Judge approves sale of bankrupt Proteus Digital Health to Otsuka for $15M

private equity investment
Proteus Digital Health filed for Chapter 11 bankruptcy protection June 15 and will now be acquired by Otsuka Pharmaceutial. (Natee Meepian/Getty Images)

Despite 11th-hour objections by some investors, a judge has approved the sale of Proteus Digital Health's assets to a pharmaceutical giant.

The one-time digital health unicorn will now be able to exit bankruptcy as part of a deal with Otsuka Pharmaceutical, one of its main customers.

Judge Brendan L. Shannon in Delaware approved the sale according to an order filed Thursday following a sale hearing this week.

The deal is based on a $15 million "stalking horse" offer from the American unit of Otsuka Pharmaceutical Co. Ltd. that includes the assumption of certain liabilities, according to the case documents filed in the U.S. Bankruptcy Court for the District of Delaware.

A group of secured equity holders including drug giant Novartis and two Hong Kong investment firms objected to Proteus' potential sale out of U.S. bankruptcy court. 

The group of investors said the sales process was "flawed" and would leave investors with $500 million in equity "holding the bag," according to case documents.

RELATED: Proteus Digital Health was once valued at $1.5B. It may be acquired in a $15M 'stalking horse' bid

Proteus, founded in 2001, develops ingestible sensors and a wearable sensor patch to track medication-taking behavior.

The company filed for Chapter 11 bankruptcy protection June 15.

In approving the sale, Shannon said Otsuka's bid to buy Proteus' assets was executed "at arm's-length, in good faith, and without collusion or fraud," according to the court order. 

In their objection, the group of investors argued that the sale to Otsuka "amounts to nothing more than a giveaway" of Proteus' valuable assets to an "insider" and the $15 million sale price is calculated to bring in "just enough to pay the creditors in order to buy their silence" at the expense of equity, the investors said, according to case documents.

But Proteus attempted to raise capital and and get more financing before it filed for Chapter 11 bankruptcy, testified Geoffrey Richards, managing director at Raymond James & Associates Inc., which is the company’s investment banker.

Raymond James reached out to 240 potential buyers, but other companies passed on making an offer because Proteus was burning through too much cash and it wasn't clear when the digital health company would be profitable or cash flow positive, he said.

Proteus is burning between $2 million and $2.5 million a month, according to Richards.

With half a billion dollars invested, the company had failed to create a sustainable business model, he said.

Potential buyers were concerned that they would be "stuck in a business that was losing money and no way for them to exit on the other side," he said.

RELATED: Novartis, other investors try to delay sale of Proteus Digital Health

In the ruling, the judge said that Otsuka is not an "insider," and that Proteus had afforded a "full, fair and reasonable opportunity" for other companies to make a higher or better offer for the assets.

"We are pleased that the sale has been approved, and that the advancements Proteus made in digital medicine are in the hands of a buyer with a demonstrated interest in furthering this technology," Proteus representative John Perilli said in an emailed statement.

It is expected that the sale will be completed soon.

An attorney representing the group of secured equity holders who objected to the sale did not respond to a request for comment.

As part of the asset purchase agreement, Otsuka will buy Proteus' information technology assets, intellectual property, and equipment, including equipment used to design and manufacture wearable sensors.

The "smart pill" maker's sensor was one of the first of its kind to receive clearance from the Food and Drug Administration (FDA). Once valued at $1.5 billion, Proteus raised a total of $420 million from investors.

But the company struggled to find a market for its digital pill and failed to close a $100 million funding round in late 2019.

RELATED: Digital therapeutics company Proteus Digital Health files for Chapter 11 bankruptcy

Otsuka is the primary licensee of a significant portion of Proteus' intellectual property, the bankrupt company said in the court documents.

In 2018, Otsuka and Proteus Digital Health signed a five-year digital pill partnership, aiming to develop a new generation of ingestible sensors to track patients' adherence to treatment.

Otsuka handed Proteus $88 million in a mix of equity and other payments to help fund a portfolio of new digital medicines focused on mental health, including continuing commercial work for the sensor-laden Abilify MyCite pill approved by the FDA in 2016.