Can digital-pill company Proteus Digital Health rise from chapter eleven or will it to join a long list of failed innovative companies?
Proteus Digital Health, the pioneer digital-pill maker, and a 2009 World Economic Forum Technology Pioneer, has filed for chapter 11, having raised over US$450M. So what went wrong? Is this the end of the road for digital pills? Or can Proteus rise again?
According to Greek mythology, Proteus was a son of Poseidon, the god of the sea. To some people, the business model that underpinned Proteus Digital Health, the company with a digital pill, was built on assumptions that had more to do with mythology than fact.
That may have been unfair. Its product was, and indeed still is, real. The problem was more complicated than that.
The story begins when George Savage partnered with Andy Thompson and Mark Zdeblick and founded Proteus Digital Health in 2009. The three men knew each other well (Savage and Thompson had worked together for over 25 years) and decided to combine to explore new medical opportunities for microelectromechanical systems technology.
Andy Thompson became the Proteus CEO, George Savage, the Chief Medical Officer, and Mark Zdeblick, the Chief Technology Officer.
The idea, to develop an ingestible technology that bridges the gap between the medical device and the pharmaceutical industries, came after Thompson visited an American Heart Association conference.
“We spend hundreds of billions of dollars annually creating drugs and clinical trials,” he said “and we have no way to know if the patient is actually taking the pills. This is a huge waste of resource. Our view is digital medicines can completely change this.”
This was the concept that underlined the Proteus vision. And the company did a good job selling the idea to investors, as is illustrated by the tale of its fundraising.
|Proteus Digital Health, fundraising from May 2012 to March 2016|
|Series H||March 2016||$110 million||Undisclosed|
|Series G||June 2014||$120 million||Undisclosed|
|Series F1||January 2014||$31.6 million||Silicon Valley Bank, Oxford Finance LLC|
|Series F||May 2013||$62.5 million||Novartis, Oracle|
|Series E||May 2012||$17.5 million||Undisclosed|
It always was an ambitious idea, however. As Galen Growth states in its Venture Factsheet: “Proteus is creating a new category of pharmaceuticals: digital medicines.”
$450 million-plus is a lot of money, but the question lingers, was it ever going to be enough to create a new category of medicine?
There is another issue; you can call it the paradox of being a pioneer. Pioneers in a new marketplace are not always the ones that are ultimately successful. Think of companies like Yahoo, Alta Vista, Ask Jeeves or Netscape, which were there in the very early days of the Internet. Contrast their eventual performance with the successes of companies that were founded later, such as Google or Facebook.
The Proteus Digital Pill
There are three parts to the Proteus product; a pill, a patch and a smartphone app. The pill itself contains a tiny sensor which, according to Proteus, is the size of a grain of sand. The pill is then put into a capsule along with prescribed medication, by a pharmacist. When the pill comes into contact with fluid in the stomach, it sends a signal to the patch. In turn, the patch sends out a signal via Bluetooth to a smartphone app.
The smartphone app then has a record of when the medication was taken and the dosage. It can then provide pertinent information to the patient in question, providing a record of when it was administered, when it is next due, plus several other data points, including heart rate.
In this way, Proteus argues that the patient need never forget to take a pill or need never be in the position when they are not sure if they have taken one.
There is another element, and this is more controversial. The data produced can be used by your physician to monitor you.
Maybe this is one of the crucial differences between Proteus Digital Health and other companies that operate in related areas. For example, Given Imagine, a USA venture, which was acquired by Medtronic in 2013, produces pills used for the visualization and detection of disorders of the gastrointestinal tract. Ankon Technologies, a China venture provides what it calls a robotic pill for gastric diagnosis. Neither company produces products that are linked to the idea of surveillance in the manner of Proteus Digital Health products.
The Proteus Digital Health, Otsuka and the Elusive Sea of Change
It has been estimated that a lack of adherence to prescriptions costs between $100 billion and $300 billion annually in the US. The potential value of Proteus type solutions is, therefore, significant.
The Proteus from Greek mythology was also known as the god of “elusive sea change,” but maybe the problem for Proteus Digital Health was that the sea change required for the acceptance of digital pills was elusive. Or maybe it is just too difficult to produce a digital pill of this nature.
To understand the context, it may be worth going back to 2017, when Proteus initially signed a deal with Japanese pharmaceutical company, Otsuka. In 2018, the relationship between Otsuka and Proteus developed further when they signed a five-year contract worth $88 million. Otsuka took an equity stake in Proteus and made further payments to help the “development and commercialization of digital medicines.” The deal included continuing commercial work on Abilify MyCite, an antipsychotic medication with an embedded sensor, approved by the FDA. The Otsuka collaboration focused on mental health conditions.
So, what went wrong?
There are several possible explanations:
- The relationship with Otsuka seems to have gone sour.
- The company appears to have burned through its cash too quickly and failed to close a further fundraising round.
- There were issues with the product itself.
- Poor timing — perhaps it was just too soon for a product of this type.
- The all your eggs in one basket syndrome — was Proteus Digital Health too reliant on one commercial partner?
- Privacy concerns.
The Otsuka Relationship
In January of this year, it emerged that the Proteus and Otsuka collaboration was coming to an end. Proteus tried to spin the story as a positive development. A company statement read: “Rather than a premature end to the agreement, it’s more of an evolution of the original agreement that allows each company to independently advance the development and commercialization of digital medicine offerings. Our digital medicine businesses have evolved to a point where we can maximize success by pursuing future opportunities independently, and we are excited for both organizations moving forward. Otsuka will continue to purchase sensors and wearables from Proteus during this transition period.”
For its part, Otsuka confirmed that it had acquired the license to develop mental health treatments using Proteus’ technology, and would no longer pay royalties going forward.
But the fact is, Otsuka declined to invest more money into Proteus.
Maybe there was a fundamental issue, and Otsuka was unhappy with its trials of the Proteus product?
Cash Burn and Failed Fundraising Round
In December 2019, CNBC reported that Proteus was short on cash, after failing to close an expected $100 million funding round. The company furloughed its employees for two weeks in November, and further reports suggested that it was only able to bring those employees back after it secured $5 million of emergency funding.
It was also reported at that time that other digital health companies had received a substantial increase in job applications and resumes from Proteus staff.
This then begs the question, why did the company burn through its cash so quickly? And why was it unsuccessful in closing the fundraising round?
Presumably, investor’s got wind of the issues with Otsuka, and their due diligence threw up too many issues with the Proteus offering.
But was the real problem simply that Otsuka was unhappy with its trials of the Proteus product? Perhaps, that is why the fundraising round in 2019 was unsuccessful.
The Product Itself
Anecdotal evidence suggests that the Proteus product was not easy to use by the patient leading to poor compliance. The medication itself also may not have been a good fit for the sensor. Some patients with schizophrenia experience fears that they were being controlled or monitored by others.
It is also expensive. The cost was also a barrier – Abilify MyCite reportedly cost $1,650, at least double the cost of the brand name drug and several times the cost of the generic.
Another problem, which may have been linked with Otsuka’s decision not to continue to invest in Proteus, were questions about the effectiveness of Abilify MyCite. A paper published in the British Medical Journal Regulatory, by Dr Lisa Cosgrove et al., stated that “approval for this first-ever digital drug was based on weak evidence, and there was no evidence of better adherence with the digital version of aripiprazole compared with the non-digital version.”
Bill Gross, the founder of Idealab, has considered why startups with apparently good products fail. His conclusion: it relates to timing. He compared companies that seemed to tick all the right boxes: good management team, good products, good business model and so on. Some failed, some succeeded. “Timing accounted for 42 per cent of the difference between success and failure,” he said.
Maybe the problem with the Proteus product is that the market is not ready for it. See an analogy here with the dotcom boom and bust of the late 1990s. There was an understanding, during this period, that the Internet was going to be a massive force for change, but no one was quite sure how. Companies raised substantial sums of money by leveraging off this perceived potential, but in the year 2000, dotcoms crashed. For a short while, there was even a belief that the Internet was over-hyped technology. The reality is that the Internet did change the world. But, that in most cases, the late 1990s was too soon to work out how this was going to happen. There were exceptions — Amazon was already becoming a well-known firm in the book business, but to reiterate from earlier, Google was quite late to the dotcom era and didn’t begin to gain traction until after the crash.
Timing matters — not only can companies fail because they were too late to heed a new disruptive technology, but some can also be too early. Maybe Proteus Digital Health was such a company.
Words quoted by MobileHealthNews may back-up these observations. Bill Evans, managing director of digital health venture fund and research group Rock Health, said: “It looks now like Proteus may have picked [a] therapeutic area with a degree of difficulty that’s an eight or nine out of 10, right? They may be paying the price for that tactical choice because it’s such a challenging therapeutic modality for their particular intervention to take hold…If that’s true, it’s unfortunate, but it doesn’t disprove the value of Proteus itself. It simply means the evidence is yet to be seen.”
So “The evidence is yet to be seen,” yet Proteus had raised over $400 million. Investors need patience, but there is a limit to this.
But then again, maybe all these issues are linked with the fact that Proteus was a pioneer. The above problems may have been fundamental flaws; they may have been teething issues, that needed time and money to solve. The company may have underestimated this challenge in the first place or may have oversold the product.
Too many eggs in one basket
The company may have also made the mistake of becoming too reliant on one partner — Otsuka.
Then again, Otsuka held back from investing probably because of concerns related to trials.
The company could have had ten partnerships; if there were fatal flaws with the product, it would have still run into difficulty
So, it may have been the combination of the factors — poor timing, flaws with the product and too much reliance on the one company.
There was another issue with the Proteus product offering.
You only need to watch a YouTube video linked to Proteus describing the product and note the accompanying comments.
Immediately an issue becomes apparent. People are distrustful. For many, it smacks of an Orwellian concept — Big Brother, or in this case, maybe Big Pharma or even doctors, spying on us.
See a parallel with contact tracing apps employed to try and reverse the spread of Covid—19. Across the world, users have been reluctant to download contact tracing apps because of fears relating to their privacy.
A lack of trust in authorities is hampering the battle against Covid. In this regard, privacy regulations come into play. A common characteristic of recent privacy regulations, for example, in the EU and California, has related to the limitation in the use of data. The regulations might allow processing of data, following appropriate consent, but only if the use of the data is for the specific purpose for which the consent was granted.
Regulators hope that by imposing such restrictions, they can engender trust among data subjects so that in turn, they will be willing to comply with data gathering.
In Germany, contract tracing apps are designed to protect privacy and ensure no data collected is used beyond the original purpose. And contact tracing is proving successful in Germany.
The Proteus digital pill could potentially save lives, but unless patient privacy can be assured, and the use of data is appropriately limited, its uptake may remain modest. Maybe it was this fundamental mistrust that led to the lack of adherence to Abilify MyCite that the paper by Dr Lisa Cosgrove et al referred to. These privacy issues may have become especially acute amongst sufferers from schizophrenia.
The Wrong Market Place
Despite the apparent advantages of the US, including the size of the market, and availability of capital, the country may not have been the ideal location to trial a drug of this nature. In the US, where the libertarian ideal is so pronounced, resistance to a digital pill of the type advanced by Proteus, with all its implications concerning surveillance, might have been more significant.
It is not that these problems could not have been overcome, eventually. However, given all the extra challenges associated with being a pioneer, in the early stages, it may have been better to have focussed the product elsewhere.
If instead, trials of the pill had occurred in a region where trust levels are higher such as Scandinavia or where privacy concerns are less pronounced, they may have been more successful. Proteus may have consequently had a more reliable basis on which to build.
Can It Rise Again?
Chapter 11 is not always fatal. The list of companies that have fallen into administration but risen again is long.
The name Proteus appears many times in history, mythology and popular culture. Proteus was the name of Trojan warrior slain by Odysseus, according to Homer there was also an Egyptian King by that name, while another character named Proteus was murdered by his wife on his wedding night, according to Greek mythology.
Still, Proteus’ technology may rise from the ashes as other companies look to buy it.
Proteus is also the name of a character from Marvel Comics.
Coincidentally, Marvel Entertainment filed for bankruptcy protection in 1996. Yet today. Marvel assets are worth billions of dollars.
According to the Proteus Chapter 11 filings, the company has assets worth between $100million and 500million, and liabilities worth between $50million and $100million.
Reports suggest that its problems are cashflow related.
Then again, at one point, Proteus was valued at $1.5 billion. So, it has been quite the downfall.
The market for digital pills has probably got enormous potential. But perhaps Proteus was just too early.
Can it return from Chapter 11? Maybe this is an opportunity that successors to the Proteus dream will pick up. The digital pill sea change seems inevitable, its elusiveness may not last for much longer, but perhaps it will be too late for Proteus.