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 March 31, 2007

or

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

For the transition period from              to             .

Commission file number: 000-23265

SALIX PHARMACEUTICALS, LTD.

(Exact name of Registrant as specified in its charter)

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

1700 Perimeter Park Drive

Morrisville, North Carolina 27560

(Address of principal executive offices, including zip code)

(919) 862-1000

(Registrant’s telephone number, including area code)

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 the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨

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

The number of shares of the Registrant’s Common Stock outstanding as of May 7, 2007 was 47,161,993.

SALIX PHARMACEUTICALS, LTD.

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of March 31, 2007 (unaudited) and December 31, 2006	1
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2007 and 2006 (unaudited)	2
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2007 and 2006 (unaudited)	3
	Notes to Condensed Consolidated Financial Statements (unaudited)	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21
Item 4.	Controls and Procedures	21
PART II.	OTHER INFORMATION
Item 6.	Exhibits	22
Signatures		23

PART I. FINANCIAL INFORMATION.

Item 1. Financial Statements

SALIX PHARMACEUTICALS, LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

	March 31, 2007			December 31, 2006
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	53,983		$	76,465
Accounts receivable, net		40,608			61,730
Inventory, net		23,455			25,123
Prepaid and other current assets		10,770			6,807
Total current assets		128,816			170,125
Property and equipment, net		4,308			3,866
Goodwill		89,345			89,688
Product rights and intangibles, net and other assets		114,456			59,444
Total assets	$	336,925		$	323,123
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	5,363		$	5,912
Accrued liabilities		34,265			39,068
Total current liabilities		39,628			44,980
Long-term liabilities:
Borrowings under credit facility		15,000			—
Lease incentive obligation		582			592
Total long-term liabilities		15,582			592
Commitments and Contingencies
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, 47,152,718 shares issued and outstanding at March 31, 2007 and 47,033,717 shares issued and outstanding at December 31, 2006		47			47
Additional paid-in capital		391,787			390,467
Accumulated deficit		(110,119	)		(112,963	)
Total stockholders’ equity		281,715			277,551
Total liabilities and stockholders’ equity	$	336,925		$	323,123

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

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SALIX PHARMACEUTICALS, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

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

	Three months ended March 31,
	2007			2006
Revenues:
Net product revenues	$	59,785		$	41,853
Total revenues		59,785			41,853
Costs and expenses:
Cost of products sold (excluding $1,813 and $1,135 in amortization of product rights and intangibles for the three month periods ended March 31, 2007 and 2006, respectively)		12,005			8,285
Fees and costs related to license agreements		200			—
Amortization of product rights and intangible assets		1,813			1,135
Research and development		21,825			10,128
Selling, general and administrative		21,416			19,419
Total cost and expenses		57,259			38,967
Income from operations		2,526			2,886
Interest and other income, net		900			970
Income before provision for income tax		3,426			3,856
Provision for income tax		(582	)		(193	)
Net income	$	2,844		$	3,663
Net income per share, basic	$	0.06		$	0.08
Net income per share, diluted	$	0.06		$	0.08
Shares used in computing net income per share, basic		47,093			46,359
Shares used in computing net income per share, diluted		48,682			48,460

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

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SALIX PHARMACEUTICALS, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(U.S. dollars, in thousands)

	Three months ended March 31,
	2007			2006
Cash flows from operating activities
Net income	$	2,844		$	3,663
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		2,236			1,530
Loss on disposal of property and equipment		5			—
Stock-based compensation expense		615			—
Excess tax benefits from stock-based compensation		(149	)		(54	)
Changes in operating assets and liabilities:
Accounts receivable, inventory, prepaid expenses and other assets		17,335			(674	)
Accounts payable and accrued liabilities		(5,352	)		(13,901	)
Net cash provided by (used in) operating activities		17,534			(9,436	)
Cash flows from investing activities
Purchases of property and equipment		(870	)		(292	)
Increase in other non-current assets		—			(52	)
Purchase of product rights		(55,000	)		—
Excess tax benefits from stock-based compensation		149			54
Proceeds from maturity of investments		—			998
Net cash provided by (used in) investing activities		(55,721	)		708
Cash flows from financing activities
Borrowings under credit facility		15,000			—
Proceeds from issuance of common stock upon exercise of stock options		705			688
Net cash provided by financing activities		15,705			688
Net decrease in cash and cash equivalents		(22,482	)		(8,040	)
Cash and cash equivalents at beginning of period		76,465			67,184
Cash and cash equivalents at end of period	$	53,983		$	59,144

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

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SALIX PHARMACEUTICALS, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2007

(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 consolidated 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 wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated.

The accompanying consolidated financial statements include all adjustments that, in the opinion of management, are necessary for a fair presentation of financial position, results of operations and cash flows. These financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, included elsewhere in this Quarterly Report on Form 10-Q and with the audited consolidated financial statements and MD&A included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006 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. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted in accordance with the SEC’s rules and regulations for interim reporting.

2. Revenue Recognition

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

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

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SALIX PHARMACEUTICALS, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —Continued

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

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

• estimated levels of inventory in the distribution channel;

• historical rebates, chargebacks and returns of products;

• direct communication with customers;

• anticipated introduction of competitive products or generics;

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

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

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

• estimated remaining shelf life of products.

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

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

Allowances for estimated rebates and chargebacks were $8.4 million and $7.3 million as of March 31, 2007 and 2006, respectively. These allowances reflect an estimate of the Company’s liability for items such as rebates due to various governmental organizations under the Medicare/Medicaid regulations, rebates due to managed care organizations under specific contracts and chargebacks due to various organizations purchasing certain of our products through federal contracts and/or group purchasing agreements. The Company estimates its liability for rebates and chargebacks at each reporting period based on a methodology of applying quantitative and qualitative assumptions discussed above. Due to the subjectivity of the Company’s accrual estimates for rebates and chargebacks, the Company prepares various sensitivity analyses to ensure the Company’s final estimate is within a reasonable range and also reviews prior period activity to ensure that the Company’s methodology continues to be appropriate.

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SALIX PHARMACEUTICALS, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —Continued

Allowances for product returns were $7.7 million and $2.3 million as of March 31, 2007 and 2006, respectively. These allowances reflect an estimate of the Company’s liability for product that may be returned by the original purchaser in accordance with the Company’s stated return policy. The Company estimates its liability for product returns at each reporting period based on historical return rates, the estimated inventory in the channel, and the other factors discussed above. Due to the subjectivity of the Company’s accrual estimates for product returns, the Company prepares various sensitivity analyses to ensure the Company’s final estimate is within a reasonable range and also reviews prior period activity to ensure the Company’s methodology is still reasonable.

The Company’s provision for revenue-reducing items such as rebates, chargebacks, and product returns as a percentage of gross product revenue in the three-month period ended March 31, 2007 and 2006 was 9.3% and 10.0% for rebates, chargebacks, and discounts, and 2.3% and 0.4%, for product returns, respectively.

3. Commitments

Purchase Order Commitments

At March 31, 2007, the Company had binding purchase order commitments for inventory purchases expected to be delivered over the next 9 months aggregating approximately $18.9 million.

Potential Milestone Payments

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

License and Supply Agreement with the Debiopharm Group (“Debiopharm”) — In September 2006, the Company acquired the exclusive right to sell, market, and distribute, Sanvar in the United States. Pursuant to this agreement, the Company is obligated to make upfront and milestone payments to Debiopharm that could total up to $7.5 million over the term of the agreement. As of March 31, 2007, $0.5 million of milestone payments had been made. The remaining milestone payment is contingent upon achievement of regulatory approval.

License Agreement with Cedars-Sinai Medical Center (“CSMC”) — In June 2006, the Company entered into a license agreement with CSMC for the right to use a patent and a patent application relating to methods of diagnosing and treating irritable bowel syndrome and other disorders caused by small intestinal bacterial overgrowth. Pursuant to the license agreement, the Company is obligated to pay CSMC a license fee of an aggregate $1.2 million over time. As of March 31, 2007, $0.8 million of the license fee had been paid. The remaining $0.4 million of the license fee is payable on a periodic basis prior to September 30, 2007 based on the license agreement. The Company may terminate the license agreement upon written notice of not less than 90 days.

License and Supply Agreement with Norgine B.V. (“Norgine”) — In December 2005, the Company entered into a license and supply agreement with Norgine for the rights to sell NRL944, a bowel cleansing product the Company now markets in the United States under the trade name MoviPrep. Pursuant to the agreement, the Company is obligated to make upfront and milestone payments to Norgine that could total up to $37.0 million over the term of the agreement. As of March 31, 2007, $17.0 million of milestone payments had been made. The remaining milestone payments are contingent upon reaching sales thresholds.

License Agreement with Dr. Falk Pharma GmbH (“Dr. Falk”) — In July 2002, the Company entered into a license agreement with Dr. Falk which was subsequently amended in November 2003 and February 2005. Pursuant to the license agreement, as amended, the Company acquired the rights to develop and market a granulated formulation of mesalamine. The agreement provides that the Company is obligated to make milestone payments in an aggregate amount of up to $11.0 million to Dr. Falk. As of March 31, 2007, $3.0 million of milestone payments had been made. The remaining milestone payments are contingent upon filing a new drug application and regulatory approval.

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SALIX PHARMACEUTICALS, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —Continued

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

4. 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. The Company classifies its existing investments as available-for-sale. These investments are carried at fair market value based on current market quotes, with unrealized gains and losses reported in stockholders’ equity as a component of accumulated other comprehensive income (loss). At March 31, 2007 and 2006, there were no unrealized gains or losses because the fair market value of investments was equivalent to their cost. All available-for-sale investments are classified as current, as the Company has the ability to use them for current operating and investing purposes.

5. Inventory

Raw materials, work-in-process and finished goods inventories are stated at the lower of cost (which approximates actual cost on a first-in, first-out cost method) or market value. In evaluating whether inventory is stated at the lower of cost or market, management considers such factors as the amount of inventory on hand and in the distribution channel, estimated time required to sell such inventory, remaining shelf life, and current and expected market conditions, including levels of competition. Inventory at March 31, 2007 consisted of $12.5 million of raw materials, $2.5 million of work-in-process and $8.4 million of finished goods. Inventory at December 31, 2006 consisted of $14.4 million of raw materials, $2.5 million of work in process and $8.2 million of finished goods. As of March 31, 2007, inventory reserves totaling $0.6 million, compared to $0.7 million as of December 31, 2006, have been recorded to reduce inventories to their net realizable value.

6. Intangible Assets and Goodwill

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

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

In assessing the recoverability of its intangible assets, the Company must make assumptions regarding estimated future cash flows and other factors. If the estimated undiscounted future cash flows do not exceed the carrying value of the intangible assets the Company must determine the fair value of the intangible assets. If the fair value of the intangible assets is less than the carrying value, the Company will recognize an impairment loss 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 may not be recoverable.

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SALIX PHARMACEUTICALS, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —Continued

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

In November 2003, the Company acquired from aaiPharma LLC the exclusive right to sell 25, 75 and 100 milligram dosage strengths of azathioprine tablets in North America under the name Azasan for $2.0 million. The purchase price was fully allocated to product rights and related intangibles and is being amortized over a period of ten years. Although Azasan does not have any patent protection, the Company believes ten years is an appropriate amortization period based on established product history and management experience. At March 31, 2007, accumulated amortization for Azasan was $0.7 million.

In June 2004, the Company acquired the exclusive U.S. rights to Anusol-HC 2.5% (Hydrocortisone Cream USP), Anusol-HC 25 mg Suppository (Hydrocortisone Acetate), Proctocort Cream (Hydrocortisone Cream USP) 1% and Proctocort Suppositories (Hydrocortisone Acetate Rectal Suppositories, 30 mg) from King Pharmaceuticals, Inc. for $13.0 million. The purchase price was fully allocated to product rights and related intangibles and is being amortized over a period of ten years. Although Anusol-HC and Proctocort do not have any patent protection, the Company believes ten years is an appropriate amortization period based on established product history and management experience. At March 31, 2007, accumulated amortization for the King products was $3.6 million.

In September 2005, the Company acquired InKine Pharmaceutical Company, Inc. for $210.0 million. The Company allocated $74.0 million of the purchase price to in-process research and development, $9.3 million to net assets acquired and $37.0 million to specifically identifiable product rights and related intangibles with an ongoing economic benefit to the Company. The Company allocated the remaining $89.7 million to goodwill, which is not being amortized. The InKine product rights and related intangibles are being amortized over an average period of 14 years which the Company believes is an appropriate amortization period due to the products’ patent protection and the estimated economic lives of the product rights and related intangibles. At March 31, 2007, accumulated amortization for the InKine intangibles was $4.5 million.

In December 2005, the Company entered into a License and Supply Agreement with Norgine B.V., which granted Salix the exclusive rights to sell a patent-protected, liquid PEG bowel cleansing product, NRL944, in the United States. In August 2006, the Company received Food and Drug Administration marketing approval for NRL944 under the branded name of MoviPrep. In January 2007, the United States Patent Office issued a patent providing coverage to September 1, 2024. In August 2006, pursuant to the terms of the Agreement, Salix made a $15.1 million milestone payment to Norgine. The Company is amortizing the milestone payment over a period of 17.3 years, which the Company believes is an appropriate amortization period due to the product’s pending patent protection and the estimated economic life of the related intangible. At March 31, 2007, accumulated amortization for MoviPrep was $0.6 million.

In February 2007, the Company entered into a Master Purchase and Sale and License Agreement with Merck & Co., Inc., to purchase the U.S. prescription pharmaceutical product rights to Pepcid Oral Suspension and Diuril Oral Suspension from Merck. The Company paid Merck $55.0 million at the closing of the transaction. The purchase price was fully allocated to product rights and related intangibles and is being amortized over a period of 15 years. Although Pepcid and Diuril do not have any patent protection, the Company believes 15 years is an appropriate amortization period based on established product history and management experience. At March 31, 2007, accumulated amortization for the Merck products was $0.5 million.

7. Credit Facility

In February 2007, Salix entered into a $100.0 million revolving credit facility (the “Credit Facility”) that matures in February 2012. At March 31, 2007, $15.0 million was outstanding under the Credit Facility. Virtually all of the Company’s assets and those of its subsidiaries secure the Company’s obligations under the Credit Facility.

The Credit Facility bears interest at a rate per annum equal to, at the Company’s option, either (a) a base rate equal to the higher of (i) the Federal Funds Rate plus 1/2 of 1% and (ii) the Bank of America prime rate, or (b) a Eurodollar rate (based on LIBOR), plus, in each case, a percentage rate that fluctuates, based on the ratio of the Company’s funded debt to EBITDA (income before income taxes plus interest expense and depreciation and amortization), from 0.00% to 0.75% for base rate borrowings and 1.00% to 1.75% for Eurodollar rate borrowings.

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SALIX PHARMACEUTICALS, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —Continued

The Credit Facility contains various representations, warranties and affirmative, negative and financial covenants customary for financings of this type. The financial covenants include a leverage test and a fixed charge test. The Company was in compliance with these covenants at March 31, 2007.

The Credit Facility may be used for working capital, capital expenditures, acquisitions and other general corporate purposes.

8. Research and Development

In accordance with its policy, the Company expenses research and development costs, both internal and externally contracted, as incurred. The Company estimates certain externally contracted development activities to align the related expense with the level of progress achieved and services rendered during the period. As of March 31, 2007 and 2006, the prepaid amount related to on-going research and development activities was $6.0 million and $4.8 million, respectively.

9. Comprehensive Income

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

10. Stock-Based Compensation

At March 31, 2007, the Company had one active share-based compensation plan, the 2005 Stock Plan, allowing for the issuance of stock options and restricted shares. Awards granted from this plan are granted at the fair market value on the date of grant and vest over periods ranging from one to four years.

On December 30, 2005, the Board of Directors approved the acceleration of the vesting of all outstanding unvested stock options. The acceleration was effective for all such options outstanding on December 30, 2005, all of which were granted by the Company when the accounting rules permitted use of the intrinsic-value method of accounting for stock options. All of the other terms and conditions applicable to such outstanding stock option grants still apply. Under APB No. 25, the acceleration resulted in recognition of estimated share-based compensation expense of $0.5 million based on forfeiture assumptions, which may change in future periods. The Board of Directors took the action with the belief that it is in the best interests of stockholders, as it will reduce the Company’s stock compensation expense in future periods regarding existing stock options in light of new accounting regulations effective beginning in fiscal year 2006. As a result of the acceleration, options to purchase 3.6 million shares of the Company’s common stock became immediately exercisable.

Prior to January 1, 2006, the Company accounted 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 adopted the disclosure-only alternative of SFAS No. 123, “Accounting for Stock-Based Compensation”.

In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R, “Share-Based Payment”, which requires companies to expense the fair value of employee stock options and other forms of stock-based compensation. This requirement represents a significant change because share-based stock option awards, a historically predominate form of stock compensation for the Company, were not recognized as compensation expense under APB 25. SFAS No. 123R requires the cost of the award, as determined on the date of grant at fair value, to be recognized over the period during which an employee is required to provide service in exchange for the award, usually the vesting period. The grant-date fair value of the award is estimated using an option-pricing model.

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SALIX PHARMACEUTICALS, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —Continued

The Company adopted SFAS No. 123R effective January 1, 2006 using the modified-prospective transition method. The modified-prospective transition method of SFAS No. 123R requires the presentation of pro forma information, for periods presented prior to the adoption of SFAS No. 123R, regarding net income and net income per share as if the Company had accounted for its stock plans under the fair value method of SFAS No. 123R. For pro forma purposes, fair value of stock option awards was estimated using the Black-Scholes option valuation model. The fair value of all of the Company’s share-based awards was estimated assuming no expected dividends and estimates of expected life, volatility and risk-free interest rate at the time of grant.

Starting in 2006, the Company began issuing restricted shares to employees, executives and directors of the Company. The following table summarizes restricted stock outstanding at March 31, 2007 and changes during the three months then ended:

	Number of Shares		Weighted Average Share Price
Nonvested at December 31, 2006	681,906		$	12.17
Granted	36,300			13.57
Vested	(10,600	)		13.92
Cancelled	(14,319	)		12.28
Nonvested at March 31, 2007	693,287		$	12.18

The restrictions on the restricted stock lapse according to one of two schedules. For employees and executives of the Company, restrictions lapse 25% annually over four years. For board members of the company, restrictions lapse 100% after one year. The compensation expense related to the restricted stock was estimated based on the fair value of the restricted stock on the grant date and an assumed forfeiture rate of 8.4% and is being expensed on a straight-line basis over the period during which the restrictions lapse. For the three-month period ended March 31, 2007 the Company recognized $0.6 million in share based-compensation expense related to the restricted shares. As of March 31, 2007, the total amount of unrecognized compensation cost related to nonvested restricted stock awards, to be recognized as expense subsequent to March 31, 2007, was approximately $6.1 million, and the related weighted-average period over which it is expected to be recognized is approximately 3.09 years.

10

SALIX PHARMACEUTICALS, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —Continued

The following table summarizes certain information regarding stock options during the three-month period ended March 31, 2007:

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Yrs)	Aggregate Intrinsic Value
Balance outstanding at beginning of year	6,326,537		$	14.24
Granted	—		$	—
Exercised	(108,401	)	$	6.51
Cancelled	(183,101	)	$	18.53
Balance outstanding at end of quarter	6,035,035		$	14.25
Options exercisable at end of quarter	6,035,035		$	14.25	6.4	$	15,653

For the three-month period ended March 31, 2007, 0.1 million shares of the Company’s outstanding stock at a value of $1.6 million were exchanged upon the exercise of options. The Company recognized no share-based compensation expense during the three-month period ended March 31, 2007, nor any income tax benefit. The total intrinsic value of options exercised during the three-month period ended March 31, 2007 was $0.9 million. As of March 31, 2007, there was no unrecognized compensation cost as all stock options were fully vested. Cash received from stock option exercises was $0.7 million during the three-month period ended March 31, 2007.

11. Income Taxes

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

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

The Company adopted the provisions of FIN 48 on January 1, 2007. The implementation of FIN 48 did not result in any adjustment to the Company’s beginning tax positions. The Company continues to fully recognize its tax benefits which are offset by a valuation allowance to the extent that it is more likely than not that the deferred tax assets will not be realized.

The Company files a consolidated return in the U.S. Federal jurisdiction and consolidated and separate company income tax returns in many U.S. state jurisdictions. Generally, the Company is no longer subject to federal and state income tax examinations by U.S. tax authorities for years prior to 2003.

The Company recognizes any interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. During the three-month period ended March 31, 2007 and 2006, there was no such interest or penalties.

The provision for income taxes reflects the Company’s estimate of the effective tax rate expected to be applicable for the full fiscal year. The Company’s effective tax rate for the three-month period ended March 31, 2007 was 17% due to the utilization of net operating loss carry-forwards. The Company re-evaluates this estimate each quarter based on the Company’s estimated tax expense for the year.

11

SALIX PHARMACEUTICALS, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —Continued

12. Net Income per Share

The Company computes net income (loss) per share in accordance with SFAS No. 128, “Earnings Per Share” (“SFAS 128”). Under the provisions of SFAS 128, basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares and dilutive common share equivalents then outstanding. Common share equivalents consist of the incremental common shares issuable upon the exercise of stock options and the impact of unvested restricted stock grants.

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

	Three months ended March 31,
	2007		2006
Numerator:
Net income	$	2,844	$	3,663
Denominator:
Weighted average common shares, basic		47,093		46,359
Dilutive effect of restricted stock		230		—
Dilutive effect of stock options		1,359		2,101
Weighted average common shares, diluted		48,682		48,460

For the three-month periods ended March 31, 2007 and 2006, there were 3,976,487 and 3,769,789, respectively, potential common shares outstanding that were excluded from the diluted net income per share calculation because their effect would have been anti-dilutive.

13. Segment Reporting

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

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

	Three months ended March 31,
	2007		2006
Colazal	$	30,053	$	22,843
Xifaxan		15,400		6,584
Purgatives – Visicol/OsmoPrep/MoviPrep		11,037		9,832
Other		3,295		2,594
Net product revenues	$	59,785	$	41,853

12

SALIX PHARMACEUTICALS, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —Continued

14. Recently Issued Accounting Pronouncements

In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS 157”). The statement provides guidance for using fair value to measure assets and liabilities. SFAS 157 references fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. The statement applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. SFAS 157 does not expand the use of fair value in any new circumstances. It is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company does not believe adoption of SFAS 157 will have a material impact on the Company’s consolidated financial statements.

In February 2007, the FASB issued Statement No. 159, “Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits entities to choose, at specified election dates, to measure eligible items at fair value (the “Fair Value Option”). Unrealized gains and losses on items for which the Fair Value Option has been elected are reported in earnings. The Fair Value Option is applied instrument by instrument (with certain exceptions), is irrevocable (unless a new election date occurs) and is applied only to an entire instrument. The effect of the first remeasurement to fair value is reported as a cumulative-effect adjustment to the opening balance of retained earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company does not believe adoption of SFAS 159 will have a material impact on the Company’s consolidated financial statements.

15. Subsequent Event

In April 2007, the Company licensed exclusive rights to market DIACOL™ 1500 mg Tablets in 28 territories in Europe to Dr. Falk Pharma GmbH of Freiberg, Germany (“Falk”). DIACOL, or, sodium phosphate monobasic monohydrate, USP, and sodium phosphate dibasic anhydrous, tablets, USP, are marketed in the United States under the trade name OSMOPREP™ Tablets. As part of the agreement, Falk also has a non–exclusive option to market DIACOL in Italy and France. Under the terms of the agreement, Salix may receive up to $4 million in milestone payments, as well as royalty payments based on product sales. The first milestone payment of $1.5 million was due upon execution of the agreement. Falk is obligated to use all reasonable efforts to obtain marketing authorization by means of the mutual recognition procedure in the territories and option countries.

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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 “Part I. Item A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006, and “Cautionary Statement” included in this “Part I. Item 2. 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 approximately 150-member specialty sales and marketing team focused on high-prescribing U.S. gastroenterologists, who are doctors who specialize in gastrointestinal diseases, to sell our products.

Our current products demonstrate our ability to execute this strategy. As of March 31, 2007, our primary products were:

• Colazal^® (balsalazide disodium) capsules;

• Xifaxan^® (rifaximin) tablets;

• Visicol^® (sodium phosphate monobasic monohydrate, USP, sodium phosphate dibasic anhydrous, USP) tablets;

• OsmoPrep ™ (sodium phosphate monobasic monohydrate, USP, and sodium phosphate dibasic anhydrous, USP) tablets;

• MoviPrep ^® (PEG 350, sodium sulfate, sodium chloride, potassium chloride, sodium ascorbate and ascorbic acid) oral solution;

• Azasan^®(azathioprine 75mg and 100mg) tablets;

• Anusol-HC^® 2.5% (hydrocortisone USP) cream, Anusol-HC^® 25 mg (hydrocortisone acetate) rectal suppositories;

• Proctocort^® 1% (hydrocortisone USP) cream, Proctocort^® 30 mg (hydrocortisone acetate) rectal suppositories; and

• Pepcid ^® (famotidine) Oral Suspension and Diuril ^® (chlorothiazide) Oral Suspension.

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The primary product candidates we are developing are:

• Balsalazide disodium tablets, which, if approved by the FDA, we intend to sell in the United States to expand our range of treatment options for ulcerative colitis;

• A patented, granulated formulation of mesalamine, which, if approved by the FDA, we intend to sell in the United States to expand our range of treatment options for ulcerative colitis;

• Rifaximin for various additional potential indications; and

• Sanvar^® IR (600 ug vials vapreotide acetate powder), which, if approved by the FDA, we intend to sell in the United States as a treatment of acute esophageal variceal bleeding.

We currently market our products, and intend, if approved by the FDA, to market future products to U.S. gastroenterologists through our own direct sales force. We enter into distribution relationships outside the United States and in markets where a larger sales organization is appropriate. Currently, our sales and marketing staff consists of approximately 150 people.

We generate revenue primarily by selling our products, namely prescription drugs, to pharmaceutical wholesalers. These direct customers resell and distribute our products to and through pharmacies to patients who have had our products prescribed by doctors. Because demand for our products originates with doctors, our sales force calls on high-prescribing specialists, primarily gastroenterologists, and we monitor new and total prescriptions for our products as key performance indicators for our business.

Prescriptions result in our products being used by patients, requiring our direct customers to purchase more products to replenish their inventory. However, our revenue might fluctuate from quarter to quarter due to other factors, such as increased buying by wholesalers in anticipation of a price increase or because of the introduction of new products. Revenue could be less than anticipated in subsequent quarters as wholesalers’ increased inventory is used up. For example, wholesalers made initial stocking purchases of Osmoprep when it was launched in the second quarter of 2006 and MoviPrep when it was launched in the third quarter of 2006. Also, 2006 Colazal revenue was lower than in the comparable periods in 2005 even though prescriptions increased in 2006.

In December 2000, we established our own field sales force to market Colazal in the United States. Currently, this sales force has approximately 100 sales representatives in the field. Although the creation of an independent sales organization involved substantial costs, we believe that the financial returns from our direct product sales have been and will continue to be more favorable to us than those from the indirect sale of products through marketing partners. In addition, we intend to enter into distribution relationships outside the United States and in markets where a larger sales organization is appropriate.

Critical Accounting Policies

In our Annual Report on Form 10-K for the fiscal year ended December 31, 2006, we identified our most critical accounting policies and estimates upon which our financial status depends as those relating to revenue recognition, allowance for product returns, allowance for rebates and coupons, inventory, intangible assets and goodwill, allowance for uncollectible accounts, investments, and research and development expenses. We reviewed our policies and determined that those policies remained our most critical accounting policies for the three-month period ended March 31, 2007. We did not make any changes in those policies during the quarter.

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

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

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

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

• estimated levels of inventory in the distribution channel;

• historical rebates, chargebacks and returns of products;

• direct communication with customers;

• anticipated introduction of competitive products or generics;

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

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

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

• estimated remaining shelf life of products.

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

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

16

Allowances for estimated rebates and chargebacks were $8.4 million and $7.3 million as of March 31, 2007 and 2006, respectively. These allowances reflect an estimate of our liability for items such as rebates due to various governmental organizations under the Medicare/Medicaid regulations, rebates due to managed care organizations under specific contracts and chargebacks due to various organizations purchasing certain of our products through federal contracts and/or group purchasing agreements. We estimate our liability for rebates and chargebacks at each reporting period based on a methodology of applying the relevant quantitative and qualitative assumptions discussed above. Due to the subjectivity of our accrual estimates for rebates and chargebacks, we prepare various sensitivity analyses to ensure our final estimate is within a reasonable range and also review prior period activity to ensure that our methodology continues to be appropriate. Had a change in one or more variables in the analyses (utilization rates, contract modifications, etc.) resulted in an additional percentage point change in the trailing average of estimated chargeback and rebate activity in 2006, we would have recorded an adjustment to revenues of approximately $2.1 million, or 1.0%, for the year.

Allowances for product returns were $7.7 million and $2.3 million as of March 31, 2007 and 2006, respectively. These allowances reflect an estimate of our liability for product that may be returned by the original purchaser in accordance with our stated return policy. We estimate our liability for product returns at each reporting period based on historical return rates, the estimated inventory in the channel, and the other factors discussed above. Due to the subjectivity of our accrual estimates for product returns, we prepare various sensitivity analyses to ensure our final estimate is within a reasonable range and also review prior period activity to ensure that our methodology is still reasonable. A change in assumptions that resulted in a 10% change in forecast return rates would have resulted in a change in total product returns liability at December 31, 2006 of approximately $0.6 million and a corresponding change in 2006 net product revenue of less than 1%.

For the three-month periods ended March 31, 2007 and 2006, our absolute exposure for rebates, chargebacks and product returns has grown primarily as a result of increased sales of our existing products, the approval of new products and the acquisition of products. Accordingly, reductions to revenue and corresponding increases to allowance accounts have likewise increased. The estimated exposure to these revenue-reducing items as a percentage of gross product revenue in the three-month periods ended March 31, 2007 and 2006 was 9.3% and 10.0% for rebates, chargebacks and discounts and was 2.3% and 0.4% for product returns, respectively.

Results of Operations

Three-month Periods Ended March 31, 2007 and 2006

Net product revenues for the three-month period ended March 31, 2007 were $59.8 million, compared to $41.9 million for the corresponding three-month period in 2006, a 43% increase. Net product revenue increases for the three-month period ended March 31, 2007 compared to the three-month period ended March 31, 2006 were due to increased sales of Colazal and Xifaxan; a full quarter of sales for OsmoPrep and MoviPrep, which were launched during the second and fourth quarters of 2006, respectively; and five weeks of sales for Pepcid which was acquired during February 2007. Prescription growth for the three-month period ended March 31, 2007 compared to the corresponding three-month period in 2006 was 77% for Xifaxan and 5% for Colazal. Colazal revenue was lower during the three-month period ended March 31, 2006 compared to immediately preceding or subsequent three-month periods, due to a draw-down of wholesaler inventories during that period. As planned, Colazal’s contribution as a percentage of total product revenue incrementally decreased during the three-month period ended March 31, 2007 compared to the three-month period ended March 31, 2006 due to the expansion of our product portfolio with the launch of our bowel cleansing products, the acquisition of Pepcid, and as Xifaxan sales continued to increase as shown in the following table of net product revenues for the three-month period ended March 31:

17

	2007			2006
	Net Product Revenues		Percent of Revenue	Net Product Revenues		Percent of Revenue
Colazal	$	30,053	50	$	22,843	55
Xifaxan		15,400	26		6,584	16
Purgatives – Visicol/OsmoPrep/MoviPrep		11,037	18		9,832	23
Other		3,295	6		2,594	6
Net product revenues	$	59,785		$	41,853

We expect Colazal’s contribution as a percentage of total product revenue will continue to moderate going forward. Increases in revenue-reducing items for the three-month period ended March 31, 2007 compared to the three-month period ended March 31, 2006 were due primarily to increases in allowances for managed care agreements as a result of increased product sales and the allowance for product returns associated with Colazal, Visicol, Anusol and Proctocort.

Costs and expenses for the three-month period ended March 31, 2007 were $57.3 million, compared to $39.0 million for the corresponding three-month period in 2006. Higher operating expenses in absolute terms were due primarily to increased research and development activities, along with increased cost of products sold related to the corresponding increase in product revenue and increased selling, general and administrative expenses due to the expansion of our infrastructure and costs related to OsmoPrep and MoviPrep which were launched during the second and fourth quarters of 2006, respectively, and the acquisition of Pepcid during February 2007.

Cost of products sold for the three-month period ended March 31, 2007 was $12.0 million, compared with $8.3 million for the corresponding three-month period in 2006. Gross margin on total product revenue, excluding $1.8 million and $1.1 million in amortization of product rights and intangibles for the three-month periods ended March 31, 2007 and 2006, respectively, was 79.9% for the first quarter of 2007 compared to 80.2% for the first quarter of 2006. The increase in cost of products sold for the three-month period ended March 31, 2007 compared to the three-month period ended March 31, 2006 was due primarily to increased sales of Colazal and Xifaxan, the launch of OsmoPrep and MoviPrep during the second and fourth quarters of 2006, respectively, and the acquisition of Pepcid during February 2007.

Fees and costs related to license agreements for the three-month period ended March 31, 2007 relates to a payment made to Cedars-Sinai Medical Center under the terms of the related license agreements.

Amortization of product rights and intangible assets consists of amortization of the costs of license agreements, product rights and other identifiable intangible assets, which result from product and business acquisitions. The increase for the three-month period ended March 31, 2007 compared to the corresponding period in 2006 is primarily a result of the acquisition of Pepcid in February 2007.

Research and development expenses were $21.8 million for the three-month period ended March 31, 2007, compared to $10.1 for the comparable period in 2006. The increase in research and development expenses for the three-month period ended March 31, 2007 compared to the corresponding period in 2006 was due primarily to the expansion of our Colazal life cycle management program through initiatives to strengthen and support our 1100mg balsalazide tablet submission, studies of granulated mesalamine, and the costs associated with ongoing late-stage studies to expand the Xifaxan label. Since inception, we have incurred research and development expenditures of approximately $47.3 million for balsalazide, $56.7 million for rifaximin and $21.5 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. As disclosed in Note 2 in the Notes to Condensed Consolidated Financial Statements in our Annual Report on Form 10-K for the year

18

ended December 31, 2006, due to increased development activities and the way in which many of our long-term development contracts are structured, we have refined our process of estimating development activities to more closely align expenses with the level of progress achieved. We expect research and development costs to increase in absolute terms as we pursue additional indications and formulations for balsalazide and rifaximin, and continue to develop granulated mesalamine, and if and when we acquire new products.

Selling, general and administrative expenses were $21.4 million for the three-month period ended March 31, 2007, compared to $19.4 million in the corresponding three-month period in 2006. This increase was primarily due to the expansion of our infrastructure and costs related to OsmoPrep and MoviPrep which were launched during the second and fourth quarters of 2006, respectively, and the acquisition of Pepcid during February 2007.

Interest and other income, net was $0.9 million for the three-month period ended March 31, 2007, compared to $1.0 million in the corresponding three-month period in 2006. The decrease in interest and other income, net is primarily due to an increase in interest income as a result of higher short-term yields and higher cash and investment balances in 2007, net of interest expense of $0.1 million incurred in 2007 on our credit facility discussed below.

Income tax expense was $0.6 million for the three-month period ended March 31, 2007, compared to $0.2 million in the corresponding three-month period in 2006. Our effective tax rate was 17% for the three-month period ended March 31, 2007, and 5.0% in the corresponding three-month period in 2006, primarily due to the increased utilization of acquired net operating loss carry-forwards in the three-month period ended March 31, 2007 as compared to the three-month period ended March 31, 2006.

Net income was $2.8 million for the three-month period ended March 31, 2007, compared to net income of $3.7 million in the corresponding three-month period in 2006.

Liquidity and Capital Resources

From inception until first achieving profitability in the third quarter of 2004, we financed product development, operations and capital expenditures primarily from public and private sales of equity securities and from funding arrangements with collaborative partners. Since launching Colazal in January 2001, net product revenue has been a growing source of cash, a trend that we expect to continue. As of March 31, 2007, we had approximately $54.0 million in cash, cash equivalents and investments, compared to $76.5 million as of December 31, 2006.

Cash provided by our operations was $17.5 million for the three-month period ended March 31, 2007, compared with $9.4 million used by operations in the corresponding three-month period in 2006. Negative operating cash flows during the three-month period ended March 31, 2006 were primarily attributable to increased accounts receivable in 2006 associated with increased sales, and decreased accounts payable. The increase in cash provided by operations during the three-month period ended March 31, 2007 was primarily due to increased collections of accounts receivable.

Cash used in investing activities was $55.7 million for the three-month period ended March 31, 2007, compared with cash provided by investing activities of $0.7 million in the corresponding three-month period in 2006. Cash used in investing activities for the three-month period ended March 31, 2007 was primarily related to the acquisition of Pepcid in February 2007.

Cash provided by financing activities was $15.7 million for the three-month periods ended March 31, 2007 compared to $0.7 million in the corresponding three-month period in 2006. The increase was a result of borrowings during the three-month period ended March 31, 2007 under our credit facility entered into in February 2007.

As of March 31, 2007, we had non-cancelable purchase order commitments for inventory purchases of approximately $18.9 million. We anticipate significant expenditures related to our on-going sales, marketing, product launch and development efforts associated with Colazal, Xifaxan, Visicol, Azasan, Anusol-HC, Proctocort, OsmoPrep, MoviPrep, Pepcid Oral Suspension, and granulated mesalamine. To the extent we acquire rights to additional products, we will incur additional expenditures.

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In February 2007, we entered into a $100.0 million revolving credit facility that matures in February 2012. At March 31, 2007, $15.0 million was outstanding under the credit facility. Virtually all of our assets and those of our subsidiaries secure our obligations under the credit facility.

The credit facility bears interest at a rate per annum equal to, at our option, either (a) a base rate equal to the higher of (i) the Federal Funds Rate plus 1/2 of 1% and (ii) the Bank of America prime rate, or (b) a Eurodollar rate (based on LIBOR), plus, in each case, a percentage rate that fluctuates, based on the ratio of our funded debt to EBITDA (income before income taxes plus interest expense and depreciation and amortization), from 0.00% to 0.75% for base rate borrowings and 1.00% to 1.75% for Eurodollar rate borrowings.

The credit facility contains various representations, warranties and affirmative, negative and financial covenants customary for financings of this type. The financial covenants include a leverage test and a fixed charge test. We were in compliance with these covenants at March 31, 2007.

The credit facility may be used for working capital, capital expenditures, acquisitions and other general corporate purposes.

As of March 31, 2007, we had an accumulated deficit of $110.1 million. We believe cash flow from operations, our cash and cash equivalent balances together with amounts available under our credit facility 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 the status of competitive products, including potential generics, our success selling products, the results of research and development activities, FDA and foreign regulatory processes, establishment of and change in collaborative relationships, technological advances by us and other pharmaceutical companies, 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 incur debt, we might be restricted in our ability to raise additional capital and might be subject to financial and restrictive covenants. If we issued additional equity, our stockholders could suffer dilution. We might also enter into additional collaborative arrangements that could provide us with additional funding in the form of equity, debt, licensing, milestone and/or royalty payments. We might not be able to enter into such arrangements or raise any additional funds on terms favorable to us or at all.

Cautionary Statement

We operate in a highly competitive environment that involves a number of risks, some of which are beyond our control. The following statement highlights some of these risks. For more detail, see “Part I. Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006.

Statements contained in this Form 10-Q that are not historical facts are or might constitute forward-looking statements under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Although we believe the expectations reflected in such forward-looking statements are based on reasonable assumptions, our expectations might not be attained. Forward-looking statements involve known and unknown risks that could cause 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: intense competition, including potential generics; management of growth; the high cost and uncertainty of the research, clinical trials and other development activities involving pharmaceutical products; the unpredictability of the duration and results of regulatory review of New Drug Applications and Investigational New Drug Applications; the risks associated with the acquisition and integration of InKine; our dependence on our first 10 pharmaceutical products, particularly Colazal and Xifaxan, and the uncertainty of market acceptance of our products; the uncertainty of obtaining, and our dependence on, third parties to manufacture and sell our products; 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.

20

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

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

There was no change in our internal control over financial reporting in the quarter ended March 31, 2007 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 6. Exhibits

Exhibit Number	Description of Document	Registrant’s Form	Dated	Exhibit Number	Filed Herewith
10.58*	Master Purchase and Sale and License Agreement dated February 22, 2007 between Merck & Co., Inc. and Salix Pharmaceuticals, Ltd.				X
10.59*	License Agreement dated April 16, 2007 between Salix Pharmaceuticals, Inc. and Dr. Falk Pharma GmbH				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 Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.				X

* We have requested confidential treatment with respect to certain portions of this exhibit. Such portions have been omitted from this exhibit and have been filed separately with the United States Securities and Exchange Commission.

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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: May 10, 2007	By:	/s/ Carolyn J. Logan
		Carolyn J. Logan
		President and
		Chief Executive Officer
Date: May 10, 2007	By:	/s/ Adam C. Derbyshire
		Adam C. Derbyshire
		Senior Vice President, Finance & Administration and Chief Financial Officer

23

EX-10.58

Exhibit 10.58

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

MASTER PURCHASE AND SALE

AND LICENSE AGREEMENT

Between

MERCK & CO., INC.

and

SALIX PHARMACEUTICALS, LTD.

Dated as of February 22, 2007

TABLE OF CONTENTS

1	DEFINITIONS		2
2	SALE AND PURCHASE OF ASSETS; LIABILITIES		10
	2.1	Sale of Assets	10
	2.2	Rights Retained by Merck	11
	2.3	Liabilities	12
	2.4	Consideration	12
	2.5	Inventory	14
	2.6	Closing	14
	2.7	Regulatory and Third Party Approvals	15
	2.8	Post-Closing Payments	15
3	LICENSES		16
	3.1	Trademark License	16
	3.2	NDA License	17
	3.3	Manufacturing Know-How License	17
4	REPRESENTATIONS AND WARRANTIES		18
	4.1	Representations and Warranties of Merck	18
	4.2	Representations and Warranties of Salix	22
5	REGULATORY COVENANTS		24
	5.1	Maintenance of NDAs	24
	5.2	Labeling	25
	5.3	Regulatory Compliance	25
	5.4	Adverse Events	26
	5.5	Recalls	27
6	SUPPLY AND MANUFACTURING COVENANTS		27
	6.1	Supply of Products	27
	6.2	FDA Approval	28
	6.3	Storage and Distribution of the Products	28
	6.4	Continued Sale of Diuril OS Product	28
7	OTHER COVENANTS RELATING TO THE PRODUCTS		29
	7.1	Customer Matters	29
	7.2	Promotion and Marketing	29
	7.3	Medical and Other Inquiries	30

i

	7.4	Returned Products, Chargebacks and Rebates	31
	7.5	Price Submissions and Certifications	32
	7.6	Audits and Price Submissions	34
	7.7	Restatements of Price Submissions	34
	7.8	Indemnification Related to Price Submissions	35
	7.9	Provision of Historical Pricing Information	35
8	ADDITIONAL COVENANTS		36
	8.1	Covenants of Merck	36
	8.2	Covenants of Salix	37
	8.3	Mutual Covenants	38
9	INDEMNIFICATION		41
	9.1	Indemnification	41
	9.2	Third-Party Claim Procedure	42
	9.3	Limitations on Indemnification	43
10	MISCELLANEOUS		43
	10.1	Force Majeure	43
	10.2	Assignment/Change of Control	44
	10.3	Survival	45
	10.4	Exclusive Jurisdiction	45
	10.5	Equitable Remedies	45
	10.6	Notices	46
	10.7	Entire Agreement	47
	10.8	Section Headings	47
	10.9	Applicable Law	47
	10.10	Dispute Resolution	47
	10.11	Expenses	48
	10.12	Bulk Sales Statutes	49
	10.13	Waiver	49
	10.14	Severability	49
	10.15	Incorporation by Reference	49
	10.16	Assignment	49
	10.17	Independent Contractors	49
	10.18	No Third Party Beneficiaries	50
	10.19	Waiver of Rule of Construction	50
	10.20	Counterparts	50
	10.21	Compliance with Laws and Regulations	50

ii

EXHIBITS

SCHEDULES

Schedule	1.19	Documents
Schedule	1.38	Licensed Trademarks
Schedule	1.40	Manufacturing Know-How
Schedule	1.41	Form of Merck FDA Letters
Schedule	1.55	Purchase Orders
Schedule	1.58	Related Company
Schedule	1.60	Form of Salix FDA Letters
Schedule	2.5	Price of Inventory
Schedule	2.7.2	Third Party Consents
Schedule	4.1.9	Inventory
Schedule	6.4	Diuril Market History and Anticipated Need
Schedule	8.3.2	Approved Salix Press Release

iii

MASTER PURCHASE AND SALE AND LICENSE AGREEMENT

This MASTER PURCHASE AND SALE AND LICENSE AGREEMENT (this “Agreement”) made as of this 22nd day of February, 2007 between:

Salix Pharmaceuticals, Ltd., a corporation incorporated under the laws of the State of Delaware, whose head office is located at 1700 Perimeter Park Drive, Morrisville, NC 27560 (“Salix”); and

Merck & Co., Inc., a corporation organized under the laws of the State of New Jersey, whose head office is located at One Merck Drive, P.O. Box 100, Whitehouse Station, New Jersey, 08889-0100, U.S.A. (“Merck”).

RECITALS

WHEREAS, Merck and certain of its Affiliates (as defined below) are the owners of a business engaged in the manufacture, use, marketing, sale, and distribution of the Existing Products (as defined below), for which they have been granted the NDAs (as defined below).

WHEREAS, Merck wishes to sell, transfer and assign or license or cause to be sold, transferred and assigned or licensed to Salix the Assets (as defined below), and Salix desires to purchase or license such Assets from Merck, upon the terms and conditions hereinafter set forth.

WHEREAS, Merck intends to enter into, and Salix intends to enter into, certain ancillary agreements including, but not necessarily limited to:

(a) a Supply Agreement by which Merck or its Affiliates will manufacture, or have manufactured and supply to Salix or its designees the Existing Products and the active pharmaceutical ingredients for the Existing Products;

(b) a Trademark and Domain Name License Agreement by which Merck or its Affiliates will license to Salix the Licensed Trademarks (as defined below);

(c) a Transition Services Agreement by which Merck or its Affiliates will provide certain transition services to Salix with respect to the Existing Products; and

(d) one or more Bills of Sale and Assignment, by which Merck will transfer certain Assets to Salix.

NOW, THEREFORE, in consideration of the mutual agreements and covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:

1 DEFINITIONS

For the purposes of this Agreement, the following terms are defined as follows:

1.1 “Affiliate” means, with respect to a Person, any other Person directly or indirectly controlling or controlled by, or under direct or indirect common control with, such Person. For purposes of this definition, a Person shall be deemed to control another Person if it owns or controls, directly or indirectly, more than fifty percent (50%) of the voting equity of the other Person (or other comparable ownership if such other Person is not a corporation).

1.2 “Ancillary Agreement(s)” means the Supply Agreement, the Trademark License Agreement, and the Transition Services Agreement.

1.3 “Assets” means (a) the Documents, (b) Merck’s rights under all Purchase Orders, except for accounts receivable existing on the Closing Date, (c) the NDAs, (d) all clinical and regulatory data contained in the NDAs that are solely related to the Products (subject to the rights and licenses retained by Merck and its Affiliates as set forth in Section 2.2 and 3.3), (e) the Inventory and (f) all current customer lists of Merck related to the sale of Existing Products in the Territory.

1.4 “Astellas” means Astellas Pharma Inc., formerly known as Yamanouchi Pharmaceutical Co., Ltd.

1.5 “Astellas Agreements” means that certain License Agreement by and between Merck and Astellas, dated as of June 30, 1981, and that certain Supply Agreement by and between Merck and Astellas, dated as of June 20, 1981, each as amended, and the various related agreements by and between Merck and Astellas, or their respective Affiliates, entered into in connection therewith. For the avoidance of doubt, the Astellas Agreements are not Assets.

1.6 “Assumed Liabilities” means (a) all liabilities and obligations that Salix has expressly assumed or agreed to assume or perform under this Agreement, (b) Merck’s obligations under all Purchase Orders that are included in the Assets, and (c) all Liabilities arising out of the sale, purchase, consumption or use of the Products or the Assets in the Field in the Territory from and after the Closing Date, except for the Excluded Liabilities.

1.7 “Business” means Merck’s and its Affiliates’ business related to the manufacture, sale, marketing or distribution of the Existing Products in the Territory.

1.8 “Business Day” means any day other than Saturday, Sunday or a day on which banking institutions in the State of New Jersey are permitted or obligated by law to close.

1.9 “Calendar Quarter” means a three-month period commencing on January 1, April 1, July 1, or October 1.

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1.10 “Change of Control” of a Party means (i) the sale of all or substantially all of a Party’s assets or business relating to this Agreement; (ii) the closing of a merger, reorganization or consolidation involving a Party in which the voting securities of such Party outstanding immediately prior thereto (or any securities of the surviving entity issued in exchange therefor) cease to represent at least fifty percent (50%) of the combined voting power of the surviving entity immediately after such merger, reorganization or consolidation; or (iii) an event whereby any Person or group (as defined in Section 13(d)(3) or 14(d)(2) of the Exchange Act has become the direct or beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of more than 50% of the voting stock of a Party.

1.11 “cGMP” means current Good Manufacturing Practices, as specified in the United States Code of Federal Regulations (21 CFR Part 210 & Part 211).

1.12 “Chlorothiazide” means 6-chloro-2H-1,2,4-benzothiadiazine-7sulfonamide 1, 1-dioxide, having the empirical formula C₇H₆CIN₃0₄S₂, a molecular weight of 295.72 and the structural formula:

1.13 “Chlorothiazide Derivative” means any Derivative of Chlorothiazide in Oral Suspension developed by or on behalf of Salix or its Affiliates.

1.14 “Confidential Information” means (i) the terms and conditions of this Agreement and the Ancillary Agreements and (ii) any and all information, know-how and data, whether oral, written or graphical, including without limitation, Manufacturing Know-How, disclosed or provided by Merck or its Affiliates to Salix or its Affiliates or by Salix or its Affiliates to Merck or its Affiliates (including any analysis, materials, product or conclusions drawn or derived therefrom) or which are derived from any visits by personnel of Merck or its Affiliates or Salix or its Affiliates to the location of Salix or Merck, respectively, or are otherwise known to Merck or its Affiliates or Salix or its Affiliates through its visits or contacts with Salix or Merck, respectively, whether such information, know-how and/or data is disclosed, provided or derived before or after the Closing Date. Any information that constitutes Confidential Information of Merck prior to the Closing Date and that is included in the Assets shall, at Closing, become Confidential Information of Salix.

1.15 “Derivative” means any hydrate, solvate, salt, polymorphic form (including but not limited to a different crystal form), racemate, isomer, enantiomer, prodrug, metabolite, ester, or other analog or derivative of a particular chemical compound or molecule.

3

1.16 “Distributor Returned Products” means any Existing Product sold on or after the Closing Date by Merck in its capacity as distributor for Salix under the Transition Services Agreement and returned to Salix or to Merck within the time allowed for return under Merck’s Standard Return Terms and Conditions. Distributor Returned Products does not include any Supplied Products or other Products sold directly by Salix after the Closing.

1.17 “Diuril OS NDA” means the new drug application 11-870, including any submissions, amendments or supplements thereto and any official correspondence with FDA, as of the Closing Date.

1.18 “Diuril OS Product” means the prescription oral suspension pharmaceutical product containing Chlorothiazide as the active ingredient and approved for human therapeutic use by the FDA pursuant to the Diuril OS NDA, which product, from its date of first commercial sale through the Closing Date, has been identified by NDC 0006-3239-66.

1.19 “Documents” means the documents and records relating to the Existing Products owned, held or controlled by Merck or any of its Affiliates, as listed on Schedule 1.19.

1.20 “Encumbrance” means, with respect to the Assets, any mortgage, lien, license, pledge, charge, security interest or encumbrance of any kind, including, without limitation, the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset; provided the Astellas Agreements or any continuing rights or obligations of any Party under or pursuant thereto do not constitute an Encumbrance.

1.21 “Exchange Act” means the Securities Exchange Act of 1934, as amended.

1.22 “Excluded Assets” means all assets, property, rights and interests of Merck and its Affiliates and Related Companies other than the Assets, including, without limitation, all patents, information, know-how, trademarks, trade names, good will, intellectual property and proprietary rights, new drug applications and their equivalents (other than the NDAs), NDC numbers and their equivalents, product registrations, accounts receivable, and other assets of Merck and its Affiliates. For the avoidance of doubt, the Manufacturing Know-How and Non-Oral Suspension Pepcid Products are Excluded Assets.

1.23 “Excluded Liabilities” means the liabilities retained by Merck pursuant hereto, namely all Liabilities relating to (a) the Existing Products or any or all of the Assets if such Liabilities are made or brought prior to the Closing Date or (b) any Existing Product sold by Merck prior to the Closing Date if such Liabilities are made and brought on or after the Closing Date.

1.24 “Execution Date” means the date of execution of this Agreement as first written above.

1.25 “Existing Products” means the Diuril OS Product and the Pepcid OS Product.

4

1.26 “Famotidine” means N´-(aminosulfonyl)-3-[[[2-[(diaminomethylene)amino]-4-thiazolyl]methyl]thio]propanimidamide, having the empirical formula C₈H₁₅N₇O₂S₃, a molecular weight of 337.43 and the structural formula:

1.27 “Famotidine Derivative” means any Derivative of Famotidine in Oral Suspension developed by or on behalf of Salix or its Affiliates.

1.28 “FDA” means the U.S. Food and Drug Administration.

1.29 “Field” means the use of a pharmaceutical product in humans by prescription for the treatment of only those diseases and conditions for which the Products have been approved (or subsequent to the Closing Date, are approved) for marketing in the Territory and only as an Oral Suspension formulation. For the avoidance of doubt, the Field shall not include any prescription formulation except for Oral Suspension, any over-the-counter or non-human products or uses or any other products that may be dispensed without a prescription from a licensed physician.

1.30 “First Commercial Sale” means the first sale for end use or consumption by humans of a Generic Product in the Territory.

1.31 “First Post-Closing Period” means the period from the Closing Date through [*].

1.32 “Fiscal Year Gross Sales” means the gross sales (as defined in accordance with generally accepted accounting principles and determined in a manner consistent with that applied in preparing Salix’s annual audited financial statements) of the Products realized by Salix during any fiscal year following the Closing Date (including the partial fiscal year commencing on the Closing Date and ending on December 31, 2007).

1.33 “Generic Product” means any Oral Suspension pharmaceutical product in final form containing Famotidine as the sole active ingredient and in the same strength as the Pepcid OS Product, [*].

1.34 “Governmental Authority” means any national, regional, state, county, local or other government, or other court of competent jurisdiction, legislature, governmental, administrative or regulatory agency, department, body, bureau, council or commission or any other national, regional, state, county, local or other governmental authority or instrumentality, in each case having jurisdiction in the Territory, including, but not limited to, the FDA.

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

5

1.35 “IND” means (a) an Investigational New Drug Application (as defined in the Food, Drug, and Cosmetic Act, as amended, and the regulations promulgated thereunder, including 21 CFR part 312) that is required to be filed with the FDA before beginning clinical testing of a Product in human subjects, or any successor application or procedure, and (b) all supplements and amendments that may be filed with respect to the foregoing.

1.36 “Inventory” means all saleable finished and packaged goods inventory of Merck related exclusively to the Existing Products and located within, or held by Merck for distribution within, the Territory.

1.37 “Liabilities” means any claims and/or complaints (including, without limitation, all damages, losses, expenses, adverse reactions, recalls, product and packaging complaints and other liabilities).

1.38 “Licensed Trademarks” means the trademarks relating to the Existing Products listed in Schedule 1.38, all of which will be licensed to Salix for use in the sale of the Existing Products in the Territory on an irrevocable (except as otherwise expressly provided in the Trademark License Agreement), perpetual, fully-paid, royalty-free, transferable and sublicensable basis pursuant to the Trademark License Agreement.

1.39 “Loss” or “Losses” means each and all of the following items to the extent actually incurred: claims, actions, causes of action, liabilities, losses, damages, judgments, fines, penalties, amounts paid in settlement and reasonable costs and expenses incurred in connection therewith, including, without limitation, interest which is imposed in connection therewith, reasonable costs and expenses of suits and proceedings, and reasonable fees and disbursements of counsel.

1.40 “Manufacturing Know-How” means the data, information and know-how that is not generally known, is controlled (whether by ownership or license) by Merck or its Affiliates as of the Closing Date, and is used by or on behalf of Merck as of the Closing Date for the manufacture of the Existing Products in the Field in the Territory on the Closing Date, regardless of whether it is included in the NDAs or otherwise, including, but not limited to, (1) the data, information and know-how that is identified or described with more specificity on Schedule 1.40 and (2) any other Manufacturing data, information and know-how provided by Merck pursuant to Section 3.3.1 that is not generally known. For the avoidance of doubt, if such data, information or know-how becomes publicly disclosed (other than as a result of any disclosure by Salix in breach of its obligations under Section 8.3.4 or any other provision of this Agreement or the Supply Agreement), such data, information or know-how shall no longer be deemed Manufacturing Know-How.

6

1.41 “Merck FDA Letters” means the letters from Merck to the FDA, duly executed by Merck, to be filed with the FDA no later than one (1) Business Day following the Closing Date with regard to the NDAs, the form of which is attached hereto as Schedule 1.41.

1.42 “Merck Image Product” shall mean Existing Products using the label for such Existing Product as it exists on the Closing Date in the Territory.

1.43 “Merck’s Standard Terms and Conditions” means the standard return terms and conditions as provided by Merck to Salix prior to the Closing Date, as the same may be amended by Merck from time to time for its products generally, in Merck’s sole and absolute discretion upon notice to Salix.

1.44 “NDAs” means the Pepcid OS NDA and the Diuril OS NDA, collectively.

1.45 “Non-Oral Suspension Pepcid Products” means any pharmaceutical preparation for sale by prescription, except for Oral Suspension, in final form containing Famotidine for any and all uses outside of the Field, including without limitation the Pepcid Tablet Products and any combination product including active ingredients other than Famotidine in combination with Famotidine.

1.46 “Oral Suspension” means a liquid preparation that consists of solid particles dispersed throughout a liquid phase in which the particles are not soluble and that is intended to be administered orally.

1.47 “Party” shall mean Merck and Salix, individually, and “Parties” shall mean Merck and Salix, collectively.

1.48 “Pepcid OS NDA” means the new drug application 19-527, including any submissions, amendments or supplements thereto and any official correspondence with FDA, as of the Closing Date.

1.49 “Pepcid OS Product” means the prescription oral suspension pharmaceutical product containing Famotidine as the active ingredient and approved by the FDA for human therapeutic use pursuant to the Pepcid OS NDA, which product, from its date of first commercial sale through the Closing Date, has been identified by NDC 0006-3538-92.

1.50 “Pepcid Tablet NDA” means the new drug application 19-462, including any submissions, amendments or supplements thereto and any official correspondence with FDA, as of the Closing Date.

1.51 “Pepcid Tablet Products” means the prescription tablet pharmaceutical products identified by NDC 0006-0963-31, NDC 0006-0963-58, NDC 0006-0964-31 and NDC 0006-0964-58 and containing Famotidine as the active ingredient.

7

1.52 “Permitted Encumbrance” means, with respect to any Asset, any encumbrance for Taxes not yet due or delinquent or for those Taxes being contested in good faith by appropriate proceedings for which adequate reserves have been established.

1.53 “Person” means any individual, partnership, limited partnership, limited liability company, joint venture, syndicate, sole proprietorship, corporation, unincorporated association, trust, trustee, executor, administrator or other legal personal representative, or any other legal entity.

1.54 “Products” means, collectively, (i) the Existing Products and (ii) any prescription Oral Suspension pharmaceutical product in final form containing Famotidine or Chlorothiazide, as the case may be, or any Famotidine Derivative or Chlorothiazide Derivative, as the case may be, as the sole active ingredient.

1.55 “Purchase Orders” means all purchase orders for the sale of Existing Products in the Territory after the Closing Date accepted by Merck prior to the Closing Date and all sales contracts pursuant to which Merck is obligated to sell Existing Products in the Territory after the Closing Date entered into by Merck prior to the Closing Date, in each case to the extent that they relate solely to Existing Products, as listed on Schedule 1.55 attached hereto.

1.56 “Rebate” means any payment or credit required under any agreement or by operation of law, including, without limitation, any retroactive form of the foregoing, rebate payable to a managed care organization or a pharmaceutical benefit manager and any rebate payable to a State Medicaid program (as described in the Social Security Act, 42 U.S.C. Section 1398r-8, and related provisions) or to a State pharmaceutical assistance program.

1.57 “Recorded Information” means information or data that is physically recorded or stored in a readable or retrievable form, including, without limitation, any information or data recorded in or on any writing, microfiche, computer disk, or electronic or optical storage media.

1.58 “Related Company” means (a) Johnson & Johnson-Merck Consumer Pharmaceuticals Co., (b) the several joint ventures between Merck and Schering-Plough Corporation, and (c) any joint venture, partnership, corporation or other business entity in which Merck owns an equity interest of fifty percent (50%) or less, as set forth on Schedule 1.58.

1.59 “Returned Products” means any Existing Product sold by Merck before the Closing Date and returned to Salix or to Merck within the time allowed for returns under Merck’s Standard Return Terms and Conditions. Returned Products do not include any Supplied Products or other Products sold directly by Salix after the Closing Date.

1.60 “Salix FDA Letters” means the letters from Salix to the FDA, duly executed by Salix, to be filed with the FDA no later than one (1) Business Day following the Closing Date with regard to the NDAs, the form of which is attached hereto as Schedule 1.60.

8

1.61 “Second Post-Closing Period” means the period from [*], through [*].

1.62 “Serious” means (as per ICH E2A) an adverse experience at any dose which is fatal or life threatening, results in persistent or significant disability/incapacity, requires in-patient hospitalization or results in prolongation of existing hospitalization, is a congenital anomaly/birth defect, or is a medically important event or reaction (even if not life-threatening, resulting in death, or requiring hospitalization) if, based upon appropriate medical judgment, such medical event or reaction may jeopardize the patient’s or subject’s health or may require medical intervention to prevent one of the other outcomes listed previously.

1.63 “Specifications” means the final release quality specifications for the Existing Products.

1.64 “Subsidiary” means an Affiliate of Salix of which one hundred percent (100%) of the voting stock or other equity interest is owned directly or indirectly by Salix.

1.65 “Supplied Products” means the Existing Products manufactured, labeled and packaged by Merck or its Affiliate that are sold to Salix pursuant to the Supply Agreement or the Transition Services Agreement (including, without limitation, Existing Products distributed for Salix by Merck under the Transition Services Agreement).

1.66 “Supply Agreement” means that certain agreement, dated as of even date herewith, by which Merck or its Affiliates will manufacture, or have manufactured and supply to Salix or its designees the Existing Products and the active pharmaceutical ingredients for the Existing Products.

1.67 “Taxes” means all taxes of any kind, and all charges, fees, customs, levies, duties, imposts, required deposits or other assessments, including all federal, state, local or foreign net income, capital gains, gross income, gross receipt, property, franchise, sales, use, excise, withholding, payroll, employment, social security, worker’s compensation, unemployment, occupation, capital stock, transfer, gains, windfall profits, net worth, asset, transaction, and other taxes, and any interest, penalties or additions to tax with respect thereto, imposed upon any person by any taxing authority or other Governmental Authority under applicable law.

1.68 “Territory” means the United States of America and its territories and possessions, including, without limitation, the Commonwealth of Puerto Rico. With respect to Diuril OS Product only the Territory shall include Sweden.

1.69 “Trademark License Agreement” means that certain Trademark and Domain Name License Agreement, dated as of even date herewith, by which Merck or its Affiliates will license to Salix the Licensed Trademarks.

1.70 “Transition Services Agreement” means that certain agreement, dated as of even date herewith, by which Merck or its Affiliates will provide certain transition services to Salix with respect to the Existing Products.

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

9

1.71 Other Definitions

The following terms have the meaning set forth in the Sections below:

DEFINED TERM	LOCATION OF DEFINITION
AAA	10.10.1
Agreement	Introduction
AMP	7.5.1
Approvals	4.1.11
Asset Acquisition Statement	2.4.2
Closing	2.6.1
Closing Date	2.6.1
Closing Payment	2.4.1(b)
CMS	7.5.5
Excluded Claim	10.10
FCPs	7.9.2
FD&C Act	4.1.8
FSS	7.9.2
Insurance Term	8.2.2(a)
Manufacturing Know-How License	3.3.1
Merck	Introduction
Merck Intellectual Property	4.1.7
Non-FAMP	7.5.2
Retained Rights	2.2.1
Sales Data	4.1.13
Salix	Introduction
Salix Insurance	8.2.2(a)
Third Party Auditor	7.6.1
Third Party Consents	2.7.2

2 SALE AND PURCHASE OF ASSETS; LIABILITIES

2.1 Sale of Assets

2.1.1 Subject to the terms and conditions hereof, Merck agrees to sell, transfer and assign (or in the case of the Licensed Trademarks and Manufacturing Know-How, to license), or cause its Affiliates to sell, transfer and assign (or in the case of the Licensed Trademarks and Manufacturing Know-How, to license), to Salix, on the Closing Date, the Assets, free and clear of all Encumbrances other than the Permitted Encumbrances, and Salix agrees to purchase (or in the case of the Licensed Trademarks and Manufacturing Know-How, to license) from Merck, on the Closing Date, such Assets.

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2.1.2 Salix shall not acquire pursuant hereto any assets or rights of any kind or nature, real or personal, tangible or intangible, other than (i) all right, title and interest in and to the Assets and (ii) the licenses to the Manufacturing Know-How and Licensed Trademarks described herein and in the Ancillary Agreements, subject to the conditions and rights set forth herein and therein, and Merck shall retain all other assets, including, without limitation, the Excluded Assets. Nothing contained in this Agreement shall be deemed to create a liability or obligation for, or to impose any restriction on, any Related Company.

2.1.3 It is understood that Salix receives no rights by virtue of this Agreement (a) in any countries other than the Territory, except the right to (i) conduct research and development concerning Products outside the Territory and (ii) manufacture Products outside the Territory for sale or distribution in the Territory or use in research and development outside the Territory, or (b) outside the Field. For greater certainty, but without limiting the generality of anything otherwise contained herein, it is expressly understood and agreed that after the Closing Date, Salix shall not (A) sell, market or distribute Products (a) outside the Territory or (b) outside of the Field in the Territory or (B) knowingly sell, market or distribute Products to any Person for resale, marketing or distribution (x) outside the Territory or (y) outside the Field in Territory, except, in the case of (A) and (B), for the purposes of (1) conducting research and development outside the Territory or (2) Manufacturing Products for sale or distribution in the Territory or use in research and development outside the Territory.

2.2 Rights Retained by Merck

2.2.1 Notwithstanding Section 2.1 above, and subject to the remaining provisions of this Agreement, Merck (on behalf of itself and its Affiliates) as of the Closing Date reserves and retains the right (collectively, the “Retained Rights”) to use any data, know-how or intellectual property contained in the Assets to the extent they relate to:

(a) the Excluded Assets or the Excluded Liabilities;

(b) the manufacture, marketing, distribution, import or sale of the Products inside and outside of the Territory solely and exclusively for non-prescription use and non-human use;

(c) the use of the Existing Products solely and exclusively for research and/or development purposes;

(d) except as provided in Section 8.1.1, any pharmaceuticals, biologicals or chemical entities or products (other than the Existing Products) currently or hereafter developed, acquired, manufactured or marketed by Merck, including formulations, other than Oral Suspensions, containing the same active pharmaceutical ingredient(s) as the Existing Products;

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(e) any and all purposes outside the Territory; or

(f) the defense or prosecution of any legal or regulatory proceeding to which Merck and/or its Affiliates is a party or a potential party.

2.2.2 Merck reserves and retains a right of reference to the NDAs in connection with (i) manufacture of the Existing Products under the Supply Agreement and (ii) any and all of the purposes set forth in Section 2.2.1.

2.2.3 Merck reserves and retains all rights with respect to registrations and sales relating to the Products outside the Territory and outside the Field in the Territory, provided that Salix, or any third party(ies) Manufacturing Products or conducting research and developments concerning Products on Salix’s behalf, outside the Territory to the extent expressly permitted by this Agreement, may obtain any such registrations as may be required in order to perform such activities outside the Territory.

2.3 Liabilities

2.3.1 Assumed Liabilities. Subject to the terms and conditions hereof, as of the Closing Date, Salix shall assume the Assumed Liabilities related to the Assets.

2.3.2 Excluded Liabilities. Salix shall not assume any liabilities or obligations of Merck or any of its Affiliates (other than the Assumed Liabilities to be assumed by Salix) and the Excluded Liabilities shall remain the sole obligation and responsibility of Merck and its Affiliates.

2.4 Consideration

2.4.1 Purchase Price

(a) Salix has heretofore paid to Merck the sum of FIVE HUNDRED THOUSAND DOLLARS (US $500,000).

(b) At the Closing, Salix shall pay to Merck the sum of FIFTY-FOUR MILLION FIVE HUNDRED THOUSAND DOLLARS (US $54,500,000) by wire transfer of immediately available funds in accordance with the written instructions delivered by Merck to Salix (the “Closing Payment”).

(c) In the event that any Person (including Merck, its Affiliates and any Related Company) other than (i) Salix or its Affiliates, (ii) a Person of which Salix or its Affiliates owns an equity interest greater than one percent (1%) or (iii) any Person (other than Merck or its Affiliates) to

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whom Salix, its Affiliates or a Person defined in clause (ii) may grant rights under the Assets, including, without limitation, the NDAs, obtains the requisite regulatory approvals for and achieves a First Commercial Sale during the First Post-Closing Period, Merck shall, within 60 days after demand by Salix accompanied by reasonably sufficient evidence that such First Commercial Sale has occurred, pay to Salix the sum of FIFTEEN MILLION DOLLARS (US $15,000,000) by wire transfer of immediately available funds in accordance with the written instructions delivered by Salix to Merck.

(d) In the event that (i) a First Commercial Sale does not occur during the First Post-Closing Period, and (ii) any Person (including Merck, its Affiliates and any Related Company) other than (x) Salix or its Affiliates, (y) a Person of which Salix or its Affiliates owns an equity interest greater than one percent (1%) or (z) any Person (other than Merck or its Affiliates) to whom Salix, its Affiliates or a Person of which Salix or its Affiliates owns an equity interest greater than one percent (1%) may grant rights under the Assets, including, without limitation, the NDAs, obtains the requisite regulatory approvals for and achieves a First Commercial Sale during the Second Post-Closing Period, then Merck shall, within 60 days after demand by Salix accompanied by reasonably sufficient evidence that such First Commercial Sale has occurred, pay to Salix the sum of [*] DOLLARS (US $[*]) by wire transfer of immediately available funds in accordance with the written instructions delivered by Salix to Merck. Any payment by Merck pursuant to this Section 2.4.1 shall be deemed to be an adjustment to the purchase price for the Assets. In no event shall Merck be obligated to make more than one payment pursuant to this Section 2.4.1.

2.4.2 Allocation of Consideration. Merck and Salix recognize their mutual obligations pursuant to Section 1060 of the Code to file timely IRS Form 8594 (the “Asset Acquisition Statement”) with each of their respective United States federal income tax returns. Accordingly, Merck and Salix shall, as promptly as practicable following the Closing Date with respect to the Existing Products, but in any event not later than sixty (60) days following the Closing Date allocate the Purchase Price between and among the underlying asset categories. If Merck and Salix shall have agreed on a Purchase Price allocation and an Asset Acquisition Statement, then Merck and Salix shall file the Asset Acquisition Statement in the form so agreed and neither Merck nor Salix shall take a tax position which is inconsistent with such Purchase Price allocation. Merck and Salix agree to cooperate to make any and all filings necessary or required in all other jurisdictions in which Assets are located and further agree that the positions taken in such filings shall be consistent with the Asset Acquisition Statement.

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

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2.5 Inventory

At or prior to Closing, Merck shall deliver to Salix a listing, based on Merck’s inventory records of the Inventory maintained by Merck as of the Closing Date. At Closing, Salix shall pay to Merck, in consideration for the Inventory, the amount equal to (i) the number of units of Pepcid OS Products reflected in such inventory, multiplied by the cost therefor specified on Schedule 2.5, plus (ii) the number of units of Diuril OS Products reflected in such inventory, multiplied by the cost therefor specified on Schedule 2.5.

2.6 Closing

2.6.1 Closing. The closing of the transactions contemplated by this Agreement (the “Closing”) and all actions specified in this Agreement to occur at the Closing shall take place via facsimile at 10:00 a.m., New York time, on the date of this Agreement, or at such other time and/or on such other date as Merck and Salix shall agree. The date on which the Closing takes place is referred to herein as the “Closing Date”.

2.6.2 Closing Deliveries.

(a) At the Closing, Merck shall deliver the following to Salix:

(i) the Ancillary Agreements, executed by Merck;

(ii) a copy of the executed Merck FDA Letters;

(iii) an electronic copy of the NDAs; and

(iv) a copy of the Third Party Consent listed on Schedule 2.7.2.

(b) At the Closing, Salix shall deliver the following to Merck:

(i) the Ancillary Agreements, executed by Salix;

(ii) a copy of the executed Salix FDA Letters;

(iii) the Closing Payment (by wire transfer of immediately available funds to an account designated by Merck); and

(iv) payment for the Inventory (by wire transfer of immediately available funds to an account designated by Merck).

2.6.3 Merck shall deliver to Salix the Documents electronically (unless otherwise provided on Schedule 1.19) as soon as reasonably practicable but in no event later than [*] Business Days after the Closing Date, except for the Documents listed on items 4 and 7 of Schedule 1.19, each of which shall be delivered no later than [*] days of the Closing Date or as otherwise provided on Schedule 1.40. Notwithstanding any provision of this Agreement to the contrary, Merck shall have the right to retain copies of the NDAs and the Documents for its records and in order to exercise the Retained Rights.

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

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2.7 Regulatory and Third Party Approvals

2.7.1 FDA Notification of Transfer of the NDAs

(a) Salix and Merck shall file the Salix FDA Letters and the Merck FDA Letters, respectively, with the FDA within one (1) Business Day after the Closing Date. Salix shall be responsible for the payment of any filing or similar fees payable to the FDA with respect to the transfer of the NDAs and the Products to the Salix. Transfer of title to the NDAs shall be effective as of the Closing Date.

(b) In addition to the filing of the Salix FDA Letters and Merck FDA Letters, the Parties shall each, at the request of the other Party, promptly make any further filings and take any actions reasonably required to consummate the transactions contemplated hereby and perform its obligations hereunder, including without limitation, filing with the FDA, any other notices, assignments, documents and/or other materials required by applicable regulations and laws.

2.7.2 Third Party Consents. Each of the Parties hereto shall use its reasonable efforts and cooperate with the other Party hereto to promptly secure all necessary consents, approvals, authorizations, exemptions and waivers from third parties as shall be required in order to enable the Parties hereto to promptly effect the transactions contemplated hereby (the “Third Party Consents”) (all of which are listed in Schedule 2.7.2), and will otherwise use its reasonable efforts to cause the prompt consummation of such transactions in accordance with the terms and conditions hereof.

2.8 Post-Closing Payments

2.8.1 During the five-year period commencing on the Closing Date, Salix shall provide Merck with quarterly reports, not later than 45 days after the end of each Calendar Quarter, of the Fiscal Year Gross Sales to date achieved by Salix. Such reports shall be certified by the chief financial officer of Salix as true and correct, and shall be accompanied by such information and documentation as Merck may reasonably request to permit it to substantiate and verify such reports. In the event that, during the five-year period commencing on the Closing Date, Salix achieves Fiscal Year Gross Sales in excess of the amounts specified below, Salix shall pay to Merck the following amounts, each payable within ten (10) Business Days following the date of the report disclosing such Fiscal Year Gross Sales except as otherwise specified in this Section 2.8:

(a) When Salix’s Fiscal Year Gross Sales first reach $[*] million, Salix shall pay to Merck the sum of $[*] million;

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

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(b) When Salix’s Fiscal Year Gross Sales first reach $[*] million, Salix shall pay to Merck the sum of $[*] million; and

(c) When Salix’s Fiscal Year Gross Sales first reach $[*] million, Salix shall pay to Merck the sum of $[*] million.

2.8.2 The payments specified above shall be cumulative and all payments payable under this Section 2.8 shall not exceed $6 million in the aggregate. Salix and Merck agree to cooperate in the preparation of a supplemental Asset Acquisition Statement consistent with their obligations under Section 2.4.2 and Treasury Reg. § 1.1060-1(e) as a result of any adjustment to the Purchase Price. If more than one Fiscal Year Gross Sales target is first achieved in a single fiscal year, then the payment for each such target shall be payable, but Salix shall have the right to defer payment of the second such payment for a period of [*] and, if three payments are due with respect to a single fiscal year, to defer payment of the third such payment for a period of [*].

2.8.3 Salix has no right of setoff of any amounts due and payable, or any liabilities arising, under this Agreement against any amounts due and payable, or any liabilities arising, under the Ancillary Agreements. In addition, Salix has no right of setoff of any amounts due and payable, or any liabilities arising, under the Ancillary Agreements against any amounts due and payable, or any liabilities arising, under this Agreement. The payment obligations under each of this Agreement and the Ancillary Agreements remain independent obligations of each Party, irrespective of any amounts owed to the other Party under this Agreement or the respective Ancillary Agreements.

3 LICENSES

3.1 Trademark License

At Closing, Merck and Salix shall enter into a Trademark License Agreement, granting Salix a perpetual, irrevocable (except as otherwise expressly provided in the Trademark License Agreement), fully-paid, royalty-free, exclusive, sublicensable, assignable license to the Licensed Trademarks in the Territory for use in the registration, manufacture, marketing, distribution and/or sale of the Products in the Territory and the Manufacturing of Products outside the Territory for use or sale in the Territory. In such Trademark License Agreement, the Parties shall agree to take such further actions as reasonably requested by the other Party, to effect the grant of the license to the Licensed Trademarks in accordance with the intent of this Agreement.

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

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3.2 NDA License

3.2.1 Subject to the terms and conditions of this Agreement, Salix hereby grants to Merck, effective as of the Closing, a perpetual, fully-paid, royalty-free, irrevocable and non-exclusive license, with the right to sublicense, to use and reference the NDAs and the data and know-how contained in the NDAs (a) for the research, manufacture (by or on behalf of Merck), sale and marketing of products other than the Products, including, without limitation, the Non-Oral Suspension Pepcid Products, in the Territory for use outside the Field, and (b) for all purposes with respect to the Products and all other products outside the Territory.

3.2.2 Subject to the terms and conditions of this Agreement, Merck hereby grants to Salix, effective as of the Closing, a perpetual, fully-paid, royalty-free, irrevocable and non-exclusive license, with the right to sublicense, to use and reference the “Drug Substance Specifications and Analytical Methods” sections of the Pepcid Tablet NDA and any other sections of the Pepcid Tablet NDA that the FDA advises Salix are necessary for, together with the data and know-how contained in those sections of the Pepcid Tablet NDA, the research, manufacture (by or on behalf of Salix), sale and marketing of the Products in the Field inside the Territory.

3.3 Manufacturing Know-How License

3.3.1 License Grant. Subject to the terms and conditions of this Agreement, the Supply Agreement and the Transitions Services Agreement, Merck hereby grants to Salix, effective as of the Closing, under the Manufacturing Know-How (i) a perpetual, irrevocable, fully-paid, royalty-free, exclusive (subject to Merck’s right to manufacture and have manufactured the Products pursuant to the Supply Agreement) worldwide license, with the right to sublicense, to manufacture or have manufactured (including by third parties for Salix) Products solely for use or sale in the Field in the Territory and (ii) a perpetual, irrevocable, fully-paid, royalty-free, nonexclusive, worldwide license, with the right to sublicense, to manufacture or have manufactured (including by third parties for or on behalf of Salix) Products for purposes of conducting research and development of Products outside the Territory (collectively, the “Manufacturing Know-How License”); provided that Salix shall not be entitled to exercise its rights under the Manufacturing Know-How License to manufacture or have manufactured the Products for sale prior to the date of expiration or termination of the Supply Agreement, except as otherwise permitted thereby.

3.3.2 Merck Ownership of Manufacturing Know-How. Salix acknowledges and agrees that, notwithstanding any information or data contained in the NDAs relating to Manufacturing, Merck retains sole ownership of and title to the Manufacturing Know-How and no ownership interest in or title to the Manufacturing Know-How is or has been transferred or conveyed to Salix or any other Person by this Agreement or otherwise. Salix acknowledges and agrees that it shall not at any time claim adversely to Merck or its Affiliates any right, title or interest in or to the Manufacturing Know-How, except as necessary to exercise, defend or protect its rights hereunder or under the Ancillary Agreements with respect thereto.

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3.3.3 Supply of Active Ingredient and Materials. From and after the expiration or termination of the Supply Agreement, Salix, at its own expense, shall, as between the Parties, be responsible for (a) obtaining its own source of Famotidine, Chlorothiazide and any other ingredients and materials associated with the manufacture of the Existing Products, (b) obtaining all equipment necessary to manufacture the Existing Products, and (c) Manufacturing the Existing Products, provided that this Section 3.3.3 shall not create any affirmative obligation on the part of Salix to undertake any of the foregoing activities.

4 REPRESENTATIONS AND WARRANTIES

4.1 Representations and Warranties of Merck

Merck hereby represents and warrants to Salix with regard to itself and/or the Assets, as the case may be, that, as of the Closing Date:

4.1.1 Corporate Status. Merck is a corporation duly organized and validly existing and in good standing under the laws of the State of New Jersey, USA and has all requisite corporate power and authority to own, use or operate the Assets, to produce, market, distribute and sell the Existing Products prior to the Closing Date and to consummate the transactions contemplated hereby.

4.1.2 Authority. Merck and its Affiliates each has the full corporate power and authority to enter into this Agreement, the Ancillary Agreements and any other documents contemplated hereby or thereby. Such deliveries will convey to Salix good and marketable title to the Assets. The execution and delivery of this Agreement and Ancillary Agreements and the consummation of the transactions contemplated hereby and thereby have been duly authorized by the necessary corporate actions of Merck and its Affiliates. This Agreement, the Ancillary Agreements and any other documents contemplated hereby or thereby constitute valid and legally binding obligations of Merck and its Affiliates enforceable against them in accordance with their respective terms.

4.1.3 Non-Contravention. The execution, delivery and performance by Merck and its Affiliates (as applicable) of this Agreement, the Ancillary Agreements and any other agreements and instruments contemplated hereunder will not (i) in any material respect violate any statute, regulation, judgment order, decree or other restriction of any Governmental Authority to which Merck or any of its Affiliates is subject, (ii) violate any provision of the corporate charter, by-laws or other organizational documents of Merck or any of its Affiliates, or (iii) constitute a material violation or breach by Merck or any of its Affiliates of any provision of any material contract, agreement or instrument to which Merck or any of its Affiliates is a Party or to which Merck or any of its Affiliates may be subject although not a Party.

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4.1.4 No Broker. There is no broker, finder or financial advisor acting or who has acted on behalf of Merck, who is entitled to receive any brokerage or finder’s or financial advisory fee from Salix in connection with the transactions contemplated by this Agreement.

4.1.5 No Lawsuits; Consents. There is no lawsuit, arbitration or proceeding pending or, to the knowledge of Merck, threatened against Merck which might prevent the consummation of any of the transactions contemplated by this Agreement or have a material adverse effect upon the Assets, and, except for the consents required to be obtained pursuant to Section 2.7, the execution, delivery and performance by Merck of this Agreement, the Ancillary Agreements and each of the instruments contemplated hereby to which Merck is a Party and the consummation by Merck of the transactions contemplated hereby and thereby, require no action by or in respect of, or filing with any Governmental Agency or any other consent of any Person, firm or other entity.

4.1.6 Title to the Assets. Merck and its Affiliates are the true and lawful owners of, and will convey to Salix upon Closing, all right, title and interest in the Assets, free and clear of any adverse interest, claim, lien, pledge, mortgage, security interest, restriction on transfer or Encumbrance other than Permitted Encumbrances.

4.1.7 Intellectual Property. Merck owns all right, title and interest to the Assets, Manufacturing Know-How, and Licensed Trademarks with respect to the Existing Products for use in the Field in the Territory (collectively, the “Merck Intellectual Property”), free and clear of all Encumbrances. Neither Merck nor its Affiliates has any Recorded Information constituting notice of any claim in the Territory (i) that the Licensed Trademarks are not valid or enforceable trademarks, (ii) that Merck’s use of the Merck Intellectual Property infringes upon or conflicts with any trademark, service mark, name, logo, design, trade dress or other intellectual property rights of any third party, or (iii) that a third party is engaged in the unauthorized use or infringement of the Merck Intellectual Property. Any necessary registration, maintenance and renewal fees due in connection with the Licensed Trademarks have been paid in a timely manner and all necessary documents and certificates in connection with the Licensed Trademarks have, for the purposes of maintaining the Licensed Trademarks, been filed in a timely manner with all necessary Governmental Authorities in the Territory.

4.1.8 Compliance with Laws. The Manufacturing of the Existing Products is and has been conducted in compliance with cGMP, the Specifications, the NDAs, and all other applicable laws, rules, and regulations, and the development, marketing, sale, distribution, import and export of the Existing Products and the conduct of

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the Business are, and have been conducted, in compliance with all applicable laws, rules and regulations (including, but not limited to, the United States Federal Food, Drug and Cosmetic Act, as amended (the “FD&C Act”) and the United States Prescription Drug Marketing Act, as amended from time to time) in all material respects. Neither the FDA nor any other Governmental Authority, has notified Merck that it is in violation of any laws, rules or regulations with respect to the Existing Products, the Business or the development, manufacture, use, sale, marketing, import or export thereof or of the active ingredients of the Existing Products in the Territory.

4.1.9 Inventory. Schedule 4.1.9 sets forth the Inventory as of the Closing Date. All of the Inventory was manufactured, produced, tested, validated and released in accordance with cGMP and the Specifications; none of the Inventory has been adulterated or misbranded within the meaning of the FD&C Act and the regulations promulgated thereunder; and none of the Inventory is an article that may not be introduced into interstate commerce under the provisions of Section 404 or 505 of the FD&C Act. The Existing Products in the Inventory are of a quality usable and saleable in the ordinary course of Business and do not have an expiration date prior to [*] months after the Closing Date.

4.1.10 Third Party Contracts. Except for the Astellas Agreements, the Purchase Orders, the obligations that arise out of the listing of the Existing Products on the Federal Supply Schedule, and a Section 340B contract with the Office of Drug Pricing, there are no contracts between Merck (or any Affiliate thereof) and any third parties (including, but not limited to, government agencies, health maintenance organizations and other buyers of the Existing Products in the Territory) specifically relating to the sale of the Existing Products in the Territory. The Third Party Consent listed on Schedule 2.7.2 is in full force and effect as of the Closing Date and shall not be modified or terminated after the Closing Date without the prior written consent of Salix.

4.1.11 Regulatory Status

(a) Merck has all required approvals, licenses, permits, authorizations and registrations with any Governmental Authority with respect to the use of the Assets and the use, manufacture, sale, marketing, and import of Existing Products in the Territory, including without limitation all required FDA registrations and the NDAs (the “Approvals”). Each Approval is in full force and effect. Merck is in compliance in all material respects with each Approval. All information submitted or made known by Merck to any Governmental Authority for the purpose of seeking the Approvals has, to Merck’s knowledge, been true, accurate and complete in all material respects, and Merck and its Affiliates have taken all reasonable steps to ensure that such information is true, accurate and complete in all material respects.

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

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(b) 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 Merck to the FDA or any other Governmental Authority with respect to the Approvals or the Existing Products. Merck has made available to Salix copies, if any, of all serious and unexpected adverse event reports and periodic adverse event reports with respect to the Existing Products that have been filed by Merck with the FDA, including any correspondence relating thereto.

(c) There is no action or proceeding by any Governmental Authority pending or, to the knowledge of Merck as of the Closing Date, threatened, seeking the revocation or suspension of any Approval in the Territory.

4.1.12 Taxes. Merck has no material liability for Taxes that would affect Salix’s rights, title and interest in or Salix’s right to use or enjoy (free and clear of any lien or restriction) any Asset, Licensed Trademark, or Manufacturing Know-How, or any aspect of the Business acquired by Salix pursuant to this Agreement or the Ancillary Agreements.

4.1.13 Sales Data. The historical sales data related to the Existing Products for the period from [*] to [*] provided to Salix prior to the date hereof (the “Sales Data”) has been prepared by Merck pursuant to and is consistent with the books and records of Merck and presents fairly the sales of Existing Products for the respective periods covered thereby. The internal books and records of Merck upon which the Sales Data was prepared have been kept accurately in all material respects.

4.1.14 Disclaimers. Merck does not make any representation or warranty, and specifically disclaims any warranty:

(a) That the Assets will be useful to Salix for any purpose whatsoever; and more specifically Merck makes no representations or warranties concerning the Manufacturing process, or the efficacy, efficiency or adequacy of the Assets for the purpose of Manufacturing, marketing or selling the Products or any other product either before or after the Closing.

(b) Concerning the efficacy or safety for human use of Famotidine, Pepcid OS Product or any other product, whether in the formulation heretofore manufactured and sold under the name “PEPCID” or in the form of any other hydrates, solvates, salts, polymorphic forms (different crystal forms) of Famotidine or any Derivatives thereof.

(c) Concerning the efficacy or safety for human use of Chlorothiazide, or Diuril OS Product or any other product, whether in the formulation heretofore manufactured and sold under the name “DIURIL” or in the

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

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form of any other hydrates, solvates, salts, polymorphic forms (different crystal forms) of Chlorothiazide or any Derivatives thereof.

(d) Concerning the accuracy, completeness or utility of the Documents contained within the Assets.

(e) Concerning any legal and regulatory requirements that must be satisfied by Salix before Salix will be able lawfully to manufacture, market and sell the Products in the Territory.

(f) That any medical information provided by Merck to Salix concerning the use of the Existing Products is in accordance with sound medical practice or may be relied on by Salix or any other Person for any purpose.

(g) That it is the holder of any unexpired patent rights for the Existing Products in the Territory.

(h) SALIX ACKNOWLEDGES AND AGREES THAT, EXCEPT FOR THE EXPRESS REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS AGREEMENT, MERCK HAS MADE NO REPRESENTATION OR WARRANTY WHATSOEVER AND SALIX HAS NOT RELIED ON ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, EXCEPT THOSE EXPRESSLY SET FORTH IN THIS AGREEMENT. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, SALIX ACKNOWLEDGES AND AGREES THAT, EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT, SALIX IS ACQUIRING THE ASSETS ON AN “AS IS, WHERE IS” BASIS WITHOUT ANY EXPRESS OR IMPLIED WARRANTIES AS TO THE FITNESS FOR A PARTICULAR PURPOSE, MERCHANTABILITY OR CONDITION OF THE ASSETS OR AS TO THE NON-INFRINGEMENT OF ANY INTELLECTUAL PROPERTY RIGHTS OF ANY PERSON OR AS TO ANY OTHER MATTER.

4.2 Representations and Warranties of Salix

Salix represents and warrants, as of the Closing Date that:

4.2.1 Corporate Status. Salix is a corporation duly incorporated and validly existing under the laws of the State of Delaware and has all requisite corporate power and authority to own its properties and carry on its business as now being conducted and to consummate the transactions contemplated hereby.

4.2.2 Authority. Salix and its Affiliates each has the full corporate power and authority to enter into this Agreement, the Ancillary Agreements and any other documents contemplated hereby or thereby. The execution and delivery of this Agreement

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and Ancillary Agreements and the consummation of the transactions contemplated hereby and thereby have been duly authorized by the necessary corporate actions of Salix and its Affiliates. This Agreement, the Ancillary Agreements and any other documents contemplated hereby or thereby constitute valid and legally binding obligations of Salix and its Affiliates enforceable against them in accordance with their respective terms.

4.2.3 Non-Contravention. The execution, delivery and performance by Salix and its Affiliates (as applicable) of this Agreement, the Ancillary Agreements and any other agreements and instruments contemplated hereunder will not (i) in any material respect violate any statute, regulation, judgment order, decree or other restriction of any Governmental Authority to which Salix is subject, (ii) violate any provision of the corporate charter, by-laws or other organizational documents of Salix, or (iii) constitute a material violation or breach by Salix of any provision of any material contract, agreement or instrument to which Salix is a Party or to which Salix may be subject although not a Party.

4.2.4 No Broker. There is no broker, finder, financial advisor or other Person acting or who has acted on behalf of Salix, who is entitled to receive any brokerage or finder’s or financial advisory fee from Merck in connection with the transactions contemplated by this Agreement.

4.2.5 No Lawsuits; Consents. There is no lawsuit, arbitration or proceeding pending or, to the knowledge of Salix, threatened against Salix which might prevent the consummation of any of the transactions contemplated by this Agreement, and, except for the consents required to be obtained pursuant to Section 2.7, the execution, delivery and performance by Salix of this Agreement, the Ancillary Agreements and each of the instruments contemplated hereby to which Salix is a Party and the consummation by Salix of the transactions contemplated hereby and thereby, require no action by or in respect of, or filing with any Governmental Authority or any other consent of any Person, firm or other entity.

4.2.6 Insurance. Salix has obtained the insurance coverages required in Section 8.2.2 hereof.

4.2.7 Debarred Personnel. Salix has not been debarred and is not subject to debarment pursuant to Section 306 of the Federal Food, Drug, and Cosmetic Act, as amended, or nor is it the subject of a conviction described in such section.

4.2.8 Intention to Distribute Diuril OS Products. Salix has no current intention or plan to discontinue at any time the supply and distribution of the Diuril OS Product for the Territory.

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4.2.9 Financial Capacity. Salix has adequate financial resources to complete the transactions contemplated hereby and to perform its obligations under this Agreement and the Ancillary Agreements.

4.2.10 Compliance with State Law. Salix is aware of state laws in the United States relating to distribution of Merck Image Product, and can legally distribute Merck Image Product in all states, territories and possessions of the United States.

5 REGULATORY COVENANTS

5.1 Maintenance of NDAs

5.1.1 After the Closing Date and until such time as Salix decides to withdraw the Pepcid OS NDA, Salix shall maintain the validity and good standing of the Pepcid OS NDA such that Salix is authorized to manufacture (or have manufactured pursuant to and in accordance with the Supply Agreement) and to sell the Pepcid OS Product under the name “PEPCID” in the Territory, in accordance with applicable laws and regulations. During such period, Salix shall not alter or impair the Pepcid OS NDA in any manner or take any other action with respect to the Assets that might adversely affect Merck’s or its Affiliates’ or Related Companies’ ability to (i) manufacture the Pepcid OS Product under the Supply Agreement or (ii) otherwise exercise their rights regarding (x) the Excluded Assets or (y) Famotidine and its Derivatives outside the Field or outside the Territory.

5.1.2 During the period specified in Section 6.4, Salix shall maintain the validity and good standing of the Diuril OS NDA such that Salix is authorized to manufacture (or have manufactured pursuant to and in accordance with the Supply Agreement) and to sell the Diuril OS Product under the name “DIURIL” in the Territory, in accordance with applicable laws and regulations. During such period, Salix shall not alter or impair the Diuril OS NDA in any manner or take any other action with respect to the Assets that might adversely affect Merck’s or its Affiliates’ or Related Companies’ ability to (i) manufacture the Diuril OS Product under the Supply Agreement or (ii) otherwise exercise their rights regarding (x) the Excluded Assets or (y) Chlorothiazide and its Derivatives outside the Field or outside the Territory.

5.1.3 After the Closing Date and until such time as Merck decides to withdraw or convey the Pepcid Tablet NDA, Merck shall maintain the validity and good standing of the Pepcid Tablet NDA such that Merck is authorized to manufacture and to sell the Pepcid Tablet Product under the name “PEPCID” in the Territory, in accordance with applicable laws and regulations. During such period, Merck shall not alter or impair the Pepcid Tablet NDA in any manner that might adversely affect Salix’s or its Affiliates’ ability to exercise the rights pursuant to the license set forth in Section 3.2.2 hereof.

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5.2 Labeling

5.2.1 From and after the Closing Date, except to the extent otherwise provided in this Agreement, the Supply Agreement or the Transition Services Agreement, Salix will be responsible for developing, and shall promptly develop, at its own expense, new labeling (i.e., the package insert), new NDC numbers and printed packaging components, including, without limitation, bottle labels, cartons, shipper end-labels and packaging data as appropriate for the Products. Unless otherwise specifically provided herein or in the Supply Agreement or Transition Services Agreement, Salix, at its own expense, shall prepare and file with the FDA any and all reports, documents and materials, and take such other actions, as are necessary to undertake the foregoing.

5.2.2 Notwithstanding the provisions of Section 5.2.1, with respect to certain labeling for the Pepcid OS Product, the Parties acknowledge and agree as follows:

(a) The Pepcid OS Product and Pepcid Tablet Products share a common product circular and such product circular contains the Merck company signature.

(b) Concurrently with or after the amendment described in subparagraph (b) above has been completed, (1) the Parties shall amend the product circular for the Pepcid OS Product and the Pepcid Tablet Products in order to establish two separate product circulars so that (i) one refers primarily to the Pepcid OS Product and identifies Salix as the owner of such Pepcid OS Product and (ii) the other refers primarily to the Pepcid Tablet Products and identifies Merck as the owner of such Pepcid Tablet Products. The foregoing amendments to the product circulars shall be effected by annual report submissions to FDA by Merck and Salix, respectively. Thereafter, Salix shall be solely responsible for the product labeling as described in Section 5.2.1).

5.3 Regulatory Compliance

From and after the Closing Date, except as provided in the Transition Services Agreement and with respect to the manufacture of the Existing Products pursuant to the Supply Agreement, Salix will be responsible for, and shall conduct, all regulatory compliance activities with respect to the NDAs and the Products in the Territory.

5.3.1 Reporting Obligations. After the Closing Date, Salix shall have full responsibility for completing and filing, and shall complete and file, the annual report and all other reports required by any Government Authority in the Territory for the Products. With respect to such period of time that Merck is supplying Existing Products to Salix pursuant to the Supply Agreement, Merck shall provide to Salix Merck’s internal annual review to the extent applicable to the Existing Products in the Field and in the Territory.

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5.3.2 Annual Report; Other FDA Submissions. Upon request by Merck, Salix shall promptly send to Merck a copy of the annual report for the NDAs, any other New Drug Application(s) or other regulatory approvals or applications with respect to the Products, any supplements, amendments or changes to the NDAs, other New Drug Application(s), other regulatory approvals or applications, and any INDs or other filing, correspondence or other communication (including any summaries or reports thereof) made with, or to, or received from, the FDA with respect to the Products, and any changes made to the product circular or product label for the Products after the Closing Date. Merck agrees to assist Salix in the preparation of the first annual report for the Existing Products.

5.3.3 Third Party Contractors; Debarment. Salix shall not at any time retain or use in any capacity in connection with the research, development, manufacture, marketing, sale or distribution of the Products any Person who has been debarred pursuant to Section 306 of the Federal Food, Drug, and Cosmetic Act, as amended, or who is the subject of a conviction described in such section. Salix shall inform Merck in writing immediately if Salix, any of Salix’s Affiliates or, to Salix’s knowledge, any other Person connected with the research, development, manufacture, marketing, sale or distribution of the Products is debarred or is the subject of a conviction described in such Section 306, or if any action, suit, claim, investigation or legal or administrative proceeding is pending or, to Salix’s knowledge, is threatened, relating to the debarment or conviction of Salix or any such Person.

5.4 Adverse Events

5.4.1 Effective as of the Closing Date, Salix shall be responsible for reporting of adverse event information received with respect to the Products to meet the current requirements for adverse drug reaction reporting to the FDA and shall comply with the adverse experience reporting requirements set forth in this Section 5.4 with respect to the Existing Products, except as otherwise provided in the Transition Services Agreement. Pursuant to Section 2.6.3, Merck will provide Salix an electronic copy of all legacy data of adverse events or experiences, both Serious and non-Serious, as maintained by Merck on its global safety database.

5.4.2 Merck and its Affiliates shall provide to Salix, and Salix shall provide to Merck, timely notice of all side effects, drug interactions and other adverse effects identified or suspected by such Party with respect to the Existing Products. Merck shall provide Salix, and Salix shall provide Merck, with all necessary assistance in complying with all adverse reaction reporting requirements established by, or required under, either of the NDAs within the Territory.

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5.4.3 Merck shall provide Salix, and Salix shall provide Merck, within five (5) calendar days of “date first learned,” written notice of all such side effects, drug interactions and other adverse effects reported to such Party or its Affiliates regarding the Products. With respect to any such information, Merck and Salix shall also use reasonable efforts to obtain, and to furnish to each other, such information, including, but not limited to, patients, circumstances, consequences and sources of information, reasonably sufficient to permit the other Party to evaluate such side effects, drug interactions or other adverse effects of the Products. Each Party shall retain all documents, reports, studies and other materials relating to any and all such side effects, drug interactions, or other adverse effects relating to the Products. Upon reasonable written notice, Merck shall permit Salix, and Salix shall permit Merck, to inspect, and to make copies of, all such documents, reports, studies and other materials.

5.4.4 Merck shall provide Salix, and Salix shall provide Merck, with such assistance as the other Party shall reasonably request in connection with the identification, analysis, mitigation and elimination of all such side effects, drug interactions and other adverse effects with respect to the Products, as applicable, provided, however, that, in the event that the FDA requires any clinical studies or additional studies with respect to any such side effects, drug interactions or other adverse effects of the Products in order to maintain the NDA for such Products, Salix shall bear the costs in relation to the performance of any such studies Salix elects, in its sole discretion, to conduct.

5.4.5 Within thirty (30) days of the Closing Date, Merck and Salix shall enter into a separate agreement, consistent with pharmaceutical industry practices and standards, regarding procedures for adverse event reporting for the Products.

5.5 Recalls

Effective as of the Closing Date, Salix shall have full responsibility for determinations to initiate recalls, field corrections or withdrawals with respect to Products sold or marketed in the Field in the Territory, provided, however, that during the term of the Supply Agreement any recalls, field corrections or withdrawals shall be effected in accordance with the Supply Agreement. The costs of any such recall or withdrawal, to the extent not subject to the provisions of the Supply Agreement, shall be deemed to be an Assumed Liability except to the extent encompassed within the term “Excluded Liability”, in which case such costs shall be borne by Merck.

6 SUPPLY AND MANUFACTURING COVENANTS

6.1 Supply of Products

Except with respect to the Supplied Products pursuant to the Supply Agreement and any extension or modification thereof, Salix will manufacture, or have manufactured on its

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behalf by a third party, the Products, in compliance with cGMPs and in material compliance with those applicable laws governing quality compliance of human pharmaceutical products.

6.2 FDA Approval

To the extent that the manufacture, distribution and sale of the Products is subject to approval or certification by the FDA, Salix will not manufacture, distribute or sell the Products without such approval or certification.

6.3 Storage and Distribution of the Products

Salix shall comply with cGMP in the storage and distribution of Inventory and Supplied Products.

6.4 Continued Sale of Diuril OS Product

Merck and Salix acknowledge and agree that the Diuril OS Product is medically necessary to treat a disease, illness, condition and/or patient population, that there are no alternative sources or acceptable alternative molecules, and that the Diuril OS Product is currently being used for its appropriate indications in the Territory. It is the joint desire of Merck and Salix that the Diuril OS Product satisfy the foregoing need and continue to be available to the public to meet reasonably anticipated patient needs. Consequently, and as a material inducement to Merck to enter into this Agreement, Salix agrees for a period of at least [*] to maintain a supply of Diuril OS Product for the Territory reasonably sufficient to meet reasonably anticipated patient needs and demands as determined by reference to certain historical data as set forth on Schedule 6.4, but taking into account any subsequent developments that cause Merck and Salix to mutually agree in writing that such Diuril OS Product is no longer medically necessary. In addition, Salix shall distribute the Diuril OS Product in the Territory in a manner reasonably calculated to meet such patient needs and demands. Further, no later than [*], Salix shall obtain and receive approval from the FDA to provide for an update to the packaging and formulation of the Diuril OS Product from a source of supply other than Merck or its Affiliates and shall keep Merck periodically and reasonably informed of such approval process. Any failure of Salix to perform its obligations under this Section 6.4 shall constitute a material breach of this Agreement.

6.5 Equipment

In the event that Merck determines that it desires to sell certain equipment related to the manufacture of the Existing Products, and Salix desires to acquire any or all such equipment from Merck, Salix may request that Merck sell such equipment to Salix. In the event of such request, Merck and Salix shall negotiate in good faith and seek to reach agreement for the sale of such equipment by Merck to Salix on an as is basis upon mutually acceptable terms, taking into account the fair market value of such equipment at the time of sale.

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

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7 OTHER COVENANTS RELATING TO THE PRODUCTS

7.1 Customer Matters

7.1.1 Customer Notification. Merck will notify the other parties to the Purchase Orders in writing within [*] Business Days after the Closing Date that Salix is the owner of the NDAs for the Existing Products in the Territory but that Merck will continue to distribute the Existing Products, as Salix’s agent, for a limited period of time pursuant to the Transition Services Agreement.

7.1.2 Orders; Customer Service. Commencing on the Closing Date, Salix shall be responsible for receiving and processing all orders, undertaking all invoicing, collection and receivables, and providing all customer service related to the sale of Products in the Territory including the handling of customer orders; provided, that Merck shall perform certain services for Salix with respect to the Existing Products. For a period of [*] from and after the Closing Date, if Merck receives any customer order for an Existing Product in the Territory, Merck shall, within [*] of receipt, forward such order to Salix by facsimile, followed by the original hard copy if the order is placed by hard copy and if requested by Salix. Except as provided in the Transition Services Agreement, commencing on the Closing Date, Salix shall be responsible for and handle all customer complaints and inquiries (medical and non-medical) with respect to the Products.

7.2 Promotion and Marketing

7.2.1 Products Selling Price. Effective as of the Closing Date, Salix shall independently determine and set prices for the Products in the Territory to be sold by Salix, including the selling price, volume discounts, rebates and similar matters.

7.2.2 Advertising and Promotional Materials

(a) Salix Promotion. Commencing on the Closing Date, Salix shall be responsible for development of all advertising and promotional materials in the Territory for the Products, if any.

(b) FDA Contacts. Commencing on the Closing Date, Salix shall be the contact for review and discussion of all promotional materials for the Products with the FDA. In connection with the transfer hereunder of the NDAs, Salix shall file on a timely basis after the Closing Date, all promotional materials for the Products as may be required with the FDA.

(c) Use of Merck Trade Names. Except to the extent otherwise provided in the Supply Agreement or the Transition Services Agreement, beginning on

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

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the Closing Date, Salix shall mark clearly all units of the Products manufactured or distributed by Salix to indicate Salix’s ownership of the Products in the Territory and shall not use the words, names or combined letters “Merck”, “Merck & Co., Inc.”, “MMD”, “Merck Manufacturing Division”, “Merck Sharp & Dohme”, “MSD”, “Merck Frosst”, “Frosst”, “Merck Frosst Canada Ltd.” or any variation thereof or other word, name or letter combination substantially similar thereto, or any other trade name or trademark (except as expressly set forth in the Trademark License Agreement) of Merck, or any NDC of Merck, in connection with the Products or otherwise, or as part of the name of Salix. After the Closing Date, except to the extent otherwise provided in the Supply Agreement or the Transition Services Agreement, Salix shall not give the impression to the public, to physicians or to the pharmaceutical marketplace that the Products are products of Merck or its Affiliates or are in any way connected with Merck or its Affiliates (except in a public announcement approved by Merck as provided in Section 8.3.2), provided that Salix shall be entitled to identify any Existing Products supplied to Salix under the Supply Agreement as manufactured by Merck.

(d) Trade Dress. Commencing on the Closing Date, Salix shall not use trade dress, packaging (both internal and external) or labeling which is substantially the same as that of Merck in connection with any Product which is not manufactured by, or purchased under this Agreement or the Supply Agreement from, Merck or its Affiliates.

7.3 Medical and Other Inquiries

7.3.1 Commencing on the Closing Date, Salix shall be responsible for, and shall respond to, all medical inquiries related to the Products. In addition, Salix shall be responsible for, and shall conduct, all correspondence and communication with physicians and other health care professionals in the Territory relating to the Products. Salix shall keep such records and make such reports as shall be reasonably necessary to document such communications in compliance with all applicable regulatory requirements.

7.3.2 Merck and Salix shall cooperate to effect an orderly transfer of the responsibilities associated with correspondence and communication with health care professionals and customers relating to the Existing Products sold in the Territory. Except to the extent otherwise required in the case of medical emergency (in which case, Merck shall promptly inform Salix of the question and response), Merck will refer all questions raised by health care professionals and customers relating to the Products sold by Salix in the Territory to Salix for response. Salix shall provide to Merck a U.S. toll-free telephone number and facsimile number to use for such referrals.

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7.4 Returned Products, Chargebacks and Rebates

7.4.1 Salix shall keep adequate records of any Returned Products and shall promptly notify Merck of receipt of any Returned Products. Salix shall at the request of Merck remit all such Returned Products to Merck at:

[*]

[*]

[*]

[*]

at the expense of Merck, unless Merck specifically authorizes Salix to destroy such Returned Products at Merck’s expense, in which event Salix shall provide such certifications regarding the destruction and cost of destruction of such Returned Products as Merck shall reasonably require.

7.4.2 Merck shall keep adequate records of any Distributor Returned Products and shall promptly notify Salix of receipt of any Distributor Returned Products. Merck shall at the request of Salix remit all such Distributor Returned Products to Salix at:

Salix Pharmaceuticals, Ltd.

Attn: Brad Bainbridge

1700 Perimeter Park Drive

Morrisville, NC 27560-8404

Fax: 919-862-1095

at the expense of Salix, unless Salix specifically authorizes Merck to destroy such Distributor Returned Products at Salix’s expense, in which event Merck shall provide such certifications regarding the destruction and cost of destruction of such Distributor Returned Products as Salix shall reasonably require.

7.4.3 Merck shall give credit for all Returned Products in accordance with Merck’s Standard Return Terms and Conditions to (i) customers who purchased Returned Products from Merck and return such Returned Products to Merck and (ii) Salix if Salix provides documentation that it provided credit to a customer who purchased Returned Products from Merck and returned such Returned Products to Salix. A Product shall be deemed a Returned Product if it comes from a batch from which any sale was made by Merck prior to the Closing Date.

7.4.4 Salix shall be responsible for all Distributor Returned Products and shall give credit for all Distributor Returned Products in accordance with Merck’s Standard Return Terms and Conditions to (i) customers who purchased Distributor Returned Products and return such Distributor Returned Products to Salix and (ii) Merck if Merck provides documentation that it provided credit to a customer who

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

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purchased Distributor Returned Products and returned such Distributor Returned Products to Merck. A Product shall be deemed a Distributor Returned Product if it does not come from a batch from which any sale was made by Merck prior to the Closing Date.

7.4.5 Merck shall be responsible for processing all chargebacks arising from sales of the Existing Products bearing Merck’s NDC by wholesalers to customers in the Territory. Merck shall be responsible for the cost of such chargeback claims submitted prior to the Closing Date and through (and including) [*]. Salix shall be responsible for the cost of all chargeback claims submitted on or after [*] (including, without limitation, any Supplied Products sold by Merck as distributor for Salix pursuant to the Transition Services Agreement).

7.4.6 Salix shall be responsible for payment of all non-Medicaid Rebates arising from the utilization of the Existing Products bearing Merck’s NDCs sold on and after the Closing Date in the Territory (including, without limitation, the utilization of any Supplied Products sold by Merck as distributor for Salix pursuant to the Transition Services Agreement).

7.4.7 Merck shall be responsible for processing all Medicaid Rebates for the Existing Products bearing Merck’s NDC. Salix will cooperate as necessary to facilitate the processing of Medicaid Rebate claims by Merck during this period. Salix shall reimburse Merck for all such Rebates paid by Merck for Existing Products sold on or after the Closing Date.

7.4.8 Salix shall at all times have sole and exclusive responsibility for the processing and payment of any and all chargebacks and Rebates arising from or with respect to Products bearing Salix’s NDC numbers.

7.5 Price Submissions and Certifications

7.5.1 Monthly Submissions to Merck. Beginning on the Closing Date, Salix shall submit to Merck on a monthly basis, within [*] days after the last day of the previous month, the monthly Average Manufacturer Price (“AMP”) for each Existing Product that bears a Merck NDC number, calculated from sales of that Existing Product made by Salix (including, without limitation, sales made by Merck as distributor for Salix under the Transition Services Agreement) in accordance with applicable law and regulatory guidance.

7.5.2 Quarterly Submissions to Merck. Beginning on the Closing Date, Salix shall submit to Merck on a quarterly basis, within [*] days after the last day of the previous calendar quarter, the quarterly AMP, Best Price, and Non-Federal Average Manufacturer Price (“Non-FAMP”) for each Existing Product that bears a Merck NDC, calculated from sales of that Existing Product made by Salix (including, without limitation, sales made by Merck as distributor for Salix under the Transition Services Agreement) in accordance with applicable law and regulatory guidance.

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

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7.5.3 Customary Prompt Pay Discounts and Nominally Priced Sales. Salix agrees to include with its quarterly AMP submissions to Merck information concerning all customary prompt pay discounts on sales of each Existing Product that bears a Merck NDC that Salix provided to wholesalers during the preceding calendar quarter. Salix also agrees to include with its quarterly Best Price submissions to Merck information concerning all nominally priced sales that occurred during the preceding calendar quarter and that Salix excludes from each Best Price calculation.

7.5.4 Representations and Warranties Concerning Price Submissions to Merck

Salix understands that Merck is reasonably relying on Salix for the timely and accurate submission of the information described in Subparagraphs 7.5.1 through 7.5.3. Accordingly, Salix represents and warrants that: (a) any information submitted to Merck pursuant to those subparagraphs: is accurate, based on the best and most complete data available at the time each submission is made; and (b) each price is calculated pursuant to the appropriate price calculation methodology. Salix further represents and warrants that each of its price calculation methodologies complies with applicable law, including without limitation all applicable regulations and agency guidance.

7.5.5 Certifications to Merck

(a) Salix agrees that each AMP and Best Price submission to Merck shall be accompanied by the following certification, to be executed by the Salix official who executes the certifications that accompany Salix’s Medicaid rebate-related price reports to the Centers for Medicare and Medicaid Services (“CMS”):

I, John Temperato, Vice President, Managed Markets, an authorized representative of Salix Pharmaceuticals LTD, certify that the information provided to Merck & Co., Inc. with this submission: (a) is accurate based on the best information currently available; and (b) has been calculated pursuant to Salix’s Medicaid Drug Rebate Program calculation methodology.

I further certify that Salix’s Medicaid Drug Rebate Program calculation methodology fully complies with all applicable laws and regulations, and all applicable guidance issued by the Centers for Medicare and Medicaid Services.

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(b) Salix agrees that each non-FAMP submission to Merck shall be accompanies by the following certification:

I, John Temperato, Vice President, Managed Markets, an authorized representative of Salix Pharmaceuticals LTD, certify that the information provided to Merck & Co., Inc. with this submission: (a) is accurate based on the best information currently available; and (b) has been calculated pursuant to Salix’s non-Federal Average Manufacturer Price calculation methodology.

I further certify that Salix’s non-Federal Average Manufacturer Price calculation methodology fully complies with all applicable laws and regulations, and all applicable guidance issued by the Department of Veterans Affairs.

7.6 Audits and Price Submissions

7.6.1 Merck Audit Rights. Merck shall have the right to have an independent third party reasonably acceptable to Salix (“Third Party Auditor”) audit and examine all relevant records of Salix as may be reasonably necessary to verify the accuracy and completeness of the prices and other information submitted to Merck pursuant to Paragraph 7.5 and to verify that each of Salix’s price calculation methodologies complies with applicable law. Such Third Party Auditor shall execute a confidentiality agreement and shall report its conclusions to both Merck and Salix without disclosing to Merck any information about pricing or discounts for any of the Products, except information that Salix is required to submit to Merck pursuant to Paragraph 7.5, including the correct figures if the auditor believes any price or other information submitted by Salix was incorrect. Payment for any audit services rendered by the Third Party Auditor shall be made by [*].

7.6.2 Representations and Warranties Concerning Information Furnished to the Third Party Auditor. Salix represents and warrants that all information required to be provided to the Third Party Auditor: (a) will be made available for inspection and audit by the Third Party Auditor not later than seven (7) days after the close of each month; (b) will be complete and accurate; and (c) will be collected and maintained in accordance with applicable law.

7.7 Restatements of Price Submissions

7.7.1 Routine Restatements. With respect to any information described in Subparagraphs 7.5.2 or 7.5.3 and submitted by Salix to Merck, Salix agrees, upon obtaining sales data not available at the time the information was originally submitted to Merck but that renders the original submission incorrect, to revise the original information and to re-submit the information to Merck within five (5) days of obtaining the new sales data.

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

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7.7.2 Restatements to Address Inaccuracies in Original Price Submissions. Upon discovery by Merck or Salix, either through their own efforts or those of the Third Party Auditor, that any information was inaccurate at the time it was originally submitted, Salix agrees to correct the inaccurate information and to re-submit the information to Merck within five (5) days of its own discovery of the inaccuracy or notification by Merck or the Third Party Auditor of the inaccuracy.

7.8 Indemnification Related to Price Submissions

7.8.1 Agreement to Indemnify. Salix shall reimburse and indemnify Merck for any liability that results from any inaccuracy in any price or related information submitted to Merck pursuant to Paragraph 7.5.

7.8.2 Construction with Other Provisions. The indemnity obligation set forth above shall be separate from, in addition to, and not subject to, any indemnification obligations arising under Article 10 of this Agreement.

7.9 Provision of Historical Pricing Information

7.9.1 Medicaid Drug Rebate Program. Within [*] days of the Closing Date, Merck shall provide to Salix the baseline information for the Existing Products that Merck submitted to CMS in accordance with Paragraph II(f) of its Medicaid Rebate Agreement with the Secretary of Health and Human Services, including, but not limited to, base date AMP.

7.9.2 Federal Supply Schedule Listings. Within [*] days of the Closing Date, Merck shall provide to Salix the necessary information required by Salix to establish the Products bearing Salix’s NDCs on Salix’s Federal Supply Schedule (“FSS”) contract, including, but not necessarily limited to, the Products’ Federal Ceiling Prices (“FCPs”), FSS prices that are in effect as of the Closing Date, and any other historical information necessary for Salix to calculate the Products’ FCPs or FSS prices for the following calendar year. By the date Salix begins marketing or selling Products bearing Salix’s NDCs, Salix agrees to execute with the Secretary of Veterans Affairs an FSS contract, a Master Agreement, and a Pharmaceutical Pricing Agreement, each covering the Products bearing Salix’s NDCs.

7.9.3 Section 340B Pricing. Within [*] days of the Closing Date, Merck shall provide to Salix the necessary information required by Salix to establish the Products bearing Salix’s NDCs on Salix’s contract with the Secretary of Health and Human Services entered into pursuant to Section 340B of the Public Health Service Act, which such contract Salix will execute by no later than the date it begins marketing or selling Products bearing Salix’s NDCs.

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

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8 ADDITIONAL COVENANTS

8.1 Covenants of Merck

Merck hereby covenants and agrees that:

8.1.1 Non-Competition Relating to Products. During the period commencing on the Closing Date and ending on the [*] thereof, Merck and its Affiliates shall not:

(a) market, sell or distribute any prescription Oral Suspension pharmaceutical product containing Famotidine, Chlorothiazide, or any Derivative of either of the foregoing as the sole active ingredient in the Field in the Territory except for (i) any sales or distribution of Existing Products or active ingredients to or on behalf of Salix pursuant to the Supply Agreement or Transition Services Agreement or (ii) any sales of Products that are intended, at the time of sale, for use outside of the Territory; or

(b) grant a license to any third Party to sell or distribute under the name “PEPCID” or “DIURIL”, as the case may be, any prescription Oral Suspension pharmaceutical product containing Famotidine, Chlorothiazide, or any Derivative of either of the foregoing in the Field in Territory.

8.1.2 Limitation on Covenants of Merck. Nothing in this Agreement shall be construed as restricting the ability of Merck or its Affiliates:

(a) to manufacture any Product for use by Salix in the Territory, for use by a Person outside of the Field in the Territory, or for use by a Person for any purpose outside of the Territory;

(b) to market, sell or distribute any Product intended for use outside of the Field in the Territory or for any use for any purpose outside of the Territory;

(c) to research Famotidine or Chlorothiazide, as the case may be, or any product or combination product containing Famotidine, Chlorothiazide or any of their respective Derivatives for any purpose;

(d) to manufacture, formulate and use Famotidine or Chlorothiazide, as the case may be, or any product or combination product containing Famotidine, Chlorothiazide or any of their respective Derivatives thereof in the Field in the Territory solely for the purpose of using such compound as a comparator in one or more clinical studies;

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

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(e) to use any information, data, or intellectual property contained in the Assets in a manner consistent with Section 2.2; and

(f) to research, develop, manufacture, market, sell or distribute Famotidine or Chlorothiazide, as the case may be, or any product or combination product containing Famotidine, Chlorothiazide or any of their respective Derivatives for any purpose anywhere in the world, other than any Oral Suspension pharmaceutical preparation containing Famotidine or Chlorothiazide, as the case may be, that is labeled or intended for use in the Field in the Territory.

8.2 Covenants of Salix

Salix hereby covenants and agrees that:

8.2.1 Notice of Litigation. Salix shall give prompt written notice to Merck of any litigation or regulatory proceeding (including, without limitation, any government investigation) in which Salix is involved as a party that directly concerns, and might materially and adversely affect, the Products or Assets or Salix’s rights in the same or that might otherwise have a material adverse affect on the rights of Merck and its Affiliates and Related Companies to Famotidine or Chlorothiazide, as the case may be, or any product or combination product containing Famotidine, Chlorothiazide or any of their respective hydrates, solvates, salts, polymorphic forms (different crystal forms) or other Derivatives thereof outside the Field or outside the Territory.

8.2.2 Insurance

(a) Salix shall at all times until [*] after the Closing Date (the “Insurance Term”) maintain at its own expense standard products liability/completed operations insurance covering all claims against Salix whatsoever and howsoever arising from the manufacture, sale, distribution or use of the Products by Salix, its employees, agents and assigns, with coverage limits of not less than $[*] per occurrence and not less than $[*] in the aggregate for all claims made within any year (the “Salix Insurance”). Without limitation of the foregoing, the Salix Insurance shall be effective commencing on the Closing Date and shall cover Merck as an additional insured with respect to such claims and such insurers of Salix shall provide a waiver of subrogation against Merck. The Salix Insurance shall be with insurers having an AM Best (A-) or higher rating. Further, the Salix Insurance shall be primary with no contribution by Merck’s insurance.

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

37

(b) Salix shall continue to make premium payments on the Salix Insurance for as long as necessary to keep the Salix Insurance in full force and effect during the above-required period. If Salix fails for any reason to make such premium payments in a timely fashion, Merck shall have the right to make such payments at the expense of Salix. Salix shall request its insurer or its agent give Merck prompt written notice if Salix fails to make a required premium payment in a timely fashion such that Merck shall have not less than ten (10) Business Days after receipt of such notice to make such premium payments. In the event that the Salix Insurance is not in full force and effect and Merck, in its sole discretion, determines that it is able to apply its own insurance, Salix shall reimburse Merck for any premium or expense in connection therewith and Merck shall be entitled to off-set any such expense against any payments or liabilities arising under this Agreement or the Ancillary Agreements.

(c) Salix shall immediately notify Merck of any change in the status of the Salix Insurance and shall at Closing and from time to time thereafter, at Merck’s request, provide Merck with a certificate of insurance attesting that the Salix Insurance policies providing the required coverage and limits of insurance are in full force and effect and with insurers having an AM Best (A-) or higher rating. Maintenance of the Salix Insurance shall not relieve Salix of any responsibility under this Agreement, or the Ancillary Agreements for liability in excess of insurance limits or otherwise.

8.2.3 Taxes. Salix shall bear and be responsible for and pay all applicable Taxes related to (i) the transfer to Salix of the NDAs and the Assets to be transferred thereto under this Agreement and (ii) the promotion, marketing, sale and distribution by Salix of the Products in the Territory after the Closing Date, and shall indemnify and hold Merck and its relevant Affiliates harmless from any liability relating to such Taxes other than any income taxes imposed on Merck resulting from the transactions contemplated by this Agreement, including but not limited to, such transfers.

8.3 Mutual Covenants

Merck and Salix covenant and agree as follows:

8.3.1 Further Assurances. Each of Merck and Salix shall, at any time or from time to time after the Closing Date, at the request and expense of the other Party, execute and deliver to the other Party all such instruments and documents or further assurances as the other Party may reasonably request in order to (i) sell, assign and transfer to Salix Merck’s right, title and interest in and to the Assets as contemplated hereby, (ii) effectuate Salix’s assumption of the Assumed Liabilities, and (iii) grant Salix all rights licensed under this Agreement and the Ancillary Agreements; provided, however, that after the Closing Date, apart from such customary further assurances, Merck shall have no other obligations except

38

as specifically set forth and described herein or in the Ancillary Agreements. Without limitation of the foregoing Merck shall have no obligation to (i) assist or otherwise participate in the amendment or supplementation of the NDAs or otherwise to participate in any filings or other activities relating to the NDAs other than as necessary to effect the assignment thereof to Salix pursuant to this Agreement (and which shall include, but not be limited to, transmitting the Merck FDA Letters as contemplated by Section 2.7.1 and the activities in Section 5.3 (except as specifically provided in the Supply Agreement or the Transition Services Agreement)), or (ii) assist or otherwise participate in efforts to validate, continue or improve any process for or related to the manufacture of the Products (except as specifically provided in the Supply Agreement or the Transition Services Agreement), or (iii) provide any assistance to Salix related to manufacture of the Products, after the Closing Date or at any time in the future, except, in each case, as specifically set forth herein or in the Ancillary Agreements.

8.3.2 Publicity. Other than as expressly permitted herein, no press release, public announcement, confirmation or other information regarding this Agreement, the Ancillary Agreements or related matters shall be made by either Party without the prior written consent of the other Party with respect to its form, content and means of dissemination (other than Products advertising); provided that in no event shall Salix use the word “Merck” or the other words or the other words or names referred to in Section 7.2.2(c)). A public announcement substantially in the form attached hereto as Schedule 8.3.2 is hereby approved by both Parties and may be released immediately upon the Closing Date. Notwithstanding the foregoing, Salix may make any (i) filings with the U.S. Securities and Exchange Commission as permitted under Section 8.3.4(e).

8.3.3 Cooperation. From and after the Closing Date, each Party shall make available to the other Party during normal business hours and upon reasonable prior written notice, but without unreasonably disrupting its business, all records as to the Products, Assets, Assumed Liabilities and Excluded Liabilities held by it and reasonably necessary to permit the defense or investigation of any litigation, hearing, regulatory proceeding or investigation directly relating to the Products, Assets, Assumed Liabilities or Excluded Liabilities and shall preserve and retain all such records for the length of time contemplated by its standard record retention policies and schedules; provided, however, that in no event shall Merck be required to assist Salix in any validation process or other regulatory process or proceeding related to the manufacture of the Products or any other product except as specifically set forth herein or in the Ancillary Agreements.

8.3.4 Confidentiality

All Confidential Information disclosed by one Party to the other Party hereunder shall be maintained in confidence by the receiving Party and its Affiliates and

39

shall not be disclosed to any third party or used for any purpose except as set forth herein without the prior written consent of the disclosing Party, except to the extent that such Confidential Information:

(a) is known by the receiving Party at the time of its receipt, and not through a prior disclosure by the disclosing Party, as documented by the receiving Party’s business records;

(b) is in the public domain by use and/or publication before its receipt from the disclosing Party, or thereafter enters the public domain through no fault of the receiving Party;

(c) is subsequently disclosed to the receiving Party by a third party who may lawfully do so and is not under an obligation of confidentiality to the disclosing Party;

(d) is developed by the receiving Party independently and without benefit of Confidential Information received from the disclosing Party, as documented by the receiving Party’s business records;

(e) is reasonably necessary to disclose to Governmental Authorities to comply with disclosure obligations under applicable laws, rules or regulations, including, without limitation, the rules and regulations of any stock exchange, provided, in the case of disclosure by Salix, that the receiving Party (i) gives the disclosing Party, to the extent reasonably practicable, a reasonable advance opportunity, in light of the time reasonably required to prepare any such filing or disclosure and the required deadlines for such filing or disclosure, to review and comment on any proposed filing, (ii) in the case of any required filing by Salix of this Agreement or any Ancillary Agreement with the Securities and Exchange Commission, Salix redacts and seeks confidential treatment for any portions of such agreements that Merck may identify to Salix as being competitively sensitive to Merck, which such portions Merck shall identify to Salix within five (5) Business Days of notification by Salix that filing of such agreement is required, (iii) in the case of any other filing or disclosure, seeks or assists the disclosing Party, as reasonably requested, in seeking protective or confidential treatment of such information, and (iv) minimizes any such disclosure to the extent permitted by applicable laws, rules or regulations;

(f) is deemed necessary by counsel to the receiving Party to be disclosed to such Party’s attorneys, independent accountants or financial advisors for the sole purpose of enabling such attorneys, independent accountants or financial advisors are subject to provide advice to the receiving Party, on the condition that such attorneys, independent accountants and financial advisors are subject to or agree to be bound by confidentiality and non-use obligations at least as strict as those contained in this Agreement;

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(g) is deemed necessary by the receiving Party to be disclosed to a third party that has provided the receiving Party with a bona fide written offer to effect a Change of Control on the condition that such third party and its attorneys, independent accountants and financial advisors agree to be bound by confidentiality and non-use obligations at least as strict as those contained in this Agreement; provided, however, that the term of confidentiality for such third party and its attorneys, independent accountants and financial advisors shall be no less than ten (10) years; or

(h) is required to be disclosed by judicial or administrative process to which the disclosing Party is subject.

Any combination of features or disclosures shall not be deemed to fall within the foregoing exclusions merely because individual features are published or available to the general public or in the rightful possession of the receiving Party unless the combination itself and principle of operation are published or available to the general public or in the rightful possession of the receiving Party.

If a Party is required by judicial or administrative process to disclose Confidential Information in accordance with Section 8.3.4(h), such Party shall promptly, and, to the extent reasonably practicable, in advance, inform the other Party of the disclosure that is being sought in order to provide the other Party an opportunity to challenge or limit the disclosure obligations and the receiving Party shall cooperate with the disclosing Party, as reasonably requested, in seeking confidential or protective treatment of such information. Confidential Information that is disclosed by judicial or administrative process shall remain otherwise subject to the confidentiality and non-use provisions of this Section 8.3.4.

9 INDEMNIFICATION

9.1 Indemnification

(a) Indemnification by Merck. Subject to Section 9.3, Merck shall indemnify, defend and hold harmless Salix and its Affiliates and their officers, directors, employees and agents from and against any and all Losses, which directly or indirectly arise out of or relate to (i) any breach by Merck of any of the representations or warranties made by Merck in this Agreement; (ii) failure by Merck to perform any of its covenants or agreements contained herein or in the Ancillary Agreements; (iii) failure by Merck to pay, perform or discharge when due, any of the Retained

41

Liabilities or (iv) waiver of compliance with any applicable bulk sales statutes pursuant to Section 10.12 hereof (other than with respect to Assumed Liabilities).

(b) Indemnification by Salix. Subject to Section 9.3, Salix shall indemnify and hold harmless Merck and its Affiliates, and their respective officers, directors, employees and agents from and against any and all Losses which directly or indirectly arise out of or relate to (i) any breach by Salix of any of the representations or warranties made by Salix in this Agreement; (ii) failure by Salix to perform any of its respective covenants or agreements contained herein or in the Ancillary Agreements; or (iii) failure by Salix to pay, perform or discharge when due, any of the Assumed Liabilities assumed by Salix pursuant to this Agreement.

9.2 Third-Party Claim Procedure

If a claim by a third party is made against an indemnified Party, and if such Party intends to seek indemnification with respect thereto under this Section 9.2, the indemnified Party shall promptly notify the indemnifying Party of such claim. The indemnifying Party shall have thirty (30) days after receipt of such notice to undertake, conduct and control, through counsel of its own choosing (subject to the consent of the indemnified Party, such consent not to be unreasonably withheld) and at its expense, the settlement or defense of such claim, and the indemnified Party shall cooperate with the indemnifying Party in connection therewith; provided, however, that (i) the indemnifying Party shall permit the indemnified Party to participate in such settlement or defense through counsel chosen by the indemnified Party, provided that the fees and expenses of such counsel shall be borne by the indemnified Party, and (ii) the indemnifying Party shall promptly reimburse the indemnified Party for the full amount of any loss resulting from such claim and all related expenses incurred by the indemnified Party (except as otherwise provided in the preceding clause) in accordance with Section 9.1, and (iii) no settlement, consent judgment or other voluntary final disposition of the suit which (1) materially limits the indemnified Party’s rights with respect to Products, (ii) subjects the indemnified Party to any non-indemnified liability or obligation, or (iii) admits fault or wrongdoing on the part of the indemnified Party may be entered into without the consent of the indemnified Party, which consent shall not unreasonably be withheld. The indemnified Party shall, in such case, provide the indemnifying Party notice of its approval or denial of such approval within ten (10) Business Days of any request for such approval by the indemnifying Party, provided that (i) in the event the indemnified Party wishes to deny such approval, such notice shall include a detailed written description of its reasonable objections to the proposed settlement, consent judgment, or other voluntary disposition and (ii) the indemnified Party shall be deemed to have approved of such proposed settlement, consent judgment, or other voluntary disposition in the event it fails to provide proper, full notice within such ten (10) Business Day period in accordance herewith. If the indemnifying Party does not notify the indemnified Party within thirty (30) days after receipt of the indemnified Party’s notice of a claim of indemnity

42

hereunder that it elects to undertake the defense thereof, or so notifies the indemnified Party but fails to undertake such defense promptly and in good faith, the indemnified Party shall have the right to contest, settle or compromise the claim in the exercise of its reasonable judgment at the expense of the indemnifying Party.

9.3 Limitations on Indemnification

(a) The provisions for indemnity under Section 9.1(a)(i) or Section 9.1(b)(i) shall be effective only when the aggregate amount of all Losses for which indemnification is sought from Merck or Salix, as the case may be, exceeds $[*], in which case the indemnified Party shall be entitled to indemnification of the indemnified Party’s Losses in excess thereof. In no event shall either indemnifying Party have liability for indemnification under Section 9.1(a)(i) or Section 9.1.(b)(i), as applicable, together with liability for breach of any representations and warranties under any of the Ancillary Agreements, for any amounts exceeding, in the aggregate, [*] percent ([*]%) (or, in the case of Merck’s liability with respect to any breach of Section 4.1.6, [*] percent ([*]%)) of the amount equal to (i) the Closing Payment less (ii) any adjustments made pursuant to Section 2.4.1(c) or Section 2.4.1(d). Indemnification under this Article 9 shall be the exclusive remedy for any breach of representation or warranty under this Agreement.

(b) IN NO EVENT WILL EITHER PARTY BE LIABLE FOR ANY PUNITIVE, SPECIAL, INDIRECT, CONSEQUENTIAL, INCIDENTAL OR EXEMPLARY DAMAGES OR SIMILAR DAMAGES OR LOSSES INCURRED BY THE OTHER PARTY, INCLUDING BUT NOT LIMITED TO LOST PROFITS, REGARDLESS OF WHETHER ARISING FROM BREACH OF CONTRACT, WARRANTY, TORT, STRICT LIABILITY OR OTHERWISE, EVEN IF THE PARTY IS ADVISED OF THE POSSIBILITY OF SUCH LOSS OR DAMAGE OR IF SUCH LOSS OR DAMAGE COULD HAVE BEEN REASONABLY FORESEEN; PROVIDED HOWEVER, THAT THE FOREGOING LIMITATION OF LIABILITY SHALL NOT APPLY TO (i) THE LIABILITIES ARISING FROM EITHER PARTY’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT AND (ii) THE LIABILITIES OF THE PARTIES UNDER SECTION 9.1.

10 MISCELLANEOUS

10.1 Force Majeure

Neither Party shall be held liable to the other Party nor be deemed to have defaulted under or breached this Agreement for failure or delay in performing any obligation under this Agreement, other than a payment obligation, to the extent that such failure or delay is

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

43

caused by or results from causes beyond the reasonable control of the affected Party, potentially including, but not limited to, embargoes, war, acts of war (whether war be declared or not), acts of terrorism, insurrections, riots, civil commotions, strikes, lockouts or other labor disturbances, fire, floods, or other acts of God, or acts, omissions or delays in acting by any governmental authority or the other Party. The affected Party shall notify the other Party of such force majeure circumstances as soon as reasonably practical, and shall promptly undertake all reasonable efforts necessary to cure such force majeure circumstances. In no event shall Salix’s inability to pay the amounts due under this Agreement be deemed a Force Majeure event and a Force Majeure event shall not excuse Salix from is obligation to make payments when due hereunder; provided, that the foregoing is not intended to apply to a bank or financial institution’s failure to process a wire transfer transaction for any reason other than lack of sufficient Salix funds, a failure by Salix to give appropriate wire instructions, or other requirements to wire transfer within the control of Salix.

10.2 Assignment/Change of Control

10.2.1 Except as provided in this Section 10.2, this Agreement may not be assigned or otherwise transferred, nor may any right or obligation hereunder be assigned or transferred, by either Party without the written consent of the other Party.

10.2.2 Merck, may without Salix’s consent, assign this Agreement and its rights and obligations hereunder in whole or in part to a Merck Affiliate or in connection with a Change of Control of Merck.

10.2.3 Salix may, without Merck’s consent, assign this Agreement and its rights and obligations hereunder in whole or in part to a Salix Affiliate (provided that Salix is not thereby relieved of any of its obligations hereunder) or in connection with a Change of Control of Salix; provided however, that Salix shall notify Merck at least thirty (30) days prior to completion of any Change of Control of Salix, except that in the case of a Change of Control as set forth in Section 1.10(iii) only, Salix shall provide Merck such notice thirty (30) days after Salix becomes aware of such Change of Control. If Merck is notified of a Change of Control of Salix pursuant to the foregoing sentence, that, in the reasonable judgment of Merck, will result in material harm to the PEPCID name or Licensed Trademark (which will continue to be used by Merck for other formulations), then Merck shall notify Salix of such determination in writing within ten (10) Business Days of such notification (such notification by Merck to be accompanied by a reasonably sufficient explanation and description of the circumstances supporting such determination) and at any time thereafter Merck shall have the right to terminate any one or more of the Ancillary Agreements or the Manufacturing Know-How License, provided that the Parties will negotiate in good faith provisions for termination of such agreements over a reasonable time period, and provided further, that if Salix does not consummate any such proposed Change of Control after the delivery of the notification required by Merck pursuant to this

44

sentence then Merck shall not have the right to terminate any one or more of the Ancillary Agreements or the Manufacturing Know-How License as provided by this Section 10.2.3 with respect to such proposed Change or Control.

10.2.4 Any permitted assignee shall assume all assigned obligations of its assignor under this Agreement. Any attempted assignment not in accordance with this Section 10.2 shall be void.

10.3 Survival

All representations, warranties, covenants and indemnities of the Parties contained herein shall, except as otherwise expressly provided herein, survive until ten (10) years after the Closing Date. The covenants and agreements of Merck and Salix hereunder that require by their terms performance or compliance on and after the Closing Date shall continue in force thereafter in accordance with their terms. In addition, the provisions of Sections 8.3.2 and 8.3.4 shall survive any expiration or termination of this Agreement.

10.4 Exclusive Jurisdiction

Subject to the provisions of Sections 10.5 and 10.10, each Party irrevocably submits to the exclusive jurisdiction of the courts of the State of New York and the Federal courts of the United States District Court for the Southern District of New York for the purposes of any suit, action or other proceeding arising out of this Agreement or transactions contemplated hereby. Each Party irrevocably and unconditionally waives any objection to the laying of venue in the state and Federal courts of New York as stated above and that any such action was brought in an inconvenient forum.

10.5 Equitable Remedies

The Parties recognize that breach by a Party of any of the obligations set forth in Sections 6.4, 8.1.1 and 8.3.4 of this Agreement may require a remedy different from the remedy for other possible breaches of this Agreement. In the event that such a breach occurs or is threatened, damages to the non-breaching Party will not be readily ascertainable, irreparable harm to such Party may occur, and such Party will not have an adequate remedy at law. The Parties therefore stipulate and agree that in the event a breach of any of the obligations set forth under Section, 6.4, 8.1.1 or 8.3.4 o of this Agreement occurs or is threatened, the non-breaching Party may seek equitable relief from any competent court in New Jersey or in the jurisdiction where the breach occurs or is threatened (including, without limitation, a temporary restraining order and/or preliminary and permanent injunction) notwithstanding the arbitration provisions set forth in Section 10.10. The foregoing shall not limit the availability of equitable or other forms of injunctive relief, whether permanent or temporary, for any other threatened, possible or actual breach of this Agreement.

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10.6 Notices

All notices, requests and other communications to any Party hereunder or under the Ancillary Agreements shall be in writing and shall be sent by fax and by first class mail or nationally recognized overnight delivery service:

If to Merck, to:

Merck & Co., Inc.

[*]

[*]

Attn: [*]

Facsimile: [*]

with a copy to:

Merck & Co., Inc.

One Merck Drive (WS 3A-65)

P.O. Box 100

Whitehouse Station, NJ 08889-0100

Facsimile: [*]

If to Salix, to:

Salix Pharmaceuticals, Ltd.

1700 Perimeter Park Drive

Morrisville, NC 27560

Attn: General Counsel

Facsimile: 919-862-1095

with a copy to:

Wyrick Robbins Yates & Ponton LLP

4101 Lake Boone Trail, Suite 300

Raleigh, NC 27607

Attn: Donald R. Reynolds

Facsimile: 919-781-4865

or such other address as such Party may hereafter specify by written notice to the other Party. Each such notice, request or other communication shall be effective when received at the address specified in this Section 10.6.

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

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10.7 Entire Agreement

This Agreement, including, without limitation, the Schedules hereto and the Ancillary Agreements, embodies the entire agreement of the Parties hereto with respect to the subject matter hereof and supersedes any and all prior agreements with respect thereto, except for any prior confidentiality agreements, which shall survive. In the event of any conflict between this Agreement and any such prior confidentiality agreement, the agreement imposing stricter confidentiality shall govern. No waiver, amendment or modification of any provision hereof or of any right or remedy hereunder shall be effective unless in writing and signed by the Party against whom such waiver, amendment or modification is sought to be enforced.

10.8 Section Headings

Captions herein are inserted for convenience of reference only and shall be ignored in the construction or interpretation of this Agreement. Unless otherwise specified, the words “herein”, “hereof” and terms of like import shall be deemed to refer to the Agreement as a whole and not merely to a single part thereof.

10.9 Applicable Law

This Agreement shall be governed by, interpreted and construed, and all claims and disputes, whether in tort, contract or otherwise be resolved in accordance with the substantive laws of the State of New York without reference to any rules of conflict or laws or renvoi.

10.10  Dispute Resolution

10.10.1 The Parties shall negotiate in good faith and use reasonable efforts to settle any dispute, controversy or claim arising from or related to this Agreement or the breach thereof. If the Parties do not fully settle, and a Party wishes to pursue the matter, each such dispute, controversy or claim that is not an “Excluded Claim” shall be finally resolved by binding arbitration in accordance with the Commercial Arbitration Rules and Supplementary Procedures for Large Complex Disputes of the American Arbitration Association (“AAA”), and judgment on the arbitration award may be entered in any court having jurisdiction thereof.

10.10.2 The arbitration shall be conducted by a panel of three independent, neutral persons experienced in the pharmaceutical business: within thirty (30) days after initiation of arbitration, each Party shall select one person to act as arbitrator; and the two Party-selected arbitrators shall select a third arbitrator within thirty (30) days of their appointment. If one Party fails to select an arbitrator within the thirty (30) day period provided therefor, the arbitrator selected by the other Party shall select such second arbitrator. If the first two arbitrators selected by the Parties are unable or fail to agree upon the third arbitrator, the third arbitrator shall be appointed by the AAA. The place of arbitration shall be New York, New York, and all proceedings and communications shall be in English.

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10.10.3 Either Party may apply to the arbitrators for interim injunctive relief until the arbitration award is rendered or the controversy is otherwise resolved. Either Party also may, without waiving any remedy under this Agreement, seek from any court having jurisdiction any injunctive or provisional relief necessary to protect the rights or property of that Party pending the arbitration award. The arbitrators shall have no authority to award punitive or any other type of damages not measured by a Party’s compensatory damages. Each Party shall bear its own costs and expenses and attorneys’ fees and an equal share of the arbitrators’ fees and any administrative fees of arbitration, provided that the arbitrators shall be entitled to apportion such costs between the Parties unequally in a manner reasonably consistent with their decision on the dispute at issue.

10.10.4 Except to the extent necessary to confirm an award or as may be required by law, neither a Party nor an arbitrator may disclose the existence, content, or results of an arbitration without the prior written consent of both Parties. In no event shall an arbitration be initiated after the date when commencement of a legal or equitable proceeding based on the dispute, controversy or claim would be barred by the applicable New York statute of limitations.

10.10.5 The Parties agree that, in the event of a dispute over the nature or quality of performance under this Agreement, neither Party may terminate this Agreement by reason of such dispute until a final resolution of the dispute through arbitration or other judicial determination and then only in accordance with the outcome of such dispute resolution. The Parties further agree that any payments made pursuant to this Agreement pending resolution of the dispute shall be refunded if an arbitrator or court determines that such payments are not due.

As used in this Section 10.10, the term “Excluded Claim” shall mean a dispute, controversy or claim that concerns (a) the validity or infringement of a patent, trademark or copyright; or (b) any antitrust, anti-monopoly or competition law or regulation, whether or not statutory.

10.11  Expenses

All legal and other costs and expenses incurred in connection herewith and the transactions contemplated hereby shall (except as otherwise provided herein) be paid by the Party incurring such expenses.

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10.12  Bulk Sales Statutes

Salix hereby waives compliance by Merck with any applicable bulk sales statutes in any jurisdiction in connection with the transactions under this Agreement.

10.13  Waiver

No waiver by any Party in one or more instances of any of the provisions of this Agreement or the breach thereof shall establish a precedent for any other instance with respect to that or any other provision. Furthermore, in case of waiver of a particular provision, all other provisions of this Agreement will continue in full force and effect.

10.14  Severability

If any provision of this Agreement is held to be illegal, invalid or unenforceable under any present or future law, and if the rights or obligations of either Party under this Agreement will not be materially and adversely affected thereby, (a) such provision will be fully severable, (b) this Agreement will be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part hereof, (c) the remaining provisions of this Agreement will remain in full force and effect and will not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom, and (d) in lieu of such illegal, invalid or unenforceable provision, there will be added automatically as a part of this Agreement a legal, valid and enforceable provision as similar to such illegal, invalid or unenforceable provision as may be possible and reasonably acceptable to the Parties.

10.15  Incorporation by Reference

The Ancillary Agreements and Schedules hereto and thereto constitute integral parts of this Agreement and are hereby incorporated into this Agreement by this reference. A disclosure in a given Schedule shall be deemed a disclosure for the purposes of any other representation, warranty and Schedule to which it may relate. In case of conflict of provisions between this Agreement and any Ancillary Agreement, the provisions of this Agreement shall govern.

10.16  Assignment

This Agreement shall be binding upon and shall inure to the benefit of the Parties and their respective successors and assigns; provided, however, that, except as expressly permitted by Section 10.2, and except for any merger, restructuring or corporate reorganization of Merck, this Agreement may not be assigned by either Party without the prior written consent of the other Party hereto, and any other attempted assignment shall be void.

10.17  Independent Contractors

It is expressly agreed that Salix and Merck shall be independent contractors and that the relationship between the Parties hereto shall not constitute a partnership, joint venture or

49

agency. Neither Salix nor Merck shall have the authority to make any statements, representations or commitments of any kind, or to take any action, which shall be binding on the other Party, without the prior written consent of the other Party.

10.18   No Third Party Beneficiaries

Nothing in this Agreement, express or implied, is intended to confer upon any third Party (other than a permitted successor or assign of a Party hereto) any rights, remedies, obligations or liabilities.

10.19   Waiver of Rule of Construction

There shall not be any presumption against either Party hereto on the ground that such Party was responsible for drafting or preparing the term sheet or this Agreement or any part of either of such documents.

10.20   Counterparts

This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute but one and the same instrument. Delivery of an executed counterpart signature page of this Agreement by facsimile transmission shall be as effective as delivery of a manually executed signature page.

10.21   Compliance with Laws and Regulations

In performing their obligations pursuant to this Agreement, the Parties hereto agree and covenant that they will comply with all applicable federal, state and local laws and regulations.

[SIGNATURE PAGE TO FOLLOW]

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IN WITNESS WHEREOF, the undersigned have duly executed this Agreement, as of the day and year first above written.

MERCK & CO., INC.
By:	/s/ Judy C. Lewent
	Judy C. Lewent
	Executive Vice President & Chief Financial Officer

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

Signature Page to Master Purchase and Sale and License Agreement

SCHEDULE 1.19

DOCUMENTS

1. Purchase Orders

2. Current customer lists

3. An electronic copy of all legacy data of adverse events and experiences, both Serious and non-Serious, as maintained by Merck on its global safety database.

4. An electronic copy of certain Manufacturing Know-How as set forth in Schedule 1.40.

5. Certificates of Analysis and Certificates of Compliance related to the Inventory.

6. Quality Issues List related to the Inventory.

7. The following documents related to the Inventory:

a. [*]

b. [*]

c. [*]

d. Batch records (paper copies only)

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

i

SCHEDULE 1.38

LICENSED TRADEMARKS

Trademark	Registration Number
DIURIL® (limited to use with Oral Solution only)	676884
PEPCID® (limited to use with Oral Solution only)	1373383

ii

SCHEDULE 1.40

MANUFACTURING KNOW-HOW

1. Manufacturing Data

• Process Formula

• Process Description

• [*]

• [*]

• [*]

• Equipment Type

2. Analytical Methods Information

• In process specifications/analytical methods

• Non-compendial specifications/analytical methods for excipients, raw materials, active pharmaceutical ingredients and/or finished product

• Non-compendial specifications for packaging components

3. DIURIL OS Product Active Pharmaceutical Ingredient Milling Parameters

4. [*]

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

iii

SCHEDULE 1.41

FORM OF MERCK FDA LETTERS

[*]	Merck & Co., Inc.
[*]	P.O. Box 1000, UG2CD-48
[*]	North Wales, PA 19454-1099
	Tel [*]
	Fax [*]
	[*]

H

February 23, 2007

Brian E. Harvey, M.D., Ph.D., Director

Food and Drug Administration

Center for Drug Evaluation and Research

Division of Gastroenterology Products

5901-B Ammendale Road

Beltsville, MD 20705-1266

Dear Dr. Harvey:

NDA 19-527: PEPCID™ Oral Suspension (Famotidine)

General Correspondence

Transfer of Ownership

This is to inform you that Merck & Co., Inc., holder of NDA 19-527 for PEPCID™ Oral Suspension has ceased selling PEPCID™ Oral Suspension and as of February 22, 2007 has sold, assigned, and transferred NDA 19-527 and the licensed trademark name PEPCID™ Oral Suspension to Salix Pharmaceuticals, Ltd. a Delaware corporation. Salix Pharmaceuticals, Ltd. will also notify the Division of Gastroenterology Products of the transfer of NDA 19-527 and of the trademark license. A copy of the letter that Salix Pharmaceuticals, Ltd. sent to the Division of Gastroenterology Products is enclosed for your information.

In accordance with 21 CFR 314.72(a)(2)(iii), Merck & Co., Inc. has provided to Salix Pharmaceuticals, Ltd. a complete copy of the approved application, including supplements and records that are required under 21 CFR 314.81 for PEPCID™ Oral Suspension.

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

iv

Brian E. Harvey, M.D., Ph.D., Director

NDA 19-527: PEPCID™ Oral Suspension (Famotidine)

Page 2

As of February 22, 2007, Merck will no longer market or sell PEPCID™ Oral Suspension in the United States or its territories and possessions (including without limitation the Commonwealth of Puerto Rico). The Merck listing of PEPCID™ Oral Suspension in the Orange Book should be revised to reflect Salix Pharmaceuticals, Ltd. as the new owner.

All future correspondences to NDA 19-527, PEPCID™ Oral Suspension (famotidine), should be directed to:

Jill Kompa, M.S., RAC

Director, Regulatory Affairs

Salix Pharmaceuticals, Inc.

1700 Perimeter Park Drive

Morrisville, NC 27560

Tel (919) 862-1047; Fax (919) 228-4247

jill.kompa@salix.com

This application is formatted as required in Title 21 paragraph 314.50 of the Code of Federal Regulations and is being submitted in accordance with the January 1999, Guidance for Industry – Providing Regulatory Submissions in Electronic Format – NDAs.

As an attachment to this letter, Merck Research Laboratories (MRL), a Division of Merck & Co., Inc., is providing one Compact Disk (CD) which contains the submission. All documents requiring signatures for certification are included as paper for archival purposes.

All of the information is contained on one CD and is not more than 100MB. Merck has taken precautions to ensure that the contents of this media are free of computer viruses (Symantec AntiVirus Corporate Edition, Symantec Corporation) and we authorize the use of anti-virus software, as appropriate.

A list of reviewers from the Division of Gastroenterology Products who should be provided access to this electronic submission on their desktops may be obtained from Mr. Giuseppe Randazzo, Regulatory Health Project Manager, Division of Gastroenterology Products.

We consider the filing of this letter to be a confidential matter, and request that the Food and Drug Administration not make its content, or any future communications in regard to it, public without first obtaining the written permission of Merck & Co., Inc.

v

Questions concerning this supplemental application should be directed to [*] [*] or, in my absence, to [*] [*].

Sincerely,

[*]

Associate Director

Worldwide Regulatory Affairs

Enclosure: CD

Desk Copy:	Giuseppe Randazzo, Regulatory Health Project Manager (cover letter)
	Division of Gastroenterology Products
	Mary A. Holovac
	Office of Generic Drugs, Orange Book Staff

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

vi

H

February 23, 2007

Norman Stockbridge, M.D., Ph. D., Director

Food and Drug Administration

Center for Drug Evaluation and Research

Division of Cardiovascular and Renal Products

5901-B Ammendale Road

Beltsville, MD 20705-1266

Dear Dr. Stockbridge:

NDA 11-870: DIURIL™ Oral Suspension (Chlorothiazide)

General Correspondence

Transfer of Ownership

This is to inform you that Merck & Co., Inc., holder of NDA 11-870 for DIURIL™ Oral Suspension, has ceased selling DIURIL™ Oral Suspension and as of February 22, 2007 has sold, assigned, and transferred NDA 11-870 and the licensed trademark name DIURIL™ Oral Suspension to Salix Pharmaceuticals, Ltd., a Delaware corporation. Salix Pharmaceuticals, Ltd. will also notify the Division of Cardiovascular and Renal Products of the transfer of NDA 11-870 and of the trademark license. A copy of the letter that Salix Pharmaceuticals, Ltd. sent to the Division of Cardiovascular and Renal Products is enclosed for your information.

In accordance with 21 CFR 314.72(a)(2)(iii), Merck & Co., Inc. has provided to Salix Pharmaceuticals, Ltd. a complete copy of the approved application, including supplements and records that are required under 21 CFR 314.81 for DIURIL™ Oral Suspension.

As of February 22, 2007, Merck will no longer market or sell DIURIL™ Oral Suspension in the United States or its territories and possessions (including without limitation the Commonwealth of Puerto Rico). The Merck listing of DIURIL™ Oral Suspension in the Orange Book should be revised to reflect Salix Pharmaceuticals, Ltd. as the new owner.

vii

Norman Stockbridge, M.D., Ph. D., Director

NDA 11-870: DIURIL™ Oral Suspension (Chlorothiazide)

Page 2

All future correspondence to NDA 11-870, DIURIL™ Oral Suspension (chlorothiazide), should be directed to:

Jill Kompa, M.S., RAC

Director, Regulatory Affairs

Salix Pharmaceuticals, Inc.

1700 Perimeter Park Drive

Morrisville, NC 27560

Tel (919) 862-1047; Fax (919) 228-4247

jill.kompa@salix.com

This application is formatted as required in Title 21 paragraph 314.50 of the Code of Federal Regulations and is being submitted in accordance with the January 1999, Guidance for Industry – Providing Regulatory Submissions in Electronic Format – NDAs.

As an attachment to this letter, Merck Research Laboratories (MRL), a Division of Merck & Co., Inc., is providing one Compact Disk (CD) which contains the submission. All documents requiring signatures for certification are included as paper for archival purposes.

All of the information is contained on one CD and is not more than 100MB. Merck has taken precautions to ensure that the contents of this media are free of computer viruses (Symantec AntiVirus Corporate Edition, Symantec Corporation) and we authorize the use of anti-virus software, as appropriate.

A list of reviewers from the Division of Cardiovascular and Renal Products who should be provided access to this electronic submission on their desktops may be obtained from Quynh M. Nguyen, Pharm.D., Regulatory Health Project Manager, Division of Cardiovascular and Renal Products.

We consider the filing of this letter to be a confidential matter, and request that the Food and Drug Administration not make its content, or any future communications in regard to it, public without first obtaining the written permission of Merck & Co., Inc.

viii

Questions concerning this supplemental application should be directed to [*] [*] or, in my absence, to [*] [*].

Sincerely,

[*]

Associate Director

Worldwide Regulatory Affairs

Enclosure: CD

Desk Copy:	Quynh M. Nguyen, Pharm.D., Regulatory Health Project Manager
	Division of Cardiovascular and Renal Products
	Mary A. Holovac
	Office of Generic Drugs, Orange Book Staff

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

ix

SCHEDULE 1.55

PURCHASE ORDERS

CUSTOMER NAME	DATE OF PURCHASE ORDER	PRODUCT PURCHASED	QTY # Bottles	AMOUNT
[*]	[*]	[*]	[*]	$ [*]
[*]	[*]	[*]	[*]	$ [*]
[*]	[*]	[*]	[*]	$ [*]
[*]	[*]	[*]	[*]	$ [*]
[*]	[*]	[*]	[*]	$ [*]
[*]	[*]	[*]	[*]	$ [*]
[*]	[*]	[*]	[*]	$ [*]
[*]	[*]	[*]	[*]	$ [*]
[*]	[*]	[*]	[*]	$ [*]
[*]	[*]	[*]	[*]	$ [*]
[*]	[*]	[*]	[*]	$ [*]
[*]	[*]	[*]	[*]	$ [*]
[*]	[*]	[*]	[*]	$ [*]
[*]	[*]	[*]	[*]	$ [*]
Grand Total			[*]	$ [*]

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

x

SCHEDULE 1.58

RELATED COMPANIES

[*]

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

xi

SCHEDULE 1.60

FORM OF SALIX FDA LETTERS

February 23, 2007

Brian E. Harvey, M.D., Ph.D., Director

Food and Drug Administration

Center for Drug Evaluation and Research

Division of Gastroenterology Products

5901-B Ammendale Road

Beltsville, MD 20705-1266

Re: NDA 19-527 PEPCID^TM Oral Suspension (Famotidine) Transfer of Rights to NDA

Dear Dr. Harvey:

Effective February 22, 2007, Salix Pharmaceuticals, Ltd., hereby accepts rights to NDA 19-527 for PEPCID^TM Oral Suspension.

Salix Pharmaceuticals, Ltd., has received a complete copy of the NDA, supplements and correspondence, including records required to be kept under 21 CFR 314.72. In accordance with 21 CFR 314.72(a)(2)(i), Salix Pharmaceuticals, Ltd., commits to all agreements, promises and conditions contained in the application or made by the former owner.

All issues regarding NDA 19-527 may be directed to:

Jill Kompa, M.S., RAC

Director, Regulatory Affairs

Salix Pharmaceuticals, Inc.

1700 Perimeter Park Drive

Morrisville, NC 27560

Telephone (919) 862-1047; Fax (919) 228-4247

jill.kompa@salix.com

Written acknowledgment of the change in holder would be appreciated. Please contact me at (919) 862-1047 if you have any comments or questions regarding this letter.

Sincerely yours,

Jill Kompa, M.S., RAC

Director, Regulatory Affairs

xii

February 23, 2007

Norman Stockbridge, M.D., Ph. D., Director

Food and Drug Administration

Center for Drug Evaluation and Research

Division of Cardiovascular and Renal Products

5901-B Ammendale Road

Beltsville, MD 20705-1266

Re: NDA 11-870: DIURIL™ Oral Suspension (chlorothiazide) Transfer of Rights to NDA

Dear Dr. Stockbridge:

Effective February 22, 2007, Salix Pharmaceuticals, Ltd., hereby accepts rights to NDA 11-870 for DIURIL^TM Oral Suspension.

Salix Pharmaceuticals, Ltd., has received a complete copy of the NDA, supplements and correspondence, including records required to be kept under 21 CFR 314.72. In accordance with 21 CFR 314.72(a)(2)(i), Salix Pharmaceuticals, Ltd., commits to all agreements, promises and conditions contained in the application or made by the former owner.

All issues regarding NDA 11-870 may be directed to:

Jill Kompa, M.S., RAC

Director, Regulatory Affairs

Salix Pharmaceuticals, Inc.

1700 Perimeter Park Drive

Morrisville, NC 27560

Telephone (919) 862-1047; Fax (919) 228-4247

jill.kompa@salix.com

Written acknowledgment of the change in holder would be appreciated. Please contact me at (919) 862-1047 if you have any comments or questions regarding this letter.

Sincerely yours,

Jill Kompa, M.S., RAC

Director, Regulatory Affairs

xiii

SCHEDULE 2.5

PRICE OF INVENTORY

PRODUCT	PRODUCT FORM	PACKAGE FORM	COST/UNIT*
Pepcid® OS	Powder (suspension)	40mg/5ml	US $[*]
Diuril® OS	Liquid (suspension)	250mg/5ml	US $[*]

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

xiv

SCHEDULE 2.7.2

THIRD PARTY CONSENTS

Astellas

xv

SCHEDULE 4.1.9

INVENTORY

Product	Bottles
Diuril® OS	[	*]
Pepcid® OS	[	*]

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

xvi

SCHEDULE 6.4

DIURIL MARKET HISTORY AND ANTICIPATED NEED

2005:

US – [*] units

Sweden – [*] unit

2006:

US – [*] units

Sweden – [*] units

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

xvii

SCHEDULE 8.3.2

APPROVED SALIX PRESS RELEASE

FOR IMMEDIATE RELEASE

Contact:	Adam C. Derbyshire	Mike Freeman
	Senior Vice President and	Executive Director, Investor Relations and
	Chief Financial Officer	Corporate Communications
	919-862-1000	919-862-1000

SALIX PHARMACEUTICALS ACQUIRES PEPCID^® ORAL SUSPENSION

Salix Secures $100 Million Senior Secured Credit Facility

RALEIGH, NC, February 28, 2007 - Salix Pharmaceuticals, Ltd. (Nasdaq:SLXP) today announced that it has purchased the U.S. prescription pharmaceutical product rights to PEPCID^® Oral Suspension and DIURIL^® Oral Suspension from Merck & Co., Inc. PEPCID Oral Suspension is a widely-known prescription pharmaceutical product indicated for several gastrointestinal indications including the treatment of duodenal ulcer, benign gastric ulcer and gastroesophageal reflux disease. Under the terms of the agreement, Salix will make a $55 million up-front payment and up to $6 million in potential sales-based milestone payments to Merck.

Commenting on this development, Carolyn Logan, President and Chief Executive Officer, Salix, stated, “The acquisition of such a trusted brand and revenue-producing product as PEPCID Oral Suspension reflects the ongoing execution of the Company’s strategy to expand and diversify revenue. These marketed products should generate immediate revenue while requiring minimal promotional expense. PEPCID Oral Suspension achieved net sales in the U.S. of approximately $20 million in 2006. In the near term, this additional revenue should serve to fund ongoing strategic product development efforts and, in the longer term, should contribute to growing EPS.

“PEPCID Oral Suspension and DIURIL Oral Suspension, both liquid formulations of their solid dosage form counterparts, compete in an approximately $150 million market that is concentrated in pediatric and hospitalized patient populations. This acquisition builds upon our recent acquisition of SANVAR^®. If XIFAXAN^® is approved for hepatic encephalopathy and C. difficile-associated diarrhea, these hospital-based indications, together with PEPCID Oral Suspension and SANVAR, should create an institutional product portfolio that complements our current field-based business.”

Salix also announced today that it has entered into a credit facility with Bank of America, N.A. for up to $100 million to help finance the transaction and for working capital, capital expenditures, other permitted acquisitions and general corporate purposes. Salix has borrowed approximately $15 million at this time. Outstanding amounts generally bear interest at the

xviii

option of Salix at the British Bankers Association LIBOR Rate or a base rate, in each case plus an applicable margin of between 1.00 percent and 1.75 percent for LIBOR Rate loans and 0.00 percent and 0.75 percent for base rate loans, each based on consolidated leverage. The facility also includes standard covenants. A copy will be filed with the SEC as an exhibit to our Form 8-K.

Salix Pharmaceuticals, Ltd., headquartered in Raleigh, North Carolina, develops and markets prescription pharmaceutical products for the treatment of gastrointestinal diseases. Salix’s strategy is to in-license late-stage or marketed proprietary therapeutic drugs, complete any required development and regulatory submission of these products, and market them through the Company’s 150-member gastroenterology specialty sales and marketing team.

Salix markets COLAZAL^®, XIFAXAN^®, OSMOPREP™, MOVIPREP^®, VISICOL^®, AZASAN^®, ANUSOL-HC^® and PROCTOCORT^®. Balsalazide tablets, Granulated Mesalamine, SANVAR^® (600 mg vials vapreotide acetate powder) and Xifaxan for additional indications are under development.

For full prescribing information on Salix products, please visit www.salix.com.

Salix trades on the Nasdaq National Market under the ticker symbol “SLXP”.

For more information please contact the Company at 919-862-1000 or visit our web site at www.salix.com. Information on our web site is not incorporated in our SEC filings.

Please Note: This press release contains forward-looking statements regarding future events. These statements are just predictions and are subject to risks and uncertainties that could cause the actual events or results to differ materially. These risks and uncertainties include: competition, including from potential generic or over-the-counter products; management of rapid growth, including the addition of these institutional products; market acceptance for approved products; risks of regulatory review and clinical trials; intellectual property risks; and the need to acquire additional products. The reader is referred to the documents that the Company files from time to time with the Securities and Exchange Commission.

xix

EX-10.59

Exhibit 10.59

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

DATED 16 APRIL 2007

SALIX PHARMACEUTICALS, INC.

and

DR. FALK PHARMA GmbH

LICENSE AGREEMENT

1

TABLE OF CONTENTS

1.	DEFINITIONS	4
2.	LICENSE GRANT	10
3.	CONSIDERATION	11
4.	MINIMUM ROYALTY PAYMENTS	12
5.	PAYMENT: GENERAL	13
6.	OBLIGATIONS OF FALK	15
7.	OBLIGATIONS OF SALIX	17
8.	PRODUCT DATA	17
9.	TRADEMARKS	18
10.	INTELLECTUAL PROPERTY OWNERSHIP AND INFRINGEMENT	19
11.	CONFIDENTIALITY	22
12.	REPRESENTATIONS AND WARRANTIES	23
13.	INDEMNIFICATION AND LIABILITY	26
14.	ADVERSE REACTIONS REPORTING	28
15.	RESTRICTIONS	28
16.	FORCE MAJEURE	28
17.	OPTION COUNTRIES	28
18.	TERMINATION	29
19.	CONSEQUENCES OF TERMINATION	30
20.	NOTICES	32
21.	ENTIRE AGREEMENT	33
22.	ASSIGNMENT	33
23.	NON-WAIVER OF RIGHTS	34
24.	AMENDMENT	34

25.	INDEPENDENT CONTRACTORS	34
26.	FURTHER ASSURANCES AND COOPERATION	34
27.	SEVERABILITY	34
28.	DISPUTE RESOLUTION	34
29.	LAW AND ARBITRATION	35
30.	COUNTERPARTS	36
31.	INTERPRETATION	36
Schedule 1 Salix Patents		37
Schedule 2 Trademark Registrations		39
Schedule 3 Press Release		40
Schedule 4 Summary of Product Characteristics		44
Schedule 5 Market Assumptions		50

3

This Agreement is made the 16^th day of April 2007

B E T W E E N:

(1) SALIX PHARMACEUTICALS, INC. a company incorporated under the law of California whose principal place of business is at 1700 Perimeter Park Drive, Morrisville, NC 27560-8404, USA (“Salix”); and

(2) DR. FALK PHARMA GmbH a company incorporated in Germany having its registered office and principal place of business at Leinenweberstraße 5, 79108 Freiburg, Germany (“Falk”).

W H E R E A S Salix has developed and owns rights in a pharmaceutical product and has agreed to grant Falk an exclusive license in respect of such product for its development, use and exploitation in certain European countries upon the terms of this Agreement.

NOW IT IS HEREBY AGREED as follows:-

1. DEFINITIONS

1.1 In this Agreement, unless the context otherwise requires:

“Affiliate”	shall mean in relation to either Party any person who directly or indirectly controls, is controlled by or is under common control with that Party or, with regard to Falk, is controlled by the same group of persons controlling Falk. A person shall be regarded as in control of another person if it owns directly or indirectly more than 50% (fifty per cent) of the voting stock or other ownership or income interest of the other person or if it directly or indirectly possesses the power to direct or cause the direction of the management and policies of any other person by any means whatsoever.
“Business Day”	shall mean any day on which clearing banks within both the USA and Germany are open for business.
“Change of Control”	shall mean any transaction or series of transactions in which in excess of 50% of a Party’s voting power is transferred or in which all or substantially all of the assets of the Party are sold or otherwise conveyed.
“Compound”	shall mean any sodium phosphate salt purgative that is the subject of any Valid Claim in any Salix Patent.
“Dossier”	shall mean the dossier of Salix Product Data and other information filed with the relevant regulatory authority in the United Kingdom in respect of the UK MA and the UK MA Product.
“Effective Date”	shall mean 1 April 2007.

4

“EMEA”	shall mean the European Medicines Evaluation Agency.
“Exchange Rate”	shall mean the €/US $ exchange rate (and as applicable in connection with the Royalties, the €/other Territory currencies exchange rate), as published by Deutsche Bundesbank as at the relevant date.
“Exploit”	shall mean to keep, have kept, make, have made, import, have imported, use, have used, sell, have sold, offer for sale, or otherwise dispose of, including all discovery, research, development, registration, modification, enhancement, improvement, manufacture, storage, formulation, exportation, transportation, distribution, promotion and marketing activities related thereto and “Exploitation” shall be construed accordingly.
“Falk Study”	shall mean any Study effected by and at the sole cost and expense of Falk.
“Falk Trademarks”	shall mean any trademark(s) used by Falk in connection with the Product in the Territory under the terms of Clause 9.2.
“FDA”	shall mean the United States Food and Drug Administration and any successor thereto.
“Force Majeure”	shall mean in relation to either Party any circumstances beyond the reasonable control of that Party including without limitation any strike, lock-out, or other form of industrial action, act of God, war, riot, accident, fire, flood, explosion or government action.
“Improvement”	shall mean any discovery, development, invention or improvement relating to a Product made by Salix (or any Affiliate or licensee of Salix) during the Term and all Intellectual Property rights existing therein provided that, for the avoidance of doubt, Improvement shall only include any such discovery, invention, development or improvement in respect of a Compound in the Indication.
“Indication”	shall mean the human pharmaceutical indication of bowel cleansing only and for the avoidance of doubt shall not include any indication relating to prevention or treatment of constipation.
“Intellectual Property”	shall mean all Patents, claims in Patents, trade marks and trade names, service marks, registered designs, applications for any of the foregoing and the right to apply for any of the foregoing in any part of the world, copyright, design right, inventions, confidential information (including without limitation Know-how) and any other similar right situated in any country in the world.
“Joint Product Data”	shall mean all Product Data relating to the Product arising out of any Falk Study.

5

“Know-How”	shall mean the information, procedures, instructions, knowledge, experience, data (including, without limitation, toxicological, pharmaceutical, clinical and medical data, health registration data, marketing data and all other data), designs, dossiers (including, without limitation, manufacturing, assay and quality control dossiers), manufacturing formulae, processing specifications, sales and marketing materials and technology relating to or concerning the Product, whether committed to writing or not including without limitation all Product Data and the Manufacturing Technology.
“Launch”	shall mean in respect of each country in the Territory the commencement of commercial sale of a Product in such country after an MA in such country of such Product.
“Manufacturing Technology”	shall mean all methods, processes, designs, data, procedures and other information relating to the manufacture of a Product including, without limitation, final quality assurance, quality control procedures, manufacturing procedures, product and raw material specifications, formulation data and other technology related thereto.
“Market Assumptions”	shall mean the assumption of Falk relating to the anticipated market for the UK MA Product in each country of the Territory during the Term as set out in Schedule 5.
“Marketing Authorisation” or “MA”	shall mean in respect of any country in the Territory, the grant by the relevant regulatory authority in such country or the EMEA, in respect of such country, of all such approvals and authorisations (including, if required, any pricing or reimbursement approvals) required to effect marketing and sale of a Product in such country.
“MA Transfer Costs”	shall mean all costs, expenses and fees directly incurred in connection with the transfer of any MA or any application for an MA and the change of identity of the registered holder or applicant, which costs shall include for example but without limitation the cost of changes to any patient information leaflet, Summary of product characteristics and/or labelling.
“Minimum Royalty Payments”	shall mean the minimum, non-refundable royalty payments as specified in Clause 4.
“Net Sales”	shall mean gross amounts invoiced in respect of sales of the Product in the Territory by Falk, its Affiliates or Sublicensees, as appropriate, to Third Parties, less the following items: (a) trade, quantity and cash discounts or rebates actually allowed and taken and any other adjustments, provided that such discounts or rebates are not applied disproportionately to the Product as compared with other similar products (for example, Endofalk) of the selling entity, including, without limitation, those granted on account of price adjustments, billing errors, rejected goods, damaged goods and recall returns;

6

(b) credits, rebates, charge-back and prime vendor rebates, fees, reimbursements or similar payments granted or given to wholesalers and other distributors, buying groups, health care insurance carriers, pharmacy benefit management companies, health maintenance organizations or other institutions or health care organizations;

(c) any tax, tariff, customs duties, excise or other duties or other governmental charge (other than an income tax) levied on the sale, transportation or delivery of the Product;

(d) payments or rebates reasonably and customarily paid in connection with sales of Product to any governmental or regulatory authority;

(e) any write offs for bad debt provided that in each Year the maximum sum which may be deducted in respect of bad debts shall not exceed [*]% ([*] per cent) of Net Sales in such Year and further provided that in the event that any bad debt is written off and subsequently recovered by Falk, upon such recovery such debt shall be included in Net Sales for such Quarter in any statement under Clause 5 provided always that:

(i) Sales of a Product by and between Falk and its Affiliates and Sublicensees are not sales to Third Parties (except where such Affiliate or Sublicensee purchasers are end users) and shall be excluded from Net Sales calculations for all purposes;

(ii) Where a Product is sold otherwise than on arm’s length terms the price that would have been charged on an arm’s length sale (calculated as above) shall be the invoice price for such Product and where a Product is disposed of for consideration other than cash, such consideration shall be valued at the fair market value thereof;

(iii) Where a Product is not sold on arm’s length terms but is used or otherwise disposed of on a commercial basis by a Third Party, the price that would have been charged (after the deductions in Sub-Clauses (a) through (e) above) on an arm’s length sale in such country shall be deemed the Net Sales for the sale of such Product, provided that reasonable quantities of Product supplied and used in clinical trials or for other research or development activities or reasonably and customarily supplied for promotional purposes as samples shall not be treated as being disposed of on a commercial basis and shall be ignored for the purpose of calculating Net Sales.

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

7

“Option Countries”	shall mean Italy and France.
“Patent Expiry Date”	shall mean the date on which a Product shall cease to be the subject of any Valid Claim in any Salix Patents in the Territory.
“Patents”	shall mean all patents or letters patent, claims in any patent and applications for any patent and the right to apply for the same in any part of the world including, without limitation, all reissues, re-examinations, extensions, substitutions, confirmations, registrations, revalidations, additions, confirmations, continuations in part and divisions thereof and any Supplementary Protection Certificates.
“Product Data”	shall mean all data, information or results generated in the performance of any clinical studies, non-clinical studies (including pharmacological and toxicological studies) or chemistry, manufacturing, control and analytical studies (including any Studies) in respect of a Product conducted by or on behalf of either party whether before or after the Effective Date during the Term, including the Manufacturing Technology.
“Product”	shall mean any human pharmaceutical product containing any Compound for use in the Indication, the Exploitation of which in the Territory falls within any Valid Claim of the Salix Patents in the Territory and for the avoidance of doubt Product shall include the UK MA Product.
“Quarter”	shall mean each three calendar-month period in any Year of the Term ending on 30th June, 30th September, 31st December and 31st March in each Year and “Quarterly” has a corresponding meaning.
“Royalties”	shall mean royalties payable by Falk to Salix under the terms of Clause 3.1.3.
“Salix IP”	shall mean all Intellectual Property of Salix relating to a Product (including any Improvement) which is at the Effective Date or subsequently during the Term: (a)    vested in Salix or any Affiliate of Salix; or (b)    licensed to Salix or any Affiliate of Salix including any Salix Patents.
“Salix Patent”	shall mean any Patent in the name of Salix or any Salix Affiliate existing at any time during the Term relating in any manner to a Product in the Territory, including the Patents listed in Schedule 1.
“Salix Product Data”	shall mean all Product Data (excluding Joint Product Data) relating to a Product in the possession or control of Salix as at the Effective Date and thereafter during the Term (including without limitation the Dossier and Manufacturing Technology and all Product Data generated in the conduct of any Salix Study).

8

“Salix Territory”	shall mean the United States of America and its possessions and the Commonwealth of Puerto Rico.
“Salix Study”	shall mean any Study effected at the sole cost and expense of Salix.
“Study/ies”	shall mean all tests and studies necessary to support an application for and to obtain a Marketing Authorisation in any country of the Territory and all marketing studies (if any) effected post MA in any part of the Territory.
“Sublicense”	shall mean a sublicense granted by Falk to a Third Party of the rights granted under Clause 2.1. For the avoidance of doubt: (a) the appointment by Falk of any distributor, wholesaler or dealer of the Product shall not be a Sublicense; and (b) the appointment of a manufacturer to manufacture Product for and on behalf of Falk, shall not be deemed a Sublicense.
“Summary”	shall mean the Summary of product characteristics in respect of the UK MA Product, as set out in Schedule 3.
“Term”	shall commence on the Effective Date and continue until whichever is later of; (a) the Patent Expiry Date; or (b) the expiry of a period of seventeen years from the Effective Date, subject always to earlier termination under Clause 18.
“Territory”	shall as at the Effective Date mean each of the following countries: Austria, Belarus, Belgium, Bulgaria, Croatia, Denmark, Estonia, Finland, Germany, Greece, Hungary, Ireland, Latvia, Lithuania, Luxembourg, Norway, Poland, Portugal, Romania, Russia, Serbia, Slovakia, Slovenia, Spain, Sweden, Switzerland, the Czech Republic, the Netherlands, Turkey, Ukraine and the United Kingdom, and Territory shall during the Term be as amended from time to time by the deletion of any country under Clause 6.2 or by the addition of any Option Country under Clause 17.
“Third Party”	shall mean any third party and shall not include the Parties or any Affiliate of either Party.
“Trademarks”	shall mean the tradenames “Diacol”, “Visicol” and “Osmoprep” registered as trademarks in the parts of the Territory and Option Countries as set out in Schedule 2.

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“UK MA Product”	shall mean the Product in the form specified in the Summary.
“UK MA”	shall mean the Marketing Authorisation for a Product granted by the Medicines and Healthcare products Regulatory Agency (MHRA) in respect of the United Kingdom (on 7 January 2005 ref: PL 19147/0001) currently held by Inkine Pharmaceutical Company Ltd., a Salix Affiliate.
“Valid Claim”	shall mean a claim of (i) any issued and unexpired Patent in the Territory, which has not been held permanently revoked, unenforceable or invalid by a decision of a court or other governmental agency of competent jurisdiction, unappealable or unappealed within the time allowed for appeal and which has not been admitted to be invalid or unenforceable through reissue or disclaimer or otherwise; and (ii) any application for a Patent during the period from filing to date of grant, provided that the applicant shall be diligently pursuing the prosecution to grant of such application and that such period shall not exceed five years, without prejudice to the obligations of a party in respect thereof on grant of any Patent pursuant to such application.
“Year”	shall mean each period of twelve calendar months from the Effective Date and starting on each anniversary of the Effective Date during the Term.

1.1 The expression “the Parties” shall mean together Falk and Salix and “Party” shall refer to one such Party;

1.2 Unless the context otherwise requires all references to a particular Clause sub-Clause schedule or paragraph shall be a reference to that Clause, sub-Clause, schedule or paragraph in or to this Agreement as it may be amended from time to time pursuant to this Agreement;

1.3 Headings are for convenience only and shall be ignored in interpreting this Agreement;

1.4 Words importing the singular shall include the plural and vice versa and words importing the masculine gender shall include the feminine and vice versa;

1.5 The words “including” or “included” are to be construed without limitation to the generality of the preceding words.

1.6 Any reference to “writing” or any cognate expression includes a reference to any communication effected by facsimile transmission or similar means.

2. LICENSE GRANT

2.1 Salix grants to Falk from the Effective Date for the Term in respect of the Salix Patents, the Salix IP and the Salix Product Data the sole and exclusive royalty bearing right and license to use the same and to develop, use and Exploit the Product throughout the Territory and a non-exclusive right and license to manufacture and have manufactured the Product in any part of the world for Exploitation in the Territory only and Salix therefore undertakes;

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2.1.1 not at any time during the Term to grant or purport to grant to any Third Party any rights to Exploit the Product in the Territory; and

2.1.2 not itself to Exploit the Product during the Term in the Territory; and

2.1.3 to maintain as Confidential Information (subject to the provisions of Clause 11), all Product Data (including Joint Product Data) and not to disclose any Product Data to any Third Party otherwise than under terms relating to confidentiality and restricting the use of such Product Data in the Territory in accordance with the terms of this Agreement.

2.2 Falk undertakes that it shall use the Salix IP and Product Data only in the development and Exploitation of the Product in the Territory under the terms of this Agreement and shall not be entitled to use all or any part of the Salix IP or Product Data for any other purpose whatsoever.

2.3 The granting of Sublicenses by Falk with respect to all or any of the rights granted to Falk pursuant to Clause 2.1 shall be subject to the prior approval in writing of Salix.

3. CONSIDERATION

3.1 In consideration of the license granted under Clause 2.1, Falk shall pay to Salix;

3.1.1 the non-refundable and non-creditable sum of US$1,500,000 (one million five hundred thousand US dollars) within seven days of the date hereof; and

3.1.2 the non-refundable and non-creditable sum of US $[*] ([*] US dollars) within [*] days of the grant of an MA for a Product by the applicable regulatory authority in Germany; and

3.1.3 a Royalty:

(a) at the rate of [*]% ([*] per cent) of Net Sales where aggregate Net Sales in the Territory in any Year do not exceed €[*] ([*] Euros),

(b) where aggregate Net Sales in any Year exceed €[*] ([*] Euros) at the rate of [*]% ([*] per cent) of all Net Sales in excess of €[*] ([*] Euros) in such Year.

3.2 Falk shall notify Salix promptly of the grant of the German MA and Salix shall promptly invoice Falk for each payment under Clause 3.1.

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

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4. MINIMUM ROYALTY PAYMENTS

4.1 In respect of the Royalties due on Net Sales, Falk shall pay to Salix in respect of each Year of the Term subject to Clause 4.3, a non-refundable Minimum Royalty Payment according to the following schedule:

Year	Minimum Royalty Payment Per Year
1	US $ [*]
2	US $ [*]
3	US $ [*]
4	US $ [*]
5	US $ [*]
6 and thereafter	US $ [*]

4.2 The Minimum Royalty Payment shall be due and payable with the Statement delivered to Salix under Clause 5.1 within ninety (90) days of the end of the relevant Year provided that all Royalties paid in such Year shall be credited against the Minimum Royalty Payment and such payment shall be made only in respect of the shortfall between the Minimum Royalty Payment and such Royalties based on actual Net Sales actually paid in respect of such Year.

4.3 The obligation to effect the Minimum Royalty Payment shall cease on the Patent Expiry Date. For the period from 1 April to the Patent Expiry Date in such Year the Minimum Royalty Payment for that Year shall be apportioned and any shortfall shall be calculated by reference to Royalties due in respect of Net Sales in such period from 1 April to the Patent Expiry Date only.

4.4 In the event that:

4.4.1 Falk exercises its option under Clause 17.2 in respect of the addition of an Option Country to the Territory;

4.4.2 the rights of Falk in respect of any country of the Territory are amended by the deletion of such country under Clause 6.2;

Falk shall promptly on exercise of such option or on such amendment under Clause 6.2 amend the Market Assumptions to reflect the addition to or deletion from the Territory and the parties undertake to renegotiate in good faith the Minimum Royalty Payments due under Clause 4.1 for the following Years, to take account of such addition to or deletion from the Territory. Each party shall use its best endeavours to procure that any such renegotiation shall be effected within a period of 60 (sixty) days from the date of notice by Falk of exercise of the option.

4.5 In the event that at any time prior to the Patent Expiry Date any Market Assumption subsequently appears to be incorrect or ill founded (a “Revision Circumstance”) and as a consequence of such Revision Circumstance the Royalties payable to Salix based on the actual Net Sales of the Product in the Year following the occurrence of the Revision Circumstance are less than the Minimum Royalties payable to Salix during such Year, the parties undertake to renegotiate in good faith the Minimum Royalty Payments due under Clause 4.1 for the following Years. Each party shall use its best endeavours to procure that any such renegotiation shall be effected within a period of 60 (sixty) days from the date of notice of either party to the other party notifying it of the Revision Circumstance

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

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and the effect thereof on Net Sales for such Year and requesting renegotiation. Any such renegotiations under this Clause 4.5 shall not in any circumstances effect any increase in the Minimum Royalty Payments and shall effect only a reduction in the sums specified in Clause 4.1. Upon any such renegotiation, the parties shall review the manner in which any such Revision Circumstance affects the Market Assumptions and shall consider the revised Market Assumptions arising from such Revision Circumstance.

4.6 In the event that the parties are unable to agree the Minimum Royalty Payments upon any such renegotiation under Clauses 4.4 or 4.5, in such 60 (sixty) day period (or any agreed extended period) the parties agree that determination of any adjustment to the Minimum Royalty Payments shall be referred to an independent expert (experienced in the negotiation of the financial terms of commercial contracts in the pharmaceutical field) appointed by the agreement of the parties, or in the event that the parties are unable to agree on the appointment of any independent expert, he shall be appointed, at the request of either party, by the President for the time being of the Association of British Pharmaceutical Industries (ABPI) who shall have the authority to appoint such an independent expert. In determining any such adjustment to the Minimum Royalty Payments:

4.6.1 such expert shall act as an expert and not as an arbitrator;

4.6.2 the costs of such expert shall be borne as determined by the expert taking account of the position of the parties as at the date of referral to the expert and the expert determination;

4.6.3 such expert shall make such determination in such manner as he reasonably considers appropriate taking account of the Market Assumptions and, in respect of renegotiation under Clause 4.5, any adjustments thereto reasonably arising by reason of any Revision Circumstance;

4.6.4 such expert’s determination shall, in the absence of manifest error, be final and binding in respect of the Minimum Royalty Payments applicable after the date of such determination; and

such expert shall be required to effect such determination within 45 (forty five) days of his appointment and any adjusted Minimum Royalty Payments shall take effect, under Clause 4.4, from the date of the amendment to the Territory and under Clause 4.5, from the date of the request for renegotiation made under Clause 4.5 and the Minimum Royalty Payments for such Year shall be adjusted pro rata from such date.

5. PAYMENT: GENERAL

5.1 Falk shall prepare a statement (“Statement”) in respect of each Quarter which shall show in reasonable detail for the Quarter in question the calculation of Royalties due to Salix with respect to aggregate Net Sales. Such Statement shall specify in reasonable detail the calculation of Net Sales (in accordance with the definition set out in Clause 1) and the applicable Royalties due to Salix and such other information relating to the calculation of Net Sales as Salix may reasonably request from time to time. Such Statement shall be submitted to Salix within ninety (90) days of the end of the Quarter to which it relates together with remittance for Royalties due to Salix under Clause 3.1.3 (as applicable). Promptly, on receipt of each such Statement, Salix shall issue an invoice in respect of the payments made with such Statement.

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5.2 In respect of the first Quarter in each Year in which aggregate Net Sales for the relevant Year shall exceed €[*] ([*] euros) Falk shall in the Statement for such Quarter:

5.2.1 account for Royalties on Net Sales in such Quarter and thereafter in such Year at the higher rate due under Clause 3.1.3(b); and

5.2.2 specify the additional Royalty due under Clause 3.1.3(b) for all Net Sales in the Year to date on which Royalty shall have been paid under Clause 3.1.3(a) and shall remit all such additional Royalties due to Salix with such Statement.

5.3 Falk, its Affiliates and Sublicensees shall keep complete, true and accurate books of account and records for the purpose or determining the amounts payable or accountable hereunder. Such books and records shall be kept at one of the principal places of business of Falk, its Affiliates and Sublicensees for at least seven (7) years following the end of the Quarter to which they pertain. Salix shall have the following audit rights:

5.3.1 Upon the written request of Salix and, except with respect to an audit permitted by Clause 5.3.2, not more than once in each Year, Falk shall permit an independent certified public accounting firm of recognized good standing in Europe, selected by Salix, at Salix’s expense, to have access during normal business hours, and upon reasonable prior written notice, to such of the records of Falk as may be reasonably necessary to verify the accuracy of the calculations of royalties and other amounts due and payable under this Agreement for any Year ending, except as otherwise permitted under Clause 5.3.2, not more than [*] Years prior to the date of such request. If such accounting firm concludes, as indicated by a written report delivered to each of the Parties, that additional Royalties or other amounts were owed during such period, Falk shall pay the additional Royalties or other amounts, as applicable, with interest from the date originally due at the rate specified in Clause 5.4 within sixty (60) days after the date on which such accounting firm’s written report is delivered to Salix. Any overpayment of Royalties shall be fully creditable against future royalties payable to Salix.

5.3.2 If, and only if, the amount of any underpayment discovered as the result of an audit conducted in accordance with Clause 5.3.1 is greater than [*] percent ([*]%) of the total amount previously paid, then Falk shall reimburse Salix for all costs related to such audit and Salix shall be entitled to conduct an audit in accordance with Clause 5.3.1 for any Year ending not more than [*] years prior to the date of such audit, provided that in no event shall Salix audit Falk more than twice in any Year.

5.4 Without prejudice to Salix’s rights under Clause 18.3 if any Royalty or any other amount due and payable under this Agreement is overdue, Falk shall pay interest thereon at an annual rate (but with interest accruing on a daily basis) of [*] ([*]%) above the then-current U.S. prime rate, as published in The Wall Street Journal, Eastern U.S. Edition. Such interest shall run from the date on which payment of such sum became due until payment thereof in full together with such interest by Falk.

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

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5.5 All sums due to Salix under this Agreement:

5.5.1 are, unless otherwise expressly stated, exclusive of any Value Added Tax or equivalent sales tax which shall be payable (if applicable) on submission by Salix of valid Value Added Tax invoices in respect thereof; and

5.5.2 shall be paid in full subject to deduction for withholding taxes, charges and other duties that may be imposed in the Territory save insofar as Salix shall be capable of obtaining a credit therefor. The Parties agree to co-operate in all respects necessary to take advantage of such double taxation agreements as may be available. If Falk is required to deduct or withhold it will (i) promptly notify Salix of such requirement, (ii) pay to the relevant authorities the full amount to be deducted or withheld promptly upon the earlier of determining that such deduction or withholding is required or receiving notice that such amount has been assessed against Salix, and (iii) promptly forward to Salix an official receipt (or certified copy) or other documentation reasonably acceptable to Salix and obtainable by Falk, evidencing such payments to such authorities.

5.6 All Royalties or other sums payable under this Agreement shall be paid in US Dollars by telegraphic transfer to such bank as Salix may designate for such purpose. For the purposes of calculating:

5.6.1 the threshold on Net Sales under Clause 3.1.3, all Net Sales effected in currency other than Euros shall be converted into Euros at the Exchange Rate at the end of the relevant Quarter;

5.6.2 payments due in US Dollars in respect of Royalties, the sum calculated as due shall be converted into US Dollars at the Exchange Rate three Business Days before the due date for payment.

6. OBLIGATIONS OF FALK

6.1 Falk shall:

6.1.1 use all reasonable commercial efforts to obtain an MA for a Product at the earliest opportunity in Germany; and

6.1.2 without prejudice to the terms of Clause 6.1.1, use all reasonable commercial efforts to progress to grant MAs in all parts of the Territory and the Option Countries and Falk shall not cease actively to pursue any MA pursuant to this Clause 6.1.2:

(a) save as provided under the terms of Clause 6.2; or

(b) in respect of any Option Country, otherwise than under the terms of Clause 17.

6.1.3 commit such resources to obtaining each MA as are reasonably required provided that Falk shall not be under any obligation under the terms of this Clause 6.1 or otherwise to effect any Studies in connection with any application for any MA in the Territory;

6.1.4 on any MA being obtained in any Option Country, Falk acknowledges that it shall not have any rights in respect of the Product in such Option Country unless and until it exercises its option under Clause 17. Falk undertakes to maintain any such MA in an Option Country at its sole expense, during the term of the Option under Clause 17, in respect of such Option Country;

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6.1.5 use reasonable commercial efforts to effect Launch of a Product in each country of the Territory as soon as reasonably practicable after the MA in that country;

6.1.6 use reasonable commercial efforts to manufacture or procure the manufacture of Product in quantities reasonably required to satisfy the anticipated demand for the Product in the Territory; and

6.1.7 after Launch in each country, use reasonable commercial efforts throughout the Term and shall devote such financial resources, personnel and other resources as may reasonably be required, to promote sales of Products throughout the Territory. Such reasonable commercial efforts shall in no event be less than used by Falk with respect to the commercialisation of its own products of comparable commercial significance and market potential or than used by other companies with respect to the commercialisation of other products in the market of comparable commercial significance and market potential in the Territory.

6.2 If in order to obtain an MA in any country of the Territory the relevant regulatory authority requires Studies to be effected, Falk shall promptly notify Salix and shall supply to Salix full details of the requirements of such regulatory authority. Notwithstanding that it is under no obligation to do so, Falk may on such notification notify Salix that it intends to effect such Studies at its sole cost and expense as Falk Studies; if Falk so notifies Salix it will diligently pursue its obligations under Clause 6.1 and such Falk Studies in such country. If Falk does not notify Salix of its intent to effect Falk Studies, Salix may in its sole discretion by notice in writing to Falk, served at any time after receipt of such notification:

6.2.1 where the notification is in respect of Studies required in Germany:

(a) amend the definition of the Territory to refer to the United Kingdom only and Germany and all other countries shall be deleted from the definition of the Territory; and

(b) terminate the option under Clause 17 in respect of the Option Countries;

and this Agreement shall continue thereafter in respect of the United Kingdom only; and

6.2.2 where the notification is in respect of Studies required in any Option Country terminate the option granted under Clause 17 in respect of such Option Country; and

6.2.3 where the notification is in respect of Studies required in any country of the Territory other than Germany, amend the definition of the Territory such that such country is removed from the definition for all purposes under this Agreement from the date of such notice from Salix and in such circumstances all rights of Falk in respect of the Product in such country shall cease and this Agreement shall continue in all respects unamended save only for the deletion of that country from the definition of the Territory.

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6.3 Falk shall keep Salix regularly informed of its progress in obtaining MAs for the Product and in the performance of its obligations under Clause 6.1. Such information shall be made available to Salix in the form of reasonably detailed written reports every three months. In immediate subsequence to the furnishing of a report the Parties shall discuss its content in telephonic meetings (including video conferencing). Furthermore, Salix may call additional personal meetings as deemed necessary or appropriate in order to review and discuss the progress in seeking and obtaining MAs in respect of all parts of the Territory and each Option Country.

6.4 Salix shall assist Falk as reasonably required in the event that Falk wishes to use a Third Party manufacturer identified by Salix for manufacture of Product for use in the Territory provided that Falk undertakes not to use such Salix Third Party manufacturer without the prior consent in writing of Salix. Falk acknowledges that in the event of any limited capacity of any such Salix Third Party manufacturer Salix shall be entitled at all times to obtain from such manufacturer all such quantities of Product as it may require for Exploitation in the Salix Territory in priority to any supplies of Product required by Falk.

7. OBLIGATIONS OF SALIX

7.1 Within 30 days of the Effective Date Salix shall deliver to Falk:

7.1.1 the Salix IP; and

7.1.2 the Salix Product Data, which for clarity shall include the Dossier.

7.2 Thereafter during the Term Salix shall (at its sole cost and expense) provide to Falk such assistance as Falk may reasonably require in connection with the performance of its obligations under Clause 6 and shall promptly deliver any further Salix IP or Salix Product Data coming into the possession or control of Salix.

7.3 Salix shall as soon as practicable after the Effective Date take all such actions as may reasonably be required to effect a transfer of the UK MA to Falk and to effect a transfer to Falk of all applications for MAs for the Product in the Territory as may have been commenced as at the Effective Date provided that:

7.3.1 Falk shall provide to Salix all such assistance as it may reasonably require in effecting such transfers; and

7.3.2 Falk shall pay all MA Transfer Costs incurred in connection with any such transfers.

8. PRODUCT DATA

8.1 Falk may at its sole discretion and at its sole cost conduct Falk Studies provided that save only in respect of any Falk Study effected pursuant to a notice served by Falk under Clause 6.2:

8.1.1 Falk Studies shall be only marketing studies effected post MA in a part of the Territory and Falk shall not conduct any Falk Studies in respect of any application for an MA in any country of the Territory; and

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8.1.2 Falk shall not effect any Falk Study without the prior consent in writing of Salix and any such Falk Study shall be effected only in accordance with a protocol therefor approved by Salix.

For the avoidance of doubt, where Falk notifies Salix under Clause 6.2 that it intends to effect Falk Studies in respect of any part of the Territory the conduct of such Falk Studies shall not require any further approval or consent of Salix.

8.2 All Joint Product Data in respect of any Falk Studies shall promptly be made available to Salix. Falk shall keep Salix informed as to conduct, progress and results of any Falk Studies. Salix acknowledges that in respect of any Joint Product Data supplied to it by Falk, it shall comply in all material respects with data privacy requirements applicable to such Joint Product Data.

8.3 All right, title and interest in all Joint Product Data shall be jointly owned by Salix and Falk and either may use such Joint Product Data without further payment or obligation to the other and each of the Parties shall be free to use and Exploit such Joint Product Data and to incorporate it in any regulatory filing provided that:

8.3.1 Salix acknowledges that during the Term it shall not and shall not authorise or permit any Third Party to, use any Joint Product Data in the Territory;

8.3.2 Falk acknowledges that during the Term it shall not and shall not authorise or permit any Third Party to use any Joint Product Data outside the Territory.

8.4 Falk shall assign into the joint names of Salix and Falk its rights in all such Joint Product Data as reasonably required by Salix from time to time. Each Party undertakes to provide such assistance as may reasonably be required by the other Party in connection with the protection of the Joint Product Data from unauthorised use or disclosure and acknowledges that the Joint Product Data shall be deemed Confidential Information of both Parties under the terms of Clause 11.

9. TRADEMARKS

9.1 Salix hereby grants to Falk an exclusive license to the Trademarks in the Territory for use on and in connection with the Product only. Falk undertakes to enter into such registered user and other agreements as may reasonably be required by Salix from time to time to evidence such license and further undertakes to use the Trademarks in the form and manner only as specified by Salix from time to time.

9.2 Falk shall have the sole right and responsibility for developing any trademark(s) for the Product in the Territory (in substitution for the Trademarks) (“Falk Trademarks”), including product names and distinctive artwork and logos, and for seeking registration or other protection of such Falk Trademarks in the Territory. Such Falk Trademarks may be the subject of trademark application(s) in the Territory (effected by Falk) and shall be registered and maintained in the name of Falk at the sole expense of Falk. However, Falk Trademarks to be used from time to time in the commercialization of the Product in the Territory so selected by Falk shall be notified to Salix and such Falk Trademarks shall be subject to the prior approval in writing of Salix, such approval not to be unreasonably withheld or delayed.

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9.3 Insofar as permitted by law and regulation in the Territory and subject to the MAs, all packaging and printed literature for the Product offered for sale in the Territory shall, if so and as long as so requested by Salix, display that the Product is an innovation of Salix and that it is distributed under a license granted by Salix.

9.4 Each Party shall notify the other, in writing, in the event of any infringement of the Trademarks or the Falk Trademarks or potential infringement of the Trademarks or the Falk Trademarks in the Territory or the Salix Territory coming to such Party’s attention. Falk shall be entitled to take such action against any infringers or potential infringers in the Territory as Falk may in its sole discretion determine.

9.5 Salix undertakes that it shall not use or register any tradename or trademark confusingly similar to the Falk Trademarks without the prior consent of Falk which may withhold consent in its absolute discretion in the event that it reasonably considers that any such use may prejudice or otherwise affect the marketing of the Product in the Territory.

10. INTELLECTUAL PROPERTY OWNERSHIP AND INFRINGEMENT

10.1 Salix shall retain all rights, title and interest in and to the Salix IP and the Salix Product Data, including any improvement, amendment, modification, enhancement, discovery or invention to the Product or the use of the Product, together with all Intellectual Property therein. In the event that Falk develops, creates or identifies any improvement, amendment, modification, enhancement, discovery or invention in connection with a Compound in the Indication or otherwise relating to the Product (“an Invention”), Falk shall promptly disclose the Invention to Salix and shall take all such actions and execute all such documents as may reasonably be required to procure the sole ownership thereof by Salix, provided that such Invention shall be licensed back to Falk for Falk to use and exploit the Invention under the terms of this Agreement in such manner as it considers appropriate within the Territory free of any payment in addition to the payments due under Clauses 3 and 4. Except as otherwise expressly provided in this Agreement, Falk has no right, title or interest in any Invention, provided that ownership rights to Joint Product Data resulting from any Falk Studies shall be as described in Clause 8.3. All rights not expressly granted to Falk under this Agreement are reserved by Salix. Falk shall not (and shall not attempt or purport to) file or prosecute in any country any patent application which claims, discloses or uses or purports to claim, disclose or use any Invention, without the prior express written consent of Salix. Additionally, Falk shall not, directly or indirectly prevent or attempt to prevent Salix from filing or prosecuting in any country any patent application which claims, discloses or uses or purports to claim, disclose or use any Invention.

10.2 Salix shall at its own cost prosecute to grant all subsisting Patent applications within the Salix Patents and shall maintain (including payment of all renewal fees) and defend all such Patents granted pursuant to the Patent rights existing as at the date hereof in respect of the Salix Patents in force for the full term thereof Provided Always that Salix shall be released from its obligation to maintain and defend the Salix Patents under this Clause 10.2 where it is advised by appropriately experienced patent counsel in the relevant jurisdiction that the prospects for success or otherwise the merits of its case and the cost of maintaining and defending the Salix Patents do not justify commercially the relevant expenditure by Salix.

10.3 In the event that Falk at any time during the Term becomes aware of any misappropriation or infringement or alleged misappropriation or infringement by a Third

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Party (the “Infringer”) of any part of the Salix IP in the Territory, Falk shall give prompt written notice thereof to Salix and (save only in respect of the Joint Product Data, under Clause 10.4);

10.3.1 Salix shall have the first right (but not the obligation) to take such steps against an Infringer including all injunctive, compensatory and other remedies and relief (collectively “Remedies”), as may be necessary or desirable to prevent such infringement and preserve the Salix IP. Salix shall permit any such Remedies to be brought in its name if permitted or required by law. Salix may compromise or settle any of the Remedies in its sole discretion provided that Salix shall not make any settlement or compromise that adversely affects the interests of Falk in respect of the Products in the Territory without the prior consent in writing of Falk, such consent not to be unreasonably withheld or delayed.

10.3.2 In the event that Salix elects not to pursue Remedies with respect to the Salix IP within the Territory within ninety (90) days after notice in writing from Falk requesting Salix to do so, Salix shall provide full details of advice obtained under Clause 10.2 to Falk. Thereafter, and in any event if Salix fails to pursue Remedies against such Infringer Falk shall have the right (but not the obligation) to pursue Remedies against such Infringer provided that Falk shall not make any settlement or compromise that adversely affects the interests of Salix in the Products outside the Salix Territory without the prior consent of Salix, such consent not to be unreasonably withheld or delayed and provided that if Salix has commenced negotiations with an Infringer for discontinuance of such Infringement within such ninety (90) day period, Salix shall have an additional ninety (90) day period to conclude its negotiations before Falk may bring suit for such Infringement.

10.4 In the event that Falk at any time during the Term becomes aware of any misappropriation or infringement or alleged misappropriation or infringement by an Infringer of any part of the Joint Product Data in the Territory, Falk shall give prompt written notice thereof to Salix and Falk shall have the first right (but not the obligation) to take such Remedies as may be necessary or desirable to prevent such infringement and preserve the Joint Product Data. Falk shall permit any such Remedies to be brought in its name if permitted or required by law. Falk may compromise or settle any of the Remedies in its sole discretion provided that Falk shall not make any settlement or compromise that adversely affects the interests of Salix in respect of the Joint Product Data outside the Territory without the prior consent in writing of Salix, such consent not to be unreasonably withheld or delayed.

10.5 In the event that either Party shall pursue Remedies under Clauses 10.3 or 10.4;

10.5.1 the other Party shall use all reasonable efforts to assist and cooperate with the Party pursuing such Remedies, including providing access to relevant documents and other evidence; and

10.5.2 each Party shall bear its own costs and expenses relating to its pursuit of Remedies or in providing assistance and cooperation; and

10.5.3 any damages or other amounts collected by either Party shall be used, (i) by the Party that pursued Remedies, to cover its costs and expenses incurred, (ii) by the other Party to cover its costs and expenses, if any, relating to the pursuit of such Remedies and (iii) the remaining amount, shall be allocated between Falk and

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Salix equitably as appropriate to reflect the loss suffered by each Party in connection with the actions of the Infringer and as appropriate to reflect the basis on which such damages were awarded in any such action to compensate for the loss of each Party.

10.6 In the event that a Third Party institutes a patent, trade secret or other infringement suit against Falk or its Affiliates during the Term, alleging that its Exploitation of the Product in the Territory infringes one or more Patents or other Intellectual Property rights held by such Third Party (an “Action”), Falk shall promptly notify Salix thereof in writing and promptly discuss with Salix the best way to respond.

10.6.1 Save as specified in Clause 10.6.2, Falk shall have the exclusive right to defend and control the defence of any such Action using counsel of its own choice, and the Action, subject to Clause 13, shall be at Falk’s own expense; provided that Salix may participate in the defence and/or settlement of such Action at its own expense with counsel of its choice and provided that Falk shall not enter into any settlement to the extent that such Action and/or the settlement of such Action is the subject of any claim made by Falk against Salix for indemnification under Clause 13.1 except as agreed in writing between the Parties, such agreement not to be unreasonably withheld and delayed. Falk acknowledges that any such agreement of Salix to any such settlement shall be without prejudice to the right of Salix to dispute any claim for indemnification in respect thereof. Falk further acknowledges that in the event that Falk enters into any settlement, without the agreement of Salix, in circumstances where such Action and/or the settlement of such Action is not as at the date of such settlement, the subject of any claim made by Falk against Salix for indemnification under Clause 13.1, Falk shall not subsequently make any claim for indemnification against Salix under Clause 13.1 in respect of such Action or settlement.

10.6.2 In the event that Salix shall have acknowledged its obligation to indemnify Falk in respect of any such Action under Clause 13, Salix shall have the exclusive right to defend and control the defence of any such Action using counsel of its own choice and the Action shall be at Salix’s own expense; provided that Falk may participate in the defence and/or settlement of such Action at its own expense with counsel of its choice and provided that Salix shall not enter into any settlement relating to the Product in the Territory if such settlement admits the invalidity or unenforceability of any of the Salix IP except as agreed in writing between the Parties, such agreement not to be unreasonably withheld and delayed.

10.6.3 In any such Action under Clauses 10.6.1 or 10.6.2, the Parties shall cooperate with each other in connection with any such claim, suit or proceeding and shall keep each other reasonably informed of any material developments in connection with any such claim, suit or proceeding, including providing access to relevant documents and other evidence.

10.6.4 It is agreed by the Parties that if by reason of any such Action or any settlement or other resolution of the same, Falk is obliged to effect payment of a royalty or other monetary compensation to the relevant Third Party in respect of its use of rights in any Third Party Intellectual Property in the Exploitation of the Products in the Territory, the Royalties due to Salix under Clause 3.1 shall continue unamended and Falk shall not make any deduction in respect of any payment to any such Third Party provided that the foregoing shall not affect any liability of Salix under Clause 13, arising out of or in connection with any Action.

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11. CONFIDENTIALITY

11.1 Each Party undertakes that in relation to all confidential information of the other Party which may be within or come into its possession in connection with or arising from this Agreement (including confidential information disclosed by the parties in confidence in the negotiations relating to this Agreement, prior to the Effective Date) or which it may generate in reliance on any confidential information so disclosed (such confidential information of Salix to include all information relating to the Salix IP, the Salix Product Data, any Improvement, any Invention under Clause 10.1 or any Joint Product Data and such confidential information of Falk to include all information relating to the Joint Product Data, marketing and development information and other information delivered to Salix under Clauses 6.2 and 6.4 (collectively “Confidential Information”, comprising respectively “Salix Confidential Information” or “Falk Confidential Information”, as applicable) it will keep the same secret and confidential and will not at any time for any reason whatsoever disclose or permit the same to be disclosed to any Third Party (save as provided in Clauses 11.3, 11.5 and 11.7 below).

11.2 The obligations of confidentiality contained in this Clause 11 shall not extend to any part of the Confidential Information of the disclosing Party which the recipient Party can show by documentary evidence:

11.2.1 shall (otherwise than by reason of any default by the recipient Party) become freely available to the general public; or

11.2.2 was legally in its possession or control free of any obligation of confidentiality prior to the date upon which it was received from the other Party; or

11.2.3 came into its possession or control legally from a Third Party free of any obligation of confidentiality and otherwise than by reason of any breach of any obligation of confidentiality by such Third Party; or

11.2.4 was generated from research and development efforts by the non-disclosing Party, its Affiliates or sublicensees independent of disclosure by the disclosing Party.

11.3 Either Party shall be permitted to disclose the other Party’s Confidential Information at such times and in such manner as may be required by law or any relevant regulatory authority or any relevant Stock Exchange regulation provided that in such circumstances it shall notify the other Party of such disclosure, shall limit such disclosure to what is strictly required and shall endeavour (insofar as is appropriate) to preserve the confidentiality of any such Confidential Information so disclosed.

11.4 In the event that either Party is required at any time whilst it shall retain any Confidential Information under the terms of this Agreement by any relevant law or regulation to disclose all or any part of the Confidential Information:

11.4.1 it shall forthwith notify the other Party of such part of the Confidential Information as may be required to be disclosed by law, the extent to which such disclosure is required and the circumstances in which such disclosure is required or effected pursuant to any applicable law; and

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11.4.2 it shall keep the other Party informed of the extent and nature of such disclosure; and

11.4.3 it shall ensure that any Party to whom all or any part of the Confidential Information is disclosed by reason of any disclosure required by law is made fully aware of the confidentiality obligations attaching to the Confidential Information and shall (insofar as is possible) procure an equivalent obligation of confidentiality from any such Party.

11.5 It is acknowledged that notwithstanding the provisions of Clause 11.1 above each Party shall be entitled to disclose any Confidential Information of the other Party to its agents, representatives, employees and consultants (collectively “Third Party Recipients”) to the extent necessary to facilitate the performance of its obligations in connection with this Agreement provided that any such disclosure shall be limited to what is necessary in order to facilitate the performance of such obligations and the disclosing Party shall procure that any Third Party recipient shall be bound by obligations of confidentiality substantially similar to the provisions of this Clause 11.

11.6 Subject to the provisions of Clause 11.9 neither Party shall issue any press release or communication to be published by or in the media in any manner concerning the subject matter of this Agreement without the prior written consent of the other Party (such consent not to be unreasonably withheld or delayed).

11.7 For the avoidance of doubt it is acknowledged that subject to the terms of Clauses 11.3, 11.4 and 11.5 Salix may disclose the Joint Product Data to the extent reasonably required in connection with Exploitation of the Product outside the Territory and Falk may use and disclose the Joint Product Data as may reasonably be required in connection with its Exploitation of the Product in the Territory. It is further acknowledged that, subject to Clauses 11.3, 11.4 and 11.5 the terms of this Agreement and the contents of its Schedules shall constitute Confidential Information of each Party under the terms of this Clause 11.

11.8 The obligations of both Parties under Clauses 11.1 to 11.7 (inclusive) shall remain in force for the Term and continue thereafter for a period of five (5) years.

11.9 The Parties agree that each Party may within the period of ten days following the Effective Date issue a press release substantially in the form of Schedule 3.

12. REPRESENTATIONS AND WARRANTIES

12.1 Falk hereby represents and warrants to Salix as at the Effective Date as follows:

12.1.1 Falk is a company duly organized, validly existing and in good standing under the laws of Germany;

12.1.2 Falk has full power, authority and legal right to execute and deliver this Agreement and to perform its obligations hereunder;

12.1.3 the execution and delivery of this Agreement by Falk has been duly authorized by all necessary actions of Falk;

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12.1.4 this Agreement is a legal and valid obligation of Falk, binding upon Falk and enforceable in accordance with its terms;

12.1.5 The execution, delivery and performance of this Agreement do not and will not violate any provision of any indenture, agreement or other instrument or document to which Falk is a Party or by which any of its assets or properties is bound or affected or be in conflict with or result in a breach of or constitute a default under any such indenture, agreement, instrument or document; and

12.1.6 other than consents, authorizations, filings, notices and other acts that have been obtained or anticipated in this Agreement, no consent or authorization of, filing with, notice to or other act by or in request of, any governmental authority or any other person, in the name of Falk, is required in connection with the execution, delivery, performance, validity or enforceability of this Agreement.

12.2 Salix hereby represents and warrants to Falk as at the Effective Date as follows:

12.2.1 Salix is a corporation duly organized and in good standing under the laws of California;

12.2.2 Salix has the full power and legal right to execute and deliver this Agreement, grant the rights granted to Falk hereby and perform Salix’s obligations hereunder;

12.2.3 the execution and delivery of this Agreement by Salix has been duly authorised by all necessary actions on the part of Salix;

12.2.4 this Agreement is a legal and valid obligation of Salix, binding upon Salix and enforceable in accordance with its terms;

12.2.5 the execution, delivery and performance of this Agreement do not and will not violate any provision of any indenture, agreement or other instrument or document to which Salix is a Party or by which any of its assets or properties is bound or affected or be in conflict with or result in a breach of or constitute a default under any such indenture, agreement, instrument or document;

12.2.6 other than consents, authorizations, filings, notices and other acts that have been obtained or anticipated in this Agreement, no consent or authorization of, filing with, notice to or other act by or in request of, any governmental authority or any other person, in the name of Salix, is required in connection with the execution, delivery, performance, validity or enforceability of this Agreement.

12.2.7 there is no action or proceeding nor, so far as Salix is aware (due inquiry having been made), any threat of an action or proceeding that would materially and adversely affect the rights granted to Falk under the terms of this Agreement in respect of the Product;

12.2.8 Salix is not aware of any Patents or Patent applications that may in Salix’s reasonable opinion, interfere in any material manner with the Exploitation by Falk of the Product under the terms of this Agreement;

12.2.9 the Salix IP and Salix Product Data includes all Intellectual Property, Know-how and Confidential Information in the possession, custody or control of Salix

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which is to the best of the scientific judgement of Salix reasonably required for the Exploitation of the Product by Falk under the terms of this Agreement;

12.2.10 to the best of Salix’s scientific judgment, the Salix IP and Salix Product Data (including all documents recording or embodying the same) supplied to Falk by Salix under Clause 7 are true, accurate and up to date;

12.2.11 there are in respect of any part of the Territory:

(a) no outstanding orders, judgments, injunctions, awards or decrees of any court or arbitrator or any other governmental regulatory body relating to the Product;

(b) no challenges, oppositions, actions, suits, personal injury or product liability or other claims, legal, administrative or arbitral proceedings or investigations against Salix, its Affiliates or sublicensees pending or threatened against or relating to the Product which have had or in the reasonable opinion of Salix may have a material adverse effect on the Exploitation of the Product in the Territory; and

(c) Salix is not aware of any written communication from or to the EMEA or any relevant regulatory authority in any part of the Territory which indicates that any application for an MA in such part of the Territory is likely to be rejected;

12.2.12 there are in respect of any part of the Salix Territory so far as Salix is aware having made diligent enquiry;

(a) no outstanding orders, judgments, injunctions, awards or decrees of any court or arbitrator or any other governmental regulatory body relating to the Product;

(b) no challenges, oppositions, actions, suits, personal injury or product liability or other claims, legal, administrative or arbitral proceedings or investigations against Salix, its Affiliates or sublicensees pending or threatened against or relating to the Product which have had or in the reasonable opinion of Salix may have a material adverse effect on the Exploitation of the Product in the Territory; and

(c) Salix is not aware of any written communication from or to the FDA or other regulatory authorities which indicates that any marketing authorisation or product approval in respect of the Product in the Salix Territory granted are likely to be invalid or subject to challenge, revocation or withdrawal or that applications for any of the same are likely to be rejected;

12.2.13 Salix is either the sole legal and beneficial owner or is the licensee of the sole legal beneficial owner of all right title and interest in and to the Salix Patents free of any lien, charge or encumbrance; and

12.2.14 so far as Salix is aware having made diligent enquiry, the Salix Patents are valid and enforceable and no act or omission has occurred whereby any of the Salix Patents has ceased to be valid and enforceable and no circumstance exists which might cause any of the Salix Patents to cease to be valid and enforceable.

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12.3 The warranties expressly set forth in this Clause 12 by each Party are exclusive and no other warranty, written or oral, is expressed or implied. Other than as expressly set forth in this Clause 12, Salix makes no warranty to Falk of any kind whether express, implied or statutory, regarding the Product and expressly disclaims all warranties and terms of non-infringement of third party rights, quality, fitness for a particular purpose or merchantability and Falk acknowledges and agrees that there are known and unknown inherent risks involved in developing and marketing a pharmaceutical product in the Territory. Furthermore, save in respect of any breach of warranty by Salix, Salix will not be liable to Falk in any amount in the event that Falk does not obtain an MA in any part of the Territory.

12.4 Each party acknowledges that in entering into this Agreement it does not do so on the basis of and does not rely on any representation or warranty or other provision (except as expressly provided herein) and all conditions, warranties or other terms implied by statute or common law are hereby excluded to the fullest extent permitted by law.

12.5 Falk acknowledges that in respect of the exercise by it of the rights granted under this Agreement it is not authorised to and shall not make any warranty, express or implied, on behalf of Salix.

13. INDEMNIFICATION AND LIABILITY

13.1 Salix shall defend, indemnify and hold Falk, its Affiliates and Sublicensees (the “Falk Indemnitees”) harmless from any claim, liability, damage or loss (including reasonable attorneys’ fees and disbursements) (“Losses”) arising out of:

13.1.1 any breach by Salix of the representations, warranties given under Clause 12.2; or

13.1.2 the manufacture and/or Exploitation of the Product by Salix, its Affiliates or licensees outside the Territory

save to the extent that the event giving rise to such Losses is an event which would give rise to an indemnification obligation of Falk under Clause 13.2 and provided that Salix shall have no obligation to indemnify any Falk Indemnitee against any Losses in connection with any product liability claim arising solely out of the manufacture, use or sale of the Product by Falk and its Affiliates and Sublicensees, regardless of whether such claim arises in tort, contract, strict liability, product liability or any other legal theory.

13.2 Falk shall defend, indemnify and hold Salix and its Affiliates harmless from any Losses arising out of:

13.2.1 any breach by Falk of the representations and warranties given under Clause 12.1; or

13.2.2 the manufacture and/or Exploitation of the Product by Falk, its Affiliates or Sublicensees in the Territory;

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save to the extent that the event giving rise to such Losses in respect of Falk’s or its Affiliates’ or Sublicensees’ Exploitation of such Product is an event which would give rise to an indemnification obligation of Salix under Clause 13.1.

13.3 Each indemnified Party agrees to give the indemnifying Party prompt written notice of any Losses or the discovery of a fact upon which such indemnified Party intends to base a request for indemnification hereunder.

13.4 Each Party shall furnish promptly to the other copies of all papers and official documents received in respect of any Losses. The indemnified Party shall co-operate as reasonably requested by the indemnifying Party in the defence against any Losses.

13.5 With respect to Losses relating to all matters as to which the indemnifying Party shall have acknowledged in writing the obligation to indemnify the indemnified Party hereunder, the indemnifying Party shall have the sole right to control the defence of such matter; provided that the indemnifying Party shall obtain the written consent of the indemnified Party, prior to ceasing to defend, settling or otherwise disposing of any Losses if as a result thereof:

13.5.1 the indemnified Party would become subject to injunctive or other equitable relief or any remedy other than the payment of money by the indemnifying Party; or

13.5.2 the business of the indemnified Party would be adversely affected.

The indemnified Party shall have the right to control the defence of all other matters; provided that the indemnifying Party shall not be liable for any settlement or other disposition of a Loss by the indemnified Party which is reached without the written consent of the indemnifying Party, which consent shall not be unreasonably withheld.

13.6 Except as provided above, the costs and expenses, including reasonable fees and disbursements of counsel, incurred by any indemnified Party in connection with any claim shall be reimbursed on a Quarterly basis by the indemnifying Party, without prejudice to the indemnifying Party’s right to contest the indemnified Party’s right to indemnification and subject to refund in the event the indemnifying Party is ultimately held not to be obligated to indemnify the indemnified Party.

13.7 Except in circumstances of gross negligence or wilful misconduct by a Party or its Affiliates and save as may be required in connection with any indemnity under this Clause 13;

13.7.1 neither Falk or Salix shall be liable to the other for special, exemplary, indirect, incidental, punitive or consequential damages, whether in contract, warranty, negligence, tort, strict liability or otherwise;

13.7.2 the aggregate liability of Salix for damages in connection with any claim or action arising under the terms of or in connection with this Agreement, whether in contract, warranty, negligence, tort, strict liability or otherwise, shall not exceed [*] US dollars (US $[*]).

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

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14. ADVERSE REACTIONS REPORTING

14.1 Salix and Falk agree to exchange adverse event information in such manner and following such procedure as may be agreed between the Parties after the Effective Date.

15. RESTRICTIONS

15.1 Each of Falk and Salix agrees that during the Term, neither of them shall directly or indirectly solicit or encourage any employee or consultant of the other to leave or terminate such employment or consultancy for any reason, including without limitation, becoming employed or otherwise engaged in any capacity by such Party (or any person or entity associated with such Party) nor shall it assist others in doing so.

16. FORCE MAJEURE

16.1 In the event that the performance of the obligations of either Party is prevented, restricted or hindered by any event of Force Majeure such Party:

16.1.1 shall not be liable to the other Party for any damages arising from any breach of the terms of this Agreement caused by Force Majeure; and

16.1.2 shall immediately serve notice in writing on the other Party specifying the nature of the Force Majeure event, its effect upon its performance of this Agreement and the period of time in which it is anticipated to apply; and

16.1.3 shall use its reasonable endeavours to overcome the Force Majeure event and resume its proper performance of its obligations under this Agreement.

17. OPTION COUNTRIES

17.1 It is acknowledged that as at the Effective Date the Option Countries do not form part of the Territory and notwithstanding the obligations of Falk to seek MAs for each of the Option Countries under the provisions of Clause 6.1.2, Falk has no rights under this Agreement or otherwise to Exploit the Product in an Option Country.

17.2 Salix hereby grants to Falk an option to amend the Territory by the addition of an Option Country, such option to be exercised (on one or two occasions) at any time by service of notice in writing by Falk on Salix and, subject to Clause 17.4, on receipt of such notice, the Parties shall negotiate in good faith and execute as soon as reasonably practicable thereafter an amendment to this Agreement amending the Territory to include for all purposes with effect from the date of execution of such amendment, the Option Country designated in such notice provided that on execution of such amendment, in consideration of the grant of rights by Salix to Falk under the terms of this Agreement in respect of an Option Country, Falk shall pay to Salix the sum of US $[*] ([*] US dollars) in respect of such Option Country.

17.3 Salix may in its sole discretion terminate the option granted under Clause 17.2 in respect of an Option Country in the circumstances specified in and under the terms of Clause 6.2.

17.4 If Salix commences negotiations with any Third Party who wishes to acquire rights in respect of the Salix IP and the Product, to enable it to have manufactured and to Exploit any Products in an Option Country, Salix shall by notice in writing to Falk, notify Falk that the option granted under Clause 17.2 shall be suspended from the date of such notice.

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

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17.5 In the event that Salix grants rights in respect of the Salix IP and the Product to any Third Party in respect of an Option Country after service of any suspension notice under Clause 17.4 it shall forthwith by notice in writing to Falk terminate the option granted under Clause 17.2 and thereafter Falk shall have no further rights or obligations under this Clause 17 or otherwise under this Agreement in respect of such Option Country.

17.6 If notwithstanding service of a suspension notice under Clause 17.4, Salix terminates its negotiations with any Third Party, Salix may by subsequent notice in writing to Falk lift the suspension of the option and with effect from the date of receipt of any such further notice, the option granted under Clause 17.2 shall be fully reinstated and effective, unless and until service of a subsequent suspension notice under Clause 17.4.

17.7 If Salix serves notice on Falk under Clause 17.5 terminating the option under Clause 17.2 in respect of any Option Country Falk shall:

17.7.1 be released from any further obligation under Clause 6.1 in connection with any MA for such Option Country; and

17.7.2 promptly on receipt of any such notice requiring the same, take all such steps as may reasonably be required to effect a transfer to Salix (or as it may require) of any application for an MA or any MA granted in respect of such Option Country. Salix or its nominee shall:

(a) pay all MA Transfer Costs in connection with any such transfer; and

(b) reimburse Falk all third party costs reasonably and necessarily incurred by Falk prior to such date in connection with the application and grant of such MA in such Option Country as evidenced by copy third party invoices, such reimbursement not to exceed €[*] in respect of each Option Country.

18. TERMINATION

18.1 This Agreement shall become effective as of the Effective Date and unless earlier terminated pursuant to the other provisions of this Clause 18, shall continue in full force and effect for the Term.

18.2 Falk may terminate this Agreement at any time after the Effective Date if Falk reasonably considers that the continued Exploitation of the Products in the Territory by Falk is no longer in the commercial interests of Falk, provided that Falk shall have discussed such circumstance and consulted fully with Salix and the Parties shall have discussed and if appropriate amended the Minimum Royalty Payments under Clause 4, prior to Falk effecting any such termination. Such termination shall be made by providing twenty four months written notice to Salix provided that Salix may in its sole discretion reduce such notice period or permit termination during such notice period. During such notice period all obligations of Falk under this Agreement shall continue in full force and effect (including in particular all payment obligations) and the obligation to effect payment of Minimum Royalties shall be apportioned over the relevant part Years up to the date of expiry of such notice period (or earlier termination permitted by Salix) and any shortfall shall be calculated by reference to Royalties due in respect of Net Sales in such period to the date of expiry of such notice or earlier termination.

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

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18.3 In the event there shall have occurred a material adverse breach of this Agreement or a material adverse default in the observance or performance of any provision of this Agreement by a Party (the “Defaulting Party”), the Party claiming the same (the “Non Defaulting Party”) shall promptly provide detailed notice thereof to the Defaulting Party. The Defaulting Party shall have sixty (60) days from the date of receipt of such notice to cure the material adverse breach or material adverse default detailed in such notice and, if the same is timely cured within such sixty (60) day period the provisions of this Agreement shall remain in full force and effect. In the event that the material adverse breach or material adverse default detailed in such notice cannot with due diligence be cured within such sixty (60) day period, and the Defaulting Party promptly notifies the Non Defaulting Party of the period (not exceeding 120 days) in which it anticipates that it can be cured, the time to cure such material adverse breach or material adverse default shall be extended for such period (up to a maximum of 120 days) as may be necessary to cure the same with all due diligence. This Agreement may be terminated forthwith by service of notice in writing by the Non Defaulting Party in the event that the Defaulting Party shall fail to cure such material adverse breach or material adverse default within such initial or extended period. The right of a Party to terminate this Agreement, under this Clause 18.3 shall not be affected in any way by its waiver or failure to take action with respect to any prior breach or default and shall be without prejudice to any other rights of the Non Defaulting Party in connection with any such material adverse breach or material adverse default.

18.4 In the event that Falk suffers a Change of Control it shall promptly notify Salix of such event and Salix may within a period of thirty (30) days after the date of such notice terminate this Agreement by service of four (4) months notice of termination to Falk provided that this Agreement shall not terminate upon the expiry of such notice period, if on or before the expiry of such four (4) month notice period Falk shall pay to Salix a sum (the “Non Termination Payment”);

18.4.1 In the event that such Change of Control occurs at any time prior to the sixth anniversary of the Effective Date, the Non Termination Payment shall be US $[*] ([*] US dollars); and

18.4.2 In the event that such Change of Control occurs at any time after the sixth anniversary of the Effective Date, the Non Termination Payment shall be a sum equal to the Royalties payable in a single Year under Clause 3.1.3 (calculated as the average of all Royalties actually paid by Salix to Falk under Clause 3.1.3 in each complete Year after Year 5, preceding the date of Change of Control); and

any such Non Termination Payment shall creditable against Royalties due under clause 3.1.3 in the one Year following the date of the Non Termination Payment only and for the avoidance of doubt any part of the Non Termination Payment not offset during such Year following the date of payment shall not thereafter be creditable against Royalties.

19. CONSEQUENCES OF TERMINATION.

19.1 Upon the effective date of termination of this Agreement howsoever caused or arising under Clause 18:

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

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19.1.1 all rights and licenses of Falk under this Agreement with respect to the Territory shall immediately terminate and Falk shall;

(a) cease all use of the Salix IP and the Salix Product Data; and

(b) cease development and Exploitation of the Product; and

(c) immediately return to Salix all relevant records and materials in its possession or control containing or comprising Salix’s Know-How and Confidential Information (except one copy of which may be retained in Falk’s confidential files for archival purposes); and

(d) provide Salix with copies of all Joint Product Data (if any) not previously provided to Salix; and

(e) at the terminating party’s cost, take all such actions as may reasonably be required to effect a transfer to Salix (or as it may direct) of all MAs for the Product in the Territory or any Option Country and any applications for any such MAs; and

(f) at the terminating party’s cost, transfer to Salix or as it may direct, any Falk Trademark used on the Products in the Territory under the provisions of Clause 9, provided that Salix shall not acquire any rights in the tradename “Falk” or any part of any Falk Trademark containing the name “Falk” or any other tradename of Falk applied to other Falk products in addition to being used in connection with the Products.

19.1.2 Falk shall, and shall cause its Affiliates and Sublicensees to, immediately cease all Exploitation of the Product. However, Falk shall be entitled to sell all stock of the Product in its possession or control during a period of three (3) months after the effective date of termination provided that if so required by notice in writing served by Salix on Falk within 30 days of the effective date of termination Falk shall sell and Salix shall purchase all such stock of Product at a price calculated as the cost to Falk incurred in respect of the manufacture of such stock of Product.

19.1.3 Save only as provided in Clause 19.2 or otherwise in respect of Royalties and other sums accrued due to Salix prior to the effective date of termination, no further payment shall be due from Falk either upon such termination or otherwise under the terms of this Agreement after the effective date of termination.

19.2 Termination of this Agreement for any cause shall not bring to an end:

19.2.1 the confidentiality obligations of the Parties hereunder;

19.2.2 Falk’s obligation to pay Royalties or other sums which have accrued due to Salix up to and including the effective date of termination, in accordance with Clauses 3 and 4; and

19.2.3 any provision of this Agreement which in order for full effect to be given thereto needs to survive termination of this Agreement.

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19.3 Any termination of this Agreement shall be without prejudice to the rights and remedies of either Party with respect to any of the provisions of this Agreement or arising out of breaches prior to such termination and shall not relieve either Party of any obligations or liability accrued hereunder prior to such termination including, without limitation, indemnity obligations and confidentiality obligations, nor rescind or give rise to any right to rescind anything done or payments made or other consideration given hereunder prior to the time of such termination.

19.4 If this Agreement expires on the expiration of the Term, the licenses granted hereunder shall continue thereafter on a non exclusive basis and shall be fully paid-up and perpetual and for the avoidance of doubt;

19.4.1 Falk shall thereafter be entitled to Exploit the Product in the Territory free of any further payment to Salix; and

19.4.2 Salix shall be entitled either itself or by a Third Party to exploit the Product in the Territory.

20. NOTICES

20.1 All notices, statements or other documents that either Party shall be required or shall desire to give to the other hereunder shall be in writing and shall be given by the Parties only as follows:

20.1.1 by personal delivery; or

20.1.2 by addressing it as indicated below or to such other address as such Party shall have last given by notice to the other Party, and by depositing it certified mail, postage prepaid, in the mail, airmail; or

20.1.3 by addressing it as indicated below or to such other address as such Party shall have last given by notice to the other Party, and by delivering it prepaid to a recognized courier service (e.g., Federal Express or DHL).

20.2 If so delivered, mailed, or couriered, each such notice, statement or other document shall, except as herein expressly provided, be conclusively deemed to have been given when personally delivered during a Business Day, or on the fifth Business Day after the date of mailing, or on the second Business Day after delivery to a courier service, as the case may be. The address of a Party shall be the address at which the other Party actually receives written notice pursuant to this Clause 20 and until further notice is:

If to Falk:	Leinenweberstraße 5, 79108 Freiburg, Germany
Facsimile:	+49/761/1514-356
Attention:	CEO
If to Salix:	1700 Perimeter Park Drive, Morrisville, NC 27560-8404, USA
Facsimile:	+1 919 862 1095
Attention:	CEO, with a copy to General Counsel

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20.3 Either Party may also deliver a copy of any such notice by facsimile to the fax numbers specified above.

21. ENTIRE AGREEMENT

21.1 This Agreement contains the entire agreement between the Parties with respect to the transactions contemplated herein or effected hereby in respect of the Product and supersedes all prior written agreements, all previous communications, either oral or written, and all negotiations and oral understandings, if any, between the Parties hereto in respect of the Product prior to the Effective Date.

21.2 The parties acknowledge and undertake that nothing contained in this Agreement shall affect in any manner whatsoever the rights and obligations of the parties under an agreement dated July 15, 2002 (“the 2002 Agreement”) pursuant to which Salix was granted rights in respect of the Salix Territory to a Falk Product provided that the Parties expressly acknowledge that the provisions of Clause 5.3 of the 2002 Agreement shall cease to apply in respect of any payments due under this Agreement and each party acknowledges and undertakes that there shall be no right of set off between the Parties:

21.2.1 under this Agreement, in respect of any sums due under the 2002 Agreement; or

21.2.2 under the 2002 Agreement, in respect of any sums due under this Agreement.

22. ASSIGNMENT

22.1 Subject only to Clause 22.2, each Party may assign its rights and obligations under this Agreement to its Affiliates, provided that save where this entire Agreement is assigned to an Affiliate whose identity shall have previously been approved in writing by the other Party (such approval not to be unreasonably withheld or delayed), the assigning Party shall remain liable for the due and proper performance of its obligations hereunder. In the event a Party assigns all or any of its rights hereunder to an Affiliate whose identity shall have been previously approved by the other Party, such other Party agrees to enter into such supplemental agreements not inconsistent herewith with such Affiliate as may be necessary or advisable to permit such Affiliate to avail itself of or perform any right or obligation of the assigning Party hereunder.

22.2 Notwithstanding the provisions of Clause 22.1, Salix undertakes that this Agreement shall be assigned only to an Affiliate or Third Party to whom Salix has assigned all right title and interest in the Salix IP and the Joint Product Data and that its rights under this Agreement and its rights in the Salix IP and Joint Product Data, shall at all times be held in common ownership by a single entity.

22.3 Either Party may assign any or all of its rights or obligations under this Agreement in connection with a Change of Control, merger or acquisition of such Party or its Affiliates or of substantially all of the assets thereof, which such assignment shall not require the consent of the other Party (subject always to the provisions of Clause 18.4 in the event of a Change of Control of Falk).

22.4 Save as expressly provided in Clauses 22.1 and 22.3 neither Party shall assign, charge or transfer this Agreement to a Third Party without the written consent of the other.

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23. NON-WAIVER OF RIGHTS

Failure of a Party to enforce any of the provisions or any rights with respect to this Agreement shall in no way be considered a waiver of such provisions or rights or in any way affect the validity of this Agreement. The failure of either Party to enforce any of such provisions or rights shall not preclude or prejudice such Party from later enforcing or exercising the same or any other provisions or rights which it may have under this Agreement.

24. AMENDMENT

This Agreement may not be revised, amended, supplemented or varied except by an instrument in writing signed by Falk and Salix.

25. INDEPENDENT CONTRACTORS

Nothing in this Agreement shall create or imply an association, partnership or joint venture between the Parties hereto, it being agreed and understood that the Parties are independent contractors and neither Party, with respect to a Third Party, shall have the power or authority to bind or obligate the other Party in any way.

26. FURTHER ASSURANCES AND COOPERATION

Each Party agrees that after the date hereof it will execute and deliver, or cause the execution and delivery of, such further documents and instruments as may be reasonably necessary or proper to fully effectuate this Agreement and the transactions contemplated thereby.

27. SEVERABILITY

This Agreement is intended to be valid and effective under any applicable law and, to the extent permissible under applicable law, shall be construed in a manner to avoid violation of or invalidity under any applicable law. Should any provisions of this Agreement be or become invalid, illegal or unenforceable under any applicable law, the other provisions of this Agreement shall not be affected and shall remain in full force and effect and, to the extent permissible under applicable law, any such invalid, illegal or unenforceable provision shall be deemed amended lawfully to conform with the intent of the Parties.

28. DISPUTE RESOLUTION

28.1 Within ten (10) days of either Party becoming aware of any dispute relating in any manner to this Agreement or the terms hereof it shall prepare and submit to the Chief Executive Officer or such other senior manager as may be nominated from time to time for such purpose (“CEOs”) of each of the Parties a memorandum or statement setting out its position in respect of the matter in dispute and its reasons for adopting that position. The other Party shall within ten (10) Business Days of receipt of the memorandum or statement prepare and submit to the other Party a memorandum or statement setting out like particulars on its own behalf and the CEOs shall consider the dispute in the light of those statements.

34

28.2 If the CEOs agree upon the resolution of the dispute they shall issue a joint statement setting out the agreed terms and shall exercise and powers available to them to procure that the agreed terms are fully and promptly carried into effect.

28.3 If the dispute is not resolved or disposed of in accordance with this Clause 28, within thirty (30) days of compliance with the terms of Clause 28.1, or if either Party shall fail to comply with the terms of Clause 28.2, either Party may by notice in writing request mediation in accordance with the provisions of Clause 28.4.

28.4 If either Party by notice in writing under Clause 28.3 invokes mediation, the CEOs shall agree upon a mediator in England. Each Party shall propose a list of up to five names within 10 Business Days of the date of the written notice invoking mediation. Each such name proposed shall be of an independent Third Party with appropriate experience and expertise. If any of the names are the same the Parties shall agree upon a mediator from the names they have jointly proposed. If none of the names are the same the Party who initiates mediation shall select a mediator from the list provided by the non-initiating Party. All lists of mediators shall include a full résumé for each mediator named on the list. The Parties shall complete the process of selecting a mediator within 20 days of the date of the written notice invoking mediation. If the Parties are unable to reach a mediated resolution within 60 days after selection of the mediator, the provisions of Clause 29 shall apply.

29. LAW AND ARBITRATION

29.1 Any controversy or claim of whatsoever nature arising out of or relating in any manner whatsoever to this Agreement or any breach of any terms of this Agreement shall be governed by and construed in all respects in accordance with the laws of England without regard to any choice of law provisions or rule that might otherwise refer construction or interpretation of this Agreement to the substantive law of another jurisdiction.

29.2 If the Parties are unable to reach a mediated resolution according to Clause 28.4, either Party may submit any dispute or other claim arising out of or in connection with this Agreement for resolution by binding arbitration in London, United Kingdom under the rules of arbitration of the London Court of International Arbitration (“LCIA”) before a single independent arbitrator with relevant business, financial, scientific or other experience based on the subject matter of the dispute. The Parties shall seek to agree the sole arbitrator and in the absence of agreement the arbitrator shall be appointed as determined by the LCIA rules. All costs incurred in the arbitration shall be borne as directed by the arbitrator. Judgment on the award rendered by the arbitrator shall in the absence of manifest error or failure of the arbitrator to conduct the arbitration in accordance with said LCIA Rules be binding on the Parties with no right of appeal to any court and such judgement may be entered by either Party in any court having jurisdiction thereof.

29.3 Nothing in either Clause 28 or this Clause 29 shall be construed to limit or preclude a Party from bringing an action in any court of competent jurisdiction for injunctive or other equitable relief as may reasonably be appropriate to protect the Intellectual Property of such Party.

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29.4 Each Party shall be entitled to recover from the other Party any costs (including reasonable legal fees) reasonably incurred by such Party in enforcing any payment or other obligation under the terms of this Agreement.

30. COUNTERPARTS

This Agreement may be executed simultaneously or in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

31. INTERPRETATION

In the event of a dispute hereunder, this Agreement shall be interpreted in accordance with its fair meaning and shall not be interpreted for or against a Party hereto on the ground that such Party drafted or caused to be drafted this Agreement or any part thereof.

IN WITNESS WHEREOF, the Parties have executed this Agreement with effect from the date first above written.

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Schedule 1

Salix Patents

NON-AQUEOUS COLONIC PURGATIVE FORMULATIONS – 63771

Country	Application Status	Application Number	Filing Date	Patent Number	Issue Date	Expiration Date
Austria	Granted	96915636.3	08-May-1996	858326	02-Apr-2003	08-May-2016
Belgium	Granted	96915636.3	08-May-1996	858326	02-Apr-2003	08-May-2016
Canada	Granted	2241445	08-May-1996	2241445	31-Jul-2001	08-May-2016
Denmark	Granted	96915636.3	08-May-1996	858326	02-Apr-2003	08-May-2016
European Patent Convention	Granted	96915636.3	08-May-1996	858326	02-Apr-2003	08-May-2016
Finland	Granted	96915636.3	08-May-1996	858326	02-Apr-2003	08-May-2016
France	Granted	96915636.3	08-May-1996	858326	02-Apr-2003	08-May-2016
Germany	Granted	96915636.3	08-May-1996	858326	02-Apr-2003	08-May-2016
Greece	Granted	96915636.3	08-May-1996	858326	02-Apr-2003	08-May-2016
Ireland	Granted	96915636.3	08-May-1996	858326	02-Apr-2003	08-May-2016
Italy	Granted	96915636.3	08-May-1996	858326	02-Apr-2003	08-May-2016
Luxembourg	Granted	96915636.3	08-May-1996	858326	02-Apr-2003	08-May-2016
Monaco	Granted	96915636.3	08-May-1996	858326	02-Apr-2003	08-May-2016
Netherlands	Granted	96915636.3	08-May-1996	858326	02-Apr-2003	08-May-2016
Patent Cooperation Treaty	Published	US96/06563	08-May-1996
Portugal	Granted	96915636.3	08-May-1996	858326	02-Apr-2003	08-May-2016
Spain	Granted	96915636.3	08-May-1996	858326	02-Apr-2003	08-May-2016
Sweden	Granted	96915636.3	08-May-1996	858326	02-Apr-2003	08-May-2016
Switzerland	Granted	96915636.3	08-May-1996	858326	02-Apr-2003	08-May-2016
United Kingdom	Granted	96915636.3	08-May-1996	858326	02-Apr-2003	08-May-2016
United States of America	Abandoned	08/411,350	31-Mar-1995
United States of America	Granted	08/669,834	26-Jun-1996	5616346	01-Apr-1997	21-May-2013

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COLONIC PURGATIVE COMPOSITION WITH SOLUBLE BINDING AGENT - 63770

Country Name	Application Status	Application Number	Filing Date	Issue Date	Expiration Date
Argentina	Published	P040104289	19-Nov-2004
Australia	Pending	2004292428	17-Nov-2004		17-Nov-2024
Brazil	Pending	PI0416702-3	17-Nov-2004
Canada	Pending	2546637	17-Nov-2004		17-Nov-2024
Chile	Published	2975-2004	18-Nov-2004
China (Peoples Republic)	Pending	2.0048E+11	17-Nov-2004		17-Nov-2024
European Patent Convention	Published	4819530.9	17-Nov-2004		17-Nov-2024
Japan	Published	2006-541302	17-Nov-2004		17-Nov-2024
Korea, Republic of	Pending	1-2006-7011762	17-Nov-2004		17-Nov-2024
Patent Cooperation Treaty	Published	US2004/038220	17-Nov-2004
United States of America	Published	10/988,693	16-Nov-2004
United States of America	Expired	60/523,142	19-Nov-2003		19-Nov-2004

38

Schedule 2

Trademark Registrations

Mark	Territory	Number	Renewal Date
DIACOL	Norway	200915	30/12/09

39

Schedule 3

Press Release

40

FOR IMMEDIATE RELEASE

Contact:	Adam C. Derbyshire	Mike Freeman
	Senior Vice President and	Executive Director, Investor Relations and
	Chief Financial Officer	Corporate Communications
	919-862-1000	919-862-1000

SALIX PHARMACEUTICALS LICENSES DIACOL™

TO DR. FALK PHARMA IN EUROPE

RALEIGH, NC, April 16, 2007 - Salix Pharmaceuticals, Ltd. (Nasdaq:SLXP) today announced that it has licensed exclusive rights to market DIACOL™ 1500 mg Tablets in 28 territories in Europe to Dr. Falk Pharma GmbH of Freiberg, Germany. DIACOL, or, sodium phosphate monobasic monohydrate, USP, and sodium phosphate dibasic anhydrous, tablets, USP, are marketed in the United States under the trade name OSMOPREP™ Tablets. As part of the agreement, Falk also has a non-exclusive option to market DIACOL in Italy and France. Under the terms of the agreement, Salix may receive up to $4 million in milestone payments, as well as royalty payments based on product sales. Falk made the first milestone payment of $1.5 million upon execution of the agreement. Falk is obligated to use all reasonable efforts to obtain Marketing Authorization by means of the Mutual Recognition Procedure in the territories and option countries noted above.

DIACOL™ 1500 mg Tablets are indicated for cleansing of the bowel when required as a preparation for certain diagnostic procedures such as colonoscopy. DIACOL™ was granted Marketing Authorization in the United Kingdom in December 2006. DIACOL has patent protection in Europe to May 2016.

Dr. Falk Pharma GmbH, based in Freiburg, Germany, specializes in the development and marketing of products used in hepatology and gastroenterology. Falk currently markets its products by means of subsidiary companies in selected European countries and a network of

41

sales partners within Europe and other geographic areas. The Falk Foundation, an independent organization associated with Dr. Falk, is well-known internationally for its symposia, forums, postgraduate courses and educational literature in hepatology and gastroenterology.

Salix Pharmaceuticals, Ltd., headquartered in Raleigh, North Carolina, develops and markets prescription pharmaceutical products for the treatment of gastrointestinal diseases. Salix’s strategy is to in-license late-stage or marketed proprietary therapeutic drugs, complete any required development and regulatory submission of these products, and market them in the United States through the Company’s 150-member gastroenterology specialty sales and marketing team.

Salix markets COLAZAL^® (balsalazide) Capsules, XIFAXAN^® (rifaximin) Tablets, OSMOPREP™ (sodium phosphate monobasic monohydrate, USP, and sodium phosphate dibasic anhydrous, USP) Tablets, MOVIPREP^® (PEG-3350, sodium sulfate, sodium chloride, potassium chloride, sodium ascorbate and ascorbic acid for Oral Solution), VISICOL^® Tablets (sodium phosphate monobasic monohydrate, USP, and sodium phosphate dibasic anhydrous), PEPCID^® (famotidine) for Oral Suspension, DIURIL^® (chlorothiazide) Suspension, AZASAN^® (Azathioprine Tablets, USP), ANUSOL-HC^® (Hydrocortisone Cream, USP) and PROCTOCORT^® (Hydrocortisone Cream, USP). Balsalazide disodium tablets, Granulated Mesalamine, SANVAR^® (600 ug vials vapreotide acetate powder) and Xifaxan are under development for additional indications.

OsmoPrep Tablets are indicated for cleansing of the colon as a preparation for colonoscopy in adults 18 years of age or older. Considerable caution should be advised before OsmoPrep Tablets are used in patients with severe renal insufficiency, congestive heart failure, ascites, unstable angina, gastric retention, ileus, acute obstruction or pseudo-obstruction of the bowel, severe chronic constipation, bowel perforation, acute colitis, toxic megacolon, gastric bypass or stapling surgery, or hypomotility syndrome. Use with caution in patients with impaired renal function, patients with a history of acute phosphate nephropathy, patients with a history of seizures or at higher risk of seizure, patients with higher risk of cardiac arrhythmias, known or suspected electrolyte disturbances (such as dehydration), or people taking drugs that affect electrolyte

42

levels. Patients with electrolyte abnormalities such as hypernatremia, hyperphosphatemia, hypokalemia, or hypocalcemia should have their electrolytes corrected before treatment with OsmoPrep Tablets. OsmoPrep is contraindicated in patients with a known allergy or hypersensitivity to sodium phosphate salts or any of its ingredients. In clinical trials, the most commonly reported adverse reactions (reporting frequency >3%) were transient and self-limited abdominal bloating, nausea, abdominal pain, and vomiting. It is recommended that patients receiving OsmoPrep Tablets be advised to adequately hydrate before, during, and after the use of OsmoPrep.

For full prescribing information on Salix products, please visit www.salix.com.

Salix trades on the Nasdaq National Market under the ticker symbol “SLXP”.

For more information please contact the Company at 919-862-1000 or visit our web site at www.salix.com. Information on our web site is not incorporated in our SEC filings.

Please Note: This press release contains forward-looking statements regarding future events. These statements are just predictions and are subject to risks and uncertainties that could cause the actual events or results to differ materially. These risks and uncertainties include: reliance on third parties for international sales; risks of regulatory review and clinical trials; intellectual property risks; market acceptance for approved products; competition, including from potential generic or over-the-counter products; management of rapid growth; and the need to acquire additional products. The reader is referred to the documents that the Company files from time to time with the Securities and Exchange Commission.

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Schedule 4

Summary of Product Characteristics

03 May 2006

(a) PART I B SUMMARY OF PRODUCT CHARACTERISTICS

1. NAME OF THE MEDICINAL PRODUCT

Diacol™ 1500 mg Tablets

2. QUALITATIVE AND QUANTITATIVE COMPOSITION

Each tablet contains 1102 mg of sodium phosphate monobasic monohydrate and 398 mg of disodium phosphate anhydrous.

For excipients, see 6.1.

3. PHARMACEUTICAL FORM

Tablet

White to off-white modified oval compressed tablets. The upper half bisected with a monogram “INKP” on the left and “1.5” on the right, and the lower half plain.

4. CLINICAL PARTICULARS

4.1 Therapeutic indications

Diacol™ Tablets are indicated for cleansing of the bowel when required as a preparation for certain diagnostic procedures such as colonoscopy.

4.2 Posology and method of administration

The usual adult dosage of Diacol™ Tablets is 32 tablets. On the day prior to colonoscopy, patients may have a light, low-fiber breakfast prior to 12 noon. After 12 noon, patients should be placed on a clear liquid diet. The total dose of phosphate is 32.79g.

Adults (over 18 years of age):

Diacol™ Tablets should be administered orally in the following manner:

The evening before the colonoscopy procedure, take 4 Diacol™. Tablets with 250mL of clear liquids every 15 minutes for a total of 20 tablets. The day of the colonoscopy procedure, (starting 3-5 hours before the procedure) take 4 Diacol™ Tablets with 250mL of clear liquids every 15 minutes for a total of 12 tablets.

Patients should be advised of the importance of following the recommended fluid regimen.

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The Elderly:

As for adults. It may be useful to assess renal function before use in the elderly.

Children:

Diacol™ Tablets are not recommended for use in children.

Renal Insufficiency:

Patients with renal disease may have difficulty excreting the large amounts of phosphates consumed in this medication. Diacol™ Tablets should be used with caution in patients with impaired renal function.

Patients should not repeat this dosage for at least seven days. No additional agents are necessary when taking Diacol™ Tablets, particularly those agents containing sodium phosphate.

4.3 Contraindications

Diacol™ Tablets are not to be used in patients with uncontrolled heart failure, ascites, unstable angina pectoris, gastric retention, bowel perforation, acute colitis, ileus or acute obstruction or pseudo-obstruction, severe chronic constipation, hypomotility syndrome (such as hypothyroidism, scleroderma) or toxic megacolon.

Diacol™ Tablets are contraindicated in patients with a known allergy or hypersensitivity to sodium phosphate salts or to any of the other ingredients.

4.4 Special warnings and special precautions for use

Patients should be advised that undigested or partially digested Diacol™ Tablets may be seen in the watery diarrhoea stool or during colonoscopy. Undigested tablets of other medications may also be seen.

Patients should be advised to drink sufficient quantities of clear liquids or water when taking Diacol™ Tablets. Inadequate fluid intake, as with any effective purgative, may lead to dehydration.

Diacol™ Tablets should be used with caution in patients experiencing an acute exacerbation of chronic inflammatory bowel disease or within three months of an acute myocardial infarction or cardiac surgery, including coronary artery bypass graft surgery.

Rarely, administration of other sodium phosphate-containing products, such as enemas or non-prescription liquid purgatives, to patients with renal insufficiency or bowel obstruction, has been reported to have serious clinical consequences including fatalities.

Administration of this product to a patient with bowel obstruction or impaired renal function could lead to exaggerated absorption of sodium and phosphate with severe serum

45

electrolyte aberrations as well as significant fluid shifts. Rarely, profound alterations in electrolyte levels could occur, which could theoretically cause severe complications including death. Prolongation of the QT interval has been observed in some patients who were dosed with Diacol™ Tablets. This effect has been seen in patients treated with other purgatives. QT prolongation has been associated with electrolyte imbalances. Diacol™ Tablets should be used with caution in patients who are taking medications known to prolong the QT interval. Electrolyte abnormalities such as hypernatraemia, hyperphosphataemia, hypokalaemia, or hypocalcaemia should be corrected before treatment with Diacol™ Tablets.

Diacol™ Tablets should be used with caution in patients with risk factors for hyponatremia, e.g., SIADH, a history of electrolyte abnormalities, inadequately treated hypothyroidism, use of other drugs associated with hyponatremia, e.g., thiazide diuretics, or adrenal insufficiency, or with risk factors for development of tonic-clonic seizures, e.g., a history of seizures, use of drugs that lower the seizure threshold such as tricyclic antidepressants, or withdrawal from alcohol or benzodiazepines.

Diacol™ 1500 mg Tablets contain 313 mg of sodium per tablet. This should be taken into consideration by patients on a controlled sodium diet.

4.5 Interaction with other medicinal products and other forms of interaction

No drug interaction studies have been conducted for Diacol™ Tablets. As with other purgatives the absorption of other orally administered medicines (e.g. oral contraceptives, antibiotics, antidiabetics) may be delayed or completely prevented.

Care should be taken with patients taking calcium channel blockers, diuretics, lithium treatment or other medications that might affect electrolyte levels as hyperphosphataemia, hypocalcaemia, hypernatraemic dehydration or acidosis may occur.

4.6 Pregnancy and lactation

No animal reproductive studies have been conducted. It is not known whether Diacol™ Tablets can cause harm to the unborn foetus if administered to a pregnant woman, or interfere with reproductive capacity.

Diacol™ Tablets should not be used during pregnancy or by lactating mothers.

4.7 Effects on ability to drive and use machines

There is no known effect on the ability to drive and use machines.

4.8 Undesirable effects

In clinical studies very common adverse reactions included abdominal bloating, abdominal pain and nausea. Common side effects included vomiting, headache and dizziness. These adverse reactions are generally transient and subside rapidly.

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There have been reports of generalised tonic-clonic and/or loss of consciousness associated with use of the active ingredient in patients with no prior history of seizures. Cases of seizure were associated with electrolyte abnormalities (e.g. hyponatraemia, hypokalaemia, hypochloraemia, hypocalcaemia, hypomagnesaemia) and low serum osmolality.

4.9 Overdose

Purposeful or accidental ingestion of more than the recommended dosage of Diacol™ Tablets may result in severe electrolyte disturbances as well as dehydration and hypovolaemia. Certain severe electrolyte disturbances may lead to cardiac arrhythmias and death. The patient should be monitored carefully and treated symptomatically (e.g. rehydration therapy) for complications until stable.

5. PHARMACOLOGICAL PROPERTIES

5.1 Pharmacodynamic properties

The primary mode of action of sodium phosphate is thought to result from the osmotic action of sodium which causes large amounts of water to be drawn into the bowel. The influx of water stimulates bowel evacuation, rapidly and effectively cleansing the entire colon.

5.2 Pharmacokinetic properties

Approximately 60-65% of ingested dietary phosphate is absorbed from the gastro-intestinal tract via an active energy-dependent process.

Phosphate distributes into plasma and extracellular fluid, cell membranes and intracellular fluids. More than 90% of plasma phosphate is filtered and 80% of the filtered phosphate is actively reabsorbed in the steady state.

Clinical studies with a higher dose of a previous formulation of Diacol™ Tablets have demonstrated that maximum peak plasma concentrations of serum inorganic phosphorous are achieved at approximately three hours after the administration of the first 30 g dose of Diacol™ Tablets, where serum inorganic phosphorous levels are increased by a mean of 1.21 ± 0.53 mmol/L. Following a second 30 g dose of Diacol™ Tablets a maximum peak plasma concentration of serum inorganic phosphorous is obtained at approximately four hours and the serum inorganic phosphorous levels are increased by a mean of 1.42 ± 0.60 mmol/L. The dosing instructions for Diacol™ Tablets recommend a first dose of 30 g and a second dose of 18 g.

5.3 Preclinical safety data

Published preclinical studies provide evidence that sodium phosphate (mono and dibasic) has no significant toxicity potential.

47

An LD₅₀ of 19.93 g/kg in rats has been identified for sodium phosphate dibasic. Studies have demonstrated that monobasic sodium phosphate exhibits no tumour producing activity.

6. PHARMACEUTICAL PARTICULARS

6.1 List of excipients

Macrogol 8000

Magnesium Stearate

6.2 Incompatibilities

Not applicable

6.3 Shelf life

24 months.

6.4 Special precautions for storage

Do not store above 30°C. Keep the bottle tightly closed.

6.5 Nature and contents of container

High-density polyethylene (HDPE) bottles with child-resistant polypropylene cap, containing a silica gel desiccant.

There are 32 Diacol™ Tablets in each bottle.

6.6 Instructions for use and handling and disposal

Not applicable.

7. UK MA HOLDER

InKine Pharmaceutical Company, Ltd.

The Coach House

The Grove

Pipers Lane

Harpenden

Hertfordshire

AL5 1AH

United Kingdom

8. MARKETING AUTHORISATION NUMBER

PL 19147/0001

48

9. DATE OF FIRST AUTHORISATION/RENEWAL OF THE AUTHORISATION

7^th January 2005

10. DATE OF REVISION OF THE TEXT

3^rd May 2006

49

Schedule 5

Market Assumptions

1) [*]

2) Product presentation is a bottle containing 32 tablets which equals one prescription (all to be taken during one course of bowel cleansing).

3) Price to wholesaler excl. VAT, per prescription is at least € [*] (in Germany, Netherlands, Austria, Turkey, Greece, Lithuania) but not higher than market leader and at least € [*] (in all other countries in the Territory).

4) Market for bowel cleansing preparations (PEG- and sodium-phosphate–based preparations and bisacodyl-based Prepacol) will be more than [*] (in Germany), [*] (in UK) and about [*] (in each of Spain, Netherlands, Belgium, Austria, Portugal) and approx. [*] each or less (in all other countries in the Territory) prescriptions/bowel cleaning courses per year.

5) At the time of launch and thereafter the following products will be on the market:

-    [*]

-    [*]

-    [*]

-    [*]

All these products can only be labelled as drugs with the exception of Germany and Slovenia, where [*] products can also be registered as medical devices, such as [*] and [*] in Germany.

6) [*] have a relatively small market share in the Territory.

7) All Products are reimbursed by the health insurance funds in the following countries: [*]. They are not reimbursed in all other countries (mostly [*]).

8) [*]

9) [*]

10) Colon cleansing will be the standard procedure before colonic diagnostics.

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

50

DR FALK PHARMA GmbH
By:	/s/ Ursula Falk
Name:	Ursula Falk
Title:	Owner

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

51

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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 10, 2007	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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 10, 2007	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 March 31, 2007 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.

Date: May 10, 2007	By:	/s/ Carolyn J. Logan
		Carolyn J. Logan
		President and Chief Executive Officer

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 March 31, 2007 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.

Date: May 10, 2007	By:	/s/ Adam C. Derbyshire
		Adam C. Derbyshire
		Senior Vice President and Chief Financial Officer