Item 1. Report to Shareholders
DECEMBER 31, 2004
HEALTH SCIENCES FUND
Annual Report
T. ROWE PRICE
The views and opinions in this report were current as of December 31, 2004. They
are not guarantees of performance or investment results and should not be taken
as investment advice. Investment decisions reflect a variety of factors, and the
managers reserve the right to change their views about individual stocks,
sectors, and the markets at any time. As a result, the views expressed should
not be relied upon as a forecast of the fund's future investment intent. The
report is certified under the Sarbanes-Oxley Act of 2002, which requires mutual
funds and other public companies to affirm that, to the best of their knowledge,
the information in their financial reports is fairly and accurately stated in
all material respects.
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T. ROWE PRICE HEALTH SCIENCES FUND
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Fellow Shareholders
Stocks rose moderately in 2004, extending the previous year's brisk gains. After
beginning the year on a strong note, equities struggled to make headway as
economic growth moderated amid rising short-term interest rates, surging energy
costs, and a heated presidential campaign. Stock prices rose as oil prices
backed away from their late-October peak, and gains accelerated following
President Bush's reelection. By year-end, several major indices such as the S&P
500 and the Dow Jones Industrials were at or near their highest levels of the
year.
Your fund produced solid returns of 4.24% and 15.84% in the 6- and 12-month
periods ended December 31, 2004, respectively. As shown in the Performance
Comparison table, the fund outperformed its Lipper benchmark and the S&P 500
index for the year, despite posting lower returns than the benchmark and index
in the last six months. Furthermore, compared with the universe of health care
funds, the Health Sciences Fund delivered strong performance. In fact, Lipper
ranked the fund in the top 8% of the Lipper health/biotechnology funds universe
for the one-year period ended December 31, 2004. Lipper also placed the fund in
the top 26% of its category for the three-year, five-year, and since-inception
(12/29/95) periods ended December 31, 2004.
PERFORMANCE COMPARISON
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Period Ended 12/31/04 6 Months 12 Months
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Health Sciences Fund 4.24% 15.84%
S&P 500 Stock Index 7.19 10.88
Lipper Health/Biotechnology Funds Index 4.62 11.74
(Based on total return, Lipper ranked the Health Sciences Fund 14 out of 195, 28
out of 159, 18 out of 70, and 3 out of 21 funds for the one-year, three-year,
five-year, and since-inception periods ended December 31, 2004, respectively.
Past performance cannot guarantee future results.)
MARKET ENVIRONMENT
For the year, companies in the services, life sciences, and products and medical
devices industries delivered the best returns. Results for biotechnology stocks
slightly lagged the benchmark, and pharmaceutical stocks, which account for the
largest portion by market capitalization of the
health care sector, were down slightly. The pharmaceutical industry was
pressured on several fronts, as election-year issues, possible increased
regulatory burdens, patent expirations, and the threat of generic competition
weighed on pharmaceutical stocks.
For much of the year, investor anxiety about the outcome of November's
presidential election created a headwind for pharmaceutical shares. The
consensus view was that a Kerry presidency would implement policies that favored
a more active government role in the pricing of pharmaceutical products, further
intensifying cost pressures confronting the industry.
Although President Bush's reelection helped ease fears regarding increased
government regulation of the pharmaceutical industry, concerns about drug safety
flared up among pharmaceutical investors. One of the year's biggest news items
came at September's end when Merck voluntarily removed the COX-2 inhibitor
Vioxx, its multibillion dollar arthritis and pain drug, from the market. A study
showed that long-term Vioxx use increased the risk of heart attack. Later,
potential safety issues with Pfizer's COX-2 inhibitors--Bextra and Celebrex--as
well as Bayer's Aleve surfaced. Hearings related to Merck's handling of the
Vioxx situation raised possible safety concerns about several other prescription
medications.
In the wake of the Vioxx removal, the FDA will likely become increasingly wary
of any potential drug-related safety risk that arises during the drug approval
process. However, there always is a benefit and a risk associated with all
drugs. The key question is whether a drug's benefit is great enough to offset
the risks. It is possible that public scrutiny surrounding the Vioxx withdrawal
will cause the FDA to become more risk averse, resulting in longer time lines
for drug development and fewer new drug approvals.
It is important to understand, however, that the removal of medicines from the
market is a relatively infrequent occurrence. Unfortunately, the drug approval
process does not eliminate, nor even bring to light, all risks associated with
the use of pharmaceutical products. While pre-approval testing is extensive and
designed to demonstrate the efficacy and safety of a drug, significant, but
rare, side effects may not be observed until there is much more experience with
the drug than clinical testing
can provide. Once a medication is on the market, many more people will use it,
and more information about side effects becomes known.
Additionally, investors are closely watching three specific pharmaceutical
industry patent challenges--Zyprexa (Eli Lilly), Plavix (Bristol-Myers Squibb),
and Lipitor (Pfizer)--that should be resolved over the next 18 months. We
believe that the stock market will react negatively to a pharmaceutical company
loss on any one of these patents.
Our relative pharmaceutical underweight is not the result of all the negative
publicity surrounding the industry over the last few months; it has been in
place for a considerable period. However, because the industry's troubles are
well known and seem to be reflected in valuations that are lower than historical
figures, we expect the group's underperformance could be less dramatic in 2005
than in 2004. As a result, there may be opportunities to increase our exposure
to the group over the next 12 to 18 months. We are closely monitoring
pharmaceutical industry developments and will act accordingly.
PORTFOLIO REVIEW
Biotechnology and Pharmaceuticals
We believe that the therapeutic business model (the discovery, development,
manufacture, and commercialization of medicines or therapeutic devices) is the
primary driver of long-term value in the health care sector. In our opinion,
therapeutic-based companies hold the greatest long-term potential. In addition,
the presence of this therapeutic-based business model in a smaller company can
lead to significantly greater leverage from new product introductions. In fact,
one important new medicine can transform these companies and the value of their
stocks.
In many instances, Wall Street refers to these smaller, therapeutic-based
companies as biotechs; however, because the major distinction between biotechs
and large-cap pharmaceuticals is often size, we believe the label lacks a
meaningful distinction. As a result, we refer to smaller biotechs as emerging
pharmaceuticals. We own a number of these companies to make a leveraged bet on
the pharmaceutical business model.
Our fourth-largest holding, Amgen, is an example of a company that has
progressed from an emerging pharmaceutical to the equivalent of a large-cap
pharmaceutical. One of our best contributors for the past six months, Amgen fell
in the first half due to concerns about changes in the Medicare reimbursement
policies for its anemia-fighting drugs
Epogen and Aranesp. However, the stock rallied as investors became more
comfortable with the company's ability to manage through these issues. Amgen
launched several new drugs in 2004 and initiated clinical studies for a
potential new medicine that could become a breakthrough treatment for
osteoporosis. (Please refer to the portfolio of investments for a complete list
of the fund's holdings and the amount each represents of the portfolio.)
Several biotech firms are good examples of the type of therapeutic companies we
favor and help explain why approximately 46% of our assets are invested in this
category. We hold significant stakes in established firms such as Biogen Idec
(drugs for oncology, neurology, dermatology, and rheumatology) and Gilead (drugs
for infectious diseases), both of which are early in what we believe will be a
strong cycle of earnings growth. Biogen, one of the year's top contributors, is
currently launching Tysabri, a potential best-in-class multiple sclerosis drug
developed in collaboration with Elan. Gilead's growth has been driven by its
successful stable of anti-HIV drugs, which includes Viread, Emtriva, and
recently launched Truvada, a single pill combining Viread and Emtriva.
Emerging biotech holdings Elan, Sepracor (drugs for respiratory and central
nervous system disorders), and Eyetech (drugs for eye diseases) were top
contributors over the last six and 12 months. Elan discovered multiple sclerosis
drug Tysabri. The Food and Drug Administration approved the drug in an
unprecedented manner because of significantly compelling clinical data. We
believe it is a dimensionally different new medicine that will become a
blockbuster commercial product. Sepracor received final approval for Lunesta,
the first new sleep aid approved in over five years. Sepracor plans to launch
the drug, which can be used to treat sleep induction and maintenance, in the
first quarter of this year. Eyetech, in collaboration with its partner Pfizer,
received FDA approval of its age-related macular degeneration drug, Macugen.
After being our best first-half performer, ImClone Systems (therapeutic products
for the treatment of cancer) was our biggest second-half laggard. Sales of its
colorectal cancer drug, Erbitux, missed expectations after getting off to a
strong start. The company also announced a filing delay for Erbitux's second
indication in head and neck cancer.
We own several emerging pharmaceutical companies to reduce overall portfolio
risk. We expect that the fund will continue its bias toward owning small- and
medium-sized companies. In fact, the average market cap of our holdings is $22.4
billion versus $36.4 billion for the peer group.
We have been very selective in our large-cap pharmaceutical investments, and our
exposure to the largest industry segment within the health care universe remains
lower than our peer group. As a result, if these companies perform particularly
well in 2005, and your fund does not make corresponding changes, it could hinder
our ability to outperform our peers.
INDUSTRY DIVERSIFICATION
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Percent of Net Assets
Periods Ended 6/30/04 12/31/04
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Biotechnology 40.8% 46.7%
Pharmaceuticals 18.9 19.5
Services 20.5 19.4
Products and Devices 13.7 10.7
Life Sciences 5.3 4.0
Options -1.7 -2.0
Other and Reserves 2.5 1.7
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Total 100.0% 100.0%
Historical weightings reflect current industry/sector classifications.
Currently, large-cap pharmaceutical companies trade at low valuations,
reflective of the problems these companies are facing. Our holdings in the
industry are focused on firms that we believe are most attractively valued and
have the most secure earnings outlook. Wyeth remains a top 10 holding. We
reduced our exposure to Pfizer, which was our second largest detractor over the
last six months.
Services and Devices
In addition to the biotech industry, we are also optimistic about selected
managed health care services companies such as Wellpoint and UnitedHealth Group,
which were key contributors to our performance over the 6- and 12-month periods.
While the market believes rising health care costs will squeeze margins, we
think that as long as the increase in medical costs remains in line with
historical norms, these companies will be able to keep profit margins at current
levels. Under that premise, we believe the growth rate of these companies
relative to their valuation remains attractive. We think UnitedHealth is a
best-in-class company. As medical costs moderate, its margins should improve.
Its network is also much stronger after recent acquisitions in the New England
and mid-Atlantic regions. After a year of negotiations, Anthem completed its
$16.5 billion acquisition of Wellpoint. The new company is using the Wellpoint
name. We believe that the merger gives Wellpoint an opportunity to rival
UnitedHealth for best in class in the managed care industry.
While medical device companies do not make pills or injectable medicines, they
do produce innovative solutions for important medical
problems, thereby allowing us to diversify the portfolio's holdings beyond the
biotech and pharmaceutical industries. Wound-management care company Kinetic
Concepts went public earlier this year and added significant value to fund
returns. In our opinion, KCI has the ability to generate rapid earnings growth
through its new approach to treating wounds. On the other hand, Boston
Scientific was a significant detractor, falling on concerns related to its Taxus
stent.
OUTLOOK
We continue to seek the strongest companies in each of the four main areas of
health care--the pharmaceutical, biotechnology, services, and medical devices
industries. Each industry offers attractive growth opportunities for
well-managed companies, and we feel the portfolio is appropriately positioned to
capture that growth. Additionally, we remain attracted to therapeutic companies
leveraged to novel products for unmet medical needs. While large-cap companies
(both pharmaceuticals and biotechs) may face significant challenges, many
smaller biotechnology firms can be transformed if they are able to gain approval
for a product that wins significant market share. Positive news flow often
drives the shares of such companies, and it has been estimated that over 50% of
2005 product launches will be from biotechs, providing plenty of opportunity for
good news.
So long as society continues to desire new medicines and therapies to soften the
impact of disease, we believe health care remains an area of tremendous growth
for the long term.
We appreciate your continued confidence and support.
Respectfully submitted,
Kris H. Jenner
President of the fund and chairman of its Investment Advisory Committee
January 19, 2005
The committee chairman has day-to-day responsibility for managing the portfolio
and works with committee members in developing and executing the fund's
investment program.
RISK OF GROWTH INVESTING
Growth stocks can be volatile for several reasons. Since these companies usually
invest a high portion of earnings in their businesses, they may lack the
dividends of value stocks that can cushion stock prices in a falling market.
Also, earnings disappointments often lead to sharply falling prices because
investors buy growth stocks in anticipation of superior earnings growth.
RISK OF HEALTH SCIENCES FUND INVESTING
Funds that invest only in specific industries will experience greater volatility
than funds investing in a broad range of industries. Companies in the health
sciences field are subject to special risks such as increased competition within
the health care industry, changes in legislation or government regulations,
reductions in government funding, product liability or other litigation, and the
obsolescence of popular products.
GLOSSARY
Lipper index: Fund benchmarks that consist of a small number of the largest
mutual funds in a particular category as tracked by Lipper Inc.
S&P 500 Stock Index: An index consisting of 500 stocks chosen for market size,
liquidity, and industry group representation. It is a market value-weighted
index with each stock's weight in the index proportionate to its market value.
T. ROWE PRICE HEALTH SCIENCES FUND
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PORTFOLIO HIGHLIGHTS
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TWENTY-FIVE LARGEST HOLDINGS
Percent of
Net Assets
12/31/04
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UnitedHealth Group 6.6%
WellPoint 5.8
Gilead Sciences 5.5
Amgen 3.6
Cephalon 3.2
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ImClone Systems 3.0
Elan 2.8
Biogen Idec 2.6
Wyeth 2.2
Medicines Company 2.1
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Sepracor 2.0
Neurocrine Biosciences 1.7
MGI Pharma 1.6
OSI Pharmaceuticals 1.6
Eyetech Pharmaceuticals 1.5
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Genentech 1.5
Kinetic Concepts 1.3
Invitrogen 1.3
Alkermes 1.2
Guidant 1.2
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Pfizer 1.2
Johnson & Johnson 1.1
Eli Lilly 1.0
Symyx Technologies 1.0
Forest Laboratories 1.0
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Total 57.6%
Note: Table excludes investments in the T. Rowe Price Reserve Investment Fund.
T. ROWE PRICE HEALTH SCIENCES FUND
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PORTFOLIO HIGHLIGHTS
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CONTRIBUTIONS TO THE CHANGE IN NET ASSET VALUE PER SHARE
6 Months Ended 12/31/04
Best Contributors Worst Contributors
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UnitedHealth Group 44(cents) ImClone Systems -44(cents)
WellPoint 26 Pfizer -12
Elan 13 Omnicare -12
Kinetic Concepts 12 Forest Laboratories -7
Amgen 11 ONYX Pharmaceuticals -7
Eyetech Pharmaceuticals 9 Eli Lilly -5
Wyeth 8 Boston Scientific -5
Guidant 8 Teva Pharmaceuticals -5
Gilead Sciences 7 Smith & Nephew ** -3
Sepracor 6 IVAX -3
- ------------------------------------- ----------------------------------------
Total 144(cents) Total -103(cents)
12 Months Ended 12/31/04
Best Contributors Worst Contributors
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UnitedHealth Group 53(cents) Pfizer -14(cents)
WellPoint 48 NPS Pharmaceuticals -9
Biogen Idec 23 Wilson Greatbatch Technologies -9
Gilead Sciences 21 Omnicare -9
Elan * 21 Forest Laboratories -8
Kinetic Concepts * 16 Watson Pharmaceuticals ** -6
Sepracor * 11 Trimeris -5
Eyetech Pharmaceuticals * 10 Eli Lilly -4
Aspect Medical Systems 10 STAAR -4
ImClone Systems 9 XOMA -3
- ------------------------------------- ----------------------------------------
Total 222(cents) Total -71(cents)
* Position added
** Position eliminated
T. ROWE PRICE HEALTH SCIENCES FUND
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GROWTH OF $10,000
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This chart shows the value of a hypothetical $10,000 investment in the fund over
the past 10 fiscal year periods or since inception (for funds lacking 10-year
records). The result is compared with benchmarks, which may include a
broad-based market index and a peer group average or index. Market indexes do
not include expenses, which are deducted from fund returns as well as mutual
fund averages and indexes.
[Graphic Omitted]
HEALTH SCIENCES FUND
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As of 12/31/04
Health Sciences Fund $ 32,940
S&P 500 Stock Index $ 22,720
S&P 500 Stock Index Health Sciences Fund
12/29/1995 $10,000 $10,000
12/96 12,296 12,675
12/97 16,399 15,136
12/98 21,085 18,522
12/99 25,522 19,999
12/00 23,198 30,437
12/01 20,441 28,621
12/02 15,923 20,682
12/03 20,491 28,436
12/04 22,720 32,940
T. ROWE PRICE HEALTH SCIENCES FUND
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AVERAGE ANNUAL COMPOUND TOTAL RETURN
This table shows how the fund and its benchmarks would have performed if their
actual (or cumulative) returns for the periods shown had been earned at a
constant rate.
Since
Inception
Periods Ended 12/31/04 1 Year 5 Years 12/29/95
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Health Sciences Fund 15.84% 10.50% 14.15%
S&P 500 Stock Index 10.88 -2.30 9.54
Lipper Health/Biotechnology
Funds Index 11.74 6.72 11.30
Current performance may be higher or lower than the quoted past performance,
which cannot guarantee future results. Share price, principal value, and return
will vary, and you may have a gain or loss when you sell your shares. For the
most recent month-end performance information, please visit our Web site
(troweprice. com) or contact a T. Rowe Price representative at 1-800-225-5132.
Average annual total return figures include changes in principal value,
reinvested dividends, and capital gain distributions. Returns do not reflect
taxes that the shareholder may pay on fund distributions or the redemption of
fund shares. When assessing performance, investors should consider both short-
and long-term returns.
T. ROWE PRICE HEALTH SCIENCES FUND
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FUND EXPENSE EXAMPLE
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As a mutual fund shareholder, you may incur two types of costs: (1) transaction
costs such as redemption fees or sales loads and (2) ongoing costs, including
management fees, distribution and service (12b-1) fees, and other fund expenses.
The following example is intended to help you understand your ongoing costs (in
dollars) of investing in the fund and to compare these costs with the ongoing
costs of investing in other mutual funds. The example is based on an investment
of $1,000 invested at the beginning of the most recent six-month period and held
for the entire period.
Actual Expenses
The first line of the following table ("Actual") provides information about
actual account values and actual expenses. You may use the information in this
line, together with your account balance, to estimate the expenses that you paid
over the period. Simply divide your account value by $1,000 (for example, an
$8,600 account value divided by $1,000 = 8.6), then multiply the result by the
number in the first line under the heading "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The information on the second line of the table ("Hypothetical") is based on
hypothetical account values and expenses derived from the fund's actual expense
ratio and an assumed 5% per year rate of return before expenses (not the fund's
actual return). You may compare the ongoing costs of investing in the fund with
other funds by contrasting this 5% hypothetical example and the 5% hypothetical
examples that appear in the shareholder reports of the other funds. The
hypothetical account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period.
Note: T. Rowe Price charges an annual small-account maintenance fee of $10,
generally for accounts with less than $2,000 ($500 for UGMA/UTMA). The fee is
waived for any investor whose T. Rowe Price mutual fund accounts total $25,000
or more, accounts employing automatic investing, and IRAs and other retirement
plan accounts that utilize a prototype plan sponsored by T. Rowe Price (although
a separate custodial or administrative fee may apply to such accounts). This fee
is not included in the accompanying table. If you are subject to the fee, keep
it in mind when you are estimating the ongoing expenses of investing in the fund
and when comparing the expenses of this fund with other funds.
You should also be aware that the expenses shown in the table highlight only
your ongoing costs and do not reflect any transaction costs, such as redemption
fees or sales loads. Therefore, the second line of the table is useful in
comparing ongoing costs only and will not help you determine the relative total
costs of owning different funds. To the extent a fund charges transaction costs,
however, the total cost of owning that fund is higher.
T. ROWE PRICE HEALTH SCIENCES FUND
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Beginning Ending Expenses Paid
Account Value Account Value During Period*
7/1/04 12/31/04 7/1/04 to 12/31/04
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Actual $1,000 $1,042.40 $4.83
Hypothetical (assumes 5%
return before expenses) 1,000 1,020.41 4.77
*Expenses are equal to the fund's annualized expense ratio for the six-month
period (0.94%), multiplied by the average account value over the period,
multiplied by the number of days in the most recent fiscal half year (184)
divided by the days in the year (366) to reflect the half-year period.
T. ROWE PRICE HEALTH SCIENCES FUND
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FINANCIAL HIGHLIGHTS For a share outstanding throughout each period
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Year
Ended
12/31/04 12/31/03 12/31/02 12/31/01 12/31/00
NET ASSET VALUE
Beginning of period $ 19.95 $ 14.51 $ 20.08 $ 21.70 $ 15.93
Investment activities
Net investment income (loss) (0.12) (0.11) (0.11) (0.11) (0.03)
Net realized and
unrealized gain (loss) 3.28 5.55 (5.46) (1.20) 8.28
Total from
investment activities 3.16 5.44 (5.57) (1.31) 8.25
Distributions
Net realized gain - - - (0.31) (2.48)
NET ASSET VALUE
End of period $ 23.11 $ 19.95 $ 14.51 $ 20.08 $ 21.70
-------------------------------------------------
Ratios/Supplemental Data
Total return^ 15.84% 37.49% (27.74)% (5.97)% 52.19%
Ratio of total expenses to
average net assets 0.93% 1.00% 1.04% 1.02% 0.98%
Ratio of net investment
income (loss) to average
net assets (0.58)% (0.64)% (0.64)% (0.60)% (0.22)%
Portfolio turnover rate 44.1% 44.8% 62.7% 74.6% 110.6%
Net assets, end of period
(in thousands) $1,329,391 $1,027,367 $677,956 $960,787 $971,867
^Total return reflects the rate that an investor would have earned on an
investment in the fund during each period, assuming reinvestment of all
distributions.
The accompanying notes are an integral part of these financial statements.
T. ROWE PRICE HEALTH SCIENCES FUND
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December 31, 2004
PORTFOLIO OF INVESTMENTS (1) Shares/$ Par Value
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(Cost and value in $ 000s)
COMMON STOCKS AND WARRANTS 99.8%
BIOTECHNOLOGY 46.2%
Other Biotechnology 8.4%
Alexion Pharmaceutical * 325,000 8,190
Amylin Pharmaceuticals *^ 250,000 5,840
BioCryst Pharmaceuticals * 534,600 3,090
Cubist Pharmaceuticals * 975,000 11,534
Cytogen * 250,000 2,880
Cytokinetics * 50,000 513
deCode Genetics * 525,000 4,100
Discovery Laboratories * 200,000 1,586
Diversa * 100,000 874
Dyax * 100,000 722
Dynavax Technologies * 50,000 400
Encysive Pharmaceuticals * 660,000 6,554
Exelixis * 750,000 7,125
Idenix Pharmaceuticals * 345,000 5,917
Incyte Genomics * 275,000 2,747
Insmed, Warrants, 5/31/05 *!!+ 250,048 0
Inspire Pharmaceuticals * 225,000 3,773
Keryx Biopharmaceuticals * 250,000 2,892
Ligand Pharmaceuticals, Class B * 125,000 1,455
Myogen * 200,000 1,614
Myogen, Warrants, 9/29/09 *!!+ 20,000 5
Myriad Genetics * 350,000 7,878
Nektar Therapeutics *^ 265,000 5,364
NeoRx * 175,000 366
NeoRx, Warrants, 12/31/08 *!!+ 18,000 0
ONYX Pharmaceuticals *^ 175,000 5,668
Pharmion * 50,000 2,111
Rigel Pharmaceuticals * 200,000 4,884
Theravance * 35,900 643
Theravance (IPO restricted shares) *!!+ 45,000 725
Theravance (restricted shares), Series D1 *!!+ 170,615 2,749
Vicuron Pharmaceuticals * 150,000 2,611
Vion Pharmaceuticals * 1,000,000 4,690
ViroLogic * 125,000 349
ViroPharma * 200,000 650
XOMA * 450,000 1,166
111,665
Major- Biotechnology 37.8%
Abgenix * 750,000 7,755
Alkermes *^ 1,175,000 16,556
Amgen *^ 750,000 48,112
Array BioPharma * 100,000 952
Atherogenics *^ 300,200 7,073
Biogen Idec *^ 525,000 34,970
Celgene * 200,000 5,306
Cephalon * 825,000 41,976
Chiron * 24,700 823
CV Therapeutics * 335,000 7,705
Eyetech Pharmaceuticals *^ 450,500 20,498
Genentech *^ 375,000 20,415
Gilead Sciences *^ 2,096,131 73,344
Human Genome Sciences * 500,000 6,010
ICOS * 25,000 707
ImClone Systems *^ 855,000 39,398
Kosan Biosciences * 100,000 693
Martek Biosciences *^ 145,000 7,424
Medicines Company *^ 975,000 28,080
MedImmune *^ 450,000 12,200
Millennium Pharmaceuticals * 250,000 3,030
Nabi *^ 200,000 2,930
Neurocrine Biosciences *^ 461,400 22,747
NPS Pharmaceuticals * 550,000 10,054
OSI Pharmaceuticals *^ 280,000 20,958
Protein Design Labs *^ 530,000 10,950
Seattle Genetics * 400,000 2,612
Seattle Genetics, Warrants, 12/31/11 *!!+ 50,000 0
Sepracor *^ 447,000 26,538
Transkaryotic Therapies * 175,000 4,443
Trimeris * 725,000 10,273
United Therapeutics *^ 50,000 2,258
Vertex Pharmaceuticals * 525,000 5,549
502,339
Total Biotechnology 614,004
LIFE SCIENCES 4.0%
Life Sciences 4.0%
Fisher Scientific * 25,000 1,560
Gen-Probe *^ 245,000 11,076
Immucor * 120,000 2,821
Invitrogen * 250,000 16,782
OraSure Technologies * 250,000 1,680
Serologicals * 175,000 3,871
Symyx Technologies * 450,000 13,536
Waters Corporation * 50,000 2,340
Total Life Sciences 53,666
PHARMACEUTICALS 19.5%
International Pharmaceuticals 1.1%
Schering (EUR) 27,000 2,011
Schwarz Pharma AG (EUR) 120,000 5,409
Solvay (EUR) 35,000 3,838
UCB (EUR) 75,000 3,797
15,055
Major- Pharmaceutical 18.4%
Able Laboratories * 350,000 7,962
Alcon ^ 80,000 6,448
Allergan ^ 70,000 5,675
Andrx * 496,200 10,832
Biocon, 144A (INR) 82,800 973
Elan ADR *^ 1,350,000 36,787
Eli Lilly ^ 240,000 13,620
Forest Laboratories *^ 288,500 12,942
GlaxoSmithKline (GBP) 59,000 1,381
Indevus Pharmaceuticals * 325,000 1,937
IVAX *^ 525,000 8,305
Johnson & Johnson 225,000 14,269
King Pharmaceuticals * 31,600 392
Medicis Pharmaceutical, Class A 25,000 878
MGI Pharma *^ 750,000 21,007
Novartis ADR 50,000 2,527
Noven Pharmaceuticals * 125,000 2,133
Novo Nordisk, Series B (DKK) 25,000 1,360
Penwest Pharmaceuticals * 110,000 1,316
Pfizer ^ 575,000 15,462
Salix Pharmaceuticals * 25,000 440
Sanofi-Aventis (EUR) 100,000 7,960
Schering-Plough 350,000 7,308
Shire Pharmaceuticals ADR 100,000 3,195
Taro Pharmaceuticals * 72,100 2,454
Teva Pharmaceutical ADR 175,000 5,226
Valeant Pharmaceuticals 375,000 9,881
Wyeth ^ 700,000 29,813
Yamanouchi Pharmaceutical (JPY) 300,000 11,652
244,135
Total Pharmaceuticals 259,190
PRODUCTS & DEVICES 10.7%
Implants 9.2%
Angiotech Pharmaceuticals * 225,000 4,151
Aspect Medical Systems * 425,000 10,395
Baxter International 50,000 1,727
Biomet 100,000 4,339
BioSphere Medical * 550,000 2,140
Boston Scientific * 50,000 1,778
C R Bard 50,000 3,199
Conor Medsystems * 75,000 1,039
CryoLife * 475,000 3,358
Edwards Lifesciences *^ 100,000 4,126
Endologix *! 375,000 2,561
EPIX Pharmaceuticals * 120,000 2,149
Fischer Imaging *! 590,000 2,301
Guidant ^ 225,000 16,222
Integra LifeSciences * 50,000 1,847
Kinetic Concepts * 225,000 17,167
Medtronic ^ 150,000 7,451
Regeneration Technologies * 450,000 4,716
St. Jude Medical * 200,000 8,386
STAAR * 200,000 1,248
Stryker 210,000 10,133
Symmetry Medical * 80,000 1,684
Wilson Greatbatch Technologies * 150,000 3,363
Zimmer Holdings *^ 90,000 7,211
122,691
Other Products & Devices 1.5%
Bausch & Lomb 40,000 2,578
Cooper Companies ^ 40,000 2,824
Dade Behring Holdings * 175,000 9,800
ResMed * 10,000 511
Select Comfort * 100,000 1,794
Varian Medical Systems * 35,000 1,513
19,020
Total Products & Devices 141,711
SERVICES 19.4%
Distribution 3.0%
AmerisourceBergen ^ 160,000 9,389
Cardinal Health ^ 125,000 7,269
Caremark RX * 25,000 986
Henry Schein * 10,000 696
NeighborCare * 200,000 6,144
Omnicare ^ 270,600 9,368
Patterson Companies * 125,000 5,424
39,276
Other Services 0.6%
HealthSouth * 250,000 1,570
INAMED * 20,000 1,265
LabOne * 150,000 4,806
United Surgical Partners International * 20,000 834
8,475
Payors 12.8%
Coventry Health Care * 75,000 3,981
UnitedHealth Group ^ 1,000,000 88,030
WellPoint *^ 675,000 77,625
169,636
Providers 3.0%
Community Health System * 400,000 11,152
HCA ^ 125,000 4,995
Manor Care 200,000 7,086
Sunrise Senior Living * 250,000 11,590
Symbion * 75,000 1,656
Triad Hospitals * 100,000 3,721
40,200
Total Services 257,587
Total Common Stocks and Warrants (Cost $1,025,225) 1,326,158
PREFERRED STOCKS 0.3%
Alexza Molecular Delivery, Series D *!!+ 1,555,210 1,800
Fibrogen, Series F *!!+ 659,341 2,700
Total Preferred Stocks (Cost $5,000) 4,500
CONVERTIBLE PREFERRED STOCKS 0.2%
Control Delivery Systems, Series A *!!+ 37,216 500
Corus Pharma *!!+ 1,724,138 1,944
NeoRx, Series B *!!+ 45 188
Total Convertible Preferred Stocks (Cost $4,450) 2,632
CORPORATE BONDS 0.7%
Morgan Stanley, 144A, 6.00%, 6/1/05 250,000 9,138
Total Corporate Bonds (Cost $10,727) 9,138
OPTIONS PURCHASED 0.0%
Sepracor, Call, 1/22/05 @ $50.00 * 25,000 237
Total Options Purchased (Cost $80) 237
OPTIONS WRITTEN (2.0%)
Abbott Labs, Put, 1/21/06 @ $50.00 * (25,000) (131)
Accredo Health, Put, 1/21/06 @ $30.00 * (21,800) (110)
Alcon, Call, 2/19/05 @ $70.00 * (25,000) (285)
Alkermes, Call, 5/21/05 @ $15.00 * (50,000) (75)
Allergan, Call, 1/22/05 @ $80.00 * (50,000) (111)
AmerisourceBergen
Call
2/19/05 @ $55.00 * (75,000) (341)
5/21/05 @ $60.00 * (75,000) (229)
Amgen
Call
1/22/05 @ $60.00 * (300,000) (1,305)
4/16/05 @ $60.00 * (150,000) (885)
Put, 4/16/05 @ $60.00 * (50,000) (66)
Amylin Pharmaceuticals
Call
1/22/05 @ $22.50 * (25,000) (34)
1/21/06 @ $25.00 * (100,000) (410)
Andrx, Put, 1/22/05 @ $30.00 * (43,800) (359)
Atherogenics
Call
1/22/05 @ $30.00 * (75,000) (5)
7/16/05 @ $30.00 * (75,000) (141)
Put, 1/22/05 @ $35.00 * (25,000) (290)
Bausch & Lomb, Put, 1/21/06 @ $65.00 * (25,000) (157)
Baxter International, Put, 1/21/06 @ $35.00 * (50,000) (155)
Biogen Idec
Call
1/22/05 @ $65.00 * (25,000) (72)
4/16/05 @ $65.00 * (50,000) (285)
4/16/05 @ $70.00 * (25,000) (80)
Put, 1/21/06 @ $60.00 * (25,000) (124)
Boston Scientific, Put, 1/22/05 @ $45.00 * (50,000) (475)
Cardinal Health
Call
1/22/05 @ $50.00 * (40,000) (332)
3/19/05 @ $50.00 * (85,000) (765)
Cephalon
Put
1/22/05 @ $50.00 * (20,000) (19)
1/22/05 @ $55.00 * (25,000) (104)
Chiron, Put, 1/22/05 @ $50.00 * (5,300) (88)
Community Health System
Put
3/19/05 @ $30.00 * (30,000) (77)
6/18/05 @ $30.00 * (25,000) (73)
Cooper Companies, Call, 5/21/05 @ $75.00 * (25,000) (78)
Coventry Health Care, Put, 1/21/06 @ $50.00 * (50,000) (232)
CV Therapeutics
Put
1/21/06 @ $15.00 * (50,000) (134)
1/21/06 @ $20.00 * (50,000) (247)
Dade Behring Holdings, Put, 2/19/05 @ 60.00 * (53,300) (261)
Edwards Lifesciences, Call, 5/21/05 @ $45.00 * (20,000) (29)
Elan
Call
1/22/05 @ $30.00 * (100,000) (43)
4/16/05 @ $30.00 * (100,000) (210)
4/16/05 @ $35.00 * (100,000) (92)
Put
4/16/05 @ $25.00 * (50,000) (100)
1/21/06 @ $25.00 * (70,000) (273)
1/21/06 @ $30.00 * (85,000) (561)
Eli Lilly
Call
1/22/05 @ $60.00 * (75,000) (24)
4/16/05 @ $60.00 * (115,000) (210)
7/16/05 @ $60.00 * (25,000) (71)
Eyetech Pharmaceuticals
Call, 3/19/05 @ $50.00 * (75,000) (116)
Put
3/19/05 @ $40.00 * (55,000) (73)
3/19/05 @ $50.00 * (25,000) (148)
6/18/05 @ $40.00 * (25,000) (70)
6/18/05 @ $45.00 * (40,000) (190)
Forest Laboratories
Call
5/21/05 @ $40.00 * (50,000) (382)
5/21/05 @ $50.00 * (150,000) (424)
Put, 1/22/05 @ $55.00 * (9,000) (92)
Gen-Probe
Call, 2/19/05 @ $45.00 * (25,000) (72)
Put
2/19/05 @ $45.00 * (15,000) (40)
5/21/05 @ $45.00 * (25,000) (111)
Genentech
Call
1/22/05 @ $52.50 * (150,000) (457)
3/19/05 @ $55.00 * (25,000) (85)
6/18/05 @ $60.00 * (100,000) (340)
Put, 1/22/05 @ $55.00 * (25,000) (54)
Gilead Sciences
Call
1/22/05 @ $35.00 * (100,000) (105)
1/22/05 @ $37.50 * (39,000) (9)
Guidant
Call, 7/16/05 @ $75.00 * (25,000) (24)
Put, 7/16/05 @ $75.00 * (25,000) (86)
HCA, Call, 1/22/05 @ $40.00 * (75,000) (62)
Henry Schein, Put, 1/21/06 @ $60.00 * (10,000) (30)
ImClone Systems
Call
2/19/05 @ $45.00 * (75,000) (307)
2/19/05 @ $50.00 * (100,000) (200)
5/21/05 @ $50.00 * (150,000) (622)
5/21/05 @ $55.00 * (100,000) (258)
5/21/05 @ $60.00 * (125,000) (197)
Invitrogen
Put
5/21/05 @ $55.00 * (25,000) (32)
1/21/06 @ $70.00 * (35,000) (306)
IVAX, Call, 6/18/05 @ $17.50 * (75,000) (103)
King Pharmaceuticals, Put, 1/22/05 @ $25.00 * (13,400) (170)
Martek Biosciences
Call
6/18/05 @ $50.00 * (50,000) (342)
6/18/05 @ $55.00 * (25,000) (115)
Medicines Company
Call, 4/16/05 @ $30.00 * (75,000) (172)
Put, 4/16/05 @ $30.00 * (25,000) (85)
MedImmune, Call, 6/18/05 @ $32.50 * (100,000) (70)
Medtronic
Call, 5/21/05 @ $50.00 * (50,000) (120)
Put, 5/21/05 @ $55.00 * (35,000) (201)
Merck, Put, 1/21/06 @ $30.00 * (40,000) (90)
MGI Pharma, Call, 1/22/05 @ $30.00 * (75,000) (34)
Nabi, Call, 3/19/05 @ $15.00 * (75,000) (96)
Nektar Therapeutics, Call, 5/21/05 @ $25.00 * (75,000) (99)
Neurocrine Biosciences
Call, 8/20/05 @ $60.00 * (100,000) (248)
Put, 8/20/05 @ $45.00 * (12,500) (44)
Omnicare, Call, 3/19/05 @ $25.00 * (50,000) (492)
ONYX Pharmaceuticals
Call
1/22/05 @ $35.00 * (25,000) (13)
2/19/05 @ $35.00 * (100,000) (185)
OSI Pharmaceuticals
Call
4/16/05 @ $60.00 * (50,000) (860)
4/16/05 @ $65.00 * (75,000) (1,009)
7/16/05 @ $55.00 * (50,000) (1,147)
Patterson Companies, Put, 7/16/05 @ $45.00 * (25,000) (94)
Pfizer
Call
3/18/05 @ $30.00 * (175,000) (66)
6/18/05 @ $30.00 * (100,000) (72)
1/21/06 @ $30.00 * (100,000) (160)
1/21/06 @ $32.50 * (50,000) (49)
Pharmion, Put, 2/19/05 @ $80.00 * (25,000) (189)
Protein Design Labs
Call
2/19/05 @ $22.50 * (75,000) (41)
5/21/05 @ $22.50 * (50,000) (79)
Sepracor
Call
1/22/05 @ $55.00 * (40,600) (201)
1/22/05 @ $60.00 * (50,000) (86)
4/16/05 @ $65.00 * (100,000) (273)
Put
4/16/05 @ $60.00 * (25,000) (126)
7/16/05 @ $60.00 * (75,000) (491)
1/21/06 @ $55.00 * (50,000) (313)
Serologicals, Put, 4/16/05 @ $22.50 * (8,800) (17)
St. Jude Medical, Put, 7/16/05 @ $40.00 * (25,000) (53)
Stryker
Put
1/22/05 @ $50.00 * (30,000) (62)
3/19/05 @ $50.00 * (30,000) (91)
Sunrise Senior Living, Put, 7/16/05 @ $45.00 * (30,000) (76)
Triad Hospitals, Put, 1/21/06 @ $40.00 * (25,000) (133)
United Therapeutics, Call, 5/21/05 @ $50.00 * (50,000) (143)
UnitedHealth Group
Call, 1/22/05 @ $70.00 * (25,000) (455)
Put, 1/22/05 @ $80.00 * (10,000) (4)
WellPoint
Call
1/22/05 @ $90.00 * (25,000) (631)
3/19/05 @ $95.00 * (25,000) (536)
6/18/05 @ $90.00 * (25,000) (688)
Put
6/18/05 @ $90.00 * (25,000) (36)
6/18/05 @ $105.00 * (25,000) (108)
Wyeth
Call
4/16/05 @ $45.00 * (25,000) (24)
7/16/05 @ $45.00 * (75,000) (122)
Zimmer Holdings, Call, 6/18/05 @ $95.00 * (25,000) (34)
Total Options Written (Cost $(20,972)) (26,188)
SHORT-TERM INVESTMENTS 1.2%
Money Market Fund 1.2%
T. Rowe Price Reserve Investment Fund, 2.28% #! 15,453,076 15,453
Total Short-Term Investments (Cost $15,453) 15,453
Total Investments in Securities
100.2% of Net Assets (Cost $1,039,963) $1,331,930
----------
(1) Denominated in U.S. dollars unless otherwise noted
# Seven-day yield
* Non-income producing
^ All or a portion of this security is pledged to cover written call options
at December 31, 2004
+ Valued by the T. Rowe Price Valuation Committee, established by the fund's
Board of Directors
144A Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may be resold in transactions exempt from registration only to
qualified institutional buyers -- total value of such securities at
period-end amounts to $10,111 and represents 0.8% of net assets
ADR American Depository Receipts
DKK Danish krone
EUR Euro
GBP British pound
INR Indian rupee
JPY Japanese yen
!Affiliated Companies
($000s)
The fund may invest in certain securities that are considered affiliated
companies. As defined by the 1940 Act, an affiliated company is one in which the
fund owns 5% or more of the outstanding voting securities, or a company which is
under common ownership or control.
Purchase Sales Investment Value
Affiliate Cost Cost Income 12/31/04 12/31/03
- --------------------------------------------------------------------------------
Endologix $1,911 $- $- $2,561 $-
Fischer Imaging - - - 2,301 2,626
T. Rowe Price
Reserve Investment
Fund * * 369 15,453 15,351
Totals $369 $20,315 $17,977
-------------------------------
*Realized gain/(loss) and purchase and sale information not shown for cash
management funds.
!!Restricted Securities
Amounts in (000s)
The fund may invest in securities that cannot be offered for public resale
without first being registered under the Securities Act of 1933 and related
rules. The total restricted securities (excluding 144A issues) at period-end
amounts to $10,611 and represents 0.8% of net assets.
Acquisition Acquisition
Description Date Cost
- ------------------------------------------ ------------ -----------
Alexza Molecular Delivery, Series D 12/23/04 $ 2,000
Control Delivery Systems, Series A 8/9/00 2,000
Corus Pharma 4/21/04 2,000
Fibrogen, Series F 12/30/04 3,000
Insmed, Warrants, 5/31/05 5/31/00 26
Myogen, Warrants, 9/29/09 9/29/04 3
NeoRx, Series B 12/5/03 450
NeoRx, Warrants, 12/31/08 12/5/03 0
Seattle Genetics, Warrants, 12/31/11 7/8/03 0
Theravance (IPO restricted shares) 10/4/04 720
Theravance (restricted shares), Series D1 10/6/04 2,380
Totals $ 12,579
--------
The fund has registration rights for certain restricted securities held as of
December 31, 2004. Any costs related to such registration are borne by the
issuer.
The accompanying notes are an integral part of these financial statements.
T. ROWE PRICE HEALTH SCIENCES FUND
- --------------------------------------------------------------------------------
December 31, 2004
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
(In thousands except shares and per share amounts)
Assets
Investments in securities, at value
Affiliated companies (cost $24,258) $ 20,315
Non-affiliated companies (cost $1,015,705) 1,311,615
Total investments in securities 1,331,930
Other assets 2,433
Total assets 1,334,363
Liabilities
Total liabilities 4,972
NET ASSETS $ 1,329,391
---------------
Net Assets Consist of:
Undistributed net realized gain (loss) $ (499)
Net unrealized gain (loss) 291,968
Paid-in-capital applicable to 57,519,770 shares of
$0.0001 par value capital stock outstanding;
1,000,000,000 shares authorized 1,037,922
NET ASSETS $ 1,329,391
---------------
NET ASSET VALUE PER SHARE $ 23.11
---------------
The accompanying notes are an integral part of these financial statements.
T. ROWE PRICE HEALTH SCIENCES FUND
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
($ 000s)
Year
Ended
12/31/04
Investment Income (Loss)
Income
Dividend $ 3,844
Interest 367
Total income 4,211
Expenses
Investment management 8,045
Shareholder servicing 2,732
Custody and accounting 228
Prospectus and shareholder reports 161
Registration 61
Legal and audit 30
Directors 7
Miscellaneous 17
Total expenses 11,281
Expenses paid indirectly (1)
Net expenses 11,280
Net investment income (loss) (7,069)
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Securities 58,592
Written options 28,104
Foreign currency transactions (81)
Net realized gain (loss) 86,615
Change in net unrealized gain (loss)
Securities 97,834
Written options (9,614)
Change in net unrealized gain (loss) 88,220
Net realized and unrealized gain (loss) 174,835
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 167,766
---------------
The accompanying notes are an integral part of these financial statements.
T. ROWE PRICE HEALTH SCIENCES FUND
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
($ 000s)
Year
Ended
12/31/04 12/31/03
Increase (Decrease) in Net Assets
Operations
Net investment income (loss) $ (7,069) $ (5,438)
Net realized gain (loss) 86,615 3,119
Change in net unrealized gain (loss) 88,220 266,737
Increase (decrease) in net assets
from operations 167,766 264,418
Capital share transactions *
Shares sold 381,311 238,878
Shares redeemed (247,053) (153,885)
Increase (decrease) in net assets
from capital share transactions 134,258 84,993
Net Assets
Increase (decrease) during period 302,024 349,411
Beginning of period 1,027,367 677,956
End of period $ 1,329,391 $ 1,027,367
----------------------------
(Including undistributed net investment income of
$0 at 12/31/04 and $0 at 12/31/03)
*Share information
Shares sold 17,677 13,705
Shares redeemed (11,654) (8,931)
Increase (decrease) in shares outstanding 6,023 4,774
The accompanying notes are an integral part of these financial statements.
T. ROWE PRICE HEALTH SCIENCES FUND
- --------------------------------------------------------------------------------
December 31, 2004
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price Health Sciences Fund, Inc. (the fund) is registered under the
Investment Company Act of 1940 (the 1940 Act) as a diversified, open-end
management investment company. The fund commenced operations on December 29,
1995. The fund seeks long-term capital appreciation.
The accompanying financial statements were prepared in accordance with
accounting principles generally accepted in the United States of America, which
require the use of estimates made by fund management.
Valuation
The fund values its investments and computes its net asset value per share at
the close of the New York Stock Exchange (NYSE), normally 4 p.m. ET, each day
that the NYSE is open for business. Equity securities listed or regularly traded
on a securities exchange or in the over-the-counter market are valued at the
last quoted sale price or, for certain markets, the official closing price at
the time the valuations are made, except for OTC Bulletin Board securities,
which are valued at the mean of the latest bid and asked prices. A security that
is listed or traded on more than one exchange is valued at the quotation on the
exchange determined to be the primary market for such security. Listed
securities not traded on a particular day are valued at the mean of the latest
bid and asked prices for domestic securities and the last quoted sale price for
international securities.
Debt securities are generally traded in the over-the-counter market. Securities
with original maturities of one year or more are valued at prices furnished by
dealers who make markets in such securities or by an independent pricing
service, which considers yield or price of bonds of comparable quality, coupon,
maturity, and type, as well as prices quoted by dealers who make markets in such
securities. Securities with original maturities of less than one year are valued
at amortized cost in local currency, which approximates fair value when combined
with accrued interest.
Investments in mutual funds are valued at the mutual fund's closing net asset
value per share on the day of valuation. Purchased and written options are
valued at the mean of the closing bid and asked prices.
Other investments, including restricted securities, and those for which the
above valuation procedures are inappropriate or are deemed not to reflect fair
value are
stated at fair value as determined in good faith by the T. Rowe Price Valuation
Committee, established by the fund's Board of Directors.
Most foreign markets close before the close of trading on the NYSE. If the fund
determines that developments between the close of a foreign market and the close
of the NYSE will, in its judgment, materially affect the value of some or all of
its portfolio securities, which in turn will affect the fund's share price, the
fund will adjust the previous closing prices to reflect the fair value of the
securities as of the close of the NYSE, as determined in good faith by the T.
Rowe Price Valuation Committee, established by the fund's Board of Directors. A
fund may also fair value securities in other situations, such as when a
particular foreign market is closed but the fund is open. In deciding whether to
make fair value adjustments, the fund reviews a variety of factors, including
developments in foreign markets, the performance of U.S. securities markets, and
the performance of instruments trading in U.S. markets that represent foreign
securities and baskets of foreign securities. The fund uses outside pricing
services to provide it with closing market prices and information used for
adjusting those prices. The fund cannot predict how often it will use closing
prices and how often it will adjust those prices. As a means of evaluating its
fair value process, the fund routinely compares closing market prices, the next
day's opening prices in the same markets, and adjusted prices.
Currency Translation
Assets, including investments, and liabilities denominated in foreign currencies
are translated into U.S. dollar values each day at the prevailing exchange rate,
using the mean of the bid and asked prices of such currencies against U.S.
dollars as quoted by a major bank. Purchases and sales of securities, income,
and expenses are translated into U.S. dollars at the prevailing exchange rate on
the date of the transaction. The effect of changes in foreign currency exchange
rates on realized and unrealized security gains and losses is reflected as a
component of security gains and losses.
Rebates and Credits
Subject to best execution, the fund may direct certain security trades to
brokers who have agreed to rebate a portion of the related brokerage commission
to the fund in cash. Commission rebates are included in realized gain on
securities in the accompanying financial statements and totaled $127,000 for the
year ended December 31, 2004. Additionally, the fund earns credits on
temporarily uninvested cash balances at the custodian that reduce the fund's
custody charges. Custody expense in the accompanying financial statements is
presented before reduction for credits, which are reflected as expenses paid
indirectly.
Investment Transactions, Investment Income, and Distributions
Income and expenses are recorded on the accrual basis. Premiums and discounts on
debt securities are amortized for financial reporting purposes. Dividends
received from mutual fund investments are reflected as dividend income; capital
gain distributions are reflected as realized gain/loss. Dividend income and
capital gain distributions are recorded on the ex-dividend date. Investment
transactions are accounted for on the trade date. Realized gains and losses are
reported on the identified cost basis. Distributions to shareholders are
recorded on the ex-dividend date. Income distributions are declared and paid on
an annual basis. Capital gain distributions, if any, are declared and paid by
the fund, typically on an annual basis.
Other
In the normal course of business, the fund enters into contracts that provide
general indemnifications. The fund's maximum exposure under these arrangements
is dependent on claims that may be made against the fund in the future and,
therefore, cannot be estimated; however, based on experience, the risk of
material loss from such claims is considered remote.
NOTE 2 - INVESTMENT TRANSACTIONS
Consistent with its investment objective, the fund engages in the following
practices to manage exposure to certain risks or enhance performance. The
investment objective, policies, program, and risk factors of the fund are
described more fully in the fund's prospectus and Statement of Additional
Information.
Restricted Securities
The fund may invest in securities that are subject to legal or contractual
restrictions on resale. Although certain of these securities may be readily
sold, for example, under Rule 144A, others may be illiquid, and their sale may
involve substantial delays and additional costs, and prompt sale at an
acceptable price may be difficult.
Options
Call and put options give the holder the right to purchase or sell,
respectively, a security at a specified price on a certain date. Risks arise
from possible illiquidity of the options market and from movements in security
values. Options are reflected in the accompanying Portfolio of Investments at
market value. Transactions in options written and related premiums received
during the year ended December 31, 2004, were as follows:
- --------------------------------------------------------------------------------
Number of
Contracts Premiums
Outstanding at beginning of period 55,000 $ 16,641,000
Written 275,000 87,075,000
Exercised (7,000) (3,195,000)
Expired (13,000) (2,341,000)
Closed (241,000) (77,208,000)
Outstanding at end of period 69,000 $ 20,972,000
-----------------------------
Other
Purchases and sales of portfolio securities, other than short-term securities,
aggregated $694,944,000 and $530,970,000, respectively, for the year ended
December 31, 2004.
NOTE 3 - FEDERAL INCOME TAXES
No provision for federal income taxes is required since the fund intends to
continue to qualify as a regulated investment company under Subchapter M of the
Internal Revenue Code and distribute to shareholders all of its taxable income
and gains. Federal income tax regulations differ from generally accepted
accounting principles; therefore, distributions determined in accordance with
tax regulations may differ significantly in amount or character from net
investment income and realized gains for financial reporting purposes. Financial
reporting records are adjusted for permanent book/tax differences to reflect tax
character. Financial records are not adjusted for temporary differences.
There were no distributions in the year ended December 31, 2004. At December 31,
2004, the tax-basis components of net assets were as follows:
- --------------------------------------------------------------------------------
Unrealized appreciation $ 367,029,000
Unrealized depreciation (77,333,000)
Net unrealized appreciation (depreciation) 289,696,000
Undistributed long-term capital gain 1,773,000
Paid-in capital 1,037,922,000
Net assets $ 1,329,391,000
---------------
Federal income tax regulations require the fund to defer recognition of capital
losses realized on certain covered option transactions; accordingly, $2,272,000
of realized losses reflected in the accompanying financial statements have not
been recognized for tax purposes as of December 31, 2004. The fund intends to
retain realized gains to the extent of available capital loss carryforwards for
federal income tax purposes. During the fiscal year ended December 31, 2004, the
fund utilized $86,373,000 of capital loss carryforwards.
For the year ended December 31, 2004, the fund recorded the following permanent
reclassifications to reflect tax character. Reclassifications to paid-in capital
relate primarily to the current net operating loss. Results of operations and
net assets were not affected by these reclassifications.
- --------------------------------------------------------------------------------
Undistributed net investment income $ 7,069,000
Undistributed net realized gain 82,000
Paid-in capital (7,151,000)
At December 31, 2004, the cost of investments for federal income tax purposes
was $1,042,235,000.
NOTE 4- RELATED PARTY TRANSACTIONS
The fund is managed by T. Rowe Price Associates, Inc. (the manager or Price
Associates), a wholly owned subsidiary of T. Rowe Price Group, Inc. The
investment management agreement between the fund and the manager provides for an
annual investment management fee, which is computed daily and paid monthly. The
fee consists of an individual fund fee, equal to 0.35% of the fund's average
daily net assets, and the fund's pro-rata share of a group fee. The group fee is
calculated based on the combined net assets of certain mutual funds sponsored by
Price Associates (the group) applied to a graduated fee schedule, with rates
ranging from 0.48% for the first $1 billion of assets to 0.295% for assets in
excess of $120 billion. The fund's portion of the group fee is determined by the
ratio of its average daily net assets to those of the group. At December 31,
2004, the effective annual group fee rate was 0.31%, and investment management
fee payable totaled $729,000.
In addition, the fund has entered into service agreements with Price Associates
and two wholly owned subsidiaries of Price Associates (collectively, Price).
Price
Associates computes the daily share price and maintains the financial records of
the fund. T. Rowe Price Services, Inc., provides shareholder and administrative
services in its capacity as the fund's transfer and dividend disbursing agent.
T. Rowe Price Retirement Plan Services, Inc., provides subaccounting and
recordkeeping services for certain retirement accounts invested in the fund. For
the year ended December 31, 2004, expenses incurred pursuant to these service
agreements were $104,000 for Price Associates, $1,550,000 for T. Rowe Price
Services, Inc., and $185,000 for T. Rowe Price Retirement Plan Services, Inc. At
period-end, a total of $248,000 of these expenses was payable.
Additionally, the fund is one of several mutual funds in which certain college
savings plans managed by Price Associates may invest. As approved by the fund's
Board of Directors, shareholder servicing costs associated with each college
savings plan are borne by the fund in proportion to the average daily value of
its shares owned by the college savings plan. For the year ended December 31,
2004, the fund was charged $40,000 for shareholder servicing costs related to
the college savings plans, of which $30,000 was for services provided by Price.
At December 31, 2004, approximately 0.8% of the outstanding shares of the fund
were held by college savings plans.
The fund may invest in the T. Rowe Price Reserve Investment Fund and the T. Rowe
Price Government Reserve Investment Fund (collectively, the Reserve Funds),
open-end management investment companies managed by Price Associates and
affiliates of the fund. The Reserve Funds are offered as cash management options
to mutual funds, trusts, and other accounts managed by Price Associates and/or
its affiliates, and are not available for direct purchase by members of the
public. The Reserve Funds pay no investment management fees.
As of December 31, 2004, T. Rowe Price Group, Inc. and/or its wholly owned
subsidiaries owned 102,153 shares of the fund, representing less than 1% of the
fund's net assets.
T. ROWE PRICE HEALTH SCIENCES FUND
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of
T. Rowe Price Health Sciences Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of T. Rowe Price Health Sciences Fund,
Inc. (the "Fund") at December 31, 2004, and the results of its operations, the
changes in its net assets and the financial highlights for each of the fiscal
periods presented, in conformity with accounting principles generally accepted
in the United States of America. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with the auditing 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 are free of material
misstatement. An audit 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, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 2004 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
Baltimore, Maryland
February 11, 2005
T. ROWE PRICE HEALTH SCIENCES FUND
- --------------------------------------------------------------------------------
INFORMATION ON PROXY VOTING POLICIES, PROCEDURES, AND RECORDS
- --------------------------------------------------------------------------------
A description of the policies and procedures used by T. Rowe Price funds and
portfolios to determine how to vote proxies relating to portfolio securities is
available in each fund's Statement of Additional Information, which you may
request by calling 1-800-225-5132 or by accessing the SEC's Web site,
www.sec.gov. The description of our proxy voting policies and procedures is also
available on our Web site, www.troweprice.com. To access it, click on the words
"Company Info" at the top of our homepage for individual investors. Then, in the
window that appears, click on the "Proxy Voting Policy" navigation button in the
top left corner.
Each fund's most recent annual proxy voting record is available on our Web site
and through the SEC's Web site. To access it through our Web site, follow the
directions above, then click on the words "Proxy Voting Record" at the bottom of
the Proxy Voting Policy page.
HOW TO OBTAIN QUARTERLY PORTFOLIO HOLDINGS
- --------------------------------------------------------------------------------
The fund files a complete schedule of portfolio holdings with the Securities and
Exchange Commission for the first and third quarters of each fiscal year on Form
N-Q. The fund's Form N-Q is available electronically on the SEC's Web site
(www.sec.gov); hard copies may be reviewed and copied at the SEC's Public
Reference Room, 450 Fifth St. N.W., Washington, DC 20549. For more information
on the Public Reference Room, call 1-800-SEC-0330.
T. ROWE PRICE HEALTH SCIENCES FUND
- --------------------------------------------------------------------------------
ABOUT THE FUND'S DIRECTORS AND OFFICERS
- --------------------------------------------------------------------------------
Your fund is governed by a Board of Directors that meets regularly to review
investments, performance, compliance matters, advisory fees, expenses, and other
business affairs, and is responsible for protecting the interests of
shareholders. The majority of the fund's directors are independent of T. Rowe
Price Associates, Inc. (T. Rowe Price); "inside" directors are officers of T.
Rowe Price. The Board of Directors elects the fund's officers, who are listed in
the final table. The business address of each director and officer is 100 East
Pratt Street, Baltimore, MD 21202. The Statement of Additional Information
includes additional information about the fund directors and is available
without charge by calling a T. Rowe Price representative at 1-800-225-5132.
Independent Directors
Name
(Year of Birth) Principal Occupation(s) During Past 5 Years
Year Elected * and Directorships of Other Public Companies
Anthony W. Deering Director, Chairman of the Board, President, and
(1945) Chief Executive Officer, The Rouse Company, real
2001 estate developers; Director, Mercantile Bank
(4/03 to present)
Donald W. Dick, Jr. Principal, EuroCapital Advisors, LLC, an
(1943) acquisition and management advisory firm
1995
David K. Fagin Director, Golden Star Resources Ltd., Canyon
(1938) Resources Corp. (5/00 to present), and Pacific Rim
1995 Mining Corp. (2/02 to present); Chairman and
President, Nye Corp.
Karen N. Horn Managing Director and President, Global Private
(1943) Client Services, Marsh Inc. (1999-2003); Managing
2003 Director and Head of International Private
Banking, Bankers Trust (1996-2003); Director, Eli
Lilly and Company and Georgia Pacific
(5/04 to present)
F. Pierce Linaweaver President, F. Pierce Linaweaver & Associates,
(1934) Inc., consulting environmental and civil engineers
2001
John G. Schreiber Owner/President, Centaur Capital Partners, Inc., a
(1946) real estate investment company; Partner,
2001 Blackstone Real Estate Advisors, L.P.; Director,
AMLI Residential Properties Trust and The Rouse
Company, real estate developers
*Each independent director oversees 112 T. Rowe Price portfolios and serves
until retirement, resignation, or election of a successor.
Inside Directors
Name
(Year of Birth)
Year Elected *
[Number of T. Rowe Price Principal Occupation(s) During Past 5 Years
Portfolios Overseen] and Directorships of Other Public Companies
John H. Laporte, CFA Vice President, T. Rowe Price and T. Rowe Price
(1945) Group, Inc.; Vice President, T. Rowe Price Health
1995 Sciences Fund
[15]
James S. Riepe Director and Vice President, T. Rowe Price; Vice
(1943) Chairman of the Board, Director, and Vice
1995 President, T. Rowe Price Group, Inc.; Chairman of
[112] the Board and Director, T. Rowe Price Global Asset
Management Limited, T. Rowe Price Global
Investment Services Limited, T. Rowe Price
Investment Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price
Services, Inc.; Chairman of the Board, Director,
President, and Trust Officer, T. Rowe Price Trust
Company; Director, T. Rowe Price International,
Inc.; Chairman of the Board, Health Sciences Fund
*Each inside director serves until retirement, resignation, or election of a
successor.
Officers
Name (Year of Birth)
Title and Fund(s) Served Principal Occupation(s)
Laurie M. Bertner (1977) Vice President, T. Rowe Price and
Vice President, Health Sciences Fund T. Rowe Price Group, Inc.
Stephen V. Booth, CPA (1961) Vice President, T. Rowe Price, T. Rowe
Vice President, Health Sciences Fund Price Group, Inc., and T. Rowe Price
Trust Company
Joseph A. Carrier (1960) Vice President, T. Rowe Price, T. Rowe
Treasurer, Health Sciences Fund Price Group, Inc., T. Rowe Price
Investment Services, Inc., and T. Rowe
Price Trust Company
Roger L. Fiery III, CPA (1959) Vice President, T. Rowe Price, T. Rowe
Vice President, Health Sciences Fund Price Group, Inc., T. Rowe Price
International, Inc., and T. Rowe Price
Trust Company
Unless otherwise noted, officers have been employees of T. Rowe Price or T. Rowe
Price International for at least five years.
Name (Year of Birth)
Title and Fund(s) Served Principal Occupation(s)
John R. Gilner (1961) Chief Compliance Officer and Vice
Chief Compliance Officer, President, T. Rowe Price; Vice
Health Sciences Fund President, T. Rowe Price Investment
Services, Inc., and T. Rowe Price Group,
Inc.
Gregory S. Golczewski (1966) Vice President, T. Rowe Price and
Vice President, Health Sciences Fund T. Rowe Price Trust Company
Henry H. Hopkins (1942) Director and Vice President, T. Rowe
Vice President, Health Sciences Fund Price Investment Services, Inc., T. Rowe
Price Services, Inc., and T. Rowe Price
Trust Company; Vice President, T. Rowe
Price, T. Rowe Price Group, Inc.,
T. Rowe Price International, Inc., and
T. Rowe Price Retirement Plan Services,
Inc.
Kris H. Jenner, M.D., D. Phil. (1962) Vice President, T. Rowe Price and
President, Health Sciences Fund T. Rowe Price Group, Inc.
Susan J. Klein (1950) Vice President, T. Rowe Price
Vice President, Health Sciences Fund
Patricia B. Lippert (1953) Assistant Vice President, T. Rowe Price
Secretary, Health Sciences Fund and T. Rowe Price Investment Services,
Inc.
Jay S. Markowitz, M.D. (1962) Vice President, T. Rowe Price and
Vice President, Health Sciences Fund T. Rowe Price Group, Inc.; formerly
Transplant Surgeon and Assistant
Professor of Surgery, Johns Hopkins
University School of Medicine (to 2001)
Charles G. Pepin (1966) Vice President, T. Rowe Price and
Vice President, Health Sciences Fund T. Rowe Price Group, Inc.
John Carl A. Sherman (1972) Vice President, T. Rowe Price Group,
Vice President, Health Sciences Fund Inc., and T. Rowe Price International,
Inc.
Julie L. Waples (1970) Vice President, T. Rowe Price
Vice President, Health Sciences Fund
Unless otherwise noted, officers have been employees of T. Rowe Price or T. Rowe
Price International for at least five years.
Item 2. Code of Ethics.
The registrant has adopted a code of ethics, as defined in Item 2 of Form N-CSR,
applicable to its principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar
functions. A copy of this code of ethics is filed as an exhibit to this Form
N-CSR. No substantive amendments were approved or waivers were granted to this
code of ethics during the period covered by this report.
Item 3. Audit Committee Financial Expert.
The registrant's Board of Directors/Trustees has determined that Mr. David K.
Fagin qualifies as an audit committee financial expert, as defined in Item 3 of
Form N-CSR. Mr. Fagin is considered independent for purposes of Item 3 of Form
N-CSR.
Item 4. Principal Accountant Fees and Services.
(a) - (d) Aggregate fees billed to the registrant for the last two fiscal years
for professional services rendered by the registrant's principal accountant were
as follows:
2004 2003
Audit Fees $8,150 $9,653
Audit-Related Fees 1,152 548
Tax Fees 2,210 2,507
All Other Fees - 124
Audit fees include amounts related to the audit of the registrant's annual
financial statements and services normally provided by the accountant in
connection with statutory and regulatory filings. Audit-related fees include
amounts reasonably related to the performance of the audit of the registrant's
financial statements, specifically the issuance of a report on internal
controls. Tax fees include amounts related to tax compliance, tax planning, and
tax advice. Other fees include the registrant's pro-rata share of amounts for
agreed-upon procedures in conjunction with service contract approvals by the
registrant's Board of Directors/Trustees.
(e)(1) The registrant's audit committee has adopted a policy whereby audit and
non-audit services performed by the registrant's principal accountant for the
registrant, its investment adviser, and any entity controlling, controlled by,
or under common control with the investment adviser that provides ongoing
services to the registrant require pre-approval in advance at regularly
scheduled audit committee meetings. If such a service is required between
regularly scheduled audit committee meetings, pre-approval may be authorized by
one audit committee member with ratification at the next scheduled audit
committee meeting. Waiver of pre-approval for audit or non-audit services
requiring fees of a de minimis amount is not permitted.
(2) No services included in (b) - (d) above were approved pursuant to
paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
(f) Less than 50 percent of the hours expended on the principal accountant's
engagement to audit the registrant's financial statements for the most recent
fiscal year were attributed to work performed by persons other than the
principal accountant's full-time, permanent employees.
(g) The aggregate fees billed for the most recent fiscal year and the preceding
fiscal year by the registrant's principal accountant for non-audit services
rendered to the registrant, its investment adviser, and any entity controlling,
controlled by, or under common control with the investment adviser that provides
ongoing services to the registrant were $903,000 and $821,000, respectively, and
were less than the aggregate fees billed for those same periods by the
registrant's principal accountant for audit services rendered to the T. Rowe
Price Funds.
(h) All non-audit services rendered in (g) above were pre-approved by the
registrant's audit committee. Accordingly, these services were considered by the
registrant's audit committee in maintaining the principal accountant's
independence.
Item 5. Audit Committee of Listed Registrants.
Not applicable.
Item 6. Schedule of Investments.
Not applicable. The complete schedule of investments is included in Item 1 of
this Form N-CSR.
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.
(a) The registrant's principal executive officer and principal financial officer
have evaluated the registrant's disclosure controls and procedures within 90
days of this filing and have concluded that the registrant's disclosure controls
and procedures were effective, as of that date, in ensuring that information
required to be disclosed by the registrant in this Form N-CSR was recorded,
processed, summarized, and reported timely.
(b) The registrant's principal executive officer and principal financial officer
are aware of no change in the registrant's internal control over financial
reporting that occurred during the registrant's second fiscal quarter 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.
(a)(1) The registrant's code of ethics pursuant to Item 2 of Form N-CSR is
attached.
(2) Separate certifications by the registrant's principal executive officer
and principal financial officer, pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 and required by Rule 30a-2(a) under the Investment Company Act of
1940, are attached.
(3) Written solicitation to repurchase securities issued by closed-end
companies: not applicable.
(b) A certification by the registrant's principal executive officer and
principal financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 and required by Rule 30a-2(b) under the Investment Company Act of 1940,
is attached.
SIGNATURES
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.
T. Rowe Price Health Sciences Fund, Inc.
By /s/ James S. Riepe
-----------------------------------
James S. Riepe
Principal Executive Officer
Date February 18, 2005
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/ James S. Riepe
-----------------------------------
James S. Riepe
Principal Executive Officer
Date February 18, 2005
By /s/ Joseph A. Carrier
-----------------------------------
Joseph A. Carrier
Principal Financial Officer
Date February 18, 2005