Proteus Digital Health CEO Andrew Thompson
Proteus Digital Health has spent two decades trying to develop "smart pills" that can be used to tell a smartphone app whether patients have taken their medications. The technology was so promising that, three years ago, investors valued the company at $1.5 billion.
But Proteus has struggled to turn its vision into reality and is now desperate for cash after an expected $100 million funding round recently fell through, according to people familiar with the matter. To preserve enough money to stay afloat, the company furloughed the majority of its employees for about two weeks in November, said the people, who asked not to be named because the information is confidential.
As 2019 wraps up, Proteus has become the latest Silicon Valley company that's gone from a one-time high flyer, raising a total of over $500 million, to deep in crisis mode after its partnership with a large pharmaceutical company failed to materialize in a way that could justify its valuation. It's an ominous sign for the digital therapeutics space, which has lured major investors but has struggled to find breakout successes and has seen big drugmakers walk away from key partnerships.
At Proteus, the furloughed employees were brought back to work in recent weeks after the company was able to land $5 million in emergency funding, according to people with knowledge of the matter. But with roughly 300 people on staff, according to LinkedIn, that money may not last long. Executives at three other digital health companies said they've seen an uptick in resumes from Proteus employees in the past few weeks.
"Proteus is currently conducting an operational review and restructuring our business to optimize effectiveness," a company spokesperson told CNBC in an email. "We are taking into consideration the impact of our restructuring on employees, patients, customers, partners and investors."
The problem Proteus was trying to tackle is real. Patients don't always take their meds and don't necessarily know if they're up to date with them. Researchers estimate that a lack of adherence to prescriptions results in $100 billion to $300 billion in costs tied to health-care spending and loss of productivity.
A digital sensor the size of a grain of sand is housed in a pill. After being swallowed, its signal is picked up by a patch worn on the body, which relays data to a phone or tablet.
With that backdrop, Novartis invested in Proteus in 2010, an agreement that allowed the drugmaker to license Proteus technology for organ transplantation, following a small study to track patients' compliance with their blood pressure drugs. Later, Proteus moved into mental health, developing digestable sensors that send a notice to users' smartphones, indicating whether they're properly medicated or if they missed a dosage. The system also includes wearable patches that detect responses to medicines, as well as mobile apps and data analytics software for hospitals to track intervention.
In 2017, Proteus announced a partnership with pharmaceutical company Otsuka for a digital medicine system called Abilify Mycite and received approval from the Food and Drug Administration. As part of the deal, Otsuka agreed to invest $88 million, including some equity and other funds for development. The landmark regulatory clearance allowed the companies to combine a pill and a patch, which had been previously and separately approved by regulators, into a therapy for people with schizophrenia, bipolar disorder and depression.
But the treatment never gained material traction with patients, according to two people familiar with the matter, making it hard to keep top talent. The company has experienced a wave of high-level departures in the past few years, such as Chief Commercial Officer Molly O'Neill, who left in 2018.
Raising additional money also became a bigger challenge. Otsuka wasn't willing to put in more cash and other potential investors were waiting for data from the Otsuka deal before writing a check, the people said, even if they were intrigued by the first-of-its-kind digital medicine system.
"The problem is that pharma hasn't rationalized a way to incorporate digital or sell digital-only interventions," said Bill Evans, CEO of digital health venture fund Rock Health, who was speaking about the industry generally. "When it comes to pharma and digital, it's been a challenge to match the cultures and really start to execute."
A spokesperson for Otsuka's U.S. unit said in an emailed statement that the company has had a "strong collaboration for many years" with Proteus, "from clinical development to FDA approval to commercial availability." The representative didn't comment on current plans, saying only that "Otsuka is committed to its digital medicine program and we are excited about the future and our role in providing an innovative approach to systematically assist patients and their family caregivers by helping to inform the patient's illness management and personalized treatment plan."
Proteus isn't alone. Pear Therapeutics, a digital therapeutics company working on apps for substance use disorders, just lost a key partnership with Sandoz, the generics division of Novartis.
Their experiences underscore the limitations of advanced digital therapies. Pharmaceutical companies don't have a roadmap yet to get the products out widely to patients or clinicians, regulatory agencies have been slow to approve them and insurers haven't established clear reimbursement plans. It's also not obvious who should be monitoring patients if they stop taking medications.
Proteus is "a really interesting technology, but it is a lot to ask of a patient to play along with this kind of system, which involves a pill and patch," said Christine Lemke, a co-founder of Evidation Health, a digital health company that works with pharmaceutical companies.
Proteus has started focusing on other conditions outside of mental health. In 2017, it moved into oncology and infectious disease with a digital cancer chemotherapy pill. The company has also touted its Discover product, targeted at people with chronic conditions, as its equivalent of Tesla's Model X. In its statement to CNBC, the company described Discover as a "valuable near-term opportunity."
While the company has gained accolades for its early efforts to improve health care in innovative ways, that doesn't always translate into a successful business.
"These companies are plowing the field for the industry," said Steve Kraus, a health investor at Bessemer Venture Partners. "I can't stress enough how hard that is."
WATCH: How health care is set to go digital
Follow @CNBCtech on Twitter for the latest tech industry news.