ORANGE COUNTY DISTRICT ATTORNEY PRESS RELEASE
Date: October 12, 2016
SANTA ANA, Calif – “Today, the Orange County District Attorney’s Office filed a 21-page civil complaint alleging unlawful and unfair business practices against DV Biologics, LLC, DaVinci Biosciences, LLC, Andres Isaias, and Estefano Isaias.
DaVinci Biosciences is jointly owned and operated by Andres Isaias, Luis Isaias and Estefano Isaias. Two of the three owners, Andres Isaias and Luis Isaias, also own and manage DV Biologics. The two companies share the same office space, employees, and management. There is no separate accounting of the financials of the two companies, located in Yorba Linda, and the accounting of revenue and expenses for both companies is 100 percent commingled. The Franchise Tax Board forfeited DaVinci and DV Biologics’ powers, rights, and privileges in July 2015 and November 2014, respectively.
This is an unlawful, unfair, business practices case filed under CA Business and Professions Code section 17200.
Since this lawsuit is the first to be filed with respect to this subject matter, I will explain the applicable law, what facts led us to the filing of this case, and the remedy we are seeking. There is a lot of material so I thank you in advance for your patience.
This Office is continuing to investigate and develop this case. All of the evidence we are using in this case was put together by the District Attorney’s Office.
This case is NOT about whether it should be lawful to sell fetal parts or whether fetal tissue research is ethical or legal. We are simply charging these Defendants with illegally selling hundreds of fetal tissue products for profit.
Let me talk about the applicable law in this case.
Regarding fetal parts — the sale of fetal tissue products for “valuable consideration” is illegal under both California and federal law.
It is against the law to intentionally sell human body parts for profit, including fetal tissue donations obtained from abortions.
For purposes of this section, “valuable consideration” excludes reasonable payment for the removal, processing, disposal, preservation, quality control, storage, transplantation, or implantation of a part.
The term “human fetal tissue” is defined broadly to include any “tissue or cells obtained from a dead human embryo or fetus.”
The term “tissue” is also broadly defined to “mean a human cell or group of cells.
Embryonic or cadaveric fetal tissue may be donated for research purposes pursuant to this chapter.
We have charged the following:
From 2009 to 2015, the defendants obtained aborted fetus donations from Planned Parenthood and turned those donations into a profit-driven business. They did so by selling tissues and cells from the heart, lungs, kidneys, brain, intestines, skeletal muscle and bones of the aborted fetus donations. The companies advertised and sold these, what they called “prenatal products” from 2009-2015 to companies all around the world, earning hundreds of thousands of dollars in revenue.
The defendants pressed onward, year-after-year, in an attempt to beat their “competition” and increase margins — just as any profit-seeking enterprise may otherwise seek to do. Indeed, rather than limiting their income on these sales, the defendants intentionally set their prices as high as possible in an effort to maximize their profits. Sales and marketing staff were hired, paid commissions, and pressured to “push” sales in order to meet increasing revenue objectives every year. They were encouraged to offer discounts, coupons, and sales-pricing on fetal products to move “inventory” more quickly as well.
The business was lucrative. To be sure, fetal products were routinely sold at a 10-fold or higher mark-up over their costs. The company also charged marked-up packaging and handling fees, as well as shipping fees, so as to earn a little extra profit on every transaction.
It is estimated that the companies sold hundreds of different fetal tissue products for valuable consideration in violation of the law. Each unlawful sale is a separate act of unlawful and unfair competition under California’s Business and Professions Code Section 17200 for which civil penalties and injunctive relief are warranted and hereby sought by way of this Complaint.
The time line is this:
In early 2009, DaVinci Biosciences decided to expand its business to include a revenue-driven unit, selling products derived from the cells and tissues they were already collecting, processing, storing and using for research purposes.
They created DV Biologics for this purpose.
A few months later, DV launched its first marketing campaign to start producing sales. According to their marketing plan: I’ll quote: “The marketing challenge for [2009-2010] will be to introduce our products in a politically conscious way given that the material is both human and in some cases pre-natal derived …. [¶] The challenge will be to form a sales tactic team, infiltrate markets … to change existing buyer’s outlook and purchasing behaviors … [and to make] human cell-derived products well understood and appear worthy of any additional cost to purchase.”
The companies hired an outside marketing consultant to develop marketing materials, including a catalog, to support their sales effort and posted the 2010 catalog on the company’s website. Prenatal products made from fetal heart, brain, lungs, kidneys, liver, large intestines, small intestines, skin, skeletal muscle and bones were all offered for sale.
Most products were priced somewhere from $300 to $700 per vial, when the “products” were produced for $20 per vial or less.
From one fetus donation, DV created dozens of different types of prenatal products, and hundreds of individual units of each product type for sale. DV was able to do so with a limited number of labor hours (ranging from approximately 2-9 labor hours per product) and at very minimal costs (usually less than $20/vial). DV maintained an inventory of products “in stock,” in one or two refrigerated locations provided by DaVinci Biosciences until sold.
Between 2009 and 2011, sales revenues nearly tripled as the business started to take shape. According to their Business Plan, “Sales increased 59% in 2011 from 2010” and the DV “product catalog ha[d] grown to greater than 48 pages for 2011-2012.” By the end of 2011, DV had 13 worldwide distributors in place and the majority of its revenue was earned from international sales.
According to their 2012 Business Plan, the Defendants’ “3 year goals [were] to infiltrate the cell-based market, be a major competitor… by “hiring a commercial representative” and/or “a dedicated sales/ marketing person,” increasing “the amount of marketing” and the “number of distributors throughout the world and tak[ing] advantage of the internet, distributors, newsletters, educational presentations, and direct marketing/sales.”
Management set forth these directives with the “aim to increase sales yearly by no less than 30 percent each year for the next 3 years …” By 2012, DV had over 500 products in its inventory “with some 13,900 units available,” for sale — an inventory that DV “valued at much greater than $4.4 Million dollars.”
A new “Regional Sales Manager” was on board in early 2013. The defendants then implemented a “2013 Sales Launch Plan” to further increase sales to “[g]enerate $550,000 in gross revenue by the end of 2013,” by hiring sales managers, prospecting, generating leads and securing sales.
From 2012-2015, products were sold to pharmaceutical companies, academic institutions, and distributors both domestically and in countries around the world, including Japan, China, Singapore, Korea, Germany, Switzerland, Spain, Australia, Netherlands, Canada, and the United Kingdom. In both 2013 and 2014, the company grossed in excess of $400,000 in revenue, which was double the gross revenues earned in 2012. In 2015, DV continued its upward momentum and reached its earlier goal to exceed $550,000 in gross revenues.
From 2009-2015, the Defendants also collected almost $57,000 in “packing and handling” fees, which was marked-up approximately 50 percent over the actual cost of packing and handling and paid commissions to their employees. As a reward to its employees, Defendants also paid commissions on the profits they earned from the packing and handling charges from 2013-2015.
In setting the prices for their prenatal product sales, DV ignored both federal and state laws that restrict earning “valuable consideration” on such sales entirely. There was no attempt to limit the prices charged on any of their prenatal product sales only to “reasonable payments allowed under the law. Indeed, there was no separate accounting for any such allowable charges conducted to support the prices DV charged for prenatal products.
Instead, the majority of sales prices were arbitrarily set based on the “market” value and what other potential “competitors” might charge on similar products.
Prices were also intentionally set as high as possible to leave room to offer discounts and negotiate a lower price so as to ensure a profit on sales even with discounts such as:
*20 to 30 percent discounts for distributors
*10 to 15 percent discounts for first time buyers
*and 50 percent discounts if they bought in bulk purchase.
The company also regularly offered “sales” pricing promotions, including, for example, a “25% off” summer sale and “25% off” fall promotion in 2013. Sales staff were given wide flexibility in using discounts in order to close a sale, because they all knew they still ended up “on top.”
As a result of the pricing structure and the various discounts available, the same product was randomly sold to different customers at different prices. The highest prices were typically charged to U.S. customers and educational institutions, while the deepest discounts were offered to international distributors in countries all around the world. This illustrates the boldness of their unlawful profit-making business scheme.
Sales personnel knew they were making money on sales, even despite large discounts. For example, a 2009 email states: “it costs us roughly $25 per unit to manufacture and we are selling for $170.” She said offering a 30-40% discount price “would leave us with a marginal profit of $94-77 per unit” and if they increase the discount to 50%, they “would still have a marginal profit of $60 per unit.”
For example, a July 2014 email states, “1000% gross does not seem unreasonable based on infrastructure and lack of competition.” DV’s company records show that they knew there was a substantial profit margin being earned on the prenatal product sales, most of which were selling at a profit margin of 70% or more.
Here are some profits per fetal part:
*Heart – up to $674 in profit.
*Liver – up to $233 in profit.
*Stomach – up to $221 in profit.
*Small Intestine – up to $664 in profit.
PRAYER FOR RELIEF
At the conclusion of this lawsuit, we will seek to obtain on behalf the citizens of Orange County civil penalties, restitution, costs, and an order enjoining the defendants from further violation of California and Federal laws concerning the sale of fetal tissue.
Most of the information we obtained to file this law suit comes from the defendant’s companies as documentation turned over to use in response to subpoenas. We don’t expect this to be an easy case. The District Attorney’s Office has a long track record of protecting the public from unscrupulous business tactics, and preventing profits off of fetal parts will be no different than our continued commitment to fighting consumer fraud.”
TONY RACKAUCKAS, District Attorney
Susan Kang Schroeder, Chief of Staff
TONY RACKAUCKAS, District Attorney
Roxi Fyad, Spokesperson