You need to have an iron stomach to invest in all but the largest drug companies. The binary nature of clinical trials can kill a drug company's stock literally overnight.

But the people designing clinical trials for companies have an equally hard task of figuring out when to roll the dice and when to take a conservative approach to drug development.

The choice of whether to compare a company's drug to the competition or to pit it against placebo is a difficult one. It's relatively easy to get positive data comparing the drug to placebo, which theoretically has no activity, but a head-to-head comparison provides much better marketing data. On the downside, the trial could give marketing ammunition to the competitor if your drug fails to win the head-to-head competition.

For some diseases, the decision to run head-to-head clinical trials is easy. The diabetes market, for instance, is so crowded that no company in their right mind would try to launch a new drug without testing it against what's already available. For instance, Amylin Pharmaceuticals and Eli Lilly's (NYSE: LLY) Bydureon is being tested in six clinical trials -- two against its predecessor, Byetta, and four others against competitors' drugs: Merck's (NYSE: MRK) Januvia, Takeda's Actos, sanofi-aventis' Lantus, and Novo Nordisk's Victoza.

Biogen Idec (Nasdaq: BIIB) and Elan (NYSE: ELN) took a more conservative approach with Tysabri, having compared it only to placebo in its pivotal phase 3 trial to get it on the market. But now the companies would like to see the drug used earlier in the progression of multiple sclerosis, so they've launched a clinical trial testing Tysabri against Teva Pharmaceutical's (Nasdaq: TEVA) Copaxone and Rebif from Pfizer (NYSE: PFE) and EMD Serono.

Taking the decision out of the companies' hands
For the most part, it's been up to companies whether head-to-head trials occur. Occasionally some government entity or nonprofit would pony up some cash to run a comparative trial, but they've been relatively infrequent.

That's about to change with new government funding of comparative trials. Last year's stimulus provided $1.1 billion for trials and the recently passed health-care reform bill sets aside at least $500 million per year for comparative trials. All that funding is going to put a lot of drugs in the crosshairs as they're compared against their peers.

As I see it, companies have two choices. They can either grin and bear it, or they can be proactive and start their own head-to-head clinical trials. The latter option has the advantage of giving companies the ability to design the trial to paint their drug in the best light. For instance, Tysabri's new trial requires patients to be on Copaxone or Rebif before entering the trial. Assuming the patients that switch to Tysabri do better than those that stay on Copaxone or Rebif, Biogen and Elan will have clinical trial data to go after the exact patient population they want to target: those already on other therapies.

In addition, when companies run their own trials, they know when the results will come out rather than being blindsided by third-party results. When third parties present clinical trial data at scientific meetings, companies have to scramble to issue press releases to counter the negative information without much warning. Earlier this month, Abbott Labs (NYSE: ABT) had to issue a "Yeah, but ..." press release after a trial sponsored by the National Heart, Lung and Blood Institute showed that TriCor didn't reduce heart issues.

Head-to-head trials, whether they're run by companies or by third parties, can be scary. But the way to make big money is by selling drugs that offer superior benefits, so investors should welcome the onslaught of upcoming comparative trial data. You'll need an iron stomach to wait for the results. But you already knew that.