Baron Health Care Fund: Latest Insights and Commentary

After selling off in March due to the U.S.-Iran conflict and disruptions in the Strait of Hormuz, U.S. equities rallied to new record highs during the second quarter, with most of the gains coming in April and May. Given narrow market breadth and concentrated position sizes in recent years, the gap in performance between the market cap-weighted S&P 500 Index and the equal-weighted version has reached extremes not seen since the dotcom bubble era (based on rolling three-year results). 

Although the Health Care sector has not outperformed the broader market, industry trends continue to improve. We believe the sector is positioned for sustained improvement as M&A activity continues. Large pharmaceutical companies need to replace billions of dollars in revenue from products expected to lose patent protection in the coming years. In addition, following personnel changes at the agency, the FDA appears to be taking a more industry-friendly stance. 

The State Street® SPDR® S&P® Biotech ETF (XBI) gained 24% in the second quarter, bringing its year-to-date return to nearly 30%. Biotechnology funding increased approximately 130% year over year, and 2026 is on track to be the strongest funding year since 2021, according to Wells Fargo’s July 1, 2026, report, Biopharma Funding Tracker: June 2026. 

Looking ahead, we remain focused on well-managed companies with durable competitive advantages and attractive growth prospects. We are particularly interested in businesses that address challenges in health care by reducing costs, increasing efficiency, or improving patient outcomes. 

CONTRIBUTORS

• Pharmaceutical company Eli Lilly and Company, currently best known for its diabetes and obesity GLP-1 therapies, contributed to performance as commercial execution and pipeline data reinforced investor confidence in the company's long-term leadership. All three major pharmacy benefit managers now cover Lilly's obesity portfolio, including its new daily oral GLP-1, Foundayo. This marks a reversal from last summer, when CVS Caremark provided preferred coverage for Novo Nordisk's Wegovy and raised concerns about a potential price war. The shift suggests that patients and physicians prefer Zepbound and are driving demand. Clinical trial data further reinforces our view that Lilly has one of the strongest next-generation metabolic pipelines in the industry. Phase 3 data showed retatrutide delivered weight loss in the high-20% range at higher doses and nearly 20% at lower doses, while maintaining excellent tolerability. We are also excited about eloralintide, where Phase 2 data showed Zepbound-like efficacy and tolerability, with combination data expected soon. Long term, we continue to view Lilly's portfolio as the gold standard in a category that we believe can exceed $150 billion.
• BillionToOne, Inc. is a diagnostics company that is disrupting the market with more accurate prenatal and oncology genetic tests. Today, the vast majority of the company's revenue is generated by UNITY, a unique prenatal test that can screen for recessive single-gene disorders from a maternal blood draw and identify fetal antigen status across both red blood cell and platelet antigens. Shares rose in the second quarter after the company reported robust first-quarter results (revenue up 84% year over year with 22% operating margins) and announced a meaningful expansion of commercial insurance coverage for its UNITY test and new UNITY Confirm product, which can replace amniocentesis or chorionic villus sampling to confirm a genetic diagnosis following a high-risk UNITY screening result. We continue to believe that BillionToOne's differentiated "quantitative counting template" technology enables more sensitive genetic testing. The company is making early headway in oncology with its SELECT therapy selection and RESPONSE therapy monitoring tests, which we think will be important future growth drivers.
• Biotechnology company argenx SE is best known for developing Vyvgart, the leading FcRn inhibitor for the treatment of autoimmune conditions. Shares rose after a period of prior weakness, which may have been partly driven by the retirement of longtime Chief Executive Officer Tim Van Hauwermeiren in early 2026. We view the transition to Karen Massey, who previously led the company's operations, as largely non-disruptive and believe she is well positioned to continue executing the company's strategy. Shares also benefited from optimism ahead of several clinical readouts, including data from studies of Vyvgart in immune-mediated necrotizing myopathy and dermatomyositis, expected in the third quarter of 2026, as well as empasibrupart in multifocal motor neuropathy, expected in the fourth quarter of 2026. Vyvgart continues to launch well in generalized myasthenia gravis and chronic inflammatory demyelinating polyneuropathy, where we believe it has established itself as an important treatment option. We expect Vyvgart to demonstrate efficacy across an expanding range of autoantibody-driven autoimmune conditions over time and remain encouraged by argenx's pipeline progress.

DETRACTORS

• Insmed Incorporated is a biotechnology company with three lead pulmonology assets that we believe can collectively generate more than $8 billion in peak sales. We are particularly excited about Brinsupri for non-cystic fibrosis bronchiectasis, which we view as a $5 billion-plus opportunity. Despite what we believe has been a strong start to the launch, shares fell after first-quarter Brinsupri sales missed expectations as investors focused on early signs of higher treatment discontinuations. Insmed's exit from the Nasdaq-100 also created additional technical selling pressure. Long term, we continue to view Brinsupri as an important treatment option for the 500,000-plus bronchiectasis patients in the U.S. We remain bullish on the portfolio's long-term fundamentals, including the opportunity for treprostinil palmitil inhalation powder (TPIP), which is being studied for pulmonary arterial hypertension and pulmonary hypertension associated with interstitial lung disease. Compared to existing inhaled prostanoids that require four daily treatments, once-daily TPIP is more convenient and can be dosed at significantly higher levels, potentially resulting in meaningfully better efficacy.
• Intuitive Surgical, Inc. sells robotic-assisted surgical systems. Shares declined after the company's first-quarter U.S. system placements came in below investor expectations. Medical device stocks also broadly underperformed the market amid concerns that health care utilization trends could decelerate following the expiration of Affordable Care Act subsidies. Concerns were further compounded by the potential impact of Medicaid work requirements expected to take effect in 2027. Despite these headwinds, we believe Intuitive can continue to grow revenue at a mid-teens rate for many years and remain positive on the company's long-term growth outlook.
• Biotechnology company Gilead Sciences, Inc. is best known for developing and commercializing therapies that treat and prevent HIV. Following a strong first-quarter advance driven by continued enthusiasm surrounding the launch of Yeztugo for HIV prevention, the stock detracted from performance in the second quarter. Shares pulled back after management issued conservative 2026 guidance in February, including expectations for approximately $800 million of Yeztugo sales, below investor expectations. Despite the more cautious outlook, we remain confident in Yeztugo's long-term opportunity. Unlike Descovy, a daily oral preventive treatment, Yeztugo is a twice-yearly injectable therapy that has the potential to significantly improve patient compliance. Looking ahead, we continue to view Gilead as a leader in HIV treatment and prevention, with Yeztugo representing an important new preventive option and a promising next-generation pipeline that includes a weekly oral lenacapavir and islatravir combination being developed with Merck, as well as a wholly-owned weekly regimen incorporating a novel integrase inhibitor designed to offer a higher barrier to resistance.

When reviewing performance attribution on our portfolio, please be aware that we construct the portfolio from the bottom up, one stock at a time. Each stock is included in the portfolio if it meets our rigorous investment criteria. To help manage risk, we are aware of our sector and security weights, but we do not include a holding to achieve a target sector allocation or to approximate an index. Our exposure to any given sector is purely a result of our stock selection process.

Baron Health Care Fund (the Fund) increased 11.99% (Institutional Shares) in the second quarter, beating the Russell 3000 Health Care Index (the Index), which rose 10.48%. The Fund outperformed by 151 basis points as solid stock selection across a handful of sub-industries offset a material headwind from being underexposed to UnitedHealth Group Incorporated and other strong-performing managed health care stocks.

Solid stock selection in pharmaceuticals, biotechnology, health care equipment, and life sciences tools & services drove outperformance in the period. Performance in pharmaceuticals was bolstered by Veradermics, Incorporated, a dermatologist-founded, late clinical-stage biopharmaceutical company developing VDPHL01, an extended-release oral minoxidil tablet for pattern hair loss. In April, the company reported solid Phase 3 data in male pattern hair loss. The drug demonstrated robust hair growth with up to 63% of male patients reporting improved hair coverage compared to just 13% on placebo. We await data from a second Phase 3 study of VDPHL01 in male pattern hair loss and the first clinical data from a Phase 2 study of VDPHL01 in female pattern hair loss patients, both expected in the second half of 2026. If VDPHL01 is U.S. Food and Drug Administration (FDA) approved, we think it will be uniquely positioned as the first FDA-approved oral treatment in several decades for a condition affecting 80 million Americans. Stock selection in pharmaceuticals was enhanced by not having exposure to larger-cap companies Pfizer, Inc., Zoetis, Inc., and Bristol-Myers Squibb Company, whose share prices declined due to company-specific issues. 

Favorable stock selection in biotechnology, mostly attributable to acquisition target Apogee Therapeutics, Inc., was partly offset by higher exposure to this underperforming sub-industry.  In June, Apogee announced an agreement to be acquired by AbbVie Inc. for $135.11 per share, representing a 49.5% premium over the prior day’s closing stock price. 

Within health care equipment, lower exposure to this lagging sub-industry and solid performance from Edwards Lifesciences Corporation was a material tailwind in the period. Shares of Edwards, a medical technology company specializing in structural heart disease therapies, rose due to solid first quarter results and an updated Medicare coverage decision for transcatheter aortic valve replacement (TAVR), which has the potential to increase procedure volumes. We retain conviction as Edwards' lead in replacement therapies for mitral and tricuspid valves, which combined with a total addressable market that could approach the scale of core TAVR provides a durable and differentiated growth runway that competitors are years away from replicating.

Strength in life sciences tools & services was widespread, led by BillionToOne, Inc. and Guardant Health, Inc. BillionToOne is a diagnostics company that is disrupting the market with more accurate prenatal and oncology genetic tests. Today, the vast majority of the company's revenue is generated by UNITY, a unique prenatal test that can screen for recessive single-gene disorders from a maternal blood draw and identify fetal antigen status across both red blood cell and platelet antigens. Shares rose in the second quarter after the company reported robust first-quarter results (revenue up 84% year over year with 22% operating margins) and announced a meaningful expansion of commercial insurance coverage for its UNITY test and new UNITY Confirm product, which can replace amniocentesis or chorionic villus sampling to confirm a genetic diagnosis following a high-risk UNITY screening result. We continue to believe that BillionToOne's differentiated "quantitative counting template" technology enables more sensitive genetic testing. The company is making early headway in oncology with its SELECT therapy selection and RESPONSE therapy monitoring tests, which we think will be important future growth drivers.

Guardant is a specialty diagnostics company best known for its blood-based liquid biopsy tests used in cancer therapy selection, monitoring, and screening. Shares increased following strong first-quarter results, with revenue growing 48% year over year due to continued adoption of the Guardant360 cancer treatment selection test and accelerating uptake of the Shield colorectal cancer blood test. Guardant360 continues to gain share within the rapidly growing liquid biopsy market, with momentum accelerating following FDA approval of the new Guardant360 Liquid CDx assay, which should qualify for Advanced Diagnostic Laboratory Test status and meaningfully expand average selling prices. Meanwhile, Shield has the potential to drive meaningful upside as adoption continues to beat expectations. Notably, the American Cancer Society recently recommended Shield in its updated colorectal cancer screening guidelines, significantly increasing the potential for expanded commercial insurance coverage. Looking ahead, we see Guardant360, Shield, and Reveal (Guardant's cancer recurrence monitoring test) positioning the company to achieve positive free cash flow over time. 

Somewhat offsetting the above was underexposure to managed health care, which was a 250-plus basis point drag on relative performance. Managed health care stocks rebounded during the quarter, rising 56% in the Index as stabilizing medical costs and favorable government reimbursement rates led to raised full-year guidance from major industry players such as UnitedHealth Group Incorporated, Elevance Health, Inc., and Centene Corporation.