The Indian pharmaceutical industry had a rough start to the year. Regulatory and pricing issues kept the sector volatile and uncertainty was the dominant theme.

These problems reflected in the stock prices of all major pharma companies as most of them have generated negative returns, so far.

The Nifty Pharma and the BSE Healthcare Index also delivered negative returns, falling 7 percent and 9 percent, respectively, as on September 6.

But, analysts are of the opinion that the pharma sector could emerge as the "dark horse", with domestic operations consolidating and China offering a big opportunity.

"Most of the pharmaceutical companies are back on track, they have a strategically re-balanced domestic and foreign portfolio. We believe FY21 will be a sunrise year for pharmaceutical companies. Here, again low valuations and rejigged businesses are a big plus," said Dharmesh Kant, Head - Retail Research, IndiaNivesh, in an interview to Moneycontrol.

The sector was an outlier in the earning season, as major pharma players posted robust earnings in the April-June quarter.

The sector also posted double-digit growth in domestic sales in July, aided by strong volumes, which reaffirm analysts' confidence in the space.

The China opportunity

According to analysts at Nirmal Bang, the opening up of the Chinese market could drive the next leg of growth for the Indian pharma.

The Chinese pharmaceutical industry has undergone a critical transformation toward high-quality and innovation-focused development, reflected by the explosion of new drug and clinical trial approvals in recent years.

A rapidly ageing society, drug regulation reforms, higher healthcare demands and increased investment inflows have helped the industry mature at a feverish pace in China.

“Healthcare is one of the most exciting sectors in China, growing above 10 percent annually,” said Franck Le Deu, a senior partner at McKinsey. “We expect more and more new drugs will come from Chinese companies."

So how is the consolidation of the Chinese pharma beneficial for India?

Indian player can carve a niche in the generic segment, says Nirmal Bang.

The increased focus on innovation and research and development means that Chinese players are not as focused on generics, and that is where Indian companies can step in.

The Chinese generic segment is four times the size of the Indian pharma market. It generates sales of about $84 billion, largely dominated by multi-national companies.

"A large share of prescriptions in China are written in favour of MNC brands (despite generic options), which are priced multi-fold higher than generics. Lipitor, which is no longer patent-protected, generates sales of $1.2 billion in China," said analysts at Nirmal Bang.

China has also adopted a new drug approval framework, which focuses on fostering confidence with both public and physicians so that they switch to generics instead of foreign brands.

Analysts expect this, along with the focus on innovation, to drive out MNCs that currently contribute $20 billion to the generic segment.

According to Nirmal Bang, the exit of MNC companies that have dominated the Chinese generic market for years, could make way for Indian drugmakers.

"The Chinese players have limited experience in developing copycats of complex generics. While Indian players, by virtue of their US filings, are prepared to do a filing anytime," said the brokerage.

The Indian players have already started entering into joint ventures and out-licensing arrangements to grab a share of the Chinese pie.

Dr Reddy's Laboratories is among the front runners. It entered the Chinese market in the year 2000, way ahead of its peers . The pharma major is in a JV with Kunshan Rotam and also has a fully-owned subsidiary in that country.

Other market leaders such as Aurobindo Pharma, Cipla, Strides Pharma and Alembic Pharma have also joined hands with Chinese counterparts over the years. Sun Pharma has taken the out-licensing route while Natco and Lupin are also looking at China.