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Pfizer (NYSE:PFE) stock is down more than 3% since announcing its third quarter earnings. The planet's largest drug maker missed earnings expectations by $0.01 ($0.61 reported as opposed to $0.62 expected). The top line came in at $13.1 billion which was in line with what was expected.I for one believe that the stock will rally to around the $40 level over the next 18 months. Here's why.

Pfizer surprised the market by announcing that it would be scrapping the cholesterol-lowering drug Bococizumab which is a good move in my opinion. This industry is all about getting to the market first with safe drugs. Bococizumab had achieved none of these competitive advantages thus far, which is why Pfizer decided to pull the plug. Increasing side effects over the long term as well as strong competition (Sanofi & Amgen) were the main catalysts that ended its run. Analysts had predicted that Bococizumab would bring in $2 billion in revenues annually, so the question that remains now is, whether Pfizer has the portfolio to make up for this loss in future revenues? I believe it does, which was confirmed by the slight increase in top line guidance for the year, although earnings guidance was reduced slightly. Here are 3 strong reasons why I still see Pfizer as being undervalued at its present share price of a little above $29 a share.

Ibrance Will Get To $6 Billion In Annual Sales By 2020

In my earnings preview, I discussed the significance of Ibrance for Q3 earnings. Although sales of the drug beat consensus by rising to $550 million, its growth rate actually dropped a notch compared to the previous quarter. Some analysts may see the decline in US growth as a slightly bearish signal, but we have to remember that the drug is yet to take off in Europe (where strong demand is projected). In fact, the annual projections in terms of revenue for Ibrance are set to reach almost $6 billion by 2020 despite the expected competing drugs from the likes of Eli Lilly & Novartis. However, Ibrance is currently being tested for other cancer treatments (60), with 24 of them currently outside the breast cancer space. This makes me confident that the drug will easily reach its revenue projections in the years to come. Furthermore, Pfizer shareholders should remember that they still have the added tailwind of Xtandi (from the Medivation acquisition) in the cancer treatment segment, so the fundamentals remain bright here in my opinion.

Prevnar's Fundamentals Remain Strong

The performances of Prevnar and Lyrica were also impressive in the third quarter. These two products are critical to Pfizer's growth as they are the two biggest divisions of the company. The Prevnar lineup had a poor second quarter, bringing in only $1.26 billion in revenue, but the third quarter beat estimates of $1.46 billion with a convincing $1.54 billion number. Furthermore, fundamentals are sound for Prevnar going forward, due to generic competition not being that strong in this space at present. Moreover, when one combines the recently approved FDA decision (Prevnar 13) along with European growth to come, Prevnar should remain the dominant player here for years to come.

Established Drugs Beat Consensus And Fundamentals For Blockbuster Drugs Remain Strong

A company like Pfizer depends on getting the maximum out of its established drugs (Lyrica, Viagra, etc) so that its new blockbusters (Ibrance, Xeljanz) and its pipeline (Ertugliflozin, Avelumab, etc) can be given time to grow their sales meaningfully. Well, Lyrica which is coming off US patent in 2019 increased its sales by 2% to $1.24 billion in the third quarter, which is encouraging, since it is the second largest selling drug in the company. Analysts touted sales declines in key drugs, but both of the company's biggest earners (Prevnar & Lyrica) beat consensus, which is encouraging. Furthermore, Xeljanz brought in $235 million, which again was ahead of consensus and continues to lead the way in the rheumatoid arthritis area. However the real reason why I remain bullish on Pfizer is because of its pipeline. Tanezumab, Avelumab & Ertugliflozin are all very close to being approved and will enter markets with strong demand. Investors should focus on the pipeline (see below) and not on the recent costs (and Bococizumab fallout) which will affect the company's near term earnings. My strong belief is that in the next 18 months, the stock will rally to around the $40 level.

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Summary

To sum up, Pfizer may have disappointed investors as a result of the Bococizumab decision, but in the long run, it will prove to have been the correct decision. The company has already spent heavily on acquisitions and R&D this year and saw that the commercial viability of Bococizumab was not up to scratch. Sometimes in business, you have to cut your potential losses and this drug has been very expensive to develop also. Yes, it will affect earnings in the near term, but I feel the pipeline is more than adequate to compensate. I would be getting long at these levels.