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

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