Muge Tian Yanlei Xu Ben Hier Mohamed Ibrahim November 29, 2007

1. Muge Tian Yanlei Xu Ben Hier Mohamed Ibrahim November 29, 2007

2. Agenda • Company Overview • Macroeconomic Outlook • Industry Competitors • Recent Developments • Portfolio Position • DCF Valuation • Comparable Multiple Valuation • Recommendation

3. Company Overview • Incorporated as an Illinois corporation in 1909, as a successor to a business founded in 1901 • Nation’s largest retail drugstore chain (based on sales) • 33rd year of consecutive sales and earnings growth • Sales are expected to continue to grow • Aging population • Introduction of lower priced generics • Development of innovative drugs • Convenience positioning: 139.1 million people live within 2 miles • Traffic: 5 million shoppers in one store location daily • As of Aug 31,2007, 5997 stores located in 48 states and Puerto Rico.

4. Walgreens’ Business Prescription Drugs Candy Non-Prescription Drugs Photofinishing Walgreens Greeting Cards Beauty Care Personal Care Seasonal Items Household Items Convenience Foods

5. Product Class

6. Top Five States 2010~2011 Florida Texas Illinois California Arizona 736 587 528 476 234 US Demography: Over 50% of baby boomers in Florida, Texas, Illinois, California, New York, Pennsylvania, Ohio, Michigan, & New Jersey

7. Growth Strategy • Store openings • Locating new stores, relocating/closing exiting stores, site selection (convenience positioning) • 2007, opened or acquired 563 stores. • Continue growth, anticipating more than 7000 locations in 2010.

8. Acquisitions • In 2006 : • Merger with Happy Harry’s pharmacy chain • Purchase of : • Medmark Inc. ( Specialty pharmacy ) • Schraft’s ( Specialty pharmacy) • Canadian Valley medical ( Home care services) • Home pharmacy of California (home infusion service) • Controlling interest in Senior Med • In 2007 : • Option Care Inc. (specialty pharmacy & home infusion service) • Take care health systems (convenient care clinic operator) • Remaining interests in Senior Med.

9. Walgreens Risk Factors Competition Regulations Product Liability Economic Condition Reduction Reimbursement Store Location PharmacyPersonnel

10. Oil Price Consumer Confidence Macroeconomic Conditions Source: Wall Street Journal The Conference Board, The Consumer Confidence Press Release

11. Industry Overview • Industry: Drug retail • CVS/Caremark Corp. (CVS) and Rite Aid Corp. (RAD) • Business segments: prescription and non-prescription drugs, and general merchandise

12. Industry • Sources and availability of raw materials • numerous domestic and foreign suppliers • Seasonal variation • timing and severity of cold/flu season, holidays • Dependence upon limited number of customers • no customers counts for 10% or more of consolidated sales • Competition • chain and independent drug stores, mail order prescription providers, grocery stores, convenient stores, mass merchants, and dollar stores • service, convenience, variety and price

13. 5-Year Industry

14. 1-Year Stock Performance

15. Porters Five Forces: Retail Drug Industry • Rivalry: High • Existing drug stores • Direct mail pharmacy benefit managers • Grocery stores & big box retailers • Threat of Substitutes: Low • Few alternative choices for products sold at Walgreens/Drug Retailers • Bargaining Power of Buyers: Moderate • Insurance companies • Walgreens receives premium prices for front end convenience items • Bargaining Power of Suppliers: High • Drug companies have price control • Barriers to Entry: Moderate • High initial capital expenditures & supplier relationship required

16. Generic Pipeline • Lipitor (#1) and Prevacid (#3) are among the top selling drugs in the U.S. • Generic drug pipeline will not be as robust as 2006 ($14B) & 2007 ($14B) • Opportunity for higher margin generics despite declining reimbursement rates Source: Forbes.com

17. Path From Branded to Generic • Stage III • 6/2/2007 - Future • Generic Exclusivity Ends • Sold at 52% of Branded Price • Insurance Companies Reduce Reimbursement • Stage II • 1/2/2007 - 6/2/2007 • First Generic Version Available • 6 Month Exclusivity • Sold at 94% of “Branded” Price • Insurance Companies Offer High Reimbursement Rates • Stage I • 1/1/1995 - 1/1/2007 (Est. 12 Yrs) • Full Price “Branded” Drug Available • Low Margin Product

18. Recent Developments • Wal-Mart Threat • In June 07, Wal-Mart announced a $4 prescription program • The effect didn’t last for long time (less than 6 weeks). • This is not a threat because: • The drugs covered by this program are not widely demanded by patients. • For Walgreens prescription drug represents 65% of sales , of which 94.8% Third party sales. • Third party : • 1-Medicare : senior above 65 years • 2-Medicaid : low income people • 3-Private insurance • Wal-Mart targets those who are not covered by any insurance and that represents 5% of the USA population.

19. Recent Developments Cont. • On Oct 1st 2007 , Walgreen announced a decline in Q4 earnings by 3.8%. • Although the annual data showed an increase in earnings by 16.6%, sales increased by 13.3%. • Walgreen lost 15% ($7.04) on that day. • Walgreen is held by many institutional investors, so when Walgreen missed their expectations, shares sold off abruptly

20. Recent Developments Cont. • The management attributed this decline : • Lower generic drug reimbursement • Higher SGA, higher salary, store expenses, higher advertising cost and some administrative costs related to acquisitions • The absence of new blockbuster generic drugs to enter the market during Q4. • The expansion in third party selling (Medicare program) that has lower margins.

21. The Zocor Story • Cholesterol drug • Huge seller in 2005 more than $ 4 billion • Generic became available June 2006 • Sales increased as insurers force people to switch to the generic, even from other drugs like the Lipitor and Crestor. • More generics start to appear, insurers force drug makers to lower the price, insurers pay lower reimbursements. • Even when sales of Simvastatin (generic Zocor) tripled, yet gross profit was flat. • At same time SGA costs increased by 15%, extra was needed staff to fill the increase in the size of business

22. Patent Expiration Schedule

23. RCMP Position Purchased 1000 shares of WAG on October 6th, 1999 for $25.00/share On September 20th, 2006, sold 500 shares @ $49.94/share for a realized gain of $12,470 Currently own 500 shares of WAG, trading at $38.31 as of Nov 28, 2007 for an unrealized gain of $6,655 or 53.24%.

24. Role in Portfolio

25. Correlation Matrix

26. Lease Obligations • 19.1% of stores are owned while 80.9% are leased • The present value of lease obligations “quasi debt” is $15.794 billion • We should take the risk from these operating leases into consideration

27. DCF Assumptions • Store openings and Capex • Increase trend SGA • Increase gross profit margin • Sales will grow in 08 due to patent expiration • Wacc Calculation : • Equity 93% Debt 7% • Beta 0.55 • Rf 4.05% (10 yr treasury note) • Ke 7.35% • Kd 5.36% • WACC 7.07% • Long term growth rate 3% • DCF Value: $ 41.66

28. Comparable Analysis Source: Onesource

29. Public Comparables Analysis Closing Price: $38.31 P/E (TTM): 22.94 * $2.03 = $46.57 Forward P/E: 16.83 * $2.03 = $34.16 Average: $40.37 Source: Onesource & Google Finance

30. Recommendation • Hold 500 Shares • DCF valuation near current stock price • Generic drug outlook not as robust as 2006-07 • Low correlation to existing portfolio holdings • Macroeconomic outlook