By Peter Loftus 

Low-cost knockoffs of the arthritis treatment Remicade in Europe hurt Merck & Co.'s second-quarter sales and earnings, a harbinger of the pressure facing sellers of other costly biotechnology drugs in the coming years.

Merck, which handles Remicade marketing in Europe, said the company's sales of the drug declined 25% to $455 million for the quarter, as European doctors prescribed copycat versions that cost up to 45% less than the branded drug.

Companies including Hospira Inc. and Celltrion Healthcare started selling Remicade knockoffs in major European markets in February. It was a one of an expected wave of biosimilars, or close copies of complex biotech drugs, as patents for blockbuster biotech drugs begin to expire. Another milestone was the March regulatory approval of the first U.S. biosimilar drug, a Novartis AG biosimilar version of Amgen Inc.'s Neupogen treatment for cancer patients.

Remicade was one of the earliest of a complex category of biotechnology drugs when it was introduced in 1998, and is now approved to treat a range of conditions including rheumatoid arthritis and gastrointestinal disorders. Johnson & Johnson, which handles marketing in the U.S. and some other countries, recently reported second-quarter Remicade sales of $1.67 billion, down 7.5%. There aren't yet any Remicade biosimilars in the U.S., but Celltrion has applied for regulatory approval to market one.

Aside from Merck and J&J, biosimilar competition is expected to pressure future sales at AbbVie Inc., whose flagship drug Humira faces copycats as early as 2017. Some companies including Pfizer Inc., Merck and Amgen Inc. are trying to play hands on both sides of the table by selling both brand-name biotech drugs and biosimilars.

Merck officials said Tuesday the company has had success convincing European health systems and doctors to keep existing Remicade patients on the drug. But new patients are being steered to the biosimilars, Merck said.

"Over time we believe that as more new patients come into the market we will lose market share," Adam Schechter, head of Merck's drug-marketing unit, told analysts on a conference call.

J.P. Morgan analyst Chris Schott said he expects sales erosion for Remicade to accelerate in Europe throughout the rest of the year.

Competition from generic and now biosimilar drugs has contributed to a multiyear sales slump at Merck, which last reported an annual revenue increase in 2011. The company has slashed costs, including by laying off thousands of employees, and sold certain assets, including its over-the-counter drug business.

The company has shifted its research spending to promising projects like the cancer drug Keytruda, which went on sale last year and generated $110 million in sales for the second quarter. Merck said Tuesday the U.S. Food and Drug Administration has accepted its application to market a new treatment for hepatitis C, with a regulatory decision due in January 2016.

To expand its cancer-drug research, Merck said Tuesday it acquired an Israeli drug developer, cCAM Biotherapeutics, for $95 million cash upfront plus potential payments of up to $510 million if experimental drugs reach certain goals. cCam is developing drugs designed to unleash the body's immune system against tumors.

But sales from newer drugs haven't yet been sufficient to replace sales of older drugs lost to generic competition after patent expirations. Aside from Remicade, Merck also reported a decline in sales of the anti-cholesterol drugs Zetia and Vytorin, partly due to the availability of generic Zetia in Canada. Merck reported sales gains for diabetes drugs Januvia and Janumet, as well as certain vaccines. Sales of animal drugs declined 4%.

Overall, Merck sales dropped 11% to $9.79 billion. Unfavorable currency-exchange rates and the divestiture of the over-the-counter business more than offset areas of growth like vaccines and the antibiotic Cubicin, which Merck acquired with its January purchase of Cubist.

Merck reported second-quarter earnings of $687 million, or 24 cents a share, down from $2 billion, or 68 cents a share a year earlier. The latest quarter included foreign exchange losses of $715 million related to Venezuela's currency devaluation, while the year-earlier quarter included a gain of $741 million related to the winding down of a partnership with AstraZeneca PLC. Excluding these and other items, earnings would have risen to 86 cents a share from 85 cents a share.

Analysts were expecting earnings excluding items of 81 cents a share, on $9.8 billion in revenue.

Merck boosted its forecast of 2015 earnings, excluding items, to a range of $3.45 to $3.55 a share, from a prior range of $3.35 to $3.48 a share.

Merck shares rose 0.1% to $57.06 in recent trading Tuesday morning.

Write to Peter Loftus at peter.loftus@wsj.com

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