Proteus Digital Health Inc.

June 15, 2020

In a week chock full of chapter 11 bankruptcy filings, in our opinion, the filing of California-based medtech company Proteus Digital Health Inc. is the most interesting and unique. Sure Extraction Oil & Gas ($XOG) is a publicly-traded oil and gas exploration and production company but, aside from the fact that it operates primarily in Colorado rather than Texas or Oklahoma, there’s nothing particularly fresh or interesting about it. We get it already: oil and gas is f*cked.

In contrast (and with apologies for the long block quote), when’s the last time you read about a chapter 11 debtor that does this:

The Debtor is a pioneer and leader of the “Digital Medicines” industry. “Digital Medicines” are oral pharmaceuticals formulated with an ingestible sensor aimed at tracking a patient’s adherence to prescribed medication treatments. When patients use Digital Medicines, their mobile devices collect information about medication taken and safely transmit the data via the cloud to the healthcare provider. Care teams are able to see if their patients are properly taking their medication and observe and analyze real-time data regarding the patient’s overall health such as heart rate, activity and rest. Digital Medicines enable care teams to manage larger patient populations and make medical decisions without the need for a patient to physically travel to the doctor’s office. Digital Medicines can help accelerate the trend toward conducting medical consultations over the internet. This opportunity is especially pronounced in rural areas and developing economies both domestically and internationally, particularly in light of challenges posed by the COVID-19 pandemic and resulting social distancing measures.

That’s like some Minority Report sh*t right there. Founded in 2002, the debtor has spent the better part of two decades developing its tech, testing its tech, commencing clinical trials, obtaining FDA approval of its drug-device combination product, entering into a marketing and distribution relationship with Otsuka Pharmaceutical Co. Ltd. ($OTSKY)(which it later expanded the scope of), and agreeing to a multi-year outcomes-based initiative with the State of Tennessee’s Medicaid program with a focus on hepatitis C treatment of underserved populations. The company currently “…has a panel of more than 20 Digital Medicines that treat cardiovascular and metabolic diseases including hypertension and diabetes being prescribed to patients in the United States.” Its patent portfolio is 400 strong.

On the flip side, the company is currently “pre-revenue.” And as you can imagine, accomplishing all of the above required a significant amount of upfront capital. There’s a reason why this company raised venture capital all the way through a Series H round: $461.5mm, actually, according to Angelist, with the last round of $50mm taking place in April 2016. The company’s cap table includes, among many others, The Carlyle Group ($CG)(Series B & C rounds), Medtronic PLC ($MDT)(Series D round), Novartis Pharma AG ($NVS)(Series E & F rounds), and PepsiCo Inc. ($PEP)(Series G round). The company also has a $9.5mm pre-petition credit facility.

In late 2019, the company experienced a severe liquidity crisis due, in part, to complications arising out of the expanded collaboration agreement with Otsuka. The debtor nearly wiggled its way out of trouble; it negotiated a synchronized deal with Otsuka and its prepetition lender that would coordinate (a) payments in from Otsuka and (b) payments out to the lender and (c) let the company get back to business as usual and buy it some time to source additional financing. But then COVID-19 struck and the company again found itself in a position where it wouldn’t be possible to live up to its obligations — in this case, a $7.75mm repayment to its pre-petition lender on or before April 30. This thing is like whack-a-mole.

The company spent April and May trying to negotiate itself out of its quagmire and hired Raymond James & Associates Inc. ($RJF) as investment banker to pursue a marketing and sale process. The company entered into a series of agreements with Otsuka and its lender to stem the tide but, ultimately, the shot clock ran out:

In light of all of these circumstances, and after having explored multiple options and carefully considering the alternatives, the Board, in consultation with managements and the Debtor’s advisors, made the difficult decision to file for chapter 11 protection in order to preserve the Debtor’s assets and conduct a sale process or other transaction, all in an effort to maintain continuity of business operations (including the Debtor's TennCare initiative) and maximize going concern value for the benefit of the Debtor’s creditors and equity stakeholders. The Debtor anticipates that it will seek approval of appropriate bidding and sale procedures in the early weeks of the Chapter 11 Case.

The pre-petition lender has consented to the use of its cash collateral to fund the case. Now we’ll see if there are any buyers out there who are as impressed with the premise of Digital Medicines as we are.*

*Full disclosure, we’re going purely off of what the debtor describes and have no medical knowledge whatsoever to opine on the efficacy of such initiatives. Sure sounds cool AF though.

• Jurisdiction: D. of Delaware (Judge Shannon)

• Capital Structure: $9.5mm secured debt (OrbiMed Royalty Opportunities II LP)

• Professionals:

  • Legal: Goodwin Procter LL (Nathan Schultz, Barry Bazian, Aretm Skorostensky) & Potter Anderson & Corroon LLP (L. Katherine Good, Aaron Stulman)

  • Financial Advisor/CRO: SierraConstellation Partners LLC (Lawrence Perkins)

  • Board of Directors: Shumeet Banerji, Regina Benjamin, Robert Epstein, Frank Fischer, Alan Levy, Ryan Schwarz, Joseph Swedish, Jonathan Symonds, Immanuel Thangaraj, Andrew Thompson

  • Investment Banker: Raymond James & Associates

  • Claims Agent: KCC (*click on the link above for free docket access)

• Other Parties in Interest:

  • Prepetition Lender: OrbiMed Royalty Opportunities II LP

  • Large Series A Preferred Equityholder: Spring Ridge Ventures I LP

  • Large Series B Preferred Equityholders: Carlyle Venture Partners II LP, Adams Street V LP, BVCF IV LP