Amazon's Impact on Healthcare M&A

2/25/2019

Amazon’s Impact on Healthcare M&A

Prepared Exclusively for MGMA Alabama by Founders Advisors

Michael White Biography

Michael White – Managing Director, Head of Healthcare Practice

. 20 years experience in M&A and capital raising across all Healthcare sectors

. Senior Banker at Barclays and Bear Stearns

. Chief Financial Officer at Carbylan Therapeutics

. B.S. International Finance, University of Alabama

. M.B.A. Finance and Accounting, University of Chicago

Detailed Bio

Michael White, Managing Director of Founders Advisors’ Healthcare practice, is a strategic finance professional with operating experience as a Chief Financial Officer. He has over 20 years’ experience advising healthcare clients on a range of strategic alternatives including IPOs, public and private equity and debt capital raises, joint ventures, licensing and buy-side and sell-side mergers and acquisitions.

Michael spent seven years at Bear, Stearns & Co. in New York where he served in a series of positions of increasing responsibility in the healthcare investment banking group. He then joined Barclays where he was a Vice President and Director in the healthcare investment banking group on the West Coast for six years. Most recently Michael has acted as a consultant, advising clients on a variety of strategic alternatives across multiple healthcare subsectors as well as serving as Chief Financial Officer of Carbylan Therapeutics, a specialty pharmaceutical company. Michael started his career at SouthTrust Bank and its affiliate, PRN Mortgage Capital, providing financing and advisory services for companies primarily in the post-acute care space.

Michael received his B.S. in International Finance from the University of Alabama and his M.B.A. with concentrations in Finance and Accounting from the University of Chicago Booth School of Business. A native of Talladega, Alabama, Michael and his wife Gayle have returned to Birmingham, where they live with their two children, Emelia and Madeline.

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1 2/25/2019

Vertical Integration in Healthcare

Capturing the customer at different touch points along the continuum creates a stickier buying experience and expands addressable markets. + +

Nov 2014 May 2017 . Created comprehensive healthcare diagnostics company offering customers . Avantor formed through New Mountain Capital's purchase of Covidien's end-to-end solutions for drug and diagnostics development and Mallinkrodt Baker specialty chemicals subsidiary in 2010 for $290 million commercialization . VWR “acquired” to create a vertically integrated organization, serving a global . Strengthens partnerships with pharma, physicians, payors and patients customer base in all areas of their activities, from research through production . First sign of divergent approaches between Lab Corp and Quest . VWR historically focused on tuck-in acquisition opportunities across three pillars: enhanced market position, geographic expansion and new product o Quest focused on lab services and outreach acquisitions while LabCorp has focused on broadening technology and diagnostic service menu areas . Walgreens/LabCorp partnership announced June 2017 o Acquired Therapak, PAW, JM Separations, Reliable and BioArra in 2016 for $164 million . Acquired Sequenom for $371 million in July 2016 and Chiltern for $1.2 billion (~12.6x EBITDA) in July 2017 + +

May 2017 May 2017 . InVentiv split equally between clinical and commercial divisions . Complementary capabilities that strengthen ThermoFisher’s unique value proposition for biopharma customers o Acquisition driven by revenue synergies from cross-selling and leveraging commercial solutions business to win contract business; . Provides entry into attractive, high-growth, fragmented contract development NewCo known as Syneos Health market o Broad suite of capabilities bridges clinical gap and more effectively o Development Services - $2 billion market (12% of Patheon revenues) communicates clinical benefits to payers / PBMs o API - $24 billion market (27% of Patheon revenues) . Evolving biopharma landscape illustrated by shift to longer and more strategic o Finished Dosages - $15 billion market (61% of Patheon revenues) relationships with customers o InVentiv allows INC to provide a comprehensive suite of end-to-end drug development solutions

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Timeline of Key Events in Healthcare Services

UNH Acquires • UnitedHealth Group announces acquisition of Catamaran in 2015 Catamaran • United’s successful integration of MCO, PBM and HC delivery assets serves as a blueprint for others and has March 2015 resulted in leading market positions across healthcare services

• Aetna attempts to acquire Humana in July 2015 to significantly increase its footprint in Medicare Advantage Horizontal M&A • At the same time Anthem attempts to acquire a resistant Cigna July 2015 • Result: Both deals are blocked by the Department of Justice in early 2017

• CVS announces acquisition of Aetna in December 2017, confirming speculative rumors in the months prior to Vertical M&A the announcement Late ‘17 – • Cigna announces acquisition of Express Scripts in March 2018 Early ‘18 • Walmart rumored to be in talks to acquire Humana in March 2018

Vertical PBM Integration • Anthem announces decision to build internal PBM, IngenioRX, in October 2017 Late ‘17 – • Centene announces ‘transformative’ partnership with RxAdvance in March 2018 Early ‘18

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2 2/25/2019

Amazon at a Glance

Public Market Overview Relative Stock Price Performance

Stock Price $1,588.22 120% % of 52-Week High 77% 90%

Equity Value $780,138 60% Plus: Debt 49,289 30% Less: Cash 31,750 0% Enterprise Value $797,677 -30% LTM NTM -60% Revenue $232,887 $275,002 Amazon -90% EBITDA 27,762 42,394 S&P 500 -120% EV / Revenue 3.43x 2.90x EV / EBITDA 28.7x 18.8x

By the Numbers Amazon’s Playbook

Active customers  Attract and retain users to its platform with a better customer 310 million experience US customers within 20 miles of an  Invest in large, upfront, fixed cost (e.g., warehouses and Amazon fulfillment node 195 million datacenters)  Bring standardization to the forefront of fragmented markets and Amazon Prime subscribers 121 million functions (e.g., logistics)  Add transparency and a platform for companies to distribute Customers Eligible for same-day 78 million goods and services Prime delivery  Fulfilled by Amazon (FBA) – provides delivery, inventory management and customer return services to vendors as an Sellers on Amazon 5 million outsourced service  Amazon Web Services (AWS) – provides datacenter Employees among Amazon, JP management and cloud services across industries Morgan and Berkshire Hathaway 1.2 million

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Amazon’s Healthcare Timeline | 2016 – 2017

April 2016 July 2016 November 2016 March 2017 April 2017

Amazon equips Alexa to American Heart Amazon CEO Jeff Bezos Amazon partners with Amazon and Merck offer health advice in a Association and Amazon invests in the San WebMD to provide unveil the Alexa Diabetes partnership with Boston Web Services form a Francisco-based, anti- physician-reviewed Challenge to explore how Children's Hospital. strategic collaboration to aging startup Unity answers to health-related voice-command Additional Alexa-based enhance the AHA's Biotechnology through questions asked through technology can support services follow, including Institute for Precision Bezos Expeditions. Alexa. chronic disease first aid assistance Cardiovascular Medicine. management. through a partnership with Mayo Clinic.

May 2017 June 16, 2017 June 28, 2017 July 27, 2017 August 8, 2017

CNBC reports on Amazon acquires Whole Teva Pharmaceutical Reports surface of CVS CEO Larry Merlo Amazon's expanded Foods for $13.7 billion, Interim President and Amazon’s secret notes on its Q2 earnings hiring of drug and medical adding 479 locations, CEO Yitzhak Peterburg healthcare team call that the "barriers to supply distribution additional distribution notes the global codenamed 1492. The entry are high" for executives and offering coverage and potentially healthcare industry is group is reportedly companies like Amazon direct shipment of moving Amazon closer to facing a "huge disruption" exploring hardware and that may be looking to medical supplies to U.S. the pharmacy market. from the technology software projects as well move into the pharmacy customers. sector, specifically noting as telemedicine and business. the "Amazons and health applications. Googles."

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Amazon’s Healthcare Timeline | 2017 – 2018

August 15, 2017 September 7, 2017 September 20, 2017 September 25, 2017 October 17, 2017

CNBC speculates that Amazon announces plans Reports surface of talks CNBC notes Amazon's UnitedHealth Group Amazon's new pickup to invest more than $5 with pharmacy benefit Alexa is not HIPAA comments on Amazon as points in the U.S. could billion into a second managers about potential compliant. a potential partner rather help shoppers quickly company headquarters in drug contracts. than a competitor in the access prescriptions. North America. pharmaceutical business.

October 27, 2017 November 13, 2017 November 22, 2017 November 30, 2017 December 1, 2017

Reports surface that Amazon claims it will use Rumors surface that Amazon has reportedly Amazon rescinds an Amazon has acquired its pharmacy licenses in Amazon Web Services is held preliminary application for a more than 10 wholesale Tennessee and Indiana reportedly planning to discussions with several wholesaler pharmacy licenses from to sell medical devices announce a partnership generic drug pharmaceutical license in state boards over 2017, and supplies instead of with EHR vendor Cerner, manufacturers, including Maine. fueling rumors over the prescriptions. but no news of the Mylan and Novartis, retailer's potential potential partnership has regarding the company's entrance into the been discussed since. potential entry into the pharmaceutical supply pharmacy business. chain.

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Amazon’s Healthcare Timeline | 2018

January 16, 2018 January 24, 2018 January 30, 2018 February 13, 2018 February 21, 2018

Amazon begins fielding According to analysts, The company announces Sources familiar with Reports surface that applications for a HIPAA Amazon's exploratory its collaboration with Amazon's plans say it is Amazon has quietly Compliance Lead, healthcare team has JPMorgan and Berkshire pushing to turn its launched an exclusive according to a job listing grown to more than 30 Hathaway to administer medical supplies line of 60 over-the- on its website. people. and share risk for their business into a major counter healthcare employees' medical care. supplier to U.S. hospitals products called Basic and outpatient clinics. Care.

March 9, 2018 March 19, 2017 April 16, 2018 May 11, 2018 June 6, 2018

Amazon hires more than Former FDA Chief Health Amazon Business (B2B CNBC reports that Fred Hutchinson Cancer 20 employees, including Informatics Officer Taha marketplace), shelves Amazon has built a team Research Center and software engineers, data Kasshout joins Amazon’s plan to become within Alexa division to AWS working to apply analysts and business 1492 as head of business pharmaceutical supplier explore ways of making machine learning to strategists with years of development for to hospitals and clinics. the device more useful in prevent and cure experience in healthcare healthcare products. Amazon to focus on healthcare. The cancers. News surfaces or pharmaceutical beefing up less sensitive healthcare team, dubbed of a project codenamed industries from medical supply offerings "health & wellness," is Hera, intended to help companies such as CVS, to smaller hospitals and exploring disease commercial health Express Scripts and clinics. management, aging and insurers by reviewing UnitedHealth. care for mothers and EHR data to point out infants. coding mistakes or misdiagnoses.

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Amazon’s Healthcare Timeline | 2018 (cont.)

June 20, 2018 June 28, 2018 July 12, 2018 July 19, 2018 August 10, 2018

Atul Gawande (Brigham Amazon enters into an CNBC reports Amazon is Amazon is rumored to be Amazon considers and Women's Hospital) agreement to acquire in talks with Xealth, a in talks to invest in an opening primary care hired as CEO of the online pharmacy startup digital prescribing and Indian pharmacy chain, clinics for its employees Amazon, Berkshire PillPack for ~$1 billion. analytics platform, and known as MedPlus. at its headquarters in Hathaway and JP Morgan PillPack is a full-service two health systems about MedPlus operates more Seattle. The tentative joint venture. pharmacy that manages a pilot project. The project than 1,400 pharmacies plan is to hire a small prescription medications would enable physicians across India. The number of physicians to for its customers by to recommend medical pharmacy chain also start a pilot clinic later in packaging, organizing product bundles to their operates an online 2018. and delivering the patients at the hospital pharmacy store called medications. with products delivered to MedPlusMart, several lab the patients' homes upon testing centers and a discharge. surgical equipment distribution business.

August 20, 2018 September 4, 2018 September 17, 2018 September 18, 2018 September 20, 2018

Maulik Majmudar Jack Stoddard, formerly Accenture and Merck Change Healthcare and STAT reports that the (Massachusetts General of Optum, hired as COO announce they are Amazon team up to healthcare venture Hospital cardiologist) of the Amazon, Berkshire partnering with Amazon launch a new cloud- formed by Amazon, tweets that he has Hathaway and JPMorgan to launch a data-driven based claims and Berkshire Hathaway and decided to join Amazon's joint venture. drug development payments network for JPMorgan has selected team. platform on Amazon Web payers and providers. the Monitor Group to help Services. The network will be drive improvements in the available on Amazon care of chronically ill Web Services and will patients. deploy technologies like blockchain.

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Amazon’s Healthcare Timeline | 2018 – Present

September 28, 2018 October 9, 2018 October 26, 2018 November 7, 2018 November 8, 2018 November 13, 2018

News breaks that Amazon files a Partners with health Partners with Amazon Web Officially picks the Amazon and Google patent Alexa, which brand consultancy Aurohealth, to Services adds three winners for its both invested in aims to detect when Arcadia Group to launch a fourth OTC HIPPA-eligible second Aiva, a startup that a user is sick. The sell an exclusive brand, “Primary machine learning headquarters, opting uses smart speakers device would then new brand (Choice) Health”. The health tools to its pipeline to split it between to connect patients help sell users of consumer- brand has four of services. Long Island, NY and and seniors with medications. focused medical products: generic Crystal City, VA. their healthcare devices, including versions of Mucinex providers. blood pressure cuffs DM, Nexium and and glucose Prilosec. monitors.

November 19, 2018 November 21, 2018 November 26, 2018 November 27, 2018 December 12, 2018 January 23, 2019

Amazon / Berkshire CNBC reports Accenture, Merck Announces plans to CNBC reports UnitedHealth Group Hathaway / Amazon will soon and AWS open data- sell software, known Amazon will team up announces lawsuit JPMorgan hires allow its employees driven drug as Amazon with Omron against Amazon and Dana Safran, the to test PillPack. development Comprehend Healthcare to create former executive former chief platform to software Medical, used to a blood pressure David William Smith performance vendors. mine patient health skill for Alexa. for stealing trade measurement and records for data to secrets and taking improvement officer help physicians them to an alleged at Blue Cross Blue improve treatment competitor. Shield of plans and to help Massachusetts. hospitals cut costs.

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5 2/25/2019

CVS Health | Woonsocket, RI

Public Market Overview Relative Stock Price Performance

120% Stock Price $65.01 % of 52-Week High 79% 90%

60% Equity Value $84,071 Plus: Debt 62,886 30% Less: Cash 41,587 0% Enterprise Value $105,370 -30% LTM NTM -60% Revenue $188,055 $238,066 Amazon EBITDA 12,662 17,595 -90% CVS Health -120% EV / Revenue 0.56x 0.44x EV / EBITDA 8.3x 6.0x

Commentary

 Announced $69B acquisition of Aetna on 12/3/17 (closed 11/28/18) o Combined company to have revenue of $238B and EBITDA of $18B o Creates a vertically integrated healthcare platform with high-touch connectivity to consumers though CVS’s 9,800 retail locations and 1,100 MinuteClinics becoming the “front door to health care” . Platform to “revolutionize the consumer healthcare experience while lowering cost of care” o Aetna to remain a separate unit within the combined company but provides access to Aetna’s 22M covered lives

 Caremark is the largest PBM with $160B in revenues and ~1.9B adjusted scripts o Cigna’s ESRX and United’s OptumRX have $103B and $69B in revenue, respectively with each having ~1.3B adjusted scripts

STRICTLY CONFIDENTIAL All public market figures in millions, except per-share figures. 11

Walgreens | Deerfield, IL

Public Market Overview Relative Stock Price Performance

120% Stock Price $70.12 % of 52-Week High 81% 90%

60% Equity Value $66,154 Plus: Debt 15,992 30% Less: Cash 980 0% Enterprise Value $81,166 -30% LTM NTM -60% Revenue $134,590 $138,160 Amazon EBITDA 7,876 9,512 -90% Walgreens -120% EV / Revenue 0.60x 0.59x EV / EBITDA 10.3x 8.5x

Commentary

 Walgreens has focused on partnerships rather than large scale M&A as a means of expanding its consumer reach and refining its approach to Amazon o WSJ reported on 2/12/18 that Walgreens was in talks with AmerisourceBergen (~$18B market cap) about acquiring the remaining 74% that it doesn’t currently own with talks reportedly ending weeks later o Announced partnership with United/Optum on 2/15/18 to put 15 MedExpress urgent care centers adjacent to Walgreens o Announced a partnership with Humana on 6/19/18 to operate “senior-focused primary care clinics” inside drugstores . WSJ reported on 11/21/18 that Walgreens and Humana were in talks to purchase mutual equity stakes . Humana still looking to expand Walmart relationship as well o Expanded LabCorp partnership on 10/28/18 to integrate 600 patient service centers in Walgreens over next 4 years (expansion of 7-store pilot program from 6/28/17) . Noted potential future benefit in clinical research and data integration o Walgreens and Kroger announced on 12/4/18 a 13-store pilot to roll out Kroger Express branded organic items and meal kits

STRICTLY CONFIDENTIAL All public market figures in millions, except per-share figures. 12

6 2/25/2019

Pharmacy and Clinic Locations

Company Pharmacies Clinics

CVS Health 9,800 1,100

Walgreens 9,560 400

Walmart 4,600 88

Rite Aid 2,526 -

Kroger 2,200 217

Commentary

• Walgreens / Rite Aid $17.2B merger announced on October 27, 2015; terminated over antitrust issues on June 29, 2017

o Walgreens ultimately acquired 1,932 locations for $4.4B

• Albertsons / Rite Aid merger announced on February 20, 2018; terminated on August 9, 2018 over relative valuation differences

o The combined company would have been worth ~$24B in market capitalization

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Cash Pay Drug Prices

An April 2018 survey published by Consumer Reports demonstrates the wide range of prices for a one month supply of a common basket of prescription drugs and shows that the least expensive option for consumers may ultimately be paying cash rather than using insurance.

CVS / Target

Rite Aid

Walgreens

Grocery Stores

Kmart

Walmart

Sam's Club Average Price Across Retailers . Actos – $116 Independents . Celebrex – $128 . Cymbalta – $114 Costco . Lipitor – $48

HealthWarehouse.com . Plavix – $51

- $50 $100 $150 $200 $250 $300

Plavix Lipitor Cymbalta Celebrex Actos

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7 2/25/2019

Cigna | Bloomfield, CT

Public Market Overview Relative Stock Price Performance

120% Stock Price $181.37 % of 52-Week High 80% 90%

60% Equity Value $68,889 Plus: Debt 42,478 30% Less: Cash 3,855 0% Enterprise Value $107,512 -30% LTM NTM -60% Revenue $48,569 $132,943 Amazon EBITDA 5,540 11,403 -90% Cigna -120% EV / Revenue 2.21x 0.81x EV / EBITDA 19.4x 9.4x

Commentary

 Announced $67B acquisition of Express Scripts on 3/8/18 in order to provide the following: o Expanded Consumer Choice – provides a full suite of medical, behavioral, specialty pharmacy and health engagement services accessible across retail and online distribution channels o Patient‐Provider Alignment – more coordinated approach to an individual’s health care, reducing complexity and creating better outcomes o Personalized Value – simplifies consumer experience through actionable insights, predictive analytics, adoption of evidence‐based care and innovation and medical technology to support care decisions  Acquisition follows blocked mergers of Cigna/Anthem and Aetna/Humana in 2017 o Also follows Anthem’s announcement on 10/18/17 that it would create its own PBM known as IngenioRX following the end of its contract with Express Scripts on 12/31/19 . Anthem accused Express Scripts of ~$3B in annual overcharges relating to discounts and filed suit for $15B . Anthem accounts for ~$20B of Express Scripts’ ~$100B in revenues annually . Announced acceleration of IngenioRX moving some clients to IngenioRX in Q2 on 1/30/19

STRICTLY CONFIDENTIAL All public market figures in millions, except per-share figures. 15

Sharing the Wealth

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8 2/25/2019

Participant Economics in the US Drug Supply Chain

Conversion of Gross Profits into EBITDA

PBMs 85%

Distributors 46%

Insurers 31%

Pharmacies 20%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

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LabCorp & Quest

Laboratory-based diagnostic testing is an integral part of patient-centered healthcare, while lab services only account for ~3% of overall healthcare spending and ~1.4% of Medicare spending, ~70% of healthcare spending is dependent on lab results.

Public Market Overview - LabCorp Public Market Overview - Quest Relative Stock Price Performance

120% Stock Price $144.83 Stock Price $89.09 % of 52-Week High 76% % of 52-Week High 76% 90%

60% Equity Value $14,613 Equity Value $12,123 Plus: Debt 6,060 Plus: Debt 3,829 30% Less: Cash 427 Less: Cash 263 0% Enterprise Value $20,246 Enterprise Value $15,689 -30% LTM NTM LTM NTM -60% Revenue $11,333 $11,493 Revenue $7,864 $7,713 Amazon LabCorp EBITDA 2,044 2,022 EBITDA 1,574 1,534 -90% Quest -120% EV / Revenue 1.79x 1.76x EV / Revenue 1.99x 2.03x EV / EBITDA 9.9x 10.0x EV / EBITDA 10.0x 10.2x 6/1/17 7/1/17 8/1/17 9/1/17 1/1/18 2/1/18 3/1/18 4/1/18 5/1/18 6/1/18 7/1/18 8/1/18 9/1/18 1/1/19 2/1/19 10/1/17 11/1/17 12/1/17 10/1/18 11/1/18 12/1/18 Commentary

 Beginning on 1/1/19 both LabCorp and Quest became in-network labs for both United and Aetna, ending previous exclusivity agreements (Quest/Aetna, LabCorp/United) o Allows insurers to begin shifting the focus of lab testing away from volume driven fee-for-service system o Through value-based programs, lab services will be focused on quality and patient outcomes, enhancing the patient experience and controlling costs for insurers  Headwinds associated with PAMA implementation likely to persist for several years given multi-year phase in o 24 of top 25 codes on CLFS will be cut with 18 of top 25 cut over 30%  LabCorp and Quest currently account for ~25% of total diagnostic testing by dollar and ~45% by volume o Consolidation likely to continue  Quest and LabCorp have executed on divergent strategies in recent years o Quest focused primarily on growing share though partnering/acquiring hospital outreach labs . Responsible for 14 of last 23 announced lab partnerships/acquisitions  5 for Quest and 4 for Sonic o LabCorp has diversified its revenue base through acquisitions of Covance, Chiltern, Sequenom and other expanded partnerships

STRICTLY CONFIDENTIAL All public market figures in millions, except per-share figures. 18

9 2/25/2019

Cardinal, McKesson & Amerisource

Broad deflationary environment for generic drugs (~2/3 of distributor profits) coupled with the current administration’s focus on branded drug pricing presents additional headwinds above Amazon/PillPack implications.

Cardinal McKesson Amerisource

Stock Price % Delta vs. Amazon*: (89.3%) Stock Price % Delta vs. Amazon*: (82.0%) Stock Price % Delta vs. Amazon*: (68.9%)

 Operates in two segments,  Highlighted 3 key growth initiatives for  Continued headwinds associated with Pharmaceutical and Medical (12% of the future at its 2018 Analyst Day PharMEDium Healthcare (compounded revenues) o Manufacturer value proposition – data and sterile preparations to acute care o Medical segment provides a broad range analytics to help bring drugs to market hospitals) which was essentially closed of national brand products and supply through R&D support and life during 2018 due to FDA CGMP chain services to hospitals, ASCs and cycle/commercialization inspection deficiencies clinical labs o Specialty pharmaceuticals – cited o Business under a full review with option to  Focused on vertically integrating within investments in US Oncology and commit more resources or move towards the distribution business by acquiring RxCrossroads as ways to help a full sale of the business product manufacturing assets manufacturers bring complex drugs to the  Walgreens and Express Scripts account market o Acquired Cordis (cardiology and for ~33% and ~13% of revenues, endovascular devices) from J&J for $1.9B o Acquired CoverMyMeds (automated respectively on 10/2/15 prior authorization software) for $1.1B on 1/26/17 o Acquired Patient Care, Deep Vein Acquired Medical Specialties Thrombosis and Nutritional Insufficiency o Distributors (home infusion, specialty businesses from Medtronic for $6.1B on pharmacy, and oncology market 4/18/17 products) for $800M on 4/25/18 o Role of retail pharmacy - bringing the pharmacist to the center of care while providing solutions for independent pharmacies to better participate and ease administrative burdens o ~4,900 Health Mart locations and 6,600 pharmacies in Health Mart Atlas PSAO

STRICTLY CONFIDENTIAL * Calculated according to difference in % change in stock price from 1/1/2017 – 2/8/2019 19

BIRMINGHAM DALLAS HOUSTON 2204 Lakeshore Drive, Suite 425 180 State Street, Suite 225 24275 Katy Freeway, Suite 400 Birmingham, AL 35209-8855 Southlake, TX 76092 Katy, TX 77494 Phone: 205.949.2043 Phone: 214.295.1055 Phone: 713.412.0313

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