N-CSR 1 hsf.txt T. ROWE PRICE HEALTH SCIENCES FUND 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. REPORTS ON THE WEB Sign up for our E-mail Program, and you can begin to receive updated fund reports and prospectuses online rather than through the mail. Log in to your account at troweprice. com for more information. T. ROWE PRICE HEALTH SCIENCES FUND -------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------- Period Ended 12/31/04 6 Months 12 Months -------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------- Percent of Net Assets Periods Ended 6/30/04 12/31/04 -------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------- PORTFOLIO HIGHLIGHTS -------------------------------------------------------------------------------- TWENTY-FIVE LARGEST HOLDINGS Percent of Net Assets 12/31/04 -------------------------------------------------------------------------------- UnitedHealth Group 6.6% WellPoint 5.8 Gilead Sciences 5.5 Amgen 3.6 Cephalon 3.2 -------------------------------------------------------------------------------- ImClone Systems 3.0 Elan 2.8 Biogen Idec 2.6 Wyeth 2.2 Medicines Company 2.1 -------------------------------------------------------------------------------- Sepracor 2.0 Neurocrine Biosciences 1.7 MGI Pharma 1.6 OSI Pharmaceuticals 1.6 Eyetech Pharmaceuticals 1.5 -------------------------------------------------------------------------------- Genentech 1.5 Kinetic Concepts 1.3 Invitrogen 1.3 Alkermes 1.2 Guidant 1.2 -------------------------------------------------------------------------------- Pfizer 1.2 Johnson & Johnson 1.1 Eli Lilly 1.0 Symyx Technologies 1.0 Forest Laboratories 1.0 -------------------------------------------------------------------------------- Total 57.6% Note: Table excludes investments in the T. Rowe Price Reserve Investment Fund. T. ROWE PRICE HEALTH SCIENCES FUND -------------------------------------------------------------------------------- PORTFOLIO HIGHLIGHTS -------------------------------------------------------------------------------- CONTRIBUTIONS TO THE CHANGE IN NET ASSET VALUE PER SHARE 6 Months Ended 12/31/04 Best Contributors Worst Contributors -------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------- GROWTH OF $10,000 -------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------- FUND EXPENSE EXAMPLE -------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------- Beginning Ending Expenses Paid Account Value Account Value During Period* 7/1/04 12/31/04 7/1/04 to 12/31/04 -------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS For a share outstanding throughout each period -------------------------------------------------------------------------------- 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 $971,867 ^Total return reflects the rate that an investor would have earned on an investment in the fund during each period, assuming reinvestment of all distributions. The accompanying notes are an integral part of these financial statements. T. ROWE PRICE HEALTH SCIENCES FUND -------------------------------------------------------------------------------- December 31, 2004 PORTFOLIO OF INVESTMENTS (1) Shares/$ Par Value -------------------------------------------------------------------------------- (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