<PAGE>
Annual Report
HEALTH
SCIENCES
FUND
December 31, 1996
[LOGO OF T. ROWE PRICE APPEARS HERE]
<PAGE>
REPORT HIGHLIGHTS
----------------------------------------------------------------------------
. The stock market had another outstanding year in 1996 amid moderate,
noninflationary economic growth and strong cash flows into equity mutual
funds.
. In its debut year, the Health Sciences Fund gained a robust 26.75%, outpacing
the broad market and other health care funds. In the second half, the fund
returned a respectable 5.45%, lagging the overall market and slightly behind
its peer group.
. The fund withstood volatility in emerging-growth health care stocks, earning
a positive return in each quarter. HMOs and smaller biotechnology stocks
hindered returns, while large drug companies and medical device firms helped
performance.
. While health care valuations remain high, we are optimistic about their long-
term prospects. Small biotech companies offer especially good potential.
<PAGE>
FELLOW SHAREHOLDERS
The Health Sciences Fund had a good first year in 1996. Amid a strengthening
economy, gradually rising long-term interest rates, and a stronger U.S. dollar,
your fund surpassed the returns of the broad market as well as its Lipper peer
group. While the bulk of its 26.75% annual return was earned during the first
three months of the year, the fund withstood the volatility in emerging-growth
health care stocks in July and October and earned a positive return in each
quarter.
<TABLE>
<CAPTION>
- -----------------------
Performance Comparison
- -----------------------------------------------------
Periods Ended 12/31/96 6 Months 12 Months
- -----------------------------------------------------
<S> <C> <C>
Health Sciences Fund 5.45% 26.75%
.....................................................
S&P 500 11.68 22.96
.....................................................
Lipper Health/Biotechnology
Fund Index 5.60 13.18
.....................................................
</TABLE>
Larger-capitalization growth stocks, including drug companies, performed well in
the last six months, but the fund's focus on smaller-cap biotechnology and
medical device companies hurt relative performance. The fund's assets continued
to grow during the second half of 1996, and we want to thank all shareholders
for the confidence they have placed in us.
YEAR-END DISTRIBUTION
The fund's Directors declared a short-term capital gain of $0.40 per share. This
distribution was paid on December 30 to shareholders of record on December 26.
In early January, we mailed your check or statement reflecting this
distribution, and Form 1099-DIV, reporting this payment for tax purposes, was
sent later in the month.
INVESTMENT STRATEGY
Our strategy is to invest in innovative health care products and services
without limitation by geography or by market capitalization. While managed care
will continue to gain market share and place constraints on health care costs,
we strongly believe that differentiated, cost-effective products and services
driven by innovative technology
1
<PAGE>
will achieve attractive unit growth and pricing power. Fortunately, your fund's
broad charter and flexible asset base permits us to diversify geographically and
invest in companies of all sizes that offer this potential.
SECTOR DIVERSIFICATION
- ----------------------------------------------------
[Pie Chart Appears Here]
Pharmaceuticals 19%
Health Care Information Systems 4%
Hospital Supply and Medical Device Technology 18%
Alternate Site Health Care Delivery 8%
Laboratory Supplies and Equipment 4%
Biotechnology 23%
Physican Practice Management 6%
Reserves and Others 18%
Based on net assets as of 12/31/96.
While smaller companies are likely to be more volatile, they are also more
likely to commercialize scientific advances and new service delivery models. To
offset some of their increased risk, your fund takes positions in more seasoned
companies with lower risk/return profiles. The past two years have been
anomalies to some extent, with large-cap drug stocks posting strong gains as
they benefited from consolidation and recovered from lows reached in the
aftermath of the Clinton Administration's health care reform proposals.
As the pie chart indicates, your fund is well diversified across the health care
universe, reducing risk while providing exposure to the many opportunities for
growth in this area. Since excessive diversification can lead to mediocre
returns and dilute our best ideas, we will increase our commitment to a position
if additional research makes us more optimistic about a particular company or
sector of health care. For example, we bought more shares in Warner-Lambert
after interviews with physicians made us increasingly comfortable with the long-
term potential of the company's oral drug for diabetes. Visits to customer sites
for Stericycle's innovative medical waste management programs, along with
background checks on management, persuaded us to increase our position in this
unique company.
We also increased exposure to the biotechnology segment as conversations with
several senior drug company executives confirmed our view that much of the
innovation needed by the pharmaceutical industry resides in smaller, emerging
biotech companies. We reduced overall weightings in the pharmaceuticals segment
of the portfolio from 24%
2
<PAGE>
in June to 19% in December as valuations reached uncomfortable levels. At year-
end, the fund's top 25 positions accounted for 48% of assets (as shown in the
table following this letter).
In the development-stage company sector of the portfolio, we try to plant
quality seeds for future growth. Since many of these companies are not
profitable, we invest in management and business models that, over time, should
result in attractive returns. Unfortunately, not all seeds germinate at the rate
we initially expect, if they germinate at all. This requires disciplined pruning
and weeding over time to allow proper cultivation of the stronger breeds.
In the fund's emerging-growth segment, we seek companies with the best
managements and business models but also some history of successful financial
performance. However, we will occasionally invest in emerging-growth companies
after a "glitch" has led Wall Street to all but abandon them, as long as we are
comfortable with management, balance sheet and cash flow characteristics, and
the long-term business opportunity.
In the larger-capitalization part of the fund, we pay closer attention to
valuation and monitor the progress a company is making relative to
preestablished milestones. At the end of 1996, development-stage companies
accounted for 27.6% of assets; emerging-growth companies, 27.8%; and larger-
capitalization companies, 41.3%. The remaining 3.3% was in cash reserves.
PORTFOLIO REVIEW
An analysis of contributions to the fund's share price over the past 12 months
reveals that positive performance was broad-based, achieved across
pharmaceuticals, medical devices, information services, and alternative site
health services. Negative performance was clustered among health maintenance
organizations (HMOs) and some biotech seedlings that to date have failed to
germinate. Six of the top 20 contributors were large pharmaceutical companies.
Top contributor Warner-Lambert received final Food and Drug Administration (FDA)
approval for a cholesterol drug and a favorable FDA Advisory Committee
recommendation for an oral diabetes drug.
Swiss drug company Ciba-Geigy agreed to merge with Basel neighbor Sandoz AG to
create the world's second-largest drug company, Novartis. Pfizer generated
superior earnings growth while continuing
3
<PAGE>
aggressive research and development efforts that appear likely to drive
future growth. Zeneca Group received approval for a new class of oral
drugs for asthma and continued to successfully roll out its oncology
product line, focused on hormone treatments for cancer. Highly innovative
medical device manufacturer Boston Scientific was the second-largest
contributor as it assimilated acquisitions that have given the company
unique physician franchises and global strategic mass.
The fund's higher-than-benchmark weighting in HMOs hurt investment
performance during 1996. While we believed we had invested in the best-
positioned companies and managements --United HealthCare, Oxford Health
Plans, and PacifiCare Health Systems -- United HealthCare temporarily lost
control of medical-cost inflation in its managed care plans in the second
quarter and failed to meet earnings expectations. While we held tough
during Wall Street's ensuing punishment of the HMO sector, we eliminated
positions in United and Oxford after they had recovered from their lows.
The lesson: even the best managements cannot avoid cyclical pressures on
margins.
Our higher biotech weighting also hurt performance. While some companies
such as Biogen and PathoGenesis (a Seattle company which completed Phase
III clinical trials for its inhaled antibiotic for cystic fibrosis) were
strong performers, others such as ImmuLogic Pharmaceutical, GalaGen, and
Cell Genesys were laggards. We increased our positions in GalaGen and Cell
Genesys because their managements and business opportunities have not
changed, while valuations have become more compelling. We are closely
monitoring ImmuLogic after a corporate partner terminated its relationship
with the company, Phase III clinical trials were delayed, and the chief
executive was fired.
FOCUS ON BIOTECHNOLOGY
Your fund has relatively more exposure than other health care funds to
biotechnology companies, with a particular emphasis on emerging, smaller-
cap stocks. While this is consistent with our search for innovation, the
mix between established, larger-cap companies like Amgen and smaller,
development-stage companies like current holding NPS Pharmaceuticals will
change based on relative valuations.
4
<PAGE>
Our commitment is based on a long-held belief that smaller, flexible biotech
companies discover and develop innovative products addressing therapeutic voids.
These voids have historically been overlooked by the traditional pharmaceutical
companies, which chose instead to develop "me-too" drugs. Moreover, the global
biopharmaceutical industry is characterized by extremely high returns on
invested capital for mature companies with proprietary products. We believe that
as the biotech industry matures, it will realize returns similar to the
pharmaceutical industry, and perhaps higher. Of course, the risks associated
with achieving these returns will be higher as well.
The Biotechnology Industry
Versus Pharmaceutical Giants
<TABLE>
<CAPTION>
1996 Estimated Public
Financials Biotech* Amgen Merck
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Product Sales $5 billion $2.1 billion $13.1 billion
............................................................................
Revenues $7 billion $2.2 billion $19.9 billion
............................................................................
R&D Spending $4.1 billion $0.525 billion $1.6 billion
............................................................................
Net Income -$2.9 billion $0.660 billion $3.8 billion
............................................................................
Companies 180 1 1
............................................................................
Employees 32,000 4,300 46,000
............................................................................
Late Stage
Products 130 (Phase III) 15 (Phase I-III) 34 (Phase I-III)
............................................................................
Market Cap $65 billion $15 billion $100 billion
............................................................................
Market Cap/
Product Revenues 13.0X 7.1X 7.6X
............................................................................
Market Cap/R&D 15.9X 28.6X 62.5X
............................................................................
</TABLE>
* Public biotech excludes Amgen
Source: Company Reports; Ernst & Young; T. Rowe Price estimates
A comparison of the aggregate financials of the biotechnology industry to Merck
or Amgen suggests that biotech investors are receiving more research bang for
the market capitalization buck, as shown in the table.
While research spending does not equate to productivity, we believe that
investors can buy more emerging value in the biotech industry as a whole than by
buying larger capitalization drug or pharmaceutical companies. Of course, the
high operating profits at these bigger companies result in higher market caps
and lower risk, while the lack of profits at biotech companies compresses
valuations and increases risk.
However, the biotech industry is finally coming of age with more than 130
products in late-stage (i.e., Phase III) clinical trials. Yet, the timing of
investment in these emerging companies presents a challenge since the biotech
sector is arguably the most inefficiently researched and emotionally driven of
the health care landscape.
Public market investment in biotechnology is difficult for several reasons.
First, product development cycles extend up to eight years, far
5
<PAGE>
longer than the time needed to bring a new computer chip, Internet software, or
blockbuster movie to market. Second, biotechnology represents science in a
fishbowl, proceeding in fits and starts. Therefore, even ultimate stars will
experience difficult periods. Third, companies are perennially undercapitalized
since it takes up to $300 million in losses to bring a product to market.
Fourth, managements can often choose when to raise capital and have a tremendous
information advantage over investors.
...EVEN ULTIMATE STARS WILL EXPERIENCE DIFFICULT PERIODS.
When the biotech group is hot, so-called "momentum" investors flock to the
group, pushing prices and valuations up substantially, often during a
relatively short period. When the group is cold, moderate selling combined
with a complete absence of buyers results in dramatic price declines.
Attempting to time the sector precisely is a fool's game. We prefer to
focus on valuations, own the good companies at the right price, and hold on
unless the investment thesis changes or valuations become detached from
reality.
In judging whether a biotechnology company is attractive over the long
term, we have several criteria. First, high-quality management that mixes
an understanding of science, drug development, and the pharmaceutical
business with the realities of Wall Street; second, broadly enabling,
proprietary technology that is capable of generating multiple product
opportunities; and finally, adequate capital. We prefer companies that
establish meaningful but realizable milestones that will permit management
to raise additional funds in a reasonable time frame.
OUTLOOK
We remain bullish on the long-term outlook for health care stocks. For the
near term, we are concerned about the strong recovery in valuations in the
health care sector since the bottom was reached in the spring of 1994. With
higher interest rates, a stronger U.S. dollar, and recent employment data
suggesting a stronger U.S. economy, investors seeking the absolute highest
relative earnings growth could rotate out of health care stocks into more
economically sensitive issues.
While we expect the Republican-controlled Congress to mute any draconian
health care reform efforts by the Clinton administration, a
6
<PAGE>
change in leadership at the FDA could slow the pace of new product approvals,
and the Health Care Financing Administration could again consider changes in
reimbursement for health care services. Reform of the Medicare system appears
likely, and managed care will put steady pressure on escalating health care
costs.
Given strong underlying demand, proprietary technology-driven innovation, and
high returns on invested capital, we believe that health care stocks are
attractive over the long run. A good approach to investing in this fund is to
dollar cost average, committing an equal amount of money at regular intervals.
As a shareholder, I invest in the fund on a regular basis.
Thank you for your continued support.
Respectfully submitted,
/s/Joseph Klein III
Joseph Klein III
Executive Vice President and
Chairman of the Investment Advisory Committee
January 22, 1997
7
<PAGE>
Sticking To Your Game Plan
TIME REDUCES VOLATILITY OF MARKET RETURNS
-----------------------------------------------
(Annualized Returns for Best and Worst Period:
Rolling Periods From 1950 to 1996*)
[AN 8-BAR CHART SHOWING BEST AND WORST ANNUALIZED TOTAL RETURNS OF STOCKS FOR
VARIOUS ROLLING TIME PERIODS BETWEEN 1950 AND 1996.]
*From 1950-1996, there were 47 one-year periods; 42 five-year periods; 37
ten-year periods; and 27 twenty-year periods.
Source: T. Rowe Price Associates; data from Ibbotson Associates.
Chart is for illustrative purposes only and is not intended to represent
the past performance or future results of any specific securities.
A year ago, we mentioned the possibility of a modest decline in stock prices. In
fact, from May to July 1996, the broad market (as measured by the Standard &
Poor's 500 Stock Index) fell around 7%. However, the bull market resumed its
charge to post a robust 23% gain for the year.
Some believe the market is poised for a significant downturn. We do not expect a
major drop in stock prices in 1997, although another modest pullback is
possible. On balance, we expect stocks to advance at a much slower pace.
How should you prepare for a potential market pullback? As always, our advice is
to diversify your investments and focus on the long term. If you've implemented
a sound investment strategy, stay the course. Stocks have historically overcome
periods of volatility to provide better returns than most other investments.
Market corrections can even have a silver lining because they result in good
buying opportunities.
Furthermore, the volatility of stock market returns has diminished significantly
over longer time frames. The chart shows the best and worst annualized returns
on stocks over various rolling time periods between 1950 and 1996. (For
instance, there were 37 rolling 10-year periods: 1950-1960, 1951-1961, etc.)
Investors who held stocks for only one year could have had as much as a 52.6%
gain, or as little as a 26.5% loss -- a spread of 79 percentage points. However,
investors who held stocks for 10-year periods or longer always overcame interim
volatility to post gains for the entire period.
In addition, a well-diversified portfolio can weather volatility better than a
more concentrated portfolio over the long term and particularly during market
corrections. For example, during last summer's correction, small-company stocks
fell nearly 16% while large-company issues dropped 7.3%. However, a portfolio
diversified among large U.S. companies (30% of assets), small U.S. companies
(15%), foreign companies (15%), intermediate-term Treasury bonds (30%), and
Treasury bills (10%) would have lost a smaller 5.2% of its value./1/
Above all, remember that investing is a long-distance race, not a sprint.
/1/ Ned Davis Research.
8
<PAGE>
T. ROWE PRICE HEALTH SCIENCES FUND
- --------------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS
- --------------------------------------------------------------------------
TWENTY-FIVE LARGEST HOLDINGS
<TABLE>
<CAPTION>
Percent of
Net Assets
12/31/96
------------------------------------------------------------------------
<S> <C>
Apria Healthcare 3.9%
........................................................................
Dentsply International 3.6
........................................................................
Warner-Lambert 3.1
........................................................................
Novartis 2.5
........................................................................
Quorum Health Group 2.3
------------------------------------------------------------------------
Medic Computer Systems 2.1
........................................................................
Collagen 1.9
........................................................................
Stericycle 1.9
........................................................................
Renal Care Group 1.8
........................................................................
IDX Systems 1.8
------------------------------------------------------------------------
PacifiCare Health Systems 1.7
........................................................................
American Oncology Resources 1.7
........................................................................
Schering-Plough 1.7
........................................................................
UICI 1.7
........................................................................
Genentech 1.7
------------------------------------------------------------------------
Nationwide Health Properties 1.6
........................................................................
Physician Reliance Network 1.6
........................................................................
Boston Scientific 1.6
........................................................................
Omnicare 1.5
........................................................................
Diagnostic Products 1.5
------------------------------------------------------------------------
NPS Pharmaceuticals 1.5
........................................................................
Synaptic Pharmaceutical 1.4
........................................................................
Utah Medical Products 1.4
........................................................................
American Health Properties 1.4
........................................................................
Life Technologies 1.3
------------------------------------------------------------------------
Total 48.2%
</TABLE>
9
<PAGE>
T. ROWE PRICE HEALTH SCIENCES FUND
- --------------------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS
- --------------------------------------------------------------------------------
CONTRIBUTIONS TO THE CHANGE IN NET ASSET VALUE PER SHARE
6 Months Ended December 31, 1996
<TABLE>
<CAPTION>
Ten Best Contributors Ten Worst Contributors
------------------------------------------------------------------------------
<S> <C> <C> <C>
Warner-Lambert 14(cent) Apria Healthcare - 17(cent)
........................................... .................................
Boston Scientific 9 United HealthCare ** 12
........................................... .................................
PacifiCare Health Systems 7 ReSound 7
........................................... .................................
American Oncology Resources * 7 Xenova Group 6
........................................... .................................
UICI 6 Diagnostic Products * 5
........................................... .................................
Biogen ** 6 Oncogene Science 5
........................................... .................................
Stryker 6 Global Pharmaceutical 4
........................................... .................................
Stericycle 6 GalaGen 4
........................................... .................................
Medic Computer Systems 5 Neurex ** 3
........................................... .................................
PathoGenesis 5 Cerner ** 3
------------------------------------------- ---------------------------------
Total 71(cent) Total - 66(cent)
</TABLE>
<TABLE>
<CAPTION>
12 Months Ended December 31, 1996
Ten Best Contributors Ten Worst Contributors
------------------------------------------------------------------------------
<S> <C> <C> <C>
Warner-Lambert * 15(cent) United HealthCare ** - 17(cent)
............................................ ................................
Boston Scientific * 14 Physicians Health Service **13
............................................ ................................
Cardinal Health * 11 ImmuLogic Pharmaceutical * 12
............................................ ................................
Ciba-Geigy *** 11 Apria Healthcare * 7
............................................ ................................
National Data ** 11 Watson Pharmaceuticals ** 7
............................................ ................................
OccuSystems * 11 ReSound * 6
............................................ ................................
UICI * 8 Diagnostic Products * 5
............................................ ................................
Renal Care Group * 8 IVAX ** 4
............................................ ................................
Quorum Health Group * 8 GalaGen * 4
............................................ ................................
ESC Medical Systems ** 8 Cell Genesys * 4
-------------------------------------------- --------------------------------
Total 105(cent) Total - 79(cent)
</TABLE>
*Position added
**Position eliminated
***Merged with Sandoz to create Novartis
10
<PAGE>
T. ROWE PRICE HEALTH SCIENCES FUND
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
- --------------------------------------------------------------------------------
This chart shows the value of a hypothetical $10,000 investment in the fund
over the past 10 fiscal year periods or since inception (for funds lacking 10-
year records). The result is compared with a broad-based average or index. The
index return does not reflect expenses, which have been deducted from the
fund's return.
HEALTH SCIENCES FUND
------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Health
S&P 500 Sciences
Index Fund
<S> <C> <C>
12/31/95 10,000 10,000
12/96 12,296 12,675
</TABLE>
AVERAGE ANNUAL COMPOUND TOTAL RETURN
- --------------------------------------------------------------------------------
This table shows how the fund would have performed each year if its actual (or
cumulative) returns for the periods shown had been earned at a constant rate.
Inception
Periods Ended 12/31/96 1 Year Date
- --------------------------------------------------------------------------------
Health Sciences Fund 26.75% 12/31/95
................................................................................
Investment return and principal value represent past performance and will
vary. Shares may be worth more or less at redemption than at original
purchase.
11
<PAGE>
T. ROWE PRICE HEALTH SCIENCES FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS For a share outstanding throughout the period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
12/31/95
to
12/31/96
NET ASSET VALUE
Beginning of period $ 10.00
............
Investment activities
Net investment income (0.03)*
Net realized and
unrealized gain (loss) 2.70
............
Total from
investment activities 2.67
............
Distributions
Net realized gain (0.40)
............
NET ASSET VALUE
End of period $ 12.27
------------
Ratios/Supplemental Data
Total return 26.75%*
..............................................................................
Ratio of expenses to
average net assets 1.35%*
..............................................................................
Ratio of net investment
income to average
net assets (0.32)%*
..............................................................................
Portfolio turnover rate 133.1%
..............................................................................
Average commission rate paid $ 0.1647
..............................................................................
Net assets, end of period
(in thousands) $ 193,958
..............................................................................
</TABLE>
* Excludes expenses in excess of a 1.35% voluntary expense limitation in effect
through 12/31/97.
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
T. ROWE PRICE HEALTH SCIENCES FUND
- --------------------------------------------------------------------------------
December 31, 1996
STATEMENT OF NET ASSETS Shares/Par Value
- --------------------------------------------------------------------------------
In thousands
COMMON STOCKS & WARRANTS 96.2%
ALTERNATE SITE HEALTH
CARE DELIVERY 8.1%
Dialysis 3.1%
Renal Care Group * 110,000 $ 3,513
.........................................................................
Vivra * 90,000 2,486
.........................................................................
5,999
.............
Home Health Care 3.9%
Apria Healthcare * 400,000 7,500
.........................................................................
7,500
.............
Specialized Home Health 0.8%
Raytel Medical * 150,000 1,575
.........................................................................
1,575
.............
Surgery Centers 0.3%
Medical Alliance * 50,000 575
.........................................................................
575
.............
Total Alternate Site Health Care Delivery 15,649
.............
BIOTECHNOLOGY 23.0%
U.S. Major - Biotechnology 2.0%
Genentech * 60,000 3,217
.........................................................................
Immunex * 37,000 717
.........................................................................
3,934
.............
Antibodies 0.5%
Cell Genesys * 110,000 997
.........................................................................
997
.............
Antisense 1.0%
Gilead Sciences * 80,000 1,995
.........................................................................
1,995
.............
Biomaterials 1.9%
Collagen 200,000 3,675
.........................................................................
3,675
.............
Combinatorial Chemistry 1.1%
Pharmacopeia * 112,500 2,166
.........................................................................
2,166
.............
Genomics 0.8%
Affymetrix * 64,700 1,310
.........................................................................
Millennium Pharmaceuticals * 15,000 260
................................................................................
1,570
.............
13
<PAGE>
T. ROWE PRICE HEALTH SCIENCES FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares/Par Value
- ----------------------------------------------------------------------------------------------------
In thousands
<S> <C> <C>
Neuroscience 1.8%
Cephalon * 71,600 $ 1,455
.............................................................................................
Guilford Pharmaceuticals * 87,000 1,979
.............................................................................................
3,434
...............
Rational Drug Design 2.0%
Oncogene Science * 177,000 1,095
.............................................................................................
Synaptic Pharmaceutical * 220,000 2,723
.............................................................................................
3,818
...............
Vaccines 0.7%
ImmuLogic Pharmaceutical * 204,700 1,343
.............................................................................................
1,343
...............
Biotech/Cardiovascular 1.0%
COR Therapeutics * 195,200 1,940
.............................................................................................
1,940
...............
Other Biotechnology 10.2%
Bone Care International * 107,500 833
.............................................................................................
Corvas International * 200,000 1,100
.............................................................................................
Creative Biomolecules * 100,000 1,025
.............................................................................................
GalaGen *+ 408,800 1,814
.............................................................................................
Ligand Pharmaceuticals (Class B) * 125,000 1,867
.............................................................................................
Magainin Pharmaceuticals * 40,600 386
.............................................................................................
Magainin Pharmaceuticals, warrants, 8/15/01 * 84,325 0
.............................................................................................
Magainin Pharmaceuticals *++ 129,730 1,094
.............................................................................................
MedImmune * 82,200 1,418
.............................................................................................
MGI PHARMA * 500,000 2,172
.............................................................................................
NPS Pharmaceuticals * 255,000 2,821
.............................................................................................
PathoGenesis * 90,000 1,935
.............................................................................................
Protein Design Labs * 25,400 921
.............................................................................................
Xenova Group (GBP) * 363,000 1,306
.............................................................................................
Xenova Group ADR * 337,000 1,074
.............................................................................................
19,766
...............
Total Biotechnology 44,638
...............
ENVIRONMENTAL SERVICES 1.9%
Waste Management 1.9%
Stericycle * 325,000 3,656
.............................................................................................
Total Environmental Services 3,656
...............
</TABLE>
14
<PAGE>
T. ROWE PRICE HEALTH SCIENCES FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares/Par Value
- ---------------------------------------------------------------------------------------------
In thousands
<S> <C> <C>
HEALTH CARE AND LIFE SCIENCE
DISTRIBUTION 1.0%
Drug Distribution 1.0%
Cardinal Health 33,000 $ 1,922
.............................................................................................
Total Health Care and Life Science Distribution 1,922
...............
HEALTH CARE INFORMATION SYSTEMS 3.9%
Physician Information Systems 3.9%
IDX Systems * 122,000 3,508
.............................................................................................
Medic Computer Systems * 100,000 4,031
.............................................................................................
Total Health Care Information Systems 7,539
...............
HEALTH CARE REITS 3.0%
Health Care REITS 3.0%
American Health Properties 110,000 2,626
.............................................................................................
Nationwide Health Properties 130,000 3,153
.............................................................................................
Total Health Care REITS 5,779
...............
HOSPITAL MANAGEMENT 3.3%
Acute Care 3.3%
Columbia/HCA Healthcare 50,000 2,037
.............................................................................................
Quorum Health Group * 150,000 4,444
.............................................................................................
Total Hospital Management 6,481
...............
HOSPITAL SUPPLY AND MEDICAL DEVICE
TECHNOLOGY 16.5%
Dental 3.5%
Dentsply International 144,900 6,892
.............................................................................................
6,892
...............
Medical Device Technology 13.0%
Arrow International 75,000 2,128
.............................................................................................
Boston Scientific * 50,700 3,042
.............................................................................................
CardioGenesis * 33,100 385
.............................................................................................
Cholestech * 120,000 667
.............................................................................................
</TABLE>
15
<PAGE>
T. ROWE PRICE HEALTH SCIENCES FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares/Par Value
- ---------------------------------------------------------------------------------------------
In thousands
<S> <C> <C>
DePuy * 100,000 $ 2,025
.............................................................................................
Diagnostic Products 110,000 2,846
.............................................................................................
Haemonetics * 50,000 944
.............................................................................................
Imagyn Medical * 50,000 391
.............................................................................................
Incontrol * 120,000 945
.............................................................................................
Medtronic 20,000 1,360
.............................................................................................
Novoste * 110,000 1,478
.............................................................................................
ReSound *++ 223,256 1,419
.............................................................................................
Stryker 60,000 1,796
.............................................................................................
UroHealth Systems (Class A) * 120,000 930
.............................................................................................
Utah Medical Products * 200,000 2,675
.............................................................................................
VISX * 36,300 810
.............................................................................................
Vital Signs 50,900 1,327
.............................................................................................
25,168
...............
Total Hospital Supply and Medical Device Technology 32,060
...............
LABORATORY SUPPLIES AND
EQUIPMENT 3.8%
Capital Equipment 0.9%
NeoPath * 100,000 1,838
.............................................................................................
1,838
...............
Consumables 2.3%
CN Biosciences * 18,000 331
.............................................................................................
Life Technologies 100,000 2,493
.............................................................................................
Sybron International * 48,000 1,584
.............................................................................................
4,408
...............
Separation Technology 0.6%
PerSeptive Biosystems * 70,000 479
.............................................................................................
Visible Genetics * 70,000 639
.............................................................................................
1,118
...............
Total Laboratory Supplies and Equipment 7,364
...............
LONG-TERM AND SUB-ACUTE CARE 0.8%
Nursing Homes/Sub-Acute 0.8%
Vencor * 50,000 1,581
.............................................................................................
Total Long-Term and Sub-Acute Care 1,581
...............
</TABLE>
16
<PAGE>
T. ROWE PRICE HEALTH SCIENCES FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares/Par Value
- ---------------------------------------------------------------------------------------------
In thousands
<S> <C> <C>
MANAGED CARE: HMOS 1.7%
California 1.7%
PacifiCare Health Systems (Class A) * 10,000 $ 819
.............................................................................................
PacifiCare Health Systems (Class B) * 28,800 2,451
.............................................................................................
Total Managed Care: HMOs 3,270
...............
MANAGED CARE: SPECIALTY COST 1.9%
Pharmacy Benefit Management 1.9%
Capstone Pharmacy Services * 75,000 844
.............................................................................................
Omnicare 90,000 2,891
.............................................................................................
Total Managed Care: Specialty Cost 3,735
...............
PHARMACEUTICALS 19.0%
U.S. Major - Pharmaceuticals 9.3%
Bristol-Myers Squibb 20,000 2,175
.............................................................................................
Eli Lilly 30,000 2,190
.............................................................................................
Merck 30,000 2,378
.............................................................................................
Pfizer 25,000 2,072
.............................................................................................
Schering-Plough 50,000 3,237
.............................................................................................
Warner-Lambert 80,000 6,000
.............................................................................................
18,052
...............
U.K. Major - Pharmaceuticals 1.0%
Zeneca Group (GBP) * 70,000 1,973
.............................................................................................
1,973
...............
European Major - Pharmaceuticals 6.8%
Altana (DEM) * 2,000 1,557
.............................................................................................
Astra (Class B) (SEK) 50,000 2,412
.............................................................................................
Bayer (DEM) 40,000 1,638
.............................................................................................
Hoechst (DEM) 30,000 1,407
.............................................................................................
Novartis (CHF) 4,199 4,809
.............................................................................................
Roussel UCLAF (FRF) 5,000 1,471
.............................................................................................
13,294
...............
Generics 1.9%
Global Pharmaceutical * 200,000 1,375
.............................................................................................
NaPro BioTherapeutics * 211,000 2,242
.............................................................................................
3,617
...............
Total Pharmaceuticals 36,936
...............
</TABLE>
17
<PAGE>
T. ROWE PRICE HEALTH SCIENCES FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares/Par Value
- ----------------------------------------------------------------------------------------------------
In thousands
<S> <C> <C>
PHYSICIAN PRACTICE MANAGEMENT 5.8%
Emergency/Primary Care 1.3%
EmCare Holdings * 50,000 $ 1,147
.............................................................................................
Inphynet Medical Management * 76,700 1,352
.............................................................................................
2,499
...............
Specialists 4.5%
American Oncology Resources * 320,000 3,260
.............................................................................................
OccuSystems * 90,000 2,419
.............................................................................................
Physician Reliance Network * 400,000 3,075
.............................................................................................
8,754
...............
Total Physician Practice Management 11,253
...............
VENDORS HEALTHCARE AND
LIFE SCIENCE 1.7%
Vendors to Health Science Companies 1.7%
UICI * 100,000 3,231
.............................................................................................
Total Vendors Healthcare and Life Science 3,231
...............
Miscellaneous Common Stocks 0.8% 1,524
...............
Total Common Stocks & Warrants (Cost $181,550) 186,618
...............
CONVERTIBLE BONDS 0.5%
UroMed (144a), Sub. Notes, 6.00%, 10/15/03 $1,000,000 941
.............................................................................................
Total Convertible Bonds (Cost $1,004) 941
...............
SHORT-TERM INVESTMENTS 3.6%
Commercial Paper 3.6%
Investments in Commercial Paper through a joint account
6.75%-7.10%, 1/2/97 6,978,814 6,977
.............................................................................................
Total Short-Term Investments (Cost $6,977) 6,977
...............
</TABLE>
18
<PAGE>
T. ROWE PRICE HEALTH SCIENCES FUND
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
- --------------------------------------------------------------------------------
In thousands
<S> <C>
Total Investments in Securities
100.3% of Net Assets (Cost $189,531) $ 194,536
Other Assets Less Liabilities (578)
.............
NET ASSETS $ 193,958
-------------
Net Assets Consist of:
Accumulated net realized gain/loss - net of distributions 408
Net unrealized gain (loss) 5,004
Paid-in-capital applicable to 15,810,454 shares of $0.0001 par
value capital stock outstanding; 1,000,000,000 shares authorized 188,546
.............
NET ASSETS $ 193,958
-------------
NET ASSET VALUE PER SHARE $ 12.27
-------------
</TABLE>
* Non-income producing
+ Affiliated company
++ Securities contain some restrictions as to public resale--total of such
securities at year-end amounts to 1.30% of net assets.
REIT Real Estate Investment Trust
144a Security was purchased pursuant to Rule 144a under the Securities Act of
1933 and may not be resold subject to that rule except to qualified
institutional buyers-- total of such securities at year-end amounts to
0.49% of net assets.
CHF Swiss franc
DEM German deutschemark
FRF French franc
GBP British sterling
SEK Swedish krona
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
T. ROWE PRICE HEALTH SCIENCES FUND
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
In thousands
<TABLE>
<CAPTION>
12/31/95
to
12/31/96
<S> <C>
Investment Income
Income
Dividend $ 778
Interest 520
..............
Total income 1,298
..............
Expenses
Investment management 750
Shareholder servicing 655
Custody and accounting 106
Registration 87
Prospectus and shareholder reports 68
Legal and audit 8
Directors 7
Miscellaneous 13
..............
Total expenses 1,694
..............
Net investment income (396)
..............
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on
Securities 6,887
Foreign currency transactions (19)
..............
Net realized gain (loss) 6,868
..............
Change in net unrealized gain or loss on
Securities 5,005
Other assets and liabilities
denominated in foreign currencies (1)
..............
Change in net unrealized gain or loss 5,004
..............
Net realized and unrealized gain (loss) 11,872
..............
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 11,476
--------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
T. ROWE PRICE HEALTH SCIENCES FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
- -----------------------------------------------------------------------------
In thousands
12/31/95
to
12/31/96
<S> <C>
Increase (Decrease) in Net Assets
Operations
Net investment income $ (396)
Net realized gain (loss) 6,868
Change in net unrealized gain or loss 5,004
................
Increase (decrease) in net assets from operations 11,476
................
Distributions to shareholders
Net realized gain (6,074)
................
Capital share transactions*
Shares sold 270,973
Distributions reinvested 5,861
Shares redeemed (88,378)
................
Increase (decrease) in net assets from capital
share transactions 188,456
................
Net Assets
Increase (decrease) during period 193,858
Beginning of period 100
................
End of period $ 193,958
----------------
Share information
Shares sold 22,758
Distributions reinvested 484
Shares redeemed (7,442)
................
Increase (decrease) in shares outstanding 15,800
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
T. ROWE PRICE HEALTH SCIENCES FUND
- --------------------------------------------------------------------------------
December 31, 1996
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price Health Sciences, Inc. (the fund) is registered under the
Investment Company Act of 1940 as a diversified, open-end management
investment company and commenced operations on December 31, 1995.
Valuation Equity securities listed or regularly traded on a securities
exchange are valued at the last quoted sales price at the time the
valuations are made. A security which is listed or traded on more than one
exchange is valued at the quotation on the exchange determined to be the
primary market for such security. Listed securities not traded on a
particular day and securities regularly traded in the over-the-counter
market are valued at the mean of the latest bid and asked prices. Other
equity securities are valued at a price within the limits of the latest bid
and asked prices deemed by the Board of Directors, or by persons delegated
by the Board, best to reflect fair value.
Debt securities are generally traded in the over-the-counter market and are
valued at a price deemed best to reflect fair value as quoted by dealers who
make markets in these securities or by an independent pricing service.
Short-term debt securities are valued at amortized cost which, when combined
with accrued interest, approximates fair value.
For purposes of determining the fund's net asset value per share, the U.S.
dollar value of all assets and liabilities initially expressed in foreign
currencies is determined by using the mean of the bid and offer prices of
such currencies against U.S. dollars quoted by a major bank.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair
value as determined in good faith by or under the supervision of the
officers of the fund, as authorized by the Board of Directors.
Affiliated Companies Investments in companies 5% or more of whose
outstanding voting securities are held by the fund are defined as
"Affiliated Companies" in Section 2(a)(3) of the Investment Company Act of
1940.
Currency Translation Assets and liabilities are translated into U.S. dollars
at the prevailing exchange rate at the end of the reporting period.
Purchases and sales of securities and income and expenses are translated
into U.S. dollars at the prevailing exchange rate on the dates of such
transactions. The effect of changes in foreign exchange rates on realized
and unrealized security gains and losses is reflected as a component of such
gains and losses.
22
<PAGE>
T. ROWE PRICE HEALTH SCIENCES FUND
- --------------------------------------------------------------------------------
Premiums and Discounts Premiums and discounts on debt securities are
amortized for both financial reporting and tax purposes.
Other Income and expenses are recorded on the accrual basis. Investment
transactions are accounted for on the trade date. Realized gains and losses
are reported on the identified cost basis. Dividend income and distributions
to shareholders are recorded by the fund on the ex-dividend date. Income and
capital gain distributions are determined in accordance with federal income
tax regulations and may differ from those determined in accordance with
generally accepted accounting principles.
NOTE 2 - INVESTMENT TRANSACTIONS
Commercial Paper Joint Account The fund, and other affiliated funds, may
transfer uninvested cash into a commercial paper joint account, the daily
aggregate balance of which is invested in high-grade commercial paper. All
securities purchased by the joint account satisfy the fund's criteria as to
quality, yield, and liquidity.
Other Purchases and sales of portfolio securities, other than short-term
securities, aggregated $329,946,000 and $155,834,000, respectively, for the
period ended December 31, 1996.
NOTE 3 - FEDERAL INCOME TAXES
No provision for federal income taxes is required since the fund intends to
qualify as a regulated investment company and distribute all of its taxable
income.
In order for the fund's capital accounts and distributions to shareholders
to reflect the tax character of certain transactions, the following
reclassifications were made during the period ended December 31, 1996. The
results of operations and net assets were not affected by the
reclassifications.
<TABLE>
- ------------------------------------------------------------------------
<S> <C>
Undistributed net investment income $ 396,000
Undistributed net realized gain (386,000)
Paid-in-capital (10,000)
</TABLE>
At December 31, 1996, the aggregate cost of investments for federal income
tax and financial reporting purposes was $189,531,000, and net unrealized
gain
23
<PAGE>
T. ROWE PRICE HEALTH SCIENCES FUND
- --------------------------------------------------------------------------------
aggregated $5,005,000, of which $17,334,000 related to appreciated
investments and $12,329,000 to depreciated investments.
NOTE 4 - RELATED PARTY TRANSACTIONS
The investment management agreement between the fund and T. Rowe Price
Associates, Inc. (the manager) provides for an annual investment management
fee, of which $123,000 was payable at December 31, 1996. The fee is computed
daily and paid monthly, and consists of an individual fund fee equal to
0.35% of average daily net assets and a group fee. The group fee is based on
the combined assets of certain mutual funds sponsored by the manager or Rowe
Price-Fleming International, Inc. (the group). The group fee rate ranges
from 0.48% for the first $1 billion of assets to 0.305% for assets in excess
of $50 billion. At December 31, 1996, and for the period then ended, the
effective annual group fee rate was 0.33%. The fund pays a pro-rata share of
the group fee based on the ratio of its net assets to those of the group.
Under the terms of the investment management agreement, the manager is
required to bear any expenses through December 31, 1997, which would cause
the fund's ratio of expenses to average net assets to exceed 1.35%.
Thereafter, through December 31, 1999, the fund is required to reimburse the
manager for these expenses, provided that average net assets have grown or
expenses have declined sufficiently to allow reimbursement without causing
the fund's ratio of net expenses to average net assets to exceed 1.35%.
Pursuant to this agreement, $101,000 of management fees were not accrued by
the fund for the period ended December 31, 1996.
In addition, the fund has entered into agreements with the manager and two
wholly owned subsidiaries of the manager, pursuant to which the fund
receives certain other services. The manager computes the daily share price
and maintains the financial records of the fund. T. Rowe Price Services,
Inc., is the fund's transfer and dividend disbursing agent and provides
shareholder and administrative services to the fund. T. Rowe Price
Retirement Plan Services, Inc., provides subaccounting and recordkeeping
services for certain retirement accounts invested in the fund. The fund
incurred expenses pursuant to these related party agreements totaling
approximately $507,000 for the period ended December 31, 1996, of which
$58,000 was payable at period-end.
24
<PAGE>
T. ROWE PRICE HEALTH SCIENCES FUND
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
T. Rowe Price Health Sciences Fund, Inc.
We have audited the accompanying statement of net assets of T. Rowe Price
Health Sciences Fund, Inc. as of December 31, 1996, and the related
statement of operations for the year then ended, the statement of changes in
net assets and the financial highlights for the period from December 31,
1995 (commencement of operations) to December 31, 1996. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
investments owned as of December 31, 1996, by correspondence with the
custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
T. Rowe Price Health Sciences Fund, Inc. as of December 31, 1996, the
results of its operations, the changes in its net assets and financial
highlights for each of the respective periods stated in the first paragraph,
in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
January 20, 1997
25
<PAGE>
For yield, price, last transaction,
current balance or to conduct
transactions, 24 hours, 7 days
a week, call Tele*Access(R):
1-800-638-2587 toll free
For assistance
with your existing
fund account, call:
Shareholder Service Center
1-800-225-5132 toll free
625-6500 Baltimore area
To open a Discount Brokerage
account or obtain information,
call: 1-800-638-5660 toll free
Internet address:
http://www.troweprice.com
T. Rowe Price Associates
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for
distribution only to shareholders
and to others who have received
a copy of the prospectus of the
T. Rowe Price Health Sciences Fund.
Investor Centers:
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
[LOGO OF T. ROWE PRICE APPEARS HERE]
T. Rowe Price Investment Services, Inc., Distributor RPRTHSF 12/31/96
