Two scientists, Dr. Carla Lewis, Ph.D., and Dr. Michael Ortiz, Ph.D., have been developing a drug, “MD-12”, that has the potential of reducing macular degeneration in humans. On August 15, 2006, Lewis and Ortiz discovered that MD-12 caused a significant reduction of this disease in laboratory animals (i.e. mice). After additional findings, Lewis and Ortiz have decided to seek the Federal and Drug Administration’s (FDA) approval to advance MD-12 to human clinical trials. Their studies and experiments of MD-12 have been performed at the University of Michigan over the past three years as part of their research as professors there.

Two other scientists, Zurich and Fischer, claim that they made the big breakthrough in the concentration process of MD-12 and patented the drug last year. Prior to this breakthrough, these scientists had been working in the field for years but had not been able to isolate MD-12 in enough purity and amount to conduct successful experiments. Zurich and Fischer published a paper two years ago about the experimentation of MD-12.

It is estimated that the Phase I clinical trial (which is expected to include 20 patients) will cost $7.7 million. This figure encompasses all necessary clinical costs and patient expenses with a possible variation of 2 to 3%, up or down. For each of the patients in the phase I trial, MD-12 will be administered once a month over 3 years

Due to certain university policies, Lewis and Ortiz will not be permitted to continue using university equipment and facilities for further development of MD-12. They will therefore need to pursue the development of MD-12 on their own. Both professors have advanced degrees in molecular biology but have no business experience.

Ortiz’s brother-in-law, Henry Jenkins, is willing to offer reasonable lease terms on a 5,000 square foot space in a building he owns. This will provide sufficient space for further development of MD-12 through its clinical trials. The building is in the Research Triangle of North Carolina, a prime location for a biotech entity. Jenkins has asked to serve on the Board of Directors. Jenkins is a Chartered Financial Analyst who operates a money management firm.

Lewis and Ortiz are considering a capital contribution of $100,000 each in this business venture. They both have strong credit ratings with each having a net worth in excess of $750,000 but less than $1 million. They wonder when a licensing agreement might come into play and would like more insight about such agreements. Lewis would like to serve as the Chief Operating Officer and oversee the research and development of MD-12, while Ortiz would like to serve as the Chief Executive Officer and serve as the liaison with the FDA through the clinical trial process.

The organization will not earn any revenues for at least the first 3 years. MD-12 will need to be in Phase II of clinical trials with strong data support for the drug before large pharmaceuticals will consider entering into licensing agreements with them. Lewis and Ortiz will focus the entity’s efforts on research and development of MD-12 to determine the safety and efficacy of the drug in slowing macular degeneration and to ascertain whether MD-12 can be used in its current form or with modifications to assist in fighting other diseases.

Lewis and Ortiz’s situation presents a plethora of legal, governance and regulatory issues/concerns that have been covered in our course thus far.

Required:

You will serve as their professional consultants and are to a professional memorandum, flesh out and provide sound advice for ALL of the legal, governance and regulatory issues/concerns involved in this scenario, and provide Lewis and Ortiz with proper guidance ranging from the beginning stages of the entity to be established to raising the necessary capital. Be sure to incorporate all pertinent facts. At times you will need to be creative - a simple example is choosing a name for the entity but ensuring that it does not raise any legal concerns.