I upgraded cyclops to orange 8 and noticed one of the gear grants him life steal and improved healing. How does he benefit from these skills if he does no physical damage?
He doesn't. Some items aren't that useful. Tons of heroes get Improved Healing from items, when they have no use for it.
Yeah, Weredragon gets armor pen....
You never should exclude the possibility they create a hero that stops any magic so your cyclops/wee/silent spirit would have to go full melee.
And that's were the lifesteal kicks in oh yeah.