[Federal Register Volume 72, Number 127 (Tuesday, July 3, 2007)]
[Notices]
[Pages 36487-36504]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 07-3218]


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DEPARTMENT OF JUSTICE

Drug Enforcement Administration

[Docket No. 07-7]


Southwood Pharmaceuticals, Inc.; Revocation of Registration

    On November 30, 2006, I, the Deputy Administrator of the Drug 
Enforcement Administration, issued an Order to Show Cause and Immediate 
Suspension of Registration to Southwood Pharmaceuticals, Inc. 
(Respondent), of Lake Forest, California. The Order immediately 
suspended Respondent's DEA Certificate of Registration, RS0204898, 
based on my preliminary finding that its continued registration 
``constitute[s] an imminent danger to the public health and safety 
because of the substantial likelihood that Southwood [would] continue 
to supply pharmacies that divert large quantities of controlled 
substances.'' Show Cause Order at 3. The Order also sought the 
revocation of Respondent's registration on the ground that its 
continued registration is ``inconsistent with the public interest.'' 
Id. at 1 (citing 21 U.S.C. 823(d) & 824(a)(4)).
    The Show Cause Order alleged that between November 2005 and August 
2006, Respondent's sales to pharmacies of hydrocodone products 
``increased from approximately 7,000 dosage units per month to 
approximately 3,000,000 dosage units per month,'' and that the increase 
was ``directly attributable to [its] supplying controlled substances to 
pharmacies that it knew or should have known were engaged in the 
widespread diversion of controlled substances.'' Id. The Show Cause 
Order alleged that several of Respondent's customers were distributing 
``large amounts of hydrocodone based on orders placed by customers 
using various Internet Web sites.'' Id.
    The Show Cause Order specifically alleged that ``from December 12, 
2005, to August 31, 2006, [Respondent] distributed approximately 
8,671,000 dosage units of hydrocodone products to Medipharm-Rx, Inc.,'' 
and did so ``under circumstances that clearly indicated that Medipharm 
was engaged in the diversion of controlled substances.'' Id. at 1-2. 
The Show Cause Order further alleged that these circumstances included 
that ``ninety-nine percent of Medipharm's business [with Respondent] 
involved the sale of controlled substances,'' that Medipharm was owned 
by an individual who also owned a Web site ``that solicit[ed] orders 
for controlled substances'' and used practitioners who issued 
prescriptions outside of ``the usual course of professional practice,'' 
and that ``Medipharm's orders were of an unusual size, deviated 
substantially from a normal pattern, and were of an unusual 
frequency.'' Id. at 2.
    Relatedly, the Show Cause Order alleged that Respondent had ``also 
supplied controlled substances under similarly suspicious 
circumstances'' to fourteen other pharmacies. Id. The Show Cause Order 
thus alleged that Respondent ``repeatedly supplied excessive quantities 
of hydrocodone to pharmacies that it knew or should have known were 
diverting hydrocodone.'' Id. Moreover, the Show Cause Order alleged 
that notwithstanding ``the unusual size and frequency of the orders 
placed by Medipharm and others, as well as the fact that the orders 
substantially deviated from the normal pattern of orders received by'' 
it, Respondent never reported any of the orders as suspicious. Id. at 
2-3.
    Next, the Show Cause Order alleged that on July 17, 2006, the 
Office of Diversion Control's E-Commerce Section held a conference call 
with Respondent's representatives to discuss ``the distribution of 
controlled substances to Internet pharmacies.'' Id. at 3. During the 
call, DEA officials allegedly presented Respondent with ``information 
on the characteristics of Internet pharmacies and the nature of their 
illegal activities.'' Id. DEA officials also allegedly discussed with 
Respondent such subjects as DEA's 2001 Guidance Document on the use of 
the Internet to prescribe controlled substances, the requirement for a 
valid prescription under federal law and existing professional 
standards, DEA's regulation requiring the reporting of suspicious 
orders, and the ``practices and ordering patterns of internet 
pharmacies.'' Id. The Show Cause Order further alleged that 
notwithstanding this information, in August 2006, Respondent proceeded 
to distribute large quantities of hydrocodone to five different 
internet pharmacies. Id. The Show Cause Order thus alleged that 
Respondent ``has failed to maintain effective controls against 
diversion and that [its] continued registration * * * would be 
inconsistent with the public interest.'' Id.
    On December 6, 2006, the Show Cause Order was served on Respondent. 
ALJ Ex. 2. Thereafter, on December 29, 2006, Respondent, through its 
counsel, requested a hearing. ALJ Ex. 3. The matter was assigned to 
Administrative Law Judge (ALJ) Gail Randall, who conducted a hearing in 
Arlington, Virginia, from February 5 through February 8, 2007. At the 
hearing, both parties called witnesses and introduced documentary 
evidence. Following the hearing, both parties submitted briefs 
containing proposed findings of fact, conclusions of law, and argument.
    On March 30, 2007, the ALJ issued her recommended decision (ALJ). 
In that decision, the ALJ concluded that DEA had proved that 
``Respondent's continued registration to handle hydrocodone products 
would be against the public interest.'' ALJ at 61-62. The ALJ 
concluded, however, that Respondent ``has kept an open dialogue with 
the DEA and has attempted to come into compliance with the DEA's 
regulations.'' Id. at 62. While acknowledging ``the egregious 
quantities of hydrocodone products the Respondent irresponsibly sold to 
registered [i]nternet pharmacies during 2005 and 2006,'' the ALJ 
nonetheless ``conclude[d] that revocation of * * * Respondent's entire 
DEA registration is too severe a remedy.'' Id.
    Continuing, the ALJ explained that ``the record contains no 
evidence of * * * Respondent's improper handling of any other 
controlled substances, especially in its sales of manufactured products 
to its practitioner customers.'' Id. Noting that Respondent had hired 
an ``experienced officer who will be making the final decisions 
concerning [its] compliance measures,'' and that this would provide 
``an increased level of protection of the public interest,'' the ALJ 
recommended that Respondent's authority to handle hydrocodone products 
be revoked but that it retain its

[[Page 36488]]

authority to handle other controlled substances. Id. The ALJ further 
recommended that DEA monitor Respondent to ensure that it comply with 
both her proposed restrictions and Respondent's decision to cease 
distributing to Florida-based internet pharmacies. Id.
    Thereafter, the Government filed exceptions. In its exceptions, the 
Government contended that the record established that Respondent had 
also distributed excessive quantities of other controlled substances 
included phentermine and alprazolam. See Gov. Exceptions at 2-9. The 
Government also contended that the ALJ's reliance on Respondent's 
hiring of a new Chief Operating Officer (COO) was misplaced because the 
company had, in fact, sold increasing amounts of controlled substances 
to ``rogue [i]nternet pharmacies'' for several months thereafter. Id. 
at 11. The Government further argued that under the ``day to day 
leadership'' of its new COO, Respondent had continued to constructively 
distribute controlled substances to its physician clients after its 
registration was suspended. Id. According to the Government, this 
conduct ``refutes the ALJ's hypothesis that [the new COO] will 
effectively manage Respondent's compliance program.'' Id.
    In response, Respondent argued that the Government had ``largely 
buried its concerns'' regarding the distribution of phentermine noting 
that the drug was not mentioned in the Show Cause Order, the lengthy 
stipulation of facts, or in the Government's opening statement. 
Respondent's Resp. at 2-3. Respondent further argued that it has 
stipulated that it will not ``ship phentermine to any pharmacy, should 
its registration be restored.'' Id. at 2. With respect to alprazolam, 
Respondent argued that ``the government wholly buried its concern with 
this substance, making explicit reference to it only in its 
Exceptions.'' Id. Finally, Respondent argued that the ALJ's findings 
regarding its new COO are based on credibility determinations and are 
entitled to deference. Id. at 4-6.
    Thereafter, on May 8, 2007, the ALJ forwarded the record to me for 
final agency action. Having reviewed the record as a whole, I hereby 
issue this decision and final order. I adopt the ALJ's findings of fact 
and conclusions of law except as expressly noted herein. However, for 
reasons explained below, I conclude that the ALJ's proposed remedy is 
insufficient to protect the public interest. While I am mindful of the 
corrective measures engaged in by Respondent, its sales of 
extraordinary quantities of controlled substances to entities which it 
had reason to know were diverting the drugs caused extraordinary harm 
to public health and safety. Therefore, Respondent's registration will 
be revoked and its pending renewal application will be denied. I make 
the following findings.

Findings

    Respondent Southwood Pharmaceuticals, Inc., is the holder of DEA 
Certificate of Registration, RS0204898, which authorizes it to 
manufacture controlled substances in schedules 3, 3N, 4, and 5. GX 1. 
While the expiration date of its registration was February 28, 2007, 
see id., Respondent submitted a timely renewal application. See Resp. 
Ex. 110. Respondent's registration thus remains in effect (although in 
suspended status) pending the issuance of this order. 5 U.S.C. 558(c).
    Respondent's market niche was the repackaging of oral dose generic 
drug products into common prescription quantities which it then 
distributed. ALJ at 3. Until December 2005, Respondent's customer base 
was primarily comprised of dispensing physicians who specialized in 
treating injured workers, pain management and urgent care. Id. at 3-4. 
Respondent also distributed its products to group practices, specialty 
clinics and some traditional retail pharmacies. Id. Among the drugs 
distributed by Respondent were schedule III controlled substances 
containing hydrocodone.\1\ See 21 CFR 1308.13(e).
---------------------------------------------------------------------------

    \1\ By itself, hydrocodone is a schedule II controlled 
substance. 21 CFR 1308.12(b)(1). Respondent did not, however, 
distribute schedule II hydrocodone. Throughout this decision, the 
term hydrocodone refers to those schedule III controlled substances 
which contain hydrocodone.
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Respondent's Hydrocodone Sales

    According to data submitted by Respondent through DEA's ARCOS 
system, during the four-month period from August through November 2005, 
it sold 3,949,454 dosage units of hydrocodone products. ALJ at 4. Of 
this amount, Respondent's individual practitioner customers purchased 
3,882,507 dosage units of the drug. Id. By contrast, Respondent sold 
approximately 29,940 dosage units of hydrocodone products to its retail 
pharmacy customers, for an average of 7,485 dosage units per month. Id. 
at 5.
    On December 7, 2005, Respondent entered a new line of business--
supplying internet pharmacies--by selling hydrocodone to Medipharm-Rx, 
Inc. (Medipharm), a Florida-based internet pharmacy.\2\ Id. Over the 
ensuing months, Respondent acquired numerous additional internet 
pharmacy customers to whom it repeatedly sold large quantities of 
hydrocodone.
---------------------------------------------------------------------------

    \2\ For purposes of this decision, the term ``internet 
pharmacy'' refers to a pharmacy that fills a prescription that is 
issued by the physician without the physician having entered into a 
legitimate doctor-patient relationship under existing professional 
standards. Typically, a person seeking controlled substances goes to 
an internet site, fills out a questionnaire which requests basic 
medical information and payment/shipping information, and requests a 
specific drug; some Web sites may require that the patient submit a 
medical record, which is easily falsified. Thereafter, the 
customer's information is forwarded to a physician either contracted 
to or employed by the Web site, who reviews the information and 
issues a prescription, either with or without the benefit of a 
perfunctory telephone consultation, but always without having 
conducted a face-to-face review of the person's medical history and 
a physical exam. The prescription is then either forwarded to the 
pharmacy or downloaded electronically by the pharmacy; the pharmacy 
then fills the prescription and ships it to the customer. See GX 3.
---------------------------------------------------------------------------

    According to the stipulated facts, from December 2005 through 
October 2006, Respondent supplied Medipharm with an average of 
1,011,882 dosage units of hydrocodone per month. ALJ at 5. Respondent 
also supplied Medipharm with approximately 538,290 dosage units of 
hydrocodone during the first half of November 2006, at which time 
Medipharm's registration was immediately suspended under 21 U.S.C. 
824(d). Id. at 5-6.
    The following table reflects Respondent's monthly distributions of 
hydrocodone to Medipharm:

------------------------------------------------------------------------
                           Month                               Quantity
------------------------------------------------------------------------
December 2005..............................................      817,010
January 2006...............................................      939,340
February 2006..............................................    1,142,250
March 2006.................................................    1,071,450
April 2006.................................................      703,550
May 2006...................................................      808,500
June 2006..................................................    1,142,000
July 2006..................................................      800,340
August 2006................................................    1,246,560
September 2006.............................................    1,450,380
October 2006...............................................    1,009,320
------------------------------------------------------------------------

Id. at 5. According to a July 2006 report created by Respondent of its 
largest purchasers of controlled substances from December 2005 through 
June 2006, controlled substances constituted ninety-nine percent of its 
prescription drug sales to Medipharm. Resp. Ex. 47.
    On December 19, 2005, Respondent obtained another Florida-based 
internet pharmacy customer, Accumed Rx, Inc. (Accumed). ALJ at 7. 
Respondent supplied Accumed with approximately 5,884,212 dosage units 
of hydrocodone as tabulated below:

[[Page 36489]]



------------------------------------------------------------------------
                           Month                               Quantity
------------------------------------------------------------------------
December 2005..............................................      273,630
January 2006...............................................      203,070
February 2006..............................................      147,180
March 2006.................................................       83,500
April 2006.................................................      169,000
May 2006...................................................      519,380
June 2006..................................................      320,470
July 2006..................................................      442,000
August 2006................................................    1,267,770
September 2006.............................................      503,020
October 2006...............................................      393,610
November 2006..............................................    1,561,582
------------------------------------------------------------------------

Id. at 8. Between December 2005 and June 2006, controlled substances 
comprised ninety-nine percent of Respondent's prescription drug sales 
to Accumed. Resp. Ex. 47.
    On December 21, 2005, Respondent obtained another Florida-based 
internet pharmacy customer, Avee Pharmacy, Inc. (Avee). ALJ at 6. 
Respondent's sales of hydrocodone to Avee averaged 566,259 dosage units 
a month and are tabulated below:

------------------------------------------------------------------------
                           Month                               Quantity
------------------------------------------------------------------------
December 2005..............................................      346,140
January 2006...............................................      859,860
February 2006..............................................            0
March 2006.................................................      912,190
April 2006.................................................       76,190
May 2006...................................................      212,000
June 2006..................................................      442,800
July 2006..................................................       94,000
August 2006................................................      506,430
September 2006.............................................      695,800
October 2006...............................................      537,900
November 2006..............................................    2,111,800
------------------------------------------------------------------------

Id. Respondent also supplied Avee with 238,140 dosage units during the 
first five days of December 2006. Id. at 7. From December 2005 through 
June 2006, controlled substances constituted one hundred percent of 
Respondent's sales to Avee. Resp. Ex. 47.
    On November 17, 2006, Respondent notified Avee by letter that 
effective December 15, 2006, it would not supply the pharmacy, whose 
registration had been continued on a day-to-day basis past its 
expiration date and not renewed, unless it obtained a renewal of its 
registration.\3\ Resp. Ex. 77. Between November 17 and December 5, 
2006, however, Respondent supplied Avee with approximately 1,804,940 
dosage units of hydrocodone. ALJ at 7.
---------------------------------------------------------------------------

    \3\ Effective December 15, 2006, Respondent instituted a policy 
of not supplying registrants whose registration remained in effect 
on a day-to-day basis for more than two months past the expiration 
date. Resp. Ex. 77. Respondent's DEA registration was suspended 
before the policy became effective.
---------------------------------------------------------------------------

    On January 4, 2006, United Prescription Services, Inc. (United), 
another internet pharmacy, became a customer of Respondent. ALJ at 14. 
Respondent sold an average of 92,988 dosage units of hydrocodone per 
month to United as tabulated below:

------------------------------------------------------------------------
                           Month                               Quantity
------------------------------------------------------------------------
February 2006..............................................      341,160
March 2006.................................................      288,000
April 2006.................................................       18,000
May 2006...................................................       18,000
June 2006..................................................       37,200
July 2006..................................................       18,000
August 2006................................................       18,000
September 2006.............................................            0
October 2006...............................................       12,000
November 2006..............................................      179,520
------------------------------------------------------------------------

Id.
    From the date United became a customer through June 2006, 
controlled substances constituted one hundred percent of Respondent's 
prescription drug sales to it. Resp. Ex. 47. On November 17, 2006, 
Respondent notified United that it would stop supplying the pharmacy if 
it did not obtain a renewal of its registration. Id. at 14. From 
November 21, 2006, through December 5, 2006, however, Respondent 
distributed to United approximately 158,280 dosage units of 
hydrocodone. Id.
    On January 25, 2006, Respondent acquired two more internet pharmacy 
customers, RKR Holdings, d/b/a Medichem RX Pharmacy (Medichem), and Bi-
Wise Drugs, Inc. (Bi-Wise). ALJ at 11, 13. Between January and November 
2006, Respondent sold Medichem a monthly average of 216,638 dosage 
units of hydrocodone as tabulated below:

------------------------------------------------------------------------
                           Month                               Quantity
------------------------------------------------------------------------
January 2006...............................................       66,000
February 2006..............................................      264,000
March 2006.................................................      276,000
April 2006.................................................      168,000
May 2006...................................................      286,200
June 2006..................................................      264,000
July 2006..................................................      120,000
August 2006................................................      216,000
September 2006.............................................      220,680
October 2006...............................................      262,140
November 2006..............................................      240,000
------------------------------------------------------------------------

Id. at 11-12. From the date it became a customer through June 2006, 
controlled substances constituted one hundred percent of Respondent's 
prescription drug sales to Medichem. Resp. Ex. 47.
    From January 25 through October 2006, Respondent's hydrocodone 
sales to Bi-Wise averaged 117,150 dosage units per month. ALJ at 13. 
Moreover, from the date Bi-Wise became a customer through the end of 
June 2006, controlled substances constituted ninety-nine percent of 
Respondent's prescription drugs sales to it. Resp. Ex. 47. Respondent's 
hydrocodone sales to Bi-Wise are tabulated below:

------------------------------------------------------------------------
                           Month                               Quantity
------------------------------------------------------------------------
January 2006...............................................       70,800
February 2006..............................................       18,240
March 2006.................................................      152,750
April 2006.................................................       63,860
May 2006...................................................      112,300
June 2006..................................................      180,000
July 2006..................................................      131,750
August 2006................................................      185,940
September 2006.............................................      111,180
October 2006...............................................      144,680
------------------------------------------------------------------------

ALJ at 13.
    On February 16, 2006, Respondent acquired another internet pharmacy 
customer, Vin-Kash, Inc., d/b/a/ Medicom RX. Id. at 12. Through October 
2006, Respondent supplied Medicom with an average of 190,281 dosage 
units of hydrocodone per month. Id. Respondent's sales are tabulated 
below:

------------------------------------------------------------------------
                           Month                               Quantity
------------------------------------------------------------------------
February 2006..............................................       14,000
March 2006.................................................       54,430
April 2006.................................................      157,850
May 2006...................................................      175,850
June 2006..................................................      231,100
July 2006..................................................      227,240
August 2006................................................      117,650
September 2006.............................................      164,000
October 2006...............................................      375,690
November 2006..............................................      385,000
------------------------------------------------------------------------

Id. Respondent also supplied Medicom with approximately 82,750 dosage 
units of hydrocodone during the first five days of December 2006. Id. 
at 13. Moreover, from the date it became a customer through June 2006, 
controlled substances comprised one hundred percent of Respondent's 
prescription drug sales to Medicom. Resp. Ex. 47.
    On February 20, 2006, Respondent obtained another internet pharmacy 
customer, Discount Mail Meds (Discount). ALJ at 8. From the inception 
of the relationship through November 2006, Respondent supplied Discount 
with an average of 330,324 dosage units of hydrocodone per month as 
tabulated below:

------------------------------------------------------------------------
                           Month                               Quantity
------------------------------------------------------------------------
February 2006..............................................       72,000
March 2006.................................................      269,500
April 2006.................................................      269,000
May 2006...................................................      364,500
June 2006..................................................      373,600
July 2006..................................................      317,780
August 2006................................................      292,720
September 2006.............................................      340,100
October 2006...............................................      501,280
November 2006..............................................      502,760
------------------------------------------------------------------------


[[Page 36490]]

Id. at 9. Respondent also supplied Discount with 43,200 dosage units of 
hydrocodone during the first five days of December 2006. Id. Moreover, 
from the date it became a customer through June 2006, controlled 
substances comprised one hundred percent of Respondent's prescription 
drug sales to Discount. Resp. Ex. 47.
    On February 22, 2006, Respondent commenced doing business with 
Universal Rx (Universal). ALJ at 9. From February through October 2006, 
Respondent supplied Universal with an average of 308,679 dosage units 
of hydrocodone per month as tabulated below:

------------------------------------------------------------------------
                           Month                               Quantity
------------------------------------------------------------------------
February 2006..............................................       60,000
March 2006.................................................      164,250
April 2206.................................................      291,000
May 2006...................................................      245,250
June 2006..................................................      384,700
July 2006..................................................      422,670
August 2006................................................      394,070
September 2006.............................................      340,500
October 2006...............................................      453,690
November 2006..............................................      330,660
------------------------------------------------------------------------

Id. at 9-10. From the date it became a customer through June 2006, 
controlled substances comprised one hundred percent of Respondent's 
prescription drug sales to Universal. Resp. Ex. 47.
    On November 17, 2006, Respondent notified Universal that, effective 
December 15, 2006, it would stop supplying the pharmacy unless it 
obtained a renewal of its registration. ALJ at 10. During the last two 
weeks of November 2006, Respondent shipped approximately 150,210 dosage 
units of hydrocodone to Universal. Id. On November 30, 2006, Respondent 
stopped shipments to Universal. Id
    On March 3, 2006, Respondent began doing business with Medcenter, 
Inc. (Medcenter), an entity owned by the same person who owned 
Medipharm. Id. at 10-11. From March through October 2006, Respondent 
supplied Medcenter with an average of 333,063 dosage units of 
hydrocodone per month as tabulated below:

------------------------------------------------------------------------
                           Month                               Quantity
------------------------------------------------------------------------
March 2006.................................................      340,500
April 2006.................................................      141,000
May 2006...................................................      153,000
June 2006..................................................      375,000
July 2006..................................................      102,000
August 2006................................................      567,000
September 2006.............................................      378,000
October 2006...............................................      608,000
------------------------------------------------------------------------

Id. Additionally, during the first two weeks of November, at which 
point Medcenter's DEA registration was suspended pursuant to 21 U.S.C. 
824(d), Respondent distributed 313,680 dosages units of hydrocodone to 
it. Id. at 11. Moreover, from the date it became a customer through 
June 2006, controlled substances constituted one hundred percent of 
Respondent's prescription drug sales to Medcenter. Resp. Ex. 47.
    On March 9, 2006, Respondent commenced doing business with CRJ 
Pharmacy, Inc. (CRJ). ALJ at 15. From March through October 2006, 
Respondent sold CRJ an average of 79,803 units of hydrocodone per month 
as tabulated below:

------------------------------------------------------------------------
                           Month                               Quantity
------------------------------------------------------------------------
March 2006.................................................       63,360
April 2006.................................................       76,200
May 2006...................................................       25,320
June 2006..................................................       49,240
July 2006..................................................       52,200
August 2006................................................       75,700
September 2006.............................................       96,000
October 2006...............................................      200,400
------------------------------------------------------------------------

Id. From the date it became a customer through June 2006, controlled 
substances comprised ninety-eight percent of Respondent's prescription 
drug sales to CRJ. Resp. Ex. 47.
    In May 2006, Respondent acquired another two customers, Grand 
Pharmacy (Grand), and Akshar Chemists, Inc., d/b/a Medicine Shoppe 
(Medicine Shoppe). ALJ at 16-17. Respondent supplied Grand with an 
average of 144,102 dosage units of hydrocodone per month between May 
and November 2006 as tabulated below:

------------------------------------------------------------------------
                           Month                               Quantity
------------------------------------------------------------------------
May 2006...................................................       24,000
June 2006..................................................      228,720
July 2006..................................................      180,000
August 2006................................................      180,000
September 2006.............................................      144,000
October 2006...............................................      144,000
November 2006..............................................      108,000
------------------------------------------------------------------------

Id. at 17.
    During the same period, Respondent supplied the Medicine Shoppe 
with an average of 73,365 dosage units of hydrocodone per month as 
tabulated below:

------------------------------------------------------------------------
                           Month                               Quantity
------------------------------------------------------------------------
May 2006...................................................       62,100
June 2006..................................................      162,340
July 2006..................................................      164,875
August 2006................................................       21,200
September 2006.............................................       12,000
October 2006...............................................       33,300
November 2006..............................................       57,740
------------------------------------------------------------------------

Id. During the first five days of December 2006, Respondent also 
supplied the Medicine Shoppe with approximately 17,010 dosage units of 
hydrocodone. Id.
    In July 2006, Q-R-G, Inc., d/b/a Duane's Discount Group (Duane's), 
began purchasing hydrocodone from Respondent. Id. at 16. From July 
through November 2006, Respondent supplied Duane's with an average of 
191,808 dosage units of hydrocodone per month as tabulated below:

------------------------------------------------------------------------
                           Month                               Quantity
------------------------------------------------------------------------
July 2006..................................................      188,400
August 2006................................................      188,940
September 2006.............................................      145,500
October 2006...............................................      276,900
November 2006..............................................      159,300
------------------------------------------------------------------------

Id. During the first five days of December 2006, Respondent supplied 
Duane's with an additional 74,850 dosage units of hydrocodone.\4\ Id.
---------------------------------------------------------------------------

    \4\ Respondent also sold 502,750 dosage units of hydrocodone to 
Woody Pharmacy Waterside, Inc., during April and May 2006, for an 
average of 251,375 units per month. ALJ at 15-16. Respondent also 
supplied Elite Pharmacy, Inc., with 140,000 dosage units of 
hydrocodone during the month of January 2006. Id. at 18.
---------------------------------------------------------------------------

    From the date it began supplying internet pharmacies in December 
2005 through November 2006, Respondent sold a total of approximately 
44,087,355 dosage units of hydrocodone to these entities. Gov. Ex. 43. 
at 1.\5\ Respondent's monthly sales of hydrocodone to these entities 
grew from approximately 1.44 million dosage units in December 2005 to 
5.78 million dosage units in November 2006. Id. at 2. By contrast, 
during the even longer time frame of August 2005 through November 2006, 
Respondent's sales of hydrocodone to its retail pharmacy customers 
never exceeded more than 16,040 dosage units in a month and typically 
never exceeded 10,000 dosage units in a month. Id. at 3.
---------------------------------------------------------------------------

    \5\ This exhibit covers the period from August 2005 through 
November 2006. Gov. Ex. 43. As found above, Respondent did not begin 
distributing to internet pharmacies until December 2005.
---------------------------------------------------------------------------

    The Government also introduced into evidence a table showing the 
average purchase of hydrocodone products by retail pharmacies in the 
State of Florida and nationwide during the period October 1, 2005, 
through January 31, 2006. See Gov. Ex. 45, at 8. This evidence 
established that Florida retail pharmacies purchased an average of 
23,850 dosage units of hydrocodone during the four month period; 
nationwide, retail pharmacies bought an average of 24,227 dosage units 
of the drug. Id.
    The record further establishes that many of Respondent's Florida-
based pharmacy customers were, in fact,

[[Page 36491]]

dispensing illegal prescriptions for controlled substances. More 
specifically, the record demonstrates that Avee (see GX 51), Medipharm 
(see GX 53 & 62), United (see GX 54), YPM Total Care Pharmacy (see GX 
66), CRJ (GX 67), Bi-Wise (see Tr. 671-72); Universal (see id.), and 
Accumed (see id.), were dispensing large numbers of prescriptions which 
were not issued in the course of a legitimate doctor-patient 
relationship and thus violated Federal law. See 21 CFR 1306.04; see 
also Tr. 628-29, 639-45, 655-57, 660-67.

Respondent's Due Diligence Efforts

    During the events at issue here, Mr. Robert Goodrich was 
Respondent's Director of Operations and Regulatory Affairs. Tr. 311. 
According to Mr. Goodrich, from ``a regulatory perspective,'' 
Respondent's due diligence in approving a new customer was limited to 
verifying that the customer had a State license and a DEA registration. 
Id. at 313-14. When asked by the Government whether Respondent had any 
processes in place prior to approving a new customer to purchase 
controlled substances, Mr. Goodrich testified that the primary process 
was to check the customer's DEA registration and that there was ``no'' 
secondary process. Id. at 318; see also ALJ at 34 (FOF 117). Based 
solely on its verifications of the entities' DEA registrations and 
state licenses, Respondent commenced to ship large quantities of 
controlled substances to the various internet pharmacies.
    In early February 2006, Mr. Goodrich traveled to the Tampa Bay, 
Florida area, to conduct on-site visits with Respondent's sales 
representative, Tom Mollick, at several of the internet pharmacy 
customers which Respondent had recently acquired including Medipharm, 
Accumed, Medichem, Bi-Wise, and Avee. Tr. 319. According to Mr. 
Goodrich, the pharmacies were selected because ``it was apparent that 
they were a different type of a customer than what we'd been used to 
dealing with.'' Id.
    At Medipharm, Mr. Goodrich found that it was filling 700 
prescriptions a day and noted that it was a ``Closed-Door (Mail Order) 
Pharmacy.'' GX 16. In his report, Mr. Goodrich specifically noted that 
``[t]he mail order business has ties to internet pharmacy with a large 
amount of pain management and a growing percentage of traditional 
maintenance medications.'' Id.
    At Accumed, Mr. Goodrich determined that it was filling 350 
prescriptions a day and that it also was a ``Closed-Door (Mail Order) 
Pharmacy.'' GX 17. In his report, Mr. Goodrich observed that Accumed 
has ``ties to the internet and * * * explained [its] requirement to 
check prescriber credentials.'' Id.
    At Medichem, Mr. Goodrich found that it was both a ``Retail & 
Closed-Door (Mail-Order) Pharmacy'' with a volume of 100 prescriptions 
per day. GX 18. Mr. Goodrich noted that while ``Medichem is primarily 
filling prescriptions on a local and state level * * * there was 
evidence of prescriptions being mailed out-of-state as well.'' Id. Mr. 
Goodrich further observed that Medichem does ``have some ties to the 
internet community and they appear to be in the process of determining 
their market niche.'' Id.
    At Avee, Mr. Goodrich found that it was a ``Closed-Door (Mail-
Order) Pharmacy,'' with a prescription volume of 500 per day. GX 20. 
Mr. Goodrich specifically noted that ``Avee operates a closed pharmacy 
that provides mail order fulfillment of prescriptions from various 
sources, including internet-connected medical providers who provide 
patient assessments and diagnosis through unconventional practice 
models. Many of these prescriptions are connected to pain management 
therapies involving the prescription of controlled substances.'' GX 20 
(emphasis added).
    Mr. Goodrich's report further noted that DEA investigators had 
inspected Avee ``earlier that day.'' Id. Moreover, Avee's management 
discussed with him ``the concerns that DEA had with establishing the 
validity of the doctor-patient relationship that formed the basis of 
the digital diagnosis that resulted in a prescription for controlled 
substances being submitted to Avee for filling. Id. (emphasis added). 
Mr. Goodrich further noted that the position of Avee's management ``was 
that if the prescriber was not authorized to prescribe controlled 
substances, then the DEA should revoke the prescriber's DEA 
registration.'' Id. According to Mr. Goodrich's report, DEA 
investigators had suggested to Avee's management that they meet with 
the physicians ``from whom they receive the most prescriptions to 
better evaluate them.'' Id.
    When asked by the Government what constitutes an ``unconventional 
practice model?,'' Mr. Goodrich testified that as he ``understood it, 
that did not involve a patient going to the doctor's office necessarily 
and presenting themselves in person.'' Tr. 347. Mr. Goodrich 
subsequently acknowledged that he knew as early as February 2006, that 
``[s]ome of the prescriptions [Avee] filled were not the result of 
physical contact between the doctor and the patient.'' Id. at 348. Mr. 
Goodrich also testified that Avee had provided him with the names of 
two internet sites which were the source of some of the prescriptions 
it filled. Id. at 351-52.
    Notwithstanding the information he obtained during his visit with 
Avee, Mr. Goodrich made no follow-up inquiries with its management 
regarding whether they had determined if the physicians were writing 
legitimate prescriptions. Id. at 352-53. Indeed, Mr. Goodrich made no 
further inquiries of Avee regarding its business practices until the 
middle of August 2006, after a meeting with DEA. Id. at 353. When asked 
by the Government whether he was concerned by the fact that DEA had 
visited Avee, Mr. Goodrich acknowledged that he did not ``know[] much 
about this telemedicine thing,'' but ``felt that if [Avee] weren't 
doing what they were supposed to do right, DEA wouldn't allow them to 
continue in business.'' Id. at 354. Mr. Goodrich also testified that he 
was not troubled by Avee management's contention that ``if the 
prescriber was not authorized to prescribe controlled substances, then 
the DEA should revoke the prescriber's DEA registration.'' Id.
    Mr. Goodrich further acknowledged that at the time of his visit to 
Avee, he was not ``versed'' in the requirement that a prescription must 
be issued by a physician acting in the usual course of professional 
practice even though he asserted that he was then ``aware that 
pharmacies had obligations to ensure that they had valid 
prescriptions.'' Id. at 355. Mr. Goodrich admitted that he had not gone 
to DEA's website prior to Respondent's engaging in business with 
internet pharmacies to determine whether the Agency had posted any 
guidance on the subject. Id. at 358. Mr. Goodrich further testified 
that he ``received most of'' the information regarding the requirements 
for a valid prescription from DEA during a July 2006 meeting (which 
will be described more fully below). Id. at 357.
    Mr. Goodrich also attempted to visit Bi-Wise, but found that it was 
closed. Tr. 321; GX 19. According to his report, Bi-Wise was a retail 
and closed-door pharmacy with minimal prescription volume. GX 19. Mr. 
Goodrich further described it as a ``[v]ery small retail unit located 
in strip mall'' and that the ``[c]ustomer is in [the] process of 
determining direction for [the] business.'' Id.
    Mr. Goodrich testified that he did not attempt to go back to the 
pharmacy when it was open, Tr. 322, and never contacted anyone from Bi-
Wise to further inquire into the nature of its business. Id. at 323. 
Furthermore,

[[Page 36492]]

notwithstanding that Bi-Wise's purchases of hydrocodone from Respondent 
increased from 18,240 dosage units in February 2006 to 152,750 dosage 
units in March 2006, Mr. Goodrich never followed up with anyone at Bi-
Wise to determine the reason for the increase. Id. at 325-26. This was 
so, Mr. Goodrich testified, because he did not ``routinely look[] at'' 
the data regarding the purchases of Respondent's customers. Id. at 326.
    As found above, during the ensuing months, Respondent took on 
additional internet pharmacies as customers and Respondent proceeded to 
sell extraordinary quantities of hydrocodone to them. Other than the 
five pharmacies visited on or about February 8, 2006, there is no 
evidence that Mr. Goodrich visited any of the other internet pharmacies 
which Respondent began supplying.
    Because of the large quantities of hydrocodone that Respondent was 
distributing to these entities, Respondent ``was invited to the DEA 
Field Office in Riverside to be educated on the [Agency's] view of 
Internet pharmacies.'' ALJ at 22 (FOF 72). On July 17, 2006, Michael 
Mapes, Chief of the Office of Diversion Control's E-Commerce Section, 
conducted a conference call with Mr. Goodrich and Ms. Grace Gonzales, 
Respondent's operations manager \6\ to discuss various issues related 
to the dispensing of controlled substances by internet pharmacies. GX 
49. Prior to the conference call, Mr. Goodrich was provided with a 
document entitled ``Internet Diversion of Controlled Pharmaceuticals.'' 
Tr. 411-12; GX 45. Included in the document was a table which showed 
the average sales by McKesson, another distributor, to seven internet 
pharmacies during the month of October 2005. See GX 45, at 7. Six of 
the seven pharmacies listed were Respondent's customers: Avee, 
Medipharm, Accumed, United, Universal, and Bi-Wise. Id. The table 
included a notation that the ``Average Sales by McKesson to Each 
Targeted Pharmacy'' was ``311,057 dosage units.'' Id. (emphasis added). 
It further indicated that McKesson's average sales of hydrocodone ``to 
other customers'' was ``2,413 dosage units.'' \7\ Id. The document also 
included a page labeled ``The Internet Pharmacies'' which included 
photographs of both Avee and Medipharm. Id. at 9.
---------------------------------------------------------------------------

    \6\ Additional DEA personnel were on the call including Group 
Supervisor (GS) Lisa Young and Diversion Investigator (DI) Cynthia 
Hooks of the DEA Riverside Office. GX 49.
    \7\ The document also included the data (discussed earlier) 
regarding the average hydrocodone purchases over a four month period 
of pharmacies in Florida and nationwide, as well as the average 
purchases by the ``Targeted Internet Pharmacies.'' GX 45, at 8.
---------------------------------------------------------------------------

    At the time of the conference call, Mr. Goodrich was provided with 
an additional package of materials which included a powerpoint 
presentation, two Supreme Court decisions,\8\ two agency final orders 
revoking the registrations of internet pharmacies for dispensing 
prescriptions that were not issued in the course of valid physician-
patient relationships,\9\ DEA's April 2001 Guidance Document on 
``Dispensing and Purchasing Controlled Substances over the Internet,'' 
\10\ and a copy of 21 CFR 1301.74, which sets forth the requirements 
pertaining to suspicious orders. See Gov. Ex. 61. The materials also 
contained a document from the National Association of Boards of 
Pharmacy entitled ``Verified Internet Pharmacy Practice Sites (VIPPS 
[supreg]) Most Frequently Asked Questions,'' the American Medical 
Association's ``Guidance for Physicians on Internet Prescribing,'' the 
Federation of State Medical Boards' ``Model Guidelines for the 
Appropriate Use of the Internet in Medical Practice,'' and a list of 
suggested questions for determining the legitimacy of internet 
pharmacies. See id. Finally, DEA provided Mr. Goodrich with a copy of 
21 U.S.C. 823. Id.
---------------------------------------------------------------------------

    \8\ Direct Sales Co., Inc. v. United States, 319 U.S. 703 
(1943); United States v. Moore, 423 U.S. 122 (1975).
    \9\ EZRX, LLC, 69 FR 63178 (2004); RX Network of South Florida, 
LLC, 69 FR 62093 (2004).
    \10\ Published at 66 FR 21181 (2001).
---------------------------------------------------------------------------

    During the conference call, Mr. Mapes specifically discussed the 
activities of Medipharm, Avee, Accumed, United, Bi-Wise and Universal 
in distributing controlled substances ``through the internet'' and 
reviewed the various slides from the Power Point presentation. Tr. at 
30-31. Mr. Mapes also discussed various issues that Respondent should 
consider in assessing the legitimacy of its customers including the 
size and frequency of a pharmacy's orders, the range of products 
ordered by the pharmacy, the percent of controlled substances versus 
non-controlled drugs ordered, and the locations of/type of facility 
used by the pharmacies. Id. at 36-38. More specifically, Mr. Mapes 
advised that eighty percent of U.S. ``pharmacies * * * are buying less 
than 5,000 dosages of hydrocodone in a month's time,'' and that ``in a 
typical retail pharmacy,'' controlled substances might amount to 
between five and twenty percent of the pharmacy's purchases'' with the 
other eighty to ninety percent of its purchases being non-controlled 
drugs. Id. at 37. Mr. Mapes also advised Respondent that as a 
distributor it was required to maintain effective controls against 
diversion. Id. at 39-40.
    Mr. Mapes later discussed with Mr. Goodrich and Ms. Gonzales the 
requirement under Federal Law that for a prescription to be valid, it 
must be issued in the usual course of medical practice, and ``that an 
internet questionnaire alone is not sufficient to legally prescribe 
controlled substances.'' Id. at 42-43; see also 21 CFR 1306.04(a). Mr. 
Mapes also discussed the factors that are necessary to establish a 
bonafide doctor-patient relationship. These include that a patient has 
a medical complaint, that a history be taken of the patient, that a 
physical exam be conducted, and that there be a nexus between the 
complaint, the history, the exam and the drug being prescribed. Id. at 
42-43, 45-46; GX 61, at 13.
    Mr. Mapes also provided Mr. Goodrich and Ms. Gonzales with several 
examples of illegal internet pharmacies. Tr. at 48-49. In one of the 
examples, which involved a Florida pharmacy, the pharmacy's purchases 
of phentermine had doubled in a five month period from approximately 
200,000 to 400,000 units and ``one hundred percent of the drugs 
purchased by [the] pharmacy were controlled substances.'' GX 61, at 10; 
Tr. 49. In another example, the pharmacy was located in an industrial 
warehouse and sold only hydrocodone and alprazolam (a schedule IV 
controlled substance), which it purchased in large quantities. Tr. 49; 
GX 61, at 11. In the final example, the pharmacy had advised the 
distributor that they were doing business over the Internet. Tr. 50. 
The pharmacy did not, however, have a VIPPS certification, made 
frequent large purchases of hydrocodone and various benzodiazepines, 
and ninety-nine percent of the drugs it ordered were controlled 
substances. Id.; GX 61, at 12.
    Mr. Mapes informed Mr. Goodrich and Ms. Gonzales that ``a pattern 
of drugs being distributed to pharmacies [which] are diverting 
controlled substances demonstrates a lack of effective controls against 
diversion by the distributor'' and could lead to the revocation of the 
distributor's registration. Tr. 51. Mr. Mapes further advised ``that 
any distributor who was selling controlled substances that are being 
dispensed outside the course of professional practice must stop that 
distribution immediately.'' Id.
    Mr. Mapes also discussed with Respondent's representatives whether 
it could ship an order which it had reported as suspicious. Id. at 57. 
Mr.

[[Page 36493]]

Mapes advised that even if Respondent reported the order, the company 
still had to make the decision as to whether to ship the order. Id. at 
57-58; GX 61, at 9. Moreover, Respondent's personnel asked DEA whether 
it should stop shipping controlled substances to the internet 
pharmacies. Tr. 79, 119-20, 342-43. DEA personnel told Mr. Goodrich and 
Ms. Gonzales that it cannot tell a distributor whether a particular 
order is legitimate or not, GX 61, at 9; and that whether to ship was 
``a business decision,'' Tr. 79; but that Respondent ``had an 
obligation to ensure that the products [it] distributed were used for 
legitimate medical purposes.'' Id. 343.
    Following the meeting, Respondent continued to distribute large 
quantities of hydrocodone to numerous internet pharmacies including the 
six pharmacies that DEA officials specifically referred to as 
``targeted.'' For instance, in August 2006, Respondent distributed ``in 
excess of 1.2 million'' dosage units of hydrocodone to Accumed. Id. at 
341.
    Mr. Goodrich cited several reasons to justify Respondent's decision 
to continue shipping hydrocodone to Accumed. First, he stated that DEA 
``did not instruct us to cease shipments'' and thus Respondent did not 
``have distinct direction.'' Id. at 343-44. Second, Mr. Goodrich 
asserted that Respondent was conducting due diligence. Id. at 343. 
Third, Mr. Goodrich did not believe that Accumed was acting illegally. 
Id. at 345.
    In August 2006, Respondent also shipped large quantities of 
hydrocodone to the other internet pharmacies which DEA officials had 
referred to as ``targeted.'' It shipped 1,246,560 dosage units to 
Medipharm, 506,340 units to Avee, 185,940 units to Bi-Wise, and 399,070 
units to Universal. Respondent also shipped large quantities to other 
entities which it had identified as internet pharmacies. See Resp. Ex. 
52.
    Moreover, Respondent continued to make large shipments of 
hydrocodone to many of these pharmacies until either its registration 
was immediately suspended or the pharmacies' registrations were 
suspended. For example, it shipped Medipharm 1.45 million dosage units 
in September 2006 and just over 1 million dosage units in October 2006; 
it shipped Accumed 1.56 million dosage units in November 2006; it 
shipped Avee 2.11 million dosage units in November 2006; and it shipped 
Discount over 500,000 dosage units in both October and November 2006.
    Following the July 2006 conference call, Respondent did undertake 
additional measures to investigate the business activities of the 
pharmacies it had identified as filling prescriptions issued through 
the internet. On July 31, 2006, Mr. Goodrich wrote the Executive 
Director of the Florida State Board of Pharmacy identifying nineteen 
pharmacies located in the Tampa Bay area which, as a result of the DEA 
conference call and ``additional research'' conducted by Respondent, 
had led it to ``question whether or not these pharmacies are operating 
legitimately.'' Resp. Ex. 49, at 1-2. Respondent thus requested that 
the Florida Board ``provide additional information to enable us to 
qualify the legitimacy of these customers.'' Id. at 2.
    By letter dated August 14, 2006, the Executive Director of the 
Florida Board responded. Resp. Ex. 50. In the letter, the Executive 
Director wrote that ``[t]he Board of Pharmacy can verify for you that 
these particular pharmacies do have active community pharmacy licenses 
in the state of Florida. Id. The Executive Director further advised 
that ``only one of these licenses [sic] has been disciplined by the 
Florida Board,'' that pharmacy being Avee, and enclosed a copy of the 
Board's final order pertaining to it.\11\ Id. The letter, however, 
offered no specific information regarding the legitimacy of the various 
pharmacies' activities. See id.
---------------------------------------------------------------------------

    \11\ According to the materials, Avee was sanctioned because it 
shipped hydrocodone to a person in Tennessee when it did not hold a 
Tennessee license authorizing it to dispense to residents of that 
State. See Resp. Ex. 50. Avee entered into a stipulation with the 
State under which it was fined $2,000 and required to pay $719.95 as 
costs. See id. Avee did, however, retain its Florida license.
---------------------------------------------------------------------------

    On August 15, 2006, Mr. Goodrich sent out a six-page questionnaire 
to seventeen of the pharmacies including all of the pharmacies which 
DEA had described as ``targeted.'' Resp. Ex. 51. The questionnaire 
noted that Respondent was conducting a ``due diligence review of our 
business relationship'' which had been prompted by four factors: (1) An 
``[e]xtremely high percentage of controlled substance purchases vs. non 
controlled substance purchases,'' (2) ``[e]xtremely high volume of 
controlled substance dosage units,'' (3) ``[i]dentification of your 
operation as an internet pharmacy,'' and (4) ``[i]dentification of your 
pharmacy filling prescriptions based on telemedicine.'' Id. The 
questionnaire then stated that Respondent ``has a responsibility to 
insure [sic] that all medications we distribute are used for legitimate 
medical purposes, much in the same way that your pharmacy has an 
obligation to ensure that every prescription you fill is a result of a 
valid medical examination by an authorized prescriber.'' Id.
    The document asked a variety of questions. The first question asked 
the pharmacies to indicate the ``overall percentage of controlled 
substances filled by [the] pharmacy,'' and to list their other 
suppliers. Id. The second question was prefaced with the observation 
that ``[t]he volume of controlled substances purchased by your pharmacy 
far exceeds the `average' quantity of controlled substances purchased 
by pharmacies nationwide.'' Id. at 2. The questionnaire then asked the 
pharmacy to ``provide an explanation for the volume of your controlled 
substance purchases.'' Id.
    The next set of questions began by noting that ``[y]our pharmacy 
has been identified as an `internet pharmacy,' '' and that ``both the 
FDA and DEA have raised concerns citing the potential for abuse.'' Id. 
at 2. The questions then asked the pharmacy to provide the ``percentage 
of prescriptions filled by your pharmacy [that] originate from the 
Internet,'' to ``list the website identifying your pharmacy,'' to 
describe how ``a patient provides prescriptions to your pharmacy,'' and 
to indicate how patients pay for their prescriptions. Id. at 2-3.
    Later, the questionnaire observed that the ``[u]se of the internet 
in a medical practice has raised many issues in regards to the issuance 
of a prescription, including, but not limited to, ensuring the validity 
of medical examinations, the establishment of a `bona fide' doctor/
patient relationship and the appropriateness of treatment where the 
physician is located in a different jurisdiction from the patient's 
residence.'' Id. at 4. The questionnaire then asked a series of 
questions regarding how the pharmacies performed their ``due diligence 
on prescriptions issued by doctors who use the internet in the course 
of their medical practice.'' Id. These included asking the pharmacy to 
``list the web sites identifying the physicians who most commonly issue 
prescriptions filled by your pharmacy,'' whether the pharmacy verified 
the physician's state license and DEA registrations, and whether the 
pharmacy verified that the physician was ``also authorized to practice 
medicine in the state in which the patient is located.'' Id. The 
questionnaire also asked whether the pharmacy had a protocol to ensure 
that ``prescriptions issued through an internet-assisted encounter 
constitute[d] a valid medical exam.'' Id.
    Next, the questionnaire observed that ``a preponderance of 
prescription orders issued by a physician for the same

[[Page 36494]]

products in the same prescription quantities'' was indicative of 
``potential prescription abuse'' and asked the pharmacy to attach its 
``policies and procedures that address prescription abuse.'' Id. at 5. 
Finally, the questionnaire noted that ``[m]any states have adopted laws 
and regulations pertaining to internet prescribing'' that mandate 
``direct contact between the doctor and patient and the requisite 
physical exam(s).'' Id. The questionnaire thus asked the pharmacy to 
``list those states [it had] identified that allow the filling of 
prescriptions issued without a face-to-face encounter between the 
physician and the patient.'' Id.\12\
---------------------------------------------------------------------------

    \12\ In a letter dated August 15, 2006, Mr. Goodrich transmitted 
a copy of the questionnaire to the DEA Diversion Group Supervisor 
and advised that he had requested that the pharmacies respond ``by 
the end of the month.'' Resp. Ex. 52. Mr. Goodrich further wrote 
that ``[i]f we do not receive a response, we will cease business 
with that particular company.'' Id.
---------------------------------------------------------------------------

    Upon receiving the questionnaires, which Respondent sent by 
certified mail, the pharmacies responded in a variety of ways. Some, 
such as Bi-Wise, did not respond at all. See Resp. Ex. 58. Others, such 
as CRJ and YPM, failed to answer questions or indicated ``N/A.'' See 
Resp. Ex. 59 & 71. Others such as Accumed completed the questionnaire 
maintaining that they were not internet pharmacies, indicated ``N/A'' 
when asked to list the websites of the physicians who wrote the 
prescriptions they filled, and answered affirmatively that they had a 
protocol to ensure that the prescriptions were issued pursuant to a 
valid medical exam. Resp. Ex. 54. Likewise, Duane's stated that zero 
percent of the prescriptions it filled originated on the internet, that 
it had retained counsel to implement a strict compliance program to 
ensure that the prescriptions it filled were valid, and indicated ``N/
A'' where asked to list the websites of the physicians who were 
commonly issuing the prescriptions that it filled. Res. Ex. 61.
    Some of the pharmacies provided information which Respondent deemed 
adequate but which clearly suggested that the prescriptions were 
illegal. For example, Respondent deemed Grand Pharmacy's response 
adequate. See ALJ at 24 (FOF 81). Yet in a letter, Grand's owner/
president indicated that ``[a]ll doctors Grand deal with require a 
current physical done in a physician's presence. All doctors Grand deal 
with have a physical or extended phone dialogue with the patient to 
establish the diagnosis and need for the medication.'' Resp. Ex. 63, at 
2 (emphasis added). It is noteworthy that Grand's response did not say 
that the physical was performed by the prescribing physician, what 
constituted a ``current physical,'' or that the doctors prescribing on 
the basis of a telephone call were the same doctors that had performed 
the physical exam. Notwithstanding the suspicious nature of the 
information, Mr. Goodrich deemed the answers satisfactory and did not 
inquire further, see Resp. Ex. 64; Respondent continued to ship large 
quantities of hydrocodone to Grand.
    The questionnaires completed by the Medicine Shoppe and Medicom, 
which apparently were owned by the same person, were of similar nature. 
For example, while the Medicine Shoppe's questionnaire indicated that 
it was ``not an internet pharmacy,'' and that only one to two percent 
of the prescriptions it filled originated on the internet, it also 
indicated the name of a website used by the ``physicians who most 
commonly issue prescriptions filled by [the] pharmacy.'' Resp. Ex. 65, 
at 2-4. Furthermore, in answer to the question of whether the pharmacy 
verified that the physicians were ``authorized to practice medicine in 
the state [where] the patient is located,'' the Medicine Shoppe stated: 
``No. The doctor[s] makes the consult from [the] state in which they 
are licensed.'' Id. at 4.
    The Medicom questionnaire indicated that ``[w]e are not [an] 
internet pharmacy; I receive Rx from doctors who have spoken [to] 
patients, discussed therapy, and also reviewed entire medical 
history.'' Resp. Ex. 66, at 2. The questionnaire also indicated that it 
received prescriptions ``via telemedicine,'' and included the names of 
three websites used by physicians whose prescriptions the pharmacy was 
filling. Id. at 3-4. Furthermore, when asked whether the pharmacy 
verified that the physicians were ``authorized to practice medicine in 
the state in which the patient is located,'' Medicom likewise stated: 
``No. The doctor makes the consultation from the state they are 
licensed'' in.\13\ Id. at 4.
---------------------------------------------------------------------------

    \13\ Both the Medicine Shoppe and Medicom included logs showing 
that the pharmacies had reviewed medical records pertaining to 
internet prescriptions and a form letter the pharmacy represented as 
sending to the physicians and which the physicians were supposedly 
required to sign and return to the pharmacies. See, e.g., Resp. Ex. 
66. The record does not establish whether these two pharmacies 
actually sent the letter and whether the physicians signed it.
---------------------------------------------------------------------------

    Mr. Goodrich deemed both the Medicine Shoppe and Medicom's 
responses to be adequate. ALJ at 24-25 (FOFs 82 & 83). Notwithstanding 
the suspicious nature of their responses, Respondent continued to ship 
large quantities of hydrocodone to both pharmacies.
    The Medipharm and Universal questionnaires were prepared by the 
same attorney, who had previously served as an Assistant State 
Attorney. See Resp. Exs. 67 & 69. Both questionnaires indicated that 
the pharmacies were ``not an `internet pharmacy,' '' and that zero 
percent of the prescriptions originated on the internet. Resp. Exs. 67 
at 2, 69 at 2. Both questionnaires indicated ``N/A'' where asked to 
``list the websites identifying the physicians who most commonly issue 
prescriptions filled by your pharmacy.'' Resp. Exs. 67 at 4, 69 at 4. 
Moreover, both questionnaires indicated that the pharmacies had 
``retained counsel to prepare and implement a strict compliance program 
to ensure compliance with the applicable rules and regulations for 
prescription practice in each of the states in which [the pharmacy] is 
licensed and transacts business.'' Id. The questionnaires also 
indicated that the pharmacies ``routinely verif[ied]'' that the doctors 
were ``authorized to practice medicine in the state in which the 
patient is located.'' Id. Finally, both pharmacies stated that they did 
``not fill prescriptions where the patient has not had a face-to-face 
encounter with a physician.'' \14\ Resp. Ex. 67, at 5; Resp. 69, at 5.
---------------------------------------------------------------------------

    \14\ On November 2, 2006, the DEA Riverside Group Supervisor met 
with Mr. Goodrich at Respondent's facility to discuss Respondent's 
criteria and procedures for determining whether to ship to internet 
pharmacies. Tr. 102-03. During the meeting, Medipharm was 
specifically discussed. Id. at 104. According to the testimony of 
the Group Supervisor, Mr. Goodrich stated that ``Medipharm * * * had 
a comprehensive compliance program, and * * * he ha[d] determined 
that they were innocent until proven guilty.'' Id.; see also ALJ at 
29 (FOF 98).
---------------------------------------------------------------------------

    United's questionnaire, which was submitted more than five weeks 
after Respondent's deadline, stated that it was ``not an internet 
pharmacy'' and that ``[r]egulations regarding physicians requiring a 
face-to-face consultation is an issue of compliance for the physician 
and the relevant medical board.'' Resp. Ex. 70. With respect to whether 
United verified that the physicians were authorized to practice 
medicine in the States where their patients were located, the pharmacy 
gave the non-responsive answer that ``We are advised by the prescribing 
physician that they are authorized to practice medicine for their 
patients.'' Id. Finally, in answering the question as to whether United 
had a protocol to ensure that the prescriptions were issued pursuant to 
a valid medical exam, the pharmacy stated: ``United has a policy, 
through a signed affidavit, as well as providing us with recent medical 
history for the patient file, that

[[Page 36495]]

the physician meets the standards noted. However, that being the case, 
we are not required [to determine] whether or not the physician has an 
internet or in-office encounter with his patient.'' Id. United further 
stated that it was ``not aware that it is a commonly accepted practice 
in the pharmacy industry, that the pharmacy verify the type of 
consultation a physician has with a patient.'' Id.
    United also included a December 2005 report by Mudri Associates 
regarding the pharmacy's compliance with the CSA.\15\ The report 
specifically noted that ``[a] doctor expecting to have his 
prescriptions filled by [United] can anticipate having to complete an 
extensive background questionnaire. This background consists of samples 
of writing along with a signed acknowledgement pertaining to a 
notification of [United's] adherence to fulfilling their corresponding 
responsibilities with the physician.'' Id. According to the report:
---------------------------------------------------------------------------

    \15\ According to the stipulated facts, Mr. Mudri is a retired 
DEA Diversion Investigator.
---------------------------------------------------------------------------

    The physician is contacted and asked to acknowledge that there 
[sic] practice subscribes to sound medical judgment criteria, such as 
valid patient medical complaints, extensive physician interview and 
consultation, in-person patient examination, or supervision and/or 
direction of an examination by a consulting medical professional, 
documented in a patient file, along with the appropriateness of 
medications based upon this physician/patient relationship.

Id. Respondent deemed United's response adequate. ALJ at 25 (FOF 84).
    Avee submitted its questionnaire nearly a month late. Resp. Ex. 55. 
Avee admitted that controlled substances comprised ninety percent of 
the prescriptions it filled and answered ``N/A'' to the question ``What 
percentage of prescriptions filled by your pharmacy originate on the 
internet.'' Id. at 1-2. Avee further maintained that it was not an 
internet pharmacy but rather a ``mail order pharmacy,'' and that it did 
not know what percentage of the physicians whose prescriptions it 
filled used the internet in the course of their medical practice. Id. 
at 3-4. Where asked to identify the websites of the physicians who were 
``most commonly issu[ing the] prescriptions filled by your pharmacy,'' 
Avee wrote ``N/A.'' Id. at 4. Where asked if it verified that the 
prescribing physician was ``authorized to practice medicine in the 
state in which the patient is located,'' Avee wrote: ``where the doctor 
is located.'' Id.
    Upon reviewing Avee's questionnaire, Mr. Goodrich wrote back to it 
noting that he ``was surprised that your responses to our questionnaire 
did not support the observations I made on site,'' and added that he 
was ``curious if your business model has changed in the past six 
months.'' Resp. Ex. 56. Mr. Goodrich further noted that he was ``unable 
to reconcile the information provided on our questionnaire with the 
information observed during a visit to [its] facility.'' Id. Mr. 
Goodrich then indicated that he wished to visit Avee again and 
requested that it provide ``a current overview of [its] internal due 
diligence protocols.'' Id.
    In an undated letter, Avee outlined its compliance procedures and 
provided Mr. Goodrich with a copy of a letter regarding prescribing 
practices which it claimed it sent to the physicians whose 
prescriptions it filled. Resp. Ex. 57. Avee maintained that it required 
that this letter be signed annually by the physician and that it also 
conducted site visits at the physician's offices. Id. at 2. In its 
letter to the physicians, Avee listed the four elements of a legitimate 
doctor/patient relationship. Id. at 5.
    While the pharmacy accurately stated the four elements, the letter 
further added that ``[t]o these, Avee would add an opportunity for the 
prescribing practitioner and patient, via some means, to confer.'' Id. 
(emphasis added). Avee further maintained that ``[i]t is not a 
requirement that the prescribing physician himself/herself took the 
history or performed the physical examination, as long as the 
prescribing practitioner had full and meaningful access to the medical 
history and physical examination, and an opportunity to confer with the 
patient.'' Id. (emphasis added).
    Avee's letter to its physicians clearly raised a substantial 
question as to the legality of the prescriptions it was filling and 
conflicted with information that DEA had previously provided Respondent 
regarding the requirements to establish a legitimate doctor-patient 
relationship. Indeed, it indicated that Avee's practices remained the 
same as Mr. Goodrich had observed during his February 2006 visit when 
he noted that the pharmacy filled ``prescriptions from various sources, 
including internet-connected medical providers who provide patient 
assessments and diagnosis through unconventional practice models.'' GX. 
20 (emphasis added). Here again, Respondent continued to ship large 
quantities of controlled substances to Avee and did so up until 
December 6, 2006, when the immediate suspension order was served.
    As a result of the surveys, Respondent stopped shipping controlled 
substances to Bi-Wise, CRJ and YPM. ALJ at 25 (FOF 86). Even then, 
however, Respondent did not stop accepting orders from these entities 
until October 20, 2006, and did not stop shipping to them until October 
27, 2006, nearly two months after the completed questionnaires were 
due. Id.; see also Gov. Ex. 36 (memorandum dated December 20, 2006, 
from Respondent's counsel to DEA attorney regarding discontinued 
pharmacy customers); Resp. Ex. 52 (questionnaire at p.6).
    Moreover, Respondent's own evidence indicates that it never sent a 
questionnaire to Discount Mail Meds (a/k/a Liddy's), see Resp. Ex. 52, 
at 2, and there is no completed questionnaire from it. See Resp. Exs. 
51-72. Respondent, however, continued to sell large quantities of 
hydrocodone to Discount and sold it more than 500,000 dosage units a 
month in both October and November 2006.
    Finally, there is no evidence that Respondent ever received a 
completed questionnaire from Medcenter and Medichem. See Resp. Exs. 54-
72; ALJ at 24-25 (Stipulated FOFs 77-86). Respondent nonetheless 
continued to supply Medcenter with large quantities until November 16, 
2006, when the latter's registration was immediately suspended. It also 
continued to supply Medichem with large quantities of hydrocodone 
through November 2006.
    Respondent also adopted a policy under which it would, effective on 
December 15, 2006, cease distributing controlled substances to those 
pharmacies whose DEA registrations had not been automatically renewed 
but were continued on a day-to-day basis for a period of more than two 
months. Accordingly, on November 17, 2006, Mr. Goodrich wrote Avee, 
United, and Universal, notifying them of the policy and its effective 
date. See Resp. Exs. 77, 78, 79. Between the date of this letter and 
December 5, 2006 (the day before service of the Immediate Suspension), 
Respondent supplied Avee with more than 1.8 million dosage units of 
hydrocodone. ALJ at 7 (FOF 21). Moreover, between the date of its 
letter and November 30, 2006, Respondent supplied Universal with 
150,210 dosage units. ALJ at 10 (FOF 31). Finally, from November 21, 
2006 through December 5, 2006, Respondent supplied United with 158,280 
dosage units of hydrocodone. ALJ at 14 (FOF 45).\16\
---------------------------------------------------------------------------

    \16\ The parties also stipulated that between January and May 
2006, Respondent stopped accepting orders from seven other 
pharmacies based on ``the cessation of their'' registrations by DEA. 
ALJ at 25 (FOF 86).

---------------------------------------------------------------------------

[[Page 36496]]

    As a result of the surveys, in October 2006, Respondent updated its 
customer profile questionnaire for potential pharmacy customers. Id. at 
26 (FOF 88). On this questionnaire, Respondent required potential 
customers to disclose information related to the prescriptions the 
pharmacy was dispensing including whether ``they [were] the result of 
an internet- or telephone-based medical encounter.'' Resp. Ex. 75. 
Respondent also required the pharmacy's responsible officer to attest 
to the validity of the information it provided. Id.
    Relatedly, in October 2006, Respondent revised its standard 
operating procedures (SOP) pertaining to the sale of controlled 
substances to pharmacy customers. ALJ 26 (FOF 88). The SOP adopted the 
requirement that Respondent's pharmacy customers certify whether they 
knowingly filled prescriptions that arose out of an internet or 
telephone-based medical encounter. Resp. Ex. 76. It also directed that 
``[i]f [a] pharmacy affirms that they fill prescriptions of this 
nature, they will be required to provide details of the compliance 
program they have adopted to ensure that these prescriptions are legal 
and valid.'' Id. The SOP further noted that ``[c]ustomers with 
significant purchases of controlled substances, significant activity in 
mail-order dispensing or with significant amounts of telemedicine 
dispensing will be subject to on-site assessments within four months 
after being accepted as a customer.'' Id. at 2.

Respondent's Failure to Report Suspicious Orders

    Under federal regulations, a registrant must ``design and operate a 
system to disclose to the registrant suspicious orders of controlled 
substances''; suspicious orders must be reported to the local Field 
Division Office upon discovery by the registrant. 21 CFR 1301.74(b). 
Under the regulation, ``[s]uspicious orders include orders of unusual 
size, orders deviating substantially from a normal pattern, and orders 
of unusual frequency.'' Id.\17\
---------------------------------------------------------------------------

    \17\ The parties also stipulated that every month since July 
2002, Respondent had submitted ARCOS reports regarding its 
distributions of schedule III controlled substances including 
hydrocodone to the ARCOS Unit at DEA headquarters. ALJ at 18 (FOF 
58)
---------------------------------------------------------------------------

    While the record establishes that Respondent had worked with a DEA 
DI to develop a system for detecting and reporting suspicious orders, 
ALJ at 20 (FOF 64), the system had been created when most of 
Respondent's customer base was comprised of physicians. Tr. 739. 
Moreover, no one from Respondent contacted the DI to discuss its 
decision to supply internet pharmacies and the criteria and procedures 
that should be used to determine whether the pharmacies' orders were 
suspicious. Id. at 741.
    Under Respondent's procedures, a monthly report was generated which 
identified those customers purchasing controlled substances and the 
percentage of controlled versus non-controlled drugs purchased by the 
customer. Resp. Ex. 109, ] 25.2. If a customer's monthly purchases of 
controlled substances deviated by ``over 150%'' from the customer's 
average monthly percentage of controlled substance purchases for the 
preceding six months, it was then subject to further review. Id. at ] 
25.3.
    Under Respondent's system, ``[i]f no customers [were] deemed 
suspicious,'' it would send DEA ``a report stating `no suspicious 
activity' for the period.'' Id. at ] 25.6. Moreover, twice a year, 
Respondent sent to DEA ``a list of the largest purchasers of controlled 
substances.'' Id. at ] 25.8. The customers on this list were not 
``reported as having suspicious purchases.'' Id. According to Mr. 
Goodrich's testimony, Respondent did not have a procedure in place to 
monitor and detect excessive purchases on a monthly basis. Tr. 397-98.
    Respondent sent DEA e-mails reporting that it had ``no suspicious 
activity to report'' for the months of December 2005 (GX 9), January 
2006 (GX 10), March 2006 (GX 11), and April 2006 (GX 12). In addition 
to the exhibits, testimony establishes that ``Respondent did not report 
any suspicious orders through the month of December 2006,'' ALJ at 36 
(FOF 129, citing Tr. 95-96), even though the Florida internet 
pharmacies were purchasing quantities that greatly exceeded the average 
amount of hydrocodone (6,000 dosage units per month) purchased by a 
traditional brick-and-mortar retail pharmacy. GX 45, at 8; Tr. 608.
    Respondent, however, twice provided the DEA Riverside Field Office 
with a report listing its top purchasers of controlled substances. See 
Resp. Ex. 46, 47, & 48. The first of these, which Mr. Goodrich e-mailed 
to the DEA Riverside office on February 13, 2006, covered the period 
June through December 2005. See Resp. Ex. 46. The report included Avee, 
Medipharm and Accumed, indicated the date the pharmacies had become 
customers,\18\ the number of bottles of controlled substances the 
pharmacies had ordered, and the percentage of prescription drugs 
ordered by the pharmacies that were controlled substances. See id.
---------------------------------------------------------------------------

    \18\ According to the document, Medipharm had become a customer 
on December 7, 2005; Accumed and Avee became customers on December 
19, 2005, and December 21, 2005, respectively. See Resp. Ex. 46.
---------------------------------------------------------------------------

    Mr. Goodrich provided the second report to DEA at the July 17, 2006 
conference call. ALJ at 23 (FOF 72). This report covered the period 
December 2005 through June 2006, and included Medipharm, Accumed, Avee, 
United, Medichem, Bi-Wise, Medicom, Discount, Universal, Medcenter, 
CRJ, and Woody Pharmacy. See Resp. Ex. 47. The report likewise listed 
the date the pharmacies had become customers, the total amount of 
controlled substances ordered, and the percentage of prescription drugs 
ordered that were controlled substances. See id. Of the aforementioned 
pharmacies, the lowest percentage of controlled substances ordered was 
ninety-eight percent by CRJ. See id. Almost all of the above pharmacies 
had ordered only controlled substances. See id. Finally, the list did 
not include several of Respondent's recently acquired customers 
including Grand Pharmacy and the Medicine Shoppe. See id.
    At the hearing, Mr. Goodrich acknowledged that ``an unusual 
quantity could be a determining factor'' in deciding whether an order 
must be reported as suspicious. Tr. 490. Mr. Goodrich further admitted 
that some of the orders received by Respondent were of an unusual size. 
Id. Moreover, Mr. Goodrich further testified that following the July 
17, 2006 conference call with DEA, Respondent did not report any of the 
orders placed by the Florida-based pharmacies to be suspicious because 
``[w]e considered [all of the pharmacies] suspicious at that point.'' 
Tr. 424.
    On cross-examination, Mr. Robert Schwartz, who became Respondent's 
Chief Operating Officer on September 26, 2006, was asked a series of 
hypothetical questions based on the evidence in the case regarding the 
reporting of suspicious orders. Tr. 953-57. Mr. Schwartz testified that 
while he had previously worked in senior management positions at major 
pharmaceutical distributors such as H.D. Smith and Barnes Wholesale, he 
could not recall a pharmacy ordering 800,000 dosage units of 
hydrocodone in a month. Id. at 953. Mr. Schwartz also testified that an 
order for 2.1 million dosage units of the drug was ``a lot of 
hydrocodone'' and should be reported as suspicious because, based on 
his experience at Barnes, it was not

[[Page 36497]]

consistent with what pharmacies ordered. Id. at 953-54. Similarly, Mr. 
Schwartz admitted that various changes in a pharmacy's ordering history 
(such as those which occurred here) would be suspicious and should be 
reported to DEA. Id. at 954-57.
    The ALJ further found that Mr. Schwartz ``provided credible 
testimony concerning two possible justifications for the Respondent's 
sharp rise in the sale of hydrocodone products in August of 2006.'' ALJ 
at 38 (FOF 135 (citing Tr. 930)). The first reason given was that there 
are ``year-end inventory shortages'' from the manufacturers and thus 
``wholesalers begin `to buy extra product from manufacturers in August, 
building up our inventories for the year-end,'' and pharmacies ``buy 
extra inventory at this time.'' Id. The second reason was the State of 
Florida's implementation of its requirement, effective July 1, 2006, 
that ``pedigree must be passed by each distributor who is not a 
manufacturer, before each distribution of a drug and provided to each 
person who receives the drug.'' ALJ at 38-39 (FOF 137). Respondent met 
the pedigree requirements, and the developer of the software it used 
issued a press release announcing that Respondent was compliant with 
Florida law. See id.; Resp. Ex. 105.
    Respondent, however, introduced no evidence that it contacted any 
of its pharmacy customers that increased their purchases between July 
and August 2006 to determine if they had done so for either reason. Tr. 
487. As Mr. Goodrich testified, he did not ``know that the pedigree 
program had a direct impact on the hydrocodone that we distributed to 
our pharmacy customers.'' Id. at 488. In fact, only seven of the 
pharmacies increased their purchases of hydrocodone from July to August 
2006. During this period, four of the pharmacies actually decreased 
their hydrocodone purchases from Respondent and the remaining three 
purchased roughly the same amount. Relatedly, Mr. Goodrich admitted 
that Respondent did not even ``develop a [suspicious orders] policy 
that specifically addressed the pharmacy customers until September of 
2006.'' ALJ at 34 (FOF 119).
    Furthermore, the orders of the Florida-based internet pharmacies 
were suspicious from the beginning because of their large size, their 
frequency, and the fact that controlled substances constituted the 
overwhelming percentage (and frequently 100 percent) of the products 
being purchased. See ALJ at 36-37 (FOF 130-132); see also Resp. Exs. 46 
& 47. Even if Respondent had contacted the seven pharmacies and 
determined that they had increased their orders for either of the above 
reasons, their orders were still suspicious and subject to reporting. 
And as Mr. Goodrich testified, following the July 17, 2006 conference, 
he considered all of the Florida-based pharmacies to be suspicious. Tr. 
424.

Respondent's Corrective Actions and Post-Suspension Conduct

    The ALJ also made several findings regarding corrective actions 
instituted by Respondent. First, the ALJ found credible the testimony 
of Mr. Schwartz that on December 5, 2006, the day before the immediate 
suspension order was served on Respondent, he and its owner, Mr. John 
Sempre, had determined that it should stop supplying the Florida-based 
internet pharmacies. ALJ at 40 (citing Tr. 938-39).
    Mr. Schwartz also testified that if Respondent regained its 
registration, he and not Mr. Goodrich, would be responsible for 
reviewing suspicious order reports before they were submitted to DEA. 
Tr. 1027. Moreover, Mr. Schwartz was to ``have ultimate authority'' to 
accept or reject any new customer seeking to purchase controlled 
substances. ALJ at 41 (citing Tr. 1027). Finally, Respondent entered 
into an agreement with SynTegra, L.L.C., to review its procedures for 
monitoring and reporting suspicious orders to DEA. Resp. Ex. 102.
    After the immediate suspension of its registration, Respondent 
continued to receive orders for controlled substances which it 
forwarded on to Pharmapac, a competitor, for filling. Tr. 184-87, GX 
63. Under the ``Sold To'' line on the Pharmapac invoices, typically the 
name of the individual practitioner who ordered the controlled 
substances was listed above Respondent's name and address. See GX 63, 
at 281-351. However, on the invoices ``Ship To'' line, the invoices 
contained the individual practitioner's name and address. See id. The 
invoices also included a label which stated: ``Please send payment to: 
SOUTHWOOD PHARMACEUTICALS, INC., 60 Empire Drive, Lake Forest, CA 
92630.'' See id.
    On February 1, 2007, Respondent Mr. Schwartz wrote a letter to 
Respondent's customers indicating that it had ``mistakenly placed a 
sticker on these invoices directing payment to Southwood 
Pharmaceuticals.'' Resp. Ex. 107. The letter instructed Respondent's 
customers that the sticker be disregarded and that payment should be 
made directly to Pharmapac at its address. Id.
    The ALJ found that ``Respondent processed an extensive number of 
orders for controlled substances in January of 2007,'' and that 
``Respondent did receive payment from many of these customers 
consistent with the invoices dated during January of 2007.'' ALJ at 44 
(FOF 157) (citing GX 63). During the hearing, however, the parties 
stipulated that ``[i]t was not [Respondent's] intent to retain any 
payment submitted to or through Southwood by [its] customers, in 
connection with orders forwarded to and filled by Pharmapac.'' Tr. 
1030. Moreover, the Government introduced no evidence establishing that 
Pharmapac is not registered with DEA to manufacture or distribute 
controlled substances.

Discussion

    Section 304(a) of the Controlled Substances Act provides that ``[a] 
registration * * * to manufacture, distribute, or dispense a controlled 
substance or a list I chemical may be suspended or revoked by the 
Attorney General upon a finding that the registrant * * * has committed 
such acts as would render [its] registration under section 823 * * * 
inconsistent with the public interest as determined under such 
section.'' 21 U.S.C. 824(a)(4). As relevant here, Congress directed 
that the following factors be considered:

    (1) Maintenance of effective controls against diversion of 
particular controlled substances and any controlled substance in 
schedule III, IV, or V compounded therefrom into other than 
legitimate medical, scientific, or industrial channels;
    (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) prior conviction record of applicant under Federal or State 
laws relating to the manufacture, distribution, or dispensing of 
such substances;
    (5) past experience in the manufacture, distribution, and 
dispensing of controlled substances, and the existence in the 
establishment of effective controls against diversion; and
    (6) such other factors as may be relevant to and consistent with 
the public health and safety.

    21 U.S.C. 823(d). These factors are considered in the disjunctive. 
I may rely on any one or a combination of factors and give each factor 
the weight I deem appropriate in determining whether to revoke a 
registration or to deny a pending application for renewal of a 
registration. See Green Acre Farms, Inc., 72 FR 24607, 24608 (2007); 
ALRA Laboratories, Inc., 59 FR 50620, 50621 (1994). Moreover, I am 
``not required to

[[Page 36498]]

make findings as to all of the factors.'' Hoxie v. DEA, 419 F.3d 477, 
482 (6th Cir. 2005); Morall v. DEA, 412 F.3d 165, 173-74 (D.C. Cir. 
2005).
    The Government bears the burden of proving that Respondent's 
continued registration would be inconsistent with the public interest. 
21 CFR 1301.44(e). If, however, the Government establishes a prima 
facie case, the burden shifts to Respondent to show why its continued 
registration would not be inconsistent with the public interest. See 
Gregory D. Owens, 67 FR 50461, 50464 (2002).
    In this case, I conclude that factors one, five and six establish 
that Respondent's continued registration would ``be inconsistent with 
the public interest.'' 21 U.S.C. 823(d). Indeed, Respondent ``concedes 
that the Government has established a prima facie case * * * that [its] 
continued registration may be inconsistent with the public interest.'' 
Resp. Proposed Findings of Fact and Conclusions of Law (hereinafter, 
Resp. Br.) at 31. Respondent maintains, however, that the record 
``encompasses sufficient examples of mitigation and ongoing remediation 
by'' it to compel the conclusion that revoking its registration ``would 
be inconsistent with the public interest.'' Id. For the reasons set 
forth below, I conclude otherwise and will order the revocation of 
Respondent's registration and the denial of its pending renewal 
application.

Factors One and Five--Maintenance of Effective Controls Against the 
Diversion of Controlled Substances Into Other Than Legitimate Channels 
and Respondent's Past Experience in Distributing Controlled Substances

    Under DEA regulations, all ``registrants shall provide effective 
controls and procedures to guard against theft and diversion of 
controlled substances.'' 21 CFR 1301.71(a). A registrant is further 
required to ``design and operate a system to disclose to the registrant 
suspicious orders of controlled substances'' and is required to 
``inform the [DEA] Field Division Office * * * in his area of 
suspicious orders when discovered by the registrant.'' Id. 1301.74(b). 
As explained below, the record establishes that Respondent failed 
repeatedly to comply with both requirements.

Respondent's Distributions of Hydrocodone and Due Diligence Efforts

    Beginning in December 2005, Respondent distributed massive 
quantities of hydrocodone, a highly abused drug and schedule III 
controlled substance, to entities which, notwithstanding their various 
assertions to Mr. Goodrich, were nothing more than drug pushers 
operating under the patina of legitimate authority. Respondent's due 
diligence measures `` which initially involved nothing more than 
verifying a pharmacy's DEA registration and state license--were wholly 
deficient.
    As the record demonstrates, Respondent sold Medipharm in excess of 
1.75 million units of hydrocodone in the months of December 2005 and 
January 2006, before Mr. Goodrich even visited this entity to inquire 
into the nature of its business. Likewise, during the months of 
December 2005 and January 2006, Respondent sold more than 1.55 million 
dosages units of hydrocodone to Avee and 476,000 dosage units of the 
drug to Accumed before Mr. Goodrich even visited these entities. It 
also sold large quantities of hydrocodone to Medichem and Bi-Wise 
before Mr. Goodrich visited them. As Mr. Goodrich admitted, Respondent 
had ``no'' process in place to determine the nature of a potential 
customer's business before it sold to them.
    Moreover, during the February on-site visits with the above 
entities, Mr. Goodrich received substantial information which raised 
serious doubt as to the legality of their business practices. As the 
evidence demonstrates, Mr. Goodrich determined that Medipharm had a 
``mail order business [with] ties to internet pharmacy,'' GX 16, that 
Accumed had ``ties to the internet,'' GX 17, and that Medichem was 
mailing prescriptions out-of-state and had ``some ties to the internet 
community.'' GX 18.
    At Avee, Mr. Goodrich found that it ``provide[d] mail order 
fulfillment of prescriptions from various sources, including internet-
connected medical providers who provide patient assessments and 
diagnosis through unconventional practice models,'' with ``[m]any of 
these prescriptions [being] connected to pain management therapies 
involving the prescription of controlled substances.'' GX 20 (emphasis 
added). Avee's management also discussed with Mr. Goodrich a visit 
earlier that day by agency investigators and their concern as to ``the 
validity of the doctor-patient relationship that formed the basis of 
the digital diagnosis that resulted in a prescription for controlled 
substances being submitted to Avee for filling.'' Id. (emphasis added). 
Moreover, in his testimony, Mr. Goodrich admitted that he knew as early 
as his visit to Avee that ``[s]ome of the prescriptions [it] filled 
were not the result of physical contact between the doctor and the 
patient,'' Tr. 348, and that Avee had also provided him with the names 
of two websites that were the source of the prescriptions it filled. 
Id. at 351-52.
    The evidence further establishes that notwithstanding that he did 
not ``know [ ] much about this telemedicine thing,'' id. at 354, Mr. 
Goodrich did not order that Respondent's shipments to these pharmacies 
be stopped. Indeed, following the visits, Respondent shipped even 
larger monthly quantities of hydrocodone to some of the pharmacies. 
Furthermore, Mr. Goodrich testified that he did not assess whether Avee 
was operating illegally, claiming that he did not think he could ``make 
that assessment.'' Tr. 359. Indeed, Respondent remained disinterested 
in determining whether the Florida-based pharmacies were lawfully 
filling prescriptions until after the July 17, 2006, conference call 
with DEA officials.\19\
---------------------------------------------------------------------------

    \19\ It is true that Mr. Goodrich testified that he visited the 
DEA Diversion Control website in early 2006. However, he testified 
that he received most of the information about prescriptions during 
the July 2006 conference call. Tr. 357. Neither Mr. Goodrich nor any 
other witness for Respondent claimed to have reviewed the DEA April 
2001 policy statement on prescribing controlled substances over the 
internet prior to it being provided to him by DEA officials. 
Moreover, Respondent makes no claim that following the February 
visits it consulted legal counsel to determine the legality of the 
prescribing practices of the Florida pharmacies.
---------------------------------------------------------------------------

    Notwithstanding that Mr. Goodrich had reason to know that the 
Florida-based internet pharmacies were not filling lawful 
prescriptions, Respondent proceeded to supply large quantities of 
hydrocodone to an additional eleven internet pharmacies (most of which 
were located in the Tampa Bay area) including United, Medicom, 
Discount, Universal, Medcenter, CRJ, Grand, Medicine Shoppe, Duane's, 
Woody, and Elite. Moreover, notwithstanding the large quantities that 
these pharmacies ordered, Mr. Goodrich apparently did not deem it 
necessary to conduct site visits to inquire into the nature of their 
businesses and whether they were filling lawful prescriptions. See, 
e.g., Resp. Br. at 34-35 (discussing ``steps taken by Mr. Goodrich to 
ascertain that [Respondent's] pharmacy customers in Florida were not 
diverting controlled substances,'' and noting only Goodrich's Feb. 8, 
2006 site visits and the August 2006 pharmacy questionnaires). 
Moreover, Respondent continued to supply the pharmacies, 
notwithstanding that they were ordering hydrocodone in quantities that 
far exceeded what its traditional retail pharmacy customers ordered, 
that Respondent had information that controlled substances comprised 
between 98 and 100 percent

[[Page 36499]]

of the prescription drugs being ordered by these entities, and that as 
Mr. Goodrich explained, these entities ``were a different type of a 
customer than what we'd been used to dealing with.'' Tr. 319.
    Respondent contends that it is ``unfair'' to compare what Mr. 
Goodrich learned during the site visits through his ``lay inquiry'' 
with what a DEA Diversion Investigator learned, ``armed as she was by 
two decades of diversion investigation experience, search warrants, and 
a team of armed agents carrying intimidating badges.'' Resp. Br. 35. 
The record demonstrates, however, that even without a warrant, a badge 
and a gun, Mr. Goodrich was able to obtain from Avee substantial 
information indicating that its practices were illegal and already 
subject to DEA's scrutiny. He was also able to obtain information from 
several other pharmacies which suggested that further inquiry was 
warranted as they were engaged in practices similar to those of Avee. 
Moreover, Respondent's argument ignores that it sold to numerous 
additional internet pharmacies without even conducting site visits.
    Furthermore, even after DEA presented information to it--on the 
proverbial silver platter--that Respondent's Florida-based internet 
pharmacy customers were likely engaged in illegal activity and even 
specifically mentioned that six of its customers were ``targeted,'' 
Respondent continued to distribute extraordinarily large quantities of 
hydrocodone to these pharmacies.
    To Medipharm, an entity described as a target of an investigation, 
in August 2006, Respondent distributed 1.25 million dosage units of 
hydrocodone. In September 2006, Respondent distributed to Medipharm 
1.45 million dosage units of the drug, and in October 2006, more than 1 
million dosage units. Furthermore, Respondent distributed an additional 
538,000 dosage units to Medipharm during the first half of November 
2006, at which time Medipharm's registration was suspended.
    To Accumed, another of the targeted pharmacies, in August 2006, 
Respondent sold approximately 1.268 million dosage units of 
hydrocodone. While in September and October 2006, Respondent's 
hydrocodone sales to Accumed declined to approximately 503,000 and 
394,000 dosage units respectively, in November 2006, Respondent sold 
1.56 million dosage units to it.
    As for Avee, which was also identified as a target, in August 2006, 
Respondent sold 506,430 dosage units of hydrocodone, an amount that was 
more than five times the previous month's sale. In September 2006, 
Respondent sold Avee approximately 696,000 dosage units; in October, it 
sold Avee 537,900 dosage units; and in November, it sold Avee 2.11 
million dosage units.\20\
---------------------------------------------------------------------------

    \20\ Respondent also continued to ship large quantities of 
hydrocodone to Universal, another pharmacy which was identified as 
``targeted.'' In August, it shipped 399,070 dosage units to 
Universal; in September, 340,500 dosage units; in October, 453,690 
dosage units; and in November, 330,600 dosage units.
---------------------------------------------------------------------------

    It is true that following the July 17, 2006 conference call, 
Respondent attempted to perform additional due diligence. More 
specifically, Mr. Goodrich requested information from the Florida Board 
of Pharmacy as to whether the pharmacies were operating legitimately. 
The Florida Board, however, only provided information as to the 
licensure status of the pharmacies. Resp. Ex. 50.
    On August 15, 2006, Respondent also sent out a questionnaire to its 
internet pharmacy customers. It is true that Respondent did eventually 
cease shipping controlled substances to three of the pharmacies (Bi-
Wise, CRJ and YPM) because these pharmacies either failed to respond 
(Bi-Wise) or gave inadequate responses on their questionnaires (CRJ and 
YPM). But even with respect to these pharmacies, Respondent did not cut 
off its shipments to them until late October 2006, nearly two months 
after its own deadline for completing the questionnaires, and sold them 
large quantities of hydrocodone notwithstanding that the pharmacies had 
failed to comply with Respondent's request for additional information.
    It is also true--as Respondent contends--that two of the pharmacies 
(Medipharm and Universal) submitted questionnaires which were 
``prepared by an apparently reputable attorney,'' Resp. Br. 35, and 
which indicated that the pharmacies had ``retained counsel to * * * 
implement a strict compliance program to ensure compliance with the 
applicable rules and regulations for prescription practice in each of 
the states in which'' the pharmacies did business. Resp. Ex. 67, at 4; 
Resp. Ex. 69, at 4. These questionnaires further stated that the 
pharmacies ``routinely verif[ied]'' that the doctors were ``authorized 
to practice medicine in the state in which the patient is located.'' 
Resp. Ex. 67, at 4; Resp. Ex. 69, at 4.
    These two pharmacies further indicated, however, that they did 
``not fill prescriptions where the patient has not had a face-to-face 
encounter with a physician.'' Resp. Ex. 67, at 5, Resp. Ex. 69, at 5 
(emphasis added). Notably, the latter statement did not say that the 
patients had a face-to-face encounter with the prescribing physician.
    I need not decide whether it was reasonable for Respondent to 
continue shipping controlled substances to Medipharm and Universal in 
light of the ambiguous statements they provided and the massive 
quantities of controlled substances they were ordering. Even if it was, 
Respondent ignores the numerous instances in which it continued to ship 
to other pharmacies which had provided ample information casting 
serious doubt as to the validity of their activities.\21\
---------------------------------------------------------------------------

    \21\ Likewise, the answers submitted by Duane's appeared to be 
in order even if they were false.
---------------------------------------------------------------------------

    For example, Respondent continued shipping hydrocodone to Grand 
Pharmacy deeming its response to be adequate. Yet Grand stated that 
``[a]ll doctors Grand deal with have a physical or extended phone 
dialogue with the patient to establish the diagnosis and need for the 
medication.'' Resp. Ex. 63, at 2 (emphasis added). While this answer 
should have stood out like a swollen thumb, Mr. Goodrich deemed Grand's 
answers adequate and Respondent continued to ship large quantities of 
controlled substances to it.
    The Medicine Shoppe's questionnaire indicated the name of a website 
used by the ``physicians who most commonly issue prescriptions filled 
by [the] pharmacy.'' Resp. Ex. 65, at 4. Moreover, the pharmacy 
answered the question of whether it verified that the physicians were 
``authorized to practice medicine in the state where the patient is 
located,'' stating: ``No. The doctor makes the consult from the state 
in which they are licensed.'' Id. at 4.
    Medicom--which apparently was owned by the same person who owned 
the Medicine Shoppe--stated that it was not an internet pharmacy. The 
pharmacy added, however, that it ``receive[d] Rx from doctors who have 
spoken [to] patients, discussed therapy, and also reviewed entire 
medical history.'' Resp. Ex. 66, at 2. Notably, Medicom did not 
maintain that the prescriptions were issued by the physicians pursuant 
to a face-to-face encounter with the patients. Moreover, the 
questionnaire indicated that the pharmacy received prescriptions ``via 
telemedicine'' and named three websites used by physicians whose 
prescriptions the pharmacy filled. Id., at 2 & 4. Finally, when asked 
whether it verified that the physicians were authorized to practice 
medicine in the states where the patients were located,

[[Page 36500]]

Medicom answered: ``No. The doctor makes the consultation from the 
state they are licensed'' in. Id. at 4.
    Here again, Mr. Goodrich deemed both the Medicine Shoppe and 
Medicom's responses to be adequate despite the obvious indications that 
they were not filling lawful prescriptions and Respondent continued to 
ship hydrocodone to both pharmacies. Most significantly, in September 
2006, it shipped 164,000 dosage units to Medicom; in October, it 
shipped 375,690 dosage units to Medicom; and in November, it shipped 
385,000 dosage units to the pharmacy.
    Avee, another of the identified targets, sent its questionnaire in 
nearly a month late. On its questionnaire, Avee indicated that it was 
not an internet but rather a ``mail order pharmacy.'' Resp. Ex. 55, at 
4. It also answered ``N/A'' to the questions which asked what 
percentage of the prescriptions it filled originated on the internet 
and to identify the websites used by the physicians who were commonly 
issuing the prescriptions it filled. Resp. Ex. 55, at 2 & 4.
    I acknowledge that Mr. Goodrich then undertook further inquiry to 
determine whether Avee had changed its business model and requested 
additional information regarding its due diligence protocols. Resp. Ex. 
56. Avee wrote back including a copy of a letter it claimed to have 
sent to the physicians who issued the prescriptions it filled. Resp. 
Ex. 57. As found above, while that letter correctly stated the four 
elements of a legitimate doctor/patient relationship, it also stated 
that ``[t]o these, Avee would add an opportunity for the prescribing 
practitioner and patient, via some means, to confer.'' Id. at 2 \22\ 
(emphasis added). Moreover, the letter maintained that ``[i]t is not a 
requirement that the prescribing physician himself/herself took the 
history or performed the physical examination, as long as the 
prescribing practitioner had full and meaningful access to the medical 
history and physical examination, and an opportunity to confer with the 
patient.'' Id. (emphasis added).
---------------------------------------------------------------------------

    \22\ This is page 5 of the exhibit.
---------------------------------------------------------------------------

    In short, Avee had not changed its practices from the time of the 
February 2006 on-site visit, when Mr. Goodrich noted that the pharmacy 
filled ``prescriptions from various sources, including internet-
connected medical providers who provide patient assessments and 
diagnosis through unconventional practice models.'' GX 20 (emphasis 
added). Respondent nonetheless continued to ship large quantities of 
hydrocodone to Avee. Indeed, in September 2006, Respondent shipped 
695,800 dosage units to Avee, in October, it shipped 537,900 dosage 
units to Avee, and in November, it shipped 2.11 million dosage units to 
the pharmacy.
    Accumed, another of the ``targeted pharmacies,'' represented in its 
questionnaire that it was ``not an internet pharmacy,'' and that zero 
percent of the prescriptions it filled originated on the internet. 
Resp. Ex. 54, at 2-3. It also indicated ``N/A'' where asked to list the 
websites used by the ``physicians who most commonly issue prescriptions 
filled by your pharmacy.'' Id. at 4. Notwithstanding the inconsistency 
between Accumed's answers and Mr. Goodrich's finding during the 
February site visit that the pharmacy had ``ties to the internet,'' GX 
17, there is no evidence that Mr. Goodrich undertook any additional 
investigation to determine whether it was filling legitimate 
prescriptions.
    Here again, Respondent continued to sell extraordinary quantities 
of hydrocodone to the pharmacy. More specifically, in August 2006, 
Respondent sold Accumed 1.267 million dosage units; in September, it 
sold 503,020 dosage units; in October, it sold 393,610 dosage units; 
and in November, it sold more than 1.56 million dosage units.
    Finally, Respondent produced no evidence that it ever received 
responses from Medcenter, Discount Mail Meds (a/k/a Liddy's), and 
Medichem. See Resp. Exs. 54-72; ALJ at 24-25 (Stipulated FOF 77-86). 
Moreover, Respondent's evidence suggests that it did not even send a 
questionnaire to Discount Mail Meds. See Resp. Ex. 52, at 2.
    Respondent nonetheless continued to distribute large quantities of 
hydrocodone to Medcenter until November 16, 2006, when the pharmacy's 
registration was suspended. More specifically, Respondent sold 
Medcenter 378,000 dosage units in September, 608,000 dosage units in 
October, and approximately 314,000 dosage units in the first half of 
November.
    Respondent also distributed large quantities of hydrocodone to 
Discount and Medichem until the immediate suspension of its 
registration on December 6, 2006. Between August and November 2006, 
Respondent sold Medichem at least 216,000 dosage units each month. 
During the same period, the lowest amount Respondent sold to Discount 
was 292,720 dosage units in August. Moreover, in October and November, 
Respondent sold to Discount more than 500,000 dosage units each month.
    Accordingly, I conclude that even after being advised by agency 
officials that its internet pharmacy customers were likely engaged in 
illegal activity, Respondent failed miserably to conduct adequate due 
diligence. Notwithstanding the breadth of information provided during 
the conference call, Respondent did not stop selling to any of its 
internet pharmacy customers while it investigated the legitimacy of 
their businesses activities.
    Moreover, even when some of the pharmacies provided information 
indicating that the prescriptions they filled were likely illegal, 
Respondent continued to distribute large quantities of hydrocodone to 
them. Indeed, the only instances in which Respondent stopped supplying 
a pharmacy pursuant its ``due diligence'' program was when one pharmacy 
(Bi-Wise) entirely failed to submit the questionnaire and when two 
other pharmacies (CRJ and YPM) answered nearly every question with a 
dash or ``N/A.'' Furthermore, Respondent failed to even send a 
questionnaire to one of the pharmacies and continued to ship to two 
pharmacies which apparently never submitted a completed questionnaire.
    In short, the direct and foreseeable consequence of the manner in 
which Respondent conducted its due diligence program was the likely 
diversion of millions of dosage units of hydrocodone. Indeed, it is 
especially appalling that notwithstanding the information Respondent 
received from both this agency and the pharmacies, it did not 
immediately stop distributing hydrocodone to any of the pharmacies. 
Moreover, in several cases, Respondent actually distributed even larger 
quantities of the drug to them. As one of the DIs testified regarding 
Respondent's distribution of 2.1 million dosage units to Avee in 
November 2006, ``[t]his is an obscene amount of drugs.'' Tr. 617. The 
term ``obscene'' also fairly describes Respondent's experience in 
distributing hydrocodone to all of its internet pharmacy customers.\23\
---------------------------------------------------------------------------

    \23\ Respondent attempts to excuse its conduct on the ground 
that it repeatedly asked DEA officials whether it should stop 
selling to the pharmacies only to be told by DEA officials that they 
could not tell them whether or not to sell because that was a 
business decision. Resp. Br. 33. Several courts have held, however, 
that DEA has no authority under the CSA to tell a distributor 
whether to sell or not. See PDK Labs Inc., v. Ashcroft, 338 
F.Supp.2d 1, 14 (D.D.C. 2004).
    Respondent also faults the July 2006 presentation by agency 
personnel as ``[s]easoned with antiquated case law and dense, 
professional material,'' and asserts that it had ``little pedagogic 
value.'' Resp. Br. at 34. The Supreme Court's decision in United 
States v. Moore, 423 U.S. 122 (1975), however, remains good law. As 
for the purportedly ``dense, professional materials,'' these 
documents were typically no more than a handful of pages in length 
and surely capable of being understood by a person of reasonable 
intelligence. See GX 61. Indeed, based on the questionnaire Mr. 
Goodrich prepared, it seems clear that he understood the 
requirements for a valid prescription and legitimate doctor/patient 
relationship even if he chose to ignore the information provided by 
many of the pharmacies. See Resp. Ex. 52.
    I further note, however, that the Agency had no obligation to 
conduct the July 2006 briefing. In any event, in April 2001, the 
Agency published in the Federal Register a guidance document 
explaining the potential illegality under existing law of the 
activities engaged in by Respondent's internet pharmacy customers. 
See Dispensing and Purchasing Controlled Substances over the 
Internet, 66 FR 21181 (2001).

---------------------------------------------------------------------------

[[Page 36501]]

Respondent's Failure to Report Suspicious Orders

    The record further demonstrates that Respondent repeatedly failed 
to report any of its sales to the Florida-based internet pharmacies as 
suspicious orders even though, as the ALJ concluded, the purchases by 
these customers ``fell within the regulatory definition of suspicious 
orders.'' ALJ at 49. From its first distribution of hydrocodone 
products in December 2005 through its last in December 2006, not once 
did Respondent report a suspicious order.
    Moreover, Respondent failed to report these distributions 
notwithstanding (1) that the Florida-based pharmacies were ordering 
massive quantities of hydrocodone, quantities which greatly exceeded 
what Respondent sold to traditional retail pharmacies, and (2) that 
controlled substances typically constituted all but a miniscule 
percentage of the prescriptions drugs being ordered by the Florida-
based pharmacies. For example, between December 7 and December 31, 2005 
(a three-and-a-half week period), Respondent distributed approximately 
817,000 dosage units of hydrocodone to Medipharm. This amount was 109 
times the amount of hydrocodone that Respondent typically sold in a 
month to its retail pharmacy customers. Moreover, controlled substances 
comprised 98 percent of Medipharm's purchases of prescriptions drugs 
from Respondent.
    Notwithstanding this information, Respondent did not deem 
Medipharm's purchases to be suspicious. It did not report any of 
Medipharm's subsequent purchases as suspicious even though the pharmacy 
never purchased less than 703,000 dosage units of hydrocodone in a 
month and purchased more than a million dosage units of this drug in 
six different months. Moreover, even though between December 2005 and 
June 2006, controlled substances constituted 99% of Medipharm's 
prescription drug purchases from it and was specifically identified as 
a targeted pharmacy, Respondent never reported the purchases as 
suspicious.
    As another example, between December 21st and 31st, 2005, Avee 
purchased approximately 346,000 dosage units of hydrocodone from 
Respondent. Just as in the case of Medipharm, this amount--which 
involved only ten days of purchases--greatly exceed Respondent's 
average monthly sale of hydrocodone to a traditional pharmacy. 
Moreover, while Avee was only a customer for ten days during the seven-
month period of June through December 2005, Avee nonetheless made 
Respondent's list (ranking eighth) of its largest purchasers of 
controlled substances. See Resp. Ex. 46. Moreover, controlled 
substances constituted 100 percent of Avee's purchases of prescription 
drug products from Respondent. Id.
    Here again, Respondent did not report any of Avee's purchases as 
suspicious. It did not do so after Mr. Goodrich acquired information 
during the February site visit indicating that Avee was engaged in the 
filling of illegitimate prescriptions. Nor did it do so even after the 
July 2006 conference call when DEA officials informed Respondent that 
it was a targeted pharmacy. It did not do so even in November 2006, 
when it distributed more than 2.1 million dosage units of hydrocodone 
to Avee.
    Moreover, as it obtained additional Florida based customers, who 
proceeded to order excessive quantities of hydrocodone, Respondent 
never reported any of these pharmacies' orders as suspicious. To the 
contrary, on various occasions, it submitted e-mails to DEA field 
personnel affirmatively stating that it had reviewed its customer's 
purchases of controlled substances and had ``no suspicious activity to 
report.'' See GX 9 (Dec. 2005); GX 10 (Jan. 2006); GX 11 (Mar. 2006); 
GX 12 (April 2006).
    Respondent contends that ``[t]he [G]overnment's focus on [its] 
failure to report orders as suspicious in early 2006 is a red 
herring.'' Resp. Br. 34. Respondent argues that its failure to file 
suspicious order reports was not the result of any intent to mislead 
and points to the fact that in February 2006, it submitted a report 
that identified Medipharm, Avee and Accumed as among its largest 
purchasers of controlled substances. Id. Respondent also argues that by 
filing reports with DEA's ARCOS unit ``it alerted the DEA to 
Southwood's commerce with internet pharmacies.'' Id.
    Even if Mr. Goodrich had no intent to mislead by submitting these 
negative reports, Respondent still violated the regulation by failing 
to report suspicious orders. That some of the pharmacies were 
identified on the two reports Respondent submitted listing its largest 
purchasers of controlled substances (which Respondent submitted in 
February and July 2006), does not excuse its failure to comply with the 
regulation. Those reports did not comply with the regulation for 
several reasons.
    First, they were not timely submitted. See 21 CFR 1301.74(b) 
(requiring reporting of ``suspicious orders when discovered by the 
registrant''). Indeed, many of the pharmacies had been purchasing 
extraordinary quantities of hydrocodone for months by the time 
Respondent submitted its July 2006 report. Second, the reports did not 
list several of the internet customers--even though they had purchased 
large quantities--either because they had only recently become 
customers (as in the case of Grand Pharmacy and the Medicine Shoppe), 
or because the pharmacy had only purchased hydrocodone from Respondent 
for a limited time (as in the case of Elite).
    Nor does Respondent's filing of ARCOS reports excuse its failure to 
report suspicious orders. The ARCOS reporting requirement and the 
suspicious orders reporting requirement serve two different purposes. 
While ARCOS provides the Agency with information regarding trends in 
the diversion of controlled substances, the reports need not be 
submitted until fifteen days after the end of the reporting period. In 
contrast, as explained above, a suspicious order must be reported 
``when discovered by the registrant.'' 21 CFR 1301.74(b). The 
suspicious orders reporting requirement exists to provide investigators 
in the field with information regarding potential illegal activity in 
an expeditious manner. Respondent's compliance with the ARCOS reporting 
requirement is thus not a substitute for its failure to report 
suspicious orders.\24\
---------------------------------------------------------------------------

    \24\ Finally, Mr. Goodrich testified that the reason Respondent 
did not file the reports even after being told during the July 2006 
conference call of the highly suspicious nature of the activities of 
the Florida-based pharmacies was that the pharmacies were already 
under investigation. Respondent's awareness of an ongoing 
investigation does not, however, excuse its failure to report its 
customers' continued suspicious orders. Indeed, such information 
might well enable the agency to complete its investigation.
---------------------------------------------------------------------------

    Accordingly, I further conclude that Respondent repeatedly violated 
federal

[[Page 36502]]

regulations by failing to report suspicious orders. 21 CFR 1301.74(b). 
As explained above, the record also clearly establishes that 
Respondent's experience in distributing controlled substances is 
characterized by recurring distributions of extraordinary quantities of 
controlled substances to entities which then likely diverted the drugs 
by filling prescriptions which were unlawful. Moreover, Respondent's 
due diligence measures were wholly inadequate to protect against the 
diversion of the drugs. Respondent's failure to maintain effective 
controls against diversion and its experience in distributing 
controlled substances thus support the conclusion that its continued 
registration would be ``inconsistent with the public interest.'' 21 
U.S.C. 824(a)(4).

Factor Six--Other Factors Relevant to and Consistent With Public Health 
and Safety

    Respondent ``concedes that the Government has established a prima 
facie case * * * that [its] continued registration may be inconsistent 
with the public interest.'' Resp. Br. 31. Respondent contends, however 
that there is sufficient evidence ``of mitigation and ongoing 
remediation by [it] to compel a conclusion that to revoke its 
registration would be inconsistent with the public interest.'' Id. 
(citations omitted).
    More specifically, Respondent argues that its ``cooperation with 
and responsiveness to * * * DEA [should] also be considered in 
evaluating whether [its] continued registration is in keeping with the 
public interest.'' Id. at 37. Respondent maintains that it has 
undertaken several remedial measures ``to prevent the occurrence of 
further violations,'' and that therefore, a sanction less than 
revocation is warranted. These measures include: (1) The development of 
a new SOP ``to more rapidly detect suspicious orders''; (2) placing its 
new COO ``in charge of DEA compliance''; (3) retaining a consultant to 
audit its compliance efforts; and (4) working with the consultant ``to 
develop a means of interdicting suspicious orders of controlled 
substances before they are shipped.'' Resp. Br. 36.
    The ALJ agreed with Respondent. According to the ALJ, ``Respondent 
has worked with * * * DEA throughout its registration,'' and had 
``worked closely with local DEA diversion investigators to establish 
systems to control against the diversion of controlled substances.'' 
Id. at 54-55. The ALJ also noted that Respondent had ``consistently 
submitted'' ARCOS reports without any deficiencies noted. Id. at 54.
    Addressing the issue of its responsiveness to the Agency, the ALJ 
noted that Respondent attempted to obtain information from the Florida 
Board, that it sent questionnaires to the pharmacies and developed a 
new customer profile to evaluate new accounts, and that it adopted a 
policy under which it stopped filling orders placed by pharmacies whose 
registrations had been continued on a day-to-day basis but not renewed. 
Id. at 59-60.
    The ALJ also explained that ``Respondent continues to demonstrate a 
willingness to bring its business practices into compliance with DEA 
regulations,'' and noted that its new COO ``has a firmer grasp [of] 
these regulatory requirements.'' Id. at 61. Reasoning that Respondent 
had ``kept an open dialogue with the DEA and has attempted to come into 
compliance with the DEA's regulations,'' and had not previously been 
subject to enforcement action, the ALJ concluded that revocation of its 
``entire * * * registration is too severe a remedy'' even though 
Respondent had ``irresponsibly sold'' what she described as ``egregious 
quantities'' of hydrocodone to the Florida internet pharmacies. Id. at 
62.
    I disagree with both Respondent and the ALJ. As for Respondent's 
view, its ``circumstances'' do not ``compare favorably with [those of] 
registrants'' whose registrations have not been revoked, but rather, 
subjected to lesser sanctions. See Resp. Br. 36. As for the ALJ's view 
that Respondent had kept ``an open dialogue,'' the record amply 
establishes that Respondent is not a good listener.
    For support, Respondent cites my decision in Joy's Ideas, 70 FR 
33195 (2005), where I noted that the registrant had taken ``aggressive 
actions to improve her'' accountability systems. Id. at 33198. 
Notwithstanding that the registrant ``may have been an unknowing and 
unintentional contributor'' to the methamphetamine problem, I still 
revoked her registration based on evidence that large amounts of the 
products she distributed were being diverted. Id. at 33198-99. The case 
thus does not support Respondent for two reasons: (1) I revoked the 
registration in Joy's Ideas notwithstanding the mitigating evidence, 
and (2) here, Respondent had reason to know that it was contributing to 
the diversion of hydrocodone through most, if not all, of the 
pharmacies it supplied.
    Respondent also cites Service Pharmacy, Inc., 61 FR 10791 (1996), 
which noted that a registrant's adherence to the terms of a consent 
order it had entered into with state authorities supported its being 
allowed to maintain its DEA registration. Respondent argues by analogy 
that its ``cooperation with and responsiveness to * * * DEA [should] 
also be considered in evaluating whether [its] continued registration 
is [consistent] with the public interest.'' Resp. Br. 37.
    I agree that Respondent's level of cooperation and responsiveness 
to DEA should be considered in determining the appropriate sanction. It 
is true that there is some evidence of Respondent's having been a 
cooperative registrant as to some issues involving its responsibilities 
under the CSA. In particular, Respondent worked with a diversion 
investigator to develop a suspicious orders reporting system (although 
it was developed for a different customer base). There was also no 
evidence of Respondent's non-compliance with the CSA prior to its 
decision to supply internet pharmacies.
    On the other hand, even were I to completely ignore Respondent's 
conduct during the period between December 2005, when it started 
supplying the pharmacies, and the July 2006 conference call, the record 
further demonstrates that it did not adequately respond to the 
information DEA provided it in July 2006. As explained above, 
Respondent did not cut off any of the pharmacies until more than three 
months after being informed of the potential illegality of the 
pharmacies' activities. Indeed, it did not even enforce the deadline it 
set in its questionnaire.
    Moreover, while some of the responses to the questionnaires were 
either false or were cleverly prepared by a wordsmith, in a number of 
other instances the responses contained information--which Respondent 
then ignored--that clearly suggested that the pharmacy was filling 
invalid prescriptions. Finally, Respondent continued to sell large 
quantities to many of the pharmacies--including those specifically 
identified as targeted--up until the suspension of either the 
pharmacy's registration or its own registration. Contrary to 
Respondent's view, the entire body of evidence regarding its 
cooperation and responsiveness does not support its continued 
registration.
    While finding that ``Respondent continues to fail to adequately 
protect against diversion of hydrocodone products,'' ALJ at 59, the ALJ 
nonetheless concluded that to revoke its entire registration would be 
``too severe a remedy,'' presumably because there was ``no evidence of 
[its] improper

[[Page 36503]]

handling of any other controlled substances.'' Id. at 62. The ALJ, 
however, offered no explanation as to why Respondent's procedures were 
nonetheless sufficient to entrust it with authority to distribute other 
controlled substances.
    To the extent the ALJ's recommendation was based on the lack of 
evidence showing that Respondent improperly handled other controlled 
substances, the ALJ erred. The Government is not required to prove that 
multiple categories of the drugs Respondent distributed were diverted 
in order to sustain the revocation of its entire registration. Rather, 
proof that a single category of a drug it distributed was diverted is 
enough to support the revocation of Respondent's entire 
registration.\25\
---------------------------------------------------------------------------

    \25\ As for the Government's exception, when a party intends to 
rely on evidence contained in a CD-ROM, it has the obligation to 
prepare a summary setting forth what the data contained therein 
show. That summary must be prepared and served on opposing counsel 
along with a copy of the CD-ROM in advance of the hearing. It is not 
the responsibility of the ALJ or this Office to plumb the depths of 
such an exhibit to determine what the data show. Moreover, such 
evidence should not be admitted into the record unless the proponent 
of the exhibit establishes an adequate foundation for its admission 
by identifying and authenticating the exhibit; this must be done 
even if opposing counsel do not object to its admission.
---------------------------------------------------------------------------

    The ALJ apparently was persuaded by the various measures undertaken 
by Respondent to bring itself into compliance. Among these was 
Respondent's hiring of its new COO. According to the ALJ, the new COO 
is ``an experienced officer who will be making the final decisions 
concerning * * * Respondent's compliance measures,'' and this hiring 
``operates as an increased level of protection of the public interest 
and [its] compliance with DEA regulations in its business practices.'' 
ALJ at 62. The ALJ also noted that Respondent had voluntarily agreed 
``to cease selling controlled substances to Internet pharmacies.'' Id. 
at 63. Relatedly, Respondent points to its retaining of a consultant to 
audit its DEA compliance efforts and to develop a means of interdicting 
suspicious orders before they are shipped.
    As for Respondent's hiring of its new COO, the record establishes 
that Mr. Schwartz commenced his duties on September 26, 2006. Mr. 
Schwartz was thus the COO for more than two months before the immediate 
suspension order was served. Yet during this period, Respondent 
continued to distribute extraordinary quantities of hydrocodone to 
numerous internet pharmacies. Moreover, with respect to some of the 
pharmacies, it actually distributed increasing quantities culminating 
with the 2.1 million dosage units it sold to Avee in November 2006.
    In his testimony, Mr. Schwartz claimed that he did not become aware 
of Respondent's sales to the internet pharmacies and DEA's interest in 
the matter until on or about November 2, 2006, when DEA investigators 
visited Respondent and again met with its employees including Mr. 
Goodrich.\26\ Mr. Schwartz testified that it took ``a couple of days'' 
for him to be given the notebook which DEA investigators had provided 
to Respondent before the July conference call and review it, and that 
on December 5, 2007--approximately four weeks later--he and Mr. Sempre 
(Respondent's owner) came to the decision to cease doing business with 
the Florida pharmacies.
---------------------------------------------------------------------------

    \26\ As Mr. Schwartz testified, ``when a regulatory agency is 
on-site * * * everybody in the company knows about it. Word travels 
quickly.'' Tr. 937.
---------------------------------------------------------------------------

    While the ALJ credited Mr. Schwartz's testimony, I decline to give 
any weight to Respondent's stroke-of-midnight decision in determining 
the appropriate sanction. See, e.g., Vico Products Co., Inc., v. NLRB, 
333 F.3d 198, 211 (D.C. Cir. 2003). As an initial matter, I note that 
it should not have taken five weeks for Mr. Schwartz to even become 
aware of Respondent's sales to the internet pharmacies. Moreover, given 
the information Mr. Schwartz claims to have reviewed and his extensive 
experience in the industry, it should not have taken another four weeks 
to decide to stop selling to these entities.
    Most importantly, the decision must be considered in light of the 
evidence that for nearly a year prior to it, Respondent distributed 
millions of dosage units of hydrocodone products to entities which were 
likely diverting the drugs. Moreover, Respondent continued to 
distribute hydrocodone to the pharmacies following at least two 
meetings in which DEA investigators discussed the questionable 
practices of these pharmacies. As the Seventh Circuit has noted, ``[a]n 
agency rationally may conclude that past performance is the best 
predictor of future performance.'' ALRA Laboratories, Inc., v. DEA, 54 
F.3d 450, 452 (7th Cir. 1995). In short, Respondent's decision is too 
little, too late, to persuade me that it can be entrusted with a 
registration.
    Nor does the other evidence Respondent presented regarding its 
remedial efforts persuade me that a sanction less than revocation is 
warranted. Respondent's distribution of 44 million dosage units of 
hydrocodone which were likely diverted caused extraordinary harm to the 
public health and safety. Moreover, the record establishes that 
Respondent had reason to know that the hydrocodone it distributed was 
likely being diverted.
    As the record demonstrates, for nearly a year, Respondent 
repeatedly supplied these drug pushers with large quantities of 
hydrocodone. Respondent commenced supplying the pharmacies showing 
little interest in determining whether they were engaged in lawful 
activity. Moreover, Respondent continued to supply the pharmacies even 
after being advised by this Agency of the likely illegality of their 
activities. Finally, while Respondent eventually undertook some 
inquiries, it then frequently ignored the information it obtained from 
the pharmacies themselves, which indicated that they were likely 
filling unlawful prescriptions, and continued to supply most of them.
    Given the scope of Respondent's conduct and the harm it caused, I 
decline to accept its assertions of reform. I therefore conclude that 
this factor also supports the conclusion that Respondent's continued 
registration ``is inconsistent with the public interest.'' 21 U.S.C. 
823(d). Finally, for the same reasons which led me to order the 
immediate suspension of Respondent's registration, I further hold that 
this order shall be effective immediately. See 21 CFR 1316.67.
* * * * *
    My determination is based on the reasons set forth above, and those 
reasons are sufficient by themselves to support the revocation of 
Respondent's registration. There is, however, an additional 
consideration, which, while not necessary to decide this case, bears 
mentioning. Specifically, to allow Respondent to maintain its 
registration--even subject to the conditions as proposed by the ALJ 
and/or Respondent--would create a perverse incentive. A precedent which 
ignores how irresponsibly a registrant has acted and allows it to 
maintain its registration based on its claim of having reformed its 
business practices, could well prompt other registrants to ignore their 
obligations under the Act and sell massive quantities of controlled 
substances to diverters.
    I acknowledge that proceedings under sections 303 and 304 of the 
CSA are non-punitive. See Samuel S. Jackson 72 FR 23848, 23853 (2007); 
Leo R. Miller, 53 FR 21931, 21932 (1988). Relatedly, DEA precedent 
holds that a proceeding under these provisions ` ``is a remedial 
measure, based upon the public interest and the necessity to protect 
the public

[[Page 36504]]

from those individuals who have misused * * * their DEA Certificate of 
Registration, and who have not presented sufficient mitigating evidence 
to assure the Administrator that they can be [en]trusted with the 
responsibility carried by such a registration.' '' Jackson, 72 FR at 
23853 (quoting Miller, 53 FR at 21932).
    Neither Jackson nor any other agency decision holds, however, that 
the Agency cannot consider the deterrent value of a sanction in 
deciding whether a registration should be revoked. Moreover, even when 
a proceeding serves a remedial purpose, an administrative agency can 
properly consider the need to deter others from engaging in similar 
acts. Cf. Butz v. Glover Livestock Commission Co., Inc., 411 U.S. 182, 
187 (1973). Consideration of the deterrent effect of a potential 
sanction is supported by the CSA's purpose of protecting the public 
interest, see 21 U.S.C. 801, and the broad grant of authority conveyed 
in the CSA's statutory text, which authorizes the revocation of a 
registration when a registrant has committed acts that render its 
``registration * * * inconsistent with the public interest,'' id. 
824(a)(4), and specifically directs the Attorney General to consider 
``such other factors as may be relevant to and consistent with the 
public health and safety.'' Id. 823(d)(6).
    As noted by a recent study of the National Center on Addiction and 
Substance Abuse (CASA), ``the abuse of controlled prescription drugs in 
America now eclipses abuse of all illicit drugs combined, except 
marijuana.'' GX 3 (Declaration of Joseph T. Rannazzisi). According to 
the CASA study, ``between 1992 and 2003, abuse of controlled 
prescription drugs grew at a rate twice that of marijuana abuse, five 
times greater than cocaine abuse, and 60 times greater than heroin 
abuse.'' Id. Relatedly, CASA has found that the number of ``controlled 
prescription drug-related visits to emergency rooms has increased three 
and a half times more than heroin-related visits and four times more 
than visits linked to cocaine abuse.'' Id. Moreover, ``between 1994 and 
2002, emergency department reports of hydrocodone * * * overdoses 
increased by 170 percent.'' Id.
    Equally alarming are the results of the National Institute of Drug 
Abuse (NIDA) 2004 survey of eighth, tenth and twelfth grade school 
children. According to the survey, ``9.3 percent of twelfth graders 
reported using Vicodin, a brand name Schedule III controlled substance 
containing hydrocodone, without a prescription in the previous year.'' 
Id.
    Illegitimate internet sites play an increasingly large and 
disturbing role in facilitating the growth of prescription drug abuse. 
Id. at 1-2.; see also William R. Lockridge, 71 FR 77791 (2006). Because 
these websites allow a person to obtain a controlled substance based on 
a prescription which is issued outside of a legitimate doctor/patient 
relationship and the safeguards that relationship provides, 
``[a]nyone--including children--can easily obtain highly addictive 
controlled substances online.'' GX 3, at 2.
    As stated above, these websites and the pharmacies that fill the 
prescriptions issued by them, are nothing more than drug pushers 
operating under the patina of legitimate authority. Cutting off the 
supply sources of these pushers is of critical importance in protecting 
the American people from this extraordinary threat to public health and 
safety. In accomplishing this objective, this Agency cannot do it all 
itself. It must rely on registrants to fulfill their obligation under 
the Act to ensure that they do not supply controlled substances to 
entities which act as pushers. And to make clear, because of the threat 
to public safety posed by the diversion of controlled substances 
through the internet, the deterrent value of a sanction is an 
appropriate consideration in proceedings brought under sections 303 and 
304 of the CSA.

Order

    Pursuant to the authority vested in me by 21 U.S.C 823(d) & 824(a), 
as well as 28 CFR 0.100(b) & 0.104, I order that DEA Certificate of 
Registration, RS0204898, issued to Southwood Pharmaceuticals, Inc., be, 
and it hereby is, revoked. I further order that the pending application 
of Southwood Pharmaceuticals, Inc., for renewal of its registration be, 
and it hereby is, denied. Moreover, for the same reasons which led me 
to conclude that Respondent's continued registration constituted an 
imminent danger to public health and safety, this order is effective 
immediately.

    Dated: June 22, 2007.
Michele M. Leonhart,
Deputy Administrator.
[FR Doc. 07-3218 Filed 7-2-07; 8:45 am]
BILLING CODE 4410-09-P