Annual Report
Health
Sciences
Fund
December 31, 1997
T. Rowe Price
Report Highlights
Health Sciences Fund
o Health care stocks performed well during the period, but
lagged the S&P 500 as large-cap stocks in general dominated
small-caps.
o Your fund's 6.95% and 19.41% 6- and 12-month returns,
respectively, fell modestly behind its peer group's
average.
o The fund benefited most from its investments in larger
pharmaceuticals but was held back by smaller-cap
biotechnology and medical device companies.
o We have developed a strong interest in health care
information systems companies, which could transform the
way HMOs and other health care providers operate.
o We continue to be bullish on the long-term prospects for
health care, although in the short term we are somewhat
concerned about valuations.
Fellow Shareholders
If 1996 witnessed the fund's successful birth, then 1997 was a
year of maturation. Your fund posted a 19.41% gain over the last
year, an acceptable return on a long- term basis, but slightly
underperformed our Lipper benchmark and also lagged the broad
market's exceptional gains. During the period, we held fast to
our investment strategy-emphasizing diversified exposure to
innovative companies without limitation by geography or market
capitalization. Your fund's 51.36% return between its inception
on December 29, 1995, and December 31, 1997, ranks third out of
21 funds for that time period in the Lipper Health/Biotechnology
Fund universe, according to Lipper Analytical Services. For the
one-year period, the fund ranks 18th out of 31 funds in its
Lipper category.
Performance Comparison
Periods Ended 12/31/97 6 Months 12 Months
_______________________________________________________________
Health Sciences Fund 6.95% 19.41%
S&P 500 10.58 33.36
Lipper Health/
Biotechnology
Fund Index 7.11 20.72
YEAR-END DISTRIBUTION
The fund's Directors declared a short-term capital gain of $0.87
per share and a long-term capital gain of $0.10 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.
HEALTH CARE INVESTMENT ENVIRONMENT
From a geographic perspective, 1997 was very much a "Tale of Two
Cities": the New York Stock Exchange powered ahead some 30.30%,
driven by persistently low levels of inflation and a strong (but
not too strong) economy; while the Jakarta Stock Exchange
plunged -34.7% in local terms (-63.3% in U.S. dollars), driven
by economic instability and a declining currency. While most of
us don't normally consider the impact of Pacific Rim economies
on our investments, concerns about the region caused global
volatility in the fourth quarter and may still come back to
haunt U.S. capital markets in 1998.
Closer to home in the health care arena, 1997 was a tale of two
market capitalizations: very large, quality growth companies
surged while many smaller rivals lagged behind. For example,
large-capitalization drug stocks, as measured by the Dow Jones
pharmaceutical group, appreciated 50.1%. In contrast, small
biotech and device stocks with market caps below $200 million
had weak returns of -8.11% and -0.72%, respectively, as measured
by Vector Securities Inter-national. The same trend was broadly
true among health care mutual funds. Competitor funds that
invest in large-capitalization health care companies handily
outperformed those that invest in emerging companies. Your fund,
by design, emphasizes innovation in both large-cap (e.g.,
Pfizer, Warner-Lambert) and small-cap companies (e.g., COR
Therapeutics, Zonagen). Corres-pondingly, our performance was in
the middle of the pack.
In the health care arena, 1997 was a tale of two market
capitalizations: very large, quality growth companies surged
while many smaller rivals lagged behind.
During 1997, the power pendulum continued to swing back toward
physicians and prescriptions. While Clinton health care reform
efforts demonized pharmaceutical companies as recently as four
years ago, health maintenance organizations (HMOs) have replaced
drug firms as the new villains in town. HMOs are now widely
perceived by the public to be middleman marketing organizations
that manage costs by withholding care-clearly not the answer to
society's need for cost-effective managed care. Support for that
assertion showed up on the bottom lines of many HMOs.
Specifically, those without medical management skills faced a
margin squeeze between providers demanding higher payments for
services and payers demanding modest premium increases. There is
growing hope that physician practice management companies
(PPMs), which we wrote about in the Focus section of the June
1997 semiannual report, will become the new managed care
delivery model. In the PPM structure, physicians with proper
incentives are organized to deliver cost-effective, appropriate,
high-quality care. Employers and other payers (e.g., Medicare)
can negotiate for care directly with the PPM, thereby avoiding
the middleman costs of the HMO.
INVESTMENT PHILOSOPHY
We remain committed to a fundamental strategy of investing in
innovative health care products and services without limitation
by geography or market capitalization. We strongly believe that
differentiated cost-effective products and services, driven by
innovative technology, will achieve attractive unit growth and
pricing power. We strive to offset some of the volatility of
emerging companies with a balanced diet of large-cap firms.
While this diversification helps reduce risk in a portfolio, it
may depress absolute returns over a shorter period of time
relative to funds with more concentrated, higher-risk
strategies.
Over the past year, your fund has invested in over 100 companies
among the more than 1,000 companies we monitor in 18 broad
sectors and 90 subsectors of the health sciences universe.
Through intensive, timely, hands-on research emphasizing company
visits, medical conferences, physician interviews, and detailed
financial analysis, we attempt to gain unique insights about the
ever-changing health care world before the information is
reflected in stock prices. The Health Sciences Fund's analytical
effort is now organized both by industry and around specific
diseases, and in 1997 we hired a surgeon with a Ph.D. in
molecular biology and a corporate development professional from
the medical device industry for your investment team. We
strongly believe that we have the strategy and resources in
place to deliver strong investment returns over the long term
without undue risk.
PORTFOLIO HIGHLIGHTS
During the last year, our stock picking was generally good,
although our allocation among the broad sectors of health care
was not always in sync with market sentiment. As shown in the
table on the following page, the fund's overall weighting in
pharmaceutical stocks has averaged around 24% of total assets
versus 50% for the Lipper Health/Biotechnology benchmark. We
owned the right large pharmaceutical companies but not enough of
them to outperform the averages.
Sector Diversification
Periods Ended 12/31/97
6/30/96 12/31/96 6/30/97 12/31/97
______________________________________________________________
Pharmaceuticals 25% 20% 30% 25%
Biotechnology 19 21 17 21
Hospital Supply and
Medical Device
Technology 21 18 20 16
Physician Practice
Management 1 6 7 6
Health Care and
Life Science
Distribution 1 3 3 4
Managed Care:
HMOs 8 2 1 4
Health Care
Information Systems 2 4 2 6
Reserves and Other 23 26 20 18
Among the best contributors to performance over the past 12
months were larger-capitalization blue chip drug and medical
stocks. Warner-Lambert (up 65.3% since December 31, 1996) has
successfully launched two blockbuster products for diabetes and
for cholesterol-lowering that will dramatically improve the
company's Parke-Davis pharmaceutical operation. We added to our
position recently when investors overreacted to safety concerns
about the diabetes product. Pfizer (up 79.7%) has arguably
invested more aggressively in innovation than any other
pharmaceutical company and awaits approval for Viagra, a
promising drug for male erectile dysfunction. Bristol-Myers
Squibb (up 73.6%) dramatically transformed investor perceptions
of its prospects by reinvesting cost savings from a
restructuring program into rejuvenating its R&D and sales and
marketing organizations. Eli Lilly (up 90.8%) recently received
FDA approval for Evista, a selective estrogen receptor modulator
or SERM, which promises to benefit post-menopausal women by
building bone, lowering total cholesterol, and potentially
protecting the breast and uterus from estrogen-sensitive
cancers.
The fund was held back by a higher-than-benchmark exposure to
smaller-cap biotechnology and medical device companies. Indeed,
half of the 10 worst contributors to net asset value over the
past 12 months were companies with capitalizations less than
$200 million. We made this allocation decision consciously based
on what we perceived to be comparatively rich valuations for
larger pharmaceutical stocks. In hindsight, we were wrong. In
our opinion, however, smaller biotechnology companies still
offer more research bang for the market cap buck. When smaller
biotechnology companies are successful in bringing a new drug to
market, the financial returns can be enormous. Shares in both
MedImmune and COR Therapeutics performed quite well during the
second half of 1997 on the strength of positive clinical trial
results on lead drug programs. We take some pleasure in the fact
that Collagen, now the fund's largest holding, started to
perform in the second half of 1997, and expect the coming
separation of its R&D and cosmetic commercial activities to
unearth significant values hidden inside the combined entity.
The largest negative contribution to fund performance has come
from the health care services arena. Home health care provider
Apria Healthcare, California-based Medicare HMO PacifiCare
Health Systems, and long-term care provider Vencor have all had
significant problems integrating acquisitions. The lesson from
these investments is that mergers in health care services are
far more difficult to execute than mergers among product and
drug companies.
We have taken advantage of the continued weakness in HMO
performance to increase our weighting in United HealthCare,
Aetna, and PacifiCare. As a group, these holdings struggled over
the past six months. But we believe that when the last chapter
is written on cost- effective health care delivery, companies
such as these with strong medical management skills will be
credited with playing a significant role in improving our health
care system.
At December 31, 1997, the top 25 positions accounted for 52.1%
of assets (as shown in the table following this letter) compared
with 47.8% at June 30, 1997. This reflects an effort to reduce
the number of stocks in the portfolio and increase our
weightings in those companies in which we have the highest
confidence. The median market capitalization of the fund was
$1,800 million December 31, 1997, compared with $640 million on
June 30, 1997.
FOCUS ON HEALTH CARE INFORMATION SYSTEMS
In our view, the difficulties experienced by HMOs such as Aetna
and Oxford in the second half were more a failure of information
systems than the commonly held view that HMOs are just middlemen
facing a margin squeeze. While we do not deny that margins are
under pressure as providers demand higher payments and employers
and payers refuse to accept premium increases, we believe many
HMOs could have managed the problem better if they had better
information systems.
An HMO is at root an insurance business, but it operates off a
far weaker information base than most insurers. In offering
prepaid health care, HMOs charge and receive premiums for
managing care in advance of delivering the care and incurring
expenses. Managing costs and reporting the financial performance
of an HMO is a constant guessing game. Management sets prices
based on an estimate of medical cost trends, and financial
performance depends critically on medical costs that have been
incurred but not reported (or IBNR, in insurance jargon). Both
the management and reporting functions require excellent,
real-time information systems, which many HMOs do not have. Most
HMOs manage day-to-day operations with information lags that
would not be tolerated in other industries.
Yet weak information is not solely an HMO problem; it is endemic
to the health care system. While it may sound like a cliche, we
have become strong believers that to manage care, you must first
be able to measure it. In the final analysis, to achieve true
medical cost savings, it is necessary to change the behavior of
physicians, other care providers, and ultimately patients so
that the appropriate level of care is provided at the
appropriate time in the appropriate setting. This requires
careful collection and analysis of data on patients, providers,
and relative costs. While a visit to a physician generates far
more data than a visit to a bank ATM, ironically the health care
industry has underinvested in information systems relative to
financial services by a four to one margin. How many times have
you received a bill for a medical procedure that was not
performed or that should have been paid by your health insurance
plan?
U.S. Health Care Spending - Pie chart showing:
Appropriate Inappropriate Administrative
Treatment Treatment Overhead
$490 Billion $330 Billion $180 Billion
As the chart indicates, 18% of the cost of health care in the U.S. is spent
on administration. Much of this is no doubt due to the Byzantine ways in
which the system provides and bills for services. Considerably more of the
total bill pays for inappropriate or unnecessary care-for example, lost lab
tests that need to be repeated or the prescription of antibiotics for
diseases caused by viruses. We are convinced that properly deployed
information systems hold great promise to lower administrative costs and
reduce the amount of inappropriate and unnecessary care.
Health care is ultimately an information business, and we think that the
companies with the best information systems will ultimately come out on top.
To this end, your fund is increasing its weighting in health care information
systems. We prefer companies that keep a keen eye on the physician, since
physicians control 75% to 80% of the costs in our health care system. We also
like companies that generate recurring revenues as opposed to lumpy, one-time
software license fees. We will pay careful attention to the increased
importance of real-time, concurrent information capable of changing physician
and patient behavior, as opposed to out-of-date, batch information that is
best used for retrospective studies in academic journals.
We view the risks and potential returns from investing in health care
information systems to be high.
We view the risks and potential returns from investing in health care
information systems to be high. With the advent of the Internet,
object-oriented relational databases, browser front ends, and intelligent
software agents, the health care information industry is as dynamic as
biotechnology and is coming of age in a highly dynamic health care industry.
We will approach this challenge with the same diligence and prudence that we
have applied to investments in biotechnology, emphasizing diversification
among high-quality management teams with compelling business models. We will
no doubt make some mistakes along the way but are committed to, and
enthusiastic about, this fertile field for growth.
Existing investments in health care information systems include:
IDX Systems, the leading provider of practice management systems to large,
multispecialty physician groups. Customer site visits at Duke and Scripps
Clinic confirm the quality of the software, implementation team, and
strategic vision of management.
National Data, a leading health care and credit card transaction processing
company that is focused on creating and managing real-time health care data
and information networks. NDC was one of your fund's top-performing holdings
in the first half of 1996, and has now corrected (due to concerns over
internal growth) to the point where valuation is once again quite compelling.
Cardinal Health. While viewed by many merely as a drug distributor (in fact,
we classify Cardinal as a distribution company), management has the ability
to mine the data collected as part of its distribution activities and to
provide specialty health care services at Pyxis, Owen, and the packaging
businesses. A recent visit to corporate headquarters uncovered some of the
key strategies behind a newly formed subsidiary, Cardinal Information
Corporation.
Medical Manager, the leading provider of practice management systems to
smaller physician practices with over 40,000 sites and 100,000 physicians
using their systems. A recent visit to the company revealed that the
acquisition of dealer networks and the generation of recurring revenue
streams from electronic data interchange (EDI) initiatives are on track.
Synetic, a development-stage, Internet-focused health care information
company managed by the team that built the Medco Containment Services
mail-service pharmacy business (acquired by Merck in 1993). Your fund owns
the convertible debentures both to reduce risk of investing in a start-up and
to get paid a yield while waiting for management to build clear business
value that will be recognized by Wall Street.
OUTLOOK
We enter 1998 with "Great Expectations." We remain bullish on the long-term
outlook for health care stocks, since strong underlying demand, proprietary
technology-driven innovation, and high returns on invested capital all
encourage long-term investment in health science companies. In the near term,
we are still concerned about the strong valuations, especially among the
larger-capitalization pharmaceutical and medical device companies. To quote
Mr. Micawber from another Dickens classic, David Copperfield, "something will
turn up" to deflate some of these valuations. Until now, however, most large
domestic drug and device companies have contended with a stronger U.S.
dollar, and the regulatory and legislative environments have been relatively
benign. With an almost perfect economic environment of moderate growth,
moderate inflation, and moderate interest rates, valuation of blue chip
growth companies may well continue to expand. Your fund is trying to limit
your risk by diligently seeking companies developing differentiated,
cost-effective products and services that address voids in existing
therapies.
We believe we have an appropriate strategy and the necessary resources to
deliver good long-term returns. We strongly believe that emerging
biotechnology and health care information systems companies are compelling
long-term investments that are appropriately held through a diversified
health care mutual fund. As a shareholder, I continue to invest in the fund
on a regular basis, believing that dollar-cost averaging* is an excellent way
to participate in the long-term growth of the dynamic health sciences field.
Thank you for your continued support.
Respectfully submitted,
Joseph Klein III
Executive Vice President and
Chairman of the Investment Advisory Committee
January 22, 1998
* Dollar-cost averaging does not assure a profit and does not protect
against loss in declining markets.
T. Rowe Price Health Sciences Fund
Portfolio Highlights
TWENTY-FIVE LARGEST HOLDINGS
Percent of
Net Assets
12/31/97
____________________________________________________________________
Collagen 3.7%
IDX Systems 3.2
Pfizer 2.7
Warner-Lambert 2.7
National Data 2.4
____________________________________________________________________
COR Therapeutics 2.2
PhyCor 2.2
Merck 2.2
Zeneca Group 2.1
Bristol-Myers Squibb 2.1
____________________________________________________________________
United HealthCare 2.0
Sandoz Capital 2.0
Cardinal Health 1.9
Medtronic 1.9
Nationwide Health Properties 1.9
____________________________________________________________________
Tenet Healthcare 1.8
Concentra Managed Care 1.8
Smith & Nephew 1.8
American Oncology Resources 1.7
United States Surgical 1.7
____________________________________________________________________
Omnicare 1.7
Service Corp. International 1.6
Biogen 1.6
MedImmune 1.6
Dentsply International 1.6
____________________________________________________________________
Total 52.1%
T. Rowe Price Health Sciences Fund
Portfolio Highlights
CONTRIBUTIONS TO THE CHANGE IN NET ASSET VALUE PER SHARE
6 Months Ended 12/31/97
Ten Best Contributors
__________________________________________________________________
MedImmune * 22(cents)
COR Therapeutics 16
Stericycle 9
Collagen 9
Pfizer 8
Medtronic 7
Renal Treatment Center * 7
Cardinal Health 7
Bristol-Myers Squibb 6
Dentsply International 5
__________________________________________________________________
Total 96(cents)
Ten Worst Contributors
__________________________________________________________________
Xenova Group - 10(cents)
Zonagen * 10
Altana AG ** 10
Vencor 10
Banyu Pharmaceutical 7
United States Surgical 6
Boston Scientific 5
Agouron Pharmaceuticals * 5
Neopath * 4
St. Jude Medical 3
__________________________________________________________________
Total - 70(cents)
12 Months Ended 12/31/97
Ten Best Contributors
__________________________________________________________________
MedImmune * 29(cents)
Warner-Lambert 27
COR Therapeutics 17
Pfizer 16
Bristol-Myers Squibb 15
Eli Lilly ** 13
Medtronic 12
American Oncology Resources 11
SmithKline Beecham ** 11
IDX Systems 9
__________________________________________________________________
Total 160(cents)
Ten Worst Contributors
__________________________________________________________________
Zonagen * - 10(cents)
PacifiCare Health Systems 10
Utah Medical Products 7
Global Pharmaceutical 6
GalaGen 6
Vencor 5
Agouron Pharmaceuticals * 5
Immulogic Pharmaceuticals 4
NPS Pharmaceuticals 4
United States Surgical * 4
__________________________________________________________________
Total - 61(cents)
* Position added
** Position eliminated
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
S&P 500 Health Sciences
Index Fund
12/31/95 $ 10,000 $10,000
12/96 12,296 12,675
12/97 16,398 15,136
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.
Since Inception
Periods Ended 12/31/97 1 Year Inception Date
____________________________________________________________________
Health Sciences Fund 19.41% 23.03% 12/29/95
Investment return and principal value represent past performance and will
vary. Shares may be worth more or less at redemption than at original
purchase.
T. Rowe Price Health Sciences Fund
For a share outstanding throughout each period
Financial Highlights
Year 12/31/95
Ended Through
12/31/97 12/31/96
NET ASSET VALUE
Beginning of period $ 12.27 $ 10.00
Investment activities
Net investment income (0.03) (0.03)*
Net realized and
unrealized gain (loss) 2.39 2.70
Total from
investment activities 2.36 2.67
Distributions
Net realized gain (0.97) (0.40)
NET ASSET VALUE
End of period $ 13.66 $ 12.27
________________________
Ratios/Supplemental Data
Total return 19.41% 26.75%*
Ratio of expenses to
average net assets 1.18% 1.35%*
Ratio of net investment
income to average
net assets (0.21)% (0.32)%*
Portfolio turnover rate 104.4% 133.1%
Average commission rate paid $ 0.0467 $ 0.0603
Net assets, end of period
(in thousands) $ 271,351 $ 193,958
* 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.
T. Rowe Price Health Sciences Fund
December 31, 1997
Portfolio of Investments
Shares/Par Value
In thousands
Common Stocks & Warrants 89.7%
AGRICULTURE & ANIMAL HEALTH 1.4%
Veterinary Products 1.4%
IDEXX Laboratories * 240,000 $ 3,848
Total Agriculture & Animal Health 3,848
ALTERNATE SITE HEALTH CARE DELIVERY 1.7%
Dialysis 1.7%
Renal Care Group * 55,000 1,767
Renal Treatment Center * 80,000 2,890
Total Alternate Site Health
Care Delivery 4,657
BIOTECHNOLOGY 20.9%
U.S. Major - Biotechnology 4.5%
Amgen * 75,000 4,059
Biogen * 120,000 4,373
Centocor * 111,300 3,715
12,147
Antiviral 1.7%
Agouron Pharmaceuticals * 80,000 2,342
Gilead Sciences * 63,600 2,441
4,783
Biomaterials 3.7%
Collagen ! 474,100 10,001
10,001
Endocrine 1.8%
Bone Care International * 135,200 1,373
NPS Pharmaceuticals * 255,000 1,952
Shaman Pharmaceuticals * 330,000 1,599
4,924
Genomics 0.5%
Millennium Pharmaceuticals * 70,000 1,343
1,343
Neuroscience 2.8%
CytoTherapeutics * 300,000 $ 1,191
Guilford Pharmaceuticals * 120,000 2,437
Neurocrine Biosciences * 260,000 2,080
Neurogen * 132,500 1,822
7,530
Signal Transduction 0.7%
Synaptic Pharmaceutical * 189,000 2,008
2,008
Immunology/Vaccines 0.9%
GalaGen * ! 425,000 770
Immulogic Pharmaceuticals * 150,000 284
Magainin Pharmaceuticals * 70,270 569
Magainin Pharmaceuticals * + 129,730 941
Magainin Pharmaceuticals,
Warrants, 8/6/01 * + 84,325 0
2,564
Other Biotechnology 1.9%
Xenova Group (GBP) * 363,000 894
Xenova Group ADR * 250,000 547
Zonagen * 200,000 3,644
5,085
Biotech/Cardiovascular 2.4%
COR Therapeutics * 267,500 6,035
Corvas International * 100,000 400
6,435
Total Biotechnology 56,820
ENVIRONMENTAL PRODUCTS & SERVICES 1.3%
Waste Management 1.3%
Stericycle * 250,000 3,641
Total Environmental
Products & Services 3,641
HEALTH CARE AND LIFE SCIENCE
DISTRIBUTION 3.7%
Drug Distribution 3.7%
Cardinal Health 70,000 5,259
Omnicare 150,000 4,650
Total Health Care and Life
Science Distribution 9,909
HEALTH CARE INFORMATION SYSTEMS 5.8%
Physician Information Systems 3.4%
IDX Systems * 231,200 $ 8,569
Medical Manager * 35,400 644
9,213
Other Information Systems 2.4%
National Data 180,000 6,502
6,502
Total Health Care Information
Systems 15,715
HEALTH CARE REITS 1.9%
Healthcare REITS 1.9%
Nationwide Health Properties, REIT 200,000 5,100
Total Health Care REITS 5,100
HOSPITAL MANAGEMENT 2.9%
Acute Care 2.9%
Quorum Health Group * 105,000 2,756
Tenet Healthcare * 150,000 4,969
Total Hospital Management 7,725
HOSPITAL SUPPLY AND MEDICAL
DEVICE TECHNOLOGY 14.1%
Dental 1.6%
Dentsply International 140,000 4,327
4,327
Medical Device Technology 12.5%
Analogic 100,000 3,775
Boston Scientific * 80,000 3,670
CardioGenesis * 69,300 442
Incontrol * 180,000 1,091
Medtronic 100,000 5,231
Smith & Nephew (GBP) * 1,650,000 4,878
St. Jude Medical * 100,000 3,050
Stryker 100,000 3,725
United States Surgical 160,000 4,690
Utah Medical Products * 160,000 $ 1,090
Ventana Medical Systems * 140,000 2,144
33,786
Total Hospital Supply and
Medical Device Technology 38,113
LABORATORY SUPPLIES AND EQUIPMENT 1.2%
Capital Equipment 1.2%
NeoPath * 130,000 1,698
Pall 80,000 1,655
Total Laboratory Supplies and
Equipment 3,353
LONG-TERM AND SUB-ACUTE CARE 2.5%
Nursing Homes/Sub Acute 0.9%
Vencor * 100,000 2,444
2,444
Funeral Services 1.6%
Service Corp. International 120,000 4,432
4,432
Total Long-Term and Sub-Acute Care 6,876
MANAGED CARE: HMOS 4.4%
California 1.1%
PacifiCare Health Systems (Class A) * 12,800 644
PacifiCare Health Systems (Class B) * 43,800 2,301
2,945
Other HMOs 3.3%
Aetna 50,000 3,528
United HealthCare 110,000 5,466
8,994
Total Managed Care: HMOs 11,939
PHARMACEUTICALS 23.2%
U.S. Major - Pharmaceutical 13.0%
Allergan 100,000 3,356
Bristol-Myers Squibb 60,000 5,677
Johnson & Johnson 20,000 $ 1,318
Merck 55,000 5,844
Monsanto 100,000 4,200
Pfizer 100,000 7,456
Warner-Lambert 60,000 7,440
35,291
Japanese Major- Pharmaceutical 2.4%
Banyu Pharmaceutical (JPY) 200,000 2,206
Takeda Chemical Industries (JPY) 150,000 4,273
6,479
U.K. Major - Pharmaceutical 2.1%
Zeneca Group (GBP) * 100,000 3,510
Zeneca Group ADR 21,400 2,311
5,821
Contract Research Organizations 1.1%
Covance * 150,000 2,981
2,981
Drug Delivery 4.0%
Alkermes * 118,800 2,347
Inhale Therapeutic Systems * + 81,250 1,892
PathoGenesis * 80,000 2,975
R.P. Scherer * 60,000 3,660
10,874
Generics 0.6%
Global Pharmaceutical * ! 354,400 1,329
NaPro BioTherapeutics * 66,200 164
1,493
Total Pharmaceuticals 62,939
PHYSICIAN PRACTICE MANAGEMENT 4.4%
Primary Care 2.6%
PhyCor * 220,000 5,947
ProMedCo * 112,600 1,133
7,080
Specialists 1.8%
American Oncology Resources * 294,500 $ 4,730
4,730
Total Physician Practice
Management 11,810
Miscellaneous Common Stocks 0.3% 889
Total Common Stocks (Cost
$225,782) 243,334
Convertible Bonds 6.0%
Concentra Managed Care,
6.00%, 12/15/01 $3,797,000 4,892
MedImmune, (144a),
7.00%, 7/1/03 1,268,000 2,844
MedImmune, 7.00%, 7/1/03 666,000 1,494
Sandoz Capital, 2.00%,
10/6/02 3,500,000 5,399
Synetic, Sub. Deb. Notes,
5.00%, 2/15/07 2,000,000 1,700
Total Convertible Bonds
(Cost $12,678) 16,329
Short-Term Investments 3.1%
Money Market Funds 3.1%
Reserve Investment Fund,
5.84% # 8,361,186 8,361
Total Short-Term Investments
(Cost $8,361) 8,361
Total Investments in Securities
98.8% of Net Assets (Cost
$246,821) $ 268,024
Other Assets Less Liabilities 3,327
NET ASSETS $ 271,351
___________
! Affiliated company
* Non-income producing
+ Securities contain some restrictions as to public resale-total
of such securities at year-end amounts to 1.04% of net assets.
# Seven-day yield
ADR American Depository Receipt
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 1.05% of net assets.
GBP British sterling
JPY Japanese yen
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Health Sciences Fund
December 31, 1997
Statement of Assets and Liabilities
In thousands
Assets
Investments in securities, at value
Affiliated companies
(cost $14,792) $ 12,100
Other companies
(cost $232,029) 255,924
Total investments in
securities 268,024
Other assets 5,843
Total assets 273,867
Liabilities
Total liabilities 2,516
NET ASSETS $ 271,351
___________
Net Assets Consist of:
Accumulated net realized
gain/loss - net of
distributions 7,549
Net unrealized gain (loss) 21,200
Paid-in-capital applicable to
19,867,884 shares of
$0.0001 par value capital
stock outstanding;
1,000,000,000 shares
authorized 242,602
NET ASSETS $ 271,351
___________
NET ASSET VALUE PER SHARE $ 13.66
___________
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Health Sciences Fund
Statement of Operations
In thousands
Year
Ended
12/31/97
Investment Income
Income
Dividend $ 1,666
Interest 796
Total income 2,462
Expenses
Investment management 1,811
Shareholder servicing 931
Custody and accounting 100
Prospectus and shareholder reports 61
Registration 59
Legal and audit 12
Directors 6
Miscellaneous 15
Total expenses 2,995
Net investment income (533)
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Securities 25,866
Foreign currency transactions (198)
Net realized gain (loss) 25,668
Change in net unrealized gain or loss
Securities 16,198
Other assets and liabilities
denominated in foreign currencies (2
)
Change in net unrealized gain or loss 16,196
Net realized and unrealized gain (loss) 41,864
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 41,331
___________
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Health Sciences Fund
Statement of Changes in Net Assets
In thousands
Year 12/31/95
Ended Through
12/31/97 12/31/96
Increase (Decrease) in Net Assets
Operations
Net investment income $ (533) $ (396)
Net realized gain (loss) 25,668 6,868
Change in net unrealized
gain or loss 16,196 5,004
Increase (decrease) in net
assets from operations 41,331 11,476
Distributions to shareholders
Net realized gain (18,004) (6,074)
Capital share transactions*
Shares sold 164,002 270,973
Distributions reinvested 17,508 5,861
Shares redeemed (127,444) (88,378)
Increase (decrease) in net
assets from capital
share transactions 54,066 188,456
Net Assets
Increase (decrease) during period 77,393 193,858
Beginning of period 193,958 100
End of period $ 271,351 $ 193,958
________________________
*Share information
Shares sold 12,409 22,758
Distributions reinvested 1,311 484
Shares redeemed (9,662) (7,442)
Increase (decrease) in
shares outstanding 4,058 15,800
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Health Sciences Fund
December 31, 1997
Notes to Financial Statements
Note 1 - Significant Accounting Policies
T. Rowe Price Health Sciences Fund, 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.
The accompanying financial statements are prepared in accordance with
generally accepted accounting principles for the investment company industry;
these principles may require the use of estimates by fund management.
Valuation Equity securities listed or regularly traded on a securities
exchange are valued at the last quoted sales price on the day 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.
Investments in mutual funds are valued at the closing net asset value per
share of the mutual fund on the day of valuation.
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 As defined by the Investment Company Act of 1940, an
affiliated company is one in which the fund owns at least 5% of the
outstanding voting securities.
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.
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
Purchases and sales of portfolio securities, other than short-term
securities, aggregated $281,342,000 and $251,235,000, respectively, for the
year ended December 31, 1997.
Note 3 - Federal Income Taxes
No provision for federal income taxes is required since the fund intends to
continue 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 year ended December 31, 1997. The
results of operations and net assets were not affected by the
increases/(decreases) to these accounts.
Undistributed net investment income $ 533,000
Undistributed net realized gain (523,000)
Paid-in-capital (10,000)
At December 31, 1997, the aggregate cost of investments for federal income
tax and financial reporting purposes was $246,821,000, and net unrealized
gain aggregated $21,203,000, of which $42,244,000 related to appreciated
investments and $21,041,000 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 $153,000 was payable at December 31, 1997. 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 0.30% for assets in excess of $80
billion. The effective annual group fee rate was 0.32% at December 31, 1997,
and 0.33% for the year then ended. 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 was
required to bear any expenses through December 31, 1997, which would have
caused the fund's ratio of expenses to average net assets to exceed 1.35%.
The fund was required to reimburse the manager for these expenses, through
December 31, 1999, provided that average net assets had grown or expenses had
declined sufficiently to allow reimbursement without causing the fund's ratio
of expenses to average net assets to exceed 1.35%. Pursuant to this
agreement, $101,000 of previously unaccrued management fees were repaid
during the year ended December 31, 1997.
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 $787,000 for the
year ended December 31, 1997, of which $89,000 was payable at period-end.
The fund may invest in the Reserve Investment Fund and Government Reserve
Investment Fund (collectively, the Reserve Funds), open-end management
investment companies managed by T. Rowe Price Associates, Inc. The Reserve
Funds are offered as cash management options only to mutual funds and other
accounts managed by T. Rowe Price and its affiliates and are not available
to the public. The Reserve Funds pay no investment management fees.
Distributions from the Reserve Funds to the fund for the year ended December
31, 1997, totaled $229,000 and are reflected as interest income in the
accompanying Statement of Operations.
During the year ended December 31, 1997, the fund, in the ordinary course of
business, placed security purchase and sale orders aggregating $9,609,000
with certain affiliates of the manager and paid commissions $22,000 related
thereto.
Tax Information for the Tax Year Ended 12/31/97
We are providing this information as required by the Internal Revenue Code.
The amounts shown may differ from those elsewhere in this report because of
differences between tax and financial reporting requirements.
The fund's distributions to shareholders included:
o $16,147,000 from short-term capital gains, and
o $1,856,000 from long-term capital gains; of which $503,000 was subject
to the 20% rate gains category.
For corporate shareholders, 4.0% of the fund's distributed income and
short-term capital gains qualified for the dividends-received deduction.
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 assets and liabilities of T.
Rowe Price Health Sciences Fund, Inc. as of December 31, 1997, and the
related statement of operations for the year then ended, and the statement
of changes in net assets and the financial highlights for the year then ended
and 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, 1997, by correspondence with the
custodian and brokers. 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, 1997, 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 21, 1998
T. Rowe Price Shareholder Services
Investment Services And Information
Knowledgeable Service Representatives
By Phone 1-800-225-5132 Available Monday through Friday from
8 a.m. to 10 p.m. ET and weekends from 8:30 a.m. to 5 p.m. ET.
In Person Available in T. Rowe Price Investor Centers.
Account Services
Checking Available on most fixed income funds ($500 minimum).
Automatic Investing From your bank account or paycheck.
Automatic Withdrawal Scheduled, automatic redemptions.
Distribution Options Reinvest all, some, or none of your distributions.
Automated 24-Hour Services Including Tele*Access(registered trademark) and
T. Rowe Price OnLine.
Discount Brokerage*
Individual Investments Stocks, bonds, options, precious metals,
and other securities at a savings over regular commission rates.
Investment Information
Combined Statement Overview of your T. Rowe Price accounts.
Shareholder Reports Fund managers' reviews of their strategies and results.
T. Rowe Price Report Quarterly investment newsletter discussing
markets and financial strategies.
Performance Update Quarterly review of all T. Rowe Price fund results.
Insights Educational reports on investment strategies and financial markets.
Investment Guides Asset Mix Worksheet, College Planning Kit, Diversifying
Overseas: A Guide to International Investing, Personal
Strategy Planner, Retirees Financial Guide, and Retirement Planning Kit.
*A division of T. Rowe Price Investment Services, Inc. Member NASD/SIPC.
T. Rowe Price Mutual Funds
Stock Funds
Domestic
Blue Chip Growth
Capital Appreciation
Capital Opportunity
Diversified Small-Cap Growth
Dividend Growth
Equity Income
Equity Index 500*
Extended Equity Market Index
Financial Services
Growth & Income
Growth Stock
Health Sciences
Media & Telecommunications**
Mid-Cap Growth
Mid-Cap Value
New America Growth
New Era
New Horizons***
Real Estate
Science & Technology
Small-Cap Stock
Small-Cap Value***
Spectrum Growth
Total Equity Market Index
Value
International/Global
Emerging Markets Stock
European Stock
Global Stock
International Discovery
International Stock
Japan
Latin America
New Asia
Spectrum International
Bond Funds
Domestic Taxable
Corporate Income
GNMA
High Yield
New Income
Short-Term Bond
Short-Term U.S. Government
Spectrum Income
Summit GNMA
Summit Limited-Term Bond
U.S. Treasury Intermediate
U.S. Treasury Long-Term
Domestic Tax-Free
California Tax-Free Bond
Florida Insured
Intermediate Tax-Free
Georgia Tax-Free Bond
Maryland Short-Term
Tax-Free Bond
Maryland Tax-Free Bond
New Jersey Tax-Free Bond
New York Tax-Free Bond
Summit Municipal Income
Summit Municipal Intermediate
Tax-Free High Yield
Tax-Free Income
Tax-Free Insured
Intermediate Bond
Tax-Free Short-Intermediate
Virginia Short-Term
Tax-Free Bond
Virginia Tax-Free Bond
International/Global
Emerging Markets Bond
Global Government Bond
International Bond
Money Market Funds!
Taxable
Prime Reserve
Summit Cash Reserves
U.S. Treasury Money
Tax-Free
California Tax-Free Money
New York Tax-Free Money
Summit Municipal
Money Market
Tax-Exempt Money
Blended Asset Funds
Balanced
Personal Strategy Balanced
Personal Strategy Growth
Personal Strategy Income
Tax-Efficient Balanced
T. Rowe Price No-Load Variable Annuity
Equity Income Portfolio
International Stock Portfolio
Limited-Term Bond Portfolio
Mid-Cap Growth Portfolio
New America Growth Portfolio
Personal Strategy Balanced Portfolio
Prime Reserve Portfolio
* Formerly the Equity Index Fund.
** Formerly the closed-end New Age Media Fund. Converted to open-end
status on 7/28/97.
*** Closed to new investors.
! Neither the funds nor their share prices are guaranteed by the U.S.
government.
Please call for a prospectus. Read it carefully before you invest or send
money.
The T. Rowe Price No-Load Variable Annuity [#V6021] is issued by Security
Benefit Life Insurance Company. In New York, it [#FSB201(11-96)] is issued
by First Security Benefit Life Insurance Company of New York, White Plains,
NY. T. Rowe Price refers to the underlying portfolios' investment managers
and the distributors, T. Rowe Price Investment Services, Inc.; T. Rowe Price
Insurance Agency, Inc.; and T. Rowe Price Insurance Agency of Texas, Inc. The
Security Benefit Group of Companies and the T. Rowe Price companies are not
affiliated. The variable annuity may not be
available in all states. The contract has limitations. Call a representative
for costs and complete details of the coverage.
For yield, price, last transaction,
current balance, or to conduct
transactions, 24 hours, 7 days
a week, call Tele*Access(registered trademark):
1-800-638-2587 toll free
For assistance
with your existing
fund account, call:
Shareholder Service Center
1-800-225-5132 toll free
410-625-6500 Baltimore area
To open a Discount Brokerage
account or obtain information,
call: 1-800-638-5660 toll free
Internet address:
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
Invest With Confidence(registered trademark)
T. Rowe Price
T. Rowe Price Investment Services, Inc., Distributor.
F10-050 12/31/97
