German operator Celesio – owner of the Midlands-based Lloyds Pharmacy chain – saw a 39 per cent drop in first quarter pre-tax profit.

It has been hurt by lower payments for generic drugs introduced by the National Health Service in October.

Profit before tax fell by 39 per cent to 88.6 million euros (£70.3 million).

The drugs distributor and operator of pharmacies said quarterly sales declined to 5.41 billion euros (£4.29 billion) from 5.63 billion euros (£4.46 billion) in the year-earlier period.

Europe's biggest drug distributor warned last month of lower earnings in the first half after sharp cuts in reimbursement prices for generic drugs in Britain started in October. But the magnitude of the fall still surprised analysts.

"As expected the first quarter has been a disaster," said Martin Possienke, an analyst at Equinet. "We will most likely have to cut our forecasts again."

Celesio confirmed that its 2008 full-year pretax profit is due to drop, while earnings before interest, tax, depreciation and amortisation (EBITDA) is set to stagnate.

Sales growth, adjusted for currency swings, is likely to be within a low single-digit percentage range this year, the company added.

Operating profit fell by 25.7 per cent.

Celesio stated: "The main reasons for this were the drastic cutback in the reimbursement prices for generic drugs in the UK, and unsustainably high discount competition in the German wholesale sector."

The UK hit cost the group 30 million euros (£23.8 million) in EBITDA, whilst exchange rate effects made up a further 8.1 million euros (£66.4 million).

Celesio added: "Ultimately, the contribution to the overall result made by the German Wholesale division was almost completely non-existent when compared with the prior year, something that played a major part in the fall in performance."

Celesio alienated German pharmacists, its wholesale customers, by acquiring Dutch company DocMorris in April last year, a move which brought it into competition with many of its clients. DocMorris is Europe's biggest mail-order pharmacy.

As a result some German wholesale customers transferred their business to Celesio rivals including Phoenix, Anzag and Sanacorp.

The deal was done in anticipation that the European Court of Justice would quash legal barriers to entry to the country's drug retail market.

German laws currently restrict ownership of pharmacies to certified pharmacists and strictly limit the number of outlets in a drug-retail chain.

Celesio says it aims to resume "sustained and profitable" growth in 2008 partly because it aims to benefit from a liberalisation in European drug retail markets, likely, besides Germany, to extend to Italy, Spain, Austria, Portugal and France.