Flopped COVID Drug Trial Spurs Corporate Waste Suit

By Hannah Albarazi
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Law360 (July 21, 2021, 5:23 PM EDT) -- Biopharmaceutical company FSD Biosciences Inc.'s top brass had "fatal conflicts of interest" leading them to abruptly abandon clinical trials for an anti-inflammatory COVID-19 treatment drug, an investor alleged in a derivative suit filed Tuesday in Delaware Chancery Court claiming corporate waste and breach of fiduciary duty.

One of the largest stockholders of FSD Biosciences' parent company FSD Pharma hit the parent company, two directors and an officer with a derivative suit alleging they recklessly diverted the company's attention to an acquisition of a company — in which they allegedly held a financial interest — pursuing development of psychedelic compounds for treatment of mental illness.

The investor said the FSD defendants "while subject to fatal conflicts of interest – took actions to starve FSD BioSciences of necessary funds and deliberately failed to make necessary decisions and take necessary actions to enable clinical trials for the use of FSD-201 to treat COVID-19 in humans, and gastrointestinal enteropathy in canines, to proceed."

"As a consequence, patients lying in hospital beds being treated for COVID-19 who had agreed to participate in this clinical trial have been abandoned," said plaintiff and investor Maheep Goyal in his complaint.

The two-count suit includes an allegation of corporate waste, one of the most serious but most difficult to prove claims in Delaware corporation law.

Canadian-based FSD Pharma, which began as a cannabis venture, in early 2020 acquired Prismic and with it an exclusive, worldwide — excluding Italy and Spain — license to exploit for pharmaceutical purposes patents and other intellectual property rights owned by Epitech Group SpA, the investor said.

FSD Pharma incorporated FSD Biosciences as a wholly-owned subsidiary in Delaware and raised roughly $75 million from the public to bring to market an anti-inflammatory drug to treat COVID-19 patients.

The drug, FSD-201, had already been used in Europe for decades and would have had a good chance of getting Food and Drug Administration approval in the U.S., Goyal said.

In mid-2020 the FDA took the "almost unprecedented step" of waiving the requirement that FSD-201 complete its preclinical and Phase 1 study, allowing FSD Pharma to submit an Investigational New Drug Application for the use of FSD-201 to treat COVID-19 patients. A few months later, FSD Pharma received FDA approval to initiate a Phase 2 clinical trial for the use of FSD-201 to treat COVID-19, according to the investor.

In early May 2021, FSD Pharma also received approval to initiate a clinical trial on the effectiveness of FSD-201 on treating gastrointestinal issues in dogs, the complaint alleges.

But Goyal claims the actions of FSD's controlling stockholder directors — Anthony Durkacz and co-founder Zeeshan Saeed — as well as CEO Donal Carroll "have needlessly, recklessly, and prematurely terminated a critical Phase 2 clinical trial that was administering FSD-201."

Goyal said that in late 2020, Durkacz and Saeed had proposed FSD Pharma acquire a start-up called Lucid Psycheceuticals Inc., which focuses on the development of psychedelic compounds for treating mental illness.

When a board member concluded that Lucid did not warrant the board of directors' time or effort, "Durkacz and Saeed were enraged," Goyal said.

Later, Goyal said, it came out that Durkacz and Saeed had financial interests in Lucid and stood to benefit from FSD Pharma acquiring it.

Around the beginning of 2021, while Phase 2 clinical trials of FSD-201 were underway, Saeed and Durkacz directed Carroll to stop paying contractors running the trials, Goyal said. Goyal alleged that they were intentionally trying to stall the further development and approval of FSD-201 and instead enable the acquisition of Lucid.

They "have forsaken their fiduciary duties and embarked on a scheme to destroy FSD BioSciences in order for FSD Pharma to pursue an acquisition that would benefit them personally," Goyal alleged.

As a result, tens of millions of investment dollars have "been rendered meaningless" by the defendants' "self-interested" and "bad faith" actions, Goyal said.

By the spring of 2021, the actions of Saeed, Durkacz and Carroll had "irreparably harmed the Phase 2 clinical trial" and only Durkacz and Saeed remained on FSD BioSciences' board of directors, Goyal said.

Goyal claims the directors breached their fiduciary duties and knew, or reasonably should have known, that their actions amounted to corporate waste. Goyal seeks monetary damages.

Representatives and counsel for the parties did not immediately respond to requests for comment.

The investors are represented by Roger A. Lane and Courtney Worcester of Holland & Knight LLP and Paul D. Brown and Joseph B. Cicero of Chipman Brown Cicero & Cole LLP.

Counsel information for the defendants could not immediately be determined Wednesday.

The case is Maheep Goyal, derivatively on behalf of FSD Biosciences Inc. v. Anthony Durkacz, et al., case number 2021-0629, in the Court of Chancery of the State of Delaware.

--Editing by Ellen Johnson.

For a reprint of this article, please contact reprints@law360.com.

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