10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2004

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.)

8540 Colonnade Center Drive, Suite 501

Raleigh, North Carolina 27615

(Address of principal executive offices, including zip code)

(919) 862-1000

(Registrant’s telephone number, including area code)

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 whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    YES  x    NO  ¨

The number of shares of the Registrant’s Common Stock outstanding as of August 4, 2004 was 36,167,588.

SALIX PHARMACEUTICALS, LTD.

TABLE OF CONTENTS

			Page No.
PART I.		FINANCIAL INFORMATION
Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets as of June 30, 2004 (unaudited) and December 31, 2003	1
		Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2004 and 2003 (unaudited)	2
		Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003 (unaudited)	3
		Notes to Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		7
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		11
Item 4.	Controls and Procedures		11
PART II.	OTHER INFORMATION
Item 4.	Submission of Matters to a Vote of Security Holders		12
Item 6.	Exhibits and Reports on Form 8-K		12
Signatures			15

PART I. FINANCIAL INFORMATION.

Item 1. Financial Statements

SALIX PHARMACEUTICALS, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(U.S. dollars, in thousands, except share amounts)

	June 30, 2004			December 31, 2003
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	42,291		$	62,795
Short-term investments		—			2,012
Accounts receivable, net		7,324			3,598
Inventory, net		21,792			16,094
Prepaid and other current assets		1,063			1,732
Total current assets		72,470			86,231
Property and equipment, net		2,442			2,621
Other assets		15,150			2,000
Total assets	$	90,062		$	90,852
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	3,835		$	1,611
Accrued liabilities		13,337			11,749
Deferred revenue		—			3,557
Total current liabilities		17,172			16,917
Commitments		—			—
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, 36,143,009 shares issued and outstanding at June 30, 2004 and 35,579,732 shares issued and outstanding at December 31, 2003		36			36
Additional paid-in capital		168,569			165,281
Accumulated other comprehensive loss		(676	)		(655	)
Accumulated deficit		(95,039	)		(90,727	)
Total stockholders’ equity		72,890			73,935
Total liabilities and stockholders’ equity	$	90,062		$	90,852

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

1

SALIX PHARMACEUTICALS, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(U.S. Dollars, in thousands, except per share data)

	Three months ended June 30,						Six months ended June 30,
	2004			2003			2004			2003
Revenues:
Product revenue	$	19,440		$	12,933		$	39,299		$	24,454
Revenue from collaborative agreements		3,799			—			3,799			—
Total revenues		23,239			12,933			43,098			24,454
Costs and expenses:
Cost of products sold		4,682			3,070			9,378			5,834
License fees and costs related to collaborative agreements		1,806			31			1,837			63
Research and development		4,569			6,459			9,524			11,609
Selling, general and administrative		14,232			9,357			27,000			18,976
Total cost and expenses		25,289			18,917			47,739			36,482
Loss from operations		(2,050	)		(5,984	)		(4,641	)		(12,028	)
Interest, and other income (expense), net		163			(1,019	)		329			(447	)
Net loss before tax		(1,887	)		(7,003	)		(4,312	)		(12,475	)
Income tax		—			—			—			—
Net loss	$	(1,887	)	$	(7,003	)	$	(4,312	)	$	(12,475	)
Net loss per share, basic and diluted	$	(0.05	)	$	(0.22	)	$	(0.12	)	$	(0.39	)
Shares used in computing net loss per share, basic and diluted		36,031			32,214			35,903			32,139

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

2

SALIX PHARMACEUTICALS, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(U.S. dollars, in thousands)

	Six months ended June 30,
	2004			2003
Cash flows from operating activities
Net loss	$	(4,312	)	$	(12,475	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		404			232
Changes in assets and liabilities:
Accounts receivable, inventory and other assets		(9,005	)		(2,143	)
Accounts payable and other current liabilities		3,812			770
Deferred revenue		(3,557	)		93
Net cash used in operating activities		(12,658	)		(13,523	)
Cash flows from investing activities
Purchases of property and equipment		(125	)		(556	)
Purchase of intangible asset		(13,000	)		—
Proceeds from maturity of investments		2,012			16,181
Net cash (used in) provided by investing activities		(11,113	)		15,625
Cash flows from financing activities
Proceeds from issuance of common stock		3,288			1,136
Net cash provided by financing activities		3,288			1,136
Effect of exchange rate changes on cash		(21	)		(93	)
Net increase in cash and cash equivalents		(20,504	)		3,145
Cash and cash equivalents at beginning of period		62,795			34,531
Cash and cash equivalents at end of period	$	42,291		$	37,676

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

3

SALIX PHARMACEUTICALS, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2004

(Unaudited)

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 financial statements are stated in United States dollars and are prepared under accounting principles generally accepted in the United States. The accompanying condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated.

The accompanying condensed consolidated financial statements include all adjustments (consisting only of normal recurring items), that, in the opinion of management, are necessary for a fair presentation of financial position, results of operations and cash flows. These financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Quarterly Report and with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003 filed with the Securities and Exchange Commission. The results of operations for interim periods are not necessarily indicative of results to be expected for a full year or any future period.

2. Commitments

At June 30, 2004, the Company had binding purchase order commitments for inventory purchases aggregating approximately $18.6 million over nine months.

3. Investments

The Company considers all investments that have a maturity of greater than three months and less than one year to be short-term investments. All securities with maturities beyond one year are considered long-term investments. The Company’s short-term and long-term investments consist of government agency and high-grade corporate bonds. The Company has the intent and ability to hold these investments until maturity; therefore, the investments are classified as held-to-maturity and are reported at amortized cost.

4. Inventory

Inventory at June 30, 2004 consisted of $17.5 million of raw materials and $4.3 million of finished goods. Inventory at December 31, 2003 consisted of $12.2 million of raw materials and $3.9 million of finished goods.

5. Intangible Assets

When the Company makes product acquisitions that include license agreements, product rights and other identifiable intangible assets, it records the aggregate purchase price, along with the value of the product related liabilities that it assumes, as intangible assets. The Company allocates the purchase price to the fair value of the various intangible assets in order to amortize their cost as an expense in our statement of operations over the estimated economic useful life of the related 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. Factors the Company considers important that could trigger an impairment review include 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.

4

In assessing the recoverability of the Company’s intangible assets, it 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, an impairment loss will be recognized in an amount equal to the difference. The Company reviews intangible assets for impairment at least annually and whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable.

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 Suppositores, 30 mg) from King Pharmaceuticals, Inc. for $13.0 million. At June 30, 2004, other assets consisted primarily of intangible assets related to the Anusol, Proctocort and Azasan product acquisitions.

6. Stock Dividend

On June 21, 2004, the Board of Directors approved a three-for-two stock split of the Company’s common stock, in the form of a stock dividend. As a result, stockholders received one additional common share for every two shares held on the record date of June 30, 2004. Statements or certificates were issued on or about July 12, 2004. All share and per share amounts have been retroactively adjusted to reflect the split for all periods presented.

7. Revenue Recognition

Product sales are recorded upon shipment of order and transfer of title.

In December 1999, the SEC issued Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements”, as amended by SAB 104, “Revenue Recognition”, which clarifies conditions to be met in order to recognize revenue. SAB 101 requires companies to recognize up-front non-refundable fees over the term of the related agreement unless the fee is in exchange for products delivered or services performed that represent the culmination of a separate earnings process.

Due to the uniqueness of each of the Company’s licensing arrangements, the Company analyzes each element of each contract, including milestone payments, to determine the appropriate revenue recognition. In accordance with SAB 101, the Company recognizes revenue upon achievement of contractual milestones only when and to the extent that it concludes that a separate earnings process has been culminated or the milestone is representative of the level of effort and progress toward completion of a long-term contract.

Revenues from collaborative agreements for the three-month and six-month periods ended June 30, 2004 were $3.8 million. These revenues were primarily related to the Company’s agreement with Shire Pharmaceuticals Group plc under which Shire purchased from us the intellectual property related to balsalazide for Austria, Belgium, Denmark, Finland, France, Germany, Iceland, Republic of Ireland, Luxembourg, Norway, the Netherlands, Switzerland and the United Kingdom.

8. Research and Development

Research and development costs, both internal and externally contracted, are expensed as incurred. These costs include direct expenditures for goods and services, as well as indirect expenditures such as salaries, administrative expenses and various allocated costs.

5

9. Comprehensive Loss

Comprehensive loss is comprised of net loss and other comprehensive loss. Other comprehensive loss includes certain changes in the stockholders’ equity of the Company that are excluded from net loss. Specifically, other comprehensive loss includes foreign currency translation adjustments.

Comprehensive loss for the three and six months ended June 30, 2004 and 2003 was as follows:

	Three months ended June 30,
	2004			2003
Net loss	$	(1,887	)	$	(7,003	)
Cumulative foreign currency translation adjustments		74			(151	)
Comprehensive loss	$	(1,813	)	$	(7,154	)

	Six months ended June 30,
	2004			2003
Net loss	$	(4,312	)	$	(12,475	)
Cumulative foreign currency translation adjustments		(21	)		(93	)
Comprehensive loss	$	(4,333	)	$	(12,568	)

10. Stock-Based Compensation

The Company accounts for stock-based awards to employees under the intrinsic value method in accordance with Accounting Principles Board Opinion, or APB, No. 25, “Accounting for Stock Issued to Employees”, and has adopted the disclosure-only alternative of SFAS No. 123, “Accounting for Stock-Based Compensation”. Under APB 25, the Company generally recognizes no compensation expense with respect to such awards.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock Based Compensation-Transition and Disclosure and amendment of FASB Statement No. 123”. This statement amends SFAS No. 123, “Accounting for Stock Based Compensation”, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock based employee compensation. In addition, this statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock based employee compensation and the effects of the method used on reported results.

6

Had compensation cost for the Company’s stock-based compensation plan been determined based on fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123, the Company’s net loss and loss per share would have been increased to the pro forma amounts indicated below for the periods ended June 30, 2004 and 2003, respectively.

	Three months ended June 30,						Six months ended June 30,
	2004			2003			2004			2003
Net loss:
As reported	$	(1,887	)	$	(7,003	)	$	(4,312	)	$	(12,475	)
Stock-based compensation expense under fair value method		(2,325	)		(1,339	)		(3,741	)		(2,163	)
Pro forma net loss	$	(4,212	)	$	(8,342	)	$	(8,053	)	$	(14,638	)
Net loss per common share-basic and diluted
As reported	$	(0.05	)	$	(0.22	)	$	(0.12	)	$	(0.39	)
Stock-based compensation expense under fair value method		(0.07	)		(0.04	)		(0.10	)		(0.07	)
Pro forma net loss per common share-basic and diluted	$	(0.12	)	$	(0.26	)	$	(0.22	)	$	(0.46	)

Future pro forma net income (loss) and earnings (loss) per share results might be materially different from actual amounts reported.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 “Cautionary Statement” included in this “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. The following discussion should be read in conjunction with our Condensed Consolidated Financial Statements and notes thereto included elsewhere in this report.

Overview

We are 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 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 100-member specialty sales and marketing team focused on high-prescribing U.S. gastroenterologists to sell our products. We rely on distribution relationships with third parties to sell our products outside the United States.

We generate revenue primarily by selling our products, prescription drugs, to pharmaceutical wholesalers. These direct customers of ours resell and distribute our products to and through pharmacies to patients who have had our products prescribed by doctors. 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. Revenue could be less than anticipated in subsequent quarters as wholesalers’ increased inventory is used up. We believe such increased buying occurred in late 2003 and early 2004, and it could again.

In July 2000, the FDA approved Colazal^® for marketing in the United States for the treatment of mildly to

7

moderately active ulcerative colitis. In December 2000, we established our own field sales force to market Colazal in the United States. Currently, this sales force has approximately 70 sales representatives in the field. Although the creation of an independent sales organization involved substantial costs, we believe that the financial returns from current and future products, if acquired and approved, will be more favorable to us than those from the indirect sale of product through marketing partners.

In November 2003, we acquired from aaiPharma LLC the exclusive right to sell three dosage strengths of Azasan (azathioprine tablets) in North America. In February 2004, we launched two dosage strengths of Azasan in the United States.

In May 2004, the FDA approved Xifaxan (rifaximin tablets) for marketing in the United States for the treatment of travelers’ diarrhea caused by noninvasive strains of E. coli in patients 12 years of age or older. We intend to market Xifaxan to gastroenterologists, hepatologists and infectious disease physicians in the United States through our own direct sales force. We are exploring other potential indications, formulations, clinical trials and co-promotion arrangements to capitalize on the potential for Xifaxan.

In June 2004, we 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. 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. We intend to market these products to gastroenterologists in the United States through our direct sales force.

In July 2002, we in-licensed exclusive development and marketing rights in the United States to a granulated formulation of mesalamine from Dr. Falk Pharma. We intend to complete the development work required to secure regulatory approval for the product in the United States.

We have made significant investments over the past few years to develop our commercialization infrastructure. As a result, we have sustained continuing operating losses and had an accumulated deficit of $95.0 million as of June 30, 2004. However, we currently expect that we will be profitable for the year ending December 31, 2004.

Critical Accounting Policies

In our Annual Report on Form 10-K for the fiscal year ended December 31, 2003, we identified our most critical accounting policies and estimates upon which our financial status depends as those relating to revenue recognition, investments, inventory, intangible assets, allowance for uncollectible accounts, and allowance for rebates and coupons. We reviewed our policies and determined that those policies remained our most critical accounting policies for the three and six months ended June 30, 2004. We did not make any changes in those policies during the quarter.

Results of Operations

Three-Month and Six-Month Periods Ended June 30, 2004 and 2003

Total product revenues for the three-month and six-month periods ended June 30, 2004 were $19.4 million and $39.3 million, respectively. Colazal product revenues for the three-month and six-month periods ended June 30, 2004 were $18.9 million and $38.3 million, respectively, compared to $12.9 million and $24.5 million, respectively, for the corresponding periods in 2003. In February 2004, we launched two dosage strengths of Azasan in the United States. Azasan product revenues for the three-month and six-month periods ended June 30, 2004 were $0.5 million and $1.0 million respectively.

Revenues from collaborative agreements for the three-month and six-month periods ended June 30, 2004 were $3.8 million. These revenues were primarily related to our agreement with Shire Pharmaceuticals Group plc under which Shire purchased from us the intellectual property related to balsalazide for Austria, Belgium, Denmark, Finland, France, Germany, Iceland, Republic of Ireland, Luxembourg, Norway, the Netherlands, Switzerland and the United Kingdom. We do not expect any future revenues under this agreement.

8

Costs and expenses for the three-month and six-month periods ended June 30, 2004 were $25.3 million and $47.7 million, respectively, compared to $18.9 million and $36.5 million for the corresponding three-month and six-month periods in 2003. Higher operating expenses in absolute terms were due primarily to on-going clinical studies and development work on rifaximin and the granulated mesalamine product, Xifaxan market research and market development activities, and the marketing campaign for Colazal. However, as expected, as we increase revenue using the commercialization infrastructure built with significant investment over the past few years, costs and expenses in 2004 were less, as a percentage of revenue, than in 2003. We expect this trend to continue.

Cost of products sold for the three-month and six-month periods ended June 30, 2004 was $4.7 million and $9.4 million respectively, compared with $3.1 million and $5.8 million for the corresponding three-month and six-month periods in 2003. Gross margins for the three-month and six-month periods ended June 30, 2004 were $14.8 million and $29.9 million, respectively, compared to $9.9 million and $18.6 million for the corresponding three-month and six-month periods of 2003. Gross margins were approximately 76% for each of the three-month and six-month periods ended June 30, 2004 and June 30, 2003.

License fees and costs related to collaborative agreements for the three-month and six-month periods ended June 30, 2004 were constant at $1.8 million, compared with $31,000 and $63,000 in the corresponding three-month and six-month periods ended June 30, 2003. The $1.8 million of expense recognized in the period ended June 30, 2004 was primarily the result of royalty expense associated with the recognition of revenue under our agreement with Shire.

Research and development expenses were $4.6 million and $9.5 million for the three-month and six-month periods ended June 30, 2004, compared to $6.5 million and $11.6 million for the comparable periods in 2003. Our current major research and development projects are rifaximin and the granulated mesalamine product. The decrease in research and development expenses for the three-month and six-month periods ended June 30, 2004 was due primarily to the reduction of research and development expenditures for seeking FDA approval of rifaximin, which we received in May 2004. To date, we have incurred research and development expenditures of approximately $19.2 million for balsalazide, $28.2 million for rifaximin and $6.7 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 increases. We expect research and development costs to increase in absolute terms as we pursue additional indications for balsalazide and rifaximin, pursue development of the granulated mesalamine product, and if and when we acquire new products.

Selling, general and administrative expenses were $14.2 million and $27.0 million for the three-month and six-month periods ended June 30, 2004, compared to $9.4 million and $19.0 million in the corresponding three-month and six-month periods in 2003. This increase was primarily due to Xifaxan market research and market development activities and the marketing campaign for Colazal.

Interest and other income (expense), net was $0.2 million and $0.3 million for the three-month and six-month periods ended June 30, 2004, compared to ($1.0) million and ($0.4) million in the corresponding three-month and six-month periods in 2003. The 2003 amounts were negatively affected by expenses related to the attempted hostile takeover of our company via a tender offer and related proxy contest by Axcan Pharma, Inc. during the first six months of 2003.

We experienced net losses of $1.9 million and $4.3 million for the three-month and six-month periods ended June 30, 2004, compared with net losses of $7.0 million and $12.5 million in the corresponding three-month and six-month periods in the prior year.

Liquidity and Capital Resources

Since inception, we have financed product development, operations and capital expenditures primarily from funding arrangements with collaborative partners and from public and private sales of equity securities. Since launching Colazal in January 2001, product revenue has been a growing source of cash, a trend that we expect to continue. As of June 30, 2004, we had approximately $42.3 million in cash, cash equivalents and investments, compared to $64.8 million as of December 31, 2003.

9

Cash used in our operations was $12.7 million for the six-month period ended June 30, 2004, compared with $13.5 million in the corresponding six-month period in 2003. Negative operating cash flows during these periods were primarily attributable to operating losses, increased inventory levels in 2004 associated with the commercial launch of Xifaxan and other working capital changes. To date, we have not experienced any material accounts receivable collection issues. Based on a review of specific customer balances, industry experience and the current economic environment, we currently reserve for specific accounts plus 1% of the outstanding accounts receivable balance as an allowance for uncollectible accounts, which at June 30, 2004 was approximately $413,000.

Cash used in investing activities for the six-month period ended June 30, 2004 was $11.1 million primarily related to the acquisition of the Anusol and Proctocort products. Cash provided by investing activities for the six-month period ended June 30, 2003 was $15.6 million primarily related to the maturity of investments. Our capital expenditures were $125,000 for the six-month period ended June 30, 2004, compared with $556,000 in the corresponding six-month period in 2003, with the expenditures in both periods primarily attributable to the purchase of office furniture and equipment.

Cash provided by financing activities during the six-month period ended June 30, 2004 was $3.3 million compared to $1.1 million in the corresponding six-month period in 2003. Cash provided by financing activities for both periods was primarily related to the exercise of stock options.

During the third quarter of 2002, we entered into a $7.0 million revolving working capital line of credit, with borrowing capacity of up to 75% of our eligible accounts receivable under 90 days old from the date of invoice. As amended, the facility expires in January 2005. We had no outstanding balance under this line as of June 30, 2004.

As of June 30, 2004, we had non-cancelable purchase order commitments for inventory purchases of approximately $18.6 million over nine months. We anticipate significant expenditures in 2004 related to our continued sales, marketing, product launch and development efforts associated with Colazal, Xifaxan and the granulated mesalamine product. To the extent we acquire rights to additional products, we will incur additional expenditures.

We have sustained continuing operating losses and had an accumulated deficit of $95.0 million as of June 30, 2004. We currently expect that we will become profitable for the year ending December 31, 2004. We believe our cash, cash equivalent and investments balances at June 30, 2004 should be sufficient to satisfy our cash requirements for the foreseeable future. However, our actual cash needs might vary materially from those now planned because of a number of factors, including our success selling products, the results of research and development activities, FDA and foreign regulatory processes, establishment of and change in relationships with strategic partners, technological advances by us and other pharmaceutical companies, the terms of our collaborative arrangements with strategic corporate partners, the status of competitive products and whether we acquire rights to additional products. We might seek additional debt or equity financing or both to fund our operations or acquisitions. If we increase our debt levels, 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 with corporate partners 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.

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.

Statements contained in this Form 10-Q which 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

10

assumptions, we can give no assurance that our expectations will be attained. Forward-looking statements involve known and unknown risks that could cause 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: our dependence on our first three pharmaceutical products, balsalazide, rifaximin and granulated mesalamine, and the uncertainty of market acceptance of those products; the unpredictability of the duration and results of regulatory review of New Drug Applications and Investigational New Drug Applications; the high cost and uncertainty of the research, clinical trials and other development activities involving pharmaceutical products; our limited sales and marketing experience; the uncertainty of obtaining, and our dependence on, third parties to manufacture and sell our products; intense competition; the possible impairment of, or inability to obtain, intellectual property rights and the costs of obtaining such rights from third parties; and results of future litigation and other risk factors detailed from time to time in our other SEC filings.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our purchases of raw materials and product sales to European distribution partners are denominated in Euros. Translation into our reporting currency, the United States dollar, has not historically had a material impact on our financial position. Additionally, our net assets denominated in currencies other than the functional currency have not 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.

Pursuant to our investment policy, we have invested a portion of our available cash in government agency and high-grade corporate bonds. Due to the nature and maturity terms of these investments, we do not believe these investments present significant market risk.

Item 4. Controls and Procedures

(a) 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 Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to provide the reasonable assurance discussed above.

(b) No change in the Company’s internal control over financial reporting occurred during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

11

PART II. OTHER INFORMATION

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

Our 2004 Annual Meeting of Shareholders was held on June 17, 2004. The following is a brief description of each matter voted upon at the meeting and a statement of the number of votes cast for, against or withheld and the number of abstentions with respect to each matter.

(a) The shareholders elected the following directors to serve for the ensuing year and until their successors are elected:

	FOR	WITHHELD
John F. Chappell	20,394,914	1,759,518
Thomas A. D’Alonzo	20,389,501	1,764,931
Richard A. Franco, R.Ph.	21,030,315	1,124,117
William P. Keane	21,029,565	1,124,867
Carolyn J. Logan	21,386,953	767,479

(b) The shareholders approved an amendment of our 1996 Stock Option Plan to increase the number of shares of common stock reserved for issuance thereunder from 5,500,000 to 6,800,000.

FOR	AGAINST	ABSTAIN
12,237,161	5,982,674	3,346

(c) The shareholders ratified the appointment of Ernst & Young LLP as our independent auditors for the fiscal year ending December 31, 2004.

FOR	AGAINST	ABSTAIN
21,828,155	322,916	3,361

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:

Exhibit Number	Description of Document	Registrant’s Form	Dated	Exhibit Number	Filed Herewith
2.2*	Asset Purchase Agreement dated June 30, 2004 between King Pharmaceuticals, Inc., Monarch Pharmaceuticals, Inc., Parkedale Pharmaceuticals, Inc., Salix Pharmaceuticals, Inc. and Salix Pharmaceuticals, Ltd.				X
10.3	Form of 1996 Stock Plan for Salix Pharmaceuticals, Ltd. and form of Notice of Stock Option Grant and Stock Option Agreement thereunder, both as amended June 17, 2004.				X
10.44*	Supply Agreement dated June 30, 2004 between King Pharmaceuticals, Inc., Parkedale Pharmaceuticals, Inc., Salix Pharmaceuticals, Inc. and Salix Pharmaceuticals, Ltd. Certificate of Incorporation, as amended.				X
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.				X

12

Exhibit Number	Description of Document	Registrant’s Form	Dated	Exhibit Number	Filed Herewith
10.46	Assignment of Trademarks Agreement dated June 30, 2004 between Parkedale Pharmaceuticals, Inc. and Salix Pharmaceuticals, Inc.				X
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.				X
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 Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.				X

* Certain portions of this agreement have been omitted pursuant to a request for confidential treatment and those portions have been filed separately with the SEC.

13

(b) Reports On Form 8-K.

We furnished or filed the following Current Reports on Form 8-K during the quarter ended June 30, 2004:

Date	Item	Description
April 19, 2004	5	Announced when we would report first quarter 2004 financial results.
April 21, 2004	5	Announced that we would present at the CIBC World Markets Annual Biotechnology and Specialty Pharmaceutical Conference.
April 26, 2004	12	Announced first quarter 2004 financial results.
May 5, 2004	5	Announced that we would present at the Rodman & Renshaw Techvest Global Healthcare Conference.
May 18, 2004	5	Announced that we would present at the UBS Global Specialty Pharmaceutical Conference.
May 19, 2004	5	Announced that we would present at the SunTrust Robinson Humphrey 33rd Annual Institutional Investor Conference.
May 19, 2004	5	Announced several Company-related events that took place at Digestive Disease Week (DDW).
May 26, 2004	5	Announced that the U.S. Food and Drug Administration granted marketing approval for XIFAXAN ™ (rifaximin) 200 mg tablets for the treatment of travelers’ diarrhea.
May 31, 2004	5	Announce that Dr. Art Kamm, our Senior Vice President, Research and Development and Chief Development Officer resigned effective May 31, 2004 to pursue other interests.
June 16, 2003	5	Announced that we would present at the William Blair & Company, L.L.C. 24th Annual Growth Stock Conference.
June 21, 2003	5	Announced that the Board of Directors approved a three-for-two stock split of our common stock.
June 29, 2003	5	Announced that we signed an agreement with Pharmatel PTY LTD of Sydney, Australia to market COLAZAL ® in Australia and New Zealand and that we also has signed an agreement with Rimaco Inc. of San Juan, Puerto Rico to market our products in Puerto Rico.

14

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

	SALIX PHARMACEUTICALS, LTD.
Date: August 9, 2004	By:	/s/ Carolyn J. Logan
		Carolyn J. Logan
		President and
		Chief Executive Officer
Date: August 9, 2004	By:	/s/ Adam C. Derbyshire
		Adam C. Derbyshire
		Senior Vice President, Finance &
		Administration and
		Chief Financial Officer

15

EX-2.2

Exhibit 2.2

Portions of this exhibit marked [*] are omitted and

are requested to be treated confidentially.

ASSET PURCHASE AGREEMENT

THIS ASSET PURCHASE AGREEMENT (this “Agreement”), is entered into as of June 30, 2004, by and among KING PHARMACEUTICALS, INC., a Tennessee corporation (“King”), MONARCH PHARMACEUTICALS, INC., a Tennessee corporation (“Monarch”), PARKEDALE PHARMACEUTICALS, INC., a Michigan corporation (“Parkedale” and together with King and Monarch, “Seller”), SALIX PHARMACEUTICALS, INC., a California corporation (“Salix Sub”), and SALIX PHARMACEUTICALS, LTD., a Delaware corporation (“Salix Parent” and together with Salix Sub, “Buyer”).

WHEREAS, Seller wishes to sell or license to Buyer, and Buyer wishes to acquire from Seller, certain rights of Seller in the pharmaceutical products known as Anusol-HC^® and Proctocort^®, and, in connection therewith, Buyer shall assume from Seller certain liabilities related to such products.

NOW, THEREFORE, in consideration of the foregoing, the covenants and agreements contained in this Agreement, and other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, Seller and Buyer hereby agree as follows:

ARTICLE 1

DEFINITIONS AND REFERENCES

1.1. Defined Terms.

As used in this Agreement, the following capitalized terms have the meanings specified below:

“Accounts Receivable” means all accounts receivable, trade accounts, notes receivable and other miscellaneous receivables, including those that are not evidenced by instruments or invoices, arising out of sales of the Products by or on behalf of Seller or its Affiliates on or prior to 11:59 p.m. EST on the Closing Date.

“Acquired Assets” has the meaning set forth in Section 2.1.

“Advertising and Promotional Materials” means all existing advertising and promotional materials, including flyers, brochures, pamphlets and

video cassettes, or any similar materials or items, which pertain exclusively to the Products and are in the possession of Seller on the Closing Date.

“Affiliates” means, with respect to any Person, any Persons directly or indirectly controlling, controlled by, or under common control with, such Person. For purposes hereof, the term “controlled” (including the terms “controlling”, “controlled by” and “under common control with”), as used with respect to any Person, shall mean the direct or indirect ability or power to direct or cause the direction of management policies of such Person or otherwise direct the affairs of such Person, whether through ownership of voting securities or otherwise.

“Allocation Schedule” has the meaning set forth in Section 4.4.

“Anusol ANDA” means the abbreviated new drug application requesting permission to place Anusol-HC^® 2.5% (Hydrocortisone Cream, USP) on the market in accordance with section 505(j) of the FDCA (21 U.S.C. 355(j)) and 21 C.F.R. 314, Part 314 Subpart C, and all supplements thereto filed pursuant to the requirements of the FDA.

“Anusol Consent Agreement” means, with respect to the Anusol Trademark License, that certain License Assignment and Consent Agreement dated as of the date hereof by and among Warner-Lambert Company LLC, Parke, Davis & Company LLC, King, Parkedale and Buyer.

“Anusol Trademark” means the registered trademark listed on Appendix A-1.

“Anusol Trademark License Agreement” means that certain License Agreement dated February 27, 1998 by and among Warner-Lambert Company, Parke, Davis & Company and Parkedale.

“API” means active pharmaceutical ingredient.

“Assigned Partial License” has the meaning set forth in the Anusol Consent Agreement.

“Assigned Trademarks” means the registered trademarks listed on Appendix A-2, including any goodwill associated therewith.

“Assignment of Trademarks” means that certain Assignment of Trademarks, dated as of the Closing Date and executed by Monarch and Parkedale, substantially in the form attached hereto as Exhibit A.

“Assumed Liabilities” has the meaning set forth in Section 3.1.

-2-

“Assumption Agreement” means that certain Assumption Agreement, dated as of the Closing Date and executed by Seller and Buyer, substantially in the form attached hereto as Exhibit B.

“Bill of Sale” means that certain Bill of Sale and Assignment of Assets, dated as of the Closing Date and executed by Seller, substantially in the form attached hereto as Exhibit C.

“Business” means the manufacturing, marketing, promotion and sale of the Products as conducted by Seller in Seller’s ordinary course of business in the Territory prior to the Closing Date.

“C.F.R.” means the United States Code of Federal Regulations.

“Cap” has the meaning set forth in Section 9.5(a).

“Closing” means the consummation of the purchase and sale of the Acquired Assets and the assumption of the Assumed Liabilities, all as contemplated by this Agreement.

“Closing Date” has the meaning set forth in Section 7.1.

“Confidentiality Agreement” has the meaning set forth in Section 6.7.

“Damages” means any and all costs, losses, damages, claims, liabilities, fines, penalties and expenses, court costs, and reasonable fees and disbursements of counsel, consultants and expert witnesses incurred by a party hereto; provided that “Damages” shall not include any indirect, incidental, consequential, exemplary or punitive damages or other special damages, lost profits, damage to goodwill or loss of business.

“Deductible” has the meaning set forth in Section 9.5(a).

“Disclosure Schedules” has the meaning set forth in Section 5.1.

“Encumbrances” means any pledges, liens, claims, licenses (other than the Assigned Partial License), security interests, restrictions, defects in title, encumbrances or charges.

“Equivalent Product” has the meaning set forth in Section 6.2.

“Excluded Assets” has the meaning set forth in Section 2.2.

“Excluded Liabilities” has the meaning set forth in Section 3.2.

-3-

“FDA” means the United States Food and Drug Administration and any successor agency or entity that may be established hereafter.

“FDA Transfer of Ownership Letter” means the letter submitted by each of the parties and the application form submitted by Buyer to the FDA notifying the agency of the change in ownership of the Anusol ANDA in accordance with 21 C.F.R. § 314.72.

“FDCA” means the federal Food, Drug and Cosmetic Act, as amended, and the regulations promulgated thereunder.

“FSS” has the meaning set forth in Section 6.4(d)(ii).

“Governmental Authority” means any governmental agency, board or commission or other governmental authority or other instrumentality of the United States, any state, county, city or other political subdivision within the United States or any other jurisdiction within the Territory (including the FDA).

“Government Rebates” has the meaning set forth in Section 6.4(b)(i).

“Indemnified Party” has the meaning set forth in Section 9.4.

“Indemnifying Party” has the meaning set forth in Section 9.4.

“Interim Period Date” has the meaning set forth in Section 6.4(b)(i).

“Inventory” means all rights of Seller in the finished goods inventory of the Products that are owned by Seller as of the Closing Date (a) that are packaged, tested, released and ready for sale to the ultimate consumer as of the Closing Date, and (b) that have expiration dates of at least twelve (12) months after the Closing Date. The Inventory is listed on Appendix A-3 hereto by Product, including lot numbers and expiration dates.

“Labeling” means any and all written, printed, or graphic matter on or affixed to an existing Product or its Packaging Materials, or accompanying the existing Product.

“Liabilities” means, as to any Person, all debts, adverse claims, liabilities and obligations, direct, indirect, absolute or contingent of such Person, whether accrued, vested or otherwise, whether in contract, tort, strict liability or otherwise and whether or not actually reflected, or required by generally accepted accounting principles to be reflected, in such Person’s balance sheets or other financial books and records.

“License” has the meaning set forth in Section 2.5.

-4-

“Licensed Technology” means any know-how, secrets, manufacturing methods or processes and technical data owned or in the possession of Seller, or that is discovered by or comes into the possession of Seller during the term of the Supply Agreement, in any case that is reasonably necessary and used by Seller in the manufacture or packaging of the Products and that Seller has the right to provide to Buyer.

“Material Adverse Effect” means (a) a material adverse effect on the Acquired Assets, taken as a whole or (b) a material impairment of the ability of Seller to fulfill Seller’s obligations under this Agreement; provided, that the term “Material Adverse Effect” shall specifically exclude any material adverse effect caused by, arising out of or related to (i) factors affecting the pharmaceutical products market generally or the markets in which the Products compete, (ii) general, national, regional or local economic or financial conditions, (iii) changes in laws, rules and regulations, or (iv) the failure to achieve any financial or operational targets, projections or milestones set forth in any business plan or budget.

“Maximum Returns Credit Amount” has the meaning set forth in Section 6.4(a)(iii).

“NDC” means National Drug Code.

“Packaging Materials” means any and all containers or wrappings in which an existing pharmaceutical product is enclosed for use in the delivery or display of the existing pharmaceutical product.

“Person” means a natural person, a corporation, a partnership, a trust, a joint venture, a limited liability company, any Governmental Authority or any other entity or organization.

“Proctocort Cream” means Proctocort^® Cream (Hydrocortisone Cream USP) 1%.

“Product Labeling and Packaging Materials” means all existing Labeling and Packaging Materials owned or developed by Seller, solely to the extent such Labeling and Packaging Materials pertain exclusively to the Products and are in the possession of Seller on the Closing Date, provided that “Product Labeling and Packaging Materials” shall not include any Packaging Materials that may be used or useful in the delivery or display of any pharmaceutical products other than the Products or that do not bear printed matter pertaining exclusively to the Products.

“Products” means Anusol-HC^® 2.5% (Hydrocortisone Cream, USP); Anusol-HC^® 25-mg Suppository (Hydrocortisone Acetate); Proctocort^® Cream

-5-

(Hydrocortisone Cream USP) 1%; and Proctocort^® Suppositories (Hydrocortisone Acetate Rectal Suppositories, 30 mg). “Product” means any of the foregoing individually.

“Purchase Price” has the meaning set forth in Section 4.1.

“Required Consents” means all consents, authorizations and approvals from third parties listed on Appendix B which are necessary for the valid assignment and transfer to Buyer of the Acquired Assets.

“Restricted Territory” has the meaning set forth in Section 6.2.

“Returns Termination Date” has the meaning set forth at Section 6.4(a)(iii).

“Sales Data” has the meaning set forth in Section 5.1.10.

“Seller Intellectual Property” has the meaning set forth in Section 5.1.4.

“Seller Packaging Material” has the meaning set forth in Section 2.3(d).

“Supply Agreement” has the meaning set forth in Section 2.6.

“Territory” means the fifty (50) states of the United States of America, the District of Columbia, the Commonwealth of Puerto Rico and all territories or possessions of the United States.

“Threshold” has the meaning set forth in Section 9.5(a).

“Transferred Documentation” means the following filings and submissions by Seller with the FDA, in each case to the extent related solely and exclusively to the Products and in Seller’s possession as of the Closing Date, all as listed on Appendix C hereto: (a) field alerts and other filings related to a product complaint, adverse event reports, medical inquiry filings, blank/sample batch records and analytical procedures, (b) the Anusol ANDA and (c) other filings and submissions by Seller with the FDA during the three (3) year period prior to the Closing Date.

“WAC” has the meaning set forth in Section 6.4(g).

1.2. Construction of Certain Terms and Phrases.

Unless the context of this Agreement otherwise requires: (a) words of any gender include each other gender; (b) words using the singular or plural

-6-

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) all references herein to “Articles” or “Sections” are to Articles or Sections of this Agreement; (e) the term “or” has, except as otherwise indicated, the inclusive meaning represented by the phrase “and/or”; and (f) the words “include”, “includes” and “including” shall be deemed to be followed by the phrase “without limitation”.

ARTICLE 2

PURCHASE AND SALE OF ASSETS

2.1. Acquired Assets.

On the Closing Date, and subject to the terms and conditions of this Agreement, Seller shall sell, assign, convey, transfer and deliver to Buyer, and Buyer shall purchase, assume and accept from Seller, all of Seller’s right, title and interest in and to the following (collectively, the “Acquired Assets”), free and clear of Encumbrances:

(a) the Advertising and Promotional Materials;

(b) the Anusol ANDA;

(c) the Assigned Partial License;

(d) the Assigned Trademarks;

(e) the Product Labeling and Packaging Materials; and

(f) the Transferred Documentation.

2.2. Excluded Assets.

Notwithstanding anything herein to the contrary, Seller does not and shall not sell, assign, convey, transfer or deliver, and Buyer does not and shall not purchase, assume or accept, any assets or rights not specifically listed and identified in Section 2.1 (the “Excluded Assets”), including:

(a) the trademarks “KING”, “KING PHARMACEUTICALS”, “KINGPHARM”, “MONARCH”, “MONARCH PHARMACEUTICALS”, “PARKEDALE”, “PARKEDALE PHARMACEUTICALS” and any variation thereof or derivation therefrom, and any other rights in or to such names or the names of any other Affiliates of Seller;

(b) internet or website addresses and domain names of Seller or its Affiliates and any applications and registrations therefor;

-7-

(c) the Accounts Receivable;

(d) any formulations, specifications, rights, uses, indications, technology, data, intellectual property and other assets related to or used in connection with other products of Seller or its Affiliates;

(e) all contracts of insurance and all insurance plans related to the Products and the assets of such insurance plans;

(f) any and all claims of Seller with respect to any tax refunds, credits, or similar benefits;

(g) any and all claims of Seller with respect to any other refund or rebate related to the Products;

(h) all rights and claims relating to any Excluded Assets or any Excluded Liabilities, including all guarantees, warranties, indemnities and similar rights in favor of Seller with respect to any Excluded Assets or any Excluded Liabilities;

(i) any Packaging Materials that may be used or useful in the delivery or display of any pharmaceutical product other than the Products or that do not bear printed matter pertaining exclusively to the Products;

(j) all of (i) Seller’s organizational documents and other corporate records, and originals of account books of entry, (ii) any books, records, accounts, checks, payment records, tax records (including payroll, unemployment, real estate and other tax records) and other similar books, records and information of Seller relating to the Business and the Products, (iii) all records prepared by, for or on behalf of Seller in connection with the sale of the Products, and (iv) any and all records and documents to the extent relating to any Excluded Assets; and

(k) all of the rights of Seller under or pursuant to this Agreement or any other rights in favor of Seller pursuant to any other agreement contemplated hereby or thereby.

Buyer further acknowledges and agrees that notwithstanding anything to the contrary in this Agreement, (i) Seller shall retain exclusively all know-how and rights necessary for Seller to manufacture, market, sell, and distribute all pharmaceutical products other than the Products, and (ii) Buyer shall acquire no right, title, or interest whatsoever in or to any property or assets of Seller or any of Seller’s Affiliates except as expressly set forth in this Agreement.

-8-

2.3. Sale of Inventory.

(a) On the Closing Date, and subject to the terms and conditions of this Agreement, Seller shall sell, assign, convey, and transfer to Buyer, and Buyer shall purchase, assume and accept from Seller, all of Seller’s right, title and interest in and to the Inventory.

(b) The purchase price for the Inventory shall be as set forth on Appendix A-3.

(c) Subject to the terms and conditions of this Agreement, Seller shall take all commercially reasonable steps to make available all of the Inventory for pick-up by Buyer or Buyer’s common carrier within ten (10) business days after the Closing Date. All Inventory shall be shipped F.O.B. Seller’s manufacturing facility at Buyer’s expense. Prior to Seller’s making available the Inventory for pick-up by Buyer or Buyer’s common carrier, Seller shall bear the risk of loss to the Inventory. From and after Seller’s making available the Inventory for pick-up by Buyer or Buyer’s common carrier, Buyer shall bear all risk of loss to the Inventory and shall be solely responsible for procuring adequate insurance to protect the Inventory against any such loss.

(d) The parties acknowledge that the Inventory purchased under this Agreement may contain Packaging Materials and Labeling with the names, logos and trademarks of Seller and/or its Affiliates (“Seller Packaging Materials”). For the avoidance of doubt, Seller Packaging Materials do not include the Assigned Trademarks. Buyer may distribute such Inventory with Seller Packaging Materials as provided by Seller and/or its Affiliates until the earlier of the date such Inventory has been sold to third parties or the date that is one (1) year after the Closing Date; provided, however, that Buyer shall not, and shall have no right to, use such names, logos, and trademarks for any other purpose and Buyer shall cease using or distributing Seller Packaging Materials after the earlier of the date such Inventory has been sold to third parties or the date that is one (1) year after the Closing Date. Buyer acquires no right, title, or interest in or to any of Seller’s names, logos, trademarks or trade names except for the Assigned Trademarks as contemplated herein. Buyer further agrees that Buyer shall not deface or remove any such Seller Packaging Materials nor alter such Seller Packaging Materials without Seller’s prior written consent. Upon Seller’s reasonable request, Buyer shall permit Seller to inspect any products containing or utilizing Seller Packaging Materials to ensure that such products are maintained in a high quality manner and in accordance with Buyer’s obligations hereunder.

(e) With respect to the Inventory, Seller shall furnish Buyer with a completed quality reviewed batch record, signed Certificate of Analysis (COA) and Certificate of Compliance (COC), and any deviation, investigations and/or OOS related to the Inventory. Notwithstanding the delivery of the foregoing certificates

-9-

and documents by Seller, Buyer acknowledges that the sole representations and warranties that Seller is making with respect to Inventory are set forth in Section 5.1.12 of this Agreement.

(f) Buyer shall at all times handle, warehouse, store, market, sell, distribute and otherwise dispose of the Inventory in accordance with customary industry practice and in compliance with all applicable laws, rules and regulations, including current good manufacturing practices and product labeling and specifications. Without limiting the foregoing, Buyer represents that it has all applicable licenses, registrations and permits necessary to take control of such Inventory.

(g) EXCEPT AS EXPRESSLY SET FORTH IN SECTION 5.1.12, THE INVENTORY IS PROVIDED “AS IS, WHERE IS,” AND SELLER MAKES NO REPRESENTATION OR WARRANTY AS TO THE INVENTORY, EXPRESS OR IMPLIED, EITHER IN FACT OR BY OPERATION OF LAW, BY STATUTE OR OTHERWISE, AND SELLER SPECIFICALLY DISCLAIMS ANY AND ALL IMPLIED OR STATUTORY WARRANTIES, INCLUDING ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR OTHERWISE.

2.4. Transfer of Tangible Acquired Assets.

(a) Subject to the terms and conditions of this Agreement, Seller shall take all commercially reasonable steps to deliver, transfer and make available to Buyer the Advertising and Promotional Materials, the Transferred Documentation and the Product Labeling and Packaging Materials for pick-up by Buyer or Buyer’s common carrier within ten (10) business days after the Closing Date. Buyer shall promptly label over or revise such Advertising and Promotional Materials to reflect that Buyer is the owner and distributor of such Products.

(b) Prior to Seller’s making available the tangible Acquired Assets for pick-up by Buyer or Buyer’s common carrier, Seller shall bear the risk of loss to the tangible Acquired Assets. From and after Seller’s making available the tangible Acquired Assets for pick-up by Buyer or Buyer’s common carrier, Buyer shall bear all risk of loss to the tangible Acquired Assets, and shall be solely responsible for procuring adequate insurance to protect such Acquired Assets against any such loss.

2.5. License.

On the Closing Date, and subject to the terms and conditions of this Agreement, Seller shall grant and deliver to Buyer a license to utilize the Licensed Technology in the form attached hereto as Exhibit D (the “License”). Buyer shall have no right to, and hereby covenants that in no event shall Buyer, use such

-10-

Licensed Technology for any purpose other than those permitted or provided for in the License.

2.6. Supply Agreement.

On the Closing Date, and subject to the terms and conditions of this Agreement, the parties shall enter into a Supply Agreement in the form attached hereto as Exhibit E (“Supply Agreement”), which provides for the supply of Product (other than Proctocort Cream) by Seller to Buyer on and after the Closing as set forth in such agreement. Seller shall have no obligation to provide any Product except as expressly set forth in this Agreement or the Supply Agreement.

ARTICLE 3

ASSUMPTION OF LIABILITIES

3.1. Assumed Liabilities.

Subject to the terms and conditions of this Agreement, Buyer shall assume, effective as of the Closing Date and at all times from and after the Closing Date shall have, the sole and exclusive liability for and shall pay, perform, discharge and otherwise fully satisfy when due, any and all Liabilities (including compliance with all applicable laws and regulations) arising out of or related to the following:

(a) any product liability, breach of warranty or similar claim for injury to person or other property, regardless of when asserted, which resulted from the use or misuse of Products or otherwise related to the Products sold on or after the Closing Date by or on behalf of Buyer;

(b) except as expressly provided in Section 6.4, the return of any Product on or after the Closing Date, whether or not sold by Seller prior to, on or after the Closing Date; and

(c) without limitation to (a) and (b) above, the ownership, licensing, operation, use of, or conduct of business in connection with, any of the Acquired Assets from and after the Closing Date, including Liabilities arising directly or indirectly from the manufacturing, marketing, sale or distribution of the Products from and after the Closing Date, including any government seizures, field corrections, withdrawals or recalls and any violations of applicable laws, rules, regulations, ordinances, orders or decrees in connection therewith; provided that the foregoing assumption of liabilities shall not limit in any way Buyer’s rights to indemnification under Section 9.2(a) or Section 9.2(b).

All of the foregoing are hereinafter collectively referred to as the “Assumed Liabilities”.

-11-

3.2. Excluded Liabilities.

Except for the Assumed Liabilities, Buyer shall not assume any Liabilities from Seller, including Liabilities arising prior to the Closing Date:

(a) with respect to the Products;

(b) out of the marketing, sale or distribution of the Products;

(c) without limitation to (a) or (b) above, out of any product liability, breach of warranty or similar claim for injury to person or other property, regardless of when asserted, which resulted from the use or misuse of Products or otherwise related to the Products sold on or before the Closing Date by or on behalf of Seller;

(d) without limitation to (a) or (b) above, out of the ownership, licensing, operation, use of, or conduct of business in connection with, any of the Acquired Assets before the Closing Date, including Liabilities arising directly or indirectly from the manufacturing, marketing, sale or distribution of the Products before the Closing Date, including any government seizures, field corrections, withdrawals or recalls and any violations of applicable laws, rules, regulations, ordinances, orders or decrees in connection therewith. All such Liabilities, except for the Assumed Liabilities, are collectively referred to as the “Excluded Liabilities”.

ARTICLE 4

CONSIDERATION AND PAYMENT

4.1. Consideration.

In consideration for the rights to be assigned or transferred by Seller to Buyer pursuant to Article 2, on the Closing Date, Buyer shall (a) pay to Seller by wire transfer of immediately available funds to an account or accounts at a United States banking institution designated by Seller in writing (i) the sum of Thirteen Million Dollars ($13,000,000) (the “Purchase Price”) and (ii) the purchase price for the Inventory in accordance with Section 2.3, and (b) assume the Assumed Liabilities as described in Section 3.1.

4.2. Currency.

All payments to be made under this Agreement shall be made in United States currency.

-12-

4.3. Taxes.

Buyer shall be responsible for and shall promptly pay any and all federal, state, provincial, territorial, and local transfer, sales, excise, use, and other taxes, filing and/or recording fees or other similar levies or assessments, if any, levied, imposed or incurred as a result of the transactions contemplated by this Agreement, excluding any taxes payable on Seller’s income. All payments under this Agreement shall be made without any deduction or withholding for or on account of any taxes, fees or other similar levies or assessments.

4.4. Purchase Price Allocation.

Set forth on Schedule 4.4 hereto is an allocation of the Purchase Price among the Acquired Assets for federal, state and foreign income tax purposes (the “Allocation Schedule”). Seller and Buyer shall sign and submit all necessary forms to report this transaction for federal, state and foreign income tax purposes in accordance with the Allocation Schedule as provided in Treasury Regulations Section 1.1060-1.

ARTICLE 5

REPRESENTATIONS AND WARRANTIES

5.1. Representations and Warranties of Seller.

Except as set forth in this Agreement or in the Disclosure Schedules attached hereto as Exhibit F (the “Disclosure Schedules”), Seller hereby represents and warrants to Buyer as follows as of the date of this Agreement:

5.1.1. Organization and Standing.

King and Monarch are each a corporation duly organized, validly existing, and in good standing under the laws of the State of Tennessee. Parkedale is a corporation duly organized, validly existing, and in good standing under the laws of the State of Michigan.

5.1.2. Power and Authority.

Seller has all requisite corporate power and authority to execute, deliver and perform this Agreement and the other agreements and instruments to be executed and delivered by Seller pursuant hereto and thereto and to consummate the transactions contemplated herein and therein. Provided that the Required Consents have been obtained, the execution, delivery, and performance of this Agreement and the other agreements and instruments to be executed and delivered by Seller pursuant hereto and thereto do not, and the consummation of the transactions contemplated hereby shall not, violate any

-13-

provisions of Seller’s organizational documents, bylaws, any law or regulation applicable to Seller, or any agreement, mortgage, lease, instrument, order, judgment, or decree to which Seller is a party or by which Seller is bound or result in the creation or acceleration of any Encumbrance on the Acquired Assets.

5.1.3.  Corporate Action; Binding Effect.

Subject to obtaining the Required Consents, Seller has duly and properly taken all action required by law, Seller’s organizational documents, or otherwise, to authorize the execution, delivery and performance of this Agreement and the other agreements and instruments to be executed and delivered by Seller pursuant hereto and thereto and the consummation of the transactions contemplated hereby and thereby. This Agreement has been duly executed and delivered by Seller and constitutes, and the other agreements and instruments contemplated hereby when duly executed and delivered by Seller shall constitute, legal, valid and binding obligations of Seller enforceable against Seller in accordance with their respective terms, except as enforcement may be affected by bankruptcy, insolvency or other similar laws and by general principles of equity.

5.1.4.  Intellectual Property.

(a) Except as set forth on Schedule 5.1.4 of the Disclosure Schedules, Seller owns exclusively all right, title and interest in, or, in the case of the Anusol Trademark, has an exclusive license to use, the Transferred Documentation, the Product Labeling and Packaging Materials, the Anusol Trademark and the Assigned Trademarks (collectively, the “Seller Intellectual Property”), free and clear of all Encumbrances. Provided that the Required Consents have been obtained, Seller or its Affiliates have the right to assign, transfer and/or grant to Buyer all rights in the Seller Intellectual Property that is being assigned, transferred and/or granted to Buyer under this Agreement.

(b) To Seller’s knowledge, (i) the operation of the Business in the Territory, as conducted on the date of this Agreement, does not infringe the intellectual property rights of any third party, (ii) Seller has not received written notice from any Person of (A) any actual or threatened claim or assertion to the contrary, or (B) any actual or threatened claim or assertion that the use of any Seller Intellectual Property would infringe any intellectual property rights of any third party and (iii) there is no unauthorized use or infringement of any of the Seller Intellectual Property by any Person.

(c) Except where the failure to do so would have a Material Adverse Effect, any necessary registration, maintenance and renewal fees due in connection with the Assigned Trademarks and, to Seller’s knowledge, the Anusol Trademark, have been paid in a timely manner and all necessary documents and certificates in connection with the Assigned Trademarks and, to Seller’s knowledge,

-14-

the Anusol Trademark, have, for the purposes of maintaining the Assigned Trademarks and the Anusol Trademark, been filed in a timely manner with the relevant Governmental Authorities.

(d) Seller has not entered into any written agreement granting any Person the right to control the prosecution or registration of any of the Assigned Trademarks or the Anusol Trademark.

(e) Seller has not executed or granted to any third party, or entered into any agreement for, any license or other right to manufacture, market, or distribute the Products.

(f) Other than the Acquired Assets and the Licensed Technology, Seller does not own or have a license to use any patent or trade secret necessary to manufacture and package the Products as manufactured and packaged by Seller as of the date of this Agreement.

(g) This Section 5.1.4 contains the only representations and warranties of Seller regarding Seller Intellectual Property in this Agreement and any other agreement executed in connection with this Agreement and no other provision hereof or thereof shall be construed to contain any such representation or warranty.

5.1.5.  Regulatory Status

(a) Except as set forth in Schedule 5.1.5 of the Disclosure Schedules, except for certain ongoing reporting and administrative requirements and except as otherwise disclosed in publicly available FDA records and filings, there are no outstanding material commitments or obligations of Seller to the FDA or any other state or federal Governmental Authority with respect to the Products. Seller has made available to Buyer copies, if any, of all serious and unexpected adverse event reports and periodic adverse event reports with respect to the Products that have been filed with the FDA, including any correspondence relating thereto.

(b) The Anusol ANDA has been approved by FDA and Seller has not received written correspondence that the Anusol ANDA is not in good standing with the FDA. There is no action or proceeding by any governmental or regulatory authority pending or, to the knowledge of Seller, as of the Closing Date threatened, seeking revocation or suspension of the Anusol ANDA. During the two (2) years prior to the date of this Agreement, Seller, to Seller’s knowledge, has not received or been subject to: (i) FDA Form 483’s directly relating to any Product (ii) any FDA Notices of adverse findings directly relating to any Product or the manufacture of any Product; or (iii) any warning letters or other written correspondence from FDA or any other governmental or regulatory authority

-15-

directly relating to the Product. For purposes of the representations in this Section 5.1.5, the “knowledge” of Seller shall mean the actual knowledge of the Executive Vice President of Regulatory Affairs for King.

5.1.6.  Laws and Regulations.

Except as set forth in Schedule 5.1.6 of the Disclosure Schedules, Seller is in compliance with all applicable laws, regulations, ordinances and statutes with respect to the conduct of the Business, except for any noncompliance which would not have a Material Adverse Effect.

5.1.7.  Title to Assets.

Except as set forth in Schedule 5.1.7 of the Disclosure Schedules, Seller has good and marketable title to, or a license to use, the Acquired Assets. As of the Closing Date, Buyer shall acquire good and marketable title to, or a license to use, and all right, title and interest of Seller and its Affiliates in and to, the Acquired Assets, free and clear of all Encumbrances.

5.1.8.  Litigation.

There is no litigation, arbitration proceeding, governmental investigation or action pending or, to the knowledge of Seller, threatened against or affecting Seller or any of its Affiliates with respect to any Product, the Business or any of the Acquired Assets.

5.1.9.  Brokers.

No agent, broker, investment banker, financial advisor or other Person is or shall be entitled to any broker’s or finder’s fee or any other commission or similar fee in connection with any of the transactions contemplated by this Agreement by reason of any action taken by or on behalf of Seller or any Affiliates of Seller.

5.1.10.  Sales Data.

Attached hereto at Schedule 5.1.10 is certain historical sales data (categorized by Product and by formulation (cream or suppository) related to the Business for the period from January 1, 2003, to March 31, 2004 (the “Sales Data”). The Sales Data has been prepared pursuant to and is consistent with the books and records of Seller. The internal books and records of Seller upon which Sales Data was prepared have been kept accurately in all material respects. Seller has not received any written notice from Seller’s independent certified public accountants that Seller has used any improper accounting practice that would result in the Sales Data being misleading in any material respect.

-16-

5.1.11.  Absence of Certain Changes.

Since March 31, 2004, through the date of this Agreement:

(a) no Material Adverse Effect has occurred and is continuing;

(b) Seller has not received any written correspondence or written notification from FDA or any other Governmental Authority, and Seller has no knowledge of any pending action by FDA or any other Governmental Authority, regarding any assertion by the FDA or any other Governmental Authority that any of the Products are not being manufactured, packaged, labeled, marketed or sold in compliance with applicable law;

(c) Seller has not taken any action outside the ordinary course of the Business with respect to (i) sales efforts or promotions related to the Products or (ii) customer purchases of Products; and

(d) Seller has no knowledge that any supplier of API or Product intends to discontinue supply to Seller or to alter the terms of the current supply arrangement with Seller.

5.1.12.  Inventory.

Seller’s inventory of Products as of the date hereof is set forth at Appendix A-3. To Seller’s knowledge, the Inventory (a) was manufactured and stored in all material respects in accordance with the applicable specifications for the Products in effect at the time of manufacture, and (b) is not adulterated or misbranded within the meaning of the FDCA in any material respect.

5.1.13.  Governmental Approvals.

To the knowledge of Seller, no consent, approval order or authorization of, or registration, declaration or filing with, any Governmental Authority on Seller’s part is required in connection with Seller’s execution, delivery or performance of this Agreement.

5.1.14.  Customer Contracts.

Schedule 5.1.14 of the Disclosure Schedules lists each material contract to which Seller is a party or bound, that relates to the sale or distribution of Products.

-17-

5.1.15.  No Implied Warranties

EXCEPT AS EXPRESSLY PROVIDED IN THIS SECTION 5.1, SELLER MAKES NO REPRESENTATION OR WARRANTY AS TO THE ACQUIRED ASSETS, THE BUSINESS OR THE MANUFACTURE OR PACKAGING OF THE PRODUCTS, EXPRESS OR IMPLIED, EITHER IN FACT OR BY OPERATION OF LAW, BY STATUTE OR OTHERWISE, AND SELLER SPECIFICALLY DISCLAIMS ANY AND ALL IMPLIED OR STATUTORY WARRANTIES, INCLUDING WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NON-INFRINGEMENT OF INTELLECTUAL PROPERTY RIGHTS. Without limiting the foregoing, except as expressly provided in this Section 5.1, Buyer acknowledges that it has not and is not relying upon any implied warranty of merchantability, fitness for a particular purpose, non-infringement of intellectual property rights or otherwise, or upon any representation or warranty whatsoever as to the future prospects (financial, regulatory or otherwise), or the likelihood of commercial success of the Business or the Products or the manufacture or packaging thereof after the date of this Agreement.

5.1.16.  Proctocort Cream.

Notwithstanding anything to the contrary in this Agreement, except as set forth in Section 5.1.12 with respect to the Inventory, Seller makes no representations or warranties related to the manufacturing, testing, packaging or labeling of Proctocort Cream, including any compliance with applicable laws, rules and regulations in connection therewith.

5.2. Representations and Warranties of Buyer.

Buyer hereby represents and warrants to Seller as follows:

5.2.1.  Organization and Standing.

Salix Parent is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware. Salix Sub is a corporation duly organized, validly existing, and in good standing under the laws of the State of California.

5.2.2.  Power and Authority.

Buyer has all requisite corporate power and authority to execute, deliver, and perform this Agreement and the other agreements and instruments to be executed and delivered by Buyer pursuant hereto and thereto and to consummate the transactions contemplated herein and therein. The execution, delivery, and performance of this Agreement and the other agreements and

-18-

instruments to be executed and delivered by Buyer pursuant hereto and thereto do not, and the consummation of the transactions contemplated hereby shall not, violate any provisions of Buyer’s organizational documents, bylaws, any law or regulation applicable to Buyer, or any agreement, mortgage, lease, instrument, order, judgment, or decree to which Buyer is a party or by which Buyer is bound.

5.2.3. Corporate Action; Binding Effect.

Buyer has duly and properly taken all action required by law, Buyer’s organizational documents, or otherwise, to authorize the execution, delivery, and performance of this Agreement and the other agreements and instruments to be executed and delivered by Buyer pursuant hereto and thereto and the consummation of the transactions contemplated hereby and thereby. This Agreement has been duly executed and delivered by Buyer and constitutes, and the other agreements and instruments contemplated hereby when duly executed and delivered by Buyer shall constitute, legal, valid and binding obligations of Buyer enforceable against Buyer in accordance with their respective terms, except as enforcement may be affected by bankruptcy, insolvency, or other similar laws and by general principles of equity.

5.2.4. Brokers.

No agent, broker, investment banker, financial advisor or other Person is or shall be entitled to any broker’s or finder’s fee or any other commission or similar fee in connection with any of the transactions contemplated by this Agreement by reason of any action taken by or on behalf of Buyer or any Affiliates of Buyer.

5.3. Limitations on Seller’s Representations and Further Acknowledgements by Buyer.

5.3.1.  Business Prospects and Reliance.

Seller does not make any representation or warranty as to the business prospects of the Products. Buyer has conducted its own thorough due diligence review and analysis, as Buyer deemed necessary and appropriate, of the Acquired Assets, the Business and of the business prospects of the Products. Buyer is not relying on any forecasts, marketing data, projections, estimates, offering brochures or materials, conversations with employees, management, or consultants, agents or brokers of Seller, market assessments, representations or warranties or other materials whether oral or written from Seller or Seller’s agents, brokers or consultants as to the business prospects or potential of the Products or any other representations or warranties, express or implied, except as expressly set forth herein, including Section 5.1.

-19-

5.3.2. Manufacture of Proctocort^® Cream.

Seller represents and warrants, and Buyer acknowledges and agrees, that a third party (not Seller or any Affiliate of Seller) manufactures Proctocort^® Cream for Seller on a purchase order basis, and that Seller has no contract with such third party for the manufacture or supply of Proctocort^® Cream. Buyer further acknowledges and agrees that Seller does not guarantee or warrant that (a) any third party shall supply or continue to supply Proctocort^® Cream or (b) that any such third party shall supply or continue to supply Proctocort^® Cream on the pricing or other terms currently available to Seller.

5.3.3. API Supply.

Seller represents and warrants, and Buyer acknowledges and agrees, that Seller does not manufacture the API for any of the Products, has no guaranteed source for such API and has no contract with any third party supplier for such API. Buyer further acknowledges and agrees that Seller does not guarantee or warrant that (a) any third party API or Product component supplier shall supply or continue to supply such items or (b) that any such third party shall supply or continue to supply such items on the pricing or other terms currently available to Seller.

ARTICLE 6

COVENANTS OF THE PARTIES

6.1. Governmental Filings; Responsibility for the Products.

(a) Subject to Section 6.1(e), as promptly as practicable following the execution of this Agreement (and with respect to the FDA Transfer of Ownership Letter on or prior to Closing in accordance with the requirements of 21 C.F.R. § 314.99 and § 314.72), Seller and Buyer each agree to prepare and file whatever filings, requests or applications are required or deemed advisable to be filed with any Governmental Authority, if any, in connection with the transactions contemplated by this Agreement, including the transfer of rights pursuant to Article 2 of this Agreement, and to cooperate with one another as reasonably necessary to accomplish the foregoing; provided, that Buyer shall be solely responsible for preparing the required submissions to the FDA with respect to the transfer of the manufacturing sites from Seller’s manufacturing sites to Buyer’s manufacturing site.

(b) Subject to Section 6.1(e), Seller and Buyer shall: (i) diligently take, or fully cooperate in the taking of, all necessary and proper steps to make such filings as required or deemed advisable pursuant to Section 6.1(a); (ii) take, or cause to be taken, all actions, and to do or cause to be done, and to assist and cooperate with the other party in doing all things reasonably necessary, proper, and/or

-20-

advisable under applicable law or otherwise (A) to consummate and make effective the transactions contemplated by this Agreement and (B) obtain from any Governmental Authority any non-actions, clearances, waivers, consents, approvals, authorizations, permits or orders required to be obtained in connection with the execution and performance of this Agreement or the transactions contemplated by this Agreement.

(c) Except as specifically set forth in the Supply Agreement, from and after the Closing Date, Buyer shall assume all regulatory responsibilities in connection with the Products and the Anusol ANDA, including responsibility for (i) all periodic and annual reports or other regulatory filings with the FDA, (ii) reporting any product quality complaints and adverse drug events in connection with the Products, and (iii) compliance with the Prescription Drug Marketing Act of 1987, as the same may be amended from time to time.

(d) Buyer shall list the Products with the FDA in accordance with 21 U.S.C. 360(j) and relevant implementing regulations and comply with all other requirements of such statutory and regulatory provisions before distributing any of the Products with Labeling that bears Buyer’s name. Buyer shall include its NDC number on any Products distributed with Buyer’s name on the Labeling. Any costs or expenses incurred in connection with Buyer’s obligations under this Section 6.1(d) shall be the sole responsibility of, and shall be paid by, Buyer.

-21-

(e) Notwithstanding anything in this Agreement to the contrary, Seller shall have no obligation whatsoever in connection with any regulatory filings, requests or applications related to the Products, except for Seller actions reasonably required by Governmental Authorities in connection therewith, and except as specifically set forth in the Supply Agreement.

(f) After the Closing, Seller shall direct all complaints or inquiries concerning the Products to Buyer to the attention of [*], Associate Director of Quality, 8540 Colonnade Center Drive, Suite 501, Raleigh, North Carolina 27615, Telephone: (919) 862-1000, Telecopy: (919) 862-1095, e-mail: [*]@salix.com, or such other person or persons as Buyer may specify from time to time by written notice to Seller.

(g) After the Closing, Buyer shall have all responsibility for any and all FDA fee obligations for holders or owners of the Products which relate to periods on or after the Closing Date, and Seller shall retain responsibility for such fee obligations which relate to periods prior to the Closing Date. Each party shall promptly reimburse the other to the extent a party pays amounts which are the responsibility of the other party hereunder.

6.2. Noncompetition.

Except as contemplated by the Supply Agreement, for a period of [*] years after the Closing Date, neither Seller nor any of Seller’s Affiliates, shall, within the Restricted Territory (as defined below), manufacture, market, promote or sell an Equivalent Product (as defined below); provided, however, that if Seller or any of Seller’s Affiliates acquires or is acquired, through a stock or asset purchase, merger, consolidation or other transaction, in each case, whether in a single transaction or a series of transactions, by any other Person or business that, prior to such stock or asset purchase, merger, consolidation or other transaction, was selling any Equivalent Product in the Restricted Territory, then the entity which had been selling such Equivalent Product in the Restricted Territory or such entity’s successor(s) shall be permitted to continue manufacturing, using, marketing, distributing and selling such Equivalent Product in the Restricted Territory in unlimited quantities notwithstanding anything in this Agreement to the contrary. For purposes of this Section 6.2, (a) the “Restricted Territory” shall mean any of the counties in the United States where Seller is performing services related to the Business; and (b) ”Equivalent Product” shall mean a pharmaceutical product that (i) contains hydrocortisone as an active ingredient, (ii) is rectally administered or anally applied and (iii) is intended for use for the indications set forth on Schedule 6.2 hereto. Seller acknowledges and agrees that the covenants regarding the restrictions above are separate and distinct covenants and that if any such covenant is determined to be void and unenforceable, in whole or in part, the same shall, and shall be deemed, not to affect or impair the validity of any of the covenants set forth in this Section 6.2.

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

-22-

6.3. Accounts Receivable.

Any Accounts Receivable shall inure to the benefit of Seller. Any accounts receivable or invoices arising out of sales of the Products by or on behalf of Buyer after 11:59 pm EST on the Closing Date shall inure to the benefit of Buyer.

6.4. Returns, Rebates and Chargebacks.

(a) (i) As of the Closing Date, each of Seller and Buyer shall process and issue credits (or render payment in such other form as the parties hereto may determine) for all returned Product they are financially responsible for in accordance with subsections (iii) and (iv) below. Buyer shall not bill Seller for the administrative costs of processing claims for returned Product for which Buyer is financially responsible for in accordance with subsections (iii) and (iv) below. Seller shall not bill Buyer for the administrative costs of processing claims for returned Product for which Seller is financially responsible for in accordance with subsections (iii) and (iv) below. Such handling of returned Product by Buyer or Seller, as applicable, and the issuance of any credits or other form of reimbursement in connection therewith, shall be in accordance with Buyer’s or Seller’s current returned goods policy, as applicable. Buyer hereby agrees that Buyer shall take no actions to solicit or otherwise encourage Product returns after the Closing. Any incremental price impact precipitated by or occurring after the Closing Date due to pricing decisions or regulatory changes are the responsibility of Buyer.

(ii) Seller and Buyer shall use commercially reasonable efforts in requesting that customers direct all Product returns after the Closing Date to Buyer. Except to the extent otherwise required by applicable law or regulation, all returned Product received by Buyer or Seller after the Closing Date shall be destroyed by such party or its contractor or designee at its respective returns handling facility or facility designated by such party. After such destruction, each party shall forward to the other party any necessary accompanying documentation required to determine the appropriate credit. If Buyer or Seller destroys Product for which the other was financially responsible as set forth in Sections 6.4(a)(iii) and (iv), that party shall bill the other party for the cost of the destruction. Each such invoice shall set forth the number of units processed, together with such other information as shall be necessary to support the invoice. Each party shall, within thirty (30) days of its receipt of invoice, pay the other party for the full invoiced amount.

(iii) The parties hereto agree and acknowledge that Seller shall be financially responsible only for returned Product bearing Seller’s NDC numbers and evidenced as being sold by Seller on or before the Closing Date; provided, however, that Seller’s maximum aggregate financial liability for or other

-23-

reimbursement for such returned Product shall be [*] Dollars ($[*]) (“Maximum Returns Credit Amount”). Buyer further agrees that Seller’s financial obligation for credits or other reimbursement for such returned Product shall terminate upon the first to occur of the date on which Seller has issued credits in the amount of or otherwise reimbursed the Maximum Returns Credit Amount or [*] years after the Closing Date (the “Returns Termination Date”). For purposes of this Section 6.4(a)(iii), the dollar value of returned Product paid or credited for by Seller shall be determined in accordance with Seller’s then current returned goods policy.

(iv) The parties hereto agree and acknowledge that Buyer shall be financially responsible for all returned Product other than returns for which Seller is financially responsible pursuant to Section 6.4(a)(iii).

(b) (i) With respect to rebates that Seller is obligated to pay pursuant to any government (federal or state) rebate program for products identified by Seller’s NDC codes with respect to sales of the Products (“Government Rebates”), Seller shall be solely responsible for the processing, handling and payment (subject to Buyer’s reimbursement obligations set forth herein) of all such rebates relating to the Product which are billed to Seller. Seller shall be responsible for all Government Rebates that Seller pays for all Products dispensed prior to [*] (the “Interim Period Date”), and Buyer shall be responsible and shall reimburse Seller for all Government Rebates that Seller pays for Product dispensed after the Interim Period Date. Seller shall promptly bill Buyer for any amounts due under this Section 6.4. Buyer shall not be responsible for any amounts otherwise due to Seller under this Section 6.4 which are not billed to Buyer within [*] years after they are invoiced to Seller under the government rebate program. All payments due under this Section 6.4 shall be made to Seller within thirty (30) days of submission to Buyer of invoices that describe the requested payments in reasonable detail.

(ii) In the event Buyer disputes in good faith an amount owed under a Government Rebate, Seller shall provide to Buyer, upon Buyer’s reasonable request, copies of any documents and records evidencing the original rebate claims and any resubmissions of such claims and data relating to unit rebate calculations which are necessary to enable Buyer to resolve such disputed amount. In the event Buyer disputes an amount owed under a Government Rebate, Buyer shall be responsible for reimbursing Seller the amounts paid by Seller and then Buyer shall dispute the claim directly with the government/state.

(iii) Seller shall provide Buyer with all information relating to the Product and the prices thereof which Buyer reasonably needs in order to comply with applicable rules and regulations relating to the Medicaid Rebate Agreement. When requested, such information shall be provided by Seller to Buyer promptly, and in any event, within fifteen (15) days after Buyer’s written request therefor. Buyer shall provide to Seller within twenty (20) days after the

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

-24-

end of each calendar quarter to enable Seller to comply with their submission requirements to the Centers for Medicare and Medicaid Services (or any successor agency), the following information: (x) the “average manufacturer price” (as defined under the Social Security Act, 42 U.S.C. Sections 1396r-8(k)(l)) for each Product identified by NDC number; (y) the “best price” (as defined under the Social Security Act, 42 U.S.C. Sections 1396r-8(c)(1)(C)) for each Product identified by NDC number; and (z) any additional data or other information related to such Medicaid issues reasonably requested in writing by Seller.

(c) Seller has provided to Buyer a list of all commercial rebate and commercial chargeback agreements in which a Product is included. Seller and Buyer agree that Seller shall continue to honor all such commercial agreements in which a Product is included; provided, however, that Seller shall endeavor to terminate each such agreement with respect to the Products promptly following the Closing, and in the event terminated, Seller’s responsibility to honor such agreements will terminate upon such termination. Seller shall be responsible, at Seller’s sole cost and expense, for the processing, payment, administration and support of all commercial rebates and chargebacks owed under these agreements. Within five (5) business days following the Closing, Seller shall issue a letter to the commercial customers under these agreements advising such customers of Seller’s responsibilities in connection with commercial rebate and chargeback agreements and associated rebates and chargebacks.

(d) (i) Seller has provided to Buyer a list of all government chargeback agreements in which a Product is included. Seller and Buyer agree that Seller shall continue to honor all such government chargeback agreements in which a Product is included through the Interim Period Date; provided, however, that Seller shall endeavor to terminate each such government agreement with respect to the Product(s) promptly following the Closing, and in the event terminated prior to the Interim Period Date, Seller’s responsibility to honor such agreements will terminate upon such termination. Seller shall be responsible, at its sole cost and expense, for the processing, payment (subject to Buyer’s reimbursement obligations set forth herein), administration and support for all chargebacks and administrative fees owed under these agreements with respect to Product dispensed through the Interim Period Date. Within five (5) business days following the Closing, Seller shall issue a letter to government chargeback customers advising such customers of Seller’s responsibilities in connection with government chargeback agreements and associated chargebacks and administrative fees. Notwithstanding anything to the contrary contained in this Section 6.4 in the event Seller is unable to terminate the government chargeback agreements by the Interim Period Date, Buyer shall reimburse Seller for the payment of government chargebacks made by Seller with respect to Product dispensed after the Interim Period Date.

-25-

(ii) Notwithstanding anything to the contrary contained in this Section 6.4, the parties acknowledge that the VA National Acquisition Center must approve the removal of the Product from Seller’s Federal Supply Schedule (“FSS”) before the responsibility of processing such rebate is transferred from Seller to Buyer. Accordingly, in the event such approval is not obtained prior to the Interim Period Date, Seller shall continue to be responsible for processing the FSS chargebacks on Buyer’s behalf, and Buyer shall promptly reimburse Seller for the same, and in any event within thirty (30) days after the request for such reimbursement.

(iii) Seller shall provide Buyer with all information relating to the Product and the prices thereof, which Buyer needs in order to comply with applicable rules and regulations relating to P.L. 102-585 as it relates to the FSS and Section 340B of the Public Health Services Act. When requested, such information shall be provided by Seller to Buyer promptly, and in any event, within ten (10) business days after Buyer’s written request thereof.

(e) All payments due to Seller under this Section 6.4 shall be made by Buyer to Seller within thirty (30) days of submission to Buyer of invoices that describe the requested payments in reasonable detail.

(f) As soon as reasonably practicable after the Closing and in no event later than five (5) business days after Closing, Buyer shall be responsible for receiving and processing customer orders and for shipping and invoicing customers for the Product. Promptly following the Closing, the parties shall jointly issue a letter to customers within the trade (wholesalers and distributors) notifying such customers that all future Product orders are to be placed with Buyer, and providing the appropriate contact information for Buyer’s personnel.

(g) In the event that Buyer increases the published Wholesaler Acquisition Cost (“WAC”) of the Product during the applicable Interim Chargeback Period or Interim Rebate Period, Buyer shall (i) promptly notify Seller of such increase and (ii) reimburse Seller the difference between the previous WAC and such new increased WAC as it pertains to returns and the affected rebates, chargebacks and administrative fees.

6.5. Publicity.

Except as otherwise required by law or applicable stock exchange requirements, for so long as this Agreement is in effect, neither Seller nor Buyer shall, and each of them shall cause their respective Affiliates, representatives and agents not to, issue or cause the publication of any press release or public announcement with respect to the transactions contemplated by this Agreement, except for the issuance of the press release attached hereto at Schedule 6.5. The parties agree to cooperate with respect to requests for confidential treatment

-26-

submitted to regulatory agencies with respect to the matters set forth in this Agreement, and the Appendices, Schedules and Exhibits hereto.

6.6. Bulk Transfer Laws.

Seller and Buyer waive compliance with any bulk sales law or similar law in connection with the consummation of the transactions contemplated herein.

6.7. Confidential Information.

The terms of the confidentiality agreement previously executed between Buyer and Seller dated December 3, 2003 (the “Confidentiality Agreement”) are hereby incorporated herein by reference and remain in full force and effect.

6.8. Access and Cooperation.

Each party shall, upon reasonable prior written notice from the other party, make available to such other party such information or records (or copies thereof) in such party’s possession after the Closing, to the extent reasonably required for the purpose of assisting such other party in (a) making any governmental filings or other matters with any Governmental Authorities relating to the Acquired Assets or the Products, and (b) prosecuting or defending or preparing for the prosecution or defense of any action, suit, claim, complaint, proceeding or investigation at any time brought by or pending against such party relating to the Acquired Assets or the Products.

ARTICLE 7

CLOSING

7.1. Closing.

Subject to the satisfaction or waiver of conditions in Section 8.1 and Section 8.2, the Closing shall take place at 10:00 a.m., EDT, on the date of this Agreement, (the “Closing Date”) at the offices of Hogan & Hartson L.L.P., 8300 Greensboro Drive, Suite 1100, McLean, Virginia 22102.

7.2. Closing Deliveries of Seller.

At Closing, Seller shall deliver or cause to be delivered to Buyer, the following:

(a) the Assignment of Trademarks;

(b) the Assumption Agreement;

-27-

(c) the Bill of Sale;

(d) the License;

(e) the Supply Agreement;

(f) a copy of the FDA Transfer of Ownership Letters executed by Seller for the Anusol ANDA;

(g) complete copies of the Anusol ANDA, all supplements thereto and all records required to be kept with respect to the Products under 21 C.F.R. § 314.81;

(h) with respect to any recorded financing statements covering any of the Acquired Assets, termination statements terminating all such financing statements with respect to the Acquired Assets, together with the written authorization of the secured party to file such termination statements promptly after Closing;

(i) the Required Consents; and

(j) the Anusol Consent Agreement

7.3. Closing Deliveries of Buyer.

At Closing, Buyer shall deliver or cause to be delivered to Seller, the following:

(a) the Purchase Price and the purchase price for the Inventory in accordance with Section 2.3;

(b) the Assumption Agreement;

(c) the License;

(d) the Supply Agreement;

(e) a copy of the FDA Transfer of Ownership Letters executed by Buyer for the Anusol ANDA; and

(f) the Anusol Consent Agreement.

-28-

ARTICLE 8

CONDITIONS PRECEDENT TO THE CLOSING

8.1. Conditions Precedent to Buyer’s Obligations.

Subject to any express written waiver of such conditions by Buyer, the obligations of Buyer to close the transactions contemplated under this Agreement are subject to the fulfillment or satisfaction of each of the following conditions precedent:

(a) Representations and Warranties True as of the Closing Date. The representations and warranties of Seller contained in this Agreement shall be true in all material respects on the Closing Date with the same effect as though such representations and warranties had been made on and as of the Closing Date (except for changes permitted hereunder and except for representations and warranties that speak as of a specific date or time other than the Closing Date (which need only be true in all material respects as of such date or time)), except to the extent that the failure of such representations and warranties to be true in all material respects shall not have had a Material Adverse Effect that is continuing on the Closing Date.

(b) Compliance with this Agreement. Seller shall have performed and complied in all material respects with all agreements required by this Agreement to be performed or complied with by Seller prior to or by the Closing Date, except to the extent the failure to perform such covenants, agreements and obligations shall not have had a Material Adverse Effect that is continuing on the Closing Date.

(c) Required Consents. The Required Consents shall have been obtained.

(d) New Laws, No Injunction. There shall not be in effect any statute, regulation, order, decree or judgment of any Governmental Authority which makes illegal or enjoins or prevents the consummation of the transactions contemplated by this Agreement.

(e) Closing Deliveries. Seller shall have delivered to or caused to be delivered to Buyer each of the documents specified in Section 7.2.

8.2. Conditions Precedent to Seller’s Obligations.

Subject to any express written waiver of such conditions by Seller, the obligations of Seller to close the transactions contemplated under this Agreement are subject to the fulfillment or satisfaction of each of the following conditions precedent:

(a) Representations and Warranties True as of the Closing Date. The representations and warranties of Buyer contained in this Agreement shall be true in all material respects on the Closing Date with the same effect as though such representations and warranties had been made on and as of the Closing Date (except for changes permitted hereunder and except for representations and warranties that speak as of a specific date or time other than the Closing Date (which need only be true in all material respects as of such date or time)), except to the extent that the failure of such representations and warranties to be true in all material respects shall not have had a material adverse effect on Buyer’s ability to perform its obligations hereunder.

-29-

(b) Compliance with this Agreement. Buyer shall have performed and complied in all material respects with all agreements required by this Agreement to be performed or complied with by Buyer prior to or by the Closing Date, except to the extent the failure to perform such covenants, agreements and obligations shall not have had a material adverse effect on Buyer’s ability to perform its obligations hereunder; provided, that the foregoing exception shall not apply to Buyer’s obligation to pay the amounts set forth in Section 4.1 or to otherwise pay any consideration for the Acquired Assets when due hereunder.

(c) Required Consents. The Required Consents shall have been obtained.

(d) New Laws, No Injunction. There shall not be in effect any statute, regulation, order, decree or judgment of any Governmental Authority which makes illegal or enjoins or prevents the consummation of the transactions contemplated by this Agreement.

(e) Closing Deliveries. Buyer shall have delivered to or caused to be delivered to Seller each of the documents specified in Section 7.3.

ARTICLE 9

INDEMNIFICATION; INSURANCE

9.1. Survival.

The representations and warranties of Seller and Buyer contained in this Agreement shall survive for a period of [*] months from and after the Closing Date. The covenants of Seller and Buyer shall not survive the Closing, except to the extent such covenants by their terms contemplate or may involve actions to be taken or obligations in effect after the Closing, which covenants shall survive in accordance with their terms; provided, that Seller’s obligations under Section 9.2(a) and Buyer’s obligations under Section 9.3(a) shall terminate on the [*] month anniversary of the Closing Date. Notwithstanding anything to the contrary, any representation, warranty or covenant which is the subject of a

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

-30-

claim which is asserted in writing after the Closing Date within the survival periods specified in this Section 9.1 shall survive with respect to such claim or dispute until final resolution thereof.

9.2. Indemnification by Seller.

Subject to this Article 9, from and after the Closing Date, Seller shall indemnify, defend and hold Buyer harmless from and against any and all Damages incurred or suffered by Buyer to the extent caused by:

(a) any breach of any representation or warranty made by Seller in this Agreement;

(b) any material breach of any covenant, agreement or undertaking on the part of Seller contained in this Agreement; or

(c) any failure to pay, perform or discharge any Excluded Liabilities.

9.3. Indemnification by Buyer.

Subject to this Article 9, from and after the Closing Date, Buyer shall indemnify, defend and hold Seller harmless from and against any and all Damages incurred or suffered by Seller to the extent caused by:

(a) any breach of any representation or warranty made by Buyer in this Agreement;

(b) any material breach of any covenant, agreement or undertaking on the part of Buyer contained in this Agreement; or

(c) any failure to pay, perform or discharge any Assumed Liabilities.

9.4. Procedures.

Promptly after receipt by a party hereto of notice of any claim which could give rise to a right to indemnification pursuant to Section 9.2 or Section 9.3, such party (the “Indemnified Party”) shall give the other party (the “Indemnifying Party”) written notice describing the claim in reasonable detail. The failure of an Indemnified Party to give notice in the manner provided herein shall not relieve the Indemnifying Party of its obligations under this Article, except to the extent that such failure to give notice materially prejudices the Indemnifying Party’s ability to defend such claim. The Indemnifying Party shall have the right, at its option, to compromise or defend, at its own expense and by its own counsel, any such matter involving the asserted liability of the party seeking such indemnification.

-31-

Notwithstanding the foregoing, the Indemnifying Party shall not settle or compromise any claim, without the Indemnified Party’s prior written consent where (a) the settlement or compromise of such claim would materially and adversely affect the rights of the Indemnified Party to use the Acquired Assets or the Licensed Technology or (b) the amount of Damages agreed to in such settlement or compromise would exceed the Indemnifying Party’s obligations under this Article 9, and such settlement or compromise does not contain a release of the Indemnified Party for the amount of Damages in excess of the Indemnifying Party’s obligations under this Article 9. If the Indemnifying Party shall undertake to compromise or defend any such asserted liability, it shall promptly (and in any event not less than ten (10) days after receipt of the Indemnified Party’s original notice) notify the Indemnified Party in writing of its intention to do so, and the Indemnified Party agrees to cooperate fully with the Indemnifying Party and its counsel in the compromise or defense against any such asserted liability. All reasonable costs and expenses incurred in connection with such cooperation shall be borne by the Indemnifying Party. Notwithstanding the foregoing, if the Indemnifying Party elects not to compromise or defend the asserted liability, or fails to notify the Indemnified Party of its election to compromise or defend as herein provided, (i) the Indemnified Party shall have the right, at its option, to pay, compromise or defend such asserted liability by its own counsel and its reasonable costs, expenses, (ii) any payment made therewith shall be included as part of the indemnification obligation of the Indemnifying Party hereunder, and (iii) the Indemnifying Party shall cooperate with the Indemnified Party and its counsel in compromise or defense against the asserted liability. Notwithstanding the foregoing, the Indemnified Party may not settle or compromise any claim without consent of the Indemnifying Party, such consent which shall not unreasonably be withheld.

The Indemnified Party shall have at all times the right to participate fully in the defense, at its own expense; provided, however, that the Indemnifying Party shall pay the legal fees of one counsel for the Indemnified Party if the Indemnified Party has been advised by counsel that there would be a conflict of interest in having the same counsel represent the Indemnified Party and the Indemnifying Party. In connection with the defense of any claim, each party shall make available to the party controlling the defense any books, records or other documents within its control that are necessary or appropriate for such defense; provided, however, any such books, records or other documents which are made available hereunder shall be held in strict confidence by the receiving party and such disclosure obligation shall apply only to the extent that such books, records or other documents relate to the Products. Notwithstanding anything to the contrary in this Section 9.4, (a) the party conducting the defense of a claim shall (i) keep the other party informed on a reasonable and timely basis as to the status of the defense of such claim (but only to the extent such other party is not participating jointly in the defense of such claim), and (ii) conduct the defense of such claim in a prudent manner, and (b) the Indemnifying Party shall not cease to defend, settle or otherwise dispose of any claim without the prior written consent of the Indemnified Party (which consent shall not be unreasonably withheld).

-32-

9.5. Limitations on Indemnification Obligations.

(a) Seller shall have no obligation or liability to Buyer pursuant to Section 9.2(a) of this Agreement, except to the extent that the aggregate amount of Damages incurred or suffered by Buyer which Seller is otherwise responsible for under such Section exceeds [*] Dollars ($[*]) (the “Threshold”), at which time Buyer shall be entitled to assert claims against Seller for Damages in excess of, but excluding [*] (the “Deductible”); provided, however, that the maximum liability of Seller for all claims by Buyer under Section 9.2(a) of this Agreement, together, shall not in any case exceed [*] Dollars ($[*]) in the aggregate (the “Cap”), provided, that, the foregoing Cap shall not apply to breaches of Section 5.1.7, for which the maximum liability of Seller for claims by Buyer under Sections 9.2(a) of this Agreement, together with any other claims made pursuant to Section 9.2(a), shall not in any case exceed the [*].

(b) Buyer shall have no obligation or liability to Seller pursuant to Section 9.3(a) of this Agreement, except to the extent that the aggregate amount of Damages incurred or suffered by Seller which Buyer is otherwise responsible for under such Section exceeds the Threshold, at which time Seller shall be entitled to assert claims against Buyer for Damages in excess of, but excluding, the Deductible; provided, however, that the maximum liability of Buyer for all claims by Seller under Section 9.3(a) of this Agreement, together, shall not in any case exceed the Cap.

9.6. Indemnification Payment Adjustments.

The amount of any Damages for which indemnification is provided under this Article 9 shall be reduced by the insurance proceeds received and any other amounts actually received by the Indemnified Party with respect to any Damages. If any Indemnified Party shall have received any payment pursuant to this Article 9 with respect to any Damages and shall subsequently have received insurance proceeds or such other amounts with respect to such Damages, then such Indemnified Party shall pay to the Indemnifying Party an amount equal to the difference (if any) between (a) the sum of the amount of those insurance proceeds or such other amounts received and the amount of the payment by such Indemnifying Party pursuant to this Article 9 with respect to such Damages and (b) the amount necessary to fully and completely indemnify and hold harmless such Indemnified Party from and against such Damages; provided, however, in no event shall such Indemnified Party have any obligation pursuant to this sentence to pay to such Indemnifying Party an amount greater than the amount of the payment by such Indemnifying Party pursuant to this Article 9 with respect to such Damages.

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

-33-

9.7. No Offset.

If any matter as to which Buyer may be able to assert a claim is pending or unresolved at the time any payment is due from Buyer to Seller under this Agreement or otherwise, Buyer shall have no right to offset, deduct, counterclaim or otherwise withhold from such payment due to Seller any amount with respect to any pending or unresolved claims whether or not such claims arise out of or relate to this Agreement or any other matter.

9.8. Further Limitations.

(a) IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR THE INDIRECT, INCIDENTAL, CONSEQUENTIAL, EXEMPLARY OR PUNITIVE DAMAGES OR OTHER SPECIAL DAMAGES, LOST PROFITS, DAMAGE TO GOODWILL OR LOSS OF BUSINESS OF THE OTHER PARTY, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY, ARISING OUT OF THE BREACH OF ANY REPRESENTATIONS, WARRANTIES, COVENANTS OR AGREEMENTS SET FORTH HEREIN.

(b) Each party agrees to use reasonable efforts to mitigate any Damages which form the basis for any claim for indemnification hereunder.

9.9. Sole and Exclusive Remedy.

Except with respect to fraud and rights to specific performance and all other equitable remedies, including declarative and injunctive relief, from and after the Closing Date, the indemnification rights provided in this Article 9 of this Agreement shall be the sole and exclusive remedy available under contract, tort or any other legal theory to Buyer and its Affiliates, and their respective officers, directors, employees, agents and representatives with respect to any Damages, including any debts, liabilities, damages, obligations, claims, demands, judgments, and settlements, whether asserted by third parties or incurred or sustained in the absence of third-party claims, including all costs and expenses, including interest, penalties, attorneys’ fees and any amounts paid in investigation, defense or settlement of any of the foregoing incurred or sustained pursuant to or in connection with this Agreement or the transactions contemplated hereby including any claims for breaches of representations, warranties, covenants or agreements contained in this Agreement, or any certificate delivered pursuant to this Agreement or otherwise in connection with this Agreement.

9.10.  Specific Performance.

Seller and Buyer acknowledge and agree that Seller and Buyer would be irreparably damaged if any of the covenants under this Agreement are not performed in accordance with their terms and that any default under or failure to

-34-

perform or comply with any such covenant by Seller or Buyer would not be adequately compensated in all cases by monetary damages alone. Accordingly, subject to the provisions of this Article 9, including Section 9.9 above, Seller and Buyer shall be entitled to enforce any of the covenants set forth in this Agreement by a decree of specific performance and to temporary, preliminary and permanent injunctive relief to prevent any breach of any of such covenants, without posting any bond or other undertaking.

ARTICLE 10

MISCELLANEOUS

10.1.  Notices.

All notices or other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand, prepaid telex, cable, courier, telegram or facsimile and confirmed in writing, or mailed first class, postage prepaid, by registered or certified mail, return receipt requested (mailed notices and notices sent by telex, cable or telegram shall be deemed to have been given on the date received) as follows:

If to Buyer, as follows:

Salix Pharmaceuticals, Inc.

8540 Colonnade Center Drive

Suite 501

Raleigh, North Carolina 27615

Attention: General Counsel

Telephone: (919) 862-1000

Facsimile: (919) 862-1095

If to Seller, as follows:

King Pharmaceuticals, Inc.

501 Fifth Street

Bristol, Tennessee 37620

Attention: President

Facsimile: (423) 989-8055

-35-

with a copy (which shall not constitute notice) to:

King Pharmaceuticals, Inc.

501 Fifth Street

Bristol, Tennessee 37620

Attention: General Counsel/Legal Affairs

Facsimile: (423) 989-6282

or in any case to such other address or addresses as hereafter shall be furnished as provided in this Section 10.1 by any party hereto to the other party.

10.2.  Entire Agreement.

This Agreement, its Appendices, Exhibits and Schedules, the Confidentiality Agreement, the Assignment of Trademarks, the Assumption Agreement, the Bill of Sale, the License and the Supply Agreement constitute the entire agreement between the parties with respect to the subject matter hereof and supersede all prior agreements or understandings of the parties relating thereto.

10.3.  Waiver; Remedies.

No delay on the part of Seller or Buyer in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of either Seller or Buyer of any right, power or privilege hereunder operate as a waiver of any other right, power or privilege hereunder nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder.

10.4.  Amendment.

This Agreement may be modified or amended only by written agreement of the parties hereto.

10.5.  No Third-Party Rights.

No provision of this Agreement shall be deemed or construed in any way to result in the creation of any rights in or obligations to any Person not a party to this Agreement.

10.6.  Successors and Assigns.

This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that neither Seller nor Buyer may assign any of its rights, duties or obligations

-36-

hereunder without the prior written consent of the other, which consent may be withheld in the other’s sole discretion. Notwithstanding the foregoing, either Seller or Buyer may assign this Agreement and its respective rights and obligations hereunder, without the other party’s consent (a) in connection with the transfer or sale to third party of all or substantially all of such party’s assets or business or such party’s merger, or consolidation with another company in which the stockholders of Seller or Buyer (as the case may be) immediately prior to the closing of such transaction hold less than 50% of the voting stock of the surviving entity, or (b) to any Affiliate; provided, that in the event of the assignment to an Affiliate, the assigning party shall remain jointly and severally liable with such Affiliate for any and all obligations and responsibilities of such assigning party. Any purported assignment without a required consent shall be void. Any permitted assignee shall assume all obligations of its assignor under this Agreement. No assignment of this Agreement or of any rights hereunder shall relieve the assigning party of any of its Liabilities hereunder.

10.7.  Governing Law.

This Agreement shall be governed and construed in accordance with the laws of the State of Delaware excluding any choice of law rules which may direct the application of the law of another state.

10.8.  Fees and Expenses.

Regardless of whether or not the transactions contemplated by this Agreement are consummated, except as may be otherwise specified herein, each party shall bear its own fees and expenses incurred in connection with this Agreement and the transactions contemplated hereby.

10.9.  Further Assurances.

Each party shall execute and deliver such additional instruments and other documents and use all commercially reasonable efforts to take or cause to be taken, all actions and to do, or cause to be done, all things necessary under applicable law to consummate the transactions contemplated hereby.

10.10.  Interpretation.

The parties hereto acknowledge and agree that: (a) each party and its representatives have reviewed and negotiated the terms and provisions of this Agreement and have contributed to its revision; (b) the terms and provisions of this Agreement shall be construed fairly as to each party hereto and not in favor of or against either party regardless of which party was generally responsible for the preparation or drafting of this Agreement; (c) all section titles or captions contained in this Agreement or in any Appendix, Exhibit or Schedule referred to herein or

-37-

annexed to this Agreement are for convenience only, shall not be deemed a part of this Agreement and shall not affect the meaning or interpretation of this Agreement; and (d) each Appendix, Exhibit and Schedule hereto is incorporated by reference and made a part of this Agreement.

10.11.  No Joint Venture.

Nothing contained herein shall be deemed to create any joint venture or partnership between the parties hereto, and, except as is expressly set forth herein, neither party shall have any right by virtue of this Agreement to bind the other party in any manner whatsoever.

10.12.  Severability.

If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws effective while this Agreement remains in effect, the legality, validity and enforceability of the remaining provisions shall not be affected thereby.

10.13.  Counterparts.

This Agreement may be executed in any number of counterparts, each of which shall be deemed an original but all of which together shall constitute a single instrument.

[The remainder of this page intentionally left blank.]

-38-

IN WITNESS WHEREOF, the parties hereto have executed, or caused to be executed, this Asset Purchase Agreement as of the date first above written.

SELLER:
KING PHARMACEUTICALS, INC.
By:	/s/ Brian A. Markison
Name:	Brian A. Markison
Title:	Acting President and Chief Executive Officer
MONARCH PHARMACEUTICALS, INC.
By:	/s/ Brian A. Markison
Name:	Brian A. Markison
Title:	Acting President and Chief Executive Officer
PARKEDALE PHARMACEUTICALS, INC.
By:	/s/ Brian A. Markison
Name:	Brian A. Markison
Title:	Acting President and Chief Executive Officer

BUYER:
SALIX PHARMACEUTICALS, LTD.
By:	/s/ Carolyn J. Logan
Name:	Carolyn J. Logan
Title:	President and Chief Executive Officer
SALIX PHARMACEUTICALS, INC.
By:	/s/ Carolyn J. Logan
Name:	Carolyn J. Logan
Title:	President and Chief Executive Officer

EX-10.3

Exhibit 10.3

SALIX PHARMACEUTICALS, LTD.

1996 STOCK OPTION PLAN

(as amended through July 1, 2004)

1. Purposes of the Plan. The purposes of this 1996 Stock Option Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to the Employees and Consultants of the Company and to promote the success of the Company’s business. Options granted hereunder may be either Incentive Stock Options or Nonstatutory Stock Options, at the discretion of the Board and as reflected in the terms of the written option agreement.

2. Definitions. As used herein, the following definitions shall apply:

(a) “Administrator” shall mean the Board or any of its Committees appointed pursuant to Section 4 of the Plan.

(b) “Applicable Laws” means the requirements relating to the administration of stock option plans under the corporate laws and securities regulations of applicable U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Options are, or will be, granted under the Plan.

(c) “Associate” shall mean (i) any company of which such person or company beneficially owns, directly or indirectly, voting securities carrying more than 10 per cent of the voting rights attached to all voting securities of the company for the time being outstanding, (ii) any partner of that person or company, (iii) any trust or estate in which such person or company has a substantial beneficial interest or as to which such person or company serves as trustee or in a similar capacity, (iv) any relative of that person who resides in the same home as that person, (v) any person of the opposite sex who resides in the same home as that person and to whom that person is married or with whom that person is living in a conjugal relationship outside marriage, or (vi) any relative of a person mentioned in clause (v) who has the same home as that person.

(d) “Board” shall mean the Board of Directors of the Company.

(e) “Change in Control” shall mean a change in control of a nature that would be required to be reported in response to item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act as such Schedule, Regulation and Act were in effect on the date of adoption of this Plan by the Board, assuming that such Schedule, Regulation and Act applied to the Company, provided that such a change in control shall be deemed to have occurred at such time as:

(i) any “person” (as that term is used in Section 13(d) and 14(d)(2) of the Exchange Act) (other than the Company, a Subsidiary or an Affiliate of the Company) becomes, directly or indirectly, the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act) of securities representing a 33 ¹/3% or more of the combined voting power for election of members of the Board of the then outstanding voting securities of the Company or any successor of the Company;

(ii) during any period of two consecutive years or less, individuals who at the beginning of such period constituted the Board of the Company cease, for any reason, to constitute at least a majority of the Board, unless the election of nomination for election of each new member of the Board was approved by a vote of at least two-thirds of the members of the Board then still in office who were members of the Board at the beginning of the period;

(iii) the equityholders of the Company approve any merger or consolidation to which the Company is a party as a result of which the persons who were equityholders of the Company immediately prior to the effective date of the merger or consolidation (and excluding, however, any shares held by any party to such merger or consolidation and their affiliates) shall have beneficial ownership of less than 50% of the combined voting power for election of members of the Board (or equivalent) of the surviving entity following the effective date of such merger or consolidation; or

(iv) the equityholders of the Company approve any merger or consolidation as a result of which the equity interests in the Company shall be changed, converted or exchanged (other than a merger with a wholly-owned Subsidiary of the Company) or any liquidation of the Company or any sale or other disposition of all or substantially all of the assets of the Company.

However, in no event shall a Change in Control be deemed to have occurred with respect to a Optionee, if the Optionee is part of a purchasing group which consummates the Change in Control transaction. The Optionee shall be deemed “part of a purchasing group” for purposes of the preceding sentence if the Optionee is either directly or indirectly an equity participant in the purchasing group (except for (i) passive ownership of less than 3% of the stock of the purchasing group, or (ii) ownership of equity participation in the purchasing group which is otherwise not significant, as determined prior to the Change in Control by the Committee).

(f) “Code” shall mean the Internal Revenue Code of 1986, as amended, or any successor thereto.

(g) “Committee” shall mean any Committee appointed by the Board of Directors in accordance with Section 4(a) of the Plan, if one is appointed.

(h) “Common Stock” shall mean the Common Stock of the Company.

(i) “Company” shall mean Salix Pharmaceuticals, Ltd., a Delaware corporation.

(j) “Consultant” shall mean any person, including an advisor, engaged by the Company or any Parent or Subsidiary to render services to such entity, and any Director of the Company whether compensated for such services or not.

(k) “Continuous Status as an Employee or Consultant” shall mean the absence of any interruption or termination of service as an Employee or Consultant. Continuous Status as an Employee or Consultant shall not be considered interrupted in the case of sick leave, military leave, or any other leave of absence approved by the Administrator; provided that such leave is for a period of not more than 90 days or reemployment upon the expiration of such leave is guaranteed by contract or statute. For purposes of this Plan, a change in status from Employee to Consultant or from Consultant to Employee will not constitute a termination of employment.

(l) “Director” shall mean a member of the Board.

(m) “Employee” shall mean any person, including Officers and Named Executives (including Officers and Named Executives who are also Directors), employed by the Company or any Parent or Subsidiary of the Company. The payment of a Director’s fee by the Company shall not be sufficient to constitute “employment” by the Company.

(n) “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.

(o) “Fair Market Value” means, as of any date, the value of Common Stock determined as follows:

(i) If the Common Stock is listed on any established stock exchange or national market system in the United States, including without limitation the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation (“NASDAQ”) System, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported, as quoted on such exchange or system for the last market trading day prior to the time of determination) as reported in The Wall Street Journal or such other source as the Administrator deems reliable;

(ii) If the Common Stock is quoted on the NASDAQ System (but not on The National Market System thereof) or regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high bid and low asked prices for the Common Stock; or

(iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board.

(p) “Incentive Stock Option” shall mean an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code.

(q) “Named Executive” shall mean any individual who, on the last day of the Company’s fiscal year, is the chief executive officer of the Company (or is acting in such capacity) or among the four highest compensated Officers of the Company (other than the chief executive officer). Such officer status shall be determined pursuant to the executive compensation disclosure rules under the Exchange Act.

(r) “Nonstatutory Stock Option” shall mean an Option not intended to qualify as an Incentive Stock Option.

(s) “Officer” shall mean a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder, or any successor thereto and (a) every Director or senior officer of the Company, (b) every Director or senior officer of a company that is itself an insider or subsidiary of the Company, (c) any person or company who beneficially owns, directly or indirectly, voting securities of the Company or who exercises control or direction over voting securities of the Company or a combination of both carrying more than 10% of the voting rights attached to all voting securities of the Company for the time being outstanding other than voting securities held by the person or company as underwriter in the course of a distribution, and (d) the Company where it has purchased, redeemed or otherwise acquired any of its securities, for so long as it holds any of its securities;

(t) “Option” shall mean a stock option granted pursuant to the Plan.

(u) “Optioned Stock” shall mean the Common Stock subject to an Option.

(v) “Optionee” shall mean an Employee or Consultant who receives an Option.

(w) “Parent” shall mean a “parent corporation,” whether now or hereafter existing, as defined in Section 424(e) of the Code.

(x) “Plan” shall mean this 1996 Stock Option Plan, as amended.

(y) “Rule 16b-3” shall mean Rule 16b-3 promulgated under the Exchange Act as the same may be amended from time to time, or any successor provision.

(z) “Share” shall mean a share of the Common Stock, as adjusted in accordance with Section 13 of the Plan.

(aa) “Subsidiary” shall mean a “subsidiary corporation,” whether now or hereafter existing, as defined in Section 424(f) of the Code.

3. Stock Subject to the Plan. Subject to the provisions of Section 13 of the Plan, the maximum aggregate number of shares that may be optioned and sold under the Plan is 10,200,000. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares that were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan. Notwithstanding any other provision of the Plan, shares issued under the Plan and later repurchased by the Company shall not become available for future grant or sale under the Plan.

4. Administration of the Plan.

(a) Procedure.

(i) Multiple Administrative Bodies. The Plan may be administered by different Committees with respect to different groups of Employees and Consultants.

(i) Section 162(m). To the extent that the Administrator determines it to be desirable to qualify Options granted hereunder as “performance-based compensation” within the meaning of Section 162(m) of the Code, the Plan shall be administered by a Committee of two or more “outside directors” within the meaning of Section 162(m) of the Code.

(ii) Rule 16b-3. To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3.

(iii) Other Administration. Other than as provided above, the Plan shall be administered by (A) the Board or (B) a Committee, which committee shall be constituted to satisfy Applicable Laws.

(b) Powers of the Administrator. Subject to compliance with Applicable Laws, and further subject to the provisions of the Plan and in the case of a Committee, the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion:

(i) to determine the Fair Market Value of the Common Stock, in accordance with Section 2(o) of the Plan;

(ii) to select the Employees and Consultants to whom Options may from time to time be granted hereunder;

(iii) to determine whether and to what extent Options are granted hereunder;

(iv) to determine the number of shares of Common Stock to be covered by each such award granted hereunder;

(v) to approve forms of agreement for use under the Plan;

(vi) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder (including, but not limited to, the share price and any restriction or limitation, or any vesting acceleration or waiver of forfeiture restrictions regarding any Option and/or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator shall determine, in its sole discretion);

(vii) to determine whether, to what extent and under what circumstances Common Stock and other amounts payable with respect to an award under this Plan shall be deferred either automatically or at the election of the participant (including providing for and determining the amount, if any, of any deemed earnings on any deferred amount during any deferral period);

(viii) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan; and

(ix) to institute an option exchange program.

(c) Effect of Administrator’s Decision. All decisions, determinations and interpretations of the Administrator shall be final and binding on all Optionees and any other holders of any Options.

5. Eligibility.

(a) Nonstatutory Stock Options may be granted only to Employees and Consultants. Incentive Stock Options may be granted only to Employees. An Employee or Consultant who has been granted an Option may, if he or she is otherwise eligible, be granted an additional Option or Options.

(b) Each Option shall be designated in the written option agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designations, to the extent that the aggregate Fair Market Value of Options that are exercisable for the first time by an Optionee during any calendar year (under all plans of the Company or any Parent or Subsidiary) exceeds $100,000, such excess Options shall be treated as Nonstatutory Stock Options.

(c) For purposes of Section 5(b), Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted.

(d) The Plan shall not confer upon any Optionee any right with respect to continuation of employment or consulting relationship with the Company, nor shall it interfere in any way with his or her right or the Company’s right to terminate his or her employment or consulting relationship at any time, with or without cause.

(e) The terms of any Option shall comply with Applicable Laws.

6. Term of Plan. The Plan shall become effective upon the earlier to occur of its adoption by the Board of Directors or its approval by the stockholders of the Company. It shall continue in effect for a term of ten (10) years, unless sooner terminated under Section 15 of the Plan.

7. Term of Option. The term of each Option shall be the term stated in the Option Agreement; provided, however, that in the case of an Incentive Stock Option, the term shall be no more than ten (10) years from the date of grant thereof or such shorter term as may be provided in the Option Agreement. However, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Option shall be five (5) years from the date of grant thereof or such shorter term as may be provided in the Option Agreement.

8. Option Exercise Price and Consideration.

(a) The per Share exercise price for the Shares to be issued pursuant to exercise of an Option shall be such price as is determined by the Administrator, but shall be no less than 100% of the Fair Market Value on the date of grant; provided, that, in the case of an Incentive Stock Option granted to an Employee who, at the time of the grant of such Incentive Stock Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant.

(b) The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant) and may consist entirely of (1) cash, (2) check, (3) other Shares that (x) in the case of Shares acquired upon exercise of an Option either have been owned by the Optionee for more than six months on the date of surrender or were not acquired, directly or indirectly, from the Company, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised, (4) authorization from the Company to retain from the total number of Shares as to which the Option is exercised that number of Shares having a Fair Market Value on the date of exercise equal to the exercise price for the total number of Shares as to which the Option is exercised, (5) delivery of a properly executed exercise notice together with irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds required to pay the exercise price, (6) any combination of the foregoing methods of payment, or (7) such other consideration and method of payment for the issuance of Shares to the extent permitted under Applicable Laws. No Optionee shall receive financial assistance from the Company in connection with the exercise of any Option and the purchase price of the Common Stock issuable pursuant to any Option shall be paid in full prior to the issuance of such Common Stock. In making its determination as to the type of consideration to accept, the Administrator shall consider if acceptance of such consideration may be reasonably expected to benefit the Company.

9. Exercise of Option.

(a) Procedure for Exercise; Rights as a Stockholder. Any Option granted hereunder shall be exercisable at such times and under such conditions as determined by the Administrator, including performance criteria with respect to the Company and/or the Optionee, and as shall be permissible under the terms of the Plan.

An Option may not be exercised for a fraction of a Share.

An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may, as authorized by the Administrator, consist of any consideration and method of payment allowable under Section 8(b) of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly upon exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 13 of the Plan.

Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised.

(b) Termination of Status as an Employee or Consultant. In the event of termination of an Optionee’s Continuous Status as an Employee or Consultant, such Optionee may, but only within thirty (30) days (or such other period of time, not exceeding three (3) months in the case of an Incentive Stock Option or six (6) months in the case of a Nonstatutory Stock Option, as is determined by the Administrator, with such determination in the case of an Incentive Stock Option being made at the time of grant of the Option) after the date of such termination (but in no event later than the date of expiration of the term of such Option as set forth in the Option Agreement), exercise his or her Option to the extent that he or she was entitled to exercise it at the date of such termination. To the extent that the Optionee was not entitled to exercise the Option at the date of such termination, or if the optionee does not exercise such Option (which he or she was entitled to exercise) within the time specified herein, the Option shall terminate.

(c) Disability of Optionee. Notwithstanding the provisions of Section 9(b) above, in the event of termination of an Optionee’s Continuous Status as an Employee or Consultant as a result of his or her disability, all unvested options under the Optionee’s Option shall immediately vest, and he or she may, but only within twelve (12) months (or such other period of time not exceeding twelve (12) months as is determined by the Administrator, with such determination in the case of an Incentive Stock Option being made at the time of grant of the Option) from the date of such termination (but in no event later than the date of expiration of the term of such Option as set forth in the Option Agreement), exercise his or her Option. To the extent that he or she does not exercise such Option (which he was entitled to exercise) within the time specified herein, the Option shall terminate.

(d) Death of Optionee. In the event of the death of an Optionee:

(i) during the term of the Option while such Optionee is at the time of his death an Employee or Consultant of the Company and who shall have been in Continuous Status as an Employee or Consultant since the date of grant of the Option, all unvested options under the Optionee’s Option shall immediately vest, and the Option may be exercised, at any time within six (6) months (or such other period of time, not exceeding six (6) months, as is determined by the Administrator, with such determination in the case of an Incentive Stock Option being made at the time of grant of the Option) following the date of death (but in no event later than the date of expiration of the term of such Option as set forth in the Option Agreement), by the Optionee’s estate or by a person who acquired the right to exercise the Option by bequest or inheritance; or

(ii) within thirty (30) days (or such other period of time not exceeding three (3) months as is determined by the Administrator, with such determination in the case of an Incentive Stock Option being made at the time of grant of the Option) after the termination of Continuous Status as an Employee or Consultant, the Option may be exercised, at any time within twelve (12) months following the date of death (but in no event later than the date of expiration of the term of such Option as set forth in the Option Agreement), by the Optionee’s estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of termination.

10. Withholding Taxes. As a condition to the exercise of Options granted hereunder, the Optionee shall make such arrangements as the Administrator may require for the satisfaction of any federal, state, local or foreign withholding tax obligations that may arise in connection with the exercise, receipt or vesting of such Option. The Company shall not be required to issue any Shares under the Plan until such obligations are satisfied.

11. Satisfaction of Withholding Tax Obligations. At the discretion of the Administrator, Optionees may satisfy withholding obligations as provided in this paragraph. When an Optionee incurs tax liability in connection with an Option which tax liability is subject to tax withholding under applicable tax laws, and the Optionee is obligated to pay the Company an amount required to be withheld under applicable tax laws, the Optionee may satisfy the withholding tax obligation by one or some combination of the following methods: (a) by cash payment, or (b) out of Optionee’s current compensation, (c) if permitted by the Administrator, in its discretion, by surrendering to the Company Shares that (i) in the case of Shares previously acquired from the Company, have been owned by the Optionee for more than six (6) months on the date of surrender, and (ii) have a Fair Market Value on the date of surrender equal to or less than Optionee’s marginal tax rate times the ordinary income recognized, or (d) by electing to have the Company withhold from the Shares to be issued upon exercise of the Option that number of Shares having a Fair Market Value equal to the amount required to be withheld. For this purpose, the Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined (the “Tax Date”).

All elections by an Optionee to have Shares withheld to satisfy tax withholding obligations shall be made in writing in a form acceptable to the Administrator.

12. Non-Transferability of Options. Unless determined otherwise by the Administrator, an Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. If the Administrator makes an Option transferable, such Option shall contain such additional terms and conditions as the Administrator deems appropriate.

13. Adjustments Upon Changes in Capitalization or Merger.

(a) Changes in Capitalization. Subject to any required action by the stockholders of the Company, the number of shares of Common Stock covered by each outstanding Option, the number of shares of Common Stock that have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, and the price per share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration.” Such adjustment shall be made by the Administrator, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option.

(b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Board shall notify the Optionee as soon as practicable prior to the effective date of such proposed action. To the extent it has not been previously exercised, the Option will terminate immediately prior to the consummation of such proposed action.

(c) Acceleration upon Change in Control. In the event of a Change in Control of the Company, all outstanding options granted under the Plan shall become vested and immediately and fully exercisable, and may either (i) be assumed or an equivalent option or right shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation or (ii) terminate ten (10) days after the Administrator shall notify the Optionee of such vesting and termination. For the purposes of this paragraph, the Option shall be considered assumed if, following the merger or sale of assets, the option confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however,

that if such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option, for each Share of Optioned Stock subject to the Option, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets.

(d) Certain Distributions. In the event of any distribution to the Company’s stockholders of securities of any other entity or other assets (other than dividends payable in cash or stock of the Company) without receipt of consideration by the Company, the Administrator may, in its discretion, appropriately adjust the price per share of Common Stock covered by each outstanding Option to reflect the effect of such distribution.

14. Time of Granting Options. The date of grant of an Option shall, for all purposes, be the date on which the Administrator makes the determination granting such Option or such other date as is determined by the Administrator. Notice of the determination shall be given to each Employee or Consultant to whom an Option is so granted within a reasonable time after the date of such grant.

15. Amendment and Termination of the Plan.

(a) Amendment and Termination. The Board may amend or terminate the Plan from time to time in such respects as the Board may deem advisable.

(b) Stockholder Approval. The Company shall obtain stockholder approval of any material Plan amendment (including but not limited to any downward repricing of outstanding options) and to the extent necessary and desirable to comply with Applicable Laws.

(c) Effect of Amendment or Termination. Any such amendment or termination of the Plan shall not affect Options already granted and such Options shall remain in full force and effect as if this Plan had not been amended or terminated, unless mutually agreed otherwise between the Optionee and the Board, which agreement must be in writing and signed by the Optionee and the Company.

16. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law.

17. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the

requirements of the Plan. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.

18. Option Agreement. Options shall be evidenced by written option agreements in such form as the Board shall approve.

19. Option Grants to Non-Employee Directors. Upon joining the Board of Directors, each non-Employee Director shall receive a one-time grant of an Option to purchase 30,000 shares (subject to adjustment for splits, recapitalizations and the like) of Common Stock at the Fair Market Value as of the date of grant, vesting ratably over 36 months. Each non-Employee Directors shall be granted an annual Option to purchase 15,000 shares (subject to adjustment for splits, recapitalizations and the like) of Common Stock at the Fair Market Value as of the date of grant, vesting ratably over 12 months.

SALIX PHARMACEUTICALS, LTD.

1996 STOCK OPTION PLAN

NOTICE OF STOCK OPTION GRANT

You have been granted an option to purchase Common Stock of Salix Pharmaceuticals, Ltd. (the “Company”) as follows:

Date of Grant:	_______________
Vesting Commencement Date:	_______________
Exercise Price Per Share	_______________
Total Number of Shares Granted:	_______________
Total Exercise Price:	_______________
Type of Option:	___ Incentive Stock Option (“ISO”)
	___ Nonstatutory Stock Option (“NSO”)
Term/Expiration Date:
Vesting Schedule:	This Option may be exercised, in whole or in part, in accordance with the following schedule: 1/4 of the shares subject to this Option shall vest and become exercisable at the end of a twelve month anniversary of the vesting commencement date and 1/48th of the shares on each monthly anniversary thereafter
	___________________________
	___________________________
Termination Period:	Option may be exercised, to the extent vested as of the date of such termination, for 90 days after termination of Continuous Status as an Employee or Consultant except as set forth in Sections 6 and 7 of the Stock Option Agreement (but in no event later than the Expiration Date).

By your signature and the signature of the Company’s representative below, you and the Company agree that this option is granted under and governed by the terms and conditions of the 1996 Stock Option Plan and the Stock Option Agreement, all of which are attached and made a part of this document.

OPTIONEE:	SALIX PHARMACEUTICALS, LTD.
	By:
Print Name	Title:

SALIX PHARMACEUTICALS, LTD.

1996 STOCK OPTION PLAN

STOCK OPTION AGREEMENT

1. Grant of Option. Salix Pharmaceuticals, Ltd. a Delaware corporation (the “Company”), hereby grants to the Optionee named in the Notice of Grant (the “Optionee”), an option (the “Option”) to purchase a total number of shares of Common Stock (the “Shares”) set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the “Exercise Price”) subject to the terms, definitions and provisions of the Salix Pharmaceuticals, Ltd. 1996 Stock Option Plan (the “Plan”) adopted by the Company, which is incorporated herein by reference. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Option.

If designated an Incentive Stock Option, this Option is intended to qualify as an Incentive Stock Option as defined in Section 422 of the Code.

2. Exercise of Option. This Option shall be exercisable during its term in accordance with the Vesting Schedule set out in the Notice of Grant and with the provisions of Section 9 of the Plan as follows:

(i) Right to Exercise.

(a) This Option may not be exercised for a fraction of a share.

(b) In the event of Optionee’s death, disability or other termination of employment or consulting relationship, the exercisability of the Option is governed by Sections 5, 6 and 7 below, subject to the limitation contained in subsection 2(i)(c).

(c) In no event may this Option be exercised after the date of expiration of the term of this Option as set forth in the Notice of Grant.

(ii) Method of Exercise. This Option shall be exercisable by written notice (in the form attached as Exhibit A) which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised, and such other representations and agreements as to the holder’s investment intent with respect to such shares of Common Stock as may be required by the Company pursuant to the provisions of the Plan. Such written notice shall be signed by the Optionee and shall be delivered in person or by certified mail to the Chief Financial Officer of the Company. The written notice shall be accompanied by payment of the Exercise Price. This Option shall be deemed to be exercised upon receipt by the Company of such written notice accompanied by the Exercise Price.

No Shares will be issued pursuant to the exercise of an Option unless such issuance and such exercise shall comply with all relevant provisions of law and the requirements of any stock exchange upon which the Shares may then be listed. Assuming such compliance, for income tax purposes the Shares shall be considered transferred to the Optionee on the date on which the Option is exercised with respect to such Shares.

3. Method of Payment. Payment of the Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee:

(i) cash; or

(ii) check; or

(iii) surrender of other shares of Common Stock of the Company which (A) in the case of Shares acquired pursuant to the exercise of a Company option, either have been owned by the Optionee for more than six (6) months on the date of surrender or were not acquired, directly or indirectly, from the Company, and (B) have a fair market value on the date of surrender equal to the Exercise Price of the Shares as to which the Option is being exercised; or

(iv) authorization from the Company to retain from the total number of Shares as to which the Option is exercised that number of Shares having a Fair Market Value on the date of exercise equal to the exercise price for the total number of Shares as to which the Option is exercised; or

(v) delivery of a properly executed exercise notice together with irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds required to pay the exercise price, or

(vi) any combination of the foregoing methods of payment.

4. Restrictions on Exercise. This Option may not be exercised until such time as the Plan has been approved by the stockholders of the Company, or if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any applicable federal or state securities or other law or regulation, including any rule under Part 207 of Title 12 of the Code of Federal Regulations (“Regulation G”)as promulgated by the Federal Reserve Board. As a condition to the exercise of this Option, the Company may require Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation.

5. Termination of Relationship. In the event of termination of Optionee’s Continuous Status as an Employee or Consultant, Optionee may, to the extent otherwise so entitled at the date of such termination (the “Termination Date”), exercise this Option during the Termination Period set out in the Notice of Grant. To the extent that Optionee was not entitled to exercise this Option at the date of such termination, or if Optionee does not exercise this Option within the time specified herein, the Option shall terminate.

6. Disability of Optionee. Notwithstanding the provisions of Section 5 above, in the event of termination of Optionee’s Continuous Status as an Employee or Consultant as a result of his or her disability, all unvested options under this Option shall immediately vest, and Optionee may, but only within twelve (12) months from the date of termination of employment (but in no event later than the date of expiration of the term of this Option as set forth in Section 9 below), exercise this Option. To the extent that Optionee does not exercise such Option within the time specified herein, the Option shall terminate.

7. Death of Optionee. In the event of the death of Optionee:

(i) during the term of this Option and while an Employee or Consultant of the Company and having been in Continuous Status as an Employee or Consultant since the date of grant of the Option, all unvested options under this Option shall immediately vest, and the Option may be exercised at any time within six (6) months following the date of death (but in no event later than the date of expiration of the term of this Option as set forth in Section 9 below), by Optionee’s estate or by a person who acquired the right to exercise the Option by bequest or inheritance; or

(ii) within thirty (30) days after the termination of Optionee’s Continuous Status as an Employee or Consultant, the Option may be exercised, at any time within twelve (12) months following the date of death (but in no event later than the date of expiration of the term of this Option as set forth in Section 9 below), by Optionee’s estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of termination.

8. Non-Transferability of Option. This option may not be transferred in any manner and may be exercised during the lifetime of Optionee only by Optionee. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee.

9. Term of Option. This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option. The limitations set out in Section 7 of the Plan regarding Options designated as Incentive Stock Options and Options granted to more than ten percent (10%) stockholders shall apply to this Option.

10. Taxation Upon Exercise of Option. Optionee understands that, upon exercising a Nonstatutory Stock Option, he or she will recognize income for tax purposes in an amount equal to the excess of the then fair market value of the Shares over the exercise price. However, the timing of this income recognition may be deferred for up to six months if Optionee is subject to Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). If the Optionee is an employee, the Company will be required to withhold from Optionee’s compensation, or collect from Optionee and pay to the applicable taxing authorities, an amount equal to a percentage of this compensation income. Additionally, the Optionee may at some point be required to satisfy tax withholding obligations with respect to the disqualifying disposition of an Incentive Stock Option. The Optionee shall satisfy his or her tax withholding obligation arising upon the exercise of this Option by one or some combination of the following methods: (i) by cash payment, or (ii) out of

Optionee’s current compensation, or (iii) if permitted by the Administrator, in its discretion, by surrendering to the Company Shares which (a) in the case of Shares previously acquired from the Company, have been owned by the Optionee for more than six months on the date of surrender, and (b) have a fair market value on the date of surrender equal to or greater than Optionee’s marginal tax rate times the ordinary income recognized, or (iv) by electing to have the Company withhold from the Shares to be issued upon exercise of the Option that number of Shares having a fair market value equal to the amount required to be withheld. For this purpose, the fair market value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined (the “Tax Date”).

If the Optionee is subject to Section 16 of the Exchange Act (an “Insider”), any surrender of previously owned Shares to satisfy tax withholding obligations arising upon exercise of this Option must comply with the applicable provisions of Rule 16b-3 promulgated under the Exchange Act (“Rule 16b-3”) and shall be subject to such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions.

All elections by an Optionee to have Shares withheld to satisfy tax withholding obligations shall be made in writing in a form acceptable to the Administrator and shall be subject to the following restrictions:

(1) the election must be made on or prior to the applicable Tax Date;

(2) once made, the election shall be irrevocable as to the particular Shares of the Option as to which the election is made;

(3) all elections shall be subject to the consent or disapproval of the Administrator;

(4) if the Optionee is an Insider, the election must comply with the applicable provisions of Rule 16b-3 and shall be subject to such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions.

11. Tax Consequences. Set forth below is a brief summary as of the date of this Option of some of the U.S. federal and North Carolina tax consequences of exercise of this Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.

(i) Exercise of ISO. If this Option qualifies as an ISO, there will be no regular U.S. federal income tax liability or North Carolina income tax liability upon the exercise of the Option, although the excess, if any, of the fair market value of the Shares on the date of exercise over the Exercise Price will be treated as an adjustment to the alternative minimum tax for federal tax purposes and may subject the Optionee to the alternative minimum tax in the year of exercise.

(ii) Exercise of Nonstatutory Stock Option. If this Option does not qualify as an ISO, there may be a regular U.S. federal income tax liability and North Carolina income tax liability upon the exercise of the Option. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the fair market value of the Shares on the date of exercise over the Exercise Price. If Optionee is an employee, the Company will be required to withhold from Optionee’s compensation or collect from Optionee and pay to the applicable taxing authorities an amount equal to a percentage of this compensation income at the time of exercise.

(iii) Disposition of Shares. In the case of an NSO, if Shares are held for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for U.S. federal and North Carolina income tax purposes. In the case of an ISO, if Shares transferred pursuant to the Option are held for at least one year after exercise and are disposed of at least two years after the Date of Grant, any gain realized on disposition of the Shares will also be treated as long-term capital gain for U.S. federal and North Carolina income tax purposes. If Shares purchased under an ISO are disposed of within such one-year period or within two years after the Date of Grant, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the difference between the Exercise Price and the lesser of (1) the fair market value of the Shares on the date of exercise, or (2) the sale price of the Shares.

(iv) Notice of Disqualifying Disposition of ISO Shares. If the Option granted to Optionee herein is an ISO, and if Optionee sells or otherwise disposes of any of the Shares acquired pursuant to the ISO on or before the later of (1) the date two years after the Date of Grant, or (2) the date one year after the date of exercise, the Optionee shall immediately notify the Company in writing of such disposition. Optionee agrees that Optionee may be subject to income tax withholding by the Company on the compensation income recognized by the Optionee from the early disposition by payment in cash or out of the current earnings paid to the Optionee.

Salix Pharmaceuticals, Ltd.

a Delaware corporation

By:

Title:

OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE OPTION HEREOF IS EARNED ONLY BY CONTINUING CONSULTANCY OR EMPLOYMENT AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY’S STOCK OPTION PLAN WHICH IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITH OPTIONEE’S RIGHT OR THE COMPANY’S RIGHT TO TERMINATE OPTIONEE’S EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR WITHOUT CAUSE.

Optionee acknowledges receipt of a copy of the Plan and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Optionee has reviewed the Plan and this Option in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option and fully understands all provisions of the Option. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan or this Option.

Dated:                         

Signature of Optionee

EXHIBIT A

SALIX PHARMACEUTICALS, LTD.

1996 Stock Option Plan

EXERCISE NOTICE

Salix Pharmaceuticals, Ltd.

8540 Colonnade Center Drive, Suite 501

Raleigh, NC 27615

Attention: Chief Financial Officer

1. Exercise of Option. Effective as of today,             ,     , 20    , the undersigned (“Optionee”) hereby elects to exercise Optionee’s option to purchase shares of the Common Stock (the “Shares”) of Salix Pharmaceuticals, Ltd. (the “Company”) under and pursuant to the Company’s 1996 Stock Option Plan, as amended (the “Plan”) and the [ ] Incentive [ ] Nonstatutory Stock Option Agreement dated                     (the “Option Agreement”).

2. Representations of Optionees. Optionee acknowledges that Optionee has received, read and understood the Plan and the Option Agreement and agrees to abide by and be bound by their terms and conditions. Optionee represents that Optionee is purchasing the Shares for Optionee’s own account for investment and not with a view to, or for sale in connection with, a distribution of any of such Shares.

3. Compliance with Securities Laws. Optionee understands and acknowledges that the Shares may not have been registered under the Securities Act of 1933, as amended (the “1933 Act”), and, notwithstanding any other provision of the Option Agreement to the contrary, the exercise of any rights to purchase any Shares is expressly conditioned upon compliance with the 1933 Act, all applicable state securities laws and all applicable requirements of any stock exchange or over the counter market on which the Company’s Common Stock may be listed or traded at the time of exercise and transfer. Optionee agrees to cooperate with the Company to ensure compliance with such laws.

4. Federal Restrictions on Transfer. Optionee understands that if the Shares have not been registered under the 1933 Act, they cannot be resold and must be held indefinitely unless they are registered under the 1933 Act or unless an exemption from such registration is available and that the certificate(s) representing the Shares may bear a legend to that effect. Optionee understands that the Company is under no obligation to register the Shares and that an exemption may not be available or may not permit Optionee to transfer Shares in the amounts or at the times proposed by Optionee. Specifically, Optionee has been advised that Rule 144 promulgated under the 1933 Act, which permits certain resales of unregistered securities, is not presently available with respect to the Shares and, in any event requires that the Shares be paid for and then be held for at a specified period before they may be resold under Rule 144.

5. Rights as Stockholder. Until the stock certificate evidencing such Shares is issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in the Plan.

6. Tax Consultation. Optionee understands that Optionee may suffer adverse tax consequences as a result of Optionee’s purchase or disposition of the Shares. Optionee represents that Optionee has consulted with any tax consultants Optionee deems advisable in connection with the purchase or disposition of the Shares and that Optionee is not relying on the Company for any tax advice.

7. Stop-Transfer Orders.

(a) Stop-Transfer Notices. Optionee agrees that, in order to ensure compliance with the restrictions referred to herein, the Company may issue appropriate “stop transfer” instructions to its transfer agent, if any, and that, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records.

(b) Refusal to Transfer. The Company shall not be required (i) to transfer on its books any Shares that have been sold or otherwise transferred in violation of any of the provisions of this Agreement or (ii) to treat as owner of such Shares or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Shares shall have been so transferred.

8. Successors and Assigns. The Company may assign any of its rights under this Agreement to single or multiple assignees, and this Agreement shall inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer herein set forth, this Agreement shall be binding upon Optionee and his or her heirs, executors, administrators, successors and assigns.

9. Interpretation. Any dispute regarding the interpretation of this Agreement shall be submitted by Optionee or by the Company forthwith to the Company’s Board of Directors or the committee thereof that administers the Plan, which shall review such dispute at its next regular meeting. The resolution of such a dispute by the Board or committee shall be final and binding on the Company and on Optionee.

10. Governing Law; Severability. This Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina excluding that body of law pertaining to conflicts of law. Should any provision of this Agreement be determined by a court of law to be illegal or unenforceable, the other provisions shall nevertheless remain effective and shall remain enforceable.

11. Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States mail by

certified mail, with postage and fees prepaid, addressed to the other party at its address as shown below beneath its signature, or to such other address as such party may designate in writing from time to time to the other party.

12. Further Instruments. The parties agree to execute such further instruments and to take such further action as may be reasonably necessary to carry out the purposes and intent of this Agreement.

13. Delivery of Payment. Optionee herewith delivers to the Company the full Exercise Price for the Shares.

14. Entire Agreement. The Plan and Notice of Grant/Option Agreement are incorporated herein by reference. This Agreement, the Plan and the Notice of Grant/Option Agreement constitute the entire agreement of the parties and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and is governed by North Carolina law except for that body of law pertaining to conflict of laws.

Submitted by:	Accepted by:
OPTIONEE:	SALIX PHARMACEUTICALS, LTD.
	By:
Signature
	Its:
Name:
	Address:	8540 Colonnade Center Drive
		Suite 501
Address:		Raleigh, NC 27615
		Attn: Chief Financial Officer

EX-10.44

Exhibit 10.44

Portions of this exhibit marked [*] are omitted and

are requested to be treated confidentially.

SUPPLY AGREEMENT

THIS SUPPLY AGREEMENT (this “Agreement”), is entered into as of June 30, 2004 (“Effective Date”), by and among KING PHARMACEUTICALS, INC., a Tennessee corporation (“King”), PARKEDALE PHARMACEUTICALS, INC., a Michigan corporation (“Subsidiary” and together with King, “Seller”), and SALIX PHARMACEUTICALS, INC., a California corporation (“Salix Sub”) and SALIX PHARMACEUTICALS, LTD., a Delaware corporation (“Salix Parent” and together with Salix Sub, “Buyer”).

WHEREAS, Seller and Buyer have entered into that certain Asset Purchase Agreement of even date herewith (“APA”) for the sale or license of certain rights of Seller in the pharmaceutical products known as Anusol-HC^® and Proctocort; and

WHEREAS, in connection therewith, Seller wishes to supply to Buyer, and Buyer wishes to purchase from Seller, Buyer’s entire requirements for certain of the Anusol-HC^® and Proctocort products, for distribution, sale and use in the Territory pursuant to the terms and conditions set forth in this Agreement.

NOW, THEREFORE, in consideration of the foregoing, the covenants and agreements contained in this Agreement, and other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, Seller and Buyer hereby agree as follows:

ARTICLE 1

DEFINITIONS AND REFERENCES

1.1. Defined Terms.

As used in this Agreement, the following capitalized terms have the meanings specified below:

“Acceptable Products” has the meaning set forth in Section 5.1.

“Affiliates” means, with respect to any Person, any Persons directly or indirectly controlling, controlled by, or under common control with, such Person. For purposes hereof, the term “controlled” (including the terms “controlling,” “controlled by” and “under common control with”), as used with respect to any Person, shall mean the direct or indirect ability or power to direct or cause the

direction of management policies of such Person or otherwise direct the affairs of such Person, whether through ownership of voting securities or otherwise.

“ANDA” means an abbreviated new drug application requesting permission to place a drug on the market in accordance with section 505(j) of the FDCA (21 U.S.C. 355(j)) and 21 C.F.R. 314, Part 314 Subpart C, and all supplements filed pursuant to the requirements of the FDA, including all documents, data and other information concerning the applicable drug which are necessary for FDA approval to market the drug in the United States.

“Anusol Cream” means Anusol-HC^® 2.5% (Hydrocortisone Cream, USP).

“API” means active pharmaceutical ingredient.

“Applicable Laws” means all laws, rules, regulations, ordinances and other requirements of any governmental authority or instrumentality within the Territory.

“C.F.R.” means the United States Code of Federal Regulations.

“cGMPs” means current Good Manufacturing Practices pursuant to 21 C.F.R. § 211 et seq., as may be amended from time to time.

“Closing Date” has the meaning set forth in the APA.

“Confidentiality Agreement” has the meaning set forth in Section 9.1.

“Discretionary Manufacturing Changes” has the meaning set forth in Section 3.4(b).

“FDA” means the United States Food and Drug Administration and any successor agency or entity that may be established hereafter.

“FDCA” means the federal Food, Drug and Cosmetic Act, as amended, and the regulations promulgated thereunder.

“Firm Order” means a written irrevocable firm purchase order for the Products, which order shall include a delivery schedule specifying the requested delivery date and quantity for each Product ordered, and the location to which shipment of the Product is to be delivered.

“Force Majeure Event” has the meaning set forth in Section 9.14.

“Forecast” has the meaning set forth in Section 2.2(a).

“Indemnitee” has the meaning set forth in Section 8.3.

-2-

“Indemnitor” has the meaning set forth in Section 8.3.

“Person” means a natural person, a corporation, a partnership, a trust, a joint venture, a limited liability company or any other entity or organization.

“Products” means the Anusol Cream; Anusol-HC^® 25-mg Suppository (Hydrocortisone Acetate); and Proctocort^® Suppositories (Hydrocortisone Acetate Rectal Suppositories, 30 mg). “Product” means any of the foregoing individually.

“Product Approvals” means any approvals, licenses, registrations or authorizations granted by, or applications therefor made to, any national, federal, state or local regulatory agency, department, bureau or other government entity within the Territory, including the FDA, necessary for the marketing, manufacture, use, storage, import, transport, or sale of the Products in a regulatory jurisdiction in the Territory, including the ANDA for the Anusol Cream.

“Purchase Price” has the meaning set forth in Section 4.1.

“Quality Agreement” has the meaning set forth in Section 3.12.

“Required Labeling Documentation” has the meaning set forth in Section 2.1(c).

“Required Manufacturing Changes” has the meaning set forth in Section 3.4(a).

“Specifications” means the applicable specifications for manufacturing and packaging of a Product as manufactured by Seller prior to the Closing Date as described on Schedule 1.1 attached hereto; provided, that the Specifications for the Anusol Cream are as set forth in the applicable ANDA therefor.

“Stability Date” has the meaning set forth in Section 3.6.

“Term” has the meaning set forth in Section 6.1.

“Territory” means the fifty (50) states of the United States of America, the District of Columbia, the Commonwealth of Puerto Rico and all territories or possessions of the United States.

1.2. Construction of Certain Terms and Phrases.

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) all references herein to “Articles” or “Sections” are to Articles or Sections of this Agreement; (e) the term “or” has, except as otherwise indicated, the

-3-

inclusive meaning represented by the phrase “and/or”; and (f) the words “include,” “includes” and “including” shall be deemed to be followed by the phrase “without limitation.” Unless otherwise specified in this Agreement, all references to Products refer to Products manufactured and supplied to Buyer under this Agreement (and not Products purchased pursuant to the APA).

ARTICLE 2

SUPPLY OF THE PRODUCTS

2.1. Sale and Purchase of the Products.

(a) Seller shall use commercially reasonable efforts to supply and sell to Buyer, and Buyer shall purchase from Seller, subject to Section 2.2(d), [*] percent ([*]%) of Buyer’s requirements for each Product for distribution, sale and use in the Territory during the Term, pursuant to Firm Orders submitted by Buyer to Seller from time to time in accordance with Section 2.2, at a price determined in accordance with Section 4.1.

(b) Seller shall manufacture, package, label, store (if and as necessary) and ship the Products or cause the same to be manufactured, packaged, labeled, stored (if and as necessary) and shipped in conformity with Section 2.3 and the applicable Specifications for the Products and in material compliance with all Applicable Laws, including cGMPs and Product Approvals.

(c) Buyer shall control the content and type of all labeling and packaging (and any changes or supplements thereto) for each Product and shall have the responsibility, at Buyer’s expense, which expense shall be commercially reasonable and documented for any changes or supplements thereto. Seller shall be responsible for obtaining such labels (and any changes or supplements thereto) and labeling and packaging all Products in accordance with the content specified by Buyer. Any changes to the labeling and packaging shall be communicated to Seller in writing at least [*] calendar days prior to the desired implementation date, together with the required documentation (the “Required Labeling Documentation”) specifying the content to be included in the labeling and packaging, including all necessary photo-ready art (or its substantial equivalent). Seller shall not be required to implement such changes until its first batch run after the expiration of such [*] day period.

(d) Notwithstanding the provisions of Section 2.1(c), with respect to the initial content and type of labeling and packaging to be provided by Buyer to Seller with respect to each Product, Seller shall implement such labeling and packaging as soon as reasonably practicable following Seller’s receipt of the Required Labeling Documentation with respect thereto from Buyer; provided that Seller shall ship Product pursuant to the initial Firm Order with such labeling not later than [*] days following Seller’s receipt of such Required Labeling

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

-4-

Documentation; provided further, that the initial Firm Order is submitted by Buyer to Seller in accordance with the [*] day advance lead time pursuant to Section 2.2(b).

(e) During the term of this Agreement, Buyer hereby grants to Seller a royalty-free, non-exclusive right and license under such intellectual property rights that are owned or licensed by Buyer as are necessary to allow Seller to manufacture and supply the Products exclusively to Buyer under this Agreement. Seller shall have the right to transfer or sublicense the foregoing right and license, at Seller’s election, to subcontractor(s) to whom Seller subcontracts its manufacturing or supply obligations hereunder; provided that (i) Seller may only subcontract its manufacturing and supply obligations hereunder upon the prior written consent of Buyer, which consent shall not be unreasonably withheld, delayed or conditioned, (ii) Buyer shall, upon receipt of a request for such consent, have the right to immediately and directly engage such proposed subcontractor as its supplier of the applicable Product(s) and, upon prior written notice to Seller, terminate this Agreement with respect to such Product(s) (and upon Seller’s receipt of such notice, this Agreement will be deemed terminated with respect to such Product(s)), and (iii) Seller may retain such right and license to the extent necessary to continue manufacturing and supplying Products in accordance with this Agreement. Seller may subcontract all or any part of its performance obligations hereunder subject to the preceding sentence. Neither Seller nor any subcontractor of Seller shall be required to notify Buyer or obtain Buyer’s consent with respect to its purchase of materials from third parties for use in its manufacture of the Products hereunder.

(f) Buyer acknowledges that Seller does not and will not keep a [*], and will not be liable for any failure or delays in supply caused by a [*] or a Force Majeure Event.

2.2. Quarterly Forecasts; Purchase Orders.

(a) Buyer shall submit to Seller upon execution of this Agreement and no later than [*] days before the first day of every calendar quarter during the term hereof, an eighteen (18) month rolling forecast (“Forecast”) organized by months and Product stock keeping units setting forth orders and requested delivery dates Buyer expects to place for each of the Products to be distributed, sold and used in the Territory during the eighteen (18) month period commencing with the beginning of said calendar quarter. Buyer shall make all Forecasts in good faith given market and other information available to Buyer. Each such Forecast shall constitute a binding commitment of Buyer to purchase the percentages of Products set forth below pursuant to Firm Orders issued in accordance with Section 2.2(b), notwithstanding any change in the quantity of a Product specified in a subsequent Forecast. Buyer shall be required to purchase that percentage of the quantity of each of the Products specified in the Forecast for successive quarters as follows:

Period of the Forecast	Percentage of each of the Products that Buyer is required to purchase
[*]	[*]%
[*]	[*]%

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

-5-

(b) Buyer shall purchase Products solely by Firm Orders for such Product. No terms and conditions contained in any Firm Order, acknowledgment, invoice, bill of lading, acceptance or other preprinted form issued by either party shall be effective to the extent they are inconsistent with or modify the terms and conditions contained herein. Buyer shall submit each such Firm Order to Seller at least [*] days in advance of the date specified in each Firm Order on which delivery of the Products is requested.

(c) Seller shall promptly notify Buyer in writing if at any time Seller has reason to believe that Seller will not be able to (i) fill a Firm Order for any Product in all material respects in accordance with the delivery schedule specified therein by Buyer and pursuant to the terms and conditions of this Agreement or (ii) supply Products to Buyer in material satisfaction of the most recent Forecast, which notice in either case shall provide Buyer with the details on the extent of the expected shortfall of supply. Upon such notice of a supply problem, or in any event upon Seller’s failure to satisfy, within the delivery time frame specified by Buyer, a portion of the Products ordered by Buyer in compliance with this Agreement, Buyer and Seller will immediately meet and work together, in good faith, to identify an appropriate resolution to the supply problem, provided that subsection (d) below shall remain applicable with respect to any such problem. Any agreed resolution to the supply problem will be set forth in a writing executed by both parties.

(d) In the event Seller cannot or does not properly supply all of Buyer’s requirements for Products on a timely basis in accordance with this Agreement, then, upon reasonable prior written notice to Seller, Buyer shall be free to engage a third party manufacturer of Products or manufacture Products directly without Seller’s written consent, solely to the extent necessary to ensure a supply of Products to Buyer sufficient to supply [*]% of Buyer’s needs therefor, and Seller shall automatically be released from any obligations to supply such quantities of Product to Buyer.

(e) In no event shall Seller have any obligation to supply any Product in excess of [*]% of the most recent forecast estimated quantity for such Product for such calendar quarter as described in the most recent Forecast.

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

-6-

(f) All Products ordered by Buyer shall be consistent with Seller’s current minimum batch sizes for the related Product, or multiples thereof, as set forth in Schedule 2.2(f). Seller shall give Buyer not less than six months’ notice prior to changing its minimum batch sizes, and all such changes in batch size shall be commercially reasonable.

2.3. Shipment and Delivery.

(a) Seller shall use commercially reasonable efforts to ship to Buyer the Products ordered pursuant to a Firm Order by the requested delivery dates therefor, F.O.B. the manufacturing facility for each Product. Freight (including customs clearance costs) and insurance shall be paid by Buyer. Title and risk of loss for each Firm Order of the Products will pass to Buyer at the time of delivery of the Products to the designated common carrier for shipment at the place of shipment. Seller shall package each Product for shipment in accordance with its customary practices therefor, which practices shall be customary and reasonable in the pharmaceutical industry with respect to similarly-situated products, unless otherwise specified in writing by Buyer at least thirty (30) business days prior to such shipment, in which event any reasonable, documented extra costs incurred by Seller on account of the packaging changes requested by Buyer shall be promptly reimbursed by Buyer.

(b) Prior to shipment, Seller shall perform release testing pursuant to the Specifications and all Applicable Laws, including cGMPs and the Product Approvals.

(c) The parties acknowledge and agree that the quantities of any of the Products delivered to Buyer hereunder may differ by up to ten percent (10%) from the quantity requested in the Firm Order. In the event that the quantity delivered hereunder differs from the quantity requested in the Firm Order, Buyer shall pay Seller for the quantity delivered rather than the quantity requested in the Firm Order.

2.4. Line Extension Products and New Products.

Seller shall have no obligation, express or implied, to develop or assist in the development of new formulations, dosages, forms of administration, or preparations for the Products.

ARTICLE 3

QUALITY AND REGULATORY MATTERS

3.1. Licenses.

Except as otherwise set forth in this Agreement, each party hereto shall, at its sole cost and expense, maintain in full force and effect all necessary licenses,

-7-

approvals, permits and other authorizations required by Applicable Law to carry out its duties and obligations under this Agreement.

3.2. Regulatory Responsibility.

All regulatory matters regarding the Products shall be the responsibility of, and shall remain under the control of Buyer, subject to Seller’s responsibilities in matters related to the manufacturing of the Products in material compliance with Applicable Laws and Product Approvals. Notwithstanding the foregoing, each party shall promptly provide the other with copies of all communications received from any regulatory agency or authority concerning the Products which directly or indirectly affect the manufacturing thereof, and shall submit copies of all such communications and filings concerning the Products to be made to any regulatory agency or authority for prior review and comment at least five (5) business days prior to such submission. Each party shall provide adequate notice to the other of meetings with a regulatory agency or authority, whether via electronic means, in person, or otherwise, which relate to the manufacturing of the Products and will permit the other party to participate in such meetings if such meetings relate solely to the manufacture of the Products. Each party shall give due consideration to all comments timely made by the other which relate solely to the manufacturing of the Products and shall notify the other, in writing, if it declines to address any such comments, stating the reason therefor. Seller also shall advise Buyer of any occurrence or new information which arises out of Seller’s manufacturing or other activities which may reasonably be expected to have material adverse regulatory compliance and/or reporting consequences concerning a Product.

3.3. Efficacy and Safety Information.

Each party shall furnish the other with efficacy, safety and other information in its possession, or that may come into its possession, as reasonably requested to assist each party in the performance of its obligations under this Agreement, including relevant clinical and safety data included in the applicable ANDA for the Anusol Cream.

3.4. Change Control

(a) For changes to the Specifications or manufacturing processes that are required by Applicable Laws (collectively, “Required Manufacturing Changes”), Seller and Buyer shall cooperate in making such changes timely.

(b) For changes to the Specifications or manufacturing process that are not Required Manufacturing Changes (collectively, “Discretionary Manufacturing Changes”), Seller and Buyer must each agree to any Discretionary Manufacturing Changes and shall, to the extent commercially reasonable under the circumstances, cooperate in making such changes as soon as reasonably practicable, and each agrees that it shall not unreasonably withhold its consent to such

-8-

Discretionary Manufacturing Changes. Notwithstanding the foregoing, Seller’s standard change control procedures shall be utilized by the parties in reviewing such changes, subject to the Quality Agreement.

(c) Notwithstanding the foregoing, the commercially reasonable, documented, direct costs, including obsolete raw materials, work-in-process, Product, packaging and labeling materials (i) associated with Required Manufacturing Changes shall be born equally by Buyer and Seller, and (ii) associated with Discretionary Manufacturing Changes shall be borne by the party initiating such changes.

3.5. Records and Release.

Seller shall keep complete, accurate and authentic accounts, notes, data and records of the work performed under this Agreement and shall maintain complete and adequate records pertaining to the methods and facilities used by it for the manufacture, processing, testing, packing, labeling, holding and distribution of Products in accordance with the Applicable Laws, including cGMPs and Product Approvals. Seller shall provide Buyer with copies of certificates of analysis, certification of compliance, and such other documents as set forth in Section 5.3 of the Quality Agreement.

3.6. Stability Testing.

Effective upon such date as Buyer has identified, qualified, and engaged an alternative laboratory for the conduct of quality control and stability testing (the “Stability Date”), Buyer shall thereafter at all times be solely responsible for (a) taking and maintaining quality control and stability samples of all Products delivered to Buyer (including the Inventory (as defined in the APA) and Products purchased hereunder), and (b) testing stability samples of all Inventory and Products purchased hereunder. Provided that Seller shall be in compliance with Seller’s obligations set forth in Section 3.13, Buyer shall use reasonable efforts to engage such an alternative laboratory as soon as reasonably practicable and in any event not later than the termination or expiration of this Agreement. Promptly after the Stability Date, Seller shall transfer to Buyer or Buyer’s designee Seller’s existing stability samples for the Products. Notwithstanding the foregoing, until such time as Buyer has identified, qualified, and engaged an alternative laboratory for the conduct of such quality control and stability testing, which (provided that Seller shall be in compliance with Seller’s obligations set forth in Section 3.13) shall not be later than the termination or expiration of this Agreement, Seller shall have full responsibility for all responsibilities and duties described in the first sentence of this Section 3.6 with respect to quality control and stability testing; provided however, that Buyer shall compensate Seller for all services provided under this Section 3.6 at the rates set forth in Schedule 3.6 hereto. Buyer shall pay any invoice for such services within thirty (30) days after Buyer’s receipt of such invoice

-9-

from Seller. Except as otherwise described herein or in the Quality Agreement, Buyer shall be solely responsible for all release and/or process testing regarding the Products.

3.7. Recalls; Product Technical Complaints.

(a) During the term of this Agreement, each party shall promptly inform the other by telephone and in writing in the event any circumstances occur which may precipitate a recall, market withdrawal, or field correction of any Products. Buyer shall have the sole authority and responsibility to respond to any regulatory agencies (subject to Seller’s responsibilities in matters related to the manufacturing of the Products in material compliance with Applicable Laws), to respond to product technical complaints and medical complaints and, subject to Section 3.7(b) and 3.7(c), to handle all recalls, market withdrawals, and field corrections of the Products in accordance with Applicable Law at Buyer’s cost and expense.

(b) Each party shall promptly (but in any case, not later than 48 hours) notify the other party in writing of any decision, order, request or directive of a court or other governmental authority to recall, withdraw, or field correct a Product. Buyer shall be solely responsible for determining, in its sole discretion, if and when to issue any recall, withdrawal, or field correction (but shall comply with all Applicable Laws in making such determination) and, subject to Section 3.7(c), for the cost and expense of any such recall, withdrawal, or field correction of the Products, provided, however, that Buyer shall give due consideration to all comments timely made by Seller relating to the manufacturing of the Product and shall notify Seller, in writing, if it declines to address any such comments, stating the reason therefor. Seller shall be entitled to effect any product recall, market withdrawal, or field correction with respect to Products, including Products sold or distributed by Seller prior to the Effective Date, without Buyer’s prior written consent, required to comply with any Applicable Laws; Seller shall not effect any other product recall, market withdrawal, or field correction with respect to Products without Buyer’s prior written consent. If a Product recall, market withdrawal or field correction does not result solely from Seller’s gross negligence, willful misconduct or a breach of Section 7.1(a), then Seller shall be relieved of its obligations to supply the Product hereunder until the cause of such recall, withdrawal, or field correction has been resolved to the reasonable satisfaction of the parties and the FDA.

(c) In the event of any Product recall, withdrawal or field correction resulting solely from Seller’s gross negligence, willful misconduct or a breach of Section 7.1(a), Seller shall, as Buyer’s sole remedy with respect to the costs of such recall, market withdrawal, or field correction, (i) bear all reasonable costs associated with such recalls, market withdrawals, or field correction provided that Seller shall have no obligation to reimburse Buyer for any consequential damages

-10-

incurred in connection therewith, including any lost profits, and (ii) at the election of Buyer, either:

(A) supply additional Product as soon as reasonably practicable, without charge to Buyer, in an amount sufficient to replace the amount of the Product recalled, withdrawn, or subject to field correction; or

(B) refund to Buyer or give credit to Buyer against outstanding receivables due from Buyer against the Purchase Price for shipments of the Product to be delivered to Buyer in the future, as requested by Buyer in its sole discretion, in amounts equal to the price paid by Buyer to Seller for Products so recalled, withdrawn, or subject to field correction, plus the reasonable transportation and/or disposal costs incurred by Buyer and not recovered by Buyer in respect of such recalled, withdrawn, or field corrected Products.

Notwithstanding the foregoing, neither Seller’s indemnification obligations under Section 8.1 nor liability with respect to product liability or personal injury resulting from Seller’s gross negligence, intentional misconduct, or breach of Section 7.1(a) shall be in any way limited by this Section 3.7(c).

3.8. Notice of Government Inspections.

Each party agrees that it will (a) advise the other of any requests by any governmental agency for any inspections with respect to the manufacturing of Products, (b) provide the other with copies of any correspondence related thereto, and, to the extent it becomes aware of the results, observations and/or outcome of any inspections or audits of the facilities or operations involved in the manufacture, processing, testing or packaging of the Products conducted by governmental agencies, including the FDA, and (c) notify the other of any such information as it relates to the Products within three (3) days of obtaining the information.

3.9. Government Inquiries.

Upon being contacted by any federal, state, or local agency for any regulatory purpose pertaining specifically to this Agreement or to the Products, including notice of the initiation of any inquiries, notices or inspection activity by any governmental or regulatory authority, a party shall immediately notify the other party and provide the other with (a) a reasonable description of any such inquiries and related documentation (including any FDA Establishment Inspection Report Form 483 or FDA warning letter), (b) an opportunity to advise and comment with respect thereto and (c) if appropriate, participate with respect thereto if such matters relates solely to the Products. Either party may permit unannounced inspections of Products or facilities by a regulatory agency with competent jurisdiction and respond to the extent necessary to comply with its obligations under Applicable Law.

-11-

3.10. Medical Inquiries.

Buyer shall handle all medical inquiries concerning the Products. Seller shall notify Buyer of any medical information requests and/or medical inquiries.

3.11. Adverse Drug Events.

Each party shall promptly notify the other party in writing of any event(s) that materially affect(s) or could reasonably be expected to materially affect the marketing of the Product, including adverse drug reactions, side effects, injuries, toxicity or sensitivity reactions, and governmental inquiries. Serious Adverse Events (as defined below) for any of the Products learned of by Seller shall be submitted in writing to Buyer within two (2) business days from the date of learning thereof. Non-Serious Adverse Events (as defined below) for any of the Products learned of by Seller shall be submitted in writing to Buyer no more than five (5) business days from the date of learning thereof. Buyer and/or its Affiliates shall have the sole responsibility for reporting and responding to adverse drug events to the applicable regulatory authorities; provided, that Seller may take such actions (including issuing such reports) as it reasonably determines are required of it as a manufacturer or supplier of Products by Applicable Laws. Each party shall promptly provide the other with copies of all periodic reports and product safety update reports relating to any of the Products which are filed or received from third parties. “Serious Adverse Event” shall mean any serious and unexpected adverse drug experience as defined by FDA in 21 C.F.R. §§ 310.305 and 314.80, associated with the use of any of the Products in humans, whether or not considered drug related. “Non-Serious Adverse Event” shall mean any adverse drug experience associated with the use of any of the Products in humans, whether or not considered drug related, which is not a Serious Adverse Event.

3.12. Product Complaints; Quality Agreement.

Buyer shall have the sole authority and responsibility to respond to any regulatory agencies with respect to product complaints and to respond to product complaints relating to any of the Products. The parties shall enter into a quality agreement, in the form attached hereto as Schedule 3.12 (“Quality Agreement”), immediately upon execution of this Agreement. In the event the terms of this Agreement and the Quality Agreement materially and explicitly conflict, the terms of this Agreement shall govern.

3.13. Alternative Manufacturers; Technology Transfer.

(a) Subject to the terms and conditions set forth herein, Seller shall upon reasonable prior notice from Buyer, reasonably assist Buyer in designating alternative supplier(s) of any Product(s) and qualifying and enabling Buyer, any alternative suppliers, and their manufacturing sites to manufacture and supply such Product(s) in accordance with all Applicable Laws, Product Approvals, and the

-12-

Specifications, including (i) the transfer and disclosure of, and enablement of such parties and sites with respect to, Licensed Technology and (ii) the provision of relevant technical documentation, technical expertise, and development reports and/or historical documentation reasonably necessary for the transfer and qualification of both analytical methodologies and manufacturing processes with respect to such parties and sites. All such assistance shall be provided during Seller’s normal business hours at times and locations to be mutually agreed upon by the parties. Seller shall have no obligation to provide more than [*] man-hours of such assistance to Buyer nor to provide such assistance at any time after [*] months after the termination or expiration of this Agreement. In the event such assistance is provided at Seller’s facility, Buyer’s visit to such facility shall be subject to, and Buyer shall comply with, Seller’s safety and security policies for such facility.

(b) Buyer shall (i) pay Seller for such assistance at a rate equal to two hundred dollars ($200) per hour and (ii) reimburse Seller for all reasonable, documented travel and other out-of-pocket expenses incurred by Seller in providing such assistance. Buyer shall pay any invoice for such assistance within thirty (30) days of Buyer’s receipt of such invoice from Seller.

(c) In addition, upon termination or expiration of this Agreement with respect to the Anusol Cream Product, Seller shall promptly transfer to Buyer the tangible embodiment of the Anusol Mold (as defined in the License Agreement dated February 28, 1998, by and between Warner-Lambert Company, Parke, Davie & Company, and Parkedale, granting Parkedale certain rights with respect thereto) used by Seller to manufacture such Product to the extent Seller has the right to do so or on an [*] basis, provided that Buyer pays for the cost of packaging and shipping thereof.

(d) Seller expressly agrees that (i) Seller’s obligations under this Section 3.13 are necessary and reasonable in order to ensure that Buyer enjoys the benefit of the assets purchased pursuant to the APA and (ii) monetary damages would be inadequate to compensate Buyer for Seller’s breach of this Section 3.13. Accordingly, Seller agrees and acknowledges that Buyer shall be entitled to specific performance by Seller of its obligations under this Section 3.13 with respect to any breach by Seller of this Section 3.13.

3.14. Quality Audits.

Seller will permit Buyer to inspect those portions of the manufacturing facilities in which the Products are manufactured upon thirty (30) days advance notice and during regular business hours to ascertain compliance with cGMPs, Applicable Laws, and this Agreement. Such audits shall be performed in a manner of not more than once annually or as otherwise provided in the Quality Agreement. Buyer representatives conducting such audits shall follow all security and facility access procedures as reasonably required by Seller. The parties agree to use

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

-13-

commercially reasonable efforts to promptly resolve any quality issues raised by such inspections.

ARTICLE 4

PRICE AND PAYMENT TERMS

4.1. Purchase Price.

(a) Buyer shall purchase from Seller, and Seller shall sell to Buyer, each Product at a price equal to that set forth on Schedule 4.1(a) with respect to such Product, subject to adjustment as set forth in this Section 4.1 (the “Purchase Price”). Effective July 1, 2005, the Purchase Price shall increase by an amount equal to the percentage change increase, if any, in the U.S. Department of Labor’s Pharmaceutical Producer Price Index – “Preparations, Ethical Prescriptions” (the “PPPI”) over the preceding year, provided that, in any event, the amount of such increase shall not exceed [*] percent ([*]%) of the original Purchase Price.

(b) In addition to the Purchase Price, Buyer shall pay all actual freight, insurance and government sales, use, excise, property, import, export or similar taxes or excises imposed on purchases for resale, and duties and other fees (except tax on income to Seller) incurred in connection with the sale and shipment of the Products to Buyer.

(c) Payments to Seller for the Purchase Price of delivered Products shall be made by Buyer within thirty (30) days after the later of (i) the date of shipment thereof and (ii) the date of invoice from Seller.

4.2. Distribution, Warehousing, Billing, Pricing.

Buyer (and/or its Affiliates) shall have the sole responsibility for the distribution, warehousing, billing and order confirmation of the Products after receipt at the designated destination and for the collection of receivables resulting from sales of the Products. As between Buyer and Seller, Buyer shall have the sole authority to determine the resale price of the Products during the term of this Agreement, including resale price increases and decreases and the timing thereof.

4.3. Labeling and Packaging Costs.

Buyer shall reimburse Seller for the reasonable, documented direct costs of any manufacturing, packaging, and labeling materials and components paid for by Seller in reasonable reliance upon Forecasts submitted by Buyer hereunder which become obsolete and which cannot be returned for a refund or otherwise used by Seller upon and due to any change by Buyer or its Affiliates in the packaging or labeling of the Product. At its option, Buyer will pay for the reasonable,

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

-14-

documented costs of the return or destruction of the obsolete materials or components.

4.4. Currency.

All payments to be made under this Agreement shall be made in United States currency.

4.5. Late Payments.

In the event that any payment due hereunder is not made when due, the payment shall accrue interest from the date due at the rate of 18% per annum;, provided that in no event shall such rate exceed the maximum legal annual interest rate. The payment of such interest shall not limit Seller from exercising any other rights it may have as a consequence of the lateness of any payment.

ARTICLE 5

INSPECTION OF PRODUCTS

5.1. Inspection by Buyer.

Within thirty (30) days from the date of delivery of Products to the destination specified by Buyer, Buyer may inspect and analyze such Products delivered to Buyer for purposes of determining whether the Products meet their Specifications and comply with all Applicable Laws, including cGMPs, in all material respects (“Acceptable Products”). Buyer shall notify Seller in writing within such thirty (30) day period of any Product or portion thereof which Buyer is returning because it is not an Acceptable Product. If Seller does not receive such notice within such thirty (30) day period, the shipped Products will be deemed accepted as Acceptable Products.

5.2. Disputes over Products.

If Seller, after good faith consultation with Buyer, disputes any finding by Buyer that a Product is not an Acceptable Product, then representative samples of such Product shall be forwarded to an independent third party jointly selected by Seller and Buyer, in their reasonable discretion, for analysis, which analysis shall be performed in compliance with industry standards and applicable FDA regulations and governmental regulations for re-testing of pharmaceutical products. The findings of such third party regarding whether the Product was an Acceptable Product shall be binding upon the parties. The cost of such analysis by such third party shall be borne by the party whose determination of whether or not the Product was an Acceptable Product differed from such conclusion of such third party.

-15-

5.3. Replacement of Products that are not Acceptable Products.

Seller shall, at Buyer’s option, in Buyer’s sole discretion, either replace any Product order, or portion thereof, which is not an Acceptable Product, as soon as reasonably practicable at Seller’s cost and expense, including shipping costs, or promptly refund to Buyer the payments made for such returned Products. At the sole option of Seller, said Product may be returned to Seller, at Seller’s expense including shipping costs, or destroyed in an environmentally acceptable manner, in accordance with applicable governmental regulations, at Seller’s expense. This Section 5.3 sets forth Buyer’s sole remedy for any Products that are rejected by Buyer under Section 5.1 as not being Acceptable Products. Seller shall have no liability to Buyer under this Section 5.3 if a Product fails to meet Specifications if such Product (a) has been subject to misuse, negligence or accident other than by Seller or its agents, representatives, or subcontractors, or (b) has been stored, handled or used by Salix or third parties other than Seller’s agents, representatives, or subcontractors in a manner contrary to Applicable Laws.

ARTICLE 6

TERM OF THE AGREEMENT

6.1. Term.

This Agreement shall become effective as of the Effective Date and shall expire upon the second (2^nd) anniversary of the Effective Date (the “Term”), unless sooner terminated as provided in this Article 6.

6.2. Termination.

(a) Either party may immediately terminate this Agreement without liability to the other party (i) if the other party materially breaches this Agreement or the Asset Purchase Agreement and fails to cure that breach within thirty (30) days after receiving written notice of the breach or (ii) in the event that the other party is adjudged bankrupt or enters into an assignment for the benefit of its creditors.

(b) Buyer may also terminate this Agreement for its convenience upon thirty (30) days prior written notice to Seller.

(c) Notwithstanding the foregoing, with respect to any breach by Seller not cured within the aforementioned thirty (30) period or Buyer’s exercise of its termination right under Section 6.2(b), Buyer shall have the right upon written notice to Seller, in lieu of terminating this Agreement in its entirety, to terminate this Agreement solely with respect to a particular Product and upon

-16-

such notice, the Agreement shall be deemed terminated with respect to such Product. For the avoidance of doubt, the parties acknowledge and agree that in the event of termination of this Agreement solely with respect to a particular Product, Section 6.3 shall apply with respect to such Product and the termination and survival portion of Section 3.6 and 3.13 shall apply with respect to such Product.

6.3. Effects of Termination.

(a) Upon termination of this Agreement for any reason:

(i) Buyer shall purchase from Seller (1) any Products which have been Firm Ordered through the effective date of termination and which comply with the warranties of Seller set forth in Section 7.1(a), and (2) any additional Products in Seller’s inventory that are in finished form and which comply with the warranties of Seller set forth in Section 7.1(a), in each case at the applicable Purchase Price; and

(ii) Buyer shall pay Seller for all reasonable, documented direct costs associated with raw materials or components used in manufacturing, packaging, or labeling the Products, to the extent that such materials or components were purchased in reasonable quantities based on Forecasts submitted by Buyer hereunder, which Seller determines, in its reasonable discretion, that it cannot practicably reuse in the manufacturing, packaging, or labeling of other products or return for a full refund or credit. At its option, Buyer will pay for the return or destruction of the obsolete materials or components.

(b) Neither the termination nor expiration of this Agreement shall release or operate to discharge either party from any liability or obligation that may have accrued prior to such termination or expiration. Any termination of this Agreement as provided herein shall not be an exclusive remedy but shall be in addition to any remedies whatsoever that may be available to the terminating party, subject to the limitations and exclusions set forth herein.

(c) Notwithstanding the giving of any notice of termination pursuant to this Article 6, and, each party shall continue to fulfill its obligations under this Agreement at all times until the effective date of any such termination.

-17-

ARTICLE 7

REPRESENTATIONS AND WARRANTIES

7.1. Seller Warranties.

(a) Seller warrants that each Product manufactured by or for Seller and sold to the Buyer under this Agreement:

(i) will meet the Specifications therefor at the time the same is tendered to the common carrier for delivery to the Buyer; and

(ii) shall be manufactured, labeled and packaged in all material respects in accordance with Applicable Law, cGMPs and Product Approvals (if applicable), except to the extent that such noncompliance is attributable to specific written instructions from Buyer or the Buyer has assumed responsibility for such manufacturing, labeling and/or packaging.

(b) Seller further represents and warrants to Buyer that:

(i) to Seller’s knowledge, Seller has all rights, approvals, consents, qualifications, and registrations of any kind reasonably required for Seller to perform under this Agreement; and

(ii) there are no outstanding agreements binding on Seller or Seller’s assets that would materially adversely affect Seller’s ability to perform under this Agreement.

7.2. Buyer Warranties.

Buyer represents and warrants to Seller that:

(a) Buyer shall at all times handle, warehouse, store, market, sell, distribute and otherwise dispose of the Products in accordance with customary industry practice and in material compliance with all Applicable Laws, including cGMPs and Product labeling and Specifications;

(b) Buyer has all applicable licenses, registrations and permits necessary to take control of such Products;

(c) Buyer will make any filings that are required to be made by it under any ANDA transferred to it by Seller, including the filing of any “adverse event reports” as required by Applicable Law, and

-18-

(d) Buyer will not knowingly sell or distribute the Products to any party outside of the Territory nor to a party inside the Territory that intends to sell or distribute the Products outside of the Territory.

7.3. DISCLAIMER OF WARRANTIES.

EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT OR ANY RELATED AGREEMENT, THERE ARE NO OTHER REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, EITHER IN FACT OR BY OPERATION OF LAW, BY STATUTE OR OTHERWISE, MADE OR GIVEN BY EITHER PARTY HEREUNDER, INCLUDING ANY WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OF ANY PRODUCT, NON-INFRINGEMENT, QUALITY, PERFORMANCE OR OTHERWISE OR FOR ANY ASSISTANCE OR SERVICE PROVIDED HEREUNDER.

7.4. No Reliance by Third Parties.

The representations and warranties of a party set forth in this Agreement are intended for the sole and exclusive benefit of the other party hereto, and may not be relied upon by any third party.

ARTICLE 8

INDEMNIFICATION; INSURANCE

8.1. Indemnification by Seller.

Seller shall defend, indemnify and hold Buyer and its Affiliates, and their respective officers, directors, employees, successors and assigns, harmless from and against any and all claims, liabilities, losses, costs, actions, suits, damages and expenses (other than special, incidental, consequential or punitive damages, but including attorneys’ fees and costs) from a third-party claim (a) arising out of any breach by Seller of this Agreement or (b) for personal injury or tangible property damage arising from Seller’s gross negligence of willful misconduct hereunder; provided, however, that Seller shall not be required to indemnify Buyer with respect to any such claim, liability, loss, cost, action, suit, damage or expense under this Section 8.1 to the extent the same (i) is otherwise covered by Buyer’s indemnification obligation in Section 8.2, or (ii) arises from Buyer’s negligent act or omission or intentional misconduct or that of any Buyer Affiliate, or (iii) arises with respect to any action taken by Seller upon the written direction of Buyer or (iv) arises from Buyer’s failure to implement reasonable mitigation efforts within Buyer’s control after Buyer has obtained knowledge of a Product defect or non-conformity.

-19-

8.2. Indemnification by Buyer.

Buyer shall defend, indemnify and hold Seller and its Affiliates, and their respective officers, directors, employees, successors and assigns, harmless from and against any and all claims, liabilities, losses, costs, actions, suits, damages and expenses (other than special, incidental, consequential or punitive damages, but including attorneys’ fees and costs) from a third-party claim (a) arising out of any breach by Buyer of this Agreement or (b) for personal injury or tangible property damage arising from Buyer’s gross negligence of willful misconduct hereunder; or (c) arising out of the performance or nonperformance of Buyer’s obligations under this Agreement; provided, however, that Buyer shall not be required to indemnify Seller with respect to any such claim, liability, loss, cost, action, suit, damage or expense under this Section 8.2 to the extent covered by Seller’s indemnification obligation in Section 8.1, or which arises from Seller’s negligent act or omission, intentional misconduct or that of any Seller Affiliate.

8.3. Procedures.

A party (the “Indemnitee”) which intends to claim indemnification under this Article 8 shall notify the other party (the “Indemnitor”) within a reasonable time in writing of any action, claim or liability in respect of which the Indemnitee believes it is entitled to claim indemnification, provided that the failure to give timely notice to the Indemnitor shall not release the Indemnitor from any liability to the Indemnitee to the extent the Indemnitor (including its right to defend) is not prejudiced thereby. The Indemnitor shall have the right, by notice to the Indemnitee, to assume the defense of any such action or claim within the fifteen (15) day period after the Indemnitor’s receipt of notice of any action or claim with counsel of the Indemnitor’s choice and at the sole cost of the Indemnitor. If the Indemnitor does not so assume the defense of such third party claim, then the Indemnitee may assume such defense with reasonable counsel of its choice and at the sole cost of the Indemnitor, provided such costs are reasonable and documented. If the Indemnitor so assumes such defense, then the Indemnitee may participate therein through counsel of its choice, but at the sole cost of the Indemnitee. The party not assuming the defense of any such claim shall render all reasonable assistance as is requested to the party assuming such defense, and all reasonable out-of-pocket costs of such assistance shall be for the account of the Indemnitor. No such claim shall be settled other than by the party defending the same; provided that Indemnitor shall not, without the Indemnitee’s prior written consent, enter into any settlement of any such action or claim which (a) imposes on the Indemnitee any liability or obligation which cannot be assumed and performed in full by the Indemnitor or (b) admits fault on the part of Indemnitee, provided that Indemnitor promptly and fully performs and/or assumes any such liability or obligation.

8.4. Insurance.

(a) Buyer. Buyer covenants that, prior to offering for sale of any Products to any third party, shall obtain comprehensive general liability insurance

-20-

and products liability insurance coverage with reputable and financially secure insurance carrier(s) covering such risks as are reasonably appropriate to sound business judgment and Buyer’s obligations and activities contemplated by this Agreement, in an amount reasonably sufficient to protect against liability under this Agreement. At Seller’s written request, Buyer shall furnish a Certificate of Insurance evidencing primary coverage and requiring thirty (30) days’ prior written notification of cancellation to Seller.

(b) Seller. Seller covenants that Seller shall obtain and maintain comprehensive general liability insurance and products liability insurance coverage with reputable and financially secure insurance carrier(s) covering such risks as are reasonably appropriate to sound business judgment and Seller’s obligations and activities contemplated by this Agreement, in an amount reasonably sufficient to protect against its liability under this Agreement. At Buyer’s written request, Seller shall furnish a Certificate of Insurance evidencing primary coverage and shall provide thirty (30) days’ prior written notification of cancellation to Buyer.

8.5. Further Limitations.

(a) NOTWITHSTANDING ANY OTHER PROVISION IN THIS AGREEMENT, NO PARTY SHALL IN ANY EVENT BE LIABLE TO THE OTHER PARTY OR ITS AFFILIATES, OFFICERS, DIRECTORS, EMPLOYEES, STOCKHOLDERS, AGENTS OR REPRESENTATIVES ON ACCOUNT OF ANY BREACH HEREOF OR ANY INDEMNITY OBLIGATION SET FORTH HEREIN FOR ANY INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES (INCLUDING, BUT NOT LIMITED TO, LOST PROFITS, LOSS OF USE, DAMAGE TO GOODWILL OR LOSS OF BUSINESS).

(b) Any action for breach of this Agreement must be commenced within twelve (12) months after the end of the term of this Agreement; provided that this Section 8.5(b) shall not apply to any claim by either party for indemnification under Section 8.1 or 8.2, or to any claim by either party for breach of the other party’s indemnity obligation.

(c) Seller and the Buyer shall cooperate with each other in resolving any claim or liability with respect to which one party is obligated to indemnify the other under this Agreement, including without limitation, by making commercially reasonable efforts to mitigate or resolve any such claim or liability.

(d) The amount of any loss, liability, damage or expense for which indemnification is provided under this Article 8 shall be net of any amounts actually recovered by the indemnified party in respect of such loss, liability, damage or expense under its insurance policies.

-21-

ARTICLE 9

MISCELLANEOUS

9.1. Confidential Information.

(a) All Buyer technical, business, and marketing information provided to Seller, including any information acquired by Buyer from Seller under the APA) is considered by Buyer to be proprietary and confidential (hereinafter the “Buyer Confidential Information”). Similarly, all Seller technical and business information provided to Buyer (excluding information acquired by Buyer from Seller under the APA) is considered by Seller to be proprietary and confidential (hereinafter “Seller Confidential Information” and together with the Buyer Confidential Information, the “Confidential Information”). Each party agrees to treat the other party’s Confidential Information as such, according such Confidential Information the same protections as it provides to its own proprietary and confidential information of a similar nature, which shall be no less than reasonable level of such protection. Each party agrees that it shall not use any of the other party’s Confidential Information for any purpose other than for the purposes of exercising its rights or fulfilling its obligations under this Agreement, the APA, or any related agreements.

(b) The confidentiality obligations of this Section 9.1 shall not extend to information which:

(i) is or was disclosed by the discloser and was known to the recipient prior to such disclosure, as evidenced by written records kept by the receiving party in the normal course of business; or

(ii) is or becomes known to the public through no fault, action, or omission by the recipient; or

(iii) is disclosed to the recipient without restriction on disclosure by a third party not (1) under an obligation of secrecy to the discloser or (2) providing Products to Seller as permitted hereby.

(c) Each party acknowledges and agrees that (i) its obligations under this Section 9.1 are necessary and reasonable to protect the discloser and its business, (ii) any violation of these provisions could cause irreparable injury to the discloser for which money damages would be inadequate, and (iii) as a result, the discloser may be entitled to seek injunctive relief against the threatened breach of the provisions of this Section 9.1. The parties agree to cooperate with respect to requests for confidential treatment to be submitted to the Securities and Exchange Commission with respect to certain portions of this Agreement.

-22-

(d) The terms of the confidentiality agreement previously executed between Buyer and Seller dated July 25, 2003 (the “Confidentiality Agreement”) are hereby superceded by the terms of this Section 9.1, provided that (i) neither party is discharged from any liability or obligation that may have accrued under the Confidentiality Agreement prior to the execution of this Agreement and (ii) both parties shall remain bound to the terms of such Agreement with respect to any confidential information disclosed thereunder that is not the subject of, nor disclosed pursuant to, this Agreement or the APA.

9.2. Notices.

All notices or other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand, prepaid telex, cable, courier, telegram or facsimile and confirmed in writing, or mailed first class, postage prepaid, by registered or certified mail, return receipt requested (mailed notices and notices sent by telex, cable or telegram shall be deemed to have been given on the date received) as follows:

If to Buyer, as follows:

Salix Pharmaceuticals, Inc.

8540 Colonnade Center Drive

Suite 501

Raleigh, North Carolina 27615

Attention: General Counsel

Telephone: (919) 862-1000

Facsimile: (919) 862-1095

If to Seller, as follows:

King Pharmaceuticals, Inc.

501 Fifth Street

Bristol, Tennessee 37620

Attention: President

Facsimile: (423) 989-8055

with a copy (which shall not constitute notice) to:

King Pharmaceuticals, Inc.

501 Fifth Street

Bristol, Tennessee 37620

Attention: General Counsel/Legal Affairs

Facsimile: (423) 989-6282

-23-

or in any case to such other address or addresses as hereafter shall be furnished as provided in this Section 9.2 by any party hereto to the other party.

9.3. Entire Agreement.

This Agreement, its schedules, and the APA constitute the entire agreement between the parties with respect to the subject matter hereof and supersede all prior agreements or understandings of the parties relating thereto.

9.4. Waiver; Remedies.

No delay on the part of Seller or Buyer in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of either Seller or Buyer of any right, power or privilege hereunder operate as a waiver of any other right, power or privilege hereunder nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder.

9.5. Amendment.

This Agreement may be modified or amended only by written agreement of the parties hereto.

9.6. No Third-Party Rights.

No provision of this Agreement shall be deemed or construed in any way to result in the creation of any rights in or obligations to any Person not a party to this Agreement.

9.7. Successors and Assigns.

This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that neither Seller nor Buyer may assign any of its rights, duties or obligations hereunder without the prior written consent of the other, which consent shall not be unreasonably withheld; further provided, however, that either party may assign this Agreement without such consent to an Affiliate or in connection with the transfer or sale of all or substantially all of its assets or business, its merger, or consolidation with another business entity. Any purported assignment without a required consent shall be void. Any permitted assignee shall assume all obligations of its assignor under this Agreement, provided that no assignment shall relieve either party of the performance of any accrued obligation.

-24-

9.8. Governing Law.

This Agreement shall be governed and construed in accordance with the laws of the State of Delaware excluding any choice of law rules which may direct the application of the law of another state.

9.9. Further Assurances.

Each party shall execute and deliver such additional instruments and other documents and use all commercially reasonable efforts to take or cause to be taken, all actions and to do, or cause to be done, all things necessary under applicable law to consummate the transactions contemplated hereby.

9.10. Interpretation.

The parties hereto acknowledge and agree that: (a) each party and its representatives have reviewed and negotiated the terms and provisions of this Agreement and have contributed to its revision; (b) the terms and provisions of this Agreement shall be construed fairly as to each party hereto and not in favor of or against either party regardless of which party was generally responsible for the preparation or drafting of this Agreement; (c) all section titles or captions contained in this Agreement or in any Appendix, Exhibit or Schedule referred to herein or annexed to this Agreement are for convenience only, shall not be deemed a part of this Agreement and shall not affect the meaning or interpretation of this Agreement; and (d) each Appendix, Exhibit and Schedule hereto is incorporated by reference and made a part of this Agreement.

9.11. No Joint Venture.

Nothing contained herein shall be deemed to create any joint venture or partnership between the parties hereto, and, except as is expressly set forth herein, neither party shall have any right by virtue of this Agreement to bind the other party in any manner whatsoever.

9.12. Severability.

If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws effective while this Agreement remains in effect, the legality, validity and enforceability of the remaining provisions shall not be affected thereby.

9.13. Counterparts.

This Agreement may be executed in any number of counterparts, each of which shall be deemed an original but all of which together shall constitute a single instrument.

-25-

9.14. Force Majeure.

Neither party shall be liable to the other party for any failure to perform as required by this Agreement (other than the obligation to pay money) if the failure to perform is due to circumstances reasonably beyond such party’s control including acts of God, civil disorders or commotions, acts of aggression, fire, explosions, floods, drought, war, sabotage, embargo, utility failures, material shortages, labor disturbances, a national health emergency, or appropriations of property (a “Force Majeure Event”). A party whose performance is affected by a Force Majeure Event shall take prompt action using its reasonable best efforts to remedy the effects of the Force Majeure Event.

9.15. Survival.

The provisions of Articles and Sections 3.5 (to the extent applicable), 3.7, 3.13, 5, 6.3, 7, 8 and 9 shall survive the expiration or termination of this Agreement.

[The remainder of this page intentionally left blank.]

-26-

IN WITNESS WHEREOF, the parties hereto have executed, or caused to be executed, this Supply Agreement as of the date first above written.

Seller:
KING PHARMACEUTICALS, INC.
By:	/s/ Brian A. Markison
Name:	Brian A. Markison
Title:	Acting President and Chief Executive Officer
PARKEDALE PHARMACEUTICALS, INC.
By:	/s/ Brian A. Markison
Name:	Brian A. Markison
Title:	Acting President and Chief Executive Officer
BUYER:
SALIX PHARMACEUTICALS, LTD.
By:	/s/ Carolyn J. Logan
Name:	Carolyn J. Logan
Title:	President and Chief Executive Officer
SALIX PHARMACEUTICALS, INC.
By:	/s/ Carolyn J. Logan
Name:	Carolyn J. Logan
Title:	President and Chief Executive Officer

SCHEDULE 2.2(f)

Minimum Batch Sizes

Product Description
Anusol-HC® 2.5% cream – 30g Tube	[	*]
Anusol-HC® 25mg suppository – pkg of 12	[	*]
Anusol-HC® 25mg suppository – pkg of 24	[	*]
Proctocort® 30mg suppository – pkg of 12	[	*]
Proctocort® 30mg suppository – pkg of 24	[	*]

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

SCHEDULE 3.6

Stability Testing Charges

With respect to Anusol Cream, the cost to Buyer is $[*] for each set of test requirements to be performed at each specified test point, for which there are 8 separate test points for the Product (i.e., initial, 3 months, 6 months, etc.), or $[*] paid in advance for the full series of tests over the 8 separate test points.

With respect to Anusol and Proctocort Suppositories, the cost to Buyer is $[*] for each set of test requirements to be performed at each specified test point, for which there are 8 separate test points for the products (i.e., initial, 3 months, 6 months, etc.), or $[*] paid in advance for the full series of tests over the 8 separate test points.

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

SCHEDULE 4.1(a)

Initial Purchase Price

Effective Until June 30, 2005

Product Description	Price
Anusol-HC® 2.5% cream – 30g tube	$	[	*]
Anusol-HC® 25mg suppository – pkg of 12	$	[	*]
Anusol-HC® 25mg suppository – pkg of 24	$	[	*]
Proctocort® 30mg suppository – pkg of 12	$	[	*]
Proctocort® 30mg suppository – pkg of 24	$	[	*]

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

EX-10.45

Exhibit 10.45

LICENSE ASSIGNMENT AND CONSENT AGREEMENT

THIS LICENSE ASSIGNMENT AND CONSENT AGREEMENT (this ”Agreement”), is entered into as of June 30, 2004, by and among PARKEDALE PHARMACEUTICALS, INC., a Michigan corporation (“Parkedale”), KING PHARMACEUTICALS, INC., a Tennessee corporation (“King Parent” and together with Parkedale, “King”), SALIX PHARMACEUTICALS, INC., a California corporation (“Salix Sub”), SALIX PHARMACEUTICALS, LTD., a Delaware corporation (“Salix Parent” and together with Salix Sub, “Salix”), and WARNER-LAMBERT COMPANY LLC, a Delaware limited liability company and successor to Warner-Lambert Company, and PARKE, DAVIS & COMPANY LLC, a Michigan limited liability company and successor to Parke, Davis & Company (collectively, “WLC”).

WHEREAS, King and Salix intend to enter into an Asset Purchase Agreement (the “Asset Purchase Agreement”), pursuant to which King would sell to Salix, and Salix would acquire from King, certain assets used by King in King’s marketing, promotion and sale of certain pharmaceutical products known as Anusol-HC^®;

WHEREAS, WLC and King are parties to that certain License Agreement dated February 27, 1998 with respect to certain trademarks and other assets owned by WLC and licensed to King thereunder (the “Original License”);

WHEREAS, Salix wishes King to assign, and Salix wishes to assume, effective as of the closing date of the Asset Purchase Agreement (the “Effective Date”), all rights, duties and obligations of King under the Original License with respect to the Anusol Trademark and Anusol Mold (each as defined in the Original License), and WLC wishes to consent to such assignment; and

WHEREAS, Salix wishes to sublicense to King the rights to the Anusol Mold and Anusol Trademark necessary for King to perform its obligations under a Supply Agreement that would be entered into between King and Salix as of the Effective Date (“Supply Agreement”), pursuant to which King will supply Salix with the Anusol products for a limited period, and WLC wishes to consent to such sublicense.

NOW, THEREFORE, in consideration of the foregoing, the covenants and agreements contained in this Agreement and the Asset Purchase Agreement, and other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, King, Salix, and WLC hereby agree as follows:

1. Defined Terms. Capitalized terms used in this Agreement and not otherwise defined in this Agreement shall have the meanings given to such terms in the Original License.

2. Consent. WLC hereby consents to the transfer and assignment from King to Salix, and assumption by Salix from King, effective upon the Effective Date, of all rights, duties, and obligations under the Original License with respect to the Anusol Trademark and Anusol Mold

as contemplated by this Agreement. Effective upon the Effective Date, this Agreement, and the rights, duties, and obligations assigned hereunder, shall be enforceable by and between Salix and WLC with respect to such rights, duties, and obligations, provided, however, that WLC and King agree that Salix shall neither assume nor otherwise have any liability resulting from any acts or omissions of King with respect to the Anusol Trademark or Anusol Mold prior to the Effective Date; provided, further, that nothing in this Agreement shall constitute a waiver or release by WLC of any claims against King with respect to any acts or omissions of King with respect to the Anusol Trademark or Anusol Mold prior to the Effective Date.

3. License Assignment. Subject to the terms and conditions of this Agreement, effective upon the Effective Date, King hereby transfers and assigns to Salix all rights, duties, and obligations of King under the Original License with respect to the Anusol Trademark and Anusol Mold (the “Assigned Partial License”), and Salix agrees to assume such duties and obligations thereunder and be bound to the terms of the Original License with respect thereto. This Agreement and the rights, duties, and obligations under the Original License assigned and transferred hereunder shall serve as the agreement between Salix and WLC with respect thereto. Accordingly, Salix and WLC agree that, upon such assignment, transfer, and assumption, each of Salix and WLC shall be entitled to enforce the applicable terms of the Original License against the other under this Agreement, provided that (i) the termination of King’s remaining rights under the Original License shall not have any effect on the rights, duties, and obligations assigned to Salix hereunder and (ii) without limiting any remedies WLC may have against King, WLC shall not be entitled to limit or terminate the rights assigned to Salix hereunder based on any default or breach by King of the Original License occurring prior to the Effective Date.

4. Consent to Sublicense. WLC hereby consents to the sublicense from Salix to King, effective upon the Effective Date, of the applicable Assigned Partial License rights with respect to the Anusol Trademark and Anusol Mold as necessary for King to perform its obligations under the Supply Agreement.

5. Release. Effective as of the Effective Date, WLC, on behalf of itself and its affiliates, successors and assigns hereby forever releases, acquits and discharges King Parent, Parkedale and their respective affiliates, shareholders, officers, directors, agents, trustees, beneficiaries, employees, successors and assigns, which shall not in any event be construed as to include Salix (the ”Released Parties”), of and from any and all claims, acts, damages, demands, rights of action and causes of action, of any nature whatsoever, which WLC and/or its affiliates, successors and assigns in the future may have with respect to matters occurring from and after the Effective Date, against the Released Parties arising from or in connection with the Assigned Partial License or any of the transactions or matters contemplated thereby.

6. Outside Date. If the Effective Date shall not have occurred on or before August 1, 2004 (the “Outside Date”), this Agreement shall become null and void and of no further force or effect.

7. Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of Delaware excluding any choice of law rules which may direct the application of the law of another state.

8. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original but all of which together shall constitute a single instrument.

[The remainder of this page intentionally left blank.]

IN WITNESS WHEREOF, the parties hereto have executed, or caused to be executed, this License Assignment and Consent Agreement as of the date first above written.

KING:
PARKEDALE PHARMACEUTICALS, INC.		KING PHARMACEUTICALS, INC.
By:	/s/ Brian A. Markison	By:	/s/ Brian A. Markison
Name:	Brian A. Markison	Name:	Brian A. Markison
Title:	Acting President and Chief Executive	Title:	Acting President and Chief Executive
	Officer		Officer
SALIX:
SALIX PHARMACEUTICALS, INC.		SALIX PHARMACEUTICALS, LTD.
By:	/s/ Carolyn J. Logan	By:	/s/ Carolyn J. Logan
Name:	Carolyn J. Logan	Name:	Carolyn J. Logan
Title:	President and Chief Executive Officer	Title:	President and Chief Executive Officer
WLC:
WARNER-LAMBERT COMPANY LLC		PARKE, DAVIS & COMPANY LLC
By:	/s/ Arthur A. Silverstein	By:	/s/ Arthur A. Silverstein
Name:	Arthur A. Silverstein	Name:	Arthur A. Silverstein
Title:	Assistant Secretary	Title:	Assistant Secretary

EX-10.46

Exhibit 10.46

ASSIGNMENT OF TRADEMARKS

WHEREAS, MONARCH PHARMACEUTICALS, INC., a Tennessee corporation having a place of business at 501 Fifth Street, Bristol, Tennessee 37620, and PARKEDALE PHARMACEUTICALS, INC., a Michigan corporation having a place of business at 501 Fifth Street, Bristol, Tennessee 37620 (together, “Assignor”), have used and are using the trademarks identified on Schedule A and are the owners of the trademark registrations identified on Schedule A (the “Marks”), including the goodwill of the business connected with the use of, and symbolized by, the Marks.

WHEREAS, SALIX PHARMACEUTICALS, INC., a California corporation having a place of business at 8540 Colonnade Center Drive, Suite 501, Raleigh, North Carolina 27615 (“Assignee”), desires to acquire all right, title and interest in and to the Marks, including any and all federal applications and registrations therefor.

WHEREAS, Assignor and Assignee have entered into an Asset Purchase Agreement dated as of the date hereof, pursuant to which Assignor has agreed, inter alia, to assign to Assignee certain assets, including: (a) all right, title and interest in and to the Marks and (b) the goodwill of the business associated with the Marks.

NOW THEREFORE, for good and valuable consideration paid by Assignee, receipt of which is hereby acknowledged, Assignor hereby assigns and transfers to Assignee, the entire right, title and interest in and to the Marks, including the goodwill of the business connected with the use of, and symbolized by, the Marks, free and clear of any and all liens, security interests, and other encumbrances.

[The remainder of this page intentionally left blank.]

IN WITNESS WHEREOF, the undersigned has caused this instrument to be signed by a duly authorized corporate officer as of this 30th day of June, 2004.

MONARCH PHARMACEUTICALS, INC.
By:	/s/ Brian A. Markison
Name:	Brian A. Markison
Title:	Acting President and Chief Executive Officer
PARKEDALE PHARMACEUTICALS, INC.
By:	/s/ Brian A. Markison
Name:	Brian A. Markison
Title:	Acting President and Chief Executive Officer

SCHEDULE A

Assigned Trademarks

Country	Mark	Application No./ Registration No.	Goods/Services	Status
United States	PROCTOCORT	2,132,640	Class 5: Topical preparation for treatment of inflammatory and pruritic demartose.	Registered on 1/27/98.
Dominican Republic	PROCTOCORT	113,905	Class 11: Chemical products for the industry, photography, etc., materials for staining drugs, pharmaceutical products, chemical or medicinal, especial or not, object for bandages, disinfectants and veterinary products	Registered 7/30/00.

EX-10.47

Exhibit 10.47

LICENSE AGREEMENT

THIS LICENSE AGREEMENT (this “Agreement”), is entered into as of June 30, 2004, by and among MONARCH PHARMACEUTICALS, INC., a Tennessee corporation (“Monarch”), PARKEDALE PHARMACEUTICALS, INC., a Michigan corporation (“Parkedale”), KING PHARMACEUTICALS, INC., a Tennessee corporation (“King” and together with Monarch and Parkedale, “Seller”), and SALIX PHARMACEUTICALS, INC., a California corporation (“Salix Sub”), and SALIX PHARMACEUTICALS, LTD., a Delaware corporation (“Salix Parent” and together with Salix Sub, “Seller”).

WHEREAS, Seller and Buyer have entered into that certain Asset Purchase Agreement of even date herewith (the “Asset Purchase Agreement”), for the sale and license of certain rights of Seller in the pharmaceutical products known as Anusol-HC^® and Proctocort^®;

WHEREAS, in connection therewith, Seller wishes to license to Buyer, and Buyer wishes to license from Seller, certain rights in the Licensed Technology (as defined in the Asset Purchase Agreement).

NOW, THEREFORE, in consideration of the foregoing, the covenants and agreements contained in this Agreement and the Asset Purchase Agreement, and other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, Seller and Buyer hereby agree as follows:

ARTICLE 1

DEFINITIONS AND REFERENCES

1.1. Defined Terms.

Capitalized terms used in this Agreement and not otherwise defined in this Agreement shall have the meanings given to such terms in the Asset Purchase Agreement.

1.2. Construction of Certain Terms and Phrases.

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) all references herein to “Articles” or “Sections” are to Articles or Sections of this Agreement; (e) the term “or” has, except as otherwise indicated, the inclusive meaning represented by the phrase “and/or”; and (f) the words “include”, “includes” and “including” shall be deemed to be followed by the phrase “without limitation”.

ARTICLE 2

LICENSE GRANT

2.1. License Grant.

Subject to the terms and conditions of this Agreement, Seller hereby grants to Buyer a non-exclusive, royalty-free, perpetual license, with rights of sublicense as set forth herein, to utilize the Licensed Technology, solely in the manufacture or packaging of the Products. Buyer may not sublicense or otherwise transfer or convey any of the foregoing rights without Seller’s prior written consent, provided that Buyer may sublicense any of the foregoing rights without such consent as reasonably necessary to enable Buyer’s licensees, distributors, or manufacturers with respect to any Product to manufacture and package such Product. Buyer acknowledges and agrees that the license granted in this Section 2.1 is for the sole purpose of enabling Buyer (and its licensees, distributors, and manufacturers with respect to Products) to manufacture or package the Products and Buyer is expressly excluded from using the Licensed Technology for any other purpose.

2.2. Reservation of Rights.

Buyer acknowledges and agrees that Seller owns, reserves and retains all right, title and interest in and to the Licensed Technology, except for the limited, express license grant set forth herein.

2.3. Technology Transfer.

Buyer acknowledges and agrees that, except as provided in the Asset Purchase Agreement and Supply Agreement, Seller has no obligation to provide Buyer with any information, data, materials or documentation regarding the Licensed Technology nor to provide any other technical assistance.

2.4. Disclaimers.

Seller makes no representation under this Agreement as to, and does not warrant hereunder, the accuracy or completeness of the Licensed Technology, nor does Seller warrant hereunder that the use of the Licensed Technology, or any Products manufactured or packaged in accordance with or utilizing such technology, will be free from claims of infringement of the patents, copyrights or other intellectual property rights of any third party. Seller shall not be under any liability arising out of granting the license set forth in Section 2.1 under, in connection with, or as a result of this Agreement, whether on warranty, contract, negligence or otherwise.

ARTICLE 3

COVENANTS

3.1. Restrictions.

Buyer covenants and agrees that it shall not use, nor permit any permitted assignee or sublicensee to use, any part of the Licensed Technology for any purpose except as set forth in Section 2.1 and Buyer agrees that any use of the Licensed Technology outside of the scope of the license grant set forth in Section 2.1 shall be a breach of this Agreement. Without limiting the foregoing, Buyer covenants and agrees that neither Buyer nor any permitted assignee or sublicensee of Buyer has the right to utilize, and further agrees that Buyer will not utilize, nor permit any permitted assignee or sublicensee to utilize, the Licensed Technology, alone or together with any process except as permitted in Section 2.1.

3.2. Additional Covenants.

Buyer’s obligations under Section 6.7 (Confidentiality) of the Asset Purchase Agreement are incorporated herein by reference.

ARTICLE 4

PROPRIETARY RIGHTS AND CONFIDENTIAL INFORMATION

4.1. Ownership.

Buyer hereby agrees that the Licensed Technology constitutes commercially valuable, proprietary trade secrets and confidential information of Seller. Buyer further agrees that except for the limited license grant set forth in Section 2.1 and such rights as may be explicitly set forth in the Asset Purchase Agreement and Supply Agreement, Buyer shall not assert any right, title or interest in or to the Licensed Technology. Buyer acknowledges that the Licensed Technology (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from the disclosure or use and (ii) are the subject of efforts of Seller that are reasonable under the circumstances to maintain their secrecy.

4.2. Confidential Information.

(a) In addition to Buyer’s other confidentiality obligations set forth in the Asset Purchase Agreement, Buyer agrees, during the term of this Agreement and thereafter, to (i) maintain the Licensed Technology which is disclosed by Seller to Buyer in any manner and in any form or format or otherwise obtained by Buyer (the “Seller Confidential Information”), in the strictest confidence, (ii) only disclose the Seller Confidential Information to Buyer’s employees who have a need to know such information and who have a legal obligation to maintain the confidentiality of

such information and to third parties who have a need to know in connection with the manufacturing or packaging of the Products and who are legally bound to maintain the confidentiality of such information in accordance with a confidentiality agreement which contains confidentiality obligations on such third parties which are at least as protective as the confidentiality obligations on Buyer set forth in this Agreement, and (iii) only use such Seller Confidential Information in accordance with this Agreement. Without limiting the foregoing, Buyer agrees to devote its commercially reasonable efforts, consistent with the practices and procedures under which Buyer protects its own proprietary information and materials of like importance, to protect the Seller Confidential Information against any unauthorized or unlawful use, disclosure, dissemination or copying.

(b) Buyer’s obligations under this Section 4.2 shall not apply to information that Buyer can demonstrably prove (i) is, or later becomes, generally available to the public through no fault of Buyer or its Affiliates, or (ii) is obtained from a third party not under an obligation of confidentiality. If required by order of any government authority, Buyer may disclose to such authority, data, information, or materials pertaining to or involving the Seller Confidential Information to the extent required by such order, provided that Buyer shall first have provided Seller with an opportunity to obtain a protective order to maintain the confidentiality of such data, information or materials.

(c) Buyer’s obligations of confidentiality shall remain in full force and effect until the Seller Confidential Information falls into one of the categories set forth in (b) above.

(d) Buyer acknowledges that in the event of a breach by Buyer of any provisions of this Article 4, Seller will not have an adequate remedy in money or damages. Seller shall therefore be entitled to obtain injunctive relief against any such breach by Buyer in any court of competent jurisdiction without the necessity of posting bond. Seller’s rights hereunder shall not in any way be construed to limit or restrict its right to seek or obtain other damages or relief under this Agreement or under applicable law.

ARTICLE 5

TERMINATION

5.1. Termination.

Buyer may terminate this Agreement for its convenience upon thirty (30) days prior written notice to Seller. Seller may terminate this Agreement for any material breach by Buyer in the event that Buyer fails to cure such breach within thirty (30) days after receipt of written notice of such breach.

5.2. Effect of Termination.

Upon termination of this Agreement, all license rights granted herein shall automatically terminate (including any sublicenses granted hereunder), and Buyer and any permitted sublicensees shall immediately cease all use the Licensed Technology.

5.3. Survival.

The following articles and sections of this Agreement shall survive termination for any reason: Articles 4, 5, 6, 7 and 8.

ARTICLE 6

WARRANTY DISCLAIMER

EXCEPT AS SET FORTH IN THE ASSET PURCHASE AGREEMENT, SELLER MAKES NO WARRANTIES REGARDING THE LICENSED TECHNOLOGY OF ANY KIND, EXPRESS OR IMPLIED, WHETHER IN FACT OR BY OPERATION OF LAW, BY STATUTE OR OTHERWISE, AND SELLER EXPRESSLY DISCLAIMS ANY AND ALL IMPLIED OR STATUTORY WARRANTIES, INCLUDING ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT, OR OTHERWISE. EXCEPT AS SET FORTH IN THE ASSET PURCHASE AGREEMENT, SELLER MAKES NO WARRANTY AS TO THE SUITABILITY OF THE LICENSED TECHNOLOGY.

ARTICLE 7

INDEMNIFICATION

In addition to Buyer’s indemnification obligations under the Asset Purchase Agreement, Buyer shall indemnify, defend, and hold Seller harmless from and against any claims and all Damages incurred or suffered by Seller to the extent caused by any material breach by Buyer of any term of this Agreement.

ARTICLE 8

MISCELLANEOUS

8.1. Notices.

All notices or other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand, prepaid telex, cable, courier, telegram or facsimile and confirmed in writing, or mailed first class, postage prepaid, by registered or certified mail, return receipt requested (mailed notices and notices sent by telex, cable or telegram shall be deemed to have been given on the date received) in accordance with the notice information set forth in Section 10.1 (Notices) of the Asset Purchase Agreement.

8.2. Entire Agreement.

This Agreement, the Asset Purchase Agreement, the Supply Agreement, and their Appendices, Exhibits and Schedules constitute the entire agreement between the parties with respect to the subject matter hereof and supersede all prior agreements or understandings of the parties relating thereto.

8.3. Waiver; Remedies.

No delay on the part of Seller or Buyer in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of either Seller or Buyer of any right, power or privilege hereunder operate as a waiver of any other right, power or privilege hereunder nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder.

8.4. Amendment.

This Agreement may be modified or amended only by written agreement of the parties hereto.

8.5. No Third-Party Rights.

No provision of this Agreement shall be deemed or construed in any way to result in the creation of any rights in or obligations of any Person not a party to this Agreement.

8.6. Successors and Assigns.

Buyer may not assign any of its rights, duties or obligations hereunder without the prior written consent of Seller, which consent shall not be unreasonably withheld, provided that Buyer may assign this Agreement without such consent to an Affiliate or in connection with the transfer or sale of all or substantially all of its assets or business, its merger, or consolidation with another business entity. Any purported assignment in breach of this Section 8.6 shall be void. Any permitted assignee shall assume all obligations of its assignor under this Agreement. No assignment or sublicense of this Agreement or of any rights hereunder shall relieve the assigning or sublicensing party of any of its obligations or liability hereunder. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns.

8.7. Governing Law.

This Agreement shall be governed and construed in accordance with the laws of the State of Delaware excluding any choice of law rules which may direct the application of the law of another state.

8.8. Fees and Expenses.

Regardless of whether or not the transactions contemplated by this Agreement are consummated, except as may be otherwise specified herein, each party shall bear its own fees and expenses incurred in connection with this Agreement and the transactions contemplated hereby.

8.9. Further Assurances.

Each party shall execute and deliver such additional instruments and other documents and use all commercially reasonable efforts to take or cause to be taken, all actions and to do, or cause to be done, all things necessary under applicable law to consummate the transactions contemplated hereby.

8.10. Interpretation.

The parties hereto acknowledge and agree that: (a) each party and its representatives have reviewed and negotiated the terms and provisions of this Agreement and have contributed to its revision; (b) the terms and provisions of this Agreement shall be construed fairly as to each party hereto and not in favor of or against either party regardless of which party was generally responsible for the preparation or drafting of this Agreement; (c) all section titles or captions contained in this Agreement and in any appendix referred to herein or annexed to this Agreement are for convenience only, shall not be deemed a part of this Agreement and shall not affect the meaning or interpretation of this Agreement; and (d) each Appendix, Exhibit and Schedule hereto is incorporated by reference and made a part of this Agreement.

8.11. No Joint Venture.

Nothing contained herein shall be deemed to create any joint venture or partnership between the parties hereto, and, except as is expressly set forth herein, neither party shall have any right by virtue of this Agreement to bind the other party in any manner whatsoever.

8.12. Severability.

If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws effective while this Agreement remains in effect, the legality, validity and enforceability of the remaining provisions shall not be affected thereby.

8.13. Counterparts.

This Agreement may be executed in any number of counterparts, each of which shall be deemed an original but all of which together shall constitute a single instrument.

[The remainder of this page intentionally left blank.]

IN WITNESS WHEREOF, the parties hereto have executed, or caused to be executed, this License Agreement as of the date first above written.

SELLER:
MONARCH PHARMACEUTICALS, INC.
By:	/s/ Brian A. Markison
Name:	Brian A. Markison
Title:	Acting President and Chief Executive Officer
PARKEDALE PHARMACEUTICALS, INC.
By:	/s/ Brian A. Markison
Name:	Brian A. Markison
Title:	Acting President and Chief Executive Officer
KING PHARMACEUTICALS, INC.
By:	/s/ Brian A. Markison
Name:	Brian A. Markison
Title:	Acting President and Chief Executive Officer

BUYER:
SALIX PHARMACEUTICALS, INC.
By:	/s/ Carolyn J. Logan
Name:	Carolyn J. Logan
Title:	President and Chief Executive Officer
SALIX PHARMACEUTICALS, LTD.
By:	/s/ Carolyn J. Logan
Name:	Carolyn J. Logan
Title:	President and Chief Executive Officer

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Carolyn J. Logan, certify that:

1. I have reviewed this quarterly report on Form 10-Q 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-14 and 15d-14) 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 quarterly report is being prepared;

b. 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

c. 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 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: August 9, 2004	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 quarterly report on Form 10-Q 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-14 and 15d-14) 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 quarterly report is being prepared;

b. 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

c. 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 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: August 9, 2004	By:	/s/ Adam C. Derbyshire
		Adam C. Derbyshire Senior Vice President 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 Quarterly Report on Form 10-Q of Salix Pharmaceuticals, Ltd. (the “Company”) for the period ended June 30, 2004 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. 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

President and

Chief Executive Officer

August 9, 2004

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 Quarterly Report on Form 10-Q of Salix Pharmaceuticals, Ltd. (the “Company”) for the period ended June 30, 2004 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. 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

Senior Vice President and

Chief Financial Officer

August 9, 2004