Walgreens Boots Alliance Equity Research Analysts: Yang Yu, Chun-Hao(Jeremy) Tseng Presented March 7, 2019

Investment Thesis Business Industry Financial Analysis Valuation Risks

Recommendation: Hold Trading Information Walgreens Boots Alliance, Inc. Recommendation: Hold Date 3/6/2019 Name Walgreens Boots Alliance, Inc. Industry Pharmaceutical Retailers Ticker WBA (NasdaqGS) 52 Week Range 59.07 - 86.31 Market Cap 57.644B PE Ratio (TTM) 11.24 EV/EBITDA (F) 11 Peer Valuation $63 DCF Valuation $59 Current Price 62 Dividends 1.76 EPS (F) 3.72 Expected return -2%~ +4.5% Source: yahoo finance Investment Business Industry Ratios Valuation Risks Timing

The most critical one is drug price deflation Investment Thesis There are 5 reasons we want to sell it The most critical one is drug price deflation Generic drugs price deflation The poor relationship with PBM British retail market goes down Horizontal M&A strategy Technical analysis: timing Investment Business Industry Ratios Valuation Risks Timing

Basically is consisted of three companies Company Structure Walgreens Boots Alliance, Inc. Basically is consisted of three companies Name Walgreens Boots Alliance Traded NASDAQ: WBA NASDAQ-100 component DJIA component S&P 100 component S&P 500 component Founded December 31, 2014 Boots (1849) Walgreen (1909) Number of employees 415,000 Retail Pharmacy USA Retail Pharmacy International Pharmacy Wholesale Retail Pharmacy Retail Pharmacy Source: WBA Investment Business Industry Ratios Valuation Risks Timing

Pharmacy is the key segment and US is key market Segment Description Walgreen has three business segments Pharmacy is the key segment and US is key market Revenue: 98.4 B Stores: 9,560 400 in-store clinic locations 85,000 healthcare service providers 823.1 million prescriptions Revenue: 12.3 B Stores: 4,767 leaders in the optical market with 618 practices 15 million Card members Revenue: 23 B supplies more than 110,000 pharmacies 288 distribution centres in 11 countries Pharmaceutical Wholesale Source: WBA Investment Business Industry Ratios Valuation Risks Timing

Most investors are institution investors Management and Investors WBA has professional management team Most investors are institution investors Institutional shareholder concentration   Value ($MM) % O/S Shares Total Inst. 54146.03 80.18 756447493 Top 10 Inst. 27348.39 38.75 365594348 Top 20 Inst. 32555.26 46.83 441796108 Top 50 Inst. 40162.59 58.63 553128334 Co-Chief Operating Officer Prior to this, he was named Executive Vice President of Walgreens Boots Alliance, Inc. Executive Chairman Prior to Walgreens, Skinner held numerous leadership positions at McDonald’s James A. Skinner Alex Gourlay Executive Vice Chairman and Chief Executive Officer Prior to this, he was Executive Chairman of Alliance Boots since July 2007. Global Chief Financial Officer He joined the company in June 2018 from Takeda Pharmaceutical Company Limited Top holders: institutional investor Holder % O/S Alliance Sante Participations S.A. 15.36 The Vanguard Group, Inc. 7.57 State Street Global Advisors (US) 4.61 BlackRock Institutional Trust Company, N.A. 3.76 Capital World Investors 1.62 Stefano Pessina James Kehoe Co-Chief Operating Officer Prior to this, she was named Executive Vice President of Walgreens Boots Alliance, Inc. Global Chief Administrative Officer He was Group Legal Counsel & Chief Administrative Officer of Alliance Boots, Ornella Barra Marco Pagni Source: WBA Investment Business Industry Ratios Valuation Risks Timing

Focus on Revenue growth and margin improvement Strategy The strategies to enhance performance Focus on Revenue growth and margin improvement Revenue Margin Stores Expenditure Cost management Source: WBA Investment Business Industry Ratios Valuation Risks Timing

Walgreen use membership to appeal customers Business Model Most of income is from in-store shopping and prescription Walgreen use membership to appeal customers pre-wholesale and contract logistics specialized healthcare such as medicine preparation and clinical trial support Boots Advantage Card loyalty program Online store, APP Own brand (No7, Boots Pharmaceuticals, Soap & Glory, Liz Earle, Sleek MakeUp, Botanics and ‘only at Boots’ exclusive products) Balance® Rewards Source: WBA Investment Business Industry Ratios Valuation Risks Timing

Most of them are horizontal acquisition Strategy M&A events Most of them are horizontal acquisition convenient access to FedEx dropoff and pickup services +1,932 stores Strategic Alliance Horizontal acquisition More frequently recently 2015 2016 2017 2018 Expand China business Invest in wholesales business combined central specialty pharmacy and mail services company Stores and wholesales business Source: Drug Channel Institute Investment Business Industry Ratios Valuation Risks Timing

Increase the efficiency of the stores Strategy Cost management Increase the efficiency of the stores Cost ~$150m - $170m to save ~$65m - $75m every year -600 stores in 2 years Cost and expenses reduction Assets efficiency Investment Business Industry Ratios Valuation Risks Timing

What is the market potential growth rate? Market trend What is the market potential growth rate? US Elderly Population US Household Expenditure on Rx Change in Pricing of Generic Drugs US Pharmacy Store Sale Source: Drug Channel Institute Investment Business Industry Ratios Valuation Risks Timing

The Crazy Drug Channel System! Drug system The Crazy Drug Channel System! Source: Drug Channel Institute Investment Business Industry Ratios Valuation Risks Timing

PBM plays a important role in this chain Value Chain How different players make money? PBM plays a important role in this chain Insurance company Hospital Patient PBM Drug manufacturer Wholesaler Pharmaceutical Retailer copayments Service fee Negotiated price Reimbursement Rebates Premiums Drug price Wholesale price Drug manufacturer: Purchase from wholesalers, chain stores & PBMS Insurance company: Premiums from patients PBM: Service fee, Wholesaler: Purchase from stores Retailer: copaymetns, payments from PBMs or other third-parties. Source: Drug Channel Institute Investment Business Industry Ratios Valuation Risks Timing

CVS is an another big player Industry Structure Who are the players? CVS is an another big player Industry structure Big player list Walgreen + CVS = 75% Source: Drug Channel Institute Investment Business Industry Ratios Valuation Risks Timing

Receive lower actual payment Threat Analysis Main Threat within the industry CVS and PBM Competitions with CVS and mail-order pharmacy etc Bargaining power from PBMs and governments Pharmacy retailer Patient Receive lower actual payment Wholesaler Pay current high price Source: Drug Channel Institute Investment Business Industry Ratios Valuation Risks Timing

Acquiring RiteAid really generate value to the shareholders!! Dupont Analysis Acquiring RiteAid really generate value to the shareholders!! 2014 2015 2016 2017 2018 Tax Burden 54% 79% 80% 84% 83% Interest Burden 92% 103% 78% 95% EBIT Margin 4.68% 4.21% 5.11% 4.7% 4.88% Asset Turnover 2.05 1.5 1.61 1.79 1.93 Financial Leverage 1.81 2.2 2.4 2.33 2.55 ROE 9% 13% 14% 19% WBA Quarterly EBIT margin Investment Business Industry Ratios Valuation Risks Timing

Key assumptions for the future The pharmacy price deflation rate is 7%,2%,1% in the next 3 years.(According to the WBA directors’ talk with analyst) The annual growth rate for retail and pharmacy retail is 1.5%.(US Last 5 years’ average GDP growth rate) The annual growth rate for wholesale 6.5%.(Market expectation) No strong evidence that the COGS will experience the same deflation in the near future. Investment Business Industry Ratios Valuation Risks Timing

$63, close to current price Peer Analysis We use CVS’s EV/EBITDA $63, close to current price EBITDA 8,184 EV/EBITDA (F) 11 EV 93,492 Debt 12,431 Outstanding Shares 1,290 Price 63 EV/EBITDA 11.26X 9.74X Investment Business Industry Ratios Valuation Risks Timing

Table of revenue and margin DCF Assumptions We decompose the revenue Table of revenue and margin   2014 2015 2016 2017 2018 2019F 2020F 2021F 2022F 2023F Stores M&A+1932 Retail Pharmacy Total stores 8,309 12,764 12,857 12,831 14,336 14,136 Retail Pharmacy USA Number of stores 8175 8100 9560 9,427 Retail Pharmacy Non-USA 4,682 4,731 4776 4,709 Price Retail USA Revenue 83,802 87,302 98,392 93,649 93,753 94,512 95,929 97,368 Retail Non-USA 13,256 11,813 12,281 11,459 11,553 11,688 11,863 12,041 Price-retail (30%) 3.08 3.23 3.09 3.13 3.18 3.28 3.33 Growth rate(%) 5% -5% 1.50% Retail non-USA Price-pharmacy (70%) 7.18 7.54 7.20 6.80 6.76 6.90 7.00 -7% -2% -1% 0% Price-retail (65%) 1.84 1.62 1.67 1.65 1.70 1.72 -12% 3% -3.00% Price-pharmacy (35%) 0.99 0.87 0.90 0.81 0.82 0.84 Wholesale 15,327 22,571 21,188 23,006 24,501 26,094 27,790 29,596 31,520 47% -6% 9% 7% Total Revenue 76392 103444 117351 118214 131537 129,609 131,400 133,989 137,389 140,929 35.4% 13.4% 0.7% 11.3% -1.5% 1.4% 2.0% 2.5% 2.6% Cost of Goods sold Gross margin 28% 26% 25% 23% 21% 22% EBIT EBIT Margin 4.68% 4.21% 5.11% 4.70% 4.88% 2.63% 2.71% 3.06% 3.85% 4.66% Investment Business Industry Ratios Valuation Risks Timing

Price trend is the key factor Scenario Analysis Price trend is the key factor $71, price deflation -5% Current Price $59-$63, price deflation -7% $39, price deflation -10% Investment Business Industry Ratios Valuation Risks Timing

$59, lower than the current price DCF DCF calculation $59, lower than the current price   2014 2015 2016 2017 2018 2019F 2020F 2021F 2022F 2023F Revenue 76,392 103,444 117,351 118,214 131,537 129,609 131,400 133,989 137,389 140,929 EBIT 3,577 4,353 6,001 5,557 6,414 3,405 3,557 4,106 5,291 6,566 EBI 2,042 3,487 4,838 4,687 5,343 2,836 2,963 3,421 4,407 5,469 (+)Dep 1,316 1,742 1,718 1,654 1,770 1,877 1,981 2,091 2,207 2,329 (-)Cap. Exp (1,106) (1,251) (1,325) (1,351) (1,367) (1,443) (1,523) (1,607) (1,696) (1,790) (-)∆ NWC - 460 (1,223) (1,283) (361) (38) 35 51 66 69 FCF 2,252 3,518 6,454 6,273 6,107 3,309 3,387 3,854 4,851 5,939 FCF-teminal 85,180 Dicount factor 1.05 1.16 1.27 1.40 1.55 DCF 3,152 2,928 3,024 3,455 3,839 DCF-terminal 55,061 EV 71,460 Debt 12,431 shares 995 Price 59 $59 Beta 0.85 Market premium 7.60% RF rate (5 years) 2.57% Cost of debt 4.96% Cost of equity 9.03% Premium 2% Tax 19% WACC 10.18% Investment Business Industry Ratios Valuation Risks Timing

Price deflation is the most critical one Risk Price deflation is the most critical one Severity Price Deflation Revenue Growth PBM reimbursement Policy M&A Drug Cost Control Higher COGS Growth Strategy SG&A Expenses Market Share SG & A Management Economic New Competitor Frequency Investment Business Industry Ratios Valuation Risks Timing

200 > 20 Moving Average d = 20, d = 200 Investment Business Industry Ratios Valuation Risks Timing

There is no insider trading signal Investment Business Industry Ratios Valuation Risks Timing