For someone who simply stumbled on sleep-disordered breathing, Dr Peter Farrell was quick to identify an opportunity that would make billions of dollars from treating the illness.
Farrell is the founder and executive chairman of medical device company ResMed, a company that grew from humble beginnings in Sydney in 1989 to become a global leader in treating obstructive sleep apnoea (OSA) and other respiratory disorders. Farrell’s son Mick was recently appointed ResMed chief executive (more on that later).
OSA occurs when the airway temporarily collapses during sleep, preventing or restricting breathing for up to 10 seconds – sometimes more. It can happen hundreds of times a night, severely disrupting sleep.
Clinical studies have linked untreated OSA to chronic diseases, including stroke, heart failure, hypertension, diabetes, obesity and coronary heart disease. Common symptoms include snoring and tiredness when waking, which gets worse during the day.
ResMed has transformed its performance from $1 million in sales and a $250,000 net loss in 1990 to annual revenue of almost $1.4 billion today and net profit of $255 million.
It’s a far cry from when Farrell first heard about a patient being treated for “snoring sickness with a reverse vacuum cleaner” at the University of Sydney Medical School in June 1986. His reaction to hearing about the disorder – and the treatment – was disbelief.
A curious Farrell visited the school to see a sleep apnoea patient being treated with what he describes as a Darth Vader-like mask resembling a toilet seat that was hooked up to a machine that made the noise of a “freight train”.
Professor Colin Sullivan, who developed the mask that allows nasal continuous positive airway pressure (CPAP), told Farrell he was treating about 100 patients suffering from sleep apnoea. Sullivan’s CPAP is widely credited as providing the first successful non-invasive treatment of OSA.
At the time, Farrell was establishing a research and development arm in Sydney on behalf of the multinational healthcare giant, Baxter.
“My mission was to look for ‘low-hanging fruit’ that Baxter’s financial and marketing muscle could take to world markets,” Farrell tells LeadingCompany from ResMed’s headquarters in San Diego, California.
“So I remember looking at this Darth Vader apparatus in 1986 and came to the conclusion that it worked well after talking to people suffering from sleep apnoea. I put Baxter’s money into it. We were developing treatments for its respiratory homecare division in Chicago.”
Although Baxter invested money initially in developing CPAP, the company wasn’t as enthused as Farrell was about its potential. Farrell says Baxter had “bigger fish to fry” at the time, after paying $3 billion for American Hospital Supply.
In 1989, Farrell stumped up his own money – a total of $1.25 million – and paid Baxter for the business that would become ResMed. He listed ResMed on the American technology exchange, the NASDAQ, in 1995, before dual-listing on the New York Stock Exchange and the ASX in 1999.
ResMed
By any measure, ResMed is a major success, and so is Farrell who, among other qualifications, holds a PhD in chemical engineering and bioengineering from the University of Washington, Seattle, and a Doctor of Science from the University of New South Wales.
ResMed, Farrell says, sells about 700,000 masks and 200,000 devices a month in about 70 countries across the world.
Treating OSA involves either wearing a discreet mask or nasal pillow that is connected to a small, portable generator that pumps air at positive pressure. The air pressure is strong enough to keep the airway open while the patient sleeps. The treatment is widely accepted and highly effective – and, it’s come a long way from the vacuum cleaner days: it’s quiet.
Even selling 2.4 million devices a year, Farrell believes the market for treating OSA is still relatively untapped; about 26% of the adult population across the world suffer to varying degrees from sleep-disordered breathing, Farrell says. Further, awareness is still low and Farrell estimates 90% of people with OSA remain undiagnosed and untreated.
For the quarter to December 31, 2012, ResMed reported net revenue of $US376.5 million, a 13% increase on the prior corresponding period. Net profit rose 24 % to $US77.9 million and diluted earnings per share were up 26% to 53 cents. The quarter to December 31, 2012 marked the 72nd consecutive quarter of revenue growth – an enviable statistic for any publically-listed company.
For the year ending June 30, 2012, net revenue was $US1.37 billion, a 10% increase on the 2011 year, and net profit was $US254.9 million, a 12% increase. Today, ResMed’s market capitalisation exceeds $US6 billion.
Strategy
To keep revenue flowing and profits up requires vision, planning, strategy and execution.
“Generally, the best people with the best strategy get the best results,” Farrell says. “The way we initially built our market for medical devices was to push the boat with distributors.
“We looked for people we could initially work within the medical business, and when we became their biggest business we would buy them. We made a couple of dozen acquisitions and that was a successful strategy.”
The ResMed strategy also involves investing between 6% and 7% of revenues in research and product development each year, which, if true to form, will continue to grow in dollar terms.
Farrell says ResMed is acutely focused on developing innovative therapies that increase patient comfort and convenience while improving health. He says ResMed has about 3500 patents, either granted or pending, involving masks, algorithm machines, ventilators, devices and accessories in 2013.
“We try to ensure that every patent offers commercial value,” Farrell says.
The company, in its best interests, is committed to educating the public about the dangers of untreated sleep-disordered breathing. Farrell says the prevalence of sleep-disordered breathing in people suffering from diabetes or heart failure is about 80%.
He says the progression of these diseases and others, such as hypertension and reflux, can be slowed by successfully treating sleep-disordered breathing.
“Our strategy centres around treating sleep-disordered breathing and its association and impact on chronic diseases and occupational health and safety,” he says.
Farrell says a business strategy requires structure and it should be consistent, defendable, measured and examined.
“What gets measured gets done,” he says. “What gets done has to be measured. What gets paid for gets measured.
“Select the most important things to work on. In our business, it’s the 90/10 rule, where 90% of revenues come from 10 per cent of our customers. We keep working closely with the 10%, but the trick is to take the major points to the underperforming 90% customer base. A strategy must be kept up to date and examined every so often in a rapidly changing world.”
New products, new companies, new markets
Farrell’s advice for launching new products or businesses is to be sure a project works before investing big money and time. Start with simple prototypes. Ensure there is a sizeable market for a new product or service. Find the best people and set a timeframe.
“In other words, you want to make sure the whole goddamn thing is going to happen in your lifetime,” he says. “The more you de-risk a project, the more it’s worth. So you come down the risk curve and up the value curve.
“Question whether the intellectual property is covered and the technology is understood. Then do a robust financial analysis.
“They don’t teach you this in business school, but you need a very high tolerance for bad news. There will be huge disappointments. You might get lucky, but you can’t count on luck.”
Leadership
“My old man used to say, ‘Listen, you’ve got two ears and one mouth – use them in that proportion’,” Farrell recalls. “You’ve got to be a good listener. I’ve learned that over the years –that’s part and parcel of being a good leader.
“A good leader must have moral courage. Leading is not about winning friends, but doing the right thing. And it requires the moral courage to make calls when you know you’re going to potentially piss off lot of people.
“A leader needs judgment and I don’t mean IQ. It helps to be smart, but judgment is having the right nose – a sense of knowing or feeling when something will or won’t work. By all means, take advice from a number of quarters, but at the end of the day, judgment counts more than IQ. The two together are fantastic.
“Good leaders are persistent and determined. Once you set the course, finish the job. Get on with it.
“We try to minimise bureaucracy. I always say, ‘Guys, if you think we are doing something dumb, for God’s sake tell us, so we can stop doing dumb things’. We have a very open-door policy.
“You also need a sense of humour. Things don’t always go to plan, but you have to laugh at yourself and the world. In other words, don’t take yourself too seriously. I mean it’s only a job. It’s not life and death – well, it is in our case,” he says, laughing.
Speaking of leaders, Farrell’s son Mick, 40, was appointed chief executive of ResMed on March 1, 2013.
A case of nepotism?
“Certainly not,” says Farrell, aged 70.
He says Mick was appointed after a recruitment firm undertook a two-year search across the globe. The ResMed board appointed Mick, and Farrell says he was removed from the selection process.
Mick Farrell joined ResMed in 2000. He had served as president of the company’s Americas division since 2011, and ResMed says he led a team that grew sales by more than 30% during seven quarters.
Farrell says he’ll still be around. As executive chairman, he will be focusing on strategy.
“I still have an operational role,” he says. “We have clinical trials around the world. If you like, it’s more stepping sideways than stepping down.”
More time for golf, perhaps?
“I do play golf and my handicap’s about 10,” he says. “I’ve got about 10 golf memberships around the world and each round costs me about 5000 bucks. It’s crazy.”
Mistakes
In 2007, a voluntary recall of 300,000 S8 flow generators worldwide cost the company $US60 million. A short circuit in the power supply connector caused the device to fail, but in only seven instances, according to Farrell.
“The printed circuit boards didn’t have a flexible connection to the back of the device,” Farrell says.” We rushed the S8 device to market after delays in getting it there.”
Farrell says the problem was initially identified within ResMed, but hushed up by a project leader until it was inevitably uncovered. But as leader, Farrell says he accepts responsibility.
“We took our eye off the ball in the interests of haste,” he says. “We didn’t do enough analysis on engineering design. The lesson is you cannot cut corners. You have to make sure the design is incredibly robust from the get-go. It’s crucial to validate and verify all steps.”
Farrell also acknowledges that over the years he has occasionally put “the wrong people in the wrong jobs”.
“They’re not bad people – it’s just they weren’t suited to the role I hired them for,” he says. “But as I became more experienced in my role, I made fewer mistakes.”
Farrell has checklist for when it comes to staff, or hiring.
“The three things I look for in people are integrity, intelligence and energy,” he says. “If you get the integrity wrong, the other two don’t matter. In fact, it’s a disaster.
“People with integrity are vital to the success of any business because you can’t do everything yourself. Leaders have ideas, but someone has to implement them.”
Shooting from the hip
So what keeps Farrell awake at night?
“Product recalls, litigation and dumb politics,” he answers.
On the litigation front, Farrell says a long-running dispute with the University of Sydney over royalty payments on masks remains unresolved since it began in 2007.
The University of Sydney accused ResMed of infringing its patent and failing to pay royalties. Farrell says ResMed was paying the university royalties when using its technology, but stopped paying when ResMed went back to the “drawing board” and developed its own new products.
Farrell says the uncertainty that follows recalls and litigation is never far from the back of his mind because they “require money, time, resources and so on”.
Farrell says most politicians “don’t have a clue” about business or innovation.
“Politics makes me spew, particularly when some dumb government decision makes the economy worse,” he says.
“Most politicians I know are complete conmen. Politicians change their opinions and comments solely based on what the polls are saying.
“Let me say this about innovation: innovation only occurs when someone writes a cheque.
“A lot of people fiddle around with great ideas. They’re creative and they’re imaginative. But unless somebody writes a cheque – unless it’s anointed by the marketplace – it’s not innovation.
“So when governments talk about innovation, they are completely clueless. Because they’ve never been exposed to what it takes to manufacture prototypes, test them, do pilot studies and then go into full manufacturing. It’s a complex undertaking to pull all the bits and pieces together.
“Entrepreneurs are not risk-takers per se – they are opportunity seekers. They do something because they think they’re going to make it, not because they think they will lose their shirt or farm. Entrepreneurship is about minimising risk and seizing opportunity.
“I don’t think you can be an entrepreneur without having vision. You must be able to see over the horizon. And that’s why it’s important to network, to go to meetings and to talk to people. Vision flows into strategy and it forces you to make choices.
“For the better, I hope.”
Farrell in brief
Q: What is your favourite source of leadership inspiration and ideas?
A: Peter Drucker’s books on business influenced me greatly. I have much respect for Andy Grove for his work at Intel and Jack Welch for his performance at General Electric.
Q: What is the one thing a leader should never do or say?
A: Pretend that something is absolutely certain. It never is.
Q: What two elements are critical to achieving change?
A: Have a thorough understanding of the change you want and communicate clearly why it’s important.
Q: What was the worst moment of your career, and what did you learn?
A: Years ago, I made a mathematical error in a published paper that was pretty influential. Not good for a man of my qualifications. It didn’t change the conclusion, but it was an embarrassment. I felt sick about it for a long time. Never take anything for granted.
Q: What important qualities do you look for in your direct reports?
A: Integrity. And the energy should be evident when performing at a high level.
Q: What makes a workforce productive or more productive?
A: An open culture. And people have to feel they are being rewarded for their work. Employees have to feel that someone will listen to them if there’s something stopping them from doing their job properly.
