AstraZeneca looks like a value trap

That's partly because of the broader question of whether the pharmaceuticals sector is still a non-cyclical safe haven. Normally there would be a 'flight to safety' that favours pharma shares in troubled times like these, but that hasn't happened this year. So far in 2012, the average price of big pharma shares has dropped 11 per cent. But mostly it's because the regulatory, competition and legal problems that bedevil big pharma as a whole are particularly acute in the case of AstraZeneca.

The root of AstraZeneca's problems is its persistent efforts over the past five years to maintain its status as a research-based pharmaceuticals company. This wasn't an unreasonable goal - given success, this business model would deliver better financial returns than those produced by diversified pharma companies.

The problem is that Astra has made little progress. It attempted acquisitions that fell through, consummated deals that were too small to offset the loss of revenues as patents on drugs expired and witnessed the slow erosion of its research and development pipeline.

This approach is no longer viable, which is why the company is looking to hire a new boss after parting ways with chief executive David Brennan. By now, however, the problem is not so much a lack of options, as a lack of time left to make restructuring plans plans work. For example, nearly one-third of group sales are tied up in just two blockbusters, ulcer treatment Nexium and heart drug Crestor, and these two will lose their patent protection in 2014 and 2016 respectively. Time, then, is of the essence, especially as Astra has to change its spots years after, for example, GlaxoSmithKline or Bristol Myers Squibb, went through the same exercise.

Nor is there break-up value in Astra's shares. For starters, the group's book value is about £11.50 a share (see table), but City analysts reckon the break-up value of the group is only about £26 per share, well short of the current share price. The problem is that most of Astra's value is tied up in the revenues generated by its leading drugs and this is set to fall as patent expiries come nearer. So taking a punt on a break-up would be a highly risky investment plan.

Management has been able to sustain the inflation-busting dividend by finding some $2bn in cost savings over the past five years. That has kept profit margins high and dividends flowing, but the group may be reaching the limits of this plan. The first signs of this came in 2011's results when management had to book a $2.1bn (£1.3bn) restructuring charge, to generate $1.6bn of annual savings by 2014. In other, words the yield from cost-cutting is starting to fall as the easier cuts have already been made. Added to that is a seriously mis-firing development pipeline, with the failure of a host of late-stage products leaving the group without an effective oncology portfolio.

When these factors are taken together, the possibility of a revenue gap opening up within two years increases markedly.

AstraZeneca waits for payment

The chart shows why the bears have latched onto Astra in such a big way. The group has had to extend extra credit to its customers since the start of the recession in 2008. This is shown by the rise in 'day sales outstanding' (DSO) relative to sales. Essentially, the DSO records the waiting time for payment on sales of drugs that have already been booked, but not yet paid. Ideally, the DSO should be stable or in decline if sales are static; while a steady rise in payment days can often be a sign that a company is trying to boost sales for a particular period by offering discounts and better terms. That may not actually be the case at AstraZeneca because most pharmaceuticals makers are having to offer lengthened credit times, but it is one more reason why its share price has become more volatile. In circumstances where traders see the prospect of a making quick profit by betting that quarterly sales forecasts will be missed, it is usually time for buy-and-hold investors to take their cash elsewhere.