Should You Forget CVS Health and Invest in a Purer Healthcare Play?

CVS Health (NYSE: CVS) is best known for its pharmacy chain, but it has a diversified healthcare business. It is one of the largest health insurers in the U.S. through Aetna, a leading pharmacy benefits manager, has boosted its presence in primary care, and owns a subsidiary that seeks to partner with biosimilar drugmakers to bring cheaper medicines to market. This level of diversification has disadvantages. It could spread the company's resources thin and lead to less-than-optimal capital allocation -- and lower growth than it otherwise would have -- in each segment. Perhaps opting for a healthcare company that focuses on a single area, like Novo Nordisk (NYSE: NVO), is a better option. Or is it?

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Each strategy has drawbacks

Novo Nordisk is a drugmaker. Not only is that all the company does, but it is also significantly focused on metabolic diseases and generates almost all of its revenue from this area. Novo Nordisk has been a leader in the diabetes drug market for a long time. And in recent years, it has established itself as a top player in weight management. Since the market for anti-obesity medicines is rapidly growing, Novo Nordisk may be well-positioned to capitalize on it.

The company's expertise in this field means it has a deeper pipeline than most of its peers, as well as the manufacturing expertise needed to bring its GLP-1 products to market at a cheaper cost per unit than most of its peers. But Novo Nordisk's high concentration has been a problem in recent years. The company lost ground in the weight loss market to Eli Lilly (NYSE: LLY). On top of that, Novo Nordisk experienced several clinical setbacks in its core area that sank the stock.

That's the problem with companies that focus almost all of their attention on one or two markets: If they face headwinds in their fields of expertise, their financial results will worsen significantly, while their share prices will also drop massively. By contrast, diversified healthcare companies are sometimes better able to navigate challenges in one area while still performing relatively well.

Which one should you buy?

CVS Health is an attractive stock to buy right now, in my view. The company's diversification and vertically integrated model should pay off in the long run as demand for medical products and services increases alongside an aging population. CVS Health's leadership in the niches of the healthcare sector in which it operates gives it a significant advantage. The industry comes with significant barriers to entry -- including regulatory ones -- and is much easier to navigate for well-established players that have already formed deep relationships with patients, doctors, and payers, as CVS Health has.

But what about Novo Nordisk? The stock has declined significantly over the past two years. But given its deep pipeline in weight loss, the stock could bounce back as it advances its clinical programs over the next few years. So, Novo Nordisk could also deliver strong returns from here on out. In my view, both are attractive options for long-term investors. No need to choose one based on whether or not it is a purer healthcare play.

Prosper Junior Bakiny has positions in Eli Lilly and Novo Nordisk. The Motley Fool recommends CVS Health and Novo Nordisk. The Motley Fool has a disclosure policy.