Despite some manufacturing headwinds, Sun Pharmaceuticals' results slightly exceeded our expectations. We plan a few adjustments to our model thanks to higher-than-expected gross margin and lower taxes. This may lead to a slight uptick to both our 2015 earnings estimate, and to Sun's fair value estimate. We're leaving the company's narrow economic moat rating in place, given its large cost advantage and reasonable pricing power in limited competition markets.
Sun reported a 7% earnings decline during its third-quarter fiscal 2015, as its U.S. business witnessed a 5% decline in sales due to temporary supply constraints at its Halol facility. The facility is undergoing remediation measures and should be able to improve manufacturing capacity starting next quarter. However, Taro continued to be the silver lining in the U.S. business. Taro's topicals drug business is not reliant on India-based manufacturing and continued to expand gross margins (up by 70 basis points to 81.4% compared with the prior quarter) by raising prices on its customers in this limited competition market. Taro's sales for the quarter ending December 2014 were up 11.3% despite a decline in volume. As a result of this gross margin expansion, a comparison of Sun’s consolidated nine-month performance yielded 6% earnings growth (after adjusting for the one-time settlement for litigation related to generic Protonix last year). This is ahead our full-year estimate of 4% decline in earnings, as gross margins were higher by nearly 190 basis points over our 80% estimate.
