Baron Health Care Fund: Latest Insights and Commentary

U.S. stocks were volatile during the first quarter of 2025 as the shock of Trump’s tariff war erased any optimism that the U.S. stock market or economy would continue to flourish under the new administration, replaced by heightened concerns of a possible recession. In this risk-off environment, there was a broad market rotation to defensive sectors such as Health Care. The Russell 3000 Health Care Index increased 3.9%.

Among the gainers within Health Care, managed care stocks generated positive returns due to lack of exposure to tariffs, the expectation that elevated medical cost trends will normalize as the year progresses, and the potential for more favorable rate increases in Medicare and Medicaid. Pharmaceuticals stocks also advanced as they were granted an exemption from tariffs.

Pockets of weakness included biotechnology and life sciences tools & services. The removal of well-regarded division heads at the Food and Drug Administration (FDA) as part of the Trump administration’s planned cuts of 3,500 employees at the agency sparked a selloff of small biotechnology stocks that rely on timely review and approval of pipeline assets. At this time, it is too early to tell how the installation of new FDA leaders will play out. The industry is also facing headwinds from large pharmaceuticals’ turning to China to acquire or license drugs at lower prices instead of acquiring U.S.-based companies.

The life sciences tools & services sector was hit by a policy change at the National Institutes for Health (NIH) that threatens to reduce funding for universities. A lawsuit challenging the policy change has been filed, although, in the meantime, funding delays and grant cancellations are pressuring spending. Longer term, we think investment in basic research will continue and the funding environment will improve.

Despite near-term policy uncertainty, we think fundamentals are stabilizing, and our long-term outlook for Health Care remains bullish. Innovation in the sector is robust. Advances in science and technology are leading to new ways to diagnose, monitor, and treat diseases in more cost-effective ways. Favorable demographic trends should drive increased demand for quality health care. We continue to follow our process for identifying investment opportunities and creating a portfolio of competitively advantaged growth companies with strong management teams.

CONTRIBUTORS

• Boston Scientific Corporation is a global manufacturer of medical devices used in a broad range of interventional medical specialties. Shares contributed to performance. End markets are growing at an attractive 9%, with the company positioned well with its differentiated products in electrophysiology and structural heart. In particular, there has been increasing excitement around the emerging field of pulsed field ablation (PFA). Traditionally, doctors have used temperature-based methods (either hot or cold) to disable heart tissue responsible for irregular heartbeats; however, these methods may damage surrounding tissue. In comparison, PFA relies on electricity to damage aberrant tissue, and because different types of tissue have different electrical thresholds, the surrounding tissue can be selectively spared. Coupled with cost discipline and more than 50 basis points of annual operating margin expansion, we believe its double-digit EPS growth profile makes Boston Scientific a compelling name within the large-cap medical device universe.
• Vertex Pharmaceuticals Incorporated is a leading biotechnology company with a cystic fibrosis franchise and a pipeline of drugs for other conditions. Shares increased on a recovery in investor sentiment after disappointing data from Journvax in lumbar spinal radiculopathy in December. We remain bullish on Vertex's cystic fibrosis business and its evolving pipeline, including Journvax, a non-opioid NaV inhibitor currently in launch for the treatment of acute pain. Although Vertex needs to finalize utilization management criteria with payers, we see a high level of unmet need and large potential market. Vertex's broader pipeline for pain treatment includes several additional non-opioid NaV inhibitor assets. We are also encouraged by its pipeline in kidney disease, including inaxaplin for APOL1-mediated kidney disease and povetacicept for IgA nephropathy.
• UnitedHealth Group Incorporated is a diversified health and well-being company with $450 billion in annual revenue that operates across four segments: UnitedHealthcare, Optum, OptumInsight, and OptumRX. Shares ended the quarter in positive territory as multiple 2024 headwinds began to subside and investors anticipated the start of a more positive rate cycle. After several years of rates that did not match cost trends, the preliminary 2026 Medicare Advantage rate was better than expected; historically, final rates are incrementally higher. The company is well positioned to expand enrollment as it competes against plans that aggressively mispriced in 2024, forcing them to scale back benefits to restore margins. The growing percentage of earnings from higher margin/unregulated Optum and the maturation of Medicare Advantage cohorts should help earnings in 2025. UnitedHealth's insulation from potential tariff impacts also proved attractive to investors. We remain shareholders.

 

DETRACTORS

• Arcellx, Inc. is developing cell therapies for multiple myeloma, including lead drug anito-cel in partnership with Gilead. Shares detracted from performance. The stock had run up as investors anticipated positive news ahead of results released in early December from a pivotal iMMagine-1 trial. Despite encouraging data showing that anito-cel is as efficacious as Legend/J&J's CARVYKTI with fewer side effects, shares then fell on fears of any new safety signals as Arcellx conducts additional trials. We think anito-cel is meaningfully differentiated on safety, and new data readouts will support this conclusion. We expect a mid-year update on trial results, which could be the basis for potential approval and launch in H2 2026.
• Glaukos Corporation develops and sells interventional glaucoma treatments, including iDose, a minimally invasive drug-delivery device launched in 2024. An iDose is implanted as a five-minute procedure and delivers highly concentrated prostaglandin inside the eye effective for up to three years. Shares declined on quarterly iDose results that missed elevated investor expectations. Although feedback has been positive, doctors have been hesitant to use iDose until they are confident they will receive reimbursement for this expensive device. Medicare coverage has started to solidify in some regions, and we think coverage across the board is a matter of when, not if. We believe uptake will accelerate over the coming quarters as the reimbursement process becomes more streamlined. Glaucoma is a large market that is ripe for new standalone interventions, and we think iDose can be 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 due to investor rotation out of high growth companies. In addition, concerns emerged about the potential impact of tariffs on Intuitive's earnings because Intuitive manufactures instruments in Mexico. If the company can get a health care exception to exempt it from tariffs, we think there are steps it could take to minimize the impact. In any event, we do not think tariffs alter the long-term investment thesis and continue to have a positive long-term view of Intuitive's opportunity to expand adoption of its robotic systems.