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

Bankruptcy
Proteus Digital Health has a $15 million "stalking horse" offer from the American unit of Otsuka Pharmaceutical, which is a fraction of the company's onetime $1.5 billion valuation. (Getty/Gam1983)

Proteus Digital Health could exit bankruptcy in a deal with Otsuka Pharmaceutical, one of its main customers.

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, according to Business Insider.

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

It filed for Chapter 11 bankruptcy protection June 15.

But the Silicon Valley company got a $2.2 million Paycheck Protection Program loan from the federal government during the COVID-19 pandemic. That loan was part of public record through the company's filing with the bankruptcy court.

Proteus now has 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.

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

The stalking horse bidder’s purchase price sets the “floor” for the subsequent auction that will occur in the bankruptcy case, and the stalking horse bid typically becomes the form all competing bids must use as a baseline.

The bidding process is set to close Aug. 4, according to court documents filed as part of Proteus' bankruptcy process.

Unless other bidders emerge in the next 11 days, the digital health company will be acquired by Otsuka, pending the bankruptcy court signing off on the deal.

The court has set the auction to take place Aug. 6 and will hold a sale hearing on Aug. 10.

If other bidders emerge and outbid Otsuka's offer, the Japanese drugmaker would receive a breakup fee equal to 3% of the cash purchase price—$450,000—and up to $600,000 as reimbursement for out-of-pocket costs, fees and other expenses, according to 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.

The company was considered one of the first digital health "unicorns," or global VC-backed digital health startup companies valued at $1 billion or more.

RELATED: Proteus' digital pill tracker shows success in TB drug adherence

In recent months, the company has struggled to raise additional financing and furloughed the majority of its employees for two weeks in November 2019.

Company officials said filing for bankruptcy protection allows Proteus to continue its sales process in a more concerted and efficient manner while continuing to run the business as usual.

According to bankruptcy court documents filed in June, the company currently holds approximately 400 patents and has a panel of more than 20 digital medicines to treat cardiovascular and metabolic diseases including hypertension and diabetes that have been prescribed to patients in the U.S.

The company's business remains almost entirely in the "pre-revenue" stage of development, according to a motion filed with the bankruptcy court. Since inception, Proteus relied primarily on equity capital and advances under its agreements with Otsuka Pharmaceutical to finance its operations.

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

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

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 this month, 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.

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