Two O.C. companies accused of unlawfully selling fetal tissue and cells

ORANGE COUNTY DISTRICT ATTORNEY PRESS RELEASE

Case # TBA

Date: October 12, 2016

OCDA FILES CIVIL SUIT AGAINST SISTER COMPANIES AND THREE FAMILY-MEMBER OWNERS FOR UNLAWFUL SALE OF FETAL TISSUE AND CELLS FOR VALUABLE CONSIDERATION

SANTA ANA, Calif. – Orange County District Attorney (OCDA) Tony Rackauckas filed a lawsuit today against two sister companies and three owners for their role in the unlawful sale of fetal tissue and stem cells for valuable consideration. The OCDA filed a Complaint for Violations of unlawful, unfair, and fraudulent business practices in the Superior Court of the State of California in Orange County on Oct. 12, 2016, against DV Biologics, LLC, and DaVinci Biosciences, LLC. The Prayer for Relief in the Complaint seeks for the defendants to cease the sale of fetal tissue and cells, pay restitution to those harmed to be determined at trial, and pay any other civil penalties deemed just and proper.

“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 DV Biologics, DaVinci Biosciences, and a father and his two sons with illegally selling hundreds of fetal tissue products for profit and treating human parts as commodities instead of giving it the respect the law intended. This lawsuit is aimed at taking the profit out of selling body parts,” stated District Attorney Rackauckas.

Background

DaVinci Biosciences was incorporated in November 2007, and DV Biologics were incorporated in March 2009, in Delaware, with their principal place of business in Orange County, including Costa Mesa and in June 2015, in Yorba Linda. DaVinci Biosciences is jointly owned and operated by the same people that also own and operate DV Biologics. The two companies share office space, management and employees. The California Franchise Tax Board forfeited DaVinci Biosciences, and DV Biologics’ powers, rights, and privileges in July 2015 and November 2014, respectively.

The Law Regarding Sales of Fetal Tissue and Cells

Under California law:

ž HSC §125320 (a) A person may not knowingly, for valuable consideration, purchase or sell embryonic or cadaveric fetal tissue for research purposes pursuant to this chapter, (b) For purposes of this section, “valuable consideration” does not include reasonable payment for the removal, processing, disposal, preservation, quality control, storage, transplantation, or implantation of a part.

ž Business and Professions Code § 17200 – unlawful, unfair, and fraudulent business practices.

Under Federal law:

ž 42 USC § 289g-2(a) Purchase of tissue: it shall be unlawful for any person to knowingly acquire, receive, or otherwise transfer any human fetal tissue for valuable consideration if the transfer affects interstate commerce.

¡ The term “valuable consideration” does not include reasonable payments associated with the transportation, implantation, processing, preservation, quality control, or storage of human fetal tissue.

ž 42 USC § 289g-1(g) “Human fetal tissue” defined: for purposes of this section, the term “human fetal tissue” means tissue or cells obtained from a dead human embryo or fetus after a spontaneous or induced abortion, or after a stillbirth.

Legislative History and Case Law:

Legislative history and case law recognizes that “stem cell research, including the use of embryonic stem cells for medical research, raises significant ethical and policy concerns, and, while not unique, the ethical and policy considerations associated with stem cell research must be carefully considered.” (Stats 2002, ch. 789 [S.B. No. 253] sec. 1 (g)-(h).)

There is a “societal belief” based thereon that “rejects commercialization of human organs and tissues and tolerates only an altruistic system of voluntary donation.” (Id.) Thus, any such “commerce is generally seen as revolting.” (Flynn v. Holder (9th Cir. 2012) 684 F.3d 852, 861 [quoting Congressional legislative history regarding organ donations and noting the widely held belief that: “Human Organs should not be treated like fenders in an auto junkyard”; “Human body parts should not be viewed as commodities”].) “People tend to have an instinctive revulsion at denial of bodily integrity, particularly removal of flesh from a human being for use by another and most particularly ‘commodification’ of such conduct, which is the sale of one’s bodily tissues.” (Id.)

Defendants’ Unlawful and Unfair Business Practices

In early 2009, DaVinci Biosciences is accused of expanding its business to include a revenue-driven unit by selling products derived from the cells and tissues they were already collecting, processing, storing and using for research purposes. A few months later, DV Biologics is accused of launching its first marketing campaign to start producing sales.

The defendants are accused of hiring an outside marketing consultant to develop marketing materials, including a catalog posted on the company’s website in January 2010 and sent to various sales leads. The two companies are accused of advertising prices in a range as low as $40 a vial for the “total RNA” cells from several fetal tissue sources to as high as $1,100 a vial for specific cells derived from fetal brain tissue. They are accused of pricing the products in a middle range from $300 to $375 a vial for fetal lung derived products, $300 to $450 a vial for fetal kidney derived products, $500 to $700 a vial for fetal heart derived products, and $250 to $700 a vial for fetal liver derived products.

Between 2009 and 2011, the defendants are accused of nearly tripling sales revenues. The defendants are accused of unlawfully selling fetal-derived products to pharmaceutical companies and academic institutions around the world through a network of distributors. By the end of 2011, the defendants are accused of unlawfully selling fetal-derived tissues and cells worldwide to countries including Japan, China, Singapore, Korea, Germany, Switzerland, Spain, Australia, Netherlands, Canada, and the United Kingdom, and earning a majority of its revenue from international sales.

In October 2009, the defendants are accused of sending an email saying, “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 margin 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.”

The companies also regularly offered “sales” pricing promotions, including, for example, a “25% off” summer sale and “25% off” fall promotion in 2013. Sales staff was given wide flexibility in using discounts in order to close a sale, because they all knew they still ended up “on top.”

In late 2011, the companies are accused of meeting to strategize a business plan and stating their “3 year goals [were] to infiltrate the cell-based market, be a major competitor in the cell-based therapies and tools market for improving health and quality of life, and provide a healthy and conservative balance sheet.” They are accused of further stating that their “objective” was to develop their “business units into revenue and value generating subsidiaries.”

By 2012, the defendants are accused of having over 500 products in its inventory “with some 13,900 units available,” for sale – an inventory that the defendants “valued at much greater than $4.4 Million dollars.”

From August 2012 to October 2015, the defendants are accused of unlawfully selling approximately 500 fetal tissue products for valuable consideration. Each of the 500 prenatal tissue and cells that were sold for valuable consideration between August 2012 and the present date is a separate violation of both California and federal law for which civil penalties and an injunction preventing any further violations are sought by way of this action.

In both 2013 and 2014, the companies are accused of grossing in excess of $400,000 in revenue, which is double the gross revenue earned in 2012. In 2015, the defendants are accused of continuing its upward momentum and reached its earlier goal to exceed $550,000 in gross revenues.

In April 2014, the defendants are accused of sending an email stating, “margins on both products are much higher than 50%. The costs range from $40-50 per vial and we sell them at a 10 fold mar[k] up.”

In July 2014, the companies are accused of discussing the pricing of prenatal renal fibroblasts via email, explaining that they were currently selling the “product” for $350/vial, and suggesting they raise the price to $375/vial, stating, “1000% gross does not seem unreasonable based on infrastructure and lack of competition.” In that email exchange, they are accused of stating, “If the market can handle a higher price then we will go with [that] since we will be giving discounts to the distributors.” After this discussion, they are accused of setting the 2015 list price for prenatal renal fibroblasts at $450/vial.

The OCDA Bureau of Investigations investigated this case, which is ongoing. Deputy District Attorney Kelly Ernby of the Consumer Protection Unit is prosecuting this case.

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TONY RACKAUCKAS, District Attorney

Susan Kang Schroeder, Chief of Staff
Office: 714-347-8408
Cell: 714-292-2718

Roxi Fyad, Spokesperson
Office: 714-347-8405
Cell: 714-323-4486