OPIUM IMPORTERS ASSAIL U.S. RULE THAT FAVORS INDIA AND TURKEY

MENAR, India -- Beside a thick carpet of plants cloaked in white flowers,
Laxmi Lal Lohar sits cross-legged in the dirt, scraping brown gunk off his
palms into a plastic pail. If all goes well -- and he prays and burns
incense each morning so it will -- the stuff in the pail will earn him a lot
more than the wheat, cauliflower and tomatoes he normally grows.

Opium does tend to pay better.

Mr. Lohar isn't doing anything illegal. He is one of 159,000 peasant farmers
licensed by the Indian government this year to grow opium poppies and help
meet rising international demand for strong painkillers.

After thousands of years and an often-tragic history, opium and its
derivatives remain the ingredients of choice for pain-relief medications.
Sales of medicines derived from opium poppies rose 32% in the U.S. last year
to more than $2 billion, according to IMS Health, a research firm. Demand
for one opium derivative, known as thebaine, is especially strong, up
sixfold since 1996 according to an importer.

Much of the raw material comes from India, and that's no accident. Under an
obscure U.S. regulation known as the 80/20 rule, importers of opiate raw
materials in the U.S., the world's largest buyer, must get 80% of their
supplies from India and Turkey.

They end up buying mostly from India because it's the only place on earth
where farmers are legally permitted to lance ripe seed pods and extract gum
opium, a latexlike substance that is easier to process than the dried pods
known as poppy straw produced in Turkey and elsewhere.

But India's unique place in the legal trade in narcotic raw materials no
longer is assured. The rising demand is shaking up the secretive business,
prompting importers to seek new sources, breed new varieties, invest in new
technologies and even try to alter foreign policy.

Lobbying for Change

The only two companies licensed to bring opium and its derivatives into the
U.S., Mallinckrodt Inc. and the Noramco unit of Johnson & Johnson, have been
lobbying the U.S. government to change the 80/20 rule. They contend the
rule, adopted by the Drug Enforcement Administration two decades ago at a
time of excess production, is outdated.

Besides citing growing demand for morphine, which is made from gum opium,
they say India and Turkey can't supply enough of the thebaine derivative. It
is turned into oxycodone, an ingredient in some popular painkillers. Sales
of one such drug, OxyContin from Purdue Pharma LP in Norwalk, Conn., leapt
95% last year to about $600 million, according to IMS Health.

The importers want the DEA to change the 80/20 rule to 60/40 over three
years. That would allow them to buy more from places like the Australian
island of Tasmania, where poppies especially rich in thebaine are being bred
by two producers, one a Noramco affiliate and one owned by drug giant Glaxo
Wellcome PLC. France also is developing thebaine-rich poppies.

"Our overwhelming concern in wanting to change the rule is the possibility
of shortage," says a Noramco official, Michael Kindergan.

Pushing Back

But the Indians and Turks don't fancy the idea of changing the 80/20 rule,
and the proposal has erupted into a contentious trade issue with the U.S.
"You just don't break your commitment unilaterally," says Reva Nayyar, joint
secretary of India's Ministry of Finance, who says India is lobbying "very
strenuously" to keep the rule intact. So is Turkey. And the United Nations'
International Narcotics Control Board in Vienna warns that changing the rule
could "destabilize the world licit market for opiate raw materials."

Nonetheless, the DEA, with input from the State Department, has been
reviewing the rule for about a year, weighing proposals that include
changing the rule to 60/40 or exempting thebaine altogether. Meanwhile, even
as the two legal importers fight that battle, they have been trying to keep
others out of their business. At least two other companies say they are
seeking licenses to become U.S. importers.

Opium's roots in history are deep. Thebaine takes its name from the ancient
Egyptian city of Thebes, and the harvesting method used in India today
originated with the Assyrians, according to a book on opium by Martin Booth.
In India's history, opium has been a nefarious player. British rulers
established gum opium as India's biggest cash export in the 19th century and
smuggled it by boat into China to supply addicts, sparking the Opium Wars
that led to the colonization of Hong Kong.

In later times, the addictive nature of opiates caused many doctors to think
twice before prescribing them. But that is changing now, especially in the
U.S., where pain treatment has emerged as a medical specialty and safer
means of administering opiates, such as patches and slow-release tablets,
have arisen. About 3,000 U.S. doctors now specialize in treating pain, says
J. David Haddox, Purdue Pharma's medical director and a past president of
the American Academy of Pain Medicine, who says opiates remain one of the
most effective means.

Opium-poppy production is strictly controlled under international treaties
and national laws. The U.N. is supposed to ensure that enough poppies are
grown to meet medical needs, without any excess that would end up with drug
traffickers. In the late 1970s, output began rising too fast. A U.N.
commission asked supplier countries to limit production and importing
nations to help out by supporting "traditional supply countries."

After much debate, the U.S. DEA instituted the 80/20 rule in 1981. Turkey
was included partly for foreign-policy reasons. The U.S. had helped persuade
Turkey to ban poppy production in the early 1970s because it was a source of
the "French connection" heroin flowing into the U.S. But Turkish officials,
upset over farmers' lost income, later reauthorized production. The 80/20
rule provided a reliable commercial market for Turkish poppies.

Turkey did agree to bar farmers from harvesting gum opium, which can easily
be turned into heroin. Instead, farmers in Turkey slice off the bulbous
poppy heads, which are dried, crushed and processed in a U.S.-built factory
into a potent substance called concentrate of poppy straw. About 100,000
Turkish farmers now legally grow poppies. The bulk of their output goes to
the U.S.

India was allowed to continue producing gum opium, even though the U.S. knew
there was leakage to drug traffickers, says an official at the State
Department's Bureau of International Narcotics and Law Enforcement Affairs.
Since most of the diverted opium stayed in India, the U.S. attitude was "to
some degree, it's their problem," the official says.

As with any crop, production depends heavily on weather, and it was lousy
for the 1998 harvest. India had to exhaust nearly all of its backup
inventory, and global stocks of gum opium fell to their lowest in two
decades, about an 18-week supply. To meet demand, Noramco and Mallinckrodt
say, they bought morphine reserves from the U.S. military.

Cash Crop

The next year, India licensed 156,000 farmers to grow poppies, up from
92,000. The increase was welcomed in poor villages such as Menar, a place of
rutted dirt roads and no running water in west-central India. Growing
ordinary food crops, most farmers here earn the equivalent of about $350 a
year. Those who are allowed to plant opium poppies on a half-acre or so of
their land -- 102 farmers this year, up from a dozen in 1997 -- can earn
$150 or more just from that small plot. And since the poppy season runs from
December to March, they can raise something else on this patch the rest of
the year, while still planting the rest of their land in food crops.

Mr. Lohar, a 35-year-old who doubles as a stonemason to support his wife and
five children, jumped at the chance for an opium license, which cost him 57
cents. His first season was disastrous; the crop was ravaged by a fungus.

This year was much better. In early March, thousands of dark-green seed
pods, many the size of tennis balls, stood erect in his plot, amid a sea of
white flowers. It was time to begin the weeks-long harvest, now nearing
completion.

Mr. Lohar begins the day at 6 a.m. He starts by placing his tools before a
"god stone" at the edge of the field, burning incense, brushing a few poppy
leaves with orange dye and praying to a goddess. The purpose, he says, is
"to get more production."

Then he, his wife and several hired hands begin the lancing process. They
carefully apply a small, four-bladed wooden stick to each seed pod and slice
the surface once from top to bottom. White, milky drops ooze out through the
four parallel, shallow cuts. Twelve hours later, the liquid has turned brown
and gummy and is ready to be scraped off the pods with a curved blade and
deposited in a pail. Pods are lanced again and again until no more milk
flows.

Off to the Lambardar

Each night, Mr. Lohar and the other poppy farmers of Menar take their output
to the village's head opium man, known as the lambardar, for weighing and
entry into the official Opium Collection Daily Record. They bring it back
home and, because even minute amounts of gum opium are valuable, scrape the
residue off their hands and into the bucket.

The lambardar is whichever village farmer produced the most gum opium in the
prior season; this year, the role went to Fulchand Jain, a leather-faced
55-year-old who has been growing poppies since 1972. The 3.6 kilograms (7.9
pounds) of gum opium he harvested last year helped him move into his own
house in his extended family's crowded complex.

As lambardar, he earns a 1.5% commission on the village's production. But he
isn't thrilled to have the job. He must measure every farmer's plot and
destroy any poppies found outside the boundaries, making him unpopular with
some.

At the end of the harvest, the farmers bring their gum opium to government
weighing stations. If they don't meet the minimum qualifying yield, they
lose their licenses -- a rule designed to deter diversion, since a farmer
delivering too little opium might be selling some to traffickers, for far
more.

But it's an inexact science, and last year, the government reduced the yield
requirement after many farmers didn't meet it. U.S. drug-enforcement
officials, concerned that a significant part of last year's Indian crop may
have been diverted and smuggled abroad, have offered to help devise
more-precise yield calculations.

Sun-Dried

Mr. Jain and Mr. Lohar shrug when asked what they think happens to the gum
opium the government buys. In fact, it is trucked in sealed plastic
containers to the Government Opium and Alkaloid Works in Nimach, one of two
such plants in India. There, workers empty the moist gum opium into
aluminum-lined wooden trays, dry it in the sun for two to three weeks, mold
it into lumps, wrap it and pack it in wooden chests. These travel by truck
and train to Bombay, where they are shipped to the U.S. for processing and
eventual sale to pharmaceutical companies.

Last year, Indian farmers were paid $13 to $32 per kilogram, depending on
yield and moisture content. After drying, India sells it to U.S. importers
for $77 a kilo, maybe one-tenth the value it will have by the time it
reaches American consumers in painkillers.

The rising market hasn't escaped notice. Seeking to join Mallinckrodt and
Noramco as U.S. importers are two companies, Penick Corp. in Newark, N.J.,
and Johnson Matthey Pharmaceutical Materials in West Deptford, N.J., a unit
of London-based Johnson Matthey PLC.

Mallinckrodt and Noramco are challenging the application by Johnson Matthey,
saying the company lacks technical expertise; Johnson Matthey declines to
comment on that.

As for Penick, it used to be an importer but went into receivership and let
its license expire. Recently it emerged from bankruptcy after attracting new
investors who hope it can regain its license and re-enter the now-thriving
business. Penick plans to apply soon and says it expects opposition from
Mallinckrodt and Noramco, which objected when Penick tried unsuccessfully to
regain the license one other time.

Their argument: There's already enough competition for the limited supply of
legal opium.

Write to Steve Stecklow at steve.stecklow@wsj.com1 and Jonathan Karp at
jonathan.karp@wsj.com2