The Silicon Valley startup that became famous for its ingestible sensor the size of a grain of sand has filed for Chapter 11 bankruptcy protection.
Proteus Digital Health had shown warning signs of its financial struggle in recent months, mainly due to challenges with its primary income source: royalties from the Japanese pharmaceutical company marketing and distributing its products.
Court filings show Redwood City, Calif.-based Proteus had worked diligently in recent months to stay afloat, even getting accelerated payments under its roughly $90 million agreement with Otsuka Pharmaceutical. It enlisted the investment bank Raymond James to explore all options for raising money in May, including a possible acquisition by Otsuka, which may still be on the table.
Proteus hinted at a forthcoming stalking horse bid transaction involving Otsuka in court filings, writing that the companies have had "fruitful discussions." Otsuka spokesman Robert Murphy confirmed the company is assessing the purchase of Proteus' assets, but declined to share more detail.
A Proteus spokesperson characterized the company as being in a sale process that's leveraging the bankruptcy filing. The spokesperson, who spoke on background, said there is continued excitement about Proteus' technology, but the sale process was impeded in early 2020 by the COVID-19 pandemic.
"It allows the business to continue but also allows them pursuit of the sale process, which had been going really well," the spokesperson said.
Founded in 2002 by Andrew Thompson, Dr. George Savage and Mark Zdeblick, Proteus specializes in so-called digital medicines, which are oral pharmaceuticals that contain tiny ingestible sensors aimed at tracking patients' treatment adherence. When the drugs are swallowed, their sensors transmit data to wearable patches that send it to their mobile devices. The data is then sent via the cloud to their healthcare providers. Proteus said the technology is especially helpful for managing care without patients needing to come into an office.
Proteus said it currently has a panel of more than 20 digital medicines that treat cardiovascular and metabolic diseases, including hypertension and diabetes. Still, the company described itself in court filings as being in the "pre-revenue" stage of development.
"Since inception, the debtor has relied primarily on equity capital and advances under its agreement with Otsuka to finance its operations," the company said in court filings.
Court filings show the company has issued about 13.7 million shares of common stock and 76 million shares of preferred stock.
Proteus' relationship with Otsuka appears to have been tumultuous at times. Leading up to the fourth quarter of 2019, Proteus experienced a "severe liquidity crisis" while trying to agree on its most recent agreement with Otsuka, which finally came together at the end of 2019. The crisis prompted Proteus to furlough nearly all of its employees for two weeks and prepare for a potential Chapter 11 filing.
As of June 15, Proteus had 93 employees, 69 of whom were salaried and 24 were hourly. The company wrote in court documents that it's critical to keep paying their wages and benefits because "any disruption from employee resignations or diminishment of their morale could have devastating effects on the debtor's restructuring efforts."
Proteus has about $9.5 million in cash and cash equivalents. Its liabilities consist of rent for its corporate headquarters and manufacturing facilities, including one in Hayward, Calif. It also owes about $9.5 million on a 2015 loan from the digital health investment firm OrbiMed, about $3.5 million for trade and other third-party accounts payable and a $2.2 million loan from the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act, which Proteus said it used to fund payroll and employee benefits.
In 2017, Proteus announced its first U.S. Food and Drug Administration approval of a digital medication called Abilify MyCite, which is marketed and distributed by Otsuka.
Otsuka does not expect Proteus' bankruptcy filing to affect its digital medicine program or its ability to deliver Abilify MyCite to patents and physicians, Murphy said in an email.
"Otsuka remains committed to building a successful digital healthcare business that includes digital medicine as well as digital therapeutics," he said.
In May, Proteus announced a multiyear agreement with Tennessee's Medicaid program, TennCare, in which its digital medicine will be used to treat patients with hepatitis C. The company said that program will not be affected by the bankruptcy.
According to the bankruptcy filing, Proteus has 200 to 999 creditors, between $100 million and $500 million in estimated assets, and $50 million to $100 million in liabilities. Its biggest creditor is Prudential Real Estate Investors' Westport Office Park, which holds a $1 million unsecured claim. Romaco North America is the second-largest unsecured creditor at about $511,000. Otsuka America Pharmaceutical is listed as holding a $400,000 unsecured claim.
Lawrence Perkins of SierraConstellation Partners has been appointed as Proteus' interim CEO following his work as chief restructuring officer. Perkins declined to comment.
