MannKind's CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: MannKind Corporation (MNKD)

MannKind Corporation (NASDAQ:MNKD)

Q4 2013 Earnings Conference Call

February 18, 2014, 05:00 PM ET

Executives

Alfred Mann - Chairman of the Board, Chief Executive Officer

Hakan Edstrom - President, Chief Operating Officer, Director

Matthew Pfeffer - Corporate Vice President and Chief Financial Officer

Analysts

Simos Simeonidis - Cowen & Company

Cory Kasimov - JPMorgan

Steve Byrne - Bank of America

Keith Markey - Griffin Securities

Graig Suvannavejh - MLV & Company

Christopher James - Brinson Patrick Securities

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the MannKind Corporation fourth quarter 2013 conference call. [Operator instructions.] Joining us today from MannKind are Chairman and CEO Alfred Mann, President and COO Hakan Edstrom and Chief Financial Advisor Matthew Pfeffer.

I would now like to turn the call over to Matthew Pfeffer, chief financial officer of MannKind Corporation. Please go ahead.

Matthew Pfeffer

Good afternoon and thank you for participating in today's call. I will discuss very briefly our financial results for the fourth quarter and full year 2013, as reported this morning. and then turn the call over to Hakan.

Before we proceed any further, please note that comments made during this call will include forward-looking statements within the meaning of federal securities laws. It is possible that actual results could differ from these stated expectations. For factors which could cause actual results to differ from expectations, please refer to the reports filed by the company with the Securities and Exchange Commission under the Securities and Exchange Act of 1934.

This conference call contains time-sensitive information and is accurate only as of the date of this live broadcast, February 18, 2014. We undertake no obligation to revise or update any statements to reflect events or circumstances after the date of this call.

Turning now to the financials, the net loss applicable to common stockholders for 2013 was $191.5 million, or $0.64 per share, based on 299.6 million weighted average shares outstanding compared with a net loss applicable to common stockholders of $159.4 million, or $0.94 per share, based on 180.9 million weighted average shares outstanding for 2012.

The primary factors resulting in this change were an increase in research and development expenses due to an increase in noncash compensation expense, partially offset by decreased clinical trial related costs resulting from the completion of the Affinity studies.

Also affecting this outcome was an increase in general and administrative expense, due primarily to increased stock compensation expense and professional, legal, and financing fees in 2013, partially offset by the nonrecurrence of the litigation settlement accrual made in 2012.

Financing activities in the fourth quarter of 2013, as previously announced, included the receipt of $45 million from warrant exercises as well as receipt of a third tranche of $40 million under our loan agreement with Deerfield. These proceeds, and more, were used to repay $115 million of our convertible debt later in that quarter.

Some of our more astute investors and analysts have done the math and questioned how, given the above, as well as our continuing cash burn, we possibly have sufficient cash to last us through the upcoming PDUFA date. Therefore, I’m pleased to announce that we have already solved this problem, having raised roughly $49 million in net proceeds from the use of our ATM facility during the month of December, so that worry is now behind us.

As a result, our cash and cash equivalents at the end of the year totaled $70.8 million, which compares to $61.8 million at December 31, 2012. Our cash burn during 2013 fluctuated, being $33.5 million in the first quarter, $27.3 million in the second quarter, $33.5 million in the third quarter, and $39.2 million in the fourth quarter of 2013.

We expect to maintain and potentially accelerate some of that spending in 2014 as we prepare for commercialization of AFREZZA. With our cash on hand, the amount remaining available under our loan arrangements now, we feel comfortable that we will be able to fund our operations at least into the third quarter of 2014.

Finally, I wanted to announce that during the months of December 2013 and January 2014, in a series of transactions, Deerfield fully exercised their option to convert $40 million of their debt into common shares. As a result, the principal outstanding under that loan arrangement has now been reduced from $120 million down to $80 million, and no further conversions are allowed under the agreement as it stands.

With that, I’d like to turn over the call to Hakan. Hakan?

Hakan Edstrom

Thank you, Matt. Good afternoon. Today my comments are going to be relatively brief. In summary, the regulatory process is proceeding as anticipated. Our interaction has been the usual Q&A with some follow-up questions to our submission. We are also well underway in our preparation for the AdCom committee meeting on April 1, guided by a reputable consulting company with extensive experience on guiding companies through AdCom sessions and with the support of select experts and potential areas of AdCom interest.

The PDUFA date of April 15 still stands, and no indication has been received from the FDA that would alter that target date for approval. Our manufacturing operation in Danbury is ready for any and all inspections that the agency may consider, and this includes our staff also working closely with our vendors, providing us with the inhalers, the cartridges, and the FDKP vehicle.

Beyond manufacturing inspection readiness for regulatory purposes, we are also actively building commercial manufacturing readiness. Upon approval and partnership agreement, we want to be able to support a commercial launch within six months of those events. Thus, we are in the process of ongoing facility configuration to accommodate two more filling lines, and up to a 375 million unit cartridge capacity early in 2015.

Regarding the partnership process, I will only say at this time that we are pleased with the support from Greenhill and Company and with the progress that we have made toward securing a partnership. And with those short comments, I will hand the commentary over to Al for some remarks.

Alfred Mann

Thank you, Hakan, and good afternoon, ladies and gentlemen. As Hakan noted, the FDA’s review of the AFREZZA NDA seems to be proceeding well. We’ve had a number of questions from the agency and have been able to provide responses to all of them in a timely fashion. So, the FDA review appears to be on course for the April 15 PDUFA date.

An advisory committee meeting has been tentatively scheduled for April 1, and our preparations for that important step are well underway. So why is there to be an advisory committee meeting? There’s actually FDA guidance which states that first-in-class medical projects should be referred to an advisory committee, and we are asking the FDA to approve something that we believe will be the very first ultrafast-acting insulin.

After all, AFREZZA, which peaks in 12 to 15 minutes and is almost gone in 2.5 to 3 hours, is very different from current prandial insulin, and over time, the use of such ultrarapid action should evolve into a new standard for diabetes therapy.

Those rapid kinetics much more closely mimic natural physiologic pancreatic insulin. They do not have the delayed activity and the late persistent hyperinsulinemia of current prandial insulins. AFREZZA does enable substantial lowering of prandial glucose elevations, and also safely lowering fasting glucose levels without having the disadvantages of the risk of hypoglycemia, weight gain, and need for dosing about 15 minutes or so before eating that is present with these current rapid-acting analogs.

An ultrarapid insulin without the late hyperinsulinemia after the meal is digested should thus reduce the hypoglycemic risk that today is responsible for requiring fasting glucose to be maintained at abnormally high levels, thereby contributing to serious long-term diabetic complications.

The significance of AFREZZA, as a more physiologic prandial insulin, was actually shown in a small study recently conducted in type 1 patients at the Sansum Clinic and supported by a grant from the Juvenile Diabetes Research Foundation. In that study, superior prandial control was achieved without any hypoglycemia when using AFREZZA for bolus dosing and closed-loop control, primarily for basal dosing.

The study results showed outstanding prandial control without any hypoglycemic depressions at all. The key lesson from that study is that AFREZZA can provide outstanding physiologic prandial control as part of a basal bolus program in type 1 and late-stage type 2 patients.

We are actually looking forward to the advisory committee meeting. Our clinical and safety experts see that as an opportunity to discuss the safety and efficacy of AFREZZA in an official public forum. After the advisory committee meeting, the next major occasion to talk in detail about the clinical potential, which today is exclusive, only with AFREZZA, will be the annual meeting of the American Diabetes Association.

That ADA session will be the first scientific meeting at which we will publicly present the full data from our recent Phase III studies, MKC-171 and 175. I know some investors had wanted earlier disclosure of the complete results of those pivotal trials, but in order to reserve the opportunity to present novel results at a major scientific meeting and to publish the studies in a peer reviewed journal, it is necessary that we comply with the editorial policies of those organizations, which do not accept for presentation or publication any previously disclosed research findings.

Since in the coming period there will be so much discussion of the clinical aspects of AFREZZA, I will not make any further comments today about our clinical data. Instead, I want to highlight some other aspects of the commercial picture for AFREZZA that have, until now, received less attention.

One topic we have not really talked about much is our patent position. When MannKind started our clinical trials program for AFREZZA over a dozen years ago, we had the potential for only a handful of patents, and those would have provided protection only until 2020. The [unintelligible] technology and its application in AFREZZA have enormous potential. Recognizing that significance in our intellectual property, our scientists and engineers have worked hard to expand and diversify our patent portfolio.

Today, [Technosphere] technology, including AFREZZA, is protected around the world by dozens of patent families that have produced over 550 issued patents, with another 470 patent applications pending.

Our current longest-lived patents outside the U.S. will expire in 2029 and 2030, but to compensate for [unintelligible] prosecution in the U.S., terms of some of our issued patents have been adjusted and will not expire until 2032.

Let me give you just a small flavor of the scope of our vast intellectual property position. Over the last few years, we have fine-tuned the carrier particle used to deliver insulin and various other active drugs, and we have generated patent claims that cover those optimal particles. The optimal particles have better aerodynamic performance so that the powder gets out of the cartridge more fully and with more of it in the [unintelligible] size range, so that much more of the powder gets quickly into the deep lung.

There, at the pH of the moist pulmonary tissue, the powder dissolves in a few seconds, and the insulin and the inert Technosphere carrier then transfer rapidly through the pulmonary membrane into arterial blood. The insulin is then very quickly available for glucose control and the carrier moves out and is disposed of in urine, unchanged.

Separately, in scaling up our manufacturing, we have prepared patents on novel processes and equipment developed for making Technosphere particles, for loading the particles with the active ingredient and for filling the powder into the cartridges.

By now, most of you are familiar with our innovative inhalers, which we call MedTone and Dreamboat. We also have a tiny single-use disposable inhaler affectionately known as Cricket, which was developed for use in occasional occasions such as to treat chronic pain.

After all, getting pain relief in a couple of minutes from a drug would seem to offer a rather significant and very valuable medical and business opportunity. These various delivery devices and their uses with Technosphere powder formulations, are protected by numerous utility patents as well as by design patents.

In the course of studying AFREZZA in the clinic over the past dozen years, we have learned a lot about how to use our product to provide better diabetes treatment and these lessons have been translated into a number of [unintelligible] treatment patents that, for example, claim to use an ultrarapid insulin in certain clinical settings.

Indeed, our people have been very, very busy over the years, and today the almost entirely homegrown technology and related patent portfolio surrounding AFREZZA and the technical process itself are robust and long-lived. The NDA for AFREZZA that was submitted to the FDA last fall included 25 United States patents certified for inclusion in the Orange Book.

Once AFREZZA is approved, our patents on Technosphere particles will provide protection until 2030 and 2031, and patents on the inhaler system and its components until 2030, 2031, and 2032. With all the effort and investment gaining such patent protection, we can expect to enjoy many years of market exclusivity where for this novel and very valuable product.

Given the imminent PDUFA date, it is important that we proceed in preparing for commercialization of AFREZZA. We are making excellent progress preparing for post-launch manufacturing. The second and third [fill/finish] machines are now being installed in our Danbury facility and when completed and validated soon after launch, should give us a capacity to produce up to 350 million cartridges per year, as Hakan has noted, with later addition of equipment and factories that have an annual capacity of about 2 billion cartridges.

Our current NDA submission covers just two cartridge dose strengths that are respectively equivalent to 3 and 6 units of injected rapid-acting analogs. Many patients may initially need to use more than one cartridge in order to get a full dose for a meal. Soon after approval, we plan to submit a supplemental NDA to add a 9-unit dosage strength and later we plan to seek a 12-unit dosage.

Our ultimate objective is that most patients will need only a single cartridge per meal. The studies for the 9-unit dosing strength are complete. The SNDA is in preparation and ought to be filed very shortly after approvals.

As we gear up for commercialization, we have also been pursuing additional market research activities. In addition to the quantitative research performed last fall that was mentioned in our previous earnings call, we recently concluded some qualitative research to give us more understanding as to the patient for which physicians would likely prescribe AFREZZA.

In this latest study, we examined physician use of current diabetes treatments and the potential role AFREZZA would play in future therapy algorithms. We contracted with a highly regarded market research company to conduct in-depth interviews with endocrinologists and primary care physicians in a number of different locations around the country.

The aim of this market research was to generate a profile of likely patient candidates for AFREZZA and enable our understanding as to how AFREZZA might impact the way in which those physicians would treat their diabetes patients.

This latest market study utilized a very conservative scenario. The new product was not specifically identified as AFREZZA, but only as Product X, an inhaled ultrarapid-acting insulin delivered with a small inhaler in a prandial therapy which would produce an [HgbA1c] glycemic [unintelligible] control that was noninferior to today’s best rapid-acting insulin, through its lower incidence of hypoglycemia and less weight gain.

One of the more interesting findings in this study was that many PCPs stated an intention to use that product, which is AFREZZA, as a second line of therapy in type 2 diabetes with very high blood glucose such as with an HgbA1c over 9%, and most PCPs also expected to use it instead of a third oral drug in type 2 patients.

Endocrinologists were a little more conservative for patients at that early stage, but some saw an insulin, which was AFREZZA, to be a good option for patients newly starting on insulin, and also as a clear replacement for rapid-acting analogs where their patient is already using insulin. Similarly, all PCPs expected that their use of current rapid-acting analogs would decline significantly in favor of this product, which was AFREZZA.

The quantitative study last fall was used to repair a sales rejection for AFREZZA. Even with the patient definition limited to only nonsmoking adult patients without any pulmonary deficiencies, that led to a multibillion dollar sales rejection, and just in the United States. Of course, the entire world needs to find ways to address the diabetes pandemic.

AFREZZA provides a significant step in that direction, with a major advance in prandial glucose control beginning in early stage type 2 and in combination together with improved basal control, would offer great promise in addressing the entire global diabetes crisis.

Clinical studies with improved basal control are already being planned. Hakan earlier commented on our partnership activity and our market research is naturally also of interest to our potential partners. We are pleased with the progress of those discussions, and with the performance of Greenhill in organizing our partnership process. There are many opportunities being explored, but we’ll not announce anything regarding partnerships until we have something very definitive to report.

2014 ought to be a very exciting year for MannKind and AFREZZA, potentially with U.S. FDA approval, finalization of the label, FDA certification of our factory, agreement on distribution partnerships, and the commercial launch in the U.S. Hopefully, we’ll also be able to resume development of several of our other exciting product opportunities.

So much will be happening over this year, but I will not say any more for now. We will make further announcements as we achieve various significant milestones. Thank you all for joining us today, and we’ll now invite your questions.

Question-and-Answer Session

Operator

[Operator instructions] And our first question is going to come from Simos from Cowen & Company.

Simos Simeonidis - Cowen & Company

In your discussions with FDA right now, are any of them related to the AdCom? And is there any way to help us narrow down what the focus of the AdCom may be other than saying efficacy and safety of the product?

Hakan Edstrom

The discussions with FDA at this point in time is purely focused on the submission. We will really not know where the FDA will be coming from in terms of their questions until the briefing document becomes available. So, we do not know yet what the focus of the AdCom committee will be, and that’s why we have to prepare ourselves for a broad range of questions across both efficacy and safety of the product.

Simos Simeonidis - Cowen & Company

Given that in the past we have not expected to have an outcome, and now there is kind of a change in thinking at the FDA, can you help us understand, maybe from your interactions with them, and I know there’s been a change of leadership of that section of the FDA, how that came about? What are they communicating with you in terms of why now they wanted to do an AdCom, where in the past they had not requested one?

Alfred Mann

First of all, as you noted, there was a change in leadership of the division that’s responsible in the bureau. But the second point is that we’re asking the FDA to approve a new class of product, and there’s an FDA guidance that requires that.

Simos Simeonidis - Cowen & Company

But that had been the case in the past, and we’ve heard you and the rest of the management team say that there’s no reason to expect one.

Alfred Mann

Well, the prior leadership didn’t think she needed one, but I’m not sure there was any focus on the new class of product.

Simos Simeonidis - Cowen & Company

And then in terms of your thoughts about timing of European submissions, I guess we’ll wait for potential approval in the U.S. first, before we get there or is this something you may want to do with a partner?

Hakan Edstrom

Certainly, if this is appropriate, depending on the partner that we end up with, certainly we would rely on them to do so. However, I would say that we ourselves, in preparation for submission to the European community, if need be, but that certainly would follow after U.S. approval because our resources are really tapped out right now in preparation for the FDA review and subsequent approval.

Simos Simeonidis - Cowen & Company

In terms of potential commercial effort that may be needed further in the U.S., can you give us an idea of what types of size of sales forces and marketing help you would need, the type of things that you’re talking with your partners about, and would you want to keep, for example, U.S. copromotion rights or would you want to just outlicence AFREZZA to the partner?

Hakan Edstrom

If you look at, say, the size of the sales forces, I would say in general to cover the entire markets, [unintelligible] four through 10 and endocrinologists. You’re probably looking, I would say, in the thousand range in terms of sales reps and regional support people and managed care, so that’s probably a guideline number. In regards to copromotion rights, at this point in time, where we stand, I prefer not to comment on that.

Operator

And our next question is going to come from Cory Kasimov of JPMorgan.

Cory Kasimov - JPMorgan

First of all, just a follow up on what Simos was asking. Has the FDA specifically told you that they consider AFREZZA a new class, when they said they did not in the past?

Hakan Edstrom

They didn’t say they did not in the past, we just never focused on that subject.

Cory Kasimov - JPMorgan

And then regarding your prior regulatory interactions with the FDA under prior NDAs, how much label discussion took place then? So if you were to have a clean panel on April 1, how much additional label negotiation do you think you would have to still work through to get a decision done within two weeks?

Hakan Edstrom

I hate to speculate. I know that we initially had planned that, really during the course of a week, you can accomplish that. So that is still our working assumption. But again, that’s a guesstimate from our side.

Cory Kasimov - JPMorgan

And then lastly, just wondering how much partnership discussions, broadly speaking, have changed, if at all, since the announcement of a panel meeting.

Hakan Edstrom

Again, I think as in my answer to Simos, I would not comment on that at this point in time.

Operator

And our next question is going to come from Steve Byrne of Bank of America.

Steve Byrne - Bank of America

Hakan, you mentioned a little bit about an expansion in the manufacturing process. Can you just reiterate that? I didn’t quite catch it all. You have three lines fully operational by April, and then what are your expansion plans beyond that?

Hakan Edstrom

No, what we do have right now, we have one commercial line in operation. We are in the process of reconfiguring some space and installation of the second and third lines. In early 2015, we should have a capacity up to 375 million cartridges.

Steve Byrne - Bank of America

With respect to the 175 trial, where the glucose monitoring, at least you hypothesized, affect patient behaviors, do you have thoughts on how to redesign such a study, perhaps as a phase IV study? And is that something that you would want to undertake soon, or wait until you had a partner on board?

Hakan Edstrom

I would say at this time, certainly it would be, if anything, a phase IV study. And right now, we are certainly at capacity in terms of utilizing our clinical and regulatory people. So it would most likely be also a discussion with a potential partner to make sure that we accommodate insights and input from a partners. So I would say look at that post-approval.

Alfred Mann

That is, as you commented, a very significant opportunity to move prandial insulin into early stage type 2, which has never been done because of the limitations of current prandial insulins. And in fact, with the growing skepticism about the safety of even some of the popular alternative antiglycemics, something like AFREZZA, which mimics natural physiologic [unintelligible] insulin, ought to be something to receive some clear attention.

Steve Byrne - Bank of America

And assuming that prospective partners would have some concerns about the AdCom and the pending label, would you anticipate formalizing the partnering process with deadlines, if you didn’t have a partner by approval?

Alfred Mann

That’s a hard question.

Hakan Edstrom

I mean, could a partnership be in place in terms of tentative agreement and become effective upon approval? That is certainly an option. I didn’t grasp exactly what you were thinking, if this were to be beyond the approval of the product?

Steve Byrne - Bank of America

That is what I meant. If you don’t have a partner by approval, at that point, would you change the partnering discussions to formalize it in a way that you had specific deadlines to conclude the deal?

Hakan Edstrom

Quite honestly, I wouldn’t see a significant difference in our approach from where we are right now. We certainly also have deadlines like performance target dates, so I don’t see a significant change in our process.

Steve Byrne - Bank of America

And just one last one. What do you anticipate, the majority of patients to use some combination of the three and six unit dose, or just one of those in particular?

Hakan Edstrom

My recollection is that most patients will get away with, say, using one dose, then of course you have a combination where you can combine the 10 and the 20. And we will cover up to 80% of patients’ needs with one, two, or a maximum of three cartridges. And that does not seem to be a problem from a patient compliance point of view.

Alfred Mann

Of course, we want to pursue, as quickly as we can, the nine and 12-unit equivalent cartridges. And we actually have another process that takes us up to very high dose levels, but that’s not ready for submission yet.

Operator

And our next question is going to come from Keith Markey with Griffin Securities.

Keith Markey - Griffin Securities

I was just wondering if you could tell us a little bit about the partnering negotiations themselves, just simply, for instance, have you received term sheets, or are you beyond that?

Hakan Edstrom

Quite honestly, the only thing I’m able to comment on at this point in time is that we are pleased in terms of our interactions with Greenhill and we are pleased with the progress we’re making together with any partnership discussions. At this point in time, it’s not appropriate for me to make any further statements.

Keith Markey - Griffin Securities

Okay. I’m not sure if I should ask this, but I’ll give it a shot. I just wondered whether pricing has come up in your talks so far, and what your feeling is. In the past, you’ve talked about a small premium to some of the short-acting insulin analog prices for AFREZZA. Is that still reasonable to think of that holding true?

Hakan Edstrom

If you remember what we stated was that we do see a price parity with pens, insulin pens, and those are already at about a 20% premium over, say, regular injected insulin. So that is a working assumption that you could count on.

Operator

Our next question is going to come from Graig Suvannavejh from MLV & Company.

Graig Suvannavejh - MLV & Company

As you think about getting near the advisory panel meeting, is there an expectation we should have that you will host a conference call one way or the other, depending on the outcome of the advisory panel meeting?

Matthew Pfeffer

We haven’t really actually discussed that. I’d say it’s quite possible. But of course the outcome of the meeting will be immediately known. So it’s not like we’re going to have to announce that information. But depending on how that comes out, it’s quite possible we will. Stay tuned. We’ll let you know.

Graig Suvannavejh - MLV & Company

Follow up question, then, would be just I know you’ve done some recent market research work with PCPs and endocrinologists. Is there anything new that you can add in terms of work that you might be doing with payers and potential reimbursement? Or is it still too early in the process for you?

Alfred Mann

We had meetings with our payers over a year ago, and they were very supportive. But we’ve only talked individually with them since.

Hakan Edstrom

I have to say that we worked also extensively with Kantar Health, as a consultant, advisor, to us, where they have represented us and the opportunity, and actually with another outfit as well that unfortunately I don’t remember the name right now. So I would say that we’ve spent considerable time in assessing the pricing, rebates, and the commercial aspects of our product. So I feel that we are well informed and it’s certainly reflected in discussions with potential partners.

Alfred Mann

And our objective is to try to get into tier 2 as quickly as we can, and that’s why we’ve targeted where we are.

Graig Suvannavejh - MLV & Company

I know you mentioned for the first time, at least to me, that you’ve got this Cricket inhaler. So maybe thinking a little further out, maybe it’s premature to do so, but let’s assume that the product gets approved, let’s assume you get a partner. What are the next pipeline priorities for MannKind?

Alfred Mann

I would say that the next pipeline, other than getting the 9 and 12-unit cartridges approved, would be the revised process that we’ve been working on, which is a much larger range of dose sizes, with single cartridge, and some other very, very significant advantages that we don’t talk about yet.

Hakan Edstrom

Let me also say, and make a quick correction to what Al said before, in terms of the Cricket will be used for people who will be in acute pain, not chronic pain. So that would be an opportunity where we would have a disposable device, like the Cricket.

Alfred Mann

I said it was a disposable device, only for acute pain. It’s not for diabetes.

Operator

And Our next question is going to come from Christopher James from Brinson Patrick Securities.

Christopher James - Brinson Patrick Securities

I just have one quick follow up regarding the advisory panel. I guess from your ongoing discussions with FDA, do you anticipate that partners outside of, let’s say, metabolic and endocrine, will be involved? For example, do you anticipate FDA would want individuals from pulmonary devices and pediatrics to bless it?

Hakan Edstrom

Yes, while the meeting is run by the one division, we do expect that other divisions certainly will be involved since they’ve been intimately involved in the overall review of the submission.

Operator

There are no additional questions at this time, so I’d like to turn the call over to Mr. Mann.

Alfred Mann

Thank you all for joining us today, and we look forward to further communication with you in the coming weeks and certainly in April. Thank you all.

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