Schering and Merck: A Match Made in Purgatory

Merck (NYSE: MRK  ) needs Schering-Plough (NYSE: SGP  ) , and the first-quarter results prove it.

Merck's sales were down a whopping 8% year over year. My call last October that Merck's drugs were becoming stale (to put it mildly) is finally coming to fruition. Sales of top-selling Singulair were down 4% and quite a few drugs saw huge declines: Cholesterol drugs Zetia and Vytorin, which Merck sells with Schering; human papillomavirus (HPV) vaccine Gardasil; and osteoporosis drug Fosamax all declined in excess of 20%.

None of those declines are big surprises, but they still hurt. Last year's decline of Zetia and Vytorin -- and rise of statins like Pfizer's (NYSE: PFE  ) Lipitor and AstraZeneca's (NYSE: AZN  ) Crestor -- was caused by results of the Enhance trial, which was released last January. Gardasil has grabbed all the low-hanging fruit and, while it has the possibility to get a label expansion to treat males, it's also likely to see competition in the U.S. from GlaxoSmithKline's (NYSE: GSK  ) Cervarix relatively soon. Sales of Fosamax were down because of generic competition in the U.S., so you can probably kiss those sales goodbye.

Schering's sales were also down -- 6% year over year -- but that was entirely due to changes in currency. At constant currency, sales were up 4%. While they can play havoc on year-over-year comparisons, those international sales are one of the main reasons that Merck wanted to purchase Schering. As long as the company doesn't lose international sales of Remicade and its follow-on golimumab to Johnson & Johnson (NYSE: JNJ  ) , the purchase should help Merck diversify considerably.

Despite the lower revenue, Schering was able to cut costs and increase adjusted earnings by $0.03 over the year-ago quarter. Unfortunately for Schering's shareholders, the stock price is tied to Merck's share price because part of the buyout offer will be paid in shares of Merck. With a lack of growth and a delay of its potential migraine drug blockbuster, Merck's shares are slumping today and dragging Schering down with it.

Until Merck can show that it's capable of growing sales again, investors should be leery of stepping in, even with the dividend yield pushing 6%. There are so many better places to get dividends and a chance for capital appreciation.