Baron Well being Care Fund Q1 2025 Shareholder Letter

Costly Baron Nicely being Care Fund Shareholder:

Throughout the quarter ended March 31, 2025, Baron Nicely being Care Fund® (the Fund) declined 2.54% (Institutional Shares), in distinction with the three.87% purchase for the Russell 3000 Nicely 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 basis in distinction with the 9.57% purchase for the Benchmark and the 12.58% purchase for the Index.

Desk I.

Effectivity

Annualized for intervals ended March 31, 2025

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The Fund trailed the Benchmark by 641 basis components primarily on account of stock alternative and, to a lesser extent, energetic sub-industry weights. Headwinds from sort biases moreover factored into underperformance for the interval, as a result of the Fund was harm by its overexposure to the weak performing Beta situation and underexposure to the upper performing Measurement situation (greater caps).

Disappointing stock alternative in biotechnology and nicely being care instruments accounted for about two-thirds of the underperformance inside the interval. Weak spot in biotechnology was broad based, led by declines from Arcellx, Inc. (ACLX) and argenx SE (ARGX)(OTCPK:ARGNF). Arcellx is rising cell therapies for plenty of myeloma, along with lead drug anito-cel in partnership with Gilead. The company was the Fund’s prime detractor on fears of potential new safety alerts from additional 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 negative effects. We keep merchants and provide additional concepts below.

Argenx is best acknowledged for rising Vyvgart, the principle FcRn inhibitor for the remedy of autoimmune circumstances. We contemplate the stock’s underperformance didn’t mirror any change in fundamentals and we keep bullish regarding the agency’s long-term prospects. Adversarial stock alternative in biotechnology was exacerbated by lack of publicity to larger-cap companies AbbVie, Inc. and Amgen Inc., whose share prices have been every up roughly 20% inside the quarter, detracting 120-plus basis components from relative outcomes (representing virtually half of the final shortfall inside the sub-industry).

Effectivity in nicely being care instruments was hindered by declines from glaucoma remedy developer Glaukos Firm (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 stock fell on account of investor rotation out of extreme progress companies and concerns regarding the potential impression of tariffs on Intuitive’s earnings given the company manufactures units in Mexico. We keep merchants and give attention to every companies in bigger component below. Lack of publicity to positive sturdy performing large-cap companies, equivalent to Abbott Laboratories and Medtronic plc, provided additional headwinds to effectivity inside the sub-industry.

Elevated publicity to lagging life sciences devices & suppliers shares and poor stock alternative in nicely being care suppliers and managed nicely being care have been totally different supplies detractors inside the interval. The Fund’s solely place in nicely being care suppliers, diagnostic imaging suppliers provider RadNet, Inc. (RDNT), weighed on effectivity after reporting below consensus guidance for fiscal 12 months 2025. We view the reasons for the lower guidance as non-recurring and keep excited regarding the optionality embedded in RadNet’s AI merchandise, which provide enhanced digital image finding out and analysis, boosting radiologists’ accuracy and effectivity.

Nicely being Monetary financial savings Account administrator HealthEquity, Inc. (HQY) was largely answerable for the stock-specific shortfall in managed nicely being care. The stock fell after the company reported its fiscal fourth quarter earnings. Whereas earnings beat Highway estimates, EBITDA and earnings fell transient and administration lowered guidance on account of elevated payments related to fraud train. Refined criminals broke into purchaser accounts and stole funds. HealthEquity reimbursed the shopper accounts completely and as well as had extra payments associated to purchaser calls related to the fraud and restoration. Administration is taking steps to deal with the issue, along with enhanced security measures for its purchasers, and is pursuing restoration from insurance coverage protection suppliers. Outdoor of this setback, the rest of the enterprise is performing properly. HealthEquity is gaining market share and benefiting from elevated charges of curiosity on deposits. We moreover see upside optionality from potential legal guidelines rising eligibility for nicely being monetary financial savings accounts.

Minimally offsetting the above was energy in nicely being care distributors attributable to a mixture of stock alternative and energetic publicity to this sturdy performing sub-industry. Present addition McKesson Firm (MCK), a primary distributor of pharmaceutical/medical gives and provider of prescription experience choices that be a part of pharmacies, suppliers, payers, and biopharmaceutical shoppers, led one of the best ways in nicely being care distributors. We give attention to why we re-established a spot in McKesson inside the Present Train half below.

Excessive Contributors to Effectivity

Desk II.

Excessive contributors to effectivity for the quarter ended March 31, 2025

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Boston Scientific Firm is a worldwide producer of medical models utilized in a broad differ of interventional medical specialties. Shares contributed to effectivity. End markets are rising at a good looking 9%, with the company positioned properly with its differentiated merchandise in electrophysiology and structural coronary coronary heart. Significantly, there was rising pleasure throughout the rising topic of pulsed topic ablation (PFA). Traditionally, medical medical doctors have used temperature-based methods (each scorching or chilly) to disable coronary coronary heart tissue answerable for irregular heartbeats; however, these methods would possibly hurt surrounding tissue. As in contrast, PFA is determined by electrical power to wreck aberrant tissue, and since numerous sorts of tissue have completely totally different electrical thresholds, the encircling tissue could be selectively spared. Coupled with worth self-discipline and better than 50 basis components of annual working margin enlargement, we contemplate its double-digit EPS progress profile makes Boston Scientific a compelling establish contained in the large-cap medical gadget universe.

Vertex Prescription drugs Built-in is a primary biotechnology agency with a cystic fibrosis franchise and a pipeline of medication for various circumstances. Shares elevated on a restoration in investor sentiment after disappointing data from Journvax in lumbar spinal radiculopathy in December. We keep bullish on Vertex’s cystic fibrosis enterprise and its evolving pipeline, along with Journvax, a non-opioid NaV inhibitor in the intervening time in launch for the remedy of acute ache. Although Vertex should finalize utilization administration requirements with payers, we see a extreme diploma of unmet need and large potential market. Vertex’s broader pipeline for ache remedy consists of plenty of additional non-opioid NaV inhibitor belongings. We’re moreover impressed by its pipeline in kidney sickness, along with inaxaplin for APOL1-mediated kidney sickness and povetacicept for IgA nephropathy.

UnitedHealth Group Built-in is a diversified nicely being and well-being agency with $450 billion in annual earnings that operates all through 4 segments: UnitedHealthcare, Optum, OptumInsight, and OptumRX. Shares ended the quarter in optimistic territory as plenty of 2024 headwinds began to subside and merchants anticipated the start of a additional optimistic cost cycle. After plenty of years of prices that didn’t match worth traits, the preliminary 2026 Medicare Profit cost was increased than anticipated; historically, final prices are incrementally elevated. The company is properly positioned to extend enrollment as a result of it competes in opposition to plans that aggressively mispriced in 2024, forcing them to cut back benefits to revive margins. The rising share of earnings from elevated margin/unregulated Optum and the maturation of Medicare Profit cohorts ought to help earnings in 2025. UnitedHealth’s insulation from potential tariff impacts moreover proved participating to merchants. We keep shareholders.

Excessive Detractors from Effectivity

Desk III

Excessive detractors from effectivity for the quarter ended March 31, 2025

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Arcellx, Inc. is rising cell therapies for plenty of myeloma, along with lead drug anito-cel in partnership with Gilead. Shares detracted from effectivity. The stock had run up as merchants anticipated optimistic data ahead of outcomes launched in early December from a pivotal iMMagine-1 trial. No matter encouraging data displaying that anito-cel is as efficacious as Legend/ Johnson & Johnson’s CARVYKTI with fewer negative effects, shares then fell on fears of any new safety alerts as Arcellx conducts additional trials. We predict anito-cel is meaningfully differentiated on safety, and new data readouts will assist this conclusion. We rely on a mid-year substitute on trial outcomes, which can very nicely be the concept for potential approval and launch inside the second half of 2026.

Glaukos Firm develops and sells interventional glaucoma therapies, along with iDose, a minimally invasive drug-delivery gadget launched in 2024. An iDose is implanted as a 5 minute course of and delivers extraordinarily concentrated prostaglandin inside the eye environment friendly for as a lot as three years. Shares declined on quarterly iDose outcomes that missed elevated investor expectations. Although solutions has been optimistic, medical medical doctors have been hesitant to utilize iDose until they’re assured they’ll acquire reimbursement for this pricey gadget. Medicare safety has started to solidify in some areas, and we predict safety all through the board is a matter of when, not if. We contemplate uptake will pace up over the approaching quarters as a result of the reimbursement course of turns into additional streamlined. Glaucoma is an enormous market that’s ripe for model new standalone interventions, and we predict iDose usually 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 stock fell on account of investor rotation out of extreme progress companies. In addition to, concerns emerged regarding the potential impression of tariffs on Intuitive’s earnings on account of Intuitive manufactures units in Mexico. If the company can get a nicely being care exception to exempt it from tariffs, we predict there are steps it might take to attenuate the impression. In any event, we don’t assume tariffs alter the long-term funding thesis and proceed to have a optimistic long-term view of Intuitive’s different to extend adoption of its robotic strategies.

Portfolio Building

We assemble the portfolio from the underside up, one stock at a time, using the Baron funding technique. We don’t try to mimic an index, and we rely on the Fund to look very completely totally different than the Benchmark. We loosely group the portfolio into three courses of shares: earnings compounders, high-growth companies, and biotechnology companies. We define earnings compounders as companies that we contemplate can develop earnings at least mid-single digits and compound earnings at double-digit prices over the long term. We define high-growth shares as companies we rely on to generate double-digit or increased earnings progress. They might be not worthwhile at current, nonetheless we contemplate they’re usually extraordinarily worthwhile ultimately. We rely on the portfolio to have a combination of earnings compounders, high-growth, and biotechnology companies.

We would spend cash on shares of any market capitalization and may keep every residence and worldwide shares. As of March 31, 2025, we held 35 shares. This compares with 532 shares inside the Benchmark. Worldwide shares represented 9.9% of the Fund’s web belongings. The Fund’s 10 largest holdings represented 64.2% of web belongings. In distinction with the Benchmark, the Fund was chubby in nicely being care instruments, life sciences devices & suppliers, nicely being care gives, and managed nicely being care, and underweight in pharmaceuticals and nicely being care suppliers. The market cap differ of the investments inside the Fund was $2.4 billion to $783 billion with a weighted widespread market cap of $202 billion. This in distinction with the Benchmark’s weighted widespread market cap of $248 billion.

We proceed to spend cash on plenty of secular progress themes in Nicely being Care, equivalent to genomics/genetic testing/genetic medicine, progressive medical models that improve outcomes and/or lower costs, minimally invasive surgical process, anti-obesity medicines, picks and shovels life sciences devices suppliers, the shift to lower worth web sites of care, and pet nicely being care, amongst others. To be clear, this itemizing is not going to be exhaustive: we private shares inside the portfolio that don’t match neatly into these themes and there are totally different themes not talked about proper right here that are inside the portfolio. We contemplate each stock by itself deserves.

Desk IV.

Excessive 10 holdings as of March 31, 2025

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Desk V.

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

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* Explicit individual weights won’t sum to the displayed full on account of rounding.

Present Train

In the middle of the quarter, we added six new positions and exited eight positions. Beneath we give attention to just a few of our prime web purchases and product sales.

Desk VI.

Excessive web purchases for the quarter ended March 31, 2025

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We initiated a spot in Waters Firm, a primary provider of analytical units and consumables for prime amount, regulated features, along with biopharmaceutical prime quality administration, late-stage drug progress, meals and environmental safety, chemical analysis and provides testing. Waters has a really sturdy market place in biopharmaceutical prime quality administration the place its liquid chromatography units are used along with its proprietary column chemistry to successfully separate contaminants from the drug mixture for analysis. That’s coupled with their Empower software program program, which is a one-stop platform acceptable for readout all through plenty of analyzer varieties, equivalent to mass spectrometry, UV spectroscopy, and multi-angle delicate scattering. Empower takes all this information and pipes it to regulators with sturdy data integrity and audit path. At current, spherical 80% of novel medicine filed with regulators use this software program program, providing a aggressive profit. Moreover, the company’s merchandise are specified inside the regulatory approval course of, making them very sticky.

Historically, Waters’ earnings has grown inside the mid-single digits yearly. Going forward, Waters has plenty of idiosyncratic progress drivers which can enhance progress above the historic cost: India generics (pushed by an even bigger number of blockbuster medicine going off patent over the following 5 years), GLP-1 testing (pushed by explosive progress inside the anti-obesity drug class over the approaching decade), biologics (pushed by progress in large molecule testing), and PFAS testing (pushed by new guidelines banning eternally chemical compounds). In addition to, administration seeks to grab bigger worth contributions versus historic prices. On prime of this, Waters should revenue from a different cycle in its instrument enterprise over the following two to 4 years. Primarily based totally on these progress drivers, earnings progress could pace as much as the extreme single digits to low double digits inside the coming years. At a present Investor Day, administration established a objective to realize 400 basis components of working margin enlargement over the following 5 years, from the company’s {{industry}} important 31% working margin in 2024 to 35% in 2030. With its sturdy free cash flow into expertise, Waters can redeploy capital into M&A and share repurchases to drive robust double-digit annual earnings per share progress.

We initiated a spot in Penumbra, Inc., a primary producer of medical models that take away blood clots from veins and arteries. Physicians use the company’s models to cope with pulmonary embolism (PE), deep vein thrombosis (DVT), acute limb ischemia, ischemic stroke, coronary sickness, and totally different circumstances. Penumbra’s models, which can be known as mechanical thrombectomy models, use laptop algorithms to modulate the aspiration power counting on if a clot is detected and to handle a separate valve that injects saline to cut back friction between the clot and catheter. This permits a differentiated gadget profile that maximizes clot eradicating with velocity whereas decreasing hazard of blood loss.

Penumbra serves large and underpenetrated markets. Administration estimates the U.S. thrombectomy market different consists of roughly 1.25 million annual procedures, along 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 models. Most PE victims in the intervening time acquire conservative medical administration with oral anticoagulation alone. Penumbra is working randomized medical trials discovering out mechanical thrombectomy versus anticoagulation for PE victims. If the trials are optimistic, the market could shift within the course of bigger adoption of mechanical thrombectomy. Within the meantime, Penumbra is gaining market share in PE and DVT. In stroke, the company’s new Thunderbolt gadget, which incorporates its laptop assisted vacuum thrombectomy experience into the stroke market for the first time, could acquire FDA approval and launch later this 12 months, providing a attainable catalyst for progress.

We reacquired shares of McKesson Firm, a primary distributor of pharmaceuticals and medical gives, all through the quarter. McKesson’s enterprise mix has been evolving within the course of a diversified nicely being care suppliers agency with important positions in oncology and biopharmaceutical suppliers. In oncology, McKesson has constructed a differentiated platform, which includes specialty distribution and pharmacy, observe administration; real-world data, proof, and experience; and medical trial administration and suppliers. Similar to the approach in oncology, McKesson is now developing a portfolio of suppliers for retina and ophthalmology practices. In biopharmaceutical suppliers, McKesson has connections with most digital nicely being report strategies, over 50,000 pharmacies, roughly 950,000 suppliers, most pharmacy revenue managers and nicely being plans, and helps a portfolio of biopharmaceutical producers to make medicines additional accessible and cheap to suppliers and victims. The enterprise generates substantial free cash flow into, and long-term administration targets 12% to 14% annual earnings per share progress.

We initiated a spot in Masimo Firm, a medical gadget agency that manufactures and sells various non-invasive affected individual monitoring utilized sciences. Masimo is the market chief in pulse oximetry, which measures oxygen saturation of arterial blood. The company’s differentiated pulse oximetry experience overcomes the constraints of typical pulse oximetry by sustaining accuracy inside the presence of motion and low perfusion. Masimo SET is the primary pulse oximetry experience used inside the prime 10 U.S. hospitals. The company has important psychological property security spherical its experience along with multi-year purchaser contracts, creating boundaries to entry. The enterprise benefits from a extraordinarily recurring earnings model pushed by disposable sensors.

With new administration in place, the company is exiting its shopper enterprise and focusing its consideration on the nicely being care enterprise. Administration is guiding to eight% to 11% mounted foreign exchange earnings progress and 400 basis components of working margin enlargement in 2025. Previous 2025, we predict the nicely being care enterprise can proceed to develop in an an identical differ on an annual basis with room for added margin enlargement.

We added to UnitedHealth Group Built-in, a primary managed nicely being care agency. We predict UnitedHealth has plenty of aggressive advantages along with scale, data, vertical integration with service suppliers, and administration in Medicare Profit and value-based care. We see a good looking enterprise shopping for and promoting at a 10-year low relative valuation and we predict fundamentals are in all probability to boost pushed by normalization of medical worth traits and additional favorable prices in Medicare and Medicaid.

Desk VII.

Excessive web product sales for the quarter ended March 31, 2025

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We decreased positions in Natera, Inc., Intuitive Surgical, Inc., and Vertex Prescription drugs Built-in on account of valuation. We decreased Thermo Fisher Scientific Inc. on account of concerns about decreased funding for all occasions sciences evaluation in instructional and biotechnology markets. We decreased Arcellx, Inc. to deal with hazard, though we protect a optimistic view.

Outlook

In early April, 1000’s of staff on the Division of Nicely being and Human Corporations (HHS) began receiving layoff notices as part of HHS Secretary Robert F. Kennedy, Jr.’s plan to cut roughly 10,000 jobs from the corporate, along with 3,500 cuts on the Meals and Drug Administration (FDA). The eradicating of well-regarded division heads on the FDA and fears about disruption sparked indiscriminate selling of small biotechnology shares which depend on nicely timed overview and approval of their pipeline belongings. It’s attainable that new leaders on the FDA could take a additional permissive stance on new drug features, resulting in faster and additional drug approvals, which can very nicely be every optimistic (faster, inexpensive to hold a drug to market) and detrimental (lower boundaries to entry, potential for unsafe or ineffective medicine to succeed out there). At this stage, it’s too early to know how it should play out. The other investor concern about biotechnology is that big pharma has been turning to China to build up or license medicine at lower prices as a substitute of shopping for U.S. based companies. On this tough environment, we’re centered on proudly proudly owning a select few commercial-stage (or near commercial-stage) biotechnology companies with seen near-term earnings. Amongst large-cap pharmaceutical companies, we keep bullish on Eli Lilly and Agency, which we predict is an {{industry}} chief by means of R&D productiveness and is competitively advantaged inside the weight issues medicine market with its sturdy pipeline, manufacturing footprint, therapeutic class expertise, and stability sheet. We proceed to contemplate the burden issues medicine market different is large and underpenetrated with solely about 8 million people taking GLP-1 medicines versus the market different of over 100 million inside the U.S. alone.

In January, it appeared as if the long-awaited restoration inside the life sciences devices sector had lastly arrived, nonetheless then events took a flip for the extra severe. In February, the Nationwide Institutes of Nicely being (NIH) adopted a model new protection with respect to funding of indirect costs, a protection change that threatens to cut back funding for universities all through the nation. A lawsuit tough the protection change has been filed. If the protection stays in influence, instructional laboratories could very nicely be pressured to cut initiatives, resulting in a lot much less spending on life sciences devices. Nonetheless, the NIH is arguing that the complete amount of spending acquired’t decrease, and the model new protection will make spending additional surroundings pleasant by re-allocating funds to direct evaluation. Throughout the meantime, funding delays and grant cancellations are pressuring spending. Whereas the companies we private have manageable publicity to instructional evaluation markets, a slowdown in biotechnology funding, which hit a three-year low inside the first quarter, and tariffs on the life sciences devices companies and their pharmaceutical shoppers, could very nicely be additional impactful. These are risks we’re monitoring.

Outdoor of life sciences, we keep bullish on medical gadget companies Intuitive Surgical, Inc., Boston Scientific Firm, and Stryker Firm. Intuitive is the chief in robotic surgical strategies and has plenty of moats spherical its enterprise along with experience, patents, regulatory approvals, an enormous put in base, medical data, and physicians expert to utilize its merchandise. Intuitive is inside the early innings of a model new product cycle with its new DV5 system which has 10,000 events the computing power of its prior expertise system, gives drive solutions, enhanced 3D imaging, and totally different benefits, and the system’s capabilities will enhance over time. Boston Scientific has plenty of progress drivers in its diversified medical gadget enterprise, along with adoption of its Farapulse ablation catheter, which makes use of a model new sort of energy to cope with irregular coronary coronary heart rhythms like atrial fibrillation. Stryker is gaining share in its hip and knee implants enterprise and has a model new product pipeline that may proceed to drive {{industry}} important top-line progress.

After two years of nice underperformance, managed care shares generated optimistic returns inside the quarter, and outperformance continued in April. That is due to lack of publicity to tariffs, the expectation that elevated medical worth traits will normalize as a result of the 12 months progresses, and potential for additional favorable cost will enhance in Medicare and Medicaid. We predict managed care companies are coming right into a interval of margin enlargement from trough ranges and accelerating earnings progress and we’re optimistic regarding the long-term outlook for UnitedHealth Group Built-in.

This quarter we’re highlighting thrilling innovation inside the topic of organ transplants. The FDA recently permitted two companies, United Therapeutics and eGenesis, to start out medical trials by means of which surgeons transplant kidneys from genetically modified pigs into individuals. There are better than 500,000 people inside the U.S. with end stage kidney sickness that rely on dialysis for survival. However, there are solely 27,000 kidney transplants carried out yearly on account of a shortage of donor organs. Scientists have tried xenotransplantation (or transplanting organs from non-human animals) before now, nonetheless the affected individual’s immune system would end up rejecting the abroad organs and there have been moreover concerns regarding the hazard of animal infections spreading to individuals through the donated organ. Present advances in gene-editing have allowed scientists to make edits inside the pig’s genome to stay away from immune rejection and to remove traces of a particular kind of pig-virus that will embed into pig DNA. The companies moreover check out the organs for a ramification of various potential infections. Whereas this experience is early, it’s thrilling that the companies are starting medical trials which may ultimately end in FDA approval. In the end, specialised farms could produce tons of and even 1000’s of lifesaving xenotransplant organs yearly.

This is just one occasion of innovation inside the Nicely being Care sector. We proceed to watch our course of for determining good funding options and making a portfolio of competitively advantaged progress companies with sturdy administration teams. Thanks for investing inside the Fund. I keep an investor inside the Fund, alongside you.

Sincerely,

Neal Kaufman, Portfolio Supervisor

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Distinctive Put up