Amgen Shares Have the Right Prescription for Long-Term Growth

NEW YORK (TheStreet) -- You will be hard-pressed to find a stronger name than Amgen (AMGN) in the biotech/pharma space.

The stock closed Friday at $122.84, up 0.47%; by noon on Monday they were down another 0.7% to $121.99. Shares are up just shy of 7% on the year to date, trailing the health care sector's 13% gain. The company reports second-quarter earnings on Tuesday.

Investors are unsure of what to make of the stock, which doesn't appear to present any long-term value. To those skeptics, I say, let's widen the scope.

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With a price-to-earnings ratio of close to 20, Amgen doesn't cheap to some. But in the near-term, Amgen should continue to benefit from efficient cost controls and stable market share gains. The company's management has done and will continue to do exactly what they were told they couldn’t -- manage growth and profits. This has become the perfect formula for a higher stock price.

This means that around $122 per share, Amgen stock can still do well for investors looking for exposure in the biotech space. On the basis of improving cash flow and positive clinical trial data, these shares should reach $130 by the end of the year and $135 in the next six to 12 months.

The trailing P/E of 20 may not present an obvious value, but on a forward-looking basis, that P/E drops to 14. So I wouldn't consider the stock expensive until it reaches at least $130, which is still 6% above current value.

And even assuming Amgen does report a strong quarter on Tuesday, investors still may not realize the company's true value until one to two years down the line. This is because Amgen recently disclosed successful results for its phase-3 thyroid drug product AMG 416. It was discovered that the drug met both primary and secondary endpoints for hyperparathyroidism.

With close to 13 million people being affected by hyperparathyroidism (kidney failure), AMG 416 can become a lucrative drug for Amgen in the coming years.

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What's more, due to expanding margins, the company is consistently growing its operating income. Analysts underestimated the extent to which management would reconcile prior concerns about Amgen's competitive position -- particularly in terms of its pipeline. That, plus stronger capital expense controls for three consecutive quarters, places Amgen in the top tier of profit generators within the sector.

Regarding the pipeline, there is still the threat from the likes of Teva Pharmaceuticals (TEVA), which is working on a rival product to Amgen's cancer drug Neulasta. For that matter, advances made from companies like Gilead (GILD) and Celgene (CELG) are keeping Amgen investors awake at night.

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