According to a report this month from pharmacy benefit manager Medco Health Solutions (NYSE: MHS), cancer drug spending jumped 11.5% in 2010 with contributions from Celgene's (Nasdaq: CELG) Revlimid and Novartis' Gleevec leading the way. The trend is set to continue with a forecast 34% to 42% rise over the next three years.

Sounds like an investment strategy to me.

Cha-ching
The growth is coming from both increased volume and increased pricing.

The number of patients who need cancer treatment is increasing thanks to better detection along with an aging population that is more prone to developing cancer. And while cancer drugs are getting better, many aren't really a cure. They just prolong life, which allows for additional treatments. Third- and even fourth-line treatments are common in some types of cancers.

On the pricing side, cancer drugs can get away with high prices because they're selling a product that patients desperately need. Medco cites a cancer journal that said 90% of anti-cancer drugs approved since 2004 cost more than $20,000 for 12 weeks of therapy. Lately, that number has been blown through. Dendreon's (Nasdaq: DNDN) Provenge costs $93,000 for its full course and Bristol-Myers Squibb's (NYSE: BMY) Yervoy is $120,000.

New, better, best!
Cancer isn't like your typical field where drugs have a lifecycle that is killed off by generic competition. Sure there are some tried-and-true drugs that have long become generics, but drugs are just as likely to fall out of favor because something better comes along. The minimal generic substitution contributes to the high prices, but it also points to where investors should be looking: new drugs.

Exelixis (Nasdaq: EXEL) is developing cabozantinib for medullary thyroid cancer. The phase 3 trial should read out soon. Based on the unmet need, cabozantinib has a fairly low hurdle to get on the market. More importantly, success in medullary thyroid cancer would also give investors hope for larger markets -- ovarian and prostate cancer in particular -- that the drug is also being tested in.

Regeneron Pharmaceuticals (Nasdaq: REGN) is farther along having read out its phase 3 trial for Zaltrap in patients with colon cancer that had already failed an earlier treatment. The company still has to report how much Zaltrap improved overall survival, but we know there was a statistically significant improvement, which should be enough to get the drug on the market.

Still farther along, Seattle Genetics (Nasdaq: SGEN) has already submitted brentuximab vedotin. The drug is up for approval as a treatment for Hodgkin's lymphoma and anaplastic large cell lymphoma. Brentuximab vedotin produced outstanding results in both types of lymphoma, so an approval in late August seems fairly likely.

Footing the bill
The cries of "death panels" during the health care reform debate make it clear that price increases are likely to be accepted in the short term. As much as Americans complain about rising health care costs, the thought of factoring cost into whether a treatment should be performed is out of the question for now. Rationing is a four letter word for Medicare and private insurance alike.

But investors need to be cautious thinking the upward trend can last forever. At some point, costs will become so outrageous that people will start questioning whether the drugs are worth it. I don't know how much an extra month or two of life is worth, but we're likely headed toward that debate at some point down the line.

Enjoy riding this trend up, just be prepared for a push back at some point.

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Fool contributor Brian Orelli holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Exelixis and Medco Health Solutions. Motley Fool newsletter services have recommended buying shares of Novartis, Medco Health Solutions, and Exelixis. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.