Transcript: Tuesday, April 22, 2014

NBR ThumANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Susie Gharib, brought to you in part by —

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TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Pharma frenzy. More than $60 billion worth of deals in just the past 24 hours. What’s driving them? And is the industry entering a new era?

SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Changing the channel. The Supreme Court is hearing a case that could shake up the television business and change the way people watch and pay for their favorite shows.

MATHISEN: Where’s the beef? McDonald’s (NYSE:MCD) reports another disappointing quarter. What’s ailing the world’s largest restaurant chain? And what’s being done to turn things around?

All that and more tonight, on NIGHTLY BUSINESS REPORT for Tuesday, April 22nd.

GHARIB: Good evening, everyone.

Some are calling it a merger boom. Others say it’s a tsunami. There’s been a frenzy of mergers, acquisitions, and deals in the pharmaceutical industry just in the past 24 hours.

The big one today, Novartis. The Swiss drug maker announced a series of transactions valued at more than $20 billion that will retool its product pipeline. The news comes just a day after Valeant Pharmaceuticals teamed up with activist investor Bill Ackman to buy Allergan (NYSE:AGN) for about $50 billion.

Well, investors snapped up stocks of drug makers today on hopes there could be a lot more deals to come as some of the biggest names in the industry looked to get out of non-core businesses and to focus instead on promising new drugs that could become financial bonanzas for years to come.

(BEGIN VIDEOTAPE)

GHARIB (voice-over): It started with rumors, a possible Pfizer (NYSE:PFE) bid for AstraZeneca for an astounding $100 billion. Then, Valeant teamed up with Bill Ackman to buy Allergan (NYSE:AGN), maker of Botox.

On top of that, Novartis announced deals with GlaxoSmithKline and Eli Lilly (NYSE:LLY). Big deals could be the new prescription for big pharma in the 21st century. The Valeant bid to buy Allergan (NYSE:AGN) is all about growth. Allergan (NYSE:AGN) is a tempting target because of its fast-growing brands like Bausch and Lomb, and its wrinkle fighter Botox that accounted for 1/3 of the company sales last year.

JEFFREY UBBEN, VALUEACT CAPITAL CEO & CIO: We’re talking about high single digit organic growth.

GHARIB: Jeff Ubben, a big Valeant shareholder, hopes the country will rank number one in both skin care and aesthetics, and number two in eye health.

Being number one or number two in the drug segment is another motivation behind these mega deals.

JOHN LECHLEITER, ELI LILLY CHAIRMAN & CEO: I believe what you’re seeing are companies really gravitating toward what they do well and really tried to build up strength and mass in those respective areas.

GHARIB: And that’s what’s going on in Novartis’ $28 billion three-way deal announced today. Novartis’ swap with Glaxo and Eli Lilly (NYSE:LLY) got it out of vaccines and animal health and more focus on cancer drugs.

LECHLEITER: That grows to be the number two player in terms of global revenues.

GHARIB: More of these kinds of deals could be coming. Merck (NYSE:MRK) is in talks to sell his consumer health business and reportedly Bayer and Sanofi are interested in buying. And then there is the talk about Pfizer (NYSE:PFE) and AstraZeneca. Both companies are struggling to find new sources of growth, with patent expirations cutting into their sales.

NAVID MALIK: We’re seeing is now they’re going down a specialty (INAUDIBLE) model. So, we’re seeing a narrowing and a focusing of businesses along strategic lines.

(END VIDEOTAPE)

GHARIB: And so far this year, the number of pharma and health care deals is just about the same as it was a year ago. But according to S&P, the value of those deals had nearly doubled.

MATHISEN: And joining us now to talk about deal activity in pharmaceutical industry is Damien Conover. He’s director of pharma research at Morningstar (NASDAQ:MORN).

Mr. Conover, welcome. Good to have you with us.

Are you expecting a big blockbuster deal sometime later this year? And if so, what might it be?

DAMIEN CONOVER, MORNINGSTAR DIRECTOR OF PHARMA RESEARCH: Yes, when we think the deal flow that we’ve seen recently, I think we’re going to continue to see, maybe not at the pace that we’ve seen just over this recent quarter, but I think it’s very likely that companies will be looking at divest units that traditionally they haven’t focused on very much. So, animal health, consumer health, things we saw Novartis do today, I think a company like Merck (NYSE:MRK) will probably do tomorrow and into the latter part of this year.

GHARIB: What’s changed? Why are they doing this, Damien?

CONOVER: I think there’s two things. First off, the innovation has slowed at big pharmaceutical firms. So they’re not really bringing out enough new products to really drive the growth rate of the underlying business, which has caused the executives to look at different areas where they can create values. That’s number one.

Number two, there’s been a lot of success from other firms, most notably Pfizer (NYSE:PFE), and its split off of Zoetis and its sale of its nutritional business, both of which got very strong valuations and probably opening the door for other pharmaceutical firms to follow in the footprints of Pfizer (NYSE:PFE).

MATHISEN: So, Damien, if I read between the lines of your answer to my first question, you think more of the acquisitions will be portfolio reshaping and pruning, and selling off units, rather than the kind of mega deal that would occur if Pfizer (NYSE:PFE) merges with company, you name it.

CONOVER: Yes, I think that is more what we’ll see happening over the remainder part of this year. Valuations in the pharmaceutical groups had increased. We’re looking at an average P/E of about 17. That’s up from about 14, the last time we saw a major round of massive consolidation of Schering-Plough and Wyeth.

So, it’s harder to create value when things are a little more expensive. However, the cost-cutting that we saw in that last round could be something that Pfizer (NYSE:PFE) deploys with an AstraZeneca deal.

GHARIB: And it seems like a lot of these deals are cross-border. They’re not just happening here in the U.S., are happening with international players as well. So, we want to know if you see that trend continuing. And then, also, how can investors take advantage of all of this buying and merging.

CONOVER: Yes, I think there’s two reasons why a lot of U.S. firms are interested in international firms. The tax rate causes a lot of firms to keep cash offshore. And instead of repatriating that cash and paying the high tax rate, they’ll usually use that cash to make some acquisitions overseas.

Secondly, there have been a lot of tax strategies where if you make acquisitions overseas you can shift some of your IP around and bring down your overall tax rate.

MATHISEN: Do we need to —

CONOVER: And regarding —

MATHISEN: Talking about that so-called tax inversion, do you think that we need to re-fashion the tax code so that tax — gaming the tax system isn’t driving business decisions?

CONOVER: I think we definitely need to. You know, and it’s going to be a hard uphill battle because you have to get a lot of the nations of the world to agree on this. But what we’re seeing here is a lot of strategic decisions being done just because of taxes. And that’s really at some point going to be out of line at fundamental decision-making and cause big problems. So, I think tax reform is needed.

MATHISEN: All right, Damien, thank you so much. Damien Conover with Morningstar (NASDAQ:MORN).

GHARIB: Our next guest says all those pharma deals are part of a broader merger boom. He’s Robert Profusek, chairman of the global and merger acquisition unit of the law firm Jones Day.

Bob, nice to have you back on the program again.

I want to start with this about, what is the conversations going on inside the corporate board rooms these days? I mean, just a year ago, CEOs were sitting on a pile of cash. They were sitting on their hands. They had no plans of buying any companies no matter what the price. How has the conversation changed?

ROBERT PROFUSEK, JONES DAY, CHAIRMAN OF THE GLOBAL AND MERGER ACQUISITION UNIT: Well, I think we’ve finally gotten rid of the fear that was in executive suites and the board rooms and investment committees of major private equity firms.

The financial crisis, it seems like it was forever ago. It really wasn’t. And we had for the longest time all the aftershocks. We had the E.U. situation. We had recession itself and we had all of this stuff. I mean, you name it, in Washington, which disrupted everything, and made major commitments hard to really come to grips with because of uncertainty.

Now, are we entering the stage of animal instincts? Possibly, because I think the fear is gone, largely gone. Sure, there is risk of interest rates going up and all the rest of it, but companies haven’t had much to do with their money except buy back their stock.

MATHISEN: There have been a lot of deals, Bob, in the first quarter of this year, many of them concentrated, as we’ve just been saying, in the pharmaceutical business, also big cable deals.

As you look forward to the rest of this year, where might you expect to see more deals?

PROFUSEK: Well, I think we’re going to see a lot more deals in commodities in general, whether there was a giant cement deal announced two weeks ago, $50 billion, by anybody’s standard is a pretty big deal. We’re going to see things in the energy space. Tech is hot as can be. But maybe pharma is a part of a broader spectrum of deals.

In health care, there’s got a — health care has just got to get more efficient. Well, how do you do that? In addition to worrying about your pipeline, you got to worry about your cost structure and synergies are a huge part of the equation.

GHARIB: And these are really bold deals. They have big price tags. Do you think there’s going to be any problems from Washington and regulators about approving these deals?

PROFUSEK: Well, the regulators, beginning last year, got a little bit tougher. I mean, frankly, I think the regulators gave — took their foot off the brakes a little bit in the immediate aftermath of the financial crisis, in part to keep business going. We saw some indications that maybe things would be looked at more carefully.

But, you know, big deals are very self-selecting. You don’t sign one up if you think there is a significant likelihood it’s not going to happen. Yes, there are surprises, AT&T (NYSE:T) mobile, was that 18 months ago or so, and the American Airlines/U.S. Air deal?

But deals tend the get done, because among other things, they’re rarely blocked. They usually can be fixed. And any adjust issues accommodated.

GHARIB: All right. Bob, thank you so much. Bob Profusek from Jones Day.

MATHISEN: All that merger and acquisition activity, along with another round of strong corporate earnings out before the bell lifted the major averages to a sixth straight day of gains. And that’s the longest winning streak since back in September. The Dow was even on an all-time high watch for much of today’s session, before it lost steam for the close.

In the end, the Dow ended 65-point higher, 65 points higher, and is now just 62 points shy of a fresh record close. NASDAQ was up 40 today, and the S&P higher by seven.

GHARIB: Well, solid earnings from two big name Dow components gave a list of stocks when the markets opened this morning. Travelers posted earnings that were 79 cents a share higher than analysts’ estimates, and that was thanks to higher premiums. Revenues were also better than expected and the insurance company raised its dividends.

United Technologies (NYSE:UTX) also topped Wall Street’s expectations. Sales there rose in all of its business unit, and the company raised its full year outlook. Shares of both companies close higher today.

And then after the closing bell, Dow member AT&T (NYSE:T) reported earnings, profits beat by a penny while revenues came in just about as expected.

MATHISEN: Well, it was a different story though at another company that released first quarter results today, along with March sales figures, and it did it before the bell. Both of the numbers disappointed investors, shares of McDonald’s (NYSE:MCD) among the biggest decliners among the blue chips today, though they went down all that much just by about a third of a percent.

Courtney Reagan takes a look at what is behind the sagging sales at the burger giant and what McDonald’s (NYSE:MCD) is trying to do about it.

(BEGIN VIDEOTAPE)

COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Diners are not likely loving it. It was a McMiss for McDonald’s (NYSE:MCD) latest earnings report, with profits falling for the world’s largest restaurant chain, thanks to higher beef costs, disappointing sales, and light foot traffic. Global sales at locations opened more than a year did grow by half a percent, with even stronger performance in Europe. But in the key U.S. market, sales fell for the fifth straight month.

While the fast food chain is selling burgers in an increasing competitive industry, facing rising costs and labor costs, CEO Don Thompson also admits McDonald’s (NYSE:MCD) needs to strengthen its menu and work on its relevancy with consumers. McDonald’s (NYSE:MCD) says recent menu options and pricing have confused diners, and slowed down service.

Breakfast remains a significant driver of sales to the golden arches, but its leadership position is shrinking as competitors like Taco Bell and Dunkin Donuts, hungry for a slice of that market share, are introducing new breakfast menu items.

But Barclays analyst Jeffery Bernstein doesn’t think McDonald’s (NYSE:MCD) is in immediate danger of losing its morning dominance.

JEFFERY BERNSTEIN, BARCLAYS ANALYST: We’ve seen Wendy’s, Subway, others go into breakfast. More often than not, they ultimately exit breakfast. It’s a very difficult day part to break.

REAGAN: McDonald’s (NYSE:MCD) does say April global comparative sales are expected to be modestly positive, though RBC Capital Markets analyst David Palmer doesn’t see a lot of upside for the fast food chain in the near term.

DAVID PALMER, RBC CAPITAL MARKETS ANALYST: Right now, we’re waiting to see what they’re going to be doing to make ultimately their sales and earnings go up, because this is really an earnings revision story when it comes right down to it.

REAGAN: Many on Wall Street need signs of the sales turn around before buying into the happy meals.

For NIGHTLY BUSINESS REPORT, I’m Courtney Reagan.

(END VIDEOTAPE)

GHARIB: And still ahead on NIGHTLY BUSINESS REPORT, the Supreme Court case that could change how you watch television, and pitting the country’s biggest broadcasters against a start-up. That story next.

(MUSIC)

GHARIB: David versus Goliath case at the highest court of the land today. The U.S. Supreme Court heard arguments from the country’s broadcast TV giants who are looking to stamp out a tiny streaming video service called Aereo that they say threatens their very existence.

Hampton Pearson was at the court and has more.

(BEGIN VIDEOTAPE)

HAMPTON PEARSON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Right now, watching network television involves seeing live programming or recording it on a DVR, often rented from a cable or satellite provider. However, online video start-up Aereo bills itself as an Internet-based alternative to cable television.

AEREO PROMOTIONAL VIDEO: A new platform for bringing you live broadcast TV to the Internet, wherever and whenever we want.

PEARSON: Currently available in 11 cities, it relies on thousands of dime-size antennas assigned to individual subscribers who pay a monthly fee to stream their local over the air broadcast to an array of devices, to record shows and watch them later.

At the Supreme Court today, lawyers for the major broadcast networks told the justices the Aereo service violates public performance copyright protections, by making available programming without paying for it.

PAUL CLEMENT, ATTORNEY REPRESENTING BROADCASTERS: A service cannot provide live TV over the Internet to thousands of paying strangers without engaging in a public performance. It really is as simple as that.

PEARSON: During oral arguments, Chief Justice John Roberts was skeptical, saying Aereo’s technology was designed specifically to get around the copyright laws. But he and the majority of the justices also voiced concerns that ruling in favor of the broadcasters could impact Cloud based computing. It may have been Aereo’s strongest argument.

DAVID FREDERICK, ATTORNEY FOR AEREO: We’re cautiously optimistic based on the way the hearing went today that the court understood that when a person watching over a broadcast television in his or her home is engaging in a private performance and not a public performance that would implicate the copyright act.

PEARSON (on camera): When we hear from the justices most likely in June, it will be interesting to see whether or not their ruling is specifically crafted to whether or not the technology of Aereo violates copyrighting law or do they deal with the larger question of what impact their decision might have on the future of Cloud computing technology.

For NIGHTLY BUSINESS REPORT, I’m Hampton Pearson at the Supreme Court.

(END VIDEOTAPE)

MATHISEN: Comcast (NASDAQ:CMCSA) (NYSE:CCS), one of the broadcasters involved in the Supreme Court case, is the parent company of the NBC network and of CNBC, which produces this program.

Separately, Comcast (NASDAQ:CMCSA) (NYSE:CCS) reported earnings and revenue today that beat consensus estimates, helped by the rise in ad revenue at NBC and thanks to the Winter Olympics. The company also added 24,000 video subscribers.

Shares of Comcast (NASDAQ:CMCSA) (NYSE:CCS) up almost 2 percent on the session.

GHARIB: Gilead Sciences (NASDAQ:GILD) post blowout earnings after the market close today, and that’s where we begin our “Market Focus”.

Revenue came in more than $1 billion over estimates, results were boosted by the company’s new treatment for hepatitis C. Shares were halted after the announcement but when the stocks reopened, shares initially rose in after-hours. The stock was up about 2 percent of the regular session, closing at $72.86.

Also, after the close, another drugmaker out with different results, Amgen (NASDAQ:AMGN) was hurt by accusation related costs and products and its earnings fell short of expectations. The company did reiterate its full year forecast though for earnings, shares initially fell after hours. The stocks closed the regular session up 2 percent to $119 and change.

Harley Davidson’s earnings topped estimates. The motorcycle market said first quarter profit jumped in nearly 20 percent helped by strong overseas sales. Also sales here in the U.S. were up despite the harsh winter weather which kept people away from Harley dealership. Shares surged almost 6 1/2 percent, to $71.87.

MATHISEN: And JetBlue Airways (NASDAQ:JBLU) pilots voted to join the Airline Pilot Association Union, about 70 percent of the company’s pilots were in favor of that move. Shares fell today almost 2 percent, $8.59.

Shares of Intuitive Surgical (NASDAQ:ISRG) got a lift on news the Food and Drug Administration cleared its Da Vinci SP Surgical System. The medical device is designed to assist in neurologic surgical procedures and it will be used with Intuitive’s other robotic surgical machines. The stock popped almost 3 percent to $422.33.

GHARIB: General Motors (NYSE:GM) is looking for even more protections against potential lawsuits over faulty ignition switches in its cars. The automaker filed a suit in federal bankruptcy court today, asking a judge to shield the company from an expected avalanche of claims related to car accidents and crash related fatalities that took place before G.M. emerged from bankruptcy back in 2009.

MATHISEN: Another carmaker took a big step today. Tesla sold its very first luxury electric cars over in China, eight of them in all. They throw in the converter for the plugs over there.

CEO Elon Musk was on hand in Beijing for the delivery, announcing plans to build a nationwide network of charging stations and service centers as quickly as possible in China. Eventually, Musk says he hopes to sell as many as 5,000 vehicles there a year.

(BEGIN VIDEO CLIP)

ELON MUSK, TESLA MOTORS CEO: As far as our sales in China, it’s difficult to make precise predictions. What we see right now is pretty strong demand. I think probably more demand than we can fulfill this year.

(END VIDEO CLIP)

MATHISEN: Now, musk also said Tesla plans to start building cars in China within the next three or four years.

GHARIB: Citigroup (NYSE:C) executives were expected to come under intense scrutiny from shareholders today who wanted to hear more about the company’s recent stumbles including, the failed stress test and allegations of fraud at its Mexican banking unit.

But as Kayla Tausche reports from St. Louis, the meeting turned out better than expected.

(BEGIN VIDEOTAPE)

KAYLA TAUSCHE, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Citigroup’s investors are clustered in the Northeast. But this year, the bank said meet us in St. Louis. The meeting, 1,000 miles away from Wall Street and not telecast for a wider audience, was criticized as avoiding questions about recent turmoil at the giant global bank. Like the two instances of fraud in Mexico that cost Citi upwards of $400 million, or high profile failing grade the Fed gave Citi on its plan to buy back $6.4 billion in stock and raise the dividends for the first time post-crisis.

Despite those hits to its reputation, attendees in the show-me state shows CEO Mike Corbat and chairman Mike O’Neill some support. In votes tallied Tuesday, investors reelected the entire board, approved auditor KPMG even as the Fed found oversight in auditing practices, and most notably, approved Corbat’s 2013 pay — something shareholders rejected two years ago when Citi under Vikram Pandit failed the stress test.

For Corbat, nearly two years into his turnaround at Citi, has earned some more time.

MIKE MAYO, CLSA BANK ANALYST: Rome wasn’t built in a day. And, you know, Citi is not going to revamp in a year. But I think over three or four years, the stock in this company will improve.

TAUSCHE: Patience is a virtual that most shareholders in St. Louis seem to have, even amid recent disappointments, just ask former employee, John Gallo.

JOHN GALLO, CITIGROUP SHAREHOLDER: The current administration really looks like to be a solid team. Now, unfortunately, it hasn’t yet, I don’t think, manifested itself in the stock price. That’s pretty static.

TAUSCHE: Gallo is among the hoards of individual investors with Citigroup (NYSE:C) in his or her portfolio. It’s one of the most widely held stocks in American mutual funds and 401(k)s.

Even Reverend Jesse Jackson owns shares through his foundation, the Rainbow/PUSH Coalition, which holds stock in 200 private sector companies. He says Citi’s restructuring, while good for the bottom line, comes at the expense of jobs and growth on Main Street.

REV. JESSE JACKSON, RAINBOW PUSH COALITION PRESIDENT: We want to see the stocks go up, but (INAUDIBLE) go up. In many ways, it’s more profitable to invest in the communities, whether they’re rural or urban, than to leave them lying fallow.

TAUSCHE (on camera): Corbat said Citi would keep heading jobs in lines of business it deems unprofitable. But as long as the bank can keep posting profits like those that they saw in the first quarter, management will keep getting a vote of confidence.

For NIGHTLY BUSINESS REPORT, I’m Kayla Tausche, in St. Louis.

(END VIDEOTAPE)

MATHISEN: Coming up, the threat of an El Nino weather event is growing. How that could impact everything from corn to copper and more.

(MUSIC)

GHARIB: A warning from the government to people with student loans.

Listen up to this: The Consumer Financial Protection Bureau released a report warning them of automatic defaults triggered for private student loans when a co-signer dies or falls into bankruptcy. The agency said many borrowers complained of being unaware of clauses in the contract, demanding that those loans be repaid in full immediately after a co-signing relative dies or even if that co-signor declares for bankruptcy.

MATHISEN: And finally tonight, it’s back. I’m talking about El Nino, and weather officials say the global system’s warm ocean temps and the devastating rains that follow may be heading toward California later this year. But that could be welcome news especially for some commodities that are hard hit by years of drought.

Jane Wells has our story.

(BEGIN VIDEOTAPE)

JANE WELLS, NIGHTLY BUSINESS REPORT CORRESPONDENT: It’s so dry in California, the USDA says 94 percent of the state’s $45 billion farm economy is experiencing severe to exceptional drought. That could all change.

This was 1982, when storms pummeled the West Coast in a weather pattern called El Nino, when warming water in the South Pacific travels north and leads to wetter, cooler temperatures in the U.S., drought in Australia and Asia.

BRAD RIPPEY, USDA METEOROLOGIST: It could help to alleviate California’s three-year drought, in places like Texas and Oklahoma and southeastern Colorado and southwestern Kansas.

WELLS: It’s a little early for California to start dusting off their umbrellas, but meteorologists put the chances of an El Nino hitting later this year at least 50 percent, perhaps as high as almost 70 percent.

If this happens, it could affect everything from copper to corn. El Nino usually means good rains for America’s farms, depending on the time, driving down corn and soybean prices, that could eventually bring down the high cost of meat as feeding livestock becomes less expensive.

But in parts of the world hit by an El Nino drought, less wheat could mean more hunger and already high cocoa and coffee prices could go higher. El Nino could even affect the price of metal.

MICHAEL HAIGH, SOCIETE GENERALE: Famously, in ’97, ’98, I believe it was that Peru and Ecuador had several years of rainfall confined to a four-month period. And so, these mines were flooded and hence production was cut off and prices spiked.

WELLS: For the moment however, it’s all a big if. If there is an El Nino, how big will it be? Thirty-two years ago, it caught California off-guard and stars like Lee Majors and Larry Hagman tried to lighten the mood.

UNIDENTIFIED MALE: By the way, your boat (ph) dropped here the other day.

UNIDENTIFIED MALE: Yes, YOU know, I was going to bring it down here and leave it at your place.

WELLS: But for those who don’t like the weather right now, just wait a few months — it could change, and be careful what you wish for.

For NIGHTLY BUSINESS REPORT, Jane Wells, Los Angeles.

(END VIDEOTAPE)

GHARIB: And we’re worried about a really hot summer.

MATHISEN: Yes.

GHARIB: And a very cold winter.

MATHISEN: Hey, I’d love it to get hot. Go ahead.

GHARIB: A lot of extremes going on coast to coast.

That’s NIGHTLY BUSINESS REPORT for tonight, I’m Susie Gharib. Thanks for watching.

MATHISEN: And thanks from me as well. I’m Tyler Mathisen. Have a great evening, everybody. We hope to see you tomorrow.

END

Nightly Business Report transcripts and video are available on-line post broadcast at http://nbr.com. The program is transcribed by CQRC Transcriptions, LLC. Updates may be posted at a later date. The views of our guests and commentators are their own and do not necessarily represent the views of Nightly Business Report, or CNBC, Inc. Information presented on Nightly Business Report is not and should not be considered as investment advice. (c) 2014 CNBC, Inc.

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