Germany's Merck KGaA and India's Dr. Reddy's Laboratories have struck a deal to develop cheap versions of biotech cancer drugs, seeking to tap into a new market as patents on biotech medicines expire.

Up to now, complex biotechnology medicines, which are given by injection, have been largely immune from generic competition, unlike conventional chemical pills and capsules.

But the landscape is starting to change as patents end and regulators establish guidelines for developing so-called biosimilar versions of drugs, posing a threat to leading biotech groups like Roche and Amgen.

In contrast to conventional chemical medicines, biotech products are impossible to copy precisely, forcing generic companies to develop biosimilars, which are close to the original but need to be sold as separate medicines.

Merck is at risk from cheaper competitors to its multiple sclerosis and cancer drugs and is hoping to hedge its bets by developing its own biosimilars capability with Dr. Reddy's.

"Sharing know-how, risks and rewards is the right approach to enter the emergent biosimilars market and will be a win-win for both parties," Merck executive board member Stefan Oschmann said in a statement on Wednesday.

Under their agreement, Merck and Dr. Reddy's will co-develop molecules. Dr. Reddy's will then lead early product development and testing before handing over to Merck for manufacturing and late-stage trials.

Merck will handle commercialisation in most parts of the world and will pay Dr. Reddy's royalties. In the United States the two companies will co-commercialise the products on a profit-sharing basis.

Europe has already approved some biosimilars, including copycat versions of human growth hormone and the anaemia treatment EPO. However, antibodies for diseases such as cancer and rheumatoid arthritis are a much bigger commercial prize.

Companies racing to develop biosimilars include traditional Big Pharma innovators, like Pfizer and Merck, as well as generic drug manufacturers in the United States, Europe, India, China and South Korea.

Merck said the investments needed for the collaboration were already factored into its profit outlook. The move comes as Merck tries to cut costs by €300 million ($374 million) a year at its prescription drugs unit by 2014 following a series of setbacks.