Deal activity in diagnostics has been way down in 1999 and while a few strategically sound deals are getting done, the scale has been very small. With financing and M&A options drying up, smaller diagnostics companies are more squeezed than ever. A plucky few have snared good deals. Here's how.

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.

The founder and former CEO of AccuMed International Inc., Peter Gombrich, has started a new company based on licensing and acquisitions in the fields of cytology and urology. He is using an innovative financing strategy that merges the privately held InPath LLC into Bell National Corp., a publically traded shell company. This allows Inpath to obtain cash and offer investors an exit, despite the coolness of public markets to small cap stocks.

The smoke from the Pap wars is beginning to clear as Cytyc, which sells the {ThinPrep} monolayer system for screening for cervical cancer pushes ahead and NeoPath gets FDA approval to sell its automated instrument as a primary reader of Pap smears. Cytyc is doing quite well in its battle to get attractive reimbursement for its sample prep method. More problematic is NeuroMed Systems, which is struggling to maintain the interest of laboratories in its device which helps pathologists pinpoint trouble spots on Pap smears.