With so many top drugs set to go off their patents in the next several years, this is a rough time to be a large-cap pharmaceutical company. Probably worst affected is Pfizer (NYSE:PFE). Reading the company's press release and listening to its conference call for its third-quarter earnings report, which came out yesterday, really brings to light the challenges the company will face in the next few years.

Pfizer deserves some credit for its Q3 results, considering the numerous generic challengers it faces on several of its key products, including Zoloft and Zithromax. As reported, revenues were up 9%, though that's not as good as it looks on the surface, since 4 percentage points of that growth comes from currency impact and an increase in wholesaler inventories. Earnings rose 6.6% adjusted for one-time items, and adjusted earnings per share increased 10% to $0.54 a share for the quarter.

The press release accompanying its quarterly results was very passionately written for a public company and clearly outlines how Pfizer plans on dealing with these challenges in the near future. The most important of these initiatives to spur earnings growth will be more expense-reducing initiatives in 2007 beyond the previously announced $4 billion cost-reduction plan. Pfizer's management has estimated that it will have reduced costs by $2.5 billion by the end of 2006.

However, some of Pfizer's cost-saving initiatives are coming out of its R&D budget, which has declined by 2% in the first nine months of the year. If Pfizer's goal is to invest for the future, then reducing R&D spending is not the way to go.

Despite the drop in R&D spending, Pfizer has taken positive steps to restock its drug pipeline and has licensed or acquired a bunch of promising drug candidates (18 transactions in the past 22 months) in various stages of clinical development. The only difficulty with this strategy is that Pfizer is so big. With a market capitalization of more than $200 billion market capitalization, Pfizer will find that even acquiring a few drug candidates with blockbuster potential won't have a major impact on its earnings. What's more, since generic competition and an inability to increase drug sales are the same problems facing Johnson & Johnson (NYSE:JNJ) and Abbott (NYSE:ABT), Pfizer will have some hefty competition when trying to acquire favorable compounds or companies.

The biggest possible revenue growth driver for Pfizer in the next couple of months will be its inhaled-insulin product, Exubera, to treat diabetes. Pfizer only just recently launched the drug in the U.S., and the real test of its potential will come when the company begins marketing it to primary-care physicians early next year. Right now, it's in a limited rollout to specialists only. Feelings on the prospects for this first-of-a-kind inhaled-insulin drug are very polarized. Analysts believe either that Exubera will be a big flop or will become one of the top-selling drugs to treat diabetes, with a billion-dollar-plus potential.

Large-cap pharmaceutical companies such as Pfizer tend to scare me, despite their reputations as the most stable of all drug companies, since they have so many moving parts and competing drugs to analyze. If Pfizer's management can succeed on its cost-savings initiatives and maintain the high single digits of earnings-per-share growth that it expects in 2007-2008, then Pfizer may make a good investment for those willing to wait for the company's new drugs to bring back higher growth.

Pfizer is a Motley Fool Inside Value recommendation, and Johnson & Johnson is a Motley Fool Income Investor pick. You're invited to try out any of our investing newsletter services free for 30 days.

Fool contributor Brian Lawler does not own shares of any company mentioned in this article.