So how do you progress?

Unfortunately, I can now confirm this isn't it. The paths from leaving Jacob and continuing on foot are:

go further south ----> Banshee (Death Scene)

go further south ----> Madman ------> Commuter lot

go west -----> Veterans Bridge (optional 'search cars' scene) ---> Train Bridge ---> Veterinary Clinic 

None of these involve encountering the drooler (and that scene is referred to as a "convenience store" instead of "drug store" FWIW).

How is the 'chopped off leg' ending reached - the only way I've found to lose a leg is to kill the hellhound in the 'wrong' way, which automatically leads to a game over screen?

Where is the "talkative zombie"?

Is there a way to get out of the subway tunnels that doesn't involve using a ceiling hatch?