The government is set to introduce a system for stringent monitoring of prices of drugs outside price control with requisite legislative sanction.

The system will ensure that price fluctuations beyond the confines being set would in most cases, lead to imposition of price controls on the drugs that are in the control-free category at present. Monitoring will deliver occasional blows to the bottomlines of drug majors.

Nearly 75% (over Rs 17,000 crore) of the retail pharma market of over Rs 23,000 crore is currently outside price controls. A government panel, headed by joint secretary (pharma), GS Sandhu, examining the drug price control mechanism, may also recommend imposition of a ceiling on retail pharma trade margins for control-free drugs, if the law ministry approves of the proposal.

The panel is convinced that the law should specify the rate of price rise of an unscheduled (control-free) drug, which would make it eligible for price control. In its report to be final by month-end, the panel is set to propose an amendment to the Drugs Price Control Order (DPCO) to specify the permissible rate of price increase for a control-free drug over a period.

Even now, the government has the power to intervene in the unscheduled drugs market if it detects an "abnormal" price increase. However, such interventions have been seldom made in practice because the DPCO does not specify a figure to reckon the abnormality of the price rise.

Hence, the National Pharmaceutical Pricing Authority (NPPA) has restricted itself to discretionary views on the matter and refrained from using the power.

Official sources said the maximum tolerable price rise over a specified period may be fixed and mentioned in the DPCO. Monitoring will be strict and assiduous. The government will not lack the legal sanction for intervening in the control-free market.

The committee is examining various options to control trade margins. These include imposing an across-the-board ceiling on trade margins for all unscheduled (both generic and branded) drugs, fixing a higher ceiling for the generic drugs and a lower one for the branded drugs and fixing the ceiling only for generic drugs.

The law ministry is examining the tenability of these proposals, officials said. The cap on margins for generic drugs may result in some shake-out in that space.

"This will put pressure on large companies to exit from the generics business," sources said. For instance, if Cipla's or Ranbaxy's branded product is available at Rs 26, the generic version may be priced at Rs 6 after the generic margin is capped on a product that costs Rs 2 to produce.

In the absence of the high margin, the chemist will have no incentive to push the generic medicine.

Currently, the maximum retail trade margin for a controlled drug is fixed at 16%. For a control-free drug, no such ceiling is officially fixed. The result - the retail margins can be as high as even 2,000% in case of generic drugs, while a margin of 500% is just common. Generic (unbranded) drugs constitute just about 8% of the retail pharma market.

Even then, the government is concerned over the huge margins in the segment since these drugs are sold mostly in the rural markets, where the chemist's preference to sell these drugs could hit the consumer.

JS Shinde, honorary general secretary, All-India Organisation of Chemists and Druggists, said: "In case the margins are capped, our margin will go down. Despite that, we are willing to work with the government on making drugs more affordable to the consumer