Baron Well being Care Fund Q1 2025 Shareholder Letter

Expensive Baron Well being Care Fund Shareholder:

Within the quarter ended March 31, 2025, Baron Well being Care Fund® (the Fund) declined 2.54% (Institutional Shares), in contrast with the three.87% acquire for the Russell 3000 Well being Care Index (the Benchmark) and the 4.72% decline for the Russell 3000 Index (the Index). Since inception (April 30, 2018), the Fund elevated 10.00% on an annualized foundation in contrast with the 9.57% acquire for the Benchmark and the 12.58% acquire for the Index.

Desk I.

Efficiency

Annualized for intervals ended March 31, 2025

Click on to enlarge

Click on to enlarge

The Fund trailed the Benchmark by 641 foundation factors primarily as a result of inventory choice and, to a lesser extent, energetic sub-industry weights. Headwinds from type biases additionally factored into underperformance for the interval, because the Fund was damage by its overexposure to the weak performing Beta issue and underexposure to the higher performing Measurement issue (bigger caps).

Disappointing inventory choice in biotechnology and well being care tools accounted for about two-thirds of the underperformance within the interval. Weak spot in biotechnology was broad based mostly, led by declines from Arcellx, Inc. (ACLX) and argenx SE (ARGX)(OTCPK:ARGNF). Arcellx is growing cell therapies for a number of myeloma, together with lead drug anito-cel in partnership with Gilead. The corporate was the Fund’s prime detractor on fears of potential new security alerts from further trials of lead drug anito-cel. These worries overshadowed preliminary encouraging outcomes for anito-cel displaying it being as efficacious as Legend/Johnson & Johnson’s Carvykti drug with fewer unwanted effects. We stay traders and supply further ideas under.

Argenx is greatest recognized for growing Vyvgart, the main FcRn inhibitor for the therapy of autoimmune circumstances. We consider the inventory’s underperformance didn’t mirror any change in fundamentals and we stay bullish in regards to the firm’s long-term prospects. Adversarial inventory choice in biotechnology was exacerbated by lack of publicity to larger-cap corporations AbbVie, Inc. and Amgen Inc., whose share costs have been each up roughly 20% within the quarter, detracting 120-plus foundation factors from relative outcomes (representing almost half of the general shortfall within the sub-industry).

Efficiency in well being care tools was hindered by declines from glaucoma therapy developer Glaukos Company (GKOS) and robotic surgical system pioneer Intuitive Surgical, Inc. (ISRG) Glaukos shares declined on quarterly iDose outcomes that missed elevated investor expectations, whereas Intuitive’s inventory fell as a result of investor rotation out of excessive progress corporations and considerations in regards to the potential impression of tariffs on Intuitive’s earnings given the corporate manufactures devices in Mexico. We stay traders and focus on each corporations in larger element under. Lack of publicity to sure sturdy performing large-cap corporations, corresponding to Abbott Laboratories and Medtronic plc, offered further headwinds to efficiency within the sub-industry.

Increased publicity to lagging life sciences instruments & providers shares and poor inventory choice in well being care providers and managed well being care have been different materials detractors within the interval. The Fund’s solely place in well being care providers, diagnostic imaging providers supplier RadNet, Inc. (RDNT), weighed on efficiency after reporting under consensus steerage for fiscal 12 months 2025. We view the explanations for the decrease steerage as non-recurring and stay excited in regards to the optionality embedded in RadNet’s AI merchandise, which offer enhanced digital picture studying and evaluation, boosting radiologists’ accuracy and effectivity.

Well being Financial savings Account administrator HealthEquity, Inc. (HQY) was largely answerable for the stock-specific shortfall in managed well being care. The inventory fell after the corporate reported its fiscal fourth quarter earnings. Whereas income beat Road estimates, EBITDA and earnings fell brief and administration lowered steerage as a result of elevated bills associated to fraud exercise. Subtle criminals broke into buyer accounts and stole funds. HealthEquity reimbursed the client accounts totally and in addition had additional bills related to buyer calls associated to the fraud and restoration. Administration is taking steps to handle the problem, together with enhanced safety measures for its purchasers, and is pursuing restoration from insurance coverage suppliers. Outdoors of this setback, the remainder of the enterprise is performing nicely. HealthEquity is gaining market share and benefiting from increased rates of interest on deposits. We additionally see upside optionality from potential laws increasing eligibility for well being financial savings accounts.

Minimally offsetting the above was power in well being care distributors attributable to a mix of inventory choice and energetic publicity to this sturdy performing sub-industry. Current addition McKesson Company (MCK), a number one distributor of pharmaceutical/medical provides and supplier of prescription expertise options that join pharmacies, suppliers, payers, and biopharmaceutical clients, led the best way in well being care distributors. We focus on why we re-established a place in McKesson within the Current Exercise part under.

High Contributors to Efficiency

Desk II.

High contributors to efficiency for the quarter ended March 31, 2025

Click on to enlarge

Boston Scientific Company is a worldwide producer of medical units utilized in a broad vary of interventional medical specialties. Shares contributed to efficiency. Finish markets are rising at a beautiful 9%, with the corporate positioned nicely with its differentiated merchandise in electrophysiology and structural coronary heart. Particularly, there was rising pleasure across the rising subject of pulsed subject ablation (PFA). Historically, medical doctors have used temperature-based strategies (both scorching or chilly) to disable coronary heart tissue answerable for irregular heartbeats; nevertheless, these strategies might harm surrounding tissue. As compared, PFA depends on electrical energy to wreck aberrant tissue, and since various kinds of tissue have totally different electrical thresholds, the encompassing tissue might be selectively spared. Coupled with value self-discipline and greater than 50 foundation factors of annual working margin enlargement, we consider its double-digit EPS progress profile makes Boston Scientific a compelling identify inside the large-cap medical gadget universe.

Vertex Prescribed drugs Integrated is a number one biotechnology firm with a cystic fibrosis franchise and a pipeline of medicine for different circumstances. Shares elevated on a restoration in investor sentiment after disappointing knowledge from Journvax in lumbar spinal radiculopathy in December. We stay bullish on Vertex’s cystic fibrosis enterprise and its evolving pipeline, together with Journvax, a non-opioid NaV inhibitor at the moment in launch for the therapy of acute ache. Though Vertex must finalize utilization administration standards with payers, we see a excessive degree of unmet want and enormous potential market. Vertex’s broader pipeline for ache therapy consists of a number of further non-opioid NaV inhibitor belongings. We’re additionally inspired by its pipeline in kidney illness, together with inaxaplin for APOL1-mediated kidney illness and povetacicept for IgA nephropathy.

UnitedHealth Group Integrated is a diversified well being and well-being firm with $450 billion in annual income that operates throughout 4 segments: UnitedHealthcare, Optum, OptumInsight, and OptumRX. Shares ended the quarter in optimistic territory as a number of 2024 headwinds started to subside and traders anticipated the beginning of a extra optimistic charge cycle. After a number of years of charges that didn’t match value traits, the preliminary 2026 Medicare Benefit charge was higher than anticipated; traditionally, last charges are incrementally increased. The corporate is nicely positioned to increase enrollment because it competes in opposition to plans that aggressively mispriced in 2024, forcing them to reduce advantages to revive margins. The rising share of earnings from increased margin/unregulated Optum and the maturation of Medicare Benefit cohorts ought to assist earnings in 2025. UnitedHealth’s insulation from potential tariff impacts additionally proved engaging to traders. We stay shareholders.

High Detractors from Efficiency

Desk III

High detractors from efficiency for the quarter ended March 31, 2025

Click on to enlarge

Arcellx, Inc. is growing cell therapies for a number of myeloma, together with lead drug anito-cel in partnership with Gilead. Shares detracted from efficiency. The inventory had run up as traders anticipated optimistic information forward of outcomes launched in early December from a pivotal iMMagine-1 trial. Regardless of encouraging knowledge displaying that anito-cel is as efficacious as Legend/ Johnson & Johnson’s CARVYKTI with fewer unwanted effects, shares then fell on fears of any new security alerts as Arcellx conducts further trials. We predict anito-cel is meaningfully differentiated on security, and new knowledge readouts will help this conclusion. We count on a mid-year replace on trial outcomes, which may very well be the idea for potential approval and launch within the second half of 2026.

Glaukos Company develops and sells interventional glaucoma therapies, together with iDose, a minimally invasive drug-delivery gadget launched in 2024. An iDose is implanted as a 5 minute process and delivers extremely concentrated prostaglandin inside the attention efficient for as much as three years. Shares declined on quarterly iDose outcomes that missed elevated investor expectations. Though suggestions has been optimistic, medical doctors have been hesitant to make use of iDose till they’re assured they’ll obtain reimbursement for this costly gadget. Medicare protection has began to solidify in some areas, and we predict protection throughout the board is a matter of when, not if. We consider uptake will speed up over the approaching quarters because the reimbursement course of turns into extra streamlined. Glaucoma is a big market that’s ripe for brand new standalone interventions, and we predict iDose generally is a $1 billion product over time.

Intuitive Surgical, Inc. manufactures the da Vinci Surgical System, a robotic surgical system used for minimally invasive surgical procedures. The inventory fell as a result of investor rotation out of excessive progress corporations. As well as, considerations emerged in regards to the potential impression of tariffs on Intuitive’s earnings as a result of Intuitive manufactures devices in Mexico. If the corporate can get a well being care exception to exempt it from tariffs, we predict there are steps it may take to attenuate the impression. In any occasion, we don’t assume tariffs alter the long-term funding thesis and proceed to have a optimistic long-term view of Intuitive’s alternative to increase adoption of its robotic techniques.

Portfolio Construction

We construct the portfolio from the underside up, one inventory at a time, utilizing the Baron funding method. We don’t attempt to mimic an index, and we count on the Fund to look very totally different than the Benchmark. We loosely group the portfolio into three classes of shares: earnings compounders, high-growth corporations, and biotechnology corporations. We outline earnings compounders as corporations that we consider can develop income no less than mid-single digits and compound earnings at double-digit charges over the long run. We outline high-growth shares as corporations we count on to generate double-digit or higher income progress. They is probably not worthwhile at present, however we consider they are often extremely worthwhile sooner or later. We count on the portfolio to have a mixture of earnings compounders, high-growth, and biotechnology corporations.

We might spend money on shares of any market capitalization and should maintain each home and worldwide shares. As of March 31, 2025, we held 35 shares. This compares with 532 shares within the Benchmark. Worldwide shares represented 9.9% of the Fund’s internet belongings. The Fund’s 10 largest holdings represented 64.2% of internet belongings. In contrast with the Benchmark, the Fund was chubby in well being care tools, life sciences instruments & providers, well being care provides, and managed well being care, and underweight in prescribed drugs and well being care providers. The market cap vary of the investments within the Fund was $2.4 billion to $783 billion with a weighted common market cap of $202 billion. This in contrast with the Benchmark’s weighted common market cap of $248 billion.

We proceed to spend money on a number of secular progress themes in Well being Care, corresponding to genomics/genetic testing/genetic medication, progressive medical units that enhance outcomes and/or decrease prices, minimally invasive surgical procedure, anti-obesity medicines, picks and shovels life sciences instruments suppliers, the shift to decrease value websites of care, and pet well being care, amongst others. To be clear, this listing will not be exhaustive: we personal shares within the portfolio that don’t match neatly into these themes and there are different themes not talked about right here which are within the portfolio. We consider every inventory by itself deserves.

Desk IV.

High 10 holdings as of March 31, 2025

Click on to enlarge

Desk V.

Fund investments in GICS sub-industries as of March 31, 2025

Click on to enlarge

* Particular person weights might not sum to the displayed complete as a result of rounding.

Current Exercise

In the course of the quarter, we added six new positions and exited eight positions. Beneath we focus on a few of our prime internet purchases and gross sales.

Desk VI.

High internet purchases for the quarter ended March 31, 2025

Click on to enlarge

We initiated a place in Waters Company, a number one supplier of analytical devices and consumables for prime quantity, regulated functions, together with biopharmaceutical high quality management, late-stage drug growth, meals and environmental security, chemical evaluation and supplies testing. Waters has a very sturdy market place in biopharmaceutical high quality management the place its liquid chromatography devices are used together with its proprietary column chemistry to effectively separate contaminants from the drug combination for evaluation. That is coupled with their Empower software program, which is a one-stop platform appropriate for readout throughout a number of analyzer varieties, corresponding to mass spectrometry, UV spectroscopy, and multi-angle mild scattering. Empower takes all this data and pipes it to regulators with sturdy knowledge integrity and audit path. At present, round 80% of novel medication filed with regulators use this software program, offering a aggressive benefit. Furthermore, the corporate’s merchandise are specified within the regulatory approval course of, making them very sticky.

Traditionally, Waters’ income has grown within the mid-single digits yearly. Going ahead, Waters has a number of idiosyncratic progress drivers which may increase progress above the historic charge: India generics (pushed by a bigger variety of blockbuster medication going off patent over the subsequent 5 years), GLP-1 testing (pushed by explosive progress within the anti-obesity drug class over the approaching decade), biologics (pushed by progress in giant molecule testing), and PFAS testing (pushed by new rules banning eternally chemical compounds). As well as, administration seeks to seize larger value contributions versus historic charges. On prime of this, Waters ought to profit from a alternative cycle in its instrument enterprise over the subsequent two to 4 years. Based mostly on these progress drivers, income progress may speed up to the excessive single digits to low double digits within the coming years. At a current Investor Day, administration established a purpose to attain 400 foundation factors of working margin enlargement over the subsequent 5 years, from the corporate’s {industry} main 31% working margin in 2024 to 35% in 2030. With its sturdy free money circulate technology, Waters can redeploy capital into M&A and share repurchases to drive strong double-digit annual earnings per share progress.

We initiated a place in Penumbra, Inc., a number one producer of medical units that take away blood clots from veins and arteries. Physicians use the corporate’s units to deal with pulmonary embolism (PE), deep vein thrombosis (DVT), acute limb ischemia, ischemic stroke, coronary illness, and different circumstances. Penumbra’s units, that are referred to as mechanical thrombectomy units, use pc algorithms to modulate the aspiration energy relying on if a clot is detected and to manage a separate valve that injects saline to scale back friction between the clot and catheter. This allows a differentiated gadget profile that maximizes clot removing with velocity whereas lowering danger of blood loss.

Penumbra serves giant and underpenetrated markets. Administration estimates the U.S. thrombectomy market alternative consists of roughly 1.25 million annual procedures, together with roughly 200,000 in stroke and over 1 million in PE, DVT, arterial, and coronary. The PE and DVT markets are solely 10% penetrated with mechanical thrombectomy units. Most PE sufferers at the moment obtain conservative medical administration with oral anticoagulation alone. Penumbra is working randomized medical trials finding out mechanical thrombectomy versus anticoagulation for PE sufferers. If the trials are optimistic, the market may shift in the direction of larger adoption of mechanical thrombectomy. In the meantime, Penumbra is gaining market share in PE and DVT. In stroke, the corporate’s new Thunderbolt gadget, which contains its pc assisted vacuum thrombectomy expertise into the stroke marketplace for the primary time, may obtain FDA approval and launch later this 12 months, offering a possible catalyst for progress.

We reacquired shares of McKesson Company, a number one distributor of prescribed drugs and medical provides, throughout the quarter. McKesson’s enterprise combine has been evolving in the direction of a diversified well being care providers firm with main positions in oncology and biopharmaceutical providers. In oncology, McKesson has constructed a differentiated platform, which incorporates specialty distribution and pharmacy, observe administration; real-world knowledge, proof, and expertise; and medical trial administration and providers. Just like the technique in oncology, McKesson is now constructing a portfolio of providers for retina and ophthalmology practices. In biopharmaceutical providers, McKesson has connections with most digital well being report techniques, over 50,000 pharmacies, roughly 950,000 suppliers, most pharmacy profit managers and well being plans, and helps a portfolio of biopharmaceutical manufacturers to make medicines extra accessible and inexpensive to suppliers and sufferers. The enterprise generates substantial free money circulate, and long-term administration targets 12% to 14% annual earnings per share progress.

We initiated a place in Masimo Company, a medical gadget firm that manufactures and sells quite a lot of non-invasive affected person monitoring applied sciences. Masimo is the market chief in pulse oximetry, which measures oxygen saturation of arterial blood. The corporate’s differentiated pulse oximetry expertise overcomes the constraints of typical pulse oximetry by sustaining accuracy within the presence of movement and low perfusion. Masimo SET is the first pulse oximetry expertise used within the prime 10 U.S. hospitals. The corporate has vital mental property safety round its expertise in addition to multi-year buyer contracts, creating boundaries to entry. The enterprise advantages from a extremely recurring income mannequin pushed by disposable sensors.

With new administration in place, the corporate is exiting its client enterprise and focusing its consideration on the well being care enterprise. Administration is guiding to eight% to 11% fixed forex income progress and 400 foundation factors of working margin enlargement in 2025. Past 2025, we predict the well being care enterprise can proceed to develop in an identical vary on an annual foundation with room for added margin enlargement.

We added to UnitedHealth Group Integrated, a number one managed well being care firm. We predict UnitedHealth has a number of aggressive benefits together with scale, knowledge, vertical integration with service suppliers, and management in Medicare Benefit and value-based care. We see a beautiful enterprise buying and selling at a 10-year low relative valuation and we predict fundamentals are probably to enhance pushed by normalization of medical value traits and extra favorable charges in Medicare and Medicaid.

Desk VII.

High internet gross sales for the quarter ended March 31, 2025

Click on to enlarge

We decreased positions in Natera, Inc., Intuitive Surgical, Inc., and Vertex Prescribed drugs Integrated as a result of valuation. We decreased Thermo Fisher Scientific Inc. as a result of considerations about decreased funding for all times sciences analysis in educational and biotechnology markets. We decreased Arcellx, Inc. to handle danger, although we preserve a optimistic view.

Outlook

In early April, 1000’s of workers on the Division of Well being and Human Companies (HHS) started receiving layoff notices as a part of HHS Secretary Robert F. Kennedy, Jr.’s plan to chop roughly 10,000 jobs from the company, together with 3,500 cuts on the Meals and Drug Administration (FDA). The removing of well-regarded division heads on the FDA and fears about disruption sparked indiscriminate promoting of small biotechnology shares which rely upon well timed overview and approval of their pipeline belongings. It’s attainable that new leaders on the FDA may take a extra permissive stance on new drug functions, leading to quicker and extra drug approvals, which may very well be each optimistic (quicker, less expensive to carry a drug to market) and detrimental (decrease boundaries to entry, potential for unsafe or ineffective medication to succeed in the market). At this level, it’s too early to know the way it will play out. The opposite investor concern about biotechnology is that enormous pharma has been turning to China to accumulate or license medication at decrease costs as an alternative of buying U.S. based mostly corporations. On this difficult surroundings, we’re centered on proudly owning a choose few commercial-stage (or close to commercial-stage) biotechnology corporations with seen near-term income. Amongst large-cap pharmaceutical corporations, we stay bullish on Eli Lilly and Firm, which we predict is an {industry} chief by way of R&D productiveness and is competitively advantaged within the weight problems medication market with its sturdy pipeline, manufacturing footprint, therapeutic class experience, and stability sheet. We proceed to consider the weight problems medication market alternative is giant and underpenetrated with solely about 8 million individuals taking GLP-1 medicines versus the market alternative of over 100 million within the U.S. alone.

In January, it appeared as if the long-awaited restoration within the life sciences instruments sector had lastly arrived, however then occasions took a flip for the more serious. In February, the Nationwide Institutes of Well being (NIH) adopted a brand new coverage with respect to funding of oblique prices, a coverage change that threatens to scale back funding for universities throughout the nation. A lawsuit difficult the coverage change has been filed. If the coverage stays in impact, educational laboratories may very well be pressured to chop initiatives, leading to much less spending on life sciences instruments. However, the NIH is arguing that the entire quantity of spending received’t lower, and the brand new coverage will make spending extra environment friendly by re-allocating funds to direct analysis. Within the meantime, funding delays and grant cancellations are pressuring spending. Whereas the businesses we personal have manageable publicity to educational analysis markets, a slowdown in biotechnology funding, which hit a three-year low within the first quarter, and tariffs on the life sciences instruments corporations and their pharmaceutical clients, may very well be extra impactful. These are dangers we’re monitoring.

Outdoors of life sciences, we stay bullish on medical gadget corporations Intuitive Surgical, Inc., Boston Scientific Company, and Stryker Company. Intuitive is the chief in robotic surgical techniques and has a number of moats round its enterprise together with expertise, patents, regulatory approvals, a big put in base, medical knowledge, and physicians skilled to make use of its merchandise. Intuitive is within the early innings of a brand new product cycle with its new DV5 system which has 10,000 occasions the computing energy of its prior technology system, provides drive suggestions, enhanced 3D imaging, and different advantages, and the system’s capabilities will increase over time. Boston Scientific has a number of progress drivers in its diversified medical gadget enterprise, together with adoption of its Farapulse ablation catheter, which makes use of a brand new type of power to deal with irregular coronary heart rhythms like atrial fibrillation. Stryker is gaining share in its hip and knee implants enterprise and has a brand new product pipeline that can proceed to drive {industry} main top-line progress.

After two years of great underperformance, managed care shares generated optimistic returns within the quarter, and outperformance continued in April. This is because of lack of publicity to tariffs, the expectation that elevated medical value traits will normalize because the 12 months progresses, and potential for extra favorable charge will increase in Medicare and Medicaid. We predict managed care corporations are coming into a interval of margin enlargement from trough ranges and accelerating earnings progress and we’re optimistic in regards to the long-term outlook for UnitedHealth Group Integrated.

This quarter we’re highlighting thrilling innovation within the subject of organ transplants. The FDA lately approved two corporations, United Therapeutics and eGenesis, to start medical trials through which surgeons transplant kidneys from genetically modified pigs into people. There are greater than 500,000 individuals within the U.S. with finish stage kidney illness that depend on dialysis for survival. Nevertheless, there are solely 27,000 kidney transplants carried out every year as a result of a scarcity of donor organs. Scientists have tried xenotransplantation (or transplanting organs from non-human animals) prior to now, however the affected person’s immune system would find yourself rejecting the overseas organs and there have been additionally considerations in regards to the danger of animal infections spreading to people via the donated organ. Current advances in gene-editing have allowed scientists to make edits within the pig’s genome to keep away from immune rejection and to take away traces of a selected sort of pig-virus that may embed into pig DNA. The businesses additionally take a look at the organs for a spread of different potential infections. Whereas this expertise is early, it’s thrilling that the businesses are beginning medical trials that might sooner or later result in FDA approval. Sooner or later, specialised farms may produce tons of and even 1000’s of lifesaving xenotransplant organs every year.

This is only one instance of innovation within the Well being Care sector. We proceed to observe our course of for figuring out nice funding alternatives and making a portfolio of competitively advantaged progress corporations with sturdy administration groups. Thanks for investing within the Fund. I stay an investor within the Fund, alongside you.

Sincerely,

Neal Kaufman, Portfolio Supervisor

Click on to enlarge

Unique Put up