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 September 30, 2009

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  ¨    NO  ¨

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

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

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

The number of shares of the Registrant’s Common Stock outstanding as of November 6, 2009 was 49,344,406.

SALIX PHARMACEUTICALS, LTD.

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, 2009 (unaudited) and December 31, 2008	1
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2009 and 2008 (unaudited)	2
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008 (unaudited)	3
	Notes to Condensed Consolidated Financial Statements (unaudited)	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	30
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	31
Item 6.	Exhibits	32
Signatures		33

PART I. FINANCIAL INFORMATION.

Item 1. Financial Statements

SALIX PHARMACEUTICALS, LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

	September 30, 2009			December 31, 2008
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	69,102		$	120,153
Accounts receivable, net		75,458			40,461
Inventory, net		22,326			17,311
Prepaid and other current assets		9,628			8,295
Total current assets		176,514			186,220
Property and equipment, net		5,430			4,849
Restricted cash		15,000			15,000
Goodwill		85,257			85,257
Product rights and intangibles, net		106,522			106,822
Other assets		1,944			2,336
Total assets	$	390,667		$	400,484
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	15,834		$	10,099
Accrued liabilities		45,060			27,443
Reserve for product returns, rebates and chargebacks		27,416			34,034
Current portion of capital lease obligations		840			849
Total current liabilities		89,150			72,425
Long-term liabilities:
Convertible senior notes		46,639			44,759
Borrowings under credit facility		15,000			15,000
Lease incentive obligations		1,832			2,108
Long term portion of capital lease obligations		631			791
Total long-term liabilities		64,102			62,658
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, 49,191,431 shares issued and outstanding at September 30, 2009 and 48,078,200 shares issued and outstanding at December 31, 2008		49			48
Additional paid-in capital		426,309			417,698
Accumulated deficit		(188,943	)		(152,345	)
Total stockholders’ equity		237,415			265,401
Total liabilities and stockholders’ equity	$	390,667		$	400,484

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 September 30,						Nine months ended September 30,
	2009			2008			2009			2008
Revenues:
Net product revenues	$	65,658		$	42,872		$	162,666		$	118,197
Costs and expenses:
Cost of products sold (excluding amortization of product rights and intangibles of $2,562 and $2,271 for the three-month periods ended September 30, 2009 and 2008, and $7,565 and $6,813 for the nine-month periods ended September 30, 2009 and 2008, respectively)		13,207			7,763			34,523			22,133
Amortization of product rights and intangible assets		2,562			2,271			7,565			6,813
Research and development		26,143			14,442			69,554			57,303
Selling, general and administrative		29,622			23,411			83,632			67,555
Total cost and expenses		71,534			47,887			195,274			153,804
Income (loss) from operations		(5,876	)		(5,015	)		(32,608	)		(35,607	)
Interest income (expense) and other income, net		(1,417	)		(541	)		(4,062	)		69
Income (loss) before provision for income tax		(7,293	)		(5,556	)		(36,670	)		(35,538	)
Income tax (expense) benefit		(22	)		112			72			(992	)
Net income (loss)	$	(7,315	)	$	(5,444	)	$	(36,598	)	$	(36,530	)
Net income (loss) per share, basic	$	(0.15	)	$	(0.11	)	$	(0.76	)	$	(0.76	)
Net income (loss) per share, diluted	$	(0.15	)	$	(0.11	)	$	(0.76	)	$	(0.76	)
Shares used in computing net income (loss) per share, basic		48,878			48,040			48,410			47,842
Shares used in computing net income (loss) per share, diluted		48,878			48,040			48,410			47,842

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)

	Nine months ended September 30,
	2009			2008
Cash flows from operating activities
Net loss	$	(36,598	)	$	(36,530	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization		9,683			9,215
Amortization of debt discount		1,880			47
Loss (gain) on disposal of property and equipment		(4	)		—
Stock-based compensation expense		4,919			3,356
Changes in operating assets and liabilities:
Accounts receivable, inventory, prepaid expenses and other assets		(43,218	)		15,623
Accounts payable, accrued and other liabilities		18,076			(3,338	)
Reserve for product returns, rebates and chargebacks		(6,618	)		(18,451	)
Net cash used by operating activities		(51,880	)		(30,078	)
Cash flows from investing activities
Purchases of property and equipment		(2,115	)		(853	)
Increase in restricted cash		—			(15,000	)
Net cash used by investing activities		(2,115	)		(15,853	)
Cash flows from financing activities
Principal payments on capital lease obligations		(749	)		(904	)
Net proceeds from convertible senior debt offering		—			57,266
Proceeds from issuance of common stock upon exercise of stock options		3,693			178
Net cash provided by financing activities		2,944			56,540
Net increase (decrease) in cash and cash equivalents		(51,051	)		10,609
Cash and cash equivalents at beginning of period		120,153			111,272
Cash and cash equivalents at end of period	$	69,102		$	121,881

Supplemental Non-Cash Disclosure

At September 30, 2009, $4.2 million is included as an accrued liability that was paid to Wilmington Pharmaceuticals in October 2009. This related to the milestone payment for the September 8, 2009 approval of Metozolv by the FDA.

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

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SALIX PHARMACEUTICALS, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(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 U. S. dollars and are prepared under accounting principles generally accepted in the United States, or GAAP. 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 in the consolidation.

The accompanying consolidated financial statements include all adjustments that, in the opinion of management, are necessary for a fair presentation of financial position, results of operations and cash flows. These financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 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 GAAP have been omitted in accordance with the SEC’s rules and regulations for interim reporting.

2. Revenue Recognition

The Company recognizes revenue when it is realized or realizable and earned. Revenue is realized or realizable and earned when all of the following criteria are met: (a) persuasive evidence of an arrangement exists; (b) delivery has occurred or services have been rendered; (c) the seller’s price to the buyer is fixed or determinable; and (d) collectibility is reasonably assured.

The Company recognizes revenue from sales transactions where the buyer has the right to return the product 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 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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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 the Company and/or its competitors;

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

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

• estimated remaining shelf life of products.

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

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

Allowances for estimated rebates and chargebacks were $15.9 million and $7.4 million as of September 30, 2009 and December 31, 2008, 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 our products through federal contracts and/or group purchasing agreements. The Company estimates its liability for rebates and chargebacks at each reporting period based on a methodology of applying quantitative and qualitative assumptions discussed above. Due to the subjectivity of the Company’s accrual estimates for rebates and chargebacks, the Company prepares various sensitivity analyses to ensure the Company’s final estimate is within a reasonable range as well as review prior period activity to ensure that the Company’s methodology continues to be appropriate.

Allowances for product returns were $8.9 million and $8.5 million as of September 30, 2009 and December 31, 2008, respectively. These allowances reflect an estimate of the Company’s liability for product that may be

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SALIX PHARMACEUTICALS, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Continued

returned by the original purchaser in accordance with the Company’s stated return policy. These balances do not include $2.6 million and $18.1 million at September 30, 2009 and December 31, 2008, respectively, reflecting the Company’s estimate of Colazal that may be returned to us under our return policy as a result of the approval of three generic balsalazide capsule products by the Office of Generic Drugs in December 2007. The Company estimates its liability for product returns at each reporting period based on historical return rates, estimated inventory in the channel and the other factors discussed above. Due to the subjectivity of the Company’s accrual estimates for product returns, the Company prepares various sensitivity analyses to ensure the Company’s final estimate is within a reasonable range and also reviews prior period activity to ensure that the Company’s methodology is still reasonable.

Colazal, the Company’s balsalazide disodium capsule, has historically accounted for a majority of the Company’s revenue prior to 2008. On December 28, 2007, the Office of Generic Drugs, or OGD, approved three generic balsalazide capsule products. As a result of these generic approvals, the Company expects the future sales of Colazal to be significantly less than historical sales of Colazal. At September 30, 2009 and December 31, 2008, respectively, $2.6 million and $18.1 million were recorded as a liability to reflect an estimate of the Company’s liability for Colazal that may be returned by the original purchaser in accordance with the Company’s stated return policy as a result of these generic approvals. The decrease in the liability from December 31, 2008 to September 30, 2009 is a result of actual Colazal returns, rebates and chargebacks. This estimate is based on an estimate of Colazal inventory in the channel and related expiration dates of this inventory, estimated erosion of Colazal demand based on the generic approvals and the resulting estimated pull-through of Colazal, and other factors. Due to the subjectivity of this estimate, the Company prepares various sensitivity analyses to ensure the Company’s final estimate is within a reasonable range.

The Company’s provision for revenue-reducing items such as rebates, chargebacks, and product returns as a percentage of gross product revenue in the nine-month periods ended September 30, 2009 and 2008 was 9.7% and 6.5% for rebates, chargebacks and discounts and was 5.6% and 6.0% for product returns, respectively, excluding the Colazal return reserve.

3. Commitments

Purchase Order Commitments

At September 30, 2009, the Company had binding purchase order commitments for inventory purchases expected to be delivered over the next three months aggregating approximately $23.8 million.

Potential Milestone Payments

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

License Agreement with Cedars-Sinai Medical Center — In June 2006, the Company entered into a license agreement with Cedars-Sinai for the right to use a patent and a patent application relating to methods of diagnosing and treating irritable bowel syndrome and other disorders caused by small intestinal bacterial overgrowth. Pursuant to the license agreement, the Company was obligated to pay Cedars-Sinai a license fee of $1.2 million over time. As of September 30, 2009, the Company had paid this license fee in full. The Company may terminate the license agreement upon written notice of not less than 90 days.

License and Supply Agreement with the Debiopharm Group — In September 2006, the Company acquired the exclusive right to sell, market and distribute Sanvar in the United States. Pursuant to the terms of this agreement, the Company is obligated to make an upfront and milestone payments to Debiopharm that could total up to $8.0 million contingent upon achievement of certain regulatory milestones, and an additional $6.0 million in milestone payments contingent on reaching certain sales thresholds over the term of the agreement. Under the terms of the agreement, on August 4, 2009, the Company provided a 30-day notice to DebioPharm of termination of the agreement because the FDA did not approve Sanvar. As of September 30, 2009, the Company had paid $1.0 million of milestone payments.

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SALIX PHARMACEUTICALS, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Continued

License Agreement with Dr. Falk Pharma GmbH for granulated mesalamine — In July 2002, the Company and Dr. Falk entered into a license agreement which they amended in November 2003 and February 2005. Pursuant to the license agreement, as amended, the Company acquired the rights to develop and market a granulated formulation of mesalamine. The agreement provides that the Company is obligated to make milestone payments up to an aggregate amount of $11.0 million to Dr. Falk. As of September 30, 2009, the Company had paid $9.0 million of milestone payments. The remaining milestone payment is contingent upon achievement of additional regulatory approval.

License Agreement with Dr. Falk Pharma GmbH for budesonide — In March 2008, the Company entered into a License Agreement with Dr. Falk. The agreement provides the Company with an exclusive license to develop and commercialize in the United States Dr. Falk’s budesonide products. The products covered in the License Agreement include U.S. patent-protected budesonide rectal foam and budesonide gastro-resistant capsule, patents for which expire in 2015 and 2016, respectively. Pursuant to the license agreement the Company is obligated to make an upfront payment and regulatory milestone payments that could total up to $23.0 million, with the majority contingent upon achievement of U.S. regulatory approval. As of September 30, 2009, the Company had paid $1.5 million of these milestone payments.

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

License Agreement with Napo Pharmaceuticals, Inc. — In December 2008 the Company entered into a Collaboration Agreement with Napo. Pursuant to the agreement, the Company has an exclusive, royalty-bearing license to crofelemer for the treatment of HIV-associated diarrhea and additional indications of pediatric diarrhea and acute infectious diarrhea in a certain territory. The Company also has a non-exclusive, worldwide, royalty-bearing license to use Napo-controlled trademarks associated with crofelemer. The Company made an initial payment of $5.0 million to Napo and will make up to $50.0 million in milestone payments to Napo contingent on regulatory approvals and up to $250.0 million in milestone payments contingent on reaching certain sales thresholds. The Company is responsible for development costs of crofelemer, but costs exceeding $12.0 million for development of crofelemer used for the HIV-associated diarrhea indication will be credited towards regulatory milestones and thereafter against sales milestones.

License and Supply Agreement with Norgine B.V. — In December 2005, the Company entered into a license and supply agreement with Norgine for the rights to sell a bowel cleansing product the Company now markets in the United States under the trade name MoviPrep. Pursuant to the terms of this agreement, the Company is obligated to make upfront and milestone payments to Norgine that could total up to $37.0 million over the term of the agreement. As of September 30, 2009, the Company had paid $22.0 million of milestone payments. The remaining milestone payments are contingent upon reaching sales thresholds.

License Agreement with Wilmington Pharmaceuticals, LLC — In September 2007, the Company entered into an Exclusive Sublicense Agreement with Wilmington Pharmaceuticals for Metozolv. The agreement provides that the Company is obligated to make upfront and milestone payments up to an aggregate amount of $8.0 million to Wilmington. As of September 30, 2009, the Company had recorded $8.0 million of these milestone payments. The Company also loaned Wilmington $2.8 million which was netted against the payment of the approval milestone as a result of FDA approval on September 8, 2009.

License Agreement with Lupin Ltd. — In September 2009, the Company entered into a Development, Commercialization and License Agreement with Lupin Ltd for Lupin’s proprietary drug delivery technology for rifaximin. The agreement provides that the Company is obligated to make upfront and milestone payments to Lupin that could total up to $55.0 million over the term of the agreement. As of September 30, 2009, the Company had paid $5.0 million of milestone payments. The remaining milestone payments are contingent upon achievement of certain clinical and regulatory milestones.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Continued

4. Fair Value of Financial Instruments

The carrying amounts of the Company’s financial instruments, which include cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and capital lease obligations, approximated their fair values as of September 30, 2009 and December 31, 2008 due to the short-term nature of these financial instruments. The carrying amount of the Company’s credit facility approximated its fair value at September 30, 2009 and December 31, 2008 due to the fact that interest rate was determined based on prevalent market rates.

5. Cash and Cash Equivalents

The Company considers all highly liquid investments with maturities from date of purchase of three months or less to be cash equivalents. The Company maintains its cash and cash equivalents in several different financial instruments with various banks and brokerage houses. This diversification of risk is consistent with Company policy to maintain liquidity and ensure the safety of principal. At September 30, 2009, cash and cash equivalents consisted primarily of demand deposits, overnight investments in Eurodollars, certificates of deposit and money market funds at reputable financial institutions, and did not include any auction rate securities.

6. 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, including generic competition.

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

Inventory at September 30, 2009 consisted of $10.6 million of raw materials, $8.8 million of work-in-process, and $2.9 million of finished goods. Inventory at December 31, 2008 consisted of $8.5 million of raw materials, $6.5 million of work-in-process, and $2.3 million of finished goods. As of September 30, 2009, inventory reserves totaling $3.1 million, compared to $3.8 million as of December 31, 2008, were recorded to reduce inventories to their net realizable value.

7. 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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Continued

When the Company makes product acquisitions that include license agreements, product rights and other identifiable intangible assets, it records the purchase price of such intangibles, along with the value of the product related liabilities that it assumes, as intangible assets. The Company allocates the aggregate purchase price to the fair value of the various tangible and intangible assets in order to determine the appropriate carrying value of the acquired assets and then amortizes the cost of the intangible assets as an expense in its consolidated statement of operations over the estimated economic useful life of the related assets. 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 that the following factors could trigger an impairment review: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of the Company’s use of the acquired assets or the strategy for the Company’s overall business; and significant negative industry or economic trends.

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

In November 2003, the Company acquired from aaiPharma LLC for $2.0 million the exclusive right to sell 25, 75 and 100 milligram dosage strengths of azathioprine tablets in North America under the name Azasan. The purchase price was fully allocated to product rights and related intangibles and is being amortized over a period of ten years. Although Azasan does not have any patent protection, the Company believes ten years is an appropriate amortization period based on established product sales history and management’s experience. At September 30, 2009 accumulated amortization for the Azasan intangible was $1.2 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 sales history and management’s experience. At September 30, 2009 accumulated amortization for the King product intangibles was $6.8 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 product’s patent protection and the estimated economic lives of the product rights and related intangibles. At September 30, 2009 accumulated amortization for the InKine intangibles was $12.1 million.

In December 2005, the Company entered into a License and Supply Agreement with Norgine B.V., granting Salix the exclusive right to sell a patented-protected, liquid PEG bowel cleansing product in the United States. In August 2006, the Company received Food and Drug Administration marketing approval for this product under the branded name of MoviPrep. In January 2007, the U. S. Patent Office issued a patent providing coverage to September 1, 2024. In August 2006, pursuant to the terms of the agreement, Salix made a $15.0 million payment to Norgine. In December 2008, pursuant to the terms of the agreement, the Company made a $5.0 million payment to Norgine. The Company is amortizing these milestone payments over a period of 17.3 years, which the Company believes is an appropriate amortization period due to the product’s patent protection and the estimated economic life of the related intangible. At September 30, 2009 accumulated amortization for the MoviPrep intangible was $3.7 million.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Continued

In February 2007, the Company entered into a Master Purchase and Sale and License Agreement with Merck & Co. Inc., to purchase the U.S prescription pharmaceutical product rights to Pepcid Oral Suspension and Diuril Oral Suspension from Merck. The Company paid Merck $55.0 million at the closing of this transaction. The purchase price was fully allocated to product rights and related intangibles, and is being amortized over a period of 15 years. Although Pepcid and Diuril do not have patent protection, the Company believes 15 years is an appropriate amortization period based on established product history and management experience. At September 30, 2009 accumulated amortization for the Merck products was $9.6 million.

In July 2002, the Company acquired the rights to develop and market a granulated formulation of mesalamine from Dr. Falk Pharma GmbH. On October 31, 2008, the FDA granted marketing approval for the product under the name Apriso, for the maintenance of remission of ulcerative colitis in adults. In November 2008, the Company made a $6.0 million milestone payment to Dr. Falk. The Company is amortizing this milestone payment over a period of 10 years, which the Company believes is an appropriate amortization period due to the product’s patent protection and the estimated economic life of the related intangible. At September 30, 2009, accumulated amortization for the Apriso intangible was $0.6 million.

In September 2007, the Company entered into an Exclusive Sublicense Agreement with Wilmington Pharmaceuticals. On September 8, 2009, the FDA granted marketing approval for the product under the name Metozolv, for relief of symptomatic gastroesophageal reflux and for the relief of symptoms associated with diabetic gastroparesis. In September 2009, the Company recorded a $7.3 million milestone payment to Wilmington. The Company is amortizing this milestone payment over a period of 8 years, which the Company believes is an appropriate amortization period due to the product’s patent protection and the estimated economic life of the related intangible. At September 30, 2009, accumulated amortization for the Metozolv intangible was $0.1 million.

8. Credit Facility

In February 2007, the Company entered into a $100.0 million revolving credit facility that matures in February 2012. On August 4, 2008 the credit facility was amended to waive defaults that might have resulted from the approval of three generic balsalazide capsule products by the Office of Generic Drugs on December 28, 2007, and the credit facility was reduced to $20.0 million. On August 22, 2008 the credit facility was further amended to allow the Company to issue the convertible Notes described in Note 9 below. At September 30, 2009, $15.0 million was outstanding under the credit facility. Virtually all assets of the Company and its subsidiaries collateralize the Company’s obligations under the credit facility. Borrowings under the credit facility may be used for working capital, capital expenditures, acquisitions and other general corporate purposes.

The credit facility bears interest at a rate per annum equal to, at the Company’s option, either (a) a base rate equal to the higher of (i) the Federal Funds Rate plus 1/2 of 1% and (ii) the Bank of America prime rate, or (b) a Eurodollar rate (based on LIBOR), plus 0.00% for base rate borrowings and 1.00% for Eurodollar rate borrowings. The Company must maintain an amount equal to the amount outstanding under the credit facility on deposit with the Administrative Agent of the credit facility and maintain a minimum of $23.0 million in cash on its balance sheet. At September 30, 2009, restricted cash of $15.0 million represents the collateral on deposit with the Administrative Agent related to the credit facility. At September 30, 2009, the Company was in compliance with applicable covenants under the credit facility.

9. Convertible Senior Notes

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

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Continued

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

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

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

The Notes are convertible into approximately 6,486,000 shares of the Company’s common stock under certain circumstances prior to maturity at a conversion rate of 108.0847 shares per $1,000 principal amount of Notes, which represents a conversion price of approximately $9.25 per share, subject to adjustment under certain conditions. Holders of the Notes may convert their Notes at their option on any day prior to the close of business on the business day immediately preceding the maturity date of August 15, 2028 only if one or more of the following conditions is satisfied: (1) during any fiscal quarter commencing after September 30, 2008, if the last reported sale price of the Company’s common stock for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is equal to or more than 130% of the conversion price of the Notes on the last day of such preceding fiscal quarter; (2) during the five business day period following any five consecutive trading day period in which the trading price for the Notes, per $1,000 principal amount of the Notes, for each such trading day was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate of the Notes on such date; (3) if the Company enters into specified corporate transactions; or (4) upon a redemption notice. The first of these conditions was met as of September 30, 2009. The Notes will be convertible, regardless of whether any of the foregoing conditions have been satisfied, on or after March 15, 2028 at any time prior to the close of business on the business day immediately preceding the stated maturity date of August 15, 2028. Upon conversion, the Company may pay cash, shares of the Company’s common stock or a combination of cash and stock, as determined by the Company in its discretion.

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

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

Effective January 1, 2009, the Company is required to separately account for the liability and equity components of the convertible debt instrument by allocating the proceeds from issuance of the Notes between the liability component and the embedded conversion option, or equity component. This allocation was done by first estimating an interest rate at the time of issuance for similar notes that do not include the embedded conversion option. This interest rate of 12.5% was used to compute the initial fair value of the liability component of $44.1 million. The excess of the initial proceeds received from the convertible Notes over the initial amount allocated to the liability component, of $15.9 million, is allocated to the embedded conversion option, or equity component. This excess is reported as a debt discount and subsequently amortized as interest cost, using the interest method, through August 2013, the first scheduled date on which the holders have the option to require the Company to repurchase the Notes.

The balance sheet at December 31, 2008 has been adjusted to reflect the retrospective application of separately accounting for the liability and equity components of the convertible debt. The carrying value of the liability component was decreased by $15.2 million to reflect the initial carrying value, less 2008 amortization of the debt

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Continued

discount of $0.7 million. Additional paid-in capital was increased by $15.2 million to reflect the initial value of the equity component of $15.9 million, less the issuance costs related to the equity component of $0.7 million. Accumulated deficit was increased by $0.6 million to reflect the amortization of the debt discount for 2008, less issuance cost amortization for 2008 related to the equity component. Other assets were decreased by $0.7 related to the issuance costs related to the equity component. The consolidated statement of operations for the three-month period and nine-month period ended September 30, 2008 have been adjusted to reflect the amortization of the debt discount of $47,000 less $18,000 related to issuances costs related to the equity component.

The carrying value of the equity component at September 30, 2009 and December 31, 2008 was $15.2 million. The effective interest rate on the liability component for the three-month and nine-month periods ended September 30, 2008 was 12.6%. Total interest cost of $1.5 million and $4.4 million was recognized during the three-month and nine-month periods ended September 30, 2009, respectively including $0.6 million and $1.9 million of amortization of debt discount, respectively. Total interest cost of $0.4 million was recognized during the three-month and nine-month periods ended September 30, 2008, respectively, including $47,000 of amortization of debt discount, respectively.

The following table summarizes information on our convertible debt as of:

	September 30, 2009			December 31, 2008
Principal amount of the liability component	$	60,000		$	60,000
Unamortized discount		(13,361	)		(15,241	)
Net carrying amount	$	46,639		$	44,759

10. Research and Development

The Company expenses research and development costs, both internal and externally contracted, as incurred. For nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities, the Company initially capitalizes the advance payment. The Company recognizes these amounts as an expense as the vendor delivers the related goods or performs the related services.

11. Comprehensive Income

The Company is required to display an amount representing comprehensive income (loss) for the year in a financial statement, which is displayed with the same prominence as other financial statements. The Company elected to present this information in the Consolidated Statements of Stockholders’ Equity. Other comprehensive income (loss) consists of foreign currency translation gains and losses, as well as any unrealized gains and losses on investments. For the periods presented, comprehensive income (loss) equaled reported net income (loss).

12. Share-Based Compensation

At September 30, 2009, the Company had one active share-based compensation plan, the 2005 Stock Plan, allowing for the issuance of stock options and restricted stock. The Company estimates the fair value of share-based payment awards on the date of the grant. The cost is to be recognized over the period during which an employee is required to provide service in exchange for the award.

Starting in 2006, the Company began issuing restricted shares to employees, executives and directors of the Company. For employees and executives of the Company, restrictions lapse 25% annually over four years or 33.3% over three years. For board members of the company, restrictions lapse 100% after one year. The fair value of the restricted stock was estimated using an assumed forfeiture rate of 9.0% and is being expensed on a straight-line basis over the period during which the restrictions lapse. For the nine-month periods ended September 30, 2009 and 2008, the Company recognized $4.9 million and $3.4 million in share-based compensation expense related to the restricted shares, respectively. For the three-month periods ended September 30, 2009 and 2008, the Company recognized

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Continued

$2.0 million and $1.5 million in share-based compensation expense related to the restricted shares, respectively. As of September 30, 2009, the total amount of unrecognized compensation cost related to nonvested restricted stock awards, to be recognized as expense subsequent to September 30, 2009, was approximately $15.9 million, and the related weighted-average period over which it is expected to be recognized is approximately 2.7 years.

Aggregate stock plan activity is as follows:

	Total Shares Available For Grant		Stock Options				Restricted Shares				Stock Options and Restricted Shares
			Number		Weighted Average Price		Number Subject to Issuance		Weighted Average Price		Number		Weighted Average Price
Balance at December 31, 2008	836,622		4,617,833		$	13.67	1,648,855		$	9.39	6,266,688		$	12.55
Additional shares authorized	2,000,000		—			—	—			—	—			—
Granted	(1,190,971	)	—			—	1,190,971		$	10.29	1,190,971		$	10.29
Exercised	—		(584,286	)	$	7.29	—			—	(584,286	)	$	7.29
Vested	—		—			—	(583,199	)	$	9.36	(583,199	)	$	9.36
Forfeited or cancelled	120,851		(150,040	)	$	18.11	(55,135	)	$	9.93	(205,175	)	$	15.91
Balance at September 30, 2009	1,766,502		3,883,507		$	14.46	2,201,492		$	9.87	6,084,999		$	12.81

For the nine-month period ended September 30, 2009, the Company issued 584,286 shares of stock with a market value of $9.3 million upon the exercise of stock options. The Company recognized no share-based compensation expense related to stock options for the nine-month period ended September 30, 2009, nor any income tax benefit. The total intrinsic value of options exercised for the nine-month period ended September 30, 2009 was $5.0 million. As of September 30, 2009, there was no unrecognized compensation cost for stock options because all stock options were fully vested. For the nine-month period ended September 30, 2009, the Company received net proceeds of $4.3 million in cash from the issuance of common stock upon the exercise of stock options.

13. Income Taxes

The Company provides for income taxes under the liability method. 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. At September 30, 2009 the Company has provided a valuation allowance for the gross deferred tax asset due to uncertainty regarding the Company’s ability to realize the entire asset.

On January 1, 2007, the Company recognized an increase of $2.4 million in the liability for unrecognized tax benefits and a reduction in the valuation allowance as of January 1, 2007, for the same amount. The unrecognized tax benefits as of September 30, 2009 relate to federal tax credit carryforwards. The Company continues to fully recognize its tax benefits which are offset by a valuation allowance to the extent that it is more likely than not that the deferred tax assets will not be realized. The Company does not expect any significant changes in its unrecognized tax benefits for the next twelve months.

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

The Company recognizes any interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. During the nine-month periods ended September 30, 2009 and 2008, 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 and nine-month periods ended September 30, 2009 were (0.3)% and 0.2%, respectively. The Company’s effective tax rate for the three-month and nine-month periods ended September 30, 2008 were 2.0% and (2.8)%, respectively. The Company re-evaluates this estimate each quarter based on the Company’s estimated tax expense for the year. The Company’s

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Continued

effective tax rates differ from the statutory rate of 35% primarily due to changes in the valuation allowance for deferred tax assets.

14. Net Income (Loss) per Share

The Company computes basic net income (loss) per share by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares and dilutive common share equivalents then outstanding. Common share equivalents consist of the incremental common shares issuable upon the exercise of stock options and the impact of vested restricted stock grants. The Company will account for the effect of the convertible Notes on diluted net income (loss) per share using the treasury stock method. As a result, the convertible Notes will have no effect on diluted net income (loss) per share until the Company’s stock price exceeds the conversion price of $9.25 per share. For the three-month and nine-month periods ended September 30, 2009, the effect of approximately 6,486,000 shares issuable upon conversion of the Notes were excluded from the diluted net income per share calculation, because their inclusion would have an anti-dilutive effect due to the net loss during those periods.

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

	Three months ended September 30,						Nine months ended September 30,
	2009			2008			2009			2008
Numerator:
Net income (loss)	$	(7,315	)	$	(5,444	)	$	(36,598	)	$	(36,530	)
Denominator:
Weighted average common shares, basic		48,878			48,040			48,410			47,842
Dilutive effect of stock options		—			—			—			—
Dilutive effect of restricted stock		—			—			—			—
Weighted average common shares, diluted		48,878			48,040			48,410			47,842

For the three-month ended September 30, 2009 and 2008, weighted average common shares, diluted are equal to weighted average common shares, basic, because inclusion of the effect of 1,629,682 and 704,290 shares of restricted stock and stock options, respectively, would have an anti-dilutive effect due to the net loss during those periods. For the nine-month periods ended September 30, 2009 and 2008, weighted average common shares, diluted are equal to weighted average common shares, basic, because inclusion of the effect of 1,349,172 and 640,533 shares of restricted stock and stock options, respectively, would have an anti-dilutive effect due to the net loss during that period. For the three-month periods ended September 30, 2009 and 2008, there were 1,082,018 and 4,268,962, respectively, potential common shares outstanding that were excluded from the diluted net income per share calculation because their effect would have been anti-dilutive. For the nine-month periods ended September 30, 2009 and 2008, there were 2,323,309 and 4,672,691, respectively, potential common shares outstanding that were excluded from the diluted net income per share calculation because their effect would have been anti-dilutive.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Continued

15. 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 category (in thousands):

	Three months ended September 30,						Nine months ended September 30,
	2009			2008			2009			2008
Inflammatory Bowel Disease – Colazal/Apriso	$	(2,379	)	$	(1,266	)	$	(1,521	)	$	79
Xifaxan		42,668			21,373			93,027			56,132
Purgatives – Visicol/OsmoPrep/MoviPrep		16,638			15,531			45,806			41,506
Other – Anusol/Azasan/Diuril/Pepcid/Proctocort		8,731			7,234			25,354			20,480
Net product revenues	$	65,658		$	42,872		$	162,666		$	118,197

16. Recently Issued Accounting Pronouncements

In August 2009, the FASB issued authoritative guidance regarding measuring liabilities at fair value. The authoritative guidance sets forth the types of valuation techniques to be used to value a liability when a quoted price in an active market for the identical liability is not available. It also clarifies transfer restrictions on the fair value of a liability and the ability to use the fair value of a liability that is traded as an asset as an input to the valuation of the underlying liability. The authoritative guidance is effective for interim and annual periods beginning after August 26, 2009. The Company is assessing the impact of this new guidance and expects no material impact to its financial statements upon adoption.

In May 2009, the FASB issued authoritative guidance regarding subsequent events. The authoritative guidance establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The authoritative guidance requires disclosure of the date through which subsequent events have been evaluated and whether that date represents the date the financial statements were issued or were available to be issued. The authoritative guidance is effective for interim and annual periods ending after June 15, 2009. The Company has evaluated subsequent events through November 9, 2009, the date of the issuance of the accompanying condensed consolidated financial statements.

In April 2009, the FASB issued authoritative guidance to aid in determining fair value when the volume and level of activity for the assets or liabilities have significantly decreased and when identifying transactions are not orderly, such as a forced liquidation or distressed sale. The authoritative guidance became effective for the Company on April 1, 2009, and the adoption of the guidance did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued authoritative guidance on the recognition and presentation of other-than-temporary impairments. The authoritative guidance incorporates impairment guidance for debt securities from various sources of authoritative literature and clarifies the interaction of the factors that should be considered when determining whether a debt security is other than temporarily impaired. The authoritative guidance became effective for the Company on April 1, 2009 and the adoption of the guidance did not have a material impact on the Company’s consolidated financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Continued

In October 2009, the FASB issued authoritative guidance regarding revenue arrangements with multiple deliverables. The guidance requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The guidance further eliminates the residual method of revenue allocation and requires revenue to be allocated using the relative selling price method. The new guidance should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The Company is currently assessing the impact of adopting this new guidance.

17. Legal Proceedings

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

The Company is involved in a lawsuit against a company seeking FDA approval to market a generic version of the Company’s MoviPrep product. Norgine, B.V. and Norgine Europe, B.V. own U.S. Patent No. 7,169,381 (the ‘381 patent). The ‘381 patent is listed with the FDA as protecting our MoviPrep product. Norgine licensed MoviPrep and the ‘381 patent to the Company for commercialization in the United States. Novel Laboratories, Inc., filed an Abbreviated New Drug Application, or ANDA, with the FDA seeking approval to market a generic version of MoviPrep in the United States prior to the September 2024 expiration of the ‘381 patent. On May 14, 2008, the Company and Norgine filed a lawsuit in the United States District Court for the District of New Jersey against Novel for infringement of the ‘381 patent. Novel filed an Answer and Counterclaims on June 20, 2008. On June 25, 2009 the Company and Norgine amended the complaint to add a claim for correction of inventorship for the ‘381 patent. Novel filed an Answer and Counterclaims to the first Amended Complaint on July 10, 2009. Novel has denied infringement and asserted various affirmative defenses, including defenses of patent invalidity and unenforceability. No trial date has been set. The Company intends to vigorously defend the patent rights for MoviPrep.

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

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

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Continued

The Company is currently and might continue to be subject to product liability claims that arise through the testing, manufacturing, marketing and sale of its products, including a number of claims relating to OsmoPrep and Visicol in connection with their “box” label warning. The Company intends to defend these claims vigorously but is currently unable to predict the outcome or to reasonably estimate the range of potential expenses or loss, if any. The Company currently maintains liability coverage for its products but it is possible that this coverage, and any future coverage, will be insufficient to satisfy any liabilities that arise. The Company would have to assume defense of the lawsuits and be responsible for damages, fees and expenses, if any, that are awarded against it or for amounts in excess of the Company’s product liability coverage.

18. Subsequent Events

The Company has performed an evaluation of subsequent events through November 9, 2009, which is the date the financial statements were issued. There were no events requiring disclosure.

17

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 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2008, 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 disorders, which are those affecting the digestive tract. Our strategy is to:

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

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

• use our approximately 245-member specialty sales and marketing team focused on high-prescribing U.S. gastroenterologists, who are doctors who specialize in gastrointestinal disorders, to sell our products.

Our current products demonstrate our ability to execute this strategy. As of September 30, 2009, our products were:

• XIFAXAN^® (rifaximin) Tablets 200 mg;

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

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

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

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

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

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

• PEPCID^® (famotidine) for Oral Suspension;

• Oral Suspension DIURIL^® (Chlorothiazide);

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

• METOZOLV™ ODT (metoclopramide HCl) 5mg and 10mg orally disintegrating tablets, which we plan to begin selling in the fourth quarter of 2009; and

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

We generate revenue primarily by selling our products, namely prescription drugs, to pharmaceutical wholesalers. These direct customers resell and distribute our products to and through pharmacies to patients who have had our products prescribed by doctors. We currently market our products, and intend to market future products, if approved by the U.S. Food and Drug Administration, or FDA, to U.S. gastroenterologists and other physicians through our own direct sales force. In December 2000, we established our own field sales force to market Colazal in the United States. Currently, this sales force has approximately 160 sales representatives in the field and

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markets our approved products. Although the creation of an independent sales organization involved substantial costs, we believe that the financial returns from our direct product sales have been and will continue to be more favorable to us than those from the indirect sale of products through marketing partners. We enter into distribution or licensing relationships outside the United States and in certain markets in the U.S. where a larger sales organization is appropriate. Currently, our sales and marketing staff, including our sales representatives, consists of approximately 245 people.

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

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

Compound	Indication	Status
Rifaximin	Hepatic encephalopathy	NDA submitted June 24, 2009
Rifaximin	Irritable bowel syndrome	Phase III
Rifaximin	Travelers’ diarrhea prevention	Phase III
Rifaximin	C. difficile — associated diarrhea	Phase III
Crofelemer	HIV-associated diarrhea	Phase III
Balsalazide disodium tablet	Ulcerative colitis	Complete response submitted to FDA October 26, 2009

Critical Accounting Policies

In our Annual Report on Form 10-K for the year ended December 31, 2008, 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, cash and cash equivalents, and research and development expenses. We reviewed our policies and determined that those policies remained our most critical accounting policies for the nine-month period ended September 30, 2009. We did not make any changes in those policies during the quarter.

We recognize revenue when 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.

We recognize revenue from sales transactions where the buyer has the right to return the product 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, 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.

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

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

• estimated levels of inventory in the distribution channel;

• historical rebates, chargebacks and returns of products;

• direct communication with customers;

• anticipated introduction of competitive products or generics;

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

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

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

• estimated remaining shelf life of products.

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

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

Allowances for estimated rebates and chargebacks were $15.9 million and $5.4 million as of September 30, 2009 and 2008, respectively. The balances exclude amounts related to Colazal, which are included in the reserve discussed below. These allowances reflect an estimate of our liability for items such as rebates due to various governmental organizations under the Medicare/Medicaid regulations, rebates due to managed care organizations under specific contracts and chargebacks due to various organizations purchasing certain of our products through federal contracts and/or group purchasing agreements. We estimate our liability for rebates and chargebacks at each reporting period based on a methodology of applying the relevant quantitative and qualitative assumptions discussed above. Due to the subjectivity of our accrual estimates for rebates and chargebacks, we prepare various sensitivity analyses to ensure our final estimate is within a reasonable range as well as review prior period activity to ensure that our methodology 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 2008, we would have recorded an adjustment to revenues of approximately $2.1 million, or 1.0%, for the year.

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Allowances for product returns were $8.9 million and $6.0 million as of September 30, 2009 and 2008, respectively. These allowances reflect an estimate of our liability for product that may be returned by the original purchaser in accordance with our stated return policy. These balances do not include $2.6 million and $23.2 million at September 30, 2009 and 2008, respectively, reflecting our estimate of Colazal that may be returned to us under our return policy as a result of the approval of three generic balsalazide capsule products by the Office of Generic Drugs in December 2007. We estimate our liability for product returns at each reporting period based on historical return rates, the estimated inventory in the channel, and the other factors discussed above. Due to the subjectivity of our accrual estimates for product returns, we prepare various sensitivity analyses to ensure our final estimate is within a reasonable range as well as review prior period activity to ensure that our methodology is still reasonable. A change in assumptions that resulted in a 10% change in forecasted return rates for all products other than Colazal would have resulted in a change in total product returns liability at December 31, 2008 of approximately $1.5 million and a corresponding change in 2008 net product revenue of less than 1.0%.

Colazal, our balsalazide disodium capsule, accounted for a majority of the Company’s revenue prior to 2008. On December 28, 2007, the Office of Generic Drugs, or OGD, approved three generic balsalazide capsule products. As a result of these generic approvals, the Company expects the future sales of Colazal to be significantly less than historical sales of Colazal. At September 30, 2009 and 2008, respectively, $2.6 million and $23.2 million were recorded as a liability to reflect the Company’s estimate of the Company’s liability for Colazal that may be returned by the original purchaser in accordance with the Company’s stated return policy as a result of these generic approvals. The decrease in the liability from December 31, 2008 to September 30, 2009 is a result of actual Colazal returns, rebates and chargebacks. This estimate was developed based on the following estimates:

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

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

• the actual demand for Colazal experienced during 2008 and 2009 subsequent to the generic approvals;

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

• other relevant factors.

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

For the nine-month periods ended September 30, 2009 and 2008, 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, and also as a result of the approval of generic balsalazide capsule products. Accordingly, reductions to revenue and corresponding increases to allowance accounts have likewise increased. The estimated exposure to these revenue-reducing items as a percentage of gross product revenue in the nine-month periods ended September 30, 2009 and 2008 was 9.7% and 6.5% for rebates, chargebacks and discounts and was 5.6% and 6.0% for product returns excluding the Colazal return reserve, respectively.

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Results of Operations

Three-month and Nine-month Periods Ended September 30, 2009 and 2008

Revenues

The following table summarizes net product revenues for the three-month and nine-month periods ended September 30 (in thousands):

	Three months ended September 30,						Nine months ended September 30,
	2009			2008			2009			2008
Inflammatory Bowel Disease – Colazal/Apriso	$	(2,379	)	$	(1,266	)	$	(1,521	)	$	79
% of net product revenues		(3	)%		(3	)%		(1	)%		—	%
Xifaxan		42,668			21,373			93,027			56,132
% of net product revenues		65	%		50	%		57	%		48	%
Purgatives – Visicol/OsmoPrep/ MoviPrep		16,638			15,531			45,806			41,506
% of net product revenues		25	%		36	%		28	%		35	%
Other – Anusol/Azasan/Diuril/Pepcid/Proctocort		8,731			7,234			25,354			20,480
% of net product revenues		13	%		17	%		16	%		17	%
Net product revenues	$	65,658		$	42,872		$	162,666		$	118,197

Net product revenues for the three-month period ended September 30, 2009 were $65.7 million, compared to $42.9 million for the corresponding three-month period in 2008, a 53% increase. The net product revenue increase for the three-month period ended September 30, 2009 compared to the three-month period ended September 30, 2008 was primarily due to:

• increased unit sales of Xifaxan;

• increased unit sales of MoviPrep;

• increased unit sales of Pepcid ; and

• price increases on our products.

These increases were partially offset by decreased unit sales of OsmoPrep and an adjustment in the reserve for Colazal returns.

Prescription growth for the three-month period ended September 30, 2009 compared to the corresponding three-month period in 2008 was 15% for Xifaxan and 11% for our purgative franchise. Prescriptions for MoviPrep increased 66% for the three-month period ended September 30, 2009 compared to prescriptions for the three-month period ended September 30, 2008. Prescriptions for OsmoPrep for the three-month period ended September 30, 2009 declined 45% compared to prescriptions for the three-month period ended September 30, 2008 due to the boxed label warning announced by the FDA on December 11, 2008.

Net product revenues for the nine-month period ended September 30, 2009 were $162.7 million, compared to $118.2 million for the corresponding nine-month period in 2008, a 38% increase. The net product revenue increase for the nine-month period ended September 30, 2009 compared to the nine-month period ended September 30, 2008 was primarily due to:

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• increased unit sales of Xifaxan;

• increased unit sales of MoviPrep;

• sales of Apriso, which the FDA approved in October 2008 and we launched in February 2009;

• increased unit sales of Pepcid; and

• price increases on our products.

These increases were partially offset by decreased unit sales of OsmoPrep and an adjustment in the reserve for Colazal returns.

Prescription growth for the nine-month period ended September 30, 2009 compared to the corresponding nine-month period in 2008 was 13% for Xifaxan and 19% for our purgatives. Prescriptions for MoviPrep for the nine-month period ended September 30, 2009 increased 79% compared to prescriptions for the nine-month period ended September 30, 2008. Prescriptions for OsmoPrep for the nine-month period ended September 30, 2009 declined 37% compared to prescriptions for the nine-month period ended September 30, 2008 due to the boxed label warning announced by the FDA on December 11, 2008.

On December 28, 2007, the Office of Generic Drugs approved three generic balsalazide capsule products. As a result of these generic approvals, the Company expects the future sales of Colazal to be significantly less than historical sales of Colazal. In the fourth quarter of 2007, the Company recorded a $34.6 million reserve as a reduction of net product revenues. The balance of this reserve at September 30, 2009 and 2008 was $2.6 million and $23.2 million, respectively. This reserve represents an estimate of the Company’s liability for Colazal that may be returned by the original purchaser in accordance with the Company’s stated return policy as a result of these generic approvals. The decrease in the liability from December 31, 2008 to September 30, 2009 is a result of actual Colazal returns. We developed this estimate based on the following:

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

• our estimate of future demand for Colazal based on the actual erosion of product demand for several comparable products that were previously genericized, and the actual demand for Colazal experienced during 2008 and 2009 subsequent to the generic approvals;

• our estimate of chargeback and rebate activity based on actual activity during 2008 and 2009 subsequent to the generic approvals; and

• other relevant factors.

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

Costs and Expenses

Costs and expenses for the three-month period ended September 30, 2009 were $71.5 million, compared to $47.9 million for the corresponding three-month period in 2008, and $195.3 million for the nine-month period ended September 30, 2009, compared to $153.8 million for the corresponding nine-month period in 2008. Higher operating expenses in absolute terms were due primarily to increased research and development costs, general and

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administrative expenses, and increased cost of products sold related to the corresponding increase in product revenue.

Cost of Products Sold

Cost of products sold for the three-month period ended September 30, 2009 was $13.2 million, compared with $7.8 million for the corresponding three-month period in 2008. Cost of products sold for the nine-month period ended September 30, 2009 was $34.5 million, compared with $22.1 million for the corresponding nine-month period in 2008. The increase in cost of products sold in absolute terms for the three-month and nine-month periods ended September 30, 2009 compared to the three-month and nine-month periods ended September 30, 2008 was primarily due to the increase in net product revenues discussed above.

Gross margin on total product revenue, excluding $2.6 million and $2.3 million in amortization of product rights and intangible assets for the three-month periods ended September 30, 2009 and 2008, respectively, was 79.9% for the three-month period ended September 30, 2009 and 81.9% for the three-month period ended September 30, 2008. Gross margin on total product revenue, excluding $7.6 million and $6.8 million in amortization of product rights and intangible assets for the nine-month periods ended September 30, 2009 and 2008, respectively, was 78.8% for the nine-month period ended September 30, 2009 and 81.3% for the nine-month period ended September 30, 2008. Lower gross margins for the three-month and nine-month periods ended September 30, 2009 compared to the corresponding periods in 2008 were primarily due to the product revenue mix in the respective periods.

Amortization of Product Rights and Intangible Assets

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 and nine-month periods ended September 30, 2009 compared to the corresponding periods in 2008 is primarily a result of payments during the fourth quarter of 2008 related to the approval of Apriso, and a sales milestone payment to Norgine for MoviPrep.

Research and Development

Research and development expenses were $26.1 million for the three-month period ended September 30, 2009, compared to $14.4 million for the comparable period in 2008. The increase in research and development expenses for the three-month period ended September 30, 2009 compared to the corresponding period in 2008 was due primarily to:

• increased expenses related to the continuation of our development program for crofelemer, which we acquired from Napo in December 2008;

• increased expenses related to our development program for budesonide;

• increased expenses related to investigator initiated studies;

• a $5.0 million upfront payment in connection with our collaboration with Lupin; and

• increased headcount costs.

These increases were partially offset by:

• reduced expenses related to our development program for granulated mesalamine, or Apriso, which the FDA approved in October 2008;

• reduced expenses related to our IBS development program for rifaximin, because our Phase III trials

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were completed in mid 2009; and

• reduced expenses related to our hepatic encephalopathy development program for rifaximin, because our Phase III trials were completed in mid 2009.

Research and development expenses were $69.6 million for the nine-month period ended September 30, 2009, compared to $57.3 million for the comparable period in 2008. The increase in research and development expenses for the nine-month period ended September 30, 2009 compared to the corresponding period in 2008 was due primarily to:

• increased expenses related to our Phase III studies of rifaximin for IBS;

• increased expenses related to the continuation of our development program for crofelemer, which we acquired from Napo in December 2008;

• increased expenses related to our development program for budesonide;

• a $5.0 million upfront payment in connection with our collaboration with Lupin;

• increased expenses related to investigator initiated studies; and

• increased headcount costs.

These increases were partially offset by:

• reduced expenses related to our development program for our 1100mg balsalazide tablet;

• reduced expenses related to our development program for granulated mesalamine, or Apriso, which the FDA approved in October 2008; and

• reduced expenses related to our hepatic encephalopathy development program for rifaximin, because our Phase III trials were completed in mid 2009.

From inception through September 30, 2009, we had incurred research and development expenditures of approximately $72.5 million for balsalazide, $131.3 million for rifaximin, $8.9 million for crofelemer and $37.7 million for granulated mesalamine.

Due to the risks and uncertainties of the drug development and regulatory approval process, research and development expenditures are difficult to forecast and subject to unexpected increases. We generally expect research and development costs to increase in absolute terms as we pursue additional indications and formulations for rifaximin, initiate development for the budesonide product candidate we acquired from Dr. Falk, continue the development of crofelemer which we acquired from Napo, and if and when we acquire new products.

Selling, General and Administrative

Selling, general and administrative expenses were $29.6 million for the three-month period ended September 30, 2009, compared to $23.4 million in the corresponding three-month period in 2008. This increase was primarily due to:

• increased costs related to the expansion of our sales force from 96 sales representatives to 160 sales representatives during the three-month period ended September 30, 2009;

• expenses related to the launch of Apriso;

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

• increased headcount costs.

These increases were partially offset by decreased pre-marketing costs for our 1100mg balsalazide tablet and decreased marketing costs for OsmoPrep.

Selling, general and administrative expenses were $83.6 million for the nine-month period ended September 30, 2009, compared to $67.6 million in the corresponding nine-month period in 2008. This increase was primarily due to:

• increased costs related to the expansion of our sales force from 96 sales representatives to 160 sales representatives during the three-month period ended September 30, 2009;

• expenses related to the launch of Apriso;

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

• increased headcount costs.

These increases were partially offset by decreased pre-marketing costs for our 1100mg balsalazide tablet, and decreased marketing costs for OsmoPrep.

We expect selling, general and administrative expenses to increase in absolute terms as we expand our sales and marketing team and efforts for our current products, the anticipated fourth quarter 2009 launch of Metozolv, and other indications for rifaximin, if approved.

Interest and Other Income, Net

Interest income (expense) and other income, net was $1.4 million in expense for the three-month period ended September 30, 2009, compared to $0.5 million in expense in the corresponding three-month period in 2008. Interest and other income, net for the three-month period ended September 30, 2009 consisted of:

• $0.1 million of interest expense on our credit facility; and

• $1.6 million of interest expense on our convertible notes issued in August 2008, including $0.6 million of amortization of debt discount; partially offset by $0.3 of interest income.

Interest and other income, net for the three-month period ended September 30, 2008 consisted of:

• $1.1 million of interest income;

• offset by $0.4 million of interest expense on our convertible notes issued in August 2008; and

• $0.1 million of interest expense on our credit facility and a $1.1 million non-cash charge to expense a portion of the unamortized costs related to the credit facility.

Interest income (expense) and other income, net was $4.1 million in expense for the nine-month period ended September 30, 2009, compared to $0.1 million in income in the corresponding nine-month period in 2008. Interest and other income, net for the nine-month period ended September 30, 2009 consisted of:

• $0.4 million of interest expense on our credit facility; and

• $4.6 million of interest expense on our convertible notes issued in August 2008, including $1.8 million of amortization of debt discount; partially offset by $1.0 million of interest income.

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Interest and other income, net for the nine-month period ended September 30, 2008 consisted of:

• $2.2 million of interest income;

• offset by $0.4 million of interest expense on our convertible notes issued in August 2008, including $0.1 million of amortization of debt discount; and

• $0.6 million of interest expense on our credit facility and the $1.1 million non-cash charge to expense a portion of the unamortized costs related to the credit facility.

The decrease in interest income for the three-month and nine-month periods ended September 30, 2009 compared to the corresponding periods in 2008 is due primarily to lower interest rates on our investments in 2009 and lower cash and cash equivalent balances during 2009 as compared to 2008.

Provision for Income Tax

Income tax expense was $22,000 for the three-month period ended September 30, 2009, compared to $112,000 in benefit for the corresponding three-month period in 2008. Income tax benefit was $72,000 for the nine-month period ended September 30, 2009, compared to $1.0 million in expense for the corresponding nine-month period in 2008. Our effective tax rate was (0.3) % for the three-month period ended September 30, 2009, and 2.0% in the corresponding three-month period in 2008. Our effective tax rate was 0.2% for the nine-month period ended September 30, 2009, and (2.8) % in the corresponding nine-month period in 2008. Our effective tax rates differ from the statutory rate of 35% primarily due to changes in the valuation allowance for deferred tax assets.

Net Income (Loss)

Net loss was $7.3 million for the three-month period ended September 30, 2009, compared to $5.4 million in the corresponding three-month period in 2008. Net loss was $36.6 million for the nine-month period ended September 30, 2009, compared to $36.5 million in the corresponding nine-month period in 2008.

Liquidity and Capital Resources

From inception until first achieving profitability in the third quarter of 2004, we financed product development, operations and capital expenditures primarily from public and private sales of equity securities and from funding arrangements with collaborative partners. Since launching Colazal in January 2001, net product revenue has been a growing source of cash. On August 22, 2008, we closed an offering of $60.0 million in convertible senior notes due 2028. Net proceeds from the offering were $57.3 million. As of September 30, 2009, we had $69.1 million in cash and cash equivalents compared to $120.2 million as of December 31, 2008. We have not encountered any material collection issues with our customers to date.

To date, the decline in the stock market, lack of credit availability and financial institution difficulties have had a limited effect on our business. We believe our cash and cash equivalent balances should be sufficient to satisfy our cash requirements for the foreseeable future. At September 30, 2009, cash and cash equivalents consisted primarily of demand deposits, certificates of deposit, overnight investments in Eurodollars and money market funds at reputable financial institutions, and did not include any auction rate securities. We have not realized any material loss in principal or liquidity in any of our investments to date. However, continued deterioration in the overall economy could impair our liquidity and/or lead to a decrease in demand for our marketed products, which could have an adverse effect on our business, financial condition and results of operations.

Net cash used by operating activities of $51.9 million for the nine-month period ended September 30, 2009 was primarily attributable to our net loss for the period, product returns and chargebacks for Colazal, the increase in accounts receivable and the increase in inventory. Net cash used by operating activities of $30.1 million for the nine-month period ended September 30, 2008 was primarily attributable to our net loss for the period, and product returns

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and chargebacks for Colazal, partially offset by collection of accounts receivable for product revenue recognized in the fourth quarter of 2007.

Net cash used in investing activities for the nine-month period ended September 30, 2009 of $2.1 million was primarily for the approval milestone payment to Wilmington Pharmaceuticals for Metozolv, and purchases of property and equipment. Net cash used in investing activities for the nine-month period ended September 30, 2008 of $15.9 million was for the purchases of property and equipment and the transfer of $15.0 million of cash to restricted cash as a result of the amendment of our credit facility.

Net cash provided by financing activities for the nine-month period ended September 30, 2009 was $2.9 million consisting primarily of proceeds from the exercise of stock options. Net cash used by financing activities for the nine-month period ended September 30, 2008 was $56.5 million consisting primarily of the proceeds of our convertible debt offering closed in August 2008.

As of September 30, 2009, we had non-cancelable purchase order commitments for inventory purchases of approximately $23.8 million. We anticipate significant expenditures related to our on-going sales, marketing, product launch efforts and our on-going development efforts for rifaximin, our budesonide product candidates and crofelemer. To the extent we acquire rights to additional products, we will incur additional expenditures.

Our contractual commitments for non-cancelable purchase commitments of inventory, minimum lease obligations for all non-cancelable operating leases, debt and minimum capital lease obligations (including interest) as of September 30, 2009 were as follows (in thousands):

	Total		< 1 year		1-3 years		3-5 years		> 5 years
Operating leases	$	9,372	$	533	$	5,388	$	2,951	$	500
Purchase commitments		23,776		23,776		—		—		—
Convertible senior notes(1)		122,425		3,300		6,600		6,600		105,925
Borrowings under credit facility(2)		15,512		159		15,353		—		—
Capital lease obligations		1,522		243		1,279		— 3		—
Total	$	172,607	$	28,011	$	28,620	$	9,551	$	106,425

(1) Contractual interest obligations related to our convertible senior notes total $62.4 million at September 30, 2009, including $3.3 million, $6.6 million, $6.6 million and $45.9 million due in one year or less, two to three years, four to five years, and greater than five years, respectively.

(2) Contractual interest obligations related to our credit facility total $1.2 million based on the interest rate at September 30, 2009, including $0.5 million and $0.7 million due in one year or less and two to three years, respectively.

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

In February 2007, we entered into a $100.0 million revolving credit facility that matures in February 2012. On August 4, 2008 we amended the credit facility to waive defaults that might have resulted from the approval of three generic balsalazide capsule products by the Office of Generic Drugs on December 28, 2007, and reduced the credit facility to $20.0 million. On August 22, 2008 we further amended the credit facility to allow us to issue the convertible notes described below. At September 30, 2009, $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.

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The credit facility contains various representations, warranties and affirmative, negative and financial covenants customary for financings of this type. The credit facility bears interest at a rate per annum equal to, at our option, either (a) a base rate equal to the higher of (i) the Federal Funds Rate plus 1/2 of 1% and (ii) the Bank of America prime rate, or (b) a Eurodollar rate (based on LIBOR), plus 0.00% for base rate borrowings and 1.00% for Eurodollar rate borrowings. The rate as of September 30, 2009 on our outstanding borrowings was 1.41%. We must maintain an amount equal to the amount outstanding under the credit facility on deposit with the Administrative Agent of the credit facility and maintain a minimum of $23.0 million in cash on our balance sheet. At September 30, 2009, restricted cash of $15.0 million represents the collateral on deposit with the Administrative Agent related to the credit facility. At September 30, 2009 we were in compliance with applicable covenants under the credit facility.

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

The Notes are convertible into approximately 6,486,000 shares of our common stock under certain circumstances prior to maturity at a conversion rate of 108.0847 shares per $1,000 principal amount of Notes, which represents a conversion price of approximately $9.25 per share, subject to adjustment under certain conditions. Holders of the Notes may convert their Notes at their option on any day prior to the close of business on the business day immediately preceding the maturity date of August 15, 2028 only if one or more of the following conditions is satisfied: (1) during any fiscal quarter commencing after September 30, 2008, if the last reported sale price of our common stock for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is equal to or more than 130% of the conversion price of the Notes on the last day of such preceding fiscal quarter; (2) during the five business day period following any five consecutive trading day period in which the trading price for the Notes, per $1,000 principal amount of the Notes, for each such trading day was less than 98% of the product of the last reported sale price of our common stock and the conversion rate of the Notes on such date; (3) if we enter into specified corporate transactions; or (4) upon a redemption notice. The first of these conditions was met as of September 30, 2009. The Notes will be convertible, regardless of whether any of the foregoing conditions has been satisfied, on or after March 15, 2028 at any time prior to the close of business on the business day immediately preceding the stated maturity date of August 15, 2028. Upon conversion, we will pay cash, shares of our common stock or a combination of cash and stock, as determined by us in our discretion.

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

As of September 30, 2009, we had an accumulated deficit of $188.9 million, and cash and cash equivalent balances of $69.1 million. We expect to be unprofitable and experience negative cash flow during 2009. We believe our cash and cash equivalent balances should be sufficient to satisfy our cash requirements for the foreseeable future. Based on our current projections, we believe that we will be able to return to a positive cash flow position without requiring additional capital. However, we might seek additional debt or equity financing or both to fund our operations or acquisitions, and our actual cash needs might vary materially from those now planned because of a number of factors including: general economic conditions; FDA and foreign regulatory processes; the status of competitive products, including potential generics; litigation and intellectual property risks; the actual amount of Colazal returns we receive compared to our current estimates; our ability to maintain our current credit facility; our

29

success selling products; the results of research and development activities; establishment of and change in collaborative relationships; technological advances by us and other pharmaceutical companies; and whether we acquire rights to additional products. If we incur more debt, we might be restricted in our ability to raise additional capital and might be subject to financial and restrictive covenants. If we issue additional equity, our stockholders could suffer dilution. We might also enter into additional collaborative arrangements that could provide us with additional funding in the form of equity, debt, licensing, milestone and/or royalty payments. We might not be able to enter into such arrangements or raise any additional funds on terms favorable to us or at all.

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, 2008.

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: general economic conditions; our need to return to profitability; intense competition, including from generics; the high cost and uncertainty of the research, clinical trials and other development activities involving pharmaceutical products; the unpredictability of the duration and results of regulatory review of New Drug Applications and Investigational New Drug Applications; the possible impairment of, or inability to obtain intellectual property rights and the costs of obtaining such rights from third parties; our dependence on a limited number of products, particularly Xifaxan and our purgatives, and the uncertainty of market acceptance of our products; the uncertainty of obtaining, and our dependence on, third parties to manufacture and sell our products; and results of litigation and other risk factors detailed from time to time in our other SEC filings.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our purchases of raw materials 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 could change. In addition, our limited amount of floating interest rate debt under our credit facility results in immaterial risk as a result of interest rate fluctuations.

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 and accumulated and communicated to the issuer’s management, including its principal financial officer, or persons performing similar functions, as appropriate to allow timely decision regarding required disclosure. 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 Executive 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 September 30, 2009 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 1. Legal Proceedings

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

We are involved in a lawsuit against a company seeking FDA approval to market a generic version of our MoviPrep product. Norgine, B.V. and Norgine Europe, B.V. own U.S. Patent No. 7,169,381 (the ‘381 patent). The ‘381 patent is listed with the FDA as protecting our MoviPrep product. Norgine licensed MoviPrep and the ‘381 patent to us for commercialization in the United States. Novel Laboratories, Inc., filed an Abbreviated New Drug Application, or ANDA, with the FDA seeking approval to market a generic version of MoviPrep in the United States prior to the September 2024 expiration of the ‘381 patent. On May 14, 2008, we and Norgine filed a lawsuit in the United States District Court for the District of New Jersey against Novel for infringement of the ‘381 patent. Novel filed an Answer and Counterclaims on June 20, 2008. On June 25, 2009 we and Norgine amended the complaint to add a claim for correction of inventorship for the ‘381 patent. Novel filed an Answer and Counterclaims to the first Amended Complaint on July 10, 2009. Novel has denied infringement and asserted various affirmative defenses, including defenses of patent invalidity and unenforceability. No trial date has been set. We intend to vigorously defend the patent rights for MoviPrep.

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

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

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

We are currently and might continue to be subject to product liability claims that arise through the testing, manufacturing, marketing and sale of our products, including a number of claims relating to OsmoPrep and Visicol in connection with their “box” label warning. We intend to defend these claims vigorously but are currently unable to predict the outcome or to reasonably estimate the range of potential expenses or loss, if any. We currently maintain liability coverage for our products but it is possible that this coverage, and any future coverage, will be insufficient to satisfy any liabilities that arise. We would have to assume defense of the lawsuits and be responsible for damages, fees and expenses, if any, that are awarded against us or for amounts in excess of our product liability coverage. Lawsuits can also be time-consuming and harm our reputation and business, even if we are successful in defending them.

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Item 6. Exhibits

Exhibit Number	Description of Document	Registrant’s Form	Dated	Exhibit Number	Filed Herewith
10.67*	Development, Commercialization and License Agreement Between Lupin Ltd. and Salix Pharmaceuticals, Inc.				X
10.68*	Rifaximin Manufacturing and Supply Agreement Between Salix Pharmaceuticals, Inc. and Lupin Ltd.				X
31.1	Certification by the Chief Executive Officer pursuant to Section 240.13a-14 or Section 240.15d-14 of the Securities and Exchange Act of 1934, as amended.				X
31.2	Certification by the Chief Financial Officer pursuant to Section 240.13a-14 or Section 240.15d-14 of the Securities and Exchange Act of 1934, as amended.				X
32.1	Certification by the Chief Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.				X
32.2	Certification by the Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.				X

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

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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: November 9, 2009	By:	/S/    CAROLYN J. LOGAN
		Carolyn J. Logan
		President and Chief Executive Officer
Date: November 9, 2009	By:	/S/    ADAM C. DERBYSHIRE
		Adam C. Derbyshire
		Executive Vice President, Finance & Administration and
		Chief Financial Officer

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EX-10.67

Exhibit 10.67

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

FINAL EXECUTION COPY

DEVELOPMENT, COMMERCIALIZATION AND LICENSE AGREEMENT

Between

LUPIN LTD.

and

SALIX PHARMACEUTICALS, INC.

Dated as of September 30, 2009

TABLE OF CONTENTS

Page
ARTICLE 1	DEFINITIONS	1
ARTICLE 2	GRANT OF RIGHTS	13
2.1	Grants to Salix	13
2.2	Sublicenses	14
2.3	No Implied Rights; Reservation of Rights	14
2.4	Grants to Lupin	15
2.5	Non-Compete	15
ARTICLE 3	DEVELOPMENT	16
3.1	Development of the Licensed Product in the Territory in the Field	16
3.2	Development Plan and Implementation	16
3.3	Technology and Materials Transfer	17
3.4	Lupin and Salix Rights and Responsibilities	17
3.5	Pre-Clinical and Clinical Supply Obligations	17
ARTICLE 4	COLLABORATION MANAGEMENT	18
4.1	Formation and Purpose of Joint Steering Committee	18
4.2	Specific Responsibilities of Joint Steering Committee	18
4.3	Committees	19
4.4	Meetings and Procedures	19
4.5	Limitations on Authority	21
ARTICLE 5	REGULATORY MATTERS	21
5.1	Regulatory Responsibilities	21
5.2	Regulatory Data	22
5.3	Rights of Reference; Consideration	22
ARTICLE 6	COMMERCIALIZATION	23
6.1	In General	23
6.2	Commercialization Plan in the Territory in the Field	23
6.3	Pricing	23
6.4	Compliance with Applicable Law	24
ARTICLE 7	CONSIDERATION	24
7.1	Payments to Lupin	24

- i -

7.2	Royalties	24
7.3	Mode of Payment	26
7.4	Taxes	26
7.5	Financial Records	26
ARTICLE 8	INTELLECTUAL PROPERTY	27
8.1	Ownership of Intellectual Property	27
8.2	Maintenance and Prosecution of Patents	28
8.3	Enforcement of Patents	30
8.4	Infringement Claims by Third Parties	32
8.5	Invalidity or Unenforceability Defenses or Actions	33
8.6	Third Party Licenses	34
8.7	Product Trademarks	35
ARTICLE 9	ADVERSE EVENT REPORTING; RECALLS AND WITHDRAWALS	35
9.1	Adverse Event Reporting	35
9.2	Recalls and Withdrawals	36
9.3	Pharmacovigilance Agreement	36
ARTICLE 10	CONFIDENTIALITY AND NON-DISCLOSURE	37
10.1	Confidentiality Obligations	37
10.2	Trade Secrets	38
10.3	Permitted Disclosures	38
10.4	Use of Name	39
10.5	Press Releases	39
10.6	Patient Information	39
10.7	Publications	40
ARTICLE 11	REPRESENTATIONS, WARRANTIES AND COVENANTS	40
11.1	Representations, Warranties and Covenants	40
11.2	Additional Representations, Warranties and Covenants of Salix	41
11.3	Additional Representations, Warranties and Covenants of Lupin	42
11.4	Disclaimer of Warranty	43
11.5	Unauthorized Sales	43
11.6	Governmental Filings	44
ARTICLE 12	INDEMNIFICATION	44
12.1	Indemnification by Salix	44

ii

12.2	Indemnification by Lupin	44
12.3	Notice of Claim	45
12.4	Control of Defense	45
12.5	Limitation on Damages and Liability	47
12.6	Insurance	47
ARTICLE 13	TERM AND TERMINATION	47
13.1	Term	47
13.2	Termination for Material Breach	47
13.3	Other Termination by Salix	48
13.4	Termination Upon Insolvency	48
13.5	Termination by Lupin	48
13.6	Rights in Bankruptcy	48
13.7	Licenses and Assignments Upon Termination	49
13.8	Additional Consequences of Termination	49
ARTICLE 14	MISCELLANEOUS	51
14.1	Force Majeure	51
14.2	Export Control	52
14.3	Subcontractors	52
14.4	Assignment	52
14.5	Severability	52
14.6	Governing Law, Jurisdiction, Venue and Service	53
14.7	Dispute Resolution	54
14.8	Notices	54
14.9	Entire Agreement; Modifications	56
14.10	English Language	56
14.11	Equitable Relief	56
14.12	Waiver and Non-Exclusion of Remedies	57
14.13	No Benefit to Third Parties	57
14.14	Further Assurance	57
14.15	Relationship of the Parties	57
14.16	Performance by Affiliates	57
14.17	Counterparts	57
14.18	Payments; Audits	58

iii

14.19	References	59
14.20	Construction	59
14.21	Additional Agreements	59

Schedules and Exhibits
Schedule 6.1	Commercialization Efforts
Schedule 7.1.2	Milestones and Milestone Payments
Schedule 8.6	Anti-Stacking
Schedule 9.2	Recall and Withdrawal Contact Information
Exhibit A	Development Plan

iv

DEVELOPMENT, COMMERCIALIZATION AND LICENSE AGREEMENT

This Development, Commercialization and License Agreement (this “Agreement”) is made and entered into effective as of September 30, 2009 (the “Effective Date”) by and between Lupin Ltd., a corporation organized under the laws of India and having its principal place of business at “B” Wing, Fifth Floor, Bandra Kurla Complex, Mumbai—400 051, India (“Lupin”), and Salix Pharmaceuticals, Inc., a corporation organized under the laws of the State of California in the United States of America and having its principal place of business at 1700 Perimeter Park Drive, Morrisville, North Carolina 27560-8404, U.S.A. (“Salix”). Lupin and Salix are sometimes referred to herein individually as a “Party” and collectively as the “Parties.”

RECITALS

WHEREAS, Lupin Controls (as defined below) certain intellectual property with respect to the Licensed Delivery Technology (as defined below);

WHEREAS, Salix desires to develop and commercialize the Licensed Product (as defined below) in accordance with the terms and conditions of this Agreement; and

WHEREAS, Lupin desires to grant certain licenses to Salix, and Salix desires to obtain certain licenses from Lupin, to develop and commercialize the Licensed Product in accordance with the terms and conditions set forth below;

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

ARTICLE 1

DEFINITIONS

Unless otherwise specifically provided herein, the following terms shall have the following meanings:

1.1 “Acceptance” means, with respect to a Drug Approval Application, the occurrence of the earlier of: (a) the expiration of the period specified in applicable regulations for any notice by the FDA that such Drug Approval Application will not be accepted for review, without Salix, Lupin or one of their respective Affiliates having received such notice from the FDA; or (b) the receipt by Salix, Lupin or one of their respective Affiliates from the FDA that the Drug Approval Application will be accepted for review, provided that in any case, if no such period for acceptance is provided for in the applicable regulations, then the Drug Approval Application shall be deemed “accepted” on the date such Drug Approval Application was filed.

1.2 “Adverse Event” means (a) any finding from tests in laboratory animals or in vitro that suggests a significant risk for human subjects including reports of mutagenicity, teratogenicity or carcinogenicity and (b) any undesirable, untoward or noxious event or experience associated with the clinical, commercial or other use, or occurring following

application of the Licensed Product to humans, whether expected and whether considered related to or caused by the Licensed Product, including such an event or experience as occurs in the course of the use of the Licensed Product in professional practice, in a clinical trial, whether accidental or intentional, from abuse, from withdrawal or from a failure of expected therapeutic action of the Licensed Product, and including those events or experiences that are required to be reported to the Regulatory Authorities under corresponding Applicable Law.

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

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

1.5 “API Agreement” means that certain Rifaximin Manufacturing and Supply Agreement, of even date herewith, between the Parties.

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

1.7 [*]

1.8 “Bioadhesive Technology” means any bioadhesive for purposes of gastrointestinal drug delivery.

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

1.10 “Business Day” means a day other than a Saturday, Sunday or a day on which banking institutions in New York, New York are required or permitted by law to remain closed.

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

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

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

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1.13 “Clinical Data” means all Information with respect to the Licensed Product made, collected or otherwise generated under or in connection with the Clinical Trials for the Licensed Product, including any data, reports and results with respect thereto.

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

1.15 “Commencement of the Pivotal Trial” means the first dosing of the first patient enrolled in a Pivotal Trial, as defined in the protocol for such Clinical Trial.

1.16 “Commercialization” means any and all activities (whether before or after Regulatory Authorization) directed to the marketing, detailing and Promotion of the Licensed Product after Regulatory Authorization for commercial sale has been obtained, and shall include marketing, Promoting, detailing, marketing research, distributing, offering to commercially sell and commercially selling the Licensed Product, importing, exporting or transporting the Licensed Product for commercial sale and regulatory affairs with respect to the foregoing. When used as a verb, “Commercializing” means engaging in Commercialization and “Commercialize” and “Commercialized” shall have corresponding meanings.

1.17 “Commercialization Plan” has the meaning set forth in Section 6.2.1.

1.18 “Commercially Reasonable Efforts” means, with respect to the research and Development of the Licensed Product, the efforts and resources commonly used in the research-based pharmaceutical industry, and with respect to the Commercialization or other Exploitation of the Licensed Product, the efforts and resources commonly used in the commercial pharmaceutical industry, in each case for products with similar commercial and scientific potential at a similar stage in their lifecycle. Commercially Reasonable Efforts shall be determined without regard to a Party’s particular circumstances, including any other product opportunities, and without regard to any payments owed by a Party to the other under this Agreement. The term “commercially reasonable efforts,” used herein without capital letters, shall have the meaning ordinarily ascribed to such term in commercial agreements of this type.

1.19 “Committee” has the meaning set forth in Section 4.3.

1.20 “Completion of the Pivotal Trial” means the final dosing of the last patient enrolled in a Pivotal Trial, as defined in the protocol for such Clinical Trial.

1.21 “Confidential Information” has the meaning set forth in Section 10.1.

1.22 “Control” means, with respect to any item of Information, Regulatory Documentation, Patent, Trademark or other intellectual property right, possession of the right, whether directly or indirectly, and whether by ownership, license or otherwise (other than by operation of any license and other grants hereunder), to assign or grant a license, sublicense or other right to or under such Information, Regulatory Documentation, Patent, Trademark or other

3

intellectual property right as provided for herein without violating the terms of any agreement or other arrangement with any Third Party.

1.23 “Data Exclusivity” has the meaning set forth in Section 1.73.

1.24 “Development” means all activities related to pre-clinical and other non-clinical testing, test method development and stability testing, toxicology, formulation, process development, manufacturing scale-up, qualification and validation, quality assurance/quality control, Clinical Trials, including Manufacturing in support thereof, statistical analysis and report writing, the preparation and submission of Regulatory Documentation, regulatory affairs with respect to the foregoing and all other activities necessary or reasonably useful or otherwise requested or required by a Regulatory Authority as a condition or in support of obtaining, maintaining or modifying a Regulatory Authorization. When used as a verb, “Develop” means to engage in Development.

1.25 “Development Plan” has the meaning set forth in Section 3.2.

1.26 “Dispute” has the meaning set forth in Section 14.7.1.

1.27 “Dollars” or “$” means United States Dollars.

1.28 “Drug Approval Application” means a New Drug Application as defined in the FFDCA, and the regulations promulgated thereunder.

1.29 “Drug Master File” means any drug master file filed with the FDA with respect to any intermediate of the Licensed Product.

1.30 “Effective Date” means the effective date of this Agreement as set forth in the Preamble.

1.31 “Exploit” means to make, have made, import, use, sell or offer for sale, including to research, Develop, Commercialize, register, Manufacture, have Manufactured, hold or keep (whether for disposal or otherwise), have used, export, transport, distribute, Promote, market or have sold or otherwise dispose of, and “Exploitation” means the act of Exploiting a product or process.

1.32 “Ex-Territory Licensee” has the meaning set forth in Section 3.4.

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

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

1.35 “Field” means all use of the Licensed Product in humans, including (a) all indications of the Licensed Product for the treatment, management or prevention of any disease or condition in humans (including infectious diarrhea, specifically including cholera and travelers’ diarrhea, hepatic encephalopathy and irritable bowel syndrome) and (b) all

4

consumption of the Licensed Product by humans (including by way of food or dietary supplements).

1.36 [*]

1.37 “First Commercial Sale” means the first sale for use by the general public of the Licensed Product in the Territory after any and all Regulatory Authorizations necessary for commercial sale of the Licensed Product in the Territory have been obtained.

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

1.39 “Generally Competitive Product” means (a) any pharmaceutical or biological composition, preparation or other type of product (including any over-the-counter product) that contains Rifaximin (including any such product that contains Rifaximin together with one or more other ingredients (which may be either combined in a single formulation or bundled with separate formulations but sold as one product)), and (b) any dietary supplement or food product that contains Rifaximin.

1.40 “Global Steering Committee” or “GSC” has the meaning set forth in Section 3.4.

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

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

1.43 “Improvements” means any and all Information and inventions that are conceived, discovered, Developed or otherwise made by a Party, its Sublicensees, licensees, or any of its or their respective Affiliates in connection with the work conducted under the Development Plan or otherwise in connection with Development, Commercialization or other Exploitation of the Licensed Product, whether patentable or not. The Parties acknowledge and agree that any rights of Salix in or with respect to Lupin Improvements will be limited to the licenses granted in Section 2.1.

1.44 “IND” means any investigational new drug application filed with the FDA for authorization to commence Clinical Trials.

1.45 “Indemnification Claim Notice” has the meaning set forth in Section 12.3.

1.46 “Indemnified Party” has the meaning set forth in Section 12.3.

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

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1.47 “Information” means all technical, scientific and other know-how and information, trade secrets, knowledge, technology, means, methods, processes, practices, formulae, instructions, skills, techniques, procedures, experiences, expressed ideas, technical assistance, designs, drawings, assembly procedures, computer programs, apparatuses, specifications, data, results and other material, including: biological, chemical, pharmacological, toxicological, pharmaceutical, physical and analytical, pre-clinical, clinical, safety, manufacturing and quality control data and information, including study designs and protocols; assays and biological methodology (whether or not confidential, proprietary, patented or patentable) in written, electronic or any other form now known or hereafter developed.

1.48 “Initial Regulatory Authorization” of the Licensed Product for an indication means the approval by the FDA.

1.49 “Invoiced Sales” has the meaning set forth in Section 1.70.

1.50 “Joint Improvements” has the meaning set forth in Section 8.1.2(c).

1.51 “Joint Know-How” means all Information (including Joint Improvements and Clinical Data) developed, acquired or otherwise Controlled (other than by virtue of the licenses granted hereunder) jointly by or on behalf of Salix, its Sublicensees or any of its or their respective Affiliates and Lupin, its licensees or Sublicensees or any of its or their respective Affiliates under or in connection with the research, development or other Exploitation of the Licensed Product that is reasonably useful or necessary for the Exploitation of the Licensed Product in the Field, but excluding any Salix Know-How or Lupin Know-How or any Information to the extent covered or claimed by published Joint Patents.

1.52 “Joint Patents” means any Patent that claims or covers Joint Improvements and any other Improvements that are conceived or reduced to practice, or that are otherwise Controlled (other than by virtue of the licenses granted hereunder), jointly by or on behalf of Salix, its Sublicensees or any of its or their respective Affiliates and Lupin, its licensees or Sublicensees or any of its or their respective Affiliates under or in connection with the Exploitation of the Licensed Product, but excluding any Lupin Patents or Salix Patents.

1.53 “Joint Platform Patent” means a Joint Patent based primarily on claims covered by the Lupin Platform Patent.

1.54 “Joint Product Patent” means a Joint Patent covering a Rifaximin product incorporating Bioadhesive Technology.

1.55 “Joint Steering Committee” or “JSC” has the meaning set forth in Section 4.1.

1.56 “Joint Technology” means the Joint Know-How and the Joint Patents.

1.57 “Knowledge” means the good faith understanding of any vice president, any senior vice president, or the president or chief executive officer of a Party of the facts and information then in such individual’s possession after due inquiry.

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1.58 “Licensed Delivery Technology” means that certain bioadhesive for purposes of gastrointestinal drug delivery developed by Lupin and claimed under the Lupin Platform Patent and the Lupin Product Patent.

1.59 “Licensed Product” means any form or dosage of pharmaceutical, biological or other composition or preparation in finished form labeled and packaged for sale by prescription, over-the-counter, as a dietary supplement, as food, or by any other method that (a) contains Rifaximin (including a product that contains Rifaximin together with one or more other ingredients (which may be either combined in a single formulation or bundled with separate formulations but sold as one product)) and, in addition, (b) utilizes the Licensed Delivery Technology or any other Bioadhesive Technology included within or claimed or covered by the Lupin Technology.

1.60 “Losses” has the meaning set forth in Section 12.1.

1.61 “Lupin” has the meaning set forth in the Preamble.

1.62 “Lupin Improvement Patent” means all of Lupin’s right in and to any Patent claiming Lupin Improvements, but excluding the Lupin Platform Patent and the Lupin Product Patent.

1.63 “Lupin Improvements” has the meaning set forth in Section 8.1.2.

1.64 “Lupin Know-How” means all Information (including Lupin Improvements) Controlled by Lupin, its Sublicensees or any of its or their respective Affiliates as of the Effective Date or at any time during the term of this Agreement that is reasonably useful or necessary for the Exploitation of the Licensed Product, whether or not patented or patentable, but excluding any Joint Improvements or any Information to the extent covered or claimed by published Lupin Patents, Lupin Improvement Patents or Joint Patents.

1.65 “Lupin Patents” means (a) the Lupin Platform Patent, (b) the Lupin Product Patent, and (c) all other Patents that are Controlled by Lupin, its Sublicensees, licensees or any of its or their respective Affiliates as of the Effective Date or at any time during the term of this Agreement that claim or cover the Licensed Product or any component thereof or the Exploitation of the Licensed Product or any component thereof. The Parties acknowledge and agree that any rights of Salix in or with respect to the Lupin Patents will be limited to the licenses granted in Section 2.1 and the rights granted in Sections 8.1, 8.2 and 8.3.

1.66 “Lupin Platform Patent” means all of Lupin’s right in and to (a) US patent application No. 12/144,894; (b) divisionals, continuations and claims of continuations in part, in each case that are entitled to the benefit of the priority date of the application referenced in subclause (a), (c) the foreign patent applications associated with the patent applications referenced in subclauses (a) and (b) above; (d) the patents issued from the patent applications referenced in subclauses (a) through (c) above, and (e) reissues, renewals, reexaminations, restorations (including supplemental protection certificates) and extensions of any patent or application set forth in subclauses (a) through (d) above.

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1.67 “Lupin Product Patent” means all of Lupin’s right in and to (a) US patent application No. 12/144,453; (b) divisionals, continuations and claims of continuations in part, in each case that are entitled to the benefit of the priority date of the application referenced in subclause (a), (c) the foreign patent applications associated with the patent applications referenced in subclauses (a) and (b) above; (d) the patents issued from the patent applications referenced in subclauses (a) through (c) above, and (e) reissues, renewals, reexaminations, restorations (including supplemental protection certificates) and extensions of any patent or application set forth in subclauses (a) through (d) above.

1.68 “Lupin Technology” means the Lupin Know-How, the Lupin Patents, and the Lupin Improvement Patents.

1.69 “Manufacture” and “Manufacturing” means all activities related to the production, manufacture, processing, formulation, filling, finishing, packaging, labeling, shipping, handling, holding, storage and warehousing of the Licensed Product or any intermediate thereof, including process development, process qualification and validation, scale-up, pre-clinical, clinical and commercial manufacture and analytic development, product characterization, stability testing, quality assurance and quality control.

1.70 “Net Sales” shall mean, for any period, the gross amount invoiced by Salix, its Sublicensees or any of its or their respective Affiliates (collectively, a “Selling Person”) for the sale of the Licensed Product (the “Invoiced Sales”), less deductions for: (a) normal and customary trade, quantity and cash discounts and sales returns and allowances, including (i) those granted on account of price adjustments, billing errors, rejected goods, damaged goods and returns, (ii) administrative and other fees and reimbursements and similar payments to wholesalers and other distributors, buying groups, pharmacy benefit management organizations, health care insurance carriers and other institutions, (iii) allowances, rebates and fees paid to distributors, and (iv) chargebacks; (b) freight, postage, shipping and insurance expenses to the extent that such items are included in the Invoiced Sales; (c) customs and excise duties and other duties related to the sales to the extent that such items are included in the Invoiced Sales; (d) rebates and similar payments made with respect to sales paid for by any governmental or regulatory authority; (e) sales and other taxes and duties directly related to the sale or delivery of the Licensed Product (but not including franchise taxes or taxes assessed against the income derived from such sale); and (f) distribution expenses to the extent that such items are included in the Invoiced Sales (collectively, “Permitted Deductions”). Any of the deductions listed above that involves a payment by a Selling Person shall be taken as a deduction in the Calendar Quarter in which the payment is accrued by such entity. For purposes of determining Net Sales, a Licensed Product shall be deemed to be sold when invoiced and a “sale” shall not include transfers or dispositions of such Licensed Product for pre-clinical or clinical purposes or as samples, in each case, without charge. A Selling Person’s transfer of Licensed Product to an Affiliate or Sublicensee shall not result in any Net Sales, unless such Licensed Product is used by such Affiliate or Sublicensee in the course of its commercial activities. In the event that any Selling Person sells the Licensed Product as part of a bundle or group sale with other products not covered by this Agreement, and such Selling Person provides a discount, allowance or rebate to the purchaser of the Licensed Product based on the aggregate amount invoiced for all products sold, such discount, allowance or rebate shall be allocated to each of the products pro rata based on the gross amount invoiced for each such product less all

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other Permitted Deductions specifically related to each such product. If any Selling Person sells the Licensed Product as part of a bundle of distinct products (i.e., one price is charged for a number of distinct products), the Net Sales for the Licensed Product shall be based on the ratio of the wholesale acquisition cost for the Licensed Product to the sum of the wholesale acquisition costs for all products in such bundle.

1.71 “Non-Prescription Competitive Product” means (a) any over-the-counter pharmaceutical or biological composition, preparation or other type of product that (i) contains Rifaximin or any derivative thereof (including any such product that contains Rifaximin or any derivative thereof together with one or more other ingredients (which may be either combined in a single formulation or bundled with separate formulations but sold as one product)), (ii) utilizes Bioadhesive Technology or any other technology involving adhesion to bodily membranes, and (iii) is labeled, advertised, marketed, promoted or intended for use in the Field in the Territory and (b) any dietary supplement or food product that (i) contains Rifaximin or any derivative thereof (including any such product that contains Rifaximin or any derivative thereof together with one or more other ingredients (which may be either combined in a single formulation or bundled with separate formulations but sold as one product)), (ii) utilizes Bioadhesive Technology or any other technology involving adhesion to bodily membranes, and (iii) is advertised, marketed, promoted or intended for use in the Field in the Territory.

1.72 “Party” and “Parties” has the meaning set forth in the Preamble.

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

1.74 “Payments” has the meaning set forth in Section 7.4.

1.75 “Permitted Deductions” has the meaning set forth in Section 1.70.

1.76 “Person” means an individual, sole proprietorship, partnership, limited partnership, limited liability partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture or other similar entity or

9

organization, including a government or political subdivision, department or agency of a government.

1.77 “Pharmacovigilance Agreement” has the meaning set forth in Section 9.3.

1.78 “Phase I Clinical Trial” means a human clinical trial of the Licensed Product, the principal purpose of which is a preliminary determination of safety in healthy individuals or patients.

1.79 “Phase II Clinical Trial” means a human clinical trial of the Licensed Product, the principal purpose of which is a determination of safety and efficacy in the target patient population.

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

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

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

1.83 “Prescription Competitive Product” means any pharmaceutical or biological composition, preparation or other type of product (other than an over-the-counter product or a dietary supplement or food product) that (a) contains Rifaximin or any derivative thereof (including any such product that contains Rifaximin or any derivative thereof together with one or more other ingredients (which may be either combined in a single formulation or bundled with separate formulations but sold as one product)), (b) utilizes Bioadhesive

10

Technology or any other technology involving adhesion to bodily membranes, and (c) is labeled, advertised, marketed, promoted or intended for use in the Field in the Territory.

1.84 “Product Labeling” means, with respect to the Licensed Product and a particular country or other jurisdiction, (a) the Regulatory Authority-approved full prescribing information for the Licensed Product for such country or jurisdiction, including any required patient information, and (b) all labels and other written, printed or graphic matter upon a container, wrapper or otherwise, including any package insert, utilized with or for the marketing, sale or other Commercialization of the Licensed Product in such country or jurisdiction.

1.85 “Product Trademarks” means, with respect to the Licensed Product, the Trademark(s) for the Licensed Product used by Salix or its Affiliates or its or their respective Sublicensees in connection with the Licensed Product (but excluding any Salix Corporate Name or similar designation) and any registrations thereof or any pending applications relating thereto.

1.86 “Promotion” means those activities normally undertaken by a pharmaceutical company’s sales force (including electronic detailing, advertising and meeting with physicians, whether undertaken by the company’s sales force or not) to implement marketing plans and strategies aimed at encouraging the appropriate use of a product. When used as a verb, “Promote” means to engage in such activities. With respect to Salix’s Promotion of the Licensed Product, Promotion includes those activities actually undertaken by Salix’s sales force to implement marketing plans and strategies aimed at encouraging the appropriate use of the Licensed Product.

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

1.88 “Recalls” has the meaning set forth in Section 9.2.

1.89 “Regulatory Authority” means any applicable supra-national, federal, national, regional, state, provincial or local regulatory agencies, departments, bureaus, commissions, councils or other government entity, including FDA, and notified authority regulating or otherwise exercising authority with respect to the Exploitation (including the determination of pricing/reimbursement) of the Licensed Product in any country or other jurisdiction.

1.90 “Regulatory Authorization” means, with respect to the Licensed Product and a particular country or other jurisdiction, any and all approvals, registrations, certificates, licenses or authorizations of any Regulatory Authority necessary to commercially distribute, sell or market or otherwise Commercialize the Licensed Product in such country or jurisdiction, including, where applicable, (a) pricing or reimbursement approval in such country or jurisdiction, (b) pre- and post-approval manufacturing and marketing authorizations (including

11

any prerequisite marketing approval or authorization related thereto), (c) labeling approval, and (d) technical, medical and scientific licenses.

1.91 “Regulatory Documentation” means, with respect to the Licensed Product, all applications, registrations, licenses, authorizations and approvals, all correspondence submitted to or received from the Regulatory Authorities (including minutes and official contact reports relating to any communications with any Regulatory Authority), and all supporting documents and all clinical trials and tests, in each case, relating to the Licensed Product, and all data contained in any of the foregoing, including Promotional Materials, Clinical Data, period safety update reports, adverse event files and complaint files, Manufacturing records (including any chemistry, manufacturing or control data) and, if applicable, any updates or supplements to any of the foregoing.

1.92 “Rifaximin” means rifaximin, which is [*], and all complexes, mixtures and other combinations, prodrugs, metabolites, enantiomers, polymorphs, salt foams, racemates, and isomers thereof, or any derivatives of any of the foregoing.

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

1.94 “Salix Improvements” has the meaning set forth in Section 8.1.2.

1.95 “Salix Know-How” means all Information (including Salix Improvements) and Clinical Data Controlled by or on behalf of Salix, its Sublicensees or any of its or their respective Affiliates at any time during the term of this Agreement that are (a) conceived, discovered, Developed or otherwise made by Salix, its Sublicensees or any of its or their respective Affiliates in connection with the work conducted under the Development Plan or otherwise in connection with Development, Commercialization or other Exploitation of the Licensed Product under this Agreement, (b) used by or on behalf of Salix, its Sublicensees or any of its or their respective Affiliates under or in connection with the research, Development, Commercialization or other Exploitation of the Licensed Product under this Agreement and (c) reasonably commercially relevant to the Exploitation of the Licensed Product, whether or not patented or patentable; but excluding any Joint Improvements or any Information to the extent covered or claimed by published Salix Patents or Joint Patents.

1.96 “Salix Patents” means any Patent Controlled by or on behalf of Salix, its Sublicensees or any of its or their respective Affiliates (a) that claims or covers any Salix Improvement that is used by or on behalf of Salix, its Sublicensees or any of its or their respective Affiliates under or in connection with the research, Development, Commercialization or other Exploitation of the Licensed Product under this Agreement and (b) is reasonably commercially relevant to the Exploitation of the Licensed Product, but in any event ((a) and (b)) excluding any Joint Patents.

1.97 “Salix Technology” means Salix Know-How and Salix Patents.

1.98 “Selling Person” has the meaning set forth in Section 1.70.

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

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1.99 “Sublicensee” means a Person, other than an Affiliate, that is granted a sublicense by a Party under the license grants in Section 2.1 or 2.4, as the case may be, as provided in Section 2.2.

1.100 “Territory” means the United States.

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

1.102 “Third Party Claims” has the meaning set forth in Section 12.1.

1.103 “Third Party License Payments” has the meaning set forth in Section 5.3.2.

1.104 “Trademark” shall include any word, name, symbol, color, designation or device or any combination thereof, including any trademark, trade dress, brand mark, service mark, trade name, brand name, logo or business symbol, whether or not registered.

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

1.106 “Valid Claim” means (a) any claim of an issued and unexpired Patent in the Territory that (i) has not been held permanently revoked, unenforceable or invalid by a decision of a court or governmental agency of competent jurisdiction, which decision is unappealable or unappealed within the time allowed for appeal and (ii) has not been abandoned, disclaimed, denied or admitted to be invalid or unenforceable through reissue or disclaimer or otherwise; or (b) a claim of a pending Patent application in the Territory that was filed and is being prosecuted in good faith and has not been abandoned or finally disallowed without the possibility of appeal or re-filing of the application; provided that such prosecution has not been ongoing for more than [*] ([*]) years.

ARTICLE 2

GRANT OF RIGHTS

2.1 Grants to Salix.

2.1.1. Subject to the terms and conditions of this Agreement, Lupin hereby grants to Salix:

(a) (i) an exclusive (including with regard to Lupin and its Affiliates), royalty-bearing right and license, with the right to grant sublicenses in accordance with Section 2.2, under the Lupin Technology, to import, make, have made, use, sell, offer for sale, and otherwise Exploit the Licensed Product in the Field in the Territory in accordance with this Agreement; and

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

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(b) an exclusive (including with regard to Lupin and its Affiliates) right of reference, with the right to grant sublicenses and further rights of reference in accordance with Section 2.2, under the Regulatory Documentation Controlled by Lupin or any of its Affiliates, if any, to Exploit the Licensed Product in the Field in the Territory.

2.1.2. Salix acknowledges that (a) the Lupin Know-How is secret and substantial and without access to the Lupin Know-How Salix would not be able to obtain and maintain Regulatory Authorizations, (b) access to Lupin Know-How is expected to provide Salix with a competitive advantage in the marketplace beyond the exclusivity afforded by the Lupin Patents, and (c) the payments and royalties set forth in Sections 7.1 and 7.2 are, in part, intended to compensate Lupin for such exclusivity and such competitive advantage. The Parties agree that the royalty rate set forth in Section 7.2 reflects an efficient and reasonable blended allocation of the values provided by Lupin to Salix.

2.2 Sublicenses. The rights and licenses granted to Salix under Section 2.1 and Lupin under Section 2.4 shall include the right to grant sublicenses (or further rights of reference), through multiple tiers of Sublicensees, provided that the Party granting such sublicense or further right of reference shall provide to the other Party a written notice setting forth in reasonable detail the nature of such sublicense and the identity of the Sublicensee. Each Party hereby guarantees the performance of its Affiliates and permitted Sublicensees and the grant of any such sublicense shall not relieve the sublicensing Party of its obligations under this Agreement, except to the extent they are satisfactorily performed by such Sublicensee. Any such sublicenses shall be consistent with and subject to the terms and conditions of this Agreement.

2.3 No Implied Rights; Reservation of Rights. For the avoidance of doubt, as between the Parties:

2.3.1. Salix, its Sublicensees and its and their respective Affiliates shall have no right, express or implied, with respect to the Lupin Technology except as expressly provided in this Agreement;

2.3.2. Lupin reserves the right under the Lupin Technology, the Joint Patents (to the extent Controlled by Lupin) and the Joint Know-How (to the extent Controlled by Lupin) to (a) perform its obligations hereunder and (b) obtain and maintain Regulatory Authorizations for, and research, Develop and Commercialize and otherwise Exploit, in accordance with the terms of this Agreement, (i) the Licensed Product outside the Territory and in the Territory outside the Field, and (ii) other products for any purpose;

2.3.3. Lupin, its Sublicensees and its and their respective Affiliates shall have no right, express or implied, with respect to the Salix Technology except as expressly provided in this Agreement; and

2.3.4. Salix reserves the right under the Salix Technology, the Joint Patents (to the extent Controlled by Salix) and the Joint Know-How (to the extent Controlled by Salix) to (a) perform its obligations hereunder and (b) obtain and maintain

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Regulatory Authorizations for, and research, Develop and Commercialize and otherwise Exploit, in accordance with the terms of this Agreement, (i) the Licensed Product in the Field in the Territory and (ii) other products (including products containing Rifaximin) for any purpose.

2.4 Grants to Lupin. Subject to the teens and conditions of this Agreement, Salix hereby grants to Lupin:

2.4.1. a [*], exclusive (including with regard to Salix and its Affiliates) license, with the right to grant sublicenses in accordance with Section 2.2, under the Salix Technology to Exploit the Licensed Product outside the Territory or inside the Territory outside the Field; and

2.4.2. subject to Section 5.3, a [*], non-exclusive license and right of reference, with the right to grant sublicenses and further rights of reference in accordance with Section 2.2, under the Regulatory Documentation Controlled by Salix or its Affiliates to Exploit the Licensed Product outside the Territory or inside the Territory outside the Field.

2.5 Non-Compete.

2.5.1. As a condition of this Agreement, and as a material inducement to Salix’s entry into this Agreement, Lupin covenants to Salix that, during [*], Lupin (or any successor or assign of Lupin) will not, and will not permit any of its Affiliates or Sublicensees (or any successor or assign of any such Affiliate or Sublicensee) to, research, Develop, market or sell in the Field in the Territory any Generally Competitive Product. If a court of competent jurisdiction determines that the restrictions set forth in this Section 2.5 are too broad or otherwise unreasonable under Applicable Law, including with respect to duration, geographic scope or space, the court is hereby requested and authorized by the Parties hereto to revise the foregoing restriction to include the maximum restrictions allowable under Applicable Law. Each of the Parties hereto acknowledges, however, that (a) this Section 2.5 has been negotiated by the Parties, (b) the geographical and time limitations on activities are reasonable, valid and necessary in light of the circumstances pertaining to the Parties and necessary for the adequate protection of the Licensed Product, and (c) Salix would not have entered in this Agreement without the protection afforded it by this Section 2.5. Notwithstanding the foregoing, Lupin, its Affiliates and its Sublicensees shall not be precluded from [*], so long as Lupin uses commercially reasonable efforts (and in no event less than generally accepted efforts that are standard in the pharmaceutical industry) to [*].

2.5.2. Without limiting the provisions of Section 2.5.1, in the event Lupin (or any successor or assign of Lupin), or any of its Affiliates or (sub)licensees (or any successor or assign of any such Affiliate or (sub)licensee) shall research or Develop, or market or sell in the Field in the Territory any Generally Competitive Product, then Salix shall have the right, in its sole and absolute discretion,

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

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by written notice delivered to Lupin (or its successor), to (a) terminate any or all provisions of this Agreement providing for any delivery by Salix to Lupin of Information relating to activities contemplated by this Agreement, save only for the provisions of Article 7, and (b) disband the JSC.

2.5.3. This Section 2.5 shall not apply to Lupin’s supply of Rifaximin into the Territory upon the termination of the API Agreement [*].

ARTICLE 3

DEVELOPMENT

3.1 Development of the Licensed Product in the Territory in the Field.

3.1.1. Development of the Licensed Product in the Territory in the Field after the Effective Date shall be conducted by Salix and Lupin in accordance with the Development Plan.

3.1.2. Except as may otherwise be agreed by the Parties, each Party shall bear all costs and expenses incurred by it in the performance of its Development activities hereunder.

3.1.3. Each of Salix and Lupin shall perform, or cause to be performed, any and all Development activities from time to time assigned to it under the Development Plan using its Commercially Reasonable Efforts and in accordance with Applicable Law.

3.2 Development Plan and Implementation. The Development of the Licensed Product in the Territory in the Field shall be conducted pursuant to a Development Plan, which as of the date of this Agreement consists of a set of principles and a preliminary timeline and is attached to this Agreement as Exhibit A (such plan, as amended from time to time, the “Development Plan”). Either Party may from time to time propose to the JSC for its consideration updates, amendments and modifications to the Development Plan; provided, that Salix shall propose an update to the Development Plan at least [*] per [*]. The Development Plan as updated, amended, progressed and modified from time to time by the JSC shall include the overall strategy and intended activities relating to the Development of the Licensed Product and in particular shall:

3.2.1. identify Development activities to be conducted and the anticipated timelines for such activities;

3.2.2. describe the clinical and regulatory strategy for the Licensed Product;

3.2.3. incorporate a manufacturing plan for the pre-clinical and clinical supplies of the Licensed Product to be provided by Lupin pursuant to Section 3.4;

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

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3.2.4. incorporate a plan for scale up and commercial manufacture of the Licensed Product [*]; and

3.2.5. include such other matters as are from time to time appropriate to the Development of the Licensed Product.

3.3 Technology and Materials Transfer. From and after the Effective Date, (a) Lupin shall provide Salix with access to Lupin Know-How as the same may exist from time to time and such assistance in the transfer thereof from Lupin to Salix as Salix may reasonably request and (b) upon Salix’s request, the Parties shall coordinate the transfer from Lupin to Salix of those physical materials relating to the Licensed Product and the Development thereof reasonably requested by Salix.

3.4 Lupin and Salix Rights and Responsibilities. It is contemplated that from and after the Effective Date, all Clinical Trials and Post Approval Studies for the Licensed Product, wherever and by whomever conducted, shall be structured, where practicable, so as not to adversely affect Salix’s ability to obtain Regulatory Authorizations for the Licensed Product in the Territory, and Lupin agrees to [*] with respect to the Licensed Product for that purpose to the extent such [*] is permitted under Applicable Law. Without limiting the foregoing, within [*] ([*]) days after Lupin enters into any agreement with a Third Party [*], Lupin shall notify Salix in writing and the Parties, [*] shall thereafter use their respective commercially reasonable efforts to form a global steering committee (the “Global Steering Committee” or “GSC”), which shall serve as a forum to discuss global Development, Regulatory Authorization, Commercialization and other Exploitation of the Licensed Product in the Field outside the Territory.

3.5 Pre-Clinical and Clinical Supply Obligations.

3.5.1. Lupin shall, as and to the extent reasonably requested by Salix, supply reasonable quantities of pre-clinical and clinical requirements of the Licensed Product (to the extent such quantities can be produced at [*]), at [*] cost and expense, for use by Lupin and Salix in the Development of the Licensed Product as contemplated hereunder.

3.5.2. Lupin shall manufacture all Licensed Product delivered by it pursuant to Section 3.5.1 pursuant to GMP. [*] shall be [*] responsible for any costs associated with manufacturing upgrades necessary to ensure that its facilities used to Manufacture Licensed Product as contemplated by this Section 3.5 comply with GMP.

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

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ARTICLE 4

COLLABORATION MANAGEMENT

4.1 Formation and Purpose of Joint Steering Committee.

4.1.1. Within fifteen (15) days after the Effective Date, the Parties shall establish a joint steering committee (the “Joint Steering Committee” or “JSC”), which shall oversee and coordinate the Development of, regulatory filings for, and other Exploitation of the Licensed Product in the Field in the Territory.

4.1.2. The JSC shall be composed of six (6) members, with an equal number of members appointed by each Party. Each member of the JSC shall be an employee of the respective Party or of an Affiliate of such Party with significant experience and responsibility for oversight of the Licensed Product. Either Party may substitute any of its representatives on the JSC by written notice to the other Party.

4.1.3. Salix shall appoint one of its representatives to serve as chairperson of the JSC (subject to the approval of Lupin, not to be unreasonably withheld). For clarity, the JSC shall at all times have a chairperson and the chairperson of the JSC shall at all times be an employee of Salix.

4.2 Specific Responsibilities of Joint Steering Committee. The JSC shall continuously monitor the progress of the Development Plan and the Commercialization Plan. Each Party shall provide updates regarding its progress on applicable aspects of the Development Plan and the Commercialization Plan no less than once per Calendar Quarter. The JSC shall provide status reports to the senior management of each of the Parties as appropriate, but also no less than once per Calendar Quarter. The Parties contemplate that the responsibilities of the Joint Steering Committee shall evolve during the course of the Parties’ relationship under this Agreement. In support of its responsibility for overseeing and coordinating the Development and Exploitation of the Licensed Product in the Territory, the JSC shall:

4.2.1. establish a strategy for the Development, Regulatory Authorization, Commercialization and other Exploitation of the Licensed Product in the Field in the Territory;

4.2.2. review and monitor the Development Plan and the implementation thereof, make recommendations to the Parties regarding updates, amendments and modifications to the Development Plan, and consider proposals of the Parties in respect of updates, amendments and modifications to the Development Plan;

4.2.3. review and monitor the Commercialization Plan and the implementation thereof, make recommendations to the Parties regarding updates, amendments and modifications to the Commercialization Plan, and consider proposals of the Parties in respect of updates, amendments and modifications to the Commercialization Plan;

4.2.4. review and make recommendations to the Parties regarding the conduct of Clinical Trials for additional indications for the Licensed Product and Post

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Approval Studies for the Licensed Product (in each case in the Field and in the Territory) and amendments to the Development Plan in respect thereof;

4.2.5. review statistical analysis plans and protocols for, and monitor the progress of, all Clinical Trials and Post Approval Studies for the Licensed Product in the Field and in the Territory;

4.2.6. review and make recommendations to the Parties on all proposed product labeling, Drug Approval Applications and other filings with Regulatory Authorities with respect to Regulatory Authorizations for the Licensed Product in the Field and in the Territory;

4.2.7. review and make recommendations to the Parties on advertising and Promotional Materials and strategies and packaging designs for the Licensed Product in the Field and in the Territory;

4.2.8. facilitate the exchange of Development Information relating to all Clinical Trials and Post Approval Studies and Commercialization Information for the Licensed Product in the Field and in the Territory;

4.2.9. consider labeling issues and undertake coordination of labeling in the Territory so as to ensure such degree of consistency in labeling as the JSC deems to be desirable; and

4.2.10. perform such other functions as are expressly set forth in this Agreement or as the Parties may mutually agree in writing.

Subject to the terms of this Agreement, the activities and resources of each Party shall be managed by such Party, acting independently and in its individual capacity. The JSC shall only have the responsibilities specifically set forth in this Agreement and shall not have any rights or responsibilities under the API Agreement [*].

4.3 Committees. The JSC may establish such other committees (each, including the JSC, a “Committee”) as it deems appropriate. Each Committee shall contain at least one Lupin representative and the chairperson of each such Committee shall be designated by Salix (subject to the approval of Lupin, not to be unreasonably withheld). For clarity, each such Committee shall have a chairperson at all times and the chairperson of each such Committee shall at all times be an employee of Salix. The JSC may delegate its powers to any such Committee, but no such Committee may have any powers that are not granted to the JSC pursuant to this Agreement.

4.4 Meetings and Procedures.

4.4.1. Each Committee shall meet at least once during each Calendar Quarter, or as otherwise agreed to by the Parties, at a location designated by the chairperson of such Committee. The chairperson of each Committee shall be responsible

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

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for calling meetings and preparing and circulating an agenda in advance of each meeting of each Committee.

4.4.2. The chairperson of each Committee shall be responsible for preparing and issuing minutes of each meeting within thirty (30) days thereafter. Minutes shall be deemed approved unless any member of the Committee objects in writing to the accuracy of such minutes within seven (7) days of receipt of the minutes. In the event that any such objection is not resolved by mutual agreement of the Parties, such minutes shall be amended to reflect such unresolved dispute.

4.4.3. Each Committee shall have the right to adopt such standing rules as shall be necessary for its work to the extent that such rules are not inconsistent with this Agreement.

4.4.4. A quorum of a Committee shall exist whenever there is present at or participating in a meeting at least one (1) representative appointed by each Party.

4.4.5. Members of a Committee may, at each such member’s option, attend a meeting either in person or by telephone, video conference or similar means in which each participant can hear what is said by, and be heard by, the other participants and the chairperson of the Committee shall make appropriate arrangements accordingly. Representation by proxy shall be allowed. Employees or consultants of either Party that are not members of a Committee may attend any meeting of such Committee; provided, however, that such attendees (a) shall not vote or otherwise participate in the decision-making process of such Committee and (b) are bound by obligations of confidentiality and non-disclosure equivalent to those set forth in Article 10.

4.4.6. A Committee shall take action by consensus of the members present at a meeting at which a quorum exists, with each Party having a single vote irrespective of the number of representatives of such Party in attendance, or by a written resolution signed by the chairperson of such Committee and one (1) representative of Lupin on such Committee.

4.4.7. If a Committee other than the JSC cannot, or does not, reach consensus on an issue within its jurisdiction, then the dispute shall be referred to the JSC for resolution and a special meeting of the JSC may be called for such purpose.

4.4.8. If the JSC cannot, or does not, reach consensus on an issue within its jurisdiction, including any dispute arising in another Committee and referred to the JSC pursuant to Section 4.4.7, [*].

4.4.9. Notwithstanding the provisions of Section 4.4.8, neither any Committee nor [*] may, without Lupin’s written consent in accordance with the provisions of Section 14.9, act to impose on Lupin any new obligation to perform

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

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research, Development, Manufacture or other activities as to which Salix has not agreed in writing to reimburse Lupin for all costs that may be incurred by Lupin in performing such new activities or that would increase Lupin’s time commitments or responsibilities under this Agreement, or reduce or abridge Salix’s obligations hereunder.

4.5 Limitations on Authority. Each Party shall retain the rights, powers and discretion granted to it under this Agreement, and no such rights, powers or discretion shall be delegated to or vested in a Committee unless the Parties expressly so agree in writing. No Committee shall have the power to amend, modify or waive compliance with this Agreement, which may only be amended or modified as provided in Section 14.9 or compliance with which may only be waived as provided in Section 14.12. No Committee shall have the power to determine compliance with this Agreement.

ARTICLE 5

REGULATORY MATTERS

5.1 Regulatory Responsibilities.

5.1.1. Subject to the Development Plan, as between the Parties, [*] shall have [*] responsibility and authority for

(a) the implementation of Clinical Trials and related Development activities that are conducted in support of Regulatory Authorizations for the Licensed Product or Commercialization of the Licensed Product in the Field and in the Territory,

(b) obtaining and maintaining Regulatory Authorizations for the Licensed Product in the Field in the Territory, including all regulatory filings and applications for relevant Regulatory Authorizations, and

(c) other communications with Regulatory Authorities in regard to the Development and Commercialization of the Licensed Product in the Field in the Territory, including (i) all correspondence submitted to Regulatory Authorities related to the design, conduct or results of non-clinical trials and Clinical Trials for the Licensed Product, (ii) except as otherwise contemplated by this Agreement [*], all correspondence submitted to Regulatory Authorities related to the Manufacture of the Licensed Product, (iii) all pricing and reimbursement approval proceedings relating to the Exploitation of any the Licensed Product, (iv) all drug naming approval proceedings, and (v) all proposed Product Labeling.

Nothing in this Section 5.1.1 shall limit Lupin’s authority and responsibility as set forth in [*] over the Manufacture of the Licensed Product.

5.1.2. Subject to Article 13, all Regulatory Authorizations and related submissions relating to the Licensed Product in the Field in the Territory shall be the property of Salix and held in the name of Salix; provided that, except as may be otherwise required by Applicable Law or in respect of any Regulatory Authorization relating to the Licensed Product in the Field in the Territory, any Regulatory Filings in

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

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support of Lupin’s Manufacture of the Licensed Product (including Lupin’s Drug Master File) shall be the property of Lupin and held in the name of Lupin.

5.2 Regulatory Data. Each Party shall provide the other Party on a timely basis with access to all material pre-clinical data and Clinical Data compiled in support of a Drug Approval Application or other regulatory filings with respect to the Licensed Product, when and as such pre-clinical data or Clinical Data become available. Without limiting the foregoing, Lupin shall, within ten (10) days of the Effective Date, provide to Salix, in such form and format as Salix may reasonably request, (a) copies of all correspondence, as of the Effective Date, to and from the FDA that relates to Rifaximin (other than the closed portion of the Drug Master File and correspondence related thereto) and (b) all pre-clinical data and Clinical Data arising from or relating to Clinical Study Report Study Number: [*]

5.3 Rights of Reference; Consideration.

5.3.1. Lupin will be provided, without additional consideration except as provided in Section 5.3.2, with rights to cross reference, file or incorporate by reference any data or documentation used in support of regulatory filings by Salix, including any technical documentation prepared by or on behalf of Salix in accordance with Applicable Law, including Directive 93/42/EEC, as and to the extent necessary or useful to support any applications for regulatory certificates or approvals that Lupin or its licensees may make in respect of the Licensed Product outside the Territory or in the Territory outside of the Field.

5.3.2. In consideration of the rights extended to it pursuant to Section 5.3.1, Lupin agrees that in the event it enters into an agreement with one or more Third Parties to Exploit the Licensed Product, Salix shall be entitled to deduct from royalties it would otherwise owe to Lupin pursuant to Section 7.2 an amount equal to the lesser of (a) [*] percent ([*]%) of (i) any (A) [*]], (B) [*]), and (C) [*], in each case ((A), (B) and (C)) paid to Lupin by such Third Party under such agreement, and (ii) any [*] and paid to Lupin by such Third Party under such agreement in respect of sales of the Licensed Product made by such Third Party (collectively, “Third Party License Payments”)] and (b) [*] percent ([*]%) of the amount of [*] with any excess beyond such [*] percent ([*]%) amount to be [*]. In the event Lupin enters into any agreement described in the preceding sentence, then within thirty (30) days after the end of the second Calendar Quarter of each Calendar Year and the end of each Calendar Year, Lupin shall provide to Salix detailed information regarding all Third Party License Payments paid to Lupin by such Third Party under such agreement in the preceding two (2) Calendar Quarters. Lupin shall, and shall cause its licensees and its and their respective Affiliates to, keep complete and accurate financial books and records that, in reasonable detail, fairly reflect any Third Party License Payments paid to Lupin by such Third Party under such agreement in conformity with GAAP and this Agreement. Such books and records shall be retained by Lupin, its licensees and its and their respective Affiliates until the later of (a) three (3) years after the end of the period to which such books and records pertain and (b) the expiration of the applicable tax statute of

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

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limitations (or any extensions thereof), or for such longer period as may be required by Applicable Law. Such books and records shall be subject to audit in accordance with the procedures set forth in Section 14.18. Payments made or to be made by Lupin to Salix pursuant to this Section 5.3.2 shall be made in accordance with the provisions of Sections 7.3 and 7.4 mutatis mutandis and Section 14.18.

ARTICLE 6

COMMERCIALIZATION

6.1 In General. As between the Parties, Salix shall have the sole right and obligation to Commercialize the Licensed Product in the Field in the Territory at [*] cost and expense in accordance with this Agreement. Without limiting the foregoing, Salix shall, and shall cause its Sublicensees and its and their respective Affiliates to use Commercially Reasonable Efforts to Commercialize the Licensed Product in the Field in the Territory following the receipt of all Regulatory Authorizations necessary for commercial sale of the Licensed Product in the Territory. For purposes of this Section 6.1, Salix’s Commercially Reasonable Efforts shall include at least the efforts set forth on Schedule 6.1.

6.2 Commercialization Plan in the Territory in the Field.

6.2.1. Plan Contents. The Commercialization of the Licensed Product in the Field in the Territory shall be conducted pursuant to a comprehensive multi-year plan to be prepared by Salix pursuant to Section 6.2.2 (such plan, as amended from time to time, the “Commercialization Plan”), which plan shall be consistent with Salix’s obligations set forth in Section 6.1. Without limiting the generality of the foregoing, the Commercialization Plan shall set forth the Promotion efforts, including the positioning of the Licensed Product in the detailing of physicians or other health care professionals and the type and level of other sales force activities to be performed by Salix in furtherance of the Commercialization Plan. The Commercialization Plan shall further set forth quarterly spending commitments and timelines for meeting Commercialization goals proposed by the JSC.

6.2.2. Preparation and Update of Commercialization Plan. Within [*] ([*]) days after data resulting from the completion of the first Phase III Clinical Trial is finalized or by a date otherwise agreed to by the Parties, Salix shall provide to Lupin a preliminary Commercialization Plan. Thereafter, Salix shall propose to the JSC amendments and updates to the Commercialization Plan as and when necessary to reflect any changes to the overall strategy or intended activities relating to the Commercialization of the Licensed Product in the Field in the Territory, but no less than once every Calendar Quarter.

6.3 Pricing. Salix may in its sole discretion establish the retail price and any discount strategies for the Licensed Product in the Territory; provided, however, that Salix, its Affiliates and their respective Sublicensee(s) shall not, [*].

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

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6.4 Compliance with Applicable Law. Salix shall, and shall cause its Sublicensees and its and their respective Affiliates to, comply with all Applicable Laws with respect to the Commercialization of the Licensed Product pursuant to this Article 6.

ARTICLE 7

CONSIDERATION

7.1 Payments to Lupin. In partial consideration of the licenses and other rights granted herein, Salix shall make the following payments to Lupin:

7.1.1. Up-Front Payment. Salix shall pay a one-time nonrefundable patent license fee in the amount of five million Dollars ($5,000,000) within ten (10) days of the Effective Date of this Agreement.

7.1.2. Milestone Payments. Salix shall pay Lupin the milestone payments set forth on Schedule 7.1.2, on achievement by Salix or any of its Affiliates or Sublicensees of each of the milestones set forth on Schedule 7.1.2 during the term of this Agreement, within (30) days after the achievement of the relevant milestone. Salix shall notify Lupin promptly of any determination, completion or approval that would trigger a payment by Salix to Lupin under this Section 7.1.2 and the amount of the payment required and shall pay such amount as provided herein.

7.2 Royalties.

7.2.1. In General. Subject to Sections 7.2.2 and 7.2.3, Salix shall pay to Lupin a royalty of [*] percent ([*]%) of Net Sales of the Licensed Product.

7.2.2. Royalty Term. Salix’s obligations to pay royalties under Section 7.2.1 shall terminate with respect to the Licensed Product upon the earlier of (a) the date of the first commercial sale (by a Person other than Salix or its Sublicensees or any of its or their respective Affiliates) in the Territory of a product that is approved by a Regulatory Authority and constitutes a Prescription Competitive Product in respect of such Licensed Product and (b) the later of (i) the [*] ([*]) anniversary of the First Commercial Sale of such Licensed Product in the Territory and (ii) the first date on which there is no longer (A) a Lupin Patent or Lupin Improvement Patent that includes at least one Valid Claim in the Territory or (B) any Data Exclusivity with respect to such Licensed Product in the Territory. Upon termination of the royalty obligations of Salix under Section 7.2.1 with respect to the Licensed Product, the license grants to Salix in Section 2.1 in respect of such Licensed Product shall become non-exclusive and fully paid-up with respect to such Licensed Product in the Territory. Following any termination of Salix’s obligation to pay royalties under Section 7.2.1, Salix shall only be responsible for any royalty payments based on Net Sales that occurred prior to the effective date of such termination.

7.2.3. Royalty Step-Down. The royalties payable pursuant to Section 7.2.1 shall be reduced by [*] ([*]) (a) during any period in which there are no

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

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Valid Claims of any Lupin Patent or Lupin Improvement Patent that would be infringed by the Exploitation of such Licensed Product in the Territory in the absence of the license grants hereunder or (b) if, following the first commercial sale (by a Person other than Salix or its Sublicensees or any of its or their respective Affiliates) in the Territory of a Non-Prescription Competitive Product, (i) aggregate commercial sales of units of the Licensed Product decline on a Calendar Quarter-by-Calendar Quarter basis, based on data generated by IMS International (or if such data is not available, another reliable data source that is mutually agreed by the Parties by mutual written consent), for [*] ([*]) or more consecutive Calendar Quarters during the first [*] ([*]) years following such first commercial sale of a Non-Prescription Competitive Product and (ii) such decline in commercial sales of units of the Licensed Product over [*] ([*]) consecutive Calendar Quarters in the aggregate is at least [*] percent ([*]%).

7.2.4. Royalty Payments. Running royalties shall be payable on a quarterly basis, within thirty (30) days after the end of each Calendar Quarter, based upon the aggregate Net Sales in the Field in the Territory during such Calendar Quarter. Notwithstanding the foregoing, (a) if at the end of a given Calendar Year, the royalty statement described in Section 7.2.5 shows that Salix has overpaid royalties for any Calendar Quarter during such Calendar Year, then at Salix’s option, (i) Salix shall have the right to deduct the amount of such overpayment from its royalty payment otherwise due to Lupin for the fourth Calendar Quarter of such Calendar Year, or (ii) Lupin shall reimburse to Salix the amount of such overpayment within thirty (30) days after receipt of the royalty payment or royalty statement for the fourth Calendar Quarter of such Calendar Year, and (b) if at the end of a Calendar Year, the royalty statement described in Section 7.2.5 shows that Salix has underpaid royalties for any Calendar Quarter during such Calendar Year, then Salix shall pay to Lupin the amount of such underpayment together with its royalty payment for the fourth Calendar Quarter of such Calendar Year. Royalties shall be calculated in accordance with GAAP and with the terms of this Article 7. Only one royalty payment shall be due on Net Sales even though the sale or use of the Licensed Product may be covered by more than one Patent or item of Lupin Know-How in the Territory.

7.2.5. Royalty Statements. Each royalty payment hereunder shall be accompanied by a statement in sufficient detail to allow for the calculation of royalties due hereunder, including by showing at a minimum, for the applicable Calendar Quarter and, in respect of the royalty statement for the fourth Calendar Quarter of each Calendar Year, the Calendar Year: (a) Invoiced Sales and Net Sales for the relevant period, (b) the number of units of Licensed Product sold during the relevant period, (c) a detailed breakdown of any deductions from the Invoiced Sales to obtain Net Sales, (d) the amount of royalties due on such Net Sales, and (e) the information set forth under clauses (a) through (d) of this Section 7.2.5, disaggregated by Sublicensee.

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

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7.2.6. Sublicense Revenue. For the avoidance of doubt, any and all Net Sales by Sublicensees shall be [*] Net Sales calculations for purposes of this Section 7.2 and Salix shall [*].

7.3 Mode of Payment. All payments to Lupin under this Agreement shall be made by deposit of Dollars in the requisite amount to such bank account as Lupin may from time to time designate by notice to Salix.

7.4 Taxes. The royalties, milestones and other amounts payable by Salix to Lupin pursuant to this Agreement (“Payments”) shall not be reduced on account of any taxes unless required by Applicable Law. Lupin alone shall be responsible for paying any and all taxes (other than withholding taxes required by Applicable Law to be paid by Salix) levied on account of, or measured in whole or in part by reference to, any Payments it receives. Salix shall deduct or withhold from the Payments any taxes that it is required by Applicable Law to deduct or withhold. Notwithstanding the foregoing, if Lupin is entitled under any applicable tax treaty to a reduction of rate of, or the elimination of, applicable withholding tax, it may deliver to Salix or the appropriate governmental authority (with the assistance of Salix to the extent that this is reasonably required and is expressly requested in writing) the prescribed forms necessary to reduce the applicable rate of withholding or to relieve Salix of its obligation to withhold tax, and Salix shall apply the reduced rate of withholding, or dispense with withholding, as the case may be, provided that Salix has received evidence, in a folio reasonably satisfactory to Salix, of Lupin’s delivery of all applicable forms (and, if necessary, its receipt of appropriate governmental authorization) at least fifteen (15) days prior to the time that the Payments are due. If, in accordance with the foregoing, Salix withholds any amount, it shall pay to Lupin the balance when due, make timely payment to the proper taxing authority of the withheld amount and send to Lupin proof of such payment within ten (10) days following such payment. Salix shall be responsible for any sales or other similar tax that Lupin may be required to collect with respect to the Payments.

7.5 Financial Records. Salix shall, and shall cause its Sublicensees and its and their respective Affiliates to, keep complete and accurate financial books and records pertaining to the Invoiced Sales (including any deductions therefrom) and Net Sales of Licensed Product in sufficient detail to calculate the royalties and other amounts payable under this Agreement. Such books and records shall be retained by Salix, its Sublicensees and its and their Affiliates, until the later of (a) three (3) years after the end of the period to which such books and records pertain and (b) the expiration of the applicable tax statute of limitations (or any extensions thereof), or for such longer period as may be required by Applicable Law.

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

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ARTICLE 8

INTELLECTUAL PROPERTY

8.1 Ownership of Intellectual Property.

8.1.1. Existing Rights. Each Party shall remain the sole owner of any and all intellectual property rights, including any ownership or property rights in materials, owned by it at the Effective Date.

8.1.2. Ownership of Improvements.

(a) Improvements which are made or generated exclusively by or on behalf of Lupin, its Sublicensees or its or their respective Affiliates (“Lupin Improvements”) will be owned by Lupin.

(b) Improvements which are made or generated exclusively by or on behalf of Salix, its Sublicensees or its or their respective Affiliates (“Salix Improvements”) will be owned by Salix.

(c) As between the Parties, the Parties shall each own an equal, undivided interest in Improvements which are made or generated jointly by or on behalf of Lupin (or its licensees or Sublicensees or any of its or their respective Affiliates), on the one hand, and Salix (or its Sublicensees or any of its or their respective Affiliates), on the other hand, under or in connection with the research, Development, Commercialization or other Exploitation of the Licensed Product under this Agreement (“Joint Improvements”). Subject to Article 13 and the licenses granted under Sections 2.1 and 2.4, Lupin shall have the right to Exploit the Joint Technology outside the Territory or inside the Territory outside the Field without a duty of accounting to Salix; and Salix shall have the right to Exploit the Joint Technology in the Territory in the Field without a duty of accounting to Lupin. Except as contemplated by the preceding sentence, neither Party shall have the right to Exploit Joint Technology without the written consent of the other Party. For those countries where a specific license is required to be granted by a Joint Technology owner to the other Joint Technology owner in order for the other Joint Technology owner to practice such Joint Technology in such countries, (i) Lupin shall, and does hereby, grant to Salix an non-exclusive, fully paid-up license to Lupin’s right, title and interest in and to all Joint Technology to Exploit the Licensed Product in the Territory in the Field and (ii) Salix shall, and does hereby, grant to Lupin a non-exclusive, fully paid-up license to Salix’s right, title and interest in and to all Joint Technology to Exploit the Licensed Product outside the Territory or inside the Territory outside the Field.

(d) Each Party shall promptly disclose to the other Party in writing, and shall cause its Affiliates, licensees and Sublicensees to so disclose, the development, making, conception or reduction to practice of any Improvement. Without limiting the provisions of the preceding sentence, at least once during every Calendar Quarter during the term of this Agreement, each Party shall deliver to the other a written report describing any and all Improvements generated or developed by it, its Affiliates or, as relevant, its Sublicensees or their Affiliates during the relevant period or, if such is the case, stating that no Improvements were so generated or developed.

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8.1.3. United States Law. The determination of whether Improvements are conceived, discovered, developed or otherwise made by a Party for the purpose of allocating proprietary rights (including Patent, copyright or other intellectual property rights) therein, shall, for purposes of this Agreement, be made in accordance with applicable law in the United States. In the event that United States law does not apply to the conception, discovery, development or making of any Improvement hereunder, each Party shall, and does hereby, assign, and shall cause its Affiliates and Sublicensees to so assign, to the other Party, without additional compensation, such right, title and interest in and to any Improvements as well as any intellectual property rights with respect thereto, as is necessary to fully effect ownership as contemplated by Section 8.1.2.

8.2 Maintenance and Prosecution of Patents.

8.2.1. Lupin Patents, Lupin Improvement Patents, and Joint Platform Patents.

(a) Lupin shall have the first right, but not the obligation, to prepare, file, prosecute and maintain Lupin Patents, Lupin Improvement Patents, and Joint Platform Patents and shall be responsible for related interference, re-issuance, re-examination and opposition proceedings; provided that (i) Lupin shall keep Salix reasonably informed in respect of its actions under this Section 8.2.1 and (ii) Lupin shall solicit and reasonably consider any Salix proposals in respect of Lupin’s actions under this Section 8.2.1 and Lupin shall make commercially reasonable efforts not to take any positions that would adversely affect the position of any such Patent in the Territory; provided, however, if Lupin plans to abandon any such Patent, Lupin shall notify Salix in writing at least ninety (90) days in advance of the due date of any payment or other action that is required to prosecute or maintain such Patent, and Salix may elect, upon written notice within such ninety (90) day period to Lupin, to make such payment or take such action (i) in respect of the Territory, for all actions, and (ii) in any country outside the Territory in which Rifaximin or the Licensed Product is being manufactured, for any action relating to Rifaximin or the Licensed Product, in each case ((i) and (ii) of this second proviso clause) at [*] expense and in Lupin’s name, and Lupin shall reasonably cooperate with Salix in connection with such maintenance activities. If Lupin so choses, Lupin may, at [*] cost and expense, assign all of Lupin’s right, title and interest to any Lupin Patent, Lupin Improvement Patent or Joint Platform Patent to Salix, after which assignment the enforcement of such Lupin Patent, Lupin Improvement Patent or Joint Platform Patent shall be governed by the provisions of Section 8.3.3 and Lupin shall have no obligation to enforce, or to incur any expense in connection with the enforcement, of such Lupin Patent, Lupin Improvement Patent or Joint Platform Patent.

(b) Except as expressly permitted in this Section 8.2.1, Salix shall have no right to prepare, file, prosecute or maintain any Lupin Patent, any Lupin Improvement Patent or any Joint Platform Patent.

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

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8.2.2. Salix Patents and Certain Joint Patents. Salix shall have the first right, but not the obligation, to prepare, file, prosecute and maintain Salix Patents and Joint Patents other than Joint Platform Patents and Joint Product Patents and shall be responsible for related interference, re-issuance, re-examination and opposition proceedings; provided that Salix shall keep Lupin reasonably informed in respect of its actions under this Section 8.2.2; provided, however, if Salix plans to abandon any such Patent, Salix shall notify Lupin in writing at least ninety (90) days in advance of the due date of any payment or other action that is required to prepare, file prosecute or maintain such Patents, and Lupin may elect, upon written notice within such ninety (90) day period to Salix, to make such payment or take such action, at [*] expense and in Salix’s name, and Salix shall reasonably cooperate with Lupin in connection with such maintenance activities. Except as expressly permitted in this Agreement, Lupin shall have no right to prepare, file, prosecute or maintain any Salix Patent or any Joint Patent other than Joint Platform Patents and Joint Product Patents.

8.2.3. Joint Product Patents.

(a) Salix shall have the first right, but not the obligation, to prepare, file, prosecute and maintain Joint Product Patents in the Territory and shall be responsible for related interference, re-issuance, re-examination and opposition proceedings; provided that Salix shall keep Lupin reasonably informed in respect of its actions under this Section 8.2.3(a); provided, however, if Salix plans to abandon any such Patent in the Territory during the term of this Agreement, Salix shall notify Lupin in writing at least ninety (90) days in advance of the due date of any payment or other action that is required to prepare, file prosecute or maintain such Patents in the Territory, and Lupin may elect, upon written notice within such ninety (90) day period to Salix, to make such payment or take such action, at Lupin’s expense and in Salix’s name, and Salix shall reasonably cooperate with Lupin in connection with such maintenance activities. Except as expressly permitted in this Agreement, Lupin shall have no right to prepare, file, prosecute or maintain any Joint Product Patents in the Territory.

(b) Lupin shall have the first right, but not the obligation, to prepare, file, prosecute and maintain Joint Product Patents outside the Territory and shall be responsible for related interference, re-issuance, re-examination and opposition proceedings; provided that Lupin shall keep Salix reasonably informed in respect of its actions under this Section 8.2.3(b); provided further that Lupin shall take no action that Salix determines in its sole and absolute discretion would adversely affect the position of any such Patent in the Territory; provided, however, if Lupin plans to abandon any such Patent in any country outside the Territory during the term of this Agreement, Lupin shall notify Salix in writing at least ninety (90) days in advance of the due date of any payment or other action that is required to prepare, file prosecute or maintain such Patents outside the Territory, and Salix may elect, upon written notice within such ninety (90) day period to Lupin, to make such payment or take such action, at [*] expense and in Lupin’s name, and Lupin shall reasonably cooperate with Lupin in connection with such maintenance activities. If Lupin so choses, Lupin may, at [*] cost and expense, assign all of Lupin’s right, title and interest to any Joint Product Patent to Salix, after which assignment the enforcement of such Joint Product Patent shall be governed by the provisions of Section 8.3.3

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

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and Lupin shall have no obligation to enforce, or to incur any expense in connection with the enforcement, of such Joint Product Patent. Except as expressly permitted in this Agreement, Salix shall have no right to prepare, file, prosecute or maintain any Joint Product Patents outside the Territory.

8.3 Enforcement of Patents.

8.3.1. Notice. If any Lupin Patent, any Lupin Improvement Patent, any Salix Patent or any Joint Patent is allegedly or actually infringed by a Third Party in a manner relating to this Agreement, the Party first having knowledge of such infringement shall promptly notify the other Party in writing. The notice shall set forth the facts of that infringement in reasonable detail.

8.3.2. Lupin Patents, Lupin Improvement Patents and Joint Platform Patents.

(a) Lupin shall have the first right, but not the obligation, through counsel reasonably acceptable to Salix, to control the prosecution of any infringement described in Section 8.3.1 relating to the Lupin Patents, the Lupin Improvement Patents and the Joint Platform Patents or, subject to the provisions of this Section 8.3.2, to grant the infringing Third Party adequate rights and licenses necessary for continuing such activities; provided, however, that Lupin shall be obligated, at Salix’s request and expense, to prosecute any infringement described in Section 8.3.1 in respect of the Lupin Platform Patent in the event that such Patent is the only Orange Book-listed Patent in respect of the Licensed Product. In the event that Lupin is obligated to enforce the Lupin Platform Patent as described above, Lupin shall solicit and reasonably consider Salix’s proposals in respect of litigation strategy and expenditures. If Lupin does not initiate an infringement action within ninety (90) days (or twenty-five (25) days in the case of an action brought under the Hatch-Waxman Act or within the timeframe of any other relevant regulatory or statutory framework that may govern) of learning of the infringement, or earlier notifies Salix in writing of its intent not to so initiate an action, and Lupin has not granted such infringing Third Party rights and licenses to continue its otherwise infringing activities, then Salix shall have the right, but not the obligation, to bring such an action (i) in the Territory in respect of the Lupin Product Patent, and (ii) in any country outside the Territory in which Rifaximin or the Licensed Product is being manufactured; provided, however, that the non-controlling Party shall have the right, at its own expense, to be represented in any such action by counsel of its own choice. No settlement or consent judgment or other voluntary final disposition of a suit under this Section 8.3.2 may be entered into without the joint consent of Lupin and Salix, such consent not to be unreasonably withheld or delayed.

(b) Notwithstanding the foregoing clause (a) (but subject to Lupin’s obligation to enforce the Lupin Platform Patent as described therein), Salix shall have the first right, but not the obligation, through counsel reasonably acceptable to Lupin, to control the prosecution of any infringement described in Section 8.3.1 relating to Orange Book-listed Lupin Product Patents, Lupin Patents and Lupin Improvement Patents or, subject to the provisions of this Section 8.3.2, to grant the infringing Third Party adequate rights and licenses necessary for

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continuing such activities. If Salix does not initiate an infringement action within ninety (90) days (or twenty-five (25) days in the case of an action brought under the Hatch-Waxman Act or within the timeframe of any other relevant regulatory or statutory framework that may govern) of learning of the infringement, or earlier notifies Lupin in writing of its intent not to so initiate an action, and Salix has not granted such infringing Third Party rights and licenses to continue its otherwise infringing activities, then Lupin shall have the right, but not the obligation, to bring such an action; provided, however, that the non-controlling Party shall have the right, at its own expense, to be represented in any such action by counsel of its own choice. No settlement or consent judgment or other voluntary final disposition of a suit under this Section 8.3.2 may be entered into without the joint consent of Lupin and Salix, such consent not to be unreasonably withheld or delayed.

8.3.3. Salix Patents and Certain Joint Patents. Salix shall have the first right, but not the obligation, through counsel reasonably acceptable to Lupin, to control the prosecution of any infringement described in Section 8.3.1 relating to the Salix Patents or Joint Patents other than Joint Platform Patents and Joint Product Patents or, subject to the provisions of this Section 8.3.3, to grant the infringing Third Party adequate rights and licenses necessary for continuing such activities. No settlement or consent judgment or other voluntary final disposition of a suit under this Section 8.3.3 may be entered into without the joint consent of Lupin and Salix, such consent not to be unreasonably withheld or delayed.

8.3.4. Joint Product Patents.

(a) Salix shall have the first right, but not the obligation, through counsel reasonably acceptable to Lupin, to control the prosecution of any infringement described in Section 8.3.1 in the Territory relating to the Joint Product Patents or, subject to the provisions of this Section 8.3.4, to grant the infringing Third Party adequate rights and licenses necessary for continuing such activities. No settlement or consent judgment or other voluntary final disposition of a suit under this Section 8.3.4 may be entered into without the joint consent of Lupin and Salix, such consent not to be unreasonably withheld or delayed. If Salix does not initiate an infringement action within ninety (90) days (or twenty-five (25) days in the case of an action brought under the Hatch-Waxman Act or within the timeframe of any other relevant regulatory or statutory framework that may govern) of learning of the infringement, or earlier notifies Lupin in writing of its intent not to so initiate an action, and Salix has not granted such infringing Third Party rights and licenses to continue its otherwise infringing activities, then Lupin shall have the right, but not the obligation, to bring such an action; provided, however, that the non-controlling Party shall have the right, at its own expense, to be represented in any such action by counsel of its own choice.

(b) Lupin shall have the first right, but not the obligation, through counsel reasonably acceptable to Salix, to control the prosecution of any infringement described in Section 8.3.1 in any country outside the Territory relating to the Joint Product Patents or, subject to the provisions of this Section 8.3.4, to grant the infringing Third Party adequate rights and licenses necessary for continuing such activities. No settlement or consent judgment or other voluntary final disposition of a suit under this Section 8.3.4 may be entered into without the joint consent of Lupin and Salix, such consent not to be unreasonably withheld or delayed.

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8.3.5. Enforcement Procedure. In the event a Party is entitled to and brings an infringement action in accordance with this Section 8.3, the other Party shall cooperate fully, including furnishing of a power of attorney, being joined as a party plaintiff in such action, providing access to relevant documents and other evidence and making its employees available at reasonable business hours. If a Party pursues an action against such alleged infringement, it shall consider in good faith any comments from the other Party and shall keep the other Party reasonably informed of any steps taken to preclude such infringement.

8.3.6. Costs and Recovery. Each Party shall [*] relating to any enforcement action commenced pursuant to this Section 8.3. Any damages or other amounts collected shall be [*]. Any remainder after such reimbursement is made shall be [*] under this Agreement with respect to the Licensed Product.

8.4 Infringement Claims by Third Parties.

8.4.1. Defense of Third Party Claims. If a Third Party asserts that a Patent or other intellectual property right (other than Trademarks, which shall be governed by Section 8.7) owned or controlled by it is infringed by the Exploitation of the Licensed Product, the Party first obtaining knowledge of such a claim shall immediately provide the other Party notice of such claim along with the related facts in reasonable detail. Salix shall have the first right, but not the obligation, through counsel reasonably acceptable to Lupin, to control the defense of any such claim in the Territory and Lupin shall have the first right, but not the obligation, through counsel reasonably acceptable to Salix, to control the defense of any such claim outside the Territory. If the Party with primary responsibility for defense under this Section 8.4.1 does not accept control of the defense of such claim within ninety (90) days (or twenty-five (25) days in the case of an action brought under the Hatch-Waxman Act or within the timeframe of any other relevant regulatory or statutory framework that may govern) of learning of the claim, or earlier notifies the other Party in writing of its intent not to so assume control of such defense, then the other Party shall have the right, but not the obligation, to defend against such claim; provided, however, that the non-controlling Party shall have the right, at its own expense, to be represented in any such action by counsel of its own choice.

8.4.2. Settlement of Third Party Claims. The Party that controls the defense of a given claim shall also have the right to control settlement of such claim; provided, however, that (a) no settlement shall be entered into by such controlling Party without the prior written consent of the non-controlling Party if such settlement would adversely affect or diminish the rights and benefits of the non-controlling Party under this Agreement, impose any new obligations or adversely affect any obligations of the non-controlling Party under this Agreement, or adversely affect the validity or enforceability of the Patents or other intellectual property rights of such non-controlling Party and (b) the controlling Party shall not be entitled to settle any such Third Party claim by granting a license or covenant not to sue under or with respect to the non-controlling Party’s intellectual property rights without the prior written consent of the non-controlling Party.

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

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8.4.3. Allocation of Costs. Each Party shall bear its own costs and expenses relating to any defense pursuant to this Section 8.4. Any damages or other amounts collected shall be first allocated to reimburse the Party that has exercised its right to control the defense of the claim for its costs and expenses in making such recovery, and second to reimburse the other Party for its costs and expenses in making such recovery. Any remainder after such reimbursement is made shall be allocated between the Parties to reflect the economic interests of the Parties under this Agreement with respect to the Licensed Product.

8.4.4. Assistance. Each Party shall provide to the other Party all reasonable assistance requested by the other Party in connection with any action, claim or suit under this Section 8.4, at the requesting Party’s expense, including allowing such other Party access to the assisting Party’s files and documents and to the assisting Party’s personnel who may have possession of relevant information. In particular, the assisting Party shall promptly make available to the other Party all information in its possession or control that it is aware shall assist the other Party in responding to any such action, claim or suit.

8.5 Invalidity or Unenforceability Defenses or Actions.

8.5.1. Third Party Defense or Counterclaim. If a Third Party asserts, as a defense or as a counterclaim in any infringement action under Section 8.3, that any Lupin Patent, Lupin Improvement Patent, Salix Patent, or Joint Patent is invalid or unenforceable, then the Party pursuing such infringement action shall promptly give written notice to the other Party. With respect to the Lupin Patents, the Lupin Improvement Patents, and the Joint Platform Patents, Lupin shall have the first right, but not the obligation, through counsel reasonably acceptable to Salix, to respond to such defense or defend against such counterclaim (as applicable) and, if Salix (or its Sublicensees or any of its or their respective Affiliates) is pursuing the applicable infringement action under Section 8.3, Salix (or its Sublicensees or any of its or their respective Affiliates) shall allow Lupin to control such response or defense (as applicable). With respect to the Salix Patents and the Joint Patents other than the Joint Platform Patents, Salix shall have the first right, but not the obligation, through counsel reasonably acceptable to Lupin, to respond to such defense or defend against such counterclaim (as applicable) and, if Lupin is pursuing the applicable infringement action under Section 8.3, Lupin shall allow Salix to control such response or defense (as applicable). Any costs and expenses with respect to such response or defense against such counterclaim shall be borne by the Party controlling such response or defense. If either Party (and such Party’s licensors, to the extent permitted by its agreements therewith, and Sublicensees, if any) determines not to assume or fails to assume such defense within relevant timeframes, the other Party shall, at its sole cost and expense, have the right to defend against such action or claim; provided, however, that such other Party shall obtain the written consent of Lupin, with respect to the Lupin Patents, the Lupin Improvement Patents and the Joint Patents, or Salix, with respect to the Salix Patents and the Joint Patents, prior to ceasing to defend, settling or otherwise compromising any such action or claim, such consent not to be unreasonably withheld or delayed.

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8.5.2. Third Party Declaratory Judgment or Similar Action. If a Third Party asserts, in a declaratory judgment action or similar action or claim filed by such Third Party, that any Lupin Patent, Lupin Improvement Patent, Salix Patent, or Joint Patent is invalid or unenforceable, then the Party first becoming aware of such action or claim shall promptly give written notice to the other Party. With respect to the Lupin Patents, the Lupin Improvement Patents, and the Joint Platform Patents, Lupin shall have the first right, but not the obligation, through counsel reasonably acceptable to Salix, to defend against such action or claim. With respect to the Salix Patents and the Joint Patents other than the Joint Platform Patents, Salix (or its Sublicensees or any of its or their respective Affiliates) shall have the first right, but not the obligation, through counsel reasonably acceptable to Lupin, to defend against such action or claim. Any costs and expenses with respect to such defense shall be borne by the Party controlling such response or defense. If either Party determines not to assume such defense or fails to assume such defense within ninety (90) days (or twenty-five (25) days in the case of an action brought under the Hatch-Waxman Act or within the timeframe of any other relevant regulatory or statutory framework that may govern) of learning of the action, the other Party shall, at its sole cost and expense, have the right to defend against such action or claim; provided, however, that such other Party shall obtain the written consent of Lupin, with respect to the Lupin Patents, the Lupin Improvement Patents, or the Joint Patents, or Salix, with respect to the Salix Patents or the Joint Patents, prior to ceasing to defend, settling or otherwise compromising any such action or claim, such consent not to be unreasonably withheld or delayed.

8.5.3. Assistance. Each Party shall provide to the other Party all reasonable assistance requested by the other Party in connection with any action, claim or suit under this Section 8.5, at the requesting Party’s expense, including allowing such other Party access to the assisting Party’s files and documents and to the assisting Party’s personnel who may have possession of relevant information. In particular, the assisting Party shall promptly make available to the other Party all information in its possession or control that it is aware would assist the other Party in responding to any such action, claim or suit.

8.6 Third Party Licenses. If the Exploitation of Licensed Product by Salix, its Sublicensees or any of its or their respective Affiliates hereunder infringes or misappropriates any Patent or other intellectual property right of a Third Party in the Territory, such that Salix, its Sublicensees or any of its or their respective Affiliates cannot Exploit the Licensed Product in the Territory as permitted hereunder without infringing the Patent or intellectual property right of such Third Party, then Salix (or its Sublicensees or any of its or their respective Affiliates) shall have the first right, but not the obligation, to take the lead in negotiating the terms of an appropriate license from such Third Party, provided that if Salix (or its Sublicensees or any of its or their respective Affiliates) does not take such lead, then Lupin may do so; provided further, that the negotiating Party shall obtain the written consent of such other Party prior to entering into any such license, such consent not to be unreasonably withheld or delayed. Irrespective of the Party that actually obtains such license, Salix shall be entitled to deduct from royalties it would otherwise owe to Lupin pursuant to Section 7.2 an amount equal to the lesser of (a) [*]

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

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percent ([*]%) of the amount of (i) any (A) [*] (including [*]), (B) [*] (including [*]), and (C) [*], in each case ((A), (B) and (C)) due under any such license and (ii) any [*], in each case ((i) and (ii)) to the extent payable to such Third Party in consideration for rights [*] and (b) [*] percent ([*]%) of the amount of [*] such [*] percent ([*]%) amount to be [*]; provided that, notwithstanding the foregoing, Salix shall have no right to any such deduction with respect to [*].

8.7 Product Trademarks.

8.7.1. Ownership of Product Trademarks. Subject to Article 13, as between the Parties, [*] shall own and retain all right, title and interest in and to the Product Trademarks.

8.7.2. Maintenance, Prosecution and Enforcement of Product Trademarks. As between the Parties, [*] (or its Sublicensees or any of its or their respective Affiliates) shall control the registration, prosecution, maintenance, enforcement and defense of the Product Trademarks.

8.8 Certain Matters. Notwithstanding any provision in this Agreement to the contrary, Salix shall have no right to (a) prepare, file, prosecute and/or maintain any Lupin Patent, Lupin Improvement Patent, Joint Platform Patent or Joint Product Patent outside the Territory, except in strict accordance with the provisions of Sections 8.2.1 and 8.2.3(b), as applicable, and/or (b) to control the prosecution of any infringement relating to any Lupin Patent, Lupin Improvement Patent, Joint Platform Patent, and/or Joint Product Patent outside the Territory, except in strict accordance with the provisions of Sections 8.3.2 and 8.3.4, as applicable, including the initiation of such right by the delivery of applicable notice by Lupin, and, in all cases, Lupin shall cooperate reasonably with Salix, and Salix shall keep Lupin reasonably informed in connection with such activities.

ARTICLE 9

ADVERSE EVENT REPORTING; RECALLS AND WITHDRAWALS

9.1 Adverse Event Reporting.

9.1.1. Complaints. Salix shall maintain a record of any and all complaints it receives with respect to the Licensed Product and shall notify Lupin in reasonable detail of any complaint received by it within five (5) days after the event.

9.1.2. Adverse Event Reporting. Salix shall be responsible for reporting Adverse Events in the Field in the Territory to the Regulatory Authorities pursuant to Applicable Law and shall provide a copy of any such reports to Lupin within five (5) days of making any such report. Lupin shall provide Salix with all information in its possession necessary for Salix to comply with its pharmacovigilance responsibilities in the Territory. The Parties’ costs incurred in connection with receiving, recording, reviewing, communicating, reporting and responding to Adverse Events in the Field in the Territory shall be borne by Salix.

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

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9.1.3. Drug Safety Information. Salix shall have the sole right to create and maintain a master drug safety database which shall cross-reference any Adverse Event relating to the Licensed Product occurring in the Territory. Salix shall be the sole owner of this master drug safety database. Lupin shall submit to Salix all data collected by it with respect to Adverse Events relating to the Licensed Product in accordance with such timelines as may be imposed by Applicable Law and otherwise promptly. Notwithstanding the foregoing, the Parties acknowledge and agree that Lupin is responsible for creating a similar database for Adverse Events outside the Territory and the Parties shall cooperate in providing data for both databases.

9.2 Recalls and Withdrawals. In the event that any Regulatory Authority issues or requests a recall, stop sale, field correction or market withdrawal or takes similar action (collectively, “Recalls”) in connection with the Licensed Product or in the event either Party determines that an event, incident or circumstance has occurred that may result in the need for a Recall of the Licensed Product, the Party notified of or desiring such Recall shall, within twenty-four (24) hours, advise the other Party thereof by telephone (and confirmed by email or facsimile), email or facsimile, at the telephone number, email address or facsimile number for such other Party set forth on Schedule 9.2. Following notification of a Recall, the Parties shall meet to discuss such notification and Recall. Salix shall decide whether to conduct any such Recall (except in the case of a government-mandated Recall) in the Field in the Territory and the manner in which any such Recall shall be conducted; and Lupin shall decide whether to conduct any such Recall (except in the case of a government-mandated Recall) outside the Territory or inside the Territory outside the Field and the manner in which any such Recall shall be conducted. Each Party shall provide a copy of all related documentation and notices to the other Party forthwith. Each Party shall provide such assistance to the other Party in its investigating and conducting any Recall as such other Party may request. [*] shall bear the expenses of any Recall of the Licensed Product in the Field in the Territory; and [*] shall bear the expenses of any Recall of the Licensed Product outside the Territory or inside the Territory outside the Field; provided, however, that, to the extent any such Recall resulted solely from the other Party’s breach of its obligations hereunder or its gross negligence or willful misconduct, such other Party shall bear the expenses of such Recall.

9.3 Pharmacovigilance Agreement. Prior to the First Commercial Sale of the Licensed Product in the Territory, the Parties shall enter into a pharmacovigilance agreement reasonably acceptable to both Parties (the “Pharmacovigilance Agreement”), which shall include, among other things, mutually acceptable guidelines and procedures for the receipt, investigation, communication and exchange (as between the Parties) of safety information, such as Adverse Events, pregnancy exposure, lack of efficacy, misuse/abuse, and any other information concerning the safety of the Licensed Product. Such guidelines and procedures will be in accordance with, and enable the Parties to fulfill regulatory reporting obligations to Regulatory Authorities. Furthermore, such agreed procedures shall be consistent with relevant Regulatory Authority and International Conference on Harmonization (ICH) guidelines, except where said guidelines may conflict with more stringent existing local regulatory safety reporting requirements, in which case local reporting requirements shall prevail. The Pharmacovigilance

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

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Agreement may, as necessary, contemplate the use of Third Party vendors currently used by the Parties.

ARTICLE 10

CONFIDENTIALITY AND NON-DISCLOSURE

10.1 Confidentiality Obligations. At all times during the term and for a period of [*] ([*]) years following termination or expiration hereof, each Party shall, and shall cause its Affiliates and Sublicensees and its and their respective officers, directors, employees and agents to, keep completely confidential and not publish or otherwise disclose and not use, directly or indirectly, for any purpose, any Confidential Information furnished or otherwise made known to it, directly or indirectly, by the other Party, except to the extent such disclosure or use is expressly permitted by the terms of this Agreement or is reasonably necessary for the performance of this Agreement. “Confidential Information” means any information provided by one Party to the other Party relating to the Licensed Delivery Technology, Rifaximin, the Licensed Product (including any Regulatory Documentation and Regulatory Authorizations and any information or data contained therein), any Development or Commercialization of the Licensed Product or the scientific, regulatory or business affairs or other activities of either Party and specifically includes the terms of this Agreement. Notwithstanding the foregoing, Confidential Information shall not include any information that:

10.1.1. is or hereafter becomes part of the public domain by public use, publication, general knowledge or the like through no wrongful act, fault or negligence on the part of the receiving Party;

10.1.2. can be demonstrated by documentation or other competent proof to have been in the receiving Party’s possession prior to disclosure by the disclosing Party without any obligation of confidentiality with respect to said information;

10.1.3. is subsequently received by the receiving Party from a Third Party who is not bound by any obligation of confidentiality with respect to said information;

10.1.4. has been published by a Third Party (other than a Sublicensee) or otherwise enters the public domain through no fault of the receiving Party in breach of this Agreement; or

10.1.5. can be demonstrated by documentation or other competent evidence to have been independently developed by or for the receiving Party without reference to the disclosing Party’s Confidential Information.

Specific aspects or details of Confidential Information shall not be deemed to be within the public domain or in the possession of the receiving Party merely because the Confidential Information is embraced by more general information in the public domain or in the possession of the receiving Party. Further, any combination of Confidential Information shall not be considered in the public domain or in the possession of the receiving Party merely because

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

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individual elements of such Confidential Information are in the public domain or in the possession of the receiving Party unless the combination and its principles are in the public domain or in the possession of the receiving Party. Notwithstanding the foregoing, Lupin may, for research or Development purposes, disclose Confidential Information of a technical nature to a Third Party licensee of Lupin Technology if (i) such Third Party licensee enters into a confidentiality agreement with Lupin at least as restrictive as this Article 10 and (ii) such license contemplates use of the Confidential Information for sales of products substantially similar to the Licensed Product outside the Territory or inside the Territory but outside the Field.

10.2 Trade Secrets. Notwithstanding the time limitation provided in Section 10.1, Confidential Information that constitutes a trade secret under New York law or the Uniform Trade Secrets Act and is so identified to the receiving Party by the disclosing Party in writing shall be maintained confidential indefinitely.

10.3 Permitted Disclosures. Each Party may disclose Confidential Information to the extent that such disclosure is:

10.3.1. Made in response to a valid order of a court of competent jurisdiction or other supra-national, federal, national, regional, state, provincial or local governmental or regulatory body of competent jurisdiction or, if in the reasonable opinion of the receiving Party’s legal counsel, such disclosure is otherwise required by law; provided, however, that the receiving Party shall first have given notice to the disclosing Party and given the disclosing Party a reasonable opportunity to quash such order and to obtain a protective order requiring that the Confidential Information and documents that are the subject of such order be held in confidence by such court or agency or, if disclosed, be used only for the purposes for which the order was issued; and provided further that if a disclosure order is not quashed or a protective order is not obtained, the Confidential Information disclosed in response to such court or governmental order shall be limited to that information which is legally required to be disclosed in response to such court or governmental order;

10.3.2. Made by the receiving Party to the Regulatory Authorities as required in connection with any filing in relation to a Regulatory Authorization; provided, however, that reasonable measures shall be taken to assure confidential treatment of such information;

10.3.3. Made by the receiving Party to its Sublicensees or its or their respective Affiliates or by the receiving Party, its Sublicensees or its or their respective Affiliates to its or their respective attorneys, auditors, advisors, consultants, contractors, existing or prospective collaboration partners or licensees or other Third Parties as may be necessary or useful in connection with the Exploitation of the Licensed Product or otherwise in connection with the performance of its obligations or exercise of its rights as contemplated by this Agreement; provided, however, that such Persons shall be subject to obligations of confidentiality and non-use with respect to such Confidential Information substantially similar to the obligations of confidentiality and non-use of the receiving Party pursuant to this Article 10; provided further that each Party shall remain responsible for any failure by its Sublicensees or its or their respective Affiliates,

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attorneys, auditors, advisors, consultants, contractors, existing or prospective collaboration partners or licensees or other Third Parties to treat such Confidential Information as required under this Article 10 (as if such Sublicensees, Affiliates, attorneys, auditors, advisors, consultants, contractors, existing or prospective collaboration partners or licensees and other Third Parties were Parties directly bound to the requirements of this Article 10).

10.3.4. Made by the receiving Party to existing or potential acquirers or merger candidates; investment bankers; or existing or potential investors, venture capital firms or other financial institutions or investors for purposes of obtaining financing, each of whom prior to disclosure must be bound by obligations of confidentiality and non-use with respect to such Confidential Information substantially similar to the obligations of confidentiality and non-use of the receiving Party pursuant to this Article 10; provided, however, that Lupin shall make no such disclosure to a Competitor, without obtaining Salix’s prior consent in writing.

10.4 Use of Name. Neither Party shall mention or otherwise use the name, insignia, symbol, Trademark, trade name or logotype of the other Party (or any abbreviation or adaptation thereof) in any publication, press release, marketing and Promotional Materials or other form of publicity without the prior written approval of such other Party in each instance. The restrictions imposed by this Section shall not prohibit either Party from making any disclosure identifying the other Party (a) as a counterparty to this Agreement to its investors (b) that is required by Applicable Law or the requirements of a national securities exchange or another similar regulatory body (provided that any such disclosure shall be governed by this Article 10), or (c) with respect to which consent has previously been obtained. Further, the restrictions imposed on each Party under this Section 10.4 are not intended, and shall not be construed, to prohibit a Party from identifying the other Party in its internal business communications, provided that any Confidential Information in such communications remains subject to this Article 10.

10.5 Press Releases. Press releases or other similar public communication by either Party relating to this Agreement, including upon termination of this Agreement by Salix pursuant to Section 13.3, shall be approved in advance by the other Party, which approval shall not be unreasonably withheld or delayed, except for those communications required by Applicable Law (provided that the other Party is given a reasonable opportunity to review and comment on any such press release or public communication in advance thereof), disclosures of information for which consent has previously been obtained, information that has been previously disclosed publicly or as otherwise set forth in this Agreement.

10.6 Patient Information. The Parties agree to abide (and to cause their respective Affiliates and Sublicensees to abide) and to take (and to cause their respective Affiliates and Sublicensees to take) all reasonable and appropriate actions to ensure that all Third Parties conducting or assisting with any clinical development activities hereunder in accordance with, and subject to the terms of, this Agreement, shall abide, to the extent applicable, by all Applicable Law concerning the confidentiality or protection of patient identifiable information or patient’s protected health information, including the regulations at 45 C.F.R. Parts 160 and 164 and where relevant, the applicable national laws implementing the European Parliament and

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Council Directive 95/46/EC on the protection of individuals with regard to the processing of personal data and on the free movement of such data of 24 October 1995 and any other Applicable Law, in the course of their performance under this Agreement.

10.7 Publications. Each Party recognizes that the publication of papers regarding results of and other information regarding activities under this Agreement, including oral presentations and abstracts, may be beneficial to both Parties, provided such publications are subject to reasonable controls to protect Confidential Information. In particular, it is the intent of the Parties to maintain the confidentiality of any Confidential Information included in any Patent application until such Patent application has been filed. Accordingly, each Party shall have the right to review and approve any paper proposed for publication by the other Party, including any oral presentation or abstract, that contains Clinical Data or pertains to results of Clinical Trials or other studies with respect to the Licensed Product or includes other data generated under this Agreement or which includes Confidential Information of the other Party. Before any such paper is submitted for publication or an oral presentation is made, the publishing or presenting Party shall deliver a complete copy of the paper or materials for oral presentation to the other Party at least forty-five (45) days prior to submitting the paper to a publisher or making the presentation. The other Party shall review any such paper and give its comments to the publishing Party within thirty (30) days of the delivery of such paper to the other Party. With respect to oral presentation materials and abstracts, the other Party shall make reasonable efforts to expedite review of such materials and abstracts, and shall return such items as soon as practicable to the publishing or presenting Party with appropriate comments, if any, but in no event later than thirty (30) days from the date of delivery to the other Party. Failure to respond within such thirty (30) days shall be deemed approval to publish or present. If approval is not given or deemed given, either Party may refer the Dispute in accordance with Section 14.7 for resolution. Notwithstanding the foregoing, the publishing or presenting Party shall comply with the other Party’s request to delete references to such other Party’s Confidential Information in any such paper and shall withhold publication of any such paper or any presentation of same for an additional sixty (60) days in order to permit the Parties to obtain patent protection if either Party deems it necessary. Any publication shall include recognition of the contributions of the other Party according to standard practice for assigning scientific credit, either through authorship or acknowledgement, as may be appropriate. Each Party shall use commercially reasonable efforts to cause investigators and institutions participating in Clinical Trials for the Licensed Product with which it contracts to agree to terms substantially similar to those set forth in this Section 10.7, which efforts shall satisfy such Party’s obligations under this Section 10.7 with respect to such investigators and institutions.

ARTICLE 11

REPRESENTATIONS, WARRANTIES AND COVENANTS

11.1 Representations, Warranties and Covenants. Each Party hereby represents and warrants to the other Party as of the Effective Date as follows:

11.1.1. Corporate Authority. Such Party (a) has the power and authority and the legal right to enter into this Agreement and perform its obligations hereunder and (b) has taken all necessary action on its part required to authorize the execution and delivery of this Agreement and the performance of its obligations

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hereunder. This Agreement has been duly executed and delivered by such Party and constitutes a legal, valid and binding obligation of such Party and is enforceable against it in accordance with its terms subject to the effects of bankruptcy, insolvency or other laws of general application affecting the enforcement of creditor rights and judicial principles affecting the availability of specific performance and general principles of equity, whether enforceability is considered in a proceeding at law or in equity;

11.1.2. Litigation. There is no pending or, to such Party’s Knowledge, threatened litigation (and such Party has not received any communication) that alleges that such Party’s activities related to this Agreement have violated or that by conducting the activities as contemplated herein such Party would violate, any of the Patent, Trademark or other intellectual property rights of any other Person;

11.1.3. Consents and Approvals. All necessary consents, approvals and authorizations of all regulatory and governmental authorities and other Persons required to be obtained by such Party in connection with the execution and delivery of this Agreement and the performance of its obligations hereunder have been obtained; and

11.1.4. Conflicts. The execution and delivery of this Agreement and the performance of such Party’s obligations hereunder (a) do not conflict with or violate any requirement of Applicable Law or any provision of the articles of incorporation or bylaws of such Party in any material way and (b) do not conflict with, violate or breach or constitute a default or require any consent under, any contractual obligation or court or administrative order by which such Party is bound.

11.2 Additional Representations, Warranties and Covenants of Salix. Salix represents, warrants and covenants to Lupin that:

11.2.1. (a) Salix is a corporation duly organized and in good standing under the laws of California and (b) Salix has full power and authority and the legal right to own and operate its property and assets and to carry on its business as it is now being conducted and as it is contemplated to be conducted by this Agreement;

11.2.2. Neither Salix nor any of its Affiliates has been debarred or is subject to debarment and neither Salix nor any of its Affiliates will use in any capacity, in connection with the services to be performed under this Agreement, any Person who has been debarred pursuant to Section 306 of the FFDCA or who is the subject of a conviction described in such section. Salix shall inform Lupin in writing immediately if it or any Person who is performing services hereunder is debarred or is the subject of a conviction described in Section 306 or if any action, suit, claim, investigation or legal or administrative proceeding is pending or, to the best of Salix’s Knowledge, is threatened, relating to the debarment or conviction of Salix or any Person performing services hereunder;

11.2.3. As of the Effective Date, to Salix’s Knowledge, neither any of its activities contemplated hereunder nor performance of any of its obligations

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contained herein, including without limitation its grant of the licenses specified herein, will infringe or misappropriate any Patent other intellectual property right Controlled by a Third Party; and

11.2.4. Salix is able to pay its debts (including trade debts) as they mature. Salix has, or reasonably expects to have available as they are needed, the funds to perform its obligations hereunder.

11.3 Additional Representations, Warranties and Covenants of Lupin. Lupin represents, warrants and covenants to Salix that:

11.3.1. Lupin is a corporation duly organized under the laws of India and has full power and authority and the legal right to own and operate its property and assets and to carry on its business as it is now being conducted and as is contemplated to be conducted by this Agreement;

11.3.2. Neither Lupin nor any of its Affiliates has been debarred or is subject to debarment and neither Lupin nor any of its Affiliates will use in any capacity, in connection with the services to be performed under this Agreement, any Person who has been debarred pursuant to Section 306 of the FFDCA or who is the subject of a conviction described in such section. Lupin shall inform Salix in writing immediately if it or any Person who is performing services hereunder is debarred or is the subject of a conviction described in Section 306 or if any action, suit, claim, investigation or legal or administrative proceeding is pending or, to the best of Lupin’s Knowledge, is threatened, relating to the debarment or conviction of Lupin or any Person performing services hereunder;

11.3.3. As of the Effective Date, (a) to Lupin’s Knowledge, (i) Lupin Controls the Lupin Technology and is entitled to grant the licenses specified herein, (ii) the Lupin Patents are subsisting and are not invalid or unenforceable in whole or in part and (iii) Lupin’s right, title and interest in and to the Lupin Technology is free and clear of any liens, charges and encumbrances; (b) to Lupin’s Knowledge, the Lupin Patents are being procured from the respective Patent offices in accordance with Applicable Law; (c) Lupin has no Knowledge of any actual infringement or threatened infringement of the Lupin Patents or any actual misappropriation or threatened misappropriation of the Lupin Know-How by any Person; (d) Lupin has no Knowledge of any claims or litigation that has been brought or threatened by any Person alleging that the Lupin Patents are invalid or unenforceable; and (e) Lupin has no Knowledge of any Patent or other intellectual property right Controlled by an Third Party that would be infringed or misappropriated by Salix’s Exploitation of the Licensed Product in the Territory in the Field as contemplated hereby; and

11.3.4. All data and other information provided by Lupin and its agents in connection with Salix’s due diligence investigation of this transaction was, to Lupin’s Knowledge, genuine and did not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made not misleading.

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11.4 Disclaimer of Warranty. EXCEPT FOR THE EXPRESS WARRANTIES SET FORTH IN SECTIONS 11.1, 11.2 AND 11.3, NEITHER PARTY MAKES ANY REPRESENTATIONS OR GRANTS ANY WARRANTY, EXPRESS OR IMPLIED, EITHER IN FACT OR BY OPERATION OF LAW, BY STATUTE OR OTHERWISE, AND EACH PARTY SPECIFICALLY DISCLAIMS ANY OTHER WARRANTIES, WHETHER WRITTEN OR ORAL, OR EXPRESS OR IMPLIED, INCLUDING ANY WARRANTY OF QUALITY, MERCHANTABILITY OR FITNESS FOR A PARTICULAR USE OR PURPOSE OR ANY WARRANTY AS TO THE VALIDITY OF ANY PATENTS OR THE NON-INFRINGEMENT OF ANY INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES.

11.5 Unauthorized Sales.

11.5.1. Undertakings by Salix. Salix (a) shall, and shall cause its Sublicensees and its and their respective Affiliates to, distribute, market, Promote, offer for sale and sell the Licensed Product only in the Territory in the Field, (b) to the maximum extent permitted by Applicable Law, shall not, and shall not permit its Affiliates and shall use commercially reasonable efforts to not permit its Sublicensees or its Sublicensees’ Affiliates to, distribute, market, Promote, offer for sale or sell the Licensed Product, directly or indirectly, (i) to any Person for sale outside the Territory or inside the Territory outside the Field or (ii) to any Person inside the Territory that (A) Salix reasonably suspects is likely to directly or indirectly distribute, market, Promote, offer for sale or sell the Licensed Product outside the Territory or inside the Territory outside the Field or assist another Person to do so or, (B) to Salix’s Knowledge, has directly or indirectly distributed, marketed, Promoted, offered for sale, sold or otherwise supplied the Licensed Product outside the Territory or inside the Territory outside the Field or assisted another Person to do so and (c) shall refer any orders for the Licensed Product outside the Territory or inside the Territory outside the Field received by Salix, its Sublicensees or any of its or their respective Affiliates to Lupin.

11.5.2. Undertakings by Lupin. To the maximum extent permitted by Applicable Law, Lupin shall not, and Lupin shall cause its Affiliates not to, and shall use commercially reasonable efforts to cause its Sublicensees and its Sublicenesees’ Affiliates not to, distribute, market, Promote, offer for sale, sell or otherwise supply the Licensed Product, directly or indirectly, whether alone or in combination with other molecules or compounds, whether as a raw material or as a finished product, and whether at wholesale or retail, to (a) any Person in the Territory other than Salix or its Affiliates or (b) any Person outside the Territory that (i) Lupin reasonably suspects is likely to directly or indirectly distribute, market, Promote, offer for sale or sell the Licensed Product in the Territory in the Field or assist another Person to do so or, (ii) to Lupin’s Knowledge, has directly or indirectly distributed, marketed, Promoted, offered for sale, sold or otherwise supplied the Licensed Product in the Territory in the Field or assisted another Person to do so. Lupin shall refer any orders for the Licensed Product in the Territory in the Field received by Lupin, its licensees or its Sublicensees or any of its or their respective Affiliates to Salix. The provisions of this

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Section 11.5.2 shall terminate as of the earlier of (A) the termination of this Agreement and (B) the termination of [*].

11.6 Governmental Filings. To the extent, if any, that a Party determines in good faith that it is required by Applicable Law to file or register this Agreement or a notification in respect thereof with any governmental authority, including the U.S. Securities and Exchange Commission, such Party may do so, and the other Party shall cooperate in such filing or notification and shall execute all documents reasonably required in connection therewith. In such situation, the filing Party shall request confidential treatment of sensitive provisions of the Agreement, to the extent permitted by Applicable Law and in consultation with the other Party. The Parties shall promptly inform each other as to the activities or inquiries of any such governmental authority relating to this Agreement, and shall cooperate to respond to any request for further information therefrom.

ARTICLE 12

INDEMNIFICATION

12.1 Indemnification by Salix. Salix shall indemnify Lupin, its Affiliates and their respective directors, officers, employees and agents, and defend and save each of them harmless, from and against any and all losses, damages, liabilities, costs, fees and expenses (including reasonable attorneys’ fees and expenses) (collectively, “Losses”) in connection with any and all suits, actions, investigations, claims or demands of Third Parties (collectively, “Third Party Claims”) arising from or occurring as a result of: (a) the breach by Salix, its Sublicensees or any of its or their respective Affiliates of any representation, warranty, covenant, undertaking or other term contained in this Agreement; (b) the negligence or willful misconduct on the part of Salix, its Sublicensees or any of its or their respective Affiliates in performing its or their obligations under this Agreement; (c) the Exploitation by Salix, its Sublicensees or any of its or their respective Affiliates of the Licensed Product; (d) [*]; or (e) [*]; except in cases (a), (b) and (c), for those Losses for which Lupin has an obligation to indemnify Salix pursuant to Section 12.2 hereof, as to which Losses each Party shall indemnify the other to the extent of their respective responsibility for the Losses; provided, however, that Salix shall not be obligated to indemnify Lupin for any Losses under (a), (b), or (c) to the extent that such Losses arise as a result of negligence or willful misconduct on the part of Lupin or any of its Affiliates or Sublicensees.

12.2 Indemnification by Lupin. Lupin shall indemnify Salix, its Affiliates and their respective directors, officers, employees and agents, and defend and save each of them harmless, from and against any and all Losses in connection with any and all Third Party Claims arising from or occurring as a result of: (a) the breach by Lupin, its licensees or its Sublicensees or any of its or their respective Affiliates of any representation, warranty, covenant, undertaking or other term contained in this Agreement; (b) the negligence or willful misconduct on the part of Lupin, its licensees or its Sublicensees or any of its or their respective Affiliates in performing its or their obligations under this Agreement; or (c) the Exploitation by Lupin, its licensees (other than Salix) or its Sublicensees or any of its or their respective Affiliates of the Licensed Product, except in each case ((a), (b) and (c)) for those Losses for which Salix has an obligation to

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

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indemnify Lupin pursuant to Section 12.1 hereof, as to which Losses each Party shall indemnify the other to the extent of their respective responsibility for the Losses; provided, however, that Lupin shall not be obligated to indemnify Salix for any Losses to the extent that such Losses arise as a result of negligence or willful misconduct on the part of Salix or any of its Affiliates or Sublicensees.

12.3 Notice of Claim. All indemnification claims in respect of a Party, its Affiliates or their respective directors, officers, employees and agents shall be made solely by such Party to this Agreement (the “Indemnified Party”). The Indemnified Party shall give the indemnifying Party prompt written notice (an “Indemnification Claim Notice”) of any Losses or discovery of fact upon which such indemnified Party intends to base a request for indemnification under Section 12.1 or 12.2, but in no event shall the indemnifying Party be liable for any Losses that result from any delay in providing such notice. Each Indemnification Claim Notice must contain a description of the claim and the nature and amount of such Loss (to the extent that the nature and amount of such Loss is known at such time). The Indemnified Party shall furnish promptly to the indemnifying Party copies of all papers and official documents received in respect of any Losses and Third Party Claims.

12.4 Control of Defense. The defense of any Third Party Claim shall be conducted as follows:

12.4.1. Control by Indemnifying Party. At its option, the indemnifying Party may assume the defense of any Third Party Claim by giving written notice to the Indemnified Party within thirty (30) days after the indemnifying Party’s receipt of an Indemnification Claim Notice. The assumption of the defense of a Third Party Claim by the indemnifying Party shall not be construed as an acknowledgment that the indemnifying Party is liable to indemnify the Indemnified Party in respect of the Third Party Claim, nor shall it constitute a waiver by the indemnifying Party of any defenses it may assert against the Indemnified Party’s claim for indemnification. Upon assuming the defense of a Third Party Claim, the indemnifying Party may appoint as lead counsel in the defense of the Third Party Claim any legal counsel selected by the indemnifying Party. In the event the indemnifying Party assumes the defense of a Third Party Claim, the Indemnified Party shall immediately deliver to the indemnifying Party all original notices and documents (including court papers) received by the Indemnified Party in connection with the Third Party Claim. Should the indemnifying Party assume the defense of a Third Party Claim, except as provided in Section 12.4.2, the indemnifying Party shall not be liable to the Indemnified Party for any legal expenses subsequently incurred by such Indemnified Party in connection with the analysis, defense or settlement of the Third Party Claim. In the event that it is ultimately determined that the indemnifying Party is not obligated to indemnify, defend or hold harmless the Indemnified Party from and against the Third Party Claim, the Indemnified Party shall reimburse the indemnifying Party for any and all costs and expenses (including attorneys’ fees and costs of suit) and any Third Party Claims incurred by the indemnifying Party in its defense of the Third Party Claim.

12.4.2. Right to Participate in Defense. Without limiting Section 12.4.1 above, any Indemnified Party shall be entitled to participate in, but not control, the

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defense of such Third Party Claim and to employ counsel of its choice for such purpose; provided, however, that such employment shall be at the Indemnified Party’s own expense unless (a) the employment thereof has been specifically authorized by the indemnifying Party in writing, (b) the indemnifying Party has failed to assume the defense and employ counsel in accordance with Section 12.4.1 (in which case the Indemnified Party shall control the defense) or (c) the interests of the indemnitee and the indemnifying Party with respect to such Third Party Claim are sufficiently adverse to prohibit the representation by the same counsel of both Parties under Applicable Law, ethical rules or equitable principles.

12.4.3. Settlement. With respect to any Losses relating solely to the payment of money damages in connection with a Third Party Claim and that shall not result in the Indemnified Party’s becoming subject to injunctive or other relief or otherwise adversely affecting the business of the Indemnified Party in any manner, and as to which the indemnifying Party shall have acknowledged in writing the obligation to indemnify the Indemnified Party hereunder, the indemnifying Party shall have the sole right to consent to the entry of any judgment, enter into any settlement or otherwise dispose of such Loss, on such terms as the indemnifying Party, in its sole discretion, shall deem appropriate. With respect to all other Losses in connection with Third Party Claims, where the indemnifying Party has assumed the defense of the Third Party Claim in accordance with Section 12.4.1, the indemnifying Party shall have authority to consent to the entry of any judgment, enter into any settlement or otherwise dispose of such Loss, provided it obtains the prior written consent of the Indemnified Party (which consent shall not be unreasonably withheld or delayed). The indemnifying Party shall not be liable for any settlement or other disposition of a Loss by an Indemnified Party that is reached without the written consent of the indemnifying Party. Regardless of whether the indemnifying Party chooses to defend or prosecute any Third Party Claim, no Indemnified Party shall, and the Indemnified Party shall ensure that no indemnitee shall, admit any liability with respect to or settle, compromise or discharge, any Third Party Claim without the prior written consent of the indemnifying Party, such consent not to be unreasonably withheld or delayed.

12.4.4. Cooperation. Regardless of whether the indemnifying Party chooses to defend or prosecute any Third Party Claim, the Indemnified Party shall, and shall cause each indemnitee to, cooperate in the defense or prosecution thereof and shall furnish such records, information and testimony, provide such witnesses and attend such conferences, discovery proceedings, hearings, trials and appeals as may be reasonably requested in connection therewith. Such cooperation shall include access during normal business hours afforded to the indemnifying Party to, and reasonable retention by the Indemnified Party of, records and information that are reasonably relevant to such Third Party Claim, and making indemnitees, employees and agents available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder, and the indemnifying Party shall reimburse the Indemnified Party for all its reasonable out-of-pocket expenses in connection therewith.

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12.4.5. Expenses. Except as provided above, the costs and expenses, including fees and disbursements of counsel, incurred by the Indemnified Party in connection with any claim shall be reimbursed on a Calendar Quarter 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.

12.5 Limitation on Damages and Liability. EXCEPT IN CIRCUMSTANCES OF [*] OR INTENTIONAL MISCONDUCT BY A PARTY OR ITS AFFILIATES OR SUBLICENSEES (OR WITH RESPECT TO SALIX, ITS DISTRIBUTORS), NEITHER PARTY NOR ANY OF ITS AFFILIATES SHALL BE LIABLE TO THE OTHER PARTY FOR SPECIAL, PUNITIVE, INDIRECT, INCIDENTAL, EXEMPLARY OR CONSEQUENTIAL DAMAGES, INCLUDING BUSINESS INTERRUPTION OR LOST PROFITS, MILESTONES OR ROYALTIES, WHETHER IN CONTRACT, WARRANTY, NEGLIGENCE, TORT, STRICT LIABILITY OR OTHERWISE, ARISING OUT OF (A) THE DEVELOPMENT, MANUFACTURE, USE OR SALE OF THE LICENSED PRODUCT UNDER THIS AGREEMENT, (B) THE USE OF OR REFERENCE TO THE PATENTS, KNOW-HOW OR REGULATORY DOCUMENTATION LICENSED HEREUNDER OR (C) ANY BREACH OF OR FAILURE TO PERFORM ANY OF THE PROVISIONS OF THIS AGREEMENT; PROVIDED, HOWEVER, THAT THIS EXCLUSION IS NOT INTENDED TO EXCLUDE DAMAGES OWED TO THIRD PARTIES PURSUANT TO SECTION 12.1 OR 12.2, REGARDLESS OF TYPE.

12.6 Insurance. Each Party shall maintain, at its sole cost and expense, an adequate liability insurance or self-insurance program (including product liability insurance) to protect against potential liabilities and risk arising out of activities to be performed under this Agreement and any agreement related hereto and upon such terms (including coverages, deductible limits and self-insured retentions) as are customary in the pharmaceutical industry generally for the activities to be conducted by such Party under this Agreement. Such liability insurance or self-insurance program shall insure against all types of liability, including personal injury, physical injury or property damage arising out of the Exploitation of the Licensed Product. This Section 12.6 shall not create any limitation on a Party’s liability to the other under this Agreement.

ARTICLE 13

TERM AND TERMINATION

13.1 Term. This Agreement shall become effective on the Effective Date and, unless earlier terminated pursuant to Section 13.2, 13.3, 13.4 or 13.5 hereof, shall continue until the expiration of Salix’s obligations to pay royalties in respect of the Licensed Product pursuant to Section 7.2.2.

13.2 Termination for Material Breach. Any material failure by a Party (the “Breaching Party”) to comply with any of its material obligations contained in this Agreement

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

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shall entitle the Party not in default to give to the Breaching Party written notice specifying the nature of the default, requiring the Breaching Party to make good or otherwise cure such default, and stating its intention if such default is not cured to terminate this Agreement. If such default is not cured within [*] ([*]) days after the receipt of such notice (or, if such default cannot be cured within such [*] ([*]) day period, if the Breaching Party does not commence actions to cure such default within such period and thereafter diligently continue such actions or if such default is not otherwise cured within [*] ([*]) days after the receipt of such notice, except in the case of a payment default, as to which the Breaching Party shall have only a [*] ([*]) day cure period), the Party not in default shall be entitled, on written notice to the Breaching Party, without prejudice to any other rights conferred on it by this Agreement, and in addition to any other remedies available to it at law or in equity, to terminate this Agreement in its entirety.

13.3 Other Termination by Salix. If Salix determines, in its sole and absolute discretion, that it is not feasible or desirable to pursue the Development or Commercialization of the Licensed Product contemplated by this Agreement, including (without thereby in any way limiting Salix’s sole and absolute discretion) for scientific, technical, regulatory or commercial reasons (including safety or efficacy reasons), reasons relating to the present or future marketability or profitability of such Licensed Product, or reasons relating to the identity of any successor to Lupin pursuant to Section 14.4(b) or relations between Salix and any such successor, then Salix may, by written notice to Lupin, terminate this Agreement in its entirety upon [*] ([*]) days’ prior written notice to Lupin.

13.4 Termination Upon Insolvency. Either Party may terminate this Agreement if, at any time, the other Party shall (a) file in any court or agency pursuant to any statute or regulation of any state, country or jurisdiction a petition in bankruptcy or insolvency or for reorganization or for an arrangement or for the appointment of a receiver or trustee of such other Party or of its assets, (b) propose a written agreement of composition or extension of its debts outside the ordinary course of its business, (c) be served with an involuntary petition against it, filed in any insolvency proceeding, and such petition shall not be dismissed within [*] ([*]) days after the filing thereof, (d) propose or be a party to any dissolution or liquidation, (e) make an assignment for the benefit of its creditors, or (f) admit in writing its inability generally to meet its obligations as they fall due in the general course.

13.5 Termination by Lupin. Lupin may terminate this Agreement immediately upon notice to Salix in the event that the API Agreement is terminated other than by Salix pursuant to Section 6.2(c)(ii) of the API Agreement.

13.6 Rights in Bankruptcy. All rights and licenses granted under or pursuant to this Agreement by Lupin or Salix are, and shall otherwise be deemed to be, for purposes of Section 365(n) of the United States Bankruptcy Code, licenses of rights to “intellectual property” as defined under Section 101 of the United States Bankruptcy Code. The Parties agree that the Parties, as licensees of such rights under this Agreement, shall retain and may fully exercise all of their rights and elections under the United States Bankruptcy Code. The Parties further agree that, in the event of the commencement of a bankruptcy proceeding by or against a Party under the United States Bankruptcy Code, the Party hereto that is not a party to such proceeding shall

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

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be entitled to a complete duplicate of (or complete access to, as appropriate) any such intellectual property and all embodiments of such intellectual property, which, if not already in the non-subject Party’s possession, shall be promptly delivered to it (a) following any such commencement of a bankruptcy proceeding upon the non-subject Party’s written request therefor, unless the Party subject to such proceeding continues to perform all of its obligations under this Agreement or (b) if not delivered under clause (a) above, following the rejection of this Agreement by or on behalf of the Party subject to such proceeding upon written request therefor by the non-subject Party.

13.7 Licenses and Assignments Upon Termination. Upon any termination of this Agreement:

13.7.1. the licenses granted by Lupin to Salix under Section 2.1 shall terminate in their entirety;

13.7.2. the licenses granted by Salix to Lupin under Section 2.4 shall be revised such that Salix shall, and does hereby, grant, and shall cause its Sublicensees and its and their respective Affiliates to so grant, to Lupin a non-exclusive, perpetual, irrevocable, worldwide, [*] license, with the right to grant sublicenses through multiple tiers of sublicensees, without the consent of Salix, under the Salix Technology to Exploit the Licensed Product for all purposes; and

13.7.3. Salix shall, and does hereby, and shall cause its Sublicensees and its and their respective Affiliates to, transfer, convey, assign and deliver to Lupin, and Lupin hereby accepts, all right, title and interest in and to, (a) the Licensed Product, including any related Information and inventions, and any Improvements with respect thereto (including Salix Know-How and all material aspects of Confidential Information Controlled by Salix as of the date of termination with respect to the Licensed Product), (b) any Regulatory Authorizations and related Regulatory Documentation and correspondence with Regulatory Authorities with respect to the Licensed Product, (c) any Product Trademarks, any other Trademarks (including any goodwill associated therewith), any generic names and any domain names incorporating the same that were used by, or developed for use by, Salix in connection with the Licensed Product and (d) to the extent requested by Lupin in writing, any agreements with any Third Parties with respect to the Licensed Product (including agreements with contract research organizations, clinical sites and investigators).

13.8 Additional Consequences of Termination.

13.8.1. Sale of Inventory. In the event of any termination of this Agreement, Salix may continue to sell its existing inventories and any work-in-process of the Licensed Product until the occurrence of either: (a) Salix’s completion of the transfer of all Regulatory Authorizations and related Regulatory Documentation for the Licensed Product and completion of performance under all then-existing contracts with Third Parties for the marketing, sale or manufacture of the Licensed Product, or (b) Lupin’s

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

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directing Salix to halt all sales of the Licensed Product by written notice. If either such event occurs prior to the sale of all of Salix’s inventories and work-in-process of the Licensed Product and the performance by Salix of its obligations under such Third Party contracts, then Salix shall [*], and Lupin shall [*].

13.8.2. Return of Lupin Materials and Information. Upon the expiration or any termination of this Agreement, Salix, at the request of Lupin, shall return or, at the election of Salix, use reasonable efforts to destroy, and thereafter provide to Lupin written certification evidencing such destruction, all data, files, records and other materials in its possession or control relating to the Lupin Technology, or containing or comprising Lupin’s Information and inventions or other Confidential Information (except one copy of which may be retained solely for archival purposes) with respect to the Licensed Product; provided, that notwithstanding the foregoing, Salix shall be required to return, and may not destroy, any Regulatory Documentation related to the Licensed Product.

13.8.3. Effect of Termination on Sublicenses Granted by Salix. Any and all sublicense agreements entered into by Salix or any of its Affiliates with a Sublicensee pursuant to Section 2.2 shall survive the termination of this Agreement, except to the extent that any such Sublicensee under any such sublicense agreement is in material breach of this Agreement or such sublicense agreement, in which case Lupin shall have the right to terminate any such sublicense agreement. Salix shall, at the request of Lupin, assign any such sublicense agreement (to the extent not terminated pursuant to the preceding sentence) to Lupin or its Affiliates and, upon such assignment, Lupin or its Affiliates, as applicable, shall assume such sublicense agreement, as applicable. For clarity, any sublicense agreement entered into by Salix with any of its Affiliates shall terminate upon the termination of this Agreement.

13.8.4. Milestone Payments; Royalties. Following any termination of this Agreement, Salix shall not be responsible for (a) any milestone payments for milestone events that are achieved under Section 7.1.2 following the effective date of such termination or (b) any royalty payments that accrue under Section 7.2 following the effective date of such termination, except in each case ((a) and (b)) with respect to any sales of the Licensed Product made by Salix, either itself or through an Affiliate, Sublicensee or Sublicensee’s Affiliate, pursuant to Section 13.8.1.

13.8.5. Assistance. Without limiting Lupin’s rights under other provisions of this Article 13, in the event of any termination of this Agreement, Salix shall, and shall cause its Sublicensees and its and their respective Affiliates to, at the request and expense of Lupin, provide Lupin with such assistance as is reasonably necessary to effectuate a smooth and orderly transition of any such Development, Commercialization and other Exploitation activities, including any ongoing Clinical Trials or Post Approval Studies, to Lupin or its designee so as to minimize any disruption of such activities.

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

50

13.8.6. Royalties to Salix. In consideration of the license rights granted by Salix to Lupin under this Article 13 and the assignment of Regulatory Authorizations and related Regulatory Documentation as contemplated by this Article 13, if the Licensed Product has received its Initial Regulatory Authorization, Lupin shall pay to Salix for Licensed Product sold by Lupin, its (sub)licensees or its or their respective Affiliates in the Territory a royalty of [*] percent ([*]%) of Net Sales (substituting Lupin for Salix in the definition thereof) during each full or partial Calendar Year from the termination of this Agreement until the [*] ([*]) anniversary of the effective date of such termination. Subject to the royalties for which provision is made in the preceding sentence, such Net Sales shall be the absolute property of Lupin. The royalties contemplated by this Section 13.8.6 shall be payable by Lupin to Salix in accordance with the provisions of Sections 7.2.4, 7.2.5, 7.2.6, 7.3, 7.4 and 7.5 mutatis mutandis and Section 14.18.

13.8.7. Accrued Rights. Termination or expiration of this Agreement for any reason shall be without prejudice to any rights that shall have accrued to the benefit of a Party prior to such termination or expiration. Such termination or expiration shall not relieve a Party from obligations that are expressly indicated to survive the termination or expiration of this Agreement.

13.8.8. Survival. Without limiting the foregoing, Sections 2.3, 2.4, 7.3, 7.4, 7.5, 8.1, Article 10, Sections 11.4 and 11.6, Articles 9 and 12, this Article 13, and Sections 14.2, 14.4, 14.5, 14.6, 14.7, 14.8, 14.9, 14.10, 14.11, 14.12, 14.13, 14.14, 14.15, 14.18, 14.19 and 14.20 of this Agreement shall survive the termination or expiration of this Agreement for any reason.

ARTICLE 14

MISCELLANEOUS

14.1 Force Majeure. Neither Party shall be held liable or responsible to the other Party or be deemed to have defaulted under or breached this Agreement for failure or delay in fulfilling or performing any tens of this Agreement (other than an obligation to make payments) when such failure or delay is caused by or results from events beyond the reasonable control of the non-performing Party, including fires, floods, earthquakes, embargoes, shortages, epidemics, quarantines, war, acts of war (whether war be declared or not), terrorist acts, insurrections, riots, civil commotion, strikes, lockouts or other labor disturbances (whether involving the workforce of the non-performing Party or of any other Person), acts of God or acts, omissions or delays in acting by any governmental authority; provided, that the requirement to engage in negotiations with or make payment to a Third Party listed on Schedule 8.6 to procure intellectual property rights necessary for the performance of a Party’s obligations hereunder shall not be considered a force majeure event under this Section 14.1. The non-performing Party shall notify the other Party of such force majeure within [*] ([*]) days after such occurrence by giving written notice to the other Party stating the nature of the event, its anticipated duration, and any action being taken to avoid or minimize its effect. The suspension of performance shall be of no greater scope and no longer duration than is necessary and the non-performing Party shall use

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

51

commercially reasonable efforts to remedy its inability to perform. In the event that such force majeure event lasts for a continuous period of more than [*] ([*]) days, such suspension of performance shall be deemed a material breach of this Agreement and such other Party shall have the right to terminate this Agreement pursuant to Section 13.2.

14.2 Export Control. This Agreement is made subject to any restrictions concerning the export of products or technical information from the United States or other countries that may be imposed on related to the Parties from time to time. Each Party agrees that it will not export, directly or indirectly, any technical information acquired from the other Party under this Agreement or any products using such technical information to a location or in a manner that at the time of export requires an export license or other governmental approval, without first obtaining the written consent to do so from the appropriate agency or other governmental entity in accordance with Applicable Law.

14.3 Subcontractors. Salix and Lupin shall each have the right to subcontract any of its Development and Commercialization activities with respect to the Licensed Product to a Third Party. Each Party shall remain solely responsible for all costs and expenses associated with its use of subcontractor(s) hereunder.

14.4 Assignment. Without the prior written consent of the other Party hereto, neither Party shall sell, transfer, assign, delegate, pledge or otherwise dispose of, whether voluntarily, involuntarily, by operation of law or otherwise, this Agreement or any of its rights or duties hereunder; provided, however, that either Party may, without such consent, assign or transfer this Agreement or any of its rights and obligations hereunder to (a) an Affiliate of such Party; or (b) to any Third Party with which it merges or consolidates, or to which it transfers all or substantially all of its assets to which this Agreement relates if in any such event (i) the assigning Party (provided that it is not the surviving entity) remains jointly and severally liable with the relevant Affiliate or Third Party assignee under this Agreement, and (ii) the relevant Affiliate assignee, Third Party assignee or surviving entity assumes in writing all of the assigning Party’s obligations under this Agreement. Any attempted assignment or delegation in violation of the preceding sentence shall be void and of no effect. All validly assigned and delegated rights and obligations of the Parties hereunder shall be binding upon and inure to the benefit of and be enforceable by and against the successors and permitted assigns of Lupin or Salix, as the case may be. In the event either Party seeks and obtains the other Party’s consent to assign or delegate its rights or obligations to another party, the assignee or transferee shall assume all obligations of its assignor or transferor under this Agreement. Notwithstanding the foregoing, Lupin shall have the right, from time to time and without the necessity of providing notice to or obtaining the consent of, Salix, to delegate, assign, or subcontract to any Affiliate, certain of Lupin’s rights or responsibilities under this Agreement. In all cases, Lupin shall remain the contract Party under the Agreement and shall remain responsible to Salix for the performance of all such obligations under this Agreement.

14.5 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

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

52

provision shall be fully severable, (b) this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part hereof, (c) the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom and (d) in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as a part of this Agreement a legal, valid and enforceable provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible and reasonably acceptable to the Parties. To the fullest extent permitted by applicable law, each Party hereby waives any provision of law that would render any provision hereof illegal, invalid or unenforceable in any respect.

14.6 Governing Law, Jurisdiction, Venue and Service.

14.6.1. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to the substantive law of another jurisdiction. The Parties agree to exclude the application to this Agreement of the United Nations Convention on Contracts for the International Sale of Goods.

14.6.2. Jurisdiction. Subject to Sections 14.7 and 14.11, the Parties hereby irrevocably and unconditionally consent to the exclusive jurisdiction of the courts of the State of New York and the United States District Court for the Southern District of New York, in either case sitting in the Borough of Manhattan in the City of New York, for any action, suit or proceeding (other than appeals therefrom) arising out of or relating to this Agreement, and agree not to commence any action, suit or proceeding (other than appeals therefrom) related thereto except in such courts. The Parties irrevocably and unconditionally waive their right to a jury trial.

14.6.3. Venue. The Parties further hereby irrevocably and unconditionally waive any objection to the laying of venue of any action, suit or proceeding (other than appeals therefrom) arising out of or relating to this Agreement in the courts of the State of New York or in the United States District Court for the Southern District of New York, in either case sitting in the Borough of Manhattan in the City of New York, and hereby further irrevocably and unconditionally waive and agree not to plead or claim in any such court that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum.

14.6.4. Service.

(a) Each Party further agrees that service of any process, summons, notice or document by registered mail to its address set forth in Section 14.8 shall be effective service of process for any action, suit or proceeding brought against it under this Agreement in any such court.

(b) Lupin hereby designates, appoints and empowers Lupin Pharmaceuticals, Inc., with an office located at Harborplace Tower, 111 S. Calvert Street, 21st Floor, Baltimore, MD 21202, U.S.A., as its designee, appointee and agent to receive, accept and

53

forward for and on its behalf, and it properties, assets and revenues, service of any and all legal process, summons, notices and documents which may be served in any action, suit or proceeding arising out of or relating to this Agreement or any of the transactions or services contemplated hereunder that is brought in the courts of the State of New York and the United States District Court for the Southern District of New York, in either case sitting in the Borough of Manhattan in the City of New York, which may be made on any designee, appointee and agent in accordance with legal procedures prescribed in such courts. If for any reason such designee, appointee and agent hereunder shall not be available to act as such, then Lupin agrees to designate a new designee, appointee or agent in the City of New York on the terms and for the purposes of this Section 14.6.4(b). Lupin further hereby consents and agrees to the service of any and all legal process, summons, notices and documents out of any of the courts of the State of New York and the United States District Court for the Southern District of New York, in either case sitting in the Borough of Manhattan in the City of New York, in any such action, suit or proceeding by serving a copy thereof upon the agent for service of process referred to in this Section 14.6.4(b) (whether or not the appointment of such agent shall for any reason prove to be ineffective or such agent shall accept or acknowledge such service) coupled with mailing of copies thereof in accordance with Section 14.6.4(a). Lupin agrees that the failure of any such designee, appointee or agent to give any notice of such service to it shall not impair or affect in any way the validity of such service or any judgment rendered in any action or proceeding based thereon.

14.7 Dispute Resolution.

14.7.1. General. If a dispute arises between the Parties in connection with or relating to this Agreement or any document or instrument delivered in connection herewith (other than a dispute arising under Section 4.4.8, which shall be finally and definitively resolved in accordance with Section 4.4.8) (a “Dispute”), then either Party shall have the right to refer such Dispute to the chief executive officers of the Parties (or their designees) who shall confer for attempted resolution of the Dispute by good faith negotiations during a period of thirty (30) Business Days. Any final decision mutually agreed to by such officers shall be conclusive and binding on the Parties. If the Dispute remains unresolved after such thirty (30)-Business Day period, then except as provided in Sections 14.7.2 and 14.18.3 and with respect to any matter for which consent or approval is assigned to the Parties jointly, either Party may, by written notice to the other Party, initiate litigation for resolution of such Dispute.

14.7.2. Interim Relief. Notwithstanding anything herein to the contrary, nothing in this Section 14.7 shall preclude either Party from seeking interim or provisional relief, including a temporary restraining order, preliminary injunction or other interim equitable relief concerning a Dispute, if necessary to protect the interests of such Party. This Section 14.7.2 shall be specifically enforceable.

14.8 Notices.

14.8.1. Notice Requirements. Any notice, request, demand, waiver, consent, approval or other communication permitted or required under this Agreement shall be in writing, shall refer specifically to this Agreement and shall be

54

deemed given only if delivered by hand or sent by facsimile transmission (with transmission confirmed) or by internationally recognized overnight delivery service that maintains records of delivery, addressed to the Parties at their respective addresses specified in Section 14.8.2 or to such other address as the Party to whom notice is to be given may have provided to the other Party in accordance with this Section 14.8. Such Notice shall be deemed to have been given as of the date delivered by hand or transmitted by facsimile (with transmission confirmed) or on the second business day (at the place of delivery) after deposit with an internationally recognized overnight delivery service. Any notice delivered by facsimile shall be confirmed by a hard copy delivered as soon as practicable thereafter. This Section 14.8 is not intended to govern the day-to-day business communications necessary between the Parties in performing their obligations under the terms of this Agreement.

14.8.2. Address for Notice.

If to Salix, to:

Salix Pharmaceuticals, Inc.

1700 Perimeter Park Drive

Morrisville, North Carolina 27560

Attention: General Counsel

Fax No.: 919.447.3417

Email: Mark.Reeth@Salix.com

with copies (which shall not constitute notice) to:

Salix Pharmaceuticals, Inc.

1700 Perimeter Park Drive

Morrisville, North Carolina 27560

Attention: Vice President Business Development

Fax No.: 919.228.4222

Email: rick.scruggs@salix.com

and

Covington & Burling LLP

1201 Pennsylvania Avenue, N.W.

Washington, D. C. 20004

Attention: Edward C. Britton, Esq.

Fax No.: 202.778.5248

Email: ebritton@cov.com

If to Lupin, to:

Lupin Limited

“B” Wing, Fifth Floor

Bandra Kurla Complex

Mumbai - 400 051, India

55

Attention: Managing Director

Facsimile: 410.576.2221

Email: vinita@lupinusa.com

with a copy to:

Lupin Pharmaceuticals, Inc.

Harborplace Tower

111 S. Calvert Street, 21st Floor

Baltimore, MD 21202

Attention: Vinita Gupta

Facsimile: 410.576.2221

Email: vinita@lupinusa.com

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

DLA Piper LLP (US)

The Marbury Building

6225 Smith Avenue

Baltimore, MD 21209

Attention: Howard S. Schwartz, Esq.

Facsimile: (410) 580-3251

Email: howard.schwartz@dlapiper.com

14.9 Entire Agreement; Modifications. This Agreement, together with the Schedules and Exhibits attached hereto, sets forth and constitutes the entire agreement and understanding between the Parties with respect to the subject matter hereof and all prior agreements, understandings, promises and representations, whether written or oral, with respect thereto are superseded hereby. Each Party confirms that it is not relying on any representations or warranties of the other Party except as specifically set forth herein. No amendment, modification, release or discharge shall be binding upon the Parties unless in writing and duly executed by authorized representatives of both Parties.

14.10 English Language. This Agreement shall be written and executed in, and all other communications under or in connection with this Agreement shall be in, the English language. Any translation into any other language shall not be an official version thereof, and in the event of any conflict in interpretation between the English version and such translation, the English version shall control.

14.11 Equitable Relief. The Parties acknowledge and agree that the restrictions set forth in Sections 2.5, 8.2, 8.3, 8.4, 8.5, 8.6, and 8.7 and Article 10 are reasonable and necessary to protect the legitimate interests of the other Party and that such other Party would not have entered into this Agreement in the absence of such restrictions, and that any breach or threatened breach of any provision of Section 2.5, 8.2, 8.3, 8.4, 8.5, 8.6, or 8.7 or Article 10 may result in irreparable injury to such other Party for which there will be no adequate remedy at law. In the event of a breach or threatened breach of any provision of Section 2.5, 8.2, 8.3, 8.4, 8.5, 8.6, or 8.7 or Article 10, the non-breaching Party shall be authorized and entitled to obtain from

56

any court of competent jurisdiction injunctive relief, whether preliminary or permanent, specific performance and an equitable accounting of all earnings, profits and other benefits arising from such breach, which rights shall be cumulative and in addition to any other rights or remedies to which such non-breaching Party may be entitled in law or equity. Both Parties agree to waive, to the maximum extent permitted by Applicable Law, any requirement that the other (a) post a bond or other security as a condition for obtaining any such relief and (b) show irreparable harm, balancing of harms, consideration of the public interest or inadequacy of monetary damages as a remedy. Nothing in this Section 14.11 is intended, or should be construed, to limit either Party’s right to equitable relief or any other remedy for a breach of any other provision of this Agreement.

14.12 Waiver and Non-Exclusion of Remedies. Any term or condition of this Agreement may be waived at any time by the Party that is entitled to the benefit thereof, but no such waiver shall be effective unless set forth in a written instrument duly executed by or on behalf of the Party waiving such term or condition. The waiver by either Party hereto of any right hereunder or of the failure to perform or of a breach by the other Party shall not be deemed a waiver of any other right hereunder or of any other breach or failure by said other Party whether of a similar nature or otherwise.

14.13 No Benefit to Third Parties. The representations, warranties, covenants and agreements set forth in this Agreement are for the sole benefit of the Parties hereto and their successors and permitted assigns, and they shall not be construed as conferring any rights on any other Persons.

14.14 Further Assurance. Each Party shall duly execute and deliver, or cause to be duly executed and delivered, such further instruments and do and cause to be done such further acts and things, including the filing of such assignments, agreements, documents and instruments, as may be necessary or as the other Party may reasonably request in connection with this Agreement or to carry out more effectively the provisions and purposes hereof, or to better assure and confirm unto such other Party its rights and remedies under this Agreement.

14.15 Relationship of the Parties. It is expressly agreed that Lupin, on the one hand, and Salix, on the other hand, shall be independent contractors and that the relationship between the two Parties shall not constitute a partnership, joint venture or agency. Neither Lupin, on the one hand, nor Salix, on the other hand, shall have the authority to make any statements, representations or commitments of any kind, or to take any action, which shall be binding on the other, without the prior written consent of the other Party to do so, such consent not to be unreasonably withheld or delayed. All persons employed by a Party shall be employees of such Party and not of the other Party and all costs and obligations incurred by reason of any such employment shall be for the account and expense of such Party.

14.16 Performance by Affiliates. Each of Lupin and Salix acknowledges that certain obligations under this Agreement may be performed by Affiliates of Lupin and Salix. Each of Lupin and Salix guarantees performance of this Agreement by any of its Affiliates.

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

57

one and the same instrument. This Agreement may be executed by scanned and electronically or facsimile transmitted signatures and such signatures shall be deemed to bind each Party hereto as if they were original signatures.

14.18 Payments; Audits.

14.18.1. Interest on Late Payments. If any payment due to a Party under this Agreement is not paid when due, then the owing Party shall pay interest thereon (before and after any judgment) at an annual rate (but with interest accruing on a daily basis) equal to the lesser of (a) the prime rate as reported on the first Business Day of each month such payment is overdue in The Wall Street Journal, Eastern Edition, plus [*] ([*]) percentage points, and (b) the maximum rate permitted by Applicable Law. Interest payable under this Section 14.18.1 shall run from the day following the date upon which payment of the relevant principal sum became due through the date of payment thereof in full together with such interest.

14.18.2. Audit. Each Party shall have the right to have an independent certified public accounting firm of internationally recognized standing, and reasonably acceptable to the other Party, provided with access by such other Party during normal business hours, and upon reasonable prior written notice, to examine only those records of such other Party (and its Affiliates and Sublicensees) as may be reasonably necessary to determine, with respect to any Calendar Year ending not more than three (3) years prior to the auditing Party’s request, the correctness or completeness of any payment made under this Agreement. Such examinations may not (a) be conducted more than once in any [*] ([*]) month period (unless a previous audit during such [*] ([*]) month period revealed an underpayment with respect to such period or the audited Party restates or revises such books and records for such period) or (b) be repeated for any Calendar Year. Results of such audit shall (i) be (A) limited to information relating to the Licensed Product, (B) made available to both Parties in writing and (C) subject to Article 10 and (ii) not reveal any specific information of the audited Party to the auditing Party other than (A) whether the audited Party is in compliance with its payment obligations under this Agreement and (B) the amount of any additional payment owed to the auditing Party or excess payment reimbursable to the audited Party. Except as provided below, the cost of this examination shall be borne by the auditing Party, unless the audit reveals a variance of more than five percent (5%) from the reported amounts, in which case the audited Party shall bear the cost of the audit. Unless disputed pursuant to Section 14.18.3, if such audit concludes that additional payments were owed or that excess payments were made during such period, the audited Party shall pay the additional amounts, with interest from the date originally due as provided in Section 14.18.1, or the auditing Party shall reimburse such excess payments, with interest from the date of original payment as provided in Section 14.18.1, within sixty (60) days after the date on which such auditor’s written report is delivered to the Parties.

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

58

14.18.3. Audit Dispute. In the event of a Dispute of any audit under Section 14.18.2, Lupin and Salix shall work in good faith to resolve the disagreement. If the Parties are unable to reach a mutually acceptable resolution of any such Dispute within thirty (30) days, the Dispute shall be resolved in accordance with Section 14.7.

14.18.4. Confidentiality. The receiving Party shall treat all information subject to review under this Article 14 in accordance with the confidentiality provisions of Article 10.

14.19 References. Unless otherwise specified, (a) references in this Agreement to any Article, Section, Schedule or Exhibit shall mean references to such Article, Section, Schedule or Exhibit of this Agreement, (b) references in any section to any clause are references to such clause of such section and (c) references to any agreement, instrument or other document in this Agreement refer to such agreement, instrument or other document as originally executed or, if subsequently varied, replaced or supplemented from time to time, as so varied, replaced or supplemented and in effect at the relevant time of reference thereto.

14.20 Construction. Except where the context otherwise requires, wherever used, the singular shall include the plural, the plural the singular, the use of any gender shall be applicable to all genders and the word “or” is used in the inclusive sense (and/or). The captions of this Agreement are for convenience of reference only and in no way define, describe, extend or limit the scope or intent of this Agreement or the intent of any provision contained in this Agreement. The term “including” as used herein shall mean including, without limiting the generality of any description preceding such term. The language of this Agreement shall be deemed to be the language mutually chosen by the Parties and no rule of strict construction shall be applied against either Party hereto.

14.21 Additional Agreements. The Parties acknowledge that they have been pursuing negotiations in respect of an agreement pursuant to which Lupin or its Affiliates will [*]. The Parties confirm their intent to continue such negotiations, but without thereby imposing on either Party to enter into any such agreement or creating any legally binding obligation in respect of any such agreement or the terms thereof unless and until such agreement is fully negotiated and executed and delivered by the parties thereto. Any failure by the Parties to enter into either of the agreements described in the first sentence of this Section 14.21 shall not in any way affect the enforceability and continued validity of this Agreement or the API Agreement.

[The remainder of this page has been intentionally left blank.]

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

59

IN WITNESS WHEREOF, the Parties have executed this Agreement in duplicate originals by their proper officers as of the date first written above.

LUPIN LIMITED		SALIX PHARMACEUTICALS, INC.
By:	/s/  Nilesh Gupta	By:	/s/  Carolyn J. Logan
Name:	Nilesh Gupta	Name:	Carolyn J. Logan
Title:	Group President	Title:	President and CEO

[SIGNATURE PAGE TO DEVELOPMENT, COMMERCIALIZATION AND LICENSE AGREEMENT]

Schedule 6.1

Commercialization Efforts

[*]

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

Schedule 7.1.2

Milestones and Milestone Payments

As set forth in Section 7.1.2, Salix shall pay Lupin the milestone payments set forth on this Schedule 7.1.2 on achievement by Salix or any of its Affiliates or Sublicensees of each of the milestones set forth on Schedule 7.1.2 during the term of this Agreement, within (30) days after the achievement of the relevant milestone.

As set forth in the following table:

	Traveler’s Diarrhea	Hepatic Encephalopathy	Irritable Bowel Syndrome
[*]	[*]	[*]	[*]
[*]	[*]	[*]	[*]
[*]	[*]	[*]	[*]
[*]	[*]	[*]	[*]

Schedule 7.12, Page 1

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

Schedule 8.6

Anti-Stacking

Third Party

1. Alfa Wassermann SpA, its Affiliates, or any of their respective licensees or sublicensees or any other Person claiming rights under any of such Persons

Agreement

Licence Agreement, dated June 24, 1996, by and between Alfa Wassermann SpA and Salix Pharmaceuticals, Inc.

Schedule 8.6, Page 1

Schedule 9.2

Recall and Withdrawal Contact Information

Lupin:

Telephone number: (410) 576-2000

Email address: vinita@lupinusa.com

Facsimile number: (410) 576-2221

Salix:

Telephone number: (919) 862-1044

Email address: Rajesh.kapoor@salix.com

Schedule 9.2, Page 1

Exhibit A

Development Plan

[*]

Exhibit A, Page 1

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

EX-10.68

Exhibit 10.68

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

EXECUTION COPY

RIFAXIMIN

MANUFACTURING AND SUPPLY AGREEMENT

between

SALIX PHARMACEUTICALS, INC.

and

LUPIN LTD.

Dated as of September 30, 2009

TABLE OF CONTENTS

ARTICLE I.		DEFINITIONS	1
ARTICLE II.		MANUFACTURING AND SUPPLY	6
2.1	Purchase and Supply Obligations		6
2.2	Forecasting, Order and Delivery of Compound		7
2.3	Materials		8
2.4	Invoice and Payment		9
2.5	Price		9
2.6	Warranty		9
2.7	Failure or Inability to Supply Compound		10
2.8	Inventory Warehousing		12
2.9	Current Capacity and Scale-Up Plans		12
2.10	Costs and Expenses		12
2.11	Amendment of Specifications		12
2.12	Quality Agreement		13
2.13	Quality Control Analyses and Release		14
2.14	Maintenance of Facility		14
2.15	Regulatory Cooperation of Lupin		14
2.16	Inspection by Salix		15
2.17	Notification of Regulatory Inspections; Communications		15
2.18	Adverse Events		15
2.19	Recalls and Withdrawals		16
2.20	Compliance with Applicable Laws		16
2.21	Retention of Manufacturing Records and Samples		16
2.22	Exclusive Supply Arrangement in Respect of the Territory		17
2.23	Shortages		17
2.24	Second Source		17
ARTICLE III.		INTELLECTUAL PROPERTY	17
3.1	Ownership of Inventions		17
3.2	Prosecution of Invention Patents		18
3.3	United States Law		18
3.4	Corporate Names		19
ARTICLE IV.		REPRESENTATIONS AND WARRANTIES; COVENANTS	19
4.1	Representations and Warranties of Each Party		19
4.2	Disclaimer of Other Warranties		20
ARTICLE V.		CONFIDENTIALITY	20
5.1	Confidential Information		20
5.2	Exceptions to Confidentiality		20
5.3	Disclosure		21
5.4	Notification		21
5.5	Remedies		21

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5.6	Use of Names		22
5.7	Press Releases		22
ARTICLE VI.		TERM AND TERMINATION	22
6.1	Term		22
6.2	Termination		22
6.3	Effect of Expiration or Termination		23
ARTICLE VII.		INDEMNIFICATION	24
7.1	Lupin Indemnification		24
7.2	Salix Indemnification		25
7.3	Indemnification Procedure		25
7.4	Insurance		27
7.5	Limitation on Damages		27
ARTICLE VIII.		MISCELLANEOUS	28
8.1	Notices		28
8.2	Force Majeure		29
8.3	Entire Agreement; Amendment		29
8.4	Further Assurances		29
8.5	Successors and Assigns		30
8.6	Dispute Resolution		30
8.7	Governing Law; Jurisdiction; Venue; Service		30
8.8	Audit; Late Payments		31
8.9	Third Party Beneficiaries		32
8.10	Export Control		32
8.11	Assignment		32
8.12	Waiver		33
8.13	Severability		33
8.14	Independent Contractors		33
8.15	Construction		33
8.16	Remedies		34
8.17	Counterparts; Facsimile Execution		34
8.18	English Language		34
Schedules and Exhibits
Schedule 2.9(a)		Current Capacity

-ii-

This RIFAXIMIN MANUFACTURING AND SUPPLY AGREEMENT (this “Agreement”), dated as of September 30, 2009 (the “Effective Date”), is made by and between Salix Pharmaceuticals, Inc., a California corporation (“Salix”), and Lupin Ltd., a corporation organized under the laws of India (“Lupin”). Salix and Lupin are sometimes referred to herein individually as a “Party” and collectively as the “Parties.”

RECITALS

WHEREAS, subject to the terms and conditions set forth in this Agreement, Salix wishes to have Lupin manufacture and supply the Compound (as defined below) for Salix, and Lupin wishes to manufacture and supply the Compound for Salix;

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

ARTICLE I. DEFINITIONS

As used herein, the following terms shall have the following meanings:

1.1 “Adverse Event” means (a) any finding from tests in laboratory animals or in vitro that suggests a significant risk for human subjects including reports of mutagenicity, teratogenicity or carcinogenicity, (b) any undesirable, untoward or noxious event or experience associated with the clinical, commercial or other use, or occurring following application of a Product to humans, whether expected and whether considered related to or caused by such Product, including such an event or experience as occurs in the course of the use of such Product in professional practice, in a clinical trial, whether accidental or intentional, from abuse, from withdrawal or from a failure of expected therapeutic action of such Product, and (c) those events or experiences that are required to be reported to the Regulatory Authorities under corresponding Applicable Law.

1.2 “Affiliate” of a Person means any other Person that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with, such first Person. “Control” and, with correlative meanings, the terms “controlled by” and “under common control with”, means to possess the power to direct the management or policies of a Person, whether through ownership of voting securities or by contract or otherwise.

1.3 “Agreement” has the meaning set forth in the preamble hereto.

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

1.5 [*]

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

1.6 “Calendar Quarter” means each period of three consecutive months commencing on January 1, April 1, July 1, and October 1.

1.7 “Calendar Year” means each successive period of twelve (12) consecutive calendar months commencing on January 1 and ending on December 31, except that the first Calendar Year of the Term shall commence on the Effective Date and end on December 31, 2009, and the last Calendar Year of the Term shall commence on January 1 of the year in which the Term ends and end on the last day of the Term.

1.8 “Capacity” means the capacity of Lupin’s plant, equipment and process to conduct the Manufacturing process and, having due regard for Lupin’s own requirements of Compound and for any commitments that it may have made to supply Compound to other Persons, to supply Compound to Salix in accordance with the terms hereof.

1.9 “Certificate of Analysis” has the meaning set forth in the Quality Agreement.

1.10 “Certificate of Compliance” has the meaning set forth in the Quality Agreement.

1.11 “CMC Data” means the chemistry, manufacturing and controls data required by Applicable Law to be included in a New Drug Application (as defined in the FFDCA and the regulations promulgated thereunder) for a Product or in any other Marketing Authorization outside the United States.

1.12 “Compound” means the active pharmaceutical entity rifaximin, which is [*], and all complexes, mixtures and other combinations, prodrugs, metabolites, enantiomers, polymorphs, salt forms, racemates, and isomers thereof, or any derivatives of any of the foregoing.

1.13 “Compound Inventions” has the meaning set forth in Section 3.1.

1.14 “Confidential Information” means any and all information or material that, at any time before or after the Effective Date, has been or is provided or communicated to the Receiving Party by or on behalf of the Disclosing Party (including by a third party) pursuant to this Agreement or in connection with the transactions contemplated hereby or any discussions or negotiations with respect thereto; any data, ideas, concepts or techniques contained therein; and any modifications thereof or derivations therefrom. Confidential Information may be disclosed either orally, visually, electronically, in writing, by delivery of materials containing Confidential Information or in any other form now known or hereafter invented.

1.15 “Corporate Names” means such Trademarks and corporate names and logos Controlled (as defined in the License Agreement) by Lupin as Lupin may designate in writing from time to time, together with any variations and derivatives thereof.

1.16 “Courts” has the meaning set forth in Section 8.7(b).

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

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1.17 “Covered Quarter” has the meaning set forth in Section 2.1(b).

1.18 “Current Capacity” has the meaning set forth in Section 2.9(a).

1.19 “Disclosing Party” means the Party disclosing Confidential Information.

1.20 “Dispute” has the meaning set forth in Section 8.6.

1.21 “Drug Master File” means any drug master file filed with the FDA with respect to the Compound.

1.22 “Effective Date” has the meaning set forth in the preamble hereto.

1.23 “Excluded Lists” means the Department of Health and Human Service’s List of Excluded Individuals/Entities and the General Services Administration’s Lists of Parties Excluded from Federal Procurement and Non-Procurement Programs.

1.24 “Exploit” means to make, have made, import, use, sell, offer for sale or otherwise dispose of a compound, product or process, including all discovery, research, development, commercialization, registration, modification, enhancement, improvement, Manufacture, storage, formulation, optimization, exportation, transportation, distribution, promotion and marketing of such compound, product or process.

1.25 “Facility” means the Manufacturing facility of Lupin located at [*].

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

1.27 “FFDCA” has the meaning set forth in Section 2.6.

1.28 “Firm Forecast” has the meaning set forth in Section 2.2(b).

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

1.30 “GMP” means the current good manufacturing practices applicable from time to time to the Manufacturing of Compound pursuant to Applicable Law.

1.31 “Indemnification Claim Notice” has the meaning set forth in Section 7.3(a).

1.32 “Indemnified Party” has the meaning set forth in Section 7.3(a).

1.33 “Indemnifying Party” has the meaning set forth in Section 7.3(a).

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

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

3

1.35 “Invention” means any discovery, improvement, process, formula, data, invention, know-how, trade secret, procedure, device, or other intellectual property, whether or not patentable, including any enhancement in the manufacture, formulation, ingredients, preparation, presentation, means of delivery, dosage or packaging of a compound or product or any discovery or development of a new indication for a compound or product.

1.36 “Joint Invention” means any Invention that is conceived, discovered, developed or otherwise made jointly by or on behalf of the Parties as a result of or in connection with this Agreement.

1.37 “Joint Invention Patent” has the meaning set forth in Section 3.2.

1.38 “Launch Date” means the first date on which Salix anticipates requiring commercial supply of Compound hereunder.

1.39 “License Agreement” means that certain Development, Commercialization and License Agreement between the Parties of even date herewith.

1.40 “Losses” has the meaning set forth in Section 7.1.

1.41 “Lupin” has the meaning set forth in the preamble hereto.

1.42 “Lupin Indemnified Parties” has the meaning set forth in Section 7.2.

1.43 “Manufacture” and “Manufacturing” means the manufacturing, processing, formulating, packaging, labeling, holding and quality control testing of a pharmaceutical product or compound.

1.44 “Marketing Authorization” means an approved New Drug Application as defined in the FFDCA and the regulations promulgated thereunder, or any corresponding foreign application, registration or certification, necessary or reasonably useful to market any Product in a country or regulatory jurisdiction in the Territory other than the United States, including applicable pricing and reimbursement approvals.

1.45 “Material(s)” means all ingredients, raw materials, packaging and labeling components, and all other supplies of any kind, required or used in connection with the Manufacturing of the Compound.

1.46 “Other Product Entry” means the commercial sale or distribution by any Person other than Salix or an Affiliate thereof of an unauthorized generic version of any Product in the Territory (which generic version is not subject to any restraining order or other injunction which would prevent it from being sold or distributed in the Territory).

1.47 “Party” and “Parties” has the meaning set forth in the preamble hereto.

1.48 “Person” means an individual, sole proprietorship, partnership, limited partnership, limited liability partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture or other similar entity or

4

organization, including a government or political subdivision, department or agency of a government.

1.49 “Policies” has the meaning set forth in Section 7.4(a).

1.50 “Products” means (a) Salix’s XIFAXAN^® product as currently marketed by Salix in the Territory, (b) any new immediate release dosage forms thereof that may receive Regulatory Approval in respect of the Territory during the Term and (c) any generic product in respect of any of the foregoing that may be authorized by Salix during the Term.

1.51 “Purchase Order” means a written purchase order that sets forth, with respect to the period covered thereby, (a) the quantities of Compound to be delivered by Lupin to Salix and (b) the required delivery dates therefor.

1.52 “Purchase Price” has the meaning set forth in Section 2.5(a).

1.53 “Quality Agreement” means the quality assurance agreement to be agreed between the Parties relating to the Manufacture of the Compound in accordance with Section 2.12, as such agreement shall be amended from time to time.

1.54 “Receiving Party” means the Party receiving Confidential Information.

1.55 “Recipients” has the meaning set forth in Section 5.1.

1.56 “Regulatory Approval” means, with respect to any particular country or other jurisdiction, any and all approvals, licenses, registrations or authorizations of any Regulatory Authority necessary for the Exploitation of a Product in such country or jurisdiction, including, where applicable, (a) approval of a Product in such country or jurisdiction, including any Marketing Authorization and supplements and amendments thereto; (b) pre- and post-approval marketing authorizations (including any prerequisite Manufacturing approval or authorization related thereto); (c) labeling approval; and (d) technical, medical and scientific licenses.

1.57 “Regulatory Authority” means any applicable supra-national, federal, national, regional, state, provincial or local regulatory agencies, departments, bureaus, commissions, councils or other government entities regulating or otherwise exercising authority with respect to the Exploitation of the Compound or a Product in any country or other jurisdiction.

1.58 “Regulatory Documentation” means (a) submissions to any Regulatory Authority, including investigational new drug applications, New Drug Applications (as defined in the FFDCA and the regulations promulgated thereunder), Drug Master Files, correspondence with regulatory agencies (registrations and licenses, regulatory drug lists, advertising and promotion documents), period safety update reports, adverse event files, complaint files and manufacturing records and, if applicable, any updates or supplements to any of the foregoing and (b) any minutes or contact logs with respect to any telephone conferences or in-person meetings conducted with any Regulatory Authority relating to the subject matter described in clause (a) of this sentence.

1.59 “Salix” has the meaning set forth in the preamble hereto.

5

1.60 “Salix Indemnified Parties” has the meaning set forth in Section 7.1.

1.61 “Salix Information” means all technical, scientific and other know-how and information, trade secrets, knowledge, technology, means, methods, processes, practices, formulae, instructions, skills, techniques, procedures, technical assistance, designs, assembly procedures, specifications, assays, test methods, analytical methods, and other material or information owned or controlled by Salix and its Affiliates and necessary or useful in the Manufacture of the Compound (including information received from a third party).

1.62 “Salix Purchase Commitment” in respect of a given Calendar Quarter means fifty percent (50%) of Salix’s requirements for Compound in such Calendar Quarter for the manufacture of Products for sale in the Territory.

1.63 “Scale-Up Plans” has the meaning set forth in Section 2.9(c).

1.64 “Specifications” means the specifications for the Compound to be reasonably agreed upon between the Parties, as the same may be amended from time to time in accordance with the terms hereof.

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

1.66 “Territory” means the United States.

1.67 “Testing Laboratory” has the meaning set forth in Section 2.7(e).

1.68 “Third Party Claim” has the meaning set forth in Section 7.3(b).

1.69 “Trademark” shall include any word, name, symbol, color, designation or device or any combination thereof, including any trademark, trade dress, brand mark, service mark, trade name, brand name, logo or business symbol, whether or not registered.

1.70 “United States” means the United States of America, its territories and possessions (including Puerto Rico).

ARTICLE II. MANUFACTURING AND SUPPLY

2.1 Purchase and Supply Obligations.

(a) Subject to the terms and conditions hereof, Lupin shall Manufacture and supply to Salix such quantities of Compound as Salix may order in accordance with the terms hereof from time to time during the Term.

(b) Salix hereby covenants and agrees that, during the Term, it shall purchase from Lupin the Salix Purchase Commitment. Salix shall provide, within thirty (30) days of the end of each Calendar Quarter, a certification that it has purchased its Salix Purchase Commitment for such Calendar Quarter, along with sufficient backup documentation of such fact. Lupin shall have the right to audit Salix’s records to confirm that Salix has purchased the Salix Purchase Commitment, pursuant to Section 8.8. In the

6

event that as of the end of any Calendar Quarter during the Term commencing on or after January 1, 2010 (a “Covered Quarter”), Salix’s purchases of Compound pursuant to this Agreement during such Calendar Quarter are less than the Salix Purchase Commitment in such Calendar Quarter, then Salix shall, within thirty (30) days following the end of such Calendar Quarter, pay to Lupin an amount equal to the product obtained by multiplying (i) the difference between the Salix Purchase Commitment and Salix’s purchases of Compound pursuant to this Agreement during such Calendar Quarter by (ii) the Purchase Price. With respect to the Calendar Quarter ending December 31, 2009, Salix shall, within thirty (30) days following the end of such Calendar Quarter, pay to Lupin an amount equal to (a)(i) Salix’s requirements for Compound in 2009 for the manufacture of Products for sale in the Territory divided by (ii) eight (8) multiplied by (b) the Purchase Price; provided, that Salix may, at its election, make such payment prior to December 31, 2009 based on its reasonable estimate of its requirements for 2009, so long as within thirty (30) days following the end of such Calendar Quarter it makes Lupin whole for any difference between such estimated requirements and Salix’s actual requirements for 2009.

(c) Lupin shall have the right, pursuant to and in accordance with Section 8.8, to audit Salix’s records to confirm that Salix has made all payments required to be made by it by the provisions of clause (b).

(d) Notwithstanding anything in this Section 2.1 to the contrary, during the [*] ([*])[*] prior to the Launch Date, Salix may at any time submit Purchase Orders for Compound solely for the purpose of qualifying then-existing Salix Products and Lupin shall use its commercially reasonable efforts to fulfill such orders. Any such Purchase Orders shall be subject to the pricing set forth in Section 2.5 but shall not be subject to the forecasting requirements set forth in Section 2.2.

2.2 Forecasting, Order and Delivery of Compound.

(a) At least [*] ([*]) days prior to the first day of each Calendar Year during the Term, commencing with the Calendar Year in which the Launch Date is anticipated to occur, Salix shall deliver to Lupin a written good faith forecast estimating, on a quarterly basis, the quantities of Compound that Salix expects to purchase from Lupin during such Calendar Year (each, an “Informational Forecast”); provided that in the event that the Launch Date is anticipated to occur in Calendar Year 2009, Salix shall deliver to Lupin the Informational Forecast in respect of Calendar Year 2009 on a date reasonably agreed by the Parties. Each Informational Forecast shall be non-binding and shall be used by Lupin for planning purposes only.

(b) Commencing with a month that is at least [*] ([*]) months prior to the month in which the Launch Date is anticipated to occur, on the fifteenth (15^th) day of each month (or, at Salix’s discretion, at any time from the eighth (8^th) day of such month up to and including the twenty-second (22^nd ) day of such month), Salix shall deliver to Lupin a written good faith forecast estimating the quantities of Compound that Salix

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

7

expects to purchase from Lupin for each month during the following [*] ([*]) months (each, a “Forecast”). The first [*] ([*]) months of each Forecast shall be a “Firm Forecast”. Except as provided in clause (c) below, each Forecast shall be non-binding and shall be used by Lupin for planning purposes only.

(c) Without duplication of any previously delivered Purchase Order, each Firm Forecast shall be accompanied by a Purchase Order for Compound to be delivered to Salix during each of the first [*] ([*]) months, respectively, set forth in such Firm Forecast. The quantity of Compound specified in any Purchase Order for delivery in any month (i) shall be in multiples of the full production lots of Compound, such full production lot sizes to be mutually agreed following determination of the Specifications, (ii) shall not be more than [*] percent ([*]%) of the quantities specified in the most recent Firm Forecast applicable to such month, and (iii) shall, unless otherwise agreed by Lupin in writing, be consistent with Lupin’s Current Capacity (or any increased capacity available to Lupin as of the Launch Date or as subsequently agreed pursuant to a Scale-Up Plan).

(d) With respect to each Purchase Order, Salix shall be obligated to purchase, and Lupin shall be obligated to deliver, by the required delivery date set forth therein such quantities of Compound as are set forth therein. In the event that the terms of any Purchase Order are not consistent with or are in addition to the teens of this Agreement, the terms of this Agreement shall prevail.

(e) Lupin shall deliver the quantities of Compound set forth in each Purchase Order by the required delivery date set forth in such Purchase Order [*] (as defined in Incoterms 2000) the port of entry designated by Salix; provided, however, that (i) Lupin shall only engage such carriage, insurance or other providers in connection with such delivery as are designated by Salix in the applicable Purchase Order, (ii) [*] shall bear costs and expenses for (A) carriage and insurance of the Compound from the Facility and (B) clearance of Compound through customs in the destination country and (iii) in the event any claim arises against any such carriage, insurance or other provider, Lupin, as promptly as possible, shall assign such claim to Salix. All Compound shall be labeled in accordance with Applicable Law and packed for shipping in accordance with packing instructions provided by Salix. Title to and risk of loss of Compound shall pass to Salix at [*].

(f) Each delivery of Compound shall be accompanied by (i) a Certificate of Analysis, (ii) a Certificate of Compliance, (iii) such other documents as may be required pursuant to the Quality Agreement, and (iv) documentation necessary for the sale or export of the Compound.

2.3 Materials.

(a) Lupin shall maintain an inventory of Materials in sufficient quantities, and shall use commercially reasonable efforts to supply Salix with quantities

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

8

of Compound that are up to [*] percent ([*]%) of the quantities specified in each Firm Forecast.

(b) Lupin shall be responsible for auditing and qualifying its supplier(s) of Materials and obtaining supplies of Materials in accordance with the Specifications. All Materials shall conform to the applicable specifications or Drug Master File, as further referenced in Regulatory Documentation owned or filed by or on behalf of Salix in respect of any Product.

2.4 Invoice and Payment. Lupin promptly shall invoice Salix for all quantities of Compound delivered in accordance herewith. Payment with respect to Compound delivered shall be due [*] ([*]) days after delivery to Salix of the invoice with respect thereto (which shall be deemed to be delivered as of the date of shipment, if delivered prior to shipment, and shall be sent in electronic form contemporaneously with such delivery); provided that if Salix rejects such Compound pursuant to Section 2.7, then payment shall be due within [*] ([*]) days after receipt by Salix of notice from the Testing Laboratory that the invoiced Compound is conforming or, subject to Section 2.7, receipt by Salix of replacement Compound, as the case may be; provided further that if Salix disputes any portion of an invoice, it shall pay the undisputed portion and shall provide Lupin with written notice of the disputed portion and its reasons therefor, and Salix shall not be obligated to pay such disputed portion. The Parties shall use good faith efforts to resolve any such disputes promptly. In the event of any inconsistency between an invoice and this Agreement, the terms of this Agreement shall control. Payment of invoices shall be made by wire transfer to an account designated in writing by Lupin in United States Dollars. If any currency conversion shall be required in connection with any payment hereunder, such conversion shall be made each calendar quarter using an exchange rate that is the arithmetic average of the daily exchange rates (obtained as described below) during such calendar quarter. Each daily exchange rate shall be obtained from The Wall Street Journal, Eastern United States Edition, or, if not so available, as otherwise agreed by the Parties.

2.5 Price.

(a) The purchase price (the “Purchase Price”) for all Compound to be delivered hereunder shall be determined as set forth in this Section 2.5.

(b) Beginning with Salix’s delivery of its first Forecast pursuant to Section 2.2(b) and continuing thereafter, the Purchase Price shall equal [*] United States Dollars ($[*]) per kilogram of Compound.

2.6 Warranty. In connection with each delivery of Compound to Salix hereunder, Lupin hereby represents and warrants to Salix as of the date of the delivery of such Compound to Salix as follows: (a) such Compound is in conformity with the Specifications and the Certificate of Analysis therefor provided pursuant to Section 2.2(f); (b) such Compound has been Manufactured in conformance with GMP, all other Applicable Law, this Agreement and the Quality Agreement; (c) title to such Compound will pass to Salix free and clear of any security interest, lien or other encumbrance; (d) such Compound has been Manufactured in facilities that

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

9

are in compliance with all Applicable Law at the time of such Manufacture (including applicable inspection requirements of FDA and other Regulatory Authorities); (e) the expiration date of such Compound is no earlier than [*] ([*]) months after the date of delivery thereof for Compound as defined in the specifications set forth in Lupin’s Drug Master File for the Compound as of the Effective Date or, with respect to Compound for which the Specifications have been amended, such period of time reasonably agreed to by the Parties after the date of delivery thereof (or, in either case, such longer period after the date of delivery thereof as may be supported by ongoing stability studies); (f) such Compound has not been adulterated or misbranded under the Federal Food, Drug, and Cosmetic Act, as amended (the “FFDCA”), and similar provisions of other Applicable Law; (g) such Compound may be introduced into interstate commerce pursuant to the FFDCA and similar provisions of other Applicable Law; and (h) neither Lupin nor any of its Affiliates has been debarred or is subject to debarment pursuant to Section 306 of the FFDCA or listed on either Excluded List.

2.7 Failure or Inability to Supply Compound.

(a) In the event that Lupin, at any time during the Term, shall have reason to believe that it will be unable to supply Salix with the full quantity of Compound forecasted to be ordered or actually ordered by Salix in a timely manner and in conformity with the warranty set forth in Section 2.6 (whether by reason of force majeure or otherwise), Lupin shall, as promptly as possible, notify Salix thereof (and, in any event, shall use commercially reasonable efforts to provide at least [*] ([*]) days’ advance notice thereof to Salix). Promptly thereafter, the Parties shall meet to discuss how Salix shall obtain such full quantity of conforming Compound. Compliance by Lupin with this Section 2.7(a) shall not relieve Lupin of any other obligation or liability under this Agreement, including any obligation or liability under Section 2.7(b), (c), or (d).

(b) If Lupin fails to deliver the full quantity of Compound specified in a Purchase Order by [*] ([*]) days after the required delivery date specified therein and in conformity with the warranty set forth in Section 2.6, then Salix may, at its option, (i) cancel all or any portion of such Purchase Order, in which event Salix shall have no liability with respect to the portion of such Purchase Order so cancelled, or (ii) accept late delivery of all or any portion of the Compound specified in such Purchase Order.

(c) If Lupin fails to deliver the full quantity of Compound specified in a Purchase Order by [*] ([*]) days after the required delivery date specified therein and in conformity with the warranty set forth in Section 2.6, then Salix may, at its option, (i) cancel all or any portion of such Purchase Order, in which event Salix shall have no liability with respect to the portion of such Purchase Order so cancelled, or (ii) accept late delivery of all or any portion of the Compound specified in such Purchase Order, in which event the Purchase Price otherwise payable by Salix with respect to all Compound accepted by Salix under such Purchase Order shall be reduced by [*] percent ([*]%).

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

10

(d) If Lupin fails to deliver the full quantity of Compound specified in a Purchase Order by [*] ([*]) days after the required delivery date specified therein and in conformity with the warranty set forth in Section 2.6, then Salix may, at its option, (i) accept late delivery of all or any portion of the Compound specified in such Purchase Order, in which event the Purchase Price otherwise payable by Salix with respect to all Compound accepted by Salix under such Purchase Order shall be reduced by [*] percent ([*]%) or (ii) provide written notice to Lupin of its intention to qualify a third party manufacturer for the Compound, in which event Lupin shall use its commercially reasonable efforts promptly to assist Salix to qualify such third party manufacturer designated by Salix to Manufacture the Compound, and shall promptly grant to such third party manufacturer, on a royalty-free, non-exclusive basis, such licenses, and provide to such third party manufacturer, free of charge, such technical assistance, as such third party manufacturer may require in order to Manufacture the Compound to the then-current Specifications in accordance with the then-current Manufacturing process for the Compound, including full technology transfer of the then-current Manufacturing process for the Compound, in all cases solely for the purposes of Salix’s production of Products.

(e) In the event that Salix determines, within [*] ([*]) days after delivery thereof by Lupin (or within [*] ([*]) days after discovery of any nonconformity that could not reasonably have been detected by a customary inspection on delivery), that any Compound supplied by Lupin does not conform to the warranty set forth in Section 2.6, Salix shall give Lupin notice thereof (including a sample of such Compound, if applicable). Lupin shall undertake appropriate evaluation of such sample and shall notify Salix whether it has confirmed such nonconformity within [*] ([*]) days after receipt of such notice from Salix. If Lupin notifies Salix that it has not confirmed such nonconformity, the Parties shall submit the dispute to an independent testing laboratory or other appropriate expert mutually acceptable to the Parties (the “Testing Laboratory”) for evaluation. Both Parties shall cooperate with the Testing Laboratory’s reasonable requests for assistance in connection with its evaluation hereunder. The findings of the Testing Laboratory shall be binding on the Parties, absent manifest error. The expenses of the Testing Laboratory shall be borne by Lupin if the testing confirms the nonconformity and otherwise by Salix. If the Testing Laboratory or Lupin confirms that a lot of Compound does not conform to the warranty set forth in Section 2.6, Lupin, at Salix’s option, promptly shall (i) supply Salix with a conforming quantity of Compound at Lupin’s expense or (ii) reimburse Salix for the Purchase Price paid by Salix with respect to such nonconforming Compound if already paid. In addition, Lupin promptly shall reimburse Salix for all costs incurred by Salix with respect to such nonconforming Compound. Salix shall have the right to offset any such costs against any payments owed by Salix to Lupin under this Agreement. Lupin immediately shall notify Salix if at any time it discovers that any Compound delivered hereunder does not conform to the warranty set forth in Section 2.6.

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

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(f) For purposes of this Section 2.7, delivery of [*] percent ([*]%) or more of the Compound ordered pursuant to any Purchase Order shall constitute “full delivery.”

2.8 Inventory Warehousing. Following delivery by Lupin, Salix agrees to maintain the Compound at a facility that is temperature and humidity controlled. Salix agrees to inspect the facility where the Compound is held or stored, and keep records of such inspection in accordance with Salix’s standard operating procedures, which records may be requested by Lupin for cause.

2.9 Current Capacity and Scale-Up Plans.

(a) Lupin represents and warrants to Salix that Lupin’s Capacity as of the Effective Date (based on the specifications for the Compound set forth in Lupin’s Drug Master File as of the Effective Date) is as set forth on Schedule 2.9(a) (the “Current Capacity”).

(b) Lupin agrees that at all times during the Term it will not, unless otherwise agreed in writing by Salix, allow its Capacity to be less than the Current Capacity (or any increased capacity, to the extent Lupin has determined in its sole discretion to make it available as of the Launch Date, or as subsequently agreed pursuant to any Scale-Up Plans). Without limiting the foregoing sentence, Lupin agrees that it will not at any time during the Term enter into any commitment to sell or otherwise supply Compound (or product containing Compound) to any third party that would cause its Capacity to be less than the Current Capacity (or any increased capacity, to the extent Lupin has determined in its sole discretion to make it available as of the Launch Date, or as subsequently agreed pursuant to any Scale-Up Plans).

(c) In the event that at any time during the Term Salix contemplates that its annual requirements of the Compound are likely to exceed the Current Capacity (or any increased Capacity as of such date), Salix shall promptly notify Lupin of that fact and the Parties shall thereafter discuss in good faith plans to increase Lupin’s Capacity in respect of the Compound so as to meet Salix’s anticipated needs (as mutually agreed upon in writing, the “Scale-Up Plans”). Lupin agrees to implement any mutually agreed upon Scale-Up Plan as promptly as possible.

(d) As of [*] ([*])[*] prior to the Launch Date, Lupin shall provide Salix with a certificate that, to the best of its knowledge, it will have sufficient Capacity as of the Launch Date to fulfill its supply obligations hereunder.

2.10 Costs and Expenses. Except as otherwise explicitly set forth herein, Lupin shall be solely responsible for all costs and expenses incurred in connection with the Manufacture of Compound hereunder, including costs and expenses of personnel, quality control testing, Manufacturing facilities and equipment, and Materials.

2.11 Amendment of Specifications.

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

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(a) Salix may amend, modify or supplement the Specifications, the Manufacturing process, or the test methods for the Compound as determined by Salix, unilaterally and in its sole discretion, to be necessary or appropriate in order to comply with any Regulatory Approval, GMP and all other Applicable Law and compendia. Salix may not amend, modify or supplement the Specifications, the Manufacturing process, or the test methods for the Compound for any other purpose without Lupin’s written consent, not to be unreasonably withheld. Salix promptly shall provide Lupin with appropriate documentation relating to any such changes to the Specifications or Manufacturing process to the extent that such changes affect Lupin’s Manufacturing of the Compound hereunder.

(b) Lupin shall not amend, modify or supplement the Specifications, the Manufacturing process, or the test methods for the Compound or any Materials or sources of Materials used in connection with Manufacturing the Compound without the prior written consent of Salix, not to be unreasonably withheld.

(c) In the event that any amendment to the Specifications, the Manufacturing process, or the test methods for the Compound adversely affects Lupin’s ability to maintain its Capacity at the Current Capacity (or any increased capacity available to Lupin as of the Launch Date or as subsequently agreed pursuant to a Scale-Up Plan) the Parties shall discuss in good faith a Scale-Up Plan to address such shortfall in Capacity and Lupin shall implement any mutually agreed Scale-Up Plan as promptly as possible.

(d) [*] shall reimburse [*] for reasonable expenses that are actually incurred by [*] in connection with any material amendment of the Specifications or the Manufacturing process for the Compound required by [*] pursuant to Section 2.11(a), including reasonable costs of capital equipment and process upgrades and obsolescence of Materials, goods-in-process, and finished goods not suitable for other use in the business or operations of [*] or any of its Affiliates; provided, however, that [*] liability for such reimbursement shall be limited to levels of inventory that are consistent with the most recent Firm Forecast; and further provided, that Salix and Lupin shall engage in good faith discussions regarding the amount of such expenses.

(e) [*] shall be solely responsible for any and all increased costs or expenses incurred by it or [*] as a result of any amendment of the Specifications or the Manufacturing process for the Compound (i) requested by [*] and consented to in writing by [*] or (ii) required by [*] as a result of [*] failure to Manufacture the Compound in conformity with the warranty set forth in Section 2.6.

2.12 Quality Agreement. Within [*] ([*]) days after the Effective Date, and in any event, prior to any commercial sale of the Compound, Salix and Lupin shall prepare and enter into a reasonable and customary quality assurance agreement that shall set forth the terms and conditions upon which Lupin will conduct its quality activities in connection with this

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

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Agreement (the “Quality Agreement”). Each Party shall duly and punctually perform all of its obligations under the Quality Agreement.

2.13 Quality Control Analyses and Release. Lupin shall be responsible for all quality control analyses of the Compound and all Compound shall be released by Lupin, in each case in accordance with the terms of the Quality Agreement.

2.14 Maintenance of Facility.

(a) Except as otherwise approved in writing by Salix, Lupin shall Manufacture the Compound exclusively at the Facility.

(b) Lupin shall ensure that any and all licenses, registrations, and Regulatory Authority approvals required by Applicable Law to be obtained in connection with the Facility and equipment used in connection with the Manufacture of the Compound by Lupin so as to permit Lupin to Manufacture Compound and supply it to Salix as contemplated hereunder have been obtained and are in all respects current and in full force and effect.

(c) Lupin shall at all times during the Term maintain the Facility and such equipment in a state of repair and operating efficiency consistent with the requirements of the Specifications, the Regulatory Approvals, GMP and all other Applicable Law.

(d) Lupin shall maintain in the Facility adequate and segregated holding accommodations for the Compound manufactured for Salix hereunder as and to the extent required by the Specifications, the Regulatory Approvals, GMP and all other Applicable Law.

(e) Lupin shall only use disposal services or sites that have appropriate environmental permits and are in compliance with Applicable Law.

2.15 Regulatory Cooperation of Lupin. Lupin shall cooperate with any reasonable requests for assistance from Salix with respect to obtaining and maintaining any and all Regulatory Approvals required in connection with the sourcing of Compound by Salix hereunder and the sale of Products in the Territory, including by:

(a) [*] making [*] employees, consultants and other staff available upon reasonable notice during normal business hours to attend meetings with Regulatory Authorities concerning the Compound and Products;

(b) [*] disclosing and making available to Salix, in whatever form Salix may reasonably request, all Manufacturing and quality control data, CMC Data and other information related to the Compound and the Manufacturing process therefor as is reasonably necessary or desirable to prepare, file, obtain and maintain any Regulatory

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

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Approval required in connection with the sourcing of Compound by Salix hereunder and the sale of Products in the Territory; and

(c) [*] (i) preparing, in accordance with Applicable Law, a Drug Master File in respect of the Compound and filing each such Drug Master File with the FDA and those Regulatory Authorities (other than the FDA) designated by Salix, as applicable, and (ii) providing to Salix a copy of the open portion of each such Drug Master File.

2.16 Inspection by Salix. Lupin agrees that Salix and its agents (so long as such agents have entered into binding confidentiality agreements with Salix providing for obligations no less strict than Salix’s confidentiality obligations to Lupin hereunder) shall have the right, as required by Applicable Law or otherwise [*] each Calendar Year, or otherwise for cause, upon reasonable prior notice to Lupin and during normal business hours, to inspect the Facility as well as the Manufacturing of the Compound, including inspection of (a) the Materials used in the Manufacture of the Compound, (b) the holding facilities for such Materials, (c) the equipment used in the Manufacture of the Compound, and (d) all records relating to such Manufacturing and the Facility (to the extent they relate to the Compound). Following such audit, Salix shall discuss its observations and conclusions with Lupin and Lupin shall implement such corrective actions as may be reasonably determined by Salix within [*] ([*]) days after notification thereof by Salix or such longer period as may be agreed by the Parties.

2.17 Notification of Regulatory Inspections; Communications. Lupin shall notify Salix by telephone within twenty-four (24) hours, and in writing within two (2) business days, after learning of any proposed visit to, or inspection of, the Facility by any Regulatory Authority and immediately by telephone after learning of any unannounced visit to, or inspection of, the Facility by any Regulatory Authority, in each case relating to the Compound or any equipment or Manufacturing process used in connection with the Manufacture of the Compound. Lupin shall [*] any report and other written communications received from such Regulatory Authority in connection with such visit or inspection, in each case relating to the Compound or any equipment or Manufacturing process used in connection with the Manufacture of the Compound, within [*] ([*]) business days after receipt thereof and shall consult with Salix concerning the response of Lupin to each such communication. Lupin shall [*] as soon as reasonably practicable. The Parties acknowledge and agree that [*] has the sole right to determine the contents and form of any communication with, or response to, FDA. Lupin covenants that such communications with, and responses to, FDA shall not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make such communication or response not misleading.

2.18 Adverse Events. Salix shall promptly notify Lupin of any information that comes to Salix’s attention concerning any Adverse Event, including any serious or unexpected symptoms (e.g. nausea, chest pain), signs (e.g., tachycardia, enlarged liver) or the abnormal results of an investigation (e.g., laboratory findings, electrocardiogram), including any unfavorable side effect, injury, toxicity or sensitivity reaction, or any unexpected incidence, and the severity thereof, associated with the clinical uses, studies, investigations, tests and marketing of the Compound or a Product.

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

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2.19 Recalls and Withdrawals. Lupin promptly shall reimburse Salix for all costs incurred by Salix in connection with recalls, market withdrawals, and returns and destruction of Product containing any nonconforming Compound (as determined pursuant to Section 2.7(e)) as and to the extent such recalls, market withdrawals, and returns and destruction of Product result from Lupin’s breach of its obligations under this Agreement or negligence or willful misconduct. Salix shall have the right to offset any such costs against any payments owed by Salix to Lupin under this Agreement.

2.20 Compliance with Applicable Laws. Lupin shall strictly comply, and shall cause each of its Materials suppliers to strictly comply, with GMP and all other Applicable Law in carrying out the Manufacturing of the Compound and its other duties and obligations under this Agreement, including those relating to environmental matters, public health, wages, hours and conditions of employment, subcontractor selection, discrimination and occupational health/safety. Without limiting the foregoing, Lupin covenants that neither Lupin nor any of its permitted subcontractors shall utilize child, or any form of forced or involuntary, labor in the Manufacture of the Compound or services under this Agreement. Upon Salix’s request, Lupin shall certify in writing its compliance with this Section 2.20 and shall provide all permits, certificates and licenses that may be required for its performance under this Agreement.

2.21 Retention of Manufacturing Records and Samples.

(a) Lupin shall generate (as and to the extent required by Applicable Law), retain and maintain, both during the Term and thereafter:

(i) all records necessary to comply with GMP and all other Applicable Law relating to the Manufacture of the Compound;

(ii) all Manufacturing records, standard operating procedures, equipment log books, batch manufacturing records, laboratory notebooks and all raw data relating to the Manufacturing of the Compound;

(iii) samples of each batch and Materials. Samples shall include a quantity of representative material of each batch and Materials sufficient to perform at least full duplicate quality control testing, and shall specify the dates of Manufacture and packaging thereof. Samples so retained shall be selected at random from either final container material or from bulk and final containers; provided that they include at least one final container as a final package, or package-equivalent of such filling of each batch. Such sample shall be stored at temperatures and under conditions which will maintain the identity and integrity of the relevant sample; and

(iv) such other records and samples as Salix reasonably may require in order to ensure compliance by Lupin with the terms of this Agreement and Applicable Law.

(a) Without prejudice to Lupin’s obligations pursuant to Section 2.21(a), Lupin shall diligently complete the master batch record for the Compound during the Manufacture of such Compound.

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(b) All materials, samples, records and other items referred to in Sections 2.21(a) and 2.21(b) shall be retained by Lupin for the longer of (i) such period as may be required by GMP and all other Applicable Law and (ii) [*] ([*]) years.

2.22 Exclusive Supply Arrangement in Respect of the Territory.

(a) To the maximum extent permitted by Applicable Law, except pursuant to [*], Lupin shall not, and Lupin shall cause its Affiliates not to, distribute, market, promote, offer for sale, sell or otherwise supply the Compound, directly or indirectly, whether alone or in combination with other molecules or compounds, whether as a raw material or as a finished product, and whether at wholesale or retail, to:

(i) any Person in the Territory other than Salix or its Affiliates for use in humans; or

(ii) any Person outside the Territory that Lupin or its Affiliates, as applicable, (A) reasonably suspects is likely to directly or indirectly distribute, market, promote, offer for sale, sell or otherwise supply the Compound to any Person in the Territory other than Salix or its Affiliates or assist another Person to do so or (B) knows has directly or indirectly distributed, marketed, promoted, offered for sale, sold or otherwise supplied the Compound to any Person in the Territory other than Salix or its Affiliates for use in humans, or assisted another Person to do so.

(b) The provisions of Section 2.22(a) shall terminate as of the end of the Term.

2.23 Shortages. In the event that the amount of Compound which Lupin Manufactures is less than the amount required to meet the requirements of all Persons permitted to be supplied by Lupin after giving effect to the provisions of Section 2.22, the total supply Manufactured by Lupin shall be apportioned first to Salix and its Affiliates, to the extent of their documented requirements during the relevant Manufacturing period, with any remainder to be allocated by Lupin among such Persons as are permitted to be supplied by Lupin after giving effect to the provisions of Section 2.22.

2.24 Second Source. Salix shall have the right to secure a second source of the Compound, and Lupin shall promptly grant to such third party manufacturer as may be designated by Salix as a second source of the Compound, on a royalty-free, non-exclusive basis, such licenses, and provide to such third party manufacturer, free of charge, such technical assistance, as such third party manufacturer may require in order to Manufacture the Compound, solely for use by Salix in its production of the Products, to the then-current Manufacturing process for the Compound.

ARTICLE III. INTELLECTUAL PROPERTY

3.1 Ownership of Inventions.

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

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(a) Except as otherwise expressly provided in this Article III, each Party shall own all right, title and interest in and to any Inventions that are conceived, discovered, developed or otherwise made exclusively by or on behalf of such Party or its Affiliates, employees or contractors in performing such Party’s obligations hereunder or in respect of such Party’s activities in respect hereof. Salix hereby grants to Lupin a [*], non-exclusive license to use all such right, title and interest in and to any such Inventions that Salix may develop for the sole purpose of performing Lupin’s obligations hereunder or exercising Lupin’s rights hereunder. Lupin hereby grants to Salix an irrevocable, perpetual, fully paid-up, royalty-free, non-exclusive license in the Territory, with the right to enforce and to grant sublicenses through multiple tiers, to use all such right, title and interest in and to any such Inventions that Lupin may develop relating to the Compound (“Compound Inventions”).

(b) Salix and Lupin shall jointly own all right, title and interest in and to any Joint Inventions; provided that (i) Lupin shall, and does hereby, grant to Salix an irrevocable, perpetual, fully paid-up, royalty-free, non-exclusive license, with the right to grant sublicenses through multiple tiers, under all of Lupin’s right, title and interest in and to all Joint Inventions to Exploit the Compound and Products, solely for use in the Territory, and (ii) Salix shall, and does hereby, grant to Lupin a worldwide (other than in the Territory), irrevocable, perpetual, [*], non-exclusive license, with the right to grant sublicenses through multiple tiers, under all of Salix’s right, title and interest in and to all Joint Inventions to Exploit the Compound and Products, solely for use outside the Territory. Each of Salix and Lupin shall, and shall cause its respective Affiliates to, promptly disclose in writing to the other Party the discovery, development, making, conception or reduction to practice of any Joint Invention.

3.2 Prosecution of Invention Patents. Salix shall have the first right, but not the obligation, to prepare, file, prosecute and maintain any patent applications and patents covering Joint Inventions and Compound Patents (collectively, the “Invention Patents,” and each, an “Invention Patent”) and shall be responsible for related interference, re-issuance, re-examination and opposition proceedings; provided, however, that if Salix plans to abandon an Invention Patent, Salix shall notify Lupin in writing at least [*] ([*]) days in advance of the due date of any payment or other action that is required to prepare, file, prosecute or maintain such Invention Patent, and Lupin may elect, upon written notice within such [*] ([*]) day period to Salix, to make such payment or take such action, at Lupin’s expense, and thereafter to become the sole owner of such Invention Patent. In such event, Salix shall cooperate, without additional consideration, to assign and transfer all of its right, title and interest in and to such Invention Patent to Lupin as the sole owner.

3.3 United States Law. The determination of whether Inventions are conceived, discovered, developed or otherwise made by a Party for the purpose of allocating proprietary rights (including patent, copyright or other intellectual property rights) therein, shall, for purposes of this Agreement, be made in accordance with applicable law in the United States. In the event that United States law does not apply to the conception, discovery, development or making of any Invention hereunder, each Party shall, and does hereby, assign, and shall cause its

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

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Affiliates to so assign, to the other Party, without additional compensation, such right, title and interest in and to any Inventions, as well as any intellectual property rights with respect thereto, as necessary to fully effect ownership as contemplated by Section 3.1.

3.4 Corporate Names. Lupin shall, and does hereby, grant to Salix a non-exclusive, royalty-free license, with the right to grant sublicenses through multiple tiers, to use such Corporate Names of Lupin or its Affiliates, solely as may be required by Applicable Law, in connection with its sale or documentation of the chain of custody of Products in the Territory.

ARTICLE IV. REPRESENTATIONS AND WARRANTIES; COVENANTS

4.1 Representations and Warranties of Each Party. Each Party hereby represents and warrants to the other Party as of the Effective Date as follows:

(a) Such Party (i) is duly formed and in good standing under the laws of the jurisdiction of its formation, (ii) has the power and authority and the legal right to enter into this Agreement and perform its obligations hereunder, and (iii) has taken all necessary action on its part required to authorize the execution and delivery of this Agreement and the performance of its obligations hereunder. This Agreement has been duly executed and delivered on behalf of such Party and constitutes a legal, valid and binding obligation of such Party and is enforceable against it in accordance with its terms, subject to the effects of bankruptcy, insolvency or other similar laws of general application affecting the enforcement of creditor rights and judicial principles affecting the availability of specific performance and general principles of equity, whether enforceability is considered in a proceeding at law or equity.

(b) All necessary consents, approvals and authorizations of all regulatory and governmental authorities and other Persons required to be obtained by such Party in connection with the execution and delivery of this Agreement and the performance of its obligations hereunder have been obtained.

(c) The execution and delivery of this Agreement and the performance of such Party’s obligations hereunder (i) do not and will not conflict with or violate any requirement of applicable law or any provision of the articles of incorporation, bylaws, limited partnership agreement or other similar documents of such Party and (ii) do not and will not conflict with, violate, or breach, or constitute a default or require any consent under, any contractual obligation or court or administrative order by which such Party is bound.

(d) Neither such Party nor any of its Affiliates has been debarred or is subject to debarment pursuant to Section 306 of the FFDCA or listed on either Excluded List.

(e) Neither such Party nor any of its Affiliates will use in any capacity, in connection with the services to be performed under this Agreement, any Person who has been debarred pursuant to Section 306 of the FFDCA, or who is the subject of a conviction described in such section, or listed on either Excluded List.

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(f) Each Party will inform the other Party in writing immediately if it or any Person who is performing services hereunder is debarred or is the subject of a conviction described in Section 306 of the FFDCA or listed on either Excluded List, or if any action, suit, claim, investigation or legal or administrative proceeding is pending or, to the best of such Party’s knowledge, is threatened, relating to the debarment or conviction under Section 306 of the FFDCA, or listing on either Excluded List, of such Party or any Person performing services hereunder.

4.2 Disclaimer of Other Warranties. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, THE PARTIES MAKE NO REPRESENTATIONS AND EXTEND NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING ANY WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE OR WARRANTY OF MERCHANTABILITY.

ARTICLE V. CONFIDENTIALITY

5.1 Confidential Information. Subject to the provisions of Sections 5.2 and 5.3, at all times during the Term and for [*] ([*]) years following the expiration or termination of this Agreement, the Receiving Party (a) shall keep completely confidential and shall not publish or otherwise disclose any Confidential Information furnished to it by the Disclosing Party, except to those of the Receiving Party’s employees, Affiliates, or consultants who have a need to know such information to perform such Party’s obligations hereunder (and who shall be advised of the Receiving Party’s obligations hereunder and who are bound by confidentiality obligations with respect to such Confidential Information no less onerous than those set forth in this Agreement) (collectively, “Recipients”) and (b) shall not use Confidential Information of the Disclosing Party directly or indirectly for any purpose other than performing its obligations or exercising its rights hereunder. The Receiving Party shall be jointly and severally liable for any breach by any of its Recipients of the restrictions set forth in this Agreement.

5.2 Exceptions to Confidentiality. The Receiving Party’s obligations set forth in this Agreement shall not extend to any Confidential Information of the Disclosing Party:

(a) that is or hereafter becomes part of the public domain by public use, publication, general knowledge or the like through no wrongful act, fault or negligence on the part of a Receiving Party or its Recipients;

(b) that is received from a third party without restriction and without breach of any agreement between such third party and the Disclosing Party;

(c) that the Receiving Party can demonstrate by competent evidence was already in its possession without any limitation on use or disclosure prior to its receipt from the Disclosing Party;

(d) that is generally made available to third parties by the Disclosing Party without restriction on disclosure; or

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

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(e) that the Receiving Party can demonstrate by competent evidence was independently developed by the Receiving Party.

5.3 Disclosure.

(a) Each Party may disclose Confidential Information to the extent that such disclosure is:

(i) made in response to a valid order of a court of competent jurisdiction or other governmental body of a country or any political subdivision thereof of competent jurisdiction; provided, however, that the Receiving Party shall first have given notice to the Disclosing Party and given the Disclosing Party a reasonable opportunity to quash such order or to obtain a protective order requiring that the Confidential Information or documents that are the subject of such order be held in confidence by such court or governmental body or, if disclosed, be used only for the purposes for which the order was issued; and provided further that if a disclosure order is not quashed or a protective order is not obtained, the Confidential Information disclosed in response to such court or governmental order shall be limited to that information that is legally required to be disclosed in such response to such court or governmental order;

(ii) made pursuant to Section 2.24; or

(iii) otherwise required by law or regulation, in the opinion of legal counsel to the Receiving Party.

(b) Salix may disclose Confidential Information to the extent that such disclosure is made to Regulatory Authorities as required in connection with any filing, application or request for Regulatory Approval; provided, however, that reasonable measures shall be taken to assure confidential treatment of such information.

(c) To the extent, if any, that a Party concludes in good faith that it is required by applicable laws or regulations to file or register this Agreement or a notification thereof with any governmental authority, including the U.S. Securities and Exchange Commission, such Party may do so, and the other Party shall cooperate in such filing or notification and shall execute all documents reasonably required in connection therewith. In such situation, the filing Party shall request confidential treatment of sensitive provisions of the Agreement, to the extent permitted by Applicable Law and in consultation with the other Party. The Parties shall promptly inform each other as to the activities or inquiries of any such governmental authority relating to this Agreement, and shall cooperate to respond to any request for further information therefrom.

5.4 Notification. The Receiving Party shall notify the Disclosing Party immediately, and cooperate with the Disclosing Party as the Disclosing Party may reasonably request, upon the Receiving Party’s discovery of any loss or compromise of the Disclosing Party’s Confidential Information.

5.5 Remedies. Each Party agrees that the unauthorized use or disclosure of any information by the Receiving Party in violation of this Agreement will cause severe and irreparable damage to the Disclosing Party. In the event of any violation of this Article V, the

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Receiving Party agrees that the Disclosing Party shall be authorized and entitled to obtain from any court of competent jurisdiction injunctive relief, whether preliminary or permanent, without the necessity of proving irreparable harm or monetary damages, as well as any other relief permitted by applicable law. The Receiving Party agrees to waive any requirement that the Disclosing Party post bond as a condition for obtaining any such relief.

5.6 Use of Names. Neither Party shall mention or otherwise use the name, insignia, symbol, trademark, trade name or logotype of the other Party (or any abbreviation or adaptation thereof) in any publication, press release, promotional material or other form of publicity without the prior written approval of such other Party in each instance. The restrictions imposed by this Section 5.6 shall not prohibit either Party from making any disclosure identifying the other Party that is required by Applicable Law; provided, however, that reasonable measures shall be taken to assure confidential treatment of such information.

5.7 Press Releases. Except as expressly provided in Section 5.3, neither Party shall make a press release or other public announcement regarding this Agreement, the terms hereof or the transactions contemplated hereby without the prior written approval of the other Party. Each Party shall provide the other with the proposed text of any such press release or public announcement for review and approval, which approval shall not be unreasonably withheld, conditioned or delayed, as early as possible, but in no event less than [*] ([*]) business days in advance of the publication, communication or dissemination thereof; provided, however, that the receiving Party shall be deemed to have approved any such press release or public announcement if it fails to notify the proposing Party in writing of any objections to such press release or public announcement within [*] ([*]) business days after receipt by the receiving Party of the text of such public announcement.

ARTICLE VI. TERM AND TERMINATION

6.1 Term. This Agreement shall commence as of the Effective Date and, unless earlier terminated in accordance with the terms hereof, shall expire on the tenth (10th) anniversary of the Launch Date, unless extended for additional [*] ([*]) year periods, at Salix’s option, upon written notice given by Salix to Lupin not less than [*] ([*]) months prior to the expiration of the then-current term (the “Term”).

6.2 Termination. In addition to any other provision of this Agreement expressly providing for termination of this Agreement, this Agreement may be terminated as follows:

(a) Salix may terminate this Agreement immediately upon notice to Lupin in the event that Regulatory Authorities require or cause the withdrawal of any Product from the Territory.

(b) Any time after the earlier of (a) an Other Product Entry and (b) the [*] anniversary of the Effective Date, Salix may terminate this Agreement for any reason or no reason upon not less than [*] ([*]) days’ prior written notice to Lupin (which may be provided prior to such [*] anniversary).

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

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(c) This Agreement may be terminated by either Party:

(i) immediately upon written notice if the other Party shall

(A) file in any court or agency pursuant to any statute or regulation of any state, country or jurisdiction a petition in bankruptcy or insolvency or for reorganization or for arrangement or for the appointment of a receiver or trustee of that Party or of its assets,

(B) propose a written agreement of composition or extension of its debts,

(C) be served with an involuntary petition against it, filed in any insolvency proceeding, and such petition shall not be dismissed within [*] ([*]) days after the filing thereof,

(D) propose or be a party to any dissolution or liquidation,

(E) make makes an assignment for the benefit of its creditors, or

(F) admit in writing its inability generally to pay its debts as they fall due in the general course;

(ii) immediately upon written notice in the event of any material breach by the other Party in the performance of any of its obligations herein contained that (if curable) has not been cured by the defaulting Party within [*] ([*]) days after receiving written notice thereof from the nonbreaching Party;

(iii) immediately upon written notice in the event that, as a result of an order of government or any other official authority, the continued operation of this Agreement in its entirety or in substantial part is prohibited or prevented or delayed for an unspecified and indeterminate period; or

(iv) as provided in Section 8.2.

6.3 Effect of Expiration or Termination.

(a) The expiration or earlier termination of this Agreement shall be without prejudice to any rights or obligations of the Parties that may have accrued prior to such termination, and the provisions of Sections 2.4, 2.6, 2.8, 2.13, 2.18, 2.19, 2.21, Articles III, IV and V, this Article VI, Article VII and Article VIII, shall survive the expiration or termination of this Agreement. Except as otherwise expressly provided herein, termination of this Agreement in accordance with the provisions hereof shall not limit remedies that may otherwise be available at law or in equity.

(b) Upon expiration or earlier termination of this Agreement, each Party, at the request of the other, shall return all data, files, records and other materials in

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

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its possession or control containing or comprising the other Party’s Confidential Information except that the legal department of such Party may retain one copy for archival purposes.

(c) Upon expiration of this Agreement or any earlier termination of this Agreement by Salix pursuant to Section 6.2(c), then, at Salix’s option, Lupin shall, for [*] from such expiration or termination, use its commercially reasonable efforts promptly to assist Salix to qualify a third party manufacturer designated by Salix to Manufacture Compound to meet Salix’s requirements, in which event Lupin shall use its commercially reasonable efforts promptly to assist Salix to qualify such third party manufacturer to Manufacture Compound, and shall promptly grant to such third party manufacturer, on a royalty-free, non-exclusive basis, such licenses, and provide to such third party manufacturer, free of charge in the event of a termination of this Agreement by Salix pursuant to Section 6.2(c) and at Lupin’s standard time and materials cost in the event of an expiration of this Agreement, such technical assistance, as such third party manufacturer may require in order to Manufacture the Compound to the then-current Specifications in accordance with the then-current Manufacturing process for the Compound, in all cases solely for the purposes of Salix’s production of Products.

(d) Upon any termination of this Agreement by Salix pursuant to Section 6.2(a) or 6.2(b) or by Lupin pursuant to Section 6.2(c), Salix shall [*] at the time of such termination. Salix shall in addition [*] in accordance with this Agreement. Salix shall [*].

(e) Except as and to the extent contemplated by clause (d), upon expiration of this Agreement or any earlier termination of this Agreement, Lupin immediately shall cease all Manufacturing of the Compound pursuant to this Agreement.

(f) Following expiration or termination of this Agreement, Lupin shall provide such reasonable cooperation and support with respect to regulatory matters as Salix may require in order to dispose of previously purchased Compound.

ARTICLE VII. INDEMNIFICATION

7.1 Lupin Indemnification. Lupin shall indemnify Salix, its Affiliates and its and their respective directors, officers, employees and agents (the “Salix Indemnified Parties”), and defend and hold each of them harmless, from and against any and all claims, lawsuits, losses, damages, liabilities, penalties, costs and expenses (including reasonable attorneys’ fees and disbursements) (collectively, “Losses”) incurred by any of them in connection with, arising from or occurring as a result of (a) the breach by Lupin of any of its representations or warranties set forth in this Agreement, (b) Lupin’s material breach of this Agreement; (c) Lupin’s negligence or willful misconduct in the performance of this Agreement, (d) the storage, release, or disposal of any hazardous or regulated material or any waste by Lupin, and (e) the enforcement by Salix of its rights under this Section 7.1, except, in each case, for those Losses for which Salix has an obligation to indemnify the Lupin Indemnified Parties pursuant to Section 7.2, as to which

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

24

Losses each Party shall indemnify the other Party to the extent of its respective liability for such Losses.

7.2 Salix Indemnification. Salix shall indemnify Lupin, its Affiliates and its and their respective directors, officers, employees and agents (the “Lupin Indemnified Parties”), and defend and hold each of them harmless, from and against any and all Losses incurred by any of them in connection with, arising from or occurring as a result of (a) the breach by Salix of any of its representations or warranties set forth in this Agreement, (b) Salix’s material breach of this Agreement, (c) any Third Party Claim made by any Person that the Manufacture and supply of the Compound in accordance with the terms hereof infringes, misappropriates or otherwise violates the patent, trademark or other intellectual property rights of such Person, (d) any Third Party Claim made by any Person relating to or arising out of death, personal injury, or other product liability, related to the marketing, sale, distribution or use of the Compound or Product and caused by the negligence of Salix or its subcontractors or agents and (e) the enforcement by Lupin of its rights under this Section 7.2, except, in each case, for those Losses for which Lupin has an obligation to indemnify the Salix Indemnified Parties pursuant to Section 7.1, as to which Losses each Party shall indemnify the other Party to the extent of its respective liability for such Losses.

7.3 Indemnification Procedure.

(a) Notice of Claim. The indemnified party (the “Indemnified Party”) shall give the indemnifying Party (the “Indemnifying Party”) prompt written notice (an “Indemnification Claim Notice”) of any Losses or discovery of facts upon which such Indemnified Party intends to base a request for indemnification under Section 7.1 or 7.2, but in no event shall the Indemnifying Party be liable for any Losses that result from any delay in providing such notice. Each Indemnification Claim Notice must contain a description of the claim and the nature and amount of such Loss (to the extent that the nature and amount of such Loss are known at such time). The Indemnified Party shall furnish promptly to the Indemnifying Party copies of all papers and official documents received in respect of any Losses.

(b) Third Party Claims. The obligations of an Indemnifying Party under this Article VII with respect to Losses arising from claims of any third Person that are subject to indemnification as provided for in Section 7.1 or 7.2 (a “Third Party Claim”) shall be governed by and be contingent upon the following additional terms and conditions:

(i) Control of Defense. At its option, the Indemnifying Party may assume the defense of any Third Party Claim by giving written notice to the Indemnified Party within thirty (30) days after the Indemnifying Party’s receipt of an Indemnification Claim Notice. The assumption of the defense of a Third Party Claim by the Indemnifying Party shall not be construed as an acknowledgment that the Indemnifying Party is liable to indemnify any Indemnified Party in respect of the Third Party Claim, nor shall it constitute a waiver by the Indemnifying Party of any defenses it may assert against any Indemnified Party’s claim for indemnification. Upon assuming the defense of a Third Party Claim, the Indemnifying Party may appoint as lead counsel in the defense of the Third Party Claim any legal counsel selected

25

by the Indemnifying Party, which shall be reasonably acceptable to the Indemnified Party. In the event the Indemnifying Party assumes the defense of a Third Party Claim, the Indemnified Party shall immediately deliver to the Indemnifying Party all original notices and documents (including court papers) received by any Indemnified Party in connection with the Third Party Claim. Subject to clause (ii) below, if the Indemnifying Party assumes the defense of a Third Party Claim, the Indemnifying Party shall not be liable to the Indemnified Party for any legal expenses subsequently incurred by such Indemnified Party in connection with the analysis, defense or settlement of the Third Party Claim. In the event that it is ultimately determined that the Indemnifying Party is not obligated to indemnify, defend or hold harmless a Salix Indemnified Party or Lupin Indemnified Party, as applicable, from and against the Third Party Claim, the Indemnified Party shall reimburse the Indemnifying Party for any and all costs and expenses (including reasonable attorneys’ fees and costs of suit) and any Losses incurred by the Indemnifying Party in its defense of the Third Party Claim with respect to such Salix Indemnified Party or Lupin Indemnified Party, as applicable.

(ii) Right to Participate in Defense. Without limiting Section 7.3(b)(i), any Indemnified Party shall be entitled to participate in, but not control, the defense of such Third Party Claim and to employ counsel of its choice for such purpose; provided, however, that such employment shall be at the Indemnified Party’s own expense unless (A) the employment thereof has been specifically authorized by the Indemnifying Party in writing, (B) the Indemnifying Party has failed to assume the defense and employ counsel in accordance with Section 7.3(b)(i) (in which case the Indemnified Party shall control the defense), or (C) the interests of the Indemnified Party and the Indemnifying Party with respect to such Third Party Claim are sufficiently adverse to prohibit the representation by the same counsel of both parties under applicable law, ethical rules or equitable principles.

(iii) Settlement. With respect to any Losses relating solely to the payment of money damages in connection with a Third Party Claim and that will not result in the Indemnified Party’s becoming subject to injunctive or other relief or otherwise adversely affect the business of the Indemnified Party in any manner, and as to which the Indemnifying Party shall have acknowledged in writing the obligation to indemnify the Indemnified Party hereunder, the Indemnifying Party shall have the sole right to consent to the entry of any judgment, enter into any settlement or otherwise dispose of such Loss, on such terms as the Indemnifying Party, in its sole discretion, shall deem appropriate. With respect to all other Losses in connection with Third Party Claims, where the Indemnifying Party has assumed the defense of the Third Party Claim in accordance with Section 7.3(b)(i), the Indemnifying Party shall have authority to consent to the entry of any judgment, enter into any settlement or otherwise dispose of such Loss; provided that it obtains the prior written consent of the Indemnified Party (which consent shall not be unreasonably withheld, conditioned or delayed). The Indemnifying Party shall not be liable for any settlement or other disposition of a Loss by an Indemnified Party that is reached without the written consent of the Indemnifying Party. Regardless of whether the Indemnifying Party chooses to defend or prosecute any Third Party Claim, no Indemnified Party shall admit any liability with respect to, or settle, compromise or dispose of, any Third Party Claim without the prior written consent of the Indemnifying Party (which consent shall not be unreasonably withheld, conditioned or delayed).

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(iv) Cooperation. If the Indemnifying Party chooses to defend or prosecute any Third Party Claim, the Indemnified Party shall cooperate in the defense or prosecution thereof and shall furnish such records, information and testimony, provide such witnesses and attend such conferences, discovery proceedings, hearings, trials and appeals as may be reasonably requested in connection therewith. Such cooperation shall include access during normal business hours afforded to the Indemnifying Party to, and reasonable retention by the Indemnified Party of, records and information that are reasonably relevant to such Third Party Claim, and making employees and agents available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder, and the Indemnifying Party shall reimburse the Indemnified Party for all its reasonable out-of-pocket expenses in connection therewith.

(v) Expenses. Except as provided above, the reasonable and verifiable costs and expenses, including fees and disbursements of counsel, incurred by the Indemnified Party in connection with any Third Party Claim shall be reimbursed on a calendar quarter basis in arrears by the Indemnifying Party, without prejudice to the Indemnifying Party’s right to contest the Indemnified Party’s right to indemnification and subject to refund in the event the Indemnifying Party is ultimately held not to be obligated to indemnify the Indemnified Party.

7.4 Insurance.

(a) Each Party shall maintain (i) comprehensive general liability insurance with a combined single limit for bodily injury and property damage of not less than [*] United States Dollars ($[*]) and (ii) product liability/completed operations coverage with a per claim limit of not less than [*] United States Dollars ($[*]) (collectively, the “Policies”). If any Policy is written on a claims-made basis, the retroactive date, if any, shall not be later than the Effective Date of this Agreement. In addition, such coverage shall be continued in full force throughout the Term of this Agreement and for a period of [*] ([*]) years thereafter and neither Party’s Policies shall be canceled or subject to a reduction of coverage or any other modification without written notice to the other Party.

(b) Each Party shall furnish certificates of insurance for its Policies to the other Party within ten (10) days after the Effective Date.

7.5 Limitation on Damages. EXCEPT WITH RESPECT TO THE [*] OR INTENTIONAL MISCONDUCT OF A PARTY, NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY FOR SPECIAL, PUNITIVE, INDIRECT, INCIDENTAL, EXEMPLARY OR CONSEQUENTIAL DAMAGES, INCLUDING BUSINESS INTERRUPTION OR LOST PROFITS, WHETHER IN CONTRACT, WARRANTY, NEGLIGENCE, TORT, STRICT LIABILITY OR OTHERWISE; PROVIDED, HOWEVER, THAT THIS EXCLUSION IS NOT INTENDED TO, NOR SHALL IT, EXCLUDE DAMAGES OWED TO THIRD PARTIES.

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

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ARTICLE VIII. MISCELLANEOUS

8.1 Notices. All notices, requests and other communications hereunder must be in writing, specifically reference this Agreement in a prominent manner, and be delivered personally or by recognized international courier to the Parties at the following addresses:

If to Salix to:

Salix Pharmaceuticals, Inc.

1700 Perimeter Park Drive

Morrisville, North Carolina 27560

Attention: AVP, Pharmaceutical Development and Manufacturing

with copies (which shall not constitute notice) to:

Salix Pharmaceuticals, Inc.

1700 Perimeter Park Drive

Morrisville, North Carolina 27560

Attention: General Counsel

and

Covington & Burling LLP

1201 Pennsylvania Avenue, N.W.

Washington, D.C. 20004

Attention: Edward C. Britton, Esq.

If to Lupin to:

Lupin Limited

“B” Wing, Fifth Floor

Bandra Kuria Complex

Mumbai - 400 051, India

Attention: Managing Director

with a copy to:

Lupin Pharmaceuticals, Inc.

Harborplace Tower

111 S. Calvert Street, 21st Floor

Baltimore, MD 21202

Attention: Vinita Gupta

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

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DLA Piper LLP (US)

The Marbury Building

6225 Smith Avenue

Baltimore, MD 21209

Attention: Howard S. Schwartz, Esq.

All such notices, requests and other communications will (a) if delivered personally to the address as provided in this Section, be deemed given upon receipt, and (b) if delivered by courier to the address as provided in this Section 8.1, be deemed given upon receipt. Any Party from time to time may change its address or other information for the purpose of notices to that Party by giving notice specifying such change to the other Party hereto.

8.2 Force Majeure. Neither Party shall be liable for delay in delivery or nonperformance in whole or in part (other than a failure to pay any amount due hereunder), nor shall the other Party have the right to terminate this Agreement except as otherwise specifically provided in this Section 8.2, where delivery or performance has been affected by a condition beyond such Party’s reasonable control, including fires, floods, embargoes, shortages, epidemics, quarantines, war, acts of war (whether war be declared or not), terrorism, insurrections, riots, civil commotion, strikes, lockouts or other labor disturbances, acts of God or acts, omissions or delays in acting by any governmental authority; provided that the Party affected by such a condition shall, within [*] ([*]) days of its occurrence, give notice to the other Party stating the nature of the condition, its anticipated duration and any action being taken to avoid or minimize its effect. The suspension of performance shall be of no greater scope and no longer duration than is reasonably required and the nonperforming Party shall use commercially reasonable efforts to remedy its inability to perform. Notwithstanding the foregoing, in the event the suspension of performance continues for [*] ([*]) days after the date of the occurrence, and such failure to perform would constitute a material breach of this Agreement in the absence of such force majeure event, the nonaffected Party may terminate this Agreement immediately by written notice to the affected Party.

8.3 Entire Agreement; Amendment. This Agreement, together with the Schedules and Exhibits attached hereto, sets forth and constitutes the entire agreement and understanding between the Parties with respect to the subject matter hereof and all prior agreements, understandings, promises and representations, whether written or oral, with respect thereto are superseded hereby. Each Party confirms that it is not relying on any representations or warranties of the other Party except as specifically set forth herein. No amendment, modification, release or discharge shall be binding upon the Parties unless in writing and duly executed by authorized representatives of both Parties.

8.4 Further Assurances. Each Party shall duly execute and deliver, or cause to be duly executed and delivered, such further instruments and do and cause to be done such further acts and things, including the filing of such assignments, agreements, documents and instruments as may be necessary or as the other Party may reasonably request in connection with this Agreement or to carry out more effectively the provisions and purposes hereof or to better assure and confirm unto such other Party its rights and remedies under this Agreement.

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

29

8.5 Successors and Assigns. The terms and provisions hereof shall inure to the benefit of, and be binding upon, Salix, Lupin and their respective successors and permitted assigns.

8.6 Dispute Resolution. Any dispute, controversy or claim arising out of or relating to this Agreement or the breach, termination or validity thereof (each, a “Dispute”), shall be referred to a senior executive of each Party; provided that each such senior executive is not involved in such Dispute. Such senior executives shall meet for attempted resolution of such Dispute by good faith negotiations within thirty (30) days after such Dispute is referred to such senior executives. If the Dispute remains unresolved after such thirty (30)-day negotiation period, then, at the election of either Party, such Dispute shall be decided by litigation. Any such litigation shall be pursued in accordance with Section 8.7; provided that any dispute regarding the validity, scope, enforceability, inventorship or ownership of intellectual property rights shall be submitted by either Party to a court of competent jurisdiction in the country in which such rights apply.

8.7 Governing Law; Jurisdiction; Venue; Service.

(a) This Agreement shall be governed and interpreted in accordance with the law of the State of New York, excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to the substantive law of another jurisdiction. The Parties agree to exclude the application to this Agreement of the United Nations Convention on Contracts for the International Sale of Goods.

(b) Subject to Section 8.6, each Party irrevocably and unconditionally consents to the exclusive jurisdiction of the courts of general jurisdiction of the State of New York and the United States District Court for the Southern District of New York sitting in the Borough of Manhattan (collectively, the “Courts”) for any action, suit or proceeding (other than appeals therefrom) concerning any matter arising out of or relating to this Agreement, and agrees not to commence any action, suit or proceeding (other than appeals therefrom) related thereto except in such Courts.

(c) Each Party hereto further hereby irrevocably and unconditionally waives any objection to the laying of venue of any action, suit or proceeding (other than appeals therefrom) arising out of or relating to this Agreement in the Courts and hereby further irrevocably and unconditionally agrees not to raise any objection at any time to the laying or maintaining of the venue of any such action, suit or proceeding in any of such Courts, irrevocably waives any claim that such action, suit or other proceeding has been brought in an inconvenient forum and further irrevocably waives the right to object, with respect to such action, suit or other proceeding, that such Court does not have any jurisdiction over such Party.

(d) Each Party hereto further agrees that, to the maximum extent permitted by Applicable Law, service of any process, summons, notice or document by United States registered mail to its address and contact person for notices provided for in

30

Section 8.1 shall be effective service of process for any action, suit or proceeding brought against it under this Agreement in any of the Courts.

(e) Lupin hereby designates, appoints and empowers Lupin Pharmaceuticals, Inc., with an office located at Harborplace Tower, 111 S. Calvert Street, 21st Floor, Baltimore, MD 21202, U.S.A., as its designee, appointee and agent to receive, accept and forward for and on its behalf, and it properties, assets and revenues, service of any and all legal process, summons, notices and documents which may be served in any action, suit or proceeding arising out of or relating to this Agreement or any of the transactions or services contemplated hereunder that is brought in the Courts which may be made on any designee, appointee and agent in accordance with legal procedures prescribed in such Courts. If for any reason such designee, appointee and agent hereunder shall not be available to act as such, then Lupin agrees to designate a new designee, appointee or agent in the City of New York on the terms and for the purposes of this paragraph (e). Lupin further hereby consents and agrees to the service of any and all legal process, summons, notices and documents out of any of the Courts in any such action, suit or proceeding by serving a copy thereof upon the agent for service of process referred to in this paragraph (e) (whether or not the appointment of such agent shall for any reason prove to be ineffective or such agent shall accept or acknowledge such service) coupled with mailing of copies thereof in accordance with paragraph (d), above. Lupin agrees that the failure of any such designee, appointee or agent to give any notice of such service to it shall not impair or affect in any way the validity of such service or any judgment rendered in any action or proceeding based thereon.

8.8 Audit; Late Payments.

(a) Each Party shall have the right to have an independent certified public accounting film of internationally recognized standing, and reasonably acceptable to the other Party, provided with access by such other Party during normal business hours, and upon reasonable prior written notice, to examine only those records of such other Party (and its Affiliates and Sublicensees) as may be reasonably necessary to determine, with respect to any Calendar Year ending not more than [*] ([*]) years prior to the auditing Party’s request, the correctness or completeness of any payment made or statement submitted under this Agreement. Such examinations may not (i) be conducted more than once in any [*] ([*]) month period (unless a previous audit during such [*] ([*]) month period revealed an underpayment with respect to such period or an incorrect statement submitted by the audited Party in respect of such period or the audited Party restates or revises such books and records for such period) or (ii) be repeated for any Calendar Year. Results of such audit shall (i) be (A) limited to information relating to the Compound and Products, (B) made available to both Parties in writing, and (C) subject to Article V and (ii) not reveal any specific information of the audited Party to the auditing Party other than (A) whether the audited Party is in compliance with its payment obligations under this Agreement or whether statements submitted by the audited Party under this Agreement are true and correct, as the case may be, and (B) the amount of any additional payment owed to the auditing Party or excess payment reimbursable to the

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

31

audited Party or any correction to statements submitted by the audited Party under this Agreement, as the case may be. Except as provided below, the cost of this examination shall be borne by the auditing Party, unless the audit reveals a variance of more than five percent (5%) from the reported amounts, in which case the audited Party shall bear the cost of the audit. Unless disputed pursuant to Section 8.8(b), if such audit concludes that additional payments were owed or that excess payments were made during such period, the audited Party shall pay the additional amounts, with interest from the date originally due as provided in Section 8.8(c), or the auditing Party shall reimburse such excess payments, with interest from the date of original payment as provided in Section 8.8(c), within sixty (60) days after the date on which such auditor’s written report is delivered to the Parties.

(b) In the event of a Dispute of any audit under Section 8.8, Lupin and Salix shall work in good faith to resolve the disagreement. If the Parties are unable to reach a mutually acceptable resolution of any such Dispute within thirty (30) days, the Dispute shall be resolved in accordance with Section 8.6.

(c) If any payment due to a Party under this Agreement is not paid when due, then the owing Party shall pay interest thereon (before and after any judgment) at an annual rate (but with interest accruing on a daily basis) equal to the lesser of (a) the prime rate as reported on the first business day of each month such payment is overdue in The Wall Street Journal, Eastern Edition, plus [*] ([*]) percentage points, and (b) the maximum rate permitted by Applicable Law. Interest payable under this Section 8.8(c) shall run from the date upon which payment of the relevant principal sum became due through the date of payment thereof in full together with such interest.

8.9 Third Party Beneficiaries. Nothing in this Agreement shall be construed as giving any Person, other than the Parties hereto and their successors and permitted assigns, any right, remedy or claim under or in respect of this Agreement or any provision hereof.

8.10 Export Control. This Agreement is made subject to any restrictions concerning the export of products or technical information from the United States or other countries that may be imposed on the Parties from time to time. Each Party agrees that it will not export, directly or indirectly, any technical information acquired from the other Party under this Agreement or any products using such technical information to a location or in a manner that at the time of export requires an export license or other governmental approval, without first obtaining the written consent to do so from the appropriate agency or other governmental entity in accordance with Applicable Law.

8.11 Assignment. Except as expressly provided herein, neither Party may, without the prior written consent of the other Party, sell, transfer, assign, delegate, pledge, subcontract or otherwise dispose of, whether voluntarily, involuntarily, by operation of law or otherwise, this Agreement or any of its rights or duties hereunder; provided, however, that (a) Salix may, without such consent, assign this Agreement and its rights and obligations hereunder to an Affiliate or to the purchaser or sublicensee of Salix’s rights in and to the Compound or any

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

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Product, (b) Lupin may, without such consent, assign this Agreement and its rights and obligations hereunder to one or more Affiliates, and (c) either Party may, without such consent, assign this Agreement and its rights and obligations hereunder to the purchaser of all or substantially all of its assets or to any successor entity or acquirer in the event of a merger, consolidation or change in control of such Party. Any attempt to assign, transfer, subcontract or delegate any portion of this Agreement in violation of this Section shall be null and void. All validly assigned and delegated rights and obligations of the Parties hereunder shall be binding upon and inure to the benefit of and be enforceable by and against the successors and permitted assigns of Salix or Lupin, as the case may be. In the event either Party assigns or delegates its rights or obligations to another Person in accordance with the terms hereof, the assignee or transferee shall assume all obligations of its assignor or transferor under this Agreement and the assignor or transferor shall cease to be a party to this Agreement and shall cease to have any rights or obligations under this Agreement from and after the effective date of such assignment. No such assignment or delegation shall relieve the assignor or transferor of any of its obligations hereunder. Notwithstanding the foregoing, Lupin shall have the right, from time to time and without the necessity of providing notice to or obtaining the consent of Salix, to delegate, assign, or subcontract to any Affiliate, certain of Lupin’s rights or responsibilities under this Agreement. In all cases, Lupin shall remain the contract Party under this Agreement and shall remain responsible to Salix for the performance of all such obligations under this Agreement.

8.12 Waiver. Any term or condition of this Agreement may be waived at any time by the Party that is entitled to the benefit thereof, but no such waiver shall be effective unless set forth in a written instrument duly executed by or on behalf of the Party waiving such term or condition. No waiver by either Party of any term or condition of this Agreement, in any one or more instances, shall be deemed to be or construed as a waiver of the same or any other term or condition of this Agreement on any future occasion.

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

8.14 Independent Contractors. The status of the Parties under this Agreement shall be that of independent contractors. Nothing in this Agreement is intended or shall be deemed to constitute a partnership, agency, employer, employee, or joint venture relationship between the Parties. Neither Party shall have the right to enter into any agreements on behalf of the other Party, nor shall it represent to any Person that it has any such right or authority.

8.15 Construction. Unless the context of this Agreement otherwise requires: (a) words of any gender include each other gender; (b) words using the singular or plural number also include the plural or singular number, respectively; (c) the terms “hereof,” “herein,” “hereby”

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and derivative or similar words refer to this entire Agreement; (d) the terms “Article,” “Section,” “Schedule,” “Exhibit” or “clause” refer to the specified Article, Section, Schedule, Exhibit or clause of this Agreement; (e) the term “or” has, except where otherwise indicated, the inclusive meaning represented by the phrase “and/or”; (f) the term “including” or “includes” means “including without limitation” or “includes without limitation”; and (g) references to any agreement, instrument or other document in this Agreement refer to such agreement, instrument or other document as originally executed or, if subsequently amended, replaced or supplemented from time to time, as so amended, replaced or supplemented and in effect at the relevant time of reference thereto. Whenever this Agreement refers to a number of days, such number shall refer to calendar days unless business days are specified. The captions of this Agreement are for convenience of reference only and in no way define, describe, extend, or limit the scope or intent of this Agreement or the intent of any provision contained in this Agreement. The language of this Agreement shall be deemed to be the language mutually chosen by the Parties and no rule of strict construction shall be applied against either Party.

8.16 Remedies. The rights and remedies provided herein are cumulative and do not exclude any other right or remedy provided by applicable law or otherwise available except as expressly set forth herein.

8.17 Counterparts; Facsimile Execution. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, and all of which, taken together, shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page of this Agreement (and each amendment, modification and waiver in respect of it) by facsimile or other electronic transmission shall be as effective as delivery of a manually executed original counterpart of each such instrument.

8.18 English Language. This Agreement shall be written and executed in, and all other communications under or in connection with this Agreement shall be in, the English language. Any translation into any other language shall not be an official version thereof, and in the event of any conflict in interpretation between the English version and such translation, the English version shall control.

[The remainder of this page has been intentionally left blank.]

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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement to be effective as of the Effective Date.

SALIX PHARMACEUTICALS, INC.		LUPIN LTD.
By:	/s/ Carolyn J. Logan	By:	/s/ Nilesh Gupta
Name:	Carolyn J. Logan	Name:	Nilesh Gupta
Title	President and CEO	Title:	Group President

Schedule 2.9(a)

Current Capacity

Manufacture and supply in accordance with the terms of this Agreement of not less than [*] of Compound per Calendar Year.

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

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 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:	November 9, 2009	By:	/s/ Carolyn J. Logan
			Carolyn J. Logan
			President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Adam C. Derbyshire, certify that:

1. I have reviewed this 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 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:	November 9, 2009	By:	/s/ Adam C. Derbyshire
			Adam C. Derbyshire
			Executive 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 September 30, 2009 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:	November 9, 2009	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 September 30, 2009 as filed with the Securities and Exchange Commission on or about the date hereof (the “Report”), I, Adam C. Derbyshire, Executive 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:	November 9, 2009	By:	/s/ Adam C. Derbyshire
			Adam C. Derbyshire
			Executive Vice President and
			Chief Financial Officer