Medical innovators are like seafarers who sail into unfamiliar territory, observing, drawing rough maps and, if they’re lucky, coming to understand a new corner of the universe. As an undergraduate in his native Australia, then later as a graduate student in science and engineering at MIT and the University of Washington, Peter Farrell set out to become an explorer of human physiology.
In the midst of a promising academic career, however, he found himself drawn, as he puts it, to “the dark side,” leaving the University of New South Wales for a research executive job with Baxter. While there he stumbled upon a puzzling discovery—one that would launch an entrepreneurial career that exemplifies the tortuous, incremental nature of medical technology.
At Baxter, Farrell was on the lookout for new business opportunities. One day, as he tells the story, “somebody came to me with this opportunity of treating snoring sickness with a reverse vacuum cleaner.” The somebody was Colin Sullivan, an early pioneer in the nascent field of sleep medicine. His technology, however, was unimpressive. Sullivan knew he was skeptical, Farrell recalls, so the inventor sat the entrepreneur in a chair and popped a videotape in the player. “There was this sumo wrestler on his back, asleep, snoring, and snorting and so forth,” Farrell said, “and he had a Hewlett-Packard tracing of blood pressure and heart rate; so the guy would be snoring like so, and then he abruptly stopped breathing.” At the same time, his blood pressure and heart rate dropped sharply and stayed there. The patient’s upper airway was closed. His lips went blue, and then after 35 or 40 seconds he gasped, regained his breath, and fell back to loud snoring. “I watched a series of these, as the blood pressure went up and down and so forth,” Farrell remembers, “and Colin asked me: Do you think that’s good for him? And I said let’s move on to the next question.”
That next question was the patient’s clinical diagnosis. Sullivan explained that it was a serious disorder called sleep apnea and started the video again. “I thought it was goofy,” Farrell recalls. “Now he had this Darth Vader mask like a toilet seat on this guy’s face, and had it connected to a 30-kilogram Hitachi pump that you could have run your swimming pool on, and it sounded like a freight train; then he told me that the guy uses this contraption every night, and I was just in disbelief.”
Farrell suspended his disbelief as soon as Sullivan described how common sleep apnea was. “Colin told me that the prevalence in the world was 2 percent. (We now know that it’s 20 percent of the adult population).”
Even at 2 percent, Farrell calculated, it was 10 times greater than renal dialysis, on which Baxter had built a billion dollar business. “So I thought, well, a $10 billion business, say it’s only $5 billion,”
Farrell remembers, “and it turns out that it’s so much bigger than we ever thought it would be.” ResMed, today the global leader in sleep-disordered breathing, has a market value approaching $4 billion.
But Sullivan’s continuous positive airway pressure (CPAP) device was the stuff of the Stone Age. “I actually couldn’t believe that anybody could use this every night,” Farrell says. “Then Sullivan brought in a patient named Eddy, a man with a body mass index of around 26, who affirmed that, indeed, he wore a mask hooked up to the CPAP machine every night. Farrell expressed his consternation, and Eddy sa“Well, let me make it easy for you Peter: It saved my life, it saved my marriage, and it saved my job.”
It turned out that Sullivan had about 50 patients on treatment, all experiencing lifechanging benefits. The average pressure of the nares of the initial device was 10 centimeters of water, which works out to a positive airflow of just 1 percent above atmospheric pressure. The device was so safe, Farrell laughs, “the only way you could get injured is if somebody picked the machine up and smashed you over the head with it.”
As Farrell quickly learned as he worked on developing CPAP machines and mask prototypes, Baxter owned patents on the technology, but had little interest in bringing it to market. And then in 1988, Baxter decided to sell off its respiratory home care division. “So we arranged for a management buy-off of the technology,” Farrell says, “but it dragged on and on. Baxter locally got lawyers and accountants, and finally I got so exasperated, and I called the president of Baxter in Chicago. He was Jim Tobin, who’s now the CEO of Boston Scientific. I said, ‘Jim, this is ridiculous—I mean, this ought to be pretty easy.’ He said, ‘What do you want to do?’ And I said, ‘You keep 30 percent equity, you know, and we’ll have 70 percent.’ And he said, ‘No equity.’ I said, ‘Oh, OK, plan B. We’ll write a check for $500,000, and we’ll pay you royalties over whatever period of time.’ He finally said, ‘OK, under one condition—when you’re next through Chicago, I want you to buy me a beer.’ And I said, ‘Well wait a minute, are we talking import or domestic?’”
The New England Journal of Medicine has called sleep-disordered breathing or obstructive sleep apnea a major public health problem, “on a level equivalent to that of tobacco smoking.” Current data suggests that as much as 20 percent of the adult population suffers from the condition. In 2003, the National Institutes of Health reported that sleep apnea was the number one cause of high blood pressure, which contributes to two out of three of the leading causes of death—heart disease and stroke.
Since his introduction to the disease, Farrell has become something of an evangelist for better understanding and treatment of apnea. The symptoms include hypertension, excessive daytime sleepiness, heart erythemas or atrial fibrillation, morning headaches because of CO2 retention, depression, and the need to get up frequently during the night to urinate. The key indicators are gastroesophageal reflux (which can lead to aspiration pneumonia); impotence in males, because sleep impairment diminishes testosterone production; accelerated eating in adults; and compromised growth in children. “One can argue,” Farrell insists, “that undiagnosed, untreated sleep-disordered breathing, of which obstructive sleep apnea is the major manifestation, is the number one cause of death in this country.”
Farrell likes to say that the world is waking up to sleep, and, since its inception, ResMed has had a compound annual growth rate at the top line of 30 percent and at the bottom line 35 percent. The company, now headquartered in San Diego, has picked up an array of accolades and awards, including being chosen by Forbes as one of the 200 best small companies in America. It has been on that list for 10 consecutive years, based on return on equity, growth in revenues, and growth in net profit after tax.
The potential patient population suggests prospects of further growth. Farrell says, “Our current statistics indicate that the prevalence is up to 30 percent of all adults, if one has hypertension, it’s 45 percent, if you have diabetes, it’s 72 percent, if you have congestive heart failure it’s 70 percent, if you’ve had a stroke or you have transient ischaemic disease, it is 70 percent, atrial fibrillation 50 percent, nocturia, 60 percent, reflux 50 percent, and on and on.”
Treatment with nasal CPAP improves, and in some of Resmed’s more sophisticated devices with the better algorithms, totally cures the underlying disease. “Some of the results we’ve experienced a little short of miraculous,” says Farrell, “like patients being discharged from hospital on a nasal CPAP device, free of congestive heart failure.”
As researchers deepen their understanding of the science of sleep, the more connections they find between sleep disorders and a host of other, serious ailments. Yet physicians in the US and around the world typically miss the diagnosis of sleep apnea even when patients manifest obvious symptoms. “Medicine stops when the lights go out,” Farrell observes. Few physicians have been trained to recognize sleep as an integral component of human physiological and neurological function. Moreover, the specialization of doctors into medical silos, focused almost exclusively on a single organ, system or procedure, makes it easy to miss the patient as a whole human being.
In the near term, Farrell believes, ResMed’s largest competitor is ignorance, and much of the company’s efforts concentrate on educating clinicians to recognize the symptoms of sleep disordered breathing.
Nonetheless, despite his company’s remarkable success, he knows that in a competitive market economy, company performance is not absolute, but basically relative to other firms. As rivals develop technologies to compete, ResMed is placing increasing emphasis on the basics of competitive advantage: lower costs of production, improved quality, superior channel management, improved marketing.
Executives at ResMed have read The Innovator’s Dilemma and deeply understand that they must outperform their growing field of rivals.
“Personally, I tend to be a little competitive,” Farrell observes. “The three most important things in business are execution, execution, and execution. Our technology is at the forefront. We’ve put millions of people on treatment, and we haven’t started. It’s like a marathon, and we’re lacing our shoes. This is billions and billions of dollars, and we’re at the absolute forefront of this technology, and we will stay there.”