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Demise of a Wall Street Star

Neuromedical Systems, once a rising star on Wall Street and the leader of a crop of new Pap smear automation companies, filed for bankruptcy in March. One of its chief competitors, AutoCyte Inc. is bidding to buy the company's intellectual property. AutoCyte then has an agreement with NeoPath Inc. to share ownership of the assets and in turn Neopath will pay approximately half of the purchase price of about $12 million to AutoCyte. The AutoCyte deal has to be approved by the US bankruptcy court.

Neuromedical Systems Inc. 's bankruptcy filing in March is a cautionary tale of what can go wrong with young, seemingly "hot" medical device companies. Only a few years ago, NSI was at the forefront of a group of innovators seeking to reduce the error rate of Pap smear screening by automating some or all of the process. Its initial public offering [See Deal] was the most successful diagnostic IPO of 1995. Others with competing approaches were also attracting a lot of investor attention, but none came close to matching the company's $400 million valuation. NSI's downfall is a typical example of the disappointments that have made the current financing market for medical start-ups so miserable.

NSI's computer-based screening system, PapNet, was one of the first of the new Pap smear technologies to get FDA approval and become commercialized.NSI competitor AutoCyte is bidding for the bankrupt...

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