Sleeping giant's big plans

Australia's most successful medical device maker, ResMed, could have a new chief executive within six months. Founder Peter Farrell suggests in today's video interview that he could move into a strategic role in the near future.

Farrell says he has set in place a strong team led by chief operating officer Kieran Gallahue, who could takeover day-to-day running of the company.

Farrell also confirms the sleep products group can maintain a 20% growth rate per annum, a pace that allows the company with a 3000-strong workforce to double in size every few years. As Farrell tells Robert Gottliebsen, "our main rival is ignorance".

The interview

Robert Gottliebsen: Around the world, how many people have sleep disorder difficulties?

Peter Farrell: I’ll give you a rough figure. The literature based on data coming out of the University of Wisconsin says 20% of all adults. On the data that we’re collecting '” it’s not peer review published '” I think it’s 30%: three out of every 10 adults.

It starts with snoring?

Starts with snoring. Snoring in fact within a decade, maybe sooner, will be a treatable disorder because it is definitely associated with hypertension.

What do these sleep disorder problems lead to?

Well, a whole series of things but let me start with heart disease. The seventh report of the Joint National Committee (set up by the National Institutes of Health) '” which meets every few years to look at all the assembled data on the prevalence, the management and the diagnosis and treatment of hypertension '” says it’s the number one out of nine identifiable factors causing hypertension. It’s number one. Hypertension is the number one cause of heart disease. The number one killer. The number two killer is cancer. We’re not in that space. The number three killer is stroke. Hypertension is the number one cause of stroke, so one can argue that untreated sleep disorder breathing is the number one and number three cause of death in the Western world.

Occupational health as well?

Correct. Well occupational health could well be the biggest of all simply because there’s a thing called presenteeism, people who show up at work and aren’t very productive, and there are a number of reasons. It could be migraines; it could be back problems or whatever but the 800-pound gorilla in the room is sleep disorder '” breathing '” so we have developed a program which we call 'Sleep for a Healthy Life’. And, very quickly, it’s awareness, a web-based questionnaire '¦ high likelihood you’ve got this.

We assess you with a thing called an apnoea link, a little diagnostic device about as big as a cell phone.

The third thing is adjustment, putting you on the therapy '” nasal pap, a very sophisticated, fully automated device. Finally, the fourth thing is adherence. We all lose if people don’t use the device but what the treatment does if you have any of these potential co-morbidities '” heart disease, stroke, diabetes is heavily associated with sleep disorder breathing '” you treat the sleep disorder, breathing in the 75% of type 2 diabetics that have this problem. You treat the diabetes itself as well as the hypertension that they nearly all have. So it normalises.

How much of this total market have you tapped?

It’s very hard to say. It’s a tiny, tiny, tiny amount. As a rough figure we might be 3–4% of the way there in the United States; at best the rest of the world '” 1–2%. We haven’t started. In other words, it’s a marathon and we’re lacing our shoes.

How quickly can ResMed grow to 2010 and beyond?

We internally have reasonably high stretch targets, if you like. When we talk publicly, I think we can grow at 20% per annum as far as I can see into the future, which means we double in four years. Could we do better than that? Maybe. I can see it. If we really click with some of the big trucking companies, say, in the United States (and we’re working with a couple of those guys now) and there’s a huge '¦ there’s 15,000–16,000 drivers, and that starts kicking in and working with some of the big pharma companies. We’re working with some of the big banks. It takes a while to get traction but, gee, you know, you could say could you get to 30. What are the limits to growth and the limits to growth? Really I think they are going to be our ability to socialise the people. We’re growing our workforce at 20% per annum. We’re getting close to 3000 now so bringing in 500–600 people each year '” you know, we’re doing it.

Who are your main rivals?

Well I was being interviewed on Bloomberg TV some time back and I was asked who our biggest competitor was and I said ignorance. And it’s still the case. We do have competitors: Respironics in Pittsburgh, Fisher & Paykel in Auckland, Tycho, which is the big conglomerate. But at the moment the two big players are Respironics and ourselves and we have about 80% of the world market together. But, you know, that will change a bit. We are growing a lot faster than Respironics.

Why?

I think we have better products. I think we have better R&D and I think we’re more hooked in clinically. I mean we spend a lot of time with the guys at Oxford and Stanford and Harvard [universities]. I was just up giving a talk at Stanford and talking to the whole of their program there, and that’s the biggest in the world.

Peter, how much of your market is treating existing patients and how much is new products?

It’s about '¦ if you look over the last three years, 75% of our revenues would be new products. It might be 70% but it’s of that order. If you look at our breakdown geographically, 55% of our sales are the Americas. Pull out Canada and Latin America, it’s 50% US, 5% those guys. About 16% in Germany; about 12–13% in France. So three countries give us nearly 80%, but our growth rate is very high in South-East Asia and we’re doing well in Scandinavia and we’re doing well in the UK. It’s an interesting mix.

So ResMed is growing an annuity stream?.

Yes. And I think that’s going to grow faster than '¦ it’s hard to tell. My guess is that the annuity, it is an annuity and I think that that will continue to grow faster than the base business simply because our equipment’s getting better. It’s quieter. It’s smaller. It’s more user-friendly. People are more likely to comply with the treatment and therefore they’re going to need new masks, I mean replacement masks, if you like; replacement tubing; replacement head gear, etc, etc. It’s a very nice little earner.

Peter you’re the founding chairman of ResMed. How long will you stay on as chief executive as well?

You know I keep getting that question and I keep sort of pushing it back a bit. Look, I’m reasonably fit, except for a recent bout with a radical prostatectomy but survived that all right '” I was out of hospital within 24 hours. Notionally I look about 18 months ahead and I think for the next 18 months I’ll be in the saddle. I’m founding chairman, which is a little different to being chairman of the company. I will remain as, if you like, chief strategy officer.

So, you know, even if I said I’m giving up the chief executive’s job '” and I could do that in six months or nine months or 12 months '” the modus operandi would hardly change because Kieran Gallahue, who is there as global president and the chief operating officer '¦ you know, putting it if you like in a crude way: I mean, if you’ve got a dog, why do you bark yourself? And if you’ve got the wrong dog, you change.

So Kieran’s doing a good job, an effective job. Every board meeting we discuss how the senior management people are working together. Are they getting the job done and so on, and they are getting the job done. So I feel fairly comfortable that we have good bench strength and even if Kieran were to leave it’s '¦ he’s doing a great job. I’m not suggesting that’s even in the stars, but we also have underneath there some good bench strength and we’ve got a learning centre and we’re trying to develop people, can we do a better job? Yes we can. But we’re looking at that continually. It’s on the agenda and so I think we’re getting better at bringing people on.

Robert Gottliebsen in a national business commentator with The Australian.