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Lannett Inc (NYSE:LCI)
Q1 2020 Earnings Call
Nov 6, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, and welcome to this afternoon's, Lanett Conference Call. My name is Sheryl, and I will be your operator, for today's call. [Operator Instructions].

I will, now turn the call over to Robert Jaffe, Investor Relations for Lannett Company. Sir you may begin.

Robert Jaffe -- Investor Relations

Thanks Sheryl. Good afternoon everyone, and thank you, for joining us today to discuss Lannett Company's Fiscal 2020 First Quarter Financial Results. On the call today are, Tim Crew, Chief Executive Officer; and John Kozlowski, the company's Chief Financial Officer. This call is being broadcast live at www.lannett.com and a playback will be available for at least 3 months on Lannett's website. I'd like to make the cautionary statement and remind everyone that all of the information discussed on today's call is covered under the safe harbor provisions of the Litigation Reform Act. The company's discussion will include forward-looking information reflecting management's current forecast of certain aspects of the company's future and actual results could differ materially from those stated or implied. In addition during the course of this call we refer to non-GAAP financial measures that are not prepared in accordance with the U.S. generally accepted accounting principles and may be different from non-GAAP financial measures used by other companies.

Investors are encouraged to review Lannett's press release announcing its fiscal 2020 first quarter financial results for the company's reasons for including non-GAAP financial measures in its earnings announcement. The reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is also contained in the company's earnings press release issued earlier today. Please note that additional information regarding the company's historical debt repayments can be found on the company's website in the Investor Relations section as part of today's press release. This afternoon Tim will provide brief remarks on the company's financial results as well as comments on recent developments and associated initiatives. Then John will discuss the financial results in more detail including the company's fiscal 2020 guidance. We will then open the call for questions.

With that said I will now turn the call over to Tim Crew. Tim?

Timothy C. Crew -- Chief Executive Officer

Thanks Robert and good afternoon everyone. This first quarter of our fiscal year was an important one on many fronts. Beyond achieving our near-term financial objectives and demonstrating year-over-year growth on an ex legal basis we also significantly improved our capital structure and added new products to both our in-line and future pipeline that could drive significant future growth. So let's review those accomplishments. On the financial front we are pleased to report a solid performance for the first quarter. Our top line and profitability was a bit better than expected largely due to strong sales of a few key products including fluphenazine and posaconazole. As a reminder we signed an agreement to be the exclusive U.S. commercialization partner for posaconazole delayed-release tablets which is the generic version of Noxafil. The posaconazole market had IMS sales of about $330 million for the 12 months ended September 2019. This first-to-market generic is currently the only approved ANDA available. Total net sales for the quarter were approximately $127 million. And adjusted net income was approximately $9 million or $0.22 per diluted share. Adjusted EBITDA was approximately $35 million. Turning to the balance sheet. As most of you are aware we have been disciplined and proactive in paying down our debt. As of September 30 2019 our combined Term A and Term B loan balance was about $670 million down from about $900 million at the beginning of fiscal 2019.

Importantly at the end of the first quarter we successfully completed an $86 million offering of convertible notes. We believe this latest transaction is an inflection point that significantly improved our capital structure. John will provide some additional comments on this transaction later in the call. Now turning to our currently marketed products and related market dynamics. As we have said we look to improve the returns from our in-line portfolio through enhanced supply readiness and portfolio optimization while also adding numerous near- and midterm new opportunities. When we build our forecasts we anticipate that the certain products will perform better than expected and others will contribute less than expected. With that in mind a basket of our currently marketed products did experience slightly higher-than-anticipated competitive pressure or quota constraints. Fortunately however other products such as fluphenazine and posaconazole did better than expected. Also along with many other suppliers both branded and generic we recalled our ranitidine liquid product. The recall is based on higher-than-acceptable levels that the FDA has recently established for so-called MDMA which was found in the API and then the finished dose. Based in part on the continued strength of fluphenazine and posaconazole and the planned new launches offset by the current competitive environment on some of our products and the voluntary recall of ranitidine we are reiterating our adjusted guidance for fiscal 2020.

Achieving our reiterated guidance is of course dependent on our successful ongoing launch parade and a balance of upsides and downsides across our portfolio. Regarding the launch parade as we have earlier noted our launch calendar this year is back-end loaded. We have launched three products so far namely posaconazole prednisone and cyproheptadine. And we are currently looking forward to launch at least another dozen or so products by the end of the fiscal year including venlafaxine ER tablets SMZ-TMP suspension azithromycin tablets and our Numbrino NDA. Now for an update on some of the key generic products in our pipeline which we expanded in the first quarter with the addition of two major products namely generic ADVAIR and the old levothyroxine. These two opportunities reflecting our earlier stated -- reflect our earlier stated intention to layer in products that have the potential to drive significant growth to our business in the medium term and beyond. We earlier announced that we formed a strategic alliance with Respirent Pharmaceuticals to be the exclusive U.S. distributor of the generic ADVAIR DISKUS product. So we'll take some time here to articulate why we think the opportunity is so important. ADVAIR DISKUS is a combination of fluticasone and salmeterol in a dry powder inhaler. Currently annual U.S. sales of this product are about $3.4 billion. So this is one of the largest addressable markets in which Lannett has ever potentially participated.

Moreover a generic ADVAIR DISKUS development program has several aspects that lead us to expect some persistency of value for approved generics on the market: first it requires a substantial initial investment in the specialized plant and related equipment; second it is quite technically challenging to manufacture given it is a drug-device combination delivering micrograms of medicines; and third it requires a substantial clinical investment. To put this in context Mylan which has the only approved ANDA in this space has referenced a several hundred million dollar investment in their ADVAIR generic program. While I'm not suggesting that under current FDA guidance anywhere near that level of investment will be needed by our partner Respirent they are nevertheless investing quite heavily. We believe the company has the expertise to bring their generic equivalent to approval and ready for commercialization. Notably Respirent has already made the investment needed for the specialized plant and equipment required and they've developed the requisite device. As part of our development program we have submitted controlled correspondence to the FDA addressing the Respirent device and the proposed product's qualitative and quantitative sameness to the reference brand. The FDA's feedback was encouraging which when combined with the successful clinical end point trial Respirent conducted for its pending U.S.A. filing and ongoing PK/DE studies means we believe we continue to march toward an ANDA filing around summer of next year.

Generic ADVAIR DISKUS is in addition to a number of other products in our pipeline with significant potential in the near to medium term. Our insulin glargine biosimilar project with HEC is also pressing. Similar to generic ADVAIR DISKUS insulin glargine will be one of the largest U.S. addressable markets in which Lannett has ever potentially participated. IMS reported sales are greater than $6 billion. Like ADVAIR it's technically challenging to develop and manufacture insulin glargine to meet U.S. FDA requirements. It requires significant investment in manufacturing capacity and development and it is a drug-device combination. Lannett is completing the analysis of the human PK/PD study comparing HEC's insulin glargine to U.S. Lantus and expects to report the study results soon. Lannett together with HEC will request a so-called biosimilar biological product developments Type three meeting to review the development plan and plan additional studies based on an in-depth data review of the biosimilarity data. The review will include extensive analytical analysis animal studies and now human PK/PD results versus U.S. Lantus. We expect to meet with the FDA in early 2020. Like Respirent our partner HEC is investing heavily in their global insulin program and is building a comprehensive manufacturing infrastructure to allow HEC to supply significant share of an affordable alternative to the current insulin markets in the U.S. China and elsewhere.

Now turning to Numbrino. We believe our NDA filing continues to progress at the FDA and remains on track for an approval in the December-January time frame and we expect to launch shortly thereafter. While we have ceased operations at the Cody plant we have already produced the product at our Carmel facility. We will complete the technical transfer at the New York site once the NDA is approved. Now regarding thalidomide. We believe our internally developed thalidomide product could launch in fiscal 2021. There are no currently approved generic equivalents available in the U.S. for thalidomide. And last but not least we expect to begin marketing our previously announced partnered levothyroxine product no later than August 1, 2022. To sum up we have again achieved our near-term financial goals reaffirmed adjusted guidance and completed a significant transaction to improve our capital structure and enhance our financial flexibility. We continue to work to strengthen diversify and expand our revenue base with numerous new product launches over the balance of the current fiscal year and beyond.

And we are excited about our expanding pipeline of large market opportunity products. And we'll continue to look for additional opportunities to build strategic alliances with partners that have the products and capabilities beyond our immediate scope. Our goal remains to achieve top line compound annual growth rates well in excess of the industry through disciplined execution. The U.S. generic industry represents a large opportunity for a mid-scale competitor like Lannett. Given our focus on the U.S. market our commitment to reliable supply chain and the strengthening of our generic pipeline we believe we are well on the way to achieving our goals.

With all of that I turn the call over to John. John?

John Kozlowski -- Vice President of Finance and Chief Financial Officer

Thanks Tim, and good afternoon, everyone. As was mentioned earlier, I will be referring to non-GAAP financial measures. The reconciliation of GAAP to non-GAAP numbers can be found in today's press release. Now for the financial results on a non-GAAP adjusted basis. For the 2020 first quarter net sales were $127.3 million which were higher than expected largely due to strong sales of certain key products including fluphenazine and posaconazole. This compares with net sales excluding levothyroxine of $101.2 million for the first quarter of fiscal 2019. Gross profit was $52.6 million or 41% of net sales compared with $68.7 million or 44% of net sales for prior year first quarter. Our adjusted gross margin of 41% was slightly lower than anticipated mainly due to inventory writedowns and adjustments related to obsolescence. Interest expense decreased to $15.3 million from $16.9 million due to pay downs of Term A and Term B loans during the previous fiscal year. Net income was $8.8 million or $0.22 per diluted share which was slightly higher than our expectations. This compares with net income of $16.9 million or $0.44 per diluted share for the fiscal 2019 first quarter.

And adjusted EBITDA was $35.1 million in Q1. Turning to our balance sheet. As Tim mentioned in late September we completed an $86.3 million offering of convertible notes the net proceeds of which we used to pay down half of the outstanding balance of our Term A loans. After the pay down the remaining balance of the Term A loans was approximately $69.5 million an amount that is lower than our cash position of $101 million. This transaction has several benefits: first the convertible notes mature in seven years or 2026 versus the Term A loans which mature in about one year; second the convertible notes have a lower interest rate than the Term A loans; third the convertible notes are unsecured debt and do not count toward the covenant calculations all of which have significantly improved our financial flexibility. As we have previously said we will continue to be proactive and disciplined on extending the maturity profile of our existing debt. And we'll continue to look for opportunities to further improve our capital structure. At September 30 2019 cash and cash equivalents totaled approximately $101 million.

During the quarter we paid approximately $20 million for the future marketing rights to levothyroxine. It was one of two separate transactions that we completed last quarter with Neopharma. Our outstanding debt at the end of the quarter was as follows: convertible notes $86.3 million due October 2026; as I mentioned a moment ago Term A loans $69.5 million due November 2020; and Term B loans $602.4 million due November 2022. Total debt was approximately $758 million and debt net of cash was $657 million and net secured debt was $571 million. We continue to expect to be within our financial covenants up to the maturity date of our Term A loans. Turning to our guidance. As a result of the convertible notes offering we have lowered interest expense for the full fiscal year to the range of $54 million to $56 million from $56 million to $58 million. Other than the change to interest expense we are reiterating our fiscal 2020 adjusted guidance.

We continue to expect net sales in the range of $525 million to $545 million; adjusted gross margin as a percentage of net sales of approximately 40% to 42%; adjusted R&D expense in the range of $34 million to $36 million; adjusted SG&A expense ranging from $63 million to $66 million; adjusted interest expense in the range of $54 million to $56 million down from $56 million to $58 million; the full year adjusted effective tax rate in the range of 22% to 23%; adjusted EBITDA in the range of $145 million to $160 million; and lastly capital expenditures to be approximately $20 million to $25 million. Regarding the phasing of the quarters we expect net sales in Q2 to be comparable to Q1 and increase in the second half of the year as a higher number of product launches are expected in Q3 and Q4. With regard to gross margin we expect Q2 to be slightly higher than Q1 and decrease modestly over the balance of the year. We expect EPS and adjusted EBITDA to increase sequentially quarter-over-quarter for the remainder of the year.

With that overview we would now like to address any questions you may have. Operator?

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Elliot Wilbur from Raymond James. Your line is now open.

Elliot Wilbur -- Raymond James -- Analyst

Thanks, and good afternoon. First question for yourself Tim just with respect to base portfolio trends. I guess the -- there's been a lot mixed messages coming out of the industry over the course of the last couple of weeks with respect to the extent of competition on older based products and hearing from some companies that you're seeing competitors sort of double down and try and reoptimize their portfolios or even a company today talked about going into the closet point out a bunch of shelled ANDAs to try and pick up revenue. I'm just wondering if you're starting to see signs of that impacting your business? And just how you're kind of thinking about that particular dynamic over the next 12 months or so?

Timothy C. Crew -- Chief Executive Officer

Elliot thanks for the question. As we indicated previously we've always felt that industry trends are not necessarily reflective of your particular portfolio. Last year we felt that we were doing a bit better than the industry trends. This year perhaps more aligned with some of those industry trends. At the end of the day we believe our slightly more mature portfolio will be relatively more stable than new products coming to market. We also believe that maintaining the pace of new product launches against the basket of products that we have come in as well as in market give some balance. And as noted in today's call we had upsides and downsides and remain on track for guidance. And we're pretty pleased with that result in context to everything else that we've been hearing.

Elliot Wilbur -- Raymond James -- Analyst

Okay. And I just want to follow -- ask a follow-up question regarding the recent deal for ADVAIR. Anything you can say in terms of the company's cumulative investment? Obviously we don't expect it to be more close to Mylan but as you alluded to those are fairly expensive programs or certainly can be. And then just wondering if we could get maybe a little bit more clarity on the timeline there. Looks like Respirent's completed a lot of the bioequivalence work but then they had a comparative trial which I think was scheduled to begin in late '18 and looks like anyway that it's been closed. So I'm not sure if that's complete or not. But anything you could say there in terms of a timeline with respect to filing would be helpful.

Timothy C. Crew -- Chief Executive Officer

Sure. As it relates to the investments that have been made by Respirent We're not going to be comfortable disclosing what they have invested although it is substantive. I do believe with current FDA guidance and developing a program post the expiration of the earlier device patents under ADVAIR DISKUS will certainly streamline and reduce those costs. But you're certainly talking 3-digit millions before you can bring a product I would believe to market. Relating to the timelines their original clinical trial that was used to support their EU filing and as well as the U.S. filing was completed. They have conducted some PK/PD trials. They are starting another confirmatory hopefully final PK/PD this January. Subsequent to results of that PK/PD if all goes well they should be able to file in the summer of this year -- next year excuse me.

Elliot Wilbur -- Raymond James -- Analyst

Okay. One last question. Just one last question. Any updates you can provide with respect to Numbrino.

Timothy C. Crew -- Chief Executive Officer

Well as we indicated on Numbrino we are basically awaiting approval from the FDA. They have all of the documentation that they requested from us on our product. And as we noted in the call we have prepared manufacturing batches at our new site. We have plentiful supplies of API from the original site. And once the NDA is approved hopefully in the next few months we will complete the tech transfer and launch that product into the market with an approved label which gives us some degrees of freedom to think about how best to promote it although our first goal will be simply to recapture as much as possible of the business we had prior to our exit in July of this year. I believe the current IMS environment reflects as of September that we still hold about a 65% share. So many of our customers we hope to be able to bridge to a new product that -- if it's approved in the January time frame or December.

Elliot Wilbur -- Raymond James -- Analyst

All right. Thank you.

Timothy C. Crew -- Chief Executive Officer

Thank you Elliot.

Operator

Our next question comes from Gary Nachman from BMO Capital Markets. Your line is now open.

Gary Nachman -- BMO Capital Markets -- Analyst

Hi, good afternoon. Tim describe the basket that's experiencing competitive pressures? How many products were affected and the magnitude of the impact? And then how much did posaconazole contribute in the quarter? What are the competitive dynamics here going forward so durability of that product? And then I have a follow-up.

Timothy C. Crew -- Chief Executive Officer

Thanks Gary. As it relates to some of the products that have had some pressure we have earlier noted the methylphenidates had some approvals that created additional intensity in that space. Similarly our earlier launched aspirin-dipyridamole had some additional competitive pressure. And then of course the withdrawal from the market of ranitidine. Those were some of the bigger movers. There's always puts and takes on the other side of the portfolio. But those were the blocks that we noticed as much as anything else for the quarter. The question as it relates to posaconazole is pretty encouraging. We were approaching double-digit millions for that month. Some of that was a bridging or stocking of the market given there was just ourselves and the AG in the market. We will expect some persistency to those sales at least perhaps for a quarter or 2. Recall this is an extruded product so the technology is a little more complicated than your average oral product. But we would certainly expect the competitor to be showing up sometime next calendar year.

Gary Nachman -- BMO Capital Markets -- Analyst

Okay. And then the fluphenazine was that price or volume or both you called that out as well moving in the positive direction?

Timothy C. Crew -- Chief Executive Officer

Yes the fluphenazine sales this quarter were aligned with the last quarter. We again have persistently benefited from fewer competitors in the market. Mylan has not yet returned and another competitor has not yet showed up. So the trend has been consistent. The expectation there will be pressure on that product over the coming quarters we don't know when. But it was a bit better than we had otherwise forecast as we try to risk adjust our forecast across the basket of our products. It wasn't so much a change in our market share or our yield on that market share but rather the competitive environment remaining limited to our product.

Gary Nachman -- BMO Capital Markets -- Analyst

Okay. And then are you still confident in the 3-year sales CAGR of greater than 15%? I think you said at the end of your comments growth rates greater than the industry but you didn't specify that 15%. And how much of that growth will need to come inorganically from partnerships?

Timothy C. Crew -- Chief Executive Officer

Thanks Gary. The higher end of the CAGRs that we look for obviously require the successful funds and launch of products like ranitidine. So to the extent those larger products and the levos and the C-Topicals and the other pipeline products that I alluded to to the extent those products occur on the time lines we believe they will occur we feel good about a CAGR in those sorts of ranges.

Gary Nachman -- BMO Capital Markets -- Analyst

Okay. All right. Thank you.

Operator

Our next question comes from Matt Hewitt from Craig-Hallum Capital. Your line is now open.

Matt Hewitt -- Craig-Hallum Capital -- Analyst

Good afternoon, thanks for taking the questions. First one for me regarding ADVAIR and the insulin products given the significant investment required by your partners how should we be thinking about what that will mean for you from a gross margin standpoint once you're able to launch those products?

Timothy C. Crew -- Chief Executive Officer

So both of those products given the substantial infrastructure and investments required would lead us to believe there will be a smaller number of folks that will be coming to the market. And I think that competitive set is fairly well known. Given that both of those products have three or four or five serious players that are committing this level of resource it'd be hard to envision not impossible but hard to envision additional people putting up that level of investment for these sorts of products. So we think that competitive set is getting to be fairly well defined that's an opinion. And we're very comfortable with the investments our partners are making in that space. I would note on some of these more technologically challenging FDA emerging requirements there is a real advantage to being a fast follow-on given that our development programs with our partners have started once most of that path was more clear.

And they're still able to make the investments necessary because they're looking to obviously globalize their investments with the other markets that they expect to service. Regarding our gross margins on those sorts of products we have earlier stated that our partnerships tend to range between the sort of 30-ish 35% shares to the 50% share of profits. And I think these two partnerships are arranged along those lines. And it's a clear example even for those sorts of products if we're on the lower end of that range as a percentage we're talking very significant gross margin dollars which of course makes sense as a business.

Matt Hewitt -- Craig-Hallum Capital -- Analyst

Makes sense. Okay. And then regarding ranitidine how big of a contributor was that prior to the disruption or prior to pulling that from the market? Just trying to get a sense for what that headwind represents until you're able to bring that product back.

Timothy C. Crew -- Chief Executive Officer

For us at least on a go-forward basis we are expecting single-digit millions mid-single-digit millions of revenue from that product and it was fairly -- fairly high gross margin. Of course patient safety first. And as the FDA's guidance emerged it was clear that there were risks here that they were trying to balance. We've made that withdrawal. I would also want to be clear that as I understand and I'm not a chemist but some of the precursors to this HDMA -- excuse me MDMA is somewhat resident in the moiety of ranitidine. So our expectation of this product coming back is limited but that's something that we will follow the FDA guidance as they balance risks and opportunities of the medicines that are on the market.

Matt Hewitt -- Craig-Hallum Capital -- Analyst

Okay. And that kind of answered the second part of that is what would it take to bring that product back to market but it sounds like that's kind of on hold. The last one I guess for me Buprenorphine Teva has talked about part of their settlement agreement basically giving that product away. What -- how does that impact your opportunity for that product? Or does it not? I'm just trying to figure out how to I guess quantify that market opportunity for you.

Timothy C. Crew -- Chief Executive Officer

So it was a novel and interesting proposal. I don't know the likelihood of it progressing. There are lots of constituencies and had a lot of opinions about how that may or may not work. As a practical matter all that I could say at this point from where we sit it was a fairly modest product in our portfolio. I'm not thrilled to see value we create and see even it's for someone else's sort of situation or problem. But it is not a significant or -- it's not a significant component to our sales. Again I think that our current holding position is that's not happening soon but should it occur transpire a settlement in that sort of mechanism it would not have a huge impact on our expectations of our year and our forward strategic plan.

Matt Hewitt -- Craig-Hallum Capital -- Analyst

That's really helpful. All right, thank you.

Operator

Our next question comes from Greg Fraser from SunTrust. Your line is now open.

Greg Fraser -- SunTrust -- Analyst

Thank you. It's Fraser on for Gregg Gilbert. I'm not sure if I missed this but did you guys quantify the sales contribution from new launches in the quarter?

John Kozlowski -- Vice President of Finance and Chief Financial Officer

Not specifically. We had the one product posaconazole. We talked a little bit about its contribution being close to double-digit millions but that was the one launch for Q1.

Greg Fraser -- SunTrust -- Analyst

Okay. And on Numbrino what are your latest thoughts on sort of size of the market and the sales potential of your product? Obviously in the scenario where you have an approved NDA that you can market? How are you thinking about the potential size?

Timothy C. Crew -- Chief Executive Officer

So thanks for the question Fraser. It's Tim. Recall our sales of Numbrino -- of the unapproved products excuse me before its withdrawal was around $3 million a quarter focused mainly on sort of trade engagement. I think our first objective will be to regain as much of that value as we can through the sort of more trade-based channels. Based on the label that does get approved we will certainly entertain looking at opportunities to expand market share. Recall from earlier conferences and calls the utilization of this product in the space is fairly low single-digit percentages. Now the label is I don't think likely to support a significant market share in the space but it certainly could support a larger market share. And some of that of course being involved with how the product is handled by the insurers and reimbursement cascades which is not something we obviously can pursue of an unapproved product but might have options on the approved side. So I think it's a little bit of stay tuned. But near term our expectation is to get back as much as we can of our former sales trends that we had historically on the unapproved product.

Greg Fraser -- SunTrust -- Analyst

Got it. That's helpful. And then just the last one is on generic collusion and the cases in which Lannett is involved. Do you anticipate any movement in those cases in the near to medium term.

Timothy C. Crew -- Chief Executive Officer

Yes. We on the litigation side don't make public commentary beyond saying we cooperate and we believe we've acted within the confines of the law. This process has been slow as it relates to things actually in the courts a little bit more noise in the areas of public opinion. So I defer to what you read and what you hear. We remain focused on doing the right thing working with demands for information as they occur and continue to believe we've acted appropriately.

Greg Fraser -- SunTrust -- Analyst

Okay. Thank you.

Operator

We have no further questions at this time. And at this time I'd like to turn the call back to management for closing comments.

Timothy C. Crew -- Chief Executive Officer

All right. It's Tim again. I'll close out with our customary shout out to all of our employees customers and partners so important to the success we have just described. We look forward to sharing our progress with you on our next call. Good night.

Operator

[Operator Closing Remarks]

Duration: 38 minutes

Call participants:

Robert Jaffe -- Investor Relations

Timothy C. Crew -- Chief Executive Officer

John Kozlowski -- Vice President of Finance and Chief Financial Officer

Elliot Wilbur -- Raymond James -- Analyst

Gary Nachman -- BMO Capital Markets -- Analyst

Matt Hewitt -- Craig-Hallum Capital -- Analyst

Greg Fraser -- SunTrust -- Analyst

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