Health

Proteus Digital Health, maker of ‘smart pills,’ sees key pharma pact unravel

SAN FRANCISCO — It was supposed to be a showcase for the way in which technology can revolutionize how some patients take their medications — and ultimately improve health outcomes. It has proven far more complicated.

Proteus Digital Health, a Silicon Valley company, raised close to $500 million and soared to a valuation of $1.5 billion on the promise that its sensor technology could be used to monitor whether patients with a wide range of health conditions have taken their pills. Then, late last year, the company’s funds fell dangerously low.

Now, Proteus’ CEO, Andrew Thompson, told STAT that the company and Japanese drug maker Otsuka Pharmaceutical have prematurely ended a deal in which Otsuka had been paying Proteus to help it develop a portfolio of digital medicines for serious mental health conditions. That revenue source for Proteus is now gone — and it marks an inauspicious end to a collaboration that produced the first so-called digital pill to win approval from the Food and Drug Administration.

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Proteus will now abandon its work in mental illness and cardiovascular conditions. The company will try to pivot to focus on getting insurers to pay for its technology in patients with cancer and infectious diseases. The company has also notified an unspecified number of employees that they are being laid off, Thompson confirmed.

The unraveling of Otsuka and Proteus’ co-development deal is the latest in a series of breakups between pharma giants and health tech startups in recent months. Last fall, Novartis’ generics unit, Sandoz, ended a deal to commercialize Pear Therapeutics’ smartphone apps for substance use disorders. And last month, Sanofi said it would no longer be involved in running Onduo, its joint venture with Alphabet’s life sciences unit Verily using digital tools to help patients manage their type 2 diabetes.

Under a contract amendment and revised agreement between Proteus and Otsuka, Otsuka has acquired what’s known as a fully paid-up license for Proteus’s technology in mental health — giving Otsuka the exclusive rights to use Proteus’ tech so that it can independently develop medicines for severe mental illness.

“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,” said Otsuka spokesperson Robert Murphy. “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.”

The payout from Otsuka gives Proteus a lifeline to stay afloat, for now. And the changed relationship with Otsuka “allows Proteus to now focus on therapeutic areas where we think we can potentially move a little bit more quickly,” Thompson said.

People familiar with Proteus say that while the company’s technology had real promise, a combination of missteps and thorny challenges brought the company to a precarious financial position.

The central problem they described: When deployed in health systems, Proteus’ technology often didn’t fit neatly into the clinical workflow of physicians and patients — meaning that uptake was too slow for Proteus to bring in enough revenue and keep investors happy as it burned through cash.

Some patients didn’t like having to wear the patch that’s central to Proteus’ tracking system. Physicians often didn’t know what to do with the reams of data, on things like sleep patterns and physical activity levels, that Proteus captured beyond its core goal of logging when patients took their pills.

Moreover, while health system executives often bought in enthusiastically to Proteus’ pitch, many physicians on the frontlines didn’t have enough incentive to actually prescribe their patients’ medications using Proteus’s technology. Doing so created more work for them, but they didn’t get paid for their effort.

Thompson pointed to several reasons for the company’s pivot to oncology and infectious diseases such as hepatitis C. In those conditions, “the imperatives for payers are perhaps more pressing than in primary care,” he said. Proteus is also betting that its technology is most likely to be adopted for expensive drugs, as well as in cases “where the pharmacologic therapy is absolutely key to the outcome — and where it’s a defined period of therapy,” he said.

Thompson wouldn’t disclose the number of employees being laid off, though he said they were concentrated among those working with Otuska as part of the co-development pact, such as those helping Otuska rebuild software. In November, Proteus issued a notice to the state of California warning that all 292 of its employees were in danger of being laid off. That figure is “a much, much larger number than actually will be affected,” Thompson said. He added that all of Proteus’ facilities will remain open and operating.

Proteus, a privately held company founded in 2001, first partnered with Otsuka in 2012. They achieved a major milestone in November 2017: securing approval from the FDA to market a first-of-its-kind drug for schizophrenia, bipolar disorder, and depression — reliant on Proteus’s tracking system involving patches and sensors to log when a patient ingests the pill.

That high-tech medication, called Abilify MyCite, was an upgrade to Otsuka’s Abilify, which had gone generic. It marked an advance over the technology that Proteus had developed and is still using in other disease areas, including cancer and infectious diseases. While Proteus’ usual technology involves loosely packaging its sensor and the active medication within a capsule, Abilify MyCite relies on a sensor embedded within the active medication in the pill.

Encouraged by that landmark approval, in 2018 Otsuka signed an $88 million deal with Proteus as part of an expanded collaboration meant to last five years. Under that deal, Proteus would help Otsuka develop more digital medicines, while also helping commercialize Abilify MyCite.

But sales of Abilify MyCite got off to a sluggish start. Otuska unveiled a plan to roll out the medicine to patients with mental illness covered by a handful of Medicaid plans administered by the managed care company Magellan Health.

But the medicine didn’t get prescribed to a single patient in a commercial setting in the first year after its approval. The Otsuka spokesperson confirmed that commercial prescriptions began last year, including outside of the Magellan system, but wouldn’t say how many patients have taken the medicine outside of clinical trials so far.

Proteus had “some engagement and involvement” in commercializing Abilify MyCite, but “we didn’t get too far along before we changed course again,” Thompson said.

Under its new arrangement with Otsuka, Proteus will no longer be involved in commercializing Abilify MyCite, nor will it be receiving royalties from sales of the medicine, Thompson said. (He declined to say whether Proteus had previously been bringing in royalties from the drug’s sales. If so, it likely would have been a very small amount, because of how slow sales have been to date.)

Otsuka will continue to purchase sensors and wearables from Proteus during “a transition period,” the Otsuka spokesperson said.

Separate from its relationship with Otsuka, Proteus has long brought in revenue by charging health systems to use its tech in a wide range of conditions. Hospitals and clinics pay up in the hope that they can save money if the technology can help their patients do better. These are typically value-based contracts, in which payments to Proteus are tied to how patients fare.

For example, Proteus has a deal in which it charges the Minnesota health system Fairview Health Services to use its tech in patients with cancer; Proteus only gets paid if indicated cancer patients take their digital chemotherapy as prescribed 80% of the time.

As Proteus pivots, it expects to have conversations with some of its existing health system customers about “whether or not they wish to transition to new use cases” in oncology and infectious diseases, Thompson said. For instance, Proteus has a deal with the Southern California health system Desert Oasis Healthcare to use its tech in patients with high cholesterol, type 2 diabetes, and hypertension. That relationship will need to undergo “a transition or some new type of arrangement” going forward, Thompson said.

Proteus will also double down on trying to get its technology paid for by insurers, which generally offer the advantage of covering a wider and more distributed network of patients than a regional health system. Asked whether Proteus has any existing deals with payers, Thompson said the company will be “making some announcements shortly.”

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