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DOJ asks Third Circuit to reinstate conspiracy charges against Pennsylvania drug manufacturer

The Department of Justice pushed the court to re-examine whether the company’s use of an ingredient from a factory without FDA approval in an antidepressent constituted conspiracy.

PHILADELPHIA (CN) — An attorney for the United States pushed the Third Circuit Tuesday to reinstate conspiracy to defraud charges against a Pennsylvania-based generic drug company accused of distributing an anxiety drug that contained an active ingredient produced in a Mexican laboratory that was not approved by the Food and Drug Administration.

“What I think is actually going on here is that the government recognizes the jury appeal of be[ing] able to go in and say, ‘Oh this came from Mexico. And because it came from Mexico it must be bad,’” Jack Pirozzolo, a Sidley Austin attorney representing KVK-Tech, told a three-member panel of the appeals court.

In February of last year, a federal court in Philadelphia shot down conspiracy charges filed by the United States against KVK, saying the indictment failed to state an offense.

The U.S. appealed the dismissal to the Third Circuit in March 2022, maintaining its charges that the company conspired “to defraud the United States by impeding, impairing, and defeating the lawful function of the Food and Drug Administration” and concealed material facts and made false statements "in a matter within the jurisdiction of the FDA” in violation of U.S. law.

The company, which is headquartered a little more than 30 miles from Philadelphia in Newtown, Pennsylvania, distributed 383,000 bottles of hydroxyzine, a prescription drug for the treatment of anxiety, between 2011 and 2013 that contained a pharmaceutical ingredient made in an unapproved laboratory in Mexico, according to the Department of Justice.

According to the FDA, that laboratory — Dr. Reddy’s Laboratories or DRL Mexico — was considered adulterated as the plant violated the agency’s good manufacturing practices to the extent that the FDA issued an alert for all the lab’s ingredient users from July 2011 through July 2012.

As a result of KVK's business with the Mexican plant during that time period, the federal government charged the company, its de facto owner Murty Vepuri, and its quality assurance lead Ashvin Panchal, in June 2021 with distributing unapproved drugs and misleading the FDA by concealing information about drugs’ safety and effectiveness.

“Is it one of the [FDA’s] requirements that there be approval of the place of manufacture in the manufacturing process?” U.S. Circuit Judge Anthony Scirica, a Ronald Reagan appointee, asked the manufacturer’s lawyer Tuesday.

“It could be one of the requirements for approval,” pirozzolo responded. “However, the question here is whether the violation of one of those requirements for approval makes the drug unapproved.”

“Statutorily, this is not a new drug because there is no allegation that it was changed in composition,” Pirozzolo argued.

He explained that KVK obtained the drug from an approved manufacturer with several operations in Europe that had contracted with the Mexican laboratory.

The ingredient, he said, “was chemically identical and there's no allegation of any kind, that it was different.” 

“That should dispose of the case,” continued Pirozzolo.

Attorney Daniel Tenny, representing the government said Teusady the only thing that had been approved was the manufacturing of the drug at other facilities.

Tenny maintained Tuesday that the FDA needs to know where a drug company is going to manufacture its ingredients and what the process is going to be.

“The problem with what they did here was they got approval to do one thing, and they did a different thing,” Tenny said, noting that without the FDA’s inspection of the facility and its processes the risk of a drug ingredient being adulterated is heightened.

“The district court’s error here seems to have stemmed from a misunderstanding from a statutory scheme,” Tenny said.

“What statutory provision says that an approval ceases to be effective if you have a change in manufacturing facilities?” U.S. Circuit Judge Marjorie Rendell, a Clinton appointee, asked.

“It’s effective for the things that were approved, but it’s not effective for the products that they were selling,” Tenny said.

“Fundamentally what the defendants were doing was selling a drug to the American public under circumstances where FDA had not approved the sale of that drug manufactured at that place in that way,” Tenny added. “That goes to the core of FDA’s mission — the point is a closed system. The idea is that if you want to market a drug, you have to submit to FDA not only what the drug is, not only the composition, but also where it's going to be manufactured.”

“I just don’t know why this isn’t an administrative matter,” Chief U.S. Circuit Judge Michael Chagares, a George W. Bush appointee said.

The indictment in the case noted that Vepuri, who made business decisions for the company, hid his involvement with KVK-Tech by registering its official ownership in the name of private trusts for his children, and representing that he was merely an adviser. Notably, the company leader had previously received a restraining order for FDA violations as the owner of a separate New Jersey-based generic drug manufacturing company.

The government noted that Vepuri’s company ignored FDA regulatory requirements and provided false explanations to the FDA.

If the charges are reinstated and the parties are convicted, Vepuri and Panchal could face up to five years in prison and $250,000 fines while KVK could be fined up to $4 million and face other financial penalties.

A sealed Report and Recommendation was issued in the federal case in September 2022, a few months before the case was appealed.

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