Neuromedical Systems Files Bankruptcy Action

Manufacturer of the PapNet® system finally runs out of time and money

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CEO SUMMARY: Automated cytology technology suffered its first financial failure. Escalating losses and dismal revenue prospects combined to drive Neuromedical Systems, Inc. into bankruptcy. Its PapNet System for Pap smears was a pioneering technology that never achieved market acceptance. Neuromedical’s experience demonstrates that lab executives take a risk when they adopt new technology.

Faced with poor financial prospects and escalating losses, Neuromedical Systems, Inc. (NSI) filed Chapter 11 bankruptcy on March 26, 1999.

This is the first business failure among the firms pioneering automated cytology technology. It means that the combination of Neuromedical’s technology, marketing strategy, and management implementation failed to secure a successful foothold in the healthcare marketplace.

Neuromedical Systems was the developer of the PapNet® system for diagnosing Pap smears. Since obtaining FDA approval to use PapNet as an adjunctive test for Pap smear screening in 1995, the company has struggled to carve a place for itself in the healthcare marketplace.

Filed Bankruptcy Action

NSI, based in Upper Saddle River, New Jersey, filed its bankruptcy action shortly after a similar filing in Europe. NSI Netherlands, B.V. is NSI’s European division. It obtained a court-mandated moratorium on March 16 to evaluate business options, including bankruptcy. Business operations in Germany have also ceased.

The impact of NSI’s bankruptcy action upon clinical laboratories using PapNet is difficult to assess. Calls to NSI’s corporate offices went unanswered as of press time.

Centralized Pap Screening

PapNet was originally introduced into the marketplace as a centralized screening center. Labs sent Pap smear slides to NSI’s central laboratory. The slides were scanned and PapNet used software algorithms to identify the 128 cells most likely to be abnormal.

These pictures and the original slide were returned to the referring lab. There a cytotechnologist would evaluate PapNet’s highlighted 128 cells to determine if manual rescreening was needed.

Critics of the system pointed out that most laboratories do not want to ship slides to a national center and wait to have them returned. NSI responded by developing a more sophisticated PapNet system, dubbed PAPNET-on-Cyte. This version of PapNet was installed at the customer’s laboratory, where both screening and diagnosis would be done on site. This gave the laboratory more control over the process.

Double-Screening of Paps

One early proponent of the PapNet system has been Associated Pathologists Laboratories (APL) of Las Vegas, Nevada. It operates a PAP-NET-on-Cyte instrument in their central laboratory. APL has a standing policy of manually double-screening 100% of its Pap smears. With PapNet approved as an adjunctive test, APL found it to be a cost-effective solution to give its patients the option of a third screen by PapNet.

“As Neuromedical notified us of their financial situation, we’ve worked out an arrangement to continue using the PapNet system,” stated John Schwartz, President and CEO of APL. “We’ve hired their technician and continue using the instrument as before.

“I do not know what lies ahead for NSI,” added Schwartz. “When we originally evaluated the various automated cytology technologies, one of our concerns was about the viability and staying power of these start-up companies. This certainly demonstrates the risk of being an early adapter of new technology.”

Huge Amounts of Capital

One person who agrees with Schwartz is Alan Nelson, Ph.D, Chairman of NeoPath, Inc. in Redmond, Washington. “It requires huge amounts of capital to develop automated cytology technology and introduce it into the marketplace.

“During the corporate life of Neuromedical Systems, they went through over $170 million of investors’ money, if you include venture capital financing and subsequent stock offerings,” he noted. “At NeoPath, we’ve raised over $150 million from investors and are only now approaching a point of break-even cash flow.

“The other cytology company in the U.S. marketplace is Cytyc Corporation, makers of the ThinPrep monolayer Pap smear preparation system,” added Dr. Nelson. “Cytyc has also gone through about $160 million of investor funding. It was only at the end of last year that Cytyc posted its first quarterly profits.”

Indications are that Neuromedical Systems will cease operations and exit the automated cytology business. It is selling its intellectual property, patents, and other assets to AutoCyte, Inc. of Burlington, North Carolina.

“I do not know what lies ahead for NSI,” added Schwartz. “When we originally evaluated the various automated cytology technologies, one of our concerns was about the viability and staying power of these start-up companies.”

It is estimated that less than 20 PapNet systems are in operation around the world, including the United States, Europe, Hong Kong, and Taiwan. Like Associated Pathologists Laboratories, current users will develop their own solutions to NSI’s bankruptcy.

The bankruptcy of Neuromedical Systems is a reminder that automated cytology technology remains a high risk business. Lab executives should exercise caution when selecting a vendor to provide automated cytology systems in their


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