Peter Farrell’s authoritative baritone is at odds with his mission in life: to put people to sleep. From the embers of an idea, this erudite chemical engineer built ResMed into one of the world’s most successful fast growth companies. By Paul D. Ryan
“Anthill? Yes, I’ve seen it. Tell me, how would you describe your publication?” I give him the run down — fast-growth business, ambitious entrepreneurs, commercial creativity, the innovative spirit…. Dr Peter Farrell, founding chairman and CEO of ResMed — one of Australia’s hottest commercial exports — stops me there. “Innovation?” he says, and laughs. “My definition of innovation is: it’s not innovation, until somebody writes a cheque.”
It’s something of a credo for Farrell, whose no nonsense approach to business and life is the driving factor in ResMed’s phenomenal success.
The company was formed in 1989 to commercialise medical equipment for the diagnosis, treatment and management of sleep-disordered breathing (SDB). Since listing on the New York Stock Exchange in 1995, ResMed has had 38 consecutive quarters of record year-on-year growth in revenues and profits, with compound annual growth of about 45 percent. The company has a market capitalisation of about US$1.8 billion and sells its products in over 60 countries.
SDB (which includes obstructive sleep apnea) causes people to stop breathing repeatedly during their sleep, often for a minute or longer and as many as one hundred times during a single night. It is estimated to affect four million Australians and 50 million Americans — a prevalence similar to asthma or diabetes. It is also now acknowledged as being a major contributing factor in heart disease, strokes and hypertension. Astonishingly, only around five percent of sufferers are being diagnosed and treated.
This discrepancy has fed a booming market sector for SDB treatment, and ResMed’s air flow generators, masks and diagnostic products are reputedly the best in the world.
To give you some idea of ResMed’s prestige, Forbes magazine has named it one of the “200 Best Small Companies in America” for eight consecutive years (1997 – 2004). It also ranked ResMed as one of “America’s One Hundred Fastest Growing Companies” in both 1999 and 2000. For five of the past six years (1999-2004), ResMed was listed as one of Business Week’s “Hundred Hot Growth Companies” . In 2003, Investor’s Business Daily ranked ResMed as one of the “Top 100” companies in America.
Heady praise, indeed. But Farrell takes it in his stride. He holds a degree in chemical engineering from the University of Sydney, a Masters degree from the Massachusetts Institute of Technology, a Ph.D. in bioengineering from the University of Washington, Seattle, and a Doctor of Science from the University of New South Wales. Was the transition to the business world difficult? For such a disciplined entrepreneur, it’s all academic.
Means and Ends
“I’m an engineer, and engineers by definition look for solutions to problems,” says Farrell. “It’s difficult to lump academics in the same box because there are so many different disciplines. For instance, I don’t even know what a sociologist does, but I know they’re important because we produce a lot of them. Engineers tend to have a practical bent. When there is a glaring gap in the marketplace, that’s where you apply your focus. My undergraduate degree at Sydney University was very industry focused. I even worked a placement at a Shell refinery. When I went to college in the US at MIT, nearly all the professors were consulting to industry. Some of them were President and Chairman of their own companies. Commercial considerations were always central.”
Farrell is back in Australia to launch stage one of ResMed’s new $135 million campus at Norwest Business Park in Sydney’s west. He’s a proud man with strong views and a sense of mission. He offers his succinct philosophy of business.
“Unless somebody is out there creating wealth, you can’t have a just and fair society. Somebody has to be growing the pie. Money really doesn’t grow on trees.”
But given ResMed’s enviable market position, corporate success seems less important to Farrell than helping people live normal lives. He carries the statistics around in his head, and seems a little indignant at the lack of awareness in society.
“I was on Bloomberg TV some time back and the interviewer asked me who our biggest competitor was, and I said ‘ignorance’. He said, ‘What?’ I said ‘Ignorance. It’s ignorance on the part of the public and it’s ignorance on the part of physicians.’”
The Naked Truth
According to Farrell, 45 percent of people suffering from hypertension also suffer from sleep-disordered breathing. “Do you know how many hypertensives there are in the United States?” he asks. “Sixty-five million. If you don’t treat the SDB in these patients you will never fi nd enough drugs to get their blood pressure down.”
Of diabetics, who make up ten percent of the general population (and rising), 60 percent suffer from SDB. A recent University Of San Diego School Of Medicine study revealed that treating SDB in diabetics improved their insulin resistance and their general condition.
The prevalence of SDB in gastrooesophageal reflux disease patients is 60 percent. In congestive heart failure patients, it is 70 percent. “ We had a patient in Germany on the heart transplant waiting list,” says Farrell. “We found out about it, had the guy tested for sleep-disordered breathing, put him on one of our machines when it was obvious that he had it and in eight weeks he was discharged from hospital free of congestive heart failure. Will every patient respond like that? We don’t know enough to know that. But the potential for us is literally unlimited.”
A New Dawn
Prior to ResMed, the only effective procedure to alleviate SDB was the tracheotomy, which bypasses the upper airway and goes straight into the trachea (the windpipe). There were some other surgical procedures where the surgeons would whip out the uvula (the dangling bit of skin in the throat), cut into the soft pallet and remove tonsils and adenoids at the same time. It was acclaimed by surgeons to be 50 percent effective. However, their measure of effectiveness was based on the number of episodes per hour.
“Severe cases have between 60 and 100 cases per hour of interruptions and micro arousals,” says Farrell. “If you reduce these from 100 to 50 or 60 to 30, well, I’m sorry Doc, you’re not there. The patient still needs treatment. Before ResMed, there were very few tools available and the tools that were available were ineffective and/or very painful.”
In Bed with the Enemy
No company, however innovative, operates alone in a market experiencing double digit growth. The SDB treatment sector is growing at 15 percent internationally and 20 percent in the US. ResMed’s main competitor is the Pittsburgh-based Respironics. Together they make up 80 percent of the US market.
Farrell is quick to point out that ResMed is the only major company in this space dedicated exclusively to SDB diagnosis and treatment.
“I was in a meeting in San Diego where Frank Blunt, former Telstra chief, said the three most important things in business are ‘execution, execution and execution’,” says Farrell. “Ideas and concepts are great but you have to execute them, and execute them well. This industry is more competitive than ever and good branding is vital. We’ve established a pretty good brand over 15 years.”
And when technology and design are your greatest assets, securing intellectual property is an essential part of that execution. ResMed has filed and issue over a thousand patents. Farrell believes a spider web of continuation patents is the most effective defensive strategy.
“We were in an eight year patent dispute in a Pittsburgh courts against our major competitor, Respironics,” says Farrell. “It cost us about $6 million, so you have to have long pockets. It cost them about $12 million, and at the end of it we cut a deal with them. We found the courts appalling and the decisions appalling. You never want to end up in court. We have actually sold off some of our intellectual property as royalties and up-front payments, but the best way to avoid court is to secure you IP comprehensively.”
ResMed is the embodiment of a successful modern Australian company. It was conceived as an innovative solution to a market (and very human) problem. As such, it was born global. Farrell acknowledges that most of today’s ambitious companies simply cannot afford to start off on the easy road and get serious later on. “You’ll miss your window,” he says. “If you think small, you stay small.”
Australia might be a prosperous nation with modern infrastructure and an educated population, but our paltry population relative to the rest of the world means that we rarely make up more than two percent of the global market share, whatever the sector.
“You have to export,” says Farrell. “If you have something that addresses an unmet clinical need in the life sciences and health care, the market is outside the country. In our first year (1989-90), 10 percent of what we produced was sent to the US. Now our exports are 97 percent of what we manufacture here. I never even gave it a thought as to whether we’d be a global company. There was no choice.”
Awake at the Wheel
Australian start-ups would do well to learn from the ResMed example. It began with world class Australian research, built on it by formulating an ambitious business strategy, penetrated into key international markets, and all the while kept innovating to stay ahead of competitors following in its wake.
ResMed spends approximately seven to eight percent of net revenues on research and product development. The new Norwest Facility is evidence of this and of ResMed’s commitment to its country of origin.
Farrell has received rich accolade for his role in ResMed’s success. He was named Australian Entrepreneur of the Year in 2001, was admitted to the World Academy of Entrepreneurs in 2002 and was made a Member of the Order of Australia in 2004.
He could be forgiven for switching on the autopilot and resting on his staggering achievements, just for a moment. On the contrary, he’s hungrier than ever.
“We have a fabulous team of people. They get it. We are the best in the world and we will absolutely maintain that focus,” he says. “I think that we’ll continue to grow north of 20 percent. The market potential is billions and billions of dollars. I don’t even worry about it, it’s so enormous. This is like a marathon, and we are just beginning to lace our shoes.”