Bored due to the lack of major cases, Sherlock sinks into ennui and desperately wants to smoke, but John forbids it. Just as Sherlock is nearing delirium, a young man named Henry seeks his help. Henry is from the Dartmoor area, home to a military base long suspected by the public of conducting biochemical research. Rumors suggest that genetically modified animals have been created and might have escaped. Henry witnessed his father's death as a child and believes a genetically engineered hound was responsible. Initially, Sherlock dismisses this as a distorted memory from childhood trauma and is about to send Henry away, but he suddenly changes his mind, deciding to go to Dartmoor personally to solve the mystery of the hound.
Upon arriving in Dartmoor, Sherlock finds the locals all talking about a giant hound. The legend has attracted many tourists to the area. Sherlock gathers information about the hound from a local tour guide. Meanwhile, Henry has been undergoing therapy with little success. However, his new treatment makes him repeatedly recall two words: "liberty" and "in."
Using credentials stolen from his brother Mycroft, Sherlock infiltrates the Baskerville military base but finds nothing suspicious. By chance, he discovers that Mrs. Stapleton, the mother of the little girl who previously emailed Sherlock about a missing rabbit, is a researcher at the base. This confirms the base is indeed involved in genetic engineering research. Sherlock is nearly exposed as an imposter, but a Dr. Frankland covers for them. Claiming to have been a close friend of Henry's father and a fan of Sherlock, Dr. Frankland offers his assistance.
Sherlock and John visit Henry's home and take him back to the moor where his father died. John sees flashing lights on the opposite hillside resembling Morse code and stops to investigate, falling behind Sherlock and Henry. Sherlock and Henry reach the foggy valley, where the giant hound appears. Henry is terrified, but Sherlock claims he didn't see anything and quickly leaves. John finds Sherlock sitting by the fireplace in the hotel lobby. Sherlock admits he saw the hound and felt fear, but his mind remains sharp. During their conversation, Sherlock states he has no friends, leaving John feeling dejected.
Henry's mental state deteriorates further. Sherlock asks John to speak with Henry's therapist, Dr. Mortimer, to gather more information about Henry, but their conversation is interrupted by Dr. Frankland.
Sensing John's low spirits, Sherlock explains that he indeed has no friends—because he only has one friend—and sincerely praises John. At that moment, John sees Inspector Lestrade, who has been sent by Mycroft for "forced leave." John asks Lestrade to investigate a vegetarian restaurant where he noticed large meat orders. They discover the restaurant was secretly keeping a large dog to create paw prints, impersonating those of a genetically modified hound to attract tourists, though the dog is already dead.
With Mycroft's help, Sherlock and John re-enter the Baskerville base. Sherlock confronts the Major while John searches the facility. John gets locked in a room where the power cuts out. He finds several empty cages, one with its door open, and hears heavy panting... Terrified, John hides in a cage and calls Sherlock, saying he saw the giant hound, glowing exactly as described. Sherlock arrives to find nothing. This was actually an experiment set up by Sherlock; he used powerful suggestion to make John see what he expected to see. The real hound did not glow. Sherlock concludes something is amiss and retreats to his mind palace for answers.
Meanwhile, during a therapy session, Henry loses control and fires a shot at his therapist, Dr. Mortimer, but misses. Horrified by his actions, Henry flees.
Still at the base, Sherlock deduces the Major's password and accesses secret files. Searching with the keyword "H.O.U.N.D.," he finds records of an experiment from 20 years ago. Sherlock reaches the moor in time to stop Henry from committing suicide. The giant hound appears again and is shot by Lestrade and John, revealing it to be an ordinary dog.
The mastermind is revealed to be Dr. Frankland. Twenty years ago, he participated in Project H.O.U.N.D., which developed an aerosol drug designed to induce extreme fear and paranoia, intended as a chemical weapon. The project was cancelled due to severe side effects on test subjects. However, the obsessed Dr. Frankland continued his experiments in secret. His activities were discovered by his close friend, Henry's father. To protect his work, Frankland killed his friend in the valley, which was saturated with the aerosol drug. Young Henry witnessed this but repressed the memory, substituting it with the hound attack. For 20 years, Frankland manipulated Henry into repeatedly returning to the moor, exposing him to the psychosis-inducing drug.
After the truth is revealed, Frankland escapes in the chaos but accidentally wanders into a minefield. Overcome with guilt, he detonates a mine, committing suicide.