Review and Outlook

as of 09/30/23

One of the biggest growth categories in health care today is the use of GLP-1 medicines to treat type 2 diabetes and obesity. Although GLP-1s have been used to treat diabetes for many years, the newest generation (Ozempic, Wegovy, Mounjaro) are more effective and can also help people lose 15% or more of their body weight. The August news of Novo Nordisk’s SELECT trial results showed that these newer GLP-1s also benefit cardiovascular health. This news sent shockwaves through the market as investors digested the potential impact of GLP-1s on health care companies, food and beverage manufacturers, restaurants, retailers, and even tobacco and gaming companies.

Elsewhere within the sector, multiple headwinds weighed on performance. Managed care companies continued to grapple with heightened political and regulatory scrutiny of the Medicare Advantage program and the pharmacy benefit management industry, less favorable Medicare Advantage rates for 2024, and an uptick in medical cost trends. The challenging funding environment for biotech continued. Life sciences tools stocks were impacted by a pullback in spending by pharmaceutical customers, less biotech funding, a slowdown in China, and inventory destocking.

The Center for Medicare and Medicaid Services released the list of the first 10 drugs to be subject to price negotiation under the Inflation Reduction Act. The list did not surprise investors, and many of the drugs will be close to patent expiration by the time they are subject to negotiation. We are tracking litigation challenging the program’s constitutionality and monitoring whether and how it will impact biopharmaceutical R&D spend.

Against this backdrop, Baron Health Care Fund declined. Holdings within the pharmaceuticals, managed health care, and biotechnology sub-industries contributed the most. Investments within the health care equipment, life sciences tools & services, and health care supplies sub-industries detracted the most. Top contributor Eli Lilly and Company led gains within pharmaceuticals. Third largest contributor UnitedHealth Group Incorporated drove positive returns within managed health care. Appreciation within biotechnology was led by second largest contributor argenx SE. Health care equipment had a weak quarter, with top detractor Inspire Medical Systems, Inc. and second largest detractor DexCom, Inc. both within the sub-industry. Third largest detractor Exact Sciences Corporation led declines within life sciences tools & services. Both positions within health care supplies lost ground.

Despite a multitude of near-term headwinds, our long-term outlook for Health Care remains bullish. Innovation in the sector and the themes in which we have been investing are intact. We believe the portfolio includes competitively advantaged growth companies with pricing power, strong management, and excellent balance sheets.

Top Contributors/Detractors to Performance

as of 09/30/23


  • Eli Lilly and Company is a global pharmaceutical company primarily focused on therapeutics. Stock performance was strong mostly due to consistent financial growth and the constant drumbeat surrounding the obesity and diabetes franchises, which represent, at a minimum, $10s of billions in revenue. Most recently, the narrative has been fueled by positive Phase 3 Select trial results from competitor Novo Nordisk showing that patients on the obesity medication semaglutide had a 20% relative risk reduction in major adverse cardiovascular events. The current rate limiter has been the manufacturer's capacity to product drug and insurance adoption for these medications that make this market dynamic. We retain conviction given Eli Lilly's Alzheimer's/obesity opportunities and continued strong operational execution.
  • Argenx SE is a biotechnology company focused on autoimmune disorders. Shares increased in the quarter given a positive chronic immune demyelinating polyneuropathy (CIDP) Phase 3 trial result. CIDP is an important commercial market representing billions of dollars in potential sales, and investors viewed this dataset as a high profile catalyst. Overall, the market expects the strong Vyvgart launch, with early sales tripling consensus expectations and global approvals coming earlier than guided, to continue to grow revenue. We expect 2023/2024 to have many catalysts, including readouts in pemphigus vulgaris, immune thrombocytic purpura, bullous pemphigoid, myositis, and argenx's subcutaneous formulation launch. We think 2023 will be another year of solid performance.
  • UnitedHealth Group Incorporated is a diversified health and well-being company with $200 billion in revenue that operates across four segments, United Healthcare, Optum Health, OptumInsight, and OptumRX, serving 134 million individuals in all 50 states and more than 125 countries. Shares increased on a second quarter upside surprise, including an EPS beat and medical loss ratio of 82.3%, 30 basis points better than investors had feared after management's warning of higher Medicare Advantage utilization. Investors were also reassured by management confidence that it had priced to trend, which it backed up by raising the low end of 2023 guidance. We remain positive on this market-leading managed care company with revenue twice that of its nearer competitor. The company continues to gain Medicare Advantage share given attractive and stable benefits and could achieve greater profitability as medical management is deployed across newer, higher acuity lives. We believe UnitedHealth has a broad number of levers at its command and can sustainably deliver 13% to 16% annual long-term earnings growth.


  • Inspire Medical Systems, Inc. offers a treatment option called hypoglossal nerve stimulation for patients with moderate-to-severe obstructive sleep apnea who are unable to use or get benefit from continuous positive airway pressure. The stock declined after Novo Nordisk released Select trial results showing that obesity medicine Wegovy reduced the risk of major cardiovascular events by 20% in overweight adults aged 45 or older with cardiovascular disease and no prior history of diabetes. The results have led to investor concerns that Wegovy and medications in the same class (such as Ozempic, Mounjaro, and other new drugs in development) may be broadly reimbursed by payors and widely adopted in the future. While this has raised questions about the long-term impact of GLP-1 drugs on the size of Inspire Medical’s addressable market and the terminal value of the stock as weight loss can significantly reduce the severity of sleep apnea, the net impact remains unclear as some severely obese patients who would otherwise be ineligible for the company’s therapy could become candidates for treatment after losing weight. We retain conviction in Inspire Medical's growth outlook.
  • DexCom, Inc. is a leading provider of continuous glucose monitoring technology (CGM) for people with diabetes. The stock declined after Novo Nordisk released Select trial results showing that obesity medicine Wegovy reduced the risk of major cardiovascular events by 20% in overweight adults aged 45 or older with cardiovascular disease and no prior history of diabetes. The trial results have led to investor concerns that Wegovy and medications in the same class (Ozempic, Mounjaro, and other drugs in development) may be broadly reimbursed by payors and widely adopted. This has raised questions about the long-term impact of GLP-1 drugs on the size of DexCom's addressable market and the terminal value of the stock as these new medications could slow the progression of diabetes for those who are pre-diabetic and reduce the need for insulin for those with type 2 diabetes. We think GLP-1 drugs will be used in conjunction with CGM technology, which will remain a critical diabetes management tool. We continue to believe DexCom has an attractive long-term growth runway ahead.
  • Exact Sciences Corporation is a cancer diagnostics company whose flagship product is Cologuard, a stool-based screening test for colon cancer. After rallying in the first half of the year as investor fears of competition from liquid biopsy dissipated, shares gave back some gains in the quarter. The company reported good quarterly results, but this was not enough to satisfy lofty expectations. The potential for more liquid biopsy data (such as from Freenome) served as an overhang as well. However, the screening market for colon cancer is vast, and management continues to build optionality by moving several liquid biopsy programs of their own through the pipeline.

Quarterly Attribution Analysis (Institutional Shares)

as of 09/30/23

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.

as of 09/30/23

Baron Health Care Fund (Institutional Shares) was down 6.05% in the third quarter, trailing the Russell 3000 Health Care Index by 217 basis points due to a combination of stock selection and active sub-industry weights.

Investments in health care equipment, life sciences tools & services, biotechnology, and health care supplies accounted for most of the underperformance in the period. Adverse stock selection in health care equipment was linked to concerns about growing adoption of Wegovy, Ozempic, Mounjaro, and other GLP-1 drugs and how it will impact the growth prospects of certain Fund holdings, namely sleep apnea treatment leader Inspire Medical Systems, Inc. and diabetes device companies DexCom, Inc. and Insulet Corporation. Novo Nordisk released SELECT trial results in early August showing that Wegovy reduced major adverse cardiovascular events by 20% in overweight adults aged 45 or older with cardiovascular disease and no prior history of diabetes. With the study’s results supporting broader insurance coverage of GLP-1 drugs, some investors believe increased GLP-1 adoption will potentially shrink the size of Inspire Medical's addressable market and the terminal value of the stock because weight loss could reduce the severity of sleep apnea. Similarly, there are investors who think increased use of GLP-1 drugs may slow the progression of diabetes and lead to less insulin and continuous glucose monitoring use. We retain conviction and offer additional detail on these holdings in our quarterly letter.

Weakness in life sciences tools & services was driven by double-digit declines from cancer diagnostics company Exact Sciences Corporation and precision instruments provider Mettler-Toledo International Inc. After rallying in the first half of the year as competition-related concerns from liquid biopsy dissipated, Exact Sciences’ shares pulled back. The company reported solid quarterly results that fell short of lofty expectations. There is also more potential liquid biopsy data coming (such as from privately held Freenome), which we believe also served as an overhang. The screening market for colon cancer is vast, however, and management continues to build optionality by moving several liquid biopsy programs of their own through the pipeline. Mettler’s stock declined in response to disappointing second quarter financial results and lowered 2023 guidance. Management noted market conditions in China have worsened considerably, particularly among biopharmaceutical customers who are delaying investment decisions as they wait for government stimulus. Management also stated that global manufacturing PMIs have continued to trend lower. We think these headwinds are temporary and continue to believe Mettler has a solid long-term outlook. Another material detractor in the sub-industry was Bio-Techne Corporation, a leading developer and manufacturer of reagents, instruments, and services for the life sciences research, diagnostics, and bioprocessing markets. Bio-Techne’s shares were pressured by various headwinds in the life sciences tools end market including reduced biotechnology funding, continued inventory destocking by customers, and a slowdown in China.

The relative shortfall in biotechnology mostly had to do with owning a few larger cap names, particularly AbbVie Inc., Amgen Inc., and Regeneron Pharmaceuticals, Inc., whose share prices were up double digits for the quarter as investors flocked to larger, safer, cash flow positive biotechnology companies as long-term interest rates rose. These losses were somewhat blunted by gains from the Fund’s sizeable positions in argenx SE and Rocket Pharmaceuticals, Inc. The Fund’s higher exposure to heath care supplies via positions in The Cooper Companies, Inc. and Neogen Corp. also proved costly as the sub-industry was among the worst performers in the index during the quarter.

Partially offsetting the above was favorable stock selection in pharmaceuticals and health care distributors along with cash exposure in a declining market. Strength in pharmaceuticals and health care distributors was driven by gains from Eli Lilly and Company and McKesson Corporation, respectively. Global pharmaceutical company Lilly was the largest contributor due to strong second quarter sales of Mounjaro and ongoing enthusiasm surrounding the company’s obesity and diabetes franchises. McKesson is a leading distributor of pharmaceuticals and medical supplies and also provides prescription technology solutions that connect pharmacies, providers, payers, and biopharmaceutical customers. McKesson’s stock performed well due to strong financial results in the company’s pharmaceutical distribution and prescription technology solutions businesses, driven in part by higher volumes of GLP-1 medicines and prior authorization technology services related to GLP-1 medicines. 

Investors should consider the investment objectives, risks, and charges and expenses of the investment carefully before investing. The prospectus and summary prospectuses contain this and other information about the Funds. You may obtain them from the Funds’ distributor, Baron Capital, Inc., by calling 1-800-99BARON or visiting Please read them carefully before investing.

The performance data quoted represents past performance. Past performance is no guarantee of future results. The investment return and principal value of an investment will fluctuate; an investor's shares, when redeemed, may be worth more or less than their original cost. The Fund’s transfer agency expenses may be reduced by expense offsets from an unaffiliated transfer agent, without which performance would have been lower. Current performance may be lower or higher than the performance data quoted.

Risks:All investments are subject to risk and may lose value.

The discussion of market trends is not intended as advice to any person regarding the advisability of investing in any particular security. The views expressed on this page reflect those of the respective writer. Some of our comments are based on management expectations and are considered “forward-looking statements.” Actual future results, however, may prove to be different from our expectations. Our views are a reflection of our best judgment at the time and are subject to change at any time based on market and other conditions and Baron has no obligation to update them

Portfolio holdings are subject to change. Current and future portfolio holdings are subject to risk.

The index performance is not fund performance; one cannot invest directly into an index.