This makes Dr Reddy's the first Indian pharmacueticals company to become an "authorised generics" manufacturer for a multinational.
Another Indian drug major, Ranbaxy Laboratories, is in the fray to launch the cholesterol lowering drug, simvastatin, in the US.
Ranbaxy had filed a Para IV challenge to the drug and is fighting a patents challenge on it.
Simvastatin, which raked in $5.2 billion in global sales in 2004, is the biggest drug in terms of sales after Pfizer's Lipitor (atorvastatin).
A victory in the court would have given Ranbaxy the coveted 180-day exclusivity period for marketing the drug.
The other drug, Proscar (finasteride), had a turnover of about $630 million in 2004.
Dr Reddy's share price rose 5.2 per cent on the Bombay Stock Exchange, the stock ending the day at Rs 1,177.95.
The Hyderabad-based company would have the right to launch the generic products, provided the six-month exclusivity was granted to any pharmaceuticals company, said a spokesperson for Dr Reddy's.
Confirming the development, an executive of Merck's Indian subsidiary said, "The agreement pertains to the US market only. This is Merck's first agreement of this sort with an Indian company."
In June last year, Merck had delisted its simvastatin patent from the "Orange book" in the US, much to the anguish of Ranbaxy and Ivax, which were eyeing the exclusivity period.
In the US, the term "authorised generics" implies an agreement under which an innovator drug company allows a generics player to launch a generic copy of its patented drug for a share in revenue. This guards the innovator company against any generic challenge.
The lure of a Para IV filing has diminished ever since authorised generics were allowed even in the 180-day exclusivity period.
Ranbaxy refused to see this deal as a setback. "In case of any first-to-file, we assume there would be an authorised generic. In fact, we consider it a norm and view it as a business opportunity for ourselves too," said a spokesperson.
But analysts see this as an encouraging shift of stance on part of Indian pharma companies that have so far been dependent on the patents challenge route."So far, authorised generics have posed a threat to Indian companies. Pitching themselves for the role is a smart way of working round the problem. While short-term benefits would be revenue flows, developing partnership potential will be the larger gain," said an analyst.