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

There is a potential deal on the table for Proteus Digital Health to exit bankruptcy in a $15 million sale to Otsuka Pharmaceutical.

But, in an 11th-hour play, a group of investors is trying to push off that sale.

Investors including drug giant Novartis and two Hong Kong investment firms objected last week to Proteus' potential sale out of U.S. bankruptcy court through a "stalking horse" offer from the American unit of Otsuka Pharmaceutical Co. Ltd. 

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 filed in U.S. Bankruptcy Court for the District of Delaware.

The potential sale of the one-time digital health unicorn was scheduled to be decided by Judge Brendan L. Shannon in Delaware Tuesday. The sale hearing has now been moved to Aug. 17.

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

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.

The company filed for Chapter 11 bankruptcy protection June 15.

Otsuka, one of Proteus' main customers, made its $15 million offer as a "stalking horse" bid to set the floor for a subsequent auction in the bankruptcy case. But no other bidders emerged by the Aug. 4 deadline.

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

The group of investors argues in the objection that the potential buyer, Otsuka, is an "insider," as it its Proteus' largest shareholder, largest customer, and had observation rights to attend Proteus' board meetings.

Otsuka is the primary licensee of a significant portion of the company's intellectual property.

The group also argues that the bidding procedures are intended to "chill" bidding by setting an "impossibly short timeline" during a pandemic that would discourage parties from getting involved.

The potential sale "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.

The group, saying that Proteus is worth millions more, requested that Judge Shannon scrutinze the transaction and delay the sale to Otsuka for 90 days.

The group represents approximately 16% of the senior preferred shareholders.

RELATED: Otsuka and Proteus sign 5-year, $88M digital pill partnership

Proteus attorneys said in a court filing Monday that the Novartis group's objections were "baseless accusations and wildly unfounded speculation."

The investors' objections are "at bottom, a thinly-veiled collateral attack" on the sale process set in motion when Proteus' filed for Chapter 11 bankruptcy, the attorneys said.

Proteus attorneys said the bankruptcy case and Proteus' corporate governance have been conducted "by the book."

Otsuka had rights to a Proteus board seat but never designated a member and only sent a board observer, Proteus attorneys said in a filing. Otsuka stopped exercising its board observation rights in September 2019.

Otsuka is Proteus' largest shareholder, with a 19.3% senior preferred stake, according to case 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.

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

The company has listed debts of $100 million to $500 million in assets and $50 million to $100 million in liabilities. Proteus has an estimated 200 to 999 creditors, according to case documents.

According to a court filing in July, Proteus reported cash of $8 million and total assets of $23 million as of June 30. That includes about $2 million in security deposits for its facilities in Redwood City and Hayward, California.

Its largest creditors include Silicon Valley Bank for the $2.2 million Paycheck Protection Program loan, PREI's Westport Office Park ($1 million), Romaco North America ($510,000) and Otsuka for almost $400,000.

Four investors—Novartis, Keymount Investments Co. Ltd. and Sensor International Investment Ltd. of Hong Kong and investor Timothy Robertson—collectively held more than 9.5 million senior preferred shares of Proteus worth about $120 million, according to the bankruptcy court fiing.

Investor Markus Christen and Robertson had 567,000 common shares, court filings show.