Jan. 17 (Bloomberg) -- Novartis AG, Europe's third-largest drugmaker, reported fourth-quarter profit fell more than analysts expected because of unexpected generic competition to two of its best-selling treatments.

Novartis had its steepest decline in nine months in Zurich trading after earnings fell 45 percent to $904 million, more than analysts' median estimate of $1.5 billion. Cheap copies cut into sales of Trileptal for epilepsy and the Lotrel hypertension drug. Two other products were also hurt by generics, and Novartis lost sales from the recall of the Zelnorm irritable bowel treatment.

Revenue rose at the slowest pace in five quarters, and Chief Executive Officer Daniel Vasella said today the company won't grow faster than its peers again until the fourth quarter. The Basel, Switzerland-based company will buy back 10 billion Swiss francs ($9.1 billion) in shares, the most in its 12-year history.

``Why Vasella isn't putting more money into R&D beats me,'' said Joerg de Vries-Hippen, who oversees about $60 billion, including Novartis shares, as chief investment officer for European stocks at AllianzGlobal Investors in Frankfurt. ``I can't see how things are to improve soon either.''

Cheaper copies in the U.S. hurt the company's largest unit, pharmaceuticals, where sales growth slowed to 1.7 percent in the quarter, compared with 6.4 percent over the whole year.

`Underestimated'

Analysts ``underestimated the impact of the loss of the products where we got generic competition,'' Vasella said in a televised interview. ``We had two where we expected generic competition, Lamisil and Trileptal, and two where we still have patents and got competition, Lotrel and Famvir. That had an impact.''

Net income fell to 41 cents a share from $1.65 billion, or 67 cents, a year earlier. The company was expected to earn $1.5 billion, the median forecast of five analysts surveyed by Bloomberg. Sales rose 5.7 percent to $9.9 billion.

Slowing sales growth pushed Novartis to eliminate 2,500 jobs over the next two years to save $1.6 billion annually by 2010. Drugmakers including GlaxoSmithKline Plc, AstraZeneca Plc and Pfizer Inc. are also cutting positions.

Novartis, which also makes the Gleevec leukemia medicine, had one-time costs of $444 million from the job cuts.

``In terms of core, underlying pharmaceutical sales growth, it was quite weak and margins were also hit,'' Andrew Fellows, a Helvea analyst in London, said in a televised interview.

Sales Drop

Sales of Lotrel fell 75 percent to $88 million in the quarter, while Trileptal declined 67 percent to $48 million. Revenue from Lamisil fungal dropped 71 percent to $66 million. The company took a $320 million one-time cost for writing down rights to Famvir, which treats herpes. Lotrel and Trileptal were among Novartis' top 10 best-selling drugs. U.S. sales of the four drugs and Zelnorm fell to $1.7 billion last year from $3.1 billion in 2006.

``The main disappointment comes from pharmaceuticals,'' Karl Heinz Koch, a Zurich-based analyst at Bank Vontobel said in a note to investors. ``The underlying profitability is lower-than- expected on the generic loss of legendary products and higher- than-expected investments in launch products.''

Novartis shares declined 2.05 francs, or 3.4 percent, to 59.20 Swiss francs. The Swiss drugmaker's stock fell 12 percent in 2007, making it the third-worst-performing on the Bloomberg Europe Pharmaceutical Index. The company owns a 33 percent stake in Roche Holding AG.

2008 Outlook

Novartis repeated that it expects the first half of 2008 to be affected by an ``ongoing negative impact'' from the U.S. drug unit. Vasella expects a ``new growth cycle'' to start in the second half of 2008.

``I would say in pharmaceuticals, the first quarter will be negative growth, the second quarter will be quite neutral, the third clearly toward growth and the fourth should be dynamic, meaning above market,'' Vasella said in an interview with Bloomberg television.

An earlier-than-usual shipment of flu shots meant sales at the vaccines unit fell 13 percent in the fourth quarter. Sales at Sandoz, the company's generic drugs unit, rose 19 percent.

Novartis has struggled in the last year with the delay of the potentially best-selling diabetes medicine Galvus, the withdrawal of Zelnorm and failure to win approval for the Prexige painkiller. Diovan, Novartis's best-selling drug with sales of $5 billion in 2007, loses patent protection in 2012.

Galvus, which analysts expected to generate sales of more than $1 billion, may never reach the U.S., Vasella said today.

FDA Letter

Novartis received an ``approvable'' letter from the U.S. Food and Drug Administration in February, which means the agency is prepared to clear Galvus if some conditions are met. The company hasn't yet come to an agreement with U.S. regulators about what tests are needed to file for approval, Vasella said.

The U.S. delay has put Novartis more than a year behind Merck & Co.'s competing Januvia in a race to move diabetics to drugs that use the body's own mechanisms to control blood sugar, analysts say. Januvia was approved by the FDA in October, 2006. Galvus was approved in the European Union in September last year.

Novartis replaced the head of its pharmaceuticals unit after regulatory delays to Galvus and hypertension treatments. Joe Jimenez now runs the drug operation, replacing Thomas Ebeling, who moved to the smaller consumer-health business.

In July, London-based AstraZeneca announced plans to reduce its workforce by about 11 percent. Pfizer, the world's biggest drugmaker, is cutting 10,000 positions. GlaxoSmithKline, also based in London, is eliminating jobs in sales, manufacturing and research to save 700 million pounds ($1.37 billion).

To contact the reporter on this story: Eva von Schaper in Munich at evonschaper@bloomberg.net.

Last Updated: January 17, 2008 12:38 EST