The Cochlear Story

Introduction

A switch is turned on and a little girl’s face lights up with pure joy. Catapulted out of her world of silence, she reacts with excitement. She hears her mother’s voice for the first time in her young life and her mother cries. The clinician’s eyes moisten and a tear gently rolls down his cheek.

The business of bringing sound to over 160 000 people around the world is full of emotion-packed moments like this. But it is a complex business and from initial idea to current reality was nearly 50 years in the making. As always, these great realities start from one person’s journey. In this case it could be argued that it started with two people refusing to stay in the comfort zone of current reality and challenging the unknown to do what was thought to be impossible, especially in Australia. But had the story been left to these two extraordinary people, it would have been short. A number of other leaders with very different personalities that underpinned essential leadership styles and skill sets, took the baton and delivered the organisation, its people and its technology to the next level of development. As the baton-passing continued, the number of people catapulted out of their silent world grew exponentially. The amazing benefits that the technology has brought to the recipients, their families, their friends and their communities continue to drive the company and those who work to successfully bring sound to the severely and profoundly deaf.

Australians have long been recognised for their ground-breaking medical research and there are numerous Nobel Prizes as evidence. But as so many commentators have lamented, Australians don’t seem to be able to commercialise these outstanding research achievements. The loss to the country’s productivity is obvious and well documented. Why is this so? Is it just that Australian entrepreneurs don’t have the backbone to take on the challenge, or are there barriers to such development that are too big to overcome? Is Australia doomed to stay in the upstream, research end of the business cycle? This book provides the evidence that the news is not necessarily negative. It tells the story of a number of Australians who have together made an outstanding success of commercialising an Australian medical invention on a global scale. Although there are literally thousands of people who have contributed to the successful process, it could be argued that there was a unique series of leadership qualities that led the company’s development at critical stages of its growth cycle. The identification of those stages and the leadership that drove each stage demonstrates what it takes to grow a successful Australian medical device company in the global market. It also provides an excellent model of the possible barriers that can be expected by people proposing similar commercialisation journeys.

The story in these pages focuses on the leaders of the various stages of the company’s journey. Graeme Clark was and continues to be a brilliant surgeon and researcher but he certainly operated outside the mould of an academic and respected surgeon. Unlike many researchers, he lobbied government and interest groups for critical funding while managing the disdain of colleagues and students, to achieve the dream. He also understood the need to make the difficult decision to hand over the reins to someone who had experience in the challenges of commercialisation. Many scientific entrepreneurs feel that because they have driven the research, achieved budgetary outcomes in the lab and led a team of researchers they are qualified to lead the commercialisation process. It is their baby, their invention and it is hard to let it go. Clark was not one of those but he did nearly make a critical mistake – he first offered his prototype to an overseas company for possible commercialisation. Fortunately for Australia, it turned him down. If the overseas company had accepted his offer, another Australian story would have been lost to history. It was close.

Clark’s commercialisation partner, Paul Trainor, was an outstanding business entrepreneur driven by a vision that he understood very well – how to build global technology platforms in the highly regulated and protectionist country which was Australia in the 1960s. His company, Nucleus, was built on the concept of a central cell nurturing a number of orbiting cells of medical device companies. It was unique at the time and served the industry well. Trainor trawled through university research to pick the gems of scientific discovery. He lobbied governments mercilessly and built his empire on government grants but always with an understanding of the financial essentials that would drive each of the growing number of orbiting companies under the Nucleus umbrella. He often manipulated his staff when it was not necessary, believing that top-grade people work better in tense competitive environments. His strategies, however they were viewed, produced outstanding achievements.

Without Clark and Trainor there would be no invention to commercialise, but without champions in government it is unlikely that any innovation would have taken place. It is all very well to invent in the lab but it is expensive to take that invention to commercial success, to innovate. Champions in government are the third critical element in a successful commercialisation partnership. It is not an exaggeration to say that without visionary champions in the government, there would be no Cochlear Ltd today. At least, not one that is proudly Australian. Commercial development, global market studies, clinical trials and the establishment of global subsidiaries are too costly for a small technology company when it is not earning any income. There were many in government who said it was imprudent to spend taxpayers’ money on science fiction, and opposed financial support for the invention. Tens of thousands of people who have escaped their world of silence are extremely grateful to the government visionaries who fought in Cabinet for the initial financial support that would make their hearing world possible.

Engineers and the ear, nose and throat (ENT) surgeons are also critical elements in this story. The highest level of financial support in the world would not be any use without engineers who could create a manufacturable product and without surgeons who could drill into a patient’s skull – a patient who may be only two years old – and place the device correctly. The engineers and surgeons championed this innovative industry. Peers and colleagues condemned the idea and said that it was impossible to restore hearing to the profoundly deaf. To this day, some in the deaf community continue to protest against such intervention despite the mountains of evidence of life-changing experiences.

The difference between the groups of engineers and surgeons was, however, substantial. Although the engineers agreed that the challenges were enormous, the drive to overcome the engineering challenges was like having fun and being paid for it. For surgeons the challenge was significantly greater. Surgeons in Australia, the USA, Europe and Japan placed their reputations and careers on the line. If they were wrong, their reputations would be destroyed along with their careers and incomes. Some truly brave champions were willing to go out on this kind of limb. They were not avaricious. They were not driven by the dollar; the risk did not provide a strong financial return. But they were driven to make a difference in the lives of implant recipients and their families and to ensure that the industry survived. And survive it has, with resounding success.

Trainor understood the need to pass the baton. But although he had little choice, the baton was passed to the wrong team. Therein lies a critical lesson and perhaps one that identifies the real reason why so many Australian companies do not succeed in the commercialisation process. With Trainor gone, the focus changed from the medical to the economic with hazardous consequences. Trainor’s umbrella group Nucleus did not survive the change of direction and all the companies under its control were sold or disbanded, except one. One company in the group not only survived but thrived. Cochlear Ltd, under a new leader, Catherine Livingstone, successfully went out on its own. It listed on the stock market with a successful initial public offering, and demonstrated to the world that it is possible for an Australian medical company to become an international leader. Cochlear Ltd is now in the very capable care of one of Trainor’s protégés, Chris Roberts. By all accounts, despite a recent product recall, its future remains promising.

Situated below the leadership level are the hundreds, indeed thousands of engineers, surgeons, clinicians, audiologists, marketing experts, lawyers, manufacturing entrepreneurs and financial experts without whom the best leadership in the world would not survive. Where would you put someone like Amitava Sen, who was on the phone till 3am trying to order a critical part that was desperately needed? He is not on the list of heroes, but he was a hero to the person who was sweating on the needed part. There were many situations where people went the extra mile to make things happen. There are thousands of people who should be included in stories like this one, but for practical reasons can’t be. Within each chapter there are many stories. It would be excellent to see some of those stories emerge while memories can still recall them.

My thanks go to David Money and Jim Patrick for their assistance and support over the many years required to bring this story to these pages. Peter Seligman, my technological co-author, also deserves thanks for bringing the project back to life after I abandoned it. Without such support there would be no story to tell. I am grateful for the time taken by many people who contributed their time and patience in interviews, making corrections and additions that hopefully produced as accurate a picture of events as distant memories make possible. There are too many people to acknowledge here and many are listed in the appendix. Any misinterpretations are my responsibility.

Mostly this book owes a great deal to Mike Hirshorn, who sadly passed away on 18 November 2011. Tragically, he died without seeing the final product. He was always dedicated to the cochlear project and was a major force behind opening up markets for the implant around the world.

Hirshorn was a most humble high-flyer with a dry sense of humour. His verbal style was non-threatening and gently persuasive. He cared about the fate of people and would rather hear other people’s stories than dine out on the details of his own. He was determined to have this story written to record and acknowledge the people who contributed to Cochlear Pty Ltd’s success. He also hoped that it would be an inspiration and a guide to scientists and engineers who may want to follow a similar path. It is very likely that without his persuasion, this story about the people who drove the commercial success of the cochlear project would still not have been written.

The extraordinary number of people who attended Mike’s funeral attested to the difference he made to many people’s lives in his quite unconventional but determined way. He will always be sorely missed.

VB

CHAPTER

1.

The beginning: a visionary entrepreneur, Paul Trainor

Paul Trainor was not a happy man as he entered the public gallery of Australia’s Parliament House. The public gallery with its dark green leather, dark wooden panels and security guard at the door can be an intimidating place but Trainor was not one to be easily intimidated. He had spent his life taking risks and there was no way he was not going to be heard on this occasion. The public gallery of Parliament House is situated above the chamber housing the House of Representatives. Members of the general public and the press are able to hear and observe the elected representatives dealing with the nation’s business, but on no account do they participate in the discussion. They are expected to sit in silence. Guards are at the door to ensure that protocol is observed. They are also there to eject any member of the public who does not behave appropriately and they have done so many times.

The year was 1976 and one of Trainor’s roles was to serve on the board of the Industrial Research and Development Corporation (IR&DC) for the federal government. His dissatisfaction on this occasion was based on information provided to him, as a board member, that anyone without university qualifications was ineligible for IR&DC grants. Trainor knew, and his ‘bitter bloody experience’ (BBE, as he called it) had shown, that innovators were not necessarily academics. He was very much aware that it was not academic qualifications that produced blue-sky research discoveries. Trainor had failed engineering and dropped out of economics at the University of Sydney but had gone on to succeed in running a multi-national company. He was a perfect example of the philosophy that discoveries did not depend on academic qualifications, and it urged him to attend the parliamentary sitting.

At the time the Liberal Party was in power and Malcolm Fraser, having won a double dissolution of the Houses of Parliament, was Prime Minister. His Treasurer was John Howard who, 20 years later, would lead the Liberal Party and become Australia’s second longest-serving Prime Minister. John Button sat on the Labor Party side of the House. His education, like Trainor’s, was one of BBE. So was the education of many others who were present.

Hushed silences meant little to someone who had left a secure job with his father in one of Australia’s leading medical device companies, where he was a director with a good income, to set up his own business in a tin shed. Trainor stood up to speak, much to the alarm of the guard who insisted that he sit down and be quiet. The disturbance caught Howard’s eye; on seeing who it was he said, ‘Hello Paul.’

A few others looked up and waved. Without hesitation the intruder said, ‘There’s an issue I want to raise.’ Howard turned to the Speaker of the House and asked, ‘Can this gentleman say a few words? He is quite a sensible man.’ Trainor beamed. He took the comment as a compliment and explained his concern that most developments around the world had been achieved by people who were not necessarily academics. Indeed, in his view most activities were achieved by non-academically qualified people. Trainor had come prepared and gave example after example to prove his point. In a very short time he was getting nods from both the Labor and the Liberal Coalition groups, at which point he ended his speech. Then, much to the relief of the guard at the door, he sat down. It was no surprise to those who knew Trainor that the bureaucrats subsequently changed the wording of the IR&DC Grants Act so that people who were not necessarily academically qualified could receive grants if their cases were eligible.

Trainor was a Sydney boy educated at Marist Brothers College and at St Ignatius, Riverview, a beautiful Sydney suburb situated on the edge of the Parramatta River. He excelled at team sports and was captain of cricket and football, but scholastically he did not achieve so well. He began a degree in engineering, but he did not complete it. As his performance in Parliament House demonstrated, academic setbacks did not constitute impediments to his career. By the 1980s he was invited to lecture and debate at the University of Sydney on international law, world patents and the value of intellectual property, a situation which always gave him a buzz. Such contradictions were not unusual for Trainor. He was not intimidated by the unknown. He, like the many he would eventually lead, loved challenges, especially by what initially appeared to be impossible.

As a teenager during World War II Trainor went to work with his father, who was originally an optician and who later became skilled in the field of X-rays and microscopic analysis. When he left school he worked in the store in X-ray electro-medical service and attended lectures at university at night. By the age of 30 Trainor was a senior manager in one of Australia’s largest suppliers of X-ray, electro-medical, surgical and scientific instruments, Watson Victor Ltd, as well as a director of the public company and its subsidiaries. He was working for a great company with good people, earning an excellent income, but the entrepreneurial spirit directed that he should go out and do his own thing, in his own way. The 20 years spent with his father in the company had given him an excellent education and established the BBE that underpinned and guided his actions towards many of his future achievements in the difficult world he was about to enter.

Throughout Trainor’s mid 30s he had kept check of his strengths and weaknesses, calling it ‘walking the pebbled beach’. He would go away alone to review the previous year’s list of good and bad points to see what he had done to reduce the bad and enhance the good. In 1965, on a pebble beach, aged 38 and with a wife and three children to support, he decided that the time had come to enhance the future and take a risk. With his wife’s approval, he sold their prestigious home and moved into a rented house next to the railway tracks. He paid off the mortgage and with the balance started a company aimed at scientific health care.

In the 1960s, Australia’s manufacturing base was focused on import substitution, protected from world competition through tariff protection and quota restrictions. Jack McEwen, leader and guardian of the Country Party’s best interests, was easily able to drive the concept of high tariff barriers in an environment that feared the spread of communism and potential overwhelming Asian migration from the north. It was an atmosphere that promoted the concept of national self-sufficiency and encouraged highly unlikely industries, such as rice- and cotton-growing that needed huge amounts of water, to become established in a country that suffered from prolonged droughts. Subsidies and other forms of assistance and protection ensured the sustainability of such industries but at a cost that can be measured in opportunity, competitiveness and financial terms. In world parity terms, therefore, Australia was an expensive location. A fixed exchange rate ensured that there would be little change to that situation for some time.

Making international sales was always a difficult challenge. In today’s business environment the extent of the challenge confronting Trainor in 1965 is easily underestimated. The ‘tyranny of distance’ really meant something. It no doubt contributed to the nationalistic, post-war Australian perspective and made overseas communication cumbersome and expensive. The telex machine was the most advanced form of communication technology and any organisation with critical communication requirements was confronted with escalating costs. Anyone who dreamed of creating an internationally significant medical device company based in a country with uncompetitive protectionist policies, no efficient communication systems and a distrust of the foreign, would surely have to be considered foolhardy. An entrepreneurial perspective that saw beyond what was and believed in what could be was a major asset that Trainor brought to his new business. In the next 25 years he kept up with world developments in the high-tech industry – an industry which involves R&D spend rates many times higher than the rates other Australian manufacturers could handle. He began by spending 7% of turnover on R&D when the manufacturing Australian average was 1%. In 1983 he spent $2 million just on travel expenses – more than most government departments would spend on such expenses – and his phone and telex bill reached $1000 per employee. Foolhardy he might have seemed to the casual observer, but there were vision, tenacity and some interesting people skills behind his endeavour.

His business concept went against the trend of the day. He had no faith in the large bureaucratic structures which were then very much the organisational fashion. He favoured separate companies where accountability and responsibility could reside with those executing strategy. The name of his organisation, Nucleus, reflected the concept of a central nucleus, surrounded by cells of activity. These cells would eventually become separate companies, developing markets in a wide range of medical products including diagnostic ultrasound machines, pacemakers, kidney dialysis machines and ultimately cochlear implants, all operating under the Nucleus umbrella.

Having registered the company, Trainor set about devising a positive cash flow and selecting what he called ‘A-grade’ people who could help develop a profitable scientific service company. To gain cash flow, he entered into service contracts with hospitals and universities to service their sophisticated instrumentation on the basis of a year’s contract paid six months ahead, balance on monthly payment. Within weeks of forming Nucleus he travelled to the USA and Japan to establish agencies to meet Australian demand. The initiative clearly demonstrated experience in this industry sector. From the very beginning of operations, Nucleus was focusing on global markets.

Trainor’s experience had taught him to negotiate technical and price-sensitive issues as well as terms of payment. He insisted that payment was always 90 days after sight of bills of loading. Such a strategy gave the company time to clear the goods, install the equipment and be paid. Australians love someone who is trying to have a go, and he found that many institutional customers were supportive and some paid before the due date. Some senior government department officials trusted him to the point of saying, ‘When you finish up here, your cheque is in the second drawer. I’m off to a meeting.’ One time, a reverend mother in Perth gave a substantial order for equipment, involving a very large sum of money. But the shipment was still on the water, it would be weeks before it arrived and at least six weeks before it was installed. This was a particularly stressful time when cash burn was high and there was little in the bank to pay the wages; the team at Nucleus was facing a bleak Christmas with no pay for a month. Whether due to Trainor’s negotiation skills, his charm or the Catholic connection, the reverend mother agreed to an immediate 60% prepayment. She said, ‘Paul, may God bless you and have a happy Christmas.’ Phew! In the beginning, there were many such days. At Nucleus, the families knew that they lived on a cliff’s edge. But that was exactly the kind of challenging environment within which entrepreneurs thrive and the A-grade people Trainor chose to work for him were all entrepreneurial in their own way.

He particularly liked the unconventional, being more a lateral thinker than most. He didn’t just think outside the square, he thought beyond the horizon. At a lunch on the Mediterranean shores, Trainor pondered possibilities with Chris Roberts who was then Product Manager of Domedica and the Telectronics Greek distributor. Domedica’s principal activity was importing and distributing artificial kidneys which are used in dialysis machines. Domedica had contractual links with a major overseas supplier of those products and acted as the supplier’s distributor for Australia and New Zealand. Although Domedica was initially an importer, the mission was always to think of ways to manufacture and export from Australia. Trainor proposed that they export dialysis blood lines (the manufacturing of which had just been established in Sydney) to Greece. The economics of traditional manufacture and export were not favourable but, in an idyllic setting by the sparkling waters of the Mediterranean, Trainor and Roberts sketched a plan to convert shipping containers into portable manufacturing units that could be sent by boat around the world, docking in certain countries, manufacturing a year’s supply then moving on to the next location. The concept of converting a jet airliner to a pacemaker manufacturing facility, which could be flown around the world thereby avoiding local import duties in the respective countries, was also a serious idea – but only for the brave. This was unconventional thinking on any scale. Although neither of these ideas was implemented, the thoughts generated other ideas that did lead to implementation and success.

Trainor was good at the big picture, but his key insight was choosing people better than himself in specialty areas such as science and accounting. He saw A-grade people as those with a strong ethical sense and a strong character. An individualist, he was tolerant of other individualists, preferring people like himself that responded to a challenge. He understood that the vision of taking Australian ingenuity to global markets was critically dependent on strong foundations in research and development. This meant finding people who often didn’t fit very easily into conventional environments, and letting them flourish in truly creative surroundings.

His choice of people, both in Australia and offshore, depended first on good character and second on their skills. He tried to select people who, irrespective of their qualifications, were top-grade, driven by the challenge not by the money. He hoped they would work 13 or 14 hours a