UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-03595
Name of Fund: Merrill Lynch Healthcare Fund, Inc.
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Robert C. Doll, Jr., Chief Executive
Officer, Merrill Lynch Healthcare Fund, Inc., 800 Scudders Mill Road,
Plainsboro, NJ, 08536. Mailing address: P.O. Box 9011, Princeton,
NJ, 08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 04/30/06
Date of reporting period: 05/01/05 - 04/30/06
Item 1 - Report to Stockholders
Annual Report
April 30, 2006
Merrill Lynch
Healthcare Fund, Inc.
(BULL LOGO) Merrill Lynch Investment Managers
www.mlim.ml.com
Mercury Advisors
A Division of Merrill Lynch Investment Managers
www.mercury.ml.com
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. Statements and
other information herein are as dated and are subject to change.
A description of the policies and procedures that the Fund uses to determine
how to vote proxies relating to portfolio securities is available (1)
without charge, upon request, by calling toll-free 1-800-637-3863; (2) at
www.mutualfunds.ml.com; and (3) on the Securities and Exchange Commission's
Web site at http://www.sec.gov. Information about how the Fund voted proxies
relating to securities held in the Fund's portfolio during the most recent
12-month period ended June 30 is available (1) at www.mutualfunds.ml.com; and
(2) on the Securities and Exchange Commission's Web site at http://www.sec.gov.
Merrill Lynch Healthcare Fund, Inc.
Box 9011
Princeton, NJ 08543-9011
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Merrill Lynch Healthcare Fund, Inc.
Announcement to Shareholders
On February 15, 2006, BlackRock, Inc. ("BlackRock") and Merrill Lynch & Co.,
Inc. ("Merrill Lynch") entered into an agreement to contribute Merrill Lynch's
investment management business, Merrill Lynch Investment Managers, L.P. and
certain affiliates (including Fund Asset Management, L.P. and Merrill Lynch
Investment Managers International Limited), to BlackRock to create a new
independent company that will be one of the world's largest asset management
firms with over $1 trillion in assets under management (based on combined
assets under management as of March 31, 2006). The transaction is expected to
close in the third quarter of 2006, at which time the new company will operate
under the BlackRock name. The Fund's Board of Directors has approved a new
investment advisory agreement with BlackRock Advisors, Inc. or its successor
("BlackRock Advisors") on substantially the same terms and for the same
advisory fee as the current investment advisory agreement with the Investment
Adviser. If the new agreement is approved by the Fund's shareholders,
BlackRock Advisors is expected to become the Fund's investment adviser upon
the closing of the transaction between Merrill Lynch and BlackRock.
Portfolio Information as of April 30, 2006
Percent of
Ten Largest Equity Holdings Net Assets
Sanofi-Aventis 5.3%
Wyeth 5.2
Novartis AG Registered Shares 5.0
Caremark Rx, Inc. 5.0
Abbott Laboratories 4.8
Cerner Corp. 4.1
Astellas Pharma, Inc. 4.1
SonoSite, Inc. 3.6
Boston Scientific Corp. 3.6
Roche Holding AG 3.5
Percent of
Total
Geographic Allocation Investments
United States 62.4%
Switzerland 7.4
France 5.2
Japan 4.3
United Kingdom 1.5
Germany 1.5
Denmark 1.4
India 1.1
Sweden 0.9
Finland 0.5
Netherlands 0.3
Israel 0.3
Austria 0.2
Other* 13.0
* Includes portfolio holdings in short-term investments.
MERRILL LYNCH HEALTHCARE FUND, INC. APRIL 30, 2006
A Letter From the President
Dear Shareholder
You may be aware that changes are on the horizon at Merrill Lynch Investment
Managers ("MLIM"). On February 15, 2006, Merrill Lynch announced plans to
combine the firm's investment advisory business, including MLIM, with another
highly regarded investment manager - BlackRock, Inc. ("BlackRock").
We believe this merger of asset management strength will benefit our
investors. MLIM is a leading investment management organization with over
$576 billion in assets under management globally and 2,757 employees in
17 countries. It offers over 100 investment strategies in vehicles ranging
from mutual funds to institutional portfolios. BlackRock is one of the
largest publicly traded investment management firms in the United States
with $463.1 billion in assets under management and 1,839 employees. It
manages assets on behalf of institutional and individual investors worldwide
through a variety of equity, fixed income, liquidity and alternative
investment products.
At the completion of the transaction, which is expected in the third quarter
of this year, the resultant firm will be a top-10 investment manager worldwide
with over $1 trillion in assets under management.* The combined company will
provide a wider selection of high-quality investment solutions across a
range of asset classes and investment styles. MLIM and BlackRock possess
complementary capabilities that together create a well-rounded organization
uniting some of the finest money managers in the industry. At the same time,
the firms share similar values and beliefs - they are focused on delivering
excellence on behalf of clients, and both make investment performance their
single most important mission. In short, the merger only reinforces our
commitment to shareholders.
Most of MLIM's investment products - including mutual funds, separately
managed accounts, annuities and variable insurance funds - eventually will
carry the "BlackRock" name. As a shareholder in one or more MLIM-advised
mutual funds, you will receive a proxy package in the coming weeks in
connection with this transaction. After you receive this information, should
you have any questions or concerns, do not hesitate to contact your financial
advisor.
As always, we thank you for entrusting us with your investment assets, and we
look forward to continuing to serve your investment needs with even greater
strength and scale as the new BlackRock.
Sincerely,
(Robert C. Doll, Jr.)
Robert C. Doll, Jr.
President and Chief Investment Officer
Merrill Lynch Investment Managers
* $1.039 trillion in assets under management as of March 31, 2006.
Data, including assets under management, are as of March 31, 2006.
MERRILL LYNCH HEALTHCARE FUND, INC. APRIL 30, 2006
A Discussion With Your Fund's Portfolio Manager
The Fund outperformed the broader equity market and its composite benchmark
for the fiscal year as we remained focused on our long-term strategy of
balancing the upside potential of growth-oriented subsectors with the downside
support offered by more defensive healthcare areas.
How did the Fund perform during the fiscal year in light of the existing
market conditions?
For the 12-month period ended April 30, 2006, Merrill Lynch Healthcare Fund's
Class A, Class B, Class C, Class I and Class R Shares had total returns of
+18.61%, +17.64%, +17.50%, +18.70% and +18.25%, respectively. (Fund results
shown do not reflect sales charges and would be lower if sales charges were
included. Complete performance information can be found on pages 6 - 7 of this
report to shareholders.) The Fund outpaced the broader stock market, as
represented by the Standard & Poor's (S&P) 500 Index, and its composite
benchmark, which comprises four Morgan Stanley Capital International (MSCI)
industries.* The S&P 500 Index returned +15.42% for the 12-month period while
the composite benchmark returned +14.09%. The Fund also outperformed the
Lipper Health/Biotechnology Funds category, which posted an average return of
+12.37%for the year ended April 30, 2006. (Funds in this Lipper group focus
their investment on companies engaged in healthcare and biotechnology.)
The past 12 months were marked by continued stable economic growth in the
United States. Inflation was contained, helped by the Federal Reserve Board's
series of interest rate hikes and by increased global trade. In particular,
China and India, two markets with low labor costs, helped to offset the higher
interest rates, soaring oil prices and lofty industrial commodity prices that
prevailed during the 12-month period. This led investor interest to shift
toward cyclical companies, and the health care sector underperformed virtually
all industry groups as the year progressed. The biotechnology and HMO sub-
groups were strong performers from May through December 2005, until HMOs
pulled back in early 2006. All health care sub-groups underperformed the broad
market during the first four months of 2006.
* The Fund's composite benchmark comprises the following four
MSCI industries: health care equipment and supplies (15%),
health care providers and services (25%), biotechnology (25%)
and pharmaceuticals (35%).
Within the pharmaceutical industry, companies continued to be pressured by
fiscally hard-pressed governments throughout the world. At the same time,
generic price competition has been increasingly severe as patents have
expired. Meanwhile, the number of internally developed new products with
potential for higher prices has continued to be meager. This combination of
factors has led to margin pressure, and valuations of drug companies have been
modest as a consequence. During the past year, however, drug companies started
to meaningfully bolster their new product pipelines by entering into license
deals with biotechnology companies. We believe a pharmaceutical industry
recovery should come into sight in 2006, as many new drugs appear to be in
an early phase of development. After 2007, the presently heavy load of
pharmaceutical patent expirations should abate. For these reasons, we view
the intermediate-term outlook for pharmaceuticals as brightening.
The Fund performed quite well against this backdrop. For the most part, we
attribute the portfolio's outperformance of its benchmarks to favorable
allocation decisions - that is, being weighted in the appropriate subgroups of
the health care sector. The strongest performance came from biotechnology and
HMOs, the two areas where we had maintained the greatest weightings during the
fiscal year.
What changes were made to the portfolio during the period?
We maintained our "barbell" approach, which seeks to balance upside potential
and downside support within the health care sector. However, based on our
relatively optimistic outlook for pharmaceuticals, we shifted our focus on the
defensive side of the barbell from HMOs toward pharmaceuticals in early 2006.
As described earlier, we find that early signs of recovery and reasonable
valuations provide defensive support for selective prescription drug
companies. At the same time, we continue to emphasize biotechnology companies
for their upside potential based on robust new product discovery. For example,
Celgene Corp.'s Revlimid and Genentech, Inc.'s Avastin are two promising new
cancer treatments now being rapidly accepted by physicians throughout the
world.
MERRILL LYNCH HEALTHCARE FUND, INC. APRIL 30, 2006
In all, the portfolio's total number of holdings was increased from 58 one
year ago to 78 at period-end. New positions added to the portfolio during this
past year include Hologic, Inc., a company with a digital mammography screen
that provides much greater accuracy than present imaging systems, and Elekta
AB, a Swedish company that developed the gamma knife, a non-invasive means to
excise brain tumors. The Fund's foreign holdings rose from 15.4% of net assets
to 28.1% during the year. This largely reflected the addition of European,
Japanese and Indian pharmaceutical companies and the lightening of our
position in U.S.-based HMOs.
How would you characterize the portfolio's position at the close of the
period?
At the close of the fiscal year, the Fund was defensively positioned. We
continue to pursue a growth-oriented investment style while remaining
sensitive to stock valuations. We seek risk reduction through diversification
among various health care sub-groups with different performance
characteristics. The portfolio also ended the period with a greater weighting
in dividend-paying stocks and a larger total number of holdings.
Jordan C. Schreiber
Vice President and Portfolio Manager
May 11, 2006
MERRILL LYNCH HEALTHCARE FUND, INC. APRIL 30, 2006
About Fund Performance
Investors are able to purchase shares of the Fund through multiple pricing
alternatives:
* Class A Shares incur a maximum initial sales charge (front-end load) of 5.25%
and an account maintenance fee of 0.25% per year (but no distribution fee).
* Class B Shares are subject to a maximum contingent deferred sales charge of
4% declining to 0% after six years. In addition, Class B Shares are subject to
a distribution fee of 0.75% per year and an account maintenance fee of 0.25%
per year. These shares automatically convert to Class A Shares after
approximately eight years. (There is no initial sales charge for automatic
share conversions.) All returns for periods greater than eight years reflect
this conversion.
* Class C Shares are subject to a distribution fee of 0.75% per year and an
account maintenance fee of 0.25% per year. In addition, Class C Shares are
subject to a 1% contingent deferred sales charge if redeemed within one year
of purchase.
* Effective December 28, 2005, Class I Shares are no longer subject to any
front-end sales charge. Class I Shares bear no ongoing distribution or account
maintenance fees and are available only to eligible investors. Had the sales
charge been included, the Fund's Class I Shares' performance would have been
lower.
* Class R Shares do not incur a maximum sales charge (front-end load) or
deferred sales charge. These shares are subject to a distribution fee of 0.25%
per year and an account maintenance fee of 0.25% per year. Class R Shares are
available only to certain retirement plans. Prior to inception, Class R Share
performance results are those of Class I Shares (which have no distribution or
account maintenance fees) restated for Class R Share fees.
None of the past results shown should be considered a representation of future
performance. Current performance may be lower or higher than the performance
data quoted. Refer to www.mlim.ml.com to obtain performance data current to
the most recent month-end. Performance results do not reflect the deduction of
taxes that a shareholder would pay on fund distributions or the redemption of
fund shares. Figures shown in each of the following tables assume reinvestment
of all dividends and capital gain distributions, if any, at net asset value on
the ex-dividend date. Investment return and principal value of shares will
fluctuate so that shares, when redeemed, may be worth more or less than their
original cost. Dividends paid to each class of shares will vary because of the
different levels of account maintenance, distribution and transfer agency fees
applicable to each class, which are deducted from the income available to be
paid to shareholders.
Recent Performance Results
6-Month 12-Month 10-Year
As of April 30, 2006 Total Return Total Return Total Return
ML Healthcare Fund, Inc.--Class A Shares* +4.28% +18.61% +218.87%
ML Healthcare Fund, Inc.--Class B Shares* +4.01 +17.64 +200.19
ML Healthcare Fund, Inc.--Class C Shares* +3.88 +17.50 +194.27
ML Healthcare Fund, Inc.--Class I Shares* +4.37 +18.70 +227.02
ML Healthcare Fund, Inc.--Class R Shares* +4.17 +18.25 +213.21
S&P 500 (R) Index** +9.64 +15.42 +135.44
* Investment results shown do not reflect sales charges; results shown would be lower if a sales
charge was included. Cumulative total investment returns are based on changes in net asset
values for the periods shown, and assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date.
** This unmanaged index covers 500 industrial, utility, transportation and financial companies
of the U.S. markets (mostly NYSE issues) representing about 75% of NYSE market capitalization
and 30% of NYSE issues.
S&P 500 is a registered trademark of the McGraw-Hill companies.
MERRILL LYNCH HEALTHCARE FUND, INC. APRIL 30, 2006
PERFORMANCE DATA (CONCLUDED)
Total Return Based on a $10,000 Investment
A line graph illustrating the growth of a $10,000 investment in ML Healthcare
Fund, Inc.++ Class A, Class B, Class C, Class I and Class R Shares* compared
to a similar investment in Standard & Poor's 500 Index++++. Values illustrated
are as follows:
ML Healthcare Fund, Inc.++
Class A Shares*
Date Value
April 1996 $ 9,475.00
April 1997 $10,244.00
April 1998 $14,746.00
April 1999 $16,469.00
April 2000 $21,036.00
April 2001 $24,025.00
April 2002 $24,692.00
April 2003 $20,649.00
April 2004 $25,287.00
April 2005 $25,473.00
April 2006 $30,213.00
ML Healthcare Fund, Inc.++
Class B Shares*
Date Value
April 1996 $10,000.00
April 1997 $10,744.00
April 1998 $15,322.00
April 1999 $16,975.00
April 2000 $21,556.00
April 2001 $24,420.00
April 2002 $24,871.00
April 2003 $20,667.00
April 2004 $25,124.00
April 2005 $25,310.00
April 2006 $30,019.00
ML Healthcare Fund, Inc.++
Class C Shares*
Date Value
April 1996 $10,000.00
April 1997 $10,728.00
April 1998 $15,305.00
April 1999 $16,961.00
April 2000 $21,490.00
April 2001 $24,364.00
April 2002 $24,814.00
April 2003 $20,569.00
April 2004 $25,067.00
April 2005 $25,045.00
April 2006 $29,427.00
ML Healthcare Fund, Inc.++
Class I Shares*
Date Value
April 1996 $10,000.00
April 1997 $10,855.00
April 1998 $15,637.00
April 1999 $17,515.00
April 2000 $22,429.00
April 2001 $25,698.00
April 2002 $26,445.00
April 2003 $22,196.00
April 2004 $27,279.00
April 2005 $27,550.00
April 2006 $32,702.00
ML Healthcare Fund, Inc.++
Class R Shares*
Date Value
April 1996 $10,000.00
April 1997 $10,801.00
April 1998 $15,483.00
April 1999 $17,256.00
April 2000 $21,987.00
April 2001 $25,068.00
April 2002 $25,669.00
April 2003 $21,465.00
April 2004 $26,346.00
April 2005 $26,488.00
April 2006 $31,321.00
Standard & Poor's 500 Index++++
Date Value
April 1996 $10,000.00
April 1997 $12,513.00
April 1998 $17,652.00
April 1999 $21,504.00
April 2000 $23,682.00
April 2001 $20,610.00
April 2002 $18,008.00
April 2003 $15,612.00
April 2004 $19,183.00
April 2005 $20,399.00
April 2006 $23,544.00
* Assuming maximum sales charge, transaction costs and other operating
expenses, including advisory fees.
++ ML Healthcare Fund, Inc. invests worldwide primarily in equity
securities of companies that, in the opinion of management, derive or
are expected to derive a substantial portion of their sales from
products or services in health care.
++++ This unmanaged Index covers 500 industrial, utility, transportation and
financial companies of the U.S. markets (mostly NYSE issues) representing
about 75% of NYSE market capitalization and 30% of NYSE issues.
Past performance is not indicative of future results.
Average Annual Total Return
Return Without Return With
Sales Charge Sales Charge**
Class A Shares*
One Year Ended 4/30/06 +18.61% +12.38%
Five Years Ended 4/30/06 + 4.69 + 3.57
Ten Years Ended 4/30/06 +12.30 +11.69
Return Return
Without CDSC With CDSC++++++
Class B Shares++
One Year Ended 4/30/06 +17.64% +13.64%
Five Years Ended 4/30/06 + 3.87 + 3.54
Ten Years Ended 4/30/06 +11.62 +11.62
Return Return
Without CDSC With CDSC++++++
Class C Shares++++
One Year Ended 4/30/06 +17.50% +16.50%
Five Years Ended 4/30/06 + 3.85 + 3.85
Ten Years Ended 4/30/06 +11.40 +11.40
Class I Shares Return
One Year Ended 4/30/06 +18.70%
Five Years Ended 4/30/06 + 4.94
Ten Years Ended 4/30/06 +12.58
Class R Shares Return
One Year Ended 4/30/06 +18.25%
Five Years Ended 4/30/06 + 4.56
Ten Years Ended 4/30/06 +12.09
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
++ Maximum contingent deferred sales charge is 4% and is reduced
to 0% after six years.
++++ Maximum contingent deferred sales charge is 1% and is reduced
to 0% after one year.
++++++ Assuming payment of applicable contingent deferred sales
charge.
MERRILL LYNCH HEALTHCARE FUND, INC. APRIL 30, 2006
Disclosure of Expenses
Shareholders of this Fund may incur the following charges: (a) expenses
related to transactions, including sales charges, redemption fees and exchange
fees; and (b) operating expenses including advisory fees, distribution fees
including 12b-1 fees, and other Fund expenses. The following example (which is
based on a hypothetical investment of $1,000 invested on November 1, 2005 and
held through April 30, 2006) is intended to assist shareholders both in
calculating expenses based on an investment in the Fund and in comparing these
expenses with similar costs of investing in other mutual funds.
The first table below provides information about actual account values and
actual expenses. In order to estimate the expenses a shareholder paid during
the period covered by this report, shareholders can divide their account value
by $1,000 and then multiply the result by the number in the first line under
the heading entitled "Expenses Paid During the Period."
The second table below provides information about hypothetical account values
and hypothetical expenses based on the Fund's actual expense ratio and an
assumed rate of return of 5% per year before expenses. In order to assist
shareholders in comparing the ongoing expenses of investing in this Fund and
other funds, compare the 5% hypothetical example with the 5% hypothetical
examples that appear in other funds' shareholder reports.
The expenses shown in the table are intended to highlight shareholders'
ongoing costs only and do not reflect any transactional expenses, such as
sales charges, redemption fees or exchange fees. Therefore, the second table
is useful in comparing ongoing expenses only, and will not help shareholders
determine the relative total expenses of owning different funds. If these
transactional expenses were included, shareholder expenses would have been
higher.
Expenses Paid
Beginning Ending During the Period*
Account Value Account Value November 1, 2005
November 1, April 30, to April 30,
2005 2006 2006
Actual
Class A $1,000 $1,042.80 $ 7.76
Class B $1,000 $1,040.10 $11.61
Class C $1,000 $1,038.80 $11.65
Class I $1,000 $1,043.70 $ 6.51
Class R $1,000 $1,041.70 $ 9.06
Hypothetical (5% annual return before expenses)**
Class A $1,000 $1,016.90 $ 7.67
Class B $1,000 $1,013.12 $11.45
Class C $1,000 $1,013.07 $11.50
Class I $1,000 $1,018.12 $ 6.43
Class R $1,000 $1,015.62 $ 8.95
* For each class of the Fund, expenses are equal to the annualized expense ratio for the class
(1.55% for Class A, 2.32% for Class B, 2.33% for Class C, 1.30% for Class I and 1.81% for Class R),
multiplied by the average account value over the period, multiplied by 179/365 (to reflect the
one-half year period shown).
** Hypothetical 5% annual return before expenses is calculated by pro-rating the number of days in the
most recent fiscal half year divided by 365.
MERRILL LYNCH HEALTHCARE FUND, INC. APRIL 30, 2006
Schedule of Investments (in U.S. dollars)
Shares
Industry Common Stocks Held Value
Middle East
Israel--0.3%
Medical Devices--0.3%
Given Imaging Ltd. (c)(e) 80,000 $ 1,875,200
Total Common Stocks in the
Middle East--0.3% 1,875,200
North America
United States--71.2%
Biotechnology Discovery Tools
& Platform Technologies--3.4%
Covance, Inc. (c)(e) 180,000 10,503,000
Exelixis, Inc. (c) 380,000 4,088,800
Lexicon Genetics, Inc. (c) 175,957 923,774
Medarex, Inc. (c) 199,000 2,389,990
-------------
17,905,564
Biotechnology Products--11.5%
Altus Pharmaceuticals, Inc. (c) 67,320 1,470,269
Amgen, Inc. (c) 100,000 6,770,000
Arena Pharmaceuticals, Inc. (c) 134,000 1,897,440
Atherogenics Inc. (c) 14,457 204,566
BioCryst Pharmaceuticals, Inc. (c)(e) 503,599 7,830,964
Biogen Idec, Inc. (c) 72,600 3,256,110
Cell Genesys, Inc. (c)(e) 50,000 340,000
Coley Pharmaceutical Group, Inc. (c)(e) 138,000 2,206,620
Genentech, Inc. (c)(e) 165,000 13,152,150
Genzyme Corp. (c) 111,000 6,788,760
Neurometrix, Inc. (c) 35,143 1,325,594
Onyx Pharmaceuticals, Inc. (c)(e) 100,000 2,335,000
PDL BioPharma, Inc. (c) 16,000 460,480
Progenics Pharmaceuticals, Inc. (c) 120,000 2,812,800
Seattle Genetics, Inc. (c) 400,000 1,964,000
Vertex Pharmaceuticals, Inc. (c)(e) 206,000 7,492,220
-------------
60,306,973
Health Care Information
& Technology--10.0%
Cerner Corp. (c)(e) 552,000 21,886,800
Emageon, Inc. (c) 196,000 3,479,000
Emdeon Corp. (c) 1,400,000 15,974,000
Matria Healthcare, Inc. (c) 120,000 3,682,800
Nighthawk Radiology Holdings, Inc. (c) 31,826 771,144
WebMD Health Corp. Class A (c)(e) 159,700 6,950,144
-------------
52,743,888
Managed Health Care--
Medicare/Medicaid--0.3%
WellCare Health Plans, Inc. (c) 40,000 1,675,200
Managed Health Care--
Multi-line--4.4%
UnitedHealth Group, Inc. 200,000 9,948,000
WellPoint, Inc. (c) 185,000 13,135,000
-------------
23,083,000
Shares
Industry Common Stocks Held Value
North America (concluded)
United States (concluded)
Managed Health
Care--Regional--1.1%
Humana, Inc. (c) 132,000 $ 5,963,760
Medical Devices--15.6%
Boston Scientific Corp. (c) 819,000 19,033,560
Conor Medsystems, Inc. (c) 160,000 4,320,000
DexCom, Inc. (c)(e) 154,200 3,879,672
ev3, Inc. (c) 154,000 2,416,260
Gen-Probe, Inc. (c) 80,000 4,277,600
HemoSense, Inc. (c) 266,800 1,667,500
Hologic, Inc. (c) 372,000 17,733,240
Intuitive Surgical, Inc. (c) 8,000 1,016,000
Medtronic, Inc. 42,000 2,105,040
Somanetics Corp. (c) 50,500 828,705
SonoSite, Inc. (c)(e) 505,700 19,090,175
St. Jude Medical, Inc. (c) 54,000 2,131,920
Stereotaxis, Inc. (c) 49,806 589,703
Thoratec Corp. (c) 64,000 1,152,640
Zimmer Holdings, Inc. (c) 30,000 1,887,000
-------------
82,129,015
Pharmaceutical--
Diversified--4.8%
Abbott Laboratories 594,000 25,387,560
Pharmaceutical--
Prescription--7.1%
Bristol-Myers Squibb Co. 60,000 1,522,800
Forest Laboratories, Inc. (c) 133,000 5,370,540
Pfizer, Inc. 105,000 2,659,650
Schering-Plough Corp. 30,000 579,600
Wyeth 564,000 27,449,880
-------------
37,582,470
Pharmaceutical--
Specialty--6.5%
Avalon Pharmaceuticals, Inc. (c) 58,800 268,128
Celgene Corp. (c)(e) 394,000 16,611,040
Dov Pharmaceutical, Inc. (c)(e) 228,100 1,856,734
Hana Biosciences, Inc. (c)(e) 100,000 1,181,000
Nektar Therapeutics (c) 200,000 4,302,000
Renovis, Inc. (c)(e) 514,610 9,077,720
Sirna Therapeutics, Inc. (c)(e) 150,000 1,134,000
-------------
34,430,622
Pharmacy Benefit Managers--6.5%
Caremark Rx, Inc. 575,000 26,191,250
Medco Health Solutions, Inc. (c) 155,000 8,250,650
-------------
34,441,900
Total Common Stocks in
North America--71.2% 375,649,952
MERRILL LYNCH HEALTHCARE FUND, INC. APRIL 30, 2006
Schedule of Investments (continued) (in U.S. dollars)
Shares
Industry Common Stocks Held Value
Pacific Basin/Asia
India--1.3%
Pharmaceutical--Generic--1.3%
Sun Pharmaceuticals Industries Ltd. 355,000 $ 6,891,339
Total Common Stocks in India 6,891,339
Japan--5.0%
Pharmaceutical--
Prescription--5.0%
Astellas Pharma, Inc. 524,000 21,795,096
Chugai Pharmaceutical Co., Ltd. 200,000 4,316,988
Total Common Stocks in Japan 26,112,084
Total Common Stocks in the
Pacific Basin/Asia--6.3% 33,003,423
Western Europe
Austria--0.2%
Biotechnology Products--0.2%
Intercell AG (c) 80,756 1,322,418
Total Common Stocks in Austria 1,322,418
Denmark--1.6%
Biotechnology Products--1.6%
Genmab A/S (c) 235,000 8,313,422
Total Common Stocks in Denmark 8,313,422
Finland--0.5%
Pharmaceutical--
Diversified--0.5%
Orion OYJ Class B 114,100 2,703,492
Total Common Stocks in Finland 2,703,492
France--6.0%
Pharmaceutical--
Prescription--5.3%
Sanofi-Aventis 298,000 28,059,380
Pharmaceutical--
Specialty--0.7%
Flamel Technologies SA (a)(c) 174,500 3,524,900
Total Common Stocks in France 31,584,280
Germany--1.7%
Medical--1.7%
Schwarz Pharma AG 100,000 8,849,056
Total Common Stocks in Germany 8,849,056
Netherlands--0.4%
Biotechnology Products--0.1%
Pharming Group NV (c) 100,000 464,812
Medical Devices--0.3%
Orthofix International NV (c) 36,504 1,481,697
Total Common Stocks in the
Netherlands 1,946,509
Shares
Industry Common Stocks Held Value
Western Europe (concluded)
Sweden--1.0%
Medical Devices--1.0%
Elekta AB 320,000 $ 5,264,156
Total Common Stocks in Sweden 5,264,156
Switzerland--8.4%
Pharmaceutical--
Prescription--8.4%
Novartis AG Registered Shares 459,000 26,257,568
Roche Holding AG 120,000 18,399,196
Total Common Stocks in Switzerland 44,656,764
United Kingdom--1.7%
Pharmaceutical--
Prescription--0.8%
GlaxoSmithKline Plc 146,625 4,146,948
Pharmaceutical--
Specialty--0.9%
Ark Therapeutics Group Plc (c) 2,400,000 3,969,754
Skyepharma Plc (c) 1,000,000 745,238
-------------
4,714,992
Total Common Stocks in the
United Kingdom 8,861,940
Total Common Stocks in
Western Europe--21.5% 113,502,037
Total Common Stocks
(Cost--$424,661,836)--99.3% 524,030,612
Rights (c)
Western Europe
United Kingdom--0.0%
Pharmaceutical--Specialty--0.0%
Ark Therapeutics Group Plc (f) 600,000 65,436
Total Rights (Cost--$0)--0.0% 65,436
Beneficial
Short-Term Securities Interest
Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I, 4.75% (b)(g) $13,895,619 13,895,619
Merrill Lynch Liquidity Series, LLC
Money Market Series,
4.89% (b)(d)(g) 64,293,650 64,293,650
Total Short-Term Securities
(Cost--$78,189,269)--14.8% 78,189,269
Total Investments (Cost--$502,851,105*)--114.1% 602,285,317
Liabilities in Excess of Other Assets--(14.1%) (74,643,118)
-------------
Net Assets--100.0% $ 527,642,199
=============
MERRILL LYNCH HEALTHCARE FUND, INC. APRIL 30, 2006
Schedule of Investments (concluded) (in U.S. dollars)
* The cost and unrealized appreciation (depreciation) of investments
as of April 30, 2006, as computed for federal income tax purposes,
were as follows:
Aggregate cost $ 504,240,727
=================
Gross unrealized appreciation $ 107,687,036
Gross unrealized depreciation (9,642,446)
-----------------
Net unrealized appreciation $ 98,044,590
=================
(a) Depositary receipts.
(b) Investments in companies considered to be an affiliate of the Fund,
for purposes of Section 2(a)(3) of the Investment Company Act of 1940,
were as follows:
Net Interest
Affiliate Activity Income
Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I $ 1,870,226 $791,918
Merrill Lynch Liquidity Series, LLC
Money Market Series $(20,463,700) $296,167
(c) Non-income producing security.
(d) Security was purchased with the cash proceeds from securities loans.
(e) Security, or a portion of security, is on loan.
(f) The rights may be exercised until 5/22/2006.
(g) Represents the current yield as of 4/30/2006.
o For Fund compliance purposes, the Fund's industry classifications
refer to any one or more of the industry sub-classifications used by
one or more widely recognized market indexes or ratings group indexes,
and/or as defined by Fund management. This definition may not apply for
purposes of this report, which may combine industry sub-classifications
for reporting ease. Industries are shown as a percent of net assets.
These industry classifications are unaudited.
o Forward foreign exchange contracts as of April 30, 2006 were as follows:
Unrealized
Settlement Appreciation
Foreign Currency Purchased Date (Depreciation)
EUR 2,156,952 May 2006 $ 5,834
GBP 2,188,348 May 2006 31,699
JPY 1,646,064,587 May 2006 (40,440)
-----------
Total Unrealized Depreciation on
Forward Foreign Exchange Contracts--Net
(USD Commitment--$21,135,661) $ (2,907)
===========
o Currency Abbreviations:
EUR Euro
GBP British Pound
JPY Japanese Yen
USD U.S. Dollar
See Notes to Financial Statements.
MERRILL LYNCH HEALTHCARE FUND, INC. APRIL 30, 2006
Statement of Assets and Liabilities
As of April 30, 2006
Assets
Investments in unaffiliated securities, at value (including securities
loaned of $62,463,748) (identified cost--$424,661,836) $ 524,096,048
Investments in affiliated securities, at value (identified cost--$78,189,269) 78,189,269
Unrealized appreciation on forward foreign exchange contracts 37,533
Foreign cash (cost--$24,122) 24,639
Receivables:
Securities sold $ 21,008,478
Dividends 420,006
Capital shares sold 326,233
Securities lending 18,742 21,773,459
---------------
Prepaid expenses and other assets 28,791
---------------
Total assets 624,149,739
---------------
Liabilities
Collateral on securities loaned, at value 64,293,650
Deferred foreign capital gain tax 80,563
Unrealized depreciation on forward foreign exchange contracts 40,440
Bank overdraft 1,354
Payables:
Securities purchased 29,574,518
Capital shares redeemed 1,533,319
Investment adviser 414,177
Other affiliates 242,268
Distributor 186,216 31,950,498
---------------
Accrued expenses and other liabilities 141,035
---------------
Total liabilities 96,507,540
---------------
Net Assets
Net assets $ 527,642,199
===============
Net Assets Consist of
Class A Shares of Common Stock, $.10 par value, 100,000,000 shares authorized $ 2,580,759
Class B Shares of Common Stock, $.10 par value, 250,000,000 shares authorized 2,142,110
Class C Shares of Common Stock, $.10 par value, 100,000,000 shares authorized 1,738,714
Class I Shares of Common Stock, $.10 par value, 200,000,000 shares authorized 2,182,231
Class R Shares of Common Stock, $.10 par value, 250,000,000 shares authorized 97,000
Paid-in capital in excess of par 356,136,627
Undistributed investment income--net $ 2,907
Undistributed realized capital gains--net 63,447,813
Unrealized appreciation--net 99,314,038
---------------
Total accumulated earnings--net 162,764,758
---------------
Net Assets $ 527,642,199
===============
Net Asset Value
Class A--Based on net assets of $172,584,634 and 25,807,594 shares outstanding $ 6.69
===============
Class B--Based on net assets of $105,502,664 and 21,421,103 shares outstanding $ 4.93
===============
Class C--Based on net assets of $85,553,300 and 17,387,142 shares outstanding $ 4.92
===============
Class I--Based on net assets of $159,116,103 and 21,822,313 shares outstanding $ 7.29
===============
Class R--Based on net assets of $4,885,498 and 970,000 shares outstanding $ 5.04
===============
See Notes to Financial Statements.
MERRILL LYNCH HEALTHCARE FUND, INC. APRIL 30, 2006
Statement of Operations
For the Year Ended April 30, 2006
Investment Income
Dividends (net of $129,634 foreign withholding tax) $ 1,827,622
Interest from affiliates 791,918
Securities lending--net 296,167
---------------
Total income 2,915,707
---------------
Expenses
Investment advisory fees $ 5,288,419
Account maintenance and distribution fees--Class B 1,183,051
Account maintenance and distribution fees--Class C 799,805
Account maintenance fees--Class A 415,265
Transfer agent fees--Class A 304,922
Transfer agent fees--Class I 295,282
Transfer agent fees--Class B 248,649
Accounting services 202,888
Transfer agent fees--Class C 173,121
Custodian fees 128,395
Professional fees 75,348
Registration fees 63,147
Printing and shareholder reports 56,026
Directors' fees and expenses 44,595
Account maintenance and distribution fees--Class R 17,228
Pricing fees 6,901
Transfer agent fees--Class R 6,358
Other 39,295
---------------
Total expenses 9,348,695
---------------
Investment loss--net (6,432,988)
---------------
Realized & Unrealized Gain (Loss)--Net
Realized gain (loss) on:
Investments--net (including $127,033 foreign capital gain tax) 97,830,593
Foreign currency transactions--net (350,240)
Payment by affiliate 165,361 97,645,714
---------------
Change in unrealized appreciation/depreciation on:
Investments--net (including $80,563 deferred foreign capital gain tax) (5,751,204)
Foreign currency transactions--net (49,232) (5,800,436)
--------------- ---------------
Total realized and unrealized gain--net 91,845,278
---------------
Net Increase in Net Assets Resulting from Operations $ 85,412,290
===============
See Notes to Financial Statements.
MERRILL LYNCH HEALTHCARE FUND, INC. APRIL 30, 2006
Statements of Changes in Net Assets
For the Year Ended April 30,
Increase (Decrease) in Net Assets: 2006 2005
Operations
Investment loss--net $ (6,432,988) $ (7,680,053)
Realized gain--net 97,645,714 28,495,750
Change in unrealized appreciation/depreciation--net (5,800,436) (24,271,798)
--------------- ---------------
Net increase (decrease) in net assets resulting from operations 85,412,290 (3,456,101)
--------------- ---------------
Distributions to Shareholders
Realized gain--net:
Class A (11,287,434) (9,134,235)
Class B (10,211,998) (11,655,113)
Class C (6,879,317) (6,066,998)
Class I (10,315,668) (11,767,593)
Class R (286,716) (63,939)
--------------- ---------------
Net decrease in net assets resulting from distributions to shareholders (38,981,133) (38,687,878)
--------------- ---------------
Capital Share Transactions
Net increase (decrease) in net assets derived from capital share transactions 3,436,185 (180,272,066)
--------------- ---------------
Net Assets
Total increase (decrease) in net assets 49,867,342 (222,416,045)
Beginning of year 477,774,857 700,190,902
--------------- ---------------
End of year* $ 527,642,199 $ 477,774,857
=============== ===============
* Undistributed (accumulated) investment income (loss)--net $ 2,907 $ (250,563)
=============== ===============
See Notes to Financial Statements.
MERRILL LYNCH HEALTHCARE FUND, INC. APRIL 30, 2006
Financial Highlights
Class A
The following per share data and ratios have been derived For the Year Ended April 30,
from information provided in the financial statements. 2006 2005 2004 2003 2002
Per Share Operating Performance
Net asset value, beginning of year $ 6.04 $ 6.38 $ 5.21 $ 6.23 $ 6.29
---------- ---------- ---------- ---------- ----------
Investment loss--net** (.07) (.07) (.06) (.05) (.07)
Realized and unrealized gain (loss)--net 1.19 .10 1.23 (.97) .24
---------- ---------- ---------- ---------- ----------
Total from investment operations 1.12 .03 1.17 (1.02) .17
---------- ---------- ---------- ---------- ----------
Less distributions from realized gain--net (.47) (.37) -- -- (.23)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 6.69 $ 6.04 $ 6.38 $ 5.21 $ 6.23
========== ========== ========== ========== ==========
Total Investment Return*
Based on net asset value per share 18.61%++ .74% 22.46% (16.37%) 2.78%
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses 1.55% 1.58% 1.55% 1.58% 1.52%
========== ========== ========== ========== ==========
Investment loss--net (.99%) (1.13%) (1.00%) (1.04%) (1.20%)
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of year (in thousands) $ 172,585 $ 142,774 $ 160,443 $ 119,375 $ 146,714
========== ========== ========== ========== ==========
Portfolio turnover 120.32% 126.81% 141.46% 128.24% 81.36%
========== ========== ========== ========== ==========
* Total investment returns exclude the effects of sales charges.
** Based on average shares outstanding.
++ In 2006, there was no impact to the Fund's total investment return as a result of a payment by
Merrill Lynch Investment Managers, L.P. (an affiliate).
See Notes to Financial Statements.
MERRILL LYNCH HEALTHCARE FUND, INC. APRIL 30, 2006
Financial Highlights (continued)
Class B
The following per share data and ratios have been derived For the Year Ended April 30,
from information provided in the financial statements. 2006 2005 2004 2003 2002
Per Share Operating Performance
Net asset value, beginning of year $ 4.57 $ 4.96 $ 4.08 $ 4.91 $ 5.05
---------- ---------- ---------- ---------- ----------
Investment loss--net** (.09) (.09) (.08) (.08) (.10)
Realized and unrealized gain (loss)--net .89 .07 .96 (.75) .19
---------- ---------- ---------- ---------- ----------
Total from investment operations .80 (.02) .88 (.83) .09
---------- ---------- ---------- ---------- ----------
Less distributions from realized gain--net (.44) (.37) -- -- (.23)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 4.93 $ 4.57 $ 4.96 $ 4.08 $ 4.91
========== ========== ========== ========== ==========
Total Investment Return*
Based on net asset value per share 17.64%++ (.09%) 21.57% (16.90%) 1.85%
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses 2.33% 2.36% 2.32% 2.36% 2.29%
========== ========== ========== ========== ==========
Investment loss--net (1.79%) (1.91%) (1.78%) (1.83%) (1.97%)
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of year (in thousands) $ 105,503 $ 117,482 $ 177,952 $ 194,543 $ 310,916
========== ========== ========== ========== ==========
Portfolio turnover 120.32% 126.81% 141.46% 128.24% 81.36%
========== ========== ========== ========== ==========
* Total investment returns exclude the effects of sales charges.
** Based on average shares outstanding.
++ In 2006, approximately .23% of the Fund's total investment return was attributable to a payment by
Merrill Lynch Investment Managers, L.P. (an affiliate).
See Notes to Financial Statements.
MERRILL LYNCH HEALTHCARE FUND, INC. APRIL 30, 2006
Financial Highlights (continued)
Class C
The following per share data and ratios have been derived For the Year Ended April 30,
from information provided in the financial statements. 2006 2005 2004 2003 2002
Per Share Operating Performance
Net asset value, beginning of year $ 4.57 $ 4.96 $ 4.07 $ 4.91 $ 5.05
---------- ---------- ---------- ---------- ----------
Investment loss--net** (.09) (.09) (.08) (.08) (.10)
Realized and unrealized gain (loss)--net .88 .07 .97 (.76) .19
---------- ---------- ---------- ---------- ----------
Total from investment operations .79 (.02) .89 (.84) .09
---------- ---------- ---------- ---------- ----------
Less distributions from realized gain--net (.44) (.37) -- -- (.23)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 4.92 $ 4.57 $ 4.96 $ 4.07 $ 4.91
========== ========== ========== ========== ==========
Total Investment Return*
Based on net asset value per share 17.50%++ (.09%) 21.87% (17.11%) 1.85%
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses 2.33% 2.37% 2.33% 2.37% 2.30%
========== ========== ========== ========== ==========
Investment loss--net (1.77%) (1.92%) (1.79%) (1.84%) (1.99%)
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of year (in thousands) $ 85,553 $ 68,743 $ 85,753 $ 76,606 $ 98,994
========== ========== ========== ========== ==========
Portfolio turnover 120.32% 126.81% 141.46% 128.24% 81.36%
========== ========== ========== ========== ==========
* Total investment returns exclude the effects of sales charges.
** Based on average shares outstanding.
++ In 2006, there was no impact to the Fund's total investment return as a result of a payment by
Merrill Lynch Investment Managers, L.P. (an affiliate).
See Notes to Financial Statements.
MERRILL LYNCH HEALTHCARE FUND, INC. APRIL 30, 2006
Financial Highlights (continued)
Class I
The following per share data and ratios have been derived For the Year Ended April 30,
from information provided in the financial statements. 2006 2005 2004 2003 2002
Per Share Operating Performance
Net asset value, beginning of year $ 6.55 $ 6.87 $ 5.59 $ 6.66 $ 6.70
---------- ---------- ---------- ---------- ----------
Investment loss--net** (.05) (.06) (.05) (.04) (.06)
Realized and unrealized gain (loss)--net 1.27 .11 1.33 (1.03) .25
---------- ---------- ---------- ---------- ----------
Total from investment operations 1.22 .05 1.28 (1.07) .19
---------- ---------- ---------- ---------- ----------
Less distributions from realized gain--net (.48) (.37) -- -- (.23)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 7.29 $ 6.55 $ 6.87 $ 5.59 $ 6.66
========== ========== ========== ========== ==========
Total Investment Return*
Based on net asset value per share 18.70%++ .99% 22.90% (16.07%) 2.91%
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses 1.30% 1.33% 1.29% 1.33% 1.27%
========== ========== ========== ========== ==========
Investment loss--net (.75%) (.88%) (.75%) (.79%) (.95%)
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of year (in thousands) $ 159,116 $ 146,922 $ 275,570 $ 244,217 $ 311,288
========== ========== ========== ========== ==========
Portfolio turnover 120.32% 126.81% 141.46% 128.24% 81.36%
========== ========== ========== ========== ==========
* Total investment returns exclude the effects of sales charges. Effective December 28, 2005,
Class I Shares are no longer subject to any front-end sales charge.
** Based on average shares outstanding.
++ In 2006, there was no impact to the Fund's total investment return as a result of a payment by
Merrill Lynch Investment Managers, L.P. (an affiliate).
See Notes to Financial Statements.
MERRILL LYNCH HEALTHCARE FUND, INC. APRIL 30, 2006
Financial Highlights (concluded)
Class R
For the Period
January 3, 2003++
The following per share data and ratios have been derived For the Year Ended April 30, to April 30,
from information provided in the financial statements. 2006 2005 2004 2003
Per Share Operating Performance
Net asset value, beginning of period $ 4.66 $ 5.02 $ 4.09 $ 4.04
---------- ---------- ---------- ----------
Investment loss--net** (.06) (.06) (.02) (.01)
Realized and unrealized gain--net .90 .07 .95 .06
---------- ---------- ---------- ----------
Total from investment operations .84 .01 .93 .05
---------- ---------- ---------- ----------
Less distributions from realized gain--net (.46) (.37) -- --
---------- ---------- ---------- ----------
Net asset value, end of period $ 5.04 $ 4.66 $ 5.02 $ 4.09
========== ========== ========== ==========
Total Investment Return
Based on net asset value per share 18.25%++++ .54% 22.74% 1.24%+++++
========== ========== ========== ==========
Ratios to Average Net Assets
Expenses 1.80% 1.83% 1.73% 1.84%+++
========== ========== ========== ==========
Investment loss--net (1.20%) (1.37%) (1.15%) (.36%)+++
========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $ 4,885 $ 1,853 $ 473 --*
========== ========== ========== ==========
Portfolio turnover 120.32% 126.81% 141.46% 128.24%
========== ========== ========== ==========
* Amount is less than $1,000.
** Based on average shares outstanding.
++ Commencement of operations.
++++ In 2006, there was no impact to the Fund's total investment return as a result of a payment by
Merrill Lynch Investment Managers, L.P. (an affiliate).
+++ Annualized.
+++++ Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH HEALTHCARE FUND, INC. APRIL 30, 2006
Notes to Financial Statements
1. Significant Accounting Policies:
Merrill Lynch Healthcare Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as a non-diversified, open-end
management investment company. The Fund's financial statements are prepared
in conformity with U.S. generally accepted accounting principles, which may
require the use of management accruals and estimates. Actual results may
differ from these estimates. The Fund offers multiple classes of shares.
Effective December 28, 2005, Class I Shares are no longer subject to any
front-end sales charge. Class A Shares are sold with a front-end sales charge.
Shares of Class B and Class C may be subject to a contingent deferred sales
charge. Class I Shares are sold only to certain eligible investors. Class R
Shares are sold only to certain retirement plans. All classes of shares have
identical voting, dividend, liquidation and other rights and the same terms
and conditions, except that Class A, Class B, Class C and Class R Shares bear
certain expenses related to the account maintenance of such shares, and Class
B, Class C and Class R Shares also bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights with
respect to matters relating to its account maintenance and distribution
expenditures (except that Class B shareholders may vote on certain changes
to the Class A distribution plan). Income, expenses (other than expenses
attributable to a specific class) and realized and unrealized gains and
losses are allocated daily to each class based on its relative net assets.
The following is a summary of significant accounting policies followed by
the Fund.
(a) Valuation of securities--Equity securities that are held by the Fund that
are traded on stock exchanges or the Nasdaq National Market are valued at the
last sale price or official close price on the exchange, as of the close of
business on the day the securities are being valued or, lacking any sales, at
the last available bid price for long positions, and at the last available
asked price for short positions. In cases where equity securities are traded
on more than one exchange, the securities are valued on the exchange
designated as the primary market by or under the authority of the Board of
Directors of the Fund. Long positions traded in the over-the-counter ("OTC")
market, Nasdaq Small Cap or Bulletin Board are valued at the last available
bid price or yield equivalent obtained from one or more dealers or pricing
services approved by the Board of Directors of the Fund. Short positions
traded in the OTC market are valued at the last available asked price.
Portfolio securities that are traded both in the OTC market and on a stock
exchange are valued according to the broadest and most representative market.
Options written are valued at the last sale price in the case of exchange-
traded options or, in the case of options traded in the OTC market, the last
asked price. Options purchased are valued at their last sale price in the case
of exchange-traded options or, in the case of options traded in the OTC
market, the last bid price. Swap agreements are valued based upon quoted fair
valuations received daily by the Fund from a pricing service or counterparty.
Financial futures contracts and options thereon, which are traded on
exchanges, are valued at their last sale price as of the close of such
exchanges. Obligations with remaining maturities of 60 days or less are valued
at amortized cost unless the Investment Adviser believes that this method no
longer produces fair valuations. Valuation of other short-term investment
vehicles is generally based on the net asset value of the underlying
investment vehicle or amortized cost.
Repurchase agreements are valued at cost plus accrued interest. The Fund
employs pricing services to provide certain securities prices for the Fund.
Securities and assets for which market quotations are not readily available
are valued at fair value as determined in good faith by or under the direction
of the Board of Directors of the Fund, including valuations furnished by the
pricing services retained by the Fund, which may use a matrix system for
valuations. The procedures of a pricing service and its valuations are
reviewed by the officers of the Fund under the general supervision of the
Fund's Board of Directors. Such valuations and procedures will be reviewed
periodically by the Board of Directors of the Fund.
Generally, trading in foreign securities, as well as U.S. government
securities, money market instruments and certain fixed income securities,
is substantially completed each day at various times prior to the close of
business on the New York Stock Exchange ("NYSE"). The values of such
securities used in computing the net asset value of the Fund's shares
are determined as of such times. Foreign currency exchange rates also are
generally determined prior to the close of business on the NYSE. Occasionally,
events affecting the values of such securities and such exchange rates may
occur between the times at which they are determined and the close of business
on the NYSE that may not be reflected in the computation of the Fund's net
asset value. If events (for example, a company announcement, market volatility
or a natural disaster) occur during such periods that are expected to
materially affect the value of such securities, those securities may be valued
at their fair value as determined in good faith by the Fund's Board of
Directors or by the Investment Adviser using a pricing service and/or
procedures approved by the Fund's Board of Directors.
MERRILL LYNCH HEALTHCARE FUND, INC. APRIL 30, 2006
Notes to Financial Statements (continued)
(b) Foreign currency transactions--Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized.
Assets and liabilities denominated in foreign currencies are valued at the
exchange rate at the end of the period. Foreign currency transactions are the
result of settling (realized) or valuing (unrealized) assets or liabilities
expressed in foreign currencies into U.S. dollars. Realized and unrealized
gains or losses from investments include the effects of foreign exchange rates
on investments. The Fund invests in foreign securities, which may involve a
number of risk factors and special considerations not present with investments
in securities of U.S. corporations.
(c) Derivative financial instruments--The Fund may engage in various portfolio
investment strategies both to increase the return of the Fund and to hedge, or
protect, its exposure to interest rate movements and movements in the
securities markets. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
* Financial futures contracts--The Fund may purchase or sell financial futures
contacts and options on such futures contracts. Futures contracts are
contracts for delayed delivery of securities at a specific future date and at
a specific price or yield. Upon entering into a contract, the Fund deposits
and maintains as collateral such initial margin as required by the exchange on
which the transaction is effected. Pursuant to the contract, the Fund agrees
to receive from or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are known as
variation margin and are recorded by the Fund as unrealized gains or losses.
When the contract is closed, the Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed.
* Foreign currency options and futures--The Fund may also purchase or sell
listed or OTC foreign currency options, foreign currency futures and related
options on foreign currency futures as a short or long hedge against possible
variations in foreign exchange rates. Such transactions may be effected with
respect to hedges on non-U.S. dollar denominated securities owned by the Fund,
sold by the Fund but not yet delivered, or committed or anticipated to be
purchased by the Fund.
* Forward foreign exchange contracts--The Fund may enter into forward foreign
exchange contracts as a hedge against either specific transactions or
portfolio positions. The contract is marked-to-market daily and the change in
market value is recorded by the Fund as an unrealized gain or loss. When the
contract is closed, the Fund records a realized gain or loss equal to the
difference between the value at the time it was opened and the value at the
time it was closed.
* Options--The Fund may purchase and write call and put options. When the Fund
writes an option, an amount equal to the premium received by the Fund is
reflected as an asset and an equivalent liability. The amount of the liability
is subsequently marked-to-market to reflect the current market value of the
option written. When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or deducted from)
the basis of the security acquired or deducted from (or added to) the proceeds
of the security sold. When an option expires (or the Fund enters into a
closing transaction), the Fund realizes a gain or loss on the option to the
extent of the premiums received or paid (or gain or loss to the extent the
cost of the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(d) Income taxes--It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends and
capital gains at various rates.
MERRILL LYNCH HEALTHCARE FUND, INC. APRIL 30, 2006
Notes to Financial Statements (continued)
(e) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Dividend income is recorded on the ex-dividend dates.
Dividends from foreign securities where the ex-dividend date may have passed
are subsequently recorded when the Fund has determined the ex-dividend date.
Interest income is recognized on the accrual basis.
(f) Prepaid registration fees--Prepaid registration fees are charged to
expense as the related shares are issued.
(g) Dividends and distributions--Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates.
(h) Securities lending--The Fund may lend securities to financial institutions
that provide cash or securities issued or guaranteed by the U.S. government as
collateral, which will be maintained at all times in an amount equal to at
least 100% of the current market value of the loaned securities. The market
value of the loaned securities is determined at the close of business of the
Fund and any additional required collateral is delivered to the Fund on the
next business day. Where the Fund receives securities as collateral for the
loaned securities, the Fund typically receives the income on both the loaned
securities and the collateral and, as a result, the Fund's yield may increase.
Where the Fund receives cash collateral, it may invest such collateral and
retain the amount earned on such investment, net of any amount rebated to the
borrower. The Fund may receive a flat fee for its loans. Loans of securities
are terminable at any time and the borrower, after notice, is required to
return borrowed securities within five business days. The Fund may pay
reasonable finder's, lending agent, administrative and custodial fees in
connection with its loans. In the event that the borrower defaults on its
obligation to return borrowed securities because of insolvency or for any
other reason, the Fund could experience delays and costs in gaining access to
the collateral. The Fund also could suffer a loss where the value of the
collateral falls below the market value of the borrowed securities, in the
event of borrower default or in the event of losses on investments made with
cash collateral.
(i) Bank overdraft--The Fund recorded a bank overdraft, which resulted from
management estimates of available cash.
(j) Reclassification--U.S. generally accepted accounting principles require
that certain components of net assets be adjusted to reflect permanent
differences between financial and tax reporting. Accordingly, during the
current year, $6,686,458 has been reclassified between undistributed net
realized capital gains and undistributed net investment income as a result of
permanent differences attributable to net operating losses, foreign currency
transactions and foreign taxes paid. This reclassification has no effect on
net assets or net asset values per share.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Merrill Lynch
Investment Managers, L.P. ("MLIM"). The general partner of MLIM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch
& Co., Inc. ("ML & Co."), which is the limited partner. The Fund has also
entered into a Distribution Agreement and Distribution Plan with FAM
Distributors, Inc. ("FAMD" or the "Distributor"), which is a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
MLIM is responsible for the management of the Fund's portfolio and provides,
or arranges for affiliates to provide, the administrative services necessary
for the operation of the Fund. As compensation for its services to the Fund,
MLIM receives monthly compensation at the annual rate of 1.0% of the average
daily net assets of the Fund. MLIM has entered into a Sub-Advisory Agreement
with Merrill Lynch Asset Management U.K. Limited ("MLAM U.K."), an affiliate
of MLIM, pursuant to which MLAM U.K. provides investment advisory services to
MLIM with respect to the Fund. There is no increase in the aggregate fees paid
by the Fund for these services.
Pursuant to the Distribution Plan adopted by the Fund in accordance with Rule
12b-1 under the Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are accrued daily
and paid monthly at annual rates based upon the average daily net assets of
the shares as follows:
Account
Maintenance Distribution
Fee Fee
Class A .25% --
Class B .25% .75%
Class C .25% .75%
Class R .25% .25%
MERRILL LYNCH HEALTHCARE FUND, INC. APRIL 30, 2006
Notes to Financial Statements (continued)
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("MLPF&S"), an affiliate of MLIM, also provides
account maintenance and distribution services to the Fund. The ongoing
account maintenance fee compensates the Distributor and MLPF&S for providing
account maintenance services to Class A, Class B, Class C and Class R
shareholders. The ongoing distribution fee compensates the Distributor and
MLPF&S for providing shareholder and distribution-related services to
Class B, Class C and Class R shareholders.
For the year ended April 30, 2006, FAMD earned underwriting discounts and
direct commissions and MLPF&S earned dealer concessions on sales of the Fund's
Class A and Class I Shares as follows:
FAMD MLPF&S
Class A $ 12,558 $ 175,787
Class I $ 125 $ 1,271
For the year ended April 30, 2006, MLPF&S received contingent deferred sales
charges of $114,393 and $6,555 relating to transactions in Class B and Class C
Shares, respectively.
The Fund has received an exemptive order from the Securities and Exchange
Commission permitting it to lend portfolio securities to MLPF&S or its
affiliates. As of April 30, 2006, the Fund lent securities with a value of
$11,475,952 to MLPF&S or its affiliates. Pursuant to that order, the Fund
also has retained Merrill Lynch Investment Managers, LLC ("MLIM, LLC"), an
affiliate of MLIM, as the securities lending agent for a fee based on a share
of the returns on investment of cash collateral. MLIM, LLC may, on behalf of
the Fund, invest cash collateral received by the Fund for such loans, among
other things, in a private investment company managed by MLIM, LLC or in
registered money market funds advised by MLIM. For the year ended April 30,
2006, MLIM, LLC received $128,191 in securities lending agent fees.
In addition, MLPF&S received $381,847 in commissions on the execution of
portfolio security transactions for the Fund for the year ended April 30, 2006.
MLIM reimbursed the Fund $165,361 as a result of an administrative error.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co.,
is the Fund's transfer agent.
For the year ended April 30, 2006, the Fund reimbursed MLIM $11,515 for
certain accounting services.
Certain officers and/or directors of the Fund are officers and/or directors of
MLIM, PSI, FDS, FAMD, MLAM U.K., ML & Co., and/or MLIM, LLC.
In February 2006, ML & Co. and BlackRock, Inc. entered into an agreement to
contribute ML & Co.'s investment management business, including MLIM, to the
investment management business of BlackRock, Inc. The transaction is expected
to close in the third quarter of 2006.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended April 30, 2006 were $612,074,374 and $647,030,877, respectively.
4. Capital Share Transactions:
Net increase (decrease) in net assets derived from capital share transactions
was $3,436,185 and $(180,272,066) for the years ended April 30, 2006 and
April 30, 2005, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Year Dollar
Ended April 30, 2006 Shares Amount
Shares sold 5,209,230 $ 35,351,422
Automatic conversion of shares 1,865,830 12,619,876
Shares issued to shareholders in
reinvestment of distributions 1,482,227 9,897,213
--------------- ---------------
Total issued 8,557,287 57,868,511
Shares redeemed (6,376,078) (43,135,276)
--------------- ---------------
Net increase 2,181,209 $ 14,733,235
=============== ===============
Class A Shares for the Year Dollar
Ended April 30, 2005 Shares Amount
Shares sold 2,840,992 $ 17,026,680
Automatic conversion of shares 2,538,742 15,235,649
Shares issued to shareholders in
reinvestment of distributions 1,345,733 7,908,862
--------------- ---------------
Total issued 6,725,467 40,171,191
Shares redeemed (8,228,619) (49,224,908)
--------------- ---------------
Net decrease (1,503,152) $ (9,053,717)
=============== ===============
MERRILL LYNCH HEALTHCARE FUND, INC. APRIL 30, 2006
Notes to Financial Statements (continued)
Class B Shares for the Year Dollar
Ended April 30, 2006 Shares Amount
Shares sold 2,540,095 $ 12,808,840
Shares issued to shareholders in
reinvestment of distributions 1,823,121 9,031,488
--------------- ---------------
Total issued 4,363,216 21,840,328
--------------- ---------------
Shares redeemed (6,145,786) (30,792,636)
Automatic conversion of shares (2,504,306) (12,619,876)
--------------- ---------------
Total redeemed (8,650,092) (43,412,512)
--------------- ---------------
Net decrease (4,286,876) $ (21,572,184)
=============== ===============
Class B Shares for the Year Dollar
Ended April 30, 2005 Shares Amount
Shares sold 2,194,158 $ 10,113,067
Shares issued to shareholders in
reinvestment of distributions 2,296,589 10,280,937
--------------- ---------------
Total issued 4,490,747 20,394,004
--------------- ---------------
Shares redeemed (11,362,052) (51,790,118)
Automatic conversion of shares (3,306,410) (15,235,649)
--------------- ---------------
Total redeemed (14,668,462) (67,025,767)
--------------- ---------------
Net decrease (10,177,715) $ (46,631,763)
=============== ===============
Class C Shares for the Year Dollar
Ended April 30, 2006 Shares Amount
Shares sold 4,355,082 $ 22,039,665
Shares issued to shareholders in
reinvestment of distributions 1,208,718 5,982,447
--------------- ---------------
Total issued 5,563,800 28,022,112
Shares redeemed (3,227,561) (16,165,790)
--------------- ---------------
Net increase 2,336,239 $ 11,856,322
=============== ===============
Class C Shares for the Year Dollar
Ended April 30, 2005 Shares Amount
Shares sold 1,680,859 $ 7,724,596
Shares issued to shareholders in
reinvestment of distributions 1,201,784 5,387,888
--------------- ---------------
Total issued 2,882,643 13,112,484
Shares redeemed (5,132,233) (23,414,159)
--------------- ---------------
Net decrease (2,249,590) $ (10,301,675)
=============== ===============
Class I Shares for the Year Dollar
Ended April 30, 2006 Shares Amount
Shares sold 1,980,252 $ 14,623,037
Shares issued to shareholders in
reinvestment of distributions 1,238,017 8,995,171
--------------- ---------------
Total issued 3,218,269 23,618,208
Shares redeemed (3,840,068) (28,130,597)
--------------- ---------------
Net decrease (621,799) $ (4,512,389)
=============== ===============
Class I Shares for the Year Dollar
Ended April 30, 2005 Shares Amount
Shares sold 2,119,737 $ 13,738,441
Shares issued to shareholders in
reinvestment of distributions 1,696,873 10,649,607
--------------- ---------------
Total issued 3,816,610 24,388,048
Shares redeemed (21,504,553) (140,059,954)
--------------- ---------------
Net decrease (17,687,943) $ (115,671,906)
=============== ===============
Class R Shares for the Year Dollar
Ended April 30, 2006 Shares Amount
Shares sold 813,812 $ 4,173,316
Shares issued to shareholders in
reinvestment of distributions 56,656 286,716
--------------- ---------------
Total issued 870,468 4,460,032
Shares redeemed (298,389) (1,528,831)
--------------- ---------------
Net increase 572,079 $ 2,931,201
=============== ===============
Class R Shares for the Year Dollar
Ended April 30, 2005 Shares Amount
Shares sold 364,470 $ 1,671,887
Shares issued to shareholders in
reinvestment of distributions 13,862 63,939
--------------- ---------------
Total issued 378,332 1,735,826
Shares redeemed (74,722) (348,831)
--------------- ---------------
Net increase 303,610 $ 1,386,995
=============== ===============
5. Short-Term Borrowings:
The Fund, along with certain other funds managed by MLIM and its affiliates,
is a party to a $500,000,000 credit agreement with a group of lenders. The
Fund may borrow under the credit agreement to fund shareholder redemptions
and for other lawful purposes other than for leverage. The Fund may borrow up
to the maximum amount allowable under the Fund's current prospectus and
statement of additional information, subject to various other legal,
regulatory or contractual limits. The Fund pays a commitment fee of .07% per
annum based on the Fund's pro rata share of the unused portion of the credit
agreement. Amounts borrowed under the credit agreement bear interest at a
rate equal to, at each Fund's election, the federal funds rate plus .50% or a
base rate as defined in the credit agreement. The Fund did not borrow under
the credit agreement during the year ended April 30, 2006. On November 23,
2005, the credit agreement was renewed for one year under substantially the
same terms.
MERRILL LYNCH HEALTHCARE FUND, INC. APRIL 30, 2006
Notes to Financial Statements (concluded)
6. Distributions to Shareholders:
The tax character of distributions paid during the fiscal years ended April
30, 2006 and April 30, 2005 was as follows:
4/30/2006 4/30/2005
Distributions paid from:
Ordinary income $ 6,200,040 $ --
Net long-term capital gains 32,781,093 38,687,878
--------------- ---------------
Total taxable distributions $ 38,981,133 $ 38,687,878
=============== ===============
As of April 30, 2006, the components of accumulated earnings on a tax basis
were as follows:
Undistributed ordinary income--net $ 2,649,994
Undistributed long-term capital gains--net 62,187,441
---------------
Total undistributed earnings--net 64,837,435
Capital loss carryforward --
Unrealized gains--net 97,927,323*
---------------
Total accumulated earnings--net $ 162,764,758
===============
* The difference between book-basis and tax-basis net unrealized
gains is attributable primarily to the tax deferral of losses on
wash sales and the realization for tax purposes of unrealized
gains (losses) on certain foreign currency contracts.
MERRILL LYNCH HEALTHCARE FUND, INC. APRIL 30, 2006
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
of Merrill Lynch Healthcare Fund, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Merrill Lynch Healthcare Fund, Inc.
as of April 30, 2006,and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years in
the period then ended, and the financial highlights for each of the five years
in the period then ended. 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 the standards of the Public
Company Accounting Oversight Board (United States). 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. The Fund is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting. Our
audits included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. Our procedures included confirmation of securities
owned as of April 30, 2006, by correspondence with the custodian and brokers;
where replies were not received from brokers, we performed other auditing
procedures. 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
Merrill Lynch Healthcare Fund, Inc. as of April 30, 2006, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and its financial highlights for each
of the five years in the period then ended, in conformity with U.S. generally
accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
June 20, 2006
Important Tax Information (unaudited)
The following information is provided with respect to the ordinary income
distribution paid by Merrill Lynch Healthcare Fund, Inc. to shareholders of
record on December 14, 2005:
Qualified Dividend Income for Individuals 11.40%*
Dividends Qualifying for the Dividends Received
Deduction for Corporations 7.46%*
Short-Term Capital Gain Dividends for
Non-U.S. Residents 100.00%**
* The Fund hereby designates the percentage indicated above or the
maximum amount allowable by law.
** Represents the portion of the taxable ordinary income dividends
eligible for exemption from U.S. withholding tax for nonresident
aliens and foreign corporations.
Additionally, the Fund distributed long-term capital gains of $.155995
per share to shareholders of record on July 21, 2005 and $.228661 per
share to shareholders of record on December 14, 2005.
MERRILL LYNCH HEALTHCARE FUND, INC. APRIL 30, 2006
Disclosure of Investment Advisory Agreement
Activities and Composition of the Board of Directors
All but one member of the Fund's Board of Directors is a non-interested
director as that term is defined in the Investment Company Act of 1940,
whose only association with Merrill Lynch Investment Managers, L.P. (the
"Investment Adviser") or other Merrill Lynch affiliates is as a director of
the Fund, and of certain other funds advised by the Investment Adviser or its
affiliates. The Chairman of the Board is an independent director and nominees
to become independent directors are chosen by a Nominating Committee
comprised of independent directors. All independent directors also are
members of the Board's Audit Committee. The independent directors meet in
executive session at each regular Board meeting. The Board and the Board's
Audit Committee meet in person for at least two days each quarter and conduct
other in-person and telephone meetings throughout the year, some of which
are formal Board meetings and some of which are informational meetings.
Independent counsel to the independent directors attends all in-person Board
and Audit Committee meetings and other meetings at the request of the
independent directors.
Investment Advisory Agreement--Matters Considered by the Board
Every year, the Board considers approval of the investment advisory agreement
with respect to the Fund (the "Investment Advisory Agreement") and throughout
each year, reviews and evaluates the performance of and services provided by
the Investment Adviser. The Board also annually reviews and considers approval
of the sub-advisory agreement on behalf of the Fund between the Investment
Adviser and Merrill Lynch Asset Management U.K. Limited (the "sub-adviser").
The Board assesses the nature, scope and quality of the services provided to
the Fund by the personnel of the Investment Adviser, the sub-adviser and their
affiliates, including administrative services, shareholder services, oversight
of fund accounting, marketing services and assistance in meeting legal and
regulatory requirements. The Board also receives and assesses information
regarding the services provided to the Fund by certain unaffiliated service
providers.
At various times throughout the year, the Board also considers a range of
information in connection with its oversight of the services provided by the
Investment Adviser and its affiliates, including the sub-adviser. Among the
matters considered with respect to the Fund are: (a) fees (in addition to
management fees) paid to the Investment Adviser and its affiliates by the
Fund, such as transfer agency fees and fees for marketing and distribution;
(b) Fund operating expenses paid to third parties; (c) the resources devoted
to and compliance reports relating to the Fund's investment objective,
policies and restrictions, and the Fund's compliance with its Code of Ethics
and the Investment Adviser's compliance policies and procedures; and (d) the
nature, cost and character of non-investment management services provided by
the Investment Adviser and its affiliates.
The Board believes that the Investment Adviser is one of the most experienced
global asset management firms and considers the overall services provided by
the Investment Adviser to be of high quality. The Board also believes that
the Investment Adviser is financially sound and well managed and notes that
the Investment Adviser is affiliated with one of America's largest financial
firms. The Board works closely with the Investment Adviser in overseeing the
Investment Adviser's efforts to achieve good performance. As part of this
effort, the Board discusses portfolio manager effectiveness and, when
performance is not satisfactory, discusses with the Investment Adviser taking
steps such as changing investment personnel.
Annual Consideration of Approval by the Board of Directors
In the period prior to the Board meeting to consider renewal of the Investment
Advisory Agreement and the sub-advisory agreement, the Board requests and
receives materials specifically relating to the Investment Advisory Agreement
and/or the sub-advisory agreement. These materials include (a) information
compiled by Lipper Inc. ("Lipper") on the fees and expenses and the investment
performance of the Fund as compared to a comparable group of funds as
classified by Lipper; (b) sales and redemption data for the Fund; (c) a
discussion by the Fund's portfolio management team regarding investment
strategies used by the Fund during its most recent fiscal year; (d)
information on the profitability to the Investment Adviser and its affiliates
of the Investment Advisory Agreement, the sub-advisory agreement and other
relationships with the Fund; and (e) information provided by the Investment
Adviser concerning investment advisory fees charged to a retail offshore fund
under a similar investment mandate. Since the sub-advisory services are
provided by an affiliate of the Investment Adviser, and no additional fee is
paid for these services, the Board considered the sub-advisory agreement and
Investment Advisory Agreement together. The Board also considers other matters
it deems important to the approval process such as payments made to the
Investment Adviser or its affiliates relating to the distribution of Fund
shares, the services related to the valuation and pricing of portfolio
holdings, allocation of brokerage fees of the Fund, the portfolio turnover
statistics of the Fund, and direct and indirect benefits to the Investment
Adviser and the sub-adviser and their affiliates from their relationship with
the Fund (including the related benefits to the Investment Adviser of "soft
dollars"). The Board did not identify any particular information as
controlling, and each member of the Board may have attributed different
weights to the various items considered.
MERRILL LYNCH HEALTHCARE FUND, INC. APRIL 30, 2006
Disclosure of Investment Advisory Agreement (continued)
Certain Specific Renewal Data
In connection with the most recent renewal of the Fund's Investment Advisory
Agreement and the sub-advisory agreement in November 2005, the independent
directors' and Board's review included the following:
The Investment Adviser's Services and Fund Performance--The Board reviewed the
nature, extent and quality of services provided by the Investment Adviser and
the sub-adviser, including the investment advisory services and the resulting
performance of the Fund. The Board focused primarily on the Investment
Adviser's investment advisory services and the Fund's investment performance.
The Board compared the Fund's performance - both including and excluding the
effects of the fees and expenses of the Fund - to the performance of a
comparable group of funds, and the performance of a relevant index or
combination of indexes. While the Board reviews performance data at least
quarterly, consistent with the Investment Adviser's investment goals, the
Board attaches more importance to performance over relatively long periods of
time, typically three to five years. According to Lipper's ranking of all
retail and institutional health/biotechnology funds, for the periods ended
August 31, 2005, the Fund's performance after fees and expenses ranked in the
first quintile for the one-year period, in the third quintile for the three-
year period, and in the second quintile for the five-year period. The Board
also considered the Fund's performance based on annualized yield and noted
that the Fund's yield was in the first quintile for the one-year period ended
August 31, 2005, in the fifth quintile for the prior year, in the third
quintile for the one-year period ended August 31, 2003, and in the second
quintile for the one-year periods ended August 31, 2002 and 2001. Considering
these factors, the Board concluded that the Fund's performance supported the
continuation of the Investment Advisory Agreement.
The Investment Adviser's Personnel and Investment Process--The Board reviewed
the investment objectives and strategies of the Fund. The Board discussed with
senior management of the Investment Adviser's equity investing group the
strategies being used to achieve the stated objectives. Among other things,
the Board considered the size, education and experience of the Investment
Adviser's investment staff, its use of technology, and the Investment
Adviser's approach to training and retaining portfolio managers and other
research, advisory and management personnel. The Board also reviewed the
Investment Adviser's compensation policies and practices with respect to the
Fund's portfolio managers. The Board noted that Mr. Schreiber has more than 23
years, and Mr. Hodgson has more than nine years, of investment experience in
analyzing and investing in equity securities. The Board concluded that the
Investment Adviser and its investment staff and the Fund's management team
have extensive experience in analyzing and managing the types of investments
used by the Fund and that the Fund benefits from that experience.
Management Fees and Other Expenses--The Board reviewed the Fund's contractual
management fee rate and actual management fee rate as a percentage of total
assets at common asset levels - the actual rate includes advisory and
administrative service fees and the effects of any fee waivers - compared to
the other funds considered comparable by Lipper. It also compared the Fund's
total expenses to those of other comparable funds. The Board considered the
services provided to and the fees charged by the Investment Adviser to a
retail offshore fund with a similar investment mandate. It was noted that the
fees charged by the Investment Adviser to the retail client were higher than
those being charged to the Fund. The Board noted that the Fund's actual and
contractual management fees and actual total expenses including investment-
related expenses were above the median of expenses of comparable funds as
classified by Lipper. The Board concluded that the Fund's management fee rate
and overall expense ratio are acceptable compared to those of other comparable
funds.
MERRILL LYNCH HEALTHCARE FUND, INC. APRIL 30, 2006
Disclosure of Investment Advisory Agreement (concluded)
Profitability--The Board considered the cost of the services provided to the
Fund by the Investment Adviser and the Investment Adviser's and its
affiliates' profits relating to the management and distribution of the Fund
and the MLIM/FAM-advised funds. As part of its analysis, the Board reviewed
the Investment Adviser's methodology in allocating its costs to the management
of the Fund and concluded that there was a reasonable basis for the
allocation. The Board concluded that the Investment Adviser's profits are
acceptable in relation to the nature and quality of services provided and
given the level of fees and expenses overall.
Economies of Scale--The Board considered the extent to which economies of
scale might be realized as the assets of the Fund increase and whether there
should be changes in the management fee rate or structure in order to enable
the Fund to participate in these economies of scale. While there was no
evidence to date that the Fund's assets have reached a level where such
economies are effectively available, the Board noted that they would continue
to seek information relating to economies of scale. The Board determined that
no changes were currently necessary.
Conclusion
After the independent directors deliberated in executive session, the Board of
the Fund including all of the independent directors approved the renewal of
the existing Investment Advisory Agreement and sub-advisory agreement,
concluding that the advisory fee was reasonable in relation to the services
provided and that a contract renewal was in the best interests of the
shareholders.
Officers and Directors
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name, Address & Age Funds Served Principal Occupation(s) During Past 5 Years Director Director
Interested Director
Robert C. Doll, Jr.* President 2005 to President of the MLIM/FAM-advised funds since 131 Funds None
P.O. Box 9011 and present 2005; President of MLIM and FAM since 2001; 177 Portfolios
Princeton, Director Co-Head (Americas Region) thereof from 2000
NJ 08543-9011 to 2001 and Senior Vice President from 1999
Age: 51 to 2001; President and Director of Princeton
Services, Inc. ("Princeton Services") since 2001;
President of Princeton Administrators, L.P.
("Princeton Administrators") since 2001; Chief
Investment Officer of OppenheimerFunds, Inc.
in 1999 and Executive Vice President thereof
from 1991 to 1999.
* Mr. Doll is a director, trustee or member of an advisory board of certain other
investment companies for which MLIM or FAM acts as investment adviser. Mr. Doll is
an "interested person," as defined in the Investment Company Act, of the Fund based
on his positions with MLIM, FAM, Princeton Services and Princeton Administrators.
Directors serve until their resignation, removal or death, or until December 31 of
the year in which they turn 72. As Fund President, Mr. Doll serves at the pleasure
of the Board of Directors.
MERRILL LYNCH HEALTHCARE FUND, INC. APRIL 30, 2006
Officers and Directors (continued)
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name, Address & Age Funds Served Principal Occupation(s) During Past 5 Years Director Director
Independent Directors*
Ronald W. Forbes** Director 2000 to Professor Emeritus of Finance, School of 49 Funds None
P.O. Box 9095 present Business, State University of New York at 50 Portfolios
Princeton, Albany since 2000 and Professor thereof from
NJ 08543-9095 1989 to 2000; International Consultant, Urban
Age: 65 Institute, Washington D.C. from 1995 to 1999.
Cynthia A. Montgomery Director 2000 to Professor, Harvard Business School since 49 Funds Newell
P.O. Box 9095 present 1989; Associate Professor, J.L. Kellogg 50 Portfolios Rubbermaid, Inc.
Princeton, Graduate School of Management, Northwestern (manufacturing)
NJ 08543-9095 University from 1985 to 1989; Associate
Age: 53 Professor, Graduate School of Business
Administration, University of Michigan from
1979 to 1985; Director, Harvard Business
School Publishing since 2005; Director,
McLean Hospital since 2005.
Jean Margo Reid Director 2004 to Self-employed consultant since 2001; Counsel 49 Funds None
P.O. Box 9095 present of Alliance Capital Management (investment 50 Portfolios
Princeton, adviser) in 2000; General Counsel, Director
NJ 08543-9095 and Secretary of Sanford C. Bernstein & Co.,
Age: 60 Inc. (investment adviser/broker-dealer) from
1997 to 2000; Secretary, Sanford C. Bernstein
Fund, Inc. from 1994 to 2000; Director and
Secretary of SCB, Inc. since 1998; Director
and Secretary of SCB Partners, Inc. since 2000;
and Director of Covenant House from 2001 to 2004.
Roscoe S. Suddarth Director 2000 to President, Middle East Institute, from 1995 49 Funds None
P.O. Box 9095 present to 2001; Foreign Service Officer, United 50 Portfolios
Princeton, States Foreign Service, from 1961 to 1995
NJ 08543-9095 and Career Minister from 1989 to 1995; Deputy
Age: 70 Inspector General, U.S. Department of State,
from 1991 to 1994; U.S. Ambassador to the
Hashemite Kingdom of Jordan from 1987 to 1990.
Richard R. West Director 1983 to Professor of Finance from 1984 to 1995, 49 Funds Bowne & Co.,
P.O. Box 9095 present Dean from 1984 to 1993 and since 1995 50 Portfolios Inc. (financial
Princeton, Dean Emeritus of New York University printers);
NJ 08543-9095 Leonard N. Stern School of Business Vornado Realty
Age: 68 Administration. Trust (real estate
company);
Alexander's, Inc.
(real estate
company)
Edward D. Zinbarg Director 1994 to Self-employed financial consultant since 48 Funds None
P.O. Box 9095 present 1994; Executive Vice President of the 48 Portfolios
Princeton, Prudential Insurance Company of America from
NJ 08543-9095 1988 to 1994; Former Director of Prudential
Age: 71 Reinsurance Company and former Trustee of the
Prudential Foundation.
* Directors serve until their resignation, removal or death, or until December 31
of the year in which they turn 72.
** Chairman of the Board of Directors and the Audit Committee.
MERRILL LYNCH HEALTHCARE FUND, INC. APRIL 30, 2006
Officers and Directors (concluded)
Position(s) Length of
Held with Time
Name, Address & Age Funds Served Principal Occupation(s) During Past 5 Years
Fund Officers*
Donald C. Burke Vice 1993 to First Vice President of MLIM and FAM since 1997 and Treasurer thereof since 1999;
P.O. Box 9011 President present Senior Vice President and Treasurer of Princeton Services since 1999 and Director
Princeton, and and since 2004; Vice President of FAM Distributors, Inc. ("FAMD") since 1999 and
NJ 08543-9011 Treasurer 1999 to Director since 2004; Vice President of MLIM and FAM from 1990 to 1997; Director
Age: 45 present of Taxation of MLIM from 1990 to 2001; Vice President, Treasurer and Secretary of
the IQ Funds since 2004.
Jordan C. Schreiber Vice 1983 to Managing Director of MLIM since 2000; Director of MLIM from 1997 to 2000.
P.O. Box 9011 President present
Princeton,
NJ 08543-9011
Age: 76
Jeffrey Hiller Chief 2004 to Chief Compliance Officer of the MLIM/FAM-advised funds and First Vice President
P.O. Box 9011 Compliance present and Chief Compliance Officer of MLIM (Americas Region) since 2004; Chief
Princeton, Officer Compliance Officer of the IQ Funds since 2004; Global Director of Compliance at
NJ 08543-9011 Morgan Stanley Investment Management from 2002 to 2004; Managing Director and
Age: 54 Global Director of Compliance at Citigroup Asset Management from 2000 to 2002;
Chief Compliance Officer at Soros Fund Management in 2000; Chief Compliance
Officer at Prudential Financial from 1995 to 2000; Senior Counsel in the
Commission's Securities and Exchange Division of Enforcement in Washington,
D.C. from 1990 to 1995.
Alice A. Pellegrino Secretary 2004 to Director (Legal Advisory) of MLIM since 2002; Vice President of MLIM from 1999
P.O. Box 9011 present to 2002; Attorney associated with MLIM since 1997; Secretary of MLIM, FAM, FAMD
Princeton, and Princeton Services since 2004.
NJ 08543-9011
Age: 46
* Officers of the Fund serve at the pleasure of the Board of Directors.
Further information about the Fund's Officers and Directors is available in
the Fund's Statement of Additional Information, which can be obtained without
charge by calling 1-800-637-3863.
Custodian
JPMorgan Chase Bank, N.A.
3 Chase Metrotech Center
Brooklyn, NY 11245
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
800-637-3863
Availability of Quarterly Schedule of Investments
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available on the SEC's Web site at
http://www.sec.gov. The Fund's Forms N-Q may also be reviewed and copied at the
SEC's Public Reference Room in Washington, DC. Information on the operation of
the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Electronic Delivery
The Fund offers electronic delivery of communications to its shareholders. In
order to receive this service, you must register your account and provide us
with e-mail information. To sign up for this service, simply access this Web
site at http://www.icsdelivery.com/live and follow the instructions. When you
visit this site, you will obtain a personal identification number (PIN). You
will need this PIN should you wish to update your e-mail address, choose to
discontinue this service and/or make any other changes to the service. This
service is not available for certain retirement accounts at this time.
MERRILL LYNCH HEALTHCARE FUND, INC. APRIL 30, 2006
Item 2 - Code of Ethics - The registrant has adopted a code of ethics, as of
the end of the period covered by this report, that applies to the
registrant's principal executive officer, principal financial
officer and principal accounting officer, or persons performing
similar functions. A copy of the code of ethics is available
without charge upon request by calling toll-free 1-800-MER-FUND
(1-800-637-3863).
Item 3 - Audit Committee Financial Expert - The registrant's board of
directors has determined that (i) the registrant has the following
audit committee financial experts serving on its audit committee
and (ii) each audit committee financial expert is independent: (1)
Ronald W. Forbes, (2) Richard R. West, and (3) Edward D. Zinbarg.
Item 4 - Principal Accountant Fees and Services
(a) Audit Fees - Fiscal Year Ending April 30, 2006 - $36,500
Fiscal Year Ending April 30, 2005 - $36,000
(b) Audit-Related Fees - Fiscal Year Ending April 30, 2006 - $0
Fiscal Year Ending April 30, 2005 - $0
(c) Tax Fees - Fiscal Year Ending April 30, 2006 - $6,000
Fiscal Year Ending April 30, 2005 - $5,700
The nature of the services include tax compliance, tax advice and
tax planning.
(d) All Other Fees - Fiscal Year Ending April 30, 2006 - $0
Fiscal Year Ending April 30, 2005 - $0
(e)(1) The registrant's audit committee (the "Committee") has
adopted policies and procedures with regard to the pre-approval of
services. Audit, audit-related and tax compliance services
provided to the registrant on an annual basis require specific pre-
approval by the Committee. The Committee also must approve other
non-audit services provided to the registrant and those non-audit
services provided to the registrant's affiliated service providers
that relate directly to the operations and the financial reporting
of the registrant. Certain of these non-audit services that the
Committee believes are a) consistent with the SEC's auditor
independence rules and b) routine and recurring services that will
not impair the independence of the independent accountants may be
approved by the Committee without consideration on a specific case-
by-case basis ("general pre-approval"). However, such services
will only be deemed pre-approved provided that any individual
project does not exceed $5,000 attributable to the registrant or
$50,000 for all of the registrants the Committee oversees. Any
proposed services exceeding the pre-approved cost levels will
require specific pre-approval by the Committee, as will any other
services not subject to general pre-approval (e.g., unanticipated
but permissible services). The Committee is informed of each
service approved subject to general pre-approval at the next
regularly scheduled in-person board meeting.
(e)(2) 0%
(f) Not Applicable
(g) Fiscal Year Ending April 30, 2006 - $3,439,633
Fiscal Year Ending April 30, 2005 - $9,780,582
(h) The registrant's audit committee has considered and determined
that the provision of non-audit services that were rendered to the
registrant's investment adviser and any entity controlling,
controlled by, or under common control with the investment adviser
that provides ongoing services to the registrant that were not pre-
approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of
Regulation S-X is compatible with maintaining the principal
accountant's independence.
Regulation S-X Rule 2-01(c)(7)(ii) - $1,227,000, 0%
Item 5 - Audit Committee of Listed Registrants - Not Applicable
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies - Not Applicable
Item 8 - Portfolio Managers of Closed-End Management Investment Companies -
Not Applicable
Item 9 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers - Not Applicable
Item 10 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 11 - Controls and Procedures
11(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others
particularly during the period in which this report is being
prepared. The registrant's certifying officers have determined
that the registrant's disclosure controls and procedures are
effective based on our evaluation of these controls and procedures
as of a date within 90 days prior to the filing date of this
report.
11(b) - There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act
(17 CFR 270.30a-3(d)) that occurred during the second fiscal half-
year of the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - See Item 2
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Merrill Lynch Healthcare Fund, Inc.
By: /s/ Robert C. Doll, Jr.
---------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Merrill Lynch Healthcare Fund, Inc.
Date: June 22, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By: /s/ Robert C. Doll, Jr.
---------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Merrill Lynch Healthcare Fund, Inc.
Date: June 22, 2006
By: /s/ Donald C. Burke
---------------------------
Donald C. Burke,
Chief Financial Officer of
Merrill Lynch Healthcare Fund, Inc.
Date: June 22, 2006