by Adrian Payne
If you think that ‘a bex and a good lie down’ is the recipe for a good night’s sleep, it’s not so in the wider world for people who suffer from sleep-disordered breathing. In the late 1980’s, chemical and biomedical engineer Peter Farrell was setting up a business that was to become involved in the commercialisation of ideas that had promising signs for their application in modern medicine. In less than 20 years he would show the world that Australia has the talent and the design ability to lead the world. This is about him and his ‘baby’ – ResMed.
Peter Farrell was born in Sydney to parents of Celtic descent, Irish and Welsh. He believes that his grandparents came to Australia in the late 1800’s. Peter’s maternal family lived in Darling Point and his father grew up down the road in Paddington. During his childhood he lived in what he describes as a ‘happy-go-lucky’ family environment. He remembers that his father was a very bright person but hadn’t had the benefit of university education. His mother, on the other hand, was a very practical soul, again without any tertiary education, but with great wisdom; she understood the value of higher education and could see the need for qualifications in the developing post war world.
Peter tells the story of his uncle Harold, his father’s brother who was studying to be a lawyer and whose books were destroyed in a fire. His parents, being traditionally God-fearing folk, decided that God had sent a sign that He didn’t want Harold to be a lawyer, so they removed him from college. Harold and wife Yvonne were a little older than Peter’s parents and saw to it that their own sons all received a quality university education. John and Colin did aeronautical engineering and electrical engineering respectively at the University of Sydney. They had another son, Chris, a little younger than Peter, who took an Arts degree at Sydney University
Peter’s maternal grandfather Roy had set up an electrical engineering and contracting business in Paddington. Peter remembers that his grandfather was something of an entrepreneur. Occasionally Roy would go with them to their Catholic church and put in ‘the plate’ what seemed to Peter at the time to be an ‘ungodly sum of money’. Roy was the sort of person who thought that to those to whom more is given, more is expected. Peter acknowledges that his grandfather’s entrepreneurial bent and the friendly, supportive relationships he had with his staff were observations that stayed with him when the time came to build a business of his own.
The day came when Peter would have to decide on a university course that would lead to a career and a secure future. He was good at maths and chemistry at high school and thought that medicine might be the way to go. So he enrolled at Sydney University in the early sixties and thought he might do medicine as, at the time, the first year was a general year, although certain subjects, such as zoology and chemistry, had to be taken for one to enter medicine. He breezed through the first year of the course and became aware that in the second year, the dissection of human bodies was part of the deal, so went to the appropriate area in the university to inspect the ‘facilities’. There he found dead bodies, which were covered, on trolleys and body parts for further inspection preserved in formaldehyde. He decided, perhaps with some ‘visceral persuasion’ that maybe medicine wasn’t for him! Besides, the course was going to take at least four more years before specialisation whereas engineering would only take three more. So at this fork in the road, he followed the engineering bent of his cousins, but with a chemical engineering degree as his goal.
After graduating with honours, he took a job with Union Carbide at Rhodes in Sydney. The work was not particularly satisfying there and he became restless. Noticing that his North American counterparts were earning half as much again for similar work, he organised a transfer to Union Carbide in Montreal. While working in Canada he realised that the people who were really doing well were those with advanced degrees. So he decided to follow their lead. He applied to the Massachusetts Institute of Technology based in Cambridge across the Charles River from Boston, partly because many of the text books he had used at Sydney University had been written by professors at MIT, and partly because one of his fellow students at Sydney, Murray Freeman, was already enrolled at MIT. In addition, Murray’s father, Doug, was the managing director of Union Carbide in ANZ and probably knew what made the most sense for further education in chemical engineering. It also turned out that MIT’s engineering departments were nearly all ranked first in the United States which probably made them number one in the world.
He had recently married his Australian fiancée, Rosemary, who had come to Canada to be with him. Their wedding he recalls was rather memorable. They were married in a local Montreal Catholic church; his best man was an atheist, the surrogate father a Protestant, Rosemary was Jewish, and it all came together in a Catholic ceremony! After a quick check with Rosemary, they went to Boston for their honeymoon where Peter interviewed with MIT. He was offered a teaching scholarship and did his time at MIT, completing a master’s degree in chemical engineering. He was subsequently offered a scholarship to undertake a doctorate but Rosemary was anxious to return to Sydney, keen for their new baby daughter to have an Australian upbringing. But this wasn’t to be so at that time. Nevertheless, they edged a little closer as they drove from Boston across America to California in their family Volkswagen because Peter had been offered a job with Standard Oil in San Francisco, working on polymers.
However, this didn’t turn out to be what he ultimately wanted to do. Meanwhile MIT contacted him and said they had been going through their list of recent graduates and were looking for someone with Peter’s qualifications, someone who had both academic and real-world experience, to work in their Industrial Liaison Office. Rosemary’s hopes of going back to Australia looked even further pushed onto the backburner, as Peter went to MIT for an interview and secured the job. The work entailed meeting with high profile scientists and researchers, as well as high flyers in commerce and industry, particularly those in chemical industries like Texaco, Dupont and Campbell’s who were paying up to $50,000 per year to be part of MIT’s Industrial Liaison Program.
It was at this time, circa 1969, that Peter decided he wanted to be an academic. He ended up accepting a particularly attractive scholarship from the University of Washington in Seattle. He completed his PhD within 18 months, after which he was offered an Assistant Professorship working in the field of biomedical engineering, with a focus on treatment with the artificial kidney, the subject of his PhD thesis. Notably, he was able to continue working with the hemo-dialysis pioneer, Dr Belding Scribner, the developer of the Scribner shunt, who was one of his doctoral supervisors. He might have been there for two years or more, when out of the blue came a call from the University of NSW with a job offer to work in the chemical engineering department with a mission to set up a biomedical engineering program. Peter accepted the position. Rosemary was thrilled, as now the family included one daughter and two sons; so finally, they headed back to Sydney in time for the children’s secondary schooling.
Peter began to build a career as a senior academic. After five years, in 1978, the university proposed setting up the now Graduate School for Biomedical Engineering and Peter was chosen to be Foundation Director. Soon he found himself embroiled in the heady world of raising funds, coping with petty jealousies and being involved in the rigours of university politics.
In 1981, he was awarded a Doctor of Science degree for the research he had done in the field of artificial kidneys and, by this time, he had raised substantial funding for the School of Biomedical Engineering. He had attracted many students and the graduate program was going well. In 1982 it was suggested by both the Dean of Medicine and the Dean of Engineering that, because there was no designated chair in biomedical engineering, that as an associate professor, he should apply for a personal Chair. However, far from being the ‘chip shot’ he thought it would be with the complete support of both Deans, he was thwarted by a pedantic senior official in the university’s administration who went looking for problems. When his application for a personal Chair failed, he immediately thought about moving on.
Baxter Healthcare in Chicago had recently offered him a job as a Vice President of Research, so he ultimately went to work for Baxter in Tokyo and set up Baxter’s R&D unit in Japan. He enjoyed his time in Tokyo which lasted for almost two years. In his last 6 months there in 1985, Peter had an idea that he would put to the University of NSW for a ‘translational research centre’ to be built on campus. He spoke to the then President and Vice Chancellor, Michael Birt who, bringing an enthusiastic fist down hard on the table, thought this was a fantastic idea! However, Professor Birt put it to Peter that funds would be needed, and Peter then persuaded Baxter’s to put up ten million dollars and make a future commitment to making the relationship sustainable.
A building was eventually erected on the university campus. Designed by a team recruited and led by Peter Farrell, a six story building was completed with the top two floors dedicated to the Graduate School for Biomedical Engineering and the lower four floors for the University’s use. The deal was to include Baxter research in the mix with university research. The benefit was that students and researchers would get exposure to both the commercial world and the cloistered university environment. This of course caused what Peter deemed the “lice infested leftie” purists to claim that the arrangement would ‘taint’ the research with grubby commercial interests and would diminish the University’s ‘pure’ research value. This would have been anathema to MIT who embraced commercial associations, as long as there was transparency in the relationships.
With Baxter’s investment in mind, (by this time they had given Peter a five million dollar annual budget to work with), they were looking for what Peter calls ‘low hanging fruit’ – elements of research that could be relatively quickly developed to bring an early return on the initial investment by Baxter, who would develop and market the end products. So Peter set up the Baxter Centre for Medical Research (BCMR). Very early on, BCMR was working on acute myeloid leukaemia with the University of Adelaide, doing diabetes research with the Walter and Elisa Hall Institute at the University of Melbourne. Dialysis work was being undertaken with partners all around the world and, as Peter put it “BCMR later got into ‘the sleep business’ with Colin Sullivan at the University of Sydney ”.
Colleague Chris Lynch said one day “There’s this guy at the University of Sydney who’s treating snoring sickness with a reverse vacuum cleaner.”
“That sounds pretty nutty!”, was Peter’s first response!
“No, no, the guy seems credible,” replied Lynch. Peter at least agreed to go and talk to Sullivan.
In the meantime, internal politics at the university, driven by a pessimistic bean-counter at the top and the then Chancellor, Gordon Samuels, canned the Baxter partnered project altogether! Peter Farrell was flabbergasted that such a decision could be made at this stage when the building had been completely designed and the architects paid for by Baxter and building about to begin. ”You can imagine what Baxter thought!” he said. “It was like slapping a gift horse right in the mouth” – was one reaction from Baxter’s Chicago office. Peter says “We then decided to find space for BCMR off campus. Needless to say, we were far from happy, particularly as the VC has approved the idea so enthusiastically”.
In June of 1986, Peter Farrell went to see Colin Sullivan at Sydney University – the guy with the reverse-action vacuum cleaner used to treat ‘snoring sickness’. Colin put on a video of a Sumo type individual, snoring, and then stopping snoring, which Colin described as ‘asphyxiating’. When the snoring suddenly stopped, the heart rate and the blood pressure dropped dramatically. After 25, 30, 40 seconds the’ Sumo’ snorted loudly, concomitant with arousal and the blood pressure and heart rate shot back to supra-normal as he began breathing again. Colin Sullivan asked me a question at the time: “Do you think that’s good for him?” I suggested that we could move to the next question.
Next on the video, a mask in the shape of a ‘toilet seat’ was put on the sufferer’s face. The mask was connected to a hose which in turn connected to a pump that Peter says could’ve run a swimming pool! “It sounded like a freight train and was quite heavy. You could barely pick it up!” Colin explained that it was working with room temperature air and it had a bit of a coarse filter to keep out cockroaches. The difference between this unit and Continuous Positive Airway Pressure (CPAP) machines that had been used in hospitals for some time, was that this machine only applied positive air pressure to the nose. Everybody thought the air would blow out of the mouth, but it didn’t.
Peter talked to one of Colin Sullivan’s original patients – Eddie Merck. Peter enquired how he put up with the noise of the pump. Eddie had been inventive himself and moved his bed next to the internal garage wall; he knocked a hole in the wall and put the pump in the garage with the car, having only the air pipe and the mask in the bedroom. Peter remarked that having to endure the inconvenience of a primitive mask and the noise of the pump every night must be incredibly inconvenient! Eddie said: “Yes, but it saved my life, it saved my marriage and it saved my job. I put up with this seemingly monstrous inconvenience because I am back in the land of the living; I can now function during the day without falling asleep”.
Eddie went on to say that he used to lie in bed ‘not sleeping’ for 10 hours at night. He’d get up in the morning and fall asleep at breakfast, wake up, get in his car, fall asleep again at the first set of traffic lights, he’d go into work but couldn’t sit down because he would go into Rapid Eye Movement sleep (REM sleep), so he would wander around, unproductive – just focused on staying awake. He would go home, but couldn’t go to the movies or out to dinner because he would fall asleep. Then when he went to bed he would start the round again ‘not sleeping’ for another 10 hours. Eddie said that the first time he used Sullivan’s prototype equipment, crude as it was, he had a good night’s sleep, had dreams and awoke feeling ‘reborn’. He said that he would put up with any inconvenience to get that result every night.
Peter asked Colin Sullivan how many people he thought would have this disorder and was told, about 2% of the population.
Baxter at this time was still financing projects. After a few sums, Peter could see the potential, even at 2%, so it was decided to fund the prototype. He believed that within six months they could completely redesign the original ‘Darth Vader’ unit so it would be a fifth the size, make a fifth the noise, be a fifth the weight, and they could even design and build a decent airtight mask.
*Chris Lynch, then General Manager of the Baxter Centre for Medical Research, worked tirelessly with a team of solicitors to negotiate with Professor Sullivan, a deal on behalf of BCMR to acquire the rights to manufacture his CPAP technology. Eventually it was agreed to pay the University of Sydney royalties for five years.
In 1989 Baxter was refocusing its business and dropped their interest in obstructive sleep apnea (OSA). Peter Farrell could have remained in a well paid secure position with Baxter, but chose instead to offer Baxter a small consideration to take his OSA project with him and go. They agreed. With many a hurdle yet to jump, he formed a new company in Australia using his own and angel investor money, and called it ResCare, later to become ResMed.
The first year 1990, they achieved just under $1m in sales and lost $250,000. In 1991 they had sales of $2m and lost $150,000. 1992 ended with sales of $4m and the new entity made a profit of $400,000. At this time they were breaking even. 1993 sales were $8m and they were making about $800,000 in profit. In 1994 sales leapt to $14m. In 1995 the company went public on NASDAQ, at which point the name was changed to ResMed. In 1999, ResMed switched to the New York Stock Exchange, as most of the company’s business was in America and they thought the NYSE would offer a better profile for ResMed. In 1995, they listed in the US because they had a better offer there than they could get in Australia by about 50%. ResMed has since achieved 67 consecutive record quarters in top-line revenue growth since going public.
ResMed now employs about 3,500 people in 80 countries. They manufacture in Paris, Munich, Los Angeles, Singapore, Kuala Lumpur and Sydney. And they have direct offices in 18 Countries.
After setting up the business with an expectation of 2% of the population having need of the machine, recent research now shows that approximately 80% of type 2 diabetics have sleep disordered breathing (SDB), and when it’s treated with nasal CPAP, the hypertension and the diabetes are also treated. In addition, approximately 80% of heart failure patients have SDB at some level. Nasal CPAP treats the actual heart failure. Nocturia sufferers can also expect to be spared many night-time trips to the bathroom. In short, it is now estimated that around 30% of all adults are affected by SBD at some level. The number of people who should be treated is now being determined by sleep researchers but it is very clear that, if one has a co-morbidity, such as hypertension, heart disease or diabetes, there is no choice.
It’s the biggest single health problem on the planet asserts Peter Farrell. “And we haven’t even started”, he says. “It’s like a marathon and we’re just lacing our shoes”.
Editor, Dmitry Greku, asked Peter Farrell what advice he might give members of the Sydney Business Community.
He said that the number one issue, particularly if you are building a business is you have to have ethics – people have to trust you. “If you say you’re going to do something, you do it. If you can’t, you have to pick up the phone and explain your reasons for things being different from what you said. It’s a combination of consistency and working hard.”
He suggests that with any prospective project “you need a template, you need some way of assessing if something makes sense”.
Another thing is to look carefully at the project, and ask “are we the right people to do this”, and “do we have sufficient coverage in the area of intellectual property? If you can’t do it properly and with sufficiently robust IP, someone else will thank you, take your idea, manufacture and sell it, cutting you out of the deal completely.”
The market for your product also has to be big and it has to be accessible. If you can’t figure out a way to get into the market he says “Let it go, it’s never going to happen”.
Financially, you need a ‘sense’ of the ultimate value of the end product, because if the money isn’t in the bank for its development, you need to know whether it has the right kind of value for others to invest in it later down the track. He calls this ‘de-risking the project and exponentially increasing its value’.
The old 80/20 rule, where 80% of your business comes from 20% of your customers, is useful. “So long as you can find out who they are” – he says, and accordingly “pick what you are going to do to serve these customers and help them become more profitable by helping them serve better the market that they are in. People only make money when they make a contribution which is valued and you need to figure out the robust contribution which you and your team can make.”
Once you have picked an appropriate business opportunity, you have to have the discipline to stick to it and make it happen. “You have to have a fetish for delivering the product into the market place.‘ And you will need a high tolerance for bad news”.
The final test is to do a robust financial analysis. You might love the idea but it also has to pay the rent. If you never get to breakeven, that’s a bad sign or if a project doesn’t have a positive net present value, that’s a bad sign. In short, you have to figure out whether or not you have an actual business with the product or process in which you are thinking of investing.
He says leadership is also vital to getting something worthwhile done. “There are many aspects to leadership, but the aspects which resonated with me came years ago from Paul Johnson, one of Maggie Thatcher’s advisers, who also attended Oxford with Thatcher. He felt that leadership comprised of five main features. “First, leadership is about moral courage. Sometimes you have to make a call that won’t please everybody and it’s important to explain to people the reasons why a particular path has been chosen”. He says: “You’re not there for people to love you”.
Then second there’s judgment. “It’s about smelling what makes sense, taking advice from a wide range of people, then making your decision about what area of business you are going to focus on in a general sense. Then third you need an ability to pick the specifics of what you are going to focus on and where you are going to expend your scarce resources; the Pareto items, if you like. Then fourth, one needs the discipline to finish the job you’ve started.”
And, finally, “having a sense of humour is an important ingredient”. “You have to laugh at life, because no one gets out of it alive! When the pressure is on, you need to step back and find something to laugh at!”
He also puts great store in the wisdom of appropriate experts: world class researchers in the field of interest. In the case of ResMed, he has regularly flown in academic experts in various fields, such as cardiology, diabetology and anaesthesiology, wined and dined them and then presented his ideas and intentions for their evaluation and feedback. “It costs a few dollars but, in my experience, it’s been absolutely worth it.”
“And one other thing they never teach this in business school,” he says, “you have to have a very high tolerance for bad news. The proverbial always ‘hits the fan’ and you have to get up in the morning, be glad you’re in the business and handle the challenges with a smile on your face”.
He believes that there should have been one more commandment etched in the tablets of stone that Moses brought down from the mountain – “Thou shalt be fiscally responsible. You shouldn’t do dumb things with other people’s money, unlike the bulk of politicians who grossly waste a country’s resources on mindless attempts to decide what’s best for the private sector and for the public. And most of them are completely unqualified for the job at hand”.
Jack Welch, who completed a PhD in chemical engineering from Illinois, reminded Peter that if there were only three things you could measure in a business, they ought to be: employee satisfaction, customer satisfaction and cash flow. As Peter says: “They are all connected and interdependent, but the point is that if you don’t have satisfied employees, you’re unlikely to have satisfied customers and your cash flow is unlikely to be positive. These are good high-level yardsticks.”
The future prospects for ResMed under Peter Farrell’s guiding hand look remarkable. The market is huge for the products which ResMed is developing, and the real challenge is the ‘ignorance of the medical profession in their various silos’ about the level of untreated SDB in their patients. In short, specialist physicians do not yet fully understand the signs and symptoms of untreated SDB and how it interacts with the diseases they are treating. “Having said that, says Peter, “we are working at lifting the veil of ignorance so that the value of ResMed products for the health and wellbeing of patients around the globe will eventually be realised.”
*An excellent detailed history of this transitionary period is in the publication ‘ResMed Origins’, which can be found on the ResMed website.
