The two companies cited "individual priorities" as the reason for the split in a joint statement released on Tuesday, which immediately ends a relationship that stood to earn Biocon hundreds of millions of dollars in royalties.

"The development is definitely negative for Biocon's insulin sales as it will have to look for new partners," said Bino Pathiparampil, an analyst at Mumbai-based brokerage IIFL.

"This is mainly because of strategy confusion...Pfizer's business strategy has been changing over the last two to three years, which probably has led to this development."

Biocon will retain royalties worth $150 million from Pfizer and stands to receive an undisclosed amount from the U.S. drugmaker as a severance payment, Biocon's chairman, Kiran Mazumdar Shaw, told CNBC-TV18 news channel on Tuesday.

Pfizer made upfront payments of $200 million to Biocon and the Indian drugmaker was eligible to receive additional development and regulatory milestone payments of up to $150 million, on top of royalties on sales.

Biocon's shares fell more than 7 percent in early trading on Tuesday after the split was announced.

The Biocon-Pfizer divorce is the latest blow for relations between Indian drugmakers and their global peers and comes a day after Germany's Bayer lost a landmark ruling in India, forcing it to grant a compulsory licence for its cancer treatment Nexavar to Natco Pharma.

The Bayer ruling is likely to unnerve international pharmaceutical companies that see emerging markets like India as a major growth opportunity, but remain worried about intellectual property protection in such countries.

"INDIVIDUAL PRIORITIES"

Biocon said in November that it was searching for a global partner for its experimental oral insulin pill, which if commercialized, could have entered the market as a direct competitor to the Pfizer-marketed drugs.

"The companies have agreed that due to the individual priorities for their respective bio-similars businesses, it is in their best interest to move forward independently," the two companies said in the joint statement.

The October 2010 deal gave Pfizer exclusive rights to commercialize bio-similars of human insulin Glargine, Aspart and Lispro developed by Biocon.

The United States alone has 18 million diabetic patients and a healthcare cost of approximately $200 billion per year associated with the disease. By 2030, the number of people living with diabetes in the U.S. is expected to hit 30 million.

Biocon in January blamed poor financial results for the quarter to end-December on lower licensing income, and said it expected income from sales of its products by others would be the key driver of its growth.

"Biocon will continue to work with its existing partners in several markets and will pursue a commercial strategy on its own and through new alliances in other markets," Mazumdar Shaw said in the statement.

All rights licensed to Pfizer revert to Biocon as of March 12, the statement said.

(Addtional reporting by Sakthi Prasad in BANGALORE; Writing by Henry Foy; Editing by Matt Driskill)

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