Baron Health Care Fund®: Navigating the Complex and Rapidly Changing Health Care Landscape

These are higher risk/return companies typified by revenue growth of 15% or more that we believe will lead to dramatic future earnings growth. This category includes newer businesses with novel products or services. Yet they are not venture businesses. We invest only in companies with fully formed business strategies.

Intuitive Surgical, Inc. is a high-growth stock we own. Intuitive manufactures and markets the da Vinci Surgical System, a robotic surgical system used for minimally invasive surgical procedures. We believe a large number of medical procedures that are currently performed using open surgery will eventually be performed using the da Vinci System. Robotic surgery is less invasive than open surgery, and patients experience less blood loss, less nerve damage, reduced pain, and faster recovery. Intuitive generates a large and expanding portion of its revenue from recurring procedures. We expect revenue and earnings to grow at attractive rates as procedure volumes increase.

Even among high-growth health care stocks, biotechs present a unique challenge. For one, their growth—and in some cases, their very survival—is dictated by binary catalysts, usually the greenlighting of a drug by the FDA. Equally as important, in addition to all the other research we do into potential investments, biotechs require an expert understanding of and deep dive into the clinical and scientific data associated with the drugs being developed. Within biotechnology, we have a preference for platform companies in which the drugs being developed are potentially applicable to more than one disease.

Argenx SE is developing antibodies for the treatment of autoimmune disorders and cancer. Argenx’s main product, efgartigimod, which treats a rare muscle weakness disorder, has potentially broad applicability in ameliorating overactive antibody-based diseases. The stock has appreciated significantly in the time we have held it, and we expect it will continue to ramp as the company proves its product’s effectiveness in multiple auto-antibody disorders.

This category is constructed to help dampen volatility by offsetting holdings in other parts of the portfolio that may have higher beta. This category is also typically not as correlated to the market as the other two. These holdings might be more yield- or asset-oriented and generate solid free cash flow growth.

UnitedHealth Group Incorporated is the nation’s leading health care franchise. Our investment allows us to participate in the strong secular growth of health care. We believe UnitedHealth has a uniquely diversified portfolio and complementary set of skills, services, and expertise that will allow it to deliver higher quality health care at lower cost to its members and customers. It uses its significant free cash flow to fund acquisitions and $5 billion in annual technology, research, and innovation investments, which serve to reinforce the company’s competitive moat.

Without question, the biggest development in health care in 2023 was the exploding popularity of GLP-1 drugs to treat obesity. While earlier generations of GLP-1s, used to treat type 2 diabetes, had only a limited impact on weight loss, the newest generation (Ozempic/ Wegovy and Mounjaro/Zepbound) has been shown to reduce body weight by 15% to 20%, with few major side effects or safety concerns seen to date. We estimate a $150 billion opportunity in the U.S. alone and expect top 10 holding Eli Lilly and Company to capture a meaningful share of that market with its drug Mounjaro/Zepbound and its pipeline of next-generation GLP-1s. We view Lilly as a unique company with a compelling growth profile, strong competitive advantages, and a top-rated management team. Its R&D productivity is well above the industry average, and it has first mover advantage, clinical expertise, manufacturing capabilities, and payer relationship advantages in the diabetes and obesity market.

Less invasive surgery is less traumatic for the patient, enabling a faster recovery and in many cases resulting in cost savings to the system. We have a number of investments in this growing space, including robotic surgery pioneer Intuitive, which we discussed above, and Stryker Corporation, a leading medical technology company that is well known for its orthopedic implants and the Mako robotic system.

The prevalence of diabetes is staggering, with over 400 million people globally with diabetes, yet this number is expected to keep climbing. The International Diabetes Federation estimates that 629 million people could have diabetes by 2045. We own Lilly (discussed above), which has been a leader in diabetes research and care since 1923, when it became the first company to commercialize insulin.

We like businesses that provide products and services to life sciences companies because they can benefit from the growth in life sciences without the risk inherent in drug development. Our investments in life sciences tools providers include Thermo Fisher Scientific Inc., Bio-Techne Corporation, and Mettler-Toledo International, Inc.

Growth in pet ownership and spending on pets, and, on the flip side, increased consumption of animal protein and focus on food safety all bode well for the animal health industry. In addition, compared with drug development for humans, the animal health industry is characterized by lower regulatory barriers, faster and less costly R&D, less generic competition, and lower third-party reimbursement risks. We have investments in Zoetis Inc., which develops and sells medicines for pets and food-producing animals; and IDEXX Laboratories, Inc., the leading provider of diagnostic instruments and assays used for pet care in veterinarian offices.

What we witnessed in 2020 with the development of vaccines for COVID-19 is nothing short of amazing. In less than a year, two separate pharmaceutical companies took the genetic sequence of a novel coronavirus, created a vaccine, completed clinical trials, received FDA authorization, and commercially launched a new product. This achievement is remarkable not just for the length of time involved—in the past, it could take up to a decade to develop a vaccine—but also for its novel use of messenger RNA, heralding a revolutionary new approach to building drugs. There are many other examples of disruptive innovation across the Health Care sector, from early-stage cancer screening tests using simple blood draws to medicines that cure rare genetic diseases. In short, we think the long-term outlook for the Health Care sector is excellent.

We remain optimistic about the long-term growth prospects for our holdings. We believe the companies in which the Fund invests are unique, competitively advantaged, well-managed growth companies. We continue to work hard to identify new themes and ideas that meet our investment criteria.