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by Erica Thinesen

These days, more and more pharmaceutical and biotech companies are investing in cancer fighting drugs. This trend, amplified by the number of drugs aimed at treating smaller groups of patients -- such as those with melanoma, a form of skin cancer -- in addition to treating larger groups such as those with breast or prostate cancer, has caught the eye of many investors in recent years. Unfortunately, for patients and the heath care industry in general, the cost of these drugs is very high.

What's more surprising is that some of these drugs may only prolong life expectancy of those with cancer by a few months, which has also caused alarm when compared to drug costs. As an investor, understanding how drugs will impact patients and the health care industry can make the difference between striking it rich or losing everything.

From an investment standpoint, there are pros and cons to investing in companies developing new cancer drugs. While investors can make a substantial return on their investments, the downside is that the drugs may be too expensive for most patients. That reduces demand for them in the first place and can lead to less-than-stellar returns on investment.

For example, in 2010 Dendreon (DNDN) received FDA approval to release Provenge, a vaccine used to help the body fight prostate cancer by improving immune system function. Since then, however, critics have come forward to reject claims that the drug has any real affect on patients. Other concerns about its cost (around $93,000, including physician fees) have raised questions as to whether the drug is worth taking, as there are no guarantees (as with any new drug) that it will greatly prolong a patient's life. So far, though, the drug has been a commercial success.

Provenge is the only drug Dendreon currently manufactures. The company does, however, have new drugs in the pipeline for preclinical trials. These drugs may also help patients with kidney, cervical, and colon cancer and those with solid tumors, once the drugs have been developed, tested and approved by the FDA. This process could take years, so investors should consider investing in other companies rather than investing solely in Dendreon -- but also keep a close eye on the company.

Other pharmaceutical companies, such as Pfizer (PFE), have received FDA approval for new cancer fighting drugs. Last year, the company released Xalkori (crizotinib), a kinase inhibitor used in the treatment of metastatic non-small cell lung cancer.

Cell Therapeutics (CTIC) recently announced that the University of Washington's School of Medicine -- Departments of Neurology and Neurosurgery, Division of Neuro-Oncology -- is launching a study of the company's new drug OPAXIO (paclitaxel poliglumex, PPX, CT-2103). This drug, not yet approved by the FDA, helps in the treatment of certain types of brain tumors.

According to the National Cancer Institute, the cost of cancer treatments will increase from $125 billion in 2010 to around $158 billion by 2020 (or even higher, depending on the percentage of annual increases in overall health care costs). While this means more powerful and effective drugs will be available, paying for them is another story. This is something investors need to be wary of before sinking large amounts of money into companies that manufacturer these types of drugs. Unless radical changes to the health care system occur, many patients will simply not be able to pay for these drugs without help from public programs like Medicare.

Exelixis (EXEL) manufactures a variety of drugs for patients with advanced prostate and other types of cancer. The company recently announced a new clinical trial for a combination drug containing cabozantinib, abiraterone and prednisone (commonly used to boost the immune system and reduce inflammation).

Cabozantinib, developed by Exelixis, is a dual inhibitor that could potentially stop the formation of tumors by inhibiting tumor cell growth. The drug is being tested in several clinical trials in addition to this one. Abiraterone is a drug commonly used in the treatment of prostate cancer.

The trial is a Phase 1 dose-finding trial to determine the optimum dose patients can take while receiving chemotherapy or while taking other cancer fighting drugs. The company's goal is to develop a drug that works in conjunction with other cancer fighting therapies.

The company is involved in additional clinical trials for ovarian cancer and prostate cancer. It also concluded a medullary thyroid cancer trial in October 2011.

When considering investing in pharmaceutical and biotech companies devoted to the treatment of cancer, it's best to have not only an understanding of the drug and its intended use, but also how much companies plan to charge for treatments.

Unfortunately, as the cost of basic living expenses such as transportation, food and housing continue to rise, for many patients these treatments are simply not a sound economic option. Traditional treatments such as surgery and chemotherapy, while costly, are more affordable for those with even basic health coverage.

On the other hand, Medicare Part B covers the majority of the costs associated with new treatments like Provenge through reimbursements to physicians. Private insurance companies are also more willing to pay for a higher percentage of these costs because they want to maintain their customer base. As long as a patient can cover the remainder, they will be able to receive these and other new drugs.

This is what makes investing in companies that focus on one disease or condition tricky; for now, people may be able to afford these treatments, but what happens when Medicare can no longer offer reimbursement or when health insurers finally say enough is enough? It is only through constant monitoring and studying health care trends can investors adequately prepare to invest elsewhere or invest more.

Cancer probably isn't going to be cured any time soon, so it's more the affordability of new drug treatments (and also the effectiveness of these treatments) that will drive the market. Being a savvy investor means knowing the companies you invest in thoroughly enough to get in and get out as necessary to maintain a healthy and profitable stock portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: 4 Biotechs Struggling Due To High Drug Costs