MERRILL
LYNCH
HEALTHCARE
FUND, INC.
FUND LOGO
Quarterly Report January 31, 1994
This report is not authorized for use as an offer of sale
or a solicitation of an offer to buy shares of the Fund
unless accompanied or preceded by the Fund's current
prospectus. Past performance results shown in this
report should not be considered a representation of
future performance. Investment return and principal
value of shares will fluctuate so that shares, when
redeemed, may be worth more or less than their
original cost.
Merrill Lynch Healthcare Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
MERRILL LYNCH HEALTHCARE FUND, INC.
Officers and
Directors
Ken E. Mathysen-Gerst, Chairman of the Board of Directors
Arthur Zeikel, President and Director
Donald Cecil, Director
Edward H. Meyer, Director
Charles C. Reilly, Director
John F. Wallace, Director
Richard R. West, Director
Terry K. Glenn, Executive Vice President
Norman R. Harvey, Senior Vice President
Philip L. Kirstein, Senior Vice President
Donald C. Burke, Vice President
Jordan C. Schreiber, Vice President and Portfolio Manager
Gerald M. Richard, Treasurer
Robert Harris, Secretary
<PAGE>
Custodian
The Chase Manhattan Bank, N.A.
Global Securities Services
Chase Metro Tech Center
Brooklyn, New York 11245
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
(800) 637-3863
DEAR SHAREHOLDER
Relative performance between the large-capitalization and
smaller-capitalization stocks in the healthcare sector shifted
over the course of the January quarter. As 1993 drew to a close,
shares of large-capitalization US healthcare companies rallied,
following laggard performances for most of the year. The interim
recovery of pharmaceutical companies' share prices reflected the
developing interest of value-oriented investors (attracted by the
group's relatively high dividend yields). There was also the
general realization that the Clinton Administration's healthcare
reform proposal is a worst-case scenario, and that the final
structure of healthcare reform is likely to be much less onerous
for these companies. Furthermore, ongoing company announcements
of business restructurings and layoffs spurred share price
advances, since investors envisioned stabilization of earnings
growth rates in the pharmaceutical industry through cost
reductions.
At the same time, as 1993 drew to a close the performances of
smaller-capitalization healthcare issues generally lagged those
of their larger-capitalization counterparts. This trend reflected
the impact of the large number of initial public offerings (IPOs)
and corporate finance transactions late in the year. However, in
January investor sentiment shifted in favor of the smaller-
capitalization companies.
<PAGE>
Outside of the United States, healthcare companies' shares
continued to underperform relative to their stock markets, with
the exception of Switzerland. In Japan, anticipation of drug
price reductions in April 1994 led to share price erosion for
several leading pharmaceutical companies. Share prices for
Swedish pharmaceutical companies also declined because of drug
price and prescribing pressures in their important German and
Italian markets. In the United Kingdom, the disarray in the US
healthcare sector, the most important market for British
healthcare companies, constrained share prices. In contrast,
share prices of Swiss pharmaceutical companies rose based on the
general investment attractiveness of Switzerland, since it is
relatively insulated from the protracted European recession and
is perceived as a safe haven in the midst of political and
economic turmoil in Russia. Swiss companies are also shifting to
international accounting standards which is boosting earnings
growth.
Investment Strategy
While Merrill Lynch Healthcare Fund, Inc. continues to
selectively invest in large-capitalization issues, our overall
emphasis is on mid- and smaller-capitalization healthcare
companies, with 70.1% of the portfolio invested in these issues
as of January 31. We believe our investments in biotechnology,
diagnostic and medical specialty companies will continue to
benefit performance in 1994. Although the heavy volume of IPOs
and financing will continue, the substantial decline in share
prices in 1993, the potential for important scientific
discoveries and new products, and ongoing progress toward
commercialization lead us to believe that selected biotechnology
shares will remain at the forefront of the healthcare sector's
performance over the longer term. Furthermore, the job creation
and capital investment potential of these companies suggest that
they may experience less regulation under healthcare reform
legislation.
Among the Fund's smaller-capitalization investments are
Perseptive Biosystems, Inc. (3.9% of net assets), Cordis Corp.
(8.9%), Scios Nova, Inc. (2.8%), and Life Medical Sciences Inc.
(0.7%). These companies typify the new technologies and
treatments and the long-term investment potential offered by
smaller healthcare companies. Perseptive Biosystems is a small
but rapidly growing biotechnology company which has pioneered new
purification techniques for use in pharmaceutical research
laboratories. Cordis makes catheters for medical use. As a low-
cost producer that is quickly gaining market share, we believe
Cordis is well-positioned in the current cost-containment
environment. Scios Nova is a biotechnology company that has a
compound in advanced clinical study for treatment of endstage
kidney disease. This medication may offer an alternative to
costly and often ineffective kidney dialysis. We established a
position in Life Medical Sciences during the October quarter.
This small-capitalization company has an FDA-approved device that
closes open wounds and not only avoids expensive skin grafts but
also accelerates healing.
<PAGE>
In the larger-capitalization area we have focused on companies
with new products and few near-term patent expirations. Our
pharmaceutical holdings in the United States are Pfizer, Inc.
(0.9% of net assets), a new position, and Eli Lilly & Company
(0.8%). Pfizer has a new drug for treating arthritis that is
awaiting review by the Food & Drug Administration (FDA). Lilly's
Prozac is the leading antidepressant medication in the United
States and other major world markets. The US FDA has been
publicly supportive of Prozac's safety, which has silenced the
drug's former critics.
The Fund's other major pharmaceutical holdings are based outside
of the United States. Two key overseas investments are Roche
Holdings AG--PC (8.4% of net assets) in Switzerland and the
Swedish-based Astra AB (0.3%). In addition to manufacturing
pharmaceuticals and diagnostics, Roche is a leading worldwide
manufacturer of vitamins, which are increasing in popularity as
greater emphasis is placed on self care and preventative medicine
in the current environment of cost containment. We expect Astra
to convert its US license arrangement with Merck & Co. into a far
more profitable joint venture in 1995. This should boost the
company's earnings growth rate. Should Astra and Merck elect to
continue the present arrangement, the sales growth of Astra's
ulcer treatment Losec will continue to accelerate, and should be
a strong source of royalty income well into the late 1990s.
Our investments in health maintenance organizations (HMOs) are
focused on geographic areas such as New York City (Oxford Health
Plans, Inc.) and Baltimore/Washington DC (Mid Atlantic Medical
Services, a new position), where penetration is still low, as
opposed to California where competition is intense.
In Conclusion
Looking ahead, we believe that the downside potential for large-
capitalization healthcare stocks will be modest in 1994 based on
present valuations and reasonable dividend yields. While the
portfolio is potentially exposed to greater downside risk based
on the concentration in smaller-capitalization issues, we believe
that new product development advances, industry consolidation
and the recent decline in share prices will limit the risk.
Overall, we expect that 1994 may prove to be a better, but still
subdued, year for healthcare investors. As the final form of US
healthcare legislation becomes clearer, the present uncertainties
in the investment environment will diminish.
Thank you for your investment in Merrill Lynch Healthcare Fund,
Inc., and we look forward to reviewing our outlook and strategy
with you again in our upcoming annual report to shareholders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
<PAGE>
(Jordan C. Schreiber)
Jordan C. Schreiber
Vice President and Portfolio Manager
February 28, 1994
PERFORMANCE DATA
None of the past results shown should be considered a
representation of future performance. Investment return and
principal value of shares will fluctuate so that shares,
when redeemed, may be worth more or less than their original
cost.
<TABLE>
Recent
Performance
Results*+++
<CAPTION>
12 Month 3 Month
1/31/94 10/31/93 1/31/93 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares $4.17 $3.87 $3.89 +7.20% +7.75%
Class B Shares 3.83 3.56 3.59 +6.69 +7.58
Class A Shares--Total Return +7.59(1) +7.75
Class B Shares--Total Return +6.69 +7.58
<FN>
* Investment results shown for the 3-month and 12-month periods
are before the deduction of any sales charges.
(1) Percent change includes reinvestment of $0.013 per share
ordinary income dividends.
</TABLE>
Average
Annual
Total Return+++
% Return Without % Return With
Class A Shares* Sales Charge Sales Charge**
Year Ended 12/31/93 -2.63% -8.96%
2/01/90++ through 12/31/93 +9.25 +7.39
Five Years Ended 12/31/93 +9.66 +8.20
Ten Years Ended 12/31/93 +9.63 +8.90
[FN]
*Maximum sales charge is 6.5%.
**Assuming maximum sales charge.
++On February 1, 1990, Merrill Lynch Asset Management became
the sole investment adviser.
<PAGE>
% Return % Return
Class B Shares* Without CDSC With CDSC**
Year Ended 12/31/93 -3.49% -7.35%
2/01/90++ through 12/31/93 +8.08 +8.05
Five Years Ended 12/31/93 +8.51 +8.51
Inception (10/21/88) through 12/31/93 +8.63 +8.63
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced
to 0% after 4 years.
**Assuming payment of applicable contingent deferred sales
charge.
++On February 1, 1990, Merrill Lynch Asset Management became
the sole investment adviser.
<TABLE>
Performance
Summary--
Class A Shares+++
<CAPTION>
Net Asset Value Capital Gains Dividends
Period Covered Beginning Ending Distributed Paid* % Change**
<C> <C> <C> <C> <C> <C>
4/1/83-12/31/83 $ 9.15 $ 9.56 -- $0.120 + 5.85%
1984 9.56 8.83 $ 0.040 0.090 - 6.34
1985 8.83 10.65 -- 0.120 +22.16
1986 10.65 11.94 0.530 0.100 +17.86
1987 11.94 9.90 3.347 0.015 +10.24
1988 9.90 9.56 0.825 0.145 + 6.39
1989 9.56 9.09 1.422 0.068 +11.46
1990 9.09 7.29 0.832 0.489 - 6.19
1991 7.29 9.18 -- 1.320 +45.71
1992 9.18 4.03 4.123++ 1.028 + 6.92
1993 4.03 3.91 -- 0.013 - 2.63
1/1/94-1/31/94 3.91 4.17 -- -- + 6.65
------- ------
Total $11.119 Total $3.508
Cumulative total return as of 1/31/94: +183.20%
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital
gains distributions at net asset value on the ex-dividend date,
and do not include sales charge; results would be lower if sales charge was included.
++Figure includes a $0.879 and $3.089 return of capital on
4/22/92 and 4/27/92, respectively.
</TABLE>
<PAGE>
<TABLE>
Performance
Summary--
Class B Shares+++
<CAPTION>
Net Asset Value Capital Gains Dividends
Period Covered Beginning Ending Distributed Paid* % Change**
<C> <C> <C> <C> <C> <C>
10/21/88-12/31/88 $10.24 $9.55 $0.825 $0.089 + 2.22%
1989 9.55 9.07 1.422 0.006 +10.70
1990 9.07 7.19 0.832 0.455 - 7.42
1991 7.19 8.96 -- 1.291 +44.21
1992 8.96 3.72 4.123++ 1.028 + 5.46
1993 3.72 3.59 -- -- - 3.49
1/1/94-1/31/94 3.59 3.83 -- -- + 6.69
------ ------
Total $7.202 Total $2.869
Cumulative total return as of 1/31/94: +64.03%
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital
gains distributions at net asset value on the ex-dividend date,
and do not reflect deduction of any sales charge; results
would be lower if sales charge was deducted.
++Figure includes a $0.879 and $3.089 return of capital on
4/22/92 and 4/27/92, respectively.
</TABLE>
+++Important Note:
Prior to April 27, 1992, Merrill Lynch Healthcare Fund, Inc. was
known as Sci/Tech Holdings, Inc. and contained, in addition
to a healthcare portfolio, a portfolio of technology securities.
The data above include the performance of the technology
portfolio which is no longer part of the Fund. Set forth below is
performance data which, for the period before April 27, 1992,
includes only the performance of the healthcare portfolio and a
pro rata allocated portion of Sci/Tech Holdings, Inc.'s cash
reserves. On February 1, 1990, Merrill Lynch Asset Management
became the sole investment adviser.
<PAGE>
Average
Annual
Total Return++
% Return Without % Return With
Class A Shares* Sales Charge Sales Charge**
Year Ended 12/31/93 - 2.63% - 8.96%
2/01/90++ through 12/31/93 +18.00 +15.99
[FN]
*Maximum sales charge is 6.5%.
**Assuming maximum sales charge.
++Due to the inability to completely isolate the performance of
Sci/Tech Holdings, Inc.'s technology portfolio from its healthcare
portfolio, computations are based upon management's estimates of
the healthcare portfolio.
% Return % Return
Class B Shares* Without CDSC With CDSC**
Year Ended 12/31/93 - 3.49% - 7.35%
2/01/90++ through 12/31/93 +17.46 +17.30
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced
to 0% after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
Recent
Performance
Results
12 Month 2/01/90 to 1/31/94++
% Change % Change
Class A Shares--Total Return +7.59%(1) +103.88%
Class B Shares--Total Return +6.69 +100.34
[FN]
++Due to the inability to completely isolate the performance of
Sci/Tech Holdings, Inc.'s technology portfolio from its
healthcare portfolio, computations are based upon management's
estimates of the healthcare portfolio.
(1)Percent change includes reinvestment of $0.013 per share
ordinary income dividends.
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
NORTH
AMERICA Percent of
Industries Shares Held Investments Cost Value Net Assets
<S> <S> <C> <S> <C> <C> <C>
United States Biotechnology 25,000 Alkermes Inc. $ 208,125 $ 196,875 0.1%
50,000 Athena Neurosciences 492,500 500,000 0.4
420,000 Bio-Technology General Corp. 2,410,929 2,362,500 1.7
10,000 Biogen Inc. 465,000 520,000 0.4
20,000 British Bio-Technology Group PLC (ADR)* 260,000 215,000 0.1
10,000 Chiron Corp. 508,333 952,500 0.7
10,000 Genentech Inc. 347,480 503,750 0.4
100,000 Matrix Pharmaceuticals Inc. 937,500 1,100,000 0.8
260,000 Molecular Dynamics, Inc. 4,191,876 3,315,000 2.4
20,000 Neozyme II Corp.--Units (a) 311,881 670,000 0.5
200,000 Perseptive Biosystems, Inc. 3,375,000 5,450,000 3.9
20,000 Perseptive Tech II Corp.--Units (b) 440,000 550,000 0.4
420,000 Scios Nova, Inc. 4,804,322 3,937,500 2.8
20,000 Vertex Pharmacueticals Inc. 360,000 370,000 0.3
---------- ----------- ----
19,112,946 20,643,125 14.9
Diagnostics 240,000 Aprogenex Inc. 2,124,148 1,980,000 1.4
95,000 Epitope Inc. 2,125,431 1,840,625 1.3
450,000 Meris Laboratories, Inc. 4,322,794 1,293,750 1.0
270,000 Quidel Corp. 1,348,629 1,417,500 1.0
100,000 Sangstat Medical Corp. 700,000 700,000 0.5
---------- ----------- ----
10,621,002 7,231,875 5.2
Healthcare Cost 30,000 A.L. Laboratories Inc. 556,800 457,500 0.3
Containment 20,000 Coventry Corp. 1,020,000 1,015,000 0.7
80,000 Health Management Systems, Inc. 1,306,248 1,900,000 1.4
20,000 Horizon Healthcare Corp. 438,700 440,000 0.3
10,000 Marsam Pharmaceuticals Inc. 220,000 187,500 0.1
40,400 Medaphis Corp. 535,300 1,464,500 1.1
190,000 Mid Atlantic Medical Services 4,715,006 5,795,000 4.2
60,000 Oxford Health Plans, Inc. 1,894,218 3,960,000 2.8
40,000 Purepac Inc. 683,181 540,000 0.4
10,000 Value Health Inc. 248,100 396,250 0.3
50,000 Watson Pharmaceutical Inc. 1,411,871 1,362,500 1.0
---------- ---------- ----
13,029,424 17,518,250 12.6
<PAGE>
Medical Specialties 50,000 Arrow International, Inc. 1,237,875 1,175,000 0.8
50,000 Bard (C.R.) Inc. 1,244,899 1,468,750 1.1
240,000 Cordis Corp. 8,846,875 12,420,000 8.9
530,000 EP Technologies Inc. 3,647,502 3,908,750 2.8
295,000 Ethical Holdings PLC (ADR)* 2,742,500 2,507,500 1.8
85,000 Life Medical Sciences Inc. 645,960 871,250 0.6
30,000 Life Medical Sciences Inc. (Warrants)(c) 80,252 97,500 0.1
50,000 Medtronic, Inc. 3,390,500 4,200,000 3.1
100,000 North American Vaccine Inc., NVX 1,087,479 1,150,000 0.8
133,334 Uromed Corp. Inc. 1,000,005 1,000,005 0.7
60,000 Ventritex Inc. 2,201,876 2,385,000 1.7
50,000 Visix Inc. 1,106,875 1,175,000 0.9
---------- ---------- ----
27,232,598 32,358,755 23.3
Pharmaceutical-- 180,000 Carter-Wallace, Inc. 5,062,667 4,455,000 3.2
Diversified 50,000 IVAX Corp. 1,409,912 1,606,250 1.1
50,000 Penederm Inc. 550,000 650,000 0.5
---------- ---------- ----
7,022,579 6,711,250 4.8
Pharmaceutical-- 110,000 Alpha 1 Biomedicals, Inc. 1,636,708 1,622,500 1.2
Prescription 270,000 Aphton Corp. 5,425,581 6,615,000 4.7
48,000 Argus Pharmaceuticals, Inc. 286,800 258,000 0.2
20,000 Eli Lilly & Company 1,184,600 1,197,500 0.8
20,000 Pfizer, Inc. 1,336,200 1,292,500 0.9
---------- ---------- ----
9,869,889 10,985,500 7.8
Investments in the United States 86,888 438 95,448,755 68.6
Total Investments in North America 86,888,438 95,448,755 68.6
PACIFIC
BASIN
Australia
Biotechnology 300,000 Biota Holdings, Ltd. 1,812,417 2,030,712 1.5
Investments in Australia 1,812,417 2,030,712 1.5
Japan
Pharmaceutical-- 25,000 Sankyo Co., Ltd. 635,566 609,363 0.4
Diversified
Investments in Japan 635,566 609,363 0.4
Total Investments in the Pacific Basin 2,447,983 2,640,075 1.9
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
WESTERN
EUROPE Percent of
Industries Shares Held Investments Cost Value Net Assets
<S> <S> <C> <S> <C> <C> <C>
Germany
Pharmaceutical-- 1,600 Schering AG $ 683,876 $ 1,027,751 0.8%
Diversified
Investments in Germany 683,876 1,027,751 0.8
Netherlands
Pharmaceutical-- 68,000 AKZO N.V. 5,621,687 7,340,513 5.3
Prescription
Investments in the Netherlands 5,621,687 7,340,513 5.3
Sweden
Pharmaceutical-- 20,000 Astra AB 'B' Fria 387,322 465,534 0.3
Prescription 100,000 Pharmacia Biotech AB (Class B) 1,668,203 1,910,208 1.4
Investments in Sweden 2,055,525 2,375,742 1.7
Switzerland
Pharmaceutical-- 4,000 Ciba-Geigy AG (Registered) 1,578,703 2,542,593 1.8
Diversified 2,400 Roche Holdings AG--PC 4,650,337 11,724,940 8.4
400 Sandoz AG (Registered) 1,177,760 1,187,821 0.9
Investments in Switzerland 7,406,800 15,455,354 11.1
United Kingdom
Biotechnology 140,000 British Bio-Technology Group PLC 838,541 758,151 0.5
Medical Specialties 523,808 Scotia Holdings PLC 504,511 2,045,973 1.5
Investments in the United Kingdom 1,343,052 2,804,124 2.0
Total Investments in Western Europe 17,110,940 29,003,484 20.9
<CAPTION>
SHORT-TERM
SECURITIES Face Amount Commercial Paper**
<C> <S> <C> <C> <C>
$5,525,000 Associates Corp. of North America,
3.15% due 2/01/1994 5,525,000 5,525,000 4.0
2,000,000 The Dow Chemical Co., 3.00%
due 2/03/1994 1,999,667 1,999,667 1.4
3,000,000 Matterhorn Capital Corp., 3.05%
due 2/22/1994 2,994,662 2,994,662 2.2
2,000,000 PHH Corp., 3.08% due 2/11/1994 1,998,289 1,998,289 1.4
Total Investments in Short-Term
Securities 12,517,618 12,517,618 9.0
<PAGE>
Total Investments $118,964,979 139,609,932 100.4
============
Liabilities in Excess of Other Assets (614,693) (0.4)
------------ -----
Net Assets $138,995,239 100.0%
============ =====
Net Asset Class A--Based on net assets of $76,314,456
Value: and 18,310,899 shares outstanding. $ 4.17
============
Class B--Based on net assets of $62,680,783
and 16,382,126 shares outstanding. $ 3.83
============
<FN>
* American Depositary Receipt (ADR).
** Commercial Paper is traded on a discount basis; the interest rates shown are the discount rates
paid at the time of purchase by the Company.
(a)Each unit consists of one share of Neozyme II Corp. and one "Callable Warrant." The Callable
Warrant may be exercised at any time from 1/01/1997-12/31/1998.
(b)Each unit consists of one share of Perseptive Tech II Corp. and one "Callable Warrant." The
Callable Warrant may be exercised at any time from 1/01/1996--12/31/1998.
(c)Warrants entitle the Fund to purchase a predetermined number of shares of common stock. The
purchase price and number of shares are subject to adjustment under certain conditions
until the expiration date.
</TABLE>
PORTFOLIO CHANGES
For the Quarter Ended January 31, 1994
Additions
Alkermes Inc.
Athena Neurosciences
Biogen Inc.
*Branded Consumer Product
Coventry Corp.
Eli Lilly & Company
Horizon Healthcare Corp.
*Human Genome Sciences, Inc.
IVAX Corp.
Penederm Inc.
Mid Atlantic Medical Services
Perseptive Tech II Corp.--Units
Pfizer, Inc.
Pharmacia Biotech AB (Class B)
Sandoz AG (Registered)
Sangstat Medical Corp.
Vertex Pharmaceuticals Inc.
Visix Inc.
<PAGE>
Deletions
Applied Immune Sciences, Inc.
Astra AB 'A' Fria
*Branded Consumer Product
Cyberonics
Emisphere Technologies, Inc.
GMIS Inc.
*Human Genome Sciences, Inc.
Magainin Pharmaceuticals Inc.
Merck & Co., Inc.
Neozyme Corp.
Procordia AB (Class B)
Rhone--Poulenc Rorer
Roberts Pharmaceutical Corp.
Vision--Sciences, Inc.
Warner--Lambert Co.
Wellpoint Health Networks, Inc.
[FN]
*Added and deleted in the same quarter.
PORTFOLIO INFORMATION
Worldwide
Investments
As of 1/31/94
Percent Breakdown of Percent of
Securities by Country Net Assets
United States 68.6%
Switzerland 11.1
Netherlands 5.3
United Kingdom 2.0
Sweden 1.7
Australia 1.5
Germany 0.8
Japan 0.4
Industries Represented Percent of
In the Portfolio Net Assets
Medical Specialties 24.8%
Pharmaceutical--Diversified 17.1
Biotechnology 16.9
Pharmaceutical--Prescription 14.8
Healthcare Cost Containment 12.6
Diagnostics 5.2
<PAGE>
Ten Largest Holdings Percent of
Represented in the Portfolio Net Assets
Cordis Corp. 8.9%
Roche Holdings AG--PC 8.4
AKZO N.V. 5.3
Aphton Corp. 4.7
Mid Atlantic Medical Services 4.2
Perseptive Biosystems, Inc 3.9
Carter--Wallace, Inc. 3.2
Medtronic Inc. 3.1
Scios Nova, Inc. 2.8
Oxford Health Plans, Inc. 2.8
