Stage four is definitely not what you want to hear. I don't think there's a stage five.
If I were in your place, I would definitely say something to the friend - probably when the party guests are doing something else, because I wouldn't know how much she has told her own children. I would ask how her sister is doing, and let her volunteer what information about her sister's condition she chooses. I might say, "I've never experienced that in my family - and I hope I never will - but if there's something I can do for her, or for you, please let me know." And I'd have to mean it. For instance, I might need to be willing to have the friend's children over for a while so she could be with her sister.
I might also call her every couple of weeks and just ask how things are going. It isn't necessary to have knowledge or advice. Sometimes a listening, sympathetic ear is needed most.
People often say nothing when they don't know what to say. But, in their caution not to say the wrong thing, they come across as not caring. So don't be afraid to open your mouth. It's necessary to *show* that we care, not just feel it.
My DIL's father was diagnosed with another type of cancer last year, and he was given a very bad prognosis almost right away. He's still alive, amazingly, but we all know there isn't a whole lot of time left. There isn't anything I can do for him, but DIL is glad when I check with her to ask how her dad is doing.