NYSE: WAG Junying Shen Xiaosi (Sarah) Song Chi (Tracy) Zhang Xiangyuan (Arthur) Zhong Nov 6, 2012

1. NYSE: WAG Junying Shen Xiaosi (Sarah) Song Chi (Tracy) Zhang Xiangyuan (Arthur) Zhong Nov 6, 2012

2. Agenda • Introduction • Industry and Macroeconomic Overview • Company Overview • Relevant Stock Market • Financial Analysis • Financial Projections • Recommendation

3. Current Portfolio Position • 500 shares bought on Oct 6, 1999 @ $25.00 • Current Stock Price: $ 34.89 (Nov 2, 2012) • EPS: $ 2.24 • Unrealized Gain: 36.32%

4. Pharmacies & Drug Stores Industry Overview • Revenue: $238.5 billion • Annual Growth Rate since 2007: 1.7% • Profit: $5.2 billion • Major players: • Walgreen 30.9% • CVS Caremark 27% • Rite Aid Corporation 11% Source: WWW.IBISWORLD.COM

5. Pharmacies & Drug Stores Industry Structure Source: WWW.IBISWORLD.COM

6. External Drivers • Per capita disposable income • Private Health Insurance Coverage • Aging Population • Medicare, Medicaid & Obamacare • Generic Drug Wave

7. Per Capita Disposable Income • Per Capita Disposable Income determines a person’s ability to purchase goods and services • The growth is hindered by the negative Macroeconomic outlook though

8. Private Health Insurance Coverage • Pros: Private health insurance membership can lower the price of pharmaceutical and hence increase the demand for the industry • Cons: Managed care organizations associated with health insurance plans can give lots of pressure on drug price and cut profitability margin

9. Aging Population • Baby boomers are getting old and this will bring huge opportunities for the industry because senior people has a higher demand for medical services Source: WWW.IBISWORLD.COM

10. Medicare, Medicaid & Obamacare • Medicare and Medicaid subsidize prescription drug purchases and can spur demand for the industry • Obamacare is aimed at increasing the insurance coverage, which may bring opportunities • But you’ll never know until tonight….

11. Generic Drug Wave • After the expiration of the patent of a medication, a generic version of the drug can be produced and sold • Generic drugs have the same effect but are much cheaper compared to brand name drugs • Normally generic drugs have a higher gross profit margin for pharmacy retailers, partially because of generic drug producers have smaller bargaining power • In the next few years, there will be lots of brand drugs lose patents Source: WWW.IBISWORLD.COM

12. Threats • Pharmacy Benefit Managers • Third party administrator of prescription drug programs, primarily responsible for processing and paying prescription drug claims • Diversified Supermarkets

13. Pharmacy Benefit Managers • PBMs are the primary contact of the pharmaceutical supply chain to many patients • PBMs’ major tools: • Pharmacy networks: PBMs build networks of retail pharmacies to provide customers convenient access to prescriptions at discounted rates • Mail Service pharmacies: PBMs provide home-delivered prescriptions to consumers • PBMs aggregate the buying clout of millions of enrollees through their client health plans to obtain massive bargaining power over pharmacy retailers • PBMs are encouraging consumers to use their mail service instead of going to pharmacy retailers and also pressing the pharmacy retailers to charge a lower price for the drugs

14. Pharmacy Benefit Managers • Major players: • Medco Health Solutions 32.3% • CVS Caremark 27.3% • Express Scripts Inc. 21.6% • UnitedHealth Group Inc. 9.8% • Consolidation • Express Scripts acquired Medco Health Solutions with $29.1 billion in 2012 • SXC Health Solutions bought Catalyst Health Solutions with &4.14 billion in 2012

15. Diversified Supermarkets • Big retailers like Wal-Mart and King Soopers are stepping into the pharmacy supply chain and we’ve already seen pharmacy shops in many supermarkets

16. Walgreen Co. (NYSE: WAG)Fiscal year ended: Aug. 31, 2012 • Incorporated: 1901 in Illinois, US, retail drug store chain: Prescription, non-prescription drugs and general merchandise • Net sales: $71.6 billion • Net earnings: $2.1 billion • Employees: 240,000 • Prescription sales: 63.2% (2012) vs. 64.7% (2011) Revenue in Millions Source: 2012 Walgreens Annual Report

17. Number of stores and locations New store growth  expansion into new markets Source: 2012 Walgreens Annual Report

18. FY 2012 Overview

19. June 21, 2011, unable to reach a contract agreement with pharmacy benefit manager Express Scripts, Inc., exited the network as of Jan 1, 2012  sales impact • Signed a multiyear agreement with Express Scripts to participate in its broadest retail pharmacy on Jul 19, 2012 • On Sep 15, customers began to return  positive effect on WAG’s net sales, earnings and CFs Source: 2012 Walgreens Annual Report

20. Launched its innovative Balance Reward loyalty program on Sep 16, 2012 As of Sept 28, 2012 Source: http://investor.walgreens.com/

21. Strategic partnership with Alliance Boots to create the first global pharmacy-led, health and wellbeing enterprise • Closed on first phase of the transaction in August, acquiring a 45% stake. (Full combination in 3 years) • Investment : $4.0 Billion in cash and 83.4 million common stock • Multinational pharmacy-led health and beauty group • Over 3,330 retail locations in Europe Creating Value Through Synergies Source: 2012 Walgreens Annual Report

22. Stock Performance Over 5 years CVS SPX WAG RAD Source: Bloomberg

23. Financial Analysis- Liquidity Measure Quick Ratios: WAG vs. Industry

24. Financial Analysis- Probability Indicator ROIC: WAG vs. Industry

25. Financial Analysis- Debt Ratios Debt to Equity: WAG vs. Industry

26. Financial Analysis • Among Walgreens’ total stores: • 20% owned • 80% leased • Caution: $35,356 mm (PV) of operating leases are not reported on balance sheet, which are their contractual obligations and commitments. •  Significantly higher obligation level

27. Financial Analysis- Operating Performance Inventory Turnover: WAG vs. Industry * Accounting method of booking Alliance Boots acquisition do not allow us to use asset turnover ratio.

28. Financial Analysis- Investment Valuation Ratios PE ratio: WAG vs. Industry

29. Financial Projection • Step one: • Invest a total of $6.7 bil. in cash ($4 bil.) and stock (83.4 mil. shares) for 45% equity stake in Alliance Boots • Step two (after 2.5 years; done within 6 months) : • At share price on Aug 2, 2012 and at exchange rate of $1.55=£1, invest a total of $9.5 bil. in cash($4.9 bil.) and stock(144.3 mil. shares)

30. Financial Projection on Income Statement • Income Statement • 45% of Alliance Boots’ operating income added to year 2013 2014 • 100% of Alliance Boots’ operating income added to year 2015 2016 2017 • Interest expense of $3.5 bil. (w/ 2.2% weighted average interest) added to year 2013 2014 • Interest expense of $4.9 bil. (w/ 2.2% weighted average interest) added to year 2015 2016 2017

31. Financial Projection on Balance Sheet • Balance Sheet • Use the equity method of accounting • book Alliance Boots’ purchased equity into Walgreens asset • 2012: 1st step, $6.7 bil. cash and stock • 2015: 2nd step, $9.5 bil. cash and stock • Short Term Borrowing • Long Term Borrowing

32. Short Term and Long Term Borrowing Source: http://investor.walgreens.com/

33. Comparable Analysis Price = $39.05

34. Valuation $33.31 $30.84 $39.05

35. Recommendation HOLD