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Sun Pharma - Ranbaxy Merger: Understanding Cumulative Abnormal Return*

CASE STUDY, STRATEGIC MANAGEMENT
ET Cases - GSMC, 8 Pages

Case Preview

Sun Pharma - Ranbaxy Merger: Understanding Cumulative Abnormal Return

 

Indian pharmaceutical market ranks third in terms of its volume and thirteenth in terms of its value. Indian pharmaceutical industry witnessed an increase in CAGR of 17.46 % in 2015 from $6 billion in 2005 and is forecasted to expand at a CAGR of 15.92 % to $55 billion by 2020. 70% of the revenue comes from generic drugs and it forms the largest segment of the Indian pharmaceutical sector, whereas remaining 30% comes from OTC drugs (21%) and patented drugs (9%).1

As defined by US, FDA2, “A generic drug is identical—or bioequivalent—to a brand name drug in dosage form, safety, strength, route of administration, quality, performance characteristics and intended use”. USA is one of the major export markets of Indian drugs. India is the largest exporter of generic drug which constitutes more than 20% of the global export volume. Low cost of production in India is helping the companies in India to have a competitive edge over other foreign companies and have a larger share of global Pharma market by producing generic drugs. To get approval from US FDA for promotion and distribution of generic drugs, the companies have to submit an abbreviated new drug application (ANDA). Change in the attitude of people in India towards health care accompanied by increase in their purchasing power is also one of the reasons behind the rapid growth of this sector......................


1 http://www.ibef.org/industry/pharmaceutical-india.aspx
2 http://www.fda.gov/Drugs/ResourcesForYou/Consumers/BuyingUsingMedicineSafely/UnderstandingGenericDrugs/ucm144456.html (accessed date: September 19th 2015)

Teaching Note Preview

Sun Pharma - Ranbaxy Merger: Understanding Cumulative Abnormal Return

 

Synopsis

This case attempts to enumerate a step by step procedure for calculating cumulative abnormal return (CAR) for the case of Sun Pharma – Ranbaxy merger. CAR is an academic way of analyzing merger performance based on stock market returns of both acquirer and target firm. It is observed that the cumulative abnormal return for both the acquirer and the target is positive.

Prerequisite Conceptual Understanding Before The Classroom Discussion

There is no need of pre-requisite conceptual understanding before the classroom discussion. This case is sufficient for an introduction to event study analysis. An elementary knowledge of linear regression would be beneficial.

Case Positioning and Setting

The following courses can utilize the case in their teaching material at MBA/Post Graduate level:

• Strategic Management
• International Business
• Mergers & Acquisitions

Teaching Plan

The following is a proposed a simple teaching plan with the intention of covering the requisite concepts and analysis within the class duration [Annexure (TN)-I]............

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Product code: STG-1-0042, STG-1-0042A

Abstract

Event studies are used to analyze firm behaviour by observing stock prices in and around corporate events. Event studies are important in the context of corporate affairs as it attempts to highlight the magnitude of abnormal performance at the time of the event indicating considerable evidence on investor’s reaction of the event. Existing literature characterize event study decisions based on the time frame of the study in consideration. Short horizon event studies generally include window period of less than twelve months. On the other hand, long horizon event studies include those whose event study period is more than twelve months. One of the most used short horizon event study in the field of mergers is Cumulative Abnormal Return (CAR). CAR is an academic way of analyzing merger performance based on stock market returns of both acquirer and target firm. It is an event study analysis used to access short term merger performance from windows ranging from 11 days to 3 days around the merger announcement date. This case provides scope to calculate cumulative abnormal return for both Sun Pharma and Ranbaxy using Excel spread sheet and attempts to derive meaningful insights from the perspective of target and acquirer firm.




Pedagogical Objectives


  • To make students appreciate the importance of Pharmaceuticals mergers in the Indian Context

  • To enumerate the synergy achieved from Ranbaxy-Sun Pharma merger

  • To make students calculate the cumulative abnormal return (CAR) in excel spreadsheet



Case Positioning and Setting

The following courses can utilize the case in their teaching material at MBA/Post Graduate level:


  • Strategic Management

  • International Business

  • Mergers & Acquisitions





* GSMC 2017, IIM Raipur


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- Abstract
- Case Study
- Teaching Note (**ONLY for Academicians)
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