Non-binding Guidance: Examining FDA’s Enforcement Authority Over Stem Cell Clinics and Compounders

June 28, 2019
25:12 minutes

The third installment of Ropes & Gray’s podcast series, Non-binding Guidance, highlights two recent federal district court decisions implicating enforcement efforts in the stem cell and compounding arenas. This episode, Ropes & Gray lawyers Greg Levine and Beth Weinman first explore the D.C. District Court’s decision to grant summary judgment to FDA in its efforts to enjoin a Florida clinic from administering unapproved adipose derived stem cell injections to patients to treat a number of serious diseases. Next they address a loss for the government in the decision by the Federal District Court for the District of Massachusetts to overturn the convictions of two former employees of the New England Compounding Center (NECC) for conspiracy to defraud FDA, on the basis of legal impossibility. Tune in to this discussion to learn more about these federal district court decisions, their impact on the industry, and how the Agency will move forward as a result of these findings.


Greg Levine: Hi. I'm Greg Levine, a partner in the life sciences practice group at Ropes & Gray, based in our Washington, D.C. office. Welcome to Non-binding Guidance, a podcast series from Ropes & Gray focused on current trends in FDA regulatory law as well as other important developments affecting the life science industry. I'm here today with my colleague Beth Weinman, counsel in the life sciences group, who joined us late last year from FDA's Office of Chief Counsel. On today's episode we will be talking about two very recent federal district court decisions that implicate FDA's enforcement authority.

The first case is the D.C. District Court's decision to grant summary judgment to FDA in its efforts to enjoin a Florida clinic from administering stem cell injections to patients to treat a number of serious diseases and conditions. The second decision was issued by the Federal District Court for the District of Massachusetts, granting motions for acquittal notwithstanding the jury's verdicts against two defendants in the New England Compounding Center case, finding that their convictions for conspiracy to defraud FDA failed on the basis of legal impossibility. These are two fascinating decisions hot off the presses. Beth, let's start off with the U.S. stem cell decision. Would you describe the case and then we can discuss it?

Beth Weinman: Sure. Let me just begin with some background on FDA stem cell regulation for the benefit of any listeners who are not familiar with this area. Under FDA regulations, stem cell products are considered to be a type of what FDA calls HCT/Ps – human cell, tissue, and cellular and tissue-based products. These products are defined as “articles containing or consisting of human cells or tissues that are intended for implantation, transplantation, infusion, or transfer into a human recipient.” Other examples of HCT/Ps include bone, ligament, skin, heart valve, amniotic membrane, semen, and cartilage.

Depending on the processing method used to create an HCT/P and its intended use, vastly different regulatory frameworks can apply. Some HCT/Ps qualify for regulation solely under section 361 of the Public Health Services Act. Such products must adhere to a set of safety standards tailored primarily to prevent the introduction, transmission, or spread of communicable diseases. Generally, makers of these products must be registered with FDA, list the HCT/Ps they market, comply with good tissue practices as defined in FDA regulations, and comply with requirements related to reporting adverse events and labeling. But such products do not require any FDA premarket review, or approval, or clearance.

HCT/Ps that do not qualify for regulation solely under section 361 are regulated under section 351 of the PHSA and are regulated as drugs, biological products, or devices. They must undergo premarket review and obtain approval or clearance, or a BLA license before they can be marketed. Manufacturers of products regulated under section 351 have to register and list just like manufacturers of other drugs, biologics, and devices. They also have to comply with current good manufacturing practices and to all the other requirements applicable to drugs, biologics, or devices.

The regulations governing how an HCT/P is regulated are set out in 21 CFR part 1271. Specifically, 1271 section 10 lists a number of criteria that determine whether a product will be regulated solely under section 361 of the Public Health Services Act or under 351, as we just described. One of those criteria I'll mention now will be important to the case we're going to talk about, and that is that in order to be regulated solely under section 361, the intended use of the HCT/P has to be a homologous use. So what does that mean? That means that the intended use of the HCT/P that is going to be implanted into the recipient will perform the same basic function in the recipient that it performed in the donor.

In addition to the criteria that determine whether an HCT/P will be regulated under section 361 or 351 of the Public Health Service Act, part 1271 also has a series of exceptions from the applicability of the part in total – these exceptions are found at 1271 section 15. And for our purposes, the most relevant of these additional exceptions is referred to as the “Same Surgical Procedure Exception.” This basically says that if a firm is transplanting HCT/Ps into the same person as part of the same surgical procedure, it need not worry about FDA's HCT/P regulations at all.

FDA is generally hesitant to regulate the practice of medicine and has made a judgment that the removal of cells or tissues from an individual and re-implantation in the same person during the same surgery without any further processing of the tissue doesn't raise any greater communicable disease risks than the risks typically associated with surgery. This exception has been relied upon by thousands of clinics that have popped up around the country in recent years, offering various types of stem cell injections as cures for a wide range of conditions. As we know from a series of public statements that former Commissioner Gottlieb made before he left the Agency, FDA has become increasingly concerned over the past few years that these are unproven cures being marketed to vulnerable patients and that the conditions in which they are prepared do not comply with current good manufacturing practices and therefore present risks of harming patients, rather than helping them.

Okay, so now to U.S. Stem Cell. In May 2018, FDA sought injunctions against two big stem cell clinics or clinical networks. One of those entities was U.S. Stem Cell Clinic, a Florida-based clinic in which patients underwent mini-liposuction procedures in which adipose tissue, which is essentially fat, was removed from their abdomens, processed into a product called stromal vascular fraction (or SVF), and then re-implanted in different parts of the body. U.S. Stem Cell marketed these injections as treatments for a whole host of serious diseases, including Parkinson's, ALS, lung disease, heart disease, diabetes, COPD, osteoarthritis to name a few. In addition, the clinic offered SVF injections into patients' eyes to treat macular degeneration. And these injections purportedly resulted in the blinding of at least three women, according to FDA's complaint in the case.

FDA inspected the facility twice between 2015 and 2017 and determined that the firm's SVF products were drugs and were adulterated and misbranded. The basis of FDA's injunction action was that U.S. Stem Cell was manufacturing SVF in a facility that did not comply with cGMPs, thus adulterating its SVF drug product while held for sale after a component of the SVF was shipped in interstate commerce; and that the clinic was misbranding the SVF because its labeling lacked adequate directions for the product's intended uses. U.S. Stem Cell's defense was that it was exempt from all regulation and FDA's jurisdiction entirely because of the same surgical procedure exemption that we talked about earlier. The specific language of the regulatory exception is this: "You are not required to comply with the requirements of this part if you are an establishment that removes HCT/Ps from an individual and implants such HCT/Ps into the same individual during the same surgical procedure."

The D.C. District Court boiled the whole dispute down to whether the SVF implanted into the patient constitutes “such HCT/Ps” removed from that patient, which would then qualify it for the exception under 1271.15(b). The Court agreed with FDA that because of the processing of the adipose tissue that was removed from the patient in order to create the SVF, the SVF implanted did not constitute such HCT/P removed from the patient. Defendants argued otherwise. They said, "Such HCT/Ps should be interpreted not as identical to what was explanted but related to, of the same class, type, or sort.” FDA argued that "such" must refer to an antecedent. The word "such" means that the HCT/P implanted must be in its original form. Because the regulation did not provide any criteria to limit what might constitute the same “class, type, or sort,” the Court found that the defendants' interpretation would create ambiguity, whereas FDA's interpretation was simple, and straightforward, and consistent with dictionary definitions of the terms and the context in which they appear.

After finding that the same surgical procedure exemption did not apply, the Court found that the SVF was a drug regulated under section 351 of the Public Health Service Act primarily because it found that the intended use of the adipose tissue was not a homologous use, meaning it was not intended to play the same role after implantation as it had originally played. For example, adipose tissue is a structural tissue – it's fat. But the SVF that was implanted into patients was implanted for a whole host of intended uses to cure the diseases that we talked about before, and the Court found that that was not a homologous use. And for those reasons, the Court found for FDA, enjoining further violations of the FDCA at U.S. Stem Cell Clinic.

Greg Levine: Beth, obviously this was a slam dunk win for the Agency. What are your thoughts on how significant this case is? What will it mean for FDA's attempts to address the explosive growth of this industry?

Beth Weinman: I mean, well, obviously FDA thinks this is huge. Without it, FDA wouldn't have any ability to slow the growth of the industry at all. The question really is whether FDA will have the resources to go after the huge number of clinics that are out there. So I do think there is some skepticism as to how much impact the case will really have. Are there firms that will take their chances? I imagine so. And firms may also change the services they offer slightly. The Washington Post reports that U.S. Stem Cell will still be offering stem cell treatments – they just won't offer SVF derived from adipose tissue. So I don't know how far reaching this will be in actuality in terms of slowing down growth.

Greg Levine: So the problem is with this type of case, FDA has to play whack-a-mole, right? They have injunctive authority, but if other companies continue to proceed, they'll have to go after each one individually?

Beth Weinman: Exactly.

Greg Levine: Do you think U.S. Stem Cell is going to appeal? What would be the considerations on either side of a decision like that?

Beth Weinman: I think it will have to appeal if it wants to continue doing the types of treatments they say they continue doing, even though they're not adipose tissue-based. You know, this decision both outlined the scope of the same surgical procedure exception, but it also talked about the scope of homologous use. To the extent the clinic wants to continue offering stem cell treatments to cure all of these various diseases, the Agency's position is going to be, "that's not homologous use" – that's what the District Court decided in this case. And just a few weeks ago, FDA issued an untitled letter to an Arizona clinic just based on a review of the claims made on its website for similar types of intended uses that those were not homologous use. Homologous use is dispositive. If a use is not going to be homologous, then that HCT/P will not be regulated under section 361 of the Act and the product will have to be reviewed by FDA and approved before it could be marketed.Greg Levine: Beth, the Court did not spend much time evaluating the question of whether this product is within FDA's regulatory jurisdiction because it's in interstate commerce. In the opinion, the Court says that there are two components or two ingredients used in the processing of the product (a cell wash solution and an enzyme solution), but there's no discussion about whether those items are in the final product at all and whether that matters. You know, looking at a dictionary definition of "component" or so on. Is this an issue that could come up again? Does this seem like a valid question to you?

Beth Weinman: Well, look – there is a regulatory definition of the term "component." In section 210.3, "component" is defined as "any ingredient intended for use in the manufacture of a drug product, including those that may not appear in such drug product." So FDA's position is going to be that any ingredient that's used to manufacture the drug product is a component.

Greg Levine: Now, 210, that's the GMP regulations for finished pharmaceuticals. And FDA has independent statutory authority to regulate the manufacturing of drugs. I just wonder whether, does that definition necessarily control here? One could look at the dictionary definition of a component and say, "No, to be a component of something, it has to be in it. It can't just be something that was in it, or that passed through it, or was part of its processing at some point." So, anyway, interesting academic question for the moment.

Beth Weinman: Agreed. How about we turn to our next case, which is anything but a victory for FDA? Greg, can you tell us about the NECC-related case?

Greg Levine: Absolutely. The second decision we will discuss today arises out of another area of FDA regulation where there have been significant questions over the years about FDA's authority. The context for this case is the New England Compounding Center prosecution. As most of our listeners probably remember, New England Compounding Center (or NECC) was a firm in Massachusetts holding itself out as a compounding pharmacy regulated by the Massachusetts State Board of Pharmacy and in its view exempt from FDA requirements to obtain NDA approval for the drugs it compounded and to comply with current good manufacturing practices and other requirements applicable to drugs regulated by the FDA. NECC was a firm that was mass-producing injectable drugs that were represented as sterile and shipped across the country. It turned out that not all of the drugs it shipped were sterile. There were drugs that were contaminated. There was a fungal meningitis outbreak in 2012 that resulted in the death of 64 people and sickening of many more – nearly 800, reportedly.

In December 2014, a grand jury returned an indictment against 14 NECC employees, including the owner and the head pharmacist, a supervisory pharmacist, and others. The nearly 73-page indictment contains 131 criminal counts against combinations of the 14 defendants. These counts included racketeering, racketeering conspiracy, FDCA violations, conspiracy to defraud the FDA, and many others. Among those charged were Gregory Conigliaro, an owner and director of NECC who according to the government's indictment served as NECC's vice president, secretary, treasurer, and general manager and who was responsible for regulatory compliance for NECC. Also charged was Sharon Carter, a pharmacy technician who became NECC's director of operations responsible for NECC's order processing, packaging, and shipping.

These two defendants were charged and convicted of conspiring to defraud the FDA, sometimes referred to as a Klein conspiracy. The theory was that the co-conspirators were engaged in a concerted effort to hold NECC out as more or less a conventional pharmacy that was engaging in traditional compounding activities and regulated by the state Board of Pharmacy. The theory went on that in doing so the conspirators deprived FDA of the opportunity to exercise its regulatory authority over the firm, which in FDA's view might have prevented shipments of these contaminated products from going out the door.

After Carter and Conigliaro were convicted, they both filed Rule 29 motions for acquittal notwithstanding the jury verdict. Their basis for this argument was that it was legally impossible to determine whether a business was a manufacturer of a drug regulated by the FDA or a compounding pharmacy that the FDA had said over many years it would not regulate and would leave regulation of such entities to the states. They argue that the only federal law that sought to differentiate between a manufacturer of a drug that FDA would regulate and a compounding pharmacy that FDA would not regulate was section 503A of the statute enacted as part of the Food and Drug Modernization Act of 1997, and that that statutory provision had been invalidated in a 2002 case, Western States.

The defendants argued that because of this lack of a clear statutory distinction between manufacturer and compounder, it was impossible for them to be guilty of conspiring to defraud FDA by deceiving FDA into thinking that they were a compounding pharmacy and not a manufacturer. Now, Rule 29 motions are routine in criminal cases, but they're very rarely granted following a jury verdict. What's striking in this case is that the motions were granted and that they were granted on the grounds of legal impossibility. The judge in this case noted in his opinion that the government was able to find no cases in the country, and defendants cited none, in which a court had dismissed a conspiracy to defraud a federal agency (the Klein conspiracy). Yet the judge had no qualms about making history by vacating the defendants' conspiracy convictions on this ground.

In the opinion, the judge reviewed the evidence presented at trial that undermined the idea that there was any clear law distinguishing between drug manufacturers and compounding pharmacies, and that FDA had essentially abdicated its responsibility to regulate compounders and left regulation of such entities to the states. The judge also noted that in inspections that FDA had undertaken before the NECC outbreak, when it might have seen evidence that NECC was something more than a compounding pharmacy, FDA repeatedly labeled NECC as a pharmacy or a compounding pharmacy under the jurisdiction of the Massachusetts Board of Pharmacy. The judge focused on FDA's decision to keep itself out of the business of compounding pharmacies over the years and noted congressional testimony from high-ranking FDA officials that perhaps FDA could have done more but did not. And the judge noted in his opinion, “Thus, the bottom line: during the critical times these defendants (and NECC) could not have defrauded the FDA by interfering with the relevant regulatory functions because there were none to speak of.”

The government's argument, which the judge found unavailing, was that FDA did in fact have regulatory authority over entities like NECC and could have exercised it, but hadn't done so. The government noted that to the extent the law seeking to clarify the differences between compounding pharmacies and manufacturers was invalidated in 2002, that meant that safe harbors for compounding pharmacies were removed and they were no different than other manufacturers subject to the same NDA approval requirements and the like under the statute. And thus, FDA did have regulatory authority that the defendants had interfered with in their Klein conspiracy.

This position worried the judge in light of the evidence presented at trial, that criminal liability could be based upon authority that FDA might have asserted over compounding pharmacies had it chosen to, when the Agency itself had taken the position for years that it would not exercise this authority. Quoting Judge Corrigan in the 2012 Franck's Lab case, which involved an entity that was compounding animal drugs, the judge wrote, "The FDA cannot simply upset the expectations it helped to create through decades of inaction without explanation, especially where its asserted expansion of authority impacts the federal-state balance and potentially subjects many individuals and companies to criminal liability."

Beth Weinman: Thanks, Greg. So what impact do you think this case will have on FDA enforcement authority in the compounding arena generally?

Greg Levine: Well, on the one hand, this case is a big loss for the Agency. The judge obviously was not impressed by the government's charging theories. On the other hand, I'm not sure as a practical matter how much of an impact it will have. First of all, plenty of people were punished for what happened at NECC. Barry Cadden, the owner and the head pharmacist at NECC, was sentenced to nine years in prison. The supervisory pharmacist was sentenced to eight years in prison. And plenty of others associated with NECC have paid a price. Perhaps more importantly, Congress has clarified the law to some extent since this time. In 2013, there were amendments to the statute that reenacted section 503A of the law without the provision that had been declared unconstitutional in 2002 and added a new provision (section 503B) that creates this new category called outsourcing facilities, which are entities that can do some of the drug production activities of the type that NECC was involved in but now they would be subject to various FDA regulatory authorities, including perhaps most critically current good manufacturing practices.

Beth Weinman: But what about the impossibility defense as an obstacle to conspiracies to defraud the agency in the future? It's not like compounding is the only area of FDA law that is highly unclear.

Greg Levine: No, there are plenty of areas that are unclear in certain respects, but I think there are some aspects of this history that are unusual. I mean, this was many, many years of FDA struggling with this issue, trying to figure out what to regulate, what not to regulate, and where to draw the line. They chose not to draw black and white lines. FDA could have said, "If you have patient-specific prescriptions, you're compounding. And if you don't, you're not." But they chose not to do that – they had more criteria at play. And then we had all these court cases, right, that were very confusing. We had the First Amendment issue. We had the circuit split between the 9th Circuit and the 5th Circuit as to whether the original FDAMA provision was totally invalidated or severable, whether that advertising provision could be severed from the rest of the statute. There were a lot of aspects of this that are factually very specific, so I think it's unclear whether there will be a repeat of this type of defense, at least with the FDA.

Beth Weinman: All right. And so the big question, is the government going to appeal?

Greg Levine: Well, it's an interesting question. I mean, I don't know from the perspective of just the FDA if they would want to take this on and have the risk of a loss and whatever comes with that. For reasons we discussed before, there have been plenty of very severe punishments meted out in this NECC case. Department of Justice, I don't know – there may be broader institutional concerns across the government that this type of defense could be used in other cases involving other agencies. So I don't know where the government will come out. It'll be interesting. What do you think, Beth?

Beth Weinman: That's a tough question. I mean, if FDA didn't want to appeal, I don't know if DOJ would bring it forward. Maybe. Look, Klein conspiracy is a very often used charge, and it's a very important charge to the government. For that reason, maybe it would be worth appealing. On the other hand, this is a very specific set of circumstances that may be unlikely to reappear. And, again, like you said, because the FDA has sort of fixed the problem with respect to regulating entities like NECC, I'm not sure how much it's a problem for the Agency that this decision has come down. So I'm not really sure. I'm not always the best predictor. I guess we'll see what happens.

I think we're going to have to stop there because we're out of time, but thanks for tuning in to our podcast, Non-binding Guidance, brought to you by our FDA regulatory attorneys and the life sciences practice at Ropes & Gray. For more information about our practice or other topics of interest to life sciences companies, please visit our FDA regulatory practice page at You can also subscribe to Non-binding Guidance and other RopesTalk podcasts in Ropes & Gray's podcast newsroom on our website or by searching for "Ropes & Gray podcasts" in Apple or Spotify. Thanks again for listening.

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