Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-03-01060/USCOURTS-caDC-03-01060-0/pdf.json

Parties Involved:
Drug Enforcement Administration
Respondent
Mallinckrodt, Inc.
Intervenor for Petitioner
Noramco of Delaware, Inc.
Petitioner
Penick Corporation, Inc.
Intervenor

Document Text:

Notice: This opinion is subject to formal revision before publication in the

Federal Reporter or U.S.App.D.C. Reports. Users are requested to notify

the Clerk of any formal errors in order that corrections may be made

before the bound volumes go to press.

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued December 11, 2003 Decided July 23, 2004

No. 02-1211

NORAMCO OF DELAWARE, INC.,

PETITIONER

v.

DRUG ENFORCEMENT ADMINISTRATION,

RESPONDENT

JOHNSON MATTHEY, INC.,

INTERVENOR

 Bills of costs must be filed within 14 days after entry of judgment.

The court looks with disfavor upon motions to file bills of costs out

of time.

USCA Case #03-1060 Document #838059 Filed: 07/23/2004 Page 1 of 18
2

No. 03–1060

NORAMCO OF DELAWARE, INC.,

PETITIONER

v.

DRUG ENFORCEMENT ADMINISTRATION,

RESPONDENT

PENICK CORPORATION, INC. AND MALLINCKRODT, INC.,

INTERVENORS

On Petitions for Review of Orders of the

United States Drug Enforcement Agency

Thomas C. Morrison argued the cause for the petitioners.

John A. Gilbert, Jr. and Douglas B. Farquhar were on brief.

Harry J. Matz, Attorney, United States Department of

Justice, argued the cause for the respondents. Joseph S.

Uberman, Attorney, United States Department of Justice,

was on brief. Rose A. Briceno, Attorney, United States

Department of Justice, entered an appearance.

James Dabney Miller argued the cause for intervenor

Johnson Matthey, Inc.

Steven J. Poplawski and Scott M. Badami were on brief

for intervenor Mallinckrodt, Inc.

Wayne H. Matelski and Deborah M. Shelton were on brief

for intervenor Penick Corporation, Inc.

Before: GINSBURG, Chief Judge, and HENDERSON and

ROGERS, Circuit Judges.

Opinion for the court filed by Circuit Judge HENDERSON.

KAREN LECRAFT HENDERSON, Circuit Judge: Noramco of

Delaware, Inc. (Noramco) has filed two petitions for review of

USCA Case #03-1060 Document #838059 Filed: 07/23/2004 Page 2 of 18
3

final orders of the Drug Enforcement Agency (DEA, Agency)

which grant applications by Johnson Matthey, Inc. (Johnson

Matthey) and by Penick Corporation, Inc. (Penick) to register

as importers of narcotic raw materials (NRMs) pursuant to

the Controlled Substances Import and Export Act, 21 U.S.C.

§§ 952 and 958, and the Controlled Substances Act, 21 U.S.C.

§§ 823 et seq., (collectively referred to as CSA). For the

reasons set out below, we deny both of Noramco’s petitions.

I. Background

The CSA establishes a comprehensive regulatory system

that controls the manufacture, distribution and use of hazardous drugs. MD Pharm., Inc. v. DEA, 133 F.3d 8, 10 (D.C.

Cir. 1998). The DEA Administrator, by delegation of the

United States Attorney General, 28 C.F.R. § 0.100(b), classifies each drug into one of five schedules according to such

factors as its potential for abuse and its risk to the public

health Id. (citing 21 U.S.C. § 811).1

 In order to import or

1 The dangerousness and abuse potential of the drugs decrease

with each schedule. Section 812 directs that drugs be assigned to

the five schedules according to the following criteria:

(1) Schedule I.—

(A) The drug or other substance has a high potential for

abuse.

(B) The drug or other substance has no currently accepted

medical use in treatment in the United States.

(C) There is a lack of accepted safety for use of the drug or

other substance under medical supervision.

(2) Schedule II.—

(A) The drug or other substance has a high potential for

abuse.

(B) The drug or other substance has a currently accepted

medical use in treatment in the United States or a currently

accepted medical use with severe restrictions.

(C) Abuse of the drug or other substances may lead to

severe psychological or physical dependence.

(3) Schedule III.—

(A) The drug or other substance has a potential for abuse

less than the drugs or other substances in schedules I and II.

USCA Case #03-1060 Document #838059 Filed: 07/23/2004 Page 3 of 18
4

export a controlled substance, a company must apply for and

obtain registration with the DEA, 21 U.S.C. § 957, which is

required to register an application for Schedule I or II

substances if it ‘‘determines that such registration is consistent with the public interest and with United States obligations under international treaties, conventions, or protocols

in effect on May 1, 1971,’’ 21 U.S.C. § 958(a). Section 823(a)

of title 21 sets out the factors to be considered in determining

the public interest: (1) ‘‘maintenance of effective controls

against diversion of [controlled substances and their compounds] into other than legitimate medical, scientific, research, or industrial channels, 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,

(B) The drug or other substance has a currently accepted

medical use in treatment in the United States.

(C) Abuse of the drug or other substance may lead to

moderate or low physical dependence or high psychological

dependence.

(4) Schedule IV.—

(A) The drug or other substance has a low potential for

abuse relative to the drugs or other substances in schedule

III.

(B) The drug or other substance has a currently accepted

medical use in treatment in the United States.

(C) Abuse of the drug or other substance may lead to limited

physical dependence or psychological dependence relative to

the drugs or other substances in schedule III.

(5) Schedule V.—

(A) The drug or other substance has a low potential for

abuse relative to the drugs or other substances in schedule

IV.

(B) The drug or other substance has a currently accepted

medical use in treatment in the United States.

(C) Abuse of the drug or other substance may lead to limited

physical dependence or psychological dependence relative to

the drugs or other substances in schedule IV.

21 U.S.C. § 812(b).

USCA Case #03-1060 Document #838059 Filed: 07/23/2004 Page 4 of 18
5

and industrial purposes’’; (2) ‘‘compliance with applicable

State and local law’’; (3) ‘‘promotion of technical advances in

the art of manufacturing these substances and the development of new substances’’; (4) the ‘‘prior conviction record of

[the] applicant under Federal and State laws relating to the

manufacture, distribution, or dispensing of such substances’’;

(5) ‘‘past experience in the manufacture of controlled substances, and the existence in the establishment of effective

control against diversion’’; and (6) ‘‘such other factors as may

be relevant to and consistent with the public health and

safety.’’ Pursuant to these provisions, both Johnson Matthey

and Penick filed applications with the DEA for registration.

Before filing its registration application, Johnson Matthey

was already registered as an importer of phenyl acetone, a

Schedule II controlled substance, and as a bulk manufacturer

of Schedule I and II substances, including oxycodone and

hydrocodone, which are active pharmaceutical ingredients

(APIs) that it sells in bulk to manufacturers of narcotic-based

prescription drugs. Because Johnson Matthey was not registered to import opium or poppy straw concentrate, the NRMs

from which the narcotic alkaloids morphine, codeine and

thebaine are extracted to produce oxycodone and hydrocodone, it had to rely on supplies from Noramco and Mallinckrodt, Inc. (Mallinckrodt), the two companies then registered

to import the NRMs. Dissatisfied with this arrangement, on

December 23, 1998 it filed an application to modify its registration to include importation of opium and poppy straw

concentrate. At the same time it applied to renew its registration to manufacture Schedule I and II controlled substances in bulk. On May 10, 1999 Noramco and Mallinckrodt

filed separate objections to and requests for hearing on

Johnson Matthey’s registration application.

An administrative law judge (ALJ) conducted a hearing in

January 2000. In a decision filed September 21, 2000 the

ALJ recommended that Johnson Matthey’s application be

granted, subject to the conditions that Johnson Matthey (1)

demonstrate to the DEA’s satisfaction, before receipt of its

first NRM shipment, ‘‘the manner in which the NRMs will be

imported, transferred to the processing facility, and proUSCA Case #03-1060 Document #838059 Filed: 07/23/2004 Page 5 of 18
6

cessed,’’ (2) provide the DEA with a timetable for its proposed ‘‘ramp-up activities’’ and (3) inform the DEA of ‘‘any

changes to these procedures and/or any changes made to the

physical plant’’ and obtain approval thereof before making

any shipment under the ‘‘changed circumstances.’’ Johnson

Matthey, Inc., Docket No. 99–27 (September 21, 2000) (‘‘Recommended Rulings, Findings of Fact, Conclusions of Law,

and Decision’’) (ALJ Op. I), slip op. at 57.

In a decision dated May 22, 2002 the DEA Deputy Administrator adopted and incorporated the ALJ’s findings and

conclusions ‘‘in their entirety’’ and granted Johnson Matthey

‘‘a conditional registration until such time as Johnson Matthey’s facilities are complete and DEA can complete its

requisite physical security and record keeping evaluation to

ensure Johnson Matthey’s continued protection of NRMs

against diversion.’’ Johnson Matthey, Inc., 67 Fed. Reg.

39,041, 39,045 (June 6, 2002) (conditional grant of registration

to import Schedule II substances). The decision further

directed that ‘‘Johnson Matthey should provide DEA with a

timetable of its proposed activities and submissions so that

DEA may plan for the prompt scheduling of its inspection

and review activities.’’ Id. at 39,045–46.

Penick filed its application on April 11, 2000 for registration

to import the Schedule II NRMs coca leaves, raw opium,

poppy straw and poppy straw concentrate and to manufacture

Schedule II APIs, including oxycodone, hydrocodone, morphine, hydromorphone and codeine, from the imported

NRMs. On September 15, 2000 Noramco and Mallinckrodt

each filed objections to and requests for hearing on Penick’s

registration application.

An ALJ conducted a hearing on Penick’s application in July

and August 2001. In a decision filed May 29, 2002 the ALJ

recommended that Penick’s application be granted. Penick

Corp., Docket No. 01–3 (May 29, 2002) (‘‘Opinion and Recommended Ruling, Findings of Fact, Conclusions of Law and

Decision of the Administrative Law Judge’’) (ALJ Op. II).

On February 11, 2003, the DEA Deputy Administrator issued

a final order adopting the ALJ’s findings and conclusions ‘‘in

USCA Case #03-1060 Document #838059 Filed: 07/23/2004 Page 6 of 18
7

their entirety.’’ Penick Corp., Inc., 68 Fed. Reg. 6947, 6948

(Feb. 11, 2003) (grant of registration to import Schedule II

substances).

Noramco filed a timely petition for review of each registration approval. Malinckrodt intervened in the challenge to

Penick’s registration. We address each registration separately.

II. Johnson Matthey’s Registration

Noramco challenges the DEA’s conditional grant of Johnson Matthey’s registration application on two grounds: (1)

the DEA misconstrued its obligation to ensure effective diversion control under section 823(a) and (2) the DEA acted

arbitrarily and capriciously in failing to require Johnson

Matthey to submit detailed plans for importing NRMs and

processing them into APIs. We find neither ground meritorious.

First, Noramco contends the DEA’s approval of Johnson

Matthey’s registration contravenes the plain language of section 823(a)(1). We review the DEA’s interpretation of section

823 under the familiar two-step Chevron framework:

We first ask ‘‘whether Congress has directly spoken to

the precise question at issue,’’ in which case we ‘‘must

give effect to the unambiguously expressed intent of

Congress.’’ If the ‘‘statute is silent or ambiguous with

respect to the specific issue,’’ however, we move to the

second step and defer to the agency’s interpretation as

long as it is ‘‘based on a permissible construction of the

statute.’’

Bluewater Network v. EPA, No. 03–1120, slip op. at 10 (D.C.

Cir. June 22, 2004) (quoting Chevron U.S.A. Inc. v. Natural

Res. Def. Council, 467 U.S. 837, 842–43 (1984)). Noramco

contends that under Chevron step one, the unambiguous

language of section 823(a)(1) requires that, before the DEA

approves an application for registration to import a Schedule

I or II controlled substance, the agency is required to balance

the risk of unlawful diversion of the substance against the

need for competition by ensuring both (1) that effective

USCA Case #03-1060 Document #838059 Filed: 07/23/2004 Page 7 of 18
8

controls will be maintained against diversion and (2) that

approval will not increase the number of importers beyond

that which can ‘‘produce an adequate and uninterrupted

supply of these substances under adequately competitive conditions for legitimate TTT purposes,’’ 21 U.S.C. § 823(a)(1).

We disagree.

Section 823(a)(1) does not expressly speak to whether the

DEA must consider the number of importers necessary to

provide an adequate supply if it determines diversion will be

effectively controlled regardless. The stated purpose of section 823(a)(1) is to effectively control against diversion and it

expressly directs the DEA to limit competition only as a

means to achieve ‘‘maintenance’’ of such control. In the

absence of an express contrary statutory directive, the DEA

reasonably concluded under Chevron step 2 that ‘‘if DEA

determines that there would be no increased difficulty in

controlling diversion, the requirements of [section 823(a)(1)]

are satisfied, and an analysis of adequate competition is not

required.’’ 67 Fed. Reg. at 39,044; see also id. at 39,043–44

(‘‘Furthermore, DEA has written that, stated conversely,

DEA is ‘required to register an applicant who meets all the

other statutory requirements, without regard to the adequacy

of competition, if the Administration determines that registering another manufacturer will not increase the difficulty of

maintaining effective controls against diversion.’ ’’) (quoting

Bulk Manufacture of Schedule I and II Substance, 39 Fed.

Reg. 12,138 (DEA April 13, 1974)).2

 The DEA determined,

2 Noramco objects to the DEA’s citation to this 1974 policy

statement because the two rules proposed therein were not subsequently adopted. In this case, however, the DEA treated the policy

statement merely as instructive and supportive of its independent

construction of the statutory language. See ALJ Op. I at 43–44 &

n.37 (finding policy statement to be ‘‘instructive but not determinative of the proper interpretation of the statute’’). As the ALJ

noted, the policy statement is also ‘‘consistent with the relevant

regulatory language currently controlling in the importer application process’’ ALJ Op I. at 43–44 & n.38 (noting that ‘‘[t]he current

regulation concerning the registration of a manufacturer of Schedule I and II substances states: ‘(b) In order to provide adequate

USCA Case #03-1060 Document #838059 Filed: 07/23/2004 Page 8 of 18
9

based on substantial expert testimony, that Johnson Matthey’s registration is consistent with section 823(a)(1) because

it found that ‘‘Johnson Matthey is in compliance with DEA

regulations’’ and ‘‘maintain[s] effective controls against diversion of controlled substances,’’ 67 Fed. Reg. at 39,044–45—

findings that Noramco does not dispute, see Pet’r Br. (02–

1211) at 24. After analyzing the other five statutory factors,

the DEA concluded that registration is in the public interest

based on findings that Johnson Matthey’s registration (1)

‘‘promote[s] technical advances in the manufacturing of oxycodone and hydrocodone’’ because Johnson Matthey had obtained or applied for 6 patents to more efficiently produce

APIs and (2) helps ensure a steady supply of APIs and

pharmaceuticals. 67 Fed. Reg. at 39,045, ALJ Op. I at 16–17.

Thus, under the DEA’s permissible interpretation of section

823(a), it was required to approve Johnson Matthey’s registration

Noramco challenges the DEA’s reading of section 823(a)(1)

on two grounds. First, Noramco charges that the DEA’s

interpretation ignores the distinction between the statutory

regulation of Schedule I and II substances, at issue here, and

of Schedule III and IV substances. Noramco points out that

section 823(d), which governs Schedule III and IV substances,

lists the same six public interest factors as section 823(a)—

except that the first factor in 823(d)(1) lacks the limiting

prepositional phrase addressing supply and competition contained in section 823(a)(1) (‘‘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’’). The DEA’s interpretation, Noramco argues, ‘‘eviscerates’’ this distinction by eliminating the

competition, the Administrator shall not be required to limit the

number of manufacturers in any basic class to a number less [than]

that consistent with maintenance of effective controls against diversion solely because a smaller number is capable of producing an

adequate and uninterrupted supply.’ ’’ (quoting 21 C.F.R.

§ 1301.33(b) (1999))).

USCA Case #03-1060 Document #838059 Filed: 07/23/2004 Page 9 of 18
10

competition factor from the public interest calculus. Not so.

Under the DEA’s interpretation, it must still ensure that the

number of importers and manufacturers is limited where such

limitation is necessary to maintain effective diversion controls; it is only where, as here, the DEA affirmatively finds

that diversion will be effectively controlled without regard to

limiting competition that it is not required to inquire into

market competitiveness.

Second, Noramco contends the DEA’s interpretation is

inconsistent with the CSA’s legislative history and with the

testimony before the ALJ by a former DEA administrator.

The statements Noramco cites, however, simply reflect a

concern that the marketing of Schedule I and II controlled

substances not be so broadened as to enhance the risk of

diversion. See Pet’r Br. (02–1211) at 42–44 (quoting S. Rep.

No. 91–613 at 7 (1969) (explaining that section 823(a)(1)

addresses ‘‘concern TTT that parts of [the CSA] TTT may

tend to expand the commerce in controlled dangerous substances, particularly narcotics, possibly adding to the danger

of diversion and leading to unfavorable changes in the price

structures of these substances’’) (first ellipsis added); CSA,

Hearings before the Subcomm. to Investigate Juvenile Delinquency of Sen. Comm. on the Judiciary, 91st Cong. 261–

62 (1969) (Statement of Attorney Gen. Mitchell) (‘‘[T]here is

no intention on the part of the Justice Department nor the

Bureau of Narcotics and Dangerous Drugs by this provision

to expand beyond necessity TTT any manufacturers in this

particular area’’); id. at 371 (Statement of Dep’t of Justice)

(‘‘If evidence indicates that additional licensing will result in

more reasonable prices with no significant diminution in the

effectiveness of drug control, the Attorney General should be

able to license the additional manufacturers.’’)); Pet’r Br.

(02–1211) at 40 (quoting testimony of former DEA Administrator Peter Bensinger) (‘‘Given the intent of the law and

regulations to limit the number of registrants, in administering the law one must accept that not all qualified persons

who seek to register are entitled to be registeredTTTT The

public interest is served by limiting the access to NRMS to a

much smaller number of companies than would be appropriUSCA Case #03-1060 Document #838059 Filed: 07/23/2004 Page 10 of 18
11

ate in a free market.’’). That concern is not in play where,

as here, the DEA affirmatively finds that diversion is effectively controlled.

Noramco next contends that the DEA acted arbitrarily and

capriciously in not requiring that Johnson Matthey submit

‘‘concrete’’ plans for how it will import and process NRMs

(specifically regarding the technology it will use, the amount

and identity of NRMs imported, the kind of plant it will

construct, the technical expertise of its employees and its

commitment to spend sufficient funds). Noramco asserts

that by failing to do so the DEA held Johnson Matthey to a

‘‘lower standard of proof’’ than it imposed when it granted the

registration application of McNeilab, Inc. in 1981. Pet’r Br.

(02–1211) 57. We see no material difference in the DEA’s

treatment of the two applicants. McNeilab’s application was

approved ‘‘contingent upon the successful completion of all

necessary and pertinent actions outlined in the applications,

such as the construction of a secure manufacturing facility,

and upon the ultimate approval of those actions by the Drug

Enforcement Administration.’’ McNeilab, Inc., 46 Fed. Reg.

22,089 (DEA Apr. 15, 1981) (grant of registration; adopting

findings of fact and conclusions of law from NcNeilab, Inc,

Docket No. 78–12 (Aug. 20, 1980)). This is substantially what

the DEA did in approving Johnson Matthey’s application

‘‘upon Johnson Matthey’s providing to DEA, prior to the

receipt of the first shipment of NRMs, sufficient information

concerning its facilities and procedures contingent upon the

successful completion of all necessary and pertinent actions

outlined in the applications, such as the construction of a

secure manufacturing facility, and upon the ultimate approval

of those actions by the Drug Enforcement Administration.’’

67 Fed. Reg. at 39,045. In each case, the DEA withheld final

approval pending the applicant’s completion of its facilities

and the DEA’s ultimate approval thereof. Noramco complains in particular that the DEA did not require that Johnson Matthey, as McNeilab was required to do, provide a

‘‘concrete business plan calling for the importation of opium

and the construction of a plant capable of converting opium

into APIs.’’ Pet’r Br. (02–1211) at 58. Unlike McNeilab,

USCA Case #03-1060 Document #838059 Filed: 07/23/2004 Page 11 of 18
12

however, Johnson Matthey was already in the business of

importing and manufacturing controlled substances and had

facilities in place for doing so. Given Johnson Matthey’s

experience and its pre-existing facilities, the DEA reasonably

required less detailed specifications in advance of Jackson

Matthey’s proposed expansion.4

III. Penick’s Registration

Noramco and intervenor Mallinckrodt raise both statutory

and evidentiary challenges to the DEA’s approval of Penick’s

registration. We address, and reject, each of their arguments in turn.

First, Noramco and Mallinckrodt assert the DEA misinterpreted section 823(a)(1) as not requiring it to consider the

effect of Penick’s registration on diversion overseas, specifically potential diversion in India, a primary source of imported NRMs.5

 This argument fails for two reasons. First, the

DEA in fact considered and rejected the contention that

Penick’s registration would increase diversion in India. Noramco argued before the agency that Penick’s use of morphine-based technology was less efficient than Noramco’s use

of a high-thebaine-content poppy to produce oxycodone and

would therefore increase demand, cultivation and production

of opium in India and, in turn, the likelihood of diversion

there. See JA 145–49 (Decl. of Noramco Vice President

Michael Kindergan) (citing Decl. of Michael Wilson, Ph.D.).

The ALJ found that ‘‘Noramco’s and Mallinckrodt’s claims

that registering Penick would increase diversion in India are

speculative at best, particularly in light of the as-yet-unknown

impact of the expanded use of high-thebaine-content poppy

4 We have no basis to speculate, as Noramco asserts, that the

DEA’s review of Johnson Matthey’s final submissions will be less

than ‘‘rigorous.’’ See Pet’r Br. (02–1211) at 58.

5 The ‘‘80/20 Rule,’’ adopted by the DEA in 1981, requires that

‘‘[a]t least eighty (80) percent of the narcotic raw material imported

into the United States shall have as its original source Turkey and

India.’’ 21 C.F.R. § 1312.13(g).

USCA Case #03-1060 Document #838059 Filed: 07/23/2004 Page 12 of 18
13

straw as a narcotic raw material.’’ ALJ Op. II at 94.6

 We

agree with the ALJ’s assessment, especially in light of the

testimony by Penick’s research and development director that

Penick could also manufacture oxycodone from high-thebaine

poppy straw. See JA 997, 1004 (testimony of Bao–Shan

Huang, Ph.D.) In any event, the DEA’s alternate determination that it is not required to consider possible diversion

overseas reflects a reasonable construction of section

823(a)(1) and we therefore uphold it under step two of

Chevron.

As both the ALJ and the DEA noted, section 823(a)(1) is

silent on whether the ‘‘diversion’’ the DEA must consider is

limited to the United States or includes unlawful diversion

overseas as well.7

 Nonetheless, the language of the statute

itself, in its focus on importation and domestic manufacturing,

suggests, reasonably enough, that the Congress was concerned with preventing diversion in this country rather than

abroad. The legislative history similarly suggests an intent

to prevent diversion through control of commercial activities

that occur in this country, rather than in the countries of

origin. See Comprehensive Drug Abuse Prevention and Control Act of 1970, H. Rep. No. 91–1444 (Sept. 10, 1970),

6 It is questionable whether Noramco has preserved a challenge

to this finding, which it only barely disputes in a single paragraph of

the factual portion of its opening brief, Pet’r Br. (03–1060) at 43.

See United States v. Hall, 370 F.3d 1204, 1209 n.4 (D.C. Cir. 2004)

(‘‘[O]ne sentence, unaccompanied by argument or any citation to

authority, does not preserve the issue for decision.’’ (citing United

States v. Mathis, 216 F.3d 18, 27 n.4 (D.C. Cir. 2000); SEC v.

Banner Fund Int’l, 211 F.3d 602, 613–14 (D.C. Cir. 2000))).

7 Noramco’s brief repeatedly cites and quotes the Single Convention on Narcotic Drugs, a multinational treaty under which 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,’’ 68 Fed. Reg. at 6949. Nonetheless,

Noramco makes clear that ‘‘the command that DEA must take

account of ‘diversion’ comes from the text of the CSA itself,’’

specifically from section 823(a)(1), and not from the treaty. Pet’r

Br. (03–1060) at 48.

USCA Case #03-1060 Document #838059 Filed: 07/23/2004 Page 13 of 18
14

reprinted in 1970 U.S.C.C.A.N. 4566, 4571–72 (‘‘The Bill is

designed to improve the administration and regulation of the

manufacturing, distribution, and dispensing of controlled

substances by providing for a ‘closed’ system of drug distribution for legitimate handlers of such drugs. Such a closed

system should significantly reduce the widespread diversion

of these drugs out of legitimate channels into the illicit

marketTTTT’’). On the flip side, we find unpersuasive the

authorities Noramco cites to support its assertion that ‘‘diversion,’’ within the meaning of section 823(a)(1), is intended to

include pre-importation diversion overseas. Neither the

CSA’s restrictions on limiting the United States’ export of

narcotics nor policies, unrelated to the CSA, that reflect

concern over overseas diversion nor the testimony of a former

DEA Administrator (cautioning against registering importers

whose activities might adversely affect ‘‘ ‘the worldwide control, stability and supply of NRMs’ ’’ or ‘‘ ‘the international

drug control effort,’ ’’Pet’r Br. at (03–1060) at 53 (quoting

testimony of former Administrator Peter Bensinger)), negate

the reasonableness of the DEA’s construction of section

326(a)(1).8

Next, Noramco and Mallinckrodt challenge the DEA’s decision on a sufficiency of evidence ground. Under the CSA, the

8 Noramco and Mallinckrodt also argue that the DEA’s position

here is inconsistent with that expressed by DEA staff members in

two other proceedings pending before the DEA (Chattem Chems.,

Inc., DEA Docket No. 01–45, and Houba, Inc., DEA Docket No. 02–

6), in support of which Noramco has filed a supplemental appendix

of materials from those proceedings in No. 03–1060 and moved to

file a similar supplemental appendix in 02–1211. Challenging the

DEA’s decision here based on the agency’s subsequent position,

however, ‘‘puts the cart before the horse.’’ Cellular Mobile Sys. of

Penn., Inc. v. FCC, 782 F.2d 182, 207–08 (D.C. Cir. 1985). It is the

DEA’s position here to which it will be held in the later decisions.

Id. In any event, views expressed by staff do not constitute

authoritative agency action. See WHX Corp. v. SEC, 362 F.3d 854.

860 (D.C. Cir. 2004). Accordingly, we deny Noramco’s motion to

file a supplemental brief in No. 02–1211 and grant Penick’s motion

to strike the supplemental appendix filed in No. 03–1060.

USCA Case #03-1060 Document #838059 Filed: 07/23/2004 Page 14 of 18
15

DEA’s findings of fact, ‘‘if supported by substantial evidence,

shall be conclusive.’’ 21 U.S.C. § 877; see MD Pharmaceutical, Inc. v. DEA, 133 F.3d 8, 14 (D.C. Cir. 1998). We

conclude that the challenged portions of the DEA’s decision

are supported by substantial evidence in the record.

Noramco and Mallinckrodt first assert that substantial

evidence does not support the DEA’s finding, in support of

registration, that competition among NRM importers that

process APIs is not adequate.9

 See 21 U.S.C. § 823(a)(1)

(directing DEA to consider ‘‘maintenance of effective controls

against diversion of [controlled substances and their compounds] into other than legitimate medical, scientific, research, or industrial channels, 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’’). The ALJ concluded that competition was inadequate based on the undisputed evidence that

‘‘the prices of active pharmaceutical ingredients rose steeply

from 1991 to 2000,’’ concluding that ‘‘[t]his price increase,

absent specific explanation, is strong evidence of a lack of

competition in the active pharmaceutical ingredient market.’’

ALJ Op. II at 92. The ALJ acknowledged that during the

period there were a number of ‘‘switches’’ by purchasers from

one of the bulk suppliers (Noramco and Mallinckrodt) to the

9 Mallinckrodt also complains that the DEA’s decisions are inconsistent regarding whether the Agency is required to analyze the

adequacy of competition and supply before issuing a registration,

noting that, while the DEA performed such an analysis in this case,

it did not do so in Johnson Matthey. We reject this argument for

two reasons. First, whatever injury Mallinckrodt may claim from

this inconsistency occurred not in this case but in Johnson Matthey,

in which Mallinckrodt elected not to participate before this court.

In any event, as noted supra pp. 8–9 & n.2, the DEA has long

adhered to the policy that it need not address adequacy of competition if, as the DEA found in the case of Johnson Matthey’s

registration, effective diversion controls are in place.

USCA Case #03-1060 Document #838059 Filed: 07/23/2004 Page 15 of 18
16

other but concluded they ‘‘do not demonstrate strong competition.’’10 Id.

Noramco and Mallinckrodt argue, as they did before the

agency, that the price increases are attributable to rising

costs of raw materials, rather than lack of competition, and

cite their expert’s testimony before the ALJ that their profit

10 The ALJ analyzed the adequacy of competition under the

factors set out in 21 C.F.R. § 1301.34(d), which provides:

(d) In determining whether competition among the domestic

manufacturers of a controlled substance is adequate within the

meaning of paragraphs (b)(1) and (b)(6)(iii) of this section, as

well as section 1002(a)(2)(B) of the Act (21 U.S.C. 952(a)(2)(B)),

the Administrator shall consider:

(1) The extent of price rigidity in the light of changes in:

 (i) raw materials and other costs and

 (ii) conditions of supply and demand;

(2) The extent of service and quality competition among the

domestic manufacturers for shares of the domestic market

including:

 (i) Shifts in market shares and

 (ii) Shifts in individual customers among domestic manufacturers;

(3) The existence of substantial differentials between domestic prices and the higher of prices generally prevailing in

foreign markets or the prices at which the applicant for

registration to import is committed to undertake to provide

such products in the domestic market in conformity with the

Act. In determining the existence of substantial differentials

hereunder, appropriate consideration should be given to any

additional costs imposed on domestic 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 in the

foreign market or markets from which the importer is obtaining his/her supply;

(4) The existence of competitive restraints imposed upon

domestic manufacturers by governmental regulations; and

(5) Such other factors as may be relevant to the determinations required under this paragraph.

USCA Case #03-1060 Document #838059 Filed: 07/23/2004 Page 16 of 18
17

margins actually decreased between 1988 and 2000. The

ALJ, however, found the increases in API prices and NRM

costs ‘‘do not correlate strongly,’’ id., and this finding is

supported by the evidence. Penick’s expert economic witness, Michael I. Cragg, disputed the opinions of Noramco’s

and Mallinckrodt’s experts, explaining they had compared

apples with oranges. Cragg testified that the comparison of

API prices and NRM costs ‘‘does not account for the relative

importance of NRM inputs in overall costs’’ because ‘‘[a]

kilogram of API and a kilogram of NRM are not comparable—the mistake is analogous to comparing the price of a

gallon of gasoline to the price of a gallon of crude oil.’’ JA

193 (Written Revised Direct Testimony of Michael I. Cragg,

Ph.D.). The ALJ credited Cragg’s testimony over the other

experts’, see ALJ Op. II at 89 (‘‘[T]he two types of increases

[costs of NRMs and prices of APIs] seem to be only loosely

related when the proportion of the price of the active pharmaceutical ingredient that is attributable to the narcotic raw

material is taken into consideration.’’), and our review of her

choice among the ‘‘ ‘disputing expert witnesses’ ’’ is ‘‘particularly deferential.’’ Fla. Mun. Power Agency v. FERC. 315

F.3d 362, 368 (D.C. Cir. 2003) (quoting Wis. Valley Improvement Co. v. FERC, 236 F.3d 738, 746–47 (D.C. Cir. 2001)).

Moreover, it is not surprising that profit margins declined

somewhat after 1994 when Noramco joined Mallinckrodt in

the market, transforming it from a monopoly to a duopoly—

but this does not mean the minimal competition between two

market participants was adequate. Noramco and Mallinckrodt also cite the evidence of customer switches between

them as evidence of competition but, as the ALJ noted, citing

Cragg’s testimony, there was no evidence these switches were

related to changes in API prices. Last, Noramco and Mallinckrodt assert that increased competition will not reduce the

price of drugs to the consumer. This may be true but

expanding the playing field may yield other benefits such as

reduced prices for bulk API purchasers and improved product quality, reliability of supply, financial terms and conditions and order lead times.

USCA Case #03-1060 Document #838059 Filed: 07/23/2004 Page 17 of 18
18

Finally, Noramco challenges the DEA’s finding that Penick’s registration will promote technical advances. Specifically, Noramco asserts that Penick’s morphine-based production

technology is less efficient than Noramco’s high-thebaine

poppy technology. This argument overlooks the substantial

evidence that Penick has developed and patented numerous

other processing technologies. See, e.g., JA 42–43, 72, 2384–

85, 2696. Accordingly, we reject this argument as well.

* * *

For the foregoing reasons, the petitions for review in these

cases are denied.

So ordered.

USCA Case #03-1060 Document #838059 Filed: 07/23/2004 Page 18 of 18