Review and Outlook

as of 03/31/24

Health Care is off to a good start in 2024, though not as strong as the rest of the equity market due in part to the underperformance of managed care stocks. The Medicare Advantage (MA) business has experienced a perfect storm of elevated medical cost trends and less favorable reimbursement from the Center for Medicare and Medicaid Services (CMS). It is possible that these are short-term, temporary headwinds, but near-term earnings visibility is low, and CMS has made several policy decisions over the past year that are negatively impacting the industry, raising questions about the attractiveness of the MA business.

The flip side of higher medical cost trends is that health care providers and medical device companies have been seeing strong trends in their businesses. Whether this higher utilization is cyclical or structural is unclear. The argument in favor of structural change is that there are more access points for health care services post-COVID, such as ambulatory surgery centers, retail clinics, and urgent care centers, and this increased access has added to overall health care utilization rather than replaced hospital admissions. Life sciences tools companies, which have experienced headwinds post the COVID demand surge, saw signs of stabilization during the quarter. Intra-quarter commentary from life sciences tools companies suggested a bottoming process and an expectation of improving trends in the second half of 2024 and into 2025.

Biotech funding in the first quarter was the highest since the fourth quarter of 2021. In addition, biopharma R&D spending remains at healthy levels. This bodes well for future life sciences customer demand. In biopharma, we remain bullish on the market opportunity for new diabetes and obesity medicines as well as select companies developing innovative therapies for severe autoimmune diseases, rare genetic diseases, and cancer, among other diseases.

Against this backdrop, Baron Health Care Fund increased. Holdings within the pharmaceuticals, health care equipment, and life sciences tools & services sub-industries contributed the most. Managed health care, health care supplies, and health care technology investments detracted. With top contributor Eli Lilly and Company and second largest contributor Merck & Co., Inc. within the sub-industry, pharmaceuticals had a strong quarter. Third largest contributor Intuitive Surgical, Inc. led gains within health care equipment. Contract research organization ICON Plc led appreciation within life sciences tools & services. Top detractor UnitedHealth Group Incorporated drove declines within managed health care. Food and animal safety provider Neogen Corp. drove poor performance within health care supplies, while biotech/technology hybrid Schrodinger, Inc. drove depreciation within health care technology.

Overall, our long-term outlook for Health Care remains bullish. Innovation in the sector and the themes in which we have been investing are very much intact. We believe the portfolio holds competitively advantaged growth companies with strong management teams.

Top Contributors/Detractors to Performance

as of 03/31/24


  • Eli Lilly and Company is a global pharmaceutical company primarily focused on therapeutics. Stock performance has been strong, mostly due to consistent financial growth and the constant drumbeat surrounding the GLP-1 obesity and diabetes franchises, with Eli Lilly's Zepbound the number two drug in the space. Narrative growth has most recently been fueled by the positive Phase 3 Select trial results from competitor Novo Nordisk that showed a 20% relative risk reduction in major adverse cardiovascular events for patients on a GLP-1 medication. Supply constraints and insurance coverage for these medications have curtailed adoption; we think these challenges are temporary. We retain conviction in Eli Lilly given its opportunities in Alzheimer's/obesity and continued strong operational execution.
  • Global pharmaceutical company Merck & Co., Inc. contributed on the continued growth of Keytruda, the company’s key asset and the leading immuno-oncology agent used to treat a variety of cancers. The FDA’s late March approval of pulmonary arterial hypertension drug sotatercept, also drove share gains. We retain conviction as Merck has started to transition from prioritizing its Keytruda franchise to building a more diversified business, with a focus on the Gardasil vaccine, pneumococcal vaccine development, and cardiovascular drug development, well in advance of the scheduled expiration of patent protection/exclusivity rights.
  • Intuitive Surgical, Inc. sells the da Vinci surgical robotic system for minimally invasive surgical procedures. The stock rose after the company announced the planned launch of the da Vinci 5, its next-generation, multiport robotic system. The new system has 10,000 times the computing power of its predecessor and features over 150 design upgrades such as force feedback, improved visualization, and productivity enhancements. Intuitive plans to launch the device at a small number of customers in the U.S. before releasing it more broadly. We think the da Vinci 5 will enable Intuitive to continue to generate strong revenue and earnings growth and maintain its competitive edge.


  • UnitedHealth Group Incorporated is a leading health insurance company that operates across four segments: United Healthcare, Optum Health, OptumInsight, and OptumRX. Shares fell alongside other managed care organizations (MCOs) due to patient utilization of Medicare Advantage (MA) that was higher than consensus forecasts, raising concerns that MCOs had mispriced 2024 bids and could suffer margin compression as a result. In addition, the industry is facing headwinds from MA reimbursement cuts and Star Rating changes. While management said higher cost trends are mostly transitory and reflected in its bidding, and 2024 guidance was roughly in line with consensus, investors took a more cautious wait-and-see approach. We believe UnitedHealth should remain a core portfolio holding, as it is a way to play positive demographic, population health, and value-based reimbursement trends. Despite its size, we think the company should be able to grow earnings consistent with its 13% to 16% long-term EPS annual target, the fastest among major MCOs.
  • Zoetis Inc. is a global leader in medicines and vaccines for companion and farm animals, operating in more than 120 countries across eight core species and five major product categories. Shares fell after the company reported mixed fourth quarter results that fell short of high market expectations and issued below-consensus 2024 guidance. While revenue beat Street forecasts primarily on higher sales in the livestock category, EPS missed consensus due to FX headwinds, costs associated with an acquired asset, and investments related to the U.S. launch of canine arthritis drug Librela. Investor concerns about new parasiticide competition and inefficiencies with the Librela ramp also weighed on the share price. Zoetis remains an attractive holding given its consistent above-market growth, diverse portfolio and rich pipeline, new and innovative product flow, and attractive end-markets that have proven resilient in periods of heightened economic uncertainty.
  • Rocket Pharmaceuticals, Inc. specializes in the development of gene therapies for rare genetic diseases outside of oncology. Currently these include Danon disease, Fanconi anemia, lysosomal acid lipase deficiency, and pyruvate kinase deficiency. The first three drug treatments are slated for commercial launch by 2025, which should generate substantial revenue. Shares detracted from performance after the FDA extended the priority review period by three months for the Kresladi gene therapy to treat leukocyte adhesion deficiency, potentially influenced by sluggish competitive gene therapy launches from Bluebird in sickle cell disease and BioMarin in hemophilia B. Given the life-saving nature of Rocket's therapies and the high unmet need for each of these life-ending diseases, we retain conviction in our investment.

Quarterly Attribution Analysis (Institutional Shares)

as of 03/31/24

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 03/31/24

Baron Health Care Fund (Institutional Shares) appreciated 8.92% in the first quarter, performing similarly to the Russell 3000 Health Care Index, which rose 8.52%. Solid stock selection was mostly offset by negative impacts from active sub-industry weights and cash exposure in a rising market.

Investments in health care equipment, pharmaceuticals, and life sciences tools & services added the most value in the period. Stock selection in health care equipment accounted for about 130 basis points of relative gains, driven by outstanding performance from Shockwave Medical, Inc., a medical device company focused on developing and commercializing products intended to transform the way calcified cardiovascular disease is treated. The company is best known for its intravascular lithotripsy technology, which targets severely calcified plaques in the coronary and peripheral arteries with shockwaves, clearing the way for cardiologists before percutaneous coronary intervention. Shockwave’s shares moved sharply higher due to a combination of solid financial results and news that pharmaceutical giant Johnson & Johnson was in talks to acquire the company. We remain shareholders given our belief that Shockwave can grow revenue by more than 20% for at least the next few years. The company is already highly profitable with 20%-plus operating margins and room to expand.

Strength in the sub-industry also came from robotic surgical system leader Intuitive Surgical, Inc. and global medical device manufacturer Boston Scientific Corporation. Intuitive’s stock rose after the company announced the planned launch of a new multi-port robotic system called the da Vinci 5. Boston Scientific’s shares outperformed due to increasing excitement around the emerging field of pulsed field ablation (PFA), where the company is well positioned. Traditionally, physicians have used temperature-based methods (either hot or cold) to disable heart tissue responsible for irregular heartbeats. Temperature-based methods may damage surrounding tissue, however. PFA, in comparison, relies on electricity to damage aberrant tissue, and because different types of tissue have different electrical thresholds, the surrounding tissue can be selectively spared. We remain positive about Boston Scientific because of the company’s differentiated products in electrophysiology and structural heart, double-digit EPS growth profile, proven track record of cost discipline, and consistent annual operating margin expansion.

Within pharmaceuticals, not owning certain underperforming large-cap pharmaceutical stocks (Johnson & Johnson, Pfizer Inc., and Bristol-Myers Squibb Company) was again a tailwind to performance as these companies continue to face concerns about diminished growth prospects and upcoming patent expirations. The Fund also benefited from its sizeable position in global pharmaceutical company Eli Lilly and Company, whose shares continued their strong run due to strong fourth quarter sales of Mounjaro/Zepbound, better-than-anticipated initial guidance for fiscal year 2024, and ongoing enthusiasm surrounding the company’s obesity and diabetes franchises.

Solid stock selection in life sciences tools & services was mainly due to double-digit gains from clinical genetic testing company Natera, Inc. and global contract research organization ICON Plc. Natera’s stock was bolstered by significant momentum in the oncology market, where its personalized blood-based DNA test Signatera is driving strong testing volume growth. The test detects and quantifies how much residual cancer DNA remains in the body after surgery. Signatera helps physicians determine whether chemotherapy is necessary after surgery and monitor for cancer recurrence before the cancer is detectable with standard imaging. We think Natera has a long runway for growth with expanding margins and profitability. ICON’s shares rose in response to management’s optimistic messaging in the face of a firming industry backdrop and accelerating trends, which led investors to believe that the company’s initial guidance for fiscal year 2024 was more conservative than initially believed. The company continues to experience strong demand despite lingering concerns over biotechnology funding levels. Customer preference is shifting toward functional outsourcing services, which should disproportionally benefit ICON as the leader in this market.

Somewhat offsetting the above was adverse stock selection in biotechnology and health care supplies coupled with cash exposure amid favorable market conditions. Weakness in biotechnology was mainly due to disappointing performance from Rocket Pharmaceuticals, Inc. and Immunovant, Inc., whose shares fell double digits in the period. Rocket specializes in the development of gene therapies for rare genetic diseases outside of oncology. Currently these include Danon disease, Fanconi’s anemia, LAD-I, and Pyruvate kinase disorder. The first three drug treatments should all commercially launch by 2025, generating substantial potential revenue for the company. In the near term, Rocket’s shares were pressured by a three-month FDA delay to their initial commercial asset in LAD-1 and the added overhang of slow gene therapy launches from bluebird bio in sickle cell disease and BioMarin in hemophilia B. Given the life-saving nature of Rocket's therapies and the high unmet need for treatments and cures for each of these diseases, we retain conviction in our investment. Immunovant is focused on autoimmune disorders targeting the FcRn mechanism of action. A host of concerns weighed on Immunovant’s stock price, the most critical of which was competitor argenx SE's failure in pemphigus vulgaris, which has raised questions about the addressable opportunity for the FcRn class. Overall, we continue to believe FcRn will command billions in revenue and that Immunovant has one of the two competitive offerings in the space. We are most optimistic about Immunovant's development plans in Graves disease, a large commercial unmet need in which they currently have no competition. Xenon Pharmaceuticals Inc., Legend Biotech Corporation, argenx, and Vertex Pharmaceuticals Incorporated also underperformed in the period, overshadowing excellent performance from Viking Therapeutics, Inc., whose shares nearly quadrupled after the company’s experimental weight-loss drug showed impressive weight loss and good tolerability in a Phase 2 clinical trial.  

Performance in health care supplies was hindered by Neogen Corp., a leading provider of food and animal safety products. Neogen’s shares pulled back after management lowered guidance for fiscal year 2024. While end-market challenges appear to be bottoming, this improvement is happening at a slower pace than the company had initially forecasted, prompting the guidance reduction. Despite likely near-term volatility related to macroeconomic uncertainty and the integration with a unit of 3M, we believe Neogen is a good company with solid industry tailwinds and is poised for success once the merger integration process is completed.

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.