A 19th-century surgeon described cancer as "the emperor of all maladies, the king of terrors." Cancer isn't just one disease. Instead, it includes a wide range of diseases in which abnormal cells in the body divide uncontrollably.

But the reign of this terrible "emperor" is definitely under attack. Over the last several decades, new ways to diagnose and treat cancer have been developed. An entire industry has emerged with a primary goal of fighting cancer.

It might seem callous to think about trying to make a profit by investing in cancer-fighting stocks. However, companies developing more effective cancer therapies need access to capital. And publicly traded companies have made some of the greatest breakthroughs in cancer treatment.

How can you get started in investing in cancer-fighting stocks? There are seven key steps to follow:

  1. Develop a general understanding of the cancer treatment industry.
  2. Identify the key trends for cancer-fighting stocks.
  3. Understand the risks associated with cancer-fighting stocks.
  4. Know what to look for in cancer-fighting stocks.
  5. Evaluate the top cancer-fighting stocks.
  6. Invest in one or more cancer-fighting stocks.
  7. Reevaluate your investment decisions periodically.

Here's what you need to know about each of these seven steps for investing in cancer-fighting stocks.

Boxing glove on a mechanical arm extending from a capsule to hit a cancer cell.

Image source: Getty Images.

1. Develop a general understanding of the cancer treatment industry

Nearly $150 billion was spent in 2018 on drugs to treat cancer, according to the IQVIA Institute for Human Data Science. The top 38 drugs accounted for 80% of this amount.

As you might expect, both large pharmaceutical companies and small biotechs have targeted cancer. More than 700 drugmakers have cancer therapies in late-stage clinical development. Of these, nearly 500 have late-stage pipelines solely focused on treating cancer.

What does "late-stage" actually mean? Once a drug candidate is identified, there's a long process required before it can reach the market, often referred to as the drug pipeline. Preclinical testing is first conducted in the laboratory and with animals. If this testing goes well, the drug advances to phase 1 clinical studies that primarily focus on evaluating the drug's safety. Assuming this phase 1 testing is successful, the drug moves to phase 2 studies that test the drug's efficacy and determine appropriate dosage levels. Only after the successful completion of phase 2 studies will a drug advance to phase 3 clinical testing and be viewed as a late-stage candidate.

Cancer drugs that appear to be both safe and effective in late-stage testing are then submitted for regulatory approval. In the U.S., the Food and Drug Administration (FDA) reviews all drugs for approval. In the European Union, the European Medicines Agency (EMA) evaluates drugs and makes approval decisions.

2. Identify the key trends for cancer-fighting stocks

Three key trends should impact cancer-fighting stocks for years to come:

  • Aging populations
  • Earlier diagnosis
  • Personalized cancer medicines

As individuals age, their risk for cancer increases significantly. Around 60% of cancer patients are age 65 or older. This 65-and-over group is the fastest-growing segment of the U.S. population. Sixteen percent of the world's population will be age 65 or over by 2050, up from 9% in 2018. Demographic trends appear likely to drive the numbers of cancer diagnoses much higher over the next few decades.

Many types of cancer can be effectively treated if they're diagnosed early enough. Another key trend that will impact cancer-fighting stocks is the emergence of new methods to detect the presence of cancer at early stages. One important development on this front is liquid biopsies -- blood tests that can identify DNA fragments that break off from tumor cells and can be used in early diagnosis of cancer.

While the prevalence of cancer increases and new methods help diagnose cancer earlier, personalized medicine will likely be a major trend in treating cancer. Personalized cancer medicine involves genetic testing of a patient's cancer cells and normal cells to identify the most effective treatment option. Drugmakers are increasingly focusing on developing personalized medicines that target types of cancer caused by specific genetic mutations (abnormal changes in genes).

3. Understand the risks associated with cancer-fighting stocks

Companies that develop cancer drugs have a high risk of failure in clinical testing. Cancer drugs that begin a phase 1 clinical study have only a 6.2% chance of going on to win FDA approval, according to an analysis by the Biotechnology Innovation Organization (BIO). Cancer drugs have the lowest probability of approval compared to drugs that treat other diseases.

Even after a drug successfully completes late-stage clinical studies, there's no guarantee of regulatory approval. Only one-third of cancer drugs that make it to phase 3 studies win FDA approval, according to BIO. Again, those odds are lower than with any other disease.

Certain types of cancer drugs have better chances, though. More than 73% of hematology drugs, which include drugs that fight blood cancers such as leukemia, that begin phase 1 clinical testing go on to win FDA approval. Still, drugmakers face a significant risk of clinical or regulatory failure.

Also, it's not a slam dunk that a cancer drug will be a commercial success after it wins regulatory approval. Competition is intense. More than half of cancer drugs on the market combined generate only 2.2% of total oncology spending.

4. Know what to look for in cancer-fighting stocks

For the stocks of companies with cancer drugs already on the market, you'll want to look into how quickly sales are increasing for those drugs. Note, however, that the launches of new drugs sometimes start off slowly as companies increase awareness about the drugs among physicians.

Large pharmaceutical companies will typically have other types of approved drugs as well. It's important to find out how well these companies' overall revenue and earnings are growing. A company could have a great cancer drug with fast-growing sales that are eclipsed by declining sales for other drugs that don't treat cancer.

Check out the company's pipeline as well. The stocks of companies that have promising late-stage candidates will generally be less risky than those of companies with only early-stage drugs.

Evaluating the strength of a drugmaker's pipeline can be challenging. Find out what analysts and other industry observers say about a company's pipeline candidates. Read up on any previous clinical results for the drugs. For smaller drugmakers, see if larger companies have partnered on any of their pipeline candidates. That's usually a good sign that the experimental drug has significant potential.

You'll also want to closely examine the cash position of the drugmakers that aren't yet profitable. A small company could have to issue new shares or take on debt if it doesn't have enough cash to fund operations well into the future. Issuing new shares causes shareholder dilution -- each existing share becomes less valuable when more shares become available. Increased debt means higher interest expenses, which can limit how much a company can invest in research and commercialization.

5. Evaluate the top cancer-fighting stocks

There are far too many cancer-fighting stocks to evaluate here. To keep it simple, we'll look at five stocks that are most likely to have top-selling cancer drugs over the next few years to give you a feel for how to evaluate cancer-fighting stocks.

Company Top Cancer Drugs
AbbVie (NYSE:ABBV) Imbruvica
Bristol-Myers Squibb (NYSE:BMY) Opdivo, Yervoy, Empliciti, Sprycel
Johnson & Johnson (NYSE:JNJ) Darzalex, Imbruvica, Zytiga
Merck (NYSE:MRK) Keytruda
Pfizer (NYSE:PFE) Ibrance, Sutent, Xtandi

Data sources: Company SEC filings.

AbbVie

AbbVie is best known for immunology drug Humira, which currently reigns as the world's top-selling drug. However, the company also has a tremendously successful cancer drug for which sales are soaring: Imbruvica.

Imbruvica is currently approved to treat several types of cancer, including chronic lymphocytic leukemia (CLL) and mantle cell lymphoma (MCL). Market researcher EvaluatePharma predicts that Imbruvica will be the No. 5 biggest blockbuster drug in the world by 2024 with annual sales of $9.5 billion, more than twice the $4.5 billion the drug made in 2018.

In addition to Imbruvica, AbbVie's lineup includes another fast-rising cancer star with Venclexta. The leukemia drug could be on track to achieve peak annual sales of around $2 billion.

The challenge for AbbVie will be to offset declining sales for Humira, which currently generates more than 56% of total revenue. AbbVie's cancer franchise will help but won't be enough on its own. The company announced the $63 billion acquisition of Allergan in June 2019 as part of its growth strategy. AbbVie also has a promising pipeline, although its primary strength is in immunology.

Bristol-Myers Squibb

Bristol-Myers Squibb claims two drugs on EvaluatePharma's ranking of the biggest blockbusters of the future. One of them, Opdivo, is a cancer drug, while the other, Eliquis, is an anticoagulant.

Opdivo is a cancer immunotherapy, which means it harnesses the body's immune system to attack cancer cells. The drug is currently approved for treating a wide range of cancer types, including lung cancer, melanoma, and kidney cancer. Opdivo raked in $7.6 billion in 2018 and appears to be on track to make more than $11 billion by 2024.

BMS pairs another of its immunotherapies, Yervoy, with Opdivo to treat some types of cancer. The big pharma company also has two other cancer blockbusters, Empliciti and Sprycel.

Thanks to its pending acquisition of Celgene, Bristol-Myers Squibb should soon have an even stronger cancer franchise. Celgene's Revlimid is the top drug used for treating multiple myeloma and myelodysplastic syndrome (MDS). Celgene also claims one of the most valuable pipeline drugs in development with liso-cel, a cancer therapy the biotech expects to submit for FDA approval this year.

Johnson & Johnson

Johnson & Johnson co-markets Imbruvica with AbbVie. While the company's share of Imbruvica's sales continues to climb, J&J has two other cancer drugs for which sales grew even more rapidly in 2018: Darzalex and Zytiga.

Multiple myeloma drug Darzalex could eventually generate annual sales of more than $5 billion, up from $2 billion in 2018. However, prostate cancer drug Zytiga appears to have already hit its peak. The drug made nearly $3.5 billion in 2018, but sales are falling now that it faces generic competition.

The good news for J&J is that it already has another prostate cancer drug on the market with Erleada. The bad news is that although Erleada should be successful, its peak annual sales are expected to reach $1.3 billion -- well below Zytiga's peak.

In addition, J&J's bladder cancer drug Balversa could become another blockbuster for the company. The drug is the first personalized medicine approved for treating bladder cancer. Balversa targets patients whose tumors have specific mutations in the FGFR3 or FGFR2 genes.

Merck

Merck's cancer immunotherapy Keytruda was the No. 3 best-selling drug in the world in 2018. But it's on course to take the top spot within the next few years. Keytruda is expected to generate annual sales of $17 billion by 2024, more than double the $7.2 billion the drug made in 2018.

But Merck doesn't have a deep bench beyond Keytruda, at least in cancer treatment. The company does, however, claim a strong vaccine franchise led by Gardasil and ProQuad/M-M-R II/Varivax.

Keytruda is a cornerstone of Merck's late-stage pipeline, with phase 3 studies in progress evaluating the drug in a number of cancer types. Merck is also partnering with Japanese drugmaker Eisai on Lenvima and with AstraZeneca on Lynparza. Both drugs are already approved for treating multiple types of cancer and are in late-stage studies targeting additional types of cancer.

Pfizer

Pfizer's breast cancer drug Ibrance is already a huge winner, racking up sales of $4.1 billion in 2018. Some analysts think that Ibrance could generate peak annual sales of $8 billion.

While Ibrance has plenty of growth potential, cancer drug Sutent is likely to experience sales declines in the face of newer competition. On the other hand, Pfizer's prostate cancer drug Xtandi could become the company's next cancer blockbuster. Pfizer also has several new cancer drugs that should deliver solid growth, including breast cancer drug Talzenna and lung cancer drug Lorbrena.

Pfizer has a dozen late-stage cancer programs. Four of those programs involve Bavencio, an immunotherapy Pfizer is co-developing with German pharma company Merck KGaA (not to be confused with the U.S.-based Merck).

Although Pfizer's cancer franchise appears to be strong, the company is headed for a major sales slump with blockbuster nerve pain drug Lyrica facing an onslaught of generic competition. The company should be able to return to growth after 2020, though, as it moves past the negative impact of declining sales for Lyrica.

One exchange-traded fund to consider

In addition to evaluating top cancer-fighting stocks, consider one exchange-traded fund (ETF) that focuses on stocks of companies with cancer drugs. The Loncar Cancer Immunotherapy ETF (NASDAQ:CNCR) offers exposure to multiple stocks of companies that develop cancer immunotherapies. Like a mutual fund, an ETF allows investors to spread their money around and not rely too much on any individual stock. Unlike a mutual fund, an ETF is traded on a major stock exchange, and the price you'll pay to buy shares is determined just like that of a common stock.

The primary reason to consider the Loncar Cancer Immunotherapy ETF is that it provides some diversification. The ETF currently holds positions in 25 cancer-fighting stocks, including Bristol-Myers Squibb and Merck. The main downside to buying the ETF is that there's an annual management fee of 0.79%.

6. Invest in one or more cancer-fighting stocks

Your next step is to actually invest in one or more cancer-fighting stocks. Keep in mind, though, that you shouldn't put too much of your portfolio in one stock or even in one industry, for that matter. Diversification will always be a smart choice for investors.

Different investors have different views about how much of their overall portfolio to put in one stock or one industry. In general, you probably should initially invest no more than 5% of your portfolio in one stock and no more than 20% in one industry. Over time, though, it's possible that growth could give an individual stock or a specific industry a greater weighting in your portfolio.

7. Reevaluate your investment decisions periodically

The last step is one that you'll need to repeat periodically: Reevaluate your investment decisions. Go back to the reasons you initially bought cancer-fighting stocks and make sure they're still applicable. It's possible that one or more of your stocks have run into some of the risks discussed earlier and no longer are as attractive.

How often should you reevaluate? There's no magic answer, but a good rule of thumb is to look at your investments every three months or so.

Why invest in cancer-fighting stocks?

You've learned how to invest in cancer stocks. But why should you invest in these stocks? The main reason is the same reason you would invest in any kind of stock: to generate market-beating returns over the long run.

The good news is that solid cancer-fighting stocks should be able to achieve this goal. IQVIA projects that the cancer treatment market will grow by a compound annual growth rate (CAGR) of 11% to 14% over the next five years. The best-performing cancer-fighting stocks should provide returns that beat this overall growth range.

Of course, there's also another key reason to invest in cancer-fighting stocks: It allows you to own part of one or more companies that are attempting to battle a group of terrifying diseases. By owning cancer-fighting stocks, you play a small part in the ongoing effort to dethrone the emperor of all maladies.