Mayo is also developing another product with IBM's Engineering and Technology Services group. Called the interactive breath monitor, the device is intended to improve lung biopsy methods. The product went from Mayo prototype to engineering prototype in just 10 weeks and is currently undergoing the FDA premarket approval process.

Commercializing research at this level entails different risks and rewards compared to simply licensing the technology. By outsourcing product development and manufacturing, Mayo assumes the regulatory risk associated with becoming a medical device manufacturer--regardless of the fact that it outsourced development of the product to IBM. And because the outsourced product carries the Mayo brand, the company assumes risk associated with the product's safety and effectiveness. This is not to mention the costs that Mayo assumed in underwriting product development and manufacturing costs.


But with such risk come rewards. By becoming a medical device vendor, Mayo receives a much higher margin on the sales of its BC-10 coils than it would have received if it had simply licensed the technology. And as a manufacturer, if it is not satisfied with its distributors, it can find new ones.

"Our customer is the finished-product manufacturer that sells to end-users and deals with group purchasing organizations (GPOs), but we could go through distributors in the future," says VanNurden.

"This is now one of technology commercialization's established strategies for new products. We look at the product and market first to determine the best approach," he adds. "The commercialization strategy is evaluated on a per-idea basis." Not surprisingly, VanNurden has received several calls from peers regarding this new business model.

Industry Implications
Founded on proprietary technologies, the medical device industry has pursued a strategy of vertical integration for many years. Vendors have held their secrets tightly, bringing distribution and manufacturing in-house to maintain margins in the face of price pressures. Vertical integration has fostered proprietary hardware platforms and communications protocols, increasing customer's costs for changing vendors and helping to lock in the installed base.

In most other high-tech industries outside healthcare, the vertical integration business model has been replaced. Using outsourcing, industry standards, and open-source technology, other industries have given up purely proprietary solutions, allowing more resources to be focused on core technologies and competitive differentiators.

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