Cancer treatment has undergone a revolution in recent years, creating opportunities for companies pioneering new approaches and their investors. In the last five years, since around the time the first immuno-oncology drugs hit the market, 61 cancer drugs have been launched to treat 23 different kinds of cancers. Last year, worldwide sales of oncology drugs amounted to about $124 billion, more than twice that of any other therapy area, and are growing at a double-digit rate.

Investors wanting to profit from the trend should consider buying several stocks in the space to spread out the risk. There are over 700 cancer drugs in late-stage development, a 60% increase over the number a decade ago, and many of them will fail in clinical trials. But choosing several stocks of companies that have already established a history of success is one way to build a portfolio to take advantage of one of the most innovative and lucrative markets in healthcare.

Three such stocks, spanning the range of market capitalization from pharmaceutical giant to under-the-radar mid-cap, are Merck (MRK -2.29%), Seattle Genetics (SGEN), and NeoGenomics (NEO 0.63%).

Cancer cell surrounded by antibodies.

Image source: Getty Images.

1. The maker of the biggest cancer blockbuster of all time

Any investor building a portfolio of cancer treatment stocks should consider making a position in Merck a core holding. Merck's immunotherapy drug Keytruda is becoming a foundational treatment for a wide variety of cancers, and its rapid growth is expected to make it the world's best-selling drug in the next five years.

Keytruda is a PD-1 inhibitor, which works to defeat a mechanism that cancer cells use to hide from the body's immune system. A number of companies have drugs in this class, but Keytruda is on its way to overtake Bristol-Myers Squibb's Opdivo as the best-selling immunotherapy treatment.

The drug has been approved for 20 different indications, including melanoma, lung cancer, lymphoma, gastric cancer, and kidney cancer. Because it can be combined with chemotherapy and other cancer-fighting strategies, Keytruda is in over 1,000 clinical trials by various companies that are testing Keytruda against a wide variety of cancers.

In the most recent quarter, Keytruda sales grew 58%, to $2.6 billion, helping Merck post a 12% revenue gain. Market research firm EvaluatePharma expects Keytruda sales to grow to $17 billion a year by 2024 to take the top spot in the drug industry, but even that estimate could prove to be conservative as the company turns in one win after another in clinical trials.

Merck is definitely dependent on this single drug for its results, often a danger sign for investors, with 22% of sales and most of its growth coming from Keytruda. But because Keytruda has so much potential ahead of it and its patent won't expire until 2028, it's worth the risk. Merck also has anti-virals, vaccines, an antibiotic, and a cardiovascular drug among its 35 drugs in late-stage trials or under regulatory review.

Analysts expect Merck to grow earnings per share 11% next year, and the stock sells for 15 times the consensus estimate for 2020, with a $217 billion market capitalization. It also pays a generous 2.6% dividend.

2. A cancer treatment specialist on the verge of breaking out

If you're looking for a smaller company that's focused entirely on cancer treatments, consider Seattle Genetics. This $14 billion biotech has one cancer-fighting drug in its portfolio that has accelerating sales, and three others in late-stage testing that are on the verge of commercialization.

Seattle Genetics specializes in antibody-drug conjugate (ADC) technology, which uses a monoclonal antibody that's designed to find and attach to certain cancer cells combined with a toxic agent that kills the target cell. The company's lead drug is Adcetris, which is approved for six different lymphoma indications and is being evaluated in 70 clinical trials. Growing acceptance by oncologists and new indications are driving rapid growth, with sales of the drug rising 35% in the first half of 2019, to $294 million.

Adcetris will soon be joined in the portfolio by a second drug, enfortunab vedotin (EV), an ADC that's very effective in fighting metastatic bladder cancer. Seattle Genetics has filed an application with the U.S. Food and Drug Administration, and a decision is expected on March 15. The company also made a splash at the European Society for Medical Oncology meeting last month when it presented results of a trial that showed that EV in combination with Keytruda shrank tumors in 71% of patients with advanced or metastatic bladder cancer.

Besides the launch of EV, Seattle Genetics will have some other events in the next few months that could propel the stock. A pivotal trial for tucatinib, an oral, small molecule drug for HER2-positive breast cancer, should read out before the end of the year, and results from a pivotal trial for tisotumab vedotin in metastatic cervical cancer are expected in the first half of 2020.

With accelerating revenue growth and three potential pipeline catalysts for the stock in the next few months, the prospects for Seattle Genetics have never been better, and the stock is a buy right now.

3. A service crucial to precision medicine

This pick is a company that doesn't develop drugs for cancer, but its services are becoming increasingly vital for treatment of the disease. NeoGenomics is the leading oncology testing company, and its cancer genetic testing helps physicians diagnose the disease and decide on the best course of treatment.

NeoGenetics has two lines of business. The largest segment is clinical services, with the company offering a comprehensive menu of tests for oncologists, pathologists, and hospitals. The company's pharma services business serves drug companies and researchers by offering cancer genetic testing to help advance drugs from pre-clinical research through to regulatory approval.

The emergence of precision medicine to treat cancers based on their specific genetic makeup is one of the most important trends in healthcare stocks, and is driving rapid growth for NeoGenetics. Revenue in the most recent quarter grew 50%, to $101.7 million, thanks to a 34% increase in clinical test volume and a 12% increase in average revenue per test.

Part of that volume growth is due to an acquisition, but the company estimates organic growth is running at about a 20% clip. The company is just edging into profitability, earning $2 million last quarter and expecting net income between a loss of $1 million and profit of $3 million in the current quarter. NeoGenetics has raised its full-year guidance for revenue two quarters in a row.

Other clinical testing companies offer oncology tests, but NeoGenomics is the pure-play oncology reference lab with the most comprehensive menu of tests, and the company is growing market share in an industry that could be as large as $6 billion. With a market capitalization of $2.1 billion, the stock is still relatively underfollowed, and the stock is one way to participate in the growth of the cancer treatment market without exposure to the risk of failed clinical trials.