Dallas-Based Sleep Holdings Sees Big Money in Sleepless Nights

On certain mornings, Roy Mers, who for 30 years has been spearheading multimillion-dollar mergers and acquisitions, arrives at his Dallas office toting bags of brussels sprouts, chard, and kale. “I picked four bushels of squash this weekend,” he says. “We have an acre under intensive cultivation and a greenhouse under construction. I’ve produced watermelons in October.”

Mers, it’s safe to say, grows things. Whether from the earth at his farm near Waxahachie, or from corporate soil ripe for fertilization, he seems to know how to coax bounty from dormant terrain. As the chairman and CEO of Sleep Holdings Inc., a 20-month-old Dallas company that owns and manages sleep disorder diagnostic centers, Mers (pronounced Mirz) is aiming to consolidate a highly fragmented industry into a network of uniformly run practices. And, with an ever-flourishing population of sorry slumberers—more and more people just can’t seem to get a decent night’s rest—the demand for his services seems reliably strong.

“We have all said, ‘Grandpa, Grandpa, get out of that chair and go to bed,” says Sleep Holdings COO Tim Kriske, who helped develop the model for the omnipresent Monarch Dental Corp., a California company that operates offices for individual dentists. “The truth is, he doesn’t want to go to bed because he just can’t sleep.”

About 18 million Americans of all ages suffer from some degree of apnea, a chronic and progressive condition that obstructs breathing during sleep, depriving the body of oxygen, according to the National Heart, Lung, and Blood Institute. Apnea can also increase the incidence of other medical ailments, including high blood pressure, diabetes, and depression. For many people, sleep is anything but a restorative process.

If a person—or all too often, an irritated mate—complains of noise and disruption throughout the night, he or she must go to a physician who will order tests and possibly send him or her to a diagnostic center. These are typically independent operations—most often owned by the technicians who run them—or hospital-based facilities. Nearly 99 percent of patients who are evaluated require some type of treatment, Mers says, from the noninvasive protocol prescribed at his offices to more extreme reconstructive surgeries performed in hospitals. Various industry analysts estimate the number of U.S. sleep labs to be between 3,000 and 3,500, an increase of 33 percent in the past two to three years.

For Mers, 60, who directed acquisitions at Dallas-based Allegiance Telecom and the Robert A. McNeil Corp. in California before joining Sleep Holdings, the business of dreamland, well, kept him up at night. “I was talking to a business acquaintance I know about consolidating the dirt-track industry, car racing in Oklahoma, and when I wasn’t interested, he said, ‘I’ve got another business. Take a look at it.’ It was a sleep lab in Texas,” Mers says. “I couldn’t get it out of my mind.”

Mers believed that this was a business that could be instantly profitable. He found no public companies specializing solely in sleep diagnostics and thought that the benefits of both professional management and, more critically, the treatment’s results, were most compelling.

“This is life-changing for the patient,” he says. “I was overwhelmed by the number of people who said the therapy altered their daily existence.” The treatment in most instances is a continuous positive airway pressure (CPAP) machine, which delivers a continuous stream of high-pressure air into the throat through a hose that is connected to a face or nasal mask. The force of the air presses open the narrowed airway and allows more oxygen to be transferred into the lungs.

Since that initial conversation two years ago, Sleep Holdings has acquired four pre-existing centers—on the fringes of Houston, Austin, and Huntsville, and one in Soldotna, Alaska—and now manages one clinic in Virginia along with the labs inside eight hospitals, six in Texas and two in Alaska. Mers also intends to build his own facilities from the foundation up.

“When you build by acquisition, you are buying opportunity, but you are also buying someone else’s problems,” he says. “You want to do it at the right pace, to make sure the model is working.”

The company additionally oversees the sale and rental of sleep therapy products, which patients use at home.

With a typical investment of $500,000 to $2.5 million, Mers and his executive team of four transform the labs physically (from cold, linoleum clinics and sterile equipment to serene spas and fluffy robes), set up sophisticated accounting and billing systems, and craft marketing plans to attract and educate the local population. Individual staffs are kept in place.

“I am there to counsel, and I am present, but it’s my job to let them run, let them do great,” Mers says. “I’m in the business of business. They are the [sleep] experts.”
              
SETTING A STANDARD
One of those experts is Debbie Downey, who opened her Austin laboratory in 2000, hoping to eventually expand from testing to treatment. But that was a costly leap.

“While we were recognized as a leader in diagnostics with a great business model, we did not have the capital to take the next step,” says Downey, an entrepreneur who owned two other health-care companies before the lab. “So, as an individual owner of a micro-business, being purchased by a holding company that wants to grow your operation … has allowed me to follow my initial plan.”

Now, the practice she developed has taken the leap—Sleep Holdings acquired her operation for an undisclosed sum last March—and landed with the kind of infrastructure that she hopes will set up the business for continued success. With management software in place; a billing system that helps track profitability; accreditation; and the trust that Sleep Holdings is committed, Downey thinks she can raise the bar for the 13 other sleep centers in the greater Austin area.

Importantly for Downey, the backing has provided the freedom to think beyond day-to-day concerns, forever the bane of broad-minded entrepreneurs. “Having someone on the outside assess your potential, advising us to branch out here, do this there, has been very liberating,” she says. “When you are the sole person, driving the company with your own money, you don’t have the time to be that creative. This corporate structure has allowed me to use my imagination.”

PEOPLE, SERVICE, STEWARDSHIP
Roy Mers, of course, really didn’t need another job. He figured he could find the properties for Sleep Holdings, do the deals, and end it at that. But then he was asked to be the CEO.

“Clearly, I am not at the beginning of my business career,” he says. “Basically, I said to my wife, ‘Sweetie, you’ll lose me for five years.’ She asked, ‘Do you want to do it?’ I said, “Yeah,” and she said, ‘Well, go do it.’”

Mers was born in Carthage, Mo., “a science kid” who grew up on a farm, the only child of two hard-working parents. His chore was to take care of the garden. “I … hated it,” he remembers. “Now, of course, it is very different. Putting something in the ground and watching it grow, there is something spiritual about it.”

His early years were spent on 640 acres of rocky land near Carthage, where wheat and oats grew amid herds of dairy cows. His mother was secretary to a bank president, a woman “with a true business mind,” Mers says. His father was involved in the cold-storage industry, at first. When Mers was 7, the family moved to a 20-acre farm, where he was sent out to garden. His father bought a business selling scrap cheese, making $100,000 a year out of his barn. He began with 500-pound barrels of the cheese, which was used for catfish bait, and grew to 40,000-pound semi-trailer loads that he sold to commercial fisherman.

“I used to do some woodworking, so I cut a sign for him with a wood router,” Mers says. “It said, ‘The Cheese Barn.’ I thought he would cry.” The sign hangs today in Mers’ home workshop.

His mother passed away a year or two before he left  Missouri to study at Southern Methodist University, where he graduated with a BA degree in chemistry and advanced studies in finance and economics. He stayed in Dallas, rearing children in Highland Park, ultimately moving near Waxahachie in Ellis County, a place that reminds him of Carthage. “I like the smallness, the quiet, and I can see the stars at night,” Mers says.

He arrives at his North Dallas office by 10 each morning, sometimes with a stash of garlic or peppers for his Louisiana-born CFO, ready to cultivate this latest endeavor. “It is fabulous,” Mers says. “For me, it’s all about people, the service, the stewardship.”

The business has also provided Mers with an unanticipated benefit. In April, he tried a CPAP machine himself, just for kicks. While he never roused during sleep or snored more than the next guy, he experienced a completely new feeling upon waking. “I was completely energized. I felt as if I had slept more; the quality of sleep was undeniably different.”

As all smart executives understand, knowing your product intimately only makes selling it easier. All the members of Sleep Holdings’ management team have strapped on a mask and gone to bed. “Since I’ve been using the CPAP, I have gone off my Lipitor, my blood pressure is down, my cholesterol is down, I am even losing weight and feeling like working out,” Kriske says. “The results were immediate, and they required no pharmaceutical drugs.”

Considering that human beings spend, on average, one-third of their lives with their eyes closed, efforts to maximize that time would make sense. “Everybody knows that you feel better, look better, and think better after a good night’s sleep,” Kriske says. “Now, cardiologists, pulmonary specialists, and other physicians are seeing the merit in sleep diagnostics.”

The CPAP has undergone drastic improvements since it was invented in Australia in 1981, and now is quieter, less bulky, and more pliable. Even so, the steepest hurdle for patients—and for Mers—is getting them used to wearing it. About 50 percent of people who are prescribed the device stop using it after six months, because of comfort and appearance. Mers has set out to decrease that figure to 20 percent by offering proper fittings, smaller masks, and suggestions for use—including wearing the mask for short, oxygen-enriched naps, rather than entire nights. The company is accumulating data through the use of “Smart Cards” that can report how often an individual machine is being used. Still, the face is a sensitive part of the human body, and about 15 percent of patients simply cannot tolerate the contact.  
 
“We can’t help those people, and we can’t do much about the way it looks,” Mers says. “I’ve thought about doing a Ralph Lauren design or putting a D&G on the side of the mask.”

Meantime, the Sleep Holdings labs are operating to capacity. And, last October, Mers secured $2.3 million from a Denver investment firm to finance future acquisitions.  “With the acceptance of sleep therapy in the medical community, I am sure that someone is doing this right alongside of us,” he says. “But consolidating small businesses is not an easy business. This one, though, is phenomenal for what it can do.”

BY THE NUMBERS:

18 MILLION
Number of people in the U.S. with some degree of obstructive sleep apnea.

60 EPISODES
Number of obstructive episodes apnea sufferers may experience per hour in an average night.

1,400
Number of traffic fatalities per year that occur due to drowsiness from sleep apnea.

SOURCE: (1) National Heart, Lung, and Blood Institute, (2) sleepapneainfo.com, (3) ABC News