Baron Health Care Fund | Q1 2025

Dear Baron Health Care Fund Shareholder:

In the quarter ended March 31, 2025, Baron Health Care Fund® (the Fund) declined 2.54% (Institutional Shares), compared with the 3.87% gain for the Russell 3000 Health Care Index (the Benchmark) and the 4.72% decline for the Russell 3000 Index (the Index). Since inception (April 30, 2018), the Fund increased 10.00% on an annualized basis compared with the 9.57% gain for the Benchmark and the 12.58% gain for the Index.

The Fund trailed the Benchmark by 641 basis points primarily due to stock selection and, to a lesser extent, active sub-industry weights. Headwinds from style biases also factored into underperformance for the period, as the Fund was hurt by its overexposure to the weak performing Beta factor and underexposure to the better performing Size factor (larger caps).

Disappointing stock selection in biotechnology and health care equipment accounted for about two-thirds of the underperformance in the period. Weakness in biotechnology was broad based, led by declines from Arcellx, Inc. and argenx SE. Arcellx is developing cell therapies for multiple myeloma, including lead drug anito-cel in partnership with Gilead. The company was the Fund’s top detractor on fears of potential new safety signals from additional trials of lead drug anito-cel. These worries overshadowed initial encouraging results for anito-cel showing it being as efficacious as Legend/Johnson & Johnson’s Carvykti drug with fewer side effects. We remain investors and offer additional thoughts below.

Argenx is best known for developing Vyvgart, the leading FcRn inhibitor for the treatment of autoimmune conditions. We believe the stock’s underperformance did not reflect any change in fundamentals and we remain bullish about the company’s long-term prospects. Adverse stock selection in biotechnology was exacerbated by lack of exposure to larger-cap companies AbbVie, Inc. and Amgen Inc., whose share prices were both up approximately 20% in the quarter, detracting 120-plus basis points from relative results (representing nearly half of the overall shortfall in the sub-industry).

Performance in health care equipment was hindered by declines from glaucoma treatment developer Glaukos Corporation and robotic surgical system pioneer Intuitive Surgical, Inc. Glaukos shares declined on quarterly iDose results that missed elevated investor expectations, while Intuitive’s stock fell due to investor rotation out of high growth companies and concerns about the potential impact of tariffs on Intuitive’s earnings given the company manufactures instruments in Mexico. We remain investors and discuss both companies in greater detail below. Lack of exposure to certain strong performing large-cap companies, such as Abbott Laboratories and Medtronic plc, presented additional headwinds to performance in the sub-industry.

Higher exposure to lagging life sciences tools & services stocks and poor stock selection in health care services and managed health care were other material detractors in the period. The Fund’s only position in health care services, diagnostic imaging services provider RadNet, Inc., weighed on performance after reporting below consensus guidance for fiscal year 2025. We view the reasons for the lower guidance as non-recurring and remain excited about the optionality embedded in RadNet’s AI products, which provide enhanced digital image reading and analysis, boosting radiologists’ accuracy and efficiency.

Health Savings Account administrator HealthEquity, Inc. was largely responsible for the stock-specific shortfall in managed health care. The stock fell after the company reported its fiscal fourth quarter earnings. While revenue beat Street estimates, EBITDA and earnings fell short and management lowered guidance due to increased expenses related to fraud activity. Sophisticated criminals broke into customer accounts and stole funds. HealthEquity reimbursed the customer accounts fully and also had extra expenses associated with customer calls related to the fraud and recovery. Management is taking steps to address the issue, including enhanced security measures for its clients, and is pursuing recovery from insurance providers. Outside of this setback, the rest of the business is performing well. HealthEquity is gaining market share and benefiting from higher interest rates on deposits. We also see upside optionality from potential legislation expanding eligibility for health savings accounts.

Minimally offsetting the above was strength in health care distributors attributable to a combination of stock selection and active exposure to this strong performing sub-industry. Recent addition McKesson Corporation, a leading distributor of pharmaceutical/medical supplies and provider of prescription technology solutions that connect pharmacies, providers, payers, and biopharmaceutical customers, led the way in health care distributors. We discuss why we re-established a position in McKesson in the Recent Activity section below.

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.

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/ Johnson & Johnson’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 the second half of 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.

We build the portfolio from the bottom up, one stock at a time, using the Baron investment approach. We do not try to mimic an index, and we expect the Fund to look very different than the Benchmark. We loosely group the portfolio into three categories of stocks: earnings compounders, high-growth companies, and biotechnology companies. We define earnings compounders as companies that we believe can grow revenue at least mid-single digits and compound earnings at double-digit rates over the long term. We define high-growth stocks as companies we expect to generate double-digit or better revenue growth. They may not be profitable today, but we believe they can be highly profitable in the future. We expect the portfolio to have a mix of earnings compounders, high-growth, and biotechnology companies.

We may invest in stocks of any market capitalization and may hold both domestic and international stocks. As of March 31, 2025, we held 35 stocks. This compares with 532 stocks in the Benchmark. International stocks represented 9.9% of the Fund’s net assets. The Fund’s 10 largest holdings represented 64.2% of net assets. Compared with the Benchmark, the Fund was overweight in health care equipment, life sciences tools & services, health care supplies, and managed health care, and underweight in pharmaceuticals and health care services. The market cap range of the investments in the Fund was $2.4 billion to $783 billion with a weighted average market cap of $202 billion. This compared with the Benchmark’s weighted average market cap of $248 billion.

We continue to invest in multiple secular growth themes in Health Care, such as genomics/genetic testing/genetic medicine, innovative medical devices that improve outcomes and/or lower costs, minimally invasive surgery, anti-obesity medications, picks and shovels life sciences tools providers, the shift to lower cost sites of care, and pet health care, among others. To be clear, this list is not exhaustive: we own stocks in the portfolio that do not fit neatly into these themes and there are other themes not mentioned here that are in the portfolio. We evaluate each stock on its own merits.

* Individual weights may not sum to the displayed total due to rounding.

During the quarter, we added six new positions and exited eight positions. Below we discuss some of our top net purchases and sales.

We initiated a position in Waters Corporation, a leading provider of analytical instruments and consumables for high volume, regulated applications, including biopharmaceutical quality control, late-stage drug development, food and environmental safety, chemical analysis and materials testing. Waters has a particularly strong market position in biopharmaceutical quality control where its liquid chromatography instruments are used along with its proprietary column chemistry to efficiently separate contaminants from the drug mixture for analysis. This is coupled with their Empower software, which is a one-stop platform compatible for readout across multiple analyzer types, such as mass spectrometry, UV spectroscopy, and multi-angle light scattering. Empower takes all this information and pipes it to regulators with robust data integrity and audit trail. Currently, around 80% of novel drugs filed with regulators use this software, providing a competitive advantage. Moreover, the company’s products are specified in the regulatory approval process, making them very sticky.

Historically, Waters’ revenue has grown in the mid-single digits annually. Going forward, Waters has several idiosyncratic growth drivers which could boost growth above the historic rate: India generics (driven by a larger number of blockbuster drugs going off patent over the next five years), GLP-1 testing (driven by explosive growth in the anti-obesity drug category over the coming decade), biologics (driven by growth in large molecule testing), and PFAS testing (driven by new regulations banning forever chemicals). In addition, management seeks to capture greater price contributions versus historic rates. On top of this, Waters should benefit from a replacement cycle in its instrument business over the next two to four years. Based on these growth drivers, revenue growth could accelerate to the high single digits to low double digits in the coming years. At a recent Investor Day, management established a goal to achieve 400 basis points of operating margin expansion over the next five years, from the company’s industry leading 31% operating margin in 2024 to 35% in 2030. With its strong free cash flow generation, Waters can redeploy capital into M&A and share repurchases to drive solid double-digit annual earnings per share growth.

We initiated a position in Penumbra, Inc., a leading manufacturer of medical devices that remove blood clots from veins and arteries. Physicians use the company’s devices to treat pulmonary embolism (PE), deep vein thrombosis (DVT), acute limb ischemia, ischemic stroke, coronary disease, and other conditions. Penumbra’s devices, which are called mechanical thrombectomy devices, use computer algorithms to modulate the aspiration power depending on if a clot is detected and to control a separate valve that injects saline to reduce friction between the clot and catheter. This enables a differentiated device profile that maximizes clot removal with speed while decreasing risk of blood loss.

Penumbra serves large and underpenetrated markets. Management estimates the U.S. thrombectomy market opportunity consists of roughly 1.25 million annual procedures, including roughly 200,000 in stroke and over 1 million in PE, DVT, arterial, and coronary. The PE and DVT markets are only 10% penetrated with mechanical thrombectomy devices. Most PE patients currently receive conservative medical management with oral anticoagulation alone. Penumbra is running randomized clinical trials studying mechanical thrombectomy versus anticoagulation for PE patients. If the trials are positive, the market could shift towards greater adoption of mechanical thrombectomy. Meanwhile, Penumbra is gaining market share in PE and DVT. In stroke, the company’s new Thunderbolt device, which incorporates its computer assisted vacuum thrombectomy technology into the stroke market for the first time, could receive FDA approval and launch later this year, providing a potential catalyst for growth.

We reacquired shares of McKesson Corporation, a leading distributor of pharmaceuticals and medical supplies, during the quarter. McKesson’s business mix has been evolving towards a diversified health care services company with leading positions in oncology and biopharmaceutical services. In oncology, McKesson has built a differentiated platform, which includes specialty distribution and pharmacy, practice management; real-world data, evidence, and technology; and clinical trial management and services. Like the strategy in oncology, McKesson is now building a portfolio of services for retina and ophthalmology practices. In biopharmaceutical services, McKesson has connections with most electronic health record systems, over 50,000 pharmacies, approximately 950,000 providers, most pharmacy benefit managers and health plans, and supports a portfolio of biopharmaceutical brands to make medications more accessible and affordable to providers and patients. The business generates substantial free cash flow, and long-term management targets 12% to 14% annual earnings per share growth.

We initiated a position in Masimo Corporation, a medical device company that manufactures and sells a variety of non-invasive patient monitoring technologies. Masimo is the market leader in pulse oximetry, which measures oxygen saturation of arterial blood. The company’s differentiated pulse oximetry technology overcomes the limitations of conventional pulse oximetry by maintaining accuracy in the presence of motion and low perfusion. Masimo SET is the primary pulse oximetry technology used in the top 10 U.S. hospitals. The company has significant intellectual property protection around its technology as well as multi-year customer contracts, creating barriers to entry. The business benefits from a highly recurring revenue model driven by disposable sensors.

With new management in place, the company is exiting its consumer business and focusing its attention on the health care business. Management is guiding to 8% to 11% constant currency revenue growth and 400 basis points of operating margin expansion in 2025. Beyond 2025, we think the health care business can continue to grow in a similar range on an annual basis with room for additional margin expansion.

We added to UnitedHealth Group Incorporated, a leading managed health care company. We think UnitedHealth has several competitive advantages including scale, data, vertical integration with service providers, and leadership in Medicare Advantage and value-based care. We see an attractive business trading at a 10-year low relative valuation and we think fundamentals are likely to improve driven by normalization of medical cost trends and more favorable rates in Medicare and Medicaid.

We reduced positions in Natera, Inc., Intuitive Surgical, Inc., and Vertex Pharmaceuticals Incorporated due to valuation. We reduced Thermo Fisher Scientific Inc. due to concerns about reduced funding for life sciences research in academic and biotechnology markets. We reduced Arcellx, Inc. to manage risk, though we maintain a positive view.

In early April, thousands of employees at the Department of Health and Human Services (HHS) began receiving layoff notices as part of HHS Secretary Robert F. Kennedy, Jr.’s plan to cut approximately 10,000 jobs from the agency, including 3,500 cuts at the Food and Drug Administration (FDA). The removal of well-regarded division heads at the FDA and fears about disruption sparked indiscriminate selling of small biotechnology stocks which depend upon timely review and approval of their pipeline assets. It’s possible that new leaders at the FDA could take a more permissive stance on new drug applications, resulting in faster and more drug approvals, which could be both positive (faster, less costly to bring a drug to market) and negative (lower barriers to entry, potential for unsafe or ineffective drugs to reach the market). At this point, it is too early to know how this will play out. The other investor concern about biotechnology is that large pharma has been turning to China to acquire or license drugs at lower prices instead of acquiring U.S. based companies. In this challenging environment, we are focused on owning a select few commercial-stage (or near commercial-stage) biotechnology companies with visible near-term revenue. Among large-cap pharmaceutical companies, we remain bullish on Eli Lilly and Company, which we think is an industry leader in terms of R&D productivity and is competitively advantaged in the obesity medicine market with its strong pipeline, manufacturing footprint, therapeutic category expertise, and balance sheet. We continue to believe the obesity medicine market opportunity is large and underpenetrated with only about 8 million people taking GLP-1 medicines versus the market opportunity of over 100 million in the U.S. alone.

In January, it appeared as if the long-awaited recovery in the life sciences tools sector had finally arrived, but then events took a turn for the worse. In February, the National Institutes of Health (NIH) adopted a new policy with respect to funding of indirect costs, a policy change that threatens to reduce funding for universities across the nation. A lawsuit challenging the policy change has been filed. If the policy remains in effect, academic laboratories could be forced to cut projects, resulting in less spending on life sciences tools. On the other hand, the NIH is arguing that the total amount of spending won’t decrease, and the new policy will make spending more efficient by re-allocating funds to direct research. In the meantime, funding delays and grant cancellations are pressuring spending. While the companies we own have manageable exposure to academic research markets, a slowdown in biotechnology funding, which hit a three-year low in the first quarter, and tariffs on the life sciences tools companies and their pharmaceutical customers, could be more impactful. These are risks we are monitoring.

Outside of life sciences, we remain bullish on medical device companies Intuitive Surgical, Inc., Boston Scientific Corporation, and Stryker Corporation. Intuitive is the leader in robotic surgical systems and has several moats around its business including technology, patents, regulatory approvals, a large installed base, clinical data, and physicians trained to use its products. Intuitive is in the early innings of a new product cycle with its new DV5 system which has 10,000 times the computing power of its prior generation system, offers force feedback, enhanced 3D imaging, and other benefits, and the system’s capabilities will expand over time. Boston Scientific has multiple growth drivers in its diversified medical device business, including adoption of its Farapulse ablation catheter, which uses a new form of energy to treat irregular heart rhythms like atrial fibrillation. Stryker is gaining share in its hip and knee implants business and has a new product pipeline that will continue to drive industry leading top-line growth.

After two years of significant underperformance, managed care stocks generated positive returns in the quarter, and outperformance continued in April. This is due to lack of exposure to tariffs, the expectation that elevated medical cost trends will normalize as the year progresses, and potential for more favorable rate increases in Medicare and Medicaid. We think managed care companies are entering a period of margin expansion from trough levels and accelerating earnings growth and we are positive about the long-term outlook for UnitedHealth Group Incorporated.

This quarter we are highlighting exciting innovation in the field of organ transplants. The FDA recently authorized two companies, United Therapeutics and eGenesis, to begin clinical trials in which surgeons transplant kidneys from genetically modified pigs into humans. There are more than 500,000 people in the U.S. with end stage kidney disease that rely on dialysis for survival. However, there are only 27,000 kidney transplants performed each year due to a lack of donor organs. Scientists have tried xenotransplantation (or transplanting organs from non-human animals) in the past, but the patient’s immune system would end up rejecting the foreign organs and there were also concerns about the risk of animal infections spreading to humans through the donated organ. Recent advances in gene-editing have allowed scientists to make edits in the pig’s genome to avoid immune rejection and to remove traces of a specific type of pig-virus that can embed into pig DNA. The companies also test the organs for a range of other potential infections. While this technology is early, it’s exciting that the companies are starting clinical trials that could one day lead to FDA approval. In the future, specialized farms could produce hundreds or even thousands of lifesaving xenotransplant organs each year.

This is just one example of innovation in the Health Care sector. We continue to follow our process for identifying great investment opportunities and creating a portfolio of competitively advantaged growth companies with strong management teams. Thank you for investing in the Fund. I remain an investor in the Fund, alongside you.

Sincerely,