The story behind ResMed‘s (NYSE:RMD) meteoric rise from Baxter spinout to $1.5 billion medical device Goliath is no snore.

Or maybe it is. After all, stopping snoring has paid off pretty nicely for the San Diego-based sleep apnea device company, which has a more than 40% share in the growing market for products to diagnose, treat and manage respiratory disorders.

And while those devices help people rest easy, new CEO Mick Farrell has no intention of letting the company put its investors to sleep. Farrell, who took over the corner office earlier this year, has big plans for ResMed in the chronic disease market.

Hear from Mick Farrell in person at the Big 100 West

MassDevice.com caught up with Farrell recently for a quick one-on-one ahead of his appearance at the MassDevice Big 100 West in Irvine, Calif., Dec. 10, where he’ll be a panelist speaking on the future of chronic diseases.

MassDevice: You’re the 2nd Farrell generation to lead ResMed. What was your reaction when your father, Peter Farrell, told you he was starting a company to combat snoring?

Mick Farrell: When ResMed was founded it was 1989, my father was vice president of Baxter Healthcare in Asia-Pacific and this was 1 of maybe 20 ideas that were in his to-do list. When Baxter was pulling back their R&D to the Midwest, he said, ‘This is an idea that has a lot of potential and I think there’s commercial potential as well."

I was finishing high school and just starting college, so I didn’t really have much of a perspective other than saying, "I can’t believe my father is leaving a Fortune 500 healthcare company to run off with this idea of a reverse vacuum cleaner and a glue-on mask for people’s faces that he thinks is going to stop them from suffocating at night."

But he saw the potential, because there was a huge, undiagnosed patient group. In particular, he’d seen a patient who had worn this device, which was loud and uncomfortable at the time, but it saved this guy’s life, it saved his job and it saved his marriage. Those were 3 things that stuck in my father’s head. He repeated that to me at the time and many times over during the last 24 years.

The fundamentals of improving quality of life, reducing the burden on the healthcare system and potentially changing the progression of chronic diseases are things that are fundamental to the genesis of ResMed.

We consider ourselves a 24-year-old start up. There are 85% of patients that aren’t diagnosed or treated for it and our job is to get out there and find, smaller, quieter, cheaper, more comfortable and easier ways for people to get diagnosed, treated and managed for their respiratory disorders.

MassDevice: That concept of saving someone’s job, their life and their marriage is a pretty good value proposition.

Find out more about the future of treating chronic diseases such as sleep apnea

Farrell: It is, and the only 1 we’ve added onto that is that we’re going to save the healthcare system money, so the healthcare economics proposition adds on to the mortality, quality of life and contribution to society. You’ve now got Adam Smith in addition to all the science.

MassDevice: When ResMed started there was a belief that 2% of adults had sleep apnea. Now, it’s assumed that 24%-25% of adults may have the condition. What’s changed? What role has ResMed played in that evolution?

Farrell: It was about 2%-4% of the population that was thought to have sleep apnea when Terry Young, from the University of Wisconsin, published her original studies.

The 2012-2013 data showed that 26% of adults between 30-70 years old have sleep disorder breathing of some type, primarily obstructive sleep apnea. Over those 20 years, what portion has been ResMed and what has been academia or our competitors is very difficult to weigh out exactly.

If you walk into headquarters here there’s a sign that says, "Our primary competitor is ignorance." This is true today and it was true 20 years ago. Our primary opportunity is to drive education and awareness, primarily in the general public, secondly in physicians and thirdly in the healthcare economics space, with payers/health insurance companies.

We’ve invested in PR firms, non-branded awareness and now some branded awareness with physician groups. I would say that given our investment in it, probably about about 50% of the impact in awareness is driven by ResMed, our actions and our influence with key opinion leaders, whether they’re physician-based, payer-based or in the general community. We’ve reached across the aisle to our competitors for some PR awareness and we work with the National Sleep Foundation, American Sleep Apnea Foundation and the American Academy of Sleep Education – all the groups that drive awareness.

That’s just the U.S. market. We’re in 100 countries around the world and those markets are in different states of development, but we invest very heavily in awareness in France and Japan. We’ve partnered with our primary customer in Japan to advertise on the subway there. This was called "the green pillow approach" and it was a way using a TV personality to drive people’s awareness of sleep apnea, to get them thinking about the diagnosis and treatment.

MassDevice: It has to be a difficult condition to increase awareness about, because the patients themselves aren’t aware of the symptoms.

Farrell: The bed partner is the number 1 source of referrals, because you are unconscious when you are asleep, therefore you don’t witness your own apnea. In fact, by the time you’re awake the fight or flight responses have reacted and you don’t know why you’ve woken up. The micro-arousal’s are so small that you’ve gone from REM stage 3 or 4 to stage 2, which is light sleep, and you don’t even know about it.

In 2013 though, everybody has a smartphone, and now that we have growing awareness of this we have some products and solutions out there where you can plug in devices and monitor your sleep. There are probably 50 different apps that monitor snoring. We have one, many others do. We also have a bedside monitor that can monitor your breathing and we’ll be looking to refresh that over time. These denial eliminators used be just the bed partner, now it’s the digital device. That connectivity to the cloud means we can add connectivity to monitoring your sleep patterns.

MassDevice: What are the signs of sleep apnea?

Farrell: There are many signs, but the most obvious and visceral is snoring, intermittent snoring with cessation of snoring because when you stop snoring, quite often that means you’re suffocating.

The second sign is a witnessed apnium that a bed partner has observed, which is the deep, audible breath that means, "I’ve been suffocating for 10 seconds," and the third is daytime sleepiness – people who fall asleep driving their car home from work, or in front of the television at 5 or 6 o’clock at night versus 9 or 10 o’clock like the rest of us. There are many other signs or symptoms but those are the top 3.

MassDevice: You’re scaring me a little bit.

Farrell: I was on a flight from Hong Kong recently and I was sitting beside an analyst from Deutsche Bank by happenstance.

He was saying to me, "Gosh, you guys are all tapped out, there’s no more patients left. Where is this going?" I couldn’t have planned this any better, because two rows over, directly in our line of sight, a gentlemen sat down perfectly upright. Our takeoff time was 6 p.m. and right after we took off this person spontaneously fell asleep. Then he proceeded to snore and I nudged the analyst and said. "Look right there, if he’s not a patient now he’ll be one in 5 years, because snoring leads to apnea." About 2 minutes later he had an audible apnium, 5 rows of people turned around to look at him and I looked over at the analyst and he said, "My God, did you plant this?"

The point is, there are 40 to 60 million Americans and if you run the math on the 24% to 26% of 30-70 year olds, you can actually get north of that number because you add some of the juveniles and the population that is beyond that. Let’s just say there’s 40 to 60 million Americans, 6 million Americans have been diagnosed and treated, so that’s, at most, 15% penetration. Eighty-five of the opportunity is in front of us and they’re on planes, trains and automobiles. Sadly, sometimes they’re driving them.

MassDevice: How can ResMed help save the healthcare system money?

Farrell: Our opportunity is to show healthcare systems, whether it’s a payer/provider model like Kaiser, or a pure-payer opportunity, or, on the most extreme, with an employer with a sustained workforce, that there’s a return on investment. That if you invest money to diagnose and treat patients for sleep disorder breathing, you’ll actually see a reduction in your total healthcare spend and get your money back in 12 to 24 months and the rest is gravy. So, our job is to drive the clinical angle with physicians and the economic angle with payers.

Every clinical trial we do has a healthcare economics angle to it now. We running a major trial called Serve/HF for heart failure that’s 1,320 patients, all of whom have been recruited in May this year. The patients will stay on for 2 years and mid-2015 we’ll be cracking the code and by late 2015, early 2016 looking at publication in a major journal. That trial has two outcomes. First, mortality, so can we show we save lives. The second is can we show that we reduce hospitalizations and reduce the healthcare burden of these heart failure patients who are frequent fliers at the hospital. I have no question we’re going to show cardiac improvement in function. I’m very confident we’ll get a reduction in hospitalizations in 2 years. I think aiming for mortality reduction in 2 years is aiming for the fences. If we hit that 1, then that’s an incredible unlocked value for ResMed that has a probability of occurring. As I look, that’s the primary story of what we can do with reimbursement.

MassDevice: If you get the outcomes you’re hoping for, what will be the impact?

Farrell: There are 20 million patients globally who suffer from heart failure, 50 to 70% have sleep disorder breathing, so there’s another 10 to 14 million patients, some of the sickest patients on the planet that clog up the ER, ICU and CCU that we can diagnose, treat and manage, keep them out of the hospital longer, keep them in the home longer with their family and friends, which will improve the quality of their life but also reduce the burden on the healthcare system.

Heart failure patients cost between $5,000 to $15,000 per patient per year. One hospitalization can cost up to $15,000 for 1 episode, so the ROI for the system is clear. The ROI for us is you take 14 million patients and multiply it by a good ventilator selling price and you can get the total addressable market. It’s huge and there’s only 1 player fully enrolled in the market in this space. There’s only 2 players in the global space that have ability to play in this space. We’re very excited about the ROI.

We’re also excited about the impact we’ve had on lives. In this past 12 months we’ve sold 7 million mask systems and over 1 million devices on the bedside table. We’ve impacted the lives of 8 million people positively. Our goal is to make that 20 million by 2020, so we change 20 million lives by 2020. We improve healthcare costs and make them feel better and have less co-morbidities and disease progressions.