Baron Health Care Fund | Q3 2026

During the quarter ended September 30, 2026, Baron Health Care Fund® (the Fund) advanced 4.02% (Institutional Shares), compared with the 6.19% gain for the Russell 3000 Health Care Index (the Benchmark) and the 1.40% gain for the Russell 3000 Index (the Index). Since inception (April 30, 2018), the Fund increased 10.80% on an annualized basis compared with the 10.49% gain for the Benchmark and the 14.55% gain for the Index.

The Fund (Institutional Shares) trailed the Benchmark by 217 basis points as disappointing stock selection in a few sub-industries overshadowed favorable impact from being meaningfully overexposed to life sciences tools & services stocks.

Biotechnology was responsible for the majority of the shortfall, detracting 235 basis points from relative results, as the sub-industry's solid headline return in the Benchmark masked wide dispersion beneath the surface. The single largest stock-specific headwind came from not owning Moderna, Inc., whose shares nearly tripled after the company announced that its personalized mRNA cancer vaccine in combination with Merck & Co., Inc.’s KEYTRUDA as adjuvant therapy demonstrated statistically significant and clinically meaningful improvements in recurrence-free survival and distant metastasis-free survival compared to KEYTRUDA alone for patients with completely resected stage IIB-IV melanoma who had not undergone prior treatment with systemic therapy. We thought there was a high probability that this trial would succeed, but we also thought success in adjuvant melanoma would not necessarily translate into success in other cancers because melanoma is uniquely responsive to immunotherapy. We look forward to seeing data from Moderna/Merck trials with intismeran in other cancers.

Adverse stock selection in biotechnology was further compounded by limited exposure to larger-cap companies Amgen Inc., Gilead Sciences, Inc., and Regeneron Pharmaceuticals, Inc., all of which rallied in the quarter. Most of the remaining weakness was attributable to losses from Xenon Pharmaceuticals Inc., which is developing azetukalner, a Kv7 Potassium channel opener, for epilepsy and depression, and Cytokinetics, Incorporated, which is commercializing a MYQORZO, a cardiac myosin inhibitor for hypertrophic cardiomyopathy. We discuss Xenon in the Top Detractors section below. Shares of Cytokinetics struggled in the third quarter after its second-quarter update showed MYQORZO (aficamten) generating just $25 million in net product revenue across roughly 1,500 patients, below the market’s more aggressive launch expectations. Sentiment weakened further in late August when full ACACIA-HCM results, published in the New England Journal of Medicine, showed a higher rate of serious adverse events on aficamten than placebo, including two cases of heart failure with reduced ejection fraction—raising questions about the monitoring the U.S. Food and Drug Administration (FDA) may require in the broader non-obstructive HCM population. As a result, we reduced our position.

Pharmaceuticals was another material detractor, subtracting 96 basis points from relative results. The Fund's position in AstraZeneca PLC was the primary culprit, as shares fell 17.5% in the period for the reasons discussed in the Top Detractors section below. Innovative animal health solutions provider Elanco Animal Health Incorporated also detracted, as investors became concerned about a price war with Zoetis which has been losing market share to Elanco. We remain shareholders, as we believe concerns about a price war are overblown, and we remain encouraged by the company's market share gains, margin improvement, and continued deleveraging. Lack of exposure to Benchmark heavyweight Pfizer Inc., which rose 20.5%, along with weakness in Definium Therapeutics, Inc. and Veradermics, Incorporated, further pressured relative results.

Somewhat offsetting the above was the Fund’s large overweight to life sciences tools & services, which contributed 190 basis points. The sub-industry staged a broad-based recovery after several difficult years marked by post-pandemic destocking, weak demand from China, and cautious biopharmaceutical R&D budgets. Biopharmaceutical funding levels rebounded to their highest quarterly total since late 2021, underlying clinical pipeline activity continued to expand, and a long-awaited bioprocessing and lab-instrument replacement cycle gained traction, prompting several bellwethers to beat expectations and raise full-year guidance during the quarter.

Health care services and managed health care rounded out the quarter's positive contributors. RadNet, Inc., the largest owner and operator of outpatient diagnostic imaging centers, drove strength in health care services, with shares rising 13.0% as the company’s core imaging center business continued to deliver strong results. Advanced imaging volumes (MRI, CT, and PET/CT) grew 21.2% in aggregate and 9.6% on a same center basis, lifting the advanced imaging mix by 238 basis points to 29.9% of the business. We believe this trend has substantial runway driven by a combination of new clinical indications (particularly prostate and Alzheimer's PET/CT studies), a secular mix shift toward higher-acuity modalities, and capacity expansion through new center openings and AI-enabled technology such as TechLive.

Managed health care stocks gave back a portion of their robust gains from the prior quarter, with the sub-industry falling nearly 9% in the Benchmark, amid lingering uncertainty around Medicare Advantage Star Ratings and concerns about the upcoming election. Lower relative exposure to UnitedHealth Group Incorporated and to the broader sub-industry was a modest tailwind to relative performance.

Our strategy is to identify competitively advantaged growth companies that we can own for years. Similar to other Baron Funds, we remain focused on finding businesses that we believe have secular growth opportunities, durable competitive advantages, and strong management teams. We conduct independent research and take a long-term perspective. We are particularly focused on businesses that solve problems in health care, whether by reducing costs, enhancing efficiency, and/or improving patient outcomes.

We continue to think the Health Care sector will offer attractive investment opportunities over the next decade and beyond. Health Care is one of the largest and most complex sectors in the U.S. economy, accounting for an estimated 18.4% of GDP in 2025, according to projections from the Centers for Medicare & Medicaid Services (CMS) published in Health Affairs, and encompassing a diverse array of sub-industries. Health Care is also a dynamic sector undergoing changes driven by legislation, regulation, and advances in science and technology. We think navigating these changes requires investment experience and sector expertise, which makes the Health Care sector particularly well suited for active management.

Thermo Fisher Scientific Inc. is a global life sciences company offering analytical instruments, laboratory products, biopharmaceutical services, and specialty diagnostics. Shares rose on better-than-expected second-quarter results. Organic growth of 5% exceeded consensus by 200 basis points, and management raised full-year organic growth guidance to the top of its prior range, driven by improving pharmaceutical and biotechnology spending. Bioproduction remained a standout franchise, while the divestiture of the lower-quality microbiology business funded additional share repurchases. We retain conviction that the life sciences tools industry can return to growth approximately two percentage points above GDP and believe Thermo Fisher’s scale, disciplined capital allocation, and broad-based margin expansion position the company to lead the recovery.

Mettler-Toledo International Inc. is a leading provider of precision instruments and services used in research and development, quality control, and manufacturing processes across the life sciences, food, and chemicals industries. The stock contributed to performance following strong second-quarter results and a raised full-year outlook. Local-currency sales grew 6%, exceeding prior guidance of 3%, supported by better-than-expected growth in China and strength across other emerging markets. Earnings per share (EPS) of $11.46 also exceeded sell-side estimates of $10.80. In addition, positive commentary on business trends from life sciences tools peers, including Thermo Fisher and Agilent, contributed to Mettler-Toledo’s share price appreciation. We think the company is well positioned to benefit from several positive trends, including life sciences investment in China and new U.S. plant construction by biopharmaceutical companies. Over the long term, we believe Mettler-Toledo can generate mid-teens or better annual EPS growth.

Global pharmaceutical company Teva Pharmaceutical Industries Limited contributed to performance, outpacing the broader pharmaceutical sector. Second-quarter results showed strength in Teva’s branded innovative portfolio, with Austedo, Ajovy, and Uzedy collectively growing 43% year-over-year to more than $1 billion in quarterly revenue for the first time. Management raised guidance for all three brands, targeting combined 2026 revenue of approximately $3.7 billion, or roughly 17% year-over-year growth at the midpoint. Sentiment also benefited from Teva’s plan to replace its American Depositary Share program with a direct listing of ordinary shares on the New York Stock Exchange, a move designed to broaden its investor base and reduce financing costs. Pipeline progress added another catalyst, with investigational celiac disease drug TEV ’408 meeting its primary endpoint and the FDA accepting a drug application for a pediatric Tourette syndrome therapy. These developments underscore Teva’s transformation from a generics-heavy business into a diversified innovative biopharmaceutical company with a deepening pipeline and improving financial profile.

UnitedHealth Group Incorporated, a diversified health care and benefits company operating through UnitedHealthcare and Optum, detracted from performance. While Medicare Advantage cost trends came in better than expected following an especially challenging 2025, elevated commercial utilization raised investor concerns, though we believe annual repricing can close the gap. Management also flagged pressure from No Surprises Act arbitration and increasingly aggressive provider billing, pushing the expected margin recovery beyond the prior 2027 target. Election-related policy uncertainty added another overhang across managed care, while the then-pending 2027 Medicare Advantage Star Ratings further pressured shares. We believed management had planned for a range of outcomes and was comfortable with its Star positioning, with the ability to redirect growth toward higher-rated plans if needed, as it had done in the past. We retain long-term conviction and view UnitedHealth’s 13% to 16% earnings-per-share growth target as intact.

Biopharmaceutical company Xenon Pharmaceuticals Inc. detracted from performance after voluntarily pausing enrollment of new patients in its Phase 3 depression studies following the emergence of neuropsychiatric adverse events, including confusion, somnolence, ataxia, and rare cases of psychosis.

The announcement was particularly disappointing because it coincided with what otherwise should have been a positive catalyst: the submission of a New Drug Application to the FDA for azetukalner as a treatment for focal seizures in epilepsy, supported by strong pivotal trial data. Investors questioned whether the safety signals observed at higher doses in the depression studies could complicate the regulatory review of azetukalner for epilepsy or result in label restrictions, a Risk Evaluation and Mitigation Strategy, or heightened post-marketing requirements that could limit the drug’s commercial potential. We chose to exit our position.

Pharmaceutical company Eli Lilly and Company detracted from performance as pricing pressure and competitive concerns weighed on sentiment. Shares declined following the company’s second-quarter earnings release as realized U.S. prices for its GLP-1 drugs declined approximately 9% excluding rebate adjustments, fueling concerns that the incretin market is entering a price-war phase. Meanwhile, early prescription growth for Lilly’s oral GLP-1 Foundayo also fell short of investor expectations. Foundayo was approved and launched in April, but Lilly did not begin marketing the drug until payer coverage was in place. Despite these concerns, Lilly continues to deliver strong underlying financial results, including 48% second-quarter revenue growth. Prescription trends for Foundayo have also started to improve. Our focus remains on the long-term potential of Lilly’s broader GLP-1 franchise and business rather than solely on Foundayo’s early launch. We continue to believe Lilly has one of the strongest next-generation metabolic pipelines in the industry, addressing a market we believe can exceed $150 billion.

We build the portfolio from the bottom up, one stock at a time, using the Baron investment approach. We do not try to mimic an index, and we expect the Fund to look very different than the Benchmark. We loosely group the portfolio into three categories of stocks: earnings compounders, high-growth companies, and biotechnology companies. We define earnings compounders as companies that we believe can grow revenue at least mid-single digits and compound earnings at double-digit rates over the long term. We define high-growth stocks as companies we believe can generate double-digit or better revenue growth. They may not be profitable today, but we believe they can be highly profitable in the future. We expect the portfolio to have a mix of earnings compounders, high-growth, and biotechnology companies.

We may invest in stocks of any market capitalization and may hold both domestic and international stocks. As of September 30, 2026, we held 33 stocks. This compares with 526 stocks in the Benchmark. International stocks represented 10.5% of the Fund’s net assets. The Fund’s 10 largest holdings represented 61.3% of net assets. Compared with the Benchmark, the Fund was overweight in life sciences tools & services and other health-care-related companies, roughly equal weight in health care services, health care distributors, health care technology, managed health care, and pharmaceuticals, and underweight by varying degrees in health care equipment, biotechnology, health care facilities, and health care supplies. The market cap range of the investments in the Fund was $4.3 billion to $1.1 trillion with a weighted average market cap of $283.5 billion. This compared with the Benchmark’s weighted average market cap of $324.0 billion.

We continue to invest in multiple secular growth themes in Health Care, such as genomics/genetic testing/genetic medicine, innovative medical devices that endeavor to improve outcomes and/or lower costs, minimally invasive surgery, anti-obesity medications, picks and shovels life sciences tools providers, the shift to lower cost sites of care, and beneficiaries of AI, among others. To be clear, this list is not exhaustive: we own stocks in the portfolio that do not fit neatly into these themes and there are other themes not mentioned here that are in the portfolio. We evaluate each stock on its own merits.

¹ Consists of position in health care REIT Welltower Inc.
^* Individual weights may not sum to the displayed total due to rounding.

During the quarter, we added 4 new positions and exited 14, bringing the number of positions in the Fund to 33. Below we discuss some of our top net purchases and sales.

We initiated a position in Biogen Inc., a neuroscience and immunology-focused biopharmaceutical company that we believe is in the early stages of a transformation. The company has 10 programs in Phase 3 trials with the potential for multiple new product launches over the next several years. Key pipeline readouts include: Litifilimab in systemic lupus erythematosus (SLE), with Phase 3 data expected in Q4 2026; Litifilimab in cutaneous lupus erythematosus (CLE) with Phase 3 data expected in the first half of 2027; Felzartamab in a kidney disease called antibody-mediated rejection, with Phase 3 data expected in the first half of 2027; Zorevunersen in Dravet syndrome, with Phase 3 readout expected in 2027; BIIB122 in Parkinson's disease, with Phase 2/3 data expected around mid-2027; and BIIB080 (anti-tau) in Alzheimer's disease, with data expected in mid-2027. In addition, the FDA recently approved LEQEMBI IQLIK, a subcutaneous formulation of lecanemab that for the first time allows patients to self-administer their Alzheimer's treatment at home via a once-weekly autoinjector—eliminating the need for biweekly IV infusions and dramatically lowering the treatment burden for patients and caregivers alike. We believe this convenience improvement will expand the patient population and contribute to sales growth. We also note Eli Lilly and Company's TRAILBLAZER-ALZ 3 trial, a large Phase 3 study of donanemab in preclinical Alzheimer's disease expected to read out in late 2027, could, if positive, validate the anti-amyloid class’ potential in the pre-symptomatic setting, with direct read-through to LEQEMBI's long-term commercial opportunity.

We initiated a position in Humana Inc., the largest pure-play Medicare Advantage insurer in the U.S., because we believe the stock offers compelling margin recovery opportunities. Humana is currently operating at near-breakeven Medicare Advantage margins in 2026, the product of a painful but well-understood confluence of factors: a sharp decline in CMS Star Ratings that dramatically reduced quality bonus payments, elevated medical cost trends that were embedded in bids submitted well before the utilization environment deteriorated, and the actuarial pricing lag inherent to the Medicare Advantage business. The result has been a compression of adjusted EPS from $17.14 in 2025 to guidance of at least $9.00 in 2026—a trough that we believe substantially understates the normalized earnings power of the business.

Management has set a target of returning to a sustainable pre-tax Medicare Advantage margin of at least 3% by 2028, progress toward which requires recovering roughly 100 basis points of margin in 2027 through repriced bids, disciplined plan exits in unprofitable counties, tighter care management, and expanded value-based care. Critically, the Star Ratings recovery is tracking ahead of schedule—management reports progress on 11 of 12 key HEDIS quality measures and expects to return to top-quartile Stars performance in the 2028 bonus year, which would restore hundreds of basis points of quality bonus revenue. CMS also finalized a 2.48% average Medicare Advantage rate increase for 2027, well above initial proposals, providing a meaningful tailwind to the recovery. At its 2025 Investor Day, management laid out a framework suggesting EPS could reach $36 to $44 by 2028—implying the stock currently trades at a single-digit multiple of its potential normalized earnings. We believe that represents a highly attractive entry point for what remains a structurally advantaged, pure-play business serving the secular tailwind of an aging American population.

We added to positions in Johnson & Johnson (J&J), Merck & Co., Inc., and Vertex Pharmaceuticals Incorporated. J&J's growth appears poised to accelerate, driven by a robust pipeline of innovative, potential blockbuster medicines. Merck has been proactively managing the anticipated loss of exclusivity for Keytruda through aggressive business development and pipeline investment. We believe the company is well positioned to bridge that gap and sustain growth into the next decade. Vertex, meanwhile, benefits from a durable cystic fibrosis franchise as its foundation, with meaningful growth opportunities ahead in pain, renal disease, and endocrinology.

We sold AstraZeneca PLC for the reasons discussed earlier. We sold Madrigal Pharmaceuticals, Inc. to manage risk ahead of a competitor’s clinical trial readout. We sold Gilead Sciences, Inc. because of concerns about slowing growth of key growth driver Yeztugo. We reduced the positions in BillionToOne, Inc. and RadNet, Inc. due to valuation, though we maintain conviction in both companies.

Life sciences tools companies delivered encouraging results this quarter, with improving outlooks as several tailwinds converged. Biotechnology funding, which began recovering in the second half of 2025, is now translating into tangible orders, and China sales rebounded alongside a newly released five-year pharmaceutical plan targeting at least 20% annual sector growth. Domestically, pharmaceutical and biotechnology companies are actively building U.S. manufacturing capacity following agreements reached with the administration, and life sciences tools companies are beginning to capture those orders—a reshoring trend we view as a multi-year demand driver. Longer term, we see additional opportunity in AI-enabled drug discovery, which we expect will expand the number of new molecules in development. Each of those molecules must be tested, validated, and characterized—a process that generates significant demand for the instruments, consumables, and services that life sciences tools companies provide. Separately, machine learning is increasingly being applied to identify molecular and genomic signatures associated with disease risk and progression, a capability that holds significant promise for earlier disease detection and the advancement of personalized medicine. Two Fund holdings are well positioned to benefit from this trend. Natera, Inc. is leveraging cell-free DNA analysis to detect cancer recurrence and guide treatment decisions, while Guardant Health, Inc. is advancing liquid biopsy technology to enable earlier cancer detection through simple blood tests. We believe this trend will also drive growing demand for the high-throughput instruments, multi-omics platforms, and data-intensive workflows where life sciences tools companies have deep expertise. The broader shift toward autonomous, AI-powered laboratories represents another meaningful growth driver across the sector.

While life sciences tools stocks were a bright spot in the quarter, biopharmaceutical stocks had more modest gains. Several high-profile clinical trial failures weighed on sentiment, notably three in the cardiovascular space—CARDIO-TTRansform, ZEUS, and Lp(a) HORIZON. On a more encouraging note, Moderna and Merck & Co., Inc. announced that their personalized mRNA cancer vaccine, in combination with Keytruda, met the primary endpoint in a pivotal Phase 3 melanoma trial. Biotechnology funding and M&A activity both moderated after a robust first half, though year-to-date levels remain healthy. Rising interest rates continue to pressure early-stage biotechnology valuations, but we expect M&A to remain active as large pharmaceutical companies face the imperative to replace billions in revenue from products approaching patent expiration. According to a Jefferies report dated October 1, the FDA continues to operate within historical norms on drug approvals and rejections, notwithstanding recent leadership changes at the agency.

Outside of life sciences, managed care stocks gave back some of their first-half gains despite moderating cost trends within the Medicare Advantage program as investors awaited the release of Star Ratings in October and the mid-term election results in November. Medical device companies had mixed performance, with some companies like Intuitive Surgical, Inc. noting an impact on procedure volumes following the expiration of Affordable Care Act (ACA) subsidies. Many medical device stocks have de-rated significantly relative to their historical multiples, and we see select valuation-driven opportunities emerging.

The upcoming mid-term elections introduce policy uncertainty for the Health Care sector. A shift in congressional control could alter the legislative path of several key issues, including drug pricing reform, the implementation of Medicaid work requirements, National Institutes of Health funding, and the future of enhanced ACA subsidies. However, we do not expect major changes to health care policy even if Democrats gain a congressional majority, as divided government would make it difficult to enact significant legislation. One area to watch is most-favored-nation drug pricing, which would tie U.S. drug prices to those paid in other developed, high-income countries and could draw support from both parties. We are mindful of these risks, but we believe our focus on competitively advantaged companies with durable growth profiles positions the Fund well across a range of political outcomes.

Overall, we remain confident in the long-term outlook for health care, underpinned by durable secular growth drivers—an aging population, rising rates of chronic disease, and ongoing advances in biotechnology, medical technology, and diagnostics—alongside sustained growth in global health care spending. We continue to apply our disciplined investment process to identify compelling long-term opportunities and build a portfolio of competitively advantaged growth companies led by exceptional management teams. Thank you for your continued confidence in the Fund. I am an investor in the Fund alongside you.

Sincerely,