Glaxo takes hit in China, but these are global dilemmas for Big Pharma

August 6, 2013

Glaxo Smith Kline faces a serious scandal for its business practices in China. There are serious implications for the entire global pharmaceutical industry

Some years ago, I wrote of the dilemmas facing Glaxo as its then chief sought to address criticisms of the gap between corporate actions and its rhetoric of corporate social responsibility. The entire pharmaceutical industry has been a favourite target on the internet under the cover-all term Big Pharma, as long-term profits were threatened, and speed-to-market pressures increased. Various unpleasant and often illegal practices were revealed.

The $400 million scam

Glaxo Smith Kline [GSK] is currently [July 2013] the centre of another scandal through its operations in China. The company is accused of a $400 million scam involving bribing doctors. Eighteen Glaxo employees have been arrested in China. The Chinese authorities claim a network of 700 people has been involved.

The issues are those facing the global giants known collectively as Big Pharma. The current story has a depressingly familiar tone. Last year [2012] Glaxo Smith Kline was hit with a $3bn fine for mis-selling drugs in the US. To date, the city has taken a relaxed view on the affair. Analyst Nils Pratley disagrees, offering three reasons:

First, reputation matters to drug companies and to Glaxo chief Andrew Witty who has been on a clean-up campaign during his five years in charge. After [last year’s fine] Witty said he was dealing with “echoes of the past” and announced his determination that such events would never happen again.

Nobody should doubt his sincerity but the Chinese allegations, if they are proved, would represent a serious failure of management. As far one can tell, GSK put in audit controls that it thought were sufficient for China; it may have been bamboozled by a sophisticated internal scam that was hard to spot without access to private bank accounts and emails. But that would be an explanation of failure, and won’t help GSK on the image front. Witty the unwitting is poor branding when you are dealing with governments around the world.

Second, GSK will probably have to rethink its entire model of doing business in China and other “high risk” countries. That signals disruption ahead as internal compliance controls are overhauled yet again.

[Eventually] in China, GSK will have to arrive at a working arrangement with a central government that appears to have a twofold agenda of running an anti-corruption drive and getting more funding into its dysfunctional healthcare system. Greater opportunity for GSK could emerge from the mess [through lower costs but greater volumes of sale and a better-regulated market.} But, to judge by the current aggressive rhetoric in China, the road to that position could be very long indeed. The story is still developing, but the City looks to be underplaying it.

I have long argued that the ‘pipeline’ model of innovation long-accepted by Big Pharma is in need of rethinking. It is based on a belief that success requires a pipeline of massive proportions through which vast numbers of candidates proceed in a Darwinian series of tests. Commercial pressures have ramped up the size and speed of operations. The temptation to ignore corporate social responsibilities is strong, regardless of the rhetoric and the establishment of CSR departments. Sir Andrew faces a host of leadership dilemmas.

July 2014

China continues legal proceedings

See Feldman, S. (2013) Trouble in the middle, oxford: Routledge for a broader analysis. http://blogs.wsj.com/chinarealtime/2013/08/01/eight-questions-steven-feldman-trouble-in-the-middle/

Accessed, July 12th 2014


Shazam helps redefine the consumer engagement market with a little help from Carlos Slim

July 11, 2013

Shazam Logo
New technology firm Shazam is still working out how to convert its potential into profit. Billionaire Carlos Slim is its latest backer

Leaders we deserve have picked early-signals of market leaders before. We have also picked market losers as well. Undeterred however, I offer Shazam for the attention of our subscribers.

The news story this week [July 2013] is that the Mexican billionaire Carlos Slim is putting $40 million into the UK-based firm.

Background to Shazam

Background to Shazam can be found in a LA Times article summarized below [strictly speaking, Andrew Fisher is currently Chairman of Shazam, having handed over the role of CEO to Rich Riley ]

Shazam, the mobile app that instantly recognizes songs and TV commercials, has announced a $40-million round of funding led by Mexican billionaire Carlos Slim. The app, which users turn on when they hear a song that they want to identify, said the funding is being headed up by Slim’s company, America Movil, one of the world’s largest wireless communication firms. Shazam Chief Executive Rich Riley called the investment a milestone.

“It’s a great continuation of the incredible momentum that we have,” he said.

Though Shazam is not profitable, the company said it has generated revenue of $300 million in the past 12 months from song purchases. When users purchase a song from iTunes or other digital stores after tagging it on Shazam, the company gets a cut of the sale.

“We intentionally operate at a slight loss so we can focus on continuing to grow our user base, deepen the experience and accelerate our revenue growth,” Riley said.

Additionally, Shazam said it has worked on more than 300 TV ad campaigns. The London-based company began using its software to tag TV commercials a few years back, and it charges companies it works with six-figure fees to include the Shazam logo on their ads, letting users know that they can expand the commercial through their smartphones. The company last received funding, for $32 million, in September. Since then, Shazam said it has more than tripled its active user base to 70 million.
“Shazam is defining a new category of media engagement which combines the power of mobile with traditional broadcast media and advertising to create compelling value-added experiences for consumers, content providers and brands,” Slim said in statement.

Points of leadership interest in Shazam

Shazam shows the hallmarks of other new-technology companies. Andrew Fisher is a serial innovator and entrepreneur. He is technologically-savvy but not a geek whose interest in technology holds him back from financially shrewd actions. He has attracted Rich Riley as CEO so that Fisher can focus on the new investment required for growth. The last statement above indicates his strategic thinking and the need to re-define what is the emerging market of consumer engagement.

Health warning

All pioneering ventures are vulnerable. This one may succeed, perhaps as an acquisition for its technology, or as a stand-alone global corporation. LWD does not recommend investment opportunities. Its posts are primarily intended as materials of interest to business students and researchers.


A leader’s legacy: strong words on Tesco’s Sir Terry Leahy by former chairman Lord MacLaurin

July 6, 2013

Sir Terry Leahy’s reign as Tesco chief executive has been slammed by his predecessor and mentor, Lord MacLaurin, in a public attack at the supermarket giant’s annual general meeting. He later told the Guardian [June 28th 2013] that Leahy “lost the plot” and that the US venture was “disastrous”.

Lord McLaurin’s attack is the more surprising from someone who has been quoted as saying that his part in the appointment of Terry Leahy to replace himself as CEO of Tesco was the achievement he was most proud of [citation required, although it appears in his Wikipedia cite].

Applying the legacy test

Applying the legacy test to Lord McLaurin and Vodaphone, we find that the company was involved in a leadership battle with Lord McLaurin as its departing chairman in 2006. Vodaphone’s view of Lord McLaurin’s legacy may be inferred from the unexpectedly low compensation package he received at the time.


Flourishing organizations and flourishing individuals

May 31, 2013

The Fowler Center at the Weatherhead School of Business has recently published an article on the practice of self-reflection as a means of promoting reflection within an organization. The intention is to support discussion and initiatives for promoting change in the way organizations treat employees in order to create flourishing businesses

LWD is pleased to be able to promote this initiative by summarizing a recent item from The Fowler Center:

The Fowler Center at the Weatherhead School of Business has recently published an article on the practice of self-reflection and promoting reflection within an organization. The intention is to support discussion and initiatives for promoting change in the way organizations treat employees in order to create flourishing businesses

The article, to appear in this summer’s issue of The Journal of Corporate Citizenship,is a prelude to a forthcoming book titled The Flourishing Enterprise: Connecting Sustainability and Spirituality. It will be the final product of the Fellows’ research and careful thought on “the journey to a greater sense of connectedness” as central to business success.

The idea is that if individuals can find and create spiritual contentment in their organization, they can enrich their whole organization and help others flourish as well. The journey to a flourishing organization begins with the self. The Fellows argue that since knowledge workers’ productivity is deeply influenced by the workers’ inner states, cultivating optimal internal states becomes the responsibility of management.

Appreciative Inquiry is an excellent tool to cultivate reflection on the best of what is and to co-create the best of what could be. Created at the Weatherhead School [Case Western University] Appreciative Inquiry is a strength-based approach to whole systems change and is an excellent tool for creating large systemic change.

The Fowler Center hopes that its work will proliferate and create deep meaningful conversations about ways to transform businesses into agents of world benefit–where flourishing individuals create flourishing organizations that lead to a flourishing world.


First Group plans derailed by shareholder activists

May 25, 2013

First GroupThe First Group transport company has run into difficulties compounded by the loss of a Government contract after a battle with Richard Branson, and board room resignations influenced by shareholder activists

LWD subscribers were alerted to a leadership story at First Group the bus and rail transport outfit last year [Oct 2012] . The post noted that

Richard Branson called foul when his company Virgin Trains lost the franchise recently for the West Coast Main Line services from Scotland to London. His reaction was justified when the Department of Transport was forced to admit there had been flaws in the bidding process.

Virgin Trains has run the West Coast Main Line since 1997. When it recently lost its bid to renew the contract to rival operator FirstGroup, it claimed the evaluation was flawed, called for a review, and started court proceedings over the government’s decision.

On 3rd October 2012, Government ministers announced that there were “significant technical flaws” in the way the risks for each bid were calculated, justified the legal case that Branson had brought against the decision.

The fun fighter

Richard Branson, for all his business is fun image is not a stranger to fighting his case through the courts. His success contributed to problems building up for First Group.

Difficulties pile up for First Group

This week [May 2013] First Group is shown to have encountered further difficulties after the hole in its financial plans resulting from the loss of the contract. The Guardian reports

FirstGroup, the train and bus operator, has turned to shareholders for £615m, scrapped a final dividend and parted company with its chairman in an effort to reduce its debts and avoid a credit rating downgrade.

The shares fell 30% after the cash call was announced alongside a sharp fall in full-year profits at the company which employs 120,000 people. It is struggling with almost £2bn of debt largely as a result of its acquisition of the US bus company Laidlaw in 2007. The company came under further pressure last year when the government announced in August that it had won a lucrative contract to run the west coast main line rail franchise between London and Scotland, only to scrap the decision in October citing flaws in the bidding process.

Shareholder activists

Other reports suggest that shareholders have played an important part in “encouraging ” the company to take major actions to deal with its problems.

FirstGroup’s problems finally caught up with it [on Monday 13th May 2013] . Its CEO, Tim O’Toole, had repeatedly denied that FirstGroup needed to raise capital. But, with the credit rating agencies threatening to downgrade the company’s debt to junk, it launched a humiliating three-for-two rights issue to raise £615m. It was priced at a 62 per cent discount to the prevailing share price. Shareholders were also introduced to a “new progressive dividend policy”, otherwise known as no final dividend this year and a slashed pay out from next. The shares fell 68.2 to 155.6p.
For this, someone had to pay the price. And, after 27 years at the wheel, it was Chairman Martin Gilbert, ushered off the clattering train by shareholders keen to make a clean break with the past. It was either him or O’Toole – and at least the American-born former London Underground boss had the excuse of only having been at the controls since April 2011.

A similar shareholder spring-cleaning is underway at J P Morgan.


Google accused of being evil, doing evil by UK politicians

May 21, 2013

Do no evilGoogle stands accused of acting in a way contrary to its slogan “do no evil”. This continues a debate over tax avoidance, tax evasion and corporate social responsibility

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Last week [May 18th 2013] Google’s European leader Matt Brittin appeared before The Commons Public Accounts Committee in London to defend his Company’s tax arrangements in the UK. A pivotal point was the practice of declaring sales were completed in another country [Ireland] with more generous Corporate taxation arrangements.

The Chair of the Committee, Margret Hodge, was particularly vehement in her criticism of the firm’s methods of tax avoidance in the UK. The criticism had moved on from tax evasion (illegal) to tax avoidance (legal) in a way that amounts to serious departure from the corporate claims of good citizenship.

The Guardian reported that

“[The] Commons Public Accounts Committee Members reacted in disbelief on Thursday [16th May 2013] after it emerged that they paid just £3.4m of tax on £3.2bn of sales taken from UK customers last year as their sales were technically “closed” in low-tax Ireland.”

Writing in The Observer a few days later, Google CEO Eric Schmidt noted:

“It is tempting for every government to assume that they will benefit if and when the current [tax] structure changes. But in reality, it’s probably only a significant increase in corporation taxes globally that would make every country a “winner” – and the consequences of that would likely be less innovation, less growth and less job creation. That said, the UK government has the perfect opportunity to take the lead in shaping this complex debate at the G8 summit next month. We hope George Osborne seizes the initiative and makes meaningful tax reform one of the top items on the agenda.”

It’s a Tax Dodge, says Hodge

Margaret Hodge had made clear her view at the Committee investigation, telling Google’s European CEO Matt Brittin, that his company’s behaviour on tax was “devious, calculated and, in my view, unethical”.

[Mr Brittin] had been recalled by MPs after being accused of misleading parliament over the firm’s tax affairs six months ago. Hodge said: “You are a company that says you ‘do no evil’. And I think that you do do evil.” Hodge was referring to Google’s long-standing corporate motto, “Don’t be evil,” which appeared in its $23bn US stock market flotation prospectus in 2004.

Do no evil image

Image from grokdot

To be continued


Musical conductors and surgeons share leadership skills

May 19, 2013

Eye SurgeryThe leadership skills required of musical conductors and surgeons are highly situational and yet applicable to many other leadership roles

This idea is not particularly novel, although I have not come across it in the introductory leadership textbooks prepared for business executives. The closest is an infrequent reference to improvisation, or creating within accepted principles or rules.

Distributed leadership

LWD subscribers may have noticed recent posts mentioning musical conductors. I also interviewed the promising young conductor Duncan Ward a few years ago.

Overall, the impression I received of musical leadership was of a form of distributed leadership. The conductor symbolizes and ‘orchestrates’ the performance, and coordinates its execution, assisted by the contributions of the leaders of various musical sub-groups within the whole.

The surgeon

More recently I had direct experience of a highly skilled surgeon at work. My contribution to the performance was as his patient, but was able to witness the procedure to some degree because of the absence of a general anaesthetic.

Distributed leadership as a non-zero sum game

The surgeon was clearly the leader of a team. However, again there were sub-groupings each with a formal leader. Distributed leadership again. This not the simple splitting up of the tasks as was made famous by Adam Smith’s distribution of labour or Henry Ford’s efficiency concept of a production line. Power is not asserted top-down as in a zero-sum game. The conductor or surgeon creates within constraints imposed by the situation and its interpretation. The other lead players and ‘team members’ are not de-skilled (as they are in the classical model of a modernist business production line) but enabled. In other words, it becomes a non-zero sum game.

Footnote

A similar metaphor was used by footballer Robin van Persie in an interview. he talks of football training as being in an orchestra with the coach as conductor.


HBOS Leadership without the benefits of hindsight

May 10, 2013

180px-ripvanwinkle.jpg The following post anticipated the financial crisis of 2007-8 under an earlier title. HBOS changes: Too little, too late? It is reissued following the news this week of the fall from grace of the bank’s three leaders

Over the last few weeks, pressure has increased on HBOS executives following a government report and calls for former CEO James Crosby to give up his knighthood and part of his pension rights. The Original post indicates the perspective in 2007.

ORIGINAL POST

This week [Nov 2007] saw a little-heralded leadership change in the retail division of the financial giant HBOS. When a bank changes one or two members of its management team, it does so to reassure investors of continuity as well as to signal change. Has HBOS been too complacent over its business environment? Are the changes too little, too late?

According to a BBC report this week:

HBOS has announced a revamp of its retail division, including the departure of its head Benny Higgins … finance director Phil Hodkinson will [also] retire at 50 next year, and will be replaced by a former incumbent, Mike Ellis …”The structural changes we have introduced in our retail business are right for the group,” said chief executive Andy Hornby. Mr Higgins, who moved from Royal Bank of Scotland last year to head the retail unit, will leave HBOS at the end of 2007. [CEO] Mr Hornby told the Reuters news agency that Mr Higgins’ departure was not related to a recent 8% drop in profits at the retail unit. The business was hit by a sharp drop in its share of mortgages earlier in the year after a new pricing strategy went wrong, although the bank says its share has since recovered.

So there we are. No change there, then. Banks are as prone to jolts and change as any other business. Arguably they have become as accustomed to dealing with change as companies in many other business sectors. Their corporate advertising increasingly seeks to present images of innovative and dynamic set-ups. Yet, they also work hard at maintaining a corporate image of stability and reliability. Which just goes to show that effective creativity in advertising can be pretty challenging. How would you send out a convincing signal that you are reliable and adventurous, dynamic and prudent?

HBOS doesn’t stand for anything

I used to think of HBOS as an abbreviation for two big names in Banking after a recent merger, namely the Halifax and Bank of Scotland. Wrong. The (usually) reliable Wikipedia tells me we shouldn’t connect it with some earlier entity or entities. Same with ICI. which is initialized not an abbreviated Imperial Chemical Industries. Anyway, let’s just say that what is now HBOS used to be the Halifax Building Society of Halifax, Yorkshire, and The Bank of Scotland of Edinburgh.

Background to the story

Earlier this year [2007] the bank announced satisfaction with its profits. CEO Andrew Hornby said HBOS was optimistic about the UK economy and growth in its main markets, and that the UK business environment was “generally benign”.

How benign is benign?

Hornby’s view was not widely shared

“Overall the quality of these figures looks poor and the guidance of 2007 on loan growth, margin, costs and bad debt looks disappointing,” analysts at Fox-Pitt, Kelton said in a note

. AS it turned out, the HBOS retail business environment was to prove far from benign. Over Christmas 2006 there had been unfortunate publicity for the bank’s role in the sad tale of the collapse of Farepak. In 2007 it became clearer that the shared business model of the retail banks was failing. This relied on offering ‘free’ retail banking, partly subsidized by high charges for non-agreed overdrafts. HBOS faces substantial losses. It also proved non-competitive in mortgages, and failed in its retention strategy.

Anatomy of a high flier

In 2005, CEO Andy Hornby was assessed as one of the FTSE’s ‘power players’ for among other things being remunerated with ‘biggest directorship’ of the FTSE 100 at around £ one million sterling for his HBOS responsibilities. The young city high-flier was a former Blue Circle and Asda executive, and could take credit for his part in steering through the HBOS merger successfully. The deal was a coup for The Halifax. However gently the merger was presented, Halifax emerged with the better hand. Hornby became its CEO, and Lord Dennis Stevenson (another Halifax man) became Chairman of the new company. The Bank of Scotland had recently lost out in several take-over bids, including its wooing of National Westminster Bank, when it had lost to its bitter rival, the Royal Bank of Scotland.

What’s going on?

Perhaps researching this blog has made me over-sensitive to leadership battles. But the story leaves me with just that suspicion that there is more to unfold. Has HBOS been complacent over its business environment? The kindest that can be said was that it did not rush into hasty action recently. More unkindly, maybe it could be accused of being too reactive. I haven’t picked up the signals of stakeholder discontent that indicate real ‘trouble at the top’. No comments about excessive remuneration packages. But those city analysts have already sent out signals suggesting the business environment is not as benign as HBOS would like it to be. I have a very small shareholding in one of the group’s financial products. I’m not planning on selling. I’m not planning on acquiring any more either. And maybe there will be a business case to be written on leadership style and proactivity.


Why business students like the Alibaba case and Jack Ma

March 23, 2013

Jack Ma wikipediaWhen Asian business students are asked to write about leadership, one of their favourite topics is the Chinese telecommunications giant Alibaba, and its dynamic leader Jack Ma

This is hardly surprising. The company has grown through the vision and enterprise of its founder. Already a host of corporate stories are developing around him and his giant baby, recently valued at 35 billion dollars.

The Jack Ma story

Jack Ma fits the profile of the creative entrepreneur. His decisions are imaginative. He describes his leadership journey in vivid anecdotes which suggests that he has a well-developed transformational style. An English teacher and graduate of Hangzhou, Mr Ma became a skilled web site builder, one of the first in China.

When he was thinking about going international he looked for a corporate name that worked in Chinese but which also had global connotations. Once when in America, someone mentioned the story of Ali-Baba to him, and he thought he had found what he was looking for. He tested his idea quickly and locally, as found there was surprising recognition of the story from the Arabian Knights, and the magic password Open Sesame which opened up a cave full of treasures.. Yes, my company could be remembered for opening up a place full of treasures, he thought. Ali-Baba had brought prosperity to his village.

He listed the new name slightly differently, noticing that it was also effective when written in Chinese characters.

A sprawling conglomerate

Alibaba, founded in 1999, was to grow into the largest private corporation in China. It was described by Bloomberg Business Week as a sprawling conglomerate of web-based companies. The largest elements are Taobao and the Alibaba group. The former is a Chinese version of E-Bay and was to become market leader in e-commerce in China

Its Business relationship with Yahoo has been controversial. Alibaba grew and prospered under its founder-leader, Yahoo struggled to compete in its more global business.

Time to quit says Jack Ma

Recently, the founder has decided to hand over the leadership to a senior executive Jonathan Lu in advance of an anticipated initial public share offering which is being predicted to match that of Facebook [or more, as Facebook's shares have dipped this year]. The South China Post stated:

The announcement came a few days after Alibaba, which Ma founded in 1999, announced a sweeping restructuring that will divide the group into 25 business units under the direction of two committees, one for strategy and the other for operations. In an e-mail sent to Alibaba’s more than 24,000 employees worldwide on January 15, Ma said he decided to relinquish his position as chief executive because the company had people who “are better equipped to manage and lead an internet ecosystem like ours”.

Ma described how he realised years ago that he was not suited to be a traditional chief executive of a big firm. He said that “at 48 I am no longer ‘young’ for the internet business”. What he aims to be is “a good partner to more capable colleagues”, which he intends to accomplish by continuing his role as executive chairman.

Ma described the restructuring as “the most difficult reorganisation” in Alibaba’s history. But it is a bet to stay competitive in the mainland’s fast-growing e-commerce market. JP Morgan has estimated this market to be worth US$436 billion in 2015. The move fuelled speculation that Ma was laying the groundwork for Alibaba’s initial public offering, which the company has denied.

What happens next?

Predictions are generally favourable. I agree with The Economist [March 23rd 2013] which noted that while the future is promising “…there is nothing inevitable about Alibaba’s future fortunes”. I urge students of leadership to do a little ‘map testing’ before accepting that newspaper’s casual SWOT analysis: [1] that Alibaba could overreach itself; that [2] it would face the risk that ‘foreign governments will clamp down’ and [3] face an internal threat because ” The Communist Party is bound to be jealous of an outfit that has so much data on Chinese citizens.”

I’m afraid that piece of analysis would have not obtained a particular high grade, if it had been supplied in a student assignment on Alibaba’s prospects.


Global reach: Does Manchester United Football Club have five hundred million ‘followers’?

February 18, 2013

MUFC red devilTudor Rickards

A market research firm claims that Manchester United Football Club is followed by approximately one of every ten people in the world. This figure has prompted much suspicion.

The claim was made by Kantar Sport, and is featured within promotional material by the football club which also has claims to have the greatest following world-wide.

The story was reported by the BBC [February 18th 2012]

Even the most ardent opponent of Manchester United would acknowledge that the club has fans right around the world. But the statement that the club has a global following of 659 million adults – out of a total five billion adults in the world – is still quite staggering.

The work was carried out earlier, and had already appeared on MUFC’s official website which stated:

The largest global football follower survey ever conducted has today [29th May 2012] named Manchester United the world’s most popular club, with 659 million followers worldwide.

The survey was carried out by leading market research agency, Kantar, and gathered 54,000 respondents from 39 countries. The club that Forbes recently named the most valuable in world sport was identified as the favourite team of 659 million followers around the world. Kantar found that football remains the world’s most popular sport, with 1.6 billion followers globally, reinforcing the results of a recent FIFA survey which produced a similar figure.
Richard Arnold, the club’s Commercial Director, commented on the long-term strategy that has made Manchester United the number one club in the world’s number one sport.

The BBC was more skeptical:

Even the most ardent opponent of Manchester United would acknowledge that the club has fans right around the world. But the statement that the club has a global following of 659 million adults – out of a total five billion adults in the world – is still quite staggering.

When an advertising agency makes statistical claims, it is a good idea to carry out a few simple tests to understand the degree of marketing speak behind the statement.

Schrank’s analysis

The advertising guru Jeffrey Shrank has compiled a list of the methods behind advertising claims in The Language of Advertising Speak. The Schrank article ‘does what it says on the can’ to borrow another advertising claim. Schrank lists ten ways in which advertising claims seek to imply more than the words claim.

The Manchester United Claim

In the case of Manchester United, this will be the owners, The Glazer family. It is worth asking: What part might the ‘one person in ten’ claim play in the strategic thinking of the owners of the club?

Note to students of leadership:

Can you apply the processes of map reading, testing and making to understanding more about the claim? What do you make of the statistical methods applied by Kantor? [intelligent assessment if you are not experienced with stats] How would you advise a competitive club on the significance of the claim for their own strategic considerations?


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