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) 33 rd 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: 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 Prescription Drugs Non-Prescription Drugs Beauty Care Personal Care Household Items Photofinishing Greeting Cards Candy Seasonal Items Convenience Foods Walgreens’ Business Walgreens

5 Product Class Percentage Prescription Drugs6564 Non-Prescription Drugs1011 General Merchandise25 Total Sales100

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

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 Risk Factors Competition Regulations Reduction Reimbursement Walgreens Pharmacy Personnel Product Liability Store Location Economic Condition

10 Macroeconomic Conditions Oil Price Consumer Confidence 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 Number of Drugs Losing Patent Protection U.S. Sales at Stake$11B$8.5B$5.5B$15B Advair ($2.8B)Prevacid ($3.3B)Cozaar ($5.5B)Lipitor ($6B) Effexor ($2.2B)Lexapro ($1.9B)Abilify ($1.1B)Protonix ($2B) Risperdol ($1.5B)Topamax ($1.3B)Aricept ($0.6B)Actos ($1.6B) Fosomax ($1.5B)Lamictal ($1B)Flomax ($0.6B)Zyprexa ($1.6B) 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 I 1/1/ /1/2007 (Est. 12 Yrs) Full Price “Branded” Drug Available Low Margin Product Stage II 1/2/ /2/2007 First Generic Version Available 6 Month Exclusivity Sold at 94% of “Branded” Price Insurance Companies Offer High Reimbursement Rates Stage III 6/2/ Future Generic Exclusivity Ends Sold at 52% of Branded Price Insurance Companies Reduce Reimbursement

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 1 st 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 DateDrugPharmaceutical Company 8-Jun-07ZeritBristol Mayers Squibb 11-Dec-07MerediaAbbott Laboratories 25-Dec-07ZyrtecPfizer Jan-08camptosarPfizer 6-Feb-08FosamaxMerck 12-Feb-08AdvairGlaxosmithkline 12-Feb-08SerevantGlaxosmithkline 1-Oct-08CasodexAstraZeneca Jan-10LipitorPfizer Sep-11AvaproBristol Mayers Squibb Nov-11PlavixBristol Mayers Squibb Jan-13OrzelBristol Mayers Squibb Jan-13SustivaBristol Mayers Squibb Jan-17ReyatazBristol Mayers Squibb

23 RCMP Position Purchased 1000 shares of WAG on October 6 th, 1999 for $25.00/share On September 20 th, 2006, sold 500 $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 AEEAEOCPRTDFSFRJKHYKMBMVSNSRCLSRZWAG AEE1 AEO CPRT DFS FR JKHY KMB MVSN SRCL SRZ WAG

26 Lease Obligations 19.1% of stores are owned while 80.9% are leased The present value of lease obligations “quasi debt” is $ 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 RatioWalgreensIndustryS&P 500 P/E (TTM) Beta Price to Book (MRQ) Sales - 5 Yr. Growth Rate Capital Spending - 5 Yr. Growth Rate Quick Ratio (MRQ) Current Ratio (MRQ) Gross Margin (TTM) Net Profit Margin (TTM) ROA – 5 Year Average ROE – 5 Year Average Source: Onesource

29 Public Comparables Analysis RatioWalgreensCVSRite AidLong’s Drugstores P/E (TTM) N/A26.76 Forward P/E Beta Source: Onesource & Google Finance Closing Price: $38.31 P/E (TTM): * $2.03 = $46.57 Forward P/E: * $2.03 = $34.16 Average: $40.37

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