10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  For the Fiscal Year ended December 31, 2008 or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  For the Transition Period from              to             

Commission File Number: 000-23265

Salix Pharmaceuticals, Ltd.

(Exact name of Registrant as specified in its charter)

Delaware	94-3267443
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1700 Perimeter Park Drive

Morrisville, North Carolina 27560

(Address of principal executive offices, including zip code)

(919) 862-1000

(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Exchange on which Registered
Common Stock, $0.001 Par Value Preferred Share Purchase Rights	Nasdaq Global Market Nasdaq Global Market

Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES  ¨    NO  x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    YES  ¨    NO  x

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Act (Check one):

Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨    Smaller reporting company  ¨

Indicate by check mark whether registrant is a shell company (as defined) in Rule 12b-2 of the Exchange Act.    YES  ¨    NO  x

The aggregate market value of the Registrant’s common stock held by non-affiliates of the Registrant on June 30, 2008 (based on the closing sale price of U.S. $7.03 of the Registrant’s common stock, as reported on The Nasdaq Global Market on such date) was approximately U.S. $141,251,133. Common stock held by each officer and director and by each person known to the Company who owned 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares of the Registrant’s common stock outstanding at March 10, 2009 was 48,119,013.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive Proxy Statement to be filed for its 2009 Annual Meeting of Stockholders currently scheduled to be held June 18, 2009 are incorporated by reference into Part III of this report.

SALIX PHARMACEUTICALS, LTD.

ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

		Page
	PART I
Item 1.	Business	1
Item 1A.	Risk Factors	18
Item 1B.	Unresolved Staff Comments	24
Item 2.	Properties	24
Item 3.	Legal Proceedings	25
Item 4.	Submission of Matters to a Vote of Security Holders	25
	Executive Officers of the Registrant	25
	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	27
Item 6.	Selected Financial Data	29
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	45
Item 8.	Financial Statements and Supplementary Data	45
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	45
Item 9A.	Controls and Procedures	45
Item 9B.	Other Information	46
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	47
Item 11.	Executive Compensation	47
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	47
Item 13.	Certain Relationships and Related Transactions, and Director Independence	48
Item 14.	Principal Accountant Fees and Services	48
	PART IV
Item 15.	Exhibits and Financial Statement Schedule	49
SIGNATURES		54

i

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are subject to risks and uncertainties, including those set forth under “Item 1A. Risk Factors” and “Cautionary Statement” included in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report, that could cause actual results to differ materially from historical results or anticipated results. Unless otherwise indicated or required by the context, the terms “we,” “our,” “us” and the “Company” refer to Salix Pharmaceuticals, Ltd. and all of its subsidiaries.

PART I

Item 1. Business

Salix Pharmaceuticals, Ltd., a Delaware corporation, is a specialty pharmaceutical company dedicated to acquiring, developing and commercializing prescription drugs used in the treatment of a variety of gastrointestinal diseases, which are those affecting the digestive tract. Our website address is www.salix.com. Information on our website is not incorporated herein by reference. We make available free of charge through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.

OVERVIEW

We are a specialty pharmaceutical company dedicated to acquiring, developing and commercializing prescription drugs used in the treatment of a variety of gastrointestinal disorders, which are those affecting the digestive tract. Our strategy is to:

• identify and acquire rights to products that we believe have potential for near-term regulatory approval or are already approved;

• apply our regulatory, product development, and sales and marketing expertise to commercialize these products; and

• use our approximately 150-member specialty sales and marketing team focused on high-prescribing U.S. gastroenterologists, who are doctors who specialize in gastrointestinal disorders, to sell our products.

Our current products demonstrate our ability to execute this strategy. As of December 31, 2008, our products were:

• XIFAXAN^® (rifaximin) Tablets 200 mg;

• MOVIPREP^® (PEG 3350, Sodium Sulfate, Sodium Chloride, Potassium Chloride, Sodium Ascorbate and Ascorbic Acid for Oral Solution);

• OSMOPREP™ (sodium phosphate monobasic monohydrate, USP and sodium phosphate dibasic anhydrous, USP) Tablets;

• VISICOL^® (sodium phosphate monobasic monohydrate, USP, and sodium phosphate dibasic anhydrous, USP) Tablets;

• AZASAN^® Azathioprine Tablets, USP, 75/100 mg;

• ANUSOL-HC^® 2.5% (Hydrocortisone Cream, USP), ANUSOL-HC^® 25 mg Suppository (Hydrocortisone Acetate);

• PROCTOCORT^® Cream (Hydrocortisone Cream, USP) 1% and PROCTOCORT^® Suppository (Hydrocortisone Acetate Rectal Suppositories) 30 mg;

• PEPCID^® (famotidine) for Oral Suspension;

• Oral Suspension DIURIL^® (Chlorothiazide);

• APRISO™ (mesalamine) extended-release capsules 0.375g; and

• COLAZAL^® (balsalazide disodium) Capsules 750 mg.

1

We generate revenue primarily by selling our products, namely prescription drugs, to pharmaceutical wholesalers. These direct customers resell and distribute our products to and through pharmacies to patients who have had our products prescribed by doctors. We currently market our products, and intend to market future products, if approved by the U.S. Food and Drug Administration, or FDA, to U.S. gastroenterologists and other physicians through our own direct sales force. In December 2000, we established our own field sales force to market Colazal in the United States. Currently, this sales force has approximately 100 sales representatives in the field and markets our approved products. Although the creation of an independent sales organization involved substantial costs, we believe that the financial returns from our direct product sales have been and will continue to be more favorable to us than those from the indirect sale of products through marketing partners. We enter into distribution or licensing relationships outside the United States and in certain markets in the U.S. where a larger sales organization is appropriate. Currently, our sales and marketing staff, including our sales representatives, consists of approximately 150 people.

Because demand for our products originates with doctors, our sales force calls on high-prescribing specialists, primarily gastroenterologists, and we monitor new and total prescriptions for our products as key performance indicators for our business. Prescriptions result in our products being used by patients, requiring our direct customers to purchase more products to replenish their inventory. However, our revenue might fluctuate from quarter to quarter due to other factors, such as increased buying by wholesalers in anticipation of a price increase or because of the introduction of new products. Revenue could be less than anticipated in subsequent quarters as wholesalers’ increased inventory is used up.

Our primary product candidates currently under development and their status are as follows:

Compound	Indication	Status
Rifaximin	Hepatic encephalopathy	Phase III
Rifaximin	Irritable bowel syndrome	Phase III
Rifaximin	Travelers’ diarrhea prevention	Phase III
Rifaximin	C. difficile–associated diarrhea	Phase III
Vapreotide acetate	Acute esophageal variceal bleeding	Complete response submitted to FDA October 27, 2008
Metozolv™ (metoclopramide)	Gastroparesis and refractory gastroesophageal reflux	Complete response letter received February 26, 2009
Crofelemer	HIV-associated diarrhea	Phase III
Balsalazide disodium tablet	Ulcerative colitis	Complete response letter received December 22, 2008

PRODUCTS

Xifaxan^® (rifaximin) tablets

Xifaxan is a gastrointestinal-specific oral antibiotic that the FDA approved in May 2004 for the treatment of patients 12 years of age and older with travelers’ diarrhea caused by noninvasive strains of E coli. According to the Centers for Disease Control, each year between 30% and 50% of international travelers, an estimated 20.0 million people, develop diarrhea, with approximately 80% of the cases caused by bacteria. Approximately 1.4 million people sought treatment in the United States for infectious diarrhea in 2008 and approximately 1.2 million of those patients were prescribed a drug.

We believe the advantages of Xifaxan to treat these infections are two-fold: (1) site-targeted antibiotic delivery; and (2) improved tolerability compared to other treatments. Less than 0.5% of the drug is absorbed into the bloodstream when it is taken orally. In addition, the drug might also cause fewer side effects or discomforts such as nausea, headache or dizziness than observed with currently available, more highly-absorbed antibiotics. We believe Xifaxan is also less likely to cause harmful interaction with other drugs a patient may be taking. We believe Xifaxan is unique because there is no other U.S.-approved oral antibiotic with its potential lack of systemic absorption and safety profile.

2

We launched Xifaxan in the United States in July 2004 using our own direct sales force. We had net product sales of $79.9 million, $64.3 million and $51.6 million of Xifaxan in the United States in 2008, 2007 and 2006 respectively. We are exploring potential additional indications, formulations, clinical trials and co-promotion arrangements to capitalize on the potential for Xifaxan, including our development programs in hepatic encephalopathy, irritable bowel syndrome, prevention of travelers’ diarrhea, and C. difficile–associated diarrhea. Based on these potential indications, we believe Xifaxan can potentially compete in an annual U.S. market in excess of approximately $4 billion, comprised of over 12 million patient visits. While the potential market for Xifaxan is large, we expect to capture only a portion of each market due to competition, ability to capture share in each market, market acceptance and/or other factors.

The patents for the rifaximin composition of matter (also covering a process of making rifaximin and using rifaximin to treat gastrointestinal infectious diseases) expired in May 2001 in the United States and Canada. Rifaximin is a new chemical entity and was granted a five-year new chemical exclusivity by the FDA when it was approved in May 2004. Rifaximin, therefore, has data exclusivity to May 2009. In May 2006, a U.S. patent (composition of matter and process patent that covers several physical states of rifaximin) was issued that we believe extends the patent coverage of the current form of rifaximin until May 2024. Alfa Wasserman S.p.a., the patent owner, has licensed rights to rifaximin in the United States to Salix. In July 2006, Salix entered into an agreement with Cedars-Sinai Medical Center, or CSMC, for the right to use its patent and patent applications relating to methods of diagnosis and treating irritable bowel syndrome and other disorders caused by small intestinal bacterial overgrowth. The CSMC agreement also provides Salix the right to use the U.S. Patent No. 7,452,857, which issued in November 2008 and provides protection relating to rifaximin for treating irritable bowel syndrome, or IBS, caused by small intestinal bacterial overgrowth until August 2019. We have filed applications for patents relating to additional indications using rifaximin and related chemical substances.

MoviPrep^® (PEG 3350, sodium sulfate, sodium chloride, potassium chloride, sodium ascorbate and ascorbic acid) oral solution

In December 2005, we acquired exclusive rights to sell MoviPrep in the United States from Norgine B.V. MoviPrep is a patent-protected, liquid polyethylene glycol-salt , or PEG, bowel cleansing product that was approved by the FDA in August 2006 and competes with a number of liquid PEG bowel cleansing products. MoviPrep is differentiated from other liquid PEG bowel cleansing products by the inclusion of ascorbic acid in its formulation. MoviPrep is indicated for bowel cleansing prior to colonoscopy, intestinal surgery and barium enema X-ray examinations. Net product sales for MoviPrep were $33.9 million in 2008, $20.1 million in 2007 and $5.0 million in 2006. We expect that the voluntary recall of C.B. Fleet’s products discussed below could lead to increased future demand for MoviPrep.

Approximately 5.7 million prescriptions for bowel cleansing products were written in 2008, representing a market value of $218 million. In terms of prescription dollar sales, the market for bowel cleansing products has been growing at a 28% annual compound rate for the last five years. Our bowel cleansing products compete with a number of PEG bowel cleansing products.

Norgine, B.V. and Norgine Europe, B. V. own U.S. Patent No. 7,169,381, or the ‘381 patent, which is listed with the FDA as protecting our MoviPrep product to 2024. Norgine licensed MoviPrep and the ‘381 patent to us for commercialization in the United States. In 2008, Novel Laboratories, Inc., filed an Abbreviated New Drug Application, or ANDA, with the FDA seeking approval to market a generic version of MoviPrep in the United States prior to the September 1, 2024 expiration of the ‘381 patent. On May 14, 2008, we and Norgine filed a lawsuit in the United States District Court for the District of New Jersey against Novel for infringement of the ‘381 patent and seeking a declaratory judgment confirming the validity of the patent. This lawsuit prevents Novel from marketing a generic version of MoviPrep for up to 30 months, unless Novel receives an earlier non-appealable judgment to the contrary. Novel filed an Answer and Counterclaim on June 20, 2008. No trial date has been set.

Visicol^® and OsmoPrep^® (sodium phosphate monobasic monohydrate, USP, sodium phosphate dibasic anhydrous, USP) tablets

In September 2005, we acquired Visicol with the completion of the acquisition of InKine Pharmaceutical Company, Inc. Visicol and OsmoPrep tablets are indicated for cleansing of the colon as a preparation for colonoscopy

3

in adults 18 years of age or older. Visicol was the first, and it and OsmoPrep are the only, tablet bowel cleansing products approved by the FDA and marketed in the United States. OsmoPrep is a patented, second-generation tablet bowel cleansing product approved by the FDA in March 2006. OsmoPrep offers potential benefits compared to Visicol such as its lack of microcrystalline cellulose, smaller tablet size and possible lower dose administration. Net product sales for Visicol were ($1.4) million, $2.2 million and $18.0 million in 2008, 2007 and 2006 respectively. Net product sales for OsmoPrep were $30.3 million in 2008, $25.4 million in 2007 and $22.5 million in 2006.

CDC, LLC, owns U.S. Patent No. 5,616,346, or the ‘346 patent, for the formulation and use of OsmoPrep, which CDC licensed to us for commercialization in the United States. The ‘346 patent is listed with the FDA as protecting our OsmoPrep product to 2013. In 2008, Novel Laboratories, Inc., filed an ANDA with the FDA seeking approval to market a generic version of OsmoPrep in the United States prior to the May 18, 2013 expiration of the ‘346 patent. On September 8, 2008, we filed a lawsuit in the United States District Court for the District of New Jersey against Novel for the infringement of the ‘346 patent and seeking a declaratory judgment confirming the validity of the patent. The lawsuit also joins CDC as a party. This lawsuit prevents Novel from marketing a generic version of OsmoPrep for up to 30 months, unless Novel receives an earlier non-appealable judgment to the contrary. No trial date has been set. An additional U.S. patent application for OsmoPrep is pending that, if issued, could provide patent protection through 2024.

On December 11, 2008, the FDA announced a proposed boxed warning for OsmoPrep and Visicol that addresses the potential risk of acute kidney injury. We are working with the FDA to develop a risk evaluation and mitigation strategy, or REMS, including a medication guide, and we plan to conduct post–marketing clinical trials. In its announcement, the FDA also recommended that consumers not use over the counter Oral Sodium Phosphate, or OSP’s, for bowel cleansing. On December 12, 2008, C.B. Fleet Company announced a voluntary complete recall of their over-the-counter products Fleet^® Phospho-soda^® and Fleet^® Phospho-soda^® EZ-Prep^® Bowel Cleansing System. These products were priced significantly lower than the available prescription bowel cleansing products and we believe accounted for approximately 3 million bowel cleansing procedures during 2008. We expect that this recall will result in an increase in demand for prescription bowel cleansing products in 2009. It is difficult to predict the effect that this combination of events will have on future demand for OsmoPrep and Visicol at this time.

Azasan^® (azathioprine) tablets

In November 2003, we acquired from aaiPharma LLC the exclusive right to sell 25, 75 and 100 milligram dosage strengths of azathioprine tablets in North America under the brand name Azasan. Azasan is an FDA-approved drug that suppresses immune system responses and is indicated for preventing rejection of kidney transplants and treatment of severe arthritis. In February 2004, we launched the 75 and 100 milligram dosage strengths of Azasan in the United States. Net product sales for Azasan were $3.1 million, $3.4 million and $4.8 million in 2008, 2007 and 2006, respectively. The patents and data exclusivity for Azasan have expired.

Anusol-HC^® and Proctocort^® (hydrocortisone) creams and suppositories

In June 2004, we acquired the exclusive right to sell Anusol-HC 2.5% (hydrocortisone USP) cream, Anusol-HC 25 mg (hydrocortisone acetate) rectal suppositories, Proctocort 1% (hydrocortisone USP) cream and Proctocort 30 mg (hydrocortisone acetate) rectal suppositories from King Pharmaceuticals, Inc. The two cream products are topical corticosteroids indicated for relief of the inflammatory and pruritic, or itching, manifestations of corticosteroid-responsive dermatoses. The two suppository products are indicated for use in inflamed hemorrhoids and postirradiation proctitis, as well as an adjunct in the treatment of chronic ulcerative colitis and other inflammatory conditions. Combined net product sales for the Anusol-HC and Proctocort product lines were $3.7 million, $2.9 million and $3.0 million in 2008, 2007 and 2006, respectively. The patents and data exclusivity for Anusol-HC and Proctocort have expired.

Pepcid^® (famotidine) for Oral Suspension and Oral Suspension Diuril^® (Chlorothiazide)

In February 2007, we purchased the U.S. prescription pharmaceutical product rights to Pepcid Oral Suspension and Diuril Oral Suspension from Merck & Co., Inc. Pepcid Oral Suspension is a widely known prescription pharmaceutical product indicated for several gastrointestinal indications, including the treatment of duodenal ulcer,

4

benign gastric ulcer and gastro-esophageal reflux disease. Pepcid Oral Suspension and Diuril Oral Suspension, both liquid formulations of their solid dosage form counterparts, compete in a combined market of approximately $150 million, concentrated in pediatric and hospitalized patient populations. Net product sales for Pepcid were $18.2 million in 2008 and $22.2 million in 2007. Net product sales for Diuril were $0.6 million for 2008 and $0.2 million for 2007. The patents and data exclusivity for Pepcid Oral Suspension and Diuril Oral Suspension have expired.

Apriso™ (mesalamine) extended-release capsules 0.375g

In July 2002 we acquired the exclusive development rights in the United States to a granulated mesalamine product from Dr. Falk Pharma GmbH, one of the most recognized gastroenterology companies worldwide. On October 31, 2008, the FDA granted marketing approval for Apriso for the maintenance of remission of ulcerative colitis in adults. Apriso is a locally-acting aminosalicylate and is the first and only mesalamine product approved by the FDA for once-a-day dosing for the maintenance of remission of ulcerative colitis. Apriso is designed to provide for the distribution of the active ingredient beginning in the small bowel and continuing throughout the colon. The product’s unique prolonged release mechanism might allow us to expand the range of treatment options for ulcerative colitis. We shipped Apriso to wholesalers in the fourth quarter of 2008 and launched Apriso to physicians in late February 2009.

Ulcerative colitis is a chronic form of inflammatory bowel disease characterized by inflammation of the lining of the colon. Symptoms of active ulcerative colitis include rectal bleeding, abdominal pain, increased stool frequency, loss of appetite, fever and weight loss. The cause of ulcerative colitis is unknown and no known cure exists except for the removal of the colon. It is estimated that as many as 500,000 people in the United States have ulcerative colitis. People are most often diagnosed with the disease in their mid-30’s, although the disease can occur at any age.

Apriso is patent protected until 2018.

Colazal^® (balsalazide disodium) capsules

Our first drug, Colazal, was approved by the FDA in 2000 for the treatment of mildly to moderately active ulcerative colitis. We launched Colazal to physicians in the United States in January 2001 using our own sales force. In December 2006, the FDA approved Colazal for use in pediatric patients between 5 to 17 years of age with ulcerative colitis. The pediatric use of Colazal has been granted orphan drug designation. On December 28, 2007, the Office of Generic Drugs, or OGD, approved three generic balsalazide capsule products, and we announced that we had entered into an agreement with Watson Pharma, Inc. to market and sell an authorized generic of Colazal.

We had net product sales of $1.4 million, $92.4 million and $103.5 million of Colazal in the United States in 2008, 2007 and 2006, respectively. Colazal net product revenues for 2007 include a $34.6 million reduction representing our estimate of Colazal previously sold to wholesalers that may be returned to us under our return policy as a result of the generic approvals discussed above. We do not anticipate significant Colazal sales in 2009 or beyond.

DEVELOPMENT PROGRAMS

Balsalazide Disodium tablets

We have developed an 1100 mg tablet formulation of balsalazide disodium. We believe the convenience the balsalazide tablet formulation is designed to provide, by means of twice-a-day dosing and a reduced number of pills, demonstrates our ongoing commitment to bring products to market that better serve the needs of gastroenterologists and their patients. On July 17, 2007 we submitted an NDA to the FDA seeking approval to market an 1100 mg tablet formulation of balsalazide disodium. On May 16, 2008 we received an approvable letter from the FDA. We submitted a complete response to the approvable letter on June 30, 2008. On December 22, 2008, the FDA issued a complete response letter. Based on its review, the FDA has determined that the application cannot be approved in its present form and that clinical data from an additional adequate and well-controlled clinical trial will be required in order to conduct further review on the NDA. We have been granted a Type A meeting with the FDA and will meet with the FDA to discuss appropriate next steps and determine if the issues described in the December 22, 2008 complete response letter can be resolved and the product can be approved for marketing. We do not intend to conduct additional clinical investigation of balsalazide tablets in this indication. The patent for balsalazide disodium tablets will expire in 2018.

5

Xifaxan^® (rifaximin) tablets

We are committed to maximizing the commercial potential of our GI-targeted antibiotic, Xifaxan. We have prioritized our development efforts and have budgeted resources to expedite our late-stage trials in hepatic encephalopathy and irritable bowel syndrome. These studies are generating data that should provide the basis for forthcoming New Drug Applications.

Hepatic Encephalopathy

In October 2008, we announced the successful completion and outcome of our pivotal Phase III trial to evaluate the efficacy, safety and tolerability of rifaximin in preventing hepatic encephalopathy, or HE. This study demonstrates that the protocol–specified, intent-to-treat, primary endpoint comparison of a 6-month course of rifaximin at 550 mg dosed twice-a-day provides a highly statistically significant result in preventing HE, compared to placebo. The results seen with the primary endpoint are corroborated by the secondary endpoints. Hepatic encephalopathy, which encompasses a spectrum of reversible neuropsychiatric abnormalities that occur in patients with acute or chronic liver disease, is a serious medical condition that has no FDA-approved drug therapies available. We intend to submit an NDA during 2009.

Irritable Bowel Syndrome

In June 2008 we initiated patient enrollment in the Phase III trials to assess the efficacy and safety of rifaximin (550 mg TID) in the treatment of patients with non-constipation irritable bowel syndrome, or non-C IBS. We are conducting two 600-subject trials, TARGET 1 and TARGET 2, in a total of approximately 190 study centers throughout the U.S. and Canada. We expect to complete patient enrollment by mid-2009.

Prevention of Travelers’ Diarrhea

We have completed two Phase III trials to evaluate Xifaxan in the prevention of travelers’ diarrhea. In December 2008 we had a pre-NDA meeting with the FDA to discuss these data and potential next steps. We currently plan to submit an NDA for the prevention of travelers’ diarrhea in late 2009.

C. difficile-associated Diarrhea

In December 2008, we concluded patient enrollment in our C. Difficile-associated diarrhea, or CDAD, trial. Final enrollment into this trial concluded with the enrollment of 238 of the protocol defined 300 patients enrolled. During 2009, we intend to analyze the results of this trial and, data allowing, request a meeting with the FDA to discuss the next appropriate steps for this indication.

Vapreotide acetate

In September 2006 we acquired exclusive marketing rights for vapreotide acetate in the United States from the Debiopharm Group. Patient enrollment in a confirmatory Phase III trial in the United States as a treatment of acute esophageal variceal bleeding was completed during the third quarter of 2008. Debiopharm submitted a complete response to the FDA during the fourth quarter of 2008, and the FDA granted an April 1, 2009 Prescription Drug User Fee Act, or PDUFA, goal date. We believe the FDA is likely to request a review of vapreotide acetate at a future Advisory Committee meeting, and therefore the April 1, 2009 PDUFA date may be extended. If approved by the FDA, vapreotide acetate will be the only approved treatment for esophageal variceal bleeding in the United States. Vapreotide acetate has been granted orphan drug designation in the United States, and as a result, if approved, will have seven years of exclusivity from the approval date.

Metozolv™ (metoclopramide) orally disintegrating tablets

In September 2007, we acquired exclusive, worldwide rights to metoclopramide-Zydis^® from Wilmington Pharmaceuticals. Metoclopramide is indicated for short-term (4–12 weeks) therapy for adults with symptomatic documented gastroesophageal reflux who fail to respond to conventional therapy, and for the relief of symptoms associated with acute and recurrent diabetic gastric stasis. Metozolv is a fast-dissolve formulation of metoclopramide that has patent protection until 2017 and additional patent protection pending that, if issued, will provide intellectual property protection until 2023.

6

Wilmington submitted an NDA seeking approval to market Metozolv and, the FDA originally granted a November 30, 2008 PDUFA goal date. In November 2008, however, the FDA extended the PDUFA goal date three months, to February 27, 2009, to provide time for a full review of the submission. On February 26, 2009, Wilmington received a complete response letter from the FDA, indicating that it requires a REMS for Metozolv prior to approval of the NDA. With the exception of the REMS requirement, all substantive questions and issues surrounding the Metozolv application have been resolved. We intend to submit the REMS by mid March and will work with the FDA to expedite the approval of Metozolv. In a separate action on February 26, 2009, the FDA issued a class-wide requirement for all manufacturers of metoclopramide in the United States to provide a REMS for their products.

Crofelemer

In December 2008 we acquired rights to crofelemer from Napo Pharmaceuticals, Inc. We are investigating crofelemer in a Phase III study as an anti-secretory anti-diarrheal agent for the treatment of chronic diarrhea in people living with HIV, or HIV-associated diarrhea. Patents for crofelemer provide intellectual property protection to 2018. If crofelemer receives marketing approval, it should be eligible for 5 years marketing exclusivity as a new molecular entity. The product also might be entitled to patent term restoration.

Budesonide

In March 2008, we acquired a license from Dr. Falk Pharma GmbH to a family of budesonide products, including a budesonide rectal foam and a budesonide gastro-resistant capsule, in the United States. The rectal foam product and the gastro-resistant capsule products have patent coverage in the U.S. until 2015 and 2016, respectively. We expect to initiate Phase III studies on the budesonide rectal foam product during 2009.

COLLABORATIVE AND PRODUCT ACQUISITION AGREEMENTS

We have and will continue to enter into various collaborations and product acquisition agreements with licensors, licensees and others. To date, we have entered into the following agreements:

Product Acquisitions and In-License Agreements

aaiPharma LLC

In November 2003, we acquired from aaiPharma LLC for $2.0 million the exclusive right to sell 25, 75 and 100 milligram dosage strengths of azathioprine tablets in North America under the name Azasan. In addition, the agreement provides that Salix is to pay aaiPharma, on a quarterly basis, a percentage royalty payment based on Salix’s net sales of Azasan in exchange for aaiPharma supplying us with drug product. Because the amount of the royalty payment is based on net sales during a quarter, with no minimum royalty amount, Salix is unable to prospectively disclose the absolute amount of such royalty payments. Royalties are only incurred if there is associated revenue, and then are included in “Cost of products sold” in the Statements of Operations.

Alfa Wassermann S.P.A.

In June 1996, Salix entered into a license agreement with Alfa Wassermann S.p.A, a privately held pharmaceutical company headquartered in Italy, pursuant to which Alfa Wassermann licensed to Salix the exclusive rights to make, use and sell rifaximin (Xifaxan) in the United States and Canada for the treatment of gastrointestinal and respiratory tract diseases. Pursuant to the license agreement, we agreed to pay Alfa Wassermann a net sales-based royalty, as well as milestone payments. Salix made annual milestone payments in varying amounts to Alfa Wassermann until the commercial launch of Xifaxan in July 2004. No more milestone payments remain under this agreement. Our obligation to pay royalties commenced upon the commercial launch of the product and continues until the later of (1) the expiration of the period in which the manufacture, use or sale of the products by an unlicensed third party would constitute an infringement on the patent covering the product or (2) 10 years from commercial launch. Thereafter, the licenses granted to us shall continue as irrevocable royalty-free paid-up licenses. However, we would remain obligated to pay a net sales based royalty for use of the product trademark if we choose to continue using it after the other licenses expired. Because the amount of the royalty payment is based on net sales during a quarter, with

7

no minimum royalty amount, Salix is unable to prospectively disclose the absolute amount of such royalty payments. Royalties are only incurred if there is associated revenue, and then are included in “Cost of products sold” in the Statements of Operations.

Alfa Wassermann has agreed separately to supply us with bulk active ingredient rifaximin at a fixed price. Salix is committed to purchase a percentage of its rolling 12-month forecast that is updated monthly, and these amounts are included in the “Purchase Commitments” line of its contractual commitments table in its Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The license agreement does not have a set term and continues until terminated in accordance with its terms. Either party to the agreement may terminate it following a material breach by the other party and the failure of the breaching party to remedy the breach within 60 days. In addition, Alfa Wassermann has the right to terminate the agreement on three months’ written notice in the event that we fail to sell the product for a period of six consecutive months after commercial launch. In addition, Alfa Wassermann may terminate the agreement if we become involved in bankruptcy, liquidation or similar proceedings. We may terminate the agreement in respect of any indication or any part of the territory covered on 90 days’ notice, at which point our rights with respect to that indication or territory shall cease.

Biorex Laboratories Limited

Pursuant to an agreement entered into between us and Biorex in 1992, Biorex granted us the exclusive worldwide right (other than Japan, Taiwan, Korea and the United States) to develop, manufacture and sell balsalazide for all disease indications for a period of 15 years from the date of commercial launch, subject to early termination in certain circumstances, including upon the material breach by either party and, in the case of Biorex, in the event of our bankruptcy or if a sub-licensee of ours terminates or becomes entitled to terminate its sublicense as a result of actions by us. Pursuant to this agreement, Salix must pay to Biorex a percentage of any gross profits realized by Salix, plus a percentage of fees payable to Salix in connection with any sublicense by Salix of the rights under the agreement. Under a separate agreement, Biorex granted us the exclusive right to develop, manufacture and sell balsalazide for all disease indications in the United States for a period of nine years from the date of commercial launch or the term of the applicable patent, whichever is longer. Under these agreements, we paid Biorex fees upon entering into the agreements and are obligated to make additional milestone and royalty payments for the drug. The royalty payments to be made by us pursuant to the agreement governing the United States are based on net sales, subject to minimum royalty payments for the first five years following commercial launch. Under the agreement governing territories other than the United States, we are obligated to pay to Biorex a portion of any gross profit on sales of balsalazide outside the United States. Under these agreements, we undertook to complete preclinical testing, perform clinical trials and obtain regulatory approvals for balsalazide. During 2001, we acquired from Biorex the exclusive right and license to develop, manufacture and sell balsalazide in Japan, Korea and Taiwan. We did not have to pay any fees to Biorex upon entering into this agreement, but we are obligated to pay Biorex a portion of any upfront payments, milestone payments and gross profit on sales of balsalazide in Japan, Korea and Taiwan as well. Because the amount of the royalty payment is based on net sales during a quarter, with no minimum royalty amount, Salix is unable to prospectively disclose the absolute amount of such royalty payments. Royalties are only incurred if there is associated revenue, and then are included in “Cost of products sold” in the Statements of Operations.

Cedars — Sinai Medical Center

On June 28, 2006, Salix entered into a license agreement with Cedars-Sinai Medical Center, or CSMC, for the right to use a patent and a patent application relating to methods of diagnosing and treating irritable bowel syndrome and other disorders caused by small intestinal bacterial overgrowth. Under the agreement, CSMC grants Salix the right to use its patent and patent application relating to methods of diagnosis and treating irritable bowel syndrome and other disorders caused by small intestinal bacterial overgrowth. CSMC also grants Salix a nonexclusive license to use any unpublished research and development information, know-how and technical data of CSMC as necessary to exploit all rights granted to Salix with respect to rifaximin, with a right to sublicense. In November 2008, the U.S. Patent and Trademark Office issued a patent to Cedars-Sinai Medical Center providing protection relating to rifaximin for treating irritable bowel syndrome caused by small intestinal bacterial overgrowth which provides protection until August 2019. Salix has an exclusive license to this patent from Cedars–Sinai Medical Center to make, have made, use, sell and have sold and import licensed products related to the use of rifaximin.

8

As of December 31, 2007, the aggregate $1.2 million license fee had been paid. A portion of the $1.2 million was considered an up-front, non-refundable and irrevocable licensing fee. The balance was considered a prepaid, non-refundable and irrevocable royalty applicable as credit towards royalty amounts due and payable to CSMC, if any, under the agreement. At such time as the use of rifaximin is approved by the FDA as a treatment for irritable bowel syndrome, Salix will be required to pay CSMC low single digit percentage royalties on net sales of licensed products. An additional term of the license agreement with CSMC provides that Salix will expend a minimum amount per calendar year to seek and obtain regulatory approval and develop and commercialize licensed products. Because the license agreement provides the ability for Salix to terminate the agreement upon giving written notice of not less than 90 days, Salix does not include amounts payable under the license agreement as a purchase obligation in its contractual commitments table in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Clinical Development Capital Partnership

In connection with Salix’s acquisition of InKine in September 2005, Salix assumed a license agreement with ALW Partnership for the worldwide rights, in perpetuity, to develop, use, market, sell, manufacture, have manufactured and sub-license Visicol and improvements, including OsmoPrep, in the field of colonic purgatives, along with ALW Partnership’s body of proprietary technical information, trade secrets and related know-how. Pursuant to this license agreement, Salix pays to Clinical Development Capital, or CDC, ALW’s successor, on a quarterly basis, a percentage royalty payment based on Salix’s net sales of these products. Because the amounts of the royalty payments are based on net sales during a quarter Salix is unable to prospectively disclose the amount of such royalty payments. The agreement requires a minimum annual royalty payment of $0.1 million. Additional royalties are only incurred if there is associated revenue, and then are included in “Cost of products sold” in the Statements of Operations.

Debiopharm Group

The Debiopharm Group is a global biopharmaceutical development company headquartered in Lausanne, Switzerland. Debiopharm developed vapreotide acetate for the treatment of acute esophageal variceal bleeding. In September 2006 we acquired the exclusive right to sell, market and distribute vapreotide acetate in the United States. The agreement provides that Salix make an upfront payment and milestone payments of up to $8.0 million to Debiopharm contingent upon achievement of regulatory milestones, up to an additional $6.0 million in milestone payments contingent on reaching sales thresholds, and quarterly royalty payments on net sales of vapreotide acetate, if approved. As of December 31, 2008, $1.0 million of the upfront and milestone payments had been made. The remaining milestone payments are contingent upon achievement of regulatory approval and sales thresholds. Because the milestone payments are conditioned upon events that might never occur, we do not consider the potential milestone payment as a purchase obligation nor a commitment to be reported in our contractual commitments table in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Dr. Falk Pharma GmbH

Pursuant to Salix’s license agreement, as amended, with Dr. Falk Pharma GmbH, Salix acquired the rights to develop and market a granulated formulation of mesalamine. The agreement provides that Salix make milestone payments in an aggregate amount of up to $11.0 million to Dr. Falk upon certain events prior to the commercial launch of the product, and quarterly royalty payments thereafter. As of December 31, 2008, $9.0 million of milestone payments had been made. The remaining milestone payment is contingent upon achievement of additional regulatory approval. Because this milestone payments are conditioned upon events that might never occur, we do not consider the potential milestone payments as purchase obligations nor a commitment to be reported in our contractual commitments table in Management’s Discussion and Analysis of Financial Condition and Results of Operations. Royalties are only incurred if there is associated revenue, and then are included in “Cost of products sold” in the Statements of Operations.

In March 2008 we acquired a license from Dr. Falk Pharma GmbH to a family of budesonide products, including a budesonide rectal foam and a budesonide gastro-resistant capsule, in the United States. The rectal foam product and the gastro-resistant capsule products have patent coverage in the U.S. until 2015 and 2016, respectively. The agreement

9

requires Salix to make an upfront payment and regulatory milestone payments that could total up to $23.0 million to Dr. Falk Pharma, with the majority contingent upon achievement of U.S. regulatory approval. At such time as the use of either of these products is approved by the FDA, Salix will be required to pay Dr. Falk royalties on net sales of licensed products. As of December 31, 2008, $1.0 million of upfront and milestone payments had been made. The remaining milestone payments are contingent upon filing NDA’s and achievement of regulatory approvals. Because these milestone payments are conditioned upon events that might never occur, we do not consider the potential milestone payments as purchase obligations nor a commitment to be reported in our contractual commitments table in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

King Pharmaceuticals, Inc.

In June 2004, we acquired the exclusive right to sell Anusol-HC^® 2.5% (hydrocortisone USP) cream, Anusol-HC^® 25 mg (hydrocortisone acetate) rectal suppositories, Proctocort^® 1% (hydrocortisone USP) cream and Proctocort^® 30 mg (hydrocortisone acetate) rectal suppositories from King Pharmaceuticals, Inc. We paid $13.0 million cash for the four products, and entered into a supply agreement for the suppository products and the Anusol-HC cream product with King Pharmaceuticals; we established an alternate supply arrangement with a contract manufacturer for the Proctocort cream product. Once payment amounts under this and other supply agreements are known and are non-cancelable, Salix includes them in its contractual commitments table in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Merck & Co., Inc.

In February 2007, we entered into a Master Purchase and Sale and License Agreement with Merck & Co., Inc., to purchase the U.S. prescription pharmaceutical product rights to Pepcid Oral Suspension and Diuril Oral Suspension. Pursuant to the Agreement, Salix paid Merck $55.0 million at the closing of the transaction. In addition, Salix will make additional payments to Merck up to an aggregate of $6.0 million upon the achievement of certain annual gross sales targets for the acquired products during any of the five calendar years beginning in 2007 and ending in 2011. Because these payments are conditioned upon events that might never occur, we do not consider these payments as purchase obligations nor a commitment to be reported in our contractual commitments table in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

In return for these payments, Salix obtained (1) all rights to the United States regulatory approvals and related data, open purchase orders, inventory and customer lists related to the acquired oral suspension products, (2) an exclusive license to the Pepcid Oral Suspension and Diuril Oral Suspension trademarks for the use of prescription sale of the acquired oral suspension products in the United States, and (3) an exclusive license to certain know-how related to the manufacture of the acquired oral suspension products in the United States. Merck also agreed to manufacture and supply the acquired oral suspension products to Salix through December 31, 2008. In the event that Salix is acquired by another party or if Salix sells all or substantially all of the rights to the acquired products, and Merck determines in its reasonable judgment that such transaction will result in material harm to the Pepcid Oral Suspension name or the licensed trademark, Merck has the right to terminate one or more of the above licenses and the supply obligation.

Napo Pharmaceuticals, Inc.

In December 2008 we acquired rights to crofelemer from Napo Pharmaceuticals, Inc. Patents for crofelemer provide intellectual property protection to 2018. Crofelemer currently is being investigated in a Phase III study as an anti-secretory anti-diarrheal agent for the treatment of chronic diarrhea in people living with HIV, or HIV-associated diarrhea. We made an initial payment of $5 million, consisting of $4.5 million in an upfront license fee, and a $500,000 equity investment. In addition, we will make up to $50.0 million in milestone payments to Napo contingent on regulatory approvals and up to $250.0 million in milestone payments contingent on reaching certain sales thresholds. We will be responsible for development costs of crofelemer, but costs exceeding $12.0 million for development of crofelemer used for the HIV-associated diarrhea indication will be credited towards regulatory milestones and thereafter against sales milestones. Additionally, Salix will pay royalties on net sales of crofelemer, if approved. Because these milestone payments are conditioned upon events that might never occur, we do not consider the potential milestone payments as purchase obligations nor a commitment to be reported in our contractual commitments table in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

10

Norgine B.V.

In December 2005, we acquired from Norgine B.V. the exclusive rights to sell NRL944 (now marketed by us under the trade name MoviPrep), a proprietary, liquid PEG bowel cleansing product in the United States. The agreement provides that Salix make an upfront payment and milestone payments to Norgine that could total up to $37.0 million. As of December 31, 2008, $22.0 million of upfront and milestone payments had been made. The remaining milestone payments are contingent upon reaching sales thresholds. Because these milestone payments are conditioned upon events that might never occur, we do not consider the potential milestone payments as purchase obligations nor a commitment to be reported in our contractual commitments table in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Wilmington Pharmaceuticals, LLC

In September 2007, we acquired the exclusive, worldwide right to sell metoclopramide–Zydis^® (trade name Metozolv) from Wilmington Pharmaceuticals, LLC. The agreement provides that Salix make an upfront payment and milestone payments that could total up to $8.0 million. As of December 31, 2008, we had paid $1.0 million of these upfront and milestone payments. The remaining milestone payment is contingent upon regulatory approval. Additionally, Salix will pay royalties on net sales of Metozolv, if approved. Because these milestone payments are conditioned upon events that might never occur, we do not consider the potential milestone payments as purchase obligations nor a commitment to be reported in our contractual commitments table in Management’s Discussion and Analysis of Financial Condition and Results of Operations. We also loaned Wilmington $2.0 million which is due December 31, 2009, or earlier, based on regulatory approval.

Product Out-License Collaborations

Dr. Falk Pharma GmbH

In April 2007, we licensed to Dr. Falk exclusive rights to market DIACOL™ 1500 mg Tablets in 28 territories in Europe. We sell DIACOL, or, sodium phosphate monobasic monohydrate, USP, and sodium phosphate dibasic anhydrous, tablets, USP, in the United States under the trade name OSMOPREP™ Tablets. As part of the agreement, Dr. Falk also has a non–exclusive option to market DIACOL in Italy and France. Under the terms of the agreement, we could receive up to $4 million in milestone payments, as well as royalty payments based on product sales. Dr. Falk made the first milestone payment of $1.5 million upon execution of the agreement. Dr. Falk is obligated to use all reasonable efforts to obtain Marketing Authorization by means of the Mutual Recognition Procedure in the territories and option countries.

In December 2008, Falk terminated this agreement pursuant to its terms. Falk will transfer all marketing authorizations for Diacol back to Salix or its designee at Falk’s expense. Salix will retain the $1.5 million non-refundable and non-creditable sum Falk paid Salix upon execution of the License Agreement. Otherwise, there are no other early termination penalties or other financial ramifications to Falk or Salix as a result of the termination.

Menarini Pharmaceutical Industries S.R.L.

Menarini, headquartered in Italy, is the largest manufacturer and distributor of pharmaceuticals in Southern Europe. Menarini also has extensive experience developing and marketing therapies for gastrointestinal disease in its markets. Under our agreements with Menarini, we granted Menarini certain manufacturing rights and exclusive distribution rights with respect to balsalazide in Italy, Spain, Portugal and Greece. The agreement calls for additional milestone revenues to be paid to us relating to additional European marketing approvals, if any, in the Menarini territories. Under the terms of the agreements, we will sell the bulk active ingredient balsalazide to Menarini for marketing and distribution in its territories at cost plus a sales-based royalty. Menarini did not purchase any bulk active ingredient balsalazide from us during 2003, 2005, 2006, 2007 or 2008. During 2004 and 2008, Menarini paid us approximately $0.1 million and $0.4 million related to balsalazide purchases, respectively.

Unless terminated sooner in accordance with its terms, the agreement with Menarini continues until the earlier of the expiration of (1) the patents relating to the product or (2) 15 years from the date of the agreement, provided however

11

that in any case the agreement shall continue for a period of 10 years from the date of first launch. Either party may terminate the agreement upon a material breach by the other party and the failure to remedy such breach within 30 days in the case of a payment breach or 90 days in the case of any other material breach or if a party enters liquidation, bankruptcy or similar proceedings.

Mayoly-Spindler S.A.S.

In October 2007, we licensed exclusive rights to market OSMOPREP™ (sodium phosphate monobasic monohydrate, USP and sodium phosphate dibasic anhydrous, USP) Tablets in France to Mayoly–Spindler S.A.S of Chatou, France. Under the terms of the agreement, we may receive up to $1.0 million in milestone payments, as well as royalty payments based on product sales.

Pharmatel PTY Limited.

In June 2004, we granted Pharmatel certain manufacturing rights and exclusive distribution rights with respect to balsalazide in Australia and New Zealand. Under the terms of the agreements, Pharmatel pays us royalty payments based on product sales.

Zeria Pharmaceutical Co. Ltd.

In August 2001, InKine licensed exclusive commercial rights in Japan to Visiclear^® Tablets for colon cleansing to Zeria Pharmaceutical Co., Ltd. of Tokyo, Japan. Zeria launched Visiclear in June 2007. Visiclear, or sodium phosphate monobasic monohydrate and sodium phosphate dibasic anhydrous, tablets are marketed in the United States under the trade name VISICOL^®. Under the terms of the agreements, Zeria pays us royalty payments based on product sales.

Supply and Distribution Agreement with Watson Pharma, Inc.

On December 28, 2007, we announced that we entered into a Supply and Distribution Agreement with Watson Pharma, Inc., pursuant to which Watson will be Salix’s exclusive distributor to market and sell an authorized generic of Colazal (balsalazide disodium) Capsules 750 mg, Salix’s anti-inflammatory drug approved for the treatment of mildly to moderately active ulcerative colitis, in the United States. Watson agrees to use commercially reasonable efforts to sell authorized generic Colazal, and has sole discretion to establish prices and terms. Watson will pay Salix a portion of its profits for sales under the agreement, and Salix will supply Watson with all its requirements for the product. The agreement terminates in October 2011, provided that either party may terminate immediately upon bankruptcy of the other, or for uncured breaches of the other party. Salix may also terminate on 30 days notice if the agreement has become commercially unviable, if it obtains the right to prohibit other generics from being sold or if it ceases distribution of branded Colazal.

MANUFACTURING

We own no manufacturing facilities. We have in the past used and plan to continue to use third-party manufacturers to produce material for use in clinical trials and for commercial product. This manufacturing strategy enables us to direct our financial resources to product in-licensing and acquisition, product development, and sales and marketing efforts, without devoting resources to the time and cost associated with building and maintaining manufacturing facilities.

Under our supply agreement with Alfa Wassermann, Alfa Wassermann is obligated to supply us with bulk rifaximin drug substance, the active pharmaceutical ingredient in Xifaxan tablets, until July 2014 or introduction of a generic product, whichever occurs first. Our supply of rifaximin drug substance is manufactured by ZaCh Systems (formerly Zambon) in Lonigo, Italy, and Aventis in Brindisi, Italy. Under a long-term supply agreement, rifaximin is converted into Xifaxan drug product for us by Patheon, Inc. in Whitby, Ontario. Bulk Xifaxan tablets are packaged into finished Xifaxan commercial bottles by Patheon and packaged into Xifaxan commercial blister packs by Carton Service Inc. in Norris, Tennessee.

12

Under our long-term supply agreement with aaiPharma, aaiPharma produces our commercial supply of 75 mg and 100 mg Azasan finished product.

Under our long-term supply agreement with Paddock Laboratories, Inc. in Minneapolis, Minnesota, Paddock produces our commercial supply of finished product of Anusol-HC Cream, Anusol-HC Suppositories and Proctocort Suppositories. In addition, through prior supply arrangements between King Pharmaceuticals and Crown Laboratories, Inc. in Johnson City, Tennessee, Crown continues to produce our commercial supply of Proctocort Cream finished product.

Under our long-term supply agreement with WellSpring Pharmaceutical Corporation in Oakville, Ontario, WellSpring produces our commercial supply of OsmoPrep finished product.

Under our long-term supply agreement with Norgine in Hengoed, Wales, Norgine produces our commercial supply of MoviPrep pouches. For secondary packaging of MoviPrep into commercial finished kits, we have two vendors qualified: Norgine, at its Hengoed, Wales facility; and Carton Service in Norris, Tennessee.

Merck manufactured our commercial supply of Pepcid Oral Suspension and Diuril Oral Suspension through December 2008. Under a long-term supply agreement beginning in 2009, Paddock Laboratories in Minneapolis, Minnesota, now produces our commercial supply of Pepcid Oral Suspension and Diuril Oral Suspension.

Bayer AG in Wuppertal, Germany supplies us with bulk mesalamine active ingredient. Under a long-term supply agreement with Catalent Pharma Solutions in Winchester, Kentucky, Catalent converts this mesalamine into our commercial supply of bulk Apriso, 375mg mesalamine capsules. The bulk Apriso capsules are then packaged into finished Apriso commercial bottles by Carton Service in Norris, Tennessee.

Cosma S.P.A. in Bergamo, Italy supplies us with bulk metoclopramide active ingredient. Under a long-term supply agreement with Catalent in Swindon, United Kingdom, Catalent converts this metoclopramide into our commercial supply of Metozolv, 5mg and 10mg tablets in blister packaging. The Metozolv blister packs are then packaged into finished cartons by Carton Service in Norris, Tennessee.

Currently, under long-term supply agreements, we use balsalazide drug substance (the active pharmaceutical ingredient in Colazal capsules) manufactured by OmniChem s.a., a subsidiary of Ajinomoto in Belgium, and PharmaZell (formerly Noveon Pharma, GmbH) in Raubling, Germany. Also, under long-term supply agreements, balsalazide is encapsulated into Colazal drug product for us by Nexgen Pharma, Inc. (formerly Anabolic Laboratories) in Irvine, California. Bulk Colazal capsules are packaged into finished Colazal commercial bottles by Nexgen and Carton Service in Norris, Tennessee.

With respect to our 1100 mg balsalazide tablet formulation and our 550 mg rifaximin tablet formulation, which are currently under development, we plan to negotiate commercial supply agreements with the same manufacturers who supplied the drug substance and drug product for the supplies of the Phase III clinical trial material, if approved. Under our manufacturing and supply agreement with Glenmark Pharmaceuticals, Ltd. in Mumbai, India, Glenmark supplies us with crofelemer, which we are currently investigating in a Phase III study, and will supply us with commercial supplies of crofelemer, if approved.

SALES AND MARKETING

We currently market our products and intend, if approved by the FDA, to market future products to U.S. gastroenterologists through our own direct sales force. We enter into distribution relationships outside the United States and in markets where a larger sales organization is appropriate. Currently, our sales and marketing staff consists of approximately 150 people, which we believe should also position us to sell additional products, if and when acquired and/or approved for U.S. marketing. Because there are a relatively small number of gastroenterologists that write a majority of the prescriptions in our indications, we believe that the size of our sales force is appropriate to reach our target physicians. Our sales force consists of approximately 100 employees who regularly call on approximately 16,000 healthcare professionals. We also have approximately ten national account managers who regularly call on major drug

13

wholesalers, managed care organizations, large retail chains, formularies and related organizations. We believe we have created an attractive incentive program for our sales force that is based upon goals in prescription growth, market share achievement and customer service.

We cultivate relationships of trust and confidence with the high prescribing gastroenterologists in the United States. We use a variety of marketing techniques to promote our products including sampling, journal advertising, promotional materials, specialty publications, coupons, money-back or product replacement guarantees, educational conferences and informational websites.

PATENTS AND PROPRIETARY RIGHTS

General

The patents for the rifaximin composition of matter (also covering a process of making rifaximin and using rifaximin to treat gastrointestinal infectious diseases) expired in May 2001 in the United States and Canada. In May 2006, a U.S. patent (composition of matter and process patent that covers several physical states of rifaximin) was issued that extends the patent coverage of the currently marketed form of rifaximin to May 22, 2024. Alfa Wasserman S.p.a., the patent owner, has licensed rights to rifaximin in the United States to Salix. In July 2006, Salix entered into an agreement with Cedars-Sinai Medical Center, or CSMC, for the right to use its patent and patent applications relating to methods of diagnosis and treating irritable bowel syndrome and other disorders caused by small intestinal bacterial overgrowth. The CSMC agreement also provides Salix the right to use the U.S. Patent No. 7,452,857 which issued in November 2008, and provides protection relating to rifaximin for treating irritable bowel syndrome, or IBS, caused by small intestinal bacterial overgrowth until August 2019. We have filed applications for patents relating to additional indications using rifaximin and related chemical substances.

The patent for the treatment of the intestinal tract with Apriso, the granulated mesalamine product, provides patent coverage to 2018.

The patent for balsalazide 1100 mg tablets provides patent coverage to 2018.

The patent for balsalazide 1100 mg tablets relating to the increase of bioavailability provides coverage until November 2027.

The patent for Visicol provides patent coverage to 2013.

The patent for OsmoPrep provides patent coverage to 2013. Additional patent protection is being sought on OsmoPrep that, if approved, will provide patent coverage to 2024.

The patent for MoviPrep provides patent coverage to 2024. This patent was issued by the USPTO in January 2007 and it contains composition of matter and kit claims.

The patent for vapreotide acetate expired in 2006; however, we will be applying for Patent Term Restoration.

The patents for crofelemer provide protection to 2018. We are seeking applications for patents relating to additional indications using crofelemer and related chemical substances.

The budesonide rectal foam product and the gastro-resistant capsule product have patent coverage in the U.S. until 2015 and 2016, respectively.

The patents for the balsalazide composition of matter and method of treating ulcerative colitis with balsalazide expired in July 2001 in the United States; however, we were granted five years of new chemical entity data exclusivity for balsalazide until July 2005 and an extension of such patent under the Waxman-Hatch Act through July 2006. We also obtained patent extensions for the composition of balsalazide in Italy and the United Kingdom until July 2006. We have filed applications for patents relating to additional indications using balsalazide and related chemical substances. In November of 2008, the United States Patent and Trademark Office issued a patent covering methods for increasing the bioavailability of balsalazide.

14

Data Exclusivity

Rifaximin was a new chemical entity, therefore, the FDA granted us five-year new chemical entity exclusivity when it was approved in May 2004. Therefore, rifaximin has data exclusivity through May 2009.

Apriso, the granulated mesalamine product, is not a new chemical entity, but is entitled to three years of exclusivity from its approval based on the new clinical investigations that have been required during the approval process. The exclusivity prevents the FDA from approving an NDA for a granulated mesalamine product which relied upon the new clinical investigation in our NDA for three years from October 31, 2008. The patent for the granulated mesalamine protects the product until April 2018.

Metoclopramide, which is not a new chemical entity, might be entitled to three years of data exclusivity from the date of its approval based on the new clinical investigations that have been required during the approval process. Such exclusivity would have the effect of preventing the FDA from approving an NDA for a metoclopramide product which relied upon the new clinical investigation in our NDA for three years from the date of approval. Our metoclopramide product is a fast-dissolve formulation that has patent protection until 2017 and additional patent protection pending that, if issued, will provide intellectual property protection until 2023.

Vapreotide acetate is a new chemical entity and will be entitled to data exclusivity for five years beginning from the date of the approval of our NDA, if approved. Vapreotide acetate is also an orphan drug, therefore, the product will be entitled to orphan exclusivity for seven years beginning from the date of the approval of our NDA, if approved.

Azasan and the Anusol-HC and Proctocort product lines are mature products, thus, there are no available patent or exclusivity rights.

The Pepcid product line is a mature product line, thus, there are no available patent or exclusivity rights.

Crofelemer, which is a new chemical entity, should be eligible for market exclusivity for five years in the United States. As a new molecular entity, we believe crofelemer may be entitled to patent term restoration. The patents for crofelemer provide protection until 2018.

GOVERNMENT REGULATION

The research, testing, manufacture, marketing and distribution of drug products are extensively regulated by governmental authorities in the United States and other countries. In the United States, drugs are subject to rigorous regulation by the FDA. The Federal Food, Drug and Cosmetic Act, as amended, and the regulations promulgated thereunder, and other federal and state statutes and regulations, govern, among other things, the research, development, testing, manufacture, storage, record keeping, labeling, promotion and marketing and distribution of pharmaceutical products. Failure to comply with applicable regulatory requirements may subject a company to administrative sanctions or judicially imposed sanctions such as civil penalties, criminal prosecution, injunctions, product seizure or detention, product recalls, and total or partial suspension of product marketing and/or approvals. In addition, non-compliance may result in the FDA’s refusal to approve pending NDAs or supplements to approved NDAs or in the withdrawal of an NDA. Any such sanction could result in adverse publicity, which could have a material adverse effect on our business, financial conditions, and results of operation.

The steps ordinarily required before a new pharmaceutical product containing a new chemical entity may be marketed in the United States include: (1) preclinical laboratory tests, preclinical studies in animals and formulation studies; (2) the submission to the FDA of a notice of claimed investigational exemption for a new drug or antibiotic, which must become effective before clinical testing may commence; (3) adequate and well-controlled clinical human trials to establish the safety and efficacy of the drug for each indication; (4) the submission of an NDA to the FDA; and (5) FDA review and approval of the NDA prior to any commercial sale or shipment of the drug. Preclinical tests include laboratory evaluation of product chemistry and formulation, as well as animal studies to assess the potential safety and efficacy of the product. Preclinical tests must be conducted in compliance with Good Laboratory Practice regulations. The results of preclinical testing are submitted to the FDA as part of an IND. A 30-day waiting period after the filing of each IND is required prior to the commencement of clinical testing in humans. In addition, the FDA may, at any time during this 30-day period or at any time thereafter, impose a clinical hold on proposed or ongoing clinical

15

trials. If the FDA imposes a clinical hold, clinical trials cannot commence or recommence without FDA authorization and then only under terms authorized by the FDA. In some instances, the IND application process can result in substantial delay and expense.

Clinical trials to support NDAs are typically conducted in three sequential phases, but the phases may overlap. In Phase I, the initial introduction of the drug into healthy human subjects or patients, the drug is tested to assess metabolism, pharmacokinetics and pharmacological actions and safety, including side effects associated with increasing doses. Phase II usually involves studies in a limited patient population to (1) assess the efficacy of the drug in specific, targeted indications, (2) assess dosage tolerance and optimal dosage and (3) identify possible adverse effects and safety risks. If a compound is found to be potentially effective and to have an acceptable safety profile in Phase II evaluations, Phase III trials are undertaken to further demonstrate clinical efficacy and to further test for safety within an expanded patient population at geographically dispersed clinical study sites. There can be no assurance that Phase I, Phase II or Phase III testing will be completed successfully within any specified time period, if at all, with respect to any of our products subject to such testing.

After successful completion of the required clinical testing, generally an NDA is submitted. FDA approval of the NDA is required before marketing may begin in the United States. The FDA reviews all NDAs submitted before it accepts them for filing and may request additional information rather than accepting an NDA for filing. In such an event, the NDA must be resubmitted with the additional information and, again, is subject to review before filing. Once the submission is accepted for filing, the FDA begins an in-depth review of the NDA. The FDA generally has 10 months in which to review the NDA and respond to the applicant. The review process is often significantly extended by FDA requests for additional information or clarification regarding information already provided in the submission. The FDA may refer the application to an appropriate advisory committee, typically a panel of clinicians, for review, evaluation and a recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee. If the FDA’s evaluation of the NDA submission or manufacturing facilities is not favorable, the FDA may refuse to approve the NDA or issue a not approvable letter, outlining the deficiencies in the submission and often requiring additional testing or information. If FDA evaluations of the NDA and the manufacturing facilities are favorable, the FDA may issue either an approval letter or an complete response letter, which usually contains a number of conditions that must be met in order to secure final approval of the NDA. When and if those conditions have been met to the FDA’s satisfaction, the FDA will issue an approval letter, authorizing commercial marketing of the drug for certain indications. Furthermore, approval may entail ongoing requirements for post-marketing studies, and marketed products, manufacturers and manufacturing facilities are subject to continual review and periodic inspections. In addition, identification of certain side effects after a drug is on the market or the occurrence of manufacturing problems could cause subsequent withdrawal of approval, reformulation of the drug, additional preclinical testing or clinical trials and changes in labeling of the product.

Under the Orphan Drug Act, the FDA may designate a product as an orphan drug if it is a drug intended to treat a disease or condition that affects populations of fewer than 200,000 individuals in the United States or a disease whose incidence rates number more than 200,000 where the sponsor establishes that it does not realistically anticipate that its product sales will be sufficient to recover its costs. The sponsor that obtains the first marketing approval for a designated orphan drug for a given rare disease is eligible to receive marketing exclusivity for use of that drug for the orphan indication for a period of seven years. Vapreotide acetate, rifaximin for the treatment of hepatic encephalopathy and Colazal for the treatment of mildly to moderately active ulcerative colitis in pediatric patients between 5 to 17 years of age have been granted orphan drug status.

Regulation of Drug Compounds Outside of the United States

Outside the United States, the ability to market a drug is contingent upon receiving marketing authorizations from the appropriate regulatory authorities. The requirements governing the conduct of clinical trials and marketing authorization vary widely from country to country. Currently, foreign marketing authorizations are applied for at a national level, although within the European Union procedures are available to companies wishing to market a product in more than one European Union member state. The foreign regulatory approval process includes all of the risks associated with FDA approval set forth above.

16

If and when necessary, we will choose the appropriate route of European regulatory filing to accomplish the most rapid regulatory approvals. However, the chosen regulatory strategy might not secure regulatory approvals or approvals of our chosen product indications. Furthermore, we must obtain pricing approval in addition to regulatory approval prior to launching the product in the approving country. Failure to obtain pricing approval in a timely manner or approval of pricing which would support an adequate return on investment or generate a sufficient margin to justify the economic risk might delay or prohibit the commercial launch of the product in those countries.

COMPETITION

Competition in our business is intense and characterized by extensive research efforts, rapid technological progress and an increasing rate of generic product approvals. Technological developments by competitors, earlier regulatory approval for marketing competitive products, including generic versions of our products, or superior marketing capabilities possessed by competitors could adversely affect the commercial potential of our products and could have a material adverse effect on our revenue and results of operations. We believe that there are numerous pharmaceutical and biotechnology companies, including large well known pharmaceutical companies and generic manufacturers, as well as academic research groups throughout the world, engaged in research and development efforts with respect to pharmaceutical products targeted at gastrointestinal diseases and conditions addressed by our current and potential products. In particular, we are aware of products in research or development by competitors that address the diseases being targeted by our products. Developments by others might render our current and potential products obsolete or non-competitive. Competitors might be able to complete the development and regulatory approval process sooner and, therefore, market their products earlier than us. Many of our competitors have substantially greater financial, marketing and personnel resources and development capabilities than we do.

For example, many large, well capitalized companies already offer products in the United States and Europe that target the indications for balsalazide and our mesalamine extended-release capsule product, including mesalamine (GlaxoSmithKline plc, Giuliani S.p.A., Axcan Pharma, Inc., Solvay S.A., The Procter & Gamble Company and Shire Pharmaceuticals Group plc), sulfasalazine (Pharmacia & Upjohn, Inc.), and olsalazine (Alaven Pharmaceutical LLC). Asacol, marketed by Proctor & Gamble, is currently the most prescribed product for the treatment of ulcerative colitis in the United States, and Shire introduced once-a-day Lialda in 2007. In addition, on December 28, 2007, the Office of Generic Drugs approved three generic balsalazide capsule products.

Several prescription, liquid PEG products compete with Visicol, OsmoPrep and MoviPrep in the bowel cleansing market. These prescription products include Colyte, Golytely, Halflytely, and Nulytely (Braintree) and Trilyte (Alaven Pharmaceutical LLC). Generic prescription, liquid PEG products are also available.

The most frequently prescribed product for treatment of travelers’ diarrhea in the United States currently is ciprofloxacin, commonly known as “Cipro^®” and marketed by Bayer AG. The most frequently prescribed products that compete with Azasan are Imuran^®, marketed by Prometheus Laboratories, Inc., and its various generics and Purinethol^®, marketed by GATE Pharmaceuticals, and it’s various generics. The most frequently prescribed products that compete with Anusol-HC and Proctocort are AnaMantle HC, marketed by Bradley Pharmaceuticals; Analpram HC, marketed by Ferndale Laboratories; Proctofoam-HC and Proctocream-HC, marketed by Alaven Pharmaceutical LLC; Procto-Kit, marketed by Ranbaxy Pharmaceuticals; and various generics.

EMPLOYEES

As of December 31, 2008, we had approximately 280 full-time employees. We believe that our future success will depend in part on our continued ability to attract, hire, and retain qualified personnel, including sales and marketing personnel in particular. Competition for such personnel is intense, and there can be no assurance that we will be able to identify, attract, and retain such personnel in the future. None of our employees are represented by a labor union. We have not experienced any work stoppages and consider our relations with our employees to be good.

17

Item 1A. Risk Factors

This report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in this report. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this report and in any documents incorporated in this report by reference.

If any of the following risks, or other risks not presently known to us or that we currently believe to not be significant, develop into actual events, then our business, financial condition, results of operations or prospects could be materially adversely affected. If that happens, the market price of our common stock could decline, and stockholders may lose all or part of their investment.

We expect to be unprofitable and experience negative cash flow during 2009, and we may need additional capital.

We will be unprofitable and have negative cash flow during 2009. We believe that our current cash and cash equivalents together with cash generated from the sale of our products will be sufficient to fund our operations for 2009. Our future capital requirements will depend on many factors, including but not limited to:

• any impact on us of current conditions and uncertainties in the economy generally and the financial markets;

• patient and physician demand for our products;

• the status of competitive products, including current and potential generics;

• the results, costs and timing of our research and development activities, regulatory approvals and product launches;

• our ability to reduce our costs in the event product demand is less than expected, or regulatory approvals are delayed or more expensive than expected;

• the number of products we acquire or in-license;

• the actual amount of Colazal returns we receive compared to our current estimates; and

• our ability to maintain our current credit facility.

We believe that we will be able to return to a positive cash flow position without requiring additional capital based on our current projections. However these projections may change due to changes in the factors discussed above, or other factors. If we need additional capital, we might seek additional debt or equity financing or both to fund our operations or acquisitions. If we incur more debt, we might be restricted in our ability to raise additional capital and might be subject to financial and restrictive covenants. If we issued additional equity, our stockholders could suffer dilution. We might also enter into additional collaborative arrangements that could provide us with additional funding in the form of equity, debt, licensing, milestone and/or royalty payments. We might not be able to enter into such arrangements or raise any additional funds on terms favorable to us or at all, especially in the current economic environment. Our common stock is likely to decrease in value if the market believes that we will be unable to return to profitability, or that we will be required to raise additional capital.

Our credit facility, as amended, contains various representations, warranties and affirmative, negative and financial covenants customary for financings of this type. For example, as long as we maintain an amount equal to the amount outstanding under the credit facility on deposit with the Administrative Agent of the credit facility and maintain a minimum of $23.0 million in cash on our balance sheet, the leverage test and fixed charge test are suspended under the credit facility. We were in compliance with all applicable covenants under the credit facility, as amended, at December 31, 2008. If we fall out of compliance with the financial covenants in the future, we would need to obtain a waiver or amendment, or the amount outstanding on the credit facility would be immediately due.

18

Future sales of Xifaxan and our other marketed products might be less than expected.

We currently market and sell eleven primary products, with a majority of our historical revenue derived from sales of Colazal prior to 2008. We expect Xifaxan, which was launched in mid-2004, MoviPrep, which we acquired from Norgine in December 2005, and OsmoPrep, which we acquired in connection with our acquisition of InKine in September 2005, to be growing and significant sources of revenue in the future. If sales of our marketed products decline or if we experience product returns significantly in excess of estimated amounts recorded, particularly with respect to Xifaxan, MoviPrep and OsmoPrep, it would have a material adverse effect on our business, financial condition and results of operations.

The degree of market acceptance of our products among physicians, patients, healthcare payors and the medical community will depend upon a number of factors including:

• the timing of regulatory approvals and product launches by us or competitors, such as the launch of Lialda, and including any generic or over-the-counter competitors;

• perceptions by physicians and other members of the healthcare community regarding the safety and efficacy of the products;

• price increases, and the price of our products relative to other drugs or competing treatments;

• patient and physician demand;

• adverse side effects or unfavorable publicity concerning our products or other drugs in our class;

• the results of product development efforts for new indications;

• the scope and timing of additional marketing approvals and favorable reimbursement programs for expanded uses;

• availability of sufficient commercial quantities of the products; and

• our success in getting other companies to distribute our products outside of the U.S. gastroenterology market.

Regulatory approval of our product candidates is time-consuming, expensive and uncertain, and could result in unexpectedly high expenses and delay our ability to sell our products.

Development of our products are subject to extensive regulation by governmental authorities in the United States and other countries. This regulation could require us to incur significant unexpected expenses or delay or limit our ability to sell our product candidates, including specifically metoclopramide, balsalazide disodium tablets, rifaximin for hepatic encephalopathy, or HE, and vapreotide acetate, our product candidates that are farthest along in the regulatory approval process. In early 2008, the FDA announced that because of its large workload it might not meet its target dates to respond to NDA submissions, and in November 2008 it extended the metoclopramide-Zydis review until February 2009. In addition, in 2008 we received two “approvable” or “complete response” letters from the FDA for balsalazide tablets and Wilmington Pharmaceuticals received one in February 2009 for metoclopramide, each requesting additional information or further studies, rather than regulatory approval.

Our clinical studies might be delayed or halted, or additional studies might be required, for various reasons, including:

• the drug is not effective;

• patients experience severe side effects during treatment;

• appropriate patients do not enroll in the studies at the rate expected, as has been the case with our Xifaxan Phase III trial in Thailand for the prevention of travelers’ diarrhea;

• drug supplies are not sufficient to treat the patients in the studies; or

• we decide to modify the drug during testing.

19

If regulatory approval of any product is granted, it will be limited to those indications for which the product has been shown to be safe and effective, as demonstrated to the FDA’s satisfaction through clinical studies. For example, Xifaxan has been approved for treatment of travelers’ diarrhea, but we are developing Xifaxan for HE and other indications. The FDA may never approve any of our compounds in the indications we are pursuing, which would mean we cannot market these compounds for use in these indications.

Our ability to increase revenue in the future will depend in part on our success in in-licensing or acquiring additional pharmaceutical products.

We currently intend to in-license or acquire additional pharmaceutical products, as we did with vapreotide acetate and crofelemer, that have been developed beyond the initial discovery phase and for which late-stage human clinical data is already available, or as we did with Pepcid Oral Suspension, that has already received regulatory approval. These kinds of pharmaceutical products might not be available to us on attractive terms or at all. To the extent we acquire rights to additional products, we might incur significant additional expense in connection with the development and, if approved by the FDA, marketing of these products.

Regulatory approval, even if granted, might entail ongoing requirements or restrictions on marketing that could increase our expenses and limit revenue.

Approval might entail ongoing requirements for post-marketing studies, or limit how or to whom we can sell our products. Even if regulatory approval is obtained, labeling and promotional activities are subject to continual scrutiny by the FDA and state regulatory agencies and, in some circumstances, the Federal Trade Commission. For example, in 2008 the FDA required us to put a “black box” warning on the OsmoPrep and Visicol labels regarding potential kidney damage that could result from their use, which could limit future sales of those products. In addition, FDA enforcement policy prohibits the marketing of approved products for unapproved, or off-label, uses. These regulations and the FDA’s interpretation of them might increase our expenses, impair our ability to effectively market our products, and limit our revenue.

Failure to comply with manufacturing regulation could harm us financially and could hurt our reputation.

We and our third-party manufacturers such as Glenmark Pharmaceuticals Ltd. that produces crofelemer are also required to comply with the applicable FDA current Good Manufacturing Practices, or cGMP, regulations, which include requirements relating to quality control and quality assurance, as well as the corresponding maintenance of records and documentation. Further, manufacturing facilities must be approved by the FDA before they can be used to manufacture our products, and they are subject to additional FDA inspection. Manufacturing regulations can increase our expenses and delay production, either of which could reduce our margins. In addition, if we fail to comply with any of the FDA’s continuing regulations, we could be subject to reputational harm and sanctions, including:

• delays, warning letters and fines;

• product recalls or seizures and injunctions on sales;

• refusal of the FDA to review pending applications;

• total or partial suspension of production;

• withdrawals of previously approved marketing applications; and

• civil penalties and criminal prosecutions.

In addition, the occurrence of manufacturing problems could cause subsequent withdrawal of approval, reformulation of the drug, additional testing or changes in labeling of the product.

Our intellectual property rights might not afford us with meaningful protection.

The intellectual property rights protecting our products might not afford us with meaningful protection from generic and other competition. In addition, because our strategy is to in-license or acquire pharmaceutical products

20

which typically have been discovered and initially researched by others, future products might have limited or no remaining patent protection due to the time elapsed since their discovery. Competitors could also design around any of our intellectual property or otherwise design competitive products that do not infringe our intellectual property.

Any litigation that we become involved in to enforce intellectual property rights could result in substantial cost to us. In addition, claims by others that we infringe their intellectual property could be costly. Our patent or other proprietary rights related to our products might conflict with the current or future intellectual property rights of others. Litigation or patent interference proceedings, either of which could result in substantial cost to us, might be necessary to defend any patents to which we have rights and our other proprietary rights or to determine the scope and validity of other parties’ proprietary rights. The defense of patent and intellectual property claims is both costly and time-consuming, even if the outcome is favorable. Any adverse outcome could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties, or require us to cease selling one or more of our products. We might not be able to obtain a license to any third-party technology that we require to conduct our business, or, if obtainable, that technology might not be available at a reasonable cost.

Upon patent expiration, our drugs could be subject to generic competition, which could negatively affect our pricing and sales volume. As previously disclosed, this has already happened to Colazal, which had been our largest selling drug prior to 2008.

Patent applications relating to rifaximin compositions and related chemical substances were filed together with Alfa Wasserman and issued in May 2006. This patent extends patent coverage to 2024. In November of 2008, the United States Patent and Trademark Office issued a patent covering the use of rifaximin for treating irritable bowel syndrome (IBS) caused by small intestinal bacterial overgrowth. In January 2007, the United States Patent and Trademark Office issued a patent covering composition of matter and kit claims for MoviPrep. The MoviPrep patent provides coverage to September 2024. The patent for Visicol and OsmoPrep will expire in 2013. Additional patent protection is being sought for OsmoPrep that, if approved, will provide patent coverage to 2024. The patent for the treatment of the intestinal tract with the Apriso will provide patent coverage to 2018. The patent application relating to the dosage form for metoclopramide protects the product until July 2017. The patent for vapreotide acetate expired in 2006; however, we will be applying for patent Term Restoration. The patent for crofelemer, relating to enteric formulations and uses thereof provide protection until 2018 and should be entitled to patent term restoration as a new molecular entity. There is no assurance that these patents or the patent term restorations will be issued or granted, respectively. Patent expiration dates listed herein, unless otherwise noted, are for U.S. patents and assume there are no patent term adjustments, extensions or other adverse events that could affect the term or scope of a patent.

Rifaximin is a new chemical entity and was granted five-year new chemical entity exclusivity by the FDA when it was approved in May 2004. Rifaximin, therefore, has data exclusivity only until May 2009. Accordingly, the Office of Generic Drugs would have been able to accept an ANDA for Xifaxan tablets on or any time subsequent to May 2008, if the applicant certified that its generic rifaximin does not infringe Salix’s patent. If this occurred, a Paragraph IV notification would have to be provided to us by the applicant. Although we do not possess any specific knowledge of any such filing at the current time, the expiration of data exclusivity could result in a challenge to the related intellectual property rights of Xifaxan 200mg tablets at any time in the future. In May 2008 we submitted a Citizen Petition, requesting the director of the Office of Generic Drugs of the Food and Drug Administration impose scientifically appropriate standards for the demonstration of bioequivalence for abbreviated new drug applications citing Xifaxan as the reference listed drug.

Vapreotide acetate is a new chemical entity and will be entitled to data exclusivity for five years beginning from the date of the approval of our NDA, if approved. Vapreotide acetate is also an orphan drug, therefore the product will be entitled to orphan exclusivity for seven years beginning from the date of the approval of the NDA, if approved.

Because Azasan, Anusol-HC and Proctocort are mature products there are no patents or data exclusivity rights available, which subjects us to greater risk of generic competition for those products.

We also rely on trade secrets, proprietary know-how and technological advances, which we seek to protect, in part, through confidentiality agreements with collaborative partners, employees and consultants. These agreements might be breached and we might not have adequate remedies for any such breach. In addition, our trade secrets and proprietary know-how might otherwise become known or be independently developed by others.

21

Intense competition might render our products noncompetitive or obsolete.

Competition in our business is intense and characterized by extensive research efforts and rapid technological progress. Technological developments by competitors, regulatory approval for marketing competitive products, including potential generic or over-the-counter products, or superior marketing resources possessed by competitors could adversely affect the commercial potential of our products and could have a material adverse effect on our revenue and results of operations. We believe that there are numerous pharmaceutical and biotechnology companies, including large well-known pharmaceutical companies, as well as academic research groups throughout the world, engaged in research and development efforts with respect to pharmaceutical products targeted at gastrointestinal diseases and conditions addressed by our current and potential products. In particular, we are aware of products in research or development by competitors that address the diseases being targeted by our products. Developments by others might render our current and potential products obsolete or noncompetitive. Competitors might be able to complete the development and regulatory approval process sooner and, therefore, market their products earlier than we can.

Many of our competitors have substantially greater financial, marketing and personnel resources and development capabilities than we do. For example, many large, well-capitalized companies already offer products in the United States and Europe that target the indications for:

• Xifaxan as approved (travelers’ diarrhea), including ciprofloxacin, commonly known as Cipro (Bayer AG);

• Visicol, OsmoPrep and MoviPrep, including Colyte, Golytely, Halflytely, and Nulytely (Braintree) and Trilyte (Alaven Pharmaceutical LLC) and Fleets Phospho-Soda;

• Apriso, including Asacol (Proctor & Gamble), sulfasalazine (Pfizer), Dipentum (Alaven Pharmaceutical LLC), Pentasa (Shire Pharmaceuticals Group, plc), once-a-day Lialda (Shire), and three generic balsalazide capsule products; and

• Xifaxan under development, including Lotronex^® (Prometheus), and Zelnorm^® (Novartis), which is no longer available on the market in the US, for IBS.

In addition, other products are in research or development by competitors that address the diseases and diagnostic procedures being targeted by these and our other products.

We could be exposed to significant product liability claims that could prevent or interfere with our product commercialization efforts.

We have been in the past and might continue to be subjected to product liability claims that arise through the testing, manufacturing, marketing and sale of our products. These claims could expose us to significant liabilities that could prevent or interfere with our product commercialization efforts. Product liability claims could require us to spend significant time and money in litigation or to pay significant damages. Although we currently maintain liability coverage for both clinical trials and the commercialization of our products, it is possible that this coverage will be insufficient to satisfy any liabilities that may arise. In the future, we might not be able to obtain adequate coverage at an acceptable cost or might be unable to obtain adequate coverage at all.

If third-party payors do not provide coverage or reimburse patients for our products, our ability to derive revenues will suffer.

Our success will depend in part on the extent to which government and health administration authorities, private health insurers and other third-party payors will pay for our products. Reimbursement for newly approved healthcare products is uncertain. In the United States and elsewhere, third-party payors, such as Medicaid, are increasingly challenging the prices charged for medical products and services. Government and other third-party payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement for new therapeutic products. In the United States, a number of legislative and regulatory proposals aimed at changing the healthcare system have been proposed in recent years, and the Obama administration has indicated it would like to address this. In addition, an increasing emphasis on managed care in the United States has and will continue to increase pressure on pharmaceutical pricing. While we cannot predict whether legislative or regulatory proposals will be

22

adopted or what effect those proposals or managed care efforts, including those relating to Medicaid payments, might have on our business, the announcement and/or adoption of such proposals or efforts could increase costs and reduce or eliminate profit margins. Third-party insurance coverage might not be available to patients for our products. If government and other third-party payors do not provide adequate coverage and reimbursement levels for our products, the market acceptance of these products might be reduced.

We are dependent on third parties to manufacture our products.

We have limited experience and capabilities in manufacturing pharmaceutical products. We do not generally expect to engage directly in the manufacturing of products, but instead contract with others for these services. A limited number of manufacturers exist which are capable of manufacturing our marketed products and our product candidates. We might fail to contract with the necessary manufacturers or might contract with manufacturers on terms that may not be entirely acceptable to us. Our manufacturing strategy presents the following risks:

• the manufacture of products might be difficult to scale up when required and result in delays, inefficiencies and poor or low yields of quality products;

• some of our contracts contain purchase commitments that require us to make minimum purchases that might exceed needs or limit the ability to negotiate with other manufacturers, which might increase costs;

• the cost of manufacturing certain products might make them prohibitively expensive;

• delays in scale-up to commercial quantities and any change in manufacturers could delay clinical studies, regulatory submissions and commercialization of our products;

• manufacturers are subject to the FDA’s cGMP regulations and similar foreign standards, and we do not have control over compliance with these regulations by the third-party manufacturers; and

• if we need to change manufacturers, FDA and comparable foreign regulators would require new testing and compliance inspections and the new manufacturers would have to be educated in the processes necessary for the production of our products.

We are dependent on third parties to supply us with products.

We rely entirely on third parties to supply us with our commercially marketed products and our products under development. For example, Glenmark Pharmaceuticals Ltd., a corporation organized and located in India, manufactures and supplies us with crofelemer, an anti-secretory agent that we are developing for the treatment of HIV-associated diarrhea. The raw material for crofelemer grows in parts of South America. Glenmark obtains it from select countries in South America. The amount of resources Glenmark devotes to these activities and its ability to successfully obtain raw material is not within our control. Failure of Glenmark to manufacture and supply us with crofelemer, whether due to international political or economic conditions or otherwise, could delay development, increase expenses and delay or prevent us from generating revenue from crofelemer, if approved, any of which could have a material adverse effect on our business. Likewise, interruption of supply of any of our other products could have a material adverse effect on our business.

Our results of operations might fluctuate from period to period, and a failure to meet the expectations of investors or the financial community at large could result in a decline in our stock price.

Our results of operations might fluctuate significantly on a quarterly and annual basis due to, among other factors:

• the timing of regulatory approvals and product launches by us or competitors, including potential generic or over-the-counter competitors;

• the level of revenue generated by commercialized products, including potential increased purchases of inventory by wholesalers in anticipation of potential price increases or introductions of new dosages or bottle sizes, and subsequent lower than expected revenue as the inventory is used;

• the timing of any up-front payments that might be required in connection with any future acquisition of product rights;

23

• the timing of milestone payments that might be required to our current or future licensors;

• fluctuations in our development and other costs in connection with ongoing product development programs;

• the level of marketing and other expenses required in connection with product launches and ongoing product growth;

• the timing of the acquisition and integration of businesses, assets, products and technologies; and

• general and industry-specific business and economic conditions.

Our stock price is volatile.

Our stock price has been extremely volatile and might continue to be, making owning our stock risky. Between January 1, 2005 and March 10, 2009, the price of a share of our common stock varied from a low of $5.07 to a high of $22.79, as adjusted for the 3-for-2 stock split effected in July 2004.

The securities markets have experienced significant price and volume fluctuations unrelated to the performance of particular companies, including as a result of the current credit and economic crisis. In addition, the market prices of the common stock of many publicly traded pharmaceutical and biotechnology companies have in the past been and can in the future be expected to be especially volatile. Announcements of prescription trends, technological innovations or new products by us or our competitors, generic approvals, developments or disputes concerning proprietary rights, publicity regarding actual or potential medical results relating to products under development by us or our competitors, regulatory developments in both the United States and other countries, public concern as to the safety of pharmaceutical products, and economic and other external factors, as well as period-to-period fluctuations in financial results, might have a significant impact on the market price of our common stock.

Antitakeover provisions could discourage a takeover that stockholders consider to be in their best interests or prevent the removal of our current directors and management.

We have adopted a number of provisions that could have antitakeover effects or prevent the removal of our current directors and management. We have adopted a stockholder protection rights plan, commonly referred to as a poison pill. The rights plan is intended to deter an attempt to acquire us in a manner or on terms not approved by our board of directors. The rights plan will not prevent an acquisition that is approved by our board of directors. We believe our rights plan assisted in our successful defense against a hostile takeover bid earlier in 2003. Our charter authorizes our board of directors to determine the terms of up to 5,000,000 shares of undesignated preferred stock and issue them without stockholder approval. The issuance of preferred stock could make it more difficult for a third party to acquire, or discourage a third party from acquiring, voting control in order to remove our current directors and management. Our bylaws also eliminate the ability of the stockholders to act by written consent without a meeting or make proposals at stockholder meetings without giving us advance written notice, which could hinder the ability of stockholders to quickly take action that might be opposed by management. These provisions could make more difficult the removal of current directors and management or a takeover of Salix, even if these events could be beneficial to stockholders. These provisions could also limit the price that investors might be willing to pay for our common stock.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

In mid-2005, we moved our corporate headquarters to Morrisville, North Carolina, where we occupy approximately 77,000 square feet of office space under a lease expiring in 2015. We sub-leased our former corporate headquarters located in Raleigh, North Carolina, of approximately 26,000 square feet of office space under a lease expiring in 2011. We also lease a small amount of additional space in Palo Alto, California. We believe our existing facilities are adequate for our current needs and that suitable additional or alternative space will be available in the future on commercially reasonable terms as needed.

24

Item 3. Legal Proceedings

From time to time, we are party to various legal proceedings or claims, either asserted or unasserted, which arise in the ordinary course of business. Management has reviewed pending legal matters and believes that the resolution of such matters will not have a significant adverse effect on our financial condition or results of operations.

We are involved in a lawsuit against a company seeking FDA approval to market a generic version of our MoviPrep product. Norgine, B.V. and Norgine Europe, B.V. own U.S. Patent No. 7,169,381 (the ‘381 patent). The ‘381 patent is listed with the FDA as protecting our MoviPrep product. Norgine licensed MoviPrep and the ‘381 patent to us for commercialization in the United States. Novel Laboratories, Inc., filed an Abbreviated New Drug Application, or ANDA, with the FDA seeking approval to market a generic version of MoviPrep in the United States prior to the September 2024 expiration of the ‘381 patent. On May 14, 2008, we and Norgine filed a lawsuit in the United States District Court for the District of New Jersey against Novel for infringement of the ‘381 patent. Novel filed an Answer and Counterclaims on June 20, 2008. Novel denied infringement and asserted defenses of patent invalidity and unenforceability. No trial date has been set. We intend to vigorously defend the patent rights for MoviPrep.

We are also involved in a lawsuit against Novel because it is seeking FDA approval to market a generic version of our OsmoPrep product. CDC, LLC, owns U.S. Patent No. 5,616,346 (the ‘346 patent). The ‘346 patent is listed with the FDA as protecting our OsmoPrep product. CDC, by its predecessor, licensed OsmoPrep and the ‘346 patent to us for commercialization in the United States. Novel Laboratories, Inc., filed an ANDA with the FDA seeking approval to market a generic version of OsmoPrep in the United States prior to the May 2013 expiration of the ‘346 patent. On September 8, 2008, we filed a lawsuit in the United States District Court for the District of New Jersey against Novel for the infringement of the ‘346 patent. The lawsuit also joins CDC as a party. Novel filed an Answer and Counterclaims on December 16, 2008. Novel denied infringement and asserted defenses of patent invalidity. No trial date has been set. We intend to vigorously defend the patent rights for OsmoPrep.

On or about July 14, 2008, Strides Arcolab Limited filed a Citizens Petition with the FDA seeking permission to submit an ANDA for change of dosage form from tablet to capsule for a 200mg generic version of Xifaxan. We intend to vigorously enforce the regulatory and intellectual property rights regarding Xifaxan. We are unable to predict the outcome of any ensuing regulatory action or litigation at the present time.

Regulatory data exclusivity for Xifaxan 200mg tablets ends on or about May 24, 2009. Accordingly, the Office of Generic Drugs would have been able to accept an ANDA for Xifaxan tablets on or any time subsequent to May 24, 2008, if the applicant certified that its generic rifaximin does not infringe Salix’s patent. If this occurred, a Paragraph IV notification would have to be provided to us by the applicant. Although we do not possess any specific knowledge of any such filing at the current time, the expiration of data exclusivity could result in a challenge to the related intellectual property rights of Xifaxan 200mg tablets at any time in the future. We intend to vigorously enforce the patent rights for Xifaxan.

Item 4. Submission of Matters to a Vote of Security Holders

No matter was submitted to a vote of our stockholders during the fourth quarter of the year ended December 31, 2008.

Executive Officers of the Registrant

The following table sets forth information concerning our executive officers as of March 1, 2008:

Name	Age	Position
Carolyn J. Logan	60	President, Chief Executive Officer, and Director
Adam C. Derbyshire	43	Senior Vice President, Finance and Administration, and Chief Financial Officer
William P. Forbes	47	Vice President, Research and Development and Chief Development Officer

25

Carolyn J. Logan has served as President and Chief Executive Officer and as a member of the Board of Directors since July 2002. She previously served as Senior Vice President, Sales and Marketing from June 2000 to July 2002. Prior to joining us, Ms. Logan served as Vice President, Sales and Marketing of the Oclassen Dermatologics division of Watson Pharmaceuticals, Inc. from May 1997 to June 2000, and as Vice President, Sales from February 1997 to May 1997. Prior to that date, she served as Director, Sales of Oclassen Pharmaceuticals, Inc. from January 1993 to February 1997. Prior to joining Oclassen, Ms. Logan held various sales and marketing positions with Galderma Laboratories, Ulmer Pharmacal and Westwood Pharmaceuticals. Ms. Logan received a B.S. degree in Biology and Dental Hygiene from the University of North Carolina at Chapel Hill.

Adam C. Derbyshire has served as Senior Vice President, Finance and Administration and Chief Financial Officer since June 2003. Mr. Derbyshire previously served as Vice President, Finance and Administration and Chief Financial Officer from June 2000 to June 2003. From June 1999 to June 2000, Mr. Derbyshire was Vice President, Corporate Controller and Secretary of Medco Research, Inc., acquired by King Pharmaceuticals, Inc. in February 2000, Corporate Controller and Secretary of Medco from September 1995 to June 1999 and Assistant Controller of Medco from October 1993 to September 1995. Mr. Derbyshire received his B.S. degree from the University of North Carolina at Wilmington and his MBA from the University of North Carolina at Charlotte.

William P. Forbes joined Salix in January 2005 as Vice President, Research and Development, and Chief Medical Officer. From 2002 through 2004, Dr. Forbes was Vice President, Clinical Development and Regulatory Affairs of Metabasis Therapeutics, Inc. He has also worked for Otsuka America Pharmaceutical, Inc. in a variety of roles of increasing responsibility from 1991 to 2002 and Glaxo, Inc. from 1989 through 1991. He has extensive experience in clinical development, regulatory affairs and project management. Dr. Forbes received his Doctor of Pharmacy degree from Creighton University.

26

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity              Securities

Our common stock is traded on the Nasdaq Global Market under the symbol “SLXP”. The following table sets forth the high and low sales prices of our common stock, as reported on the Nasdaq Global Market for the eight quarters ended December 31, 2008.

	High		Low
Fiscal year ended December 31, 2007
First quarter	$	16.38	$	11.63
Second quarter		14.49		12.24
Third quarter		14.26		10.75
Fourth quarter		13.33		7.50
Fiscal year ended December 31, 2008
First quarter	$	8.18	$	5.40
Second quarter		7.86		6.06
Third quarter		9.10		5.34
Fourth quarter		10.47		5.07

On March 10, 2009 the closing price for the common stock as reported on the Nasdaq Global Market was $6.87. As of March 10, 2009 there were 234 stockholders of record, which excludes stockholders whose shares were held in nominee or street name by brokers.

The securities markets have from time to time experienced significant price and volume fluctuations unrelated to the operating performance of particular companies. Our stock has been particularly volatile, including for example the approximate 21.8% single-day drop on December 28, 2007, when three generic versions of our drug Colazal were approved. The market prices of the common stock of Salix and many publicly traded pharmaceutical and biotechnology companies have in the past and can in the future be expected to be especially volatile. Announcements of technological innovations or new products by us or our competitors, developments or disputes concerning proprietary rights, publicity regarding actual or potential medical results relating to products under development by us or our competitors, regulatory developments in both the United States and other countries, public concern as to the safety of pharmaceutical products and economic and other external factors, as well as period-to-period fluctuations in our financial results, might have a significant impact on the market price of our common stock.

27

Performance Graph

The following graph compares our cumulative total stockholder return from December 31, 2003 with those of the Nasdaq Composite Index and the Nasdaq Biotech Index and that all dividends were reinvested. The graph assumes that U.S. $100 was invested on December 31, 2003 in (1) our common stock, (2) the Nasdaq Composite Index and (3) the Nasdaq Biotech Index. The measurement points utilized in the graph consist of the last trading day in each calendar year, which closely approximates the last day of the respective fiscal year of the Company. The historical stock performance presented below is not intended to and may not be indicative of future stock performance.

	12/31/03		12/31/04		12/31/05		12/31/06		12/31/07		12/31/08
SLXP	$	100	$	116	$	116	$	80	$	52	$	58
Nasdaq Composite Index	$	100	$	109	$	110	$	121	$	132	$	79
Nasdaq Biotech Index	$	100	$	106	$	109	$	110	$	115	$	101

In July 2004, we effected a three-for-two stock split of our common stock. As a result of the stock split, stockholders as of the record date of June 30, 2004 received one additional common share for every two shares held on the record date. The payment date for the additional shares was July 13, 2004.

Dividend Policy

We have never declared or paid cash dividends on our common stock. We currently expect to retain future earnings, if any, for use in the operation and expansion of business and do not anticipate paying any cash dividends in the foreseeable future.

28

Item 6. Selected Financial Data

The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and the Notes thereto included elsewhere in this report.

Consolidated Statements of Operations Data:

	Year Ended December 31,
	2008			2007			2006			2005			2004
	(U.S. dollars, in thousands, except per share data)
Revenues:
Net product revenues	$	178,766		$	232,880		$	208,533		$	154,703		$	101,697
Revenues from collaborative agreements		—			2,912			—			200			3,799
Total revenues		178,766			235,792			208,533			154,903			105,496
Costs and expenses:
Cost of products sold		36,710			55,024			41,443			34,222			21,754
Fees and costs related to license agreements		7,105			1,850			1,296			100			1,837
Amortization of product rights and intangible assets		9,891			8,627			4,907			2,279			762
Research and development		76,630			71,947			47,917			34,547			20,366
Selling, general and administrative		95,088			86,492			82,636			70,823			54,128
In-process research and development		—			—			—			74,000			—
Total costs and expenses		225,424			223,940			178,199			215,971			98,847
Income (loss) from operations		(46,658	)		11,852			30,334			(61,068	)		6,649
Interest and other income (expense), net		(495	)		3,326			2,552			1,222			598
Income (loss) before income tax expense		(47,153	)		15,178			32,886			(59,846	)		7,247
Income tax (expense) benefit		116			(6,953	)		(1,376	)		(739	)		(408	)
Net income (loss)	$	(47,037	)	$	8,225		$	31,510		$	(60,585	)	$	6,839
Net income (loss) per share, basic(1)	$	(0.98	)	$	0.17		$	0.68		$	(1.55	)	$	0.19
Net income (loss) per share, diluted(1)	$	(0.98	)	$	0.17		$	0.65		$	(1.55	)	$	0.18
Shares used in computing net income (loss) per share, basic(1)		47,898			47,329			46,634			39,129			36,112
Shares used in computing net income (loss) per share, diluted(1)		47,898			48,678			48,369			39,129			38,930

Consolidated Balance Sheet Data:

	As of December 31,
	2008			2007			2006			2005			2004
Cash and cash equivalents	$	120,153		$	111,272		$	76,465		$	67,184		$	48,108
Short-term investments		—			—			—			998			4,000
Working capital		113,795			108,891			126,216			94,520			69,914
Total assets		401,147			397,102			323,123			282,472			107,864
Borrowings under credit facility		15,000			15,000			—			—			—
Convertible senior notes		60,000			—			—			—			—
Long term portion of capital lease obligations		791			612			—			—			—
Accumulated deficit		(151,775	)		(104,738	)		(112,963	)		(144,473	)		(83,888	)
Stockholders’ equity		250,823			292,570			277,551			239,853			86,687

(1) See Note 2 of Notes to Consolidated Financial Statements for an explanation of shares used in computing net income (loss) per share.

29

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

We are a specialty pharmaceutical company dedicated to acquiring, developing and commercializing prescription drugs used in the treatment of a variety of gastrointestinal disorders, which are those affecting the digestive tract. Our strategy is to:

• identify and acquire rights to products that we believe have potential for near-term regulatory approval or are already approved;

• apply our regulatory, product development, and sales and marketing expertise to commercialize these products; and

• use our approximately 150-member specialty sales and marketing team focused on high-prescribing U.S. gastroenterologists, who are doctors who specialize in gastrointestinal disorders, to sell our products.

Our current products demonstrate our ability to execute this strategy. As of December 31, 2008, our products were:

• XIFAXAN^® (rifaximin) Tablets 200 mg;

• MOVIPREP^® (PEG 3350, Sodium Sulfate, Sodium Chloride, Potassium Chloride, Sodium Ascorbate and Ascorbic Acid for Oral Solution);

• OSMOPREP™ (sodium phosphate monobasic monohydrate, USP and sodium phosphate dibasic anhydrous, USP) Tablets;

• VISICOL^® (sodium phosphate monobasic monohydrate, USP, and sodium phosphate dibasic anhydrous, USP) Tablets;

• AZASAN^® Azathioprine Tablets, USP, 75/100 mg;

• ANUSOL-HC^® 2.5% (Hydrocortisone Cream, USP), ANUSOL-HC^® 25 mg Suppository (Hydrocortisone Acetate);

• PROCTOCORT^® Cream (Hydrocortisone Cream, USP) 1% and PROCTOCORT^® Suppository (Hydrocortisone Acetate Rectal Suppositories) 30 mg;

• PEPCID^® (famotidine) for Oral Suspension;

• Oral Suspension DIURIL^® (Chlorothiazide);

• APRISO™ (mesalamine) extended-release capsules 0.375g, and

• COLAZAL^® (balsalazide disodium) Capsules 750 mg.

We generate revenue primarily by selling our products, namely prescription drugs, to pharmaceutical wholesalers. These direct customers resell and distribute our products to and through pharmacies to patients who have had our products prescribed by doctors. We currently market our products, and intend to market future products, if approved by the U.S. Food and Drug Administration, or FDA, to U.S. gastroenterologists and other physicians through our own direct sales force. In December 2000, we established our own field sales force to market Colazal in the United States. Currently, this sales force has approximately 100 sales representatives in the field and markets our approved products. Although the creation of an independent sales organization involved substantial costs, we believe that the financial returns from our direct product sales have been and will continue to be more favorable to us than those from the indirect sale of products through marketing partners. We enter into distribution or licensing relationships outside the United States and in certain markets in the U.S. where a larger sales organization is appropriate. Currently, our sales and marketing staff, including our sales representatives, consists of approximately 150 people.

Because demand for our products originates with doctors, our sales force calls on high-prescribing specialists, primarily gastroenterologists, and we monitor new and total prescriptions for our products as key performance indicators for our business. Prescriptions result in our products being used by patients, requiring our direct customers to

30

purchase more products to replenish their inventory. However, our revenue might fluctuate from quarter to quarter due to other factors, such as increased buying by wholesalers in anticipation of a price increase or because of the introduction of new products. Revenue could be less than anticipated in subsequent quarters as wholesalers’ increased inventory is used up.

Our primary product candidates currently under development and their status are as follows:

Compound	Indication	Status
Rifaximin	Hepatic encephalopathy	Phase III
Rifaximin	Irritable bowel syndrome	Phase III
Rifaximin	Travelers’ diarrhea prevention	Phase III
Rifaximin	C. difficile — associated diarrhea	Phase III
Vapreotide acetate	Acute esophageal variceal bleeding	Complete response submitted October 27, 2008
Metozolv™ (metoclopramide)	Gastroparesis and refractory gastroesophageal reflux	Complete response letter received February 26, 2009
Crofelemer	HIV-associated diarrhea	Phase III
Balsalazide disodium tablet	Ulcerative colitis	Complete response letter received December 22, 2008

CRITICAL ACCOUNTING POLICIES

General

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to sales of our products, bad debts, inventories, investments, intangible assets and legal issues. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results might differ materially from these estimates under different assumptions or conditions.

Methodologies used and assumptions selected by management in making these estimates, as well as the related disclosures, have been reviewed by and discussed with the Audit Committee of our Board of Directors.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

We recognize revenue in accordance with the SEC’s Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” as amended by Staff Accounting Bulletin No. 104 (together, “SAB 101”), and FASB Statement No. 48, “Revenue Recognition When Right of Return Exists” (“SFAS 48”). SAB 101 states that revenue should not be recognized until it is realized or realizable and earned. Revenue is realized or realizable and earned when all of the following criteria are met: (a) persuasive evidence of an arrangement exists; (b) delivery has occurred or services have been rendered; (c) the seller’s price to the buyer is fixed and determinable; and (d) collectibility is reasonably assured.

31

SFAS 48 states that revenue from sales transactions where the buyer has the right to return the product shall be recognized at the time of sale only if (1) the seller’s price to the buyer is substantially fixed or determinable at the date of sale, (2) the buyer has paid the seller, or the buyer is obligated to pay the seller and the obligation is not contingent on resale of the product, (3) the buyer’s obligation to the seller would not be changed in the event of theft or physical destruction or damage of the product, (4) the buyer acquiring the product for resale has economic substance apart from that provided by the seller, (5) the seller does not have significant obligations for future performance to directly bring about resale of the product by the buyer, and (6) the amount of future returns can be reasonably estimated. We recognize revenues for product sales at the time title and risk of loss are transferred to the customer, and the other criteria of SAB 101 and SFAS 48 are satisfied, which is generally at the time products are shipped. Our net product revenue represents our total revenues less allowances for customer credits, including estimated discounts, rebates, chargebacks, and product returns.

We establish allowances for estimated rebates, chargebacks and product returns based on numerous quantitative and qualitative factors, including:

• the number of and specific contractual terms of agreements with customers;

• estimated levels of inventory in the distribution channel;

• historical rebates, chargebacks and returns of products;

• direct communication with customers;

• anticipated introduction of competitive products or generics;

• anticipated pricing strategy changes by us and/or our competitors;

• analysis of prescription data gathered by a third-party prescription data provider;

• the impact of changes in state and federal regulations; and

• estimated remaining shelf life of products.

In our analyses, we use prescription data purchased from a third-party data provider to develop estimates of historical inventory channel pull-through. We utilize an internal analysis to compare historical net product shipments to estimated historical prescriptions written. Based on that analysis, we develop an estimate of the quantity of product in the channel that might be subject to various rebate, chargeback and product return exposures. At least quarterly for each product line, we prepare an internal estimate of ending inventory units in the distribution channel by adding estimated inventory in the channel at the beginning of the period, plus net product shipments for the period, less estimated prescriptions written for the period. Based on that analysis, we develop an estimate of the quantity of product in the channel that might be subject to various rebate, chargeback and product return exposures. This is done for each product line by applying a rate of historical activity for rebates, chargebacks and product returns, adjusted for relevant quantitative and qualitative factors discussed above, to the potential exposed product estimated to be in the distribution channel. Internal forecasts that are utilized to calculate the estimated number of months in the channel are regularly adjusted based on input from members of our sales, marketing and operations groups. The adjusted forecasts take into account numerous factors including, but not limited to, new product introductions, direct communication with customers and potential product expiry issues.

Consistent with industry practice, we periodically offer promotional discounts to our existing customers. These discounts are calculated as a percentage of the current published list price and are treated as off-invoice allowances. Accordingly, the discounts are recorded as a reduction of revenue in the period that the program is offered. In addition to promotional discounts, at the time that we implement a price increase, we generally offer our existing customers an opportunity to purchase a limited quantity of product at the previous list price. Shipments resulting from these programs generally are not in excess of ordinary levels, therefore, we recognize the related revenue upon shipment and include the shipments in estimating our various product related allowances. In the event we determine that these shipments represent purchases of inventory in excess of ordinary levels for a given wholesaler, the potential impact on product returns exposure would be specifically evaluated and reflected as a reduction in revenue at the time of such shipments.

32

Allowances for estimated rebates and chargebacks were $7.4 million and $9.7 million as of December 31, 2008 and 2007, respectively. The balances exclude amounts related to Colazal, which are included in the reserve discussed below. These allowances reflect an estimate of our liability for items such as rebates due to various governmental organizations under the Medicare/Medicaid regulations, rebates due to managed care organizations under specific contracts and chargebacks due to various organizations purchasing certain of our products through federal contracts and/or group purchasing agreements. We estimate our liability for rebates and chargebacks at each reporting period based on a methodology of applying the relevant quantitative and qualitative assumptions discussed above. Due to the subjectivity of our accrual estimates for rebates and chargebacks, we prepare various sensitivity analyses to ensure our final estimate is within a reasonable range as well as review prior period activity to ensure that our methodology is still reasonable. Had a change in one or more variables in the analyses (utilization rates, contract modifications, etc.) resulted in an additional percentage point change in the trailing average of estimated chargeback and rebate activity in 2008, we would have recorded an adjustment to revenues of approximately $2.1 million, or 1.0%, for the year.

Allowances for product returns were $26.6 million and $43.0 million as of December 31, 2008 and 2007, respectively. These allowances reflect an estimate of our liability for product that may be returned by the original purchaser in accordance with our stated return policy. These balances include $18.1 million and $34.6 million at December 31, 2008 and 2007, respectively, reflecting our estimate of Colazal that may be returned to us under our return policy as a result of the approval of three generic balsalazide capsule products by the Office of Generic Drugs on December 28, 2007. We estimate our liability for product returns at each reporting period based on historical return rates, the estimated inventory in the channel, and the other factors discussed above. Due to the subjectivity of our accrual estimates for product returns, we prepare various sensitivity analyses to ensure our final estimate is within a reasonable range as well as review prior period activity to ensure that our methodology is still reasonable. A change in assumptions that resulted in a 10% change in forecasted return rates for all products other than Colazal would have resulted in a change in total product returns liability at December 31, 2008 of approximately $1.5 million and a corresponding change in 2008 net product revenue of less than 1.0%.

Colazal, our balsalazide disodium capsule, accounted for a majority of the Company’s revenue prior to 2008. On December 28, 2007, the Office of Generic Drugs, or OGD, approved three generic balsalazide capsule products. As a result of these generic approvals, the Company expects the future sales of Colazal to be significantly less than historical sales of Colazal. At December 31, 2008 and 2007, respectively, $18.1 million and $34.6 million were recorded as a liability to reflect the Company’s estimate of the Company’s liability for Colazal that may be returned by the original purchaser in accordance with the Company’s stated return policy as a result of these generic approvals. This estimate was developed based on the following estimates:

• our estimate of the quantity and expiration dates of Colazal inventory in the distribution channel based on historical net product shipments less estimated historical prescriptions written;

• our estimate of future demand for Colazal based on the actual erosion of product demand for several comparable products that were previously genericized, and the most recent demand for Colazal prior to the generic approvals;

• the actual demand for Colazal experienced during 2008 subsequent to the generic approvals;

• our estimate of chargeback and rebate activity based on price erosion as a result of the generic approvals; and

• other relevant factors.

Due to the subjectivity of this estimate, the Company prepares various sensitivity analyses to ensure the Company’s final estimate is within a reasonable range. A change in assumptions that resulted in a 10% change in the quantity of Colazal inventory in the distribution channel would have resulted in a change in the Colazal return reserve of approximately $1.1 million and a corresponding change in 2008 net product revenue of less than 1%. A change in assumptions that resulted in a 10% change in the estimated future demand of Colazal would not have resulted in a change in the Colazal return reserve.

For the years ended December 31, 2008 and 2007, our absolute exposure for rebates, chargebacks and product returns has grown primarily as a result of increased sales of our existing products, the approval of new products and the

33

acquisition of products, and also as a result of the approval of generic balsalazide capsule products. Accordingly, reductions to revenue and corresponding increases to allowance accounts have likewise increased. The estimated exposure to these revenue-reducing items as a percentage of gross product revenue in the year ended December 31, 2008 and 2007 was 6.3% and 9.7% for rebates, chargebacks and discounts and was 7.2% and 3.3% for product returns excluding the Colazal return reserve, respectively. The differences between 2007 and 2008 were primarily due to the mix of products sold. Increases to the Colazal return reserve was 11.2% of gross product revenue in 2007.

During the fourth quarter of 2008 we recognized $9.1 million of net product revenue related to shipments to wholesalers of Apriso, which was approved by the FDA on October 31, 2008, and launched to physicians in late February 2009. We evaluated the “Criteria for Recognizing Revenue When Right of Return Exits” under paragraphs 6 and 8 of SFAS No. 48, and “other factors” conditions provided by the Staff within Staff Accounting Bulletin Topic 13(A)(4)(9). Based on our historical experience with Colazal, which has the same indication, is distributed through the same distribution channels and prescribed by the same physicians as Apriso, we have the ability to estimate returns for Apriso and therefore recognized revenue.

Inventories

Raw materials, work-in-process and finished goods inventories are stated at the lower of cost (which approximates actual cost on a first-in, first-out cost method) or market. In evaluating whether inventory is stated at the lower of cost or market, management considers such factors as the amount of inventory on hand and in the distribution channel, estimated time required to sell such inventory, remaining shelf life, and current and expected market conditions, including levels of competition, including generic competition.

We expense pre-approval inventory unless we believe it is probable that the inventory will be saleable. We capitalize inventory costs associated with marketed products and certain products prior to regulatory approval and product launch, based on management’s judgment of probable future commercial use and net realizable value. Capitalization of this inventory does not begin until the product candidate is considered to have a high probability of regulatory approval, which is generally after we have analyzed Phase III data or filed an NDA. If we are aware of any specific risks or contingencies that are likely to impact the expected regulatory approval process or if there are any specific issues identified during the research process relating to safety, efficacy, manufacturing, marketing or labeling of the product candidate, we do not capitalize the related inventory. Once we capitalize inventory for a product candidate that is not yet approved, we monitor, on a quarterly basis, the status of this candidate within the regulatory approval process. We could be required to expense previously capitalized costs related to pre-approval inventory upon a change in our judgment of future commercial use and net realizable value, due to a denial or delay of approval by regulatory bodies, a delay in the timeline for commercialization or other potential factors. On a quarterly basis, we evaluate all inventory, including inventory capitalized for which regulatory approval has not yet been obtained, to determine if any lower of cost or market adjustment is required. As it relates to pre-approval inventory, we consider several factors including expected timing of FDA approval, projected sales volume and estimated selling price.

Inventory at December 31, 2008 consisted of $8.5 million of raw materials, $6.5 million of work-in-process and $2.3 million of finished goods. Inventory at December 31, 2007 consisted of $7.5 million of raw materials, $3.6 million of work-in-process and $6.6 million of finished goods. As of December 31, 2008, we had recorded inventory reserves totaling $3.8 million, compared to $0.8 million as of December 31, 2007, to reduce inventories to their net realizable value. The increase in inventory reserves during 2008 is due to a reserve for inventory related to balsalazide tablets. In December 2008 we received a complete response letter from the FDA on the balsalazide tablet NDA, which indicated that based on its review, the FDA has determined that the application cannot be approved in its present form and that clinical data from an additional adequate and well-controlled clinical trial will be required in order to conduct further review of the NDA. We do not intend to conduct additional clinical investigation of balsalazide tablets in this indication, as a result we reserved the inventory related to balsalazide tablets.

Intangible Assets and Goodwill

The Company’s intangible assets consist of license agreements, product rights and other identifiable intangible assets, which result from product and business acquisitions. Goodwill represents the excess purchase price over the fair value of assets acquired and liabilities assumed in a business combination.

34

When the Company makes product acquisitions that include license agreements, product rights and other identifiable intangible assets, it records the purchase price of such intangibles, along with the value of the product-related liabilities that we assume, as intangible assets. The Company allocates the aggregate purchase price to the fair value of the various tangible and intangible assets in order to determine the appropriate carrying value of the acquired assets and then amortizes the cost of the intangible assets as an expense in the consolidated statements of operations over the estimated economic useful life of the related assets. In accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets”, the Company assesses the impairment of identifiable intangible assets whenever events or changes in circumstances indicate that the carrying value might not be recoverable. The Company believes the following factors could trigger an impairment review: significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for our overall business, and significant negative industry or economic trends.

In assessing the recoverability of its intangible assets, the Company must make assumptions regarding estimated future cash flows and other factors. If the estimated undiscounted future cash flows do not exceed the carrying value of the intangible assets, the Company must determine the fair value of the intangible assets. If the fair value of the intangible assets is less than the carrying value, the Company will recognize an impairment loss equal to the difference. The Company reviews goodwill for impairment on an annual basis, and goodwill and other intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

The Company assesses impairment of goodwill on an annual basis in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”.

In November 2003, the Company acquired from aaiPharma LLC for $2.0 million the exclusive right to sell 25, 75 and 100 milligram dosage strengths of azathioprine tablets in North America under the name Azasan. The purchase price was fully allocated to product rights and related intangibles and is being amortized over a period of ten years. Although Azasan does not have any patent protection, the Company believes ten years is an appropriate amortization period based on established product history and management’s experience. At December 31, 2008 and 2007, accumulated amortization for the Azasan intangible was $1.0 million and $0.8 million, respectively.

In June 2004, the Company acquired the exclusive U.S. rights to Anusol-HC 2.5% (hydrocortisone Cream USP), Anusol-HC 25 mg Suppository (Hydrocortisone Acetate), Proctocort Cream (Hydrocortisone Cream USP) 1% and Proctocort Suppositories (Hydrocortisone Acetate Rectal Suppositories, 30 mg) from King Pharmaceuticals, Inc. for $13.0 million. The purchase price was fully allocated to product rights and related intangibles and is being amortized over a period of ten years. Although Anusol-HC and Proctocort do not have any patent protection, the Company believes ten years is an appropriate amortization period based on established product sales history and management’s experience. At December 31, 2008 and 2007, accumulated amortization for the King product intangibles was $5.9 million and $4.6 million, respectively.

In September 2005, the Company acquired InKine Pharmaceutical Company, Inc. for $210.0 million. We allocated $74.0 million of the purchase price to in-process research and development, $9.3 million to net assets acquired and $37.0 million to specifically identifiable product rights and related intangibles with an ongoing economic benefit to us. The Company allocated the remaining $89.7 million to goodwill, which is not being amortized. The InKine product rights and related intangibles are being amortized over an average period of 14 years, which the Company believes is an appropriate amortization period due to the product’s patent protections and the estimated economic lives of the product rights and related intangibles. At December 31, 2008 and 2007, accumulated amortization for the InKine intangibles was $9.8 million and $6.8 million, respectively. There is no future research or development planned for the products purchased from InKine.

In December 2005, the Company entered into a License and Supply Agreement with Norgine B.V., granting Salix the exclusive right to sell a patent-protected, liquid PEG bowel cleansing product, NRL 944, in the United States. In August 2006, the Company received Food and Drug Administration marketing approval for NRL 944 under the branded name of MoviPrep. In January 2007 the United States Patent Office issued a patent providing coverage to

35

September 1, 2024. In August 2006, pursuant to the terms of the Agreement, Salix made a $15.0 million payment to Norgine. In December 2008, pursuant to the terms of the Agreement, Salix made a $5.0 million payment to Norgine. The Company is amortizing these milestone payments over a period of 17.3 years, which the Company believes is an appropriate amortization period due to the product’s patent protection and the estimated economic life of the related intangible. At December 31, 2008 and 2007, accumulated amortization for the MoviPrep intangible was $2.8 million and $1.2 million, respectively.

In February 2007, the Company entered into a Master Purchase and Sale and License Agreement with Merck & Co., Inc., to purchase the U.S. prescription pharmaceutical product rights to Pepcid Oral Suspension and Diuril Oral Suspension from Merck. The Company paid Merck $55.0 million at the closing of the transaction. The purchase price was fully allocated to product rights and related intangibles, and is being amortized over a period of 15 years. Although Pepcid and Diuril do not have any patent protection, the Company believes 15 years is an appropriate amortization period based on established product history and management experience. At December 31, 2008 and 2007, accumulated amortization for the Merck products was $6.9 million and $3.2 million, respectively.

In July 2002, the Company acquired the rights to develop and market a granulated formulation of mesalamine from Dr. Falk Pharma GmbH. On October 31, 2008, the FDA granted marketing approval for Apriso for the maintenance of remission of ulcerative colitis in adults. In November 2008, the Company made a $6.0 million milestone payment to Dr. Falk. The Company is amortizing this milestone payment over a period of 9.5 years, which the Company believes is an appropriate amortization period due to the product’s patent protection and the estimated economic life of the related intangible. At December 31, 2008, accumulated amortization for the Apriso intangible was $0.1 million.

Allowance for Uncollectible Accounts

Based on a review of specific customer balances, industry experience and the current economic environment, we currently reserve for specific past due accounts that may represent collection concerns plus a percentage of our outstanding trade accounts receivable balance as an allowance for uncollectible accounts, which at December 31, 2008 and 2007 was approximately $0.6 million and $3.1 million, respectively. Refer to “Schedule II—Valuation and Qualifying Accounts” for a roll-forward of the allowance for uncollectible accounts.

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturities from date of purchase of three months or less to be cash equivalents. The Company maintains its cash and cash equivalents in several different financial instruments with various banks and brokerage houses. This diversification of risk is consistent with Company policy to maintain liquidity and ensure the safety of principal. At December 31, 2008, cash and cash equivalents consisted primarily of demand deposits, overnight investments in Eurodollars, certificates of deposit and money market funds at reputable financial institutions and did not include any auction rate securities. The Company has not experienced any loss of principal or liquidity in any of its cash and cash equivalents subsequent to year-end through March 10, 2009.

Research and Development

The Company expenses research and development costs, both internal and externally contracted, as incurred. For nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities, the Company initially capitalizes the advance payment. Such amounts are then recognized as an expense as the related goods are delivered or the related services are performed. At December 31, 2007, the net asset related to on-going research and development activities to be charged to expense in future periods was $8.9 million and at December 31, 2008, the net liability related to on-going research and development activities was $12.7 million.

36

RESULTS OF OPERATIONS

Years Ended December 31, 2008, 2007 and 2006

Revenues

The following table summarizes net product revenues for the years ended December 31, 2008, 2007 and 2006:

	Year ended December 31,
	2008			2007			2006
Colazal	$	1,422		$	92,401		$	103,478
% of net product revenues		1	%		40	%		49	%
Xifaxan		79,928			64,260			51,628
% of net product revenues		45	%		28	%		25	%
Purgatives—MoviPrep/OsmoPrep/Visicol		62,862			47,693			45,502
% of net product revenues		35	%		20	%		22	%
Apriso		9,123			—			—
		5	%		—			—
Other—Anusol/Azasan/Diuril/Pepcid/Proctocort		25,431			28,526			7,925
% of net product revenues		14	%		12	%		4	%
Net product revenues	$	178,766		$	232,880		$	208,533

Revenues totaled $178.8 million, $235.8 million and $208.5 million for 2008, 2007 and 2006, respectively. Revenues for the years ended December 31, 2008 and 2006 consisted solely of net product revenues. Revenues for the year ended December 31, 2007 included net product revenues of $232.9 million and revenues from collaborative agreements of $2.9 million.

Net product revenues for 2008 were $178.8 million, compared to $232.9 million for 2007. The net product revenue decrease from 2007 to 2008 was primarily due to:

• decreased Colazal sales in 2008 as a result of the approval of three generic balsalazide capsule products on December 28, 2007;

• no additional sales to Watson Pharma, Inc. during 2008, compared to $2.2 million in sales to Watson Pharma, Inc. during the fourth quarter of 2007 in connection with their launch of the authorized generic;

• decreased net sales of Visicol due to an increase in the return reserve for a return from a small wholesaler; and

• decreased unit sales of Pepcid.

These decreases in net product revenue were partially offset by increases in net product revenues due to:

• price increases on our products;

• increased unit sales of Xifaxan, OsmoPrep and MoviPrep; and

• the sale of $9.1 million of Apriso in 2008 after FDA approval was received in October 2008.

Total estimated prescription growth from 2007 to 2008 was 9% for Xifaxan and 16% for our purgatives.

On December 28, 2007, the Office of Generic Drugs approved three generic balsalazide capsule products. As a result of these generic approvals, the Company expects the future sales of Colazal to be significantly less than historical sales of Colazal. At December 31, 2008 and 2007, respectively, $18.1 million and $34.6 million were recorded as a liability to reflect the Company’s estimate of the Company’s liability for Colazal that may be returned by the original purchaser in accordance with the Company’s stated return policy as a result of these generic approvals. This estimate was developed based on the following estimates:

• our estimate of the quantity and expiration dates of Colazal inventory in the distribution channel based on historical net product shipments less estimated historical prescriptions written;

37

• our estimate of future demand for Colazal based on the actual erosion of product demand for several comparable products that were previously genericized, and the actual demand for Colazal experienced during 2008 subsequent to the generic approvals;

• our estimate of chargeback and rebate activity based on actual chargeback and rebate activity during 2008 subsequent to the generic approvals; and

• other relevant factors.

Due to the subjectivity of this estimate, the Company prepares various sensitivity analyses to ensure the Company’s final estimate is within a reasonable range. A change in assumptions that resulted in a 10% change in the quantity of Colazal inventory in the distribution channel would have resulted in a change in the Colazal return reserve of approximately $1.1 million and a corresponding change in 2008 net product revenue of less than 1%. A change in assumptions that resulted in a 10% change in the estimated future demand of Colazal would not have resulted in a change in the Colazal return reserve.

Net product revenues for 2007 were $232.9 million, compared to $208.5 million for 2006. The net product revenue increase from 2006 to 2007 was primarily due to:

• price increases on our products;

• increased unit sales of Xifaxan;

• 41 weeks of sales for Pepcid, which we acquired during February 2007;

• increased unit sales of Colazal, offset by the Colazal return reserve recorded as a result of the approval of three generic balsalazide capsule products on December 28, 2007;

• $2.2 million in sales to Watson Pharma, Inc. during the fourth quarter of 2007 in connection with their launch of the authorized generic; and

• a full year of sales for OsmoPrep and MoviPrep, which were launched during the second and fourth quarters of 2006, respectively;

• partially offset by reduced unit sales of Visicol.

Total estimated prescription growth from 2006 to 2007 was 1% for Colazal, 35% for Xifaxan, and 98% for our purgatives.

Revenues from collaborative agreements for 2007 consists of an upfront payment of $1.5 million upon execution of an agreement to license exclusive rights to market OsmoPrep, under the name DIACOL™, in 28 territories in Europe to Dr. Falk Pharma GmbH of Freiberg, Germany; a $1.0 million milestone payment from Zeria Pharmaceutical Co., Ltd. of Tokyo, Japan as a result of their receipt of marketing approval of Visiclear^® Tablets, for colon cleansing in Japan; and $0.4 million upon execution of an agreement to license exclusive rights to market OSMOPREP™ in France to Mayoly — Spindler S.A.S of Chatou, France. Revenues from collaborative agreements for 2007 also include $12,000 in royalty income from sales of Visiclear^® by Zeria. We did not receive any revenues from collaborative agreements during 2006.

Costs and Expenses

Total costs and expenses were $225.4 million, $223.9 million and $178.2 million for 2008, 2007 and 2006, respectively. Higher operating expenses in absolute terms for 2008 compared to 2007 were due primarily to increased research and development activities; and increased selling, general and administrative expenses, offset by decreased cost of products sold related to the corresponding decrease in product revenue. Higher operating expenses in absolute terms for 2007 compared to 2006 were due primarily to increased research and development activities, increased cost of products sold related to the corresponding increase in product revenue, increased selling, general and administrative expenses due to the expansion of our infrastructure, marketing costs related to our launches of OsmoPrep in the second quarter of 2006 and MoviPrep in the fourth quarters of 2006, and the acquisition of Pepcid during February 2007.

38

Cost of Products Sold

Cost of products sold were $36.7 million, $55.0 million and $41.4 million for 2008, 2007 and 2006, respectively. Gross margin on total product revenue, excluding $9.9 million, $8.6 million and $4.9 million in amortization of product rights and intangible assets for 2008, 2007 and 2006, was 79%, 76% and 80% in 2008, 2007 and 2006, respectively. The decrease in cost of products sold in absolute dollars from 2007 to 2008 was primarily due to decreased sales of Colazal, partially offset by increased sales of Xifaxan, MoviPrep, OsmoPrep and Apriso. The lower gross margin in 2007 compared to 2008 is a result of the return reserve recorded in the fourth quarter of 2007 for Colazal as a result of the approval of three generic balsalazide capsule products.

The increase in cost of products sold in absolute dollars from 2006 to 2007 was primarily due to increased sales of Colazal and Xifaxan, a full year of sales for OsmoPrep and MoviPrep and the acquisition of Pepcid during February 2007. Cost of products sold does not include amortization of product rights and intangibles. Refer to “Critical Accounting Policies — Intangible Assets and Goodwill” above.

Fees and Costs Related to License Agreements

Fees and costs related to license agreements were $7.1 million, $1.9 million and $1.3 million in 2008, 2007 and 2006, respectively, and relate primarily to payments made to Debiovision, Cedars-Sinai, Biorex and Alfa Wassermann under the terms of their respective license agreements. The amount for 2008 includes $5.0 in upfront payments to Napo Pharmaceuticals in connection with the acquisition of the rights to crofelemer. The amount for 2007 also includes payments of $1.5 million to Clinical Development Capital, the successor licensor of Visicol^® and OsmoPrep, for its share of the German, Japanese and French milestone revenue of $2.9 million recognized during 2007.

Research and Development

Research and development expense was $76.6 million, $71.9 million and $47.9 million for 2008, 2007 and 2006, respectively. The increase in research and development expenses from 2007 to 2008 was due primarily to:

• initiation of our Phase III IBS studies of Xifaxan;

• continuation of our Phase III HE study of Xifaxan; and

• increased headcount costs;

• partially offset by reduced expenses related to development of our 1100mg balsalazide tablet submission completed in July 2007.

The increase in research and development expenses from 2006 to 2007 was due primarily to:

• the expansion of our Colazal life cycle management program through initiatives to strengthen and support our 1100mg balsalazide tablet submission;

• our development program for granulated mesalamine; and

• the costs associated with ongoing late-stage studies of Xifaxan.

Through December 31, 2008, we had incurred research and development expense of approximately $64.4 million for balsalazide, $73.9 million for rifaximin and $28.6 million for granulated mesalamine.

Due to the risks and uncertainties of the drug development and regulatory approval process, research and development expenditures are difficult to forecast and subject to unexpected changes. Effective January 1, 2008 we adopted EITF No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities”. EITF 07-3 states that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities should be deferred and capitalized. Such amounts should be recognized as an expense as the related goods are delivered or the related services are performed. Adoption of EITF No. 07-3 did not have a material effect on our consolidated financial position, results of operations or cash flows. We expect research and development costs to increase in absolute terms as we pursue

39

additional indications and formulations for rifaximin, initiate development for the budesonide product candidates we recently acquired from Dr. Falk, continue the clinical development of crofelemer, which we recently acquired from Napo, and if and when we acquire new products.

Selling, General and Administrative

Selling, general and administrative expenses were $95.1 million, $86.5 million and $82.6 million for 2008, 2007 and 2006, respectively. The increase from 2007 to 2008 was primarily due to:

• increased headcount costs;

• increased sales and marketing costs related to our purgative franchise;

• pre-marketing expenses related to Apriso, balsalazide tablets and metoclopramide-Zydis; and

• increased legal costs for to the patent litigation related to MoviPrep and OsmoPrep;

• partially offset by decreased marketing costs related to Colazal and Xifaxan.

The slight increase in absolute dollars from 2006 to 2007 was primarily due to:

• the expansion of our infrastructure related to OsmoPrep and MoviPrep;

• the acquisition of Pepcid; and

• the write-off of Colazal samples;

• partially offset by reduced spending on the launch of OsmoPrep.

We expect selling, general and administrative expenses to increase in absolute terms as we expand our sales and marketing efforts for our current products; the launch of Apriso and potential launches of Metoclopramide-Zydis and other indications for rifaximin, if approved.

Interest and Other Income (Expense), Net

Interest and other income (expense), net was ($0.5) million, $3.3 million and $2.6 million in 2008, 2007 and 2006, respectively. Interest and other income (expense), net for 2008 consisted of:

• $1.1 million of interest expense on our credit facility;

• $1.4 million of interest expense on our convertible notes issued in August 2008; and

• a $1.1 million non-cash charge to expense a portion of the unamortized costs related to the credit facility under EITF No. 98-14, “Debtor’s Accounting for Changes in Line-of-Credit or Revolving-Debt Arrangements”;

• partially offset by $3.1 million of interest and other income.

Interest and other income (expense), net for 2007 consisted of:

• $1.2 million received as final settlement of a legal matter initiated by InKine prior to our acquisition of InKine; and

• $3.4 million of interest income;

• partially offset by $1.3 million of interest expense on our credit facility which was closed in February 2007.

Interest and other income (expense), net for 2006 consisted of $2.6 million of interest income.

The increase in interest income from 2006 to 2007 was primarily due to higher average daily cash balances and increased short-term interest rates. Due to the current economic climate, future interest rates on our cash and cash equivalents, and as a result, interest income, will be lower than we experienced during 2008.

40

Provision for Income Tax

Income tax (benefit) expense was ($0.1) million, $7.0 million and $1.4 million in 2008, 2007 and 2006, respectively. Our effective tax rate was (0.2%), 45.8% and 4.2% in 2008, 2007 and 2006, respectively, due to utilization of net operating loss carryforwards. The higher than expected rate in 2007 was due to an increase in the valuation allowance for deferred taxes related to the $34.6 million reserve related to Colazal recorded in the fourth quarter.

At December 31, 2008, 2007 and 2006, we had U.S. federal net operating loss carryforwards of approximately $108.7 million, $37.0 million and $111.1 million, respectively. These carryforwards will expire on various dates beginning in 2020 through 2024 if not utilized. Utilization of the federal net operating loss and credit carryforwards may be subject to a substantial annual limitation due to the “change in ownership” provisions of the Internal Revenue Code. The annual limitation might result in the expiration of net operating losses and credits before utilization.

Quarterly Results of Operations

See Note 13 of Notes to Consolidated Financial Statements for a presentation of our quarterly results of operations for the years ended December 31, 2008 and 2007.

LIQUIDITY AND CAPITAL RESOURCES

From inception until first achieving profitability in the third quarter of 2004, we financed product development, operations and capital expenditures primarily from public and private sales of equity securities and from funding arrangements with collaborative partners. Since launching Colazal in January 2001, net product revenue has been a growing source of cash. On August 22, 2008 we closed an offering of $60.0 million in convertible senior notes due 2028. Net proceeds from the offering were $57.3 million. As of December 31, 2008, we had $120.2 million in cash and cash equivalents compared to $111.3 million as of December 31, 2007.

To date, the recent decline in the stock market, lack of credit availability and financial institution difficulties have had a limited effect on our business. As a result of the closing of our convertible note offering in August 2008, we believe our cash and cash equivalent balances should be sufficient to satisfy our cash requirements for the foreseeable future. At December 31, 2008, cash and cash equivalents consisted primarily of demand deposits, certificates of deposit, overnight investments in Eurodollars and money market funds at reputable financial institutions, and did not include any auction rate securities. We have not realized any material loss in principal or liquidity in any of our investments to date. However, continued declines in the stock market and deterioration in the overall economy could lead to a decrease in demand for our marketed products, which could have an adverse effect on our business, financial condition and results of operations.

Net cash used by operating activities was $20.9 million in 2008 and was primarily attributable to our net loss for the period, and product returns and chargebacks for Colazal, partially offset by collection of accounts receivable for product revenue recognized in the fourth quarter of 2007. Net cash provided by operating activities for 2007 and 2006 was $76.1 million and $17.9 million in 2007 and 2006, respectively. Positive operating cash flows in 2007 was primarily attributable to increased earnings before the Colazal return reserve noncash charge, and reduced accounts receivable and inventory balances in 2007. Positive operating cash flows in 2006 was primarily attributable to increased earnings, partially offset by increased accounts receivable balances due to increased sales in December 2006 and decreased accounts payable and accrued liability balances.

Net cash used in investing activities was $26.9 million in 2008 and was primarily attributable to the transfer of $15.0 million of cash to restricted cash as a result of the amendment of our credit facility, a $6.0 million milestone payment to Dr. Falk in connection with the approval of Apriso, and a $5.0 million sales milestone payment to Norgine for MoviPrep. Net cash used in investing activities was $59.4 million in 2007 and was primarily attributable to the acquisition of Pepcid for $55.0 million and the purchase of property and equipment. Net cash used in investing activities was $12.8 million in 2006 and was primarily attributable to the acquisition of MoviPrep and the purchase of property and equipment, partially offset by $1.0 million of investments that matured or were called by the issuers.

41

Net cash provided by financing activities of $56.6 million in 2008 consisted primarily of the proceeds of our convertible debt offering closed in August 2008. Net cash provided by financing activities of $18.1 million in 2007 consisted primarily of $15.0 million of borrowings under our credit facility entered into in February 2007, and the exercise of stock options. Net cash provided by financing activities of $4.2 million in 2006 consisted primarily of the exercise of stock options.

As of December 31, 2008, we had non-cancelable purchase order commitments for inventory purchases of approximately $28.3 million. We anticipate significant expenditures related to our on-going sales, marketing, product launch efforts and our on-going development efforts for rifaximin, our budesonide product candidates and crofelemer. To the extent we acquire rights to additional products, we will incur additional expenditures.

Our contractual commitments for non-cancelable purchase commitments of inventory, minimum lease obligations for all non-cancelable operating leases, debt and minimum capital lease obligations (including interest) as of December 31, 2008 were as follows (in thousands):

	Total		< 1 year		1-3 years		3-5 years		> 5 years
Operating leases	$	10,956	$	2,116	$	5,388	$	2,952	$	500
Purchase commitments		28,294		28,294		—		—		—
Convertible senior notes(1)		124,900		3,300		6,600		6,600		108,400
Borrowings under credit facility(2)		16,496		472		945		15,079		—
Capital lease obligations		1,717		901		813		3		—
Total	$	182,363	$	35,083	$	13,746	$	24,634	$	108,900

(1) Contractual interest obligations related to our convertible senior notes total $64.9 million at December 31, 2008, including $3.3 million, $6.6 million, $6.6 million and $48.4 million due in one year or less, two to three years, four to five years, and greater than five years, respectively.

(2) Contractual interest obligations related to our credit facility total $1.5 million based on the interest rate at December 31, 2008, including $0.5 million, $0.9 million, and $0.1 million due in one year or less, two to three years, and four to five years, respectively.

We enter into license agreements with third parties that may require us to make royalty, milestone or other payments that are contingent upon the occurrence of certain future events linked to the successful development and commercialization of pharmaceutical products. Certain of the payments may be contingent upon the successful achievement of an important event in the development life cycle of these pharmaceutical products, which may or may not occur. If required by the agreements, we may make royalty payments based upon a percentage of the sales of a pharmaceutical product if regulatory approval to market this product is obtained and the product is commercialized. Because of the contingent nature of these payments, we have not attempted to predict the amount or period in which such payments would possibly be made and thus they are not included in the table of contractual obligations.

In February 2007, we entered into a $100.0 million revolving credit facility that matures in February 2012. On August 4, 2008 we amended the credit facility to waive defaults that may have arisen as a result of the approval of three generic balsalazide capsule products by the Office of Generic Drugs on December 28, 2007 and reduced the credit facility to $20.0 million. On August 22, 2008 we further amended the credit facility to allow us to issue the convertible notes described below. At December 31, 2008, $15.0 million was outstanding under the credit facility. Virtually all of our assets and those of our subsidiaries secure our obligations under the credit facility.

The credit facility contains various representations, warranties and affirmative, negative and financial covenants customary for financings of this type. The credit facility bears interest at a rate per annum equal to, at our option, either (a) a base rate equal to the higher of (i) the Federal Funds Rate plus 1/2 of 1% and (ii) the Bank of America prime rate, or (b) a Eurodollar rate (based on LIBOR), plus 0.00% for base rate borrowings and 1.00% for Eurodollar rate borrowings. The rate as of December 31, 2008 on our outstanding borrowings was 3.15%. We must maintain an amount equal to the amount outstanding under the credit facility on deposit with the Administrative Agent of the credit facility and maintain a minimum of $23.0 million in cash on our balance sheet. At December 31, 2008, restricted cash of $15.0 million represents the collateral on deposit with the Administrative Agent related to the credit facility. At December 31, 2008 we were in compliance with applicable covenants under the credit facility.

42

On August 22, 2008 we closed an offering of $60 million in convertible senior notes (“Notes”) due 2028. Net proceeds from the offering were $57.3 million. The Notes are governed by an indenture, dated as of August 22, 2008, between us and U.S. Bank National Association, as trustee. The Notes bear interest at a rate of 5.5% per year, payable semiannually in arrears on February 15 and August 15 of each year, beginning on February 15, 2009. The Notes will mature on August 15, 2028, unless previously converted or repurchased in accordance with their terms prior to such date. The Notes are senior unsecured obligations, and rank (i) equally to any of our existing and future unsecured senior debt, (ii) senior to any of our future indebtedness that is expressly subordinated to these Notes, and (iii) effectively junior to any secured indebtedness to the extent of the value of the assets securing such indebtedness. We may redeem the Notes, in whole or in part, at any time after August 15, 2013 for cash equal to the principal amount of the Notes to be redeemed, plus any accrued and unpaid interest. On August 15, 2013, August 15, 2018 and August 15, 2023 or upon the occurrence of a “fundamental change”, as defined in the Indenture, the holders may require us to repurchase all or a portion of the Notes for cash at 100% of the principal amount of the Notes being purchased, plus any accrued and unpaid interest.

The Notes are convertible into approximately 6,486,000 shares of our common stock under certain circumstances prior to maturity at a conversion rate of 108.0847 shares per $1,000 principal amount of Notes, which represents a conversion price of approximately $9.25 per share, subject to adjustment under certain conditions. Holders of the Notes may convert their Notes at their option on any day prior to the close of business on the business day immediately preceding the maturity date of August 15, 2028 only if one or more of the following conditions is satisfied: (1) during any fiscal quarter commencing after September 30, 2008, if the last reported sale price of our common stock for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is equal to or more than 130% of the conversion price of the Notes on the last day of such preceding fiscal quarter; (2) during the five business day period following any five consecutive trading day period in which the trading price for the Notes, per $1,000 principal amount of the Notes, for each such trading day was less than 98% of the product of the last reported sale price of our common stock and the conversion rate of the Notes on such date; (3) if we enter into specified corporate transactions; or (4) upon a redemption notice. The Notes will be convertible, regardless of whether any of the foregoing conditions has been satisfied, on or after March 15, 2028 at any time prior to the close of business on the business day immediately preceding the stated maturity date of August 15, 2028. Upon conversion, we will pay cash, shares of our common stock or a combination of cash and stock, as determined by us in our discretion.

As long as the Notes are outstanding, we are prohibited from incurring any debt other than “permitted debt”, as defined in the Indenture, except that we may incur debt in certain circumstances, including meeting a consolidated leverage ratio test and a consolidated fixed charge coverage ratio test. We may refinance our existing credit facility provided the refinanced credit facility contains substantially the same restrictive covenants with respect to financial ratios as the existing credit facility did as of August 22, 2008.

As of December 31, 2008, we had an accumulated deficit of $151.6 million, and cash and cash equivalent balances of $120.2 million. We expect to be unprofitable and experience negative cash flow during 2009. We believe our cash and cash equivalent balances should be sufficient to satisfy our cash requirements for the foreseeable future. Based on our current projections, we believe that we will be able to return to a positive cash flow position without requiring additional capital. However, we might seek additional debt or equity financing or both to fund our operations or acquisitions, and our actual cash needs might vary materially from those now planned because of a number of factors including: general economic conditions; FDA and foreign regulatory processes; the status of competitive products, including potential generics; intellectual property risks; the actual amount of Colazal returns we receive compared to our current estimates; our ability to maintain our current credit facility; our success selling products; the results of research and development activities; establishment of and change in collaborative relationships; technological advances by us and other pharmaceutical companies; and whether we acquire rights to additional products. If we incur more debt, we might be restricted in our ability to raise additional capital and might be subject to financial and restrictive covenants. If we issue additional equity, our stockholders could suffer dilution. We might also enter into additional collaborative arrangements that could provide us with additional funding in the form of equity, debt, licensing, milestone and/or royalty payments. We might not be able to enter into such arrangements or raise any additional funds on terms favorable to us or at all.

43

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In December 2007, the FASB issued SFAS No. 141 (revised 2007) “Business Combinations” (SFAS 141R). SFAS 141R is effective for fiscal years beginning on or after December 15, 2008, which means that we will adopt SFAS 141R in our fiscal year 2009. SFAS 141R replaces SFAS 141 “Business Combinations” and requires that the acquisition method of accounting (which SFAS 141 called the purchase method) be used for all business combinations, as well as for an acquirer to be identified for each business combination. SFAS 141R establishes principles and requirements for how the acquirer: (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and (iii) determines what information to disclose to enable users of financial statements to evaluate the nature and financial affects of the business combination. We do not believe the adoption of SFAS 141R will have a material impact on our consolidated financial position, results of operations and cash flows; however, our accounting for acquisitions after the adoption of SFAS 141R may produce materially different results than accounting under the current guidance.

In December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (SFAS 160). SFAS 160 is effective for fiscal years beginning on or after December 15, 2008, which means that we will adopt SFAS 160 in our fiscal year 2009. This statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 changes accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity in the Consolidated Financial Statements. SFAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements of SFAS 160 shall be applied prospectively. We do not believe the adoption of SFAS 160 will have a material impact on our consolidated financial position, results of operations and cash flows.

In May 2008, the FASB issued FASB Staff Position (“FSP”) No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (including Partial Cash Settlement)” which is effective for financial statements issued for fiscal years beginning after December 15, 2008, and early adoption is not permitted. Upon adoption, this FSP will be applied retrospectively to all periods presented and the cumulative effect of the change in accounting principle on periods prior to those presented will be recognized as of the beginning of the first period presented. This FSP applies to convertible debt instruments that may be settled in cash and requires separate accounting for the liability and equity components of the convertible debt. We are currently evaluating the impact of the adoption of this FSP. Our convertible Notes may be settled in cash, as a result, upon adoption of the FSP on January 1, 2009, we will be required to separately account for the liability and equity components of the convertible debt instrument by allocating the proceeds from issuance of the instrument between the liability component and the embedded conversion option, or equity component. This allocation will be done by first determining the fair value of similar Notes that do not include the embedded conversion option, which equals the liability component. The excess of the initial proceeds received from the convertible Notes over the amount allocated to the liability component will be allocated to the embedded conversion option, or equity component. This excess will be reported as a debt discount and subsequently amortized as interest cost, using the interest method, through August 2013, the first scheduled date on which the holders have the option to require the Company to repurchase the Notes. This will result in interest expense for periods subsequent to adoption related to the convertible debt in excess of the coupon rate of 5.5%. We currently believe approximately 25% of the initial proceeds will be allocated to the equity component, and the effective interest rate, including the amortization of the debt discount, on the liability component will be approximately 12%.

CAUTIONARY STATEMENT

We operate in a highly competitive environment that involves a number of risks, some of which are beyond our control. The following statement highlights some of these risks. For more detail, see “Item 1A . Risk Factors”.

Statements contained in this Form 10-K that are not historical facts are or might constitute forward-looking statements under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Although we believe the expectations reflected in such forward-looking statements are based on reasonable assumptions, our expectations might not be attained. Forward-looking statements involve known and unknown risks that could cause

44

actual results to differ materially from expected results. Factors that could cause actual results to differ materially from our expectations expressed in the report include, among others: general economic conditions; our need to return to profitability; intense competition, including from generics; the high cost and uncertainty of the research, clinical trials and other development activities involving pharmaceutical products; the unpredictability of the duration and results of regulatory review of New Drug Applications and Investigational New Drug Applications; the possible impairment of, or inability to obtain intellectual property rights and the costs of obtaining such rights from third parties; our dependence on our first nine pharmaceutical products, particularly Colazal and Xifaxan, and the uncertainty of market acceptance of our products; the uncertainty of obtaining, and our dependence on, third parties to manufacture and sell our products; and results of future litigation and other risk factors detailed from time to time in our other SEC filings.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Our purchases of raw materials are denominated primarily in Euros. Translation into our reporting currency, the U.S. dollar, has not historically had a material impact on our financial position. Additionally, our net assets denominated in currencies other than the U.S. dollar have not historically exposed us to material risk associated with fluctuations in currency rates. Given these facts, we have not considered it necessary to use foreign currency contracts or other derivative instruments to manage changes in currency rates. However, these circumstances might change.

Item 8. Financial Statements and Supplementary Data

The information required by this Item is set forth in the Consolidated Financial Statements and Notes thereto beginning at page F-1 of this Report.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A. Control and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) are designed only to provide reasonable assurance that information to be disclosed in our Exchange Act Reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s President and Chief Executive Officer and Senior VP, Finance and Administration and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e). Based upon this evaluation, the Company’s President and Chief Executive Officer and Senior VP, Finance and Administration and Chief Financial Officer have concluded that our disclosure controls and procedures are effective to provide the reasonable assurance discussed above.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting is designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. A control system, no matter how well designed and operated, can only provide reasonable, not absolute, assurance that the objectives of the control system are met and must reflect the fact that there are resource constraints that require management to consider the benefits of internal controls relative to their costs. Because of these inherent limitations, management does not expect that our internal controls over financial reporting will prevent all error and all fraud. Under the supervision and with the participation of our management, including our CEO and our Senior VP, Finance and Administration and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2008.

45

The effectiveness of our internal control over financial reporting as of December 31, 2008, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included on page F-2 herein.

Changes in Internal Control over Financial Reporting

There was no change in our internal controls over financial reporting during the fourth quarter of the period covered by this Annual Report that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

Item 9B. Other Information

Not applicable.

46

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Information required by this Item concerning our directors is incorporated by reference from the section captioned “Proposal One—Election of Directors” contained in our proxy statement related to the 2009 Annual Meeting of Stockholders scheduled to be held on June 18, 2009, which we intend to file with the SEC within 120 days of the end of our fiscal year pursuant to General Instruction G(3) of Form 10-K.

The Board of Directors has determined that the members of the Audit Committee are independent as defined in Rule 4200(a)(15) of the National Association of Securities Dealers’ listing standards. The Board of Directors has also determined that John F. Chappell, Thomas W. D’Alonzo, William Harral III and William P. Keane are “audit committee financial experts” as defined in Item 401(h) of Regulation S-K.

Our Board of Directors adopted a code of conduct that applies to all of our directors and employees. Our Board also adopted a separate code of ethics for our Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer and Controller, or persons performing similar functions. We will provide copies of our code of conduct and code of ethics without charge upon request. To obtain a copy of our code of conduct and code of ethics, please send your written request to Salix Pharmaceuticals, Ltd., 1700 Perimeter Park Drive, Morrisville, NC 27560, Attn: General Counsel. In addition, you can find those codes on our website at www.salix.com/pdf/Salix_Code_Bus_Cond.pdf.

The information required by this Item concerning executive officers of the Registrant is set forth at the end of Part I of this report.

The information required by this Item concerning compliance with Section 16(a) of the United States Securities Exchange Act of 1934, as amended, is incorporated by reference from the section of the proxy statement captioned “—Section 16(a) Beneficial Ownership Reporting Compliance.”

Item 11. Executive Compensation

The information required by this Item is incorporated by reference to the information under the sections captioned “—Grant of Plan Based Awards for 2008,” “—Outstanding Equity Awards at 2008 Fiscal Year End,” “—Option Exercises and Stock Vested in 2008,” “—Director Compensation For 2008,” “—Compensation Discussion and Analysis,” “—Summary Compensation Table,” “—Compensation Committee Report,” and “—Compensation Committee Interlocks and Insider Participation” contained in the proxy statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table sets forth the indicated information as of December 31, 2008 with respect to our equity compensation plans:

Plan Category	(a) Number of Securities to be issued Upon Exercise of Outstanding Options, Warrants and Rights, or Vesting of Restricted Shares	(b) Weighted Average Exercise Price of Outstanding Options, Warrants, Rights and Restricted Shares		(c) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Related in Column (a))
Equity Compensation Plans Approved by Security Holders	6,266,688	$	12.55	836,622
Equity Compensation Plans Not Approved by Security Holders	—		—	—
Total	6,266,688	$	12.55	836,622

47

The other information required by this Item is incorporated by reference to the information under the section captioned “—Security Ownership of Management and Certain Beneficial Owners.”

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this Item is incorporated by reference to the information under the section captioned “—Transactions with Related Persons” and “Proposal One—Election of Directors—Corporate Governance Matters” contained in the proxy statement.

Item 14. Principal Accountant Fees and Services

The information required by this Item is incorporated by reference to the information under the section captioned “—Audit Committee Report” contained in the proxy statement.

48

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a) 1. Financial Statements

The following statements are filed as part of this report:

	Page
Report of Independent Registered Public Accounting Firm	F-2
Report of Independent Registered Public Accounting Firm on Financial Statements	F-3
Consolidated Balance Sheets	F-4
Consolidated Statements of Operations	F-5
Consolidated Statements of Stockholders’ Equity	F-6
Consolidated Statements of Cash Flows	F-7
Notes to Consolidated Financial Statements	F-8

     2. Financial Statement Schedules

Schedule II—Valuation and Qualifying Accounts F-30

Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto.

     3. Exhibits

Exhibit Number	Description of Document	Registrant’s Form	Dated	Exhibit Number	Filed Herewith
1.1	Purchase Agreement dated August 18, 2008 by and between Salix Pharmaceuticals, Ltd. and Banc of America Securities LLC.	8-K	8/22/08	1.1
2.1	Agreement and Plan of Merger dated June 23, 2005 among Salix Pharmaceuticals, Ltd., InKine Pharmaceutical Company, Inc. and Metal Acquisition Corp.	8-K	6/24/05	2.1
2.2	Certificate of Domestication.	S-3	02/12/02	2.1
2.3*	Asset Purchase Agreement dated June 30, 2004 between King Pharmaceuticals, Inc., Monarch Pharmaceuticals, Inc., Parkedale Pharmaceuticals, Inc., Salix Pharmaceuticals, Inc. and Salix Pharmaceuticals, Ltd.	10-Q	08/09/04	2.2
3.1	Certificate of Incorporation, as amended.	10-Q	05/10/06	3.1
3.2	Amended and Restated Bylaws.	8-K	09/02/03	3.2
4.1	Indenture dated August 22, 2008 by and between Salix Pharmaceuticals, Ltd. and U.S Bank, National Association.	8-K	08/22/08	4.1
4.2	Form of 5.5% Convertible Senior Note due 2028 (included in Exhibit 4.1).	8-K	08/22/08	4.2
10.3	Form of 1996 Stock Plan for Salix Holdings, Ltd., as amended September 2000 and form of Notice of Stock Option Grant and Stock Option Agreement thereunder, as amended March 12, 2001.	10-Q	08/09/04	10.3

49

Exhibit Number	Description of Document	Registrant’s Form	Dated	Exhibit Number	Filed Herewith
10.4*	Amendment Agreement effective as of September 17, 1992 by and among Glycyx Pharmaceuticals, Ltd., Salix Pharmaceuticals, Inc. and Biorex.	S-1	08/15/97	10.4
10.5*	License Agreement, dated September 17, 1992 between Biorex Laboratories Limited and Glycyx Pharmaceuticals, Ltd. and letter agreement amendments thereto.	S-1	08/15/97	10.5
10.6*	Research and Development Agreement dated September 21, 1992 between Glycyx Pharmaceuticals, Ltd. and AB Astra and letter agreement amendments thereto.	S-1	08/15/97	10.6
10.7*	Distribution Agreement dated September 21, 1992 between Glycyx Pharmaceuticals, Ltd. and AB Astra.	S-1	08/15/97	10.7
10.8*	Amended and Restated License Agreement by and between Salix Pharmaceuticals, Inc. and Biorex Laboratories, Limited, dated April 16, 1993.	S-1	08/15/97	10.8
10.9*	Co-Participation Agreement, dated April 30, 1993 between Salix Pharmaceuticals, Inc. and AB Astra as amended by Amendment No. 1 thereto effective September 30, 1993.	S-1	08/15/97	10.9
10.9.1	Letter Agreement dated October 16, 1998 to Co-Participation Agreement dated April 30, 1993 by and between Salix Pharmaceuticals, Inc. and AB Astra.	10-Q	11/16/98	10.9.1
10.11*	Distribution Agreement, dated September 23, 1994 between Glycyx Pharmaceuticals, Ltd. and Menarini International Operations Luxembourg SA and amendments thereto.	S-1	08/15/97	10.11
10.12*	License Agreement, dated June 24, 1996, between Alfa Wassermann S.p.A. and Salix Pharmaceuticals, Ltd.	S-1	08/15/97	10.12
10.13*	Supply Agreement, dated June 24, 1996, between Alfa Wassermann S.p.A. and Salix Pharmaceuticals, Ltd.	S-1	08/15/97	10.13
10.22	Termination and Settlement Agreement dated as of December 22, 1999, by and between Astra AB and Salix Pharmaceuticals Inc. (a wholly owned subsidiary of Salix Pharmaceuticals, Ltd.).	8-K	12/28/99	10.22
10.23	Agreement dated December 22, 1999, between Glycyx Pharmaceuticals, Ltd. and Astra AB.	8-K	12/28/99	10.23
10.25*	Agreement dated May 17, 2000 between Glycyx Pharmaceuticals, Ltd. and Shire Pharmaceuticals Group plc.	10-Q	08/14/00	10.25
10.26*	Agreement dated May 17, 2000 between Biorex Laboratories Limited and Glycyx Pharmaceuticals, Ltd.	10-Q	08/14/00	10.26
10.29	Lease Agreement dated June 30, 2000 by and between Colonnade Development, LLC and Salix Pharmaceuticals, Inc.	10-Q	08/14/01	10.29
10.30*	License Agreement between Biorex Laboratories Limited and Glycyx Pharmaceuticals, Ltd. dated August 22, 2001.	10-Q	11/14/01	10.30

50

Exhibit Number	Description of Document	Registrant’s Form	Dated	Exhibit Number	Filed Herewith
10.31	Form of Employment Agreement for executive officers.	10-Q	11/14/01	10.31
10.32*	License Agreement by and between Salix Pharmaceuticals, Inc. and Dr. Falk Pharma GmbH dated July 15, 2002.	10-Q	11/14/02	10.32
10.36	Rights Agreement, dated as of January 10, 2003, between Salix Pharmaceuticals, Ltd. and Computershare Investor Services LLC, as Rights Agent.	8-K	01/10/03	10.36
10.37	Common Stock Purchase Agreement dated November 6, 2003 among Salix Pharmaceuticals, Ltd. and the investors listed therein.	8-K	11/10/03	10.37
10.39*	License Agreement dated October 17, 2003, between Glycyx Pharmaceuticals, Ltd (a wholly owned subsidiary of Salix Pharmaceuticals, Ltd.) and Chong Kun Dang Pharmaceutical Corporation.	10-Q	11/14/03	10.39
10.40*	Amendment Agreement dated November 24, 2003 between Salix Pharmaceuticals, Inc. and Dr. Falk Pharma Gmbh.	10-K	03/12/04	10.40
10.41*	License Agreement dated October 31, 2003 between aaiPharma LLC, aaiPharma Inc. and Salix Pharmaceuticals, Ltd.	10-K	03/12/04	10.41
10.44*	Supply Agreement dated June 30, 2004 between King Pharmaceuticals, Inc., Parkedale Pharmaceuticals, Inc., Salix Pharmaceuticals, Inc. and Salix Pharmaceuticals, Ltd.	10-Q	08/09/04	10.44
10.45	License Assignment and Consent Agreement dated June 30, 2004 between Parkedale Pharmaceuticals, Inc., King Pharmaceuticals, Inc., Salix Pharmaceuticals, Inc., Salix Pharmaceuticals, Ltd., Warner-Lambert Company LLC and Parke, Davis & Company LLC.	10-Q	08/09/04	10.45
10.46	Assignment of Trademarks Agreement dated June 30, 2004 between Parkedale Pharmaceuticals, Inc. and Salix Pharmaceuticals, Inc.	10-Q	08/09/04	10.46
10.47	License Agreement dated June 30, 2004 between Monarch Pharmaceuticals, Inc., Parkedale Pharmaceuticals, Inc., King Pharmaceuticals, Inc., Salix Pharmaceuticals, Inc. and Salix Pharmaceuticals, Ltd.	10-Q	08/09/04	10.47
10.48	Office lease dated as of November 24, 2004 between Salix Pharmaceuticals, Ltd. And Duke Realty Limited Partnership.	8-K	12/13/04	10.48
10.49	Co-Promotion Agreement dated March 2, 2005 between Salix Pharmaceuticals, Inc. and Altana Pharma US, Inc.	10-Q/A	08/23/05	10.49
10.50	2005 Stock Plan and forms of Notice of Option Grant and Stock Option Agreement.	S-8	06/30/05	10.50
10.51	Termination Agreement dated August 19, 2005 between Salix Pharmaceuticals, Inc. and Altana Pharma US, Inc.	8-K	08/22/05	10.51

51

Exhibit Number	Description of Document	Registrant’s Form	Dated	Exhibit Number	Filed Herewith
10.53	License and Supply Agreement dated as of December 7, 2005 between Salix Pharmaceuticals, Inc. and Norgine B.V.	8-K	12/13/05	10.53
10.54	Form of Restricted Stock Grant to be granted pursuant to the 2005 Stock Plan.	10-K	03/16/06	10.54
10.55	License Agreement entered into on June 18, 2006 between Cedars-Sinai Medical Center and Salix Pharmaceuticals, Inc.	8-K	07/05/06	10.55
10.56	Development and License Agreement, dated September 5, 2006 with Debiovision Inc.	10-Q	11/09/06	10.56
10.57	$100.0 million Credit Facility by and among Salix Pharmaceuticals, Ltd., Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, Wachovia Bank, National Association, as Syndication Agent, and RBC Centura Bank, as Documentation Agent, and the Other Lenders Party thereto, and Banc of America Securities LLC, as Sole Lead Arranger and Sole Book Manager, dated February 22, 2007.	8-K	02/28/06	10.57
10.58*	Master Purchase and Sale and License Agreement dated February 22, 2007 between Merck & Co., Inc. and Salix Pharmaceuticals, Ltd.	10-Q	5/10/07	10.58
10.59*	License Agreement dated April 16, 2007 between Salix Pharmaceuticals, Inc. and Dr. Falk Pharma GmbH.	10-Q	5/10/07	10.59
10.60*	Co-Promotion Agreement dated September 4, 2007, with Eisai Inc.	10-Q	8/09/07	10.60
10.61**	Supply and Distribution Agreement between Salix Pharmaceuticals, Inc. and Watson Pharma, Inc.	10-K	3/14/08	10.61
10.62*	License Agreement dated March 13, 2008 between Dr. Falk Pharma GmbH and Salix Pharmaceuticals, Inc.	10-Q	5/07/08	10.62
10.63	Waiver and First Amendment to Credit Agreement, by and among Salix Pharmaceuticals, Ltd., Bank of America, N.A., as Administrative Agent, and the lender parties thereto, dated as of August 4, 2008	10-Q	8/05/08	10.63
10.64**	Collaboration Agreement between Napo Pharmaceuticals, Inc. and Salix Pharmaceuticals, Inc.				X
10.65**	Manufacturing and Supply Agreement between Salix Pharmaceuticals, Inc. and Glenmark Pharmaceuticals Ltd.				X
21.1	Subsidiaries of the Registrant.				X
23.1	Consent of Independent Registered Public Accounting Firm.				X
23.2	Consent of Independent Registered Public Accounting Firm.				X

52

Exhibit Number	Description of Document	Registrant’s Form	Dated	Exhibit Number	Filed Herewith
31.1	Certification by the Chief Executive Officer pursuant to Section 240.13a-14 or Section 240.15d-14 of the Securities and Exchange Act of 1934, as amended.				X
31.2	Certification by the Chief Financial Officer pursuant to Section 240.13a-14 or Section 240.15d-14 of the Securities and Exchange Act of 1934, as amended.				X
32.1	Certification by the Chief Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.				X
32.2	Certification by the Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.				X

* The registrant has received confidential treatment with respect to portions of this exhibit. Those portions have been omitted from this exhibit and filed separately with the U.S. Securities and Exchange Commission.

** The registrant has requested confidential treatment with respect to portions of this exhibit. Those portions have been omitted from the exhibit and filed separately with the U.S. Securities and Exchange Commission.

(b) Exhibits

See Item 15(a)(3) above.

(c) Financial Statement Schedules

See Item 15(a)(1) above.

53

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

SALIX PHARMACEUTICALS, LTD.

/s/    CAROLYN J. LOGAN        

Carolyn J. Logan

President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Form 10-K has been signed below by the following persons on behalf of the Registrant and on the dates indicated.

Date: March 11, 2009	/s/    CAROLYN J. LOGAN
	Carolyn J. Logan President, Chief Executive Officer (Principal Executive Officer) and Director
Date: March 11, 2009	/s/    ADAM C. DERBYSHIRE
	Adam C. Derbyshire Senior Vice President, Finance & Administration and Chief Financial Officer (Principal Financial and Accounting Officer)
Date: March 11, 2009	/s/    JOHN F. CHAPPELL
	John F. Chappell Chairman of the Board
Date: March 11, 2009	/s/    THOMAS W. D’ALONZO
	Thomas W. D’Alonzo Director
Date: March 11, 2009	/s/    RICHARD A. FRANCO
	Richard A. Franco Director
Date: March 11, 2009	/s/    WILLIAM P. KEANE
	William P. Keane Director
Date: March 11, 2009	/s/    WILLIAM HARRAL III
	William Harral III Director
Date: March 11, 2009	/s/    MARK A. SIRGO
	Mark A. Sirgo Director

54

SALIX PHARMACEUTICALS, LTD.

Index to Consolidated Financial Statements

	PAGE
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm	F-2
Report of Independent Registered Public Accounting Firm on Financial Statements	F-3
Consolidated Balance Sheets	F-4
Consolidated Statements of Operations	F-5
Consolidated Statements of Stockholders’ Equity	F-6
Consolidated Statements of Cash Flows	F-7
Notes to Consolidated Financial Statements	F-8
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Schedule II—Valuation and Qualifying Accounts	F-30

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To Board of Directors and Stockholders of

Salix Pharmaceuticals, Ltd.

In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, stockholders’ equity and cash flows present fairly, in all material respects, the financial position of Salix Pharmaceuticals, Ltd. at December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing in Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for uncertain tax positions in 2007.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

Raleigh, North Carolina

March 11, 2009

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENTS

The Board of Directors and Stockholders of

Salix Pharmaceuticals, Ltd.

We have audited the accompanying consolidated statements of operations, stockholders’ equity, and cash flows of Salix Pharmaceuticals, Ltd. for the year ended December 31, 2006. Our audit also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of Salix Pharmaceuticals, Ltd.’s operations and its cash flows for the year ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ Ernst & Young LLP

Raleigh, North Carolina

March 9, 2007

F-3

SALIX PHARMACEUTICALS, LTD.

Consolidated Balance Sheets

	December 31,
	2008			2007
	(U.S. dollars, in thousands, except share and per share amounts)
A S S E T S
Current assets:
Cash and cash equivalents	$	120,153		$	111,272
Accounts receivable, net		40,461			52,208
Inventory, net		17,311			17,676
Prepaid and other current assets		8,295			14,219
Total current assets		186,220			195,375
Property and equipment, net		4,849			5,877
Restricted cash		15,000			—
Goodwill		85,257			86,383
Product rights and intangibles, net		106,822			105,713
Other assets		2,999			3,754
Total assets	$	401,147		$	397,102
L I A B I L I T I E S   A N D   S T O C K H O L D E R S’   E Q  U I T Y
Current liabilities:
Accounts payable	$	10,099		$	11,889
Accrued liabilities		27,443			20,929
Reserve for product returns, rebates and chargebacks		34,034			52,657
Current portion of capital lease obligations		849			1,009
Total current liabilities		72,425			86,484
Long-term liabilities:
Convertible senior notes		60,000			—
Borrowings under credit facility		15,000			15,000
Lease incentive obligation		2,108			2,436
Long term portion of capital lease obligations		791			612
Total long-term liabilities		77,899			18,048
Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized, issuable in series, none outstanding		—			—
Common stock, $0.001 par value; 80,000,000 shares authorized, 48,078,200 and 47,708,985 shares issued and outstanding at December 31, 2008 and 2007, respectively		48			47
Additional paid-in-capital		402,550			397,261
Accumulated deficit		(151,775	)		(104,738	)
Total stockholders’ equity		250,823			292,570
Total liabilities and stockholders’ equity	$	401,147		$	397,102

The accompanying notes are an integral part of these consolidated financial statements

F-4

SALIX PHARMACEUTICALS, LTD.

Consolidated Statements of Operations

	Year Ended December 31,
	2008			2007			2006
	(U.S. dollars, in thousands, except per share data)
Revenues:
Net product revenues	$	178,766		$	232,880		$	208,533
Revenues from collaborative agreements		—			2,912			—
Total revenues		178,766			235,792			208,533
Costs and expenses:
Cost of products sold (excluding $9,891, $8,627 and $4,907 in amortization of product rights and intangible assets for the years ended December 31, 2008, 2007 and 2006, respectively)		36,710			55,024			41,443
Fees and costs related to license agreements		7,105			1,850			1,296
Amortization of product rights and intangible assets		9,891			8,627			4,907
Research and development		76,630			71,947			47,917
Selling, general and administrative		95,088			86,492			82,636
Total costs and expenses		225,424			223,940			178,199
Income (loss) from operations		(46,658	)		11,852			30,334
Interest and other income (expense), net		(495	)		3,326			2,552
Income (loss) before income tax		(47,153	)		15,178			32,886
Income tax (expense) benefit		116			(6,953	)		(1,376	)
Net income (loss)	$	(47,037	)	$	8,225		$	31,510
Net income (loss) per share, basic	$	(0.98	)	$	0.17		$	0.68
Net income (loss) per share, diluted	$	(0.98	)	$	0.17		$	0.65
Shares used in computing net income (loss) per share, basic		47,898			47,329			46,634
Shares used in computing net income (loss) per share, diluted		47,898			48,678			48,369

The accompanying notes are an integral part of these consolidated financial statements.

F-5

SALIX PHARMACEUTICALS, LTD.

Consolidated Statements of Stockholders’ Equity

	Common Stock			Additional Paid-in- capital		Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholders’ Equity
	Shares	Amount
	(U.S. dollars, in thousands, except share amounts)
Balance at December 31, 2005	46,307,394	$	46	$	384,959	$	(679	)	$	(144,473	)	$	239,853
Issuance of common stock upon exercise of stock options	726,323		1		4,213		—			—			4,214
Income tax benefit from non-qualified stock option exercises	—		—		90		—			—			90
Compensation expense related to restricted stock awards	—		—		1,205		—			—			1,205
Realized loss on foreign currency translation	—		—		—		679			—			679
Net income	—		—		—		—			31,510			31,510
Balance at December 31, 2006	47,033,717		47		390,467					(112,963	)		277,551
Issuance of common stock upon exercise of stock options	382,115		—		2,053		—			—			2,053
Income tax benefit from non-qualified stock option exercises	—		—		118		—			—			118
Issuance of common stock upon vesting of restricted stock	204,425		—		—		—			—			—
Issuance of common stock upon exercise of warrants	88,728		—		945		—			—			945
Compensation expense related to restricted stock awards	—		—		3,678		—			—			3,678
Net income	—		—		—		—			8,225			8,225
Balance at December 31, 2007	47,708,985		47		397,261					(104,738	)		292,570
Issuance of common stock upon exercise of stock options	67,713		—		248		—			—			248
Issuance of common stock upon vesting of restricted stock	301,502		1		—		—			—			1
Income tax benefit from non-qualified stock option exercises	—		—		285		—			—			285
Compensation expense related to restricted stock awards	—		—		4,756		—			—			4,756
Net loss	—		—		—		—			(47,037	)		(47,037	)
Balance at December 31, 2008	48,078,200	$	48	$	402,550	$	—		$	(151,775	)	$	250,823

The accompanying notes are an integral part of these consolidated financial statements.

F-6

SALIX PHARMACEUTICALS, LTD.

Consolidated Statements of Cash Flows

	Year Ended December 31,
	2008			2007			2006
	(U.S. dollars, in thousands)
Cash Flows from Operating Activities
Net income (loss)	$	(47,037	)	$	8,225		$	31,510
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
Loss on disposal of property and equipment		—			3			47
Reduction in income taxes payable from stock option exercises		—			—			90
Depreciation and amortization		12,973			10,642			6,472
Realized loss on foreign currency translation		—			—			679
Stock-based compensation expense		4,757			3,678			1,205
Changes in assets and liabilities:
Accounts receivable, inventory, prepaid expenses and other assets		22,651			11,266			(25,063	)
Accounts payable and accrued liabilities		4,396			5,129			(1,077	)
Reserve for product returns, rebates and chargebacks		(18,623	)		37,210			4,031
Net cash provided (used) by operating activities		(20,883	)		76,153			17,894
Cash Flows from Investing Activities
Purchases of property and equipment		(856	)		(2,368	)		(1,700	)
Purchase of product rights, intangibles and other assets		(11,000	)		(55,000	)		(12,124	)
Increase in restricted cash		(15,000	)		—			—
Increase in other non-current assets		—			(2,054	)		—
Proceeds from maturity of investments		—			—			998
Net cash used in investing activities		(26,856	)		(59,422	)		(12,826	)
Cash Flows from Financing Activities
Borrowing under credit facility		—			15,000			—
Net proceeds from convertible senior note offering		57,266			—			—
Principal payments on capital lease obligations		(1,179	)		(40	)		—
Excess tax benefit from stock-based compensation		285			118			—
Proceeds from issuance of common stock upon exercise of stock options		248			2,998			4,213
Net cash provided by financing activities		56,620			18,076			4,213
Net increase in cash and cash equivalents		8,881			34,807			9,281
Cash and cash equivalents at beginning of year		111,272			76,465			67,184
Cash and cash equivalents at end of year	$	120,153		$	111,272		$	76,465
Supplemental Disclosure of Cash Flow Information
Cash paid for income taxes	$	591		$	3,385		$	1,023
Cash paid for interest	$	875		$	862		$	—

The accompanying notes are an integral part of these consolidated financial statements.

F-7

SALIX PHARMACEUTICALS, LTD.

Notes to Consolidated Financial Statements

December 31, 2008

(1) ORGANIZATION AND BASIS OF PRESENTATION

Salix Pharmaceuticals, Ltd., a Delaware corporation (“Salix” or the “Company”), is a specialty pharmaceutical company dedicated to acquiring, developing and commercializing prescription drugs used in the treatment of a variety of gastrointestinal diseases, which are those affecting the digestive tract.

These consolidated financial statements are stated in U.S. dollars and are prepared under accounting principles generally accepted in the United States. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant inter-company balances and transactions have been eliminated in the consolidation.

The accompanying consolidated financial statements include all adjustments that, in the opinion of management, are necessary for a fair presentation of financial position, results of operations, and cash flows.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Revenue Recognition

The Company recognizes revenue in accordance with the SEC’s Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” as amended by Staff Accounting Bulletin No. 104 (together, “SAB 101”), and FASB Statement No. 48 “Revenue Recognition When Right of Return Exists” (“SFAS 48”). SAB 101 states that revenue should not be recognized until it is realized or realizable and earned. Revenue is realized or realizable and earned when all of the following criteria are met: (a) persuasive evidence of an arrangement exists; (b) delivery has occurred or services have been rendered; (c) the seller’s price to the buyer is fixed or determinable; and (d) collectibility is reasonably assured.

SFAS 48 states that revenue from sales transactions where the buyer has the right to return the product shall be recognized at the time of sale only if (1) the seller’s price to the buyer is substantially fixed or determinable at the date of sale, (2) the buyer has paid the seller, or the buyer is obligated to pay the seller and the obligation is not contingent on resale of the product, (3) the buyer’s obligation to the seller would not be changed in the event of theft or physical destruction or damage of the product, (4) the buyer acquiring the product for resale has economic substance apart from that provided by the seller, (5) the seller does not have significant obligations for future performance to directly bring about resale of the product by the buyer, and (6) the amount of future returns can be reasonably estimated. The Company recognizes revenues for product sales at the time title and risk of loss are transferred to the customer, and the other criteria of SAB 101 and SFAS 48 are satisfied, which is generally at the time products are shipped. The Company’s net product revenue represents the Company’s total revenues less allowances for customer credits, including estimated discounts, rebates, chargebacks, and product returns.

The Company establishes allowances for estimated rebates, chargebacks and product returns based on numerous qualitative and quantitative factors, including:

• the number of and specific contractual terms of agreements with customers;

• estimated levels of inventory in the distribution channel;

• historical rebates, chargebacks and returns of products;

F-8

SALIX PHARMACEUTICALS, LTD.

Notes to Consolidated Financial Statements — Continued

• direct communication with customers;

• anticipated introduction of competitive products or generics;

• anticipated pricing strategy changes by the Company and/or its competitors;

• analysis of prescription data gathered by a third-party prescription data provider;

• the impact of changes in state and federal regulations; and

• estimated remaining shelf life of products.

In its analyses, the Company uses prescription data purchased from a third-party data provider to develop estimates of historical inventory channel pull-through. The Company utilizes an internal analysis to compare historical net product shipments to estimated historical prescriptions written. Based on that analysis, it develops an estimate of the quantity of product in the channel which may be subject to various rebate, chargeback and product return exposures. At least quarterly for each product line, the Company prepares an internal estimate of ending inventory units in the distribution channel by adding estimated inventory in the channel at the beginning of the period, plus net product shipments for the period, less estimated prescriptions written for the period. Based on that analysis, the Company develops an estimate of the quantity of product in the channel that might be subject to various rebate, chargeback and product return exposures. This is done for each product line by applying a rate of historical activity for rebates, chargebacks and product returns, adjusted for relevant quantitative and qualitative factors discussed above, to the potential exposed product estimated to be in the distribution channel. Internal forecasts that are utilized to calculate the estimated number of months in the channel are regularly adjusted based on input from members of the Company’s sales, marketing and operations groups. The adjusted forecasts take into account numerous factors including, but not limited to, new product introductions, direct communication with customers and potential product expiry issues.

The Company periodically offers promotional discounts to the Company’s existing customer base. These discounts are calculated as a percentage of the current published list price and are treated as off-invoice allowances. Accordingly, the discounts are recorded as a reduction of revenue in the period that the program is offered. In addition to promotional discounts, at the time that the Company implements a price increase, it generally offers its existing customer base an opportunity to purchase a limited quantity of product at the previous list price. Shipments resulting from these programs generally are not in excess of ordinary levels, therefore, the Company recognizes the related revenue upon shipment and includes the shipments in estimating various product related allowances. In the event the Company determines that these shipments represent purchases of inventory in excess of ordinary levels for a given wholesaler, the potential impact on product returns exposure would be specifically evaluated and reflected as a reduction in revenue at the time of such shipments.

Allowances for estimated rebates and chargebacks were $7.4 million and $9.7 million as of December 31, 2008 and 2007, respectively. The balance at December 31, 2008 excludes amounts related to Colazal, which are included in the reserves discussed below. These allowances reflect an estimate of the Company’s liability for items such as rebates due to various governmental organizations under the Medicare/Medicaid regulations, rebates due to managed care organizations under specific contracts and chargebacks due to various organizations purchasing our products through federal contracts and/or group purchasing agreements. The Company estimates its liability for rebates and chargebacks at each reporting period based on a methodology of applying quantitative and qualitative assumptions discussed above. Due to the subjectivity of the Company’s accrual estimates for rebates and chargebacks, the Company prepares various sensitivity analyses to ensure the Company’s final estimate is within a reasonable range as well as review prior period activity to ensure that the Company’s methodology continues to be appropriate.

Allowances for product returns were $26.6 million and $43.0 million as of December 31, 2008 and 2007, respectively. These allowances reflect an estimate of the Company’s liability for product that may be returned by the original purchaser in accordance with the Company’s stated return policy. These balances include $18.1 million and $34.6 million at December 31, 2008 and 2007, respectively, reflecting the Company’s estimate of Colazal that may be

F-9

SALIX PHARMACEUTICALS, LTD.

Notes to Consolidated Financial Statements — Continued

returned to us under our return policy as a result of the approval of three generic balsalazide capsule products by the Office of Generic Drugs on December 28, 2007. The Company estimates its liability for product returns at each reporting period based on historical return rates, estimated inventory in the channel and the other factors discussed above. Due to the subjectivity of the Company’s accrual estimates for product returns, the Company prepares various sensitivity analyses to ensure the Company’s final estimate is within a reasonable range and also reviews prior period activity to ensure that the Company’s methodology is still reasonable.

Colazal, the Company’s balsalazide disodium capsule, has historically accounted for a majority of the Company’s revenue prior to 2008. On December 28, 2007, the Office of Generic Drugs, or OGD, approved three generic balsalazide capsule products. As a result of these generic approvals, the Company expects the future sales of Colazal to be significantly less than historical sales of Colazal. At December 31, 2008 and 2007, respectively, $18.1 million and $34.6 million were recorded as a liability to reflect an estimate of the Company’s liability for Colazal that may be returned by the original purchaser in accordance with the Company’s stated return policy as a result of these generic approvals. This estimate is based on an estimate of Colazal inventory in the channel and related expiration dates of this inventory, estimated erosion of Colazal demand based on the generic approvals and the resulting estimated pull-through of Colazal, and other factors. Due to the subjectivity of this estimate, the Company prepares various sensitivity analyses to ensure the Company’s final estimate is within a reasonable range.

The Company’s provision for revenue-reducing items such as rebates, chargebacks, and product returns as a percentage of gross product revenue in the twelve-month periods ended December 31, 2008 and 2007 was 6.3% and 9.7% for rebates, chargebacks and discounts and was 7.2% and 3.3% for product returns, respectively, excluding the Colazal return reserve. Increase to the Colazal return reserve were 11.2% of gross product revenue in 2007.

During the fourth quarter of 2008 we recognized $9.1 million of net product revenue related to shipments to wholesalers of Apriso, which was approved by the FDA on October 31, 2008, and will be launched to physicians in late February 2009. We evaluated the “Criteria for Recognizing Revenue When Right of Return Exits” under paragraphs 6 and 8 of SFAS No. 48, and “other factors” conditions provided by the Staff within Staff Accounting Bulletin Topic 13(A)(4)(9). Based on our historical experience with Colazal, which has the same indication, is distributed through the same distribution channels and prescribed by the same physicians as Apriso, we have the ability to estimate returns for Apriso and therefore recognized revenue.

Research and Development

The Company expenses research and development costs, both internal and externally contracted, as incurred. For nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities, the Company initially capitalizes the advance payment. Such amounts are then recognized as an expense as the related goods are delivered or the related services are performed. At December 31, 2007, the net asset related to on-going research and development activities to be charged to expense in future periods was $8.9 million and at December 31, 2008, the net liability related to on-going research and development activities was $12.7 million.

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturities from date of purchase of three months or less to be cash equivalents. The Company maintains its cash and cash equivalents in several different financial instruments with various banks and brokerage houses. This diversification of risk is consistent with Company policy to maintain liquidity and ensure the safety of principal. At December 31, 2008, cash and cash equivalents consisted primarily of demand deposits, overnight investments in Eurodollars, certificates of deposit and money market funds at reputable financial institutions and did not include any auction rate securities.

F-10

SALIX PHARMACEUTICALS, LTD.

Notes to Consolidated Financial Statements — Continued

Accounts Receivable

The Company extends credit on an uncollateralized basis primarily to wholesale drug distributors and retail pharmacy chains throughout the United States. The Company is required to estimate the level of accounts receivable which ultimately will be uncollectible. The Company calculates this estimate based on a review of specific customer balances, industry experience and the current economic environment. Currently, the Company reserves for specific accounts plus a percentage of the Company’s outstanding trade accounts receivable balance as an allowance for uncollectible accounts. Our allowance for uncollectible accounts at December 31, 2008 and 2007 was $0.6 million and $3.1 million, respectively.

Fair Value of Financial Instruments

The carrying amounts of the Company’s financial instruments, which include cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, and capital lease obligations approximated their fair values as of December 31, 2008 and 2007 due to the short-term nature of these financial instruments. The carrying amount of the Company’s credit facility approximated its fair value at December 31, 2007 and 2008 due to the fact that interest rate was determined based on prevalent market rates.

Property and Equipment

Property and equipment are stated at cost and depreciated over the estimated useful lives of the assets, generally three to five years, using the straight-line method.

Inventories

Raw materials, work-in-process and finished goods inventories are stated at the lower of cost (which approximates actual cost on a first-in, first-out cost method) or market value. In evaluating whether inventory is stated at the lower of cost or market, management considers such factors as the amount of inventory on hand and in the distribution channel, estimated time required to sell such inventory, remaining shelf life, and current and expected market conditions, including levels of competition, including generic competition.

The Company expenses pre-approval inventory unless the Company believes it is probable that the inventory will be saleable. The Company capitalizes inventory costs associated with marketed products and certain products prior to regulatory approval and product launch, based on management’s judgment of probable future commercial use and net realizable value. Capitalization of this inventory does not begin until the product candidate is considered to have a high probability of regulatory approval, which is generally after the Company has analyzed Phase III data or filed an NDA. If the Company is aware of any specific risks or contingencies that are likely to impact the expected regulatory approval process or if there are any specific issues identified during the research process relating to safety, efficacy, manufacturing, marketing or labeling of the product candidate, the Company does not capitalize the related inventory. Once the Company capitalizes inventory for a product candidate that is not yet approved, the Company monitors, on a quarterly basis, the status of this candidate within the regulatory approval process. The Company could be required to expense previously capitalized costs related to pre-approval inventory upon a change in its judgment of future commercial use and net realizable value, due to a denial or delay of approval by regulatory bodies, a delay in the timeline for commercialization or other potential factors. On a quarterly basis, the Company evaluates all inventory, including inventory capitalized for which regulatory approval has not yet been obtained, to determine if any lower of cost or market adjustment is required. As it relates to pre-approval inventory, the Company considers several factors including expected timing of FDA approval, projected sales volume and estimated selling price.

Inventory at December 31, 2008 consisted of $8.5 million of raw materials, $6.5 million of work-in-process, and $2.3 million of finished goods. Inventory at December 31, 2007 consisted of $7.5 million of raw materials, $3.6 million of work-in-process and $6.6 million of finished goods. As of December 31, 2008, inventory reserves totaling $3.8

F-11

SALIX PHARMACEUTICALS, LTD.

Notes to Consolidated Financial Statements — Continued

million, compared to $0.8 million as of December 31, 2007, have been recorded to reduce inventories to their net realizable value. The increase in inventory reserves during 2008 is due to a reserve for inventory related to balsalazide tablets. In December 2008 the Company received a complete response letter from the FDA on the balsalazide tablet NDA, which indicated that based on its review, the FDA has determined that the application cannot be approved in its present form and that clinical data from an additional adequate and well-controlled clinical trial will be required in order to conduct further review on the NDA. The Company does not intend to conduct additional clinical investigation of balsalazide tablets in this indication, as a result the Company reserved the inventory related to balsalazide tablets.

Intangible Assets and Goodwill

The Company’s intangible assets consist of license agreements, product rights and other identifiable intangible assets, which result from product and business acquisitions. Goodwill represents the excess purchase price over the fair value of assets acquired and liabilities assumed in a business combination.

When the Company makes product acquisitions that include license agreements, product rights and other identifiable intangible assets, it records the purchase price of such intangibles, along with the value of the product related liabilities that it assumes, as intangible assets. The Company allocates the aggregate purchase price to the fair value of the various tangible and intangible assets in order to determine the appropriate carrying value of the acquired assets and then amortizes the cost of the intangible assets as an expense in its consolidated statement of operations over the estimated economic useful life of the related assets. In accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company assesses the impairment of identifiable intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company believes that the following factors could trigger an impairment review: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of the Company’s use of the acquired assets or the strategy for the Company’s overall business; and significant negative industry or economic trends.

In assessing the recoverability of its intangible assets, the Company must make assumptions regarding estimated future cash flows and other factors. If the estimated undiscounted future cash flows do not exceed the carrying value of the intangible assets, the Company must determine the fair value of the intangible assets. If the fair value of the intangible assets is less than the carrying value, the Company will recognize an impairment loss in an amount equal to the difference. The Company reviews goodwill for impairment on an annual basis, and goodwill and other intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

The Company assesses impairment of goodwill on an annual basis in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”. At December 31, 2008 there is no impairment to goodwill.

The following table reflects the components of all specifically identifiable intangible assets as of December 31 (in thousands):

	Gross Amount		Accumulated Amortization		Net Carrying Amount		Average Life
2008	$	133,388	$	26,566	$	106,822	10 years
2007	$	122,388	$	16,675	$	105,713	13 years

Amortization expense is calculated on a straight-line basis over the estimated useful life of the asset. Amortization expense for the years ended December 31, 2008, 2007 and 2006 was $9.9 million, $8.6 million and $4.9 million, respectively. Estimated amortization expense related to intangible assets existing as of December 31, 2008 is $10.0 million annually for each of the succeeding five years.

F-12

SALIX PHARMACEUTICALS, LTD.

Notes to Consolidated Financial Statements — Continued

In November 2003, the Company acquired from aaiPharma LLC for $2.0 million the exclusive right to sell 25, 75 and 100 milligram dosage strengths of azathioprine tablets in North America under the name Azasan. The purchase price was fully allocated to product rights and related intangibles and is being amortized over a period of ten years. Although Azasan does not have any patent protection, the Company believes ten years is an appropriate amortization period based on established product sales history and management’s experience. At December 31, 2008 and 2007, accumulated amortization for the Azasan intangible was $1.0 million and $0.8 million, respectively.

In June 2004, the Company acquired the exclusive U.S. rights to Anusol-HC 2.5% (hydrocortisone Cream USP), Anusol-HC 25 mg Suppository (Hydrocortisone Acetate), Proctocort Cream (Hydrocortisone Cream USP) 1% and Proctocort Suppositories (Hydrocortisone Acetate Rectal Suppositories, 30 mg) from King Pharmaceuticals, Inc. for $13.0 million. The purchase price was fully allocated to product rights and related intangibles and is being amortized over a period of ten years. Although Anusol-HC and Proctocort do not have any patent protection, the Company believes ten years is an appropriate amortization period based on established product sales history and management’s experience. At December 31, 2008 and 2007, accumulated amortization for the King product intangibles was $5.9 million and $4.6 million, respectively.

In September 2005, the Company acquired InKine Pharmaceutical Company, Inc. for $210.0 million. The Company allocated $74.0 million of the purchase price to in-process research and development, $9.3 million to net assets acquired and $37.0 million to specifically identifiable product rights and related intangibles with an ongoing economic benefit to the Company. The Company allocated the remaining $89.7 million to goodwill, which is not being amortized. The decrease in goodwill over the twelve-month period ended December 31, 2008 was a result of the use of net operating income tax loss carryforwards generated by InKine prior to its acquisition by the Company in 2005. The InKine product rights and related intangibles are being amortized over an average period of 14 years, which the Company believes is an appropriate amortization period due to the product’s patent protection and the estimated economic lives of the product rights and related intangibles. At December 31, 2008 and 2007, accumulated amortization for the InKine intangibles was $9.8 million and $6.8 million, respectively.

In December 2005, the Company entered into a License and Supply Agreement with Norgine B.V., granting Salix the exclusive right to sell a patented-protected, liquid PEG bowel cleansing product, NRL 944, in the United States. In August 2006, the Company received Food and Drug Administration marketing approval for NRL 944 under the branded name of MoviPrep. In January 2007 the United States Patent Office issued a patent providing coverage to September 1, 2024. In August 2006, pursuant to the terms of the Agreement, Salix made a $15.0 million payment to Norgine. In December 2008, pursuant to the terms of the Agreement, the Company made a $5.0 million payment to Norgine. The Company is amortizing these milestone payments over a period of 17.3 years, which the Company believes is an appropriate amortization period due to the product’s patent protection and the estimated economic life of the related intangible. At December 31, 2008 and 2007, accumulated amortization for the MoviPrep intangible was $2.8 and $1.2 million, respectively.

In February 2007, the Company entered into a Master Purchase and Sale and License Agreement with Merck & Co. Inc., to purchase the U.S prescription pharmaceutical product rights to Pepcid Oral Suspension and Diuril Oral Suspension from Merck. The Company paid Merck $55.0 million at the closing of this transaction. The purchase price was fully allocated to product rights and related intangibles, and is being amortized over a period of 15 years. Although Pepcid and Diuril do not have patent protection, the Company believes 15 years is an appropriate amortization period based on established product history and management experience. At December 31, 2008 and 2007, accumulated amortization for the Merck products was $6.9 million and $3.2 million, respectively.

In July 2002, the Company acquired the rights to develop and market a granulated formulation of mesalamine from Dr. Falk Pharma GmbH. On October 31, 2008, the FDA granted marketing approval for Apriso for the maintenance of remission of ulcerative colitis in adults. In November 2008, the Company made a $6.0 million milestone payment to Dr. Falk. The Company is amortizing this milestone payment over a period of 9.5 years, which

F-13

SALIX PHARMACEUTICALS, LTD.

Notes to Consolidated Financial Statements — Continued

the Company believes is an appropriate amortization period due to the product’s patent protection and the estimated economic life of the related intangible. At December 31, 2008, accumulated amortization for the Apriso intangible was $0.1 million.

Asset Impairment

The Company reviews the value and remaining useful lives of its long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable to determine if an impairment has occurred. If this review indicates that the assets will not be recoverable, based on an analysis of undiscounted cash flows over the remaining amortization period, the Company will reduce the carrying value of its long-lived assets accordingly, in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

The approval of three generic balsalazide capsule products on December 28, 2007 was a change in circumstance that caused us to review the carrying amount of our long-lived assets. Based on this review there was no impairment to our long-lived assets and no reduction to their carrying value is required.

Restricted Cash

At December 31, 2008, restricted cash of $15.0 million represents the collateral on deposit with the Administrative Agent related to the Company’s credit facility.

Shipping and Handling Costs

The Company does not charge its customers for freight costs. The amounts of such costs are included in selling, general and administrative expenses and are not material.

Advertising Costs

The Company charges advertising costs to expense as incurred. Advertising expenses were approximately $8.3 million, $5.7 million and $2.3 million for the years ended December 31, 2008, 2007 and 2006, respectively.

Segment Reporting

The Company operates in a single industry and segment acquiring, developing and commercializing prescription drugs used in the treatment of a variety of gastrointestinal diseases, which are those affecting the digestive tract. Accordingly, the Company’s business is classified as a single reportable segment.

The following table presents net product revenues by product (in thousands):

	Year Ended December 31,
	2008		2007		2006
Colazal	$	1,422	$	92,401	$	103,478
Xifaxan		79,928		64,260		51,628
Purgatives – Visicol/OsmoPrep/MoviPrep		62,862		47,693		45,502
Pepcid		18,225		22,191		—
Apriso		9,123		—		—
Other		7,206		6,335		7,925
Net product revenues	$	178,766	$	232,880	$	208,533

F-14

SALIX PHARMACEUTICALS, LTD.

Notes to Consolidated Financial Statements — Continued

Colazal net product revenues for 2007 includes a $34.6 million reduction representing the Company’s estimate of Colazal previously sold to wholesalers that may be returned to the Company under its return policy as a result of the approval of three generic balsalazide capsule products on December 28, 2007.

Comprehensive Income (Loss)

The Company adopted SFAS No. 130, “Reporting Comprehensive Income” effective January 1, 1998. SFAS 130 requires that the Company display an amount representing comprehensive income (loss) for the year in a financial statement, which is displayed with the same prominence as other financial statements. The Company elected to present this information in the Consolidated Statements of Stockholders’ Equity. Other comprehensive income (loss) consists of foreign currency translation gains and losses, as well as any unrealized gains and losses on investments. For the periods presented, comprehensive income (loss) approximated reported net income (loss).

Stock-Based Compensation

At December 31, 2008, the Company had one active share-based compensation plan, the 2005 Stock Plan, allowing for the issuance of stock options and restricted stock. The Company accounts for share-based compensation under SFAS No 123R, “Share-Based Payment,” which requires that companies estimate the fair value of share-based payment awards on the date of the grant. The cost is to be recognized over the period during which an employee is required to provide service in exchange for the award. The valuation provisions of SFAS 123R apply to new grants and grants modified after the adoption date that were outstanding as of the effective date.

Income Taxes

The Company provides for income taxes under the liability method in accordance with SFAS No. 109, “Accounting for Income Taxes”. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of differences between the tax basis of assets or liabilities and their carrying amounts in the consolidated financial statements. The Company provides a valuation allowance for deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize their benefit or if future deductibility is uncertain.

In June 2006, the FASB issued FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN 48”), which is an interpretation of SFAS 109 “Accounting for Income Taxes”. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and also provides guidance on derecognizing, classification, interest and penalties, accounting in interim periods, disclosure and transition.

On January 1, 2007, the Company adopted the provisions of FIN 48. As a result of applying the provisions of FIN 48, the Company recognized an increase of $2.4 million in the liability for unrecognized tax benefits and a reduction in the valuation allowance as of January 1, 2007 for the same amount. The unrecognized tax benefits as December 31, 2008 relate to federal tax credit carryforwards. The Company does not expect the unrecognized tax benefits to change significantly over the next 12 months.

The Company continues to fully recognize its tax benefits which are offset by a valuation allowance to the extent that it is more likely than not that the deferred tax assets will not be realized. The Company does not expect any significant changes in its unrecognized tax benefits for the next twelve months.

The Company files a consolidated U.S. federal income tax return and consolidated and separate company income tax returns in many U.S. state jurisdictions. Generally, the Company is no longer subject to federal and state income tax examinations by U.S. tax authorities for years prior to 1993.

F-15

SALIX PHARMACEUTICALS, LTD.

Notes to Consolidated Financial Statements — Continued

The Company recognizes any interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. During the twelve-month period ended December 31, 2008 there was no such interest or penalties.

Net Income (Loss) Per Share

The Company computes net income (loss) per share in accordance with SFAS No. 128, “Earnings Per Share” (“SFAS 128”). Under the provisions of SFAS 128, basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares and dilutive common share equivalents then outstanding. Common share equivalents consist of the incremental common shares issuable upon the exercise of stock options and the impact of vested restricted stock grants. Under the provisions of SFAS 128, the Company will account for the effect of the convertible Notes on diluted net income (loss) per share using the treasury stock method. As a result, the convertible Notes will have no effect on diluted net income (loss) per share until the Company’s stock price exceeds the conversion price of $9.25 per share. For the year ended December 31, 2008, the effect of approximately 6,486,000 shares that may be issued upon conversion of the Notes were excluded from the diluted net income per share calculation.

The following table reconciles the numerator and denominator used to calculate diluted net income (loss) per share (in thousands):

	Year ended December 31,
	2008			2007		2006
Numerator:
Net income (loss)	$	(47,037	)	$	8,225	$	31,510
Denominator:
Weighted average common shares, basic		47,898			47,329		46,634
Dilutive effect of stock options and restricted stock awards		—			1,349		1,735
Weighted average common shares, diluted		47,898			48,678		48,369

For the year ended December 31, 2008, weighted average common shares, diluted are equal to weighted average common shares, basic, because inclusion of the 133,053 and 578,386 shares of restricted stock and stock options, respectively, would have an anti-dilutive effect due to the net loss during that period. For the years ended 2008, 2007, and 2006, there were 4,434,835, 3,731,150, and 4,027,149, respectively, potential common shares outstanding that were excluded from the diluted net income (loss) per share calculation because their effect would have been anti-dilutive.

Recently Issued Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141 (revised 2007) “Business Combinations” (SFAS 141R). SFAS 141R is effective for fiscal years beginning on or after December 15, 2008, which means that we will adopt SFAS 141R in our fiscal year 2009. SFAS 141R replaces SFAS 141 “Business Combinations” and requires that the acquisition method of accounting (which SFAS 141 called the purchase method) be used for all business combinations, as well as for an acquirer to be identified for each business combination. SFAS 141R establishes principles and requirements for how the acquirer: (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and (iii) determines what information to disclose to enable users of financial statements to evaluate the nature and financial affects of the business combination. The Company does not believe the adoption of SFAS 141R will have a material impact on the Company’s consolidated financial position, results of operations and cash flows; however, the Company’s accounting for acquisitions after the adoption of SFAS 141R may produce materially different results than accounting under the current guidance.

F-16

SALIX PHARMACEUTICALS, LTD.

Notes to Consolidated Financial Statements — Continued

In December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (SFAS 160). SFAS 160 is effective for fiscal years beginning on or after December 15, 2008, which means that we will adopt SFAS 160 in our fiscal year 2009. This statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 changes accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity in the Consolidated Financial Statements. SFAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements of SFAS 160 shall be applied prospectively. The Company does not believe the adoption of SFAS 160 will have a material impact on the Company’s consolidated financial position, results of operations and cash flows.

In May 2008, the FASB issued FASB Staff Position (“FSP”) No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (including Partial Cash Settlement)” which is effective for financial statements issued for fiscal years beginning after December 15, 2008, and early adoption is not permitted. Upon adoption, this FSP will be applied retrospectively to all periods presented and the cumulative effect of the change in accounting principle on periods prior to those presented will be recognized as of the beginning of the first period presented. This FSP applies to convertible debt instruments that may be settled in cash and requires separate accounting for the liability and equity components of the convertible debt. We are currently evaluating the impact of the adoption of this FSP. Our convertible Notes may be settled in cash, as a result, upon adoption of the FSP on January 1, 2009, we will be required to separately account for the liability and equity components of the convertible debt instrument by allocating the proceeds from issuance of the instrument between the liability component and the embedded conversion option, or equity component. This allocation will be done by first determining the fair value of similar Notes that do not include the embedded conversion option, which equals the liability component. The excess of the initial proceeds received from the convertible Notes over the amount allocated to the liability component will be allocated to the embedded conversion option, or equity component. This excess will be reported as a debt discount and subsequently amortized as interest cost, using the interest method, through August 2013, the first scheduled date on which the holders have the option to require the Company to repurchase the Notes,. This will result in interest expense for periods subsequent to adoption related to the convertible debt in excess of the coupon rate of 5.5%. The Company currently believes approximately 25% of the initial proceeds will be allocated to the equity component, and the effective interest rate, including the amortization of the debt discount, on the liability component will be approximately 12%.

(3) PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at December 31 (in thousands):

	2008			2007
Cost:
Furniture and equipment	$	6,228		$	5,383
Computer equipment		4,801			4,940
Assets under capital lease		2,860			1,661
		13,889			11,984
Accumulated depreciation:
Furniture and equipment		(4,124	)		(3,230	)
Computer equipment		(3,696	)		(2,837	)
Assets under capital lease		(1,220	)		(40	)
		(9,040	)		(6,107	)
Net property and equipment	$	4,849		$	5,877

Depreciation expense was approximately $3.1 million, $2.0 million and $1.6 million in 2008, 2007 and 2006, respectively.

F-17

SALIX PHARMACEUTICALS, LTD.

Notes to Consolidated Financial Statements — Continued

(4) ACCRUED LIABILITIES

Accrued liabilities consisted of the following at December 31 (in thousands):

	2008		2007
Accrued expenses	$	23,831	$	13,278
Accrued royalties		3,612		7,651
Total accrued liabilities	$	27,443	$	20,929

(5) CREDIT FACILITY

In February 2007, the Company entered into a $100.0 million revolving credit facility that matures in February 2012. On August 4, 2008 the credit facility was amended to waive defaults that may have arisen as a result of the approval of three generic balsalazide capsule products by the Office of Generic Drugs on December 28, 2007 and the credit facility was reduced to $20.0 million. On August 22, 2008 the credit facility was further amended to allow the Company to issue the convertible Notes described in Note 6 below. As a result of the execution of the amendment to our credit facility on August 4, 2008, the Company recorded a $1.1 million non-cash charge to expense a portion of the unamortized costs related to the credit facility under EITF No. 98-14, “Debtor’s Accounting for Changes in Line-of-Credit or Revolving-Debt Arrangements”. At December 31, 2008, $15.0 million was outstanding under the credit facility. Virtually all assets of the Company and its subsidiaries collateralize the Company’s obligations under the credit facility. Borrowings under the credit facility may be used for working capital, capital expenditures, acquisitions and other general corporate purposes.

The credit facility bears interest at a rate per annum equal to, at the Company’s option, either (a) a base rate equal to the higher of (i) the Federal Funds Rate plus 1/2 of 1% and (ii) the Bank of America prime rate, or (b) a Eurodollar rate (based on LIBOR), plus 0.00% for base rate borrowings and 1.00% for Eurodollar rate borrowings. The Company must maintain an amount equal to the amount outstanding under the credit facility on deposit with the Administrative Agent of the credit facility and maintain a minimum of $23.0 million in cash on its balance sheet. At December 31, 2008, restricted cash of $15.0 million represents the collateral on deposit with the Administrative Agent related to the credit facility. At December 31, 2008 the Company was in compliance with applicable covenants under the credit facility.

The credit facility contains various representations, warranties and affirmative, negative and financial covenants customary for financings of this type.

(6) CONVERTIBLE SENIOR NOTES

On August 22, 2008 the Company closed an offering of $60 million in Convertible Senior Notes (“Notes”) due 2028. Net proceeds from the offering were $57.3 million. The Notes are governed by an indenture, dated as of August 22, 2008, between the Company and U.S. Bank National Association, as trustee.

The Notes bear interest at a rate of 5.5% per year, payable semiannually in arrears on February 15 and August 15 of each year, beginning on February 15, 2009. The Notes will mature on August 15, 2028, unless previously converted or repurchased in accordance with their terms prior to such date.

The Notes are senior unsecured obligations, and rank (i) equally to any of the Company’s existing and future unsecured senior debt, (ii) senior to any of the Company’s future indebtedness that is expressly subordinated to these Notes, and (iii) effectively junior to any secured indebtedness to the extent of the value of the assets securing such indebtedness.

F-18

SALIX PHARMACEUTICALS, LTD.

Notes to Consolidated Financial Statements — Continued

The Company may redeem the Notes, in whole or in part, at any time after August 15, 2013 for cash equal to the principal amount of the Notes to be redeemed, plus any accrued and unpaid interest.

On August 15, 2013, August 15, 2018 and August 15, 2023 or upon the occurrence of a “fundamental change”, as defined in the indenture, the holders may require the Company to repurchase all or a portion of the Notes for cash at 100% of the principal amount of the Notes being purchased, plus any accrued and unpaid interest.

The Notes are convertible into approximately 6,486,000 shares of the Company’s common stock under certain circumstances prior to maturity at a conversion rate of 108.0847 shares per $1,000 principal amount of Notes, which represents a conversion price of approximately $9.25 per share, subject to adjustment under certain conditions. Holders of the Notes may convert their Notes at their option on any day prior to the close of business on the business day immediately preceding the maturity date of August 15, 2028 only if one or more of the following conditions is satisfied: (1) during any fiscal quarter commencing after September 30, 2008, if the last reported sale price of the Company’s common stock for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is equal to or more than 130% of the conversion price of the Notes on the last day of such preceding fiscal quarter; (2) during the five business day period following any five consecutive trading day period in which the trading price for the Notes, per $1,000 principal amount of the Notes, for each such trading day was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate of the Notes on such date; (3) if the Company enters into specified corporate transactions; or (4) upon a redemption notice. The Notes will be convertible, regardless of whether any of the foregoing conditions have been satisfied, on or after March 15, 2028 at any time prior to the close of business on the business day immediately preceding the stated maturity date of August 15, 2028. Upon conversion, the Company may pay cash, shares of the Company’s common stock or a combination of cash and stock, as determined by the Company in its discretion.

As long as the Notes are outstanding, the Company and its subsidiaries are prohibited from incurring any debt other than “permitted debt”, as defined in the indenture, except that the Company and its subsidiaries may incur debt in certain circumstances, including meeting a consolidated leverage ratio test and a consolidated fixed charge coverage ratio test. The Company may refinance its existing credit facility provided the refinanced credit facility contains substantially the same restrictive covenants with respect to financial ratios as the existing credit facility did as of August 22, 2008.

In connection with the issuance of the Notes, the Company incurred $2.7 million of issuance costs, which primarily consisted of investment banker fees, legal and other professional fees. These costs are being amortized and are recorded as additional interest expense through August 2013, the first scheduled date on which holders have the option to require the Company to repurchase the Notes.

(7) STOCKHOLDERS’ EQUITY

Preferred Stock

A total of 5,000,000 shares of preferred stock are authorized and issuable. No shares of preferred stock were issued or outstanding as of December 31, 2008.

Common Stock

As of December 31, 2008 the Company was authorized to issue up to 80,000,000 shares of $0.001 par value common stock. As of December 31, 2008 and 2007, there were 48,078,200 and 47,708,985 shares of common stock issued and outstanding, respectively.

Stockholder Rights Plan

On January 9, 2003, the Company’s Board of Directors adopted an updated stockholder rights plan. Consequently, the Board authorized the redemption, effective on January 20, 2003, of rights under its existing stockholder rights plan

F-19

SALIX PHARMACEUTICALS, LTD.

Notes to Consolidated Financial Statements — Continued

for $0.0001 per right. Pursuant to the updated plan, stock purchase rights were distributed to stockholders at the rate of one right with respect to each share of common stock held of record as of January 20, 2003. The rights plan is designed to enhance the Board’s ability to prevent an acquirer from depriving stockholders of the long-term value of their investment and to protect stockholders against attempts to acquire the Company by means of unfair or abusive takeover tactics. The rights become exercisable based upon certain limited conditions related to acquisitions of stock, tender offers and business combinations involving the Company.

Stock Plans

The Company’s 1994 Stock Plan (the “1994 Plan”) was adopted by the Board of Directors in March 1994 and approved by the stockholders in March 1995. The Company’s 1996 Stock Plan (the “1996 Plan”) was adopted by the Board of Directors and approved by the Company’s stockholders in February 1996. The Company’s 2005 Stock Plan (the “2005 Plan”) was adopted by the Board of Directors in April 2005 and approved by the stockholders in June 2005. The stock granted under the 1994 Plan, the 1996 Plan and the 2005 Plan may be either stock options or restricted shares. Stock options expire no later than ten years from the date of grant.

Option prices shall be at least 100% of the fair market value on the date of grant for incentive stock options, and no less than 85% of the fair market value for nonqualified stock options. If, at the time the Company grants an option, the optionee directly or by attribution owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company, the exercise price for an incentive stock option shall be at least 110% of the fair market value and the option shall not be exercisable more than five years after the date of grant. The options generally become exercisable in increments of 1/48th per month over a period of 48 months from the date of grant. Options may be granted with different vesting terms as determined by the board of directors. Since inception of the Company’s 1994 Plan, 1996 Plan and 2005 Plan the Company’s stock option grants were all at fair market value. Starting in 2006, the Company began issuing restricted shares to employees, executives and directors of the Company.

Stock-Based Compensation

At December 31, 2008, the Company had one active share-based compensation plan, the 2005 Stock Plan, allowing for the issuance of stock options and restricted stock. The Company accounts for share-based compensation under SFAS No 123R, “Share-Based Payment,” which requires that companies estimate the fair value of share-based payment awards on the date of the grant. The cost is to be recognized over the period during which an employee is required to provide service in exchange for the award. The valuation provisions of SFAS 123R apply to new grants and grants modified after the adoption date that were outstanding as of the effective date.

Starting in 2006, the Company began issuing restricted shares to employees, executives and directors of the Company. The restrictions on the restricted stock lapse according to one of two schedules. For employees and executives of the Company, restrictions lapse 25% annually over four years or 33% over 3 years. For board members of the company, restrictions lapse 100% after one year. The fair value of the restricted stock was estimated using an assumed forfeiture rate of 8.1% and is being expensed on a straight-line basis over the period during which the restrictions lapse. For the year ended December 31, 2008, the Company recognized $4.8 million in share based compensation expense related to the restricted shares. As of December 31, 2008, the total amount of unrecognized compensation cost related to nonvested restricted stock awards, to be recognized as expense subsequent to December 31, 2008, was approximately $12.4 million, and the related weighted-average period over which it is expected to be recognized is approximately 2.34 years.

F-20

SALIX PHARMACEUTICALS, LTD.

Notes to Consolidated Financial Statements — Continued

Aggregate stock plan activity is as follows:

	Total Shares Available For Grant		Stock Options				Restricted Shares				Stock Options and Restricted Shares
			Number		Weighted Average Price		Number Subject to Issuance		Weighted Average Price		Number		Weighted Average Price
Balance at December 31, 2005	54,925		7,336,606		$	13.58	—			—	7,336,606		$	13.58
Additional shares authorized	1,500,000		—			—	—			—	—			—
Granted	(711,826	)	—			—	711,826		$	12.13	711,826		$	12.13
Exercised	—		(726,280	)	$	5.81	—			—	(726,280	)	$	5.81
Canceled/forfeited	143,612		(283,789	)	$	18.75	(29,920	)	$	12.02	(313,709	)	$	18.11
Balance at December 31, 2006	986,711		6,326,537		$	14.24	681,906		$	12.52	7,008,443		$	14.07
Granted	(758,407	)	—			—	758,407		$	12.81	758,407		$	12.81
Vested	—		—			—	(204,425	)	$	12.45	(204,425	)	$	12.45
Exercised	—		(382,115	)	$	5.37	—			—	(382,115	)	$	5.37
Canceled/forfeited	382,949		(729,893	)	$	20.33	(112,689	)	$	13.06	(842,582	)	$	19.36
Balance at December 31, 2007	611,253		5,214,529		$	14.03	1,123,199		$	12.68	6,337,728		$	13.80
Additional shares authorized	837,311		—			—	—			—	—			—
Granted	(1,009,597	)	—			—	1,009,597		$	7.10	1,009,597		$	7.10
Exercised	—		(67,713	)	$	3.66	—			—	(67,713	)	$	3.66
Vested	—		—			—	(301,502	)	$	12.65	(301,502	)	$	12.65
Canceled/forfeited	397,655		(528,983	)	$	18.55	(182,439	)	$	11.54	(711,422	)	$	16.75
Balance at December 31, 2008	836,622		4,617,833		$	13.67	1,648,855		$	9.39	6,266,688		$	12.55

Exercise prices for options outstanding as of December 31, 2008 ranged from $1.13 to $48.58 per share.

	Options Outstanding and Exercisable
Exercise Price	Number Outstanding	Weighted Average Remaining Contractual Life (Yrs)	Weighted Average Exercise Price
$  1.13 –   4.92	1,034,690	2.61	$	3.39
$  5.40 – 14.46	1,003,797	4.30		9.57
$15.02 – 17.94	1,161,139	5.91		17.35
$18.14 – 20.89	894,478	5.56		19.09
$21.07 – 48.58	523,729	5.61		24.43
	4,617,833	4.72	$	13.67

At December 31, 2008, there were 4,617,833 exercisable options with a weighted average exercise price of $13.67. At December 31, 2007, there were 5,214,529 exercisable options with a weighted average exercise price of $14.03.

For the year ended December 31, 2008, 0.1 million shares of the Company’s outstanding stock with a market value of $0.5 million were issued upon the exercise of stock options. The Company recognized no share-based compensation expense related to stock options for the year ended December 31, 2008 or 2007, nor any income tax benefit. The total intrinsic value of options exercised for the years ended December 31, 2008, 2007 and 2006 was $0.3 million, $3.0 million, and $5.8 million, respectively. As of December 31, 2008, there was no unrecognized compensation cost for stock options due to the fact that all stock options were fully vested as noted above. For the year ended December 31, 2008, the Company received $0.2 million in cash from stock option exercises.

F-21

SALIX PHARMACEUTICALS, LTD.

Notes to Consolidated Financial Statements — Continued

(8) INCOME TAXES

As of December 31, 2008, the Company had U.S. federal net operating loss carryforwards of $116.0 million. Of this amount, approximately $21.7 million is limited by section 382 of the Internal Revenue Code. The Company’s remaining net operating loss carryforwards of approximately $16.6 million relates to excess stock option benefit which, if and when realized, will credit additional paid-in capital. The Company also has gross North Carolina net operating loss carryforwards in the amount of $51.7 million.

The provision for income taxes in the accompanying consolidated statements of operations for the years ended December 31, 2008, 2007 and 2006 consisted of the following (in thousands):

	2008			2007		2006
Current:
Federal	$	(541	)	$	1,424	$	522
State		(701	)		2,224		854
Total current taxes		(1,242	)		3,648		1,376
Deferred:
Federal		1,126			3,305		—
State		—			—		—
Total deferred taxes		1,126			3,305		—
Total current taxes	$	(116	)	$	6,953	$	1,376

The tax effects of temporary differences that give rise to significant portions of the deferred tax asset at December 31, 2008 and 2007 are as follows (in thousands):

	2008			2007
Net operating loss carryforwards	$	35,420		$	15,270
Capitalized research and development expenses		2,244			3,583
Research and development credits		18,131			7,505
Other credits		1,760			1,105
Timing differences, including reserves, accruals, and writeoffs		9,858			26,949
Total deferred tax assets		67,413			54,412
Valuation allowance		(60,378	)		(42,345	)
Net deferred tax assets		7,035			12,067
Intangible assets		(4,825	)		(11,930	)
Property, plant and equipment		—			(2	)
Accrued return allowance		(2,209	)		—
Allowance for third parties		(1	)		(135	)
Net deferred tax liabilities		(7,035	)		(12,067	)
Net deferred taxes	$	—		$	—

The Company has provided a valuation allowance for the gross deferred tax asset due to the uncertainty regarding the Company’s ability to realize the entire asset. The valuation allowance has increased by approximately $18.0 million and decreased by approximately $8.5 million during the years ended December 31, 2008 and 2007, respectively.

F-22

SALIX PHARMACEUTICALS, LTD.

Notes to Consolidated Financial Statements — Continued

The deferred tax assets include deferred tax assets and liabilities acquired from InKine which were fully reserved in the amount of $14.5 million. In the current year, $1.1 million of these deferred tax assets were realized, resulting in a reduction to goodwill.

Utilization of the federal net operating loss carryforwards may be subject to a substantial annual limitation due to the change in ownership provisions of the Internal Revenue Code of 1986. If this limitation applies, the ultimate ability for the Company to use existing net operating loss carryovers and tax credit carryovers to offset future income may be limited. The Company’s net operating loss carryforwards begin to expire at the end of the taxable year ending December 31, 2021.

A reconciliation of the statutory income tax rate to the effective income tax rate is as follows:

	2008		2007		2006
Federal statutory income tax rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal income tax benefit	(0.5	)%	1.4	%	2.4	%
Change in valuation allowance	(40.6	)%	55.7	%	(30.7	)%
Tax credit, non-deductible expenses and other	5.9	%	(46.3	)%	(2.5	)%
	(0.2	)%	45.8	%	4.2	%

In June 2006, FASB issued FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN 48”), which is an interpretation of SFAS 109 “Accounting for Income Taxes”. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

On January 1, 2007, the Company adopted the provisions of FIN 48. As a result of applying the provisions of FIN 48, the Company recorded an increase of $2.4 million in its unrecognized tax benefits. The unrecognized tax benefits as of December 31, 2008 relate to federal tax credit carryforwards. The Company does not expect our unrecognized tax benefits to change significantly over the next 12 months.

The following table summarizes the activity related to our unrecognized tax benefits for the years ended December 31, 2008 and 2007 (in thousands):

	2008			2007
Balance at January 1	$	2,448		$	2,448
Increases related to prior year tax positions		18,413			—
Decreases related to prior year tax positions		(18,413	)		—
Balance at December 31	$	2,448		$	2,448

If these unrecognized tax benefits of $2.4 million at December 31, 2008 were recognized, they would have decreased the Company’s annual effective tax rate. No expense has been recorded for interest and penalties related to these tax positions.

The 1993 through 2008 tax years remain subject to examination by federal and state taxing authorities. The audit of the 2005 tax year by the Internal Revenue Service was closed during 2008.

(9) SIGNIFICANT CONCENTRATIONS

The Company operates in a single industry acquiring, developing and commercializing prescription drugs used in the treatment of a variety of gastrointestinal diseases, which are those affecting the digestive tract. The Company’s

F-23

SALIX PHARMACEUTICALS, LTD.

Notes to Consolidated Financial Statements — Continued

principal financial instruments subject to potential concentration of credit risk are accounts receivable, which are unsecured, and cash equivalents. The Company’s cash equivalents consist primarily of money market funds. The amount of certain bank deposits may at times exceed the FDIC insurance limits.

The Company’s primary customers are wholesale pharmaceutical distributors and retail pharmacy chains in the United States.

Total revenues from customers representing 10% or more of total revenues for the respective years, are summarized as follows:

	Year Ended December 31,
	2008		2007		2006
Customer 1	42	%	41	%	42	%
Customer 2	24	%	23	%	22	%
Customer 3	12	%	9	%	9	%

Additionally, 74% and 72% of the Company’s accounts receivable balances were due from these three customers at December 31, 2008 and 2007, respectively.

Under the Company’s supply agreement with Alfa Wassermann, Alfa Wassermann is obligated to supply the Company with bulk rifaximin drug substance (the active pharmaceutical ingredient in Xifaxan tablets) until July 2014 or introduction of a generic product, whichever occurs first. The Company’s supply of rifaximin drug substance is manufactured by ZaCh Systems (formerly Zambon) in Lonigo, Italy, and Aventis in Brindisi, Italy. Under a long-term supply agreement, rifaximin is converted into Xifaxan drug product by Patheon, Inc. in Whitby, Ontario. Bulk Xifaxan tablets are packaged into finished Xifaxan commercial bottles by Pathoen and packaged into Xifaxan commercial blister packs by Carton Service in Norris, Tennessee.

Under the Company’s long-term supply agreement with aaiPharma, aaiPharma produces the Company’s commercial supply of 25 mg, 75 mg and 100 mg Azasan finished product.

Under the Company’s long-term supply agreement with Paddock Laboratories in Minneapolis, Minnesota, Paddock produces the Company’s commercial supply of finished product of Anusol-HC Cream, Anusol-HC Suppositories and Proctocort Suppositories. In addition, through prior supply arrangements between King Pharmaceuticals and Crown Laboratories in Johnson City, Tennessee, Crown continues to produce the Company’s commercial supply of Proctocort Cream finished product.

Under the Company’s long-term supply agreement with WellSpring Pharmaceuticals in Oakville, Ontario, WellSpring produces commercial supply of OsmoPrep finished product.

Under the Company’s long-term supply agreement with Norgine in Hengoed, Wales, Norgine produces commercial supply of MoviPrep pouches. For secondary packaging of MoviPrep into commercial finished kits, we have two vendors qualified: Norgine, at its Hengoed, Wales facility, and Carton Service in Norris, Tennessee.

Merck manufactured the Company’s commercial supply of Pepcid Oral Suspension and Diuril Oral Suspension through December 2008. Under a long-term supply agreement beginning in 2009, Paddock Laboratories in Minneapolis, Minnesota, will produce the Company’s commercial supply of Pepcid Oral Suspension and Diuril Oral Suspension

Bayer AG in Wuppertal, Germany supplies the Company with bulk mesalamine active ingredient. Under a long-term supply agreement with Catalent Pharma Solutions in Winchester, Kentucky, Catalent converts this mesalamine into the Company’s commercial supply of bulk Apriso, 375mg mesalamine capsules. The bulk Apriso capsules are then packaged into finished Apriso commercial bottles by Carton Service in Norris, Tennessee.

F-24

SALIX PHARMACEUTICALS, LTD.

Notes to Consolidated Financial Statements — Continued

Cosma S.P.A. in Bergamo, Italy supplies the Company with bulk metoclopramide active ingredient. Under a long-term supply agreement with Catalent in Swindon, United Kingdom, Catalent converts this metoclopramide into the Company’s commercial supply of Metozolv, 5mg and 10mg tablets in blister packaging. The Metozolv blister packs are then packaged into finished cartons by Carton Service in Norris, Tennessee.

Currently, under long-term supply agreements, the Company uses balsalazide drug substance (the active pharmaceutical ingredient in Colazal capsules) manufactured by Omnichem s.a., a subsidiary of Ajinomoto in Belgium, and Pharmazell (formerly Noveon Pharma, GmbH) in Raubling, Germany. Also, under long-term supply agreements, balsalazide is encapsulated into Colazal drug product by Nexgen Pharma, inc. (formerly Anabolic Laboratories) in Irvine, California. Bulk Colazal capsules are packaged into finished Colazal commercial bottles by Nexgen and Carton Service in Norris, Tennessee.

With respect to the Company’s products currently under development, namely the Company’s 1100 mg balsalazide tablet formulation and 550 mg rifaximin tablet formulation, the Company plans to negotiate commercial supply agreements with the same manufacturers who supplied the drug substance and drug product for the supplies of the Phase III clinical trial material.

(10) 401(K) PLAN

In 1996, the Company adopted the Salix Pharmaceuticals, Inc. 401(k) Retirement Plan. Eligible participants may elect to defer a percentage of their compensation. From inception through June 2006, the Company matched up to 50% of participant deferrals up to 6% of the participant’s compensation. Effective July 2006, the Company matches up to 75% of participant deferrals up to 6% of the participant’s compensation. The Company’s total matching contributions for all participants were approximately $1.1 million, $1.0 million and $0.7 million in 2008, 2007 and 2006, respectively. Additional discretionary employer contributions may be made on an annual basis.

(11) COMMITMENTS

At December 31, 2008, the Company had binding purchase order commitments for inventory purchases aggregating approximately $28.3 million over the next five months.

Lease Agreements

During 2007, the Company entered into a three-year agreement to lease computer equipment. The equipment was capitalized at $0.2 million, which approximates the present value of the minimum lease payments.

The Company leases fleet vehicles for its domestic sales force under a four-year lease agreement. The vehicles were capitalized at $1.5 million, which approximates the present value of the minimum lease payments.

The Company leases office facilities under various non-cancelable operating leases, the last of which expires on April 30, 2015. Certain of these leases contain future payment obligations that escalate over time. Rent expense was approximately $1.5 million, $1.9 million and $1.6 million for the years ended December 31, 2008, 2007 and 2006, respectively. The Company sub-leased its former corporate headquarters of approximately 26,000 square feet of office space under a lease expiring in 2011, total future minimum sublease payments due under this sublease were $1.1 million as of December 31, 2008.

F-25

SALIX PHARMACEUTICALS, LTD.

Notes to Consolidated Financial Statements — Continued

As of December 31, 2008, future minimum payments for leases were as follows (in thousands):

Years ending December 31,	Operating Leases		Capital Leases
2009	$	2,116	$	901
2010		2,163		611
2011		1,735		202
2012		1,490		3
2013		1,461		—
Thereafter		1,991		—
Total future minimum payments required	$	10,956		1,717
Less: Amount representing interest				77
Present value of net minimum lease payments				1,640
Less: Current portion of capital lease obligations				849
Long term portion of capital lease obligations			$	791

Potential Milestone Payments

The Company has entered into collaborative agreements with licensors, licensees and others. Pursuant to the terms of these collaborative agreements, the Company is obligated to make one or more payments upon the occurrence of certain milestones. The following is a summary of the material payments that the Company might be required to make under its collaborative agreements if certain milestones are satisfied.

License Agreement with Cedars-Sinai Medical Center — In June 2006, the Company entered into a license agreement with Cedars-Sinai for the right to use a patent and a patent application relating to methods of diagnosing and treating irritable bowel syndrome and other disorders caused by small intestinal bacterial overgrowth. Pursuant to the license agreement, the Company is obligated to pay Cedars-Sinai a license fee of $1.2 million over time. As of December 31, 2008, the Company had paid this license fee in full. The Company may terminate the license agreement upon written notice of not less than 90 days.

License and Supply Agreement with the Debiopharm Group — In September 2006, the Company acquired the exclusive right to sell, market and distribute Sanvar in the United States. Pursuant to the terms of this agreement, the Company is obligated to make an upfront and milestone payments to Debiopharm that could total up to $8.0 million contingent upon achievement of certain regulatory milestones, and an additional $6.0 million in milestone payments contingent on reaching certain sales thresholds over the term of the agreement. As of December 31, 2008, the Company had paid $1.0 million of milestone payments. The remaining milestone payments are contingent upon achievement of regulatory approval and certain sales thresholds.

License Agreement with Dr. Falk Pharma GmbH for granulated mesalamine — In July 2002, the Company and Dr. Falk entered into a license agreement which they amended in November 2003 and February 2005. Pursuant to the license agreement, as amended, the Company acquired the rights to develop and market a granulated formulation of mesalamine. The agreement provides that the Company is obligated to make milestone payments up to an aggregate amount of $11.0 million to Dr. Falk. As of December 31, 2008, the Company had paid $9.0 million of milestone payments. The remaining milestone payment is contingent upon achievement of additional regulatory approval.

License Agreement with Dr. Falk Pharma GmbH for budesonide — In March 2008, the Company entered into a License Agreement with Dr. Falk Pharma GmbH. The agreement provides the Company with an exclusive license to develop and commercialize in the United States Dr. Falk Pharma’s budesonide products. The products covered in the

F-26

SALIX PHARMACEUTICALS, LTD.

Notes to Consolidated Financial Statements — Continued

License Agreement include U.S. patent-protected budesonide rectal foam and budesonide gastro-resistant capsule, patents for which expire in 2015 and 2016, respectively. Pursuant to the license agreement the Company is obligated to make an upfront payment and regulatory milestone payments that could total up to $23.0 million to Dr. Falk Pharma, with the majority contingent upon achievement of U.S. regulatory approval. As of December 31, 2008, the Company had paid $1.0 million of these milestone payments.

License Agreement with Merck & Co, Inc. — In February 2007, the Company entered into a Master Purchase and Sale and License Agreement with Merck, paying Merck $55.0 million to purchase the U.S. prescription pharmaceutical product rights to Pepcid^® Oral Suspension and Diuril^® Oral Suspension. Pursuant to the license agreement, the Company is obligated to make additional milestone payments to Merck up to an aggregate of $6.0 million contingent upon reaching certain sales thresholds during any of the five calendar years beginning in 2007 and ending in 2011.

License Agreement with Napo Pharmaceuticals, Inc. — In December 2008 the Company entered into a Collaboration Agreement with Napo. Pursuant to the agreement, the Company has an exclusive, royalty-bearing license to crofelemer for the treatment of HIV-associated diarrhea and additional indications of pediatric diarrhea and acute infectious diarrhea in a certain territory. The Company also has a non-exclusive, worldwide, royalty-bearing license to use Napo-controlled trademarks associated with crofelemer. The Company has made an initial payment of $5.0 million to Napo and will make up to $50 million in milestone payments to Nap contingent on regulatory approvals and up to $250.0 million in milestone payments contingent on reaching certain sales thresholds. The Company is responsible for development costs of crofelemer, but costs exceeding $12.0 million for development of crofelemer used for the HIV-associated diarrhea indication will be credited towards regulatory milestones and thereafter against sales milestones.

License and Supply Agreement with Norgine B.V. — In December 2005, the Company entered into a license and supply agreement with Norgine for the rights to sell NRL944, a bowel cleansing product the Company now markets in the United States under the trade name MoviPrep. Pursuant to the terms of this agreement, the Company is obligated to make upfront and milestone payments to Norgine that could total up to $37.0 million over the term of the agreement. As of December 31, 2008, the Company had paid $22.0 million of milestone payments. The remaining milestone payments are contingent upon reaching sales thresholds.

License Agreement with Wilmington Pharmaceuticals, LLC — In September 2007, the Company entered into an Exclusive Sublicense Agreement with Wilmington Pharmaceuticals. The agreement provides that the Company is obligated to make upfront and milestone payments up to an aggregate amount of $8.0 million to Wilmington. As of December 31, 2008, the Company had paid $1.0 million of these milestone payments. The remaining milestone payment is contingent upon regulatory approval. The Company also loaned Wilmington $2.0 million which is due December 31, 2009, or earlier based on regulatory approval.

F-27

SALIX PHARMACEUTICALS, LTD.

Notes to Consolidated Financial Statements — Continued

(12) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 2008 and 2007:

	Mar 31			June 30			Sept 30			Dec 31 (2)
(in thousands, except per share amounts)	(unaudited)
2008
Net product revenue	$	34,254		$	41,071		$	42,872		$	60,569
Cost of products sold, excluding amortization of product rights and intangible assets		7,256			7,114			7,763			14,577
Net loss		(23,997	)		(7,089	)		(5,415	)		(10,536	)
Net loss per share, basic (1)		(0.50	)		(0.15	)		(0.11	)		(0.22	)
Net loss per share, diluted (1)		(0.50	)		(0.15	)		(0.11	)		(0.22	)
2007
Net product revenue	$	59,785		$	66,678		$	67,355		$	39,062
Cost of products sold, excluding amortization of product rights and intangible assets		12,005			13,041			13,083			16,895
Net income (loss)		2,844			10,237			14,173			(19,029	)
Net income (loss) per share, basic (1)		0.06			0.22			0.30			(0.40	)
Net income (loss) per share, diluted (1)		0.06			0.21			0.29			(0.40	)

(1) The sum of per share earnings by quarter may not equal earnings per share for the year due to the changes in average share calculations. This is in accordance with prescribed reporting requirements.

(2) The quarter ended December 31, 2007 includes a $34.6 million charge as a reduction of net product revenues as a result of the approval of three generic balsalazide capsule products on December 28, 2007.

(13) LEGAL PROCEEDINGS

From time to time, the Company is party to various legal proceedings or claims, either asserted or unasserted, which arise in the ordinary course of business. Management has reviewed pending legal matters and believes that the resolution of such matters will not have a significant adverse effect on the Company’s financial condition or results of operations.

The Company is involved in a lawsuit against a company seeking FDA approval to market a generic version of the Company’s MoviPrep product. Norgine, B.V. and Norgine Europe, B.V. own U.S. Patent No. 7,169,381 (the ‘381 patent). The ‘381 patent is listed with the FDA as protecting our MoviPrep product. Norgine licensed MoviPrep and the ‘381 patent to the Company for commercialization in the United States. Novel Laboratories, Inc., filed an Abbreviated New Drug Application, or ANDA, with the FDA seeking approval to market a generic version of MoviPrep in the United States prior to the September 2024 expiration of the ‘381 patent. On May 14, 2008, the Company and Norgine filed a lawsuit in the United States District Court for the District of New Jersey against Novel for infringement of the ‘381 patent. Novel filed an Answer and Counterclaims on June 20, 2008. Novel denied infringement and asserted defenses of patent invalidity and unenforceability. No trial date has been set. The Company intends to vigorously defend the patent rights for MoviPrep.

The Company is also involved in a lawsuit against Novel because it is seeking FDA approval to market a generic version of the Company’s OsmoPrep product. CDC, LLC, owns U.S. Patent No. 5,616,346 (the ‘346 patent). The ‘346 patent is listed with the FDA as protecting the Company’s OsmoPrep product. CDC, by its predecessor, licensed OsmoPrep and the ‘346 patent to the Company for commercialization in the United States. Novel Laboratories, Inc., filed an ANDA with the FDA seeking approval to market a generic version of OsmoPrep in the United States prior to the May 2013 expiration of the ‘346 patent. On September 8, 2008, the Company filed a lawsuit in the United States

F-28

SALIX PHARMACEUTICALS, LTD.

Notes to Consolidated Financial Statements — Continued

District Court for the District of New Jersey against Novel for the infringement of the ‘346 patent. The lawsuit also joins CDC as a party. Novel filed an Answer and Counterclaims on December 16, 2008. Novel denied infringement and asserted defenses of patent invalidity. No trial date has been set. The Company intend to vigorously defend the patent rights for OsmoPrep.

On or about July 14, 2008, Strides Arcolab Limited filed a Citizens Petition with the FDA seeking permission to submit an ANDA for change of dosage form from tablet to capsule for a 200mg generic version of Xifaxan. The Company intends to vigorously enforce the regulatory and intellectual property rights regarding Xifaxan. The Company is unable to predict the outcome of any ensuing regulatory action or litigation at the present time.

Regulatory data exclusivity for Xifaxan 200mg tablets ends on or about May 24, 2009. Accordingly, the Office of Generic Drugs would have been able to accept an ANDA for Xifaxan tablets on or any time subsequent to May 24, 2008, if the applicant certified that its generic rifaximin does not infringe Salix’s patent. If this occurred, a Paragraph IV notification would have to be provided to the Company by the applicant. Although the Company does not possess any specific knowledge of any such filing at the current time, the expiration of data exclusivity could result in a challenge to the related intellectual property rights of Xifaxan 200mg tablets at any time in the future. The Company intends to vigorously enforce the patent rights for Xifaxan.

(14) SUBSEQUENT EVENTS

On February 26, 2009, Wilmington received a complete response letter from the FDA, indicating that it requires a risk evaluation and mitigation strategy, or REMS, for Metozolv prior to approval of the NDA. With the exception of the REMS requirement, all substantive questions and issues surrounding the Metozolv application have been resolved. The Company intends to submit the REMS by mid March and will work with the FDA to expedite the approval of Metozolv.

F-29

SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS

Allowance for Rebates, Chargebacks and Coupons

			Additions		Deductions
Year ended December 31,	Beginning Balance		Provision Related to Current Period Sales		Rebates, Chargebacks and Discounts or Credits Related to Current Period Sales		Rebates, Chargebacks and Discounts or Credits Related to Prior Period Sales		Ending Balance
(in thousands)
2008	$	9,676	$	13,576	$	10,333	$	5,482	$	7,437
2007	$	7,986	$	29,369	$	22,241	$	5,438	$	9,676
2006	$	7,301	$	21,577	$	15,104	$	5,788	$	7,986

Allowance for Returns

			Additions		Deductions
Year ended December 31,	Beginning Balance		Provision Related to Current Period Sales		Returns or Credits Related to Prior Period Sales		Ending Balance
(in thousands)
2008	$	43,322	$	4,074	$	20,799	$	26,597
2007	$	6,112	$	46,562	$	9,352	$	43,322
2006	$	2,081	$	8,317	$	4,286	$	6,112

Allowance for Uncollectible Accounts

			Additions		Deductions
Year ended December 31,	Beginning Balance		Charged to Costs and Expenses		Accounts Written Off During Period		Ending Balance
(in thousands)
2008	$	3,112		—	$	2,547	$	565
2007	$	2,683	$	429		—	$	3,112
2006	$	1,988	$	695		—	$	2,683

Inventory Allowance

			Additions		Deductions
Year ended December 31,	Beginning Balance		Charged to Costs and Expenses		Amounts Recovered During Period		Ending Balance
(in thousands)
2008	$	789	$	3,297	$	318	$	3,768
2007	$	684	$	297	$	192	$	789
2006	$	2,841	$	1,152	$	3,309	$	684

Valuation Allowance on Deferred Tax Assets

			Additions		Deductions
Year ended December 31,	Beginning Balance		Provisions for Valuation Allowance		Release of Valuation Allowance/Other		Ending Balance
(in thousands)
2008	$	42,345	$	18,033		—	$	60,378
2007	$	50,842		—	$	8,497	$	42,345
2006	$	55,651		—	$	4,809	$	50,842

F-30

EX-10.64

Exhibit 10.64

* Portions of this document marked [*] are requested to be treated confidentially.

EXECUTION COPY

COLLABORATION AGREEMENT

between

NAPO PHARMACEUTICALS, INC.

and

SALIX PHARMACEUTICALS, INC.

Dated as of December 9, 2008

TABLE OF CONTENTS

ARTICLE 1         DEFINITIONS.......................................................................................................................................................		1
ARTICLE 2         DEVELOPMENT ACTIVITIES...........................................................................................................................		16
2.1	Development Activities..................................................................................................................................................	16
2.2	Records and Reports......................................................................................................................................................	17
2.3	Regulatory Inspections..................................................................................................................................................	18
2.4	Development Plan and Budget......................................................................................................................................	18
2.5	Product Trademarks.....................................................................................................................................................	19
ARTICLE 3         DEVELOPMENT FUNDING................................................................................................................................		19
3.1	Salix’s Payment Obligations for Development and Other Activities in Respect of Advent Products.....................................................................................................................................	19
3.2	Salix’s Payment Obligations for Development and Other Activities for Other Indications......................................................................................................................................................	20
3.3	Invoices and Payments..................................................................................................................................................	20
3.4	Books and Records; Audit............................................................................................................................................	20
ARTICLE 4         REGULATORY MATTERS.................................................................................................................................		21
4.1	Regulatory Responsibilities...........................................................................................................................................	21
4.2	Regulatory Data.............................................................................................................................................................	21
4.3	Communications with Regulatory Authorities...........................................................................................................	21
4.4	Transfer of Product Documentation............................................................................................................................	22
4.5	Drug Safety Information...............................................................................................................................................	22
4.6	Recalls.............................................................................................................................................................................	22
4.7	Rights of Reference........................................................................................................................................................	23
4.8	Pricing and Reimbursement Approvals......................................................................................................................	23
4.9	Drug Naming Approvals...............................................................................................................................................	23
ARTICLE 5         COLLABORATION MANAGEMENT................................................................................................................		23
5.1	Joint Steering Committee..............................................................................................................................................	23
5.2	Napo and Salix Rights and Responsibilities................................................................................................................	27
ARTICLE 6         SUPPLY OBLIGATIONS.....................................................................................................................................		27
6.1	Pre-Clinical and Clinical Supply Obligations.............................................................................................................	27
6.2	Commercial Supply.......................................................................................................................................................	28
6.3	Supply Chain..................................................................................................................................................................	28
6.4	Technology Transfer......................................................................................................................................................	28
6.5	Compassionate Distribution by Napo of Pediatric Products.....................................................................................	29

i

ARTICLE 7         FINANCIAL TERMS............................................................................................................................................		30
7.1	Equity Investment..........................................................................................................................................................	30
7.2	Up-Front Payment.........................................................................................................................................................	30
7.3	Regulatory Approval Milestones..................................................................................................................................	30
7.4	Sales Milestones..............................................................................................................................................................	31
7.5	Royalties to Napo...........................................................................................................................................................	31
7.6	Royalty Term..................................................................................................................................................................	33
7.7	Royalty Step-Down........................................................................................................................................................	33
7.8	Royalty Payments and Reports....................................................................................................................................	33
7.9	Payment Method............................................................................................................................................................	33
7.10	Taxes................................................................................................................................................................................	33
7.11	Sublicenses......................................................................................................................................................................	34
7.12	Foreign Exchange...........................................................................................................................................................	34
7.13	Third Party Payments Under Existing Agreements...................................................................................................	34
7.14	Records............................................................................................................................................................................	35
7.15	Audits..............................................................................................................................................................................	35
ARTICLE 8         REPRESENTATIONS AND COVENANTS........................................................................................................		36
8.1	Representations and Warranties..................................................................................................................................	36
8.2	Covenants........................................................................................................................................................................	40
8.3	Debarment......................................................................................................................................................................	42
8.4	Disclaimer of Warranty.................................................................................................................................................	43
ARTICLE 9         COMMERCIALIZATION....................................................................................................................................		43
9.1	Commercialization of the Licensed Products..............................................................................................................	43
9.2	Promotional Materials and Activities..........................................................................................................................	43
9.3	Unauthorized Sales........................................................................................................................................................	44
9.4	Reporting........................................................................................................................................................................	45
ARTICLE 10       LICENSE GRANTS..............................................................................................................................................		46
10.1	Grants to Salix................................................................................................................................................................	46
10.2	Retention of Rights........................................................................................................................................................	46
10.3	Sublicensing....................................................................................................................................................................	47
10.4	Grants to Napo...............................................................................................................................................................	47
10.5	Available Rights; Salix First Right of Negotiation to License Additional Napo Products...........................................................................................................................................................	48
ARTICLE 11       INTELLECTUAL PROPERTY.............................................................................................................................		49
11.1	Disclosures......................................................................................................................................................................	49
11.2	Ownership of Intellectual Property..............................................................................................................................	49
11.3	Patent Maintenance and Prosecution..........................................................................................................................	50
11.4	Enforcement of Patents.................................................................................................................................................	51
11.5	Invalidity or Unenforceability Defenses or Actions....................................................................................................	52

ii

11.6	Infringement Claims by Third Parties.........................................................................................................................	53
11.7	Third Party Licenses.....................................................................................................................................................	54
11.8	Product Trademarks.....................................................................................................................................................	55
ARTICLE 12       CONFIDENTIALITY AND PUBLICATIONS....................................................................................................		56
12.1	Definition.........................................................................................................................................................................	56
12.2	Exclusions.......................................................................................................................................................................	56
12.3	Disclosure and Use Restriction.....................................................................................................................................	57
12.4	Authorized Disclosure...................................................................................................................................................	57
12.5	Use of Name...................................................................................................................................................................	58
12.6	Publicity..........................................................................................................................................................................	58
12.7	Publications.....................................................................................................................................................................	59
12.8	Patient Information.......................................................................................................................................................	59
ARTICLE 13       TERM AND TERMINATION..............................................................................................................................		59
13.1	Term................................................................................................................................................................................	59
13.2	Termination for Material Breach.................................................................................................................................	59
13.3	Other Termination by Salix..........................................................................................................................................	60
13.4	Termination Upon Insolvency......................................................................................................................................	60
13.5	Rights in Bankruptcy.....................................................................................................................................................	60
13.6	Licenses and Assignments Upon Termination............................................................................................................	61
13.7	Additional Consequences of Termination...................................................................................................................	61
13.8	Accrued Rights; Surviving Obligations.......................................................................................................................	64
13.9	Remedies.........................................................................................................................................................................	64
ARTICLE 14       INDEMNIFICATION............................................................................................................................................		65
14.1	Indemnification by Salix...............................................................................................................................................	65
14.2	Indemnification by Napo...............................................................................................................................................	65
14.3	Indemnification Procedure...........................................................................................................................................	66
14.4	Insurance........................................................................................................................................................................	68
ARTICLE 15       MISCELLANEOUS..............................................................................................................................................		68
15.1	Force Majeure................................................................................................................................................................	68
15.2	Export Control...............................................................................................................................................................	69
15.3	Subcontractors...............................................................................................................................................................	69
15.4	Assignment......................................................................................................................................................................	69
15.5	Change in Control of Napo or Acquisition by Napo...................................................................................................	69
15.6	Severability.....................................................................................................................................................................	70
15.7	Dispute Resolution.........................................................................................................................................................	70
15.8	Governing Law, Jurisdiction, Venue and Service......................................................................................................	71
15.9	Notices.............................................................................................................................................................................	72
15.10	Entire Agreement; Modifications.................................................................................................................................	73
15.11	Relationship of the Parties............................................................................................................................................	74
15.12	Equitable Relief..............................................................................................................................................................	74

iii

15.13	Waiver.............................................................................................................................................................................	74
15.14	Performance by Affiliates.............................................................................................................................................	74
15.15	Counterparts...................................................................................................................................................................	74
15.16	No Benefit to Third Parties...........................................................................................................................................	74
15.17	Further Assurance.........................................................................................................................................................	75
15.18	English Language...........................................................................................................................................................	75
15.19	References.......................................................................................................................................................................	75
15.20	Construction...................................................................................................................................................................	75
Schedules and Exhibits

Schedule 1.24	Certain Salix Competitors
Schedule 1.34(a)(ii)(A)	Certain Development Costs
Schedule 1.82	Napo Patents
Schedule 1.109(b)	Salix HIV/AIDS/Pediatric Territory
Schedule 1.109(c)	Salix ID Territory
Schedule 1.115	Specifications
Schedule 3.1.2	Certain Napo Employees
Schedule 6.3.2	Certain CPL
Schedule 6.5.1	Compassionate Distribution Countries
Schedule 7.1	Disbursement of Up-Front Payment
Schedule 8.1.6	Additional Napo Representations and Warranties
Schedule 8.1.6(u)	Incurred Costs
Exhibit A	Development Plan and Budget
Exhibit B	Form of Pharmacovigilance Agreement

iv

COLLABORATION AGREEMENT

THIS COLLABORATION AGREEMENT (the “Agreement”) is made effective as of December 9, 2008 (the “Effective Date”), by and between Salix Pharmaceuticals, Inc., a Delaware corporation having its principal place of business at 1700 Perimeter Park Drive, Morrisville, North Carolina 27560 (“Salix”), and Napo Pharmaceuticals, Inc., a Delaware corporation having its principal place of business at 250 East Grand Avenue, Suite 90, South San Francisco, California 94080 (“Napo”). Salix and Napo are sometimes referred to herein individually as a “Party” and collectively as the “Parties.”

RECITALS

WHEREAS, Napo Controls (as defined below) certain intellectual property with respect to the Licensed Compound (as defined below);

WHEREAS, Napo desires to grant certain licenses to Salix, and Salix desires to obtain certain licenses from Napo, to commercialize and distribute the Licensed Compound and the Licensed Products (as defined below) in accordance with the terms and conditions set forth below;

WHEREAS, Napo currently maintains an ongoing program to generate and develop new chemical entities and new pharmaceutical products for gastrointestinal indications;

WHEREAS, Napo desires to grant to Salix, and Salix desires to obtain from Napo, certain rights of first negotiation with respect to such chemical entities and pharmaceutical products; and

WHEREAS, simultaneously herewith, Salix and Glenmark Pharmaceuticals Ltd. (“Glenmark”) are entering into a Manufacturing and Supply Agreement, pursuant to which Glenmark will supply Salix’s commercial supply requirements of the Licensed Compound (the “Glenmark Supply Agreement”); Napo and Glenmark are entering into a Fifth Amendment (the “Glenmark-Napo Amendment”) to the Glenmark Agreement (as defined below); and Napo and Glenmark are entering into a letter agreement clarifying the Glenmark Agreement (the “Glenmark-Napo Letter Agreement”);

NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties, intending to be legally bound, do hereby agree as follows:

ARTICLE 1

DEFINITIONS

The following terms shall have the following meanings as used in this Agreement:

1.1 “Acquisition,” with respect to a Party, means a merger, acquisition (whether of all of the stock or all or substantially all of the assets of a Person or any operating or business

1

division of a Person) or similar transaction by or with the Party, other than a Change in Control of the Party.

1.2 “Act” means the United States Food, Drug, and Cosmetic Act, as amended.

1.3 “Advent Product” means any Licensed Product, including a CRO-HIV Product, that has obtained Initial Regulatory Approval based on the Advent Study.

1.4 “Advent Study” means the Randomized, Double-Blind, Parallel-Group, Placebo-Controlled, Two-Stage Study to Assess the Efficacy and Safety of Crofelemer 125 mg, 250 mg, and 500 mg Orally Twice Daily for the Treatment of HIV-Associated Diarrhea, ongoing as of the Effective Date.

1.5 “Affiliate” means, with respect to a Party, a Person that (directly or indirectly) controls, is controlled by, or is under common control with such Party. For purposes of this definition, the term “control” (including, with correlative meanings, the terms “controlled by” and “under common control with”) as used with respect to a Person (including a Party), means (a) the possession, directly or indirectly, of the power to direct, or cause the direction of, the management or policies of such Person (including a Party), whether through the ownership of voting securities, by contract or otherwise, or (b) the ownership, directly or indirectly, of more than fifty percent (50%) of the voting securities or other ownership interest of a Person (including a Party).

1.6 “Agreement” has the meaning set forth in the Preamble.

1.7 “Annual Period” means, with respect to each Licensed Product, the twelve (12)-month period beginning on the date of the first commercial sale of such Licensed Product by Salix or any of its Affiliates or Sublicensees and each successive twelve (12)-month period thereafter.

1.8 “Applicable Law” means the applicable laws, rules and regulations, including any rules, regulations, guidelines, or other requirements of the Regulatory Authorities, that may be in effect from time to time.

1.9 “Approval” means, with respect to any particular country, all those approvals, licenses, registrations or authorizations of any Regulatory Authority necessary to commercially distribute, sell or market a Licensed Product in such country (or, if applicable, the EU), including, where applicable, (a) pricing or reimbursement approval in such country (or, if applicable, the EU), (b) pre- and post-approval marketing authorizations (including any prerequisite manufacturing approval or authorization related thereto), (c) labeling approval, and (d) technical, medical and scientific licenses.

1.10 “Approved Relief Organizations” has the meaning set forth in Section 6.5.1.

1.11 “AsiaPharm” means AsiaPharm Investment Limited.

1.12 “AsiaPharm Agreement” means that certain Alliance Agreement, dated May 23, 2005, by and between AsiaPharm and Napo.

2

1.13 “Breaching Party” has the meaning set forth in Section 13.2.

1.14 “Business Day” means a day that is not a Saturday, Sunday or a day on which banking institutions in New York, New York are required or permitted by law to remain closed.

1.15 “Calendar Year” means each successive period of twelve (12) calendar months commencing on January 1 and ending on December 31.

1.16 “Change in Control,” with respect to a Party, shall be deemed to have occurred if any of the following occurs after the Effective Date:

1.16.1 any “person” or “group” (as such terms are defined below) (a) is or becomes the “beneficial owner” (as defined below), directly or indirectly, of shares of capital stock or other interests (including partnership interests) of such Party then outstanding and normally entitled (without regard to the occurrence of any contingency) to vote in the election of the directors, managers or similar supervisory positions (“Voting Stock”) of such Party representing fifty percent (50%) or more of the total voting power of all outstanding classes of Voting Stock of such Party or (b) has the power, directly or indirectly, to elect a majority of the members of the Party’s board of directors or similar governing body (“Board of Directors”); or

1.16.2 such Party enters into a merger, consolidation or similar transaction with another Person (whether or not such Party is the surviving entity) and as a result of such merger, consolidation or similar transaction (a) the members of the Board of Directors of such Party immediately prior to such transaction constitute less than a majority of the members of the Board of Directors of such Party or such surviving Person immediately following such transaction or (b) the Persons that beneficially owned, directly or indirectly, the shares of Voting Stock of such Party immediately prior to such transaction cease to beneficially own, directly or indirectly, shares of Voting Stock of such Party representing at least a majority of the total voting power of all outstanding classes of Voting Stock of the surviving Person in substantially the same proportions as their ownership of Voting Stock of such Party immediately prior to such transaction; or

1.16.3 such Party sells or transfers to any Third Party, in one or more related transactions, properties or assets representing all or substantially all of such Party’s consolidated total assets; or

1.16.4 the holders of capital stock of such Party approve a plan or proposal for the liquidation or dissolution of such Party.

For the purpose of this definition of Change in Control, (a) “person” and “group” have the meanings given such terms under Section 13(d) and 14(d) of the United States Securities Exchange Act of 1934 and the term “group” includes any group acting for the purpose of acquiring, holding or disposing of securities within the meaning of Rule 13d-5(b)(1) under the said Act, (b) a “beneficial owner” shall be determined in accordance with Rule 13d-3 under the aforesaid Act, and (c) the terms “beneficially owned” and “beneficially own” shall have meanings correlative to that of “beneficial owner.”

3

1.17 “China” means the People’s Republic of China (including Hong Kong and Macau).

1.18 “Claims” has the meaning set forth in Section 14.1.

1.19 “Clinical Data” means all information with respect to the Licensed Compound or any Licensed Product made, collected or otherwise generated under or in connection with the Clinical Trials or the Post Approval Studies for the Licensed Compound or the Licensed Products, including any data, reports and results with respect to any of the foregoing.

1.20 “Clinical Trial” means a Phase I Clinical Trial, Phase II Clinical Trial or Phase III Clinical Trial (including a Pivotal Trial), and such other tests and studies in patients that are required by Applicable Law, or otherwise recommended by the Regulatory Authorities, to obtain or maintain Drug Approval Applications, but excluding Post Approval Studies, and “Clinical Trials” means all of the foregoing clinical trials.

1.21 “Commercialization” means any and all activities (whether before or after Approval) directed to the marketing, detailing and promotion of a Licensed Product after Approval for commercial sale has been obtained, and shall include pre-launch and post-launch marketing, promoting, detailing, distributing, offering to sell and selling such Licensed Product, importing, exporting or transporting such Licensed Product for sale, and regulatory affairs with respect to the foregoing, but shall exclude Post Approval Studies. “Commercialize” and “Commercializing” shall be interpreted accordingly.

1.22 “Commercially Reasonable Efforts” means, with respect to the research, Development, Commercialization or other Exploitation of a Licensed Product, as the case may be, efforts and resources commonly used in the research-based pharmaceutical industry for an internally-developed product of similar commercial potential at a similar stage in its lifecycle, taking into consideration its safety and efficacy, its cost to Develop, the competitiveness of alternative products, its proprietary position and the likelihood of regulatory approval. Commercially Reasonable Efforts shall be determined on a market-by-market basis for each Licensed Product without regard to the particular circumstances of a Party, including any other product opportunities of such Party, and, with respect to Salix, without regard to any payments owed to Napo under Sections 7.3, 7.4 and 7.5.

1.23 “Committee” has the meaning set forth in Section 5.1.2(j).

1.24 “Competitor” means (a) the entities set forth on Schedule 1.24 and any of their respective Affiliates, (b) any Person that derives a material portion of its revenues from one or more pharmaceutical or biological products (including over-the-counter products) or dietary supplements or other products intended for human use or consumption that are directly competitive in one or more national markets with any one or more products from which Salix derives a material portion of its revenues, and (c) any Person that Controls Information, Material, invention, Patent or other intellectual property rights in or with respect to a Generally Competitive Product.

1.25 “Confidential Information” has the meaning set forth in Section 12.1.

4

1.26 “Control” means, with respect to any Information, Material, invention, Patent or other intellectual property right, possession by a Party or its Affiliates of the right, whether directly or indirectly, to grant the right to use, or to grant a license or a sublicense under, such Information, Material, invention, Patent or other intellectual property right as provided for herein without violating the terms of any agreement or other arrangement with any Third Party. No Party (or Affiliate of a Party) shall be deemed to Control any Information, Material, invention, Patent or other intellectual property right of the other Party by virtue of the grants set forth in Section 10.1, 10.4 or 13.6.

1.27 “Corporate Names” shall mean (a) in the case of Napo, such Trademarks and corporate names and logos Controlled by Napo as Napo may designate in writing from time to time and (b) in the case of Salix, such Trademarks and corporate names and logos Controlled by Salix as Salix may designate in writing from time to time, in each case ((a) and (b)) together with any variations and derivatives thereof.

1.28 “Courts” has the meaning set forth in Section 15.8.2.

1.29 “CPL” means crude plant latex of Croton lechleri.

1.30 “CRO-HIV Product” means a Licensed Product for the treatment of chronic diarrhea in humans living with HIV/AIDS.

1.31 “Data Exclusivity” has the meaning set forth in Section 1.88.

1.32 “Designated Payee” means those payees set forth on Schedule 7.1.

1.33 “Development” means those activities, including research, pre-clinical and other non-clinical activities, test method development and stability testing, toxicology, formulation, process development, manufacturing scale-up, qualification and validation, quality assurance/quality control, Clinical Trials, Post Approval Studies, supporting manufacturing activities and related regulatory activities, that are necessary or useful to obtain and maintain Initial Regulatory Approval for a Licensed Product for an indication. “Develop” and “Developing” shall be interpreted accordingly.

1.34 “Development Costs” means, subject to the other terms of this Agreement and without duplication, (a) the direct out-of-pocket costs paid to Third Party Providers or Third Party Suppliers by or on behalf of a Party or any of its Affiliates, during the term of and pursuant to this Agreement, that (i) are specifically identifiable or reasonably allocable to the Development activities for a Licensed Product for the purpose of obtaining Initial Regulatory Approval for such Licensed Product for one or more indications and any Post Approval Studies required by the FDA with respect to such Licensed Product, (ii) relate solely to Development activities performed on or after July 1, 2008, and, (iii)(A) with respect to Development activities performed from July 1, 2008 through the Effective Date, are included in the Development Plan and Budget and specifically listed on Schedule 1.34(a)(ii)(A) or, (B) with respect to Development activities performed after the Effective Date, are included in the Development Plan and Budget, (b) amounts paid by Napo or Salix to Glenmark pursuant to the Glenmark Agreement or the Glenmark Supply Agreement in respect of capital acquisition costs for equipment to support the manufacturing activities contemplated by the Glenmark Agreement or

5

the Glenmark Supply Agreement, to the extent such capital acquisition costs are included in the Development Plan and Budget, (c) the payments from Salix to Napo contemplated by Section 3.1.2, (d) amounts paid to Third Parties by either Party pursuant to Section 11.3, and (e) filing fees and other amounts paid to Regulatory Authorities in connection with applications for Initial Regulatory Approval for the Licensed Product; provided, however, that if Salix takes ownership of an IND and the corresponding program loses its small business waiver resulting in a PDUFA Fee being payable on filing of a Drug Approval Application in the United States, then payment of any resulting fee by Salix in respect of such Drug Approval Application shall constitute a Development Cost only if Salix provides written notice to Napo that the chief executive officer of Salix has determined in good faith that due to concerns regarding the financial condition and prospects of Napo it is appropriate in order to protect the rights of Salix hereunder that Salix take ownership of the IND and file the Drug Approval Application in its own name. Development Costs shall include payments to Third Party Suppliers for or in connection with the manufacture of Licensed Product for use in Clinical Trials and Post Approval Studies. Third Party Payments shall not constitute Development Costs nor, for the avoidance of doubt, shall any cost of whatever kind or nature that is not reflected in and authorized by the Development Plan and Budget constitute Development Costs.

1.35 “Development Plan and Budget” has the meaning set forth in Section 2.4.

1.36 “Distributor” means a Person, other than a Sublicensee or an Affiliate of Salix, that (a) purchases Licensed Product from Salix, its Affiliates or Sublicensees, (b) assumes responsibility from Salix for all or a portion of the Commercialization of Licensed Product, and (c) sells Licensed Product.

1.37 “Dollars” or “$” means the legal tender of the United States.

1.38 “Drug Approval Application” means a New Drug Application as defined in the Act, and the regulations promulgated thereunder, or any corresponding application in a country or jurisdiction other than the United States, including, with respect to the European Union, a Marketing Authorization Application (“MAA”) filed with the European Medicines Agency (“EMEA”) pursuant to the centralized Approval procedure or with the applicable Regulatory Authority of a country in the European Union with respect to the mutual recognition or any other national Approval procedure.

1.39 “Drug Master File” means any drug master files filed with the FDA with respect to a Licensed Product, and any equivalent filing in other countries or regulatory jurisdictions.

1.40 “Effective Date” has the meaning set forth in the Preamble.

1.41 “EMEA” has the meaning set forth in Section 1.38.

1.42 “Europe” means the countries comprising the European Union as it may be constituted from time to time, together with Switzerland and those additional countries comprising the European Economic Area as it may be constituted from time to time (as of the Effective Date, Iceland, Liechtenstein and Norway).

6

1.43 “European Union” or “EU” means the economic, scientific and political organization of member states of the European Union, and which, as of the Effective Date, consists of Austria, Belgium, Bulgaria, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, The Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the United Kingdom, and that certain portion of Cyprus included in such organization.

1.44 “Exploit” or “Exploitation” means to make, have made, import, use, sell, offer for sale, or otherwise dispose of, including all discovery, research, Development, Commercialization, registration, modification, enhancement, improvement, manufacture, storage, formulation, exportation, transportation, distribution, promotion and marketing activities related thereto.

1.45 “FDA” means the United States Food and Drug Administration, and any successor agency thereto.

1.46 “FFDCA” means the United States Federal Food, Drug, and Cosmetic Act, as amended.

1.47 “GAAP” means United States generally accepted accounting principles consistently applied.

1.48 “Generally Competitive Product” means (a) any pharmaceutical or biological product (including any over-the-counter product), whether currently marketed or in development, that is intended for use in the Human Excluding HIV/AIDS/ID/Pediatric Field, the HIV/AIDS/Pediatric Field, or the ID Field and (b) any dietary supplement or food product, whether currently marketed or in development, that is advertised, marketed or promoted for use in the Human Excluding HIV/AIDS/ID/Pediatric Field, the HIV/AIDS/Pediatric Field, or the ID Field.

1.49 “Glenmark” has the meaning set forth in the Recitals.

1.50 “Glenmark Agreement” means that certain Collaboration Agreement entered into on July 2, 2005, by and between Glenmark and Napo, as amended.

1.51 “Glenmark-Napo Amendment” has the meaning set forth in the Recitals.

1.52 “Glenmark-Napo Letter Agreement” has the meaning set forth in the Recitals.

1.53 “Glenmark Supply Agreement” has the meaning set forth in the Recitals.

1.54 “Good Manufacturing Practice” or “GMP” means the current good manufacturing practices applicable from time to time to the manufacturing of a Licensed Product or any intermediate thereof pursuant to Applicable Law.

1.55 “Hatch-Waxman Act” means the Drug Price Competition and Patent Term Restoration Act of 1984, as amended.

7

1.56 “HIV/AIDS/Pediatric Field” has the meaning set forth in Section 1.57.

1.57 “Human Excluding HIV/AIDS/ID/Pediatric Field” means all indications of the Licensed Compound for human use or consumption (including by way of food or dietary supplements), other than HIV/AIDS-related diarrhea, acute infectious diarrhea and pediatric diarrhea of any etiology including cholera; “HIV/AIDS/Pediatric Field” means only those indications of the Licensed Compound for human use for HIV/AIDS-related diarrhea and pediatric diarrhea; and “ID Field” means only those indications of the Licensed Compound for human use for acute infectious diarrhea, specifically including cholera and traveler’s diarrhea.

1.58 “ID Field” has the meaning set forth in Section 1.57.

1.59 “Improvement” shall mean any modification to a compound, product or technology or any discovery, technology, device or process or formulation related to such compound, product or technology, whether or not patented or patentable, including any enhancement in the efficiency, operation, manufacture (including any manufacturing process), ingredients, preparation, presentation, formulation, means of delivery, packaging or dosage of such compound, product or technology, any discovery or development of any new or expanded indications for such compound, product or technology, or any discovery or development that improves the stability, safety or efficacy of such compound, product or technology.

1.60 “IND” means any investigational new drug application filed with the FDA for authorization to commence Clinical Trials or its equivalent in other countries or regulatory jurisdictions.

1.61 “Indemnification Claim Notice” has the meaning set forth in Section 14.3.1.

1.62 “Indemnified Party” has the meaning set forth in Section 14.3.1.

1.63 “Indemnifying Party” has the meaning set forth in Section 14.3.1.

1.64 “Information” means techniques and data relating to the Development, Commercialization and other Exploitation of a Licensed Product, including inventions, practices, methods, knowledge, know-how, test data, including pharmacological, toxicological, biological, chemical and physical and pre-clinical and clinical test data, analytical and quality control data, regulatory submissions, correspondence and communications, marketing, pricing, distribution, cost, sales, manufacturing, patent and legal data or descriptions (whether or not confidential, proprietary, patented or patentable), in each case in written, electronic or any other form now known or hereafter developed.

1.65 “Initial Regulatory Approval” of a Licensed Product for an indication means (a) with respect to the United States, the approval by the FDA and, (b) with respect to a country or jurisdiction other than the United States, the approval by the applicable Regulatory Authorities of the Drug Approval Application with respect to such Licensed Product for such indication in the applicable regulatory jurisdiction (including, in the European Union, the approval by the EMEA of an MAA filed pursuant to the centralized Approval procedure, if applicable, or otherwise with respect to the mutual recognition Approval procedure on a country-by-country basis with the applicable Regulatory Authority of a country in Europe).

8

1.66 “Joint Steering Committee” or “JSC” has the meaning set forth in Section 5.1.1.

1.67 “Know-How” means, as applicable, in the case of Napo, the Napo Know-How, and in the case of Salix, the Salix
Know-How.

1.68 “Licensed Compound” means oligomeric proanthocyanidin (OPC) of varying chain lengths with an average molecular weight of approximately 2000 daltons (Crofelemer), including any Improvements thereto.

1.69 “Licensed Product” means any form or dosage of pharmaceutical composition or preparation in finished form labeled and packaged for sale by prescription, over-the-counter, dietary supplement, food or any other method that contains the Licensed Compound as an active ingredient (including a Licensed Product that contains the Licensed Compound as an active ingredient together with one or more other active ingredients (which may be either combined in a single formulation or bundled with separate formulations but sold as one product)), and any Improvements thereto.

1.70 “License Notice” has the meaning set forth in Section 10.5.

1.71 “License Terms” has the meaning set forth in Section 10.5.

1.72 “Losses” has the meaning set forth in Section 14.1.

1.73 “MAA” has the meaning set forth in Section 1.38.

1.74 “Manufacture” and “Manufacturing” means (a) the collecting, manufacturing, processing, formulating, packaging, labeling, holding, storage, warehousing, and quality control testing of a pharmaceutical product or compound or any component thereof and (b) the handling, holding, storage or warehousing of raw materials, finished product or work in process.

1.75 “Manufacturing Technology” shall mean any process, technology, Information, data or documentation (including batch records and regulatory documentation) that is necessary for or used in the manufacture or formulation or vialing or release of the Licensed Compound or a Licensed Product.

1.76 “Materials” means compositions of matter, articles of manufacture, assays and pharmacological, toxicological, biological, chemical or physical materials relating to the Exploitation of a Licensed Product.

1.77 “Napo” has the meaning set forth in the Preamble.

1.78 “Napo Agreements” means those agreements entered into by and between Napo or its Affiliates, on the one hand, and certain Third Parties on the other hand, whether entered into prior to or after the Effective Date, pursuant to which Napo Controls (or Third Party Payments are otherwise due with respect to) certain Licensed Products; provided, however, that Napo shall only enter into any such agreement with a Third Party with respect to a Licensed Product after the Effective Date in accordance with Section 11.7 and if Napo concludes in good

9

faith that it requires a license under Patent(s) controlled by such Third Party in order to Develop or Exploit such Licensed Product and shall not grant any rights in such Licensed Product to such Third Party to the extent such rights could reasonably be expected to adversely affect Salix’s rights to or ability to Exploit (including the ability to manufacture) such Licensed Product.

1.79 “Napo Common Stock” means the common stock, par value $0.0001 per share, of Napo.

1.80 “Napo Indemnitees” has the meaning set forth in Section 14.1.

1.81 “Napo Know-How” means all Information, Materials and inventions that are Controlled by Napo or its Affiliates as of the Effective Date or at any time during the term of this Agreement that (a) are developed or acquired by, or licensed to, Napo or any of its Affiliates or, to the extent permitted under the applicable sublicense agreement, its Sublicensees (other than Salix and its Affiliates) under or in connection with this Agreement or otherwise used by or on behalf of Napo or any of its Affiliates or, to the extent permitted under the applicable sublicense agreement, Sublicensees (other than Salix and its Affiliates) in the Development or Commercialization of a Licensed Product or (b) are necessary or useful for the Development or Commercialization of a Licensed Product, in each case ((a) or (b)), whether or not patented or patentable, excluding any Information and inventions to the extent covered or claimed by the Napo Patents that are publicly disclosed.

1.82 “Napo Patents” means all of the Patents that are Controlled by Napo or its Affiliates as of the Effective Date or at any time during the term of this Agreement that (a) are necessary or useful for the Development or Commercialization of a Licensed Product or (b) claim or cover a Licensed Product or any component thereof or the Development or Commercialization of a Licensed Product or any component thereof. Without limitation of the foregoing, the Napo Patents shall include those Patents listed on Schedule 1.82 to this Agreement, and any substitutions, divisions, continuations, continuations-in-part, reissues, renewals, registrations, confirmations, re-examinations, extensions, supplementary protection certificates, and any international or foreign equivalent of any Patent listed in such Schedule.

1.83 “Napo Technology” means the Napo Know-How and the Napo Patents.

1.84 “Net Sales” means, for any period, the gross amount invoiced by Salix and its Affiliates and Sublicensees for the sale of Licensed Product(s) to Third Parties (other than Sublicensees) (the “Invoiced Sales”), less deductions for: (a) [*] and [*] and [*] and [*] and [*], including (i) those [*] and [*], (ii) [*] and other [*] and [*] and similar [*] and other [*] and other [*], (iii) [*] and [*], and (iv) [*]; (b) [*] and [*] to the extent that such items are included in the Invoiced Sales; (c) [*] and [*] and other [*] related to the sales to the extent that such items are included in the Invoiced Sales; (d) [*] and similar [*] such as, by way of illustration and not in limitation of the Parties’ rights hereunder, [*] or [*] or similar [*] or equivalent [*] (e) [*] and other [*] and [*] directly related to the sale or delivery of Licensed Product(s) (but not including [*]); (f) any other similar and [*]; (g) [*] to the extent that such items are included in the Invoiced Sales; and (h) any [*]. Any of the deductions listed above that involves a payment by

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

10

Salix or its Affiliates or Sublicensees shall be taken as a deduction in the Quarter in which the payment is accrued by such entity. Deductions pursuant to subsection (h) above shall be taken in the Quarter in which such sales are no longer recorded as a receivable. For purposes of determining Net Sales, the Licensed Product(s) shall be deemed to be sold when invoiced and a “sale” shall not include transfers or dispositions for charitable (including pursuant to Section 6.5), promotional, pre-clinical, clinical, regulatory or governmental purposes to the extent no amount is received by Salix, its Affiliates, or Sublicensees in connection therewith.

For purposes of calculating Net Sales, sales between or among Salix, its Affiliates and its Sublicensees shall be excluded from the computation of Net Sales, but sales by Salix, its Affiliates or its Sublicensees to Third Parties (other than Sublicensees) shall be [*] in the computation of Net Sales.

If Salix should, in a given country during a given accounting period, sell a Licensed Product that contains one or more active ingredients in addition to the Licensed Compound (which may be either combined in a single formulation or bundled with separate formulations but sold as one product), Net Sales for such combination product will be calculated by multiplying actual Net Sales of such combination product by the fraction [*] where A is the [*], and B is the [*]. If, on a country-by-country basis, either a Licensed Product, on the one hand, or such other active ingredient or ingredients in the combination product, on the other hand, is, or both of the foregoing are, not sold separately in said country, Net Sales for the purpose of determining royalties of a Licensed Product shall be determined by the respective chief financial officers of the Parties in good faith and in a manner consistent with the intent of this Agreement, provided that any matters in dispute with respect thereto shall be ultimately and finally reasonably determined by the Chief Financial Officer of [*].

[*] sales of Licensed Products outside of North America that give rise to royalties or other payments that are shared between Salix and Napo pursuant to Section 7.11.2 shall constitute or be included in Net Sales.

1.85 “Non-Prescription Competitive Product” means (a) any over-the-counter product, whether currently marketed or in development, that contains as an active pharmaceutical ingredient the Licensed Compound or any compound in the same or substantially similar chemical class as the Licensed Compound and that is intended for use in the Human Excluding HIV/AIDS/ID/Pediatric Field, the HIV/AIDS/Pediatric Field, or the ID Field and (b) any dietary supplement or food product, whether currently marketed or in development, that contains any compound obtained or derived from Croton lechleri and is advertised, marketed or promoted for use in the Human Excluding HIV/AIDS/ID/Pediatric Field, the HIV/AIDS/Pediatric Field, or the ID Field.

1.86 “North America” means the United States of America (including its territories and possessions, Puerto Rico and the District of Columbia), Canada and Mexico.

1.87 “Party” or “Parties” has the meaning set forth in the Preamble.

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

11

1.88 “Patents” means (a) all national, regional and international patents and patent applications, including provisional patent applications, (b) all patent applications filed either from such patents, patent applications or provisional applications or from an application claiming priority from either of these, including divisionals, continuations, continuations-in-part (other than with respect to new subject matter that would not otherwise be covered in this Agreement), provisionals, converted provisionals, and continued prosecution applications, (c) any and all patents that have issued or in the future issue from the foregoing patent applications ((a) and (b)), including utility models, petty patents and design patents and certificates of invention, (d) any and all extensions or restorations by existing or future extension or restoration mechanisms, including revalidations, reissues, re-examinations and extensions (including any supplementary protection certificates and the like) of the foregoing patents or patent applications ((a), (b) and (c)), (e) any similar rights, including so-called pipeline protection, or any importation, revalidation, confirmation or introduction patent or registration patent or patent of additions to any of such foregoing patent applications and patents ((a), (b), (c) and (d)), and (f) any data or market exclusivity periods, including any such periods listed in the FDA’s Orange Book or periods under national implementations of Article 10.1(a)(iii) of Directive 2001/EC/83, and all international equivalents (“Data Exclusivity”).

1.89 “PDUFA Fee” means any fee in connection with a Drug Approval Application in respect of a Licensed Product in the United States pursuant to the Prescription Drug User Fee Act of 1992, as amended.

1.90 “Pediatric Licensed Products” has the meaning set forth in Section 6.5.1.

1.91 “Person” shall mean an individual, sole proprietorship, partnership, limited partnership, limited liability partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture or other similar entity or organization, including a government or political subdivision, department or agency of a government.

1.92 “Per Tablet Cost of Goods” means, with respect to a Product, the amount equal to the sum (expressed in United States Dollars per Tablet) of (a) the [*] of the Product; (b) the [*] (including [*] and [*], and including [*] and [*] therefore); (c) the [*] and the [*] and [*] for incorporation therein; (d) a reasonable [*] of [*] (including [*] of the [*] and [*]), and [*] and [*] and other [*], calculated in accordance with reasonable cost accounting methods that comply with GAAP; and (e) [*] (net of [*] or [*], if any, and not including [*]) to [*] or [*] or in connection with the [*]; provided, however, that (x) no cost may be counted more than once in such calculation, (y) in respect of Quality Control and Quality Assurance activities in respect of the Product, only amounts paid to Third Parties in respect of such activities shall be included in the calculation of Per Tablet Cost of Goods, and (z) warehousing, handling and storage costs incurred after finished Product is delivered to Salix’s or a Third Party’s distribution center and while such finished Product is held for retail or wholesale distribution shall be excluded from the calculation of Per Tablet Cost of Goods.

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

12

1.93 “Phase I Clinical Trial” means a human clinical trial of a Licensed Product, the principal purpose of which is a preliminary determination of safety in healthy individuals or patients or a similar clinical study prescribed by the Regulatory Authorities in a foreign country.

1.94 “Phase II Clinical Trial” means a human clinical trial of a Licensed Product, the principal purpose of which is a determination of safety and efficacy in the target patient population or a similar clinical study prescribed by the Regulatory Authorities in a foreign country.

1.95 “Phase III Clinical Trial” means a human clinical trial of a Licensed Product on a sufficient number of subjects that is designed to establish that a pharmaceutical product is safe and efficacious for its intended use, and to determine warnings, precautions, and adverse reactions that are associated with such pharmaceutical product in the dosage range to be prescribed, which trial is intended to support Approval of a Licensed Product. A Phase III Clinical Trial shall be deemed to have commenced when the first patient in such study has been dosed.

1.96 “Pivotal Trial” means the first pivotal Phase III Clinical Trial for a Licensed Product for an indication that is intended to support Initial Regulatory Approval of such Licensed Product for such indication in the United States, wherever conducted.

1.97 “Post Approval Study” means any human clinical study, or other test or study with respect to a Licensed Product for an indication that (a) is conducted solely in support of pricing or reimbursement for such Licensed Product in a country or (b) is not required to obtain or maintain Initial Regulatory Approval for such Licensed Product for such indication and is conducted within the scope of the labeling for such Licensed Product (for clarity, any human clinical study that is intended to expand the labeling for a Licensed Product shall be a Clinical Trial and shall not be a Post Approval Study). Subject to the foregoing, Post Approval Studies may include epidemiological studies, modeling and pharmacoeconomic studies, post-marketing surveillance studies, investigator sponsored studies, and health economics studies. For clarity, Post Approval Studies shall not include any tests or studies that are required or recommended for a Licensed Product by the Regulatory Authorities as a condition to obtaining, or as a requirement of maintaining, an Initial Regulatory Approval for such Licensed Product for an indication.

1.98 “Prescription Competitive Product” means any pharmaceutical or biological product (other than an over-the-counter product or a dietary supplement or food product), whether currently marketed or in development, that contains as an active pharmaceutical ingredient the Licensed Compound or any compound in the same or substantially similar chemical class as the Licensed Compound and that is intended for use in the Human Excluding HIV/AIDS/ID/Pediatric Field, the HIV/AIDS/Pediatric Field, or the ID Field.

1.99 “Product Labeling” means, with respect to a country, (a) the full prescribing information for any Licensed Product approved by the relevant Regulatory Authority for such country, including any required patient information; and (b) all labels and other written, printed or graphic matter upon a container, wrapper or any package insert utilized with or for such Licensed Product.

13

1.100 “Product Trademarks” shall mean all Trademarks for use with a Licensed Product designated in accordance with Section 2.5 and any registrations thereof or any pending applications relating thereto.

1.101 “Promotional Materials” means all sales representative training materials with respect to the Licensed Products and all written, printed, graphic, electronic, audio or video matter, including journal advertisements, sales visual aids, direct mail, medical information/education monographs, direct-to-consumer advertising, Internet postings, broadcast advertisements and sales reminder aids (e.g., scratch pads, pens and other such items) intended for use or used in connection with any promotion of the Licensed Products (but excluding Product Labeling).

1.102 “Quarter” means each successive period of three (3) calendar months commencing on January 1, April 1, July 1 and October 1.

1.103 “Recalls” has the meaning set forth in Section 4.6.

1.104 “Regulatory Authority” means any supra-national, federal, national, regional, state, provincial or local regulatory agency, department, bureau, commission, council or other government entity, including FDA and EMEA, regulating or otherwise exercising authority with respect to the Exploitation (including the determination of pricing/reimbursement) of a Licensed Product in any country or other jurisdiction.

1.105 “Regulatory Documentation” means (a) submissions to any Regulatory Authority, including INDs, Drug Approval Applications, Drug Master Files, correspondence with regulatory agencies (registrations and licenses, regulatory drug lists, advertising and promotion documents), period safety update reports, adverse event files, complaint files and manufacturing records and, if applicable, any updates or supplements to any of the foregoing and (b) any minutes or contact logs with respect to any telephone conferences conducted with any Regulatory Authority relating to the subject matter described in clause (a) of this sentence.

1.106 “Royalty Term” has the meaning set forth in Section 7.6.

1.107 “Salix” has the meaning set forth in the Preamble.

1.108 “Salix HIV/AIDS/Pediatric Territory” has the meaning set forth in Section 1.109.

1.109 “Salix Human Excluding HIV/AIDS/ID/Pediatric Territory” means worldwide; “Salix HIV/AIDS/Pediatric Territory” means those countries set forth on Schedule 1.109(b); and “Salix ID Territory” means worldwide, but excluding those countries set forth on Schedule 1.109(c).

1.110 “Salix ID Territory” has the meaning set forth in Section 1.109.

1.111 “Salix Indemnitees” has the meaning set forth in Section 14.2.

14

1.112 “Salix Know-How” means all Information, Materials and inventions that are Controlled by Salix or its Affiliates as of the Effective Date or at any time during the term of this Agreement that are used by or on behalf of Salix or its Affiliates, pursuant to this Agreement, in the Development or Commercialization of a Licensed Product and are necessary or useful for the Development or Commercialization of such Licensed Product, whether or not patented or patentable, excluding any Information and inventions to the extent covered or claimed by the Salix Patents that are publicly disclosed.

1.113 “Salix Patents” means all of the Patents that are Controlled by Salix or its Affiliates as of the Effective Date or at any time during the term of this Agreement that are necessary or useful for the Development or Commercialization of a Licensed Product or specifically claim or cover a Licensed Product or the Development and Commercialization thereof. For clarity, if this Agreement is terminated with respect to a Licensed Product, then (a) Patents coming under the Control of Salix or any of its Affiliates after such termination will not be included in Salix Patents for such Licensed Product and (b) Salix Patents will not include Patents necessary or useful for the Development or Commercialization of such Licensed Product because of modifications made after such termination or which specifically claim or cover such modifications.

1.114 “Salix Technology” means the Salix Know-How and the Salix Patents.

1.115 “Specifications” means, with respect to CPL, the specifications set forth on Schedule 1.115.

1.116 “Stock Purchase Agreement” means that certain Stock Purchase Agreement, dated the Effective Date, between the Parties, pursuant to which Salix will purchase certain shares of Napo Common Stock.

1.117 “Sublicensee” means a Person, other than an Affiliate, that is granted a sublicense by a Party under the license grants in Section 10.1, 10.4 or 13.6, as applicable, as provided in Section 10.3 or 13.6, as applicable.

1.118 “Tablet” means the [*] mg tablet of Product.

1.119 “Technology” means the Salix Technology and the Napo Technology, as applicable.

1.120 “Tempesta License Agreement” means that certain Amended and Restated License Agreement, dated October 16, 2002, by and between Napo and Michael Tempesta, Ph.D.

1.121 “Third Party” means any Person other than Napo, Salix and their respective Affiliates.

1.122 “Third Party Payments” means (a) up-front fees (including any fees paid in installments) and milestones (including any royalties or other payments that are not tied to sales

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

15

of a Licensed Product) to the extent payable to a Third Party in consideration for rights necessary or useful for the Exploitation of a Licensed Product, but excluding (i) amounts paid, at or below fair market value, for services provided by a Third Party (or its Affiliate), (ii) amounts paid, at or below fair market value, for equity in a Third Party (or its Affiliate), or (iii) equity issued to a Third Party in exchange for monetary consideration at or above fair market value, and (b) royalties (but excluding any royalties or other payments that are not tied to sales of a Licensed Product) payable to a Third Party in consideration for rights necessary or useful for the Exploitation of a Licensed Product.

1.123 “Third Party Provider” has the meaning set forth in Section 2.1.3.

1.124 “Third Party Supplier” has the meaning set forth in Section 6.1.3.

1.125 “Trademark” shall include any word, name, symbol, color, designation or device or any combination thereof, including any trademark, trade dress, brand mark, trade name, brand name, logo or business symbol, which in each case is specific to a Licensed Product. Notwithstanding anything in the foregoing, the term “Trademark” does not include any house marks, trade dress or logos of Salix or its Affiliates.

1.126 “UIRF License Agreement” means that certain License Agreement, dated February 26, 2008, by and between the University of Iowa Research Foundation and Napo.

1.127 “United States” means the United States of America.

1.128 “Up-Front Payment” has the meaning set forth in Section 7.1.

1.129 “Valid Claim” means, with respect to a particular country, (a) a claim of an issued and unexpired Patent in such country that (i) has not been revoked or held unenforceable or invalid by a decision of a court or governmental agency of competent jurisdiction from which no appeal can be taken or has been taken within the time allowed for appeal and (ii) has not been abandoned, disclaimed, denied or admitted to be invalid or unenforceable through reissue or disclaimer or otherwise in such country; or (b) a claim of a pending Patent application that was filed and is being prosecuted in good faith and has not been abandoned or finally disallowed without the possibility of appeal or re-filing of the application, provided that such prosecution has not been ongoing for more than five (5) years.

ARTICLE 2

DEVELOPMENT ACTIVITIES

2.1 Development Activities.

2.1.1 Each of Napo and Salix shall use Commercially Reasonable Efforts to perform the Development activities designated for Napo or Salix, as the case may be, in the Development Plan and Budget, in accordance with the terms and conditions of this Agreement.

16

2.1.2 Each of Napo and Salix shall, and shall use commercially reasonable efforts to cause its Third Party Providers to, conduct its designated Development activities (a) in good scientific manner, and in compliance in all material respects with all requirements of Applicable Law and agreed laboratory practices, and (b) efficiently and expeditiously, in accordance with the schedule set forth in the Development Plan and Budget and in compliance with the Development Plan and Budget.

2.1.3 In order to perform its Development activities set forth in the Development Plan and Budget, each of Napo and Salix may enter into agreements with one or more Third Parties as, in the case of Napo, Salix may from time to time approve in writing (such approval not to be unreasonably withheld, conditioned, or delayed) (each, a “Third Party Provider”) for the performance of such Development activities, provided that Napo shall include Salix in any discussions with any such Third Party Providers and shall follow Salix’s instructions with respect to any decision pertaining to Napo’s arrangement with such Third Party Provider.

2.1.4 The Parties acknowledge and agree that the Development Plan and Budget shall assign Development activities to Napo and Salix so as to utilize certain resources and competencies of Napo and Salix for purposes of resource optimization with respect to the Development activities. Except as provided in Section 3.1.2, any costs incurred by Salix or Napo in connection with performing such Development activities in-house pursuant to the Development Plan and Budget shall not constitute Development Costs.

2.1.5 Except as provided in the Development Plan and Budget, neither Party shall perform any Development activities of any kind or nature without the other Party’s prior written consent.

2.2 Records and Reports.

2.2.1 Each of Napo and Salix shall, and shall ensure that its Third Party Providers, maintain records in good scientific manner and in sufficient detail for patent and regulatory purposes, and in compliance with Applicable Law, fully and properly documenting all work done and results achieved in the performance of its designated Development activities. Such records shall be retained by Napo or Salix, as the case may be, for at least [*] years after the termination of this Agreement, or for such longer period as may be required by Applicable Law. Upon request, each Party shall provide copies of the records it has maintained pursuant to this Section 2.2.1 to the other Party.

2.2.2 Each Party shall have the right, during normal business hours and upon reasonable notice, to inspect and copy all records of the other Party maintained pursuant to Section 2.2.1. The inspecting Party shall maintain such records and the information disclosed therein in confidence in accordance with Article 12.

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

17

2.2.3 Without limiting Section 11.1, within [*] days following the end of each Quarter during which a Party is conducting Development activities, or with respect to the Advent Study, within [*] days following the end of each calendar month, such Party shall provide to the JSC access to or copies of such written reports and materials as such Party produces in the ordinary course of business.

2.3 Regulatory Inspections. If any governmental or Regulatory Authority (a) contacts a Party, any of its scientific staff or any other Person performing Development activities on such Party’s behalf, with respect to such Development activities; (b) conducts, or gives notice of its intent to conduct, an inspection at any facility of such Party used in the performance of its obligations hereunder; or (c) takes, or gives notice of its intent to take, any other regulatory action alleging improper or inadequate research practices (including the issuance of a “Notice of Inspectional Observations,” “Warning Letter” or the equivalent) with respect to any activity of such Party, any of its scientific staff or any other Person performing Development activities on such Party’s behalf, whether or not in connection with the services provided under this Agreement, such Party shall notify the other Party within five (5) Business Days of such contact or notice, or sooner if necessary to permit such other Party to be present at, or otherwise participate in, any such inspection or regulatory action with respect to the Development activities, and shall supply such other Party with all information pertinent thereto. Such other Party shall have the right to be present at and to participate in any such inspection or regulatory action with respect to the Development activities. The inspected Party shall provide the other Party with copies of all documentation issued by any governmental or Regulatory Authority in connection with such inspection or regulatory action and any response thereto proposed by the inspected Party. No such responses shall contain any false or misleading information, or omit any information necessary to make such response not false or misleading, with respect to the Development activities conducted by, or to be conducted by, the inspected Party.

2.4 Development Plan and Budget. The Development of the CRO-HIV Product, and of each Licensed Product for other indications as to which the JSC may determine to pursue Development activities, shall be governed by a comprehensive, multi-year plan and budget relating to such Development (the “Development Plan and Budget”). The initial Development Plan and Budget is attached hereto as Exhibit A. The JSC shall review such Development Plan and Budget on a regular basis and make amendments thereto with respect to the Development of each Licensed Product that may from time to time be included in the Development Plan and Budget. Any amendment to the Development Plan and Budget shall include a proposed budget in a format to be determined by the JSC for any new Clinical Trials, Post Approval Studies or other Development activities, which budget shall include line item estimates of Development Costs broken down on a Quarterly basis. No amendment to the Development Plan and Budget shall obligate Napo to pay for any additional cost or expense over and above the costs and expenses set forth in Exhibit A without reimbursement of Napo by Salix unless with the express written consent of Napo, which consent shall be provided or withheld by Napo in its sole and absolute discretion, provided that all such costs reimbursed by Salix shall be deemed Development Costs incurred by Salix for purposes of Section 3.1 or 3.1.3 , as applicable.

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

18

2.5 Product Trademarks. Subject to Section 4.9, the JSC shall designate Trademarks as Product Trademarks with respect to each Licensed Product to be Exploited by Salix hereunder and determine their use and manner of use. The Parties shall cooperate in all respects for the purpose of achieving appropriate coordination and harmonization of the use and manner of use of Trademarks in respect of each Licensed Product on a worldwide basis.

ARTICLE 3

DEVELOPMENT FUNDING

3.1 Salix’s Payment Obligations for Development and Other Activities in Respect of Advent Products.

3.1.1 During the term of this Agreement, Salix shall reimburse Napo for Development Costs paid by Napo to Third Party Providers in respect of Development and other activities relating to the Advent Products up to and including the filing with the FDA of an application for Initial Regulatory Approval of an Advent Product.

3.1.2 Salix shall pay to Napo [*] Dollars ($[*]) in the aggregate in respect of a portion of the costs associated with Napo’s employment of the employees named in Schedule 3.1.2 as follows: (a) [*] Dollars ($[*]) on the date that is [*] Business Days after the Effective Date, (b) [*] Dollars ($[*]) on the first day of the first calendar [*] following the month in which the Effective Date falls, and (c) [*] Dollars ($[*]) on the first day of the [*] calendar [*] following the month in which the Effective Date falls. Should any of the aforesaid employees cease to be employed by Napo prior to the end of the [*] calendar [*] following the month in which the Effective Date falls, the remainder of the obligation of Salix under the foregoing sentence shall be reduced pro rata to account for such employee’s departure. In the event that the pro rata reduction contemplated by the foregoing sentence results in the payments made by Salix to the date of the employee’s departure being in excess of its aggregate commitment as so reduced, Napo shall promptly refund any overpayment.

3.1.3 Any Development Costs incurred by Salix, whether reimbursed by Salix to Napo or incurred by Salix itself, in respect of Development and other activities relating to the Advent Products that in the aggregate exceed twelve million Dollars ($12,000,000) shall constitute and be applied as a credit to reduce the milestone payment otherwise due to Napo pursuant to Section 7.3.1 by the amount of such Development Costs that exceeds twelve million Dollars ($12,000,000). Any Development Costs incurred by Salix, whether reimbursed by Salix to Napo or incurred by Salix itself, in respect of Development and other activities relating to the Advent Products that in the aggregate exceed [*] Dollars ($[*]) shall constitute and be applied as a credit to reduce the milestone payments otherwise due to Napo pursuant to Section 7.4 by the amount of such Development Costs that exceeds [*] Dollars ($[*]).

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

19

3.2 Salix’s Payment Obligations for Development and Other Activities for Other Indications.

3.2.1 At its sole and absolute discretion, Salix may agree to incur, including by way of reimbursement of Development Costs incurred by Napo, Development Costs in respect of Development and other activities relating to Licensed Products other than an Advent Product. Any such Development Costs incurred by Salix in connection with seeking Approval for an indication shall constitute and be applied as a credit to reduce the milestone payment in respect of the relevant indication otherwise due to Napo pursuant to Section 7.3, provided that Salix, Napo or one of their respective Affiliates receives an Approval for such indication. Any such Development Costs incurred by Salix that in the aggregate exceed the amount of the milestone payment in respect of the relevant indication otherwise due to Napo pursuant to Section 7.3 shall constitute and be applied as a credit to reduce the milestone payments otherwise due to Napo pursuant to Section 7.4 by the amount of such Development Costs that exceeds the amount of the milestone payment in respect of the relevant indication otherwise due to Napo pursuant to Section 7.3.

3.2.2 For the avoidance of doubt, Salix shall not have any obligation, unless otherwise specifically agreed by the Parties in writing, to incur, or reimburse Napo for, Development Costs in respect of Development and other activities relating to a Licensed Product for pediatric indications.

3.3 Invoices and Payments. Within thirty (30) days after the end of each Quarter, or in the case of reimbursements related to the Advent Study, within five (5) days after the end of each calendar month, Napo shall invoice Salix for the amounts reimbursable by Salix to Napo pursuant to Sections 3.1 and 3.1.3 for such Quarter or month, as applicable, which invoice shall be accompanied by reasonable documentation thereof. Napo shall promptly furnish Salix with such other information in support of such invoice as Salix may reasonably request. Each undisputed Quarterly invoice shall be payable to Napo within forty-five (45) days after receipt by Salix of such invoice and supporting documentation and information, and each undisputed monthly invoice shall be payable to Napo within thirty (30) days after receipt by Salix of such invoice and supporting documentation and information, with interest calculated in accordance with Section 7.9.

3.4 Books and Records; Audit. Each Party shall maintain (and shall ensure that its Affiliates shall maintain) complete and accurate books, records and accounts that, in reasonable detail, fairly reflect any Development Costs and expenses incurred by it or its Affiliates in conformity with GAAP and this Agreement. Such books, records and accounts shall be retained by Napo or Salix, as the case may be, for at least [*] years after the end of the period to which such books, records and accounts pertain or for such longer period as may be required by Applicable Law. Such books, records and accounts shall be subject to audit pursuant to Section 7.15.

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

20

ARTICLE 4

REGULATORY MATTERS

4.1 Regulatory Responsibilities. As between the Parties, Salix shall have sole responsibility and authority for the preparation and maintenance of all Regulatory Documentation with respect to (a) Approvals, including Drug Approval Applications, for Licensed Products in (i) the Human Excluding HIV/AIDS/ID/Pediatric Field in the Salix Human Excluding HIV/AIDS/ID/Pediatric Territory; (ii) the HIV/AIDS/Pediatric Field in the Salix HIV/AIDS/Pediatric Territory; and (iii) the ID Field in the Salix ID Territory and (b) Development activities for Licensed Products that are conducted in support of Approvals for the Licensed Products or Commercialization of the Licensed Products in (i) the Human Excluding HIV/AIDS/ID/Pediatric Field in the Salix Human Excluding HIV/AIDS/ID/Pediatric Territory; (ii) the HIV/AIDS/Pediatric Field in the Salix HIV/AIDS/Pediatric Territory; and (iii) the ID Field in the Salix ID Territory. Subject to Article 13, all Approvals contemplated by the preceding sentence and related Regulatory Documentation relating to the Licensed Products shall be the sole property of Salix and held in the name of Salix (or in each such case Salix’s Affiliate or Sublicensee).

4.2 Regulatory Data. Each Party shall provide the other Party on a timely basis with access to all material pre-clinical data and Clinical Data compiled in support of a Drug Approval Application or other regulatory filings with respect to each Licensed Product, when and as such pre-clinical data or Clinical Data become available.

4.3 Communications with Regulatory Authorities.

4.3.1 As between the Parties, Salix shall have the sole responsibility and authority to communicate with Regulatory Authorities during the term of this Agreement in relation to Licensed Products in (a) the Human Excluding HIV/AIDS/ID/Pediatric Field in the Salix Human Excluding HIV/AIDS/ID/Pediatric Territory; (b) the HIV/AIDS/Pediatric Field in the Salix HIV/AIDS/Pediatric Territory; and (c) the ID Field in the Salix ID Territory. Except as necessary to comply with Applicable Law, Napo shall not, nor shall it permit any of its Affiliates or Sublicensees to, initiate any communications with any Regulatory Authority concerning the Licensed Compound or the Licensed Products without first notifying Salix in writing. The Parties acknowledge and agree that the rights and responsibilities set forth in this Section 4.3.1 shall be subject to Glenmark’s right to prepare and maintain Regulatory Documentation pursuant to Section 4.4(b) of the Glenmark Agreement as in effect as of the Effective Date.

4.3.2 Without limiting the provisions of Section 4.2 or 4.3.1, Salix shall promptly provide to Napo (a) copies of all written or electronic communications received by Salix or its Affiliates or Sublicensees from, or forwarded by Salix or its Affiliates or Sublicensees to, Regulatory Authorities with respect to (i) obtaining or maintaining any Approvals or (ii) any other activities relating to the Licensed Compound or the Licensed Products regarding such Regulatory Authorities and (b) copies of all contact reports produced by Salix or its Affiliates or Sublicensees, in each case (clause (a) and (b)), within five (5) Business Days of receiving, forwarding or producing any of the foregoing.

21

4.3.3 Without limiting the provisions of Section 4.2 or 4.3.1, Napo shall promptly provide to Salix (a) copies of all material written or electronic communications received by Napo or its Affiliates or Sublicensees from, or forwarded by Napo or its Affiliates or Sublicensees to, Regulatory Authorities with respect to (i) obtaining or maintaining any Approvals or (ii) any other activities relating to the Licensed Compound or the Licensed Products regarding such Regulatory Authorities and (b) copies of all contact reports produced by Napo or its Affiliates or Sublicensees, in each case (clauses (a) and (b)), within five (5) Business Days of receiving, forwarding or producing any of the foregoing.

4.4 Transfer of Product Documentation. Subject to Section 10.4, Napo, for itself and its Affiliates, hereby assigns and transfers to Salix its entire right, title, and interest in and to any and all INDs and Drug Approval Applications relating to the Licensed Compound or the Licensed Products and shall execute and deliver to the FDA (and any other Regulatory Authority as reasonably requested by Salix in writing) a letter in a form approved by Salix transferring ownership to Salix of any and all such INDs and Drug Approval Applications filed with the FDA (or such other Regulatory Authority) by or on behalf of Napo and its Affiliates. Napo shall provide Salix with complete and accurate copies of all such assigned INDs and Drug Approval Applications and all related Regulatory Documentation as soon as reasonably practicable after Salix’s written request therefor, but in any event within forty-five (45) days of such request.

4.5 Drug Safety Information. Notwithstanding anything to the contrary in this Article 4, the Parties shall execute a pharmacovigilance agreement (“Pharmacovigilance Agreement”) (a) for the CRO-HIV Product within ninety (90) days after the Effective Date and (b) for any other Licensed Product at least ninety (90) days prior to the first commercial sale of such Licensed Product in (i) the Human Excluding HIV/AIDS/ID/Pediatric Field in the Salix Human Excluding HIV/AIDS/ID/Pediatric Territory; (ii) the HIV/AIDS/Pediatric Field in the Salix HIV/AIDS/Pediatric Territory; or (iii) the ID Field in the Salix ID Territory. Salix shall have the sole right to create and maintain a master drug safety database which shall cross-reference any Adverse Event (as such term shall be defined in the Pharmacovigilance Agreement) relating to a Licensed Product occurring anywhere worldwide. Salix shall be the sole owner of this master drug safety database. Napo shall submit to Salix all data collected by it with respect to Adverse Events relating to a Licensed Product in accordance with the timelines set forth in the Pharmacovigilance Agreement. The Parties agree that the form of the Pharmacovigilance Agreement shall be substantially in the form of the agreement attached as Exhibit B.

4.6 Recalls. Salix shall be responsible for controlling the conduct of, and shall have the final decision whether to implement, all voluntary and involuntary recalls, stop sales, field corrections or other related actions (collectively, “Recalls”) of Licensed Products in (a) the Human Excluding HIV/AIDS/ID/Pediatric Field in the Salix Human Excluding HIV/AIDS/ID/Pediatric Territory; (b) the HIV/AIDS/Pediatric Field in the Salix HIV/AIDS/Pediatric Territory; and (c) the ID Field in the Salix ID Territory. Napo shall provide such assistance to Salix in investigating and conducting any Recall as Salix reasonably may request. Salix shall bear all of the expenses of any such Recall; provided, however, that to the extent any such Recall resulted solely from Napo’s breach of its obligations hereunder or its gross negligence or willful misconduct, Napo shall bear the expense of such Recall.

22

4.7 Rights of Reference. Each Party, each Party’s Affiliates, as well as Glenmark and AsiaPharm and their respective Affiliates, shall have the right to cross reference, file or incorporate by reference any regulatory submission or Drug Master File (and any data contained therein) for any Licensed Product, or any component thereof (including all Approvals), in order to support regulatory submissions that such Party is permitted to make under this Agreement (or, in the case of Glenmark or AsiaPharm, that Glenmark is permitted to make under the Glenmark Agreement and that AsiaPharm is permitted to make under the AsiaPharm Agreement) for any Licensed Product and the Commercialization thereof. Napo shall support Salix as may be reasonably necessary in obtaining Approvals, including providing necessary documents, or other materials required by Applicable Law to obtain Approvals, in each case in accordance with the terms and conditions of this Agreement. For the avoidance of doubt, no Party shall be obligated as a result of this Section 4.7 to develop or prepare additional information or materials beyond those that it has otherwise developed or prepared for its own purposes.

4.8 Pricing and Reimbursement Approvals. Salix shall have the sole responsibility and authority in respect of all pricing and reimbursement approval proceedings relating to the Exploitation of any Licensed Product hereunder.

4.9 Drug Naming Approvals. Salix shall have the sole responsibility and authority in respect of all drug naming approval proceedings with the Regulatory Authorities relating to the Exploitation of any Licensed Product hereunder.

ARTICLE 5

COLLABORATION MANAGEMENT

5.1 Joint Steering Committee.

5.1.1 Formation and Purpose. Within fifteen (15) days after the Effective Date, the Parties shall establish a joint steering committee (the “Joint Steering Committee” or “JSC”), which shall oversee and coordinate the Development of, regulatory filings for, and other Exploitation of the Licensed Products hereunder. The JSC shall be composed of six (6) members, with an equal number of members appointed by each Party. Each member of the JSC shall be an employee of the respective Party or of an Affiliate of such Party with significant experience and responsibility for oversight of the Licensed Products. Either Party may substitute any of its representatives on the JSC by written notice to the other Party. Salix shall appoint one of its representatives to serve as Chairperson of the JSC.

5.1.2 Specific Responsibilities. The JSC shall continuously monitor the progress of the Development Plan and Budget and provide status reports to the senior management of each of the Parties as appropriate. The Parties contemplate that the responsibilities of the Joint Steering Committee shall evolve during the course of the Parties’ relationship under this Agreement. In support of its responsibility for overseeing and coordinating the Development and Exploitation of the Licensed Products, the JSC shall:

23

(a) establish a strategy for (i) the Development, Approval, Commercialization and other Exploitation of the Licensed Products in (A) the Human Excluding HIV/AIDS/ID/Pediatric Field in the Salix Human Excluding HIV/AIDS/ID/Pediatric Territory; (B) the HIV/AIDS/Pediatric Field in the Salix HIV/AIDS/Pediatric Territory; and (C) the ID Field in the Salix ID Territory and (ii) the coordination of the Development, Approval, Commercialization and other Exploitation of the Licensed Products in fields and countries other than those specified in the preceding clause (i) to the extent such Development, Approval, Commercialization and other Exploitation impacts or affects the Development, Approval, Commercialization and other Exploitation of the Licensed Products in the fields and countries specified in clause (i);

(b) review and monitor the Development Plan and Budget and the implementation thereof and make recommendations to the Parties regarding updates, amendments and modifications to the Development Plan and Budget;

(c) consider the allocation of responsibilities between the Parties for Development pursuant to the Development Plan and Budget;

(d) consider the allocation of responsibilities between the Parties for Commercialization and other Exploitation activities pursuant to one or more written plans covering the Commercialization and other Exploitation of each Licensed Product;

(e) review and make recommendations to the Parties regarding the conduct of Clinical Trials for additional indications for Licensed Products, Post Approval Studies for Licensed Products, and amendments to the Development Plan and Budget in respect thereof;

(f) review statistical analysis plans and protocols for, and monitor the progress of, all Clinical Trials and Post Approval Studies for the Licensed Products;

(g) review and make recommendations to the Parties on all proposed product labeling, Drug Approval Applications and other filings with the Regulatory Authorities with respect to Approvals for the Licensed Products;

(h) review and make recommendations to the Parties on advertising and promotional materials and strategies, packaging designs and Product Trademarks for each Licensed Product;

(i) facilitate the exchange of Development Information relating to all Clinical Trials and Post Approval Studies and Commercialization Information for the Licensed Products;

24

(j) establish such other committees (each, including the JSC, a “Committee”) as deemed appropriate by the JSC, including such Committees as the JSC deems appropriate to coordinate the Development, Approval, Commercialization and other Exploitation of the Licensed Products on a worldwide basis;

(k) consider labeling issues and undertake coordination of labeling on a worldwide basis so as to ensure such degree of consistency in labeling as the JSC deems to be desirable; and

(l) perform such other functions as are set forth herein or as the Parties may mutually agree in writing.

For clarity, subject to the terms of this Agreement, the activities and resources of each Party shall be managed by such Party, acting independently and in its individual capacity.

5.1.3 Pediatric Formulation of the Licensed Compound. Napo, in its sole discretion, may put forward to the JSC a development plan, to be prepared and implemented at Napo’s sole expense, for a Drug Approval Application in the United States of a pediatric formulation of the Licensed Compound. Upon the presentation of such plan, Salix shall cause its representatives on the JSC to consider such plan reasonably and in good faith.

5.1.4 Meetings and Minutes. Each Committee shall meet Quarterly, or as otherwise agreed to by the Parties, at a location designated by the Chairperson. During such time as the Advent Trial is ongoing, the JSC shall also hold telephone conferences as frequently as the Chairperson deems appropriate. Employees or consultants of either Party that are not members of a Committee may attend any meeting of such Committee; provided, however, that such attendees (a) shall not vote or otherwise participate in the decision-making process of such Committee and (b) are bound by obligations of confidentiality and non-disclosure equivalent to those set forth in Article 12. The Chairperson shall be responsible for calling meetings, preparing and circulating an agenda in advance of each meeting of each Committee, and preparing and issuing minutes of each meeting within thirty (30) days thereafter. Minutes shall be deemed approved unless any member of the JSC objects in writing to the accuracy of such minutes within seven (7) days of receipt of the minutes. In the event that any such objection is not resolved by mutual agreement of the Parties, such minutes shall be amended to reflect such unresolved dispute.

5.1.5 Procedural Rules.

(a) Each Committee shall have the right to adopt such standing rules as shall be necessary for its work to the extent that such rules are not inconsistent with this Agreement. A quorum of a Committee shall exist whenever there is present at a meeting at least one (1) representative appointed by each Party. Members of a Committee may attend a meeting either in person or by telephone, video conference or similar means in

25

which each participant can hear what is said by, and be heard by, the other participants. Representation by proxy shall be allowed. A Committee shall take action by consensus of the members present at a meeting at which a quorum exists, with each Party having a single vote irrespective of the number of representatives of such Party in attendance, or by a written resolution signed by the Chairperson of such Committee and one (1) representative of Napo on such Committee.

(b) Dispute Resolution. If a Committee other than the JSC cannot, or does not, reach consensus on an issue within its jurisdiction, then the dispute shall be referred to the JSC for resolution and a special meeting of the JSC may be called for such purpose. If the JSC cannot, or does not, reach consensus on an issue within its jurisdiction, including any dispute arising in another Committee, then such issue shall be referred to a senior management employee of each of the Parties. Such senior management employees shall meet for attempted resolution by good faith negotiations within fifteen (15) days after such issue is referred to such senior management employees. In the event such designated senior management employees are not able to resolve such issue within such fifteen (15) day period, then such issue shall be finally and definitively resolved by the Chairperson of the JSC. For the avoidance of doubt, subject to the last sentence of Section 2.4, the right of the Chairperson of the JSC to finally and definitively resolve all disputes relating to matters within the purview of the JSC shall extend to amendments to the Development Plan and Budget, and the Chairperson of the JSC is specifically authorized and empowered to finally and definitively resolve any such dispute involving any and all amendments, alterations or changes to the Development Plan and Budget.

5.1.6 Limitations on Authority. Each Party shall retain the rights, powers and discretion granted to it under this Agreement, and no such rights, powers or discretion shall be delegated to or vested in a Committee unless the Parties expressly so agree in writing. No Committee shall have the power to amend, modify or waive compliance with this Agreement, which may only be amended or modified as provided in Section 15.10 or compliance with which may only be waived as provided in Section 15.13.

5.1.7 Interactions Between Committees and Internal Teams. The Parties recognize that each Party possesses an internal structure (including various committees, teams and review boards) that will be involved in administering such Party’s activities under this Agreement. Each Committee shall establish procedures to facilitate communications between such Committee and the relevant internal committee, team or board of each of the Parties in order to maximize the efficiency of the Committees and the performance by the Parties of their obligations hereunder, including by requiring appropriate members of such Committee to be available at reasonable times and places and upon reasonable prior notice for making appropriate oral reports to, and responding to reasonable inquiries from, the relevant internal committee, team or board.

26

5.2 Napo and Salix Rights and Responsibilities. It is understood that the Development of each Licensed Product shall be designed on a global basis. It is contemplated that from and after the Effective Date, all Clinical Trials and Post Approval Studies for each Licensed Product, wherever and by whomever conducted, shall be structured, where practicable, so as to support the filing of Drug Approval Applications for each Licensed Product in the United States, and Napo agrees to use Commercially Reasonable Efforts to coordinate with its licensees, sublicensees or other rights holders with respect to the Licensed Products for that purpose to the extent such coordination is permitted under Applicable Law and under the Glenmark Agreement and the AsiaPharm Agreement as such agreements are in effect as of the Effective Date. Without limiting the foregoing, each Party agrees to coordinate with the other Party to facilitate such other Party’s performance of its obligations under this Agreement that specifically support the global Development, Approval, Commercialization and other Exploitation of the Licensed Products, including mutual rights of reference in Regulatory Documentation, mutual adverse event reporting and mutual access to, and mutual exchange between the Parties of, information necessary for each Party to adhere to regulatory requirements.

ARTICLE 6

SUPPLY OBLIGATIONS

6.1 Pre-Clinical and Clinical Supply Obligations.

6.1.1 Napo shall, if and to the extent requested by Salix, supply pre-clinical and clinical requirements of the Licensed Products for use by Napo and Salix in the Development of the Licensed Products as contemplated hereunder, provided that Napo shall not be obligated to supply requested quantities of pre-clinical and clinical supply to the extent such quantities exceed the amounts reasonably contemplated under the Development Plan and Budget. Such supply arrangements shall be in such amounts and on such a schedule as is set forth in the initial Development Plan and Budget as the same exists on the Effective Date or as may be otherwise agreed between the Parties.

6.1.2 Napo shall manufacture the Licensed Compound and the Licensed Products pursuant to GMP.

6.1.3 In order to perform its supply obligations under Section 6.1.1, Napo may, with the prior written approval of Salix (such approval not to be unreasonably withheld, conditioned, or delayed), enter into agreements with one or more Third Parties (each, a “Third Party Supplier”) for the supply of Licensed Product, provided that Napo shall include Salix in any discussions with any Third Party Supplier and shall follow Salix’s instructions with respect to any decision pertaining to Napo’s arrangement with such Third Party Supplier. Payments by Napo to Third Party Suppliers shall, to the extent they otherwise qualify as Development Costs, be eligible for reimbursement by Salix as Development Costs pursuant to Article 3.

27

6.2 Commercial Supply.

6.2.1 Salix shall itself, or through a Third Party manufacturer, manufacture Licensed Products for its commercial supply and shall do so pursuant to GMP.

6.2.2 Napo shall use commercially reasonable efforts to facilitate an arrangement between Salix and Third Party suppliers of CPL to meet Salix’s commercial supply requirements of CPL for incorporation into the Licensed Products. Until Salix has entered into an appropriate arrangement with Third Party suppliers of CPL for commercial supplies of CPL for incorporation into the Licensed Products and such Third Parties are able to supply all of Salix’s commercial supply requirements of such CPL, Napo shall cause a Third Party supplier to supply to Salix’s designated Third Party suppliers of the Licensed Compound all of Salix’s commercial supply requirements of such CPL, all such CPL to be in conformity with the Specifications and the Certificate of Analysis therefor and Manufactured in conformance with Applicable Law.

6.2.3 The Parties shall cooperate and negotiate in good faith with AsiaPharm to enter into an agreement among the Parties and AsiaPharm with respect to the Development, supply and Exploitation of the Licensed Products contemplated hereunder.

6.3 Supply Chain.

6.3.1 Notwithstanding anything to the contrary in Section 6.1 or 6.2, Salix shall have the right, at its sole discretion, to (a) enter into an arrangement with a Third Party regarding supply of any material derived from plant matter that contains the Licensed Compound in commercially extractable quantities, including CPL, (b) subject to any applicable terms of the Glenmark Agreement as in effect as of the Effective Date, enter into an arrangement with a Third Party manufacturer to obtain supplies of any Licensed Product or the Licensed Compound for incorporation into any Licensed Product, and (c) otherwise control the supply chain of Licensed Product on a direct basis; provided that in all cases ((a), (b) and (c)) Salix shall consult with Napo regarding matters of fair trade and sustainable supply.

6.3.2 Napo hereby sells, coveys and transfers to Salix, without additional consideration, all of Napo’s right, title and interest in and to the CPL described on Schedule 6.3.2.

6.4 Technology Transfer. If Salix elects to manufacture a Licensed Product as provided in Section 6.2 or 6.3, Napo shall, upon [*] days’ advance written notice from Salix, commence a transfer of the then-current Manufacturing Technology of Napo for the Licensed Compound and such Licensed Product to either Salix or a Third Party manufacturer designated by Salix, the expense of which transfer shall be borne by Salix. As part of any transfer made pursuant to this Section 6.4, Napo shall provide Salix or such designee with Manufacturing

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

28

Technology related to process development activities that are relevant to and would be required (a) to perform the manufacturing process with respect to the Licensed Compound and the applicable Licensed Product as performed by or on behalf of Napo and (b) for regulatory filings (including recovery steps established, process validation, product identity assays, in-process-control assays and relevant standard operating procedures, as well as technical methods for assays required for such manufacturing process). Salix agrees that, as between the Parties, all right, title and interest to such Manufacturing Technology belongs to Napo and that Salix shall, and shall cause such designee to, use such Manufacturing Technology transferred by Napo to Salix or such designee pursuant to this Section 6.4 solely for the purpose of manufacturing the Licensed Compound and the applicable Licensed Product pursuant to the terms and conditions of this Agreement and for no other purpose and pursuant to a written agreement regarding confidentiality having terms no less stringent than those set forth in Article 12.

6.5 Compassionate Distribution by Napo of Pediatric Products.

6.5.1 Distribution to Approved Relief Organizations. Salix agrees that it will work with Napo in good faith to structure and implement arrangements to permit Napo to distribute Licensed Products that have received Approval from the FDA for sale and distribution in the United States for pediatric indications (“Pediatric Licensed Products”) to Direct Relief International and International Rescue Committee and their Affiliates and such other multi-lateral partnering organizations as Napo may from time to time propose to Salix and Salix approve (such approval not to be unreasonably withheld, conditioned, or delayed) (each, an “Approved Relief Organization”) for compassionate distribution in the countries listed in Schedule 6.5.1. The Parties agree that for any such distribution arrangement to be acceptable, (a) either (i) such distribution must be effected [*] to Salix or (ii) Napo must agree, pursuant to a legally binding agreement reasonably acceptable to Salix, to [*] Salix for any costs incurred by Salix in connection with such distribution; (b) such distribution must not, as determined by Salix in its sole and absolute discretion (such discretion nonetheless to be exercised in good faith), adversely affect the commercial position of any Licensed Product; and, (c) without limiting the provisions of Section 6.5.3, such distribution must not, as determined by Salix in its sole and absolute discretion (such discretion nonetheless to be exercised in good faith), adversely affect the “best price” concept in the United States or any similar concept in a jurisdiction outside the United States for any Licensed Product anywhere worldwide.

6.5.2 No Contravention. Any distribution effected pursuant to the provisions of Section 6.5.1 shall be deemed to be for the greater good and part of Napo’s commitment to the global health community and, subject to compliance by Napo with the provisions of Section 6.5.4, shall not be considered to be in contravention of the license rights granted by Napo to Salix in this Agreement.

6.5.3 Adverse Impact on “Best Price.” The Parties acknowledge and agree that Salix shall have no obligation to authorize or consent to any arrangement for the distribution of Pediatric Licensed Products pursuant to Section 6.5.1, and may

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

29

terminate any existing arrangements for distribution of Pediatric Licensed Products to Approved Relief Organizations pursuant to Section 6.5.1, in the event that Salix determines at any time, in its sole and absolute discretion (such discretion nonetheless to be exercised in good faith), that such distribution may adversely affect the “best price” concept in the United States or any similar concept in a jurisdiction outside the United States for any Licensed Product anywhere worldwide. Salix agrees that in the event it should decline to approve or terminate an arrangement for distribution of Pediatric Licensed Products as contemplated by Section 6.5.1 due to considerations in respect of the “best price” concept in the United States or any similar concept in a jurisdiction outside the United States, it will work with Napo in good faith to identify alternative arrangements for the compassionate distribution of Pediatric Licensed Products as contemplated by Section 6.5.1 that will avoid any such adverse impact in respect of the “best price” concept in the United States or any similar concept in a jurisdiction outside the United States for any Licensed Product anywhere worldwide.

6.5.4 Unauthorized Sales. The provisions of this Section 6.5 are in all respects subject to the provisions of Section 9.3.2 and Napo shall strictly comply with the provisions of Section 9.3.2 in connection with any distribution, marketing, promotion, offering for sale or sale effected by it pursuant to this Section 6.5.

ARTICLE 7

FINANCIAL TERMS

7.1 Equity Investment. In partial consideration of the rights granted by Napo to Salix hereunder, Salix shall purchase two hundred fifty thousand (250,000) shares of Napo Common Stock at a purchase price of two Dollars ($2.00) per share, for an aggregate purchase price of five hundred thousand Dollars ($500,000), pursuant to the Stock Purchase Agreement.

7.2 Up-Front Payment. In partial consideration of the rights granted by Napo to Salix hereunder, subject to the terms and conditions set forth in this Agreement, Salix shall pay a one-time patent license fee in the amount of four million five hundred thousand Dollars ($4,500,000) (the “Up-Front Payment”) on or before the later of five (5) Business Days after the Effective Date and the date on which Napo has received and delivered to Salix the written confirmation of each Designated Payee of the amount owed to it by Napo as of the Effective Date, as follows: (a) to each Designated Payee in the amount set forth next to such Designated Payee’s name in Schedule 7.2 and (b) the remainder of the Up-Front Payment to Napo.

7.3 Regulatory Approval Milestones. Salix shall promptly inform Napo of the achievement of each of the milestones set forth below by Salix or any of its Affiliates or, if applicable, any of its Sublicensees. In partial consideration of the rights granted by Napo to Salix hereunder and subject to the terms and conditions set forth in this Agreement (including Sections 3.1 and 3.1.3 ), Salix shall pay to Napo a [*] milestone payment within [*] days after the achievement of each of the following milestones, calculated as follows:

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

30

7.3.1 upon [*] Dollars ($[*]);

7.3.2 upon [*] Dollars ($[*]);

7.3.3 upon [*] Dollars ($[*]); and

7.3.4 upon [*] Dollars ($[*]).

Each milestone payment in this Section 7.3 shall be payable only upon the first achievement of such milestone and no amounts shall be due for subsequent or repeated achievements of such milestone, whether for the same or a different Licensed Product.

7.4 Sales Milestones. In partial consideration of the rights granted by Napo to Salix hereunder and subject to the terms and conditions set forth in this Agreement (including Sections 3.1 and 3.1.3 ), Salix shall pay to Napo a fully-earned, noncreditable, nonrefundable, non-cancelable milestone payment within [*] days after the achievement of each of the following milestones, calculated as follows:

7.4.1 upon the [*] Dollars ($[*]), [*] Dollars ($[*]);

7.4.2 upon the [*] Dollars ($[*]), [*] Dollars ($[*]);

7.4.3 upon the [*] Dollars ($[*]), [*] Dollars ($[*]);

7.4.4 upon the [*] Dollars ($[*]), [*] Dollars ($[*]);

7.4.5 upon the [*] Dollars ($[*]), [*] Dollars ($[*]);

7.4.6 upon the [*] Dollars ($[*]),[*] Dollars ($[*]).

Each milestone payment in this Section 7.4 shall be payable only upon the first achievement of such milestone and no amounts shall be due for subsequent or repeated achievements of such milestone.

7.5 Royalties to Napo. In partial consideration of the rights granted by Napo to Salix hereunder and subject to the terms and conditions set forth in this Agreement, Salix shall pay to Napo royalties on each Licensed Product in respect of each Annual Period as follows:

7.5.1 From the date of the first commercial sale of such Licensed Product by Salix or any of its Affiliates or Sublicensees until the [*] anniversary of such date and thereafter, except to the extent the royalty rates set forth in Section 7.5.2 become effective pursuant to the terms of such Section and remain effective, subject to Section 7.5.3:

(a) [*] percent ([*]%) of the first [*] Dollars ($[*]) in aggregate Net Sales of such Licensed Product;

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

31

(b) [*] percent ([*]%) of the aggregate Net Sales of such Licensed Product greater than [*] Dollars ($[*]) but not exceeding [*] Dollars ($[*]); and

(c) [*] percent ([*]%) of the aggregate Net Sales of such Licensed Product greater than [*] Dollars ($[*]).

7.5.2 After the [*] anniversary of the date of the first commercial sale of such Licensed Product by Salix or any of its Affiliates or Sublicensees, at all times when the Per Tablet Cost of Goods is equal to or greater than [*] United States Cents ($[*]) so long as Salix has then obtained and placed into service a [*]:

(a) at all times when the Per Tablet Cost of Goods is equal to or greater than [*] United States Cents ($[*]) but less than [*] United States Cents ($[*]),[*] percent ([*]%);

(b) at all times when the Per Tablet Cost of Goods is equal to or greater than [*] United States Cents ($[*]) but less than [*] United States Cents ($[*]),[*] percent ([*]%);

(c) at all times when the Per Tablet Cost of Goods is equal to or greater than [*] United States Cents ($[*]) but less than [*] United States Cents ($[*]),[*] percent ([*]%);

(d) at all times when the Per Tablet Cost of Goods is equal to or greater than [*] United States Cents ($[*]) but less than [*] United States Cents ($[*]),[*] percent ([*]%);

(e) at all times when the Per Tablet Cost of Goods is equal to or greater than [*] United States Cents ($[*]) but less than [*] United States Cents ($[*]), seven percent ([*]%);

(f) at all times when the Per Tablet Cost of Goods is equal to or greater than [*] United States Cents ($[*]) but less than [*] United States Cents ($[*]),[*] percent ([*]%); or

(g) at all times when Per Tablet Cost of Goods is equal to or greater than [*] United States Cents ($[*]),[*] percent ([*]%).

7.5.3 For clarification purposes, in the event that, at any time (and every time) after the terms of Section 7.5.2 have been triggered, the Per Tablet Cost of Goods is less than [*] United States Cents ($[*]), then the terms of Section 7.5.1 shall be
re-instated and shall again be effective for so long as the Per Tablet Cost of Goods remains less than [*] United States Cents ($[*]).

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

32

7.6 Royalty Term. Napo’s right to receive royalties under Section 7.5 shall expire on a country-by-country and Licensed Product-by-Licensed Product basis upon the earlier of (a) the date of the first commercial sale (by a Person other than Salix or its Affiliates, Sublicensees or Distributors) in the country of a product that is approved by a Regulatory Authority and constitutes a Prescription Competitive Product in respect of such Licensed Product and (b) the later of (i) ten (10) Calendar Years from the date of first commercial sale of such Licensed Product in such country and (ii) the first date on which there is no longer (A) a Napo Patent that includes at least one Valid Claim or (B) any Data Exclusivity with respect to such Licensed Product in such country (such period, the “Royalty Term”). Upon expiration of each such Royalty Term, on a country-by-country and Licensed Product-by-Licensed Product basis, the licenses set forth in Section 10.1 shall be fully paid-up and perpetual licenses with respect to such Licensed Product in such country.

7.7 Royalty Step-Down. The royalties payable pursuant to Section 7.5 shall be reduced by [*] percent ([*]%) on a
country-by-country basis (a) during any period in which there are [*] in such country in the [*] and [*] or (b) if aggregate commercial sales of units of Licensed Products [*] basis, based on data generated by IMS International (or if such data is not available, another reliable data source that is mutually agreed by the Parties by mutual written consent), for [*] or more consecutive [*] during the first [*] years following the initiation of commercial sales (by a Person other than Salix or its Affiliates, Sublicensees or Distributors) of a
Non-Prescription Competitive Product in the country.

7.8 Royalty Payments and Reports. Within forty-five (45) days after the end of each Quarter (or, for the last Quarter in a Calendar Year, sixty (60) days after the end of such Quarter), Salix shall make all royalty payments payable to Napo under this Agreement with respect to such Quarter. Along with such payments, Salix shall also provide detailed information regarding the calculation of royalties due pursuant to Section 7.5 including allowable deductions in the calculation of Net Sales of each Licensed Product on which royalties are paid.

7.9 Payment Method. All amounts due by Salix to Napo hereunder shall be paid in Dollars by wire transfer in immediately available funds to an account designated by Napo. Any undisputed payments or portions thereof due hereunder that are not paid on the date such payments are due under this Agreement shall accrue interest from the date that is thirty (30) days after the date on which payment was due at a rate equal to the lesser of (a) the prime rate as published in The Wall Street Journal, Eastern United States Edition, on the first Business Day of each Quarter in which such payments are overdue, plus [*] percentage points, and (b) the maximum rate permitted by law, calculated on the number of days such payment is delinquent, compounded monthly.

7.10 Taxes. Napo shall pay any and all taxes required by Applicable Law that are levied on account of royalties or other payments it receives under this Agreement. If laws or regulations require that taxes be withheld, Salix shall (a) deduct those taxes from the remittable royalty or other payment, (b) pay the taxes to the proper taxing authority, and (c) send evidence

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

33

of the obligation together with proof of payment to Napo within fifteen (15) days following that payment.

7.11 Sublicenses.

7.11.1 Salix shall have the responsibility to account for and report sales of any Licensed Product by its Sublicensees that are subject to royalty payments under Section 7.5 on the same basis as if such sales were Net Sales by Salix. Salix shall pay to Napo (or cause its Sublicensee(s) to pay to Napo, with Salix remaining responsible for any failure of the Sublicensee(s) to pay amounts when due under this Agreement) royalties on such sales as if such sales of the Sublicensee(s) were Net Sales of Salix or any of its Affiliates.

7.11.2 In the event Salix enters into agreements with one or more Sublicensees to Exploit any Licensed Product outside North America, Salix shall pay to Napo (a) [*] percent ([*]%) of (i) any up-front fees (including any fees paid in installments), (ii) milestone payments not tied to sales (including regulatory milestones), and (iii) the fair market value of any other consideration not tied to sales, in each case ((i), (ii) and (iii)) paid to Salix by such Sublicensee under such agreement; and (b) [*] percent ([*]%) of any royalties or other payments tied to sales and paid to Salix by such Sublicensee under such agreement in respect of sales of Licensed Products made by such Sublicensee outside North America, provided that in the event any such agreement extends to territories within North America and territories outside North America, then the payments described in the foregoing clause (a) shall be reasonably allocated between such territories and the foregoing clause (a) shall not apply in respect of payments allocated to North America.

7.11.3 Except as otherwise provided in this Section 7.11, Salix shall have no obligation to Napo or its Affiliates to share any fees, milestone payments, royalties, financial consideration or other consideration received by Salix and its Affiliates from any sublicense of their rights hereunder.

7.12 Foreign Exchange. For the purpose of computing the Net Sales for any Licensed Product sold in a currency other than Dollars and for purposes of determining Net Sales and Development Costs, or other shared expenses under this Agreement incurred by a Party in a currency other than Dollars, such Net Sales or Development Costs amounts shall be converted into Dollars each Quarter using an exchange rate that is the arithmetic average of the daily exchange rates (obtained as described below) during such Quarter. Each daily exchange rate shall be obtained from The Wall Street Journal, Eastern United States Edition, or, if not so available, as otherwise agreed by the Parties.

7.13 Third Party Payments Under Existing Agreements. Napo shall be solely responsible for all Third Party Payments and all of its other obligations under (a) the Tempesta License Agreement (including any and all royalties due, on each Licensed Product, to Michael

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

34

Tempesta, Ph.D.), (b) the UIRF License Agreement, and (c) any other agreements between Napo or any of its Affiliates and any Third Party in existence as of the Effective Date.

7.14 Records. Salix shall keep (and shall ensure that its Affiliates and Sublicensees shall keep) such records as are required to determine, in a manner consistent with GAAP and this Agreement, amounts due from it to Napo under this Article 7. All such books, records and accounts shall be retained by Salix until the later of (a) three (3) years after the end of the period to which such books, records and accounts pertain and (b) the expiration of the applicable tax statute of limitations (or any extensions thereof), or for such longer period as may be required by Applicable Law. Salix shall require its Sublicensees to provide to it a report detailing the foregoing expenses and calculations incurred or made by such Sublicensee, which report shall be made available to Napo in connection with any audit conducted by Napo pursuant to Section 7.15.

7.15 Audits. Each Party shall have the right to have an independent certified public accounting firm of internationally recognized standing, and reasonably acceptable to the audited Party, provided with access by the other Party during normal business hours, and upon reasonable prior written notice, to examine only those records of such other Party (and its Affiliates and Sublicensees) as may be reasonably necessary to determine, with respect to any Calendar Year or Annual Period ending not more than [*] years prior to the requesting Party’s request, the correctness or completeness of any report or payment made under this Agreement. The foregoing right of review may be exercised only once per Calendar Year and only upon objective criteria. Results of any such examination shall be (a) limited to information relating to the Licensed Products, (b) made available to both Parties and (c) subject to Article 12. The auditing Party shall bear the full cost and expense of the performance of any such audit, unless such audit discloses a variance to the detriment of the auditing Party of more than [*] percent ([*]%) from the amount of the original report, royalty or payment calculation, in which case the audited Party shall bear the full cost and expense of the performance of such audit. The results of such audit may be disputed in good faith by either Party according to Section 15.7.1. If such audit concludes that additional payments were owed or that excess payments were made during such period, the owing Party shall pay the additional amounts or the receiving Party shall reimburse such excess payments, with interest calculated in accordance with Section 7.9, within forty-five (45) days after the date on which such accounting firm’s written report is delivered to the Parties or any dispute with respect thereto is finally determined pursuant to Section 15.7.1, whichever is later.

ARTICLE 8

REPRESENTATIONS AND COVENANTS

8.1 Representations and Warranties. Each Party hereby represents and warrants to the other Party as of the Effective Date as follows:

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

35

8.1.1 Corporate Power. Such Party is duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or formation, and has full corporate or other power and authority to enter into this Agreement and to carry out the provisions hereof.

8.1.2 Due Authorization. Such Party (a) has the power and authority and the legal right to enter into this Agreement and to perform its obligations hereunder and (b) has taken all necessary action on its part required to authorize the execution and delivery of this Agreement and the performance of its obligations hereunder.

8.1.3 Binding Agreement. This Agreement has been duly executed and delivered on behalf of such Party and constitutes a legal, valid and binding obligation of such Party and is enforceable against it in accordance with the terms hereof subject to the effects of bankruptcy, insolvency or other laws of general application affecting the enforcement of creditor rights and judicial principles affecting the availability of specific performance and general principles of equity, whether enforceability is considered a proceeding at law or equity.

8.1.4 Consents, Approvals, etc. All necessary consents, approvals and authorizations of all Regulatory Authorities and other parties required to be obtained by such Party in connection with the execution and delivery of this Agreement and the performance of its obligations hereunder have been obtained.

8.1.5 Conflicts. The execution and delivery of this Agreement and the performance of such Party’s obligations hereunder (a) do not conflict with or violate any requirement of Applicable Law or any provision of the articles of incorporation, bylaws or any similar instrument of such Party, as applicable, in any material way and (b) do not conflict with, violate or breach, or constitute a default or require any consent under, any contractual obligation or court or administrative order by which such Party is bound.

8.1.6 Additional Napo Representations and Warranties. Napo hereby represents and warrants to Salix as of the Effective Date as follows:

(a) No Notice of Infringement. Except as set forth in Section 8.1.6(a) of Schedule 8.1.6, neither Napo nor any of its Affiliates has received written notice from any Third Party of any issued and enforceable Patent of such Third Party which would be infringed by the Napo Technology or the Development or Exploitation of any Licensed Product.

(b) No Litigation. There are no other claims, judgments or settlements against or owed by Napo or its Affiliates or to which Napo or its Affiliates is a party or, to Napo’s or its Affiliates’ knowledge, pending or threatened claims or litigation, in either case relating to the Napo Technology or any Licensed Product.

(c) Encumbrances. The Napo Technology is free and clear of any liens, charges and encumbrances.

36

(d) Necessary Agreements. Napo has (or will have at the time performance is due) maintained all agreements necessary to perform its obligations, and grant the rights granted to Salix, hereunder.

(e) No Invalidity. Napo does not have any present knowledge from which it would reasonably conclude that the Napo Patents are invalid.

(f) List of Napo Patents. Schedule 1.82 is a true and complete list of the Napo Patents.

(g) Compliance with Legal Requirements. Each Napo Patent that is registered, filed or issued under the authority of an appropriate governmental authority is and at all times has been in compliance with all legal requirements applicable thereto, and all filings, payments, and other actions required to be made or taken to maintain each item of the Napo Patents in full force and effect have been made by the applicable deadline. Furthermore, except as set forth in Section 8.1.6(g) of Schedule 8.1.6, (i) no application for a patent or any other type of intellectual property protection included in the Napo Technology (including but not limited to Napo Patents) filed by or on behalf of Napo or any licensor thereof with respect thereto has been abandoned or allowed to lapse and (ii) no provisional patent application has expired without the filing of a nonprovisional patent application that claims the benefit of such provisional patent application. All statements in any file referenced in Section 8.1.6(g) of Schedule 8.1.6 were true and accurate as of the date such statements were given or made to the applicable governmental authority.

(h) No Third Party Rights. Neither Napo nor any Affiliate thereof is a party to or otherwise bound by any oral or written contract or agreement that will result in any Third Party obtaining any interest in, or that would give to any Third Party any right to assert any claim in or with respect to, any rights granted to Salix under this Agreement.

(i) Confidentiality. Napo has taken reasonable measures, using reasonable business judgment, to protect the confidentiality of the Napo Know-How.

(j) Napo Technology. With respect to the Napo Technology:

(i) Napo does not have any knowledge that any of the Napo Patents is the subject of any pending interference, opposition, cancellation or other protest proceeding;

(ii) except as set forth in Section 8.1.6(j)(ii) of Schedule 8.1.6, relative to the Napo Patents, the technology claimed therein, and the Licensed Products, Napo does not have any knowledge of any claim pending, threatened, or previously made, alleging

37

infringement or misappropriation of any patent, trade secret, or other intellectual property right of any Third Party; and

(iii) Napo is not aware of any Third Party activities which would constitute misappropriation or infringement of the Napo Technology (including but not limited to Napo Patents).

(k) Regulatory Documentation.

(i) Except as set forth in Section 8.1.6(k)(i) of Schedule 8.1.6, Napo owns all right, title, and interest in and to all Napo Technology and Regulatory Documentation of Napo, free and clear of any liens, claims, and encumbrances of any Person.

(ii) Except as set forth in Section 8.1.6(k)(ii) of Schedule 8.1.6, none of the Napo Technology or Regulatory Documentation has been obtained by Napo pursuant to any license or other agreement with any Third Party.

(iii) All Regulatory Documentation of Napo is and has been filed, updated, and maintained in accordance with Applicable Law, and Napo has not received nor been the subject of, nor is it aware of any information for which one would reasonably expect Napo to receive or be the subject of, any correspondence or other action on the part of any Regulatory Authority which would or could reasonably be expected to have a material adverse effect on the Regulatory Documentation of Napo or on the Development or Commercialization of any Licensed Product.

(iv) To Napo’s knowledge, no Licensed Product or product incorporating or utilizing any Napo Technology has obtained regulatory Approval in any jurisdiction for marketing or sale for human use.

(l) No Adverse Information. Napo has not received, nor is it aware of, any scientific or technical information which would reasonably be expected to have a material adverse effect on Salix’s Development or Commercialization of any Licensed Product (including but not limited to the obtaining of regulatory Approvals).

(m) FDA. Napo has not received from any Regulatory Authority any written notice regarding the approvability or approval of any Licensed Product. No Licensed Product has been withdrawn, suspended or discontinued by Napo as a result of any action by any Regulatory Authority, either within or outside the United States (whether voluntarily or otherwise). With respect to any Licensed Products, no officer, employee or, to the knowledge of Napo, agent of Napo has made any untrue statement of a material fact or a fraudulent statement to any

38

Regulatory Authority, failed to disclose any material fact required to be disclosed to any Regulatory Authority, or committed an act, made a statement or failed to make a statement that, at the time such act, statement or omission was made, could reasonably be expected to provide a basis for the FDA to invoke the FDA’s policy respecting “Fraud, Untrue Statements of Material Facts, Bribery, and Illegal Gratuities” set forth in 56 Fed. Reg. 46191 (September 10, 1991) or any similar policy of any Regulatory Authority, nor has any director, officer, employee or, to the knowledge of Napo, agent of Napo been convicted of any crime or engaged in any conduct for which debarment is mandated by 21 U.S.C. Section 335a(a) (or any similar law or regulation) or authorized by 21 U.S.C. Section 335a(b) (or any similar law or regulation);

(n) Patent Owners. To Napo’s knowledge, as determined in accordance with applicable patent laws, there are no inventors with respect to the technology claimed in the Napo Patents other than the inventors named on the Patents described on Schedule 1.82.

(o) Government Funding. Except as set forth in Section 8.1.6(o) of Schedule 8.1.6, neither Napo nor any of its Affiliates is or has been a party to any agreement with the United States Federal government or an agency thereof pursuant to which the United States Federal government or such agency provided funding for the Development of any Licensed Product.

(p) Documents Provided. Napo has, up to and including the Effective Date, made available to Salix (i) all Regulatory Documentation and material information in its possession or control that relates to any Licensed Product and (ii) all other information that, to Napo’s or its Affiliates’ knowledge, is reasonably likely to have a material negative impact on the Exploitation of any Licensed Product.

(q) Conflicts. The grant by Napo to Salix of the licenses that are granted to Salix set forth in this Agreement do not conflict with, violate or breach, or constitute a default or require any consent under, any contractual obligation or court or administrative order by which Napo or its Affiliates are bound.

(r) Glenmark Agreement; AsiaPharm Agreement. Without intending to limit any of the other warranties, covenants or representations under this Article 8, the grant by Napo to Salix of the licenses that are granted or may be granted to Salix set forth in this Agreement, the Exploitation by Salix of Licensed Products pursuant thereto, and the undertaking and performance by Napo of its obligations under this Agreement do not and will not conflict with, violate or breach, or constitute a default or require any consent under, the Glenmark Agreement or the AsiaPharm Agreement, each as in effect as of the Effective Date.

39

(s) CPL. Napo has good title to all of the CPL described on Schedule 6.3.2 and title to such CPL will pass to Salix free and clear of any security interest, lien or other encumbrance whatsoever. All of the CPL described on Schedule 6.3.2 (i) is in good and usable condition; (ii) is in conformity with the Specifications and the Certificate of Analysis therefor; (iii) has been Manufactured in conformance with Applicable Law; (iv) has an expiration date no earlier than twenty-four (24) months after the Effective Date; (v) has not been adulterated (as such term is defined in the FFDCA); and (vi) may be introduced into interstate commerce pursuant to the FFDCA and similar provisions of other Applicable Law. The CPL described on Schedule 6.3.2 represents sufficient CPL to produce 450 kg of finished Licensed Compound. Neither Napo nor any of its Affiliates has been debarred or is subject to debarment pursuant to Section 306 of the FFDCA or any similar law in any country or listed on either Excluded List or any similar list in any country; provided that, with respect to any such similar laws or lists in any country other than the United States, Salix has identified for Napo with specificity such law or list.

(t) Accounts Payable. Schedule 7.1 accurately and correctly sets forth any and all unpaid Third Party invoices received by Napo in respect of services rendered or materials supplied for or in respect of Development, Manufacture, or any other activities related to the Licensed Compound or the Licensed Products and the unpaid amount of each such invoice.

(u) Incurred Costs. Schedule 8.1.6(u) accurately and correctly sets forth all unsatisfied obligations for the payment of money incurred by Napo to Third Parties in respect of services rendered or materials supplied for or in respect of Development, Manufacture, or any other activities related to the Licensed Compound or the Licensed Products and the unpaid amounts thereof.

8.2 Covenants.

8.2.1 Napo Covenants. Napo hereby covenants to Salix as follows:

(a) Necessary Agreements. Napo will maintain and keep in full force and effect all agreements necessary to perform its obligations, and grant the rights granted to Salix, hereunder.

(b) Encumbrances. Napo will not, without the prior written consent of Salix, encumber any portion of the Napo Technology with liens, charges or encumbrances that would adversely affect Salix’s ability to Exploit the Licensed Products.

(c) Conflicts. Napo will not enter into and it will cause its Affiliates to refrain from entering into any agreement or obligation that would

40

materially adversely affect Napo’s ability to grant the licenses to Salix set forth in this Agreement.

(d) License to Manufacture. Napo will consent to any license and right of reference, to the extent agreed to between Salix and Glenmark, under the Regulatory Documentation Controlled by Napo or any of its Affiliates, if any, and under the Napo Technology, to manufacture the Licensed Compound or the Licensed Products, for the sole purpose of Developing and Commercializing the Licensed Compound or the Licensed Products in (a) the Human Excluding HIV/AIDS/ID/Pediatric Field in the Salix Human Excluding HIV/AIDS/ID/Pediatric Territory; (b) the HIV/AIDS/Pediatric Field in the Salix HIV/AIDS/Pediatric Territory; and (c) the ID Field in the Salix ID Territory.

(e) Glenmark Agreement. If Napo or Glenmark proposes to amend the Glenmark Agreement (including the Glenmark-Napo Amendment) or the Glenmark-Napo Letter Agreement, in each case as amended through the Effective Date, then Napo shall provide Salix with a written notice of such proposed amendment. Napo shall not enter into any amendment to the Glenmark Agreement (including the Glenmark-Napo Amendment) or the Glenmark-Napo Letter Agreement, in each case as amended through the Effective Date, without the prior written consent of Salix, which consent is not to be unreasonably withheld, conditioned, or delayed unless Salix determines, in its sole and absolute discretion (such discretion nonetheless to be exercised in good faith), that the proposed amendment adversely affects any of Salix’s rights under this Agreement.

(f) Glenmark Sublicenses. If Glenmark proposes to grant to a Third Party a sublicense to any of its rights granted by Napo to Glenmark under the Glenmark Agreement, then Napo shall provide Salix with a written notice of such proposed sublicense. Napo shall not provide its consent to any such sublicense without the prior written consent of Salix.

(g) Financial Statements. For all periods through and including the date of Initial Regulatory Approval of the CRO-HIV Product, Napo shall provide to Salix (a) within ten (10) days following the end of each calendar month a consolidated income statement and statement of cash flows for such calendar month for Napo and its Affiliates and a consolidated balance sheet as of the end of the calendar month for Napo and its Affiliates and (b) within thirty (30) days following the end of each Quarter a consolidated income statement and statement of cash flows for such Quarter for Napo and its Affiliates and a consolidated balance sheet as of the end of the Quarter for Napo and its Affiliates. Such financial statements shall be prepared from the books and records of Napo and its Affiliates in accordance with GAAP (but without the requirement of notes thereto) and shall in each instance be certified by the chief financial officer of Napo as having been so prepared.

41

(h) Delivery of CPL. Napo shall cause the CPL described on Schedule 6.3.2 to be delivered to Salix, upon Salix’s request and at Salix’s sole cost and expense, at such location or locations as may be designated by Salix.

(i) Assignment of Contracts. Napo hereby agrees, at Salix’s request, to cooperate in good faith with Salix in effecting the assignment to Salix of Napo’s rights under any Third Party contract or agreement to which Napo is a party in respect of the Manufacture, Development or Commercialization of the Licensed Compound or the Licensed Products, excluding the Glenmark Agreement, the Glenmark-Napo Amendment, the Glenmark-Napo Letter Agreement, and the AsiaPharm Agreement. Without limiting the foregoing, Napo shall assist Salix in reaching any necessary accommodation or agreement with any Third Party that is a party to any such contract or agreement so as to permit the effective assignment of Napo’s rights as contemplated by the preceding sentence. It is acknowledged and agreed that Napo may condition any such assignment upon the assumption by Salix of Napo’s related obligations (or other satisfactory arrangement for the satisfaction by Salix of such obligations) to any Third Party that is a party to a contract or agreement to be assigned by Napo to Salix pursuant to this Section 8.2.1(i), and Napo and Salix agree to negotiate in good faith with respect to any such arrangements. For the avoidance of doubt, any assumption of obligations by Salix in connection with the assignment by Napo of its rights under a contract or agreement as contemplated by this Section 8.2.1(i) shall be without prejudice to the provisions of Article 3.

8.2.2 Salix Covenants. Salix hereby covenants and agrees that it will not, nor will it permit its Affiliates or Sublicensees to, at any time during the period ending on the later of the expiration or termination of this Agreement institute, prosecute or otherwise voluntarily participate in (or in any way voluntarily aid any Third Party in instituting, prosecuting or participating in), at law or in equity or before any administrative or regulatory body, including the United States Patent and Trademark Office or its foreign counterparts, any claim, demand, action or cause of action for declaratory relief, damages or any other remedy or for an enjoinment, injunction or any other equitable remedy, including any interference, re-examination, opposition or any similar proceeding, alleging that any claim in a Napo Patent is invalid, unenforceable or otherwise not patentable or would not be infringed by Salix’s activities absent the rights and licenses granted by Napo to Salix under Section 10.1.

8.3 Debarment. Each Party represents, warrants and covenants to the other that neither such Party nor any of its Affiliates (a) has been debarred by a Regulatory Authority, (b) is subject to debarment by a Regulatory Authority, or (c) will use, in any capacity, in connection with the activities to be performed under this Agreement, any person or entity who or that has been debarred, or is the subject of debarment proceedings by

42

any Regulatory Authority. If either Party learns that a person or entity performing on its behalf under this Agreement has been debarred by any Regulatory Authority, or has become the subject of debarment proceedings by any Regulatory Authority, such Party shall so promptly notify the other Party and shall prohibit such person or entity from performing on its behalf under this Agreement.

8.4 DISCLAIMER OF WARRANTY. EXCEPT FOR THE EXPRESS WARRANTIES SET FORTH IN SECTIONS 8.1, 8.2 and 8.3, SALIX AND NAPO MAKE NO REPRESENTATIONS AND GRANT NO WARRANTIES, EXPRESS OR IMPLIED, EITHER IN FACT OR BY OPERATION OF LAW, BY STATUTE OR OTHERWISE, UNDER THIS AGREEMENT, AND SALIX AND NAPO EACH SPECIFICALLY DISCLAIMS ANY OTHER WARRANTIES, WHETHER WRITTEN OR ORAL, OR EXPRESS OR IMPLIED, INCLUDING ANY WARRANTY OF QUALITY, MERCHANTABILITY OR FITNESS FOR A PARTICULAR USE OR PURPOSE OR ANY WARRANTY AS TO THE VALIDITY OF ANY PATENTS OR THE NON-INFRINGEMENT OF ANY INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES UNDER THIS AGREEMENT.

ARTICLE 9

COMMERCIALIZATION

9.1 Commercialization of the Licensed Products.

9.1.1 In General. As between the Parties, Salix shall have the sole right and obligation to Commercialize the Licensed Products in (a) the Human Excluding HIV/AIDS/ID/Pediatric Field in the Salix Human Excluding HIV/AIDS/ID/Pediatric Territory; (b) the HIV/AIDS/Pediatric Field in the Salix HIV/AIDS/Pediatric Territory; and (c) the ID Field in the Salix ID Territory, in each case ((a), (b) and (c)) in compliance with this Agreement and Applicable Law.

9.1.2 Commercialization Obligations. Salix, directly or through one or more of its Affiliates, Sublicensees or Distributors, shall use Commercially Reasonable Efforts to Commercialize the CRO-HIV Product in the United States.

9.1.3 Commercialization Plan. Within ninety (90) days after data resulting from the completion of the first Phase III Clinical Trial is finalized or by a date otherwise agreed to by the Parties, Salix shall provide to Napo a preliminary Commercialization plan, setting forth (a) unit volume and market share forecasts for the CRO-HIV Product in North America, (b) certain marketing and other Commercialization activities for the CRO-HIV Product that are required to be conducted by or on behalf of Salix, and (c) any other matters or activities determined by the Joint Steering Committee.

9.2 Promotional Materials and Activities.

9.2.1 In General. As between the Parties, Salix shall have sole authority and responsibility for preparing all Promotional Materials used to support the Commercialization of the Licensed Products in (a) the Human Excluding HIV/AIDS/ID/Pediatric Field in the Salix Human Excluding HIV/AIDS/ID/Pediatric Territory; (b) the HIV/AIDS/Pediatric Field in the Salix HIV/AIDS/Pediatric Territory;

43

and (c) the ID Field in the Salix ID Territory and obtaining any Approvals required for the use of any such Promotional Materials.

9.2.2 Markings. All Promotional Materials, packaging and Product Labeling for any Licensed Product used by Salix, its Affiliates, Sublicensees or Distributors in connection with the Licensed Product shall contain, to the extent permitted by Applicable Law, a statement in a reasonably prominent manner that Napo is licensor and including Napo’s logo, and an appropriate reference to the sustainable supply of the Licensed Compound.

9.3 Unauthorized Sales.

9.3.1 Unauthorized Sales by Salix. Salix (a) shall, and shall cause its Affiliates, Sublicensees and Distributors to, distribute, market, promote, offer for sale and sell the Licensed Products only in (i) the Human Excluding HIV/AIDS/ID/Pediatric Field in the Salix Human Excluding HIV/AIDS/ID/Pediatric Territory; (ii) the HIV/AIDS/Pediatric Field in the Salix HIV/AIDS/Pediatric Territory; and (iii) the ID Field in the Salix ID Territory and, (b) to the extent consistent with Applicable Law, shall not, and shall not permit its Affiliates and shall use commercially reasonable efforts to not permit Sublicensees or Distributors to, distribute, market, promote, offer for sale or sell the Licensed Products (i) to any Person in fields of use and countries other than those as specified in the preceding clause (a) or (ii) to any Person in the fields of use and countries as specified in the preceding clause (a) that Salix, or its Affiliates, Sublicensees or Distributors, as applicable, knows (A) is likely to distribute, market, promote, offer for sale or sell the Licensed Products in fields of use and countries other than those as specified in the preceding clause (a) or assist another Person to do so, or (B) has directly or indirectly distributed, marketed, promoted, offered for sale or sold the Licensed Products in fields of use and countries other than those as specified in the preceding clause (a) or assisted another Person to do so. Such commercially reasonable efforts with respect to Sublicensees and Distributors shall include obtaining their written agreement to an undertaking at least as restrictive with respect to such Sublicensees and Distributors as the preceding sentence is with respect to Salix and its Affiliates, and enforcing such right in an appropriate manner. If Salix or any of its Affiliates, Distributors or Sublicensees receives any orders for the Licensed Products for fields of use and countries other than those specified in clause (a) of the first sentence of this Section 9.3.1, it shall promptly refer such orders to Napo. For the avoidance of doubt, Salix shall not, and shall not permit its Affiliates and shall use commercially reasonable efforts to not permit its Sublicensees or Distributors to, distribute, market, promote, offer for sale or sell the Licensed Products (i) in any country within the Glenmark Territory (as defined in the Glenmark Agreement) until Salix or its Affiliates or Sublicensees have obtained Approval of such Licensed Product for an indication other than an indication covered by a field of use exclusively granted to Glenmark for such country under the Glenmark Agreement. Salix shall notify Napo and Glenmark promptly in writing upon receipt of any such Approval.

9.3.2 Unauthorized Sales by Napo. Napo (a) shall, and shall cause its Affiliates, licensees and distributors to, distribute, market, promote, offer for sale and sell

44

the Licensed Products only in fields of use and countries other than those as specified in subclause (a) of the first sentence of Section 9.3.1 and, (b) to the extent consistent with Applicable Law, shall not, and shall not permit its Affiliates and shall use commercially reasonable efforts to not permit its licensees or distributors to, distribute, market, promote, offer for sale or sell the Licensed Products (i) to any Person in the fields of use and countries as specified in subclause (a) of the first sentence of Section 9.3.1 or (ii) to any Person in fields of use and countries other than those as specified in subclause (a) of the first sentence of Section 9.3.1 that Napo, or its Affiliates, licensees or distributors, as applicable, knows (A) is likely to distribute, market, promote, offer for sale or sell the Licensed Product in the fields of use and countries as specified in subclause (a) of the first sentence of Section 9.3.1 or assist another Person to do so, or (B) has directly or indirectly distributed, marketed, promoted, offered for sale or sold the Licensed Products in the fields of use and countries as specified in subclause (a) of the first sentence of Section 9.3.1 or assisted another Person to do so. Such commercially reasonable efforts with respect to Napo’s licensees and distributors shall include obtaining their written agreement to an undertaking at least as restrictive with respect to such licensees and distributors as the preceding sentence is with respect to Napo and its Affiliates, and enforcing such right in an appropriate manner (it being agreed that in respect of Napo’s licensee, Glenmark, Napo’s obligations in this regard are satisfied by the execution and delivery simultaneously herewith of each of the Glenmark-Napo Amendment and the Glenmark-Napo Letter Agreement).

9.4 Reporting. Salix shall prepare and maintain reasonably complete and accurate records regarding Commercialization of the Licensed Products in (a) the Human Excluding HIV/AIDS/ID/Pediatric Field in the Salix Human Excluding HIV/AIDS/ID/Pediatric Territory; (b) the HIV/AIDS/Pediatric Field in the Salix HIV/AIDS/Pediatric Territory; and (c) the ID Field in the Salix ID Territory and shall provide to Napo and the JSC a detailed report regarding such Commercialization at least once per Quarter. Such report shall contain sufficient detail to enable Napo to assess Salix’s compliance with its Commercialization obligations set forth in Section 9.1.2 during the preceding Quarter, including information with respect to the following: (i) Net Sales for Licensed Products in the aforementioned fields of use and countries and (ii) actual itemized expenditures with respect to Commercialization activities. Salix shall provide Napo with such additional information regarding the Commercialization of the Licensed Products as Napo may reasonably request from time to time. All of the foregoing shall be deemed Confidential Information of Salix hereunder, and Napo shall not use any information learned by it or disclosed to it pursuant to this Section 9.4 except as reasonably necessary to assess and enforce Salix’s compliance with Section 9.1.2.

45

ARTICLE 10

LICENSE GRANTS

10.1 Grants to Salix. Subject to the terms and conditions of this Agreement, including Section 10.2, Napo hereby grants to Salix:

10.1.1 an exclusive (including with regard to Napo and its Affiliates), royalty-bearing license, with the right to grant sublicenses in accordance with Section 10.3, under the Napo Technology, to Exploit the Licensed Compound or the Licensed Products in (a) the Human Excluding HIV/AIDS/ID/Pediatric Field in the Salix Human Excluding HIV/AIDS/ID/Pediatric Territory; (b) the HIV/AIDS/Pediatric Field in the Salix HIV/AIDS/Pediatric Territory; and (c) the ID Field in the Salix ID Territory.

10.1.2 an exclusive (including with regard to Napo and its Affiliates), royalty-bearing license and right of reference, with the right to grant sublicenses and further rights of reference in accordance with Section 10.3, under the Regulatory Documentation Controlled by Napo or any of its Affiliates, if any, to Exploit the Licensed Compound or the Licensed Products in (a) the Human Excluding HIV/AIDS/ID/Pediatric Field in the Salix Human Excluding HIV/AIDS/ID/Pediatric Territory; (b) the HIV/AIDS/Pediatric Field in the Salix HIV/AIDS/Pediatric Territory; and (c) the ID Field in the Salix ID Territory;

10.1.3 subject to Sections 2.5 and 11.8, a non-exclusive, worldwide, royalty-bearing license, with the right to grant sublicenses in accordance with Section 10.3, to use the Product Trademarks (to the extent Controlled by Napo) as necessary to exercise its rights under the grants in Sections 10.1.1 and 10.1.2 as consistent with this Agreement, provided that Napo shall have a right to monitor and comment upon the manner in which such Product Trademarks are used; and

10.1.4 subject to Section 11.8, a royalty-free, worldwide, non-exclusive license, with the right to grant sublicenses in accordance with Section 10.3, to use in connection with its Exploitation of the Licensed Compound or the Licensed Products in (a) the Human Excluding HIV/AIDS/ID/Pediatric Field in the Salix Human Excluding HIV/AIDS/ID/Pediatric Territory; (b) the HIV/AIDS/Pediatric Field in the Salix HIV/AIDS/Pediatric Territory; and (c) the ID Field in the Salix ID Territory such Corporate Names of Napo or its Affiliates as Napo may designate with respect to a country.

10.2 Retention of Rights. Notwithstanding anything to the contrary in this Agreement, as between the Parties, Napo and its Affiliates retain (subject to Sections 10.1.3 and 10.1.4) (a) all rights to Exploit the Licensed Compound or the Licensed Products outside (i) the Human Excluding HIV/AIDS/ID/Pediatric Field in the Salix Human Excluding HIV/AIDS/ID/Pediatric Territory; (ii) the HIV/AIDS/Pediatric Field in the Salix HIV/AIDS/Pediatric Territory; and (iii) the ID Field in the Salix ID Territory; and (b) non-exclusive rights to Develop and manufacture the Licensed Compound or the Licensed Products

46

to the extent such Development or manufacture is for the purposes of (i) performing its obligations under this Agreement or (ii) Developing and Commercializing the Licensed Compound or the Licensed Products outside (A) the Human Excluding HIV/AIDS/ID/Pediatric Field in the Salix Human Excluding HIV/AIDS/ID/Pediatric Territory; (B) the HIV/AIDS/Pediatric Field in the Salix HIV/AIDS/Pediatric Territory; and (C) the ID Field in the Salix ID Territory.

10.3 Sublicensing. Subject to any approvals required from a Third Party licensor, the rights and licenses granted to Salix under Section 10.1 and Napo under Section 10.4 shall include the right to grant sublicenses (or further rights of reference), through multiple tiers of Sublicensees. Each Party hereby guarantees the performance of its Affiliates and Sublicensees, and the grant of any such sublicense shall not relieve the sublicensing Party of its obligations under this Agreement, except to the extent they are satisfactorily performed by such Sublicensee. Any such sublicenses shall be consistent with and subject to the terms and conditions of this Agreement.

10.4 Grants to Napo. Subject to the terms and conditions of this Agreement, Salix hereby grants to Napo:

10.4.1 a royalty-free, exclusive (including with regard to Salix and its Affiliates) license, with the right to grant sublicenses in accordance with Section 10.3, under the Salix Technology, to Exploit the Licensed Compound or the Licensed Products outside (a) the Human Excluding HIV/AIDS/ID/Pediatric Field in the Salix Human Excluding HIV/AIDS/ID/Pediatric Territory; (b) the HIV/AIDS/Pediatric Field in the Salix HIV/AIDS/Pediatric Territory; and (c) the ID Field in the Salix ID Territory.

10.4.2 a royalty-free license and right of reference, with the right to grant sublicenses and further rights of reference in accordance with Section 10.3, under the Regulatory Documentation Controlled by Salix or its Affiliates, to Exploit the Licensed Compound or the Licensed Products outside (a) the Human Excluding HIV/AIDS/ID/Pediatric Field in the Salix Human Excluding HIV/AIDS/ID/Pediatric Territory; (b) the HIV/AIDS/Pediatric Field in the Salix HIV/AIDS/Pediatric Territory; and (c) the ID Field in the Salix ID Territory.

10.4.3 subject to Sections 2.5 and 11.8, a non-exclusive, worldwide, royalty-bearing license, with the right to grant sublicenses in accordance with Section 10.3, to use the Product Trademarks (to the extent Controlled by Salix) as necessary to exercise its rights under the grants in Sections 10.4.1 and 10.4.2 and under Section 6.5 as consistent with this Agreement.

Notwithstanding anything to the contrary in this Agreement, as between the Parties, Salix retains (subject to Section 10.2(b)) (a) all rights to Exploit the Salix Technology in (i) the Human Excluding HIV/AIDS/ID/Pediatric Field in the Salix Human Excluding HIV/AIDS/ID/Pediatric Territory; (ii) the HIV/AIDS/Pediatric Field in the Salix HIV/AIDS/Pediatric Territory; and (iii) the ID Field in the Salix ID Territory; and (b) non-exclusive rights to Exploit the Salix Technology to Develop or manufacture the Licensed Compound or the Licensed Products, to the extent such Development or manufacture is for the purpose of Exploiting the Licensed

47

Compound or the Licensed Products in (i) the Human Excluding HIV/AIDS/ID/Pediatric Field in the Salix Human Excluding HIV/AIDS/ID/Pediatric Territory; (ii) the HIV/AIDS/Pediatric Field in the Salix HIV/AIDS/Pediatric Territory; and (iii) the ID Field in the Salix ID Territory.

10.5 Available Rights; Salix First Right of Negotiation to License Additional Napo Products.

10.5.1 In the event that at any time the Glenmark Agreement or the AsiaPharm Agreement should terminate and rights, territories or fields of use in respect of the Napo Technology, the Licensed Compound or Licensed Products revert to Napo as a result of such termination or Napo should become entitled pursuant to Section 2.2(c) of the Glenmark Agreement to enter a country, then the terms of this Agreement shall automatically, without further action by either Party and without any further payment by or on behalf of Salix, be, and they hereby are, amended to expand and extend the license grants, territories, fields of use, and other rights of Salix set forth in this Agreement to cover and include the rights, territories, and fields of use in respect of the Napo Technology, the Licensed Compound and Licensed Products so reverting to Napo.

10.5.2 Napo agrees that, in the event it desires to grant a license to any of its products or compounds developed or intended to be developed or marketed or intended to be marketed for gastro-intestinal indications (other than the Licensed Compound or Licensed Products), Salix shall have a first right of negotiation with respect to such license, for a period of sixty (60) days following Salix’s receipt of a written notice (the “License Notice”) from Napo of such desire. Such right of first negotiation shall be exercisable by Salix by notice given to Napo within [*] days of the date of the License Notice. In the event Salix exercises its right of first negotiation, the Parties shall promptly begin to negotiate in good faith with respect to the foregoing, but neither Party shall have any obligation to enter into any agreement unless the Parties are able to agree in writing on mutually acceptable terms and conditions at such time. During such sixty (60) day period, Napo shall negotiate exclusively with Salix and shall not pursue negotiations with, nor furnish information regarding the licensing opportunity to, any other Person. In the event the Parties are unable to conclude such an agreement during such sixty (60) day period, and Salix indicates to Napo in writing that it desires to continue negotiations with Napo, the Parties shall continue to negotiate in good faith, provided that Napo shall be free from and after the end of such sixty (60) day negotiation period to negotiate and enter into agreements with Third Parties on terms no more favorable to the Third Party than those offered to Salix (“License Terms”); provided further that if Napo does not enter into an agreement on License Terms within [*] after Napo provides to Salix the License Notice, then Napo must, after such date, provide Salix with a new License Notice and must again fulfill the other requirements of this Section 10.5.2. Furthermore, Napo shall provide to Salix the same preliminary data and information package relating to such product or compound as it provides to any such Third Party during negotiations, if any.

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

48

ARTICLE 11

INTELLECTUAL PROPERTY

11.1 Disclosures.

11.1.1 Napo shall disclose to Salix in writing any and all material Napo Know-How, Napo Patents and Regulatory Documentation developed or prepared or otherwise Controlled by Napo or any of its Affiliates or Sublicensees, promptly after the development or preparation or acquisition thereof, in each case as reasonably necessary or useful for Salix to exercise the licenses granted to it pursuant to Section 10.1.

11.1.2 Salix shall disclose to Napo in writing any and all material Salix Know-How, Salix Patents and Regulatory Documentation developed or prepared or otherwise Controlled by Salix or any of its Affiliates or Sublicensees, promptly after the development or preparation or acquisition thereof, in each case as reasonably necessary or useful for Napo to exercise the licenses granted to it pursuant to Section 10.4.

11.2 Ownership of Intellectual Property.

11.2.1 Ownership of Inventions. Subject to Sections 11.2.2, 11.3.1 and 13.6 and the licenses and rights of reference granted to Salix under Section 10.1 and Napo under Section 10.4, as between the Parties, [*] shall own and retain all right, title and interest in and to any and all Information, Materials and inventions that are conceived, discovered, developed or otherwise made under or in connection with this Agreement, whether or not patented or patentable, and any and all Patents and intellectual property rights with respect thereto, and (b) [*] shall own and retain all right, title and interest in and to any and all other Information, Materials or inventions, and Patent and intellectual property rights that are owned or otherwise Controlled (other than pursuant to the license grants set forth in Sections 10.1 and 10.4) by such Party, its Affiliates or its Sublicensees as of the Effective Date.

11.2.2 Ownership of Technology. Without limitation of Section 11.2.1, subject to Section 11.3.1 and the licenses and rights of reference granted under Sections 10.1 and 10.4, as between the Parties, Salix shall own and retain all right, title and interest in and to all Salix Technology, and Napo shall own and retain all right, title and interest in and to all Napo Technology.

11.2.3 Ownership of Regulatory Documentation and Approvals. Subject to the licenses and rights of reference granted hereunder, Section 4.4(b) of the Glenmark Agreement as in effect as of the Effective Date, and Applicable Law, and without limiting Section 4.4, as between the Parties, [*] shall own all right, title and interest in and to any Regulatory Documentation and Approvals relating to any Licensed Product.

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

49

11.2.4 Ownership of Corporate Names. As between the Parties, each Party shall retain all right, title and interest in and to its Corporate Names and agrees that it shall not attack, dispute or contest the validity of or ownership of the other Party’s Corporate Names or any registrations issued or issuing with respect thereto.

11.2.5 United States Law. The determination of whether Information, Materials and inventions are conceived, discovered, developed or otherwise made by a Party for the purpose of allocating proprietary rights (including Patent, copyright or other intellectual property rights) therein, shall, for purposes of this Agreement, be made in accordance with Applicable Law in the United States. In the event that United States law does not apply to the conception, discovery, development or making of any Information, Materials or inventions hereunder, each Party shall, and does hereby, assign, and shall cause its Affiliates and Sublicensees to so assign, to the other Party, without additional compensation, such right, title and interest in and to any Technology, as well as any intellectual property rights with respect thereto, as is necessary to fully effect the sole ownership provided for in Sections 11.2.1 and 11.2.2.

11.3 Patent Maintenance and Prosecution.

11.3.1 Napo Patents and Salix Patents. [*] shall have sole discretion and responsibility to prepare, file, prosecute and maintain the Napo Patents and the Salix Patents and shall be responsible for related interference and opposition proceedings; provided, however, that in the case of any issued Napo Patent or issued Salix Patent, if [*] plans to abandon such Patent, [*] shall notify [*] in writing at least [*] days in advance of the due date of any payment or other administrative action that is required to maintain such Patent (i.e., an administrative action that involves routine and customary filings, it being understood that interference, opposition, reissue and re-examination proceedings, prosecution or defense of infringement actions, and the like, shall not be considered administrative actions), and [*] may elect, upon written notice within such [*]-day period to [*], to make such payment or take such administrative action, in the name of Salix (with respect to a Salix Patent) or Napo (with respect to a Napo Patent), as the case may be. Except as expressly permitted in this Section 11.3.1, Napo shall have no right to prepare, file, prosecute or maintain any Salix Patents, and [*] shall have no right to prepare, file, prosecute or maintain any Napo Patents.

11.3.2 Costs and Expenses. Amounts paid by [*] to Third Parties in connection with filing, prosecuting and maintaining (including any costs and expenses of patent interference, opposition, reissue and re-examination proceedings) Patents as contemplated by Section 11.3.1 shall be included as an element of Development Costs. All other costs and expenses incurred by a Party pursuant to Section 11.3.1 shall be borne by such Party.

11.3.3 Cooperation. Each Party shall assist and cooperate with the other Party as such other Party may reasonably request from time to time in connection with its

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

50

activities set forth in Section 11.3.1. Each Party shall keep the other Party currently informed of all steps to be taken in the preparation and prosecution of all applications filed by it according to this Section 11.3 and shall furnish such other Party with copies of such applications for Patents, amendments thereto and other related correspondence to and from patent offices, and, to the extent reasonably practicable, permit such other Party an opportunity to offer its comments thereon before making a submission to a patent office which could materially affect the scope or validity of the patent coverage that may result. Such other Party shall offer its comments, if any, promptly.

11.3.4 Patent Term Extension. The JSC shall be responsible for making decisions regarding patent term extensions, including supplementary protection certificates and any other extensions that are now or become available in the future, wherever applicable, for Napo Patents and Salix Patents. Each Party shall reasonably cooperate, as requested by the other Party, to implement such decisions. Notwithstanding the foregoing, the Parties shall coordinate their activities with respect to any patent term extension with respect to all Patents in order to secure the optimal protection for each Licensed Product available under Applicable Law.

11.4 Enforcement of Patents.

11.4.1 Notice. If any Napo Patent or Salix Patent is allegedly or actually infringed by a Third Party in a manner relating to a Licensed Product, the Party first having knowledge of such infringement shall promptly notify the other in writing. The notice shall set forth the facts of that infringement in reasonable detail.

11.4.2 Prosecution. As between the Parties, [*] shall have the first right, but not the obligation, to control the prosecution of any infringement described in this Section 11.4. [*] shall have the right, at its own expense, to be represented in any such action by counsel of its own choice. If [*] does not initiate an infringement action within [*] days (or [*] days in the case of an action brought under the Hatch-Waxman Act) of learning of the infringement, [*] shall have the right, but not the obligation, to bring such an action. [*] shall have the right, at its own expense, to be represented in any such action by counsel of its own choice.

11.4.3 Enforcement Procedure. In the event a Party is entitled to and brings an infringement action in accordance with this Section 11.4, the other Party shall cooperate fully, including furnishing of a power of attorney, being joined as a party plaintiff in such action, providing access to relevant documents and other evidence, and making its employees available at reasonable business hours. If a Party pursues an action against such alleged infringement, it shall consider in good faith any comments from the other Party and shall keep the other Party reasonably informed of any steps taken to preclude such infringement.

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

51

11.4.4 Costs and Recovery. Any costs and expenses relating to any enforcement action commenced pursuant to this Section 11.4 by Salix shall be [*]. Any costs and expenses relating to any enforcement action commenced pursuant to this Section 11.4 by [*]shall be borne by [*]. Any damages or other amounts collected shall be first allocated to reimburse the Parties for their costs and expenses in making such recovery (which amounts shall be allocated pro rata if insufficient to cover the totality of such expenses). Any remainder after such reimbursement is made shall be retained by the Party that has exercised its right to bring the enforcement action; provided, however, that to the extent that any award or settlement (whether by judgment or otherwise) is attributable to loss of sales or profits with respect to a Licensed Product, the Parties shall negotiate in good faith an appropriate allocation of such remainder to reflect the economic interests of the Parties under this Agreement with respect to such Licensed Product.

11.5 Invalidity or Unenforceability Defenses or Actions.

11.5.1 Third Party Defense or Counterclaim. If a Third Party asserts, as a defense or as a counterclaim in any infringement action under Section 11.4.2, that any Napo Patent or Salix Patent is invalid or unenforceable, then the Party pursuing such infringement action shall promptly give written notice to the other Party. [*] shall have the first right but not the obligation, through counsel of its choosing, to respond to such defense or defend against such counterclaim (as applicable) and, if [*] is pursuing the applicable infringement action under Section 11.4.2, [*] shall allow [*] to control such response or defense (as applicable), provided that if [*] determines not to respond to such defense or defend against such counterclaim (as applicable), [*] shall, at its sole cost and expense, have the right but not the obligation to respond to such defense or defend against such counterclaim (as applicable); provided, however, that the Party controlling such response or defense shall obtain the written consent of Napo, with respect to the Napo Patents, or Salix, with respect to the Salix Patents, prior to ceasing to defend, settling or otherwise compromising such defense or counterclaim, such consent not to be unreasonably withheld, conditioned, or delayed. Any costs and expenses with respect to any such response or defense against such counterclaim controlled by [*] shall be [*].

11.5.2 Third Party Declaratory Judgment or Similar Action. If a Third Party asserts, in a declaratory judgment action or similar action or claim filed by such Third Party, that any Napo Patent or Salix Patent is invalid or unenforceable, then the Party first becoming aware of such action or claim shall promptly give written notice to the other Party. [*] shall have the first right, but not the obligation, through counsel of its choosing, to defend against such action or claim, provided that if [*] determines not to assume such defense, [*] shall, at its sole cost and expense, have the right but not the obligation to defend against such action or claim; provided, however, that the Party controlling such defense shall obtain the written consent of Napo, with respect to the Napo Patents, or Salix, with respect to the Salix Patents, prior to ceasing to defend, settling or otherwise compromising any such action or claim, such consent not to be

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

52

unreasonably withheld, conditioned, or delayed. Any costs and expenses with respect to any such defense controlled by [*] shall be [*].

11.5.3 Assistance. Each Party shall provide to the other Party all reasonable assistance requested by the other Party in connection with any action, claim or suit under this Section 11.5, including allowing such other Party access to the assisting Party’s files and documents and to the assisting Party’s personnel who may have possession of relevant information. In particular, the assisting Party shall promptly make available to the other Party, [*], all information in its possession or control that it is aware will assist the other Party in responding to any such action, claim or suit.

11.6 Infringement Claims by Third Parties.

11.6.1 Notice. If a Third Party asserts that a Patent, trademark, or other intellectual property right owned by it is infringed by the Exploitation of any Licensed Product, the Party first obtaining knowledge of such a claim shall immediately provide the other notice of such claim along with the related facts in reasonable detail.

11.6.2 Defense. [*] shall have the first right, but not the obligation, to control such defense. If [*] fails to accept control of the defense of any such claim within [*] days after receiving or giving notice thereof to [*] pursuant to this Section 11.6.2, then [*] shall have the right, but not the obligation, to defend against such claim. Notwithstanding the foregoing, the controlling Party shall not be entitled to assert a claim or counterclaim against such Third Party based on the other Party’s Technology without the prior written consent of such other Party, not to be unreasonably withheld, conditioned, or delayed (and if the other Party does not give such consent or wishes to control a claim or counterclaim based on its Technology, such other Party shall be entitled to assert or exercise such control pursuant to Section 11.4). The Party that does not control the defense of a claim hereunder shall reasonably cooperate with the controlling Party in any such defense and shall have the right, at its own expense, to be represented separately by counsel of its own choice in any such proceeding.

11.6.3 Settlement of Third Party Claims. The Party that controls the defense of a given claim with respect to a Licensed Product shall also have the right to control settlement of such claim; provided, however, that (a) no settlement shall be entered into without the prior consent of the other Party if such settlement would adversely affect or diminish the rights and benefits of the other Party under this Agreement or impose any new obligations or adversely affect any obligations of the other Party under this Agreement; and (b) the controlling Party shall not be entitled to settle any such Third Party claim by granting a license or covenant not to sue under or with respect to the other Party’s Technology without the prior written consent of such other Party, not to be unreasonably withheld, conditioned, or delayed.

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

53

11.6.4 Allocation of Costs. Any costs and expenses relating to any defense controlled by [*] pursuant to this Section 11.6 shall be [*]. Any costs and expenses relating to any defense controlled by [*] pursuant to this Section 11.6 shall be borne by [*]. Any damages or other amounts collected shall be first allocated to reimburse the Parties for their costs and expenses in making such recovery (which amounts shall be allocated pro rata if insufficient to cover the totality of such expenses), with any remainder being retained by the Party that has exercised its right to bring the action; provided, however, that to the extent that any award (whether by judgment, settlement or otherwise), is attributable to loss of sales or profits with respect to a Licensed Product, the Parties shall negotiate in good faith an appropriate allocation of such award to reflect the economic interests of the Parties under this Agreement with respect to such Licensed Product. Any Third Party Payments arising in connection with the settlement of any defense pursuant to this Section 11.6 shall be allocated between the Parties in accordance with the provisions of Section 11.7.

11.7 Third Party Licenses.

11.7.1 If, in the absence of a license from a Third Party, the Exploitation of a Licensed Product by [*] or its Affiliates or Sublicensees infringes or misappropriates any Patent or any intellectual property right of such Third Party in any country, such that [*] or any of its Affiliates or Sublicensees cannot Exploit such Licensed Product in such country without infringing the Patent or intellectual property rights of such Third Party, then [*] shall have the first right to take the lead on negotiating the terms of each such license; provided that if [*] does not take such lead, then [*] may do so; provided further, that the negotiating Party shall obtain the written consent of the other Party prior to entering into any such license, such consent not to be unreasonably withheld, conditioned, or delayed. In any event, the terms of any such license shall permit the Party obtaining such license to grant to the other Party a sublicense thereunder to the same extent that such Party licenses its Technology to the other Party under this Agreement and upon termination.

11.7.2 Napo shall be solely responsible for any Third Party Payments in respect of any license obtained pursuant to Section 11.7.1 to permit the Exploitation of a Licensed Product by Salix or its Affiliates or Sublicensees as contemplated by the Development Plan and Budget as the same exists on the Effective Date. In respect of any other license obtained pursuant to Section 11.7.1, Salix shall be entitled to deduct from royalties it owes to Napo [*] percent ([*]%) of the amount of any Third Party Payments due under any such license up to a maximum amount of [*] percent ([*]%) of the royalties owed to Napo pursuant to Section 7.5 for any Annual Period, with any balance then remaining to be carried over to royalties owed to Napo in respect of subsequent Annual Periods and applied against the royalties due in respect of such subsequent Annual Periods, up to a maximum amount for each Annual Period of [*] percent ([*]%) of the royalties owed in respect of such subsequent Annual Period.

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

54

11.8 Product Trademarks.

11.8.1 Ownership of Product Trademarks. Subject to Section 13.6 and the license grants to Salix under Section 10.1 and Napo under Section 10.4, as between the Parties, (a) Salix shall own and retain all right, title and interest in and to any Product Trademarks registered or otherwise used in connection with the Exploitation of a Licensed Product in (i) the Human Excluding HIV/AIDS/ID/Pediatric Field in the Salix Human Excluding HIV/AIDS/ID/Pediatric Territory; (ii) the HIV/AIDS/Pediatric Field in the Salix HIV/AIDS/Pediatric Territory; and (iii) the ID Field in the Salix ID Territory and (b) Napo shall own and retain all right, title and interest in and to any Product Trademarks registered or otherwise used in connection with the Exploitation of a Licensed Product in fields of use and countries other than those as specified in the preceding clause (a).

11.8.2 Use of Product Trademarks. Neither Party shall, nor shall it permit its Sublicensees or Affiliates to, (a) use in their respective businesses, any Trademark that is confusingly similar to, misleading or deceptive with respect to, or that dilutes any (or any part) of the Product Trademarks, or (b) do any act which endangers, destroys or similarly affects, in any material respect, the value of the goodwill pertaining to the Product Trademarks.

11.8.3 Maintenance and Prosecution of Product Trademarks. As between the Parties, (a) [*] shall control the registration, prosecution and maintenance of the Product Trademarks in (i) the Human Excluding HIV/AIDS/ID/Pediatric Field in the Salix Human Excluding HIV/AIDS/ID/Pediatric Territory; (ii) the HIV/AIDS/Pediatric Field in the Salix HIV/AIDS/Pediatric Territory; and (iii) the ID Field in the Salix ID Territory and (b) [*] shall control the registration, prosecution and maintenance of the Product Trademarks in fields of use and countries other than those specified in the foregoing clause (a), provided that if the Party with the discretion and responsibility to register, prosecute and maintain any such Product Trademark plans to abandon such Product Trademark, such Party shall notify the other Party in writing at least [*] days in advance of the due date of any payment or other action that is required to maintain such Product Trademark, and the other Party may elect, upon written notice within such [*]-day period to the abandoning Party, to make such payment or take such action, in the name of the Party proposing to abandon such Product Trademark, and the Party proposing to abandon such Product Trademark shall reasonably cooperate with the other Party in connection with such maintenance activities. Each Party shall bear its own costs and expenses of preparing the registrations for, prosecuting and maintaining the Product Trademarks.

11.8.4 Enforcement of Product Trademarks. As between the Parties, (a) [*] shall be responsible for enforcing and defending the Product Trademarks in (i) the Human Excluding HIV/AIDS/ID/Pediatric Field in the Salix Human Excluding HIV/AIDS/ID/Pediatric Territory; (ii) the HIV/AIDS/Pediatric Field in the Salix HIV/AIDS/Pediatric Territory; and (iii) the ID Field in the Salix ID Territory and (b) [*]

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

55

shall be responsible for enforcing and defending the Product Trademarks in fields of use and countries other than those specified in the preceding clause (a), including in each case ((a) and (b)) (A) any actual or alleged infringement of any trademark or of any unfair trade practices, trade dress imitation, passing off of counterfeit goods, or like offenses, or any such claims brought by a Third Party against a Party in connection with a Licensed Product and (B) any actual or alleged infringement of a Product Trademark by a Third Party. Each Party shall bear its own costs and expenses relating to any enforcement action or defense commenced pursuant to this Section 11.8.4, and shall retain any damages or other amounts collected in connection therewith. Each Party shall provide to the other Party all reasonable assistance requested by the other Party in connection with any action, claim or suit under this Section 11.8.4 at the requesting Party’s expense, including allowing such other Party access to the assisting Party’s files and documents and to the assisting Party’s personnel who may have possession of relevant information. In particular, the assisting Party shall promptly make available to the other Party, free of charge, all information in its possession or control that it is aware will assist the other Party in responding to any such action, claim or suit.

ARTICLE 12

CONFIDENTIALITY AND PUBLICATIONS

12.1 Definition. “Confidential Information” of a Party shall mean all Information, Know-How and other information, data and materials, and any tangible embodiments thereof, including the terms of this Agreement, provided by or on behalf of such Party to the other Party either in connection with the discussions and negotiations pertaining to, or in the course of performing, this Agreement. For purposes of this Agreement, (a) all Salix Know-How shall be Confidential Information of Salix and (b) all Napo Know-How shall be Confidential Information of Napo.

12.2 Exclusions. The obligations set forth in this Article 12 shall not apply with respect to any portion of such Confidential Information that the receiving Party can demonstrate, by written records or other competent proof:

12.2.1 was publicly disclosed by the disclosing Party, either before or after it becomes known to the receiving Party;

12.2.2 was already known to the receiving Party or any of its Affiliates, other than under an obligation of confidentiality or non-use, prior to when it was received from the disclosing Party;

12.2.3 is subsequently disclosed to the receiving Party or any of its Affiliates by a Third Party lawfully in possession thereof without obligation to keep it confidential;

56

12.2.4 has been published by a Third Party or otherwise enters the public domain through no fault of the receiving Party or any of its Affiliates in breach of this Agreement; or

12.2.5 has been independently developed by the receiving Party or any of its Affiliates, without the aid, application or use of Confidential Information of the other Party.

Specific aspects or details of Confidential Information shall not be deemed to be within the public domain or in the possession of a Party merely because the Confidential Information is embraced by more general information in the public domain or in the possession of such Party. Further, any combination of Confidential Information shall not be considered in the public domain or in the possession of a Party merely because individual elements of such Confidential Information are in the public domain or in the possession of such Party unless the combination and its principles are in the public domain or in the possession of such Party.

12.3 Disclosure and Use Restriction. Except as expressly provided herein, the Parties agree that, for the term of this Agreement and for five (5) years thereafter, each Party and its Affiliates and Sublicensees shall keep completely confidential and shall not publish or otherwise disclose and shall not use for any purpose except for the purposes contemplated by this Agreement any Confidential Information of the other Party, its Affiliates or Sublicensees.

12.4 Authorized Disclosure. Each Party may disclose Confidential Information of the other Party to the extent that such disclosure is:

12.4.1 Required by Governmental Order. Made in response to a valid order of a court of competent jurisdiction or other supra-national, federal, national, regional, state, provincial or local governmental or regulatory body of competent jurisdiction; provided, however, that such Party shall first have given notice to such other Party and have given such other Party a reasonable opportunity to quash such order or to obtain a protective order requiring that the Confidential Information and documents that are the subject of such order be held in confidence by such court or agency or, if disclosed, be used only for the purposes for which the order was issued; and provided further that if a disclosure order is not quashed or a protective order is not obtained, the Confidential Information disclosed in response to such court or governmental order shall be limited to that information which in the reasonable judgment of the disclosing Party is legally required to be disclosed in response to such court or governmental order;

12.4.2 Required by Law. Otherwise required by law; provided, however, that the disclosing Party shall (a) provide the other Party with reasonable advance notice of and an opportunity to comment on any such required disclosure, (b) if requested by such other Party, seek confidential treatment with respect to any such disclosure to the extent reasonably available, and (c) use good faith efforts to incorporate the reasonable comments of such other Party in any such disclosure or request for confidential treatment;

57

12.4.3 Required by Regulatory Authority. Made by such Party to the Regulatory Authorities as required in connection with any filing, application or request for Approval for a Licensed Product; provided, however, that reasonable measures shall be taken to assure confidential treatment of such information;

12.4.4 Required by Agreement. Made by such Party, in connection with the performance of this Agreement, to Affiliates, Sublicensees, research parties, employees, consultants, representatives or agents, each of whom have a need to know such Confidential Information to assist the receiving Party with the activities contemplated or required of it by this Agreement and, with respect to Napo, parties to the Napo Agreements; provided that the disclosing Party shall first obtain the other Party’s written consent prior to any such disclosure (such consent not to be unreasonably withheld, conditioned, or delayed) and if such consent is granted, provided further that such persons shall be subject to obligations of confidentiality and non-use at least equivalent in scope to those set forth in this Article 12; and provided further that each Party shall remain responsible for any failure by its Affiliates, Sublicensees, research parties, employees, consultants, representatives or agents to treat such Confidential Information as required under this Article 12 (as if such Affiliates, Sublicensees, research parties, employees, consultants, representatives, agents and parties to the Napo Agreements were Parties directly bound to the requirements of this Article 12); or

12.4.5 Required by Certain Third Parties. Made by such Party to existing or potential acquirers or merger candidates; existing or potential pharmaceutical collaborators (to the extent contemplated hereunder); investment bankers; existing or potential investors, venture capital firms or other financial institutions or investors for purposes of obtaining financing; or Affiliates, each of whom prior to disclosure must be bound by obligations of confidentiality and non-use at least equivalent in scope to those set forth in this Article 12; provided, however, that Napo shall make no such disclosure to a Competitor, without obtaining Salix’s prior consent in writing.

12.5 Use of Name. Each Party may use the name, insignia, symbol, trademark, trade name or logotype of the other Party only (a) in connection with announcements and other permitted disclosures relating to this Agreement and the activities contemplated hereby, (b) as required by Applicable Law, or (c) as otherwise expressly permitted by this Agreement or agreed in writing by such other Party; provided, however, that the use of each Party’s name, insignia, symbol, trademark, trade name or logotype must be agreed to in writing by such Party.

12.6 Publicity. Each Party shall have a right to make a public announcement of the execution of this Agreement in accordance with the provisions of this Section 12.6 and the Parties shall cooperate in the issuances thereof as soon as practicable after the execution of this Agreement unless otherwise agreed by the Parties. Any publication, news release or other public announcement or disclosure relating to this Agreement or to the performance hereunder shall first be reviewed and approved in writing by both Parties; provided, however, that any disclosure which is required by law or the rules of a securities exchange, as reasonably advised by the disclosing Party’s counsel, may be made without the prior consent of the other Party, although the other Party shall be given prompt notice of any such legally required disclosure and to the extent practicable shall be provided an opportunity to comment on the proposed disclosure and

58

the disclosing Party shall act in good faith to incorporate any comments provided by the other Party on such proposed disclosure.

12.7 Publications. The Parties acknowledge that scientific lead-time is a key element of the value of the Development activities under this Agreement and further agree that scientific publications must be strictly monitored to prevent any adverse effect from premature publication of results of the Development activities hereunder. At least thirty (30) days prior to submission of any material related to the Development of a Licensed Product hereunder for publication or presentation, the submitting Party shall provide to the JSC a draft of such material for its review and comment. The JSC shall provide any comments to the submitting Party within twenty (20) days of receipt of such materials and the publishing Party shall consider such comments in good faith. No publication or presentation with respect to such Development activities shall be made without prior approval of the JSC and unless and until any information determined by the non-publishing Party to be Confidential Information has been removed. If requested in writing by the non-publishing Party, the publishing Party shall withhold material from submission for publication or presentation for an additional thirty (30) days to allow for the filing of a Patent application or the taking of such other measures as may be required to establish and preserve proprietary rights in the information in the material being submitted for publication or presentation.

12.8 Patient Information. Salix and Napo agree to abide (and to cause their respective Affiliates to abide) by, and to take (and to cause their respective Affiliates to take), all reasonable and appropriate actions to ensure that all Third Parties conducting or assisting with any Development activities hereunder in accordance with, and subject to the terms of, this Agreement, shall abide, to the extent applicable, in the course of their performance under this Agreement, with Applicable Law concerning the confidentiality or protection of patient identifiable information or patients’ protected health information, including the regulations at 45 C.F.R. Parts 160 and 164 and, where relevant, the applicable national laws implementing the European Union Directive 95/46/EC on the protection of individuals with regard to the processing of personal data and on the free movement of such data of 24 October 1995 and any other Applicable Law.

ARTICLE 13

TERM AND TERMINATION

13.1 Term. This Agreement shall become effective on the Effective Date and, unless earlier terminated pursuant to Section 13.2, 13.3 or 13.4 hereof, shall continue on a Licensed Product-by-Licensed Product and country-by-country basis until the expiration of the last royalty obligation with respect to such Licensed Product in such country pursuant to Sections 7.5 and 7.6.

13.2 Termination for Material Breach. Any material failure by a Party (the “Breaching Party”) to comply with any of its material obligations contained in this Agreement shall entitle the Party not in default to give to the Breaching Party written notice specifying the nature of the default, requiring the Breaching Party to make good or otherwise cure such default, and stating its intention if such default is not cured to terminate this Agreement. If such default is not cured within thirty (30) days after the receipt of such notice (or, if such default cannot be

59

cured within such thirty (30)-day period, if the Breaching Party does not commence actions to cure such default within such period and thereafter diligently continue such actions or if such default is not otherwise cured within one hundred eighty (180) days after the receipt of such notice, except in the case of a payment default, as to which the Breaching Party shall have only a thirty (30)-day cure period), the Party not in default shall be entitled, on written notice to the Breaching Party, without prejudice to any other rights conferred on it by this Agreement, and in addition to any other remedies available to it at law or in equity, to terminate this Agreement in its entirety.

13.3 Other Termination by Salix. If Salix determines, in its sole and absolute discretion, that it is not feasible to pursue the Development or Commercialization of Licensed Products contemplated by this Agreement, including (without thereby in any way limiting Salix’s sole and absolute discretion) for scientific, technical, regulatory or commercial reasons (including safety or efficacy reasons), reasons relating to the present or future marketability or profitability of such Licensed Products, or reasons relating to the identity of any successor to Napo pursuant to Section 15.4(b) or relations between Salix and any such successor, then Salix may, by written notice to Napo, terminate this Agreement in its entirety upon ninety (90) days’ prior written notice to Napo.

13.4 Termination Upon Insolvency. Either Party may terminate this Agreement if, at any time, the other Party shall (a) file in any court or agency pursuant to any statute or regulation of any state, country or jurisdiction a petition in bankruptcy or insolvency or for reorganization or for an arrangement or for the appointment of a receiver or trustee of that Party or of its assets, (b) propose a written agreement of composition or extension of its debts outside the ordinary course of its business, (c) be served with an involuntary petition against it, filed in any insolvency proceeding, and such petition shall not be dismissed within sixty (60) days after the filing thereof, (d) propose or be a party to any dissolution or liquidation, (e) make an assignment for the benefit of its creditors, or (f) admit in writing its inability generally to pay its debts as they fall due in the general course.

13.5 Rights in Bankruptcy. All rights and licenses granted under or pursuant to this Agreement by Napo or Salix are, and shall otherwise be deemed to be, for purposes of Section 365(n) of the United States Bankruptcy Code, licenses of rights to “intellectual property” as defined under Section 101 of the United States Bankruptcy Code. The Parties agree that the Parties, as licensees of such rights under this Agreement, shall retain and may fully exercise all of their rights and elections under the United States Bankruptcy Code. The Parties further agree that, in the event of the commencement of a bankruptcy proceeding by or against a Party under the United States Bankruptcy Code, the Party hereto that is not a party to such proceeding shall be entitled to a complete duplicate of (or complete access to, as appropriate) any such intellectual property and all embodiments of such intellectual property, which, if not already in the non-subject Party’s possession, shall be promptly delivered to it (a) following any such commencement of a bankruptcy proceeding upon the non-subject Party’s written request therefor, unless the Party subject to such proceeding continues to perform all of its obligations under this Agreement or (b) if not delivered under clause (a) above, following the rejection of this Agreement by or on behalf of the Party subject to such proceeding upon written request therefor by the non-subject Party.

60

13.6 Licenses and Assignments Upon Termination. Upon any termination of this Agreement:

13.6.1 the licenses granted by Napo to Salix under Section 10.1 shall terminate in their entirety;

13.6.2 the licenses granted by Salix to Napo under Section 10.4 shall be revised such that Salix shall, and does hereby grant, and shall cause its Affiliates and Sublicensees to so grant, to Napo a non-exclusive, perpetual, irrevocable, worldwide, royalty-bearing (solely as provided in Section 13.7.6) license, with the right to grant sublicenses through multiple tiers of sublicensees, without the consent of Salix, under the Salix Technology to Exploit the Licensed Products for all purposes; and

13.6.3 Salix shall, and does hereby automatically, and shall cause its Affiliates and Sublicensees to, transfer, convey, assign and deliver to Napo, and Napo hereby accepts, all right, title and interest in and to, (a) the Licensed Products, including any related Information, Materials and inventions, and any Improvements with respect thereto (including Salix Know-How and all material aspects of Confidential Information Controlled by Salix as of the date of termination with respect to the Licensed Products), (b) any Approvals and related Regulatory Documentation and correspondence with Regulatory Authorities with respect to any Licensed Product, (c) any Product Trademarks, any other Trademarks (including any goodwill associated therewith), any generic names and any domain names incorporating the same that were used by, or developed for use by, Salix in connection with any Licensed Product and (d) to the extent requested by Napo in writing, any agreements with any Third Parties with respect to any Licensed Product (including agreements with contract research organizations, clinical sites and investigators).

13.7 Additional Consequences of Termination.

13.7.1 Sale of Inventory. In the event of any termination of this Agreement, Salix may continue to sell its existing inventories and any work-in-process of Licensed Products until the occurrence of either: (a) Salix’s completion of the transfer of all Approvals and related Regulatory Documentation for Licensed Products and completion of performance under all then-existing contracts with Third Parties for the marketing, sale or manufacture of Licensed Products, or (b) Napo’s directing Salix to halt all sales of Licensed Products by written notice, provided that at Napo’s request, Salix shall promptly provide to Napo copies of each such Third Party contract for purposes of Napo’s determining whether to direct Salix to halt sales of Licensed Products pursuant to the foregoing clause (b). If either such event occurs prior to the sale of all of Salix’s inventories and
work-in-process of Licensed Products and the performance by Salix of its obligations under such Third Party contracts, then Salix shall sell to Napo, and Napo shall purchase, at Salix’s cost therefor, any remaining Salix inventory and work-in-process of any Licensed Products and Napo shall assume, and thereafter perform, Salix’s obligations under any such Third Party contracts.

61

13.7.2 Return of Napo Materials and Information. Upon the expiration or any termination of this Agreement, Salix, at the request of Napo, shall return or, at the election of Salix, use reasonable efforts to destroy, and thereafter provide to Napo written certification evidencing such destruction, all Materials of Napo and all data, files, records and other materials in its possession or control relating to Napo’s Technology, or containing or comprising Napo’s Information and inventions or other Confidential Information (except one copy of which (other than Materials) may be retained solely for archival purposes) with respect to the terminated Licensed Product(s).

13.7.3 Effect of Termination on Sublicenses Granted by Salix. Any and all sublicense agreements entered into by Salix or any of its Affiliates with a Sublicensee pursuant to Section 10.3 shall survive the termination of this Agreement, except to the extent that any such Sublicensee under any such sublicense agreement is in material breach of this Agreement or such sublicense agreement, in which case Napo shall have the right to terminate any such sublicense agreement. Salix shall, at the request of Napo, assign any such sublicense agreement (to the extent not terminated pursuant to the preceding sentence) to Napo or its Affiliates and, upon such assignment, Napo or its Affiliates, as applicable, shall assume such sublicense agreement, as applicable, provided that at Napo’s request, Salix shall promptly provide to Napo copies of each such sublicense agreement for purposes of Napo’s determining whether to instruct Salix to assign such sublicense agreement to Napo or its Affiliates. For clarity, any sublicense agreement entered into by Salix with any of its Affiliates shall terminate upon the termination of this Agreement.

13.7.4 Milestone Payments; Royalties. Following any termination of this Agreement, Salix shall not be responsible for (a) any milestone payments for milestone events that are achieved under Section 7.3 or Section 7.4 following the effective date of such termination or (b) any royalty payments that accrue under Section 7.5 following the effective date of such termination, in each case ((a) and (b)) unless Salix, itself or through an Affiliate or Sublicensee, continues to sell Licensed Products pursuant to Section 13.7.1.

13.7.5 Assistance. Without limiting Napo’s rights under other provisions of this Article 13, in the event of any termination of this Agreement, Salix shall, and shall cause its Affiliates and Sublicensees to, at the request and expense of Napo, provide Napo with such assistance as is reasonably necessary to effectuate a smooth and orderly transition of any such Development, Commercialization and other Exploitation activities, including any ongoing Clinical Trials or Post Approval Studies, to Napo or its designee so as to minimize any disruption of such activities.

13.7.6 Royalties to Salix. In consideration of the license rights granted by Salix to Napo under this Article 13 and the assignment of Approvals and related Regulatory Documentation as contemplated by this Article 13, Napo shall pay to Salix for each Licensed Product sold by Napo, its Affiliates or (sub)licensees in any country the following royalties:

62

(a) Royalty Rates.

(i) In the event that Salix terminates this Agreement pursuant to Section 13.2 as a result of a breach by Napo or pursuant to Section 13.4, Napo shall pay to Salix a royalty of five percent (5%) on Net Sales (substituting Napo for Salix in the definition thereof) of all Licensed Products (other than to Salix and its Affiliates and Sublicensees) from and after the effective date of such termination.

(ii) In the event that Salix terminates this Agreement pursuant to Section 13.3, Napo shall pay to Salix a royalty on Net Sales (substituting Napo for Salix in the definition thereof) of all Licensed Products (other than to Salix and its Affiliates and Sublicensees) from and after the effective date of such termination at the following royalty rates:

(A) In respect of a termination occurring at any time from the Effective Date up to the date on which Salix has incurred [*] Dollars ($[*]) in Development Costs, whether reimbursed by Salix to Napo or incurred by Salix itself, pursuant to Section 3.1 and 3.2, [*] shall be due.

(B) In respect of a termination occurring at any time from the date on which Salix has incurred [*] Dollars ($[*]) in Development Costs, whether reimbursed by Salix to Napo or incurred by Salix itself, pursuant to Section 3.1 and 3.1.3 up to the date on which Salix has incurred [*]Dollars ($[*]) in Development Costs, whether reimbursed by Salix to Napo or incurred by Salix itself, pursuant to Section 3.1 and 3.23.1.3 , [*] percent ([*]%).

(C) In respect of a termination occurring at any time from the date on which Salix has incurred [*] Dollars ($[*]) in Development Costs, whether reimbursed by Salix to Napo or incurred by Salix itself, pursuant to Section 3.1 and 3.2 up to the date on which an application for Initial Regulatory Approval of an Advent Product is filed with the FDA, [*] percent ([*]%).

(D) In respect of a termination occurring at any time from the date on which an application for Initial Regulatory Approval of an Advent Product is filed with the FDA up to the date of the first commercial sale of an Advent Product, [*] percent ([*]%).

(E) In respect of a termination occurring at any time from and after the date of the first commercial sale of an Advent Product, [*] percent ([*]%).

(iii) In the event that Napo terminates this Agreement pursuant to Section 13.2 as a result of a breach by Salix and Salix

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

63

Technology is necessary or useful to the Commercialization of any Licensed Product and Napo uses such Salix Technology, Napo shall pay to Salix a royalty of [*] percent ([*]%) on Net Sales (substituting Napo for Salix in the definition thereof) of all such Licensed Products (other than to Salix and its Affiliates and Sublicensees) from and after the effective date of such termination.

(iv) In the event of termination of this Agreement for any other reason than as set forth in the foregoing (i), (ii) and (iii), Salix shall receive no royalties.

(b) Determination. Royalties payable by Napo to Salix under this Section 13.7.6 shall be determined and paid in accordance with Sections through 7.15, mutatis mutandis.

(c) Royalty Term. Salix’s right to receive royalties under this Section 13.7.6 shall expire on a country-by-country and Licensed Product-by-Licensed Product basis upon the same basis as set forth in Section 7.6 for the expiration of Napo’s obligations to pay royalties to Salix.

13.8 Accrued Rights; Surviving Obligations.

13.8.1 Accrued Rights. Termination or expiration of this Agreement for any reason shall be without prejudice to any rights that shall have accrued to the benefit of a Party prior to such termination or expiration. Such termination or expiration shall not relieve a Party from obligations that are expressly indicated to survive the termination or expiration of this Agreement.

13.8.2 Survival. Without limiting the foregoing, Articles 3 and 7 (each with respect to obligations arising prior to the expiration or termination of this Agreement), Article 12 (for five (5) years after the expiration or termination of this Agreement) and Article 14, and Sections 2.2 (with respect to records created prior to the expiration or termination of this Agreement), 10.4, 11.2 (with respect to intellectual property created prior to the expiration or termination of this Agreement), 11.3.2, 11.5.3 (with respect to obligations arising prior to the expiration or termination of this Agreement), 11.8.1 (with respect to such Product Trademarks used in connection with Exploitation of Licensed Products prior to the expiration or termination of this Agreement), 13.5, 13.6, 13.7, 13.9, 15.6, 15.7, 15.8, 15.9 and this Section 13.8 shall survive expiration or termination of this Agreement for any reason.

13.9 Remedies. All remedies provided hereunder are cumulative and concurrent, and are in addition to all other available remedies at law or in equity; provided, however, that a Party shall not seek to avail itself of such other remedies (except for any equitable remedy) during any cure period under this Agreement.

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

64

ARTICLE 14

INDEMNIFICATION

14.1 Indemnification by Salix. Subject to Section 14.3, Salix agrees to defend Napo, its Affiliates and their respective directors, officers, employees and agents (collectively, the “Napo Indemnitees”), at Salix’s cost and expense, and shall indemnify and hold harmless the Napo Indemnitees from and against any and all liabilities, losses, costs, damages, fees or expenses (including reasonable legal expenses and attorneys’ fees) payable to a Third Party (collectively, “Losses”) arising out of any claim, action, lawsuit, or other proceeding (collectively, “Claims”) brought against any Napo Indemnitee by a Third Party to the extent resulting directly or indirectly from:

14.1.1 the Commercialization of a Licensed Product by Salix or its Affiliates or their respective agents, Sublicensees, Distributors or subcontractors (in each case other than Napo or its Affiliates) in (a) the Human Excluding HIV/AIDS/ID/Pediatric Field in the Salix Human Excluding HIV/AIDS/ID/Pediatric Territory; (b) the HIV/AIDS/Pediatric Field in the Salix HIV/AIDS/Pediatric Territory; or (c) the ID Field in the Salix ID Territory;

14.1.2 the manufacturing of the Licensed Compound or a Licensed Product as performed by Salix or its Affiliates or their respective agents, Sublicensees, Distributors, or subcontractors (in each case other than Napo or its Affiliates);

14.1.3 the Development of the Licensed Compound or a Licensed Product as performed by Salix or its Affiliates or their respective agents, Sublicensees, Distributors, or subcontractors (in each case other than Napo or its Affiliates);

14.1.4 the negligence or willful misconduct of Salix or its Affiliates or their respective agents, Sublicensees, Distributors or subcontractors (in each case other than Napo or its Affiliates) in performing any activities in connection with this Agreement; and

14.1.5 any breach by Salix of this Agreement.

14.2 Indemnification by Napo. Subject to Section 14.3, Napo agrees to defend Salix, its Affiliates and their respective directors, officers, employees and agents (collectively, the “Salix Indemnitees”), at Napo’s cost and expense, and shall indemnify and hold harmless the Salix Indemnitees from and against any and all Losses arising out of any Claim brought against any Salix Indemnitee by a Third Party to the extent resulting directly or indirectly from:

14.2.1 the Commercialization of a Licensed Product in fields of use and countries other than those specified in Section 14.1.1 by Napo or its Affiliates or their respective agents, licensees, distributors or subcontractors (in each case other than Salix or its Affiliates);

65

14.2.2 the manufacturing of the Licensed Compound or a Licensed Product as performed by Napo or its Affiliates or their respective agents, licensees, distributors or subcontractors (in each case other than Salix or its Affiliates);

14.2.3 the Development of the Licensed Compound or a Licensed Product as performed by Napo or its Affiliates or their respective agents, licensees, distributors or subcontractors (in each case other than Salix or its Affiliates);

14.2.4 the negligence or willful misconduct of Napo or its Affiliates or their respective agents, licensees, distributors or subcontractors (in each case other than Salix or its Affiliates) in performing any activities in connection with this Agreement; and

14.2.5 any breach by Napo of this Agreement.

14.3 Indemnification Procedure.

14.3.1 Notice of Claim. A Party believing that it is entitled to indemnification under Section 14.1 or 14.2 (an “Indemnified Party”) shall give prompt written notification (each, an “Indemnification Claim Notice”) to the other Party (the “Indemnifying Party”) of the commencement of any Claim for which indemnification may be sought or, if earlier, upon the assertion of any such Claim by a Third Party (it being understood and agreed, however, that the failure by an Indemnified Party to give notice of a Third Party Claim as provided in this Section 14.3 shall not relieve the Indemnifying Party of its indemnification obligation under this Agreement except and only to the extent that such Indemnifying Party is actually prejudiced as a result of such failure to give notice). Each Indemnification Claim Notice shall contain a description of the Claim and the nature and amount of the Loss (to the extent that the nature and amount of such Loss are known at such time). The Indemnified Party shall furnish promptly to the Indemnifying Party copies of all papers and official documents received in respect of any Losses.

14.3.2 Control of Defense. At its option, the Indemnifying Party may assume the defense of any Claim by giving written notice to the Indemnified Party within thirty (30) days after the Indemnifying Party’s receipt of an Indemnification Claim Notice. The assumption of the defense of a Claim by the Indemnifying Party shall not be construed as an acknowledgment that the Indemnifying Party is liable to indemnify the Indemnified Party in respect of the Claim, nor shall it constitute a waiver by the Indemnifying Party of any defenses it may assert against the Indemnified Party’s claim for indemnification. Upon assuming the defense of a Claim, the Indemnifying Party may appoint as lead counsel in the defense of the Claim any legal counsel selected by the Indemnifying Party that is reasonably acceptable to the Indemnified Party. In the event the Indemnifying Party assumes the defense of a Claim, the Indemnified Party shall immediately deliver to the Indemnifying Party all original notices and documents (including court papers) received by the Indemnified Party in connection with the Claim. Should the Indemnifying Party assume the defense of a Claim, the Indemnifying Party shall not be liable to the Indemnified Party for any legal expenses subsequently incurred

66

by such Indemnified Party in connection with the analysis, defense or settlement of such Claim. In the event that it is ultimately determined that the Indemnifying Party is not obligated to indemnify, defend or hold harmless the Indemnified Party from and against the Claim, the Indemnified Party shall reimburse the Indemnifying Party for any and all costs and expenses (including attorneys’ fees and costs of suit) and any Losses incurred by the Indemnifying Party in its defense of the Claim with respect to such Indemnified Party.

14.3.3 Right to Participate in Defense. Without limiting Section 14.3.2, the Indemnified Party shall be entitled to (a) participate in, but not control, the defense of such Claim and to engage counsel of its choice for such purpose; provided, however, that such engagement shall be at the Indemnified Party’s own expense unless the engagement thereof has been specifically authorized by the Indemnifying Party in writing, and (b) control its defense of such Claim and to engage counsel of its choice for such purpose, at the expense of the Indemnifying Party, if (i) the Indemnifying Party has failed to assume the defense and engage counsel in accordance with Section 14.3.2, or (ii) the Indemnifying Party denies or fails to timely admit its obligation to defend the action.

14.3.4 Settlement. With respect to any Losses relating solely to the payment of money damages in connection with a Claim and that will not result in the Indemnified Party becoming subject to injunctive or other relief or otherwise adversely affect the business of the Indemnified Party in any manner, and as to which the Indemnifying Party shall have acknowledged in writing the obligation to indemnify the Indemnified Party hereunder, the Indemnifying Party shall have the sole right to consent to the entry of any judgment, enter into any settlement or otherwise dispose of such Loss, on such terms as the Indemnifying Party, in its sole discretion, shall deem appropriate. With respect to all other Losses in connection with Claims, where the Indemnifying Party has assumed the defense of the Claim in accordance with Section 14.3.2, the Indemnifying Party shall have authority to consent to the entry of any judgment, enter into any settlement or otherwise dispose of such Loss provided it obtains the prior written consent of the Indemnified Party (which consent shall not be unreasonably withheld, conditioned, or delayed). The Indemnifying Party shall not be liable for any settlement or other disposition of a Loss by the Indemnified Party that is reached without the written consent of the Indemnifying Party. Regardless of whether the Indemnifying Party chooses to defend or prosecute any Claim, the Indemnified Party shall not admit any liability with respect to, or settle, compromise or discharge, any Claim without the prior written consent of the Indemnifying Party, not to be unreasonably withheld, conditioned, or delayed.

14.3.5 Cooperation. Regardless of whether the Indemnifying Party chooses to defend or prosecute any Claim, the Indemnified Party shall reasonably cooperate in the defense or prosecution thereof and shall furnish such records, information and testimony, provide such witnesses and attend such conferences, discovery proceedings, hearings, trials and appeals as may be reasonably requested in connection therewith. Such cooperation shall include access during normal business hours afforded to the Indemnifying Party to, and reasonable retention by the Indemnified Party of, records and information that are reasonably relevant to such Claim, and making

67

employees and agents available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder, and the Indemnifying Party shall reimburse the Indemnified Party for all its reasonable out-of-pocket expenses in connection therewith.

14.3.6 Expenses. Except as provided above, the reasonable and verifiable costs and expenses, including fees and disbursements of counsel, incurred by the Indemnified Party in connection with any claim shall be reimbursed on a Quarterly basis by the Indemnifying Party, without prejudice to the Indemnifying Party’s right to contest the Indemnified Party’s right to indemnification and subject to refund in the event the Indemnifying Party is ultimately held not to be obligated to indemnify the Indemnified Party.

14.4 Insurance. Each Party shall maintain, at its sole cost and expense, an adequate liability insurance or self-insurance program (including product liability insurance) to protect against potential liabilities and risk arising out of activities to be performed under this Agreement and any agreement related hereto and upon such terms (including coverages, deductible limits and self-insured retentions) as are customary in the pharmaceutical industry generally for the activities to be conducted by such Party under this Agreement. Such liability insurance or self-insurance program shall insure against all types of liability, including personal injury, physical injury or property damage arising out of the Exploitation of a Licensed Product. This Section 14.4 shall not create any limitation on a Party’s liability to the other under this Agreement.

ARTICLE 15

MISCELLANEOUS

15.1 Force Majeure. Neither Party shall be held liable or responsible to the other Party or be deemed to have defaulted under or breached this Agreement for failure or delay in fulfilling or performing any term of this Agreement when such failure or delay is caused by or results from events beyond the reasonable control of the non-performing Party, including fires, floods, earthquakes, embargoes, shortages, epidemics, quarantines, war, acts of war (whether war be declared or not) or terrorism, insurrections, riots, civil commotion, strikes, lockouts or other labor disturbances, acts of God or acts, omissions or delays in acting by any governmental authority. The non-performing Party shall notify the other Party of such force majeure within ten (10) days after such occurrence by giving written notice to the other Party stating the nature of the event, its anticipated duration, and any action being taken to avoid or minimize its effect. The suspension of performance shall be of no greater scope and no longer duration than is necessary and the non-performing Party shall use commercially reasonable efforts to remedy its inability to perform; provided, however, that in the event the suspension of performance continues for one-hundred and sixty (60) days after the date of the occurrence, the Parties shall meet to discuss in good faith how to proceed in order to accomplish the goals outlined in this Agreement.

68

15.2 Export Control. This Agreement is made subject to any restrictions concerning the export of products or technical information from the United States or other countries that may be imposed upon or related to Napo or Salix from time to time. Each Party agrees that it will not export, directly or indirectly, any technical information acquired from the other Party under this Agreement or any products using such technical information to a location or in a manner that at the time of export requires an export license or other governmental approval, without first obtaining the written consent to do so from the appropriate agency or other governmental entity in accordance with Applicable Law.

15.3 Subcontractors. Each Party shall have the right to subcontract any of its Development and Commercialization activities with respect to Licensed Products to a Third Party, provided that it furnishes the other Party with advanced written notice thereof and an opportunity to consult regarding such subcontract, which notice shall specify the work to be subcontracted, and obtains a written undertaking from the subcontractor that it shall be subject to the applicable terms and conditions of this Agreement, including the provisions of Article 12. Except as contemplated by Sections 3.1 and 3.1.3 , each Party shall remain solely responsible for all costs and expenses associated with its use of subcontractor(s) hereunder.

15.4 Assignment. Without the prior written consent of the other Party hereto, which consent shall not be unreasonably withheld, conditioned, or delayed, neither Party shall sell, transfer, assign, pledge or otherwise dispose of, whether voluntarily, involuntarily, by operation of law or otherwise, this Agreement or any of its rights or duties hereunder; provided, however, that either Party hereto may assign or transfer this Agreement or any of its rights or obligations hereunder without the consent of the other Party (a) to any Affiliate of such Party; or (b) to any Third Party with which it merges or consolidates, or to which it transfers all or substantially all of its assets to which this Agreement relates if in any such event (i) the assigning Party (provided that it is not the surviving entity) remains jointly and severally liable with the relevant Affiliate or Third Party assignee under this Agreement, and (ii) the relevant Affiliate assignee, Third Party assignee or surviving entity assumes in writing all of the assigning Party’s obligations under this Agreement. For purposes of clarification, a Third Party that merges or consolidates with a Party or an Affiliate of a Party, or to which a Party or an Affiliate of a Party transfers all or substantially all of its assets to which this Agreement relates, shall not be deemed to grant the other Party to this Agreement any license to such Third Party’s technology in existence as of the effective date of such merger, consolidation or transfer, unless such grant is made pursuant to a separate agreement, provided such Third Party shall maintain all licenses granted hereunder by such first Party with respect to its Technology and any Information, Materials and inventions with respect thereto. Any purported assignment or transfer in violation of this Section shall be void ab initio and of no force or effect.

15.5 Change in Control of Napo or Acquisition by Napo.

15.5.1 If Napo proposes to undergo a Change in Control or engage in an Acquisition, then Napo shall provide Salix with a written notice of such proposed Change in Control or Acquisition not less than thirty (30) days prior to entering any legally binding obligation in respect of such transaction. Such written notice shall provide reasonable detail with respect to the terms of the proposed transaction, including the

69

nature of the proposed transaction, provided that Napo shall not be obligated to provide the identity of any counterparties to the proposed transaction.

15.5.2 Napo (or its successor) shall provide Salix with written notice of any Change in Control of Napo or any Acquisition by Napo within two (2) Business Days following the closing date of such transaction. Such written notice shall include a list of any Generally Competitive Products arising in connection with or as a result of such transaction.

15.5.3 In the event the Change in Control of Napo or Acquisition by Napo involves a Competitor, will result in Napo controlling, being controlled by, or being under common control with a Competitor, or will result in Napo or any Person controlling, controlled by, or under common control with Napo being involved in the Exploitation of a Generally Competitive Product, then Salix shall have the right, in its sole discretion, by written notice delivered to Napo (or its successor) at any time during the ninety (90) days following the written notice contemplated by Section 15.5.2, (a) to terminate any or all provisions of this Agreement providing for any delivery by Salix to Napo of Information relating to activities contemplated by this Agreement, the Licensed Compound or the Licensed Products, save only for the provisions of Article 7, and (b) to disband the JSC and terminate its activities and thereafter undertake all activities assigned by this Agreement to the JSC solely and exclusively by itself.

15.6 Severability. If any provision of this Agreement is held to be illegal, invalid or unenforceable under any present or future law, and if the rights or obligations of either Party under this Agreement will not be materially and adversely affected thereby, (a) such provision shall be fully severable, (b) this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part hereof, (c) the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom, and (d) in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as a part of this Agreement a legal, valid and enforceable provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible and reasonably acceptable to the Parties. To the fullest extent permitted by applicable law, each Party hereby waives any provision of law that would render any provision of this Agreement illegal, invalid or unenforceable in any respect.

15.7 Dispute Resolution.

15.7.1 Litigation. All disputes hereunder may, at the election of either Party, be decided by litigation. Any such litigation shall be pursued in accordance with Section 15.8, provided that any dispute regarding the validity, scope, enforceability, inventorship or ownership of intellectual property rights shall be submitted by either Party to a court of competent jurisdiction in the country in which such rights apply.

15.7.2 Arbitration. Unless and until a Party elects pursuant to Section 15.7.1 to pursue litigation in respect of a dispute, the Parties agree that any dispute respecting the rights and obligations of the Parties under this Agreement shall initially be referred to arbitration conducted expeditiously in accordance with the Commercial

70

Arbitration Rules then in force (the “AAA Rules”) of the American Arbitration Association (the “AAA”). There shall be a panel of three arbitrators that shall be appointed pursuant to AAA procedures. Each of the arbitrators shall be a retired judge or a practicing attorney with no less than fifteen (15) years’ experience in commercial cases, who shall not have performed any significant services for either of the Parties hereto or any of their Affiliates for a period of five (5) years prior to the date the demand for arbitration is received by the respondent(s). Any hearing with respect to any arbitration pursuant to this Section 15.7.2 (each an “Arbitration Proceeding”) shall take place in New York, New York. Commencement of the hearings in any Arbitration Proceeding must be set as soon as reasonably possible and, in any event, within ninety (90) days of the appointment of the full panel of arbitrators; provided, however, that if the arbitrators determine by majority vote that fairness so requires, such ninety (90) day period may be extended by no more than sixty (60) additional days. The Parties agree that the arbitrators shall have the right and power to shorten the length of any notice periods or other time periods provided in the AAA Rules and to implement “Expedited Procedures” under the AAA Rules in order to ensure that the arbitration process is completed within the time frames provided herein. The arbitration decision or award shall be reasoned and in writing and shall be provided to each of the Parties as soon as reasonably possible after the completion of the Arbitration Proceeding. Any arbitration conducted pursuant to this Section 15.7.2 shall be non-binding and either Party shall remain free following the decision of the arbitrators to seek review de novo, in accordance with Section 15.7.1, of any matter that was the subject of such arbitration, whether addressed in the arbitrators’ decision or not.

15.8 Governing Law, Jurisdiction, Venue and Service.

15.8.1 Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York applicable to agreements made and to be performed entirely within such state, without regard to the conflicts of law principles of such state. The Parties agree to exclude the application to this Agreement of the United Nations Convention on Contracts for the International Sale of Goods.

15.8.2 Jurisdiction. Subject to Section 15.7, each Party irrevocably and unconditionally consents to the exclusive jurisdiction of the courts of general jurisdiction of the State of New York and the United States District Court for the Southern District of New York sitting in the Borough of Manhattan (collectively, the “Courts”) for any action, suit or proceeding (other than appeals therefrom) concerning any matter arising out of or relating to this Agreement, and agrees not to commence any action, suit or proceeding (other than appeals therefrom) related thereto except in such courts.

15.8.3 Venue. The Parties further hereby irrevocably and unconditionally waive any objection to the laying of venue of any action, suit or proceeding (other than appeals therefrom) arising out of or relating to this Agreement in the Courts and hereby further irrevocably and unconditionally agree not to raise any objection at any time to the laying or maintaining of the venue of any such action, suit or proceeding in any of such Courts, irrevocably waives any claim that such action, suit or other proceeding has been

71

brought in an inconvenient forum and further irrevocably waives the right to object, with respect to such action, suit or other proceeding, that such Court does not have any jurisdiction over such Party.

15.8.4 Service. Each Party hereto further agrees that service of any process, summons, notice or document by United States registered mail to its address and contact person for notices provided for in Section 15.9 shall be effective service of process for any action, suit or proceeding brought against it under this Agreement in any of the Courts.

15.9 Notices. All notices or other communications that are required or permitted hereunder shall be in writing and delivered personally, sent by facsimile (and promptly confirmed by personal delivery, registered or certified mail or overnight courier as provided herein), sent by nationally-recognized overnight courier or sent by registered or certified mail, postage prepaid, return receipt requested, addressed as follows:

If to Salix, to:

Salix Pharmaceuticals, Inc.

1700 Perimeter Park Drive

Morrisville, North Carolina 27560

Attention: General Counsel

Fax No.: 919.447.3417

Email: Mark.Reeth@Salix.com

with copies (which will not constitute notice) to:

Salix Pharmaceuticals, Inc.

1700 Perimeter Park Drive

Morrisville, North Carolina 27560

Attention: Vice President Business Development

Fax No.: 919.228.4222

Email: rick.scruggs@salix.com

and

Covington & Burling LLP

1201 Pennsylvania Avenue, N.W.

Washington, D. C. 20004

Attention: Edward C. Britton, Esq.

Fax No.: 202.778.5248

Email: ebritton@cov.com

72

If to Napo, to:

Napo Pharmaceuticals, Inc.

250 East Grand Avenue, Suite 90

South San Francisco, CA 94080

Attention: Chief Executive Officer

Fax No.: 650.873.8367

Email: lconte@napopharma.com

with copies (which will not constitute notice) to:

Napo Pharmaceuticals, Inc.

250 East Grand Avenue, Suite 90

South San Francisco, CA 94080

Attention: General Counsel

Fax No.: 650.349.3214

Email: lreckseit@POBox.com

and

Skadden, Arps, Slate, Meagher & Flom LLP

Four Times Square

New York, New York 10036

Attention: Bruce J. Goldner, Esq.

Fax No.: 917.777.2972

Email: bruce.goldner@skadden.com

or to such other address as the Party to whom notice is to be given may have furnished to the other Party in writing in accordance herewith. Any such communication shall be deemed to have been received (a) when delivered, if personally delivered or sent by facsimile on a Business Day, (b) on the Business Day after dispatch, if sent by nationally-recognized overnight courier, and (c) on the third Business Day following the date of mailing, if sent by mail. It is understood and agreed that this Section is not intended to govern the day-to-day business communications necessary between the Parties in performing their duties, in due course, under the terms of this Agreement.

15.10 Entire Agreement; Modifications. This Agreement, together with the Exhibits and Schedules attached hereto, sets forth and constitutes the entire agreement and understanding between the Parties with respect to the subject matter hereof and all prior agreements, understandings, promises and representations, whether written or oral, with respect thereto are superseded hereby. Each Party confirms that it is not relying on any representations or warranties of the other Party except as specifically set forth herein. No amendment, modification, release or discharge shall be binding upon the Parties unless in writing and duly executed by authorized representatives of both Parties.

73

15.11 Relationship of the Parties. It is expressly agreed that the Parties shall be independent contractors of one another and that the relationship between the Parties shall not constitute a partnership, joint venture or agency. Neither Party shall have the authority to make any statements, representations or commitments of any kind, or to take any action, which shall be binding on the other, without the prior written consent of the other to do so. All persons employed by a Party shall be employees of such Party and not of the other Party and all costs and obligations incurred by reason of any such employment shall be for the account and expense of such Party.

15.12 Equitable Relief. Each Party acknowledges and agrees that the restrictions set forth in Article 12 of this Agreement are reasonable and necessary to protect the legitimate interests of the other Party and that such other Party would not have entered into this Agreement in the absence of such restrictions, and that any violation or threatened violation of any provision of Article 12 will result in irreparable injury to such other Party. Each Party also acknowledges and agrees that in the event of a violation or threatened violation of any provision of Article 12, the other Party shall be entitled to preliminary and permanent injunctive relief, without the necessity of proving irreparable injury or actual damages and without the necessity of having to post a bond, as well as to an equitable accounting of all earnings, profits and other benefits arising from any such violation. The rights provided in the immediately preceding sentence shall be cumulative and in addition to any other rights or remedies that may be available to such other Party. Nothing in this Section is intended, or should be construed, to limit such other Party’s right to preliminary and permanent injunctive relief or any other remedy for a breach of any other provision of this Agreement.

15.13 Waiver. Any term or condition of this Agreement may be waived at any time by the Party that is entitled to the benefit thereof, but no such waiver shall be effective unless set forth in a written instrument duly executed by or on behalf of the Party waiving such term or condition. The waiver by either Party hereto of any right hereunder or of the failure to perform or of a breach by the other Party shall not be deemed a waiver of any other right hereunder or of any other breach or failure by said other Party whether of a similar nature or otherwise.

15.14 Performance by Affiliates. Each of Napo and Salix acknowledges that certain obligations under this Agreement may be performed by Affiliates of Napo and Salix. Each of Napo and Salix guarantees performance of this Agreement by any of its Affiliates.

15.15 Counterparts. This Agreement may be executed in two (2) or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement may be executed by scanned and electronically or facsimile transmitted signatures and such signatures shall be deemed to bind each Party hereto as if they were original signatures.

15.16 No Benefit to Third Parties. The representations, warranties, covenants and agreements set forth in this Agreement are for the sole benefit of the Parties hereto and their successors and permitted assigns, and they shall not be construed as conferring any rights on any other parties.

74

15.17 Further Assurance. Each Party shall duly execute and deliver, or cause to be duly executed and delivered, such further instruments and do and cause to be done such further acts and things, including the filing of such assignments, agreements, documents and instruments, as may be necessary or as the other Party may reasonably request in connection with this Agreement or to carry out more effectively the provisions and purposes, or to better assure and confirm unto such other Party its rights and remedies under this Agreement.

15.18 English Language. This Agreement has been written and executed in the English language. Any translation into any other language shall not be an official version thereof, and in the event of any conflict in interpretation between the English version and such translation, the English version shall control.

15.19 References. Unless otherwise specified, (a) references in this Agreement to any Article, Section, Schedule or Exhibit shall mean references to such Article, Section, Schedule or Exhibit of this Agreement, (b) references in any section to any clause are references to such clause of such section, and (c) references to any agreement, instrument or other document in this Agreement refer to such agreement, instrument or other document as originally executed or, if subsequently varied, replaced or supplemented from time to time, as so varied, replaced or supplemented and in effect at the relevant time of reference thereto.

15.20 Construction. Except where the context otherwise requires, wherever used, the singular shall include the plural, the plural the singular, the use of any gender shall be applicable to all genders and the word “or” is used in the inclusive sense (and/or). The captions of this Agreement are for convenience of reference only and in no way define, describe, extend or limit the scope or intent of this Agreement or the intent of any provision contained in this Agreement. The term “including” as used herein shall mean including, without limiting the generality of any description preceding such term. The language of this Agreement shall be deemed to be the language mutually chosen by the Parties and no rule of strict construction shall be applied against either Party hereto.

[The remainder of this page has been intentionally left blank.]

75

IN WITNESS WHEREOF, the Parties have executed this Agreement in duplicate originals by their proper officers.

Salix Pharmaceuticals, Inc.		Napo Pharmaceuticals, Inc.
By:	/s/ Carolyn J. Logan	By:	/s/ Lisa Conte
Title:	President and CEO	Title:	CEO
Date:	December 9, 2008	Date:	December 9, 2008

[SIGNATURE PAGE TO COLLABORATION AGREEMENT]

SCHEDULE 1.24

Certain Salix Competitors

[*]

[*]

[*]

[*]

[*]

[*]

[*]

[*]

[*]

[*]

[*]

[*]

[*]

[*]

[*]

[*]

[*]

[*]

[*]

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

Schedule 1.24 - 1

Schedule 1.34(a)(ii)(A)

Certain Development Costs

	Total To Be Paid To Vendor	Activity From July 1, 2008	Reduction of Upfront
[*]

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

Schedule 1.34(a)(ii)(A) - 1

SCHEDULE 1.82

Napo Patents

“Method for Treatment of Diarrhea-Predominant Irritable Bowel Syndrome”

Pending applications in US, Argentina, Bangladesh, Bolivia, Chile, Gulf Cooperation Council, Panama, Paraguay, Peru, Thailand, Taiwan, and Venezuela, and national phase of PCT in Australia, Canada, EPO, India, Japan, Korea, Mexico, New Zealand, and Singapore

Examination in progress in the United States

“Method for Treatment of Constipation-Predominant Irritable Bowel Syndrome”

Pending applications in US and national phase of PCT in Australia, Canada, EPO, India, Japan, Korea, Mexico, New Zealand, and Singapore

Examination in progress in the United States

“Composition and Methods for Treating or Preventing Inflammatory Bowel Disease, Famililial Adenomatous Polyposis and Colon Cancer”

Pending applications in US and PCT (international phase only)

Examination in progress in the United States

“Enteric Coating”

Issued/granted patents in United States (two patents), Australia, India, South Korea, New Zealand, and Taiwan.

Applications waiting to issue/grant in EPO and Japan

Pending applications in US (undergoing pre-exam formality review), India (one divisional application), Canada, and Mexico

“Proanthocyanidin Polymers Having Antiviral Activity and Methods of Obtaining the Same” and “Methods for Using Proanthocyanidin Polymers Having Antiviral Activity”

Issued/granted patents in United States (two patents), Canada, Europe (Netherlands, Austria), Australia, Japan, Korea, Mexico, Singapore

Schedule 1.82 - 1

Four Issued US patents Assigned to Napo

Docket No.	SP- No.	Type/ Indication	Patent Title:	Patent No.
7032007 CIP	SP-303	Composition Of Matter	Proanthocyanidin polymers having antiviral activity and methods of obtaining the same. Issued May 18, 1993	US 5,211,944 exp. 12-Oct-2010
7032016	SP-303	Use Patent	Methods for using Proanthocyanidin polymers having antiviral activity. Issued Feb 27, 1996	US 5,494,661 exp. 27-Feb-2013
13784. 105005	SP-303 (enteric)	Use Patent	Enteric formulations of proanthocyanidin polymer antidiarrheal compositions. Issued March 11, 2008	US 7,341,744 exp. 12-Jan-2018
13784. 105003	SP-303 (enteric)	Composition of Matter	Enteric formulations of proanthocyanidin polymer antidiarrheal compositions. Issued January 29, 2008	US 7,323,195 exp. 24-Dec-2017

Four Pending US applications Assigned to Napo

Docket No.	Drug/ Indication	Patent Title:	Serial No.	Status
13784. 105002US1	IBS	Method for treatment of diarrhea-predominant irritable bowel syndrome	11/510,152	In Process
13784. 105004US1	cIBS	Method for treatment of constipation-predominant irritable bowel syndrome	11/741,796	In Process
13784. 105006US1	colon cancer	Composition and methods for treating or preventing inflammatory bowel disease, familial adenomatous polyposis and colon cancer	11/741,797	In Process
[*]	[*]	[*]	[*]	[*]

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

Schedule 1.82 - 2

Pending Foreign Patents/Applications Assigned to Napo

Docket No.	Drug/ Indication	Patent Title:	Status
corresponding to 13784. 105002	dIBS	Method for treatment of diarrhea-predominant irritable bowel syndrome Australia Canada EPO India Japan Korea Mexico New Zealand Singapore Argentina: AR P070101888 Bangladesh: BD 94/2007 Taiwan: TW 96115334 Thailand: TH 0701002130 GCC: GCC 8244 Bolivia: BO SP-270146 Chile: CL 1243-2007 Panama: PA 87249 Paraguay: PY 13051 Peru: PE serial number to be determined Venezuela: VE 07-00875	examination in progress
corresponding to 13784. 105004	cIBS	Method for treatment of constipation-predominant irritable bowel syndrome Australia Canada EPO India Japan Korea Mexico New Zealand Singapore	examination in progress

Schedule 1.82 - 3

Docket No.	Drug/ Indication	Patent Title:		Status
corresponding to 13784. 105003 and 105005	enteric/ diarrhea	Enteric formulations of proanthocyanidin polymer antidiarrheal compositions.		issued patents/ examination in progress
		Australia Canada EP India India (div) Japan Korea Mexico New Zealand Taiwan	Patent 775330 (Iss. 11-Nov-2004) 2,269,078 (under examination) 97912779.2 (allowed) Patent 209532 (Iss. 04-Sept-2007) 270/CHE/2007 (under examination) 10-518632 (allowed) Patent 0467532 (Iss. 13-Jan-2005) 993517 (under examination) Patent 335317 (Iss. 06-Jun-2001) Patent          NI-179821 (Iss. 13-May-03)
corresponding to 13784. 105007 and 105008	composition of matter	Proanthocyanidin polymers having antiviral activity and methods of obtaining the same.		issued patents
		Australia AT Canada Japan Netherlands EP Korea Mexico	660631 (88780/91) 194288E (published 15-Jul-2000) 2,093,825 3-518512 NL0553253 0553253 0207949 96 01703 (filed 7-May-1996)granted: MX 217866 (2-Dec-2003)
		Singapore	52707

Schedule 1.82 - 4

K&S REF.	FILING DETAILS		DESCRIPTION AND STATUS
13784.105002	INVENTOR(S):	Barry Quart, David Rosenbaum, Thomas Neenan, and Robert Blanks	DESCRIPTION: Provisional application. Filing Receipt mailed on 25-May-2006. Assignment from Trine to Napo filed 5-Mar-2008 (recorded at reel/frame 020603/0688).
	TITLE:	Method for Treatment of Diarrhea-Predominant Irritable Bowel Syndrome
	SERIAL NO:	60/797,074	STATUS:
	FILING DATE:	1-May-2006	Expired in favor of US non-provisional, PCT, and non-PCT foreign applications.
	ASSIGNEE:	Napo
13784.105002US1	INVENTOR(S):	Barry Quart, David Rosenbaum, Thomas Neenan, and Robert Blanks	DESCRIPTION: Non-provisional application filed claiming priority to US 60/797,074, filed 1-May-2006. Notice of Missing Parts. Declaration filed 10-Nov-2006. Assignment filed 13-Nov-2006 (see reel/frames 018564/0561 and 018564/0552). Filing Receipt mailed 24-Nov-2006. Election of Species mailed 27-Mar-2007. Response to Election filed 27-Apr-2007. IDS filed 27-Apr-2007. Non-final rejection mailed 1-Jun-2007. Response filed 4-Sep-2007. Misc letter filed 9-Oct-2007. Non-final rejection mailed 10-Oct-2007. Published as US 2007/0254050 on 1-Nov-2007. Response to OA filed 10-Jan-2008 with IDS. Assignment filed 5-Mar-2008 (see reel/frame 020603/0688). Final rejection mailed 19-Feb-2008. Notice of Appeal filed 18-Aug-2008.
	TITLE:	Method for Treatment of Diarrhea-Predominant Irritable Bowel Syndrome
	SERIAL NO:	11/510,152
	FILING DATE:	24-Aug-2006
	ASSIGNEE:	Napo
			STATUS:
			Final Deadline for response- 18-Mar-2009

Schedule 1.82 - 5

K&S REF.	FILING DETAILS		DESCRIPTION AND STATUS
13784.105002PCT	INVENTOR(S):	Barry Quart, David Rosenbaum, Thomas Neenan, and Robert Blanks	DESCRIPTION: PCT application filed claiming priority to US 60/797,074, filed 1-May-2006, and to US 11/510,152, filed 24-Aug-2006. Published as WO 2007/130882 on 15-Nov-2007. International Search Report mailed. Name change of Applicant filed 5-Mar-2008 (see Assignment recorded at reel/frame 020603/0688). PCT Receipt for name change mailed 20-Mar-2008.
	TITLE:	Method for Treatment of Diarrhea-Predominant Irritable Bowel Syndrome
	SERIAL NO:	PCT/US2007/67725
	FILING DATE:	30-Apr-2007
	ASSIGNEE:	Napo	STATUS:
			30-month date is 1-Nov-2008. National phase entry in Australia Canada EPO India Japan Korea Mexico New Zealand Singapore

Schedule 1.82 - 6

K&S REF.	FILING DETAILS			DESCRIPTION AND STATUS
13784.105002 foreign (non PCT)	INVENTOR(S):	Barry Quart, David Rosenbaum, Thomas Neenan, and Robert Blanks	COUNTRY LIST Argentina: AR P070101888, filed 2-May-2007 (for. assoc. Martin Guerrico at G. Breuer). Bangladesh: BD 94/2007, filed 29-Apr-2007 (for. assoc. Christopher Britton at Deacons). Taiwan: TW 96115334, filed 30-Apr-2007 (for. assoc. Christopher Britton at Deacons). Thailand: TH 0701002130, filed 30-Apr-2007 (for. assoc. Christopher Britton at Deacons). GCC: GCC 8244, filed 1-May-2007 (for. assoc. A.N Bazar Bashi Law Office). Bolivia: BO SP-270146, filed 30-Apr-2007 (for. assoc. Silva & Associates). Chile: CL 1243-2007, filed 30-Apr-2007 (for. assoc. Silva & Associates). Panama: PA 87249, filed 30-Apr-2007 (for. assoc. Silva & Associates). Paraguay: PY 13051, filed 30-Apr-2007 (for. assoc. Silva & Associates). Peru: PE , filed 30-Apr-2007 (for assoc. Silva & Associates). Pre-exam review required for serial number. Venezuela: VE 07-00875, filed 30-Apr-2007 (for. assoc. Silva & Associates).	DESCRIPTION: Foreign applications filed claiming priority to US 60/797,074, filed 1-May-2006, and to US 11/510,152, filed 24-Aug-2006. STATUS: All pending and awaiting examination
	TITLE:	Method for Treatment of Diarrhea-Predominant Irritable Bowel Syndrome
	SERIAL NO:	see country list
	APPLICANTS / ASSIGNEES:	see country list
	ASSIGNEE:	Requests to update to Napo as sole Applicant/Assignee in progress
	PROJECTED EXPIRATION:	29-Apr-2027

Schedule 1.82 - 7

K&S REF.	FILING DETAILS		DESCRIPTION AND STATUS
13784.105003	INVENTOR(S):	Rozhon et al.	DESCRIPTION: Divisional of US 09/712,033 (see 13784.105005). Recording of name change to Napo filed 22-Sep-2004 (see reel/frame 015810/0518). Published as US 2005/0019389. Non-final rejection mailed 27-Dec-2006. Response filed 27-Mar-2007. Final rejection mailed 15-Jun-2007. Response filed 17-Sep-2007. Notice of Allowance mailed 7-Nov-2007. Issue fee paid 16-Nov-2007. Request for PTA correction filed 16-Nov-2007. Request deferred by USPTO. Issue Notification mailed 9-Jan-2008. Issued 29-Jan-2008. Request to reconsider PTA correction filed 30-Jan-2008. Dismissed by USPTO and re-filed 28-Aug-2008.
	TITLE:	Enteric Formulations of Proanthocyanidin Polymer Antidiarrhea Compositions
	SERIAL NO:	10/919,969
	FILING DATE:	17-Aug-2004
	PAT. NO:	7,323,195
	ISSUE DATE:	29-Jan-2008
	EXPIRATION:	24-Dec-2017	STATUS:
	ASSIGNEE:	Napo	ISSUED. Petition for PTA pending. Certificate of Correction to correct USPTO typo in claim to be filed.
13784.105004	INVENTOR(S):	Barry Quart and David Rosenbaum	DESCRIPTION: Provisional application. Filing Receipt mailed on 25-May-2006. Assignment filed 5-Mar-2008 (see reel/frame 020603/0688).
	TITLE:	Method for Treatment of Constipation-Predominant Irritable Bowel Syndrome
	SERIAL NO:	60/797,076
	FILING DATE:	01-May-2006	STATUS:
	ASSIGNEE:	Napo	Expired in favor of US non-provisional and PCT application.

Schedule 1.82 - 8

K&S REF.	FILING DETAILS		DESCRIPTION AND STATUS
13784.105004US1	INVENTOR(S):	Barry Quart and David Rosenbaum	DESCRIPTION: Non-provisional application claiming priority to US 60/797,076, filed 1-May-2006. Filing Receipt/Notice of Missing Parts mailed 23-May-2007. Assignment recorded 21-Aug-2007 (see reel/frame 019721/0594). Response to Missing Parts filed 23-Aug-2007. Assignment recorded 10-Sep-2007 (see reel/frame 019801/0290). Updated Filing Receipt mailed 30-Aug-2007. IDS filed 3-Mar-2008. Assignment filed 5-Mar-2008 (see reel/frame 020603/0688). Office Action mailed 6-Aug-2008.
	TITLE:	Method for Treatment of Constipation-Predominant Irritable Bowel Syndrome
	SERIAL NO:	11/741,796
	FILING DATE:	30-Apr-2007
	ASSIGNEE:	Napo
			STATUS:
			response due 6-Nov-2008 (final deadline 6-Feb-2009)

Schedule 1.82 - 9

K&S REF.	FILING DETAILS		DESCRIPTION AND STATUS
13784.105004PCT	INVENTOR(S):	Barry Quart and David Rosenbaum	DESCRIPTION: PCT application filed claiming priority to US 60/797,076, filed 1-May-2006. Forms PCT/RO/102 (fees), PCT/RO/105 (serial number), and PCT/ISA/202 (search copy) mailed 20-Jun-2007. Published as WO 2007/130892 on 15-Nov-2007. Name change of Applicant filed 5-Mar-2008 (see reel/frame 020603/0688). PCT Receipt for name change mailed 20-Mar-2008.
	TITLE:	Method for Treatment of Constipation-Predominant Irritable Bowel Syndrome
	SERIAL NO:	PCT/US07/67739
	FILING DATE:	30-Apr-2007	STATUS:
	APPLICANT:	Napo	30-month date is 1-Nov-2008. National phase entry in Australia Canada EPO India Japan Korea Mexico New Zealand Singapore
13784.105005	INVENTOR(S):	Rozhon et al.	DESCRIPTION: Parent of US 09/066,989. Grandparent of 09/712,033. Great-grandparent of 10/919,969. Recording of name change to Napo filed 22-Sep-2004 (see reel/frame 015810/0518). Correction of Assignment cover sheet filed 19-Jan-2007 (see reel/frame 018845/0882).
	TITLE:	Enteric Formulations of Proanthocyanidin Polymer Antidiarrhea Compositions
	SERIAL NO:	08/730,772
	FILING DATE:	16-Oct-1996	STATUS:
	ASSIGNEE:	Napo	Abandoned in favor of CIP application 09/066,989.

Schedule 1.82 - 10

K&S REF.	FILING DETAILS		DESCRIPTION AND STATUS
13784.105005	INVENTOR(S):	Rozhon et al.	DESCRIPTION: CIP of 08/730,772. Parent of 09/712,033. Grandparent of 10/919,969. Assigned by inventors to Shaman on 25-Aug-1999 (see reel/frame 010194/0568) and 11-Jan-2000 (see reel/frame 010489/0941). Recording of sale to PS Pharmaceutical on 3-Jul-2002 (see reel/frame 013070/0105). Recording of name change to Napo on 22-Sep-2004 (see reel/frame 015810/0518).
	TITLE:	Enteric Formulations of Proanthocyanidin Polymer Antidiarrhea Compositions
	SERIAL NO:	09/066,989
	FILING DATE:	23-Apr-1998
	ASSIGNEE:	Napo
			STATUS:
			Abandoned in favor of continuation 09/712,033.

K&S REF.	FILING DETAILS		DESCRIPTION AND STATUS
13784.105005	INVENTOR(S):	Rozhon et al.	DESCRIPTION: CON of 09/066,989 (abn), which is a CIP of 08/730,772 (abn). Parent of 13784.105003. Recording of sale to PS Pharmaceutical on 3-Jul-2002 (see reel/frame 013070/0105). Recording of name change to Napo on 22-Sep-2004 (see reel/frame 015810/0518). Filing Receipt. Restriction. Non-final rejection. Final rejection. Advisory action. Non-final Rejection. Final rejection. RCE. Non-final rejection mailed 20-Dec-2006. Telephone interview on 31-Jan-2007. Response filed 27-Mar-2007. Final rejection mailed 15-Jun-2007. Response filed 17-Sep-2007. Notice of Allowance mailed 7-Nov-2007. Issue fee paid 16-Nov-2007. Request for corrected PTA filed 16-Nov-2007. Request deferred by USPTO. Petition for PTA re-filed.
	TITLE:	Enteric Formulations of Proanthocyanidin Polymer Antidiarrhea Compositions
	SERIAL NO:	09/712,033
	FILING DATE:	14-Nov-2000
	PAT. NO:	7,341,744
	ISSUE DATE:	11-Mar-2008
	EXPIRATION:	12-Jan-2018
	ASSIGNEE:	Napo	STATUS:
			Issued with PTA of 453 days. Petition for PTA pending.

Schedule 1.82 - 11

[*]	INVENTOR(S): TITLE:	[*] [*]	DESCRIPTION: [*]
			STATUS:
	SERIAL NO: FILING DATE: ASSIGNEE:	[*] [*] [*]	[*]

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

Schedule 1.82 - 12

K&S REF.	FILING DETAILS				DESCRIPTION AND STATUS
foreign counterparts	INVENTOR(S):	Rozhon et al.	COUNTRY LIST		AU: renewal due 14-Oct-2008 NZ: renewal due 14-Oct-2008 IN: renewal due 14-Oct-2008. Statement of commercial working required. IN1: Divisional application filed 7-Feb-2007. Request for examination filed 19-July-2007. KR: renewal due 13-Jan-2009 CA: OA mailed 7-Dec-2007 (instructions for response forwarded to CA associate 29-May-2008) EP: Response filed 19-Feb-2008 JP: Response due 05-Aug-2008 MX: Docs submitted for name change from PS to Napo
13784.105005
	TITLE:	Enteric Formulations of Proanthocyanidin Polymer Antidiarrheal Compositions	Australia	Patent 775330 (Iss. 11-Nov-2004)
			Canada	2,269,078 (under examination)
			EP	97912779.2 (allowed)
			India	Patent 209532 (Iss. 04-Sept-2007)
		see country list (entry of national phase of PCT/US97/18845, filed 14-Oct-1997)	India (div)	270/CHE/2007 (under exam.)
	SERIAL NO:		Japan	10-518632 (allowed)
			Korea	Patent 0467532 (Iss. 13-Jan-2005)
			Mexico	993517 (under examination)
			New Zealand	Patent 335317 (Iss. 06-Jun-2001)
			Taiwan	Patent NI-179821 (Iss. 13-May-03)
	FILING DATE:	see country list
	APPLICANT:	updated by country
	PROJECTED EXPIRATION:	14-Oct-2017
13784.105006	INVENTOR(S):	Barry Quart		DESCRIPTION:
	TITLE:	Composition and Methods for Treating or Preventing Inflammatory Bowel Disease, Famililial Adenomatous Polyposis and Colon Cancer		Provisional application. Filing Receipt mailed on 25-May-2006.
	SERIAL NO:	60/797,075		STATUS:
				Expired in favor of US nonprovisional and PCT applications.
	FILING DATE:	01-May-2006
	ASSIGNEE:	Napo

Schedule 1.82 - 13

K&S REF.	FILING DETAILS		DESCRIPTION AND STATUS
13784.105006PCT	INVENTOR(S): TITLE: SERIAL NO: FILING DATE: APPLICANT:	Barry Quart Composition and Methods for Treating or Preventing Inflammatory Bowel Disease, Famililial Adenomatous Polyposis and Colon Cancer PCT/US2007/67741 30-Apr-2007 Napo	DESCRIPTION: PCT application claiming priority from US 60/797,075, filed 1-May-2006. Forms PCT/RO/102 (fees), PCT/RO/105 (serial number), and PCT/ISA/202 (search copy) mailed 20-Jun-2007. Published as WO 2007/130893 on 15-Nov-2007. Re-published with search report as A3 publication. STATUS: 30-month date is 1-Nov-2008.

Schedule 1.82 - 14

K&S REF.	FILING DETAILS		DESCRIPTION AND STATUS
13784.105007	INVENTOR(S): TITLE: SERIAL NO: FILING DATE: PAT. NO: ISSUE DATE: EXPIRATION: ASSIGNEE:	Michael S. Tempesta Proanthocyanidin Polymers Having Antiviral Activity and Methods of Obtaining the Same 07/737,077 29-Jul-1991 5,211,944 18-May-1993 12-Oct-2010 Napo	DESCRIPTION: CIP of 07/596,893, filed 12-Oct-1990. Name change from PS to Napo recorded 22-Sep-2004 (see reel/frame 015810/0518). Issued as US Patent 5,211,944. STATUS: Issued patent in force.
13784.105007	INVENTOR(S): TITLE: SERIAL NO: FILING DATE: PAT. NO: ISSUE DATE: EXPIRATION: ASSIGNEE:	Michael S. Tempesta Methods for Using Proanthocyanidin Polymers Having Antiviral Activity 08/194,779 9-Feb-1994 5,494,661 27-Feb-1996 27-Feb-2013 Napo	DESCRIPTION: CON of 07/916,311, filed 17-Jul-1992, which is a DIV of 07/737,077, filed 29-Jul-1991, which is a CIP of 07/596,893, filed 12-Oct-1990. Name change from PS to Napo recorded 22-Sep-2004 (see reel/frame 015810/0518). Issued as US Patent 5,494,661. STATUS: Issued patent in force.

Schedule 1.82 - 15

K&S REF.	FILING DETAILS		DESCRIPTION AND STATUS
13784.105008	INVENTOR(S): TITLE: SERIAL NO: FILING DATE: APPLICANT:	Michael S. Tempesta Proanthocyanidin Polymers Having Antiviral Activity and Methods of Obtaining Same PCT/US91/07679 10-Oct-1991 Shaman Pharmaceuticals, Inc. (not necessary to change name in international phase- see national stage applications)	DESCRIPTION: Priority claim to US 07/737,077, filed 29-Jul-1991, and US 07/596,893, filed 12-Oct-1990. Published as WO 1992/006695 on 30-Apr-1992. STATUS: Entered National Phase
foreign counterparts 13784.105008	INVENTOR(S): TITLE: SERIAL NO: FILING DATE: APPLICANT:	Michael S. Tempesta Proanthocyanidin Polymers Having Antiviral Activity and Methods of Obtaining Same see country list (entry of national phase of PCT/US91/07679, filed 10-Oct-1991) see country list updated by country	COUNTRY LIST Canada Australia Japan EP Great Britain Netherlands Korea Mexico Singapore	2,093,825  660631 (88780/91)                 3-518512  0 553 253  EP 0 553 253 validated           EP 0 553 253 validated           0207949  217866  52707
	PROJECTED EXPIRATION:	10-Oct-2011

Schedule 1.82 - 16

IP SUMMARY - LICENSED IP FROM U. OF IOWA

“Use of Sulfonylureas and Other Potassium Channel Regulators to Treat Secretory Diarrhea”

Issued patent in the United States (Licensed from University of Iowa Research Foundation)

One Issued US patent Licensed to Napo

13784.	—	Use Patent	Use of Sulfonylureas and other Potassium Channel Regulators to Treat Secretory Diarrhea. Issued August 10, 1993	US 5,234,922
1050xx				exp. 28-Sep-2012

K&S REF.	FILING DETAILS		DESCRIPTION AND STATUS
13784.1050xxUS	INVENTOR(S): TITLE: SERIAL NO: FILING DATE: ASSIGNEE:	Michael J. Welsh et al. Use of Sulfonylureas and Other Potassium Channel Regulators to Treat Secretory Diarrhea 07/952,279 28-Sep-1992 University of Iowa Research Foundation (license to Napo)	DESCRIPTION: Issued as US Patent 5,234,922 on August 10, 1993.

Schedule 1.82 - 17

SCHEDULE 1.109(b)

Salix HIV/AIDS/Pediatric Territory

United States of America (including its territories and possessions, Puerto Rico and the District of Columbia)

Canada

Mexico

Japan

Austria

Belgium

Bulgaria

Croatia

Cyprus

Czech Republic

Denmark

Estonia

Finland

France

Germany

Greece

Hungary

Ireland

Italy

Latvia

Lithuania

Luxembourg

Malta

The Netherlands

Poland

Portugal

Romania

Slovakia

Slovenia

Spain

Sweden

United Kingdom

Schedule 1.109(b) - 1

SCHEDULE 1.109(c)

Salix ID Territory

The Salix ID Territory means worldwide, but excluding the following countries:

Afghanistan	El Salvador
Algeria	Equatorial Guinea
Angola	Eritrea
Antigua and Barbuda	Ethiopia
Argentina	Fiji
Armenia	Gabon
Azerbaijan	Georgia
Bahrain	The Gambia
Bangladesh	Ghana
Barbados	Grenada
Belize	Guatemala
Benin	Guinea
Bhutan	Guinea-Bissau
Bolivia	Guyana
Botswana	Haiti
Burkina Faso	Honduras
Burma (Myanmar)	India
Burundi	Indonesia
Brazil	Iran
Cambodia	Iraq
Cameroon	Jamaica
Cape Verde	Jordan
Central African Republic	Kazakhstan
Chad	Kenya
Chile	Kiribati
China	Kyrgyzstan
Colombia	Laos
Comoros	Lebanon
Congo (Democratic Republic of) (Kinshasa)	Lesotho
Congo (Republic of) (Brazzaville)	Liberia
Costa Rica	Libya
Cote d’Ivoire (Ivory Coast)	Liechtenstein
Cuba	Madagascar
Cyprus	Malaysia
Djibouti	Malawi
Dominica	Maldives
Dominican Republic	Mali
East Timor	Marshall Islands
Ecuador	Mauritania Malaysia
Egypt	Mauritius

Schedule 1.109(c) - 1

Federated States of Micronesia	Sierra Leone
Mongolia	Solomon Islands
Morocco	Somalia
Mozambique	South Africa
Namibia	Sri Lanka
Nauru	Syria
Nepal	Sudan
New Guinea	Suriname
Nicaragua	Swaziland
Niger	Tajikistan
Nigeria	Tanzania
North Korea	Thailand
Oman	Togo
Pakistan	Tonga
Panama	Trinidad and Tobago
Palau	Tunisia
Papua New Guinea	Turkey
Paraguay	Turkmenistan
Peru	Tuvalu
Philippines	Uganda
Qatar	United Arab Emirates
Rwanda	Uruguay
Saint Kitts and Nevis	Uzbekistan
Saint Lucia	Vanuatu
Saint Vincent and the Grenadines	Venezuela
Samoa	Vietnam
Sao Tome and Principe	Yemen
Saudi Arabia	Western Sahara
Senegal	Zambia
Seychelles	Zimbabwe

Schedule 1.109(b) - 1

Schedule 1.115

Specifications

[*]

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

Schedule 1.115 - 1

SCHEDULE 3.1.2

Certain Napo Employees

[*]

[*]

[*]

[*]

[*]

[*]

[*]

[*]

[*]

[*]

[*]

[*]

[*]

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

Schedule 3.1.2 - 1

SCHEDULE 6.3.2

Certain CPL

Location	Number of Drums	Gallons per  Drum	Total Gallons
Pyramid Transportation Systems, Inc. 857 East 230th Street Carson, CA 90745	128 (inclusive of   27 drums in transit)	55	7,040
Glenmark Generics Ltd.’s manufacturing facility at 3109, GIDC Industrial Estate, Ankleshwar, India 393 002.	32	55	1,760
Total to be transferred to Salix			8,800

Schedule 6.3.2 - 1

SCHEDULE 6.5.1

Compassionate Distribution Countries

Afghanistan, Bangladesh, Bolivia, Burundi, Cambodia, Cameroon, Congo, Dominican Republic, Ecuador, El Salvador, Ethiopia, Fiji, Ghana, Grenada, Guatemala, Guyana, Haiti, Honduras, Indonesia, Jamaica, Kenya, Korea, Laos, Liberia, Malawi, Myanmar, Nepal, Nicaragua, Niger, Nigeria, Pakistan, Papua New Guinea, Peru, Philippines, Rwanda, Senegal, Sierra Leone, Somalia, South Africa, Sri Lanka, Sudan, Tanzania, Thailand, Uganda, Vietnam, Zambia, and Zimbabwe.

Schedule 6.5.1 - 1

SCHEDULE 7.1

Disbursement of Up-Front Payment

See Schedule 1.34(a)(ii)(A).

Schedule 7.1 - 1

SCHEDULE 8.1.6

Additional Napo Representations and Warranties

This Schedule 8.1.6 has been prepared by Napo Pharmaceuticals, Inc. (“Napo”) in connection with the execution and delivery by Napo and Salix Pharmaceuticals, Inc. (“Salix”) of the Collaboration Agreement dated as of December 9, 2008 (the “Agreement”) to which this Schedule 8.1.6 is attached. All initially capitalized terms used in this Schedule 8.1.6 and not defined herein have the respective meanings given to them in the Agreement.

Information disclosed by Napo under any particular item of this Schedule 8.1.6 shall also be deemed a disclosure as to all other applicable items of this Schedule 8.1.6 and the Agreement where such disclosure is readily apparent from the face of such disclosure. However, the fact that any item of information is disclosed under any item of this Schedule 8.1.6 may not be construed as an admission by Napo (i) that such disclosure is required by the Agreement, including without limitation in order to render any representation or warranty true or correct, or (ii) as to the materiality of any item so disclosed.

This Schedule 8.1.6 and the information contained herein were created for the specific purpose of facilitating the transactions contemplated by the Agreement. Vis-à-vis any Third Party, nothing contained in or incorporated by reference into this Schedule 8.1.6 relating to any litigation, claim or possible breach of any agreement, law or regulation may be construed as an admission or indication that any such breach or violation exists or actually occurred, and nothing in this Schedule 8.1.6 shall constitute an admission of any liability or obligation of Napo to any Third Party or shall confer or give to any Third Party any remedy, claim, liability, reimbursement, cause of action or other right.

Section 8.1.6(a) No Notice of Infringement.

[*]

Section 8.1.6(g) Compliance with Legal Requirements.

[*]

[*]

[*]

[*]

[*]

[*]

[*]

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

Schedule 8.1.6 - 1

[*]

[*]

[*]

[*]

[*]

[*]

[*]

[*]

[*]

[*]

Note - these applications are not publicly available and will not enter the public domain in favor of a corporate Napo decision to keep this information as a trade secret.

Section 8.1.6(j)(ii) Napo Technology

In 1997, Shaman Pharmaceuticals, Inc. prevailed on a claim of infringement by Daniel Jean and Leon Cariel with respect to its patent No. 5,211,944 granted May 18, 1993. Dr. Jean and Dr. Cariel eventually filed a Notice of Concession of Priority pursuant to 37 C.F.R. 1.622(a), and the Board of Patent Appeals and Interferences of the United States Patent and Trademark Office ruled that they were not entitled to the patent claim they had asserted.

Section 8.1.6(k) Regulatory Documentation

Section 8.1.6(k)(i) Glenmark, pursuant to the Glenmark, as amended through the Effective Date, may have rights. A copy of the Glenmark Agreement has been delivered to Salix.

AsiaPharm, pursuant to the AsiaPharm Agreement, may have rights. A copy of the AsiaPharm Agreement has been delivered to Salix.

Michael Tempesta, Ph.D, pursuant to the Tempesta License Agreement, may have rights. A copy of the Tempesta License Agreement has been delivered to Salix.

Section 8.6.1(k)(ii) Napo has a non-exclusive license from the University of Iowa Research Foundation, pursuant to the UIRF License Agreement, to U.S. Patent 5,234,922 entitled “Use of Sulfonylureas and Other Potassium Channel Regulators to Treat Secretory Diarrhea”. A copy of the UIRF License Agreement has been delivered to Salix.

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

Schedule 8.1.6 - 2

Napo has an exclusive license from Michael Tempesta, Ph.D, pursuant to the Tempesta License Agreement, to certain technology. A copy of the Tempesta License Agreement has been delivered to Salix.

Section 8.6.1(o) Government Funding. Napo received a grant of $597,000 in 2006 from the Center for Scientific Review of the National Institutes of Health, in response to a RFA – A1-05-19 the Cooperative Research Partnership for Biodefense, to support Napo’s project entitled, “Development of Crofelemer to treat Vibrio Cholarae”, for the development of the enteric-coated formulation used in Napo’s cholera studies.

Schedule 8.1.6 - 3

SCHEDULE 8.1.6(u)

Incurred Costs

See Schedule 1.34(a)(ii)(A).

Schedule 8.1.6(u) - 1

EXHIBIT A

Development Plan and Budget

Document Summary

This document represents the development plan for crofelemer for the indication of treatment of chronic HIV-related diarrhea in patients receiving highly active antiretroviral therapy (HAART). The time period represented by this document is up to filing the NDA for crofelemer in the United States for seeking the label indication of “crofelemer is indicated for the treatment of HIV-associated diarrhea”.

Overall Summary of Program Activities

The program describes the details of a single Phase 3 trial for registration which will be supplemented by the work previously conducted by Shaman Pharmaceuticals prior to 1999. This proposal was reviewed favorably at an End of Phase 2 Meeting with FDA on May 5, 2004 and through a Special Protocol Assessment that was initiated in December 2006 and completed in August 2008. The plan below summarizes the ongoing and planned clinical studies and the Chemistry, Manufacturing & Controls (CMC), and nonclinical activities for crofelemer through the period of planned NDA filing for crofelemer. The program development budget for crofelemer for the HIV indication is attached in Appendix A.

Clinical Plans

[*]

[*]

Quality of Life (QoL) evaluations

[*]

Pharmacokinetics

[*]

CMC Plans

[*]

Drug Product

Description and Composition of the Drug Product (Crofelemer Enteric-Coated Tablets) Used in the phase 3 ADVENT study as Clinical Trial Material (CTM)

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

A-1

Description

Crofelemer tablets are white, enteric film coated, oval-shaped tablets manufactured in two dosage strengths, [*] and [*] mg. These tablets are clinical supply materials for use in a double-blind clinical trial; therefore no identifiers are used to distinguish the two active strengths from the placebo. The target average weight for these tablets is between [*] and [*] mg. Tablets are packaged in
7-count blister strips which are contained in child-resistant, senior friendly tri-fold cards, for use in the clinical study.

The components of Crofelemer Tablets are presented below, along with the quality standard referenced for each ingredient and their function.

Crofelemer Tablet Components

Ingredient	Reference to Standard	Function
[*]	[*]	[*]

Synopsis of Formulation Development

[*]

Summary of solid oral dosage form development

Use	Formulation Type*	Excipients
[*]

* [*]

Crofelemer Tablets of two strengths, [*] and [*] mg, are manufactured, quality control tested and tested for stability at the following location:

[*]

Crofelemer Tablets ([*] and [*] mg) investigational drug products are packaged at the following location:

[*]

Crofelemer Tablets ([*] and [*] mg) investigational drug products are QA released for use in clinical trials by:

[*]

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

A-2

Control of Drug Product

Specifications

[*]

Stability Testing of Crofelemer Tablets

[*]

Nonclinical Plans

[*]

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

A-3

Budget Summary to sNDA filing for Crofelemer for the Treatment of Chronic HIV Diarrhea

[*]

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

A-4

Dedicated HIV Employees

Employee	Department	Salary (A)
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

A-5

[*]

[*]

Consultants

[*]

[*]

[*]

[*]

[*]

[*]

[*]

[*]

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

A-6

EXHIBIT B

Form of Pharmacovigilance Agreement

NAPO PHARMACEUTICALS, INC

And

SALIX PHARMACEUTICALS, Ltd.

Pharmacovigilance Agreement

Date: XXXXX (the “Effective Date”)

PARTIES:

1) SALIX PHARMACEUTICALS, Ltd. a company incorporated in California whose principal place of business is at 1700 Perimeter Park Drive, Morrisville, North Carolina 27560 (“Salix”); and

2) Napo Pharmaceuticals, Inc., a Delaware corporation having its principal place of business at 250 East Grand Avenue, Suite 90, South San Francisco, California 94080 (“Napo”).

RECITALS:

(A) Salix Pharmaceuticals, Ltd and Napo Pharmaceuticals, Inc, entered into a Collaboration Agreement on XXXXX.

(B) This Agreement describes the procedures, time frames, and responsibilities that the safety and pharmacovigilance departments of both parties will employ to assure compliance with applicable laws and regulations pertaining to safety reporting and its related activities.

(C) The relevant FDA and ICH regulations/guidelines, including but not limited to the following form the basis of the information to be exchanged between the parties:

a. ICH E2A, E2B, E2C, E2D

b. Title 21 of the Code of Federal Regulations, as amplified by relevant FDA Guidances, Compliance Program Guides, and other relevant regulatory materials will be adhered to in relation to any applicable US reporting requirements, including without limitation, 21 CFR 312.32 and 21 CFR 314.80.

1

OPERATIVE PROVISIONS

1. Definitions

In this Agreement:

“Adverse Event” means, subject to any amendment pursuant to the ICH from time to time, any untoward medical occurrence in a patient or clinical investigator subject administered the Product and which does not necessarily have a causal relationship with the treatment for which the Product is used. An adverse event can therefore be any unfavorable and unintended sign (including an abnormal laboratory finding), symptom, or disease temporarily associated with the use of a medicinal (investigational) product, whether or not related to the Product. A pre-existing condition which, worsened in severity after administration of the Product would be considered an adverse event.

“Adverse Reaction” means a response by a patient to the Product which is noxious and unintended and which occurs at doses normally used in man for prophylaxis, diagnosis, or therapy of disease or for the restoration, correction or modification of physiological function.

For the purposes of this document, Adverse Event and Adverse Reaction are synonymous.

“Affiliate” means any person that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with a Party, and for the purposes of this definition the term “control” and, with correlative meanings, the terms “controlled by” and “under common control with” shall mean the power to direct or cause the direction of the management or policies of a person whether through the ownership of voting securities, by contract, resolution, regulation or otherwise.

“Awareness Date” means, subject to any amendment pursuant to the ICH from time to time, the date on which that Party first becomes aware of an Adverse Event and in relation to a third Party Representative of a Party, such as clinical research organizations or distributors, that have contractual and/or regulatory obligations to report Adverse Events to that Party, the date on which such third Parties first become aware of that Adverse Event.

“Confidential Information” means any information which is disclosed pursuant to or in connection with this Agreement (whether oral, written, electronic or other form, and whether or not such information is expressly stated to be confidential or marked as such) but shall not include (i) the safety and pharmacovigilance information for the Product provided to NAPO in accordance with this Agreement or (ii) information provided by Salix to Napo concerning the Product which Salix expressly designates in writing as being for disclosure by NAPO to third parties.

“Effective Date” means the date of this Agreement set forth above.

2

“ICH” means International Conference on Harmonisation guidelines including (but not limited to) E2A, E2B, E2C, and E2D as amended and any replacement thereof from time to time.

“Marketing Authorization” means any authorization granted by a Regulatory Authority required to permit the commercial marketing and sale of the Product in the Territory.

“Party” means any one of the named parties to this Agreement. The parties may also be collectively referred to as the “Parties.”

“Product” means the Licensed Product or Licensed Compound as defined in the Collaboration Agreement.

“Reference Safety Information” means the recognized Adverse Reactions and other warnings or precautions relating to the Product contained in all or any of Salix’s approved product labeling, including the US Package Insert (USPI) or the most recent version of the Investigator Brochure (IB).

“Regulatory Approval” means all necessary regulatory and governmental approvals required to market and sell a Product in the Territory.

“Regulatory Authority” means any competent regulatory authority or other governmental body responsible for granting any Regulatory Approval.

“Report” means a report of an Adverse Event, Serious Adverse Event, Adverse Reaction or a Serious Adverse Reaction.

“Representatives” means the directors, officers, employees, agents, and advisors of each of the Parties or their respective Affiliates.

“Safety Issue” means any significant Product or therapeutic device issues, including those originating from: requests from regulatory authorities, potential changes in the risk/benefit of a Product, Product quality issues which may have a clinical impact (e.g. Product contamination, deterioration or defects); external influences (media, literature), and ongoing safety surveillance.

“Serious Adverse Event” or “Serious Adverse Reaction” means, subject to any amendment pursuant to the ICH from time to time, any Adverse Event or Adverse Reaction that at any dose:

(i) results in death;

(ii) is life-threatening;

(iii) requires in-patient hospitalization or prolongation of existing hospitalization;

(iv) results in persistent or significant disability or incapacity;

3

(v) is a congenital anomaly or birth defect; or

(vi) requires intervention (devices only)

Medical and scientific judgment should be exercised in deciding whether expedited reporting for the Product is appropriate in other situations, such as medically important events that may not be immediately life-threatening or result in death or hospitalization but may jeopardize the patient or may require intervention to prevent one of the other outcomes listed above. These should also usually be considered as Serious Adverse Events.

“Signal” means, an observation of possible unexpected hazards or changes in the severity, characteristics or frequency of expected Adverse Reactions that emerge, the relevant information for which needs to be brought together for effective evaluation over a timescale appropriate to the importance and likely impact of the signal.

“Solicited Reports” means those Reports that are derived from organized data collection systems, which include clinical trials, registries, post-approval named patient use programs, other patient support and disease management programs, surveys of patients or healthcare providers or information gathering on efficacy or patient compliance. Adverse Event Reports from these should not be considered spontaneous.

“Spontaneous Report” means, subject to any amendment pursuant to the ICH from time to time, any unsolicited communication to a party, Regulatory Authority or other person that describes an Adverse Event or an Adverse Drug Reaction in a patient administered the Product, whether alone or together with one or more other medicinal products, and which does not derive from a study or any organized data collection scheme. Spontaneous reports include reports from health care professionals (medically confirmed reports) and non-health care professionals or consumers (medically unconfirmed reports). All spontaneous reports received from consumers or health care professionals are considered as suspected Adverse Drug Reactions. Cases originating from the internet where the website is under the Marketing Authorization Holder’s management or responsibility should be screened for potential adverse reactions by the appropriate Party. Other types of spontaneous reports with or without associated adverse events including overdose, medication errors and lack of efficacy reports should be exchanged, due to periodic reporting requirements. Other types of reports that qualify for expedited reporting include solicited reports generated by marketing programs or other methods used to encourage contact between the consumers and either Napo or Salix, where the information has been obtained additionally to the main purpose of the program, and would most likely not have been the subject of voluntary reporting to a health care professional or the company. Prospective and retrospective exposure in utero or during breastfeeding spontaneous reports are collected and followed up to obtain outcome information.

“Term” means the term of this Agreement commencing on the Effective Date and expiring on the date set out in Section 10 of this Agreement.

4

“Unexpected Adverse Event/Reactions” means, subject to any amendment pursuant to the ICH from time to time, an Adverse Event or an Adverse Reaction which by its nature or severity is not consistent with information in the then current Reference Safety Information.

“Valid Safety Reports” means, subject to any amendment pursuant to the ICH from time to time, the minimum information required for expedited reporting which should at least include all of the following:

(i) an identifiable patient;

(ii) a suspected medicinal product or therapeutic device;

(iii) an identifiable reporter; and

(iv) an Adverse Reaction or an Adverse Event.

2. Purpose

In consideration of the mutual obligations contained in this Agreement, the Parties have agreed to provide for the procedures relating to the exchange of safety and pharmacovigilance information for the Product between NAPO and Salix in order to aid each of them in ensuring compliance with good pharmacovigilance practices and maintaining compliance with the worldwide reporting requirements of the relevant Regulatory Authorities for the Product. The Recitals set forth above are true and correct and incorporated herein by reference.

3. Scope

This Agreement covers:

• all Spontaneous Reports and/or Solicited Reports of Adverse Events in relation to the Product;

• all Serious Adverse Reactions arising from clinical trials and post-marketing surveillance (PMS) with the Product;

• all information required for periodic reporting in relation to the Product; and

• the reporting of all other information as required by Regulatory Authorities for the Product.

• safety issues and signals

4. Language

The language of all information exchanged pursuant to this Agreement, including reports to Regulatory Authorities, shall be in English, or if any other language, accompanied by a translation into English. In the event of any conflict between the English text and the text in any other language, the English text shall prevail.

5

5. Contact Personnel and Methods for Adverse Event Transmission

The names and details of contact personnel for NAPO and Salix are detailed in Schedule 1 attached hereto and incorporated herein by reference.

Any changes in names or details of any of the contact personnel for a Party in relation to the Product must be notified by that Party to the other Party in writing to the address set out in Schedule 1 as soon as reasonably practical after the change occurs.

Any notice given under this Agreement shall be in writing and (i) personally delivered or (ii) sent by fax or (iii) e-mail to the address of the other Party as set out in Schedule 1 (or such other address as may have been notified in writing from time to time by a Party to the other Party) and any such notice shall be deemed to have been served at the time of delivery (if personally delivered) or upon receipt of confirmation of transmission by the sender’s fax machine (if sent by fax) and upon receipt of delivery confirmation by the sender’s computer (if sent by e-mail).

6. Notification of Adverse Event and Serious Adverse Event Information

A. All notification and response periods referred to in this Agreement (unless otherwise specified) will be in calendar days.

B. The relevant period for any notification or response for either Party (including their Representative) will commence on the Awareness Date.

C. Notifications shall be made via original source documents, on CIOMS I forms, or on MedWatch forms.

D. Each report should be recorded as stated by the reporter using actual, as reported, verbatim terms.

E. Clinical trial reports will be unblinded prior to forwarding to Salix.

F. Each Party shall ensure that its facilities to receive notices for any Safety Issue or Signal under this Agreement are available on a 24-hour/ 7 days per week basis.

G. Each Party shall use every effort to ensure that all Reports of Adverse Events or Serious Adverse Events meet the minimum criteria for a Valid Safety Report. If the minimum information cannot be obtained within the required timeframes, each Party shall still send the Report to the other Party within such timeframes. Every effort should then be made to obtain and send the missing minimum information required for a Valid Safety Report as soon as reasonably possible.

H. Napo shall send reports to the contacts listed in Schedule 1 of this Agreement. Salix shall confirm receipt of reports within two (2) business days.

6.1 Napo Responsibilities

6.1.1 Napo will be responsible for collecting and forwarding to Salix any Serious Adverse Events or reports of pregnancy occurring in Napo sponsored or Napo

6

conducted clinical trials. Napo will be responsible for conducting follow-up activities for these reports and all follow-up information should also be forwarded to Salix. Initial and follow-up reports should be submitted by Napo to Salix within the following timeframes of the Awareness Date:

(a) All Serious Adverse Events that result in death and/or are lifethreatening reports (per the definition of a Serious Adverse Event/Reaction) should be forwarded to Salix within two (2) calendar days.

(b) All other Serious Adverse Events should be forwarded to Salix within five (5) calendar days.

6.1.2 Napo will also be responsible for forwarding to Salix any spontaneously reported Adverse Event or Serious Adverse Event, lack of efficacy, or pregnancy reports received by Napo from any source. Reports should be submitted by Napo to Salix within 24 hours of the Awareness Date.

7. SAFETY ISSUES OR SIGNALS AND REGULATORY INQUIRIES INVOLVING SAFETY ISSUES

7.1 Napo shall as soon as reasonably possible notify Salix of any Safety Issues or Signals in relation to the Product by telephone and in writing. Salix and Napo shall co-operate with the reasonable requests of the other Party in relation to such issues. Safety Issues or Signals relating to the Product may occur as a result of: a request from a Regulatory Authority; potential changes to the risk/benefit of the Product; Product quality issues that may have a clinical impact such as a Product contamination or deterioration; external influences such as media or literature; and ongoing safety surveillance.

7.2 Napo shall as soon as reasonably possible and in any event within two (2) calendar days inform Salix of any inquiries from any Regulatory Authority involving Safety Issues or Signals in relation to the Product.

7.3 Salix will be responsible for maintaining the safety labeling text for the Product in accordance with the laws, rules, regulations and guidances applicable to the Marketing Authorization(s) for the Product.

8. REGULATORY AUTHORITY INTERACTION

Salix for assessing whether individual reports meet the criteria set out in applicable legislation and guidance relating to safety reporting and require a submission to a relevant Regulatory Authority. Salix will be responsible for reporting all qualifying reports for the Product to the relevant Regulatory Authorities.

9. CONFIDENTIALITY

Each Party agrees and undertakes that it will treat and keep confidential all Confidential Information of the other Party which may become known to such Party.

7

Each Party shall:

• not disclose any Confidential Information to any person or entity other than any of its directors, agents or employees who need to know such information in order to implement the provisions of this Agreement;

• not use any Confidential Information other than for the purpose of complying with its obligations under or to enjoy the benefits of this Agreement; and

• procure that any person to whom any Confidential Information is disclosed by it is bound by written obligations of confidentiality no less restrictive than as set forth in this Section 9.

Notwithstanding the other provisions of this Section 9, either Party may disclose any Confidential Information:

A. if and to the extent required by law provided in the case of disclosure that it has provided the other Party with prior written notice of such required disclosure to enable the other Party to seek protection or confidential treatment of such Confidential Information;

B. if and to the extent required by any securities exchange, regulatory or governmental body to whom that Party is subject, wherever situated;

C. if and to the extent the information is public knowledge or already known to that Party at the time of disclosure or subsequently becomes public knowledge other than by breach of this Agreement or subsequently comes lawfully into the possession of that Party from a third party which is itself not subject to obligations of confidence to the disclosing party or any of its Affiliates; or

D. if and to the extent that the other Party has given prior written consent to the disclosure.

The restrictions contained in this Section 9 shall survive the termination or expiration of this Agreement without limit to time.

10. DURATION AND TERMINATION

This Agreement commences on the Effective Date and shall continue in force until the License Agreement is terminated or expires and this Agreement shall immediately terminate on such date and the provisions set out in Section 11 of this Agreement shall apply.

11. CONSEQUENCES OF TERMINATION

11.1 Upon termination or expiration of this Agreement, NAPO shall:

(a) continue to comply with its obligations under this Agreement if and to the extent it continues to have the right to sell the Product after the expiry or termination of the License Agreement; and

8

(b) comply with its obligations in Section 6, 6.1, 6.3 and 6.4 for a period of 18 months after the termination or expiration of this Agreement.

11.2 The termination or expiry of this Agreement shall not release either of the Parties from any liability which at the time of termination or expiry has already accrued to the other Party, nor affect in any way the survival of any other right, duty or obligation of the Parties which is expressly stated elsewhere in this Agreement to survive such termination or expiry.

12. LIABILITY

Neither Party shall in any circumstances have any liability whatsoever to the other Party from any indirect or consequential loss (including, without limitation, loss of profit, revenue or goodwill and whether or not arising out of any liability of that Party to any other person) even if advised of the possibility of such damages.

13. FORCE MAJEURE

13.1 Neither of the Parties shall have any liability whatsoever or be deemed to be in default for any delays in any performance or any non-performance of any obligations under this Agreement if and to the extent that such delay or nonperformance is owing to acts beyond the control of that Party, including but not limited to acts of God, war, terrorism, or national emergency, accident, fire, riot, strikes, lock-outs, industrial disputes or epidemics (“Force Majeure”). This Section only applies if:

• the claiming Party could not have avoided the effect of the Force Majeure by taking precautions which, having regard to all matters known to it before the occurrence of the Force Majeure and all relevant factors, it ought reasonably to have taken but did not take;

• the claiming Party has used reasonable efforts to mitigate the effect of the Force Majeure and to carry out its obligations under this Agreement in any other way that is reasonably practicable; and

• the claiming party shall promptly notify the non-claiming Party of the nature and the extent of the circumstances giving rise to the Force Majeure.

14. GENERAL PROVISIONS

14.1 If a Party becomes aware of any changes of law or regulation, which affects any of the matters that are the subject of this Agreement, it shall notify the other Party of any such change. The Parties shall promptly meet and discuss any such changes and negotiate in good faith any amendments to this Agreement, which either Party honestly believes are necessary

9

or desirable as a result of such changes.

14.2 Changes in applicable personnel and methods of communication must be communicated to both Parties, to ensure the correct and timely flow of information.

14.3 Except as expressly provided for in this Agreement, no variation to the terms of this Agreement shall be effective unless in writing and signed on behalf of each Party by an authorized person.

14.4 If any term or provision of this Agreement is held by any court or other competent authority to be void or unenforceable in whole or in part, the other provisions of this Agreement and the remainder of the affected provision shall continue to be valid.

14.5 Failure by either party on one or more occasions to avail itself of a right conferred by this Agreement shall not be construed as a waiver of such Party’s right to enforce such right or any other right.

14.6 This Agreement and the License Agreement contain the entire agreement and understandings between the Parties with respect to the subject matter of this Agreement. Each Party acknowledges that, in entering into this Agreement, it is not relying on any representation or warranty (whether made orally or in writing) except as expressly provided in this Agreement and the License Agreement.

14.7 Nothing in this Agreement is deemed to constitute a partnership between the Parties nor constitute any Party the agent of the other Party for any purpose.

14.8 The parties to this Agreement do not intend that any term of this Agreement should be enforceable by any person who is not party to this Agreement.

14.9 The rights and remedies of each of the Parties under or pursuant to this Agreement are cumulative, may be exercised as often as such party considers appropriate and are in addition to its rights and remedies under general law.

14.10  Each of the Parties shall do, execute and perform and shall procure to be done, executed and performed all such further acts, deeds, documents and things as the other Party may reasonably require from time to time to give full effect to the terms of this Agreement.

14.11  This Agreement may be executed in any number of counterparts and by the Parties to it on separate counterparts, each of which shall be deemed an original but all of which together constitute one and the same instrument.

14.12  Capitalized terms used but not defined herein shall have the respective meaning set forth in the License Agreement.

10

IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the Effective Date by their duly authorized representatives.

SALIX PHARMACEUTICALS, INC.

By:

Print Name:

Print Title:

NAPO

By:

Print Name:

Print Title:

11

SCHEDULE 1

Contact information

For Salix Pharmaceuticals, Inc:

Karen Dillinger, RN

Director, Product Safety

Salix Pharmaceuticals

1700 Perimeter Park Dr.

Morrisville, NC 27560

Tel. 919-447-3179

E-mail: karen.dillinger@salix.com

Salix Safety Department Fax 888-314-5934

Salix Safety Department Email: adverse.events@salix.com

For Napo:

B - 1

EX-10.65

Exhibit 10.65

* Portions of this document marked [*] are requested to be treated confidentially.

EXECUTION COPY

MANUFACTURING AND SUPPLY AGREEMENT

between

SALIX PHARMACEUTICALS, INC.

and

GLENMARK PHARMACEUTICALS LTD.

Dated as of December 9, 2008

TABLE OF CONTENTS

ARTICLE I.          DEFINITIONS.......................................................................................................................................................		1
ARTICLE II.         MANUFACTURING.............................................................................................................................................		8
2.1	Supply Obligations.....................................................................................................................................................	8
2.2	Forecasting, Order and Delivery of Compound..........................................................................................................	8
2.3	Raw Materials.............................................................................................................................................................	9
2.4	Invoice and Payment...................................................................................................................................................	10
2.5	Price............................................................................................................................................................................	10
2.6	Warranty......................................................................................................................................................................	12
2.7	Failure or Inability to Supply Compound...................................................................................................................	12
2.8	Limitations of Current Capacity..................................................................................................................................	14
2.9	Costs and Expenses.....................................................................................................................................................	15
2.10	Amendment of Specifications.....................................................................................................................................	15
2.11	Quality Agreement......................................................................................................................................................	16
2.12	Quality Control Analyses and Release.......................................................................................................................	16
2.13	Maintenance of Facility..............................................................................................................................................	16
2.14	Regulatory Cooperation of Glenmark.........................................................................................................................	17
2.15	Inspection by Salix......................................................................................................................................................	17
2.16	Notification of Regulatory Inspections; Communications.........................................................................................	17
2.17	Recalls and Withdrawals............................................................................................................................................	17
2.18	Compliance with Applicable Laws.............................................................................................................................	18
2.19	Retention of Manufacturing Records and Samples....................................................................................................	18
2.20	No Other Supply.........................................................................................................................................................	19
2.21	Shortages.....................................................................................................................................................................	19
2.22	Second Source.............................................................................................................................................................	19
ARTICLE III.         GLOBAL COORDINATION...............................................................................................................................		19
3.1	Global Cooperation and Coordination........................................................................................................................	19
3.2	Consultation................................................................................................................................................................	20
3.3	Regulatory Matters.....................................................................................................................................................	20
3.4	Trademarks.................................................................................................................................................................	21
ARTICLE IV.         INTELLECTUAL PROPERTY............................................................................................................................		21
4.1	Ownership...................................................................................................................................................................	21
4.2	Patent Maintenance and Prosecution..........................................................................................................................	23
4.3	Enforcement of Invention Patents...............................................................................................................................	25
4.4	Third Person Litigation...............................................................................................................................................	26
4.5	Third Party Licenses...................................................................................................................................................	27
ARTICLE V.         REPRESENTATIONS AND WARRANTIES; COVENANTS............................................................................		27
5.1	Representations and Warranties of Each Party..........................................................................................................	27
5.2	Additional Warranties and Covenants of Glenmark...................................................................................................	28
5.3	Disclaimer of Other Warranties..................................................................................................................................	28

-i-

ARTICLE VI.         CONFIDENTIALITY..........................................................................................................................................		29
6.1	Confidential Information............................................................................................................................................	29
6.2	Exceptions to Confidentiality.....................................................................................................................................	29
6.3	Disclosure...................................................................................................................................................................	30
6.4	Notification.................................................................................................................................................................	30
6.5	Remedies.....................................................................................................................................................................	30
6.6	Use of Names..............................................................................................................................................................	30
6.7	Press Releases.............................................................................................................................................................	31
ARTICLE VII.         TERM AND TERMINATION............................................................................................................................		31
7.1	Term............................................................................................................................................................................	31
7.2	Termination.................................................................................................................................................................	31
7.3	Effect of Expiration or Termination...........................................................................................................................	32
ARTICLE VIII.         INDEMNIFICATION.......................................................................................................................................		33
8.1	Glenmark Indemnification..........................................................................................................................................	33
8.2	Salix Indemnification..................................................................................................................................................	34
8.3	Indemnification Procedure..........................................................................................................................................	34
8.4	Insurance.....................................................................................................................................................................	36
8.5	Limitation on Damages...............................................................................................................................................	37
ARTICLE IX.         MISCELLANEOUS............................................................................................................................................		37
9.1	Notices........................................................................................................................................................................	37
9.2	Force Majeure.............................................................................................................................................................	38
9.3	Entire Agreement; Amendment..................................................................................................................................	39
9.4	Further Assurances.....................................................................................................................................................	39
9.5	Successors and Assigns..............................................................................................................................................	39
9.6	Dispute Resolution......................................................................................................................................................	39
9.7	Governing Law; Jurisdiction; Venue; Service............................................................................................................	39
9.8	Third Party Beneficiaries............................................................................................................................................	40
9.9	Export Control............................................................................................................................................................	40
9.10	Assignment.................................................................................................................................................................	40
9.11	Waiver.........................................................................................................................................................................	41
9.12	Severability.................................................................................................................................................................	41
9.13	Independent Contractors.............................................................................................................................................	41
9.14	Construction................................................................................................................................................................	42
9.15	Remedies.....................................................................................................................................................................	42
9.16	Counterparts; Facsimile Execution.............................................................................................................................	42
9.17	English Language........................................................................................................................................................	42
9.18	Attorneys’ Fees...........................................................................................................................................................	43

Schedules and Exhibits
Schedule 1.6	Capped Price
Schedule 1.17	Current Capacity
Schedule 1.31	Fully-Allocated Manufacturing Costs
Schedule 1.40	Glenmark Territory

ii

Schedule 1.81	Specifications
Schedule 2.2(c)	Full Production Lot Size
Schedule 2.5(c)	Fixed Price
Schedule 2.5(d)	Compensation to Glenmark for Use of Third Party Manufacturer
Schedule 2.8(c)	Compound Equipment Usage
Exhibit A	Example of Scale-Up Plans

iii

This MANUFACTURING AND SUPPLY AGREEMENT (this “Agreement”), dated as of December 9, 2008 (the “Effective Date”), is made by and between Salix Pharmaceuticals, Inc., a Delaware corporation (“Salix”), and Glenmark Pharmaceuticals Ltd., a corporation organized under the laws of India (“Glenmark”). Salix and Glenmark are sometimes referred to herein individually as a “Party” and collectively as the “Parties.”

RECITALS

WHEREAS, subject to the terms and conditions set forth in this Agreement, Salix wishes to have Glenmark manufacture and supply the Compound (as defined below) for Salix, and Glenmark wishes to manufacture and supply, or have manufactured and supplied through its Affiliate, Glenmark Generics Ltd., the Compound for Salix.

NOW, THEREFORE, in consideration of the foregoing premises, the mutual promises and covenants of the Parties contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties, intending to be legally bound, do hereby agree as follows:

ARTICLE I. DEFINITIONS

As used herein, the following terms shall have the following meanings:

1.1 “Actual Cost” has the meaning set forth in Section 2.5(a).

1.2 “Affiliate” of a Person means any other Person that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with, such first Person. “Control” and, with correlative meanings, the terms “controlled by” and “under common control with”, means to possess the power to direct the management or policies of a Person, whether through ownership of voting securities or by contract or otherwise.

1.3 “Agreement” has the meaning set forth in the preamble hereto.

1.4 “Applicable Law” means applicable laws, rules and regulations, including any rules, regulations, guidelines or other requirements of Regulatory Authorities, that may be in effect from time to time.

1.5 “Calendar Year” means each successive period of twelve (12) consecutive calendar months commencing on January 1 and ending on December 31, except that the first Calendar Year of the Term shall commence on the Effective Date and end on December 31, 2008 and the last Calendar Year of the Term shall commence on January 1 of the year in which the Term ends and end on the last day of the Term.

1.6 “Capped Price” has the meaning set forth in Schedule 1.6.

1.7 “Certificate of Analysis” has the meaning set forth in the Quality Agreement.

1.8 “Certificate of Compliance” has the meaning set forth in the Quality Agreement.

1.9 “CMC Data” means the chemistry, manufacturing and controls data required by Applicable Law to be included in a New Drug Application (as defined in the FFDCA and the regulations promulgated thereunder) for a Product or in any other Marketing Authorization outside the United States.

1.10 “Compound” means oligomeric proanthocyanidin (OPC) of varying chain lengths with an average molecular weight of approximately 2000 daltons (Crofelemer) meeting the Specifications.

1.11 “Compound Equipment” means the Napo-Provided Equipment and the Scale-Up Equipment.

1.12 “Compound Invention Patents” has the meaning set forth in Section 4.2(a)(i).

1.13 “Compound Inventions” means any and all Inventions relating to the Compound or any derivatives thereof or other compounds related thereto, that are conceived, discovered, developed or otherwise made, solely by a Party or jointly by or on behalf of the Parties as a result of or in connection with this Agreement, but excluding the Glenmark Inventions.

1.14 “Confidential Information” means any and all information or material that, at any time before or after the Effective Date, has been or is provided or communicated to the Receiving Party by or on behalf of the Disclosing Party pursuant to this Agreement or in connection with the transactions contemplated hereby or any discussions or negotiations with respect thereto; any data, ideas, concepts or techniques contained therein; and any modifications thereof or derivations therefrom. Confidential Information may be disclosed either orally, visually, electronically, in writing, by delivery of materials containing Confidential Information or in any other form now known or hereafter invented; provided, however, that notwithstanding the Party that disclosed such information or material, (a) all information and materials regarding the Compound, including the Specifications, Salix Information, and Compound Inventions, shall be Confidential Information of Salix and not the Confidential Information of Glenmark, and Salix will be deemed to be the Disclosing Party, and Glenmark will be deemed to be the Receiving Party, with respect thereto, and (b) Glenmark Information shall be Confidential Information of Glenmark and not the Confidential Information of Salix, and Glenmark will be deemed to be the Disclosing Party, and Salix will be deemed to be the Receiving Party, with respect thereto.

1.15 “Courts” has the meaning set forth in Section 9.7(b).

2

1.16 “CPL” means crude plant latex of croton lechleri that meets the Specifications.

1.17 “Current Capacity” means the capacity of Glenmark’s equipment and process in place as of the Effective Date to conduct the Manufacturing process, as set forth on Schedule 1.17, unless and until increased pursuant to a Scale-Up Plan.

1.18 “Disclosing Party” means the Party disclosing Confidential Information.

1.19 “Dispute” has the meaning set forth in Section 9.6.

1.20 “Drug Master File” means any drug master file filed with the FDA with respect to a Product, and any equivalent filing in other countries or regulatory jurisdictions.

1.21 “Effective Date” has the meaning set forth in the preamble hereto.

1.22 “European Union” or “EU” means the economic, scientific and political organization of member states of the European Union, and which, as of the Effective Date, consists of Austria, Belgium, Bulgaria, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, The Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the United Kingdom, and that certain portion of Cyprus included in such organization.

1.23 “Excluded Lists” means the United States Department of Health and Human Service’s List of Excluded Individuals/Entities and the General Services Administration’s Lists of Parties Excluded from Federal Procurement and Non-Procurement Programs.

1.24 “Exploit” means to make, have made, import, use, sell, offer for sale or otherwise dispose of a compound, product or process, including all discovery, research, development, commercialization, registration, modification, enhancement, improvement, Manufacture, storage, formulation, optimization, exportation, transportation, distribution, promotion and marketing of such compound, product or process.

1.25 “Facility” means the Manufacturing facility of Glenmark’s Affiliate, Glenmark Generics Ltd., located at 3109, GIDC Industrial Estate, Ankleshwar, India 393 002.

1.26 “FDA” means the United States Food and Drug Administration and any successor agency thereto.

1.27 “FFDCA” means the United States Federal Food, Drug, and Cosmetic Act, as amended.

1.28 “Firm Forecast” has the meaning set forth in Section 2.2(b).

3

1.29 “Fixed Price” has the meaning set forth in Section 2.5(c).

1.30 “Forecast” has the meaning set forth in Section 2.2(b).

1.31 “Fully-Allocated Manufacturing Cost” or “FAMC” has the meaning set forth in Schedule 1.31.

1.32 “Glenmark” has the meaning set forth in the preamble hereto.

1.33 “Glenmark Activities” has the meaning set forth in Section 2.8(c).

1.34 “Glenmark Indemnified Parties” has the meaning set forth in Section 8.2.

1.35 “Glenmark Information” means all technical, scientific and other know-how and information, trade secrets, knowledge, technology, means, methods, processes, practices, formulae, instructions, skills, techniques, procedures, technical assistance, designs, assembly procedures, specifications, assays, test methods, analytical methods, and other material or information owned or controlled by Glenmark and its Affiliates and necessary or useful for the Manufacture of the Compound, excluding Glenmark Inventions.

1.36 “Glenmark Invention Patents” has the meaning set forth in Section 4.2(b)(i).

1.37 “Glenmark Inventions” has the meaning set forth in Section 4.1(b).

1.38 “Glenmark Policies” has the meaning set forth in Section 8.4(b).

1.39 “Glenmark-Supplied Material” means all ingredients, raw materials, packaging and labeling components, and all other supplies of any kind used in connection with Manufacturing the Compound, excluding the Salix-Supplied Material.

1.40 “Glenmark Territory” shall mean the countries set forth on Schedule 1.40.

1.41 “GMP” means current good manufacturing practices as required under the FFDCA and as set forth by the FDA in regulations promulgated at 21 C.F.R. Parts 210 and 211, and in applicable FDA guidance and policy documents.

1.42 “Hatch-Waxman Act” means the Drug Price Competition and Patent Term Restoration Act of 1984, as amended.

1.43 “Indemnification Claim Notice” has the meaning set forth in Section 8.3(a).

1.44 “Indemnified Party” has the meaning set forth in Section 8.3(a).

1.45 “Indemnifying Party” has the meaning set forth in Section 8.3(a).

4

1.46 “Informational Forecast” has the meaning set forth in Section 2.2(a).

1.47 “Invention” means any discovery, improvement, process, formula, data, invention, know-how, trade secret, procedure, device, or other intellectual property, whether or not patentable, including any enhancement in the manufacture, formulation, ingredients, preparation, presentation, means of delivery, dosage or packaging of a compound or product or any discovery or development of a new indication for a compound or product.

1.48 “Joint Invention Patents” has the meaning set forth in Section 4.2(c)(i).

1.49 “Joint Inventions” means any manufacturing technique, process or Compound derivative that is not derived from or based on the Specifications, any Salix Information, Compound Invention or Glenmark Information that is conceived, discovered, developed or otherwise made, jointly by or on behalf of the Parties as a result of or in connection with this Agreement, but excluding the Glenmark Inventions.

1.50 “Launch Date” means the first date on which Salix anticipates requiring supply of Compound hereunder in order to make Product available for commercial sale or distribution.

1.51 “Losses” has the meaning set forth in Section 8.1.

1.52 “Manufacture” and “Manufacturing” means (a) the manufacturing, processing, formulating, packaging, labeling, holding, storage, warehousing, and quality control testing of a pharmaceutical product or compound and (b) the holding, storage or warehousing of raw materials, finished product or work in process.

1.53 “Marketing Authorization” means an approved New Drug Application as defined in the FFDCA and the regulations promulgated thereunder, or any corresponding foreign application, registration or certification, necessary or reasonably useful to market any Product in a country or regulatory jurisdiction in the Territory other than the United States, including applicable pricing and reimbursement approvals.

1.54 “Material(s)” means the Glenmark-Supplied Material and the Salix-Supplied Material.

1.55 “Napo” means Napo Pharmaceuticals, Inc.

1.56 “Napo-Glenmark Agreement” means that certain Collaboration Agreement entered into on July 2, 2005, by and between Glenmark and Napo, as amended through the Effective Date.

1.57 “Napo-Provided Equipment” has the meaning set forth in Section 2.8(b).

1.58 “Other Product Entry” has the meaning set forth in Section 7.2(c)(iii).

1.59 “Party” and “Parties” has the meaning set forth in the preamble hereto.

5

1.60 “Patents” means the Compound Invention Patents, the Glenmark Invention Patents and the Joint Invention Patents.

1.61 “Person” means an individual, sole proprietorship, partnership, limited partnership, limited liability partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture or other similar entity or organization, including a government or political subdivision, department or agency of a government.

1.62 “Policies” means the Glenmark Policies and the Salix Policies.

1.63 “Product” means a pharmaceutical product that contains the Compound as an active ingredient.

1.64 “Purchase Order” means a written purchase order that sets forth, with respect to the period covered thereby, (a) the quantities of Compound to be delivered by Glenmark to Salix and (b) the required delivery dates therefor.

1.65 “Purchase Price” has the meaning set forth in Section 2.5(a).

1.66 “Quality Agreement” means the quality assurance agreement to be agreed between the Parties relating to the Manufacture of the Compound in accordance with Section 2.11, as such agreement shall be amended from time to time.

1.67 “Recalls” shall have the meaning set forth in Section 3.3(e).

1.68 “Receiving Party” means the Party receiving Confidential Information.

1.69 “Recipients” has the meaning set forth in Section 6.1.

1.70 “Regulatory Approval” means, with respect to any particular country, any and all approvals, licenses, registrations or authorizations of any Regulatory Authority necessary for the Exploitation of a Product in such country (or, if applicable, the EU), including, where applicable, (a) approval of a Product in such country (or, if applicable, the EU), including any Marketing Authorization and supplements and amendments thereto; (b) pre- and post-approval marketing authorizations (including any prerequisite Manufacturing approval or authorization related thereto); (c) labeling approval; and (d) technical, medical and scientific licenses.

1.71 “Regulatory Authority” means any applicable supra-national, federal, national, regional, state, provincial or local regulatory agencies, departments, bureaus, commissions, councils or other government entities regulating or otherwise exercising authority with respect to the Exploitation of the Compound or a Product in any country or jurisdiction in the Specified Territory.

1.72 “Regulatory Documentation” means (a) submissions to any Regulatory Authority, including investigational new drug applications, New Drug Applications (as defined in the FFDCA and the regulations promulgated thereunder), Drug Master Files,

6

correspondence with regulatory agencies (registrations and licenses, regulatory drug lists, advertising and promotion documents), period safety update reports, adverse event files, complaint files and manufacturing records and, if applicable, any updates or supplements to any of the foregoing, (b) any minutes or contact logs with respect to any telephone conferences conducted with any Regulatory Authority relating to the subject matter described in Section 1.72(a) and (c) any written correspondence received from any Regulatory Authority.

1.73 “Salix” has the meaning set forth in the preamble hereto.

1.74 “Salix Indemnified Parties” has the meaning set forth in Section 8.1.

1.75 “Salix Information” means all technical, scientific and other know-how and information, trade secrets, knowledge, technology, means, methods, processes, practices, formulae, instructions, skills, techniques, procedures, technical assistance, designs, assembly procedures, specifications, assays, test methods, analytical methods, and other material or information owned or controlled by Salix and its Affiliates and necessary or useful for the Manufacture of the Compound.

1.76 “Salix Policies” has the meaning set forth in Section 8.4(a).

1.77 “Salix-Supplied Material” means the CPL used in connection with Manufacturing the Compound.

1.78 “Scale-Up Equipment” has the meaning set forth in Section 2.8(c).

1.79 “Scale-Up Plan Effective Date” has the meaning set forth in Section 2.8(c).

1.80 “Scale-Up Plans” means the adaptations, scale-ups or improvements to Glenmark’s Manufacturing equipment or process, and any required investments relating thereto, in order to satisfy Salix’s anticipated annual requirements in excess of the Current Capacity. A non-binding example of such proposal is set forth on Exhibit A.

1.81 “Specifications” means, with respect to the Compound, those Compound-related specifications set forth on Schedule 1.81 and, with respect to CPL, those CPL-related specifications set forth on Schedule 1.81, in each case as the same may be amended from time to time in accordance with the terms hereof.

1.82 “Specified Territory” means the United States, the EU and India, together with such additional countries or territories as may be agreed by the Parties pursuant to written amendment to this Agreement. The Parties agree that upon the proposal by Salix of additional countries or territories to be included in the definition of “Specified Territory,” they will negotiate in good faith in respect of the inclusion of such additional countries or territories in such definition, including with respect to the appropriate allocation between the Parties of any additional costs anticipated as a result thereof.

7

1.83 “Territory” means the entire world.

1.84 “Term” has the meaning set forth in Section 7.1.

1.85 “Testing Expert” has the meaning set forth in Section 2.7(d).

1.86 “Third Party Claim” has the meaning set forth in Section 8.3(b).

1.87 “Third Party Manufacturer” means any Third Party manufacturer of the Compound designated by Salix, other than an Affiliate of Glenmark.

1.88 “Third Party Manufacturer License” means the license described in Schedule 1.88.

1.89 “United States” means the United States of America.

ARTICLE II. MANUFACTURING

2.1 Supply Obligations. Subject to the terms and conditions hereof, Glenmark shall Manufacture or have Manufactured by its Affiliate, Glenmark Generics Ltd., and supply to Salix, and Salix shall purchase from Glenmark, such quantities of Compound as Salix may order pursuant to Purchase Orders in accordance with the terms hereof from time to time during the Term.

2.2 Forecasting, Order and Delivery of Compound.

(a) At least [*] days prior to the first day of each Calendar Year during the Term commencing with the Calendar Year in which the Launch Date is anticipated to occur, Salix shall deliver to Glenmark a written good faith forecast estimating, on a quarterly basis, the quantities of Compound that Salix expects to purchase from Glenmark during such Calendar Year (each, an “Informational Forecast”); provided that in the event that the Launch Date is anticipated to occur in Calendar Year [*], Salix shall deliver to Glenmark the Informational Forecast in respect of Calendar Year [*] on a date reasonably agreed by the Parties. Each Informational Forecast shall be non-binding and shall be used by Glenmark for planning purposes only.

(b) On or before the fifteenth (15th) day of each month, commencing at least [*] months prior to the month in which the Launch Date is anticipated to occur, Salix shall deliver to Glenmark a written good faith forecast estimating the quantities of Compound that Salix expects to purchase from Glenmark for each month during the following [*] months (each, a “Forecast”). The [*] months of each Forecast shall be a “Firm Forecast”. Except as provided in Section 2.2(c), each Forecast shall be non-binding and shall be used by Glenmark for planning purposes only.

(c) Without duplication of any previously delivered Purchase Order, each Firm Forecast shall be accompanied by a Purchase Order for Compound to be

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

8

delivered to Salix during each of the [*] months, respectively, set forth in such Firm Forecast. The quantity of Compound specified in any Purchase Order for delivery in any month (i) shall be in multiples of the full production lots of Compound set forth on Schedule 2.2(c) and (ii) shall not be less than [*] percent ([*]%) nor more than [*] percent ([*]%) of the quantities specified in any previous Firm Forecast applicable to such month. In no event shall the delivery date of Compound for any Purchase Order be less than [*] months from the date of the Purchase Order; provided, however, that such period shall be shortened to [*] months so long as Salix has fulfilled its obligations under Section 2.3(b) to provide to Glenmark the Salix-Supplied Material in respect of such Purchase Order.

(d) Glenmark shall, within [*] business days after Glenmark receives each Purchase Order submitted in accordance with Section 2.2(c), accept in writing such Purchase Order. Glenmark shall be deemed to have accepted such Purchase Order if such Purchase Order is not rejected in writing by Glenmark in such [*] business day period. Salix shall be obligated to purchase, and Glenmark shall be obligated to deliver by the required delivery date set forth therein, such quantities of Compound as are set forth in each Purchase Order. In the event that the terms of any Purchase Order are not consistent with or are in addition to the terms of this Agreement, the terms of this Agreement shall prevail.

(e) Glenmark shall deliver the quantities of Compound set forth in each Purchase Order by the required delivery date set forth in such Purchase Order DDU (as defined in Incoterms 2000) the port of entry in any Specified Territory (or, in the case of the EU, any member state of the EU) other than India designated by Salix; provided, however, that (i) Glenmark shall only engage such carriage, insurance or other providers in connection with such delivery as are designated by Salix in the applicable Purchase Order, (ii) Salix shall bear costs and expenses for (A) carriage and insurance of the Compound from the Facility and (B) clearance of Compound through customs in the destination country and (iii) in the event any claim arises against any such carriage, insurance or other provider, Glenmark, as promptly as possible, shall assign such claim to Salix. All Compound shall be labeled in accordance with Applicable Law and packed for shipping in accordance with packing instructions provided by Salix. Title to and risk of loss of Compound shall pass to Salix at the time of delivery.

(f) Each delivery of Compound shall be accompanied by (i) a Certificate of Analysis, (ii) a Certificate of Compliance, (iii) such other documents as may be required pursuant to the Quality Agreement, and (iv) documentation necessary for the sale or import of the Compound.

2.3 Raw Materials.

(a) In any given month, Glenmark shall maintain an inventory of Materials in sufficient quantities, and shall use its commercially reasonable efforts, to

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

9

supply Salix with quantities of Compound that are up to [*] percent ([*]%) of the quantities specified in any Firm Forecast applicable to such month.

(b) Simultaneous with delivery of each Firm Forecast by Salix to Glenmark, Salix shall deliver to Glenmark at the Facility such quantities of Salix-Supplied Material as are necessary for Manufacture of Compound in accordance with each Firm Forecast, free of charge to Glenmark. Glenmark shall use the Salix-Supplied Material solely for the purpose of Manufacturing the Compound for supply to Salix. In the event Salix fails to deliver Salix-Supplied Material in quantities and quality necessary for Glenmark to Manufacture Compound in accordance with the applicable Purchase Order, such failure shall be deemed a force majeure event for which Glenmark’s obligation to supply to Salix shall be excused until such force majeure event has been corrected or eliminated.

(c) Each Party shall be responsible for auditing and qualifying its respective third party supplier(s) of Materials and obtaining supplies of Materials in accordance with the applicable Specifications. All Materials shall conform to the applicable Specifications and any applicable Drug Master File, as further referenced in any applicable Regulatory Documentation.

2.4 Invoice and Payment. Glenmark promptly shall invoice Salix for all quantities of Compound delivered in accordance herewith. Payment with respect to Compound delivered shall be due [*] days from the date of invoice to Salix; provided that if Salix rejects such Compound pursuant to Section 2.7, then payment shall be due within [*] days after receipt by Salix of notice from the Testing Expert that the invoiced Compound is conforming or, subject to Section 2.7, receipt by Salix of replacement Compound, as the case may be; provided further, if Salix disputes any portion of an invoice, it shall pay the undisputed portion and shall provide Glenmark with written notice of the disputed portion and its reasons therefor, and Salix shall not be obligated to pay such disputed portion. The Parties shall use good faith efforts to resolve any such disputes promptly. In the event of any inconsistency between an invoice and this Agreement, the terms of this Agreement shall control. Payment of invoices shall be made by wire transfer to an account designated in writing by Glenmark in United States Dollars. If any currency conversion shall be required in connection with any payment hereunder, such conversion shall be made each calendar quarter using an exchange rate that is the arithmetic average of the daily exchange rates (obtained as described below) during such calendar quarter. Each daily exchange rate shall be obtained from The Wall Street Journal, Eastern United States Edition, or, if not so available, as otherwise agreed by the Parties.

2.5 Price.

(a) The purchase price per kilogram (the “Purchase Price”) for all Compound delivered hereunder shall equal Glenmark’s Fully-Allocated Manufacturing Cost plus [*] percent ([*]%). Along with each acceptance of a Purchase Order

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

10

pursuant to Section 2.2(d), Glenmark shall also confirm the Purchase Price applicable for such Purchase Order, based on the formula set forth in the preceding sentence. If Glenmark fails to confirm the Purchase Price for any Purchase Order, the Purchase Price for such Purchase Order shall be the [*]. No later than thirty (30) days following each anniversary of the first day of the month in which Glenmark commences commercial supply to Salix, Glenmark shall calculate its actual Fully-Allocated Manufacturing Cost of manufacturing Compound supplied to Salix in the [*] percent ([*]%) (the “Actual Cost”). If the Purchase Price paid by Salix for Compound is within [*] ([*]%) of the Actual Cost, no reconciliation of the Purchase Price will be made between the Parties. If the Purchase Price paid by Salix for Compound is greater than the Actual Cost by more than [*] percent ([*]%), Glenmark shall reimburse Salix for such amount in excess of [*] percent ([*]%) within [*] days of such determination. If the Purchase Price paid by Salix for Compound is less than the Actual Cost by more than [*] percent ([*]%), Salix shall reimburse Glenmark for such amount in excess of [*] percent ([*]%) within [*] days of such determination.

(b) Glenmark shall provide Salix with access to such books, records, and financial and other information, including in respect of the details of its arrangements with third parties for the supply of Materials, as Salix may reasonably request in order to establish that the Purchase Price for Compound supplied hereunder is in compliance with the provisions of Section 2.5(a).

(c) The Parties acknowledge that there are other terms negotiated between Napo and Glenmark in connection with the execution of this Agreement. Section 2.5(a) notwithstanding, the Purchase Price for supply of Compound by Glenmark to Salix during the [*] months following the Effective Date shall be fixed at the purchase price set forth in Schedule 2.5(c) (“Fixed Price”); provided that the Parties shall review such Fixed Price every [*] months following the Effective Date and (i) in the event the FAMC plus [*] percent ([*]%) at such time is less than such Fixed Price, the Fixed Price shall be adjusted downward to equal such FAMC plus [*] percent ([*]%) and, (ii) in the event the FAMC plus [*] percent ([*]%) at such time is greater than such Fixed Price, the Fixed Price shall be adjusted upward to equal such FAMC plus [*] percent ([*]%) up to a maximum amount equal to the Capped Price. In no event shall the aggregate quantity of Compound purchased hereunder at the Fixed Price exceed [*] kilograms ([*]). Salix acknowledges and understands that as of the Effective Date the Fixed Price does not reflect Glenmark’s Fully-Allocated Manufacturing Cost plus [*] percent ([*]%) as of the Effective Date and such Fixed Price is only being offered as a short term accommodation.

(d) The Parties acknowledge that Glenmark has invested significant resources in developing and optimizing the manufacturing process for the Manufacture of Compound. In the event that Salix uses a Third Party Manufacturer, Salix shall provide compensation to Glenmark as set forth in Schedule 2.5(d), subject to all of the limitations set forth in such Schedule including the limitation with respect to the [*] year duration of such obligations.

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

11

2.6 Warranty. In connection with each delivery of Compound to Salix hereunder, Glenmark hereby represents and warrants to Salix as of the date of the delivery of such Compound to Salix as follows: (a) such Compound is in conformity with the Specifications and the Certificate of Analysis therefor provided pursuant to Section 2.2(f); (b) such Compound has been Manufactured in conformance with GMP, all other Applicable Law, this Agreement and the Quality Agreement; (c) title to such Compound will pass to Salix free and clear of any security interest, lien or other encumbrance; (d) such Compound has been Manufactured at the Facility and those portions of the Facility used in the Manufacture of the Compound are in compliance with all Applicable Law at the time of such Manufacture (including applicable GMP and inspection requirements of FDA and other Regulatory Authorities); (e) the expiration date of such Compound is no earlier than [*] months after the date of delivery thereof (or such longer period after the date of delivery thereof as may be supported by ongoing stability studies, it being acknowledged that a [*] month period must be allowed for packaging and shipment); (f) such Compound has not been adulterated (as such term is defined in the FFDCA) at the time of shipment by Glenmark from the Facility; (g) such Compound may be introduced into interstate commerce pursuant to the FFDCA and similar provisions of other Applicable Law in the Specified Territory; and (h) neither Glenmark nor any of its Affiliates has been debarred or is subject to debarment pursuant to Section 306 of the FFDCA or any similar law in any country in the Specified Territory or listed on either Excluded List or any similar list in any country in the Specified Territory; provided that, with respect to any such similar laws or lists in any country in the Specified Territory other than the United States, Salix has identified for Glenmark with specificity such law or list.

2.7 Failure or Inability to Supply Compound.

(a) In the event that Glenmark, at any time during the Term, shall have reason to believe that it will be unable to supply Salix with the full quantity of Compound forecasted to be ordered or actually ordered by Salix in a timely manner and in conformity with the warranties set forth in Section 2.6, Glenmark shall promptly notify Salix thereof. Promptly thereafter, the Parties shall meet to discuss how Salix shall obtain such full quantity of conforming Compound. Compliance by Glenmark with this Section 2.7(a) shall not relieve Glenmark of any other obligation or liability under this Agreement, including any obligation or liability under Section 2.7(b) or 2.7(c).

(b) Subject to Section 2.7(f), if Glenmark fails to deliver the full quantity of Compound specified in a Purchase Order by [*] days after the required delivery date specified therein and in conformity with the warranty set forth in Section 2.6, then Salix may, at its option, (i) cancel all or any portion of such Purchase Order, in which event Salix shall have no liability with respect to the portion of such Purchase Order so cancelled, or (ii) accept late delivery of all or any portion of the Compound specified in such Purchase Order.

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

12

(c) Subject to Section 2.7(f), if Glenmark fails to deliver the full quantity of Compound specified in a Purchase Order by [*] days after the required delivery date specified therein and in conformity with the warranty set forth in Section 2.6, then Salix may, at its option, (i) accept late delivery of all or any portion of the Compound specified in such Purchase Order, (ii) terminate its obligations under Section 2.1 in whole or in part by written notice to Glenmark or (iii) provide written notice to Glenmark of its intention to qualify a Third Party Manufacturer for the Compound, in which event Glenmark shall use its commercially reasonable efforts promptly to assist Salix to qualify such Third Party Manufacturer designated by Salix to Manufacture such Compound, and provide, to such Third Party Manufacturer such technical assistance, as Salix may reasonably request and such Third Party Manufacturer may reasonably require in order to Manufacture the Compound without charge to Salix, except that Salix shall be responsible for the out of pocket expenses incurred by Glenmark in providing such technical assistance and provided further that the technical assistance is for no more than [*] (equal to [*] work hours each). Glenmark shall also promptly grant to such Third Party Manufacturer a Third Party Manufacturer License, provided that Salix shall compensate Glenmark in the manner set forth in Schedule 2.5(d), subject to all of the limitations set forth in such Schedule including the limitation with respect to the [*] year duration of such obligations and Schedule 1.31, Section III.

(d) In the event that Salix determines, within [*] days after delivery thereof by Glenmark (or within [*] days after discovery of any non-conformity that could not reasonably have been detected by a customary inspection on delivery, so long as such discovery is during the production of Product, but in no event more than [*] months after delivery of Compound by Glenmark), that any Compound supplied by Glenmark does not conform to the warranties set forth in Section 2.6, Salix shall give Glenmark notice thereof (including a sample of such Compound, if applicable). Glenmark shall undertake appropriate evaluation of any such sample and shall notify Salix whether it has confirmed such nonconformity within [*] days after receipt of such notice from Salix. If Glenmark notifies Salix that it has not confirmed such nonconformity, then the Parties shall submit the dispute to an independent testing laboratory or other appropriate expert mutually acceptable to the Parties (the “Testing Expert”) for evaluation. Both Parties shall cooperate with the Testing Expert’s reasonable requests for assistance in connection with its evaluation hereunder. The findings of the Testing Expert shall be binding on the Parties, absent manifest error. The expenses of the Testing Expert shall be borne by Glenmark if the testing confirms the nonconformity and otherwise by Salix. If the Testing Expert or Glenmark confirms that a lot of Compound does not conform to the warranties set forth in Section 2.6, then Glenmark, at Salix’s option, promptly shall (A) supply Salix with a conforming quantity of Compound at Glenmark’s expense or (B) reimburse Salix for the Purchase Price paid by Salix with respect to such non-conforming Compound if already paid. In addition, Glenmark promptly shall reimburse Salix for all costs incurred by Salix with respect to such non-conforming Compound, including the Salix-Supplied Material. Salix shall have the right to offset any such costs against any payments owed by Salix to Glenmark under this Agreement. Glenmark immediately shall notify Salix if at any time it discovers that any Compound delivered hereunder does

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

13

not conform to the Specifications. Notwithstanding any other provision of this Section 2.7(d), Glenmark shall have no liability hereunder to the extent any such liability is attributable to (i) a failure of Salix-Supplied Material to conform to applicable Specifications or (ii) Salix-Supplied Material having been adulterated (as such term is defined in the FFDCA) prior to the time of delivery to Glenmark.

(e) Subject to Salix’s right to indemnification under Section 8.1, the rights and remedies provided in this Section 2.7 shall be cumulative and shall be Salix’s sole and exclusive remedy with respect to Glenmark’s failure to supply Compound that conforms to the warranties set forth in Section 2.6, or Glenmark’s inability to supply Compound pursuant to any accepted Purchase Order.

(f) The rights and remedies provided in Sections 2.7(b) and (c) shall be subject to Salix fulfilling its obligations under Section 2.3(b).

2.8 Limitations of Current Capacity.

(a) The Parties acknowledge the Current Capacity production constraints of Glenmark, and, subject to Section 2.8(b), agree that the estimation of the maximum annual quantities of the Compound that Glenmark is capable of delivering to Salix as of the Effective Date are as set forth on Schedule 1.17.

(b) Glenmark shall bear the expenses for the required civil, mechanical, HVAC, electrical and instrumentation, qualified utilities, environment and safety and consultancy charges for manufacturing state I and II of the Compound at the Facility. Napo has provided, at its sole cost and expense, the required [*] as of the Effective Date (the “Napo-Provided Equipment”).

(c) In anticipation of Salix’s annual requirements exceeding the amount of Compound permitted by Current Capacity, the Parties shall discuss in good faith the Scale-Up Plans. Glenmark agrees to use its commercially reasonable efforts to implement any agreed upon Scale-Up Plan as promptly as possible and the cost of such implementation shall be borne by Salix, including the purchase and installation of any equipment needed for the Scale-up Plans and any replacement for Napo-Provided Equipment purchased and installed after the Effective Date (the “Scale-up Equipment”). Until such time as Glenmark has been afforded a reasonable period of time to implement a Scale-Up Plan (the date on which such period expires, the “Scale-Up Plan Effective Date”), Glenmark’s inability to supply Compound in excess of the amount set forth on Schedule 1.17 per year shall not be construed as a material breach of this Agreement. Glenmark shall have the right to use all Compound Equipment to (i) carry out any research, development scale-up and other activities relating to the Compound, provided, however, that such usage shall not exceed [*] percent ([*]%) of such Compound Equipment’s capacity and (ii) subject to Section 2.21, [*] permitted pursuant to the Napo-Glenmark Agreement (collectively, the “Glenmark Activities”). Glenmark shall reimburse Salix in accordance with the terms set forth in Schedule 2.8(c).

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

14

(d) Salix acknowledges and agrees that the Scale-Up Plan as set forth on Exhibit A is for illustrative purposes only and Glenmark has no obligations to achieve the targets set forth therein.

2.9 Costs and Expenses. Except as otherwise explicitly set forth herein, [*] shall be solely responsible for all costs and expenses incurred in connection with the Manufacture of Compound hereunder, including costs and expenses of personnel, quality control testing, Manufacturing facilities and equipment, and Glenmark-Supplied Materials.

2.10 Amendment of Specifications.

(a) In the event that an amendment to the Specifications, the Manufacturing process, or the test methods for the Compound is required in writing by any Regulatory Authority, Salix promptly shall provide Glenmark with appropriate documentation relating to any such changes to the Specifications or Manufacturing process to the extent that such changes affect Glenmark’s Manufacturing of the Compound hereunder. So long as the process capability can meet such amendment to Specifications or Manufacturing process required by the Regulatory Authority, Glenmark shall promptly implement such changes in accordance with the change control procedures applicable under GMP. In the event that the process capability cannot meet such an amendment to Specifications or Manufacturing process required by the Regulatory Authority, then the Parties will pursue good faith discussions with respect to the identification and implementation of arrangements that will permit Glenmark to meet such amendment. Salix may request any other amendment to the Specifications, the Manufacturing process, or the test methods for the Compound, in which event the Parties shall meet to discuss such proposed amendment in good faith. Salix promptly shall provide Glenmark with appropriate documentation relating to any such changes to the Specifications or Manufacturing process to the extent that such changes affect Glenmark’s Manufacturing of the Compound hereunder. Promptly thereafter, Glenmark shall use its commercially reasonable efforts to implement any such change agreed to by the Parties. Glenmark shall not, in any respect, amend, modify or supplement the Specifications, the Manufacturing process, or the test methods for the Compound or any Materials or sources of Materials used in connection with Manufacturing the Compound without the prior written consent of Salix.

(b) [*] shall reimburse [*] for reasonable expenses that are actually incurred by [*] in connection with any amendment of the Specifications or the Manufacturing process for the Compound required by Salix, including reasonable costs of capital equipment and process upgrades and obsolescence of Materials, goods-in-process, and finished goods not suitable for other use in the business or operations of Glenmark or any of its Affiliates; provided, however, that [*] liability for such reimbursement shall be limited to levels of inventory that are customary in pharmaceutical manufacturing operations.

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

15

(c) [*] shall be solely responsible for any and all increased costs or expenses incurred by [*] or [*] as a result of any amendment of the Specifications or the Manufacturing process for the Compound (i) requested by Glenmark and consented to by Salix or (ii) required by Salix as a result of Glenmark’s failure to Manufacture the Compound in conformity with the Specifications.

2.11 Quality Agreement. Within [*] days after the Effective Date, and in any event, prior to any commercial sale of the Compound, Salix and Glenmark shall prepare and enter into a reasonable and customary quality assurance agreement, upon terms generally consistent with the existing quality agreement between Glenmark and Napo with such modifications thereto as either Party may reasonably request (the “Quality Agreement”). Each Party shall duly and punctually perform all of its obligations under the Quality Agreement.

2.12 Quality Control Analyses and Release. Glenmark shall be responsible for all quality control analyses of the Compound and all Compound shall be released by Glenmark, in each case in accordance with the terms of the Quality Agreement.

2.13 Maintenance of Facility.

(a) Except as otherwise approved in writing by Salix, Glenmark shall Manufacture the Compound exclusively at the Facility under GMP.

(b) Glenmark shall ensure that any and all licenses, registrations, and Regulatory Authority approvals required by Applicable Law are and shall be obtained in connection with the Facility and equipment used in connection with the Manufacture of the Compound by Glenmark.

(c) Glenmark shall maintain the Facility and such equipment in a state of repair and operating efficiency consistent with the requirements of the Specifications, the Regulatory Approvals, GMP and all other Applicable Law.

(d) Glenmark shall maintain in the Facility adequate and segregated holding accommodations for the Compound and the Materials used in Manufacturing the Compound in accordance with the Specifications, the Regulatory Approvals, GMP and all other Applicable Law.

(e) Glenmark shall only use disposal services or sites that have appropriate environmental permits and are in compliance with Applicable Law.

2.14 Regulatory Cooperation of Glenmark. Glenmark shall cooperate with any reasonable requests for assistance from Salix with respect to obtaining and maintaining any and all Regulatory Approvals, including by:

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

16

(a) at Salix’s cost and expense, making its employees, consultants and other staff available upon reasonable notice during normal business hours to attend meetings with Regulatory Authorities concerning the Compound and the Product; and

(b) at Salix’s cost and expense, disclosing and making available to Salix, in such form as may be required by any applicable Regulatory Authority, all Manufacturing and quality control data, CMC Data and other information related to the Compound and the Manufacturing process therefor as is reasonably necessary to prepare, file, obtain and maintain any Regulatory Approval.

2.15 Inspection by Salix. Glenmark agrees that Salix and its agents shall have the right [*] each Calendar Year, upon reasonable prior notice to Glenmark and during normal business hours, to inspect those portions of the Facility where Manufacture of the Compound takes place, as well as the Manufacturing of the Compound, including inspection of (a) the Materials used in the Manufacture of the Compound, (b) the holding facilities for such Materials, (c) the equipment used in the Manufacture of the Compound, and (d) all records relating to such Manufacturing and the Facility (only to the extent they relate to the Compound). Following such audit, Salix shall discuss its observations and conclusions with Glenmark and Glenmark shall use its commercially reasonable efforts to implement such corrective actions as may be requested reasonably and in good faith by Salix within [*] days after notification thereof by Salix or such longer period as may be reasonable in the circumstances as determined by Glenmark after consultation with Salix or agreed by the Parties.

2.16 Notification of Regulatory Inspections; Communications. Glenmark shall notify Salix by telephone within [*] hours, and in writing within [*] business days, after learning of any proposed visit or inspection by any Regulatory Authority, the specific (but not necessarily exclusive) focus of which is on those portions of the Facility where Manufacture of the Compound takes place or on operations of the Facility material to the Manufacture of the Compound, and shall use its commercially reasonable efforts to permit Salix or its agents to be present and participate in such visit or inspection. For purposes of clarity, routine inspection of the Facility which may include inspection of those portions of the Facility where Manufacture of the Compound takes place shall not trigger Glenmark’s notification obligation under this Section 2.16.

2.17 Recalls and Withdrawals. [*] promptly shall [*] for all costs incurred by [*] in connection with recalls, market withdrawals, and returns and destruction of Product containing any non-conforming Compound (as determined pursuant to Section 2.7(d)) as and to the extent and only to the extent any such recall, market withdrawal or return or destruction of Product is the direct result of [*]’s breach of its warranties under Section 2.6 or [*]’s gross negligence or willful misconduct. [*] shall have the right to offset any such costs against any payments owed by [*] to [*] under this Agreement. All other costs for recalls, market withdrawals and returns and destruction of Product shall be the sole and exclusive responsibility of [*] (including any recalls, market withdrawals and returns

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

17

and destruction of Product as and to the extent attributable to the failure of [*] to conform to applicable Specifications).

2.18 Compliance with Applicable Laws. Glenmark shall comply, and shall cause each of its Material suppliers (other than Salix and its Affiliates) to comply, with GMP and all other Applicable Law in carrying out the Manufacturing of the Compound and its other duties and obligations under this Agreement.

2.19 Retention of Manufacturing Records and Samples.

(a) Glenmark shall generate, retain and maintain:

(i) all records necessary to comply with GMP and all other Applicable Law relating to the Manufacture of the Compound. Without limiting the foregoing, records shall be made concurrently with the performance of each step in the Manufacture of the Compound and in such a manner that at any time successive steps in the Manufacture and distribution of any batch may be traced by an inspector. Such records shall be legible and indelible, shall identify the person immediately responsible, shall include dates of the various steps and be as detailed as necessary for a clear understanding of each step by an individual experienced in the manufacture of pharmaceutical products;

(ii) all Manufacturing records, standard operating procedures, equipment log books, batch manufacturing records, laboratory notebooks and all raw data relating to the Manufacturing of the Compound;

(iii) samples of each batch and Materials. Samples shall include a quantity of representative material of each batch and Materials sufficient to perform at least full duplicate quality control testing, and shall specify the dates of Manufacture and packaging thereof. Samples so retained shall be selected at random from either final container material or from bulk and final containers; provided that they include at least one final container as a final package, or package-equivalent of such filling of each batch. Such sample shall be stored at temperatures and under conditions which will maintain the identity and integrity of the relevant sample; and

(iv) such other records and samples that Glenmark maintains in the ordinary course of business, as Salix reasonably may require in order to ensure compliance by Glenmark with the terms of this Agreement and Applicable Law.

(b) Without prejudice to Glenmark’s obligations pursuant to Section 2.19(a), Glenmark shall diligently complete the master batch record for the Compound during the Manufacture of such Compound.

(c) All materials, samples, records and other items referred to in Sections 2.19(a) and 2.19(b) shall be retained by Glenmark for the longer of (i) such period as may be [*] and [*] and (ii) [*] years.

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

18

2.20 No Other Supply. Glenmark shall not, and Glenmark shall cause its Affiliates not to, Manufacture or supply the Compound to or for any Person other than (a) Salix and its Affiliates under and pursuant to this Agreement, (b) [*] under and pursuant to the [*]Glenmark Agreement, and (c) [*] as permitted under the [*]Glenmark Agreement.

2.21 Shortages. In the event that the amount of Compound which Glenmark Manufactures is less than the amount required to meet the requirements of all Persons to be supplied by Glenmark pursuant to Section 2.20, the total supply Manufactured by Glenmark shall be apportioned as follows: first, to those Persons with pending or approved Marketing Authorizations, pro rata on the basis of each such Person’s good faith anticipated volume requirements of the Compound for the next [*] months for itself and its Affiliates, licensees and sublicensees in respect of those countries or jurisdictions where such Person (or its Affiliates, licensees or sublicensees) has a pending or approved Marketing Authorization; second, to those Persons who paid for the Compound Equipment, pro rata on the basis of each such Person’s good faith anticipated volume requirements of the Compound for the next [*] months; and third, as agreed by the Parties in good faith.

2.22 Second Source. Notwithstanding anything to the contrary herein, Salix shall have the right, at its own expense, to secure a Third Party Manufacturer to Manufacture Compound for supply to Salix; provided, however, that no such Third Party Manufacturer shall be located in any country that is included in the Glenmark Territory. Glenmark shall use its commercially reasonable efforts to assist Salix to qualify such Third Party Manufacturer designated by Salix to Manufacture such Compound, and provide, to such Third Party Manufacturer such technical assistance, as Salix may reasonably request and such Third Party Manufacturer may reasonably require in order to Manufacture the Compound at Salix’s sole cost and expense, provided that the technical assistance is for no more than [*] (equal to [*] work hours each). [*] shall also promptly grant to such Third Party Manufacturer a Third Party Manufacturer License, provided that Salix shall compensate [*] in the manner set forth in Schedule 2.5(d), subject to all of the limitations set forth in such Schedule including the limitation with respect to the [*] year duration of such obligations and Schedule 1.31, Section III.

ARTICLE III. GLOBAL COORDINATION

3.1 Global Cooperation and Coordination. Each of the Parties holds certain licenses from Napo permitting it to Exploit the Product in certain fields of use in certain territories. Accordingly, each of the Parties has an interest in enhancing the development and commercialization of the Product in those fields and territories to which its licenses extend. Each Party hereby acknowledges that the maximum commercial potential of the Product in its field of use and territories will be achieved through the coordinated global development and commercialization. To that end, each of the Parties hereby agrees to cooperate and coordinate with the other Party to support the global development,

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

19

approval by Regulatory Authorities, commercialization and other Exploitation of the Product.

3.2 Consultation. The Parties shall consult with each other on a regular basis, either in writing, by telephone, or through face-to-face meetings, as the Parties may deem most expedient, with regard to all aspects of the development and commercialization of the Product. Without limiting the foregoing, each Party shall designate by written notice to the other Party a single senior executive of such Party to serve as the principal contact with such other Party for purposes of the cooperation and coordination contemplated by this Article 3. Each Party shall ensure that at all times during the Term it has designated such a senior executive for such purpose.

3.3 Regulatory Matters.

(a) Rights of Reference. Each Party hereby grants to the other Party rights of reference in and to all Regulatory Documentation filed by such Party with any Regulatory Authority. The Parties shall negotiate in good faith and implement appropriate provisions, consistent with Applicable Law, in respect of mutual adverse event reporting and mutual access to, and mutual exchange between the Parties of, information necessary for each Party to adhere to regulatory requirements. Without limiting the foregoing, each Party shall have the right to cross reference, file or incorporate by reference any regulatory submission or Drug Master File (and any data contained therein) for the Product, or any component thereof (including any Regulatory Approvals), in order to support regulatory submissions that such Party has the right to make.

(b) Regulatory Inspections. If any governmental or Regulatory Authority takes, or gives notice of its intent to take, any other regulatory action alleging improper or inadequate Manufacturing practices (including the issuance of a “Notice of Inspectional Observations,” “Warning Letter” or the equivalent) with respect to those portions of the Facility where Manufacture of the Compound takes place, such Party shall notify the other Party by telephone within twenty-four (24) hours, and in writing within one (1) business day of such contact or notice, or sooner if necessary to permit such other Party to be present at, or otherwise participate in, any such inspection or regulatory action with respect to the Compound and shall supply such other Party with all information pertinent thereto. Such other Party shall have the right to be present at and to participate in any such inspection or regulatory action with respect to the Compound. The inspected Party shall provide the other Party with copies of all documentation issued or inspected by any governmental or Regulatory Authority in connection with such inspection or regulatory action and any response thereto proposed by the inspected Party. No such responses shall contain any false or misleading information, or omit any information necessary to make such response not false or misleading, with respect to the Compound.

(c) Access to Data. Each Party shall provide the other Party on a timely basis with access to all material pre-clinical data and clinical data compiled in support of a an application for Regulatory Approval or other regulatory filings with

20

respect to the Product, when and as such pre-clinical data or clinical data become available. Each Party shall provide the other Party with Regulatory Documentation within a reasonable timeframe of receipt or production thereof and, to the extent applicable, within the timeframe as is necessary for the responsible Party to take action or comply with any requirement of any Regulatory Authority applicable to the responsible Party.

(d) Communications with Regulatory Authorities. As between Salix and Glenmark, Salix shall have sole responsibility and authority to communicate with Regulatory Authorities with respect to the Drug Master File for the Compound; provided that, from and after the date that such Drug Master File is transferred to Glenmark, then Glenmark shall have the sole responsibility and authority to communicate with Regulatory Authorities with respect to such Drug Master File. Subject to the foregoing, (i) Glenmark shall have the sole responsibility and authority to communicate with Regulatory Authorities during the term of the Napo-Glenmark Agreement in relation to the Product in the Glenmark Territory and for the fields of use exclusively granted Glenmark in the Glenmark Territory and (ii) in relation to the Product outside the Glenmark Territory and outside the fields of use exclusively granted to Glenmark in the Glenmark Territory, either Napo or Salix shall have sole responsibility and authority to communicate with Regulatory Authorities with respect to such Product.

(e) Conduct of Recalls. As between Salix and Glenmark, Salix shall have the sole responsibility and authority to conduct, and shall have the final decision whether to implement, all voluntary and involuntary recalls, stop sales, field corrections or other related actions (collectively, “Recalls”) of the Product in and with respect to all fields of use in all countries worldwide, except for those countries included in the General Territory (as defined in the Napo-Glenmark Agreement), but only in the field of use relating to HIV/AIDS-related diarrhea and pediatric diarrhea, and those countries included in the AAID Specific Territory (as defined in the Napo-Glenmark Agreement), but only in the field of use relating to adult acute infectious diarrhea, with respect to which fields of use in the specified countries Glenmark shall have sole responsibility and authority to conduct or implement Recalls during the term of the Napo-Glenmark Agreement. Glenmark and Salix shall cooperate and each shall provide such assistance to the other in respect of Recalls of the Product as the other may reasonably request.

3.4 Trademarks. The Parties shall cooperate in all respects for the purpose of achieving appropriate coordination and harmonization of the use and manner of use of trademarks, trade dress, and trade names in respect of the Product on a global basis.

ARTICLE IV. INTELLECTUAL PROPERTY

4.1 Ownership.

(a) Salix shall own all right, title and interest in and to (i) the Specifications and the Salix Information and (ii) any and all Compound Inventions.

21

Salix hereby grants to Glenmark and its Affiliates the right to use the Compound Inventions on the same terms and conditions set forth in Section 2.1 of the Napo-Glenmark Agreement, as such agreement is in effect as of the Effective Date. Glenmark shall, and shall cause its Affiliates to, promptly disclose in writing to Salix the discovery, development, making, conception or reduction to practice of any Compound Invention and shall and does hereby, and shall cause its Affiliates to, assign to Salix any and all right, title or interest Glenmark or its Affiliates may have in or to any Compound Invention. Glenmark shall execute any documents and perform such other acts as may be reasonably requested by Salix in order to secure, perfect, confirm, exercise or enforce Salix’s foregoing rights.

(b) Glenmark shall own all right, title and interest in and to any manufacturing technique or process that is not derived from or based on the Specifications, any Salix Information or any Compound Invention that is conceived, discovered, developed or otherwise made, solely by or on behalf of Glenmark as a result of Glenmark’s performance of its obligations hereunder (the “Glenmark Inventions”). Glenmark shall, and shall cause its Affiliates to, promptly disclose in writing to Salix the discovery, development, making, conception or reduction to practice of any Glenmark Invention. Subject to Schedule 1.31, Section III, Glenmark shall, and does hereby, grant to Salix a non-exclusive license to Glenmark Inventions and Glenmark Invention Patents to Exploit the Compound and Products in all fields of use in all countries worldwide, except for (i) those countries included in the General Territory (as such term is defined in the Napo-Glenmark Agreement as such agreement is in effect as of the Effective Date), but only in the field of use relating to HIV/AIDS-related diarrhea and pediatric diarrhea, and (ii) those countries included in the AAID Specific Territory (as such term is defined in the Napo-Glenmark Agreement as such agreement is in effect as of the Effective Date), but only in the field of use relating to adult acute infectious diarrhea.

(c) Glenmark and Salix shall jointly own all right, title and interest in and to any and all Joint Inventions. Each of Glenmark and Salix shall, and shall cause its respective Affiliates to, promptly disclose in writing to the other Party the discovery, development, making, conception or reduction to practice of any Joint Invention. For those countries in the Territory where a specific license is required to be granted by a Joint Invention owner to the other Joint Invention owner in order for the other Joint Invention owner to practice such Joint Inventions in such countries in the Territory, Glenmark shall, and does hereby, grant to Salix a non-exclusive fully paid up license to Glenmark’s interest in all Joint Inventions to Exploit the Compound and Products in all fields of use in all countries worldwide, except for (i) those countries included in the General Territory, but only in the field of use relating to HIV/AIDS-related diarrhea and pediatric diarrhea, and (ii) those countries included in the AAID Specific Territory, but only in the field of use relating to adult acute infectious diarrhea. For those countries in the Territory where a specific license is required to be granted by a Joint Invention owner to the other Joint Invention owner in order for the other Joint Invention owner to practice such Joint Inventions in such countries in the Territory, Salix shall, and does hereby, grant to Glenmark a non-exclusive fully paid-up license to Salix’s interest in all Joint Inventions to Exploit the Compound and Products in

22

(i) those countries included in the General Territory, but only in the field of use relating to HIV/AIDS-related diarrhea and pediatric diarrhea, and (ii) those countries included in the AAID Specific Territory, but only in the field of use relating to adult acute infectious diarrhea.

(d) Without limiting the provisions of Article VI, Glenmark shall use the Specifications and Salix Information solely for purposes of performing its supply obligations hereunder.

4.2 Patent Maintenance and Prosecution.

(a) Compound Invention Patents.

(i) [*] shall have sole discretion and responsibility to prepare, file, prosecute and maintain all patent applications and patents covering Compound Inventions (collectively, the “Compound Invention Patents”, and each, a “Compound Invention Patent”) and shall be responsible for related interference and opposition proceedings; provided, however, that if [*] plans to abandon any Compound Invention Patent, [*] shall notify [*] in writing at least [*] days in advance of the due date of any payment or other administrative action that is required to maintain such Compound Invention Patent (i.e., an administrative action that involves routine and customary filings, it being understood that interference, opposition, reissue and re-examination proceedings, prosecution or defense of infringement actions, and the like, shall not be considered administrative actions), and Glenmark may elect, upon written notice within such [*]-day period to [*], to make such payment or take such administrative action, on behalf of [*]. Except as expressly permitted in this Section 4.2(a)(i), [*] shall have no right to prepare, file, prosecute or maintain any Compound Invention Patents.

(ii) Costs and expenses of filing, prosecuting and maintaining (including any costs and expenses of patent interference, opposition, reissue and re-examination proceedings) Compound Invention Patents as contemplated by Section 4.2(a)(i) shall be borne by the [*] such filing, prosecution and maintenance.

(b) Glenmark Invention Patents.

(i) [*] shall have the first right, but not the obligation, to prepare, file, prosecute and maintain all patent applications and patents covering Glenmark Inventions (collectively, the “Glenmark Invention Patents”, and each, a “Glenmark Invention Patent”) and shall be responsible for related interference and opposition proceedings; provided, however, that if [*] plans to abandon any Glenmark Invention Patent, [*] shall notify [*] in writing at least [*] days in advance of the due date of any payment or other administrative action that is required to maintain such Glenmark Invention Patent (i.e., an administrative action that involves routine and customary filings, it being understood that interference, opposition, reissue and re-examination proceedings, prosecution or defense of infringement actions, and the like, shall not be

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

23

considered administrative actions), and [*] may elect, upon written notice within such [*]-day period to [*], to make such payment or take such administrative action, on behalf of [*]. Except as expressly permitted in this Section 4.2(b)(i), [*] shall have no right to prepare, file, prosecute or maintain any Glenmark Invention Patents.

(ii) If [*] does not wish to file, prosecute or maintain any Glenmark Invention Patent or maintain or defend such Glenmark Invention Patent in a particular country, it shall notify [*] in writing and, if [*] elects to maintain such Glenmark Invention Patent as contemplated by Section 4.2(b)(i), [*] shall, and shall cause its Affiliates, as applicable, to (A) reasonably cooperate with [*] in this regard and, (B) upon [*] request, promptly release or assign to [*], without compensation, all right, title and interest in and to such invention in such country. In the event of such assignment, [*] hereby grants to [*] a non-exclusive, [*] license under the relevant Glenmark Invention Patent to use for any purpose in the Territory.

(iii) Costs and expenses of filing, prosecuting and maintaining (including any costs and expenses of patent interference, opposition, reissue and re-examination proceedings) Glenmark Invention Patents as contemplated by Section 4.2(b)(i) and (ii) shall be borne by the [*] such filing, prosecution and maintenance.

(c) Joint Invention Patents.

(i) Salix and Glenmark shall collaborate to determine which Party shall be responsible for preparing, filing, prosecuting and maintaining all patent applications and patents covering Joint Inventions (collectively, the “Joint Invention Patents”, and each, a “Joint Invention Patent”) and for related interference and opposition proceedings on behalf of both Parties based on a good faith determination of the relative contributions of the Parties to the invention(s) claimed or covered by such Joint Invention Patent and the relative level of interest of the Parties in such invention(s). At least [*] business days prior to the contemplated filing with respect to a Joint Invention Patent, the [*] for such activities for such Joint Invention Patent shall submit a substantially completed draft of such Joint Invention Patent to the other Party for its review and approval, and shall incorporate any reasonable comments provided by the other Party. If the [*] does not wish to file, prosecute or maintain any Joint Invention Patent or maintain or defend such Joint Invention Patent in a particular country, it shall notify the other Party in writing and, if the other Party elects to maintain such Joint Invention Patent, such first Party shall, and shall cause its Affiliates, as applicable, to (A) reasonably cooperate with such first Party in this regard and (B) upon such first Party’s request, promptly release or assign to such first Party, without compensation, all right, title and interest in and to such invention in such country (whereupon such Joint Invention Patent shall cease to be a Joint Invention Patent and thereafter shall be deemed to be a [*] or a Compound Invention Patent, as applicable, for purposes of this Article IV).

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

24

(ii) Costs and expenses of filing, prosecuting and maintaining (including costs and expenses of patent interference, opposition, reissue and re-examination proceedings) Joint Invention Patents as contemplated by Section 4.2(c)(i) shall be shall be borne by the [*] such filing, prosecution and maintenance.

(d) Each Party shall assist and cooperate with the other Party as such other Party may reasonably request from time to time in connection with its activities set forth in Sections 4.2(a), 4.2(b) and 4.2(c). Each Party shall keep the other Party currently informed of all steps to be taken in the preparation and prosecution of all applications filed by it according to this Section 4.2 and shall furnish such other Party with copies of such applications for Patents, amendments thereto and other related correspondence to and from patent offices, and, to the extent reasonably practicable, permit such other Party an opportunity to offer its comments thereon before making a submission to a patent office which could materially affect the scope or validity of the patent coverage that may result. Such other Party shall offer its comments, if any, promptly.

(e) With respect to Patents filed in any country other than those countries included in the Glenmark Territory, [*] shall be responsible for making decisions regarding patent term extensions, including supplementary protection certificates and any other extensions that are now or become available in the future, wherever applicable, for such Patents. With respect to Patents filed in any country included in the Glenmark Territory, the Parties shall cooperate in making decisions regarding patent term extensions, including supplementary protection certificates and any other extensions that are now or become available in the future, wherever applicable, for such Patents. Notwithstanding the foregoing, the Parties shall coordinate their activities with respect to any patent term extension with respect to all Patents in order to secure the optimal protection for the Product available under Applicable Law.

4.3 Enforcement of Patents.

(a) If any Patent is allegedly or actually infringed by any Person in a manner relating to the Product, the Party first having knowledge of such infringement shall promptly notify the other in writing. The notice shall set forth the facts of that infringement in reasonable detail.

(b) As between the Parties, [*] shall have the first right, but not the obligation, to control the prosecution of any infringement described in this Section 4.3(a). [*] shall have the right, at its own expense, to be represented in any such action by counsel of its own choice. If [*] does not initiate an infringement action within [*] days (or [*] days in the case of an action brought under the Hatch-Waxman Act or within the timeframe of any other relevant regulatory or statutory framework that may govern) of learning of the infringement, [*] shall have the right, but not the obligation, to bring such an action solely (i) with respect to any Glenmark Invention Patent or

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

25

Joint Invention Patent in any country included in the Glenmark Territory and, (ii) subject to the prior written consent of [*], with respect to any Glenmark Invention Patent or Joint Invention Patent in countries outside the Glenmark Territory; provided that, if the Patent at issue is the only patent protecting the Product, [*] shall in any event consult with [*] with respect to any such action and shall obtain [*]’s written consent prior to taking any steps in respect of such action. [*] shall have the right, at its own expense, to be represented in any such action by counsel of its own choice.

(c) In the event that a Party entitled to bring an infringement action does so in accordance with this Section 4.3(a), the other Party shall cooperate fully, including furnishing of a power of attorney, being joined as a party plaintiff or indispensable party in such action, providing access to relevant documents and other evidence, and making its employees available at reasonable business hours. If a Party pursues an action against such alleged infringement, it shall consider in good faith any comments from the other Party and shall keep the other Party reasonably informed of any steps taken to preclude such infringement.

(d) Any costs and expenses relating to any enforcement action commenced pursuant to this Section 4.3 by [*] shall be borne by [*]. Any costs and expenses relating to any enforcement action commenced pursuant to this Section 4.3 by [*] shall be borne by [*]. Any damages or other amounts collected shall be first allocated to reimburse the Parties for their costs and expenses in making such recovery (which amounts shall be allocated pro rata if insufficient to cover the totality of such expenses). Any remainder after such reimbursement is made shall be [*]; provided, however, that to the extent that any award or settlement (whether by judgment or otherwise) is attributable to loss of sales or profits with respect to the Product, the Parties shall negotiate in good faith an appropriate allocation of such remainder to reflect the economic interests of the Parties under this Agreement with respect to the Product.

4.4 Third Person Litigation.

(a) If any Person institutes against Glenmark any action that alleges that the Manufacture of Compound hereunder in accordance with the terms hereof infringes the intellectual property rights held by such Person, then, as between Glenmark and Salix, [*] shall have the first right, but not the obligation, to contest, and assume direction and control of the defense of, such action, including the right to settle such action; provided that, prior to any such settlement, [*] provides its written consent (such consent not to be unreasonably withheld, conditioned or delayed). If [*] determines not to defend against such action, [*] shall, at its sole cost and expense, have the right but not the obligation to control the defense of such action solely (i) with respect to any [*] in any country included in the [*] and, (ii) subject to the prior written consent of [*], with respect to any [*] or [*] in countries outside the [*]; provided that, if the Patent at issue is the only patent protecting the Product, [*] shall in any event

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

26

consult with [*] with respect to any such action and shall obtain [*]’s written consent prior to taking any steps in respect of such action. [*] shall have the right, at its own expense, to be represented in any such action by counsel of its own choice.

(b) Any costs and expenses relating to any enforcement action commenced pursuant to this Section 4.4 shall be borne by the [*] the defense of such action. Any damages or other amounts collected shall be first allocated to reimburse the Parties for their costs and expenses in making such recovery (which amounts shall be allocated pro rata if insufficient to cover the totality of such expenses). Any remainder after such reimbursement is made shall be retained by the Party that has exercised its right to control the defense of the action.

(c) In the event that a Party entitled to defend an infringement action does so in accordance with this Section 4.4, the other Party shall cooperate fully, including providing access to relevant documents and other evidence and making its employees available at reasonable business hours. If a Party pursues the defense of such an infringement action, it shall consider in good faith any comments from the other Party and shall keep the other Party reasonably informed of any steps taken to preclude such infringement.

4.5 Third Party Licenses. If, in the absence of a license from a Person, the Manufacture of the Compound hereunder in accordance with the terms hereof infringes or misappropriates any patent or any intellectual property right of such Person, such that Glenmark or any of its Affiliates cannot Manufacture such Compound without infringing the patent or intellectual property rights of such Person, then [*] shall have the first right to take the lead on negotiating the terms of each such license; provided that if [*] does not take such lead, then [*] may do so; provided further that the negotiating Party shall obtain the written consent of the other Party prior to entering into any such license, such consent not to be unreasonably withheld, conditioned, or delayed. The Parties shall negotiate in good faith an appropriate allocation of any royalties or other payments to be made pursuant to any such license so as to reflect the economic interests of the Parties under this Agreement with respect to the Product.

ARTICLE V. REPRESENTATIONS AND WARRANTIES; COVENANTS

5.1 Representations and Warranties of Each Party. Each Party hereby represents and warrants to the other Party as of the Effective Date as follows:

(a) Such Party (i) is duly formed and in good standing under the laws of the jurisdiction of its formation, (ii) has the power and authority and the legal right to enter into this Agreement and perform its obligations hereunder, and (iii) has taken all necessary action on its part required to authorize the execution and delivery of this Agreement and the performance of its obligations hereunder. This Agreement has been duly executed and delivered on behalf of such Party and constitutes a legal, valid and binding obligation of such Party and is enforceable against it in accordance with its

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

27

terms, subject to the effects of bankruptcy, insolvency or other similar laws of general application affecting the enforcement of creditor rights and judicial principles affecting the availability of specific performance and general principles of equity, whether enforceability is considered a proceeding at law or equity.

(b) All necessary consents, approvals and authorizations of all regulatory and governmental authorities and other Persons required to be obtained by such Party in connection with the execution and delivery of this Agreement and the performance of its obligations hereunder have been obtained.

(c) The execution and delivery of this Agreement and the performance of such Party’s obligations hereunder (i) do not and will not conflict with or violate any requirement of applicable law or any provision of the articles of incorporation, bylaws, limited partnership agreement or other similar documents of such Party and (ii) do not and will not conflict with, violate, or breach, or constitute a default or require any consent under, any contractual obligation or court or administrative order by which such Party is bound.

5.2 Additional Warranties and Covenants of Glenmark. Glenmark hereby represents, warrants and covenants to Salix that (a) neither Glenmark nor any of its Affiliates has been debarred or is subject to debarment pursuant to Section 306 of the FFDCA or any similar law in any country in the Specified Territory or listed on either Excluded List or any similar list in any country in the Specified Territory and (b) neither Glenmark nor any of its Affiliates will use in any capacity, in connection with the services to be performed under this Agreement, any Person who has been debarred pursuant to Section 306 of the FFDCA or any similar law in any country in the Specified Territory, or who is the subject of a conviction described in such section, or listed on either Excluded List; provided that, in each case ((a) and (b)), with respect to any such similar laws or lists in any country in the Specified Territory other than the United States, Salix has identified for Glenmark with specificity such law or list. Glenmark shall inform Salix in writing immediately if it or, to its knowledge, any Person who is performing services hereunder is debarred or is the subject of a conviction described in Section 306 of the FFDCA or any similar law in any country in the Specified Territory or listed on either Excluded List, or if any action, suit, claim, investigation or legal or administrative proceeding is pending or is threatened, relating to the debarment or conviction under Section 306 of the FFDCA or any similar law in any country in the Specified Territory, or listing on either Excluded List, of Glenmark or, to Glenmark’s knowledge, any other Person performing services hereunder; provided that, with respect to any such similar laws or lists in any country in the Specified Territory other than the United States, Salix has identified for Glenmark with specificity such law or list.

5.3 Disclaimer of Other Warranties. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, THE PARTIES MAKE NO REPRESENTATIONS AND EXTEND NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR

28

IMPLIED, INCLUDING ANY WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE OR WARRANTY OF MERCHANTABILITY.

ARTICLE VI. CONFIDENTIALITY

6.1 Confidential Information. Subject to the provisions of Sections 6.2 and 6.3, at all times during the Term and for [*] years following the expiration or termination of this Agreement, the Receiving Party (a) shall keep completely confidential and shall not publish or otherwise disclose any Confidential Information furnished to it by the Disclosing Party, except to those of the Receiving Party’s employees, Affiliates, or consultants who have a need to know such information to perform such Party’s obligations hereunder (and who shall be advised of the Receiving Party’s obligations hereunder and who are bound by confidentiality obligations with respect to such Confidential Information no less onerous than those set forth in this Agreement) (collectively, “Recipients”) and (b) shall not use Confidential Information of the Disclosing Party directly or indirectly for any purpose other than performing its obligations or exercising its rights hereunder. The Receiving Party shall be jointly and severally liable for any breach by any of its Recipients of the restrictions set forth in this Agreement.

6.2 Exceptions to Confidentiality. The Receiving Party’s obligations set forth in this Agreement shall not extend to any Confidential Information of the Disclosing Party:

(a) that is or hereafter becomes part of the public domain by public use, publication, general knowledge or the like through no wrongful act, fault or negligence on the part of a Receiving Party or its Recipients;

(b) that is received from a third party without restriction and without breach of any agreement between such third party and the Disclosing Party;

(c) that the Receiving Party can demonstrate by competent evidence was already in its possession without any limitation on use or disclosure prior to its receipt from the Disclosing Party; provided, however, that this exception shall not apply with respect to any information or materials regarding the Compound that are provided to Glenmark by Salix under this Agreement;

(d) that is generally made available to third parties by the Disclosing Party without restriction on disclosure; or

(e) that the Receiving Party can demonstrate by competent evidence was independently developed by the Receiving Party.

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

29

6.3 Disclosure.

(a) Each Party may disclose Confidential Information to the extent that such disclosure is:

(i) made in response to a valid order of a court of competent jurisdiction or other governmental body of a country or any political subdivision thereof of competent jurisdiction; provided, however, that the Receiving Party shall first have given notice to the Disclosing Party and given the Disclosing Party a reasonable opportunity to quash such order or to obtain a protective order requiring that the Confidential Information or documents that are the subject of such order be held in confidence by such court or governmental body or, if disclosed, be used only for the purposes for which the order was issued; and provided further that if a disclosure order is not quashed or a protective order is not obtained, the Confidential Information disclosed in response to such court or governmental order shall be limited to that information that is legally required to be disclosed in such response to such court or governmental order; or

(ii) otherwise required by law or regulation, in the opinion of counsel to the Receiving Party.

(b) Salix may disclose Confidential Information to the extent that such disclosure is made to Regulatory Authorities as required in connection with any filing, application or request for Regulatory Approval; provided, however, that reasonable measures shall be taken to assure confidential treatment of such information.

6.4 Notification. The Receiving Party shall notify the Disclosing Party immediately, and cooperate with the Disclosing Party as the Disclosing Party may reasonably request, upon the Receiving Party’s discovery of any loss or compromise of the Disclosing Party’s Confidential Information.

6.5 Remedies. Each Party agrees that the unauthorized use or disclosure of any information by the Receiving Party in violation of this Agreement will cause severe and irreparable damage to the Disclosing Party. In the event of any violation of this Article V, the Receiving Party agrees that the Disclosing Party shall be authorized and entitled to obtain from any court of competent jurisdiction injunctive relief, whether preliminary or permanent, without the necessity of proving irreparable harm or monetary damages, as well as any other relief permitted by Applicable Law. The Receiving Party agrees to waive any requirement that the Disclosing Party post bond as a condition for obtaining any such relief.

6.6 Use of Names. Neither Party shall mention or otherwise use the name, insignia, symbol, trademark, trade name or logotype of the other Party (or any abbreviation or adaptation thereof) in any publication, press release, promotional material or other form of publicity without the prior written approval of such other Party in each instance. The restrictions imposed by this Section 6.6 shall not prohibit either Party from making any disclosure identifying the other Party that is required by applicable law;

30

provided, however, that reasonable measures shall be taken to assure confidential treatment of such information.

6.7 Press Releases. Except as expressly provided in Section 6.3, neither Party shall make a press release or other public announcement regarding this Agreement, the terms hereof or the transactions contemplated hereby without the prior written approval of the other Party. Each Party shall provide the other with the proposed text of any such press release or public announcement for review and approval, which approval shall not be unreasonably withheld, conditioned or delayed, as early as possible, but in no event less than four (4) business days in advance of the publication, communication or dissemination thereof; provided, however, that the receiving Party shall be deemed to have approved any such press release or public announcement if it fails to notify the proposing Party in writing of any objections to such press release or public announcement within three (3) business days after receipt by the receiving Party of the text of such public announcement.

ARTICLE VII. TERM AND TERMINATION

7.1 Term. This Agreement shall commence as of the Effective Date and, unless earlier terminated in accordance with the terms hereof, shall expire on the tenth (10th) anniversary of the Effective Date, unless extended for additional two (2) year periods, at Salix’s option, upon written notice given by Salix to Glenmark not less than six (6) months prior to the expiration of the then-current term (the “Term”).

7.2 Termination. In addition to any other provision of this Agreement expressly providing for termination of this Agreement, this Agreement may be terminated as follows:

(a) Salix may terminate this Agreement immediately upon notice to Glenmark in the event that Regulatory Authorities cause the withdrawal of any Product from any national market in the Territory.

(b) Upon the termination of the Napo-Glenmark Agreement, Glenmark may terminate this Agreement upon eighteen (18) months’ prior written notice to Salix.

(c) This Agreement may be terminated by either Party:

(i) immediately upon written notice if the other Party shall (a) file in any court or agency pursuant to any statute or regulation of any state, country or jurisdiction a petition in bankruptcy or insolvency or for reorganization or for arrangement or for the appointment of a receiver or trustee of that Party or of its assets, (b) propose a written agreement of composition or extension of its debts, (c) be served with an involuntary petition against it, filed in any insolvency proceeding, and such petition shall not be dismissed within sixty (60) days after the filing thereof, (d) propose or be a party to any dissolution or liquidation, (e) make makes an assignment for the benefit of its creditors, or (f) admit in writing its inability generally to pay its debts as they fall due in the general course;

31

(ii) immediately upon written notice in the event of any material breach by the other Party in the performance of any of its obligations herein contained that has not been cured by the defaulting Party within thirty (30) days after receiving written notice thereof from the non-breaching Party;

(iii) upon at least thirty (30) days’ prior written notice to the other Party in the event that any Person sells, offers for sale, or distributes an unauthorized generic version of the Compound or any Product in any national market in the Territory (such event, an “Other Product Entry”), which notice of termination, if given, must be given within thirty (30) days after the Other Product Entry; or

(iv) immediately upon written notice in the event that, as a result of an order of government or any other official authority, the continued operation of this Agreement in its entirety or in substantial part is prevented or delayed for an unspecified and indeterminate period.

7.3 Effect of Expiration or Termination.

(a) The expiration or earlier termination of this Agreement shall be without prejudice to any rights or obligations of the Parties that may have accrued prior to such termination, and the provisions of Section 4.1, Articles VI, VIII and IX, and this Section 7.2(c)(i) shall survive the expiration or termination of this Agreement. Except as otherwise expressly provided herein, termination of this Agreement in accordance with the provisions hereof shall not limit remedies that may otherwise be available at law or in equity.

(b) Upon expiration or earlier termination of this Agreement, each Party, at the request of the other, shall return all data, files, records and other materials in its possession or control containing or comprising the other Party’s Confidential Information except that the legal department of such Party may retain one copy for archival purposes.

(c) Upon expiration or earlier termination of this Agreement, other than pursuant to Section 7.2(b)(i), at Salix’s option and sole cost and expense, Glenmark shall use its commercially reasonable efforts promptly to assist Salix to qualify such Third Party Manufacturer designated by Salix to Manufacture such Compound, and provide, to such Third Party Manufacturer such technical assistance, as Salix may reasonably request and such Third Party Manufacturer may reasonably require in order to Manufacture the Compound provided that the technical assistance is for no more than [*] (equal to [*] work hours each). [*] shall also promptly grant to such Third Party Manufacturer a Third Party Manufacturer License, provided that Salix shall compensate [*] in the manner set forth in Schedule 2.5(d), subject to all of the limitations set forth in such Schedule including the limitation with respect to the [*] year duration of such obligations and Schedule 1.31, Section III.

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

32

(d) Subject to Section 7.3(f), upon termination of this Agreement for any reason, (i) Glenmark immediately shall cease all Manufacturing of the Compound pursuant to this Agreement, (ii) all submitted but unfilled Purchase Orders automatically shall be cancelled, and (iii) Glenmark promptly shall return any remaining Salix-Supplied Material to Salix or its designee.

(e) Subject to Glenmark’s continuing right to make Compound and use the Compound Equipment, in the event of termination of this Agreement by Glenmark pursuant to 7.2(b), Glenmark shall continue to supply Compound to Salix pursuant to the terms of this Agreement for [*] months following the date of notice of termination; provided that, notwithstanding Section 2.2, Salix shall have the right to submit a revised Forecast promptly after the date Salix receives notice of such termination from Glenmark; provided further that Salix may elect, upon [*] months’ prior written notice to Glenmark, to extend such period for [*] periods, and shall have the right, notwithstanding Section 2.2, to submit a revised Forecast together with such notice. Thereafter, upon the mutual written agreement of the Parties, such period may be extended for an additional [*] months. In addition, if there is no Third Party Manufacturer that has been approved by the FDA and is referenced in Salix’s Regulatory Documentation in respect of the Product that is supplying Compound to Salix as of the date of notice of such termination, then (i) Salix shall use commercially reasonable efforts to qualify a Third Party Manufacturer and (ii) Glenmark shall use commercially reasonable efforts to assist Salix in qualifying a Third Party Manufacturer in accordance with Section 2.22, in each case ((i) and (ii)), within [*] months of the date of notice of such termination.

(f) For purposes of clarification, termination of this Agreement does not preclude Glenmark from manufacturing Compound for its own use and the use of its Affiliates and Glenmark may continue to use Compound Equipment so long as Glenmark continues to compensate Salix in accordance with Section 2.8(c); provided that Glenmark shall have the option, in its sole discretion, to purchase the Scale-Up Equipment from Salix at such Scale-Up Equipment’s fair market value as agreed by the Parties. If Glenmark does not exercise its option, (i) Salix shall have the first right to remove the Scale-Up Equipment from the Facility at Salix’s sole cost and expense; and (ii) if Salix does not remove the Scale-Up Equipment from the Facility, Glenmark may have the Scale-Up Equipment removed from the Facility at Salix’s sole cost and expense.

ARTICLE VIII. INDEMNIFICATION

8.1 Glenmark Indemnification. Glenmark shall indemnify Salix, its Affiliates and its and their respective directors, officers, employees and agents (the “Salix Indemnified Parties”), and defend and hold each of them harmless, from and against any and all Third Party claims, lawsuits, losses, damages, liabilities, penalties, costs and expenses (including reasonable attorneys’ fees and disbursements) (collectively, “Losses”) incurred by any of them in connection with, arising from or occurring as a result of Glenmark’s gross negligence or willful misconduct in the performance of this

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

33

Agreement, except, in each case, for those Losses for which Salix has an obligation to indemnify the Glenmark Indemnified Parties pursuant to Section 8.2, as to which Losses each Party shall indemnify the other Party to the extent of its respective liability for such Losses.

8.2 Salix Indemnification. Salix shall indemnify Glenmark, its Affiliates and its and their respective directors, officers, employees and agents (the “Glenmark Indemnified Parties”), and defend and save each of them harmless, from and against any and all Losses incurred by any of them in connection with, arising from or occurring as a result of (a) any Third Party Claim made by any Person that the Manufacture and supply of the Compound in accordance with the terms hereof infringes, misappropriates or otherwise violates the patent, trademark or other intellectual property rights of such Person, (b) any Third Party Claim made by any Person relating to or arising out of death, personal injury, or other product liability, related to the marketing, sale, distribution or use of the Compound or the Product, and (c) the gross negligence or willful misconduct of Salix or its subcontractors or agents, except, in each case, for those Losses for which Glenmark has an obligation to indemnify the Salix Indemnified Parties pursuant to Section 8.1, as to which Losses each Party shall indemnify the other Party to the extent of its respective liability for such Losses.

8.3 Indemnification Procedure.

(a) Notice of Claim. The indemnified party (the “Indemnified Party”) shall give the indemnifying Party (the “Indemnifying Party”) prompt written notice (an “Indemnification Claim Notice”) of any Losses or discovery of facts upon which such Indemnified Party intends to base a request for indemnification under Section 8.1 or 8.2, but in no event shall the Indemnifying Party be liable for any Losses that result from any delay in providing such notice. Each Indemnification Claim Notice must contain a description of the claim and the nature and amount of such Loss (to the extent that the nature and amount of such Loss are known at such time). The Indemnified Party shall furnish promptly to the Indemnifying Party copies of all papers and official documents received in respect of any Losses.

(b) Third Party Claims. The obligations of an Indemnifying Party under this Article VIII with respect to Losses arising from claims of any third Person that are subject to indemnification as provided for in Section 8.1 or 8.2 (a “Third Party Claim”) shall be governed by and be contingent upon the following additional terms and conditions:

(i) Control of Defense. At its option, the Indemnifying Party may assume the defense of any Third Party Claim by giving written notice to the Indemnified Party within thirty (30) days after the Indemnifying Party’s receipt of an Indemnification Claim Notice. The assumption of the defense of a Third Party Claim by the Indemnifying Party shall not be construed as an acknowledgment that the Indemnifying Party is liable to indemnify any Indemnified Party in respect of the Third Party Claim, nor shall it constitute a waiver by the Indemnifying Party of any defenses it may assert against any Indemnified Party’s claim for indemnification. Upon assuming

34

the defense of a Third Party Claim, the Indemnifying Party may appoint as lead counsel in the defense of the Third Party Claim any legal counsel selected by the Indemnifying Party, which shall be reasonably acceptable to the Indemnified Party. In the event the Indemnifying Party assumes the defense of a Third Party Claim, the Indemnified Party shall immediately deliver to the Indemnifying Party all original notices and documents (including court papers) received by any Indemnified Party in connection with the Third Party Claim. Subject to Section 8.3(b)(ii), if the Indemnifying Party assumes the defense of a Third Party Claim, the Indemnifying Party shall not be liable to the Indemnified Party for any legal expenses subsequently incurred by such Indemnified Party in connection with the analysis, defense or settlement of the Third Party Claim. In the event that it is ultimately determined that the Indemnifying Party is not obligated to indemnify, defend or hold harmless a Salix Indemnified Party or Glenmark Indemnified Party, as applicable, from and against the Third Party Claim, the Indemnified Party shall reimburse the Indemnifying Party for any and all costs and expenses (including attorneys’ fees and costs of suit) and any Losses incurred by the Indemnifying Party in its defense of the Third Party Claim with respect to such Salix Indemnified Party or Glenmark Indemnified Party, as applicable.

(ii) Right to Participate in Defense. Without limiting Section 8.3(b)(i), any Indemnified Party shall be entitled to participate in, but not control, the defense of such Third Party Claim and to employ counsel of its choice for such purpose; provided, however, that such employment shall be at the Indemnified Party’s own expense unless (A) the employment thereof has been specifically authorized by the Indemnifying Party in writing, (B) the Indemnifying Party has failed to assume the defense and employ counsel in accordance with Section 8.3(b)(i) (in which case the Indemnified Party shall control the defense), or (C) the interests of the Indemnified Party and the Indemnifying Party with respect to such Third Party Claim are sufficiently adverse to prohibit the representation by the same counsel of both parties under applicable law, ethical rules or equitable principles.

(iii) Settlement. With respect to any Losses relating solely to the payment of money damages in connection with a Third Party Claim and that will not result in the Indemnified Party’s becoming subject to injunctive or other relief or otherwise adversely affect the business of the Indemnified Party in any manner, and as to which the Indemnifying Party shall have acknowledged in writing the obligation to indemnify the Indemnified Party hereunder, the Indemnifying Party shall have the sole right to consent to the entry of any judgment, enter into any settlement or otherwise dispose of such Loss, on such terms as the Indemnifying Party, in its sole discretion, shall deem appropriate. With respect to all other Losses in connection with Third Party Claims, where the Indemnifying Party has assumed the defense of the Third Party Claim in accordance with Section 8.3(b)(i), the Indemnifying Party shall have authority to consent to the entry of any judgment, enter into any settlement or otherwise dispose of such Loss; provided that it obtains the prior written consent of the Indemnified Party (which consent shall not be unreasonably withheld, conditioned or delayed). The Indemnifying Party shall not be liable for any settlement or other disposition of a Loss by an Indemnified Party that is reached without the written consent of the Indemnifying Party. Regardless of whether the Indemnifying Party chooses to defend or prosecute any

35

Third Party Claim, no Indemnified Party shall admit any liability with respect to, or settle, compromise or dispose of, any Third Party Claim without the prior written consent of the Indemnifying Party (which consent shall not be unreasonably withheld, conditioned or delayed).

(iv) Cooperation. If the Indemnifying Party chooses to defend or prosecute any Third Party Claim, the Indemnified Party shall cooperate in the defense or prosecution thereof and shall furnish such records, information and testimony, provide such witnesses and attend such conferences, discovery proceedings, hearings, trials and appeals as may be reasonably requested in connection therewith. Such cooperation shall include access during normal business hours afforded to the Indemnifying Party to, and reasonable retention by the Indemnified Party of, records and information that are reasonably relevant to such Third Party Claim, and making employees and agents available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder, and the Indemnifying Party shall reimburse the Indemnified Party for all its reasonable out-of-pocket expenses in connection therewith.

(v) Expenses. Except as provided above, the reasonable and verifiable costs and expenses, including fees and disbursements of counsel, incurred by the Indemnified Party in connection with any Third Party Claim shall be reimbursed on a calendar quarter basis in arrears by the Indemnifying Party, without prejudice to the Indemnifying Party’s right to contest the Indemnified Party’s right to indemnification and subject to refund in the event the Indemnifying Party is ultimately held not to be obligated to indemnify the Indemnified Party.

8.4 Insurance.

(a) Salix shall maintain (i) comprehensive general liability insurance written on an occurrence basis with a combined single limit for bodily injury and property damage of not less than [*] United States Dollars ($[*]) and (ii) product liability/completed operations coverage with a per claim limit of not less than [*] United States Dollars ($[*]) (together, the “Salix Policies”).

(b) Glenmark shall maintain (i) comprehensive general liability insurance in the amount of [*] United States Dollars ($[*]) and (ii) public liability insurance in the amount of [*] United States Dollars ($[*]) (collectively, the “Glenmark Policies”).

(c) The Policies shall (i) be provided by an insurance carrier(s) acceptable to the other Party and (ii) show the other Party as additional named insured and loss payee, as its interests may appear. Certificates of insurance for the Policies shall be furnished to the other Party within ten (10) days after the Effective Date. The Policies shall remain in effect throughout the Term of this Agreement and shall not be canceled or

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

36

subject to a reduction of coverage or any other modification without the prior written authorization of the other Party.

8.5 Limitation on Damages.

(a) EXCEPT WITH RESPECT TO THE GROSS NEGLIGENCE OR INTENTIONAL MISCONDUCT OF A PARTY, NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY FOR SPECIAL, EXEMPLARY OR CONSEQUENTIAL DAMAGES, INCLUDING BUSINESS INTERRUPTION OR LOST PROFITS, WHETHER IN CONTRACT, WARRANTY, NEGLIGENCE, TORT, STRICT LIABILITY OR OTHERWISE.

(b) EXCEPT FOR EACH PARTY’S RESPECTIVE INDEMNIFICATION OBLIGATIONS SET FORTH IN SECTIONS 8.1 AND 8.2, EACH PARTY’S TOTAL LIABILITY UNDER THIS AGREEMENT SHALL IN NO EVENT EXCEED THE TOTAL FEES PAID BY SALIX TO GLENMARK DURING THE TERM OF THIS AGREEMENT; PROVIDED, HOWEVER, THAT GLENMARK’S LIABILITY FOR RECALLS PURSUANT TO SECTION 2.17 SHALL IN NO EVENT EXCEED THE PURCHASE PRICE RECEIVED BY GLENMARK FOR THE BATCH(ES) GIVING RISE TO SUCH LIABILITY.

ARTICLE IX. MISCELLANEOUS

9.1 Notices. All notices, requests and other communications hereunder must be in writing, specifically reference this Agreement in a prominent manner, and be delivered personally, by electronic mail (i.e., E-mail) with delivery receipt requested or by recognized international courier, to the Parties at the following addresses or E-mail addresses:

If to Salix to:

Salix Pharmaceuticals, Inc.

1700 Perimeter Park Drive

Morrisville, North Carolina 27560

Attention: AVP, Pharmaceutical Development and Manufacturing

E-mail: Joseph.Lockhart@Salix.com

with copies (which will not constitute notice) to:

Salix Pharmaceuticals, Inc.

1700 Perimeter Park Drive

Morrisville, North Carolina 27560

Attention: General Counsel

E-mail: Mark.Reeth@Salix.com

and

37

Covington & Burling LLP

1201 Pennsylvania Avenue, N.W.

Washington, D. C. 20004

Attention: Edward C. Britton, Esq.

E-mail: ebritton@cov.com

If to Glenmark to:

Glenmark Pharmaceuticals Ltd.

B/2, Mahalaxmi Chambers

22, Bhulabhai Desai Road

Mumbai-400 026

India

Attention: Glenn Saldanha

E-mail: glenn_saldanha@glenmarkpharma.com

with a copy (which will not constitute notice) to:

Glenmark Pharmaceuticals Ltd.

B/2, Mahalaxmi Chambers

22, Bhulabhai Desai Road

Mumbai-400 026

India

Attention: Rajesh Desai

E-mail: rajesh_desai@glenmarkpharma.com

All such notices, requests and other communications will (a) if delivered personally to the address as provided in this Section, be deemed given upon receipt, (b) if delivered by electronic mail to the E-mail address as provided in this Section 9.1, be deemed given on the next regular business day in the jurisdiction of receipt, and (c) if delivered by courier to the address as provided in this Section 9.1, be deemed given upon receipt. Any Party from time to time may change its address, E-mail address or other information for the purpose of notices to that Party by giving notice specifying such change to the other Party hereto.

9.2 Force Majeure. Neither Party shall be liable for delay in delivery or nonperformance in whole or in part (other than a failure to pay any amount due hereunder), nor shall the other Party have the right to terminate this Agreement except as otherwise specifically provided in this Section 9.2, where delivery or performance has been affected by a condition beyond such Party’s reasonable control, including fires, floods, embargoes, shortages, epidemics, quarantines, war, acts of war (whether war be declared or not), terrorism, insurrections, riots, civil commotion, strikes, lockouts or other labor disturbances, acts of God or acts, omissions or delays in acting by any governmental authority; provided that the Party affected by such a condition shall, within ten (10) days of its occurrence, give notice to the other Party stating the nature of the

38

condition, its anticipated duration and any action being taken to avoid or minimize its effect. The suspension of performance shall be of no greater scope and no longer duration than is reasonably required and the nonperforming Party shall use its commercially reasonable efforts to remedy its inability to perform. Notwithstanding the foregoing, in the event the suspension of performance continues for [*] days after the date of the occurrence, and such failure to perform would constitute a material breach of this Agreement in the absence of such force majeure event, the non-affected Party may terminate this Agreement immediately by written notice to the affected Party.

9.3 Entire Agreement; Amendment. This Agreement, together with the Schedules and Exhibits attached hereto, sets forth and constitutes the entire agreement and understanding between the Parties with respect to the subject matter hereof and all prior agreements, understandings, promises and representations, whether written or oral, with respect thereto are superseded hereby. Each Party confirms that it is not relying on any representations or warranties of the other Party except as specifically set forth herein. No amendment, modification, release or discharge shall be binding upon the Parties unless in writing and duly executed by authorized representatives of both Parties.

9.4 Further Assurances. Each Party shall duly execute and deliver, or cause to be duly executed and delivered, such further instruments and do and cause to be done such further acts and things, including the filing of such assignments, agreements, documents and instruments as may be necessary or as the other Party may reasonably request in connection with this Agreement or to carry out more effectively the provisions and purposes hereof or to better assure and confirm unto such other Party its rights and remedies under this Agreement.

9.5 Successors and Assigns. The terms and provisions hereof shall inure to the benefit of, and be binding upon, Salix, Glenmark and their respective successors and permitted assigns.

9.6 Dispute Resolution. Any dispute, controversy or claim arising out of or relating to this Agreement or the breach, termination or validity thereof (each, a “Dispute”), shall be referred to a senior executive of each Party; provided that each such senior executive is not involved in such Dispute. Such senior executives shall meet for attempted resolution of such Dispute by good faith negotiations within thirty (30) days after such Dispute is referred to such senior management employees. In the event such senior management employees are not able to resolve such Dispute within such thirty (30) day period, then, at the election of either Party, such Dispute shall be decided by litigation. Any such litigation shall be pursued in accordance with Section 9.7; provided that any dispute regarding the validity, scope, enforceability, inventorship or ownership of intellectual property rights shall be submitted by either Party to a court of competent jurisdiction in the country in which such rights apply.

9.7 Governing Law; Jurisdiction; Venue; Service.

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

39

(a) This Agreement shall be governed and interpreted in accordance with the law of the State of New York, excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to the substantive law of another jurisdiction. The Parties agree to exclude the application to this Agreement of the United Nations Convention on Contracts for the International Sale of Goods.

(b) Subject to Section 9.6, each Party irrevocably and unconditionally consents to the exclusive jurisdiction of the courts of general jurisdiction of the State of New York and the United States District Court for the Southern District of New York sitting in the Borough of Manhattan (collectively, the “Courts”) for any action, suit or proceeding (other than appeals therefrom) concerning any matter arising out of or relating to this Agreement, and agrees not to commence any action, suit or proceeding (other than appeals therefrom) related thereto except in such Courts.

(c) Each Party hereto further hereby irrevocably and unconditionally waives any objection to the laying of venue of any action, suit or proceeding (other than appeals therefrom) arising out of or relating to this Agreement in the Courts and hereby further irrevocably and unconditionally agrees not to raise any objection at any time to the laying or maintaining of the venue of any such action, suit or proceeding in any of such Courts, irrevocably waives any claim that such action, suit or other proceeding has been brought in an inconvenient forum and further irrevocably waives the right to object, with respect to such action, suit or other proceeding, that such Court does not have any jurisdiction over such Party.

(d) Each Party hereto further agrees that, to the maximum extent permitted by Applicable Law, service of any process, summons, notice or document by registered mail to its address and contact person for notices provided for in Section 9.1 shall be effective service of process for any action, suit or proceeding brought against it under this Agreement in any of the Courts.

9.8 Third Party Beneficiaries. Nothing in this Agreement shall be construed as giving any person, firm, corporation or other entity, other than the Parties hereto and their successors and permitted assigns, any right, remedy or claim under or in respect of this Agreement or any provision hereof.

9.9 Export Control. This Agreement is made subject to any restrictions concerning the export of products or technical information from the United States or other countries that may be imposed on the Parties from time to time. Each Party agrees that it will not export, directly or indirectly, any technical information acquired from the other Party under this Agreement or any products using such technical information to a location or in a manner that at the time of export requires an export license or other governmental approval, without first obtaining the written consent to do so from the appropriate agency or other governmental entity in accordance with Applicable Law.

9.10 Assignment. Except as expressly provided herein, neither Party may, without the prior written consent of the other Party, sell, transfer, assign, delegate,

40

pledge, subcontract or otherwise dispose of, whether voluntarily, involuntarily, by operation of law or otherwise, this Agreement or any of its rights or duties hereunder; provided, however, (a) Salix may, without the prior written consent of Glenmark, assign this Agreement and its rights and obligations hereunder to the purchaser or sublicensee of Salix’s rights in and to the Compound or any Product and (b) either Party may, without the prior written consent of the other Party, assign this Agreement and its rights and obligations hereunder to any of its Affiliates or the purchaser of all or substantially all of its assets or to any successor entity or acquirer in the event of a merger, consolidation or change in control of such Party. Any attempt to assign, transfer, subcontract or delegate any portion of this Agreement in violation of this Section shall be null and void. All validly assigned and delegated rights and obligations of the Parties hereunder shall be binding upon and inure to the benefit of and be enforceable by and against the successors and permitted assigns of Salix or Glenmark, as the case may be. In the event either Party assigns or delegates its rights or obligations to another Person in accordance with the terms hereof, the assignee or transferee shall assume all obligations of its assignor or transferor under this Agreement and the assignor or transferor shall cease to be a party to this Agreement and shall cease to have any rights or obligations under this Agreement from and after the effective date of such assignment. Notwithstanding the foregoing, no such assignment or delegation shall relieve the assignor or transferor of any of its obligations hereunder. Notwithstanding anything to the contrary herein, Glenmark may not subcontract or delegate any of its obligations under this Agreement to any Person without the prior written consent of Salix, which consent shall not be unreasonably withheld, conditioned or delayed.

9.11 Waiver. Any term or condition of this Agreement may be waived at any time by the Party that is entitled to the benefit thereof, but no such waiver shall be effective unless set forth in a written instrument duly executed by or on behalf of the Party waiving such term or condition. No waiver by either Party of any term or condition of this Agreement, in any one or more instances, shall be deemed to be or construed as a waiver of the same or any other term or condition of this Agreement on any future occasion.

9.12 Severability. If any provision of this Agreement is held to be illegal, invalid or unenforceable under any present or future law, and if the rights or obligations of either Party under this Agreement will not be materially and adversely affected thereby, (a) such provision shall be fully severable, (b) this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part hereof, (c) the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom, and (d) in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as a part of this Agreement a legal, valid and enforceable provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible and reasonably acceptable to the Parties herein.

9.13 Independent Contractors. The status of the Parties under this Agreement shall be that of independent contractors. Nothing in this Agreement is intended or shall be deemed to constitute a partnership, agency, employer, employee, or joint venture

41

relationship between the Parties. Neither Party shall have the right to enter into any agreements on behalf of the other Party, nor shall it represent to any Person that it has any such right or authority.

9.14 Construction. Unless the context of this Agreement otherwise requires: (a) words of any gender include each other gender; (b) words using the singular or plural number also include the plural or singular number, respectively; (c) the terms “hereof,” “herein,” “hereby” and derivative or similar words refer to this entire Agreement; (d) the terms “Article,” “Section,” “Schedule,” “Exhibit” or “clause” refer to the specified Article, Section, Schedule, Exhibit or clause of this Agreement; (e) the term “or” has, except where otherwise indicated, the inclusive meaning represented by the phrase “and/or”; (f) the term “including” or “includes” means “including without limitation” or “includes without limitation”; and (g) references to any agreement, instrument or other document in this Agreement refer to such agreement, instrument or other document as originally executed or, if subsequently amended, replaced or supplemented from time to time, as so amended, replaced or supplemented and in effect at the relevant time of reference thereto. Whenever this Agreement refers to a number of days, such number shall refer to calendar days unless business days are specified. The captions of this Agreement are for convenience of reference only and in no way define, describe, extend, or limit the scope or intent of this Agreement or the intent of any provision contained in this Agreement. The language of this Agreement shall be deemed to be the language mutually chosen by the Parties and no rule of strict construction shall be applied against either Party.

9.15 Remedies. The rights and remedies provided herein are cumulative and do not exclude any other right or remedy provided by applicable law or otherwise available except as expressly set forth herein.

9.16 Counterparts; Facsimile Execution. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, and all of which, taken together, shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page of this Agreement (and each amendment, modification and waiver in respect of it) by facsimile or other electronic transmission shall be as effective as delivery of a manually executed original counterpart of each such instrument.

9.17 English Language. This Agreement shall be written and executed in, and all other communications under or in connection with this Agreement shall be in, the English language. Any translation into any other language shall not be an official version thereof, and in the event of any conflict in interpretation between the English version and such translation, the English version shall control.

42

9.18 Attorneys’ Fees. If a Party is determined to be in breach of this Agreement by a court of competent jurisdiction, such Party shall be responsible to the prevailing Party for any and all reasonable out-of-pocket expenses, including attorneys’ fees and court costs actually incurred by the prevailing Party by reason of its enforcement and protection of its rights under this Agreement, as determined by such court.

[The remainder of this page has been intentionally left blank.]

43

IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on the day and year first above written.

SALIX PHARMACEUTICALS, INC.		GLENMARK PHARMACEUTICALS LTD
By:	/s/ Carolyn J. Logan	By:	/s/ Rajesh Desai
Name:	Carolyn J. Logan	Name:	Rajesh Desai
Title:	President and CEO	Title:	Director Finance & Legal

Napo hereby acknowledges and consents to this Agreement.

NAPO PHARMACEUTICALS, INC.
By:	/s/ Lisa Conte
Name:	Lisa Conte
Title:	CEO

Schedule 1.6

Capped Price

$ [*]/gram

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

2

Schedule 1.17

Current Capacity

Glenmark’s Current Capacity is based on a [*] for purification and fractionation of the Compound.

The Current Capacity permits up to [*] cycles per month to be run that produce [*] kg of Compound per cycle, or [*] kg per year.

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

Schedule 1.31

Fully-Allocated Manufacturing Costs

As used in this Agreement, “Fully-Allocated Manufacturing Costs” (“FAMC”) means:

I. FAMC includes the costs of all direct materials, direct labor and manufacturing overhead consumed, provided or procured by a manufacturing facility in the manufacture of the Compound, together with appropriate: (i) allowances for manufacturing variances, (ii) inventory carrying charges, and (iii) adjustments for inventory valuations as calculated using International Financial Reporting Standards (“IFRS”). To the extent calculation under IFRS is limited due to Glenmark’s current books and records, Glenmark agrees to use Glenmark’s then current standard procedures and methodology for such calculation, consistently applied. Further, Glenmark agrees to use commercially reasonable efforts to apply IFRS calculation as soon as practicable. Costs associated with unused capacity or downtime shall not be included in determining FAMC, and FAMC shall not include [*] and other [*] or [*] or [*] or [*]. Also not included in the FAMC costs is the [*] (defined above).

For such purposes:

A. Direct material costs include:

1. The cost of [*] (i.e., [*], etc. to the extent [*] and [*] and more appropriately captured by Item I.C.2. (below), [*] and other [*] used in the production of a Compound.

2. [*] and [*] (exclusive of [*] in excess of [*] for Compound.)

B. Direct labor costs include:

1. [*] and [*] for [*].

C. Manufacturing overhead is limited to costs that can be identified in a practical manner with specific units of production in accordance with IFRS but cannot be included in specific direct material or direct labor costs. Such overhead costs may include:

1. [*], including, but not limited to, [*] (e.g., [*] and [*] (e.g., [*] and [*] and [*] and [*] (excluding [*]) and [*] with respect to the Compound at the Facility.

2. [*] which reflects on a [*] in the manufacture of the Compound at the Facility.

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

3. [*], including [*], including [*] and [*] (including [*] and [*] relating to [*] and [*]), [*], and other [*] in connection with the Manufacture of the Compound at the Facility.

4. [*] and other [*] or [*] to Manufacture the Compound at the Facility.

D. Allowances for manufacturing variances, including yield variances within GMP tolerances.

E. Allowances for adjustments to inventory, valuation, including reasonable charges for spoilage, expiration of shelf life and like charges related to the Compound Manufactured at the Facility.

F. Property and sales taxes on shipment and warehousing related to finished goods.

II. FAMC does not include:

A. [*]

B. [*]

C. [*]

C. [*]

D. Costs associated with the [*] and the [*], including, without limitation, the costs of [*] and other [*].

E. [*]

F. [*]

G. [*]

III. Adjustments for Glenmark Inventions

In the event that (a) any Glenmark Inventions come into existence during the Term, (b) such Glenmark Inventions result in a reduction of the then-current FAMC, and (c) Salix has the Compound Manufactured using such Glenmark Inventions, then the FAMC shall be increased by an amount equal to [*] percent ([*]%) of the amount of any such reduction in FAMC (the “Markup Amount”) if such Manufacture is performed by Glenmark. If such Manufacture is performed by a Third Party Manufacturer pursuant to a Third Party Manufacturer License,

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

2

then the markup set forth in Section (B) of Schedule 2.5(d) shall be increased by the [*].

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

Schedule 1.40

Glenmark Territory

[*]

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

Schedule 1.81

Specifications

Compound-Related Specifications

[*]

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

[*]

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

CPL-Related Specifications

[*]

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

Schedule 1.88

Third Party Manufacturer License

A Third Party Manufacturer License shall be a non-exclusive license to use the Glenmark Inventions and the Glenmark Information solely for the purpose to Manufacture the Compound for supply to Salix.

Schedule 2.2(c)

Full Production Lot Sizes

[*]

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

Schedule 2.5(c)

Fixed Price

$[*]/gram

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

Schedule 2.5(d)

Compensation to Glenmark for Use of

Third Party Manufacturer

In the event that Salix uses a Third Party Manufacturer at any time during the Term of this Agreement from the Effective Date until the [*] anniversary thereof, Salix shall compensate Glenmark for any such use as follows:

(A) So long as Glenmark is ready, willing and able to supply Salix’s full requirement for Compound, Salix may purchase Compound from a Third Party Manufacturer without any markup so long as Salix purchases no more than [*] ([*]%) of its total requirements for Compound from the Third Party Manufacturer;

(B) If Glenmark is ready, willing and able to supply Salix’s full requirements for Compound and Salix purchases Compound from a Third Party Manufacturer for more than [*] ([*]%) of its total requirements for Compound from the Third Party Manufacturer, Salix shall pay Glenmark a markup of [*] ([*]%) of the purchase price paid to the Third Party Manufacturer for the quantities in excess of [*] percent ([*]%);

(C) If Glenmark is unable to supply Compound to Salix, Salix may purchase any quantities of Compound from a Third Party Manufacturer such quantities of Compound that Glenmark is unable to supply to Salix without any markup, so long as Glenmark’s inability to supply is not the direct result of Salix’s breach of its obligations under this Agreement or Salix’s willful misconduct. In such event, Glenmark may resume supply of Compound to Salix for at least [*] percent ([*]%) of Salix’s full requirements of Compound, if Glenmark provides Salix’s with [*] months’ prior written notice of its intention to resume supply of Compound from Glenmark for at least [*] percent ([*]%) of Salix’s full requirements of Compound. Salix shall resume its relationship with Glenmark in such capacity as soon as practicable; provided that Salix has fulfilled its purchase requirement to its Third Party Manufacturer, which in no event shall be more than [*] months from receipt of such notice by Salix from Glenmark.

(D) If Glenmark’s inability to supply is the result of Salix’s breach of its obligations under this Agreement or Glenmark’s willful misconduct, then Salix is obligated to pay a markup in accordance with the terms of Section (B) above.

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

Exhibit A – Page 2 of 2

Schedule 2.8(c)

Compound Equipment Usage

Costs for usage of the Compound Equipment shall be based on depreciation of the Compound Equipment on a pro rata basis over the reasonably estimated life of the Compound Equipment and use of the Compound Equipment in the Manufacture of Compound for the performance of the Glenmark Activities.

Exhibit A

Example of Scale-Up Plan

[*]

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

CROFELEMER SCALE-UP KEY EQUIPMENT ESTIMATES (EXAMPLE)

[*]

* Confidential treatment requested; certain information omitted and filed separately with the SEC.

EX-21.1

Exhibit 21.1

Salix Pharmaceuticals, Ltd. Subsidiaries

Name	Jurisdiction
Salix Pharmaceuticals, Inc.	California
Glycyx Pharmaceuticals, Ltd.	Delaware
InKine Pharmaceutical Company, Inc.	New York
Corbec Pharmaceuticals, Inc.	Delaware
Sangen Pharmaceutical Company	Delaware

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (No. 333-110942) and Form S-8 (Nos. 333-126685, 333-126290, 333-116675, 333-96771, 333-63604, 333-61497, 333-135268, 333-47586 and 333-151658) of Salix Pharmaceuticals, Ltd. of our report dated March 11, 2009 relating to the financial statements, financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.

/s/ PricewaterhouseCoopers LLP

Raleigh, North Carolina

March 11, 2009

EX-23.2

EXHIBIT 23.2

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the following Registration Statements:

(1) Registration Statement (Form S-3 No. 333-110942) of Salix Pharmaceuticals, Ltd.,

(2) Registration Statement (Form S-8 No. 333-126685) pertaining to the InKine Pharmaceutical Company, Inc. 1993 Stock Option Plan, the InKine Pharmaceutical Company, Inc. 1997 Consultant Stock Option Plan, the InKine Pharmaceutical Company, Inc. 1999 Equity Compensation Plan, and the InKine Pharmaceutical Company, Inc. 2004 Equity Compensation Plan,

(3) Registration Statements (Form S-8 Nos. 333-126290, 333-135268 and 333-151658) pertaining to the 2005 Stock Plan of Salix Pharmaceuticals, Ltd., and

(4) Registration Statements (Form S-8 Nos. 333-116675, 333-96771, 333-63604, 333-61497, and 333-47586) pertaining to the 1996 Stock Option Plan, as amended;

of our report dated March 9, 2007, with respect to the consolidated financial statements and schedule of Salix Pharmaceuticals, Ltd., included in this Annual Report (Form 10-K) of Salix Pharmaceuticals, Ltd.

/s/ Ernst & Young LLP

Raleigh, North Carolina

March 11, 2009

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Carolyn J. Logan, certify that:

1. I have reviewed this annual report on Form 10-K of Salix Pharmaceuticals, Ltd.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 11, 2009	By:	/s/ Carolyn J. Logan
		Carolyn J. Logan President and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Adam C. Derbyshire, certify that:

1. I have reviewed this annual report on Form 10-K of Salix Pharmaceuticals, Ltd.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 11, 2009	By:	/s/ Adam C. Derbyshire
		Adam C. Derbyshire Senior Vice President, Finance & Administration, and Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Salix Pharmaceuticals, Ltd. (the “Company”) for the period ended December 31, 2008 as filed with the Securities and Exchange Commission on or about the date hereof (the “Report”), I, Carolyn J. Logan, President and Chief Executive Officer, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the periods presented in the Report.

/s/ Carolyn J. Logan

Carolyn J. Logan

President and Chief Executive Officer

March 11, 2009

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Salix Pharmaceuticals, Ltd. (the “Company”) for the period ended December 31, 2008 as filed with the Securities and Exchange Commission on or about the date hereof (the “Report”), I, Adam C. Derbyshire, Senior Vice President, Finance and Administration and Chief Financial Officer, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the periods presented in the Report.

/s/ Adam C. Derbyshire

Adam C. Derbyshire

Senior Vice President, Finance & Administration, and Chief Financial Officer

March 11, 2009