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Drug Stores

Drug Stores. Trevor Yerrick Section 2. Agenda. Quick Background Drug Stores Industry Walgreen Co. Important Developments to Consider Alliance Boots Acquisition AmeriSource Bergen Agreement Full-Information Forecasting Sales EPM EATO Final Valuation Buy/Sell/Hold Recommendation.

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Drug Stores

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  1. Drug Stores Trevor Yerrick Section 2

  2. Agenda • Quick Background • Drug Stores Industry • Walgreen Co. • Important Developments to Consider • Alliance Boots Acquisition • AmeriSource Bergen Agreement • Full-Information Forecasting • Sales • EPM • EATO • Final Valuation • Buy/Sell/Hold Recommendation

  3. Quick Background • Drug Store Industry • Traditional vs. In-store • Pharmacy Benefit Managers (PBMs) • “Nation’s largest drugstore chain” • 8,582 locations, including 8,116 drug stores • 2013: $72.2 B in sales, $45.5 B in prescription sales • Recent trend of expansion through acquisitions • Alliance Boots (45%) acquisition in 2012, option to purchase remaining 55% in 2015

  4. Best Sale Ever?

  5. Important Developments • Alliance Boots Acquisition (45% now, remaining 55% in 2016) • Synergies • 2014 - expected $375-425 million (increased after Q2) • 2016 - $1 billion • Revenues (AB + WAG) • 2016 - $130 billion • Operating Income • 2016 - $8.5-9.5 billion • Net Debt • 2016 - $11 billion

  6. Important Developments • AmeriSource Bergen Agreement • Leading pharmaceutical distributor • $79.7 in revenue (2012) • WAG + ASB • 10 year agreement worth $400 billion (to ASB) • Included 5% purchase of ASB stock by WAG (up to 23%) • Together - largest purchaser of pharmaceuticals worldwide • CVS expected to attempt a similar arrangement in future • Results • Better prices for branded and generic drugs • Significantly decreased inventory levels (daily delivery and complete distribution through ASB)

  7. Forecasting

  8. Full-Information Forecasting • Sales (See ‘Sales Forecast’ tab in spreadsheet) • Forecasted Prescription Sales and “Other” Sales to 2015 • Growth rates disrupted in 2012 & 2013 because of contract dispute with Express Scripts • 2016 – Adjusted for WAG management’s estimation of sales upon completion of Alliance Boots acquisition • $130 billion in sales by 2016 • 65-35 split – prescription sales vs. other in-store sales • Growth rate post-2016 - decreases by 0.5% per year until it reaches 3.5%

  9. Full-Information Forecasting • EPM (See ‘EPM Forecast’ tab in spreadsheet) • Synergies w/ Alliance Boots and AmeriSource Bergen • Cost of Sales – ASB • SG&A – AB and ASB • Operating income in 2016 – close to WAG management projection of $8.5-9.5 billion • As a result of synergies and rising sales, EPM steadily increases through 2022 • Approx. 5% post-2018

  10. Full-Information Forecasting • EATO (See ‘EATO Forecast’ tab in spreadsheet) • Synergies w/ AmeriSource Bergen • Inventories • Accounted for AB in Enterprise Assets and Liabilities using AB 2013 Annual Report • As a result of synergies and rising sales, EATO increases significantly post-2016 (acquisition of AB) • Approx. 6.50 in 2016 • 8.00 after 2020

  11. Final Valuation • Enterprise Value: • $80,906,113,490 • Adjusting for Mid-Year: • $85,055,377,700 • Adjusting for the Valuation Date: • $90,837,597,910 • See ‘Adjustments’ Tab

  12. Final Recommendation • Enterprise Value: • $90,837,597,910 • (NFL) • ($5,066,000,000) • Equity Value: • $85,771,597,910 • Number of Shares Outstanding: • 951,900,000 • Implied Share Value: • $90.11 • Current Share Price: • $67.38 • Recommendation: • BUY!!

  13. Questions?

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