Giant deal in the pharmaceutical sector: Bristol-Myers Squibb buys Celgene

Giant deal in the pharmaceutical sector:  Bristol-Myers Squibb buys Celgene

Last 6th January, US drug manufacturer Bristol-Myers Squibb (NYSE:BMY) and Celgene Corporation (NASDAQ:CELG) announced that they have entered into a definitive merger agreement under which BMY would have acquired Celgene for an equity value of approximately USD 74bn.

The board of the two firms welcome the acquisition which will imply that Bristol-Myers Squibb’s shareholders will own about 69 percent of the merged company, while Celgene’s owners account for the remaining 31 percent. After the merger, the company will have nine blockbuster products with sales exceeding USD 1bn annually. The companies also see “significant growth potential” in the core areas of oncology, immunology, inflammation and cardiovascular diseases.

Celgene stock price decline on drug’s sluggish sales

Celgene is a biotechnology company based in New Jersey with around 8’000 employees. The firm develops, discovers and commercialises medicines for inflammatory disorders and cancer. Celgene had a troubling year 2017 as the stock price declined 37 percent from October to September. In the same year, the firm decided to abandon a late-stage Crohn’s disease drugs as well as two clinical trials along with it. Also, during the period the firm encountered lawsuits associated with its patents which suggested possible jeopardies in revenue. The firm had a troublesome 2017 missing its revenue expectations for the last two quarters and disappointing sales for the drug Otezla. Bad sentiment and business continued in 2018 as the shares lost nearly 40 percent in value during the year. Lately, the stock price has been trading 39.5 percent under its 52 week-peak value and changed 13.94 percent from the 52 week-bottom stock prices.

1Figure 1: Celgene Stock price’s slump in 2017

 

The buyer’s rationale of the deal

The deal creates a new pharma company with numerous blockbuster cancer drugs and many enhanced strengths to respond to the competition in the immunotherapy market. In fact, the competition has grown as Mercks’s rival treatment Keytruda has gained market share in the lung cancer treatment which is the most lucrative oncology market. Giovanni Caforio, chairman and chief executive officer of BMY explains that: “Together with Celgene, we are creating an innovative biopharma leader, with leading franchises and a deep and broad pipeline that will drive sustainable growth and deliver new options for patients across a range of serious diseases”. The acquisition creates a firm with nine drugs, each of them generating more than USD 1bn in annual sales, as well as a large pipeline of treatments which expect the potential peak sales of USD 15bn.  Some analysts claim that the acquisition will address the importance for Bristol-Myers to diversify from immunotherapy with the opportunity to generate enhanced margins, strong combined cash flows as well as robust EPS accretion. Mark Alles, Chairman and Chief Executive Officer of Celgene explains that: “For more than 30 years, Celgene’s commitment to leading innovation has allowed us to deliver life-changing treatments to patients in areas of high unmet need. Combining with Bristol-Myers Squibb, we are delivering immediate and substantial value to Celgene shareholders and providing them meaningful participation in the long-term growth opportunities created by the combined company”. Furthermore, he adds that: “Our employees should be incredibly proud of what we have accomplished together and excited for the opportunities ahead of us as we join with Bristol-Myers Squibb, where we can further advance our mission for patients. We look forward to working with the Bristol-Myers Squibb team as we bring our two companies together”.

2Figure 2: The greatest pharmaceutical deal summarised in key points

 

The largest healthcare deal ever: a financial overview

According to data elaborated by Bloomberg, Bristol-Myers Squibb takeover of Celgene Group values the target at USD 88.8bn, including net debt, even surpassing the Pfizer’s acquisition of Warner-Lambert, a deal occurred in 1999 for a total value of USD 87.14bn in stocks. With a forecast of achieving annual cost synergies of USD 2.5bn by 2022 and generating future earnings of over $6 per share, the Bristol-Myers acquisition became the largest pharmaceutical deal in history.

This transaction has been financed by a bridge loan of USD 33.5bn, the second highest US bridge loan recorded in the healthcare sector: Bristol has obtained fully committed debt financing from Morgan Stanley Senior Funding and MUFG Bank, while, on the other hand, JPMorgan Chase and Citi served as Celgene’s financial advisers.

3Figure 3: Top deals in Pharma consolidation (Deal value: $B)

One of the most relevant aspects of this deal, for Bristol-Myers Squibb, is access to a promising experimental CAR-T therapy. Celgene, indeed, acquired in 2018 Juno Therapeutics in a USD 9bn takeover deal: Juno Therapeutics is a biopharmaceutical company specialized on CAR-T cell therapy, a cancer therapy in which a patient’s own immune cells are genetically engineered to make them attack specific proteins on cancer, and infusing them back into the patient. CAR-T could become a highly profitable market over the next four years, with an estimated growth at a CAGR of 63 percent within 2023. Therefore, Bristol-Myers through this deal will have the potential for growth especially in oncology diseases, meanwhile taking advantage from the CAR-T market expansion.

Specifically, Bristol-Myers acquired Celgene through a cash-and-stocks deal, in which Celgene stockholders will receive one Bristol-Myers share and $50 cash for each Celgene share held. According to the boards of the two Companies, the deal, which they hope to finalise in the third quarter of 2019, will represent a 53 percent premium to the average closing price of Celgene shares over the past 30 days.

Besides this, the takeover is expected to generate 3 main financial benefits:

  • Strong Returns and immediate EPS accretion. The transaction’s internal rate of return is expected to be well in excess of Celgene’s and Bristol-Myers Squibb’s cost of capital. The combination is expected to be more than 40 percent accretive to Bristol-Myers Squibb’s EPS on a standalone basis immediately after the finalisation of the deal.
  • Strong balance sheet and cash flow generation to enable significant investment in innovation. With more than USD 45bn of expected free cash flow generation over the first three full years post-closing, the Company is committed to maintaining strong investment grade credit ratings while continuing its dividend policy for the benefit of Bristol-Myers Squibb and Celgene shareholders.
  • Meaningful cost synergies. Bristol-Myers Squibb expects to realize run-rate cost synergies of approximately USD 2.5bn within 3 years.

However, the days following the merger’s announcement showed a negative market reaction: investors indeed rewarded Celgene’s shares at a limited extent of 22 percent to $81.28, while shares in Bristol-Myers fell over than 16 percent to $45.1, that is USD 11bn of capitalization in less than 2 days (from USD 86.4bn to USD 76.5bn).

According to Brian Skorney’s words, senior research analyst at Robert W. Baird & Co., “this deal has not been driven by enthusiasm or excitement on either end”: Celgene investors were not thrilled after the deal, and Bristol investors were less than enthused. In this respect, Mizuho Securities USA after conducting a quick survey of about 100 clients, concluded that Bristol investors think the Company is overpaying for Celgene, therefore not approving the acquisition. This could be a possible justification for the slipping of Bristol’s shares.

4Figure 4: Bristol-Myers Squibb share price trend

5Figure 5: Celgene Group share price trend

What drives M&A in the Pharma industry?

The approval of US tax reform in late 2017 led to speculation that merger-and-acquisition activity would soon surge among pharmaceutical companies, due in part to tax-cut benefits accruing to sellers. In the first quarter of 2018, indeed, there were 212 deals in the sector worth more than USD 200bn. Bristol-Myers takeover follows a spree of tie-ups in the healthcare industry over the past four years: Japan’s Takeda last year has won shareholder approval for its USD 58bn megamerger with Shire, and a month ago GlaxoSmithKline announced it was buying Tesaro, a cancer-focused US biotech, for USD 5.1bn. According to some senior investment bankers who presented at the Forbes Healthcare Summit in NY last November, 2019 will be another active year for live science M&A deals, particularly in the biotech, payer, outsourced services and healthcare IT arenas.

Thomas Sheehan, head of global healthcare investment banking at Bank of America Merrill Lynch, stated that we are in a “biotech bubble” which is difficult to predict how long it will last.

We showed in the chart below the climb of the number of M&A transactions implemented in the pharma industry over the last 20 years.

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According to this graph, we can point out that the pharmaceutical industry probably sees more M&A activity than any other industry, both in the number of deals and the amount of money spent on mergers-and-acquisitions operations. There are two main key drivers which justify the large amount of M&A activities in this industry:

  • Lowering R&D expenses. Most companies can no longer afford to carry out R&D to find innovative drugs: today, a company needs to invest between USD 2bn and USD 4bn per year in R&D to have a meaningful portfolio of drug development programs. In the long-term, only companies with revenue of US 10bn or higher can afford to have a substantial drug development program. The growing cost for the development of a new pharmaceutical drug drives large pharmaceutical companies in using M&A to exploit innovation sources outside of Big Pharma.

  • Capture synergies by scaling up. Pharma companies adopt such transactions in order to implement strategic changes: expanding their pipelines, broadening their product portfolios or reducing their investment costs.

In conclusion, deal-making is a fundamental tool to implement game-changing strategic moves to build companies fit to master future challenges, but M&A is essential for pharma companies also to get access to innovation, to prune business portfolios and to streamline operations in manufacturing.

 

Authors: Giovanni Cola, Edoardo Hähnel

Sources:

– Bloomberg, Seraphino P., Date: 3 January 2019, url: https://www.bloomberg.com/news/articles/2019-01-03/bristol-myers-s-celgene-deal-is-record-for-pharma-chart
– Forbes, Date: 7 January 2019, url:
https://www.forbes.com/sites/greatspeculations/2019/01/07/why-is-celgene-a-strategic-fit-for-bristol-myers-squibb/#161d36dc76c2
– Financial Times, Platt E. & Fontanella-Khan J., Date: 3 January 2019, url:
https://www.ft.com/content/560429c4-0f4f-11e9-a3aa-118c761d2745
– London Stock Exchange, Date: 21 January 2019, url:
https://www.londonstockexchange.com/exchange/prices-and-markets/stocks/summary/company-summary/US1101221083DEUSDSSX4.html
– Financial Lounge, Date: 7 January 2019, url:
https://www.financialounge.com/azienda/financialounge/news/bristol-myers-squibb-celgene/?refresh_CE
– Bristol-Myers Squibb Press Release, Date: 3 January 2019, url:
https://news.bms.com/press-release/corporatefinancial-news/bristol-myers-squibb-acquire-celgene-create-premier-innovative
– Fierce Pharma, Weintraub A., Date: 24 January 2019, url:
https://www.fiercepharma.com/pharma/bms-banks-celgene-merger-boost-as-abandoned-opdivo-lung-cancer-filing-overshadows-strong-q4
– SmithOnStocks, Smith L., Date: 3 January 2019, url:
https://smithonstocks.com/bristol-myers-squibb-negative-market-reaction-to-celgene-acquisition-is-a-buying-opportunity-bmy-buy-45-17/
– BIOPHARMADIVE, Bell J., Date: 22 January 2019, url:
https://www.biopharmadive.com/news/biopharma-deal-mergers-acquisitions-2019-trends/546369/
– Fierce Pharma, Weintraub A., Date: 19 December 2019, url:
https://www.fiercepharma.com/pharma/long-awaited-m-a-boom-will-hit-biopharma-2019-despite-persistent-worries-prognosticators
– McKinsey & Company, Bansal R., De Backer R., Ranade V., Date: October 2018, url:
https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/whats-behind-the-pharmaceutical-sectors-m-and-a-push
– KurmannPartners, Date: January 2019, url:
https://www.kurmannpartners.com/fileadmin/user_upload/170620_Newsletter_template_What_drives_pharma_manda_new.pdf
– SmartKarma, Date: 12 January 2019, url:
https://www.smartkarma.com/home/daily-briefs/united-states/daily-usa-celgene-acquisition-by-bristol-myers-squibb-a-call-to-arbs-and-more/
– Yahoo Finance, Date: 15 March 2019, url:
https://finance.yahoo.com/quote/CELG?p=CELG

https://finance.yahoo.com/quote/BMY?p=BMY

 

 

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THE RISE OF GREEN ECONOMY, A NEW CHALLENGE FOR MANAGERS AND A NEW OPPORTUNITY FOR INVESTORS

THE RISE OF GREEN ECONOMY, A NEW CHALLENGE FOR MANAGERS AND A NEW OPPORTUNITY FOR INVESTORS

Introducing the Green Economy

Investors have always looked at various elements for their investments in order to make the best choices and historically it was mainly a matter of returns. Responsible investments began in the 1960s as a social criterion, with investors excluding stocks involved in tobacco production or in the South African apartheid regime. For a long period of time, investors believed that ethical investments were reducing returns due to their nature. At the time, philanthropy was not known to be profitable. Furthermore, M. Friedman argued in the 70’s that the cost of behaving ethically would reduce returns.

However, due to the growing fears concerning climate change and new research (in particular Moskowitz’s in 1988) on the topic, Environmental, Social and Corporate Governance (ESG) factors became three leading criteria investors started looking at. ESG investing was given a shot in the arm when United Nations introduced the Principles on Responsible Investing (PRI) in 2006. The PRI has been signed by more than 2000 companies all over the world, including the main financial institutions such as Goldman Sachs, JP Morgan, Morgan Stanley or BlackRock and representing around $10.4 trillion out of the overall $89.6 trillion worldwide assets under management as of April 2018. The signatories have to commit to six voluntary principles such as, the incorporation of ESG issues into investment analysis and decision making and to increase disclosure about their environmental standards, their supply chains and their treatment of employees. ESG investing was even given a further push thanks to the Sustainable Development Goals (SDGs), a collection of 17 goals divided into 169 targets, set by United Nations in 2015 and to be achieved by 2030.

The same mainstream has been reached by Green Bonds, an investment solution that allows investors to generate profits while taking care of the planet’s health.

 

ESG investing

Nowadays many investors look at ESG factors to incorporate them into the investment process alongside with the traditional analysis. As you may have understood, now the approach to ESG investing is segmented into Environmental, Social and Governance factors. But those are only the three main criteria, whereas there are also subcategories for all of them. Regarding the Environment it could be divided into: climate change, natural resources, pollution & waste and environmental opportunities. The Social aspect mainly focuses on human capital, diversity, product liability, consumer protection and animal welfare. While Corporate Governance covers management structure, transparency, business ethics and employee relations.

Those factors can then be included in the investment process in two ways. Firstly, the “best in class” approach, focalizing into companies which within a sector have the best practices in term of sustainable development. Therefore, companies that are either polluting less or are having better social relations compared to companies in the same sector. Secondly, the “best in universe” approach, grouping companies that have the best sustainable development practices regardless of their sector of activity.

 

A growing trend

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During the past years we saw heavy inflows into ESG investments and an increasing demand for those (Social Responsible Investments, SRI, rose by 33% between 2014-2016, up to $8.72 trillion). According to various studies, this is just the beginning and it can be explained by three main reasons.

Firstly, as mentioned above, the world is changing. Investors are getting more and more aware of climate change and its implications. According to a survey of Morgan Stanley, millennials are two times more likely to invest in companies targeting social or environmental goals compared to the overall population. Furthermore, global sustainability challenge is introducing new risk factors for investors and may force them to re-evaluate their traditional investment approach preferring an ESG one. Secondly, because investors are changing. Quoting a study made by Accenture, in the next decades there should be a wealth transfer of $30 trillion from baby boomers to 90 million millennials, which should likely be translated into roughly $20 trillion put into ESG investing. And lastly, thanks to the evolution of data and analytics on this topic available in the market. Better data and transparency from the companies will allow ESG investors to have accurate and precise information for their investment process.

 

A new approach for financial returns

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As mentioned in the introduction, the main issue of ESG investing was the fear of lower returns, although some studies have proved the opposite. A recent MSCI study showed how companies with solid ESG practices have a lower cost of capital, lower volatility, and less bribery, corruption and fraud, in contrast to companies with poor ESG practices. The latter having higher cost of capital as well as higher volatility.

The graph above shows an analysis of the MSCI Emerging Market ESG Leader Index and the MSCI Emerging SRI Index returns compared to MSCI Emerging Markets Index. We can see that Companies with higher ESG ratings are usually associated with higher profitability, lower tail risk and lower systematic risk.

In order to invest in the right companies, asset managers are relying on more and more ESG rating agencies. Moreover, as the general demand is increasing, ESG indexes such as the Dow Jones Sustainability Index, the FTSE4Good Index, Bloomberg ESG data or the MSCI ESG Indices are rising in inflows.

 

Green Bond

A new initiative

Among the other market players, there is a non-profit organisation managing to mobilise a huge amount of money for climate change solutions. Its name is “Climate Bonds Initiative”, and the declared strategy is “to develop a large and liquid Green and Climate Bonds Market that will help drive down the cost of capital for climate projects in developed and emerging markets; to grow aggregation mechanisms for fragmented sectors; and to support governments seeking to tap debt capital markets”. By having a look its website, it is possible to figure out how its activities look like. Firstly, it manages the “Climate Bond Blog”, which is essentially a journal of record for relevant bond issuance including also some important industry updates, as well as drawing up a report concerning global outstanding bonds. The second workflow is related to developing trusted standards. The aim of these standards is to lead investors when making the right choice in order to tackle climate changes. Lastly, they provide policy proposals in the attempt to harmonise the work between governments, finance and industry.

At this point, someone could ask why there was the necessity to give birth to such a specific organisation. The answer lies in the overpowering rise of the abovementioned securities known as “Green Bonds”. These are issued by financial institutions, governments or companies allowing investors to receive their own returns but at the same time to contribute financing climate and environmental projects, and there is nothing else more right to do. In order to be labelled as Certified Green Bond, a security must undergo a strict process, at the end of which an Approved Verifier submit an assurance report to confirm that the bond meets the Climate Bonds Standard’s requirements. However, the Climate Bonds Standard Board has the final word. Certifications can be split in Pre-Issuance and Post-Issuance Certification, and they are available for asset related to specific sectors, currently including Solar Energy, Wind Energy, Geothermal Energy, Marine Renewable Energy, Water Infrastructure, Low Carbon Transport & Low Carbon Building. Nevertheless, other assets related to different sectors can be published after being approved by the Climate Bonds Standard Board. After the Post-Issuance verification, issuer’s duties are not over, since it is asked to provide the Climate Bonds Secretariat with annual reports with the purpose of keeping the compliance with the requirements.

 

2018 figures

Since their inception, Green Bonds have represented an unstoppable phenomenon that has seen the greatest global institutions as major players. The first socially-responsible fixed income security (€600m) has been issued in 2007 by the European Investment Bank, followed one year later by the World Bank, which issued the first Green Bond in history (€400m).

From 2008 on, a great work has been done in order to enhance the process, achieving relevant results. If we have a look again at a document from Climate Bonds Initiative, the 2018 Green Bond Market Summary, we can find some interesting figure that can help us understanding why last year has been exceptional concerning the green economy. Global green bond issuance reached $167.3bn in 2018, a figure that represents a 3% increase on 2017. Specifically, there have been 1,543 green bond issues from 320 issuers from 44 countries. The largest single green bond has been issued by Belgium with €4.5bn. USA has occupied the top spot in the bond issuance rankings for countries, followed by China and France. These three countries have already been ranked in the same positions in the previous years, and put together they have accounted to roughly $80bn issued in 2018. Consequently, it is easy to understand why the largest global issuer is an American company (Fannie Mae, $20.1bn), and the second one is Chinese (Industrial Bank Co, $9.6bn).

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Source: Climate Bond Initiative – 2018 Green Bond Market Summary

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Source: Climate Bond Initiative – 2018 Green Bond Market Summary

In addition, also Emerging Markets are playing a key role in the sector. With the contribution of Supranational Development Banks, EM accounted to the 31% of the total issuance. Obviously, China leads the group with 78% of EM’s issuance. Thanks to the introduction of the ASEAN Green Bond Standards, issuer from Thailand and Indonesia joined the market, with the latter becoming the first sovereign bond issuer from Asia in March 2018. On the European side instead, Poland, Iceland, Lithuania and Slovenia have been the major contributors.

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Source: Climate Bond Initiative – 2018 Green Bond Market Summary

 

Outlook 2019

Fortunately, also the outlook for 2019 seems to be positive according to Moody’s Investors Service. Indeed, the rating company has forecast green bond issuance to increase up to $200bn globally, representing a year-on-year growth of c.20%. The driving factors will be the increased use of the United Nations’ Sustainable Development Goals (SDG), as well as the “heightened commitment to addressing climate change”. Moreover, not only just an overall increase is expected, but also a consistent diversification in terms of sector, region and use of proceeds. Lastly, the fact that it will be easier to qualify a project as green is going to be beneficial for the growth of the sector as well.

However, not only Green Bonds market is about to explode in 2019, but also Social and Sustainability Bonds are pushing to reach a recognised position. With the birth of the SDG frameworks in 2018, investors are now able to decide where to channel their money to bonds financing green projects or to those financing social ones. According to CBI, Sustainability Bonds issuance has risen up to $21bn, a figure representing a 114% growth over 2017. Considering these trends, it is reasonable to point out that 2019 will be the year of a great consecration.

 

It’s just the beginning

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The investors’ change of mindset is shifting the world from a sole return-driven perspective to a more ethical and sustainable way of investing. This process is clearly helped by the implementation of new regulations by the United Nations and financial institutions. This is taking time and energy; and there is still a lot to do. As a study of PIMCO illustrates, although a lot of companies have a high level of awareness of the SDGs, only few are setting quantitative targets, letting us think that many are struggling to translate well-intentioned resolutions into action.

A key challenge is to develop an agreed set of performance indicators that shows a company’s target and progress. This would be extremely important for investors, in order to compare the SDG contribution of companies. We encourage financial institutions and private investors to do so and to keep on making investments in a more responsible way (obviously with the objective of delivering returns).

Is all this going to lead to a permanent change in investors’ mentality or are we just witnessing a fancy, but temporary, trend?

 

Authors: Federico Giorgi, Thomas Bauzon

 

Supervisor: Carmen Alvarez

PART I – What happened in 2018? Bain & Company “Global Private Equity Report 2019”

PART I – What happened in 2018?  Bain & Company “Global Private Equity Report 2019”

1. PE funds produced another impressive surge in investment value in 2018, capping the strongest five-year stretch in the industry’s history. Fierce competition and rising asset prices continued to constrain deal count (i.e. the number of transactions fell by -13%, to 2,936 worldwide) with total buyout value jumped +10% to $582bn supported by a strong growth of public-to-private transactions which globally reached their highest value since the previous take-private boom in 2006–07.

pe1

2. Despite the steady pace of investment, PE dry powder has been on the rise since 2012 and hit a record high of $2tr at year-end 2018 across all fund types and $695bn for buyouts alone. The build-up of excess capital is putting pressure on PE firms to find deals, but the good news is that buyout firms hold 67% of their dry powder in funds raised over the last two years, meaning the recent deal cycle is clearing out the older capital and replacing it with new.

pe2

3. The stiff competition and high multiples (i.e. 10.9x was the average EV multiple for North American buyouts in 2018) that made it challenging to find deals in 2018 also made it a great time to exit. With 1,146 transactions valued at $378bn, exit activity came in a smidgen lower than in 2017, but the total was still a strong contributor to a historic five-year stretch that has produced unprecedented distributions for investors. There was clearly some urgency on the part of GPs to sell assets, as signs of economic weakness pile up. The median holding period for buyouts fell last year to 4.5 years, after edging down slowly from a peak of 5.9 years in 2014. PE funds continued to attract an impressive amount of capital in 2018, although the pace fell off from 2017’s record-breaking performance. GPs raised $714bn from investors during the year (i.e. the third-largest amount ever) bringing the total since 2014 to $3.7tr. LPs remain committed to what has been their best-performing asset class (i.e. 90% of all institutional investors say they intend to maintain or increase their PE allocations).

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4. After several years of heavy stock market volatility around the world, buyout funds continued to outperform public equity markets in all major regions, over both short and long time horizons. At the same time, buyout returns in the current cycle have not been as robust as they were in the previous cycle. As the overall PE industry has matured and become more competitive, the outsize returns that GPs could once earn on a large pool of undervalued assets are harder to find. Yet, top-performing funds still exceed the industry average by a relatively wide margin.

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SOURCES