Peter Farrell Interview – June 12, 2014
CARUSO: : Today is the 12th of June, 2014. I'm David
CARUSO: here with Peter
FARRELL: in San Diego, California, as part of the San Diego Technology Archives Project. Thank you again for agreeing to meet with me. As I mentioned, I wanted to start talking a little bit or hearing a bit about your early life growing up. I know that you received a degree in chemical engineering in Sydney. I'm assuming that you're originally from Australia.
FARRELL: : Right.
CARUSO: : One thing I am curious to know a little bit about is how people wind up going into engineering. Were there things that as a kid you liked – I don’t know – blowing things up with chemistry sets or anything like that?
FARRELL: : No. I guess I wasn't thinking about a career really until I was starting to think, this is my last year in high school. What the hell am I going do with my life, and what am I good at? I did like mathematics very much. I enjoyed calculus, which I did at high school, differential calculus. I was reasonably good at chemistry. On both sides of the family, they were engineers. I was thinking about medicine just because a couple of kids that I was with in high school said, "This is really what I'm going to do," and they seemed committed. I thought, oh if they are that committed, there must be something to it. On my father's side of the family, my first cousins, who were older than I was, were the two senior guys and influenced me the most. One was an aeronautical engineer who graduated from Sydney University. The other was an electrical engineer, who also graduated from Sydney University. My mother was very close friends with their mother, so we saw a bit of them. They seemed cool guys as it were. Then on my mother's side of the family, my grandfather had started an electrical engineering and contracting business. A couple of my mother's siblings were actually in the business. They were electrical engineering contractors, so it was engineering on both sides. When I started to think about what I ought to do, I wasn't that attracted to electrical engineering. With aeronautical there didn’t seem to be that many jobs there. Chemical [engineering] seemed to be kind of cool, but I enrolled in a general first year where I could actually take the medicine or continue with chemical engineering. So I did zoology and dissecting dogfish as well as pulling bits and pieces off cockroaches and so forth. Funnily enough, the sophomore year, I had to start cutting up dead bodies. I went to the morgue and there were these sort of calico sheets over lots of bodies. I'd been doing some cutting up dogfish and whatever else we cut up. I'd go home with formalin on my hands, and I thought, you know what? That doesn't appeal. So I went through and completed chemical engineering.
CARUSO: : I'm not sure how things were structured in the school system. When you were taking your chemical engineering classes and other courses, was it purely theoretical, or were there practical components to it? Was there an attempt to get you to understand what it was to do engineering in the real world?
FARRELL: : Yes, but it wasn’t early on. I mean there was encouragement that over the summer break that you should go and get a job, but they didn't say it had to be an engineering job. But, that changed in junior year. You had to actually go and work in industry. So I spent the summer working for Shell Oil Company between my junior and senior year. One of the faculty members was there on site. I later on went to MIT, and they had a chemical engineering practice school that started there many years ago and was recognized as a fabulous program. It was sort of a mini, if you like, a mini practice school where one of the faculty members was associated with the Shell Oil project. We worked as teams and everything was focused on heat exchanger performance related to a water reticulation system. I found that very useful, but in the third year of the program, the junior year, we had project management. We had to apply what we learned to commercial practice. It was a very practical program at this point but highly theoretical in the first two years. We ended up having to do some electrical engineering in the third year, and it made me glad I didn't do it. [Laughs] I'm not against electrical engineers, but I thought, good God. It wasn't just I = E over R. It was detailed electronics and so forth. I just didn't take to it, as it were, like a duck to water. I've got no idea how, but I actually got through with high marks, but I'm still befuddled as to how that happened. [Laughs]
CARUSO: : What were your plans at the end of your degree? Did you want to pursue advanced degrees?
FARRELL: : No, I'd thought about it, and I thought, you know what? A bit of time in industry is probably sensible. I was definitely going to go and work abroad. It was something that I had the opportunity to do. I joined Union Carbide in Sydney and it turned out that the guy running Union Carbide, Doug Freeman, was the father of a guy I actually was a classmate with at the University of Sydney, Murray Freeman. Murray later influenced me [to apply to grad school at MIT]. I joined Union Carbide, and I was working in polymers. I was interested in that area. It was high density and medium density polypropylene for all sorts of applications. I joined the technical service department. Union Carbide was making the resins, and we'd help people when they had problems with their injection molding or anything to do with molding of the [polymer]. I found that kind of interesting. I was able to engineer, as it were, a transfer to the Union Carbide Canada a bit over a year after I had been at the Sydney facility. It might have been closer to 18 months. Anyway, I transferred to the Union Carbide labs in Montreal East, still doing technical service work. I took a look around at all the guys I was working with. Most of them had advanced degrees either Masters or Ph.Ds. I thought, I really ought to go and get more educated if I wanted to succeed. Around the same time, a lot of the textbooks we were using at Sydney University were U.S.-based textbooks that were from Wisconsin, Michigan and so on but mostly MIT. Unit Operations, which I think came out of Michigan and Bird, Stewart, and Lightfoot out of the University of Wisconsin. They were, with MIT, the recognized chemical engineering schools. There might also have been one from Stanford as well. In any case, [while working in Montreal] I decided that I really ought to go and get further educated. I applied to a number of schools and got a teaching fellowship to MIT, [which I accepted].
CARUSO: : That's the practice school?
FARRELL: : No, I didn't do the practice school because I'd already worked in industry. By that time, having worked in Sydney and Montreal, I think I'd had three years under my belt. I thought, well, maybe I'm better off not going to practice school. If I had it again, I probably would have gone there, but I ended up doing a thesis. I'd had an operation while I was in Montreal on my kidneys. There was a biomedical engineering program going on at MIT, and the guy directing it was Ed Merrill. My thesis under Dr. Merrill was related to treatment with an artificial kidney. I thought, artificial kidneys, God, maybe I might need that someday. Hopefully not, touch wood. [Laughs] I worked with Ed Merrill and a guy called Clark Colton, who is still on the faculty at MIT. I used Clark's equipment to do membrane transport studies. I won't go into it, but we got results which were difficult to reconcile. There was a guy at Columbia, Ed Leonard, who was an MIT guy, and Ed was getting different results from us. One of the funny things was that we were almost too good at MIT [as we had much more sensitive equipment and could use much lower concentrations of solute]. We were looking at sodium chloride transport, which is about the same size as urea in molecular weight, urea being 60 daltons while NaCL is 58.5. We were getting much higher resistance in the membranes and therefore slower transport numbers. We couldn't figure out why the rate of transfer through the membranes was so slow. It turned out we could use very, very low levels of sodium chloride concentration. It finally turned out that the ionic distribution within the membrane actually resisted the transfer of sodium chloride. When we went to higher concentrations, [overwhelming the charge on the membrane], we got exactly the same results as Ed and were delighted with ourselves. Ed Leonard was correct, and we were so good because we used these low NaCL concentrations. Yet once we overwhelmed the electrostatic charge on the membranes, the transport characteristics were just based upon molecular size rather than both size and electrical resistance. Anyway, I finished [my master’s degree] and then we decided, well, my wife wanted to go back to Sydney. We had a couple of kids; one born in Montreal and one born in Boston. She said, "Oh, let's go back." I said, "Okay, but on the way back, we'll just spend a year in San Francisco." I got recruited by Chevron Standard Oil in California, so I went to work at Chevron in the Bay Area. I didn't enjoy it. Chevron is a good company, but their focus was oil, and I was working in the polymer division. They just weren't serious about it, so during the year I spent there, I transferred to do operations research, which was testing various oil viscosities and so forth. I felt as though I was a fish out of water there. The job wasn't too bad, but that wasn't what I was really long-time interested in. Out of the blue, I got a job offer back in the Industrial Liaison Office at MIT. I went back to interview at MIT, and Chevron wasn’t very happy because I was leaving after just short of one year. Anyway, I said to my wife, "Well, this could be –" and she said, "Oh, no, no," but we went back to Boston. I became an industrial liaison officer, which was kind of fun. Most of the guys there were MIT undergrads and Harvard MBAs or the Sloan School. I think there were 12 of us and the 11 other guys were looking for jobs, or they were looking to be recruited by the companies they were interacting with. I thought, you know what? This is not really me. I'd spent the time well, however. I was meeting with guys like Paul Samuelson for lunch, which was not bad having lunch with a Nobel Laureate, but I was ferrying in and looking after guys from DuPont and Chevron, Texaco and so forth. I was the go between. I'd be setting up meetings between people, and working on helping to compile MIT’s Directory of Current Research which outlined MIT’s research strengths. These Companies at the time, I mean this was late '60s/early 70s were paying $50,000 a year, in uncommitted dollars. I thought, you know what I think? I want to become an academic. Then I thought, well know, what do I want to do and where do I go? I decided to do a PhD in biomedical engineering.
CARUSO: : Biomedical because of your work with the kidney?
FARRELL: : Yes, the kidney, and that appealed to me to continue doing that stuff. I can do it at MIT, but MIT was limited at that time in a clinical sense. Later on they had the whole Health Sciences and Technology Program, which was a combined Harvard/MIT Program. You could do a Ph.D. or other degree at MIT, and then an MD at Harvard. But God, this was 15 years before that program got off the ground. It was too long to wait. I didn't even know it was coming. So I applied to Penn, which had a pretty good biomedical engineering school as well as a good medical school. I remember the head guy, Mitchell Litt, called me. He said, "No, no, [not kidneys], the project here would be to work on the rheology of sputum," and I was like, [gagging] "Okay, thanks Mitchell." The money wasn't that great. MIT offered me more or less a continuation of the scholarship, but again MIT didn't have a medical school association. I also applied to the University of Washington just simply because when I was doing my master's thesis, all the relevant clinical work [on artificial kidneys] was coming out of UW in Seattle. It turned out the two guys there that were key were Belding Scribner, who was a nephrologist that UW had recruited from Stanford, and Henry Tenckhoff, who was recruited, I think, from Oxford [but originally from Freiburg in Germany]. I don't know whether he was the Randolph or the Churchill or whatever, but he had developed the Tenckhoff Catheter while working at UW. That was how you did peritoneal dialysis and Scribner had developed the Scribner shunt. UW was where home dialysis started. Anyway, they called me up. The guy running the bioengineering school at UW, [Les Babb], called me up and he said, "What are you thinking?" I said, "Well we're living in Boston, we know the joint as well as MIT, and we've got an apartment, etcetera." He said, "Well, what are they offering you?" I said, "Oh, whatever it was," and he said, "Okay." He said, "I've been thinking about this. Here's the deal. We'll double the amount of your stipend." My GPA was a bit over 4.8 out of 5.0. He said, "All we will require is for you to do one semester of courses. We expect that that should mirror what you're already doing." He said, "You can spend that semester deciding what the Ph.D. program would be. Then you will get advisors, one of whom would be Belding Scribner. All going well, you can start your research immediately, and go from there." I said, "Okay." Babb was a nuclear engineer, but he ran the biomedical engineering program. He'd done a lot of work and published [with Scribner] in the area of treatment with the artificial kidney. We folded our tent and went to Seattle. I worked seven days a week, completed my Ph.D. within about 16 months or something. Then they offered me an assistant professor's job. It was fantastic. I was working with Scribner mainly, but also Tenckhoff. We were working with home dialysis patients on campus in what was called the Coach House. My thesis involved membrane transport, modeling of the body, intra-extracellular transfer, dialyzing out amino acids, and looking at nutritional requirements in patients, and some binding of amino acids and so on. That was actually fun. I mean working with Scribner was fantastic. We'd have these weekly meetings, in the Coach House dialysis facility where the patients were being dialyzed, and we would be working with real patients. It was a buzz actually. It was also fun continuing to work there, but then I got recruited back to Sydney to the University of New South Wales to start a biomedical engineering program there which eventually developed into the Graduate School for Biomedical Engineering.
CARUSO: : What year were you being recruited?
FARRELL: : I went back there the end of '72, so this was '73 onwards, and in '78 I became the foundation director of the Center for Biomedical Engineering (CBME) which later became the Graduate School for Biomedical Engineering.
CARUSO: : Just to clarify some things, you mentioned that you wanted to be in academia. You wound up working with academics who seemed to have their hand in direct clinical practice. I don't know a lot about the technologies that they we redeveloping, but were they commercializing those technologies or were they allowing other companies to get things on the market?
FARRELL: : Yes. There wasn't actually translational research, as such. The idea was that we should partner with somebody who is already doing this. I mean, it was developing with a patient focus without a total commercial focus but there was some interaction with industry. But there were companies, like Baxter-Travenol, as it was then called, [now Baxter]. And there was a company in the area producing dialyzers and the equipment to enable dialysis to take place, like the pumps and all the paraphernalia, plus the dialyzer itself. [And there was PhysioControl with whom Scribner had a relationship to make the shunts for patients.] Then, other than Baxter, there were other big guys, Fresenius and then Gambro. We were a magnet for these dialyzer manufacturers because home dialysis started at UW and we were where companies would come to have their dialyzers evaluated. I was also a part of that program, which enabled me to do a little bit of consulting because I wasn't being paid that much as a junior assistant professor.
CARUSO: : What is it about the academic life that you were interested in? Since it wasn't the salary – I mean professors aren't paid too well.
FARRELL: : I think engineering is primarily about problem-solving, whereas, science tends to be universal and you just throw data out there, and people can work with it, and get back to you with questions, etcetera. It was fun if they confirmed your results, whereas, engineering was more technology-based to solve problems. I had a good relationship with Baxter, so I had a consultancy with them. They were funding research for my grad students. Over the years I built up a pretty good relationship with them. I ended up spending a few weeks, blocks of weeks in Chicago, in Deerfield actually. We would work on problems that were highly relevant to them because that was a way to make sure that they kept the funds flowing. I guess I then reached the point of waking up one morning, [after running CBME for 7 years], and realizing that even if I were president of the university, I just didn't care that much anymore. You get to a certain level, and the system becomes highly politicized. It's all about space and resources, although we talk quality, the importance of research and students, and helping the students out with their careers and so on. It is in reality a grab for space and a grab for resources, which were, of course, limited. I'd had a little bit of a run-in with a senior UNSW [University of New South Wales] administrator and I think this just happens on campuses. It depends on the campus obviously and the people. It's always a people game, but I'd had a run-in with one of the particular senior guys, and he seemed to go out of his way to sort of make life miserable for me. Around that time, which was '84, so only 30 years ago, Baxter came to me and they said, "Look we might have a job for you." I'd become close to quite a few senior people in Baxter by working on problems that interested them. So they came to me. The president of Baxter International happened to have just been in Japan and was doing a circle around the Pacific, [including Australia], and Baxter had a reasonably big facility in Sydney. I also consulted for Dennis Hanley, the guy who was running Baxter in Australia at the time. Dennis was an accountant, with a Harvard MBA and quite smart. He had also worked for a while in Chicago. He was sent back to run Australia and New Zealand. He and I got along quite well. Ironically, he's now on a ResMed device, but that's [laughs] another issue. It's working extremely well for him. In any case, Lawrence Kinet, who was the president then of Baxter International said, "Listen, we've got some R&D projects going on in Japan. They're all over the map. Nothing is being managed. We need to set up a proper R&D department there. I'd like to offer you the job as vice president of R&D for Baxter Japan, and to be on the Japanese board," such as it was. I mean being a subsidiary, the board didn't have a lot of influence on what was going to happen. It was primarily advisory. I said, "Oh, I don't know Lawrence. Let me think about it." Anyway, then a couple of more—I’d call them childish—things happened at a high level within UNSW. I was kind of the victim. Well, you can't be a victim without your own consent. I thought, you know what? This is sounding like a bunch of crap. I called Lawrence again, and I said, "Is that job still open?" He said, "Yeah." I said, "Okay, I'll take it." Well, before I took it, I asked, "Now, what about remuneration? “We will pay a very competitive salary with bonus and stock options and we will provide first class air fares, and a car." And I thought who would want a car in Tokyo? I said keep the car. [Laughs] Anyway, so I went back to the campus after I had the job offer and I said, "I'll take a Sabbatical," and I was due a sabbatical because I hadn't taken one for six years in the '70s. Then this jerk that I had a run-in with, decided to cut my salary because he found out I was working primarily for a commercial entity. I mean, I had an academic affiliation with Waseda University in Tokyo, one of the private universities but when he found out about Baxter he said, "We'll save a bit of money. We'll chop this bastard's salary." [Laughs] Which he did. I thought, boy, tell you what? I'm just not coming back to this joint, and I never did. I then became a visiting professor [at UNSW], which was good because we originally set up the Baxter Center for Medical Research [BCMR] on the UNSW campus. It’s a very long story, we were going to put up a building up on the campus and we had paid all the architectural fees, etcetera, and it fell over again because of politics. [BCMR] eventually ended up going off campus, but I'm still a visiting professor there after almost 30 years.
CARUSO: : Aren't you the chairman for the [UNSW] Center of Innovation and Entrepreneurship?
FARRELL: : I am, I am, but that happened much, much later. That was through the business school. Yes, but I mean much, much later.
CARUSO: : All right. This is 1984 to 1989. That's when you were in Japan?
FARRELL: : I lived in Japan from '84 through '85. I was there for about 18 months. I then came back, but I ran Baxter's R&D in Japan for three years overall, and the second 18 months I was getting up there 1 week every month. Of course, there was one or two hours’ difference in the time zones. You were just crossing lines of latitude, not longitude, so I'd fly up on a Sunday night, fly into Narita, and get a taxi. I'd get a 60-minute taxi ride, go to the hotel, have a shower, and then I'd go to a board meeting. I’d work there until Friday night, and then I'd fly home Friday night, and arrive home Saturday morning.
CARUSO: : So a couple of questions: I know in the '80s there was sort of a resurgence in Japan. That's when that started coming back.
FARRELL: : Yes. It was a good time to work there.
CARUSO: : Computers are becoming more important, I think. I mean they are becoming smaller and probably more involved. I'm just curious about what things were like around those issues, but I'm also curious what it was like to work in Tokyo. I'm assuming that English was the primary language, or did you need to converse in Japanese?
FARRELL: : Well, I took a few lessons. There was a woman at the University of Sydney whose father was a professor. She was fluent in Japanese and had spent time there. In fact, she did a Ph.D. at Harvard, and I'm not sure what it was in. It wasn't languages. I started taking lessons. I thought, boy, this is just all too hard. I thought it was actually gonna be easy [because the numbering system, 1 to 10 and on, seemed so logical]. It was ichi, ni, san, yon, go, etcetera. Then when you get to 10, 10 was ju, and then 11 was ju ichi, and then ju ni was 12 and I thought, wow, this is quite simple. Then 20 is ni-ju. I thought maybe this isn't too bad. Then the only problem was that when you started counting flat things and bottles and so forth, it was a completely different counting system. So it turns out that it is amazingly complex. I had Akiko, my assistant, although her English was quite good, speak Japanese to me and I was later able to get by in restaurants and taxis and so on but never became fluent. I also had about 80 Japanese guys reporting to me. And I was in Japan just a week ago, and it's interesting how somebody said to me, "Well, you speak Japanese, but you don't understand Japanese." And it's a bit like that. I’d have to say, "Mou ichi do." You know, "Can you repeat that?" It gets too hard for them, so they would switch to English for efficient communication. I wasn't at a level where I'd do business or run the risk, but I actually enjoyed it. At that time, you're right, the Japanese economy was pretty damn strong. Of course, the U.S. was worried about the Japanese buying up golf courses and buildings. Of course, that ended up it wasn't so smart for the Japanese to have done that. I should have left a lot of money there. Unfortunately, when I left, I converted everything back and Japanese currency kept going up and up. I converted at the wrong time. I lived in Roppongi, which of course, is the sort of night club area. It was close to the U.S. Embassy. With my job there, I was a member of the Tokyo-American Club. The Japanese work pretty hard, but most people don't appreciate that Japanese executives don't get in the office that early. They get in about 9:00 in the morning. Then the shacho [or President] and the fuku shachos—and I was a fuku shacho or vice president—would for half an hour read the paper and then go into meetings. But initially it is relax, take it easy, go get a coffee. But then you'd be there until 9:00 at night. You'd actually go out and start eating around 9:30. It was kind of a different sort of way of doing things. I actually quite enjoyed it. It was difficult work. I finally said to these guys, "Look, fundamentals count. I don't care. If you're in business, you're in there to sustain the business. And in order to sustain the business, you've got to be making a profit. We've got to figure out how to become profitable." I remember going through the fundamentals with the guys who were reporting into me. I said to them, "You start with the economics and where the money is going. Now, who are these consultants that bill us every month? What do they do for us?" "Oh, Professor So-and-so, he's at Todai." And I would say, "Okay, Tokyo University. Yes?" And I would be told that he’s a very important person. And I would continue, "Right, right. What's he do for us?" I mean they were all in medicine like hematology and cardiology [where Baxter didn’t have any relevant business]. "What does he do for Baxter?" Nothing. But he is a very important [with good contacts such as] with the Kōseishō or the Japanese Ministry of Health and Welfare. I'd say, "Great." Anyway, I started to get rid of these consultancies. "Oh, we can't do that!" They'd go to the shacho who was himself a Samurai thug, but in time, I was able to get rid of all these ridiculous [consultancies]. I mean guys were going to these bars [in the Ginza] and then sending their bills to Baxter. I said, "There's no value in this, and we've just got to cut it." Anyway, so I had some effect. They had more projects than people. I think it was something like 100 projects, and they were just ridiculous little bits and pieces with a few shekels here and a few shekels there. I thought, this is nuts. So I devised a template as to how do we assess things that were relevant to us, and it's got to be driving our business. Anyway, so I finally got down to about 25 projects, but even that was too many. So I got rid of three-quarters of the projects, most of which were useless to Baxter. It was a hang them down, drag them out kind of deal.
CARUSO: : It sounds like they had their eyes towards a lot of things, but could you characterize the overall trajectory of Baxter? What was it that they were trying to address?
FARRELL: : Well, Baxter's focus there was really two things. I mean my role was to help get approval for CAPD, continuous ambulatory peritoneal dialysis, which was basically putting fluid in the patient's peritoneal cavity, two liters, and you'd change the fluid four times a day. It was pioneered in the U.S., and the idea was to get that through the Kōseishō, the Japanese Ministry of Health and Welfare. That was the main thing. The other areas were immunoglobulins and albumin, which were plasma separation products. They were the two big areas. Then the question was, where else should Baxter be putting stakes in the ground? Let's work with people in that space. There were a couple of very good companies – Asahi Medical, for one, and Takeda. Companies who were building quite good hollow fiber dialyzers. Baxter had a plate dialyzer and I remember saying, "This is just like an aircraft carrier when you need a cruiser." There was no way it was gonna really fly in Japan. Baxter eventually got into hollow fiber dialyzer, and I think I was part of that push saying, "These plate dialyzers, which would be cumbersome dialyzers are just not gonna be appropriate for Japan. The houses have areas which are just too small. You couldn't do home dialysis."
CARUSO: : One thing I'm curious about, you had some involvement in clinical practice or clinical trials when you were in the U.S. Clearly, in Japan, you are encountering similar issues in terms of things that are gonna go into the human body.
FARRELL: : Right.
CARUSO: : Was the criteria different in the two countries for what was permissible or how rigorous the testing was to get devices usable on humans?
FARRELL: : I would say at that time, the Japanese Ministry of Health and Welfare was a lot slower. No sense of urgency, but it was predictable. That would get back to you in 6 months, maybe in 9 months. Pretty much you were looking at an 18 month to 2 year cycle of approvals of things that you thought in the U.S. were a 6 month deal. Now, it's almost the reverse. I mean the U.S. has become monstrously bureaucratic, and the FDA employee view is that you've got a job and if you approve something it might go wrong, so why approve it? There's no real incentive to get stuff out into the marketplace. It is the rearview approach and woefully outdated. The Japanese system, as cumbersome as it is, it's much more predictable. You know exactly what's required. You hit the bases. You get approval. It's a predictable kind of exercise; whereas, in the U.S. you can hit all the bases, and then they can move the goalpost. We see that happening, particularly with the current administration.
CARUSO: : So you spent a year and a half in Japan?
FARRELL: : Living there.
CARUSO: : Right, and then a year and a half commuting?
FARRELL: : Correct.
CARUSO: : At the end of that three-year period, what was next?
FARRELL: : During that time, my role was to find somebody, a Japanese guy who could take over for me, and we did that. It turned out to be an internal appointment, and then that internal appointment had a dotted line to me and the President Komatsu, the president of Baxter Japan. He and I worked well together for a while but the frequency of my visits, when the new guy was appointed, became much, much less. In fact, that dotted line became so faint, that it just gradually evaporated [laughs] and by 1989, I had cut bait with Baxter. I had five years with them but in the remaining two years, which were '88, '89, my involvement with Japan gradually tapered off. I'd set up another Baxter Center for Medical research in Sydney, so the idea was to look around Asia Pacific, see what low hanging fruit existed there where Baxter's marketing and financial muscle could take the ideas to global markets. I had to find internal receptors within Baxter, a division or somebody within Baxter, interested in taking ideas and turning them into marketable products. In short, generate innovation where somebody actually writes a check. We were doing acute myeloid leukemia because the Fenwal Division had a plasma separation device. We were also doing porcine islet cells for diabetes, mainly type 1 because Baxter had a diabetes group in Irvine, up the road from here. We were doing kidney stuff, which was a global involvement, I mean from Guy's Hospital in London [to UCSD to Penn and various others], even in Japan. Then somebody came to me and said, "Look, there's this guy over at the University of Sydney Medical School. His name is Colin Sullivan treating snoring sickness with a reverse vacuum cleaner." I was still working for Baxter at this time, and we were looking for this low hanging fruit, and I said, "Good God." I said, "This stuff sounds inane." I kind of rolled on my back like a sprayed cockroach with legs up in the air, "What are you talking about?" He said, "The guy seems credible; he is an MD, Ph.D. Pulmonologist who had recently come back from three years working with some guru at the University of Toronto," called Eliot Phillipson, who turned out to be about as highly regarded in pulmonary research as Milton Friedman was in economics. And Eliot was quite anal and both a capable clinician and a very solid researcher. Every data point on one of his graphs would be n = 6,000. I mean very anal guy. [Laughs] Elliot was interested in CO2 receptors and was well known enough to write occasional editorials for the New England Journal of Medicine and so forth. Colin had trained with Eliot, and he had the concept that PAP therapy, Positive Airway Pressure therapy, which had been around in hospitals for decades, could be used with just a nasal mask. Everybody in critical care knew that if you slapped a mask on a patient and you pressurized it at 20 centimeters of water, or thereabouts, it would move fluid out of the lungs in the pleura, very effectively. And that, without diuretics, you could dry a patient out pretty rapidly. Colin pondered whether or not one could do [PAP therapy] with just a nasal mask. He just didn’t think that the air would blow out the mouth, at least not enough to depressurize the upper airway. He tried it, and it worked spectacularly, in most cases. There's some patients who are inveterate mouth breathers, particularly if they have a little bit of [nasal passage] distortion, such as from a broken nose, or whatever, or they might need a septoplasty to open up the nasal passages. Colin started this pioneering work in 1980, early 80s.
CARUSO: : When you say pioneering it, what do you mean?
FARRELL: : Well, he came up with the idea of using just a nasal mask with CPAP not a full face mask as was the norm. Continuous Positive Airway Pressure had been around in hospital use for ages, but this was using a nasal mask which everyone thought would not work because all the air would blow out the mouth. Colin patented the idea.
CARUSO: : Was he trying to sell it?
FARRELL: : No, no. But he was interested in making money from royalties. He was thinking commercially. That's why he approached us, he was looking for local companies, but none of the local companies were convinced that this was something that made sense. When I first went over to see him, he said, "I hear you're a skeptic." The guy was clearly very smart. Intellectually, he got it, but the idea sounded crazy to me. However, Colin came from a family with loads of good DNA. He had a brother who was a professor at the University of Toronto in aeronautical engineering. He had another brother who was a nuclear physicist, and so they had some reasonable DNA I felt. [Laughs] He said to me upon meeting me, "Listen, I want you to sit in that chair. I want to show you a video." It was like, "Okay. Let’s go." He showed me a clip of this sumo wrestler like person on his back going [imitating snoring] and he had–on the video–HP tracings of blood pressure and heart rate. When the guy had an obstructed apnea, oxygen levels dropped precipitately and the guy’s heart rate and blood pressure dropped like a stone.
CARUSO: : Right.
FARRELL: : Blood pressure dropped a little bit. [phone ringing] Excuse me a second. [break in audio]
CARUSO: : You were mentioning the video, the sumo?
FARRELL: : Yeah, yeah. I watched this series of crescendo, decrescendo, blood pressure, heart rate variability, and Colin said, "Do you think that's good for him?" I said, "You know what? I think we can move to the next question." He said, "Look," and when he showed me the equipment, it was like an inverted toilet seat impaling the guy, and if you had a leak, you’d tighten the head band and go, "Okay, how's that? Still leaking? How's that?" The machine, the source of the generator of the positive airway pressure is an Hitachi blower that you could run your swimming pool on it. I said, "Good, God! It sounds like a freight train." He said, "Ah, yeah, well, it's a big noisy, but you know, it works simply by keeping the guy’s upper airway patent during sleep." He said, "By the way, I should emphasize this is not a cure. It's a treatment. The guy's gotta wear this every night." I said, "What?" He calls his patient in, and his name was Eddie Merck. I expected a big dugong to come in, and it was a guy about my body mass index, around 25 kilograms per square meter. He had welts on his cheeks and a bit of necrosis at the bridge of his nose where the mask was digging in. I said, "Eddie, this is a bit inconvenient." He said, "Aw, yeah, a bit of Vaseline and – “I said, "Wow." I said, "The machine is so God damn noisy," and he said, "Yeah, well, what I did was I moved the bed to abut the garage, and I drilled a hole in the wall, and then I put the machine out with the car." I again said, "Wow." He said, "Look, let me make it easy on you, Peter." He said, "Let me tell you what my life was like." He said, "I'd get up in the morning. I'd sit down to breakfast, and I'd fall asleep. I'd go out in the car and on my way to work I would nod off at the first set of traffic lights. The guy behind me would toot to arouse me and that's how I went into work. Every stop sign, every traffic light. When I'd get to work, I couldn't sit down because I'd go into spontaneous rapid eye movement sleep, spontaneous REM sleep, so I just couldn't sit down. I wandered around just trying to keep awake. Didn't do a tap of work. I'd go home, the same way I came in, couldn't go out to a movie, couldn't go out to dinner, couldn't go to an opera or anything like that. Forget it. I'd fall asleep at dinner every night. Then I'd go to bed for ten hours and not sleep and that was my routine. I felt like shit." I said, "Oh." He said, "The first night on this machine," he said, "I was catatonic. I hadn't dreamt for years. I spent the whole night in what is known as REM rebound. The body was craving REM sleep. He said, "When I got up in the morning after the first night." He said, "I didn't fall asleep at breakfast." He said, "I drove to work without dropping off at a traffic light." He said, "And then I was able to actually do some work." He said, "I would sleep on hot coals if I could get this result” I said, "Oh." [He then added: “It saved my life, it saved my marriage and it saved my job.”] There was a guy at Baxter I worked with who I think was an Ohio State electrical engineer. His name was Will Pierie, and he was on the board of American Hospital Supply [AHS] before Baxter bought AHS for about $3 billion, and it was about a one to one purchase price to sales from memory. I might be wrong. The two companies were merged when Baxter was doing about $2 billion, and AHS were doing $3 billion and the combined company became Baxter. [Will came to BCMR at my request and gave me some excellent advice which I’ll come back to.] You've now got a $5 billion company and we just get into this fledgling thing called nasal CPAP and I'm spending Baxter's money on it. I knew that it was gonna die because we were developing it for a division called the Respiratory Home Care Division when Baxter sold it off. I mean I read about it in the trade journal, Clinica. Baxter would have had about 8,000 employees at the time and I guess it was in the top 60 or 70 [employees in seniority] and I'm reading about what Baxter does in a trade publication, and I thought, "Holy God." This idea is gonna die in its own [backside within Baxter because there was no place now to park it within Baxter]. About the same time, my reporting relationship also changed. Lawrence Kinet who had hired me, was fired. Then I was reporting to some young kid. He had an undergraduate degree in industrial engineering from Cornell and also had an MBA from Cornell. He'd just blown about $60 million bucks on some sterilization activity, trying to sterilize fluid going into a bag without having to steam sterilize it. It was gonna save money but Baxter had to write off $60 million. [So he got promoted.] But his father, Chuck Knight, was on the board of Baxter. I didn't get along all that well with Lester, and I thought, gee, I wonder how this is gonna end up? It was basically a good time to leave. I said to Baxter, "Look, we'll buy the technology." They said, "Okay," so back and forth it went for six months. But let me step back for a moment. I mentioned Will Pierie when he visited BCMR said, "Peter, let me give you a bit of advice. Before you put big bucks and spend a lot of time on something, always do the fatal flaw first test. Get to the boundary condition where you hope this puppy is gonna work. Get there for minimal amount of money, minimal amount of time and effort. Jerry-rig something, and if it works, then you put the big bucks in. Have some idea of what you want out of it." I'm thinking along those lines when I was talking with Colin, so after I'd finished the discussion with Eddie Merck, I said, "Colin, how many people do you think suffer from this?" He said, "Well, don't exactly know, but it's got to be at least 2 percent of the population, and it might even cause high blood pressure." We now know in spades that it does. It's the number one cause of hypertension. So I’m coming from Baxter where patients with kidney disease on dialysis has a prevalence of about 0.2% and we had a billion dollar business. As an MIT-educated engineer, I did a couple of quick calculations. 0.2%, 2%, $1 billion so maybe $10 billion. I said, "Even if it's only $5 billion – "so that's when I put Baxter's money into it. Of course, after they sold off the rest of the Respiratory Home Care Division, we had this 6 months of back and forth with lawyers and accountants, [getting absolutely nowhere]. So I called Jim Tobin, who was then the president of Baxter, and I said, "Jim, this is ridiculous. How can it take six months for something simple like this? It ought to be just a chip shot." He said, "Well, what do you want to do?" I said, "Well, you guys have 30 percent equity. We keep the other 70 and divvy it up." He said, "No equity." I said, "Oh. Let me give that some quick thought." I then said, "Okay, well, we'll give you up front half a million bucks and I was aware that Baxter was always looking for a couple of extra pennies at the end of each quarter. Then we'll pay you royalties of 5 percent net profit after tax for X years." He said, "Okay, under one condition." I said, "What's that?" He said, "When you're next through Chicago, I want you to buy me a beer." I said, "Wait a minute, are we talking import or domestic?" Anyway, it was done in three weeks. So it was like that. [snaps fingers] Tobin said, "Get this asshole out of our lives." Actually, they signed a 5-year consultancy agreement with me, and then it actually went on for 6. So we put our own money in and I could afford to pay myself coolie wages out of ResMed. Anyway, the deal was done in late 1989 and 1990 was our first fiscal year ending June 30. During that year we were approached my Medtronic, and they said, "Listen, we're developing a pacemaker for the upper airway." I thought, oh good luck. I'm thinking, good luck, because there are 26 sets of muscles in the upper airway. Which muscles are you gonna stimulate? You don't know where the problem is. It could be the velo, the oropharynx or the hypopharynx, or all of the above. I thought, good luck guys. "It is going to be implantable." Well, I just thought, boy, that's at least a 10-year FDA project. They said, "So, we will invest in you and you guys can sell your current car battery in the U.S., but the new model we want with Medtronic labeling." I said, "Yeah, that should not be a problem." They put a million bucks in at a pre-money value of $5M. They said they'd like us to work with their Nortech Division. I said, "Okay, what do they do?" "Trans-electrical nerve stimulation devices for treating pain management." I said, "Okay." I said, "Where are they based?" "San Diego," and I said, "Where the hell is that?" Now, I knew a guy, a nephrologist, Lee Henderson, at UCSD Medical School, but that was it. I mean I hadn't been here. Anyway, we signed the agreement with them. They ended up owning 17 percent of us. Then they gave the project to this pacemaker salesman, who knew everything and knew nothing, who was running Nortech, Dan Pelak. Dan turned a $40 million business making about $4 million at the bottom line into a $27 million business losing about $7 million. He was our partner. Imagine how well that worked out. They sold almost nothing. We ended up with a million bucks worth of inventory with Medtronic labels on them. [When Nortech in May, 1992 were not meeting the agreed upon sales targets,] I went to Fridley [MN], the Twin Cities where Medtronic is based, and met up with their Executive Vice Chairman, Glen Nelson. He is an extremely nice guy who is a general surgeon, Harvard undergrad, University of Minnesota, MD, but he was then working full-time for Medtronic. He actually started the first HMO in the country in Minnesota. Very nice guy. I said, "This is not working out, Glen," and he was the guy who was pushing for it initially for the investment in us. He said, "What do you want to do?" I said, "Well," I said, "I think the easiest thing is we just buy back our equity." He said, "Okay." He said, "Why don't you go and get a cup of coffee, come back in half an hour or so and I'll get the boys to run a few numbers." Anyway, I got back and sat in his office. He goes, "Yeah, we can do something. We'll sell your equity back for $2 million." I said, "God almighty, Glen. You've almost sent us broke! I mean, hell, Pelak’s done absolutely nothing. The only units we sold in the U.S. were the units that you guys didn't think it was appropriate for Medtronic to sell." It did look like a car battery, but it worked. Glen said, "Pete, your call." He then added: "Hey, whatever you want to do." I was like, "Good God, this is like highway robbery." Anyway, one of the guys who had already invested a million dollars, which was half equity and half loan, John Plummer was his name, put in another million and we raised a million among ourselves. We thought, well, it's gonna die if we don’t act. Then we had the problem of what do we do with all these Medtronic labeled devices? They'd messed up the marketplace for us. They were going direct to the hospitals and the users. They were bypassing all the DMEs and the HMEs who hated them because they thought we were just gonna continue what they had done. "No, no.” we said, “We want to work with you guys." Anyway, we finally got through it, and although they couldn't find any business, we were doubling every month from a small base, like $1ok. We'd do 10 grand and we'd do 20, and then we'd do 40, and then we'd do 80, and then started to taper off a bit. We were up and running from August/July of '89 [May, 1992 without the dead hand of Nortech on the tiller].
CARUSO: : You came to San Diego. Things weren't necessarily working out. Did you stay here simply because this is where the money had been originally? Is there a reason you didn't just take things back to–
FARRELL: : Well, simply, we took six of the employees who were working on it and they were living here. We basically pulled up a pick-up truck and rented a space across the street. No more thought than that was given. Well, we are here. Is there something we can rent around here? Yes, okay. Well, let's set up over there. It turned out to be completely useless, but they [Nortech] were supplying some minor stuff to us, helping out with administrative assistance and all that sort of stuff. It was useless, and we finally just decided to cut bait completely because it was just easier. That was it. There were half a dozen employees, and I might add one of those employees is still with us. That was 1992, 22 years ago.
CARUSO: : It's a relatively small business. You're coming into the American marketplace, which I'm assuming can't be too easy for a relatively small company.
FARRELL: : No.
CARUSO: : How did you wind up convincing people to buy what you were selling?
FARRELL: : Well, there were established DMEs in this space. We had a major competitor that we ended up having a court case with, Philips, which was Respironics. Respironics were based in Pittsburg, and they had tried to do a deal with Colin Sullivan in Sydney, and they offered Colin royalties for everything outside the United States, but nothing inside the United States. Well, the US was where the market was, 45 [95]% of it at the time. In fact, the market is still 70 percent U.S. For us, it's about 45, 55. Fifty-five is the Americas and 45 is outside. They had done some groundwork, and it was treating severe apnea with an apnea hypopnea index greater than 30 per hour where the sufferers are basically incapable of doing anything. Just like the guy I described, there were plenty of them. We now know it's 26 percent of all adults between the ages of 30 and 70 at some level. Do they all need treatment? Well, it all depends. If they've got diabetes and hypertension and/or hypertension or GERD or impotence or whatever, yes, they do need treatment. We call it the Holy Grail. It improves quality of life out of sight, [prevents co-morbid disease progression and saves the sick care system money]. In fact, ironically, I had a breakfast with a guy who was pitching me some deal. He said, "By the way, I have one of your devices." So it’s very common. I was flying out to Sydney last year, and I'm sure it will happen again, the guy behind me was using a ResMed AutoSet. And flying back a few days later the guy across me was using a ResMed AutoSet. I thought this is just too much. And yesterday, one of the women [at ResMed] had just come back from a vacation in Bali and she said, "You wouldn't believe this. There was a guy there who I had just happened to meet from Sydney and when he found out I was with ResMed, he said, 'Oh my God. I've got a ResMed device, and I've got it with me.' He said, 'I want to tell you, I was on multiple medications to control my blood pressure. I got diagnosed. I got treated, and within three days, my blood pressure was normalized.'" That is not an uncommon story. It improves quality of life. It stops disease progression, and in some cases actually reverses it, like with heart failure and things like this. We've had patients diagnosed with heart failure that have actually been declared free of it after treatment with our Adaptive Servo-Ventilator. The third thing is it saves money, inpatient, outpatient costs. So it is the Holy Grail, and I'm just working on a white paper now to prove that where we're looking, in fact, globally. There are so many anecdotes of, "Thank you for saving my life." I mean I've given up collecting testimonials. I couldn't jump over them. It is a marathon and we are just lacing our shoes. The best thing, [as Andy Grove once said], is to get into a big space early, a big accessible marketplace. Your question of how do we penetrate? There were three companies in the space. There was Respironics, Healthdyne, and ourselves. They'd done a lot of the groundwork, so we initially said, "We'll target the customers that they're already selling to." We had some features that were better, slightly quieter, slightly smaller, that sort of thing. Then you've really got to build the market yourself. What we did is we actually contracted with Respironics, [who actually bought Healthdyne and were in turn bought themselves by Philips], to get the word out. There was a communications company in Boston called Schwartz Communications. We were spending about $250,000 a piece, so anything, car crashes, planes overflowing airports, whatever, bullet train crashes, [there was a very high likelihood] the guy's got sleep apnea. Put him on treatment, and he's fine, etcetera, etcetera. We kept getting stories out into USA Today and the Wall Street Journal and all that sort of stuff. We don't do it anymore because the awareness, [even on the part of primary care physicians, has grown immeasurably]. There is still a great deal of ignorance, but the ignorance is connecting the signs and the symptoms of untreated SDB with concomitant morbidities and that this is the big problem. Physicians are treating the symptoms rather than the cause. That's the big challenge now to get the word out. You say, how can it take this long? If you think about it, it's like the triumvirate of health, which everybody knows a little bit about nutrition, even in the failing K through 12 idiocy that they have here, which they call a school system in California; wrecked by the California Teachers Association. Even these poorly taught kids know that it's good to have a high fiber and a low-fat diet. And people are aware that physical activity is good. Physical fitness is even better, but if you don't sleep healthy, and that's the other part, you can’t be healthy. We spend roughly a third of our lives sleeping. If your sleep is not healthy, you cannot achieve proper health. It's very, very clear. You say, "Well, how come it has taken so long?" People don't get observed while they're sleeping by in large. They do now, but for years it was like, "We'll see you in the morning." What they should have said, "See you in the morning if you get there, if you make it." [Laughs] I mean that's literally the way it is. I mean literally your doctor would say, "Well, listen. You get a good night's rest, and we'll see you in the morning." That was it. They didn't have anybody work through the night. Nobody sort of thought, "Gee, we ought to see what's happening in this guy during the night." It just wasn't studied, and modern-day sleep medicine started in 1969 at Stanford. That's where Bill Dement and Christian Guilleminault started with polysomnography, which of course is a silly system. I mean it's a research tool that became the gold standard because it put gold in the physician's pocket. That's why. It's a very bad way to diagnose. You're in a foreign environment. You're not doing your usual bed preparation that you do at home or the routine, if you like. You're not in your own bed, so lots of people stay awake, and they get lousy results. It's the gold standard and it's called the gold standard because it puts gold in the physician's pocket. Nice game in the system.
CARUSO: : As you know, part of this project is trying to get a sense of the San Diego area, and if there were things unique to San Diego that in some ways contribute to the development of new companies? Were there relationships to other people in the area, relationships to the university? Were there groups of entrepreneurs getting together on a regular basis to chat about being entrepreneurs? Was there something about San Diego that was helping to contribute to the development of ResMed?
FARRELL: : I wouldn't say in ResMed's case it was a direct impact upon us. We are here through serendipity. Medtronic happened to have a branch down here, and they said, "We want you to work with these guys," and then we just, when we folded up relationship or tent with them, we just, as I said, moved across the street. If you look at San Diego, it's a hot bed for a life sciences. I mean you've got the Salk Institute. Sir Francis Crick was there and people like Roger Guillemin. They've got a couple of Nobel Laureates. You've got the Scripps Research Institute; they have got umpteeny-ump members of the National Academy of Sciences, probably one of the best research institutes for chemistry of the human body, human biology. Then you've got the Sanford Burnham. Then you've got UCSD and you've also got SDSU and USD, but the research intensity at UC San Diego is obviously far, far more advanced than the other two campuses. They're in La Jolla and you've got the Mesa there. You have Novartis and J&J and Pfizer and so forth. You've got the big multi-nationals, if you like, pharma guys who are working with the basic researchers at Salk and TSRI, and the Burnham and so forth. Then you've got CONNECT, which was part of the university. It was split off from UCSD, but this is connecting scientists with bankers and lawyers and VCs. Then you've got the CONNECT Program also administers the MIT Enterprise Forum. There are quite a few opportunities to network. The Rady Business School, Ernest Rady gave a fair amount of money to UCSD to start the school some years ago. It's ten years old now. You've got a lot of Ph.D. scientists who want to be a bit more business aware and so they're taking these flex-MBAs. You've got a good quality of student within the Rady School, and it's making a very good name for itself. Plus, you've got the Von Liebig Center on the campus. UCSD is the biggest engineering school in California with 8,000 students. They've got 2,000 doctoral and masters students and 6,000 undergrads. It's a big school. It's a third of the campus basically is engineering. Then you've got a very good medical school. I mean, very good medical school. Then you've got the School of Pharmacy, and then the Shiley Eye Center. Plus, of course, you've got Scripps and Sharp Hospitals, Scripps for Memorial, Scripps Green. It's a critical mass. You've got 500 companies roughly of which 350 are a biotech and about 150 med tech.
CARUSO: : As ResMed started to grow, where were you getting people from? I mean I assume you were increasing the number of engineers, the researchers. Where were you pulling people from? Was it from the area or from other biotech places in the area, or was it just word of mouth? I know you have relationships with MIT, obviously with Washington.
FARRELL: : Yes, we have never had a problem recruiting. That is we advertise. One of the easy parts is that people move here, despite the dysfunctional government we have and the high taxes, they tend to say, "This is not a bad place to live," and so if people lose their jobs, they don't say, "I can't wait to get back to Columbus, Ohio." It's a good area to recruit because it's easy to attract people into here. Even though housing is expensive, but they've got good private schools here. UCSD is ranked easily in the top 20 in the world. As far as the UC system is, you've got Berkeley, UCLA, and UCSD. Yes, it's right on the Mexican border. I mean it's an attractive place to live even though the taxes stink and so forth. A real critical mass of interaction. The MIT Enterprise Forum had a bit to do with that; very active administered by CONNECT. Then you've got the head office here of Biocom.
CARUSO: : Just a couple of other questions. I know I've taken up a lot of your time.
FARRELL: : Oh, that's all right.
CARUSO: : Can you tell me a little bit about the San Diego Entrepreneur of the Year Award that you received in 1998?
FARRELL: : Yes. The Ernst & Young, I mean it's a great moniker for them, the Entrepreneur of the Year, and of course they've spread it worldwide. I guess I was approached in 1997, early 1997. Somebody said, "You really need to have somebody put in an application, etcetera." In 1997, got into the finals and disappointingly – in fact, the company that won blew up later on. [Laughs] The next year, threw in an application again and we won it. Then a couple of years later, they said, "Listen, you should throw in your application." We kept executing and hitting the numbers. Then in 2005, I won at the national level. Didn't win the whole thing. I think somebody from Home Depot or the banks maybe. Well, Home Depot is a little bigger. That was good. That was held out at Palm Desert.
CARUSO: : You've also been elected to the National Academy of Engineering. When was that?
FARRELL: : 2012.
CARUSO: : 2012. Did you know about that in advance?
FARRELL: : No. You're not supposed to.
CARUSO: : Right. Well, you're not supposed to, but sometimes people talk.
FARRELL: : I mean it's not something that happens very quickly. The application probably went in into 2010, but it wasn't me that put it in. In fact, it was the Dean of Engineering. I was still on the Jacobs School of Engineering Advisory Board. We'd taken students, biomedical engineering students, and they've got a good program at UCSD. We took some kids here. Then we sent three to Sydney. I had a bit to do with the dean. He said, "The National Academy of Engineering, they're trying to get more non-academics," but he said, "You have been an academic." There are only about 2,100 members I think. What they do is they then get a short list, and they send it out to all the members. They said, "Do you think this guy is a hyper-headed monster or whatever?" I think they're actively trying to recruit more people from industry. I mean it's a bit of a buzz. It's not bad. The thing I like about it is that it's part of the original National Academy, which Abraham Lincoln signed in 1863. That's kind of a buzz. Although the National Academy of Engineering in Phoenix, I think that started in the '60s. I believe, interestingly enough, the Institute of Medicine, which is part of the National Academies – and why would you call it the Institute of Medicine, I have no idea. It's now being changed to the National Academy of Medicine.
CARUSO: : When was the Institute of Medicine – do you know when it was founded?
FARRELL: : I don't. I'm pretty sure it was after the National Academy of Engineering. That was in the early '60s. I've got a feeling it's in the '70s. I mean I can check it out on the web.
CARUSO: : I was just wondering, just trying to think.
FARRELL: : One of the members told me – I was playing golf with him, Ed Holmes, who was the former dean of medicine at UCSD, who is now working for the Singaporean Government; Ed told me that it was only a matter of waiting it out, that they'd voted to change the name to the National Academy of Medicine, and why not?
CARUSO: : Yes, makes sense. I only have one or two other questions.
FARRELL: : Yes. Dave, I don't know how you can keep awake. [Laughs]
CARUSO: : What are the responsibilities that you have as the chairman of the Center for Innovation and Entrepreneurship? Also, I know you're on the Advisory Board. I think you're still on the Advisory Board for the Rady Business School as well as the Jacobs Engineering School.
FARRELL: : Yes.
CARUSO: : What do you do in those capacities?
FARRELL: : I mean they are all nonprofits, so you do what you can, when you can. I mean there will be times where Bob Sullivan, the Dean of the Rady School will say, "Gee, I really need you at this meeting because Ernest is there, Ernest who wrote the original check, and there are some very important strategic things we want to split off from UCSD and like UCLA, the Anderson School did." I travel a lot, and can't always be there. I went to the last meeting of the Jacobs Schools of Engineering. Partly, these Advisory Boards are help with fundraising. Also, it's a way for the deans, in particular, to get feedback from people out in the community who are hiring their students, and what do you like? What don't you like, etcetera? What would you like to see improved, whatever? Or, here is what we're doing. Do you think we're drinking our bathwater? A lot of it is that sort of thing. It's very hard. Boards–probably like boards for companies–they're not meant to be operational. You can't be operational. How can I pick up enough to know what the hell is going on with 8,000 students and however many hundreds of staff they've got? But it's strategic. You guys ought to be thinking about doing this sort of things. Why don't you think about a degree in biomedical engineering where you get a combined MBA, biomedical engineering degree, like an Enterprise biomedical engineering Enterprise program? The Center for Engineering and Entrepreneurship, I see that role, it's really how do we encourage kids to get into entrepreneurial activity where innovation happens? All I can do is say, "Here's where I think the elements are and occasionally give a talk there." My view is very clear on this stuff. In fact, I'm giving a talk on innovation, entrepreneurship, and leadership tomorrow at UCSD to the Engineering students and some of the staff. To me, entrepreneurship, I mean people talk about risk-taking. It's got nothing to do–well, everything got to do with risk. You want to minimize it, but people don't do entrepreneurial stuff because they think it's a big risk. They're doing it because it's a big opportunity. They see it and you have a template and you look at it and say, "This is a huge potential market, and I think we can drive it, and I think we can get there." You do it because it's opportunity-seeking. Innovation only occurs when somebody writes a check. If it's not anointed by the economy, it doesn't exist. It can be very creative. It can be very imaginative. You have to deliver the idea into the marketplace to solve a problem, a process, a product, and so on. Then you've got generally a component of that, and that's why engineers make really the best entrepreneurs because engineers are taught that design matters, that systems are composed of parts, the parts are all interactive, and there are all sorts of trade-offs. There's no perfection there. You do the best you can, and then you evolve it. You don't wait to have the product with every single base covered because there will be another technology coming in or another way of doing things. You get it out there, and then you say, "Oh my God, yeah, that can be model two, three, four, five." Then, generally, technology is the enabler for a lot of this stuff. Technology, as I've said for years, it's the turbo charge of the future. It always has been. It always will be. Technology invariably comes before the science. Then the science comes in to say, "Oh my God, you know how that works?" Then you have the technology building on the science. It keeps building on itself. Science follows, and then the technology moves ahead because of the science and so forth. If we apply technology to something which we already know, we call it productivity. You are doing it better and smarter and so forth. If we apply technology to something that's completely new and hadn't been delivered into the marketplace before, it's called innovation. I'm very clear on that, and so I became chairman of the Innovation and Entrepreneurship Center because the dean of Engineering, whom I knew quite well, an ex-McKinsey guy at the University of New South Wales asked me to give some money. Then he said, "Oh, you should chair it." I said, "Well, hell, I'm living on the moon compared to–” He said, "Nah, that's all right." He said, "We'll have meetings when you can be here. You're back here three, four times a year." That was how it started, and so they'd run the meetings. Now I've said, "That's ridiculous." In fact, I ought to sit down as chairman because he ended up with some other poor mug because I'd get there and I've got to sit through four hours of updates and so on and so forth. I guess, it's chairman by default. They're just keeping me hanging in there. They've got a thing called the
FARRELL: Prize, but that's important so the kids are competing for prizes. That's why the X Prize Foundation kind of works. You have this – what do they call them – big hairy unachievable goals and moonshot, private, get it up there. Tens of millions of dollars get spent for a ten million dollar prize.
CARUSO: : Yes. People outspend the actual worth of the prize, yes.
FARRELL: : Oh, by a factor of ten. They end up developing all sorts of new ideas and so forth. I've just recently put some money in, and I was up at some X Prize thing. I was on my way to London, and ran into this guy who is an entrepreneur, a true entrepreneur, Indian guy who is part of the X Prize thing. He said, "You should invest in this Moon Express." I said, "Moon Express? I mean what the heck?" He said, "Oh, we're gonna mine, asteroids have lots of platinum and –
CARUSO: : Minerals.
FARRELL: : –minerals and so forth. We're gonna mine the moon." I said, "Eh?" Anyway, they've got a contract with NASA or something, so I said, "Okay, I'll put a few shekels in." [Laughs] Then I went off and ended up a few days later on Number 10 Downing Street. I mean talk about funny, like right up a Terranea Resort up in Palos Verdes, and then I take off to London and a couple of days later, I'm sitting with Sir Martin Sorrell, WPP. Then the head of –I think, it's Keith Williams, the head of British Airways, BA. Then we go on Number 10 Downing Street, and walking up the stairs and all the–I met Maggie Thatcher, and I just had a lot of time for her. She was a true example of leadership and its moral courage. There were five things, and it was Paul Johnson who was at Oxford with her. She did chemistry at Oxford, and so she had a technical background. It wasn't perfect, but this guy Paul Johnson who is a historian, who graduated at the same time, and then became an advisor to her. He said, "I was able to see leadership firsthand, and it was Maggie Thatcher." He said, "The first thing is moral courage. You've got to do the right thing, not the thing that the polls tell you is gonna be popular, etcetera, right thing, and have the courage to continue to do it." The second thing was judgment, which is not the same as IQ. It's being able to look at a thing and say, "You know what? We don't have all the data, but this is what we need to do." The third thing is selecting those things which you have to get right, like if you like Vilfredo Pareto, the Italian economist, that 20 percent of the people earn 80 percent of the income, which became the 80/20 Rule." See, one of the things we have to get right, and there's a whole bunch of things, it'd be nice if we did it, but they're not critical to us doing the job we need to do. The fourth thing was having the determination and the persistence that once you selected those things, to finish the goddamn job. The fifth thing, and you'll never be able to pick it now is ask people, say, "What's the fifth thing of leadership?" I could give most people 50 shots at it, and they'd never get it. Having a sense of humor. I mean isn't that true? I mean one way to put it is, look, life – nobody's going to get out of life alive, so you've got to laugh at it. In a way, and if you don't have a sense of humor, I mean you take everything so seriously, how do you get the job done?
CARUSO: : [Laughs] I think you may have answered this, so I just have two things left. One is a question about the display downstairs, and the last thing is actually just sort of turning it over to you if there's anything I haven't covered that you wanted to talk about, you're welcome to. I was curious to know why you have ResMed devices on display downstairs. I can kind of guess at the answer to it, but I just wanted to–
FARRELL: : It's just really displaying how things evolve. You think you've got a problem solved, and there's no way we're gonna – you've got the noise at the level and the comfort. I've just talked to all these people and they just are doing so well on treatment. Three years later, you look back and you say, "God, isn't it amazing. How could we have –?" When the very first CPAP device – I remember we talked to some researchers who were motor experts, and we said, "Listen, we need to improve this thing." All you're doing is taking room temperature air, and you're pressurizing it, and we'll put a million patients on treatment this year. We sell basically 700,000 masks a month and 200,000 devices. That's not bad. We think this might be a business. We're solving problems. We're treating diabetes. We're treating hypertension. We're treating GERD. It causes reflux. We're treating impotence because if you don't get slow-wave sleep, you don't get testosterone produced. We're treating growth in kids because if you don't get slow-wave sleep, you don't get somatotropin or growth hormone produced and so on, and depression. Seventy percent of major depressive disorders have sleep-disorder breathing. You treat it and the depression is gone. We get every single medical silo, every single one of them. Sleep–if you don't sleep healthy, you cannot be healthy. It's that simple. If you have one lousy night, you feel like shit. You have a lousy night every single night–
CARUSO: : Impossible to function.
FARRELL: : Bingo, and you become depressed. Dreadfully depressed. Anyway, so the display. How could anybody wear this? But the very first device we had this, and it was actually a metal box. People would breathe in, and so I said, "The setting is 10." Ten is about the average–centimeter is like 4 inches of water, which as you'll remember from your high school chemistry is 1 percent of atmospheric pressure. How does it work? The bottom line is, and this is when Colin was explaining it to me, this fatal flaw first test. I said, "The pressure is 10 centimeters of water?" So you put it in–atmospheric pressure is about 1,000 centimeters of water. It's 1 percent. So the only way you can get injured by a CPAP machine is to pick the god damn thing up and smash somebody over the head with it. If you're in a medical business, that's not bad. It's not life support, but it is. It's chronic life support. Anyway, so I remember this first device you breathe in, the pressure goes to 6. You breathe out, it goes to 13. We're almost blowing people's ears out. Now, you cannot even measure. We go to these motor manufacturers, and they've designed this beautiful motor for it, and you couldn't breathe into it or you'd blow your eardrums out. It was so efficient that it had maximum resistance. It was blowing all out for you. What you really wanted to do it was to have a lousy motor where you could spit in it because when you're exhaling, you almost want it to suck it back. The swings were 6 to 7 centimeters of water and now they're about 0.2 cm of water. We've designed it now where we have these terribly inefficient motors and that's exactly what you want. We didn't understand it, but we've evolved the things. Now, we've just released 3 brilliant masks, and we're backordered on all of them because they're so much quieter, so much lighter, and so much more comfortable.
CARUSO: : Should we stop?
FARRELL: : I think, yes.
[END OF INTERVIEW]
END OF INTERVIEW