German chemical and pharmaceutical company Merck said that Pfizer, the American drug giant had agreed to pay $850 million upfront and over $2 billion later in a deal to jointly develop one of Merck’s cancer drugs.

Merck said that this alliance with Pfizer is expected to strengthen Merck’s existing oncology business in several important markets around the world, including the United States. The deal also is expected to help spread the cost of developing the drug.

Pfizer and Merck will jointly commercialize and develop a potential treatment for several types of tumor, MSB0010718C under the agreement. MSB0010718C is a so-called immuno-oncology drug which, if successful would help the body’s own immune system fight cancer.

Merck, which is based in Germany, will receive an upfront payment of $850 million and up to $2 billion in additional payments if the drug turns out to be commercially successful, as a part of the deal. Merck also will co-promote Pfizer’s treatment for nonsmall-cell lung cancer, known as Xalkori, in the U.S and other markets.

The Merck chairman, Karl-Ludwig Kley said that the agreement with Pfizer is a very important milestone in taking their pharma pipeline forward.

Pfizer and Merck will share the cost of bringing the drug to market and developing it. Both the companies will also share revenue from its sales.

The Pfizer group president for its vaccines, oncology and consumer health care businesses,  Albert Bourla said that the alliance allows Merck and Pfizer to join forces and combine complementary strengths with the goal of meeting the needs of patients with multiple types of cancer.

Merck agreed to buy Sigma-Aldrich, the life sciences company for $17 billion in cash. In 2013, Merck completed its acquisition of a maker of functional specialty chemicals and high-tech materials, AZ Electronic Materials.

In Frankfurt, on Monday, in morning trading, Merck’s shares increased approximately $95.18 or 2.5 percent to 76.02 euros.