Late last week, Westaim Corp (NASDAQ:WEDX) priced the IPO of 4.5 million shares of its subsidiary, Nucryst Pharmaceuticals (NASDAQ:NCST), at $10 a share -- well below the forecast price of $12 to $14.

Although Nucryst is a legitimate nanotech company and its IPO deserves to be taken seriously, investors should proceed with great caution because they risk getting burned. And this is the type of burn for which even Nucryst's patented nanocrystalline technology offers no comfort.

For years, Nucryst has had a relationship with Smith & Nephew (NYSE:SNN), a world leader in wound management, to distribute its Acticoat wound dressings. The dressings utilize a nanocrystalline form of silver and are known to inhibit over 150 different types of pathogens, including many types of drug-resistant bacteria.

The nanocrystals can also be released over a sustained period of time. This property allows the bandages to stay on longer and the wound to heal quicker. As an added benefit, the nanocrystals help the bandage peel away easily, painlessly, and without damaging the underlying wound.

As a result of these benefits, the Nucryst dressings have found a home in more than 100 of the top burn centers across the country and have secured a share of the growing wound-management market, which Frost & Sullivan has estimated will double from $1.5 billion today to $3.1 billion by 2011.

Sounds pretty good, you might say, so why the trepidation?

I'm pessimistic about Nucryst's near-term prospects because a closer look at its prospectus raised too many red flags.

For starters, the wound-management sector is highly competitive. Motley Fool Inside Value pick 3M (NYSE:MMM), Bristol Myers Squibb (NYSE:BMY), and Johnson & Johnson (NYSE:JNJ) are all major players and have deeper R&D budgets, as well as wider distribution and marketing arms, than Nucryst's only partner, Smith & Nephew.

Second, while sales of Smith & Nephew's Acticoat dressings have been increasing for the past few years, Nucryst has been unable to achieve profitability -- a trend it has said it expects to continue for the foreseeable future.

This leads directly to my third concern. The company has publicly stated that it may require additional financing in the future. While this is not necessarily a bad thing -- especially if the money is to help grow the company -- it will have the effect of further diluting shareholder value. And this is a concern compounded by the fact that even after the IPO, Westaim will maintain control of 71% of Nucryst. Essentially, existing shareholders will have no say in the management of the company.

I also have some strong reservations about Nucryst's relationship with Smith & Nephew. Not only is Nucryst tied into an exclusive arrangement with the company, but also the status of the milestone payments it's expected to receive from Smith & Nephew is unclear. To date, Nucryst has collected $19 million out of a possible $56 million in such payments, but I was unable to ascertain from either the prospectus or company officials what sales figures or regulatory approval requirements Nucryst needs to meet to trigger future milestone payouts from its partner.

My final and greatest concern, however, centers on the uncertainty of regulatory approval for some of Nucryst's future products. The company currently has another nanocrystalline product in the pipeline (in phase 2 clinical trials) that treats moderate forms of eczema. If the topical cream is approved, it might establish a nice new profit center for the company (an estimated 15 million Americans suffer from some form of the disease). It may also, someday, receive regulatory approval for products to treat acne and gastrointestinal disorders, as well as coat cardiovascular devices and orthopedic implants. But those are all big "ifs" at this time.

My advice to would-be investors is to hold off on Nucryst for the time being. At its current price ($10), investors will be paying $7.50 more per share than the historical net book value ($2.46) of the company. This is far too high a premium to pay for a small-cap company with a thin product pipeline struggling to gain market share in a highly competitive market.

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Fool contributor Jack Uldrich believes in the power of nanotechnology but isn't confident that it can yet cure all types of burns -- especially those caused by overexuberant investing. He is the author of two books on nanotechnology, including the forthcoming, Investing in Nanotechnology: Think Small, Win Big. He does not own shares in any of the companies mentioned in this article, with the exception of 3M. The Fool has an ironclad disclosure policy.