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Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
Economics of the Market for Medicines in the UK (2013)
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Economics of the Market for Medicines in the UK (2013)

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  • 1. Economics of the Market for Medicines Jorge Mestre-Ferrandiz Director of Consulting City University London 21 March 2013
  • 2. Agenda1. The supply side – R&D2. Demand for medicines3. NICE – the cost-effectiveness ‘4th hurdle’4. Regulating medicine prices Economics of the Market for Medicines. City University. March 2013 2
  • 3. Structure Nature of competition£ • Follow-on compounds (dynamic) Supply Issues • R&D process • Cost of an NME Competition in the • Public/private off-patent segment collaborations • R&D incentives • Capital market Patent Launch expiry Time t0 t1 Demand / Regulation t2 t3 • Role of HTA • Uptake drivers • Prescribing Incentives • Demand vs. Supply controls Economics of the Market for Medicines. City University. March 2013 3
  • 4. Characteristics of Medicines Markets• Supply is R&D intensive, which implies: • Intellectual property rights (patents) • Long lead times • High risk • Dynamic competition is as important as static • Generic competition after patent expiry• Demand is regulated – governments and social insurers are major buyers of medicines• Prices are regulated Economics of the Market for Medicines. City University. March 2013 4
  • 5. Supply Side – Main Characteristics (1)• Patents are an incentive for dynamic efficiency – by promising temporary monopoly if successful• Patents last 20 years; first 9-11 of which are spent getting the medicine to market, i.e. research & development (R&D)• Commercial success in R&D-based companies has depended on finding ‘blockbusters’ Economics of the Market for Medicines. City University. March 2013 5
  • 6. Supply Side – Main Characteristics (2)• Average R&D cost of a new medicine up to launch c£1.2bn• Includes costs of failures• Out of pocket costs ≈ 50%• Opportunity cost of capital ≈ 50%• Only ≈ 30% of launched medicines earn revenues that exceed their lifetime costs Economics of the Market for Medicines. City University. March 2013 6
  • 7. Discovery & Development of a New Medicine Marketing Final patent Investigational new Marketing approval/REGULATION product launch application drug application (US) applicationTIME (YEARS) 1999 2002-7 2008 2010 Regulatory Post-mktg Discovery research Development research review research PHASES OF Basic Synthesis Phase Phase II Phase III Phase DRUG research Biological testing & I IVDEVELOPMENT pharmacologic screening Short-term animal testing Long-term animal testing Toxicology and pharmacokinetic studies Chemical development Pharmaceutical development ATTRITION 1 RATES 5,000 8-15 4-8 2-3 1 $800M COST 0 Economics of the Market for Medicines. City University. March 2013 7
  • 8. The Cost of an NME is Rising Economics of the Market for Medicines. City University. March 2013 8
  • 9. Understanding the R&D process: Basic concepts1. Most new medicines are developed simultaneously2. The innovation race stimulates competition3. Being the first in class does not imply being the best in class4. The market (clinical practice) determines the ‘winners’5. Spillovers in the R&D process6. Alliances have an important role to play Economics of the Market for Medicines. City University. March 2013 9
  • 10. Cash Flow for a Successful Medicine£ p.a. + Launch 0 Patent expiry _ Economics of the Market for Medicines. City University. March 2013 10
  • 11. Supply Side – Main Characteristics (3)• R&D costs are sunk (global) joint costs• R&D costs ≈ 17% of pharmaceutical sales p.a. But ≈ 31% of costs on net present value basis• => (even long-run) marginal cost << average cost• => Price discrimination (based on Ramsey rule?) if non-linear pricing is impractical•  Parallel trade Economics of the Market for Medicines. City University. March 2013 11
  • 12. % of ‘World’ Pharmaceutical Industry R&D Spend Source: EFPIA (2010) The Pharmaceutical Industry in Figures Economics of the Market for Medicines. City University. March 2013 12
  • 13. Agenda1. The supply side – R&D2. Demand for medicines3. NICE – the cost-effectiveness ‘4th hurdle’4. Regulating medicine prices Economics of the Market for Medicines. City University. March 2013 13
  • 14. Types of Prescription Medicines Original brand Branded Unbranded OTCs On-patent Off-patent generics genericsNHSPrivate • In 2007, generics accounted for more than 60% of the total number of prescriptions dispensed by pharmacies in England, compared with fewer than one in six as recently as 1982 • Proportion of prescriptions written generically (80% in 2005 vs. 35% in 1985) • Source: OHE Compendium (2009) [OTCs = over the counter medicines] Economics of the Market for Medicines. City University. March 2013 14
  • 15. Economics of the Market for Medicines. City University. March 2013 15
  • 16. Economics of the Market for Medicines. City University. March 2013 16
  • 17. Economics of the Market for Medicines. City University. March 2013 17
  • 18. Economics of the Market for Medicines. City University. March 2013 18
  • 19. Source: EGA Economics of the Market for Medicines. City University. March 2013 19
  • 20. Demand Side Characteristics Chooses Pays ConsumesNormal Consumer Consumer ConsumermarketPrescription Prescriber Government Patientmedicines / insurermarket Economics of the Market for Medicines. City University. March 2013 20
  • 21. Measures Affecting Prescriber Price Sensitivity• Primary Care Trust budgets• Practice budgets and prescribing incentive schemes• Provision of information (PRODIGY, PACT, NICE guidance, pharmaceutical advisers, etc.) Economics of the Market for Medicines. City University. March 2013 21
  • 22. Agenda1. The supply side – R&D2. Demand for medicines3. NICE – the cost-effectiveness ‘4th hurdle’4. Regulating medicine prices Economics of the Market for Medicines. City University. March 2013 22
  • 23. National Institute for Health and Clinical Excellence• Covers England & Wales• Two main outputs 1. Technology appraisals 2. Clinical guidelines Economics of the Market for Medicines. City University. March 2013 23
  • 24. Technology Appraisal Criteria - April 2004• The Institute and Appraisal Committee take into account: • The broad clinical priorities of the Secretary of State for Health and the Welsh Assembly Government • The degree of clinical need of the patients with the condition under consideration • The broad balance of benefits and costs • Any guidance from the Secretary of State for Health and the Welsh Assembly Government on the resources likely to be available and on such other matters as they think fit • The effective use of available resources Economics of the Market for Medicines. City University. March 2013 24
  • 25. NICE’s Guide to Methods of Technology Appraisal, April 2004• Below a most plausible incremental cost-effectiveness ratio (ICER) of £20,000/QALY, judgments about the acceptability of a technology as an effective use of NHS resources are based primarily on the cost-effectiveness estimate.• Above a most plausible ICER of £20,000/QALY, judgments about the acceptability of the technology as an effective use of NHS resources are more likely to make more explicit reference to factors including: • The degree of uncertainty surrounding the calculation of ICERs • The innovative nature of the technology • The particular features of the condition and population receiving the technology • Where appropriate, the wider societal costs and benefits• Above an ICER of £30,000/QALY, the case for supporting the technology on these factors has to be increasingly strong Economics of the Market for Medicines. City University. March 2013 25
  • 26. Use of Thresholds?Source: Rawlins and Culyer, 2004 Economics of the Market for Medicines. City University. March 2013 26
  • 27. Economic Evaluation Elsewhere• Focused on pharmaceuticals• Fourth hurdle i.e. reimbursement decisions: • Public reimbursement: Australia, Baltic countries, Belgium, Canada (British Columbia, Ontario), Czech Republic, Denmark, Finland, France, Hungary, Netherlands, New Zealand, Norway, Portugal, Russia, Slovenia, Sweden • US managed care formularies• Pricing negotiations • Australia, France, Italy, New Zealand• Advice to health service • England and Wales (NICE), Scotland (SMC)• Risk sharing arrangements • Australia, New Zealand, UK (few cases) Economics of the Market for Medicines. City University. March 2013 27
  • 28. HTAs – Some Issues What products to All vs. limited evaluate? When to evaluate? How to evaluate?Pre-launch (i.e. pre-requisite • Clinical effectiveness &/orto launch) vs. post-launch cost effectiveness • Additional modelling For what purpose? • Independence of agency • Information sources: RCT P&R vs. prescribing guidelines/use vs. other • Mandatory vs. advisory… Economics of the Market for Medicines. City University. March 2013 28
  • 29. Agenda1. The supply side – R&D2. Demand for medicines3. NICE – the cost-effectiveness ‘4th hurdle’4. Regulating medicine prices Economics of the Market for Medicines. City University. March 2013 29
  • 30. Why Regulate? - Market Failure• Public goods and the free-rider problem (e.g. research)• Externalities • E.g. your vaccination reduces my risk of catching an infection • E.g. the caring externality: I’m happy if you’re cared for• Incomplete or asymmetric information • Moral hazard (= ‘hidden action’) • Selection problem (= ‘hidden information’) • Principal/agent problems• Government procurement Economics of the Market for Medicines. City University. March 2013 30
  • 31. Monopoly Power• Economies of scale and/or scope• Natural (local) monopoly• Input constraints• Patents: dynamic efficiency vs static monopoly Economics of the Market for Medicines. City University. March 2013 31
  • 32. Options: Types of Regulation• ‘No regulation’ = 1998 Competition Act only• Profit, i.e. rate of return, control • Unbanded • Banded• Price control • Baskets of products, as with ‘RPI-X’ control of utilities’ prices • Individual products, e.g. via reference prices, or ‘cost- plus’, or related to therapeutic benefit Economics of the Market for Medicines. City University. March 2013 32
  • 33. 1998 Competition Act• Came into force March 2000• Based on EU Treaty - Articles 81 & 82• Prohibitions: • Chapter 1 – Agreements preventing, restricting or distorting competition • Chapter 2 – Abuse of a dominant market position• Fines up to 10% of turnover; 3rd parties may sue for damages Economics of the Market for Medicines. City University. March 2013 33
  • 34. Banded Rate of Return Regulation%RoR Outturn RoR > threshold => repay excess Outturn RoR < threshold => may increase prices 0 £ capital employed Economics of the Market for Medicines. City University. March 2013 34
  • 35. RPI-X Regulation of a Basket of ‘n’ Products{w1p11 + w2p12 + w3p13 + …….. + wnp1n--------------------------------------------------- -1 w1p01 + w2p02 + w3p03 + …….. + wnp0n { x 100 ≤ ΔRPI - XWhere:wi = weight for product ‘i’ (e.g. quantity sold in period 0)pti = price of product ‘i’ in period t = 0,1ΔRPI = % change in retail price index between period 0 and period 1X = efficiency factor Economics of the Market for Medicines. City University. March 2013 35
  • 36. Regulation Criteria• Static efficiency • Productive efficiency: making the right choice between different ways of achieving the same outcome • Allocative efficiency: doing the things that people want and ensuring that the right people get them• Dynamic efficiency• Benefit to UK plc – economic rent• Regulatory (administrative) burden• Equity/other social policy objectives Economics of the Market for Medicines. City University. March 2013 36
  • 37. (How) Should Pharmaceuticals Be Regulated in the UK?• What, if anything, to regulate? • On- and/or off-patent? • Branded and/or unbranded? • Prescribed and/or over-the-counter? • Sales to NHS only, or all UK sales?• If so, how? • Rate of return control, unbanded • Rate of return control, banded • Price control – basket, RPI-X • Price control – individual products, reference prices• From 3 perspectives • General public: patients and taxpayers • Government • Industry Economics of the Market for Medicines. City University. March 2013 37
  • 38. Key Questions1. How price-sensitive are the people making the consumption choices?2. How much competition is there between one medicine and another, or between medicines and alternative treatments?3. Do producers have incentives to keep costs down?4. Will production and consumption choices become increasingly distorted over time?5. Do producers have incentives to invest in the UK, especially in R&D?6. Would the regulatory system be costly for the regulator to administer and the companies to comply? Economics of the Market for Medicines. City University. March 2013 38
  • 39. Two Forms of Price Regulation in UK1. Pharmaceutical Price Regulation Scheme (PPRS) regulates manufacturers’ profits earned on sales to the National Health Service of branded medicines (on- and off-patent)2. Schemes M and W control the reimbursed price of generic medicines paid to dispensing pharmacists and doctors Economics of the Market for Medicines. City University. March 2013 39
  • 40. The PPRS (2009)• Have been variants of PPRS since 1960s• Department of Health acts as regulator for whole UK• Objectives of 2009 PPRS: • Deliver value for money • Encourage Innovation • Promote access and uptake for new medicines • Provide stability, sustainability and predictability• Voluntary – but statutory alternative scheme for firms that opt out Economics of the Market for Medicines. City University. March 2013 40
  • 41. The PPRS (2009)• Covers branded pharmaceuticals sold to the NHS• Negotiated every 5 years or so between the ABPI and the Department of Health• Current scheme commenced 1/1/09• Scheme applies to all companies supplying BRANDED medicines to the NHS ≈ 80% by value of pharma sales to NHS• Indirectly controls price by regulating profits earned by these firms Economics of the Market for Medicines. City University. March 2013 41
  • 42. The PPRS (2009)• Freedom of pricing at launch, subject to constraints• 21% target return on capital (ROC)• Margin of tolerance: • Scheme members will be able to retain profits of up to 140% of the ROC target. • Companies will not be granted price increases unless they are forecasting profits less than 40% of the ROC target• Limits on ‘allowed’ marketing and information expenses and R&D expenses• Potential to introduce generic substitution• Price adjustments: Economics of the Market for Medicines. City University. March 2013 42
  • 43. The PPRS 2009• Flexible Pricing Schemes: a company can increase or decrease its original list price in light of new evidence or a different indication being developed• Patient Access Schemes: will facilitate earlier patient access for medicines that are not in the first instance found to be cost- and clinically-effective by NICE within a framework that preserves the independence of NICE Economics of the Market for Medicines. City University. March 2013 43
  • 44. Flexible Pricing Schemes• Flexible pricing recognises that the initial launch indication price of a medicine may not fully reflect its longer term value to patients in the NHS• There are two circumstances under which a flexible approach to pricing would be relevant: 1. When significant new evidence is generated that changes the value of an existing indication 2. Where a significant new indication is launched• Flexible pricing will only apply when medicines are subject to NICE appraisal, as a review by NICE will be required to determine whether the revised price provides value to the NHS.• No proposals for price changes submitted under the flexible pricing provisions (PPRS, 11th Report to Parliament) Economics of the Market for Medicines. City University. March 2013 44
  • 45. Patient Access Schemes (1)• Patient Access Schemes are schemes proposed by a pharmaceutical company and agreed between the Department (with input from NICE) and the pharmaceutical company in order to improve the cost-effectiveness of a drug and enable patients to receive access to cost-effective innovative medicines Note: only relates to England and Wales, as different HTA arrangements are in place in Scotland and Northern Ireland Economics of the Market for Medicines. City University. March 2013 45
  • 46. Patient Access Schemes (2)(Some) key principles• Arrangements must respect the role of NICE• Schemes are to be discussed first and agreed in principle by the Department and the company• Schemes should be clinically robust, clinically plausible, appropriate and able to monitored• Any scheme should be operationally manageable for the NHS without unduly complex monitoring, disproportionate additional costs and bureaucracy• Schemes should be consistent with existing financial flows in the NHS and with local commissioning• The more systematic use of such schemes will need to be reviewed in light of experience. The timing of such a review will be jointly agreed but will be initiated not later than two years after the commencement of this agreement Economics of the Market for Medicines. City University. March 2013 46
  • 47. Patient Access Schemes (3)Financially Based Schemes• The company does not alter the list price of the drug, but offers effective discounts or rebates linked to various parametersOutcome-Based Schemes• Proven value: price increase: The company seeks agreement to a later increase in price subject to a re- review of the drug in the light of additional evidence collection as agreed with NICE. The company will normally be responsible for the collection of the additional evidence.• Expected value: rebate: The company seeks agreement to a price subject to the collection of additional evidence as agreed with NICE. Such an arrangement will be subject to a rebate and subsequent reduction in list price in the event of the additional evidence not supporting the current price in a re-review in the light of the additional evidence. The company will normally be responsible for the collection of the additional evidence.• Risk Sharing: Outcomes are measured, be these patient reported outcomes or clinical outcome measures; price adjustments and/or cash transfers are made in one or both directions (between the company and the NHS) in the light of the outcomes identified relative to those anticipated in line with the terms of the scheme. • Outcome based schemes, particularly risk sharing schemes, are likely to be more burdensome and only to be appropriate in exceptional circumstances Economics of the Market for Medicines. City University. March 2013 47
  • 48. Patient Access Schemes (4)• 17 PAS have been incorporated as part of 20 pieces of NICE appraisal guidance and these schemes are operational in the NHS• PAS can impose additional administrative requirements and it is important that any such burdens are minimised• PAS have proven a useful tool within the 2009 PPRS in facilitating patient access to some medicines that might not otherwise have been recommended by NICESource: PPRS 11th Report to Parliament Economics of the Market for Medicines. City University. March 2013 48
  • 49. But Prospect of Big Change… July 2010 December2010Implementation of Value Based Pricing (VBP) replacing the PPRS by 2014 (when current PPRS expires) Economics of the Market for Medicines. City University. March 2013 49
  • 50. Generics: M and W Schemes (2005)• The reimbursed price (the Drug Tariff price) is the volume- weighted average price charged by manufacturers• Manufacturers and wholesalers are required to submit quarterly data to the Department of Health on, among other things, net sales values and net acquisition costs, on a product-by-product basis, i.e. including discounts• Greater reliance on competition to control prices, but the generics market is more closely monitored than ever before Economics of the Market for Medicines. City University. March 2013 50
  • 51. UK Prices 51
  • 52. But International Price Comparisons are Sensitive to ….• Manufacturers’ prices or final selling price to the payer?• Brands or generics or molecules?• Sample size and selection (value versus volume, degree of market coverage)• Bilateral versus multilateral• Match single pack, match product form or price per unit (tablet, DDD, IMS SUs, Kg)?• Volume weights: unweighted, own country (Paasche) or foreign weights (Laspeyres)?• Choice of exchange rate• What exactly is the question you are trying to answer? Economics of the Market for Medicines. City University. March 2013 52
  • 53. Recommended ReadingCockburn, I. and Henderson, R. (1994) Racing to invest? The dynamics of competition in ethical drug discovery. Journal of Economics and ManagementStrategy. (3)3, 481-519.Danzon, P. and Chao. L. (2000) Prices, competition and regulation in pharmaceuticals: A cross national perspective. London: Office of Health Economics.Danzon, P. and Chao. L. (2000) Cross-national price differences for pharmaceuticals: How large and why? Journal of Health Economics. 19(2), 159-195.Danzon, P. and Chao. L. (2000) Does regulation drive out competition in markets for pharmaceuticals? Journal of Law and Economics. 43(2), 311.Danzon, P. and Kim, J. (2002) The life cycle of pharmaceuticals: A cross-national perspective. London: Office of Health Economics.Di Masi, J., Hansen, R. and Grabowski, H. (2003) The price of innovation: New estimates of drug development costs. Journal of Health Economics. 22(2), 151-185SGarau, M. and Sussex, J. (2007) Estimating pharmaceutical companies’ value to the UK economy: Case study of the BPG. London: Office of Health Economics.Grabowski, H., Vernon, J. and DiMasi, J. (2002) Returns on research and development for 1990s new drug introductions. Pharmacoeconomics. 20(Suppl 3),11-29.Henderson, R. and Cockburn, I. (1996) Scale, scope and spillovers: The determinants of research productivity in drug discovery. RAND Journal of Economics.27(1), 32-59.Kettler, H. (1999) Updating the cost of a new chemical entity. London: Office of Health Economics.Mason, A., Towse, A., Drummond, M. and Cooke, J. (2002) Influencing prescribing in a primary care led NHS. London: Office of Health Economics.Mestre-Ferrandiz, J. (2006) The faces of regulation. Profit and price regulation of the UK pharmaceutical industry after the 1998 Competition Act. London:Office of Health Economics.Mestre-Ferrandiz, J., Mordoh, A. and Sussex, J. (2012) The many faces of innovation. London: Association of the British Pharmaceutical Industry.Mestre-Ferrandiz, J., Sussex, J. and Towse, A. (2012) The R&D Cost of a New Medicine. London: Office of Health Economics.Pharmaceutical Industry Competitiveness Task Force (PICTF). (2005) Available at http://www.advisorybodies.doh.gov.uk/pictf/publications.htmPPRS documents available at: http://www.dh.gov.uk/en/Healthcare/Medicinespharmacyandindustry/Pharmaceuticalpriceregulationscheme/DH_494Sussex, J. and Marchant, N. eds. (1999) Risk and return in the pharmaceutical industry. London: Office of Health Economics.Towse, A., Pritchard, C. and Devlin, N. eds. (2002) Cost-effectiveness threshold: Economic and ethical issues. London: Kings Fund and Office of HealthEconomics.Danzon, P. and Towse, A. (2003) Differential pricing for pharmaceuticals: Reconciling access, R&D and patents. Journal of Health Care Financing andEconomics. 3(3), 183-205.Wertheimer, A. Levy, R. and O’Connor, T. (2001) Too many drugs? The clinical and economic value of incremental innovations. In Farquhar, K.S. and Sorkin,A. eds. Investing in health: The social and economic benefits of health care innovation (Research in human capital and development, volume 14). Boston, MA:Emerald Group Publishing Limited. 77-118. Economics of the Market for Medicines. City University. March 2013 53
  • 54. To enquire about additional information and analyses, please contact Jorge Mestre-Ferrandiz at jmestre-ferrandiz@ohe.orgTo keep up with the latest news and research, subscribe to our blog, OHE News.Follow us on Twitter @OHENews, LinkedIn and SlideShare.Office of Health Economics (OHE)Southside, 7th Floor105 Victoria StreetLondon SW1E 6QTUnited Kingdom+44 20 7747 8850www.ohe.orgOHE’s publications may be downloaded free of charge for registered users of its website.©2013 OHE Economics of the Market for Medicines. City University. March 2013

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