10-03; 8:45 am]
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