In March, regulators responded to a complaint from the prestigious Massachusetts Eye and Ear Infirmary about a potency concern involving one of the eye medications it purchased from NECC. The investigation is ongoing.

Over the summer, physicians at Ruby Memorial Hospital in West Virginia returned a bag of cardioplegia solution used in heart surgery after a patient did not respond as expected.

Testing showed the drug was not responsible, according to the hospital's pharmacy director, but the episode made at least one NECC sales representative uneasy.

"I remember thinking, are we just selling too much?" he said. "Were we growing sales faster than our lab could handle?"

It is a question federal and state regulators are now examining. More than 300 people who received a tainted steroid sold by NECC that was used to treat back pain have been infected with fungal meningitis and 25 have died.

Interviews with former NECC employees and its customers, and a review of internal documents and newly-released state records, paint a picture of a company whose rapid growth was marred almost since its inception by breaches of regulations governing compounding practices. They also show how regulators failed to punish the company despite repeated violations of the rules.

As far back as 1999, barely a year after NECC was formed, the Massachusetts Board of Registration in Pharmacy responded to a complaint from a pharmacist alleging that Barry J. Cadden, chief pharmacist and co-owner of NECC, had improperly provided a healthcare provider with prescription blanks. The Board voted to issue an informal, non-disciplinary reprimand.

In 2004 the Board voted again to issue an informal reprimand after it received complaints from pharmacists in Iowa, Wisconsin, Texas and South Dakota alleging that Cadden and NECC were improperly soliciting out-of-state business, in some cases using prescription ordering forms that had not been approved by the Board.

And in 2006, the company reached a settlement with the Board sparing it from a public reprimand and other measures despite evidence that the company had again violated rules governing the proper use of prescriptions, according to public documents.

Telephone and email requests to speak with nine individuals involved in the events leading up to that settlement, including Board members and inspectors, were not returned.

The U.S. Food and Drug Administration, which had warned NECC of violations in 2006, declined to comment on the specifics of the case due to an ongoing investigation. However, it has said a lack of clear federal authority over compounding pharmacies has inhibited its ability to take aggressive action.

NECC said it "worked cooperatively" with the Massachusetts Board to resolve issues brought to the company's attention.

A FAMILY AFFAIR

NECC was formed in 1998 by Cadden and his in-laws, the Conigliaro family, with a $5,000 investment, state records show.

Carla Conigliaro, the wife of Douglas Conigliaro, held the biggest stake with 650 shares. Douglas's brother Gregory Conigliaro, an entrepreneur who had built a successful waste management company, held 100 shares. Their sister Lisa Conigliaro and her husband Barry Cadden, both pharmacists, held 125 shares each.

None of the family members agreed to be interviewed.

Barry Cadden and his wife established themselves in a two-story brick building in Framingham, Massachusetts, next to Gregory's recycling business.

Former employees describe Cadden as gregarious and friendly, with a passion for compounding. One compound might be a medication without a certain preservative, or a pill for a patient with an allergy to the coating on the version available from the manufacturer. Or a soluble version of a pill.

"When I first started at NECC in 2004, the pharmacy consisted of maybe two or three other pharmacists, Barry and his wife, several technicians and data entry clerks, and a handful of sales staff," said one former NECC pharmacist who left the company in 2007.

The pharmacist describes an early culture typical of many small businesses.

"The staff was always happy and upbeat," she said. "The pharmacists were a funny bunch of down-to-earth characters. We were frequently treated to cook-outs and catered meals and always celebrated each others' birthdays."

Barry Cadden was extremely attentive to safety, she said. "In addition to our regular quality control meetings and reviews on Standard Operating Procedures, the techs would flag a prescription by using special colored bins as being that of a pediatric patient so that it was given extra care and priority," she said.

It was not long before Cadden sought to expand into other states. He found a receptive audience among pain clinics that enjoyed the cost savings NECC offered - in one case, the company told a client it could save $4,500 a year if it purchased a particular steroid through NECC. It also sold to hospitals who were turning to compounders to fill the gaps caused by worsening shortages of prescription drugs from traditional manufacturers.

Nearly 1,200 drug shortages, from chemotherapies to painkillers, were reported between 2001 and mid-2011, with some of the biggest increases seen in the latter half of that decade, according to the Government Accountability Office. Many of the supply disruptions stemmed from manufacturers' quality control problems and the waning profitability of certain medicines.

NECC thrived on the demand. By the time the company surrendered its license on October 3, NECC was supplying hundreds of hospitals across the country, according to a list of customers released by the FDA.

"We usually turned to the compounding center when the drugs we needed for our patients were unavailable from the suppliers we typically use," said Eric Swensen, a spokesman for the University of Virginia Health System, which purchased three drugs from NECC (but not the steroid behind the meningitis outbreak).

As the pharmacy came under increasing pressure to meet demand, additional lab staff were hired, the former NECC sales representative said. Even so, he added, NECC sales staff were routinely pulled into production to speed the process.

"We were down there for two hours at a time putting labels on syringes in the shipping area," he said. "We were doing most things by hand."

As shortages increased of ondansetron, a drug to treat nausea in cancer patients, NECC could not make the drug fast enough to meet demand, the sales representative said. Barry Cadden decided to provide the drug only to children, and priority was given to existing customers of NECC.

PRESCRIPTION PAD IRREGULARITIES

In Massachusetts, compounding pharmacies are not allowed to make unsolicited offers to physicians for products that are unavailable from a manufacturer or for which the pharmacy has not received a patient-specific prescription from a healthcare provider. Yet NECC promoted any number of products to physicians across the country, according to marketing materials reviewed by Reuters.

Complaints about irregularities in NECC's prescription ordering process have emerged periodically for more than a decade.

On October 27, 2004, Massachusetts health investigators demanded that NECC respond to allegations, stemming from a site inspection on September 23, 2004, that the company had possibly violated a Massachusetts regulation stating that compounded drugs may not be supplied to a practitioner for general dispensing without a patient-specific prescription.

"A review of the same documentation provided to you does show what would appear to be incorrect or repetitive names being provided by several of our prescribing physicians," the company said in response.

In a 2006 warning letter to NECC, the FDA wrote: "Although your firm advises physicians that a prescription for an individually identified patient is necessary to receive compounded drugs, your firm has reportedly also told physicians' offices that using a staff member's name on the prescription would suffice."

Despite the warning letter, NECC continued to seek ways to work around the patient-specific prescription requirement. It might ask, for example, for a patient schedule.

"If you are ordering 75 units we will need a representation of patients that you plan to use the medication on," one NECC sales manager wrote in an email in June this year to NewSouth NeuroSpine, a neurosurgery and pain management clinic in Mississippi. "If one day's schedule has close to 75 patients that will be acceptable to fulfill the order. If it is easier for you to provide a simple list of names that would be OK too."

Frank York, NewSouth NeuroSpine's chief executive, said its physicians did not write individual prescriptions or turn over patient names, for what he said were patient privacy reasons. Yet the center received product anyway. It is not illegal for healthcare providers to buy in bulk from licensed pharmacies, of which NECC was one.

NECC also allowed customers to stockpile medication, and to keep patient prescriptions on the hospital's premises, rather than provide them to the pharmacy, contrary to Massachusetts regulations.

"Requests for compounded medications forwarded to NECC will be based upon the (hospital's) receipt of prescriptions for individual patients or for 'office stock' in anticipation of receipt of prescriptions for the requested compounded medications," read one standard agreement offered in 2010 to hospital customers affiliated with the Child Health Corporation of America, a hospital group purchasing organization that is now part of the Children's Hospital Association,

A spokeswoman for the Children's Hospital Association did not respond to repeated requests for comment.

REGULATORY INSPECTIONS

It is unclear why Massachusetts regulators, who have primary responsibility for regulating pharmacies in the state, failed to notice that NECC appeared to be operating outside the scope of its license. Public health officials say they are investigating the matter.

Paul Cirel, an attorney for NECC, said recently in response to criticism, that Massachusetts regulators "had numerous opportunities, including as recently as last summer, to make first-hand observations of the NECC's facilities and operations."

"It is hard to imagine that the Board has not been fully apprised of both the manner and scale of the company's operations," he said.

Public documents appear to support Cirel, at least to a degree.

In a March 2003 letter to health investigators, Cirel noted that "NECC compounds some prescription medication in advance of the receipt of valid prescription orders from authorized prescribers. These compounds are made in lots, in limited quantities in anticipation of NECC's receipt of patient-specific prescription orders."

Cumulative violations by NECC from 1999 to 2003, including complaints investigated by the FDA of two adverse patient reactions to drugs compounded by NECC - one of which, methylprednisolone acetate, is the same steroid associated with the current meningitis outbreak - prompted the Board in 2004 to recommend a formal reprimand.

NECC's lawyer argued that a public reprimand of the kind the Board was seeking could trigger investigations in more than 40 other states where NECC was licensed and would be "potentially fatal to the business."

When the matter was resolved in 2006, NECC escaped the public reprimand. The Board reduced the proposed probation to one year, and stayed it. Moreover, the board of pharmacy and the FDA agreed not to report the settlement to the National Association of State Boards of Pharmacy or other outside agencies, records show.

Massachusetts regulators say they find that agreement, signed under a previous administration, "troubling."

In a statement, the Massachusetts Department of Public Health said it is "actively looking into the decisions made by the Board more than six years ago."

"All options are on the table, and no actions have been ruled out," the statement said. "We have moved to permanently revoke the license of NECC and its owners and a criminal investigation is under way. We won't be satisfied until all of those responsible for these troubling events are held accountable."

In May 2011 NECC was inspected in connection with a proposed expansion of its facility. The inspection report noted that all requirements related to prescription processing were in order, and that "patient profiles are maintained."

It said the pharmacy met sanitation standards, and that technicians "operate within the scope of the law and regulations."

This week, Dr. Madeleine Biondolillo, a top Massachusetts public health official, told journalists that the latest inspection of NECC, after the meningitis outbreak in September, showed that NECC repeatedly failed to follow standard safety and quality procedures, including waiting for results of sterility tests on its injectable steroid before shipping them to doctors.

She did not respond to an emailed question asking how NECC's standards might have fallen so precipitously.

The FDA said on Friday it had found "greenish black foreign matter" in 83 of the 321 vials of steroid linked to the meningitis outbreak. It also said an early October inspection had found bacteria and mold within two "clean rooms" used for production of sterile drug products at NECC. [ID:nL1E8LQCRX]

BIRTH OF AMERIDOSE

In 2004, new regulations led to yet more demand for NECC's compounding services. The U.S. Pharmacopeial Convention (USP), a non-profit scientific group which sets quality standards for drugs, food ingredients, and dietary supplements, issued stricter rules for all entities producing sterile preparations.

For instance, it required that air be filtered; that technicians wear masks, certain kinds of gloves, and shirts or jackets with long sleeves rather than short; and that they clean gloves with isopropol alcohol.

"A lot of hospitals said these changes really improve patient safety, so we'll budget for them," said Rick Schnatz, a senior scientist at USP. "But others said there are commercial entities already set up to do that. Over the next few years that movement got stronger, with hospitals turning to outside pharmacies that could do their sterile compounding."

The scale of the potential new business was more than NECC could manage. It was not registered with the FDA as a manufacturer and did not have the equipment that could make products at the speed or scale hospitals require.

In 2006 the Conigliaros formed Ameridose LLC to mix drugs and repackage them in a sterile environment on a much larger scale than was possible for NECC. Gregory Conigliaro and Barry Cadden were listed as company managers in the company's application. The Congiliaros and Cadden were listed as owners.

"Ameridose was a licensed manufacturing facility and was regulated by the FDA," said the former NECC pharmacist. "When my daughter was born, I was in the hospital on Oxytocin to induce labor, looked up and saw the IV solution was from Ameridose."

Between them, Ameridose and NECC offered everything from compounds mixed from powders to mixed solutions and products repackaged into tailored doses. At trade shows, the two companies would often share a booth, with a single banner listing both company names on the wall behind, the former sales representative said.

MEDICAL SALES MANAGEMENT

The sales arm for both NECC and Ameridose was a company called Medical Sales Management, also owned by the Conigliaros and housed in the same building as NECC.

Douglas Conigliaro is listed as the company's president and Gregory Conigliaro and the Caddens are listed as directors, according to Massachusetts corporate filings.

Sales representatives were employed by MSM but represented either NECC or Ameridose, the former NECC sales representative explained. By the time of the meningitis outbreak, they each had more than 20 representatives.

Douglas Conigliaro played a particularly important role at Ameridose, which has been temporarily closed.

"Doug was a top dog in the sales operation," said the former sales representative. "At Ameridose, his name is pedigree. He called the hospitals, he attended trade shows, he knew how to talk to doctors."

Douglas Conigliaro, who declined to be interviewed, is a physician who had earned his medical degree from Boston University School of Medicine and trained at Massachusetts General Hospital, according to records posted on the website of the Florida Department of Health.

In 2002, Florida's health department fined Conigliaro $10,000 and ordered him to take continuing medical education in a case involving a woman named Eleanor Karstetter. She was paralyzed from the waist down during a 1995 operation performed by Conigliaro to implant a pain pump to relieve back pain, and died two years later.

Conigliaro came to a $1 million settlement with the Karstetter family. He remains licensed to practice as an anesthesiologist and pain specialist in Florida.

NECC has stopped operating and faces an array of federal and state investigations, not to mention the prospect of civil suits for liability. Its owners could face criminal charges.

The future is also uncertain for Ameridose, even if regulators allow it to reopen.

The FDA is also under pressure, with some members of Congress calling for greater regulation of compounding pharmacies.

Amid the handwringing from regulators and politicians, those who worked for and represented NECC are clear about one thing: "Everybody knew what we were doing," the former sales representative said. "At the end of the day, we took care of problems for hospitals at a fair price."

(Additional reporting by Tim McLaughlin and Svea Herbst in Boston; Editing by Michele Gershberg, Martin Howell and Claudia Parsons)

• A Permanent Economic Emergency