Baron Health Care Fund: Latest Insights and Commentary

U.S. equities delivered a steady finish to an otherwise turbulent year in the fourth quarter of 2025, with moderate gains across most indexes amid easing economic pressures and holiday-season stability. Multiple record highs were reached during the quarter, with the S&P 500 Index and Dow Jones Industrial Average peaking on December 24, the NASDAQ Composite reaching several all-time highs earlier in the quarter. Volatility spikes in mid-October and mid-November proved short-lived, and the CBOE Volatility Index reached a 2025 low by late December, supported by resilient economic data.

Fourth-quarter gains were underpinned by moderating tariff impacts, robust corporate earnings, and continued monetary easing. Following a 25-basis-point rate cut in September, the Federal Reserve lowered rates twice more during the quarter, with additional 25-basis-point cuts in October and December. While a prolonged government shutdown introduced some uncertainty, resilient labor market conditions and the absence of major inflation spikes helped support the rally.

Sector performance was broadly positive in the fourth quarter, with health care leading and outperforming the market, driven by strength in biotechnology and pharmaceuticals. We believe health care carries positive momentum into 2026 and remain constructive, given robust innovation across the sector. Favorable secular growth drivers—including an aging population, rising prevalence of chronic disease, advances in biotechnology, medical technology, and diagnostics, and increased health care spending—support our outlook. We continue to focus on identifying attractive long-term investment opportunities and building a portfolio of competitively advantaged growth companies with strong management teams.

CONTRIBUTORS

• Eli Lilly and Company is a global pharmaceutical company currently best known for its GLP-1 treatments for diabetes and obesity. Shares rose during the quarter as Zepbound’s obesity launch continued to gain strong traction. In addition, investors welcomed the announcement of an agreement with the Trump administration that expands Medicare and Medicaid coverage for Lilly’s obesity drugs, offers lower pricing through Medicaid, and supports continued U.S. drug manufacturing investment. In exchange, Lilly was excluded from any near-term “Most Favored Nations” drug pricing programs or pharmaceutical sector tariffs, improving regulatory certainty. Long term, we view Lilly’s Mounjaro and Zepbound GLP-1/GIP therapies, along with orforglipron, its oral GLP-1, as transformational for diabetic and non-diabetic obese patients, and we expect this drug class to become the standard of care for both diabetes and obesity, ultimately representing a $150 billion-plus market opportunity. In our view, GLP-1 adoption is still in its early innings, and we believe continued uptake will drive a doubling of Lilly’s total revenues by 2030.

• Biotechnology company Cidara Therapeutics, Inc. is developing CD388, a long-acting antiviral designed as a single-dose therapy to provide season-long protection against all influenza A and B strains. The stock contributed to performance as Cidara advanced CD388 in studies of high-risk and older individuals to prevent infection and reduce complications, with Phase 2 data released in September proving highly compelling. Shares rose further following Merck’s acquisition of the company in a $9.2 billion all-cash deal announced in November 2025, representing a premium of more than 100% over the prior closing price.

• Argenx SE is a biotechnology company best known for developing Vyvgart, the leading FcRn inhibitor for the treatment of autoimmune conditions. Shares rose as Vyvgart sales meaningfully exceeded investor expectations. Our conversations with management and neurologists continue to reinforce Vyvgart’s value as an important treatment option with strong long-term growth potential. The drug continues to launch well in generalized myasthenia gravis, and its launch in chronic inflammatory demyelinating polyneuropathy is off to a strong start. Over time, we expect Vyvgart to demonstrate efficacy across an expanding range of autoantibody-driven autoimmune conditions, and we are excited by argenx’s pipeline progress and upcoming Phase 3 readouts for Vyvgart in myositis and empasiprubart in multifocal motor neuropathy.

DETRACTORS

• Arcellx, Inc. is developing cell therapies for multiple myeloma, including lead candidate anito-cel in partnership with Gilead. Anito-cel is a BCMA-targeted CAR-T therapy similar to Legend Biotech and Johnson & Johnson’s Carvykti, showing comparable efficacy with a more benign neurological side-effect profile. Despite encouraging clinical results for anito-cel, Arcellx detracted from performance following Johnson & Johnson’s announcement of strong data for its Tecvayli (a BCMA bispecific) plus Darzalex combination in previously treated, Darzalex-naïve patients, suggesting increased competition for BCMA CAR-T therapies. Based on our discussions with myeloma specialists, we think BCMA CAR-T will remain the preferred treatment option in the second-line setting for a substantial portion of patients. We continue to believe Arcellx’s drug is meaningfully differentiated on safety and expect shares to appreciate ahead of a potential 2026 launch.

• Doximity, Inc. is a leading digital platform and professional network for U.S. health care professionals. The stock detracted from performance as the company issued disappointing guidance for the next two quarters. Client discussions indicated uncertainty around how recent policy changes may affect annual budgets, prompting management to take a more measured approach to revenue yet to be booked. Given the limited visibility and increased competition from emerging peers, we exited the position. 

• Encompass Health Corporation is a national leader in post-acute health care services and the largest owner and operator of inpatient rehabilitation facilities (IRFs) in the U.S. Shares declined following disappointing third-quarter same-store discharges, which we attribute to difficult comparisons and the timing of new hospital openings. We believe this was an anomaly and expect trends to normalize with bed additions in the fourth quarter and into 2026. Notably, EBITDA increased 11% on relatively in-line revenue, reflecting strong cost control, with labor efficiency standing out. Results beat Street expectations, and management raised 2025 guidance. Given sustained demand for rehabilitation services, management increased its new-bed growth outlook to approximately 4% annually—adding more than 550 beds in 2026 and roughly 500 in 2027—and expressed confidence in achieving total volume growth of 6% to 8%. We remain constructive on Encompass Health given its positive fundamentals, driven by demographic tailwinds, a strong market position, expanding hospital joint-venture opportunities, and robust cash flow generation.