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...