SALIX HOLDINGS LTD (Form: S-1, Received: 08/15/1997 17:04:25)

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 15, 1997
REGISTRATION NO. 333-

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 SALIX HOLDINGS, LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

BRITISH VIRGIN ISLANDS               2834                     94-3267443
   (STATE OR OTHER      (PRIMARY STANDARD INDUSTRIAL       (I.R.S. EMPLOYER
   JURISDICTION OF       CLASSIFICATION CODE NUMBER)    IDENTIFICATION NUMBER)
  INCORPORATION OR
    ORGANIZATION)
                                 -----------
                      3600 WEST BAYSHORE ROAD, SUITE 205
                          PALO ALTO, CALIFORNIA 94303
                                (650) 856-1550
  (ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
                                 -----------
                                  DAVID BOYLE

VICE PRESIDENT, FINANCE & ADMINISTRATION,
AND CHIEF FINANCIAL OFFICER
SALIX HOLDINGS, LTD.
3600 WEST BAYSHORE ROAD, SUITE 205
PALO ALTO, CALIFORNIA 94303
(650) 856-1550
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE OF PROCESS) COPIES TO:

     DOUGLAS H. COLLOM, ESQ.                  ROBERT M. CHILSTROM, ESQ.
    ROBERT F. KORNEGAY, ESQ.                 CHRISTOPHER W. MORGAN, ESQ.
    ROSEMARY G. REILLY, ESQ.          SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
WILSON SONSINI GOODRICH & ROSATI           P.O. BOX 189, ROYAL BANK PLAZA
    PROFESSIONAL CORPORATION                   NORTH TOWER, SUITE 1820
       650 PAGE MILL ROAD                     TORONTO, ONTARIO M5J 2J4
   PALO ALTO, CALIFORNIA 94304                     (416) 777-4700
         (650) 493-9300
                                 -----------

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:

AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION

STATEMENT.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_]
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] ____________ If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] ____________
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_]

CALCULATION OF REGISTRATION FEE

                                                 PROPOSED MAXIMUM   PROPOSED MAXIMUM
   TITLE OF EACH CLASS OF          AMOUNT         OFFERING PRICE       AGGREGATE          AMOUNT OF
 SECURITIES TO BE REGISTERED TO BE REGISTERED(1) PER SHARE(2)(3)  OFFERING PRICE(2)(3) REGISTRATION FEE
-------------------------------------------------------------------------------------------------------
Common Shares, no par
 value.................           3,450,000         U.S.$6.13       U.S.$21,148,500       U.S.$6,409

(1) Includes 450,000 Common Shares which the Underwriters have the option to purchase solely to cover over-allotments, if any.
(2) Estimated in accordance with Rule 457 solely for the purpose of computing the amount of the registration fee based on the average of the high and low sales prices of the Common Shares as reported on The Toronto Stock Exchange on August 13, 1997.
(3) For purposes of computing the amount of the registration fee, proposed maximum offering price per share and the proposed maximum aggregate offering price have been converted to U.S. dollars based on an exchange rate of Cdn. $1.3942 to U.S. $1.00. The Common Shares of the Registrant are currently traded on The Toronto Stock Exchange in Canadian Dollars and the Common Shares being registered hereby will be purchased and subsequently traded in Canadian Dollars. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.

EXPLANATORY NOTE

This Registration Statement contains a Prospectus relating to a public offering in the United States (the "U.S. Offering") of the Common Shares, no par value (the "Common Shares"), of Salix Holdings, Ltd., together with alternate prospectus pages relating to a concurrent offering of the Common Shares in Canada (the "Canadian Offering"). The complete Prospectus for the U.S. Offering follows immediately after this explanatory note. After such Prospectus are the following alternate prospectus pages for the Canadian Offering: a front outside cover page, a front inside cover page and the pages containing the captions "Certificate of the Company" and "Certificate of the Underwriters". All other pages of the Prospectus for the U.S. Offering are to be used for both the U.S. Offering and the Canadian Offering.

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A         +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE   +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY  +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT        +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR   +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE      +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE    +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF  +
+ANY SUCH STATE OR JURISDICTION.                                               +

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED AUGUST 15, 1997

3,000,000 Common Shares

[LOGO]

All of the Common Shares offered hereby are being sold by Salix Holdings, Ltd. ("Salix" or the "Company"). The Company's Common Shares are traded on The Toronto Stock Exchange. Prior to this offering, there was no public market for the Company's Common Shares in the United States, and following this offering the Common Shares will be traded only in Canada. See "Description of Share Capital". On August 13, 1997, the closing price of the Company's Common Shares as reported on The Toronto Stock Exchange was Cdn. $8.50 per Common Share. See "Price Range of Common Shares". On August 13, 1997, The Bank of Canada noon rate of exchange for United States dollars into Canadian dollars was Cdn. $1.3942 = U.S. $1.00.

The 3,000,000 Common Shares offered hereby are being offered outside the United States by the Canadian Underwriters and in the United States by certain U.S. affiliates of the Canadian Underwriters. See "Plan of Distribution".

THE COMMON SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 9.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

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                                                 UNDERWRITING       PROCEEDS
                                   PRICE TO      DISCOUNTS AND         TO
                                 PUBLIC (/1/)  COMMISSIONS (/2/)  COMPANY(/3/)
------------------------------------------------------------------------------
Per Share.....................  Cdn. $           Cdn. $          Cdn. $
------------------------------------------------------------------------------
Total (/4/)...................  Cdn. $           Cdn. $          Cdn. $
------------------------------------------------------------------------------
------------------------------------------------------------------------------

(1) Purchasers will be required to pay for the Common Shares in Canadian dollars. The Underwriters have arranged for the conversion of U.S. dollars into Canadian dollars to enable U.S. purchasers to pay for the Common Shares. All costs of exchange will be borne by the purchasers of the Common Shares. See "Plan of Distribution".
(2) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the United States Securities Act of 1933, as amended, and applicable Canadian securities laws. See "Plan of Distribution".
(3) Before deducting expenses payable by the Company, estimated at Cdn. $1,219,925 (U.S. $875,000).
(4) The Company has granted to the Underwriters a 60-day option to purchase up to an additional 450,000 Common Shares, solely to cover over-allotments, if any. See "Plan of Distribution". If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be Cdn. $ , Cdn. $ and Cdn. $ , respectively.

The Common Shares are offered by the Underwriters as stated herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that delivery of such shares will be made through the offices of Levesque Beaubien Geoffrion Inc., Montreal, Quebec on or about , 1997.

NBC Levesque International Ltd. Yorkton Capital Inc.

Marleau, Lemire Securities Inc. Midland Walwyn Capital Corporation

THE DATE OF THIS PROSPECTUS IS , 1997

[ARTWORK: PHOTOGRAPHIC DEPICTION OF THE MANUFACTURE OF BALSALAZIDE CAPSULES
AND PHOTOGRAPHS OF FINISHED BALSALAZIDE CAPSULES].

In July 1997, Salix received
authorization to market its first product, Colazide, for treatment of acute ulcerative colitis from the United Kingdom Medicines Control Agency. The Company submitted a New Drug Application to the United States Food and Drug Administration in June 1997 for the same indication.

Colazide is currently being manufactured in preparation for the scheduled October 1997 United Kingdom product launch.

Salix, Salix Pharmaceuticals, Glycyx Pharmaceuticals, and Salix Holdings are trade names of the Company. Colazide is a trademark of Biorex Laboratories Limited. This Prospectus also contains trademarks and trade names of other companies.

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING, MAY BID FOR, AND PURCHASE, THE COMMON SHARES IN THE OPEN MARKET AND MAY IMPOSE PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "PLAN OF DISTRIBUTION".

No dealer, sales representative or any other person has been authorized to give any information or to make any representation in connection with this offering other than those contained in this Prospectus, and, if given or made, such information or representations must not be relied upon as having been authorized by the Company or any Underwriter. This Prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, any securities other than the registered securities to which it relates or an offer to, or solicitation of, any person in any jurisdiction where such an offer or solicitation would be unlawful. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the date hereof or that the information contained herein is correct as of any time subsequent to the date hereof.

Until , 1997 (90 days after the date of this Prospectus), all dealers effecting transactions in the Common Shares, whether or not participating in this distribution, may be required to deliver a Prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a Prospectus when acting as Underwriters and with respect to their unsold allotments or subscriptions.

TABLE OF CONTENTS

                                                                          PAGE
                                                                          ----
Exchange Rates...........................................................   4
Eligibility for Investment...............................................   4
Summary..................................................................   5
Risk Factors.............................................................   9
Use of Proceeds..........................................................  20
Price Range of Common Shares.............................................  21
Dividend Policy..........................................................  21
Capitalization...........................................................  22
Dilution.................................................................  23
Selected Consolidated Financial Data.....................................  24
Management's Discussion and Analysis of Financial Condition and Results
 of Operations...........................................................  25
Business.................................................................  29
Management...............................................................  46
Principal Shareholders...................................................  56
Description of Share Capital.............................................  57
Prior Sales of Securities................................................  58
Comparison of Canadian, United States and British Virgin Islands
 Corporate Laws..........................................................  59
Certain Tax Considerations...............................................  61
Shares Eligible for Future Sale..........................................  65
Plan of Distribution.....................................................  67
Legal Matters............................................................  69
Experts..................................................................  69
Transfer Agent...........................................................  69
Material Contracts.......................................................  70
Canadian Purchasers' Statutory Rights....................................  71
Additional Information...................................................  71
Glossary.................................................................  72
Index to Consolidated Financial Statements............................... F-1

The Company intends to furnish its shareholders with annual reports containing audited financial statements examined by an independent accounting firm and quarterly reports for the first three quarters of each year containing interim unaudited consolidated financial information. Upon completion of the offering contemplated hereby, the Company will be subject to the informational requirements of the United States Securities Exchange Act of 1934, and in accordance therewith, will be filing reports and other information with the United States Securities and Exchange Commission. The Company is also subject to the informational requirements of The Toronto Stock Exchange and applicable Canadian securities legislation.

EXCHANGE RATES

IN THIS PROSPECTUS, UNLESS OTHERWISE SPECIFIED OR THE CONTEXT OTHERWISE REQUIRES, ALL DOLLAR AMOUNTS ARE EXPRESSED IN UNITED STATES DOLLARS. The average exchange rate for the six months ended June 30, 1997 and 1996 and the years ended December 31, 1996, 1995, 1994, 1993 and 1992 and the exchange rate at the end of each such period for the conversion of United States dollars into Canadian dollars based on the Bank of Canada noon rate of exchange for United States dollars were as follows:

                                SIX MONTHS         YEAR ENDED DECEMBER 31,
                              ENDED JUNE 30,  ----------------------------------
                               1997    1996    1996   1995   1994   1993   1992
                              ------- ------- ------ ------ ------ ------ ------
End of period................  1.3811  1.3651 1.3696 1.3652 1.4028 1.3240 1.2711
Period average...............  1.3724  1.3668 1.3636 1.3726 1.3659 1.2898 1.2083

On August 13, 1997, the Bank of Canada noon rate of exchange for United States dollars into Canadian dollars was Cdn. $1.3942 = U.S. $1.00. Unless otherwise noted, all exchange rate conversions within this Prospectus assume an exchange rate of Cdn. $1.3942 = U.S. $1.00.

ELIGIBILITY FOR INVESTMENT

Eligibility of the Common Shares offered hereby for investment by purchasers to whom any of the following statutes apply is, in certain cases, governed by criteria which such purchasers are required to establish as policies or guidelines pursuant to the applicable statute (and, where applicable, the regulations thereunder) and is subject to the prudent investment standards and general investment provisions and restrictions provided therein:

Insurance Companies Act (Canada)          An Act respecting insurance (Quebec)
Pension Benefits Standards Act, 1985       (for insurers as defined therein
 (Canada)                                  incorporated under the laws of the
Trust and Loan Companies Act (Canada)      province of Quebec other than a
Pension Benefits Act (Ontario)             mutual association or guarantee
Financial Institutions Act                 fund)
 (British Columbia)                       An Act respecting trust companies
Pension Benefits Standards Act             and savings companies (Quebec) (for
 (British Columbia)                        savings companies investing their
Supplemental Pension Plans Act (Quebec)    own funds, and by trust companies
                                           investing their own funds and
                                           deposits received by them)

The Common Shares will be qualified investments under the Income Tax Act (Canada) (the "Canadian Act") for trusts governed by registered retirement savings plans, registered retirement income funds and deferred profit sharing plans.

The Common Shares will be foreign property for the purposes of the foreign property limitations under the Canadian Act. Part XI of the Canadian Act requires that certain tax payers, including registered retirement savings plans, registered retirement income funds and deferred profit sharing plans, restrict their investments in foreign property within the limits contained in the Canadian Act in order to avoid a penalty tax. The foreign property limit is currently 20% of the cost amount of all property held by the taxpayer.

SUMMARY

The following summary is qualified in its entirety by the more detailed information and the financial statements and notes thereto appearing elsewhere in this Prospectus. Prospective investors should consider carefully the information discussed under "Risk Factors" and elsewhere in this Prospectus. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus.

The "as adjusted" and other proforma financial information contained in this Prospectus under "Summary", "Dilution", "Capitalization" and "Use of Proceeds" assumes the completion of the offering of the Common Shares made hereby at an assumed public offering price of Cdn. $8.50 per Common Share. This assumed price represents the closing price of the Company's Common Shares as reported on The Toronto Stock Exchange on August 13, 1997, and is not indicative of the actual offering price of the Common Shares to be determined by the Company and the Underwriters.

UNLESS OTHERWISE INDICATED, ALL REFERENCES TO "$" OR "DOLLARS" REFER TO

UNITED STATES DOLLARS. ALL REFERENCES TO "CDN. $" REFER TO CANADIAN DOLLARS.

THE COMPANY

Salix Holdings, Ltd. ("Salix" or the "Company") identifies and in-licenses gastrointestinal products that have near-term commercial potential and applies its product development expertise to accelerate the commercialization of these products. The Company's business strategy is to select and in-license gastrointestinal products that have the potential for rapid regulatory approval. By in-licensing drugs with late-stage clinical data and developing these drugs for diseases that are in need of new pharmaceutical treatments, the Company believes that it can significantly reduce the risk, time and investment normally associated with the development and commercialization of pharmaceuticals products.

The Company's first product, Colazide, recently was approved for marketing in the United Kingdom for the treatment of acute ulcerative colitis. The Company currently expects that commercial launch of Colazide in the United Kingdom will occur in October 1997 and, subject to regulatory approvals, that Colazide will become commercially available in other countries in Europe in 1998. In addition, the Company has recently submitted to the United States Food and Drug Administration ("FDA") its New Drug Application ("NDA") for Colazide for the same indication.

The Company has also in-licensed a second product, rifaximin, and intends to pursue regulatory approvals for the drug in the treatment of two initial indications, hepatic encephalopathy and antibiotic associated colitis. The Company presently expects to submit an application to the FDA in the fourth quarter of 1997 seeking Orphan Drug Status for rifaximin in the treatment of hepatic encephalopathy. If the Company's application is approved, rifaximin could receive priority review from the FDA following completion of clinical trials for the drug and filing of an NDA for marketing approval. It is not currently expected that the Company will be in a position to file an NDA for rifaximin prior to mid-1998.

Kingdom in October 1997, the Company has entered into manufacturing arrangements with Courtaulds Chemicals (Holdings) Limited and Anabolic, Inc., each of which is a commercially established pharmaceutical manufacturer.

Colazide will be distributed in all markets except certain countries in southern Europe and Asia by AB Astra ("Astra"), a Swedish international pharmaceutical company, under a distribution agreement that provides Astra with exclusive distribution rights, and in Italy, Spain, Portugal, and Greece by a division of Menarini Pharmaceutical Industries s.r.l. ("Menarini"), an Italian manufacturer and distributor of pharmaceutical products. The Company's distribution arrangements with Astra and Menarini have provided the Company with funding necessary to complete the late-stage development of Colazide, in- license other gastrointestinal products and help establish the Company as a viable gastrointestinal pharmaceutical company.

The Company expects to market and sell rifaximin and other future products in-licensed and commercialized by the Company through a small, specialized direct sales force to be established by Salix. The Company believes that a direct sales model will reflect higher operating margins than the distribution partner model that the Company will use in connection with sales of Colazide.

The Company was incorporated in the British Virgin Islands in December 1993. Prior to December 1993, the business of the Company was conducted by Salix Pharmaceuticals, Inc., a California corporation ("Salix Pharmaceuticals"), which was incorporated in California in 1989 and which is now a subsidiary of Salix Holdings, Ltd. Unless the context otherwise requires, references in this Prospectus to "Salix" and the "Company" refer to Salix Holdings, Ltd., a corporation organized under the laws of the British Virgin Islands, and its wholly owned subsidiaries, Salix Pharmaceuticals and Glycyx Pharmaceuticals, Ltd., a Bermuda corporation ("Glycyx"). The Company's executive offices are located at 3600 West Bayshore Road, Suite 205, Palo Alto, California 94303, and its telephone number at that address is (650) 856-1550.

THE OFFERING

Securities Offered...... 3,000,000 Common Shares of the Company
Common Shares
 Outstanding after the
 Offering............... 10,118,173 Common Shares(/1/)
Toronto Stock Exchange
 Symbol................. SLX(/2/)
Use of Proceeds......... The net proceeds to the Company from the sale of the 3,000,000
                         Common Shares offered hereby are estimated to be approximately
                         Cdn. $22,622,575 (approximately Cdn. $26,198,950 if the
                         Underwriters' over-allotment option is exercised in full) at an
                         assumed public offering price of Cdn. $8.50 per Common Share,
                         which is not indicative of the actual offering price, and after
                         deducting estimated underwriting discounts and commissions and
                         offering expenses payable by the Company.
                         Of the offering proceeds, the Company expects to apply
                         approximately Cdn. $4,000,000 (U.S. $2,869,029) toward the
                         commercialization of Colazide in the United Kingdom and
                         obtaining regulatory approval in the United States,
                         approximately Cdn. $15,622,575 (U.S. $11,205,404) toward the
                         Company's other product development and clinical programs, and
                         approximately Cdn. $3,000,000 (U.S. $2,151,772) for other
                         working capital and general corporate purposes. The Company's
                         allocation of offering proceeds to other product development and
                         clinical programs will be increased by the amount of any net
                         proceeds resulting from the exercise of the Underwriters' over-
                         allotment option. There can be no assurance that the actual
                         allocation of the offering proceeds will not differ materially
                         from their currently anticipated use. See "Use of Proceeds" and
                         "Management's Discussion and Analysis of Financial Condition and
                         Results of Operations".
Risk Factors............ Investment in the Common Shares may be regarded as speculative
                         due to the nature of the Company's business and the various
                         stages of development of its new products. In particular,
                         investors should consider that the Company has only one product
                         approved for sale, such approval relates to the sale of the
                         product only in the United Kingdom, and the product has not yet
                         been launched commercially. The Company has incurred operating
                         losses and cash flow deficiencies to date and does not expect to
                         achieve profitability on an annual basis before 2000. The
                         Company's products are subject to strict regulatory approval
                         requirements. The proceeds from this offering may be inadequate
                         to fund the development of the new products, and it is likely
                         the Company will require additional funding in the future. See
                         "Risk Factors".

(1) Based on Common Shares outstanding as of June 30, 1997. Excludes (i) 713,500 Common Shares issuable upon exercise of options outstanding as of June 30, 1997 under the Company's 1994 Stock Plan (the "1994 Plan") and the 1996 Stock Option Plan (the "1996 Plan" and together with the 1994 Plan, the "Stock Plans") at a weighted average exercise price of $3.72 per Common Share, (ii) 303,362 Common Shares reserved for issuance under future option grants as of June 30, 1997 under the Stock Plans, and (iii) 602,331 Common Shares issuable upon exercise of outstanding warrants as of June 30, 1997 at an exercise price of $3.00 per Common Share. See "Management--Stock Plans", "Description of Share Capital" and Notes 8 and 10 of Notes to Consolidated Financial Statements.

(2) The Company's Common Shares currently trade on The Toronto Stock Exchange under the symbol "SLX.s" and carry a legend reflecting the Company's reliance, in connection with its initial public offering in Canada in May 1996, on the exemption from the registration requirements of the United States Securities Act of 1933, as amended (the "U.S. Securities Act"), set forth in Regulation S thereunder. It is the Company's current intention to authorize the removal on May 28, 1998 of the Regulation S legend from all shares currently bearing such legend. Shareholders may request that the Company remove such legend in connection with resales prior to May 28, 1998, subject to the shareholder's ability to establish, to the satisfaction of the Company and its legal counsel, that the requirements of the U.S. Securities Act have been satisfied. After May 28, 1998, all Common Shares that are then freely tradeable on The Toronto Stock Exchange will trade under the symbol "SLX". The Common Shares offered by the Company hereby will be registered under the U.S. Securities Act and will not, therefore, carry a legend. See "Shares Eligible for Future Sale".

SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

                            SIX MONTHS
                          ENDED JUNE 30,            YEAR ENDED DECEMBER 31,
                          ----------------  -------------------------------------------
                           1997     1996     1996     1995     1994     1993     1992
                          -------  -------  -------  -------  -------  -------  -------
                            (UNAUDITED)
CONSOLIDATED STATEMENT
 OF OPERATIONS DATA:
License revenue.........  $    --  $    --  $ 1,186  $    --  $    --  $ 1,000  $ 1,712
Revenue from
 collaborative
 agreements and other...       21      384      634    1,990    2,827    3,439    1,212
Loss from operations....   (2,575)  (1,443)  (2,569)  (2,332)  (1,497)    (755)  (1,023)
Net loss................   (2,475)  (1,571)  (2,451)  (2,420)  (1,452)    (714)  (1,011)
Net loss per
 share(/1/).............  $ (0.35) $ (0.41) $ (0.46) $ (0.77) $ (0.46) $ (0.23) $ (0.38)
Shares used in computing
 net loss per
 share(/1/).............    6,975    3,877    5,365    3,149    3,144    3,144    2,688

                                                            JUNE 30, 1997
                                                      --------------------------
                                                       ACTUAL   AS ADJUSTED(/2/)
                                                      --------  ----------------
                                                             (UNAUDITED)
SELECTED CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................ $  3,657       $19,883
Working capital......................................    2,986        19,212
Total assets.........................................    4,250        20,476
Accumulated deficit..................................  (11,076)      (11,076)
Shareholders' equity.................................    3,181        19,407

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

(2) Adjusted to give effect to the sale of 3,000,000 Common Shares offered by the Company hereby at an assumed public offering price of Cdn. $8.50 per Common Share (and an assumed exchange rate of Cdn. $1.3942 per U.S. $1.00) and the application of the estimated net proceeds therefrom after deducting estimated underwriting discounts and commissions and offering expenses payable by the Company. See "Use of Proceeds" and "Capitalization".

Except as otherwise indicated herein, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option.

RISK FACTORS

An investment in the Common Shares offered by this Prospectus involves a high degree of risk. Prospective purchasers of the Common Shares offered hereby should carefully review the following risk factors as well as the other information set forth in this Prospectus. This Prospectus contains forward- looking statements based upon current expectations of future events that involve risks and uncertainties. The Company's actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the following risk factors and elsewhere in this Prospectus.

Dependence on Currently Licensed Products; Uncertainty of Regulatory Approval of Company's Products. The Company's future success will depend, among other factors, on its ability to in-license, develop, and commercialize new pharmaceutical products. The Company currently licenses two pharmaceutical products, balsalazide and rifaximin, and the Company's prospects over the next three to five years are substantially dependent on regulatory approval and successful commercialization of these products. The Company has in-licensed certain rights to balsalazide and rifaximin in certain markets from Biorex Laboratories Limited ("Biorex") and Alfa Wassermann S.p.A. ("Alfa Wassermann"), respectively. In addition, the Company has entered into agreements relating to the development, commercialization, manufacture, and marketing of Colazide, the disodium salt of balsalazide, with AB Astra, a Swedish pharmaceutical company ("Astra"), and with a division of Menarini Pharmaceutical Industries s.r.l., an Italian pharmaceutical company ("Menarini"). See "--Dependence on Exclusive Licenses" and "--Dependence on Collaborative Partners".

Development, manufacture, and marketing of both balsalazide and rifaximin are subject to extensive regulation by governmental authorities in the United States and other countries. Neither drug has been approved by the United States Food and Drug Administration ("FDA") for use in the United States. In June 1997, the Company submitted a New Drug Application ("NDA") to the FDA relating to Colazide as a therapy for acute ulcerative colitis. The NDA is subject to acceptance for filing by the FDA by August 22, 1997 and, if accepted for filing, a detailed substantive review. The Company believes that FDA approval to market Colazide will not be obtained before mid-1998, if at all. In July 1997, the Medicines Control Agency in the United Kingdom approved Colazide as a treatment for acute ulcerative colitis in the United Kingdom, and the Company and its partners, Astra and Menarini, are in the process of seeking approvals in other member countries of the European Union through a mutual recognition procedure. There can be no assurance that Colazide will receive approval from the FDA or from regulatory agencies in any member country of the European Union other than the United Kingdom. Even if such approvals are ultimately received, there can be no assurance as to the timing of such approvals or market acceptance of Colazide for the approved indications. With respect to rifaximin, Alfa Wassermann is currently conducting a clinical trial in Spain relating to the drug as a therapy for hepatic encephalopathy. The Company has not yet reviewed the protocol for this trial, has not audited the data collection procedures, and has not determined that such study is being conducted in accordance with Good Clinical Procedures ("GCP"). There can be no assurance that the clinical trial for rifaximin currently being performed by Alfa Wassermann will demonstrate that the drug is safe and effective for the indication tested, that such clinical trial will support the filing of an NDA for rifaximin as a therapy for hepatic encephalopathy, that in the event an NDA is filed with the FDA, the Company will be successful in obtaining regulatory approval in the United States, or that the Company will obtain regulatory approval for rifaximin from authorities in any other jurisdiction. The Company believes that an NDA will not be filed for rifaximin prior to mid-1998 and that FDA approval for rifaximin will not be obtained for at least one year after filing, if at all. The Company expects that a significant portion of its potential revenues for the next few years will depend on regulatory approval and sales of these products. Failure to obtain regulatory approvals, delays in obtaining regulatory approvals, obtaining regulatory approvals for Colazide or rifaximin in only limited markets or for limited uses, or lack of market acceptance for either product, to the extent regulatory approvals are obtained, would have a material adverse effect on the Company's business, financial

condition, and results of operations. See "--Significant Government Regulation; No Assurance of Product Approvals" and "Business--Products Under Development".

Expectation of Future Losses. The Company has only a limited history of operations consisting primarily of development of its products and sponsorship with third parties of research and clinical trials. The Company has had no earnings to date and has not realized any material operating revenues from product sales, either directly by the Company or indirectly through its development and distribution partners. Substantially all of the Company's revenues to date have been derived from milestone payments from the Company's collaborative partners related to the development of Colazide. As of June 30, 1997, the Company had incurred cumulative losses since inception of approximately $11.1 million. The Company currently expects operating losses to continue at least through 1999 and to increase from current levels prior to 1999 as the Company continues to develop Colazide and rifaximin. The Company's future operating performance will depend on the timing of regulatory approvals of Colazide and rifaximin, particularly the timing of FDA approval, and if such approvals can be obtained, will also depend on market acceptance. See "-- Uncertainty of Market Acceptance; Lack of Sales and Marketing Experience", "-- Future Capital Needs; Uncertainty of Additional Funding", and "Management's Discussion and Analysis of Financial Condition and Results of Operations".

Dependence on Collaborative Partners. The initial commercialization of Colazide in the United Kingdom and, to the extent regulatory approval is obtained, in other countries in which the Company has commercial rights to Colazide is entirely dependent on Astra. Under its agreements with Astra, the Company has granted Astra exclusive rights to distribute and sell Colazide on a worldwide basis with the exception of Italy, Spain, Portugal, and Greece, where the Company has granted exclusive distribution rights to Menarini, and with the exception of Japan, Taiwan, and Korea, where the Company does not have rights to Colazide. Although Astra has agreed to use its best endeavors to promote, market, and sell Colazide in its exclusive markets, there are no specified financial thresholds that must be achieved for Astra to maintain its exclusivity. The Company's agreements with Astra provide for, with respect to Europe, a term of 15 years and, with respect to the United States, a term ending on the later to occur of the expiration date of the last expiring patent and the date 9 years from the first commercial launch date of Colazide but, in either event, the agreements may be terminated earlier by either party upon the occurrence of specified events, including a material breach.

The Company's agreements with Astra require Astra to accomplish the commercial launch of Colazide in any jurisdiction within 90 days of receipt of regulatory approval in that jurisdiction, subject to a 90 day cure period. The Company received marketing approval for Colazide in the United Kingdom from the Medicine Controls Agency in July 1997, and the Company and Astra have announced that the commercial launch of Colazide is expected to occur in the United Kingdom in October 1997, based on a selling price set by Astra. Following regulatory approval of Colazide in each country in Europe where Astra has exclusive distribution rights, the Company and Astra must agree on the Colazide sales price for such country, which may be less than the selling price in the United Kingdom. The agreed sales price for Colazide will directly affect the Company's revenues because the parties' agreement obligates Astra to purchase Colazide from the Company, and the Company to supply Colazide to Astra, at a transfer price equal to a percentage of Astra's selling price. The Company does not anticipate significant margins from Colazide sales by Astra in the United Kingdom or in continental Europe, where pricing has not yet been determined.

Regulatory approvals for the marketing of Colazide in European countries other than the United Kingdom are not expected until 1998, and it is unlikely the FDA will approve marketing of Colazide in the United States before mid- 1998, if at all. In addition, the Company's strategy for the research, development and commercialization of products, including balsalazide, rifaximin, and other drugs the Company may in-license in the future, requires arrangements with other corporate partners, governmental and university collaborators, clinical research organizations ("CROs"), contract manufacturers, licensors, licensees and others, and is dependent upon the success of these outside parties in performing their responsibilities. There can be no assurance that the Company will be able to negotiate acceptable

collaborative arrangements in the future, or that its current or future collaborative arrangements, including the agreements with Astra or Menarini, will be successful or will not be terminated by the other party. Although the Company believes that parties to any collaborative arrangements would have an economic motivation to succeed in performing their contractual responsibilities, the amount and timing of resources to be devoted to these activities in most instances will not be within the control of the Company. Failure of the Company and its collaborative partners to develop, commercialize, manufacture or market products, including Colazide, would have a material adverse effect on the Company's business, financial condition, and results of operations.

Significant Governmental Regulation; No Assurance of Product Approvals. The production and marketing of the Company's products and its ongoing research and development activities are subject to extensive regulation by governmental authorities in the United States and other countries. Failure to comply with FDA or other applicable regulatory requirements may subject a company to administrative sanctions or judicially imposed sanctions such as civil penalties, criminal prosecution, injunctions, product seizure or detention, product recalls, total or partial suspension of production. In addition, non- compliance may result in the FDA's refusal to approve pending NDAs or supplements to approved NDAs or in the withdrawal of an NDA. Any such sanction could result in adverse publicity, which could have a material adverse effect on the Company's business, financial condition, and results of operation. The Company has not received regulatory approval in the United States or any foreign jurisdiction other than the United Kingdom for the commercial sale of any of its products. Prior to marketing in the United States, any drug developed by the Company must undergo rigorous preclinical (animal) and clinical (human) testing and an extensive regulatory approval process implemented by the FDA under the United States Federal Food, Drug and Cosmetic Act, and implementing regulations. Satisfaction of such regulatory requirements, which includes satisfying the FDA that the product is both safe and effective for its proposed uses, typically takes several years or more, depending upon the type, complexity, and novelty of the product, and requires the expenditure of substantial resources. Preclinical studies must be conducted in conformance with the FDA's Good Laboratory Practice regulations. Clinical testing, which is rigorously regulated, must meet requirements for Institutional Review Board oversight and informed consent, as well as FDA prior review and oversight, and Good Clinical Practice requirements. The Company has limited experience in conducting preclinical and clinical testing necessary to obtain regulatory approval and will rely on CROs to perform this work. There can be no assurance that those conducting clinical trials for the Company will be able to initiate trials at preferred clinical test sites or recruit sufficient test subjects or that clinical trials will be started or completed successfully in a timely fashion, if at all, with respect to any of the Company's products. Furthermore, the Company or the FDA may suspend clinical trials at any time if it believes that the subjects participating in such trials are being exposed to unacceptable health risks. There can be no assurance that the Company will not encounter problems in clinical trials which will cause the Company or the FDA to delay or suspend clinical trials.

On June 23, 1997, the Company submitted an NDA to the FDA covering the use of Colazide as a therapy for acute ulcerative colitis. The NDA is subject to acceptance for filing by the FDA by August 22, 1997. If accepted for filing, the NDA can be approved only if the FDA determines that the NDA contains substantial evidence from clinical trials that the drug is safe and effective for its intended use. There can be no assurance that the results of the Company's preclinical or clinical studies, including its United States Phase III clinical testing in combination with the results from a European Phase III safety and efficacy study, will demonstrate, to the FDA's satisfaction, substantial evidence that the drug is safe and effective. If clinical data, in addition to that filed in the NDA, is requested from the Company to support approval of Colazide, such a request is likely to delay significantly any pending review and approval of the product, if approval is granted at all. If regulatory approval of Colazide or any other product is granted, such approval will be limited to those disease states and conditions for which the product has been shown to be safe and effective, as demonstrated to the FDA's satisfaction through well controlled clinical studies. Furthermore, approval may entail ongoing requirements for post-marketing studies. Even if such regulatory approval is obtained, a marketed product, promotional activities for the product, its manufacturer and its

manufacturing facilities are subject to continual review and periodic inspections. In addition, identification of certain side effects after a drug is on the market or the occurrence of manufacturing problems could cause subsequent withdrawal of approval, reformulation of the drug, additional preclinical testing or clinical trials and changes in labeling of the product. The Company does not expect to file an NDA for rifaximin prior to mid-1998 and will do so only if the clinical trials support such a filing. See "Business-- Government Regulation".

Dependence on Third Parties for Manufacturing. The Company currently does not intend to manufacture its potential pharmaceutical products, including Colazide and rifaximin, and, therefore, will be dependent on contract manufacturers for the production of such products for development and commercial purposes. In the event that the Company is unsuccessful in obtaining or retaining third-party manufacturing or if the Company's manufacturers experience production difficulties, delays or disruptions or fail to comply with regulatory requirements, the Company may not be able to obtain adequate supplies of products in a timely fashion or at acceptable quality, quantity, timing or prices, or to commercialize its potential products as planned. The Company's initial product, Colazide, has never been manufactured in commercial quantities. No assurances can be given that the Company, or its manufacturing partners, will be able to manufacture Colazide (or other future developed products) in commercial quantities that would enable the Company to meet its business objectives. Under the terms of the Company's distribution agreements with Astra and Menarini, the obligations of such companies to purchase product will terminate under certain circumstances in which the Company is unable or unwilling to adequately supply them with product. In such circumstances, Astra or Menarini, as the case may be, is granted a temporary license to manufacture Colazide. Under certain situations, such manufacturing licenses may become permanent, in which case the Company's revenues from the arrangements could be, depending on the circumstances, severely reduced or eliminated. Moreover, contract manufacturers that the Company may use must adhere to current Good Manufacturing Practices ("GMPs"), which are regulations strictly enforced by the FDA through its facilities inspection program. If these facilities cannot pass a pre-approval plant inspection, the likelihood of the FDA's pre-market approval of Colazide will be adversely affected. Certain material manufacturing changes that may occur after approval are also subject to FDA review and approval. There can be no assurance that the FDA or other regulatory agencies will approve the processes or the facilities by which any of the Company's products may be manufactured. In addition, if the facilities cannot pass regular post-approval FDA inspections, manufacturing and distribution may be disrupted, recalls of distributed products may be necessary, and other sanctions could be applied. Any disruption in the supply in manufacturing and marketing of the Company's proposed products would have a material adverse effect on the Company's business, financial condition, and results of operations.

Dependence on In-Licensing and Acquisition of New Products for Future Growth; Uncertainties Related to Clinical Trials of Development Stage Products. Whether or not Colazide or rifaximin receives regulatory approvals and is successfully marketed, the Company's ability to grow in the future will depend on its success in in-licensing or acquiring additional pharmaceutical products. The Company seeks to in-license or acquire pharmaceutical products that have been developed beyond the initial discovery phase and for which late-stage human clinical data is already available. There can be no assurance that such pharmaceutical products will be available on attractive terms for in-licensing or acquisition by the Company. In addition, any product in-licensed by Salix will likely require significant further research and development, including clinical testing, regulatory approval, and investment prior to commercialization, and as a result will be subject to the risks of failure inherent in the development of therapeutic products based on innovative technologies. These risks include the possibility that any or all of these proposed products may not be found to be safe or effective or that they may otherwise fail to receive necessary regulatory approvals; that the proposed products will prove uneconomical to market or will not achieve broad market acceptance; that third parties will hold proprietary rights that prevent the marketing of the proposed products; or that third parties will market a superior or equivalent product. In addition, due to the extended testing and regulatory review process required before marketing approval can be obtained, the time-frames for commercialization of any products are long and uncertain. See "Business--Government Regulation".

Uncertainty of Market Acceptance; Lack of Sales and Marketing Experience. The Company's future success will depend in part on its ability to develop and commercialize new products, including Colazide and rifaximin, or new formulations of or indications for current products. Assuming the Company can successfully develop such products and obtain regulatory approvals, their future success will depend upon their acceptance by the medical community and third-party payors as useful and cost-effective. Market acceptance will depend upon several factors, including the establishment of the safety, effectiveness, patient tolerance, and cost of the Company's products relative to those of competitors. The Company and its collaborative partners may be required to engage in extensive advertising, educational programs or other means to market its products. Failure of any of the Company's products to achieve market acceptance would have a material adverse effect on the Company's business, financial condition, and results of operations.

The Company has no experience marketing and selling its products either directly or through distributors. The Company's sales and marketing strategy for Colazide relies on its third-party distributors, Astra and Menarini, to whom the Company has granted exclusive marketing rights. There can be no assurance that either Astra or Menarini will market Colazide successfully in any country in which they have exclusive rights. The Company intends to establish its own direct sales force for the purpose of achieving direct sales of rifaximin and other future products. There can be no assurance that the Company's marketing and direct sales efforts will be successful.

Dependence on Exclusive Licenses. The Company's rights to balsalazide and rifaximin are derived from its license agreements with Biorex and Alfa Wassermann, respectively. The Company's rights under these licenses are subject to early termination by Biorex or Alfa Wassermann, as the case may be, under certain circumstances, including material breach by the Company, the bankruptcy or insolvency of the Company, the failure to commence marketing of products within specified periods after their regulatory approval, or the Company's failure to satisfy its manufacturing obligations under its agreements with distribution partners. In the event that Biorex or Alfa Wassermann terminate their respective license agreements, the Company would have no further rights to utilize their respective patents or trade secrets to manufacture and market products based on balsalazide or rifaximin, as the case may be. The Company's licenses for balsalazide and rifaximin provide that the Company's royalty obligations may extend beyond the expiration date of the underlying patents, which could have a material adverse effect on the Company's business, financial condition, and results of operations in the event a generic version of balsalazide or rifaximin, as the case may be, were introduced. In addition, the Company's license agreement with Alfa Wassermann also provides that the Company may not promote, distribute or sell any antibiotic products that compete with rifaximin in its licensed territory (the United States and Canada) for a period of five years after the first commercial sale of rifaximin under the agreement, thereby limiting the Company's ability to in-license, develop, or market such products. See "Business--Strategic Alliances".

Patents and Proprietary Rights; Expiration of Patents. Because of the substantial length of time and expense associated with bringing new products through development and regulatory approval to the marketplace, the pharmaceutical industry places considerable importance on obtaining patent and trade secret protection for new technologies, products and processes. Because the Company's strategy is to in-license or acquire pharmaceutical products which typically have been discovered and initially researched by others, such products may have limited or no remaining patent protection due to the time elapsed since their discovery. The patents for the Colazide composition of matter and method of treating ulcerative colitis with Colazide expire in July 2001 in the United States, February 2002 in the United Kingdom, May 2002 in France, July 2001 in Italy, and April 2002 in Germany. The patents for the method of treating colon cancer using Colazide expire in January 2014 in the United States and, assuming patents issue from pending applications, in January 2015 in various countries in Europe, Asia, and North America. The patents for the rifaximin composition of matter (also covering the process of making rifaximin and using rifaximin to treat gastrointestinal infectious diseases) expire in May 2001 in the United States and Canada. The patents for the process of making rifaximin expire in April 2005 in both the United States

and Canada. Patents for the use of rifaximin for H. pylori infections expire in June 2013 in the United States and February 2014 in Canada. Although the Company believes it may be granted extensions of up to five years in certain circumstances, based on patent term restoration procedures established in Europe and in the United States under the Waxman-Hatch Act for products that have received regulatory approval, there is no assurance that such extensions will be granted. See "--Uncertainty Regarding Waxman-Hatch Act and Similar Foreign Laws". The Company has filed applications for use patents for additional indications using balsalazide and related chemical substances. There can be no assurance that any patents will be issued. There can be no assurance that competitors will not develop products based on the same active ingredients for marketing as soon as the applicable patents expire or at any time thereafter or that competitors will not design around existing patents. Sales of such generic versions could have an adverse effect on the Company's business, financial condition, and results of operations. The Company's success will depend in part on its ability to obtain United States and foreign patent protection for its products and processes, preserve its trade secrets, and operate without infringing on the proprietary rights of third parties. There can be no assurance that patents will issue with respect to, or that the claims allowed will provide sufficient protection to, the Company's present or future technology.

There can be no assurance that any other patents will be issued on any of the Company's patent applications or on patent applications licensed from third parties. Moreover, there can be no assurance that the claims allowed in the patents or patent applications are or will be sufficiently broad to protect the Company's technology or that the patents will provide protection against competitive products or otherwise be commercially valuable.

Furthermore, as with any pharmaceutical company, the Company's patent and other proprietary rights are subject to uncertainty. The Company's patent or other proprietary rights related to its products might conflict with current or future rights of others. For instance, there is no assurance that the use of the Company's technology will not infringe the patent rights of others. For the same reasons, the products of others could infringe the patent or other proprietary rights of the Company. Litigation or patent interference proceedings, either of which could result in substantial cost to the Company, may be necessary to enforce any patents issued to and other proprietary rights of the Company or to determine the scope and validity of other parties' proprietary rights. The defense and prosecution of patent and intellectual property claims are both costly and time-consuming, even if the outcome is favorable to the Company. Any adverse outcome could subject the Company to significant liabilities to third parties, require disputed rights to be licensed from third parties, or require the Company to cease selling its products.

In addition to patent protection, the Company also relies on trade secrets, proprietary know-how and technological advances which it seeks to protect, in part, through confidentiality agreements with its collaborative partners, employees and consultants. There can be no assurance that these agreements will not be breached, that the Company will have adequate remedies for any breach, or that the Company's trade secrets and proprietary know-how will not otherwise become known or be independently developed by others.

There can be no assurance that the Company will be able to obtain a license to any third-party technology that it may require to conduct its business or that, if obtainable, such technology can be licensed at a reasonable cost. Failure by the Company to obtain a license to any technology that it may require to commercialize its technologies or products will have a material adverse effect on the Company. In addition, there can be no assurance that others will not independently develop substantially equivalent proprietary information or obtain access to the Company's know-how, or that others will not be issued patents which prevent the manufacture or sale of Company products or require licensing and the payment of significant fees or royalties by the Company in order for it to be able to carry on its business. Litigation, which could result in substantial cost to the Company, may be necessary to enforce or defend the Company's patents or proprietary rights.

Uncertainty Regarding Waxman-Hatch Act and Similar Foreign Laws. Certain provisions of the Waxman-Hatch Act provide patent term extensions for the first permitted commercial marketing or use of a new drug that is subject to regulatory review prior to marketing. Under the Waxman-Hatch Act, the Patent and Trademark Office is directed to extend the term of an eligible patent for a time equal to the "regulatory review period for the approved product". This time period is generally one-half the length of time between the effective date of the IND and submission of the NDA, plus the length of time between filing and approval of the NDA, up to a total possible extension of five years. Periods during which the applicant did not act with "due diligence" are subtracted from the regulatory review period. Under this law, the Colazide patent in the United States could be extended by up to five years, giving the product patent protection until as late as 2006 if approval in the United States is received before expiration of the original patent term in 2001. In addition, the Company intends to seek patent extensions under similar laws in effect in the European Union, which could give Colazide patent protection in these jurisdictions until as late as 2006. There can be no assurance that any of the benefits of the Waxman-Hatch Act or similar foreign laws will be available to the Company or that such laws will not be amended or repealed.

Uncertain Availability of Health Care Reimbursement; Health Care Reform Proposals. The Company's ability to commercialize gastrointestinal products may depend in part on the extent to which reimbursement for the costs of such products and related treatments will be available from government health administration authorities, private health insurers and others. Significant uncertainty exists as to the reimbursement status of newly approved health care products. There can be no assurance of the availability of adequate third party insurance reimbursement coverage that would enable the Company to establish and maintain price levels sufficient for realization of an appropriate return on its investment in developing new therapies. Government and other third party payors are increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement for new therapeutic products approved for marketing by the FDA and by refusing, in some cases, to provide any coverage for uses of approved products for disease indications for which the FDA has not granted marketing approval. If adequate coverage and reimbursement levels are not provided by government and third party payors for uses of the Company's therapeutic products, the market acceptance of these products could be adversely affected.

Health care reform proposals have been introduced in the United States Congress and in various state legislatures in the United States. It is currently uncertain whether any health care reform legislation will be enacted at the federal level or what actions governmental and private payors may take in response to the suggested reforms. The Company cannot predict when any suggested reforms will be implemented, if ever, or the effect of any implemented reforms on the Company's business. There can be no assurance that any implemented reforms will not have a material adverse effect on the Company's future results of operations. Such reforms, if enacted, may affect the availability of third party reimbursement for products developed by the Company as well as the price levels at which the Company is able to sell such products. In addition, to the extent that the Company is able to commercialize products in markets outside the United States, the Company's ability to achieve success in such markets will depend, in part, on the health care financing and reimbursement policies of such countries.

Intense Competition. Competition in the pharmaceutical industry is intense and characterized by extensive research efforts and rapid technological progress. The Company believes that there are numerous pharmaceutical and biotechnology companies, both public and private and including large well- known pharmaceutical companies, as well as academic research groups throughout the world engaged in research and development efforts with respect to pharmaceutical products targeted at gastrointestinal diseases and conditions addressed by the Company's current and potential products. In particular, the Company is aware of products in research or development by competitors that address the diseases being targeted by the Company's products. There can be no assurance that developments by others will not render the Company's current and potential products obsolete or non-competitive. Competitors may be able to complete the development and regulatory approval process sooner and, therefore, market their

products earlier than the Company. Many of the Company's competitors have substantially greater financial, marketing and personnel resources and development capabilities than the Company. For example, many large, well capitalized companies already offer products in the United States and Europe that target the proposed indications for Colazide, including mesalamine (SmithKline Beecham plc, Dr. Falk Pharma GmbH, Pharmacia & Upjohn, Inc., Solvay S.A., The Procter & Gamble Company, and Hoechst Marion Roussel, Inc.), sulfasalazine (Pharmacia & Upjohn, Inc.), and olsalazine (Pharmacia & Upjohn, Inc.). Technological developments by competitors, earlier regulatory approval for marketing competitive products, or superior marketing capabilities possessed by competitors could adversely affect the commercial potential of the Company's products, including Colazide, and could have a material adverse effect on the Company's business, financial condition, and results of operations. In addition, manufacturers of generic drugs may seek to compete directly with the Company's products in the absence of effective patent protection or non-patent exclusivity protection.

Future Capital Needs; Uncertainty of Additional Funding. The Company believes that the anticipated net proceeds of this offering, together with the Company's existing cash reserves and cash flows from operations, should be sufficient to satisfy the cash requirements of the Company through at least 1998. The Company's actual cash requirements will depend on numerous factors, including the costs of obtaining regulatory approvals, including FDA approvals; costs associated with the commercialization of Colazide in the United Kingdom and, if necessary regulatory approvals are obtained, in other member countries of the European Union and the United States; the Company's research and development efforts, including expenditures in connection with alliances, license agreements and acquisitions of and investments in additional pharmaceutical products; the cost of filing, prosecuting, defending and enforcing intellectual property rights; and the purchase or lease of additional capital equipment. There can be no assurance that changes in the Company's product offerings, product development plans or other changes affecting the Company's operating expenses will not result in unanticipated increases in expenditures of the Company's capital resources. In addition, the Company anticipates that it will need to raise additional funds in the form of debt or equity financing to fund future licensing, development and commercialization of new products. If additional capital is raised through the sale of equity or convertible debt securities (including warrants or other convertible securities issued in connection with any debt financing), additional dilution to existing shareholders could result. There can be no assurance that additional funding will be available on commercially reasonable terms, if at all. If required funds are not available, the Company may be compelled to curtail operations or to obtain funds through collaborative arrangements that may require the Company to relinquish rights to certain of its products, product candidates, or potential markets. See "Management's Discussion and Analysis of Financial Condition and Results of Operations".

Currency Fluctuations. A significant portion of the Company's business is conducted in currencies other than the United States dollar. Foreign currency transaction gains and losses arising from normal business operations are credited to or charged against earnings in the period incurred. As a result, fluctuations in the value of the currencies in which the Company conducts its business relative to the United States dollar have caused and will continue to cause currency transaction gains and losses. Due to the substantial volatility of currency exchange rates, among other factors, the Company cannot predict the effect of exchange rate fluctuations upon future operating results. There can be no assurance that the Company will not experience currency losses in the future. The Company has not previously undertaken hedging transactions to cover its currency exposure but may hedge a portion of its currency exposure in the future as management deems appropriate. See "Management's Discussion and Analysis of Financial Condition and Results of Operations".

Management of Growth. The Company expects to experience significant growth in the number of its employees and the scope of its operations. This growth is expected to place a significant strain on the Company's management and operations. The Company's ability to manage such growth effectively will depend upon its ability to broaden its management team and its ability to attract, hire, and retain skilled employees. The Company's success will also depend on the ability of its officers and key employees to continue to implement and improve its operational, management information and financial control

systems and to expand, train and manage its employee base. The Company's inability to manage growth effectively could have a material adverse effect on the Company's business, financial condition and results of operations.

Product Liability and Insurance; No Assurance of Adequate Insurance Coverage. The Company's business exposes it to potential products liability risks which are inherent in the testing, manufacture, and marketing of human therapeutic products. There can be no assurance that the Company will be able to maintain its current product liability insurance, that such insurance will provide adequate coverage against potential losses, or that such insurance will remain available to the Company at acceptable costs. Claims or losses in excess of any liability insurance coverage obtained by the Company could have a material adverse effect on the business, financial condition, or results of operations of the Company.

Dependence on Key Personnel; Ability to Recruit Personnel. The Company is dependent upon a number of key management and technical personnel, none of whom is bound by an employment agreement with the Company. The loss of the services of one or more key employees could have a material adverse effect on the Company. The Company's success will also depend on its ability to attract and retain additional highly qualified management and technical personnel. The Company faces intense competition for qualified personnel, many of whom are often subject to competing employment offers. In the event the Company obtains regulatory approvals for rifaximin, it intends to sell rifaximin through a small direct sales force. New employees, particularly new sales and marketing employees, will require substantial training and education concerning the Company's products. There can be no assurance that the Company will be successful in attracting and retaining qualified personnel as necessary, and the failure to do so could have a material adverse effect on the Company's business, operating results, and financial condition.

Control by Directors and Executive Officers. The Company's directors, executive officers, and entities affiliated with them will, in the aggregate, beneficially own approximately 33% of the Company's outstanding Common Shares immediately after the completion of this offering. Accordingly, these shareholders as a group could effectively control the Company on substantially all matters requiring approval by the shareholders of the Company, including the election of directors and the approval of mergers or other business combination transactions. See "Principal Shareholders".

Shares Eligible for Future Sale. Sales of a substantial number of Common Shares in the public market following this offering could adversely affect the market price for the Common Shares. The number of Common Shares available for resale in the public market by holders in the United States is limited by restrictions under the United States Securities Act of 1933, as amended (the "U.S. Securities Act"), including Rule 144 and Regulation S. Following this offering, all of the 3,000,000 Common Shares sold in this offering will be freely tradeable in the United States without restriction (unless such shares are held by an "affiliate" of the Company as such term is defined in the U.S. Securities Act) and will trade on The Toronto Stock Exchange under the symbol "SLX". An additional 2,200,000 Common Shares were issued in connection with the Company's initial public offering in Canada in May 1996 (the "Canadian IPO"). The Common Shares issued in the Canadian IPO and all other outstanding Common Shares available for resale under applicable securities laws currently trade on The Toronto Stock Exchange under the symbol "SLX.s", carry a legend reflecting the Company's reliance, in connection with the Canadian IPO, on the exemption from the registration requirements of the U.S. Securities Act set forth in Regulation S thereunder and are not presently available for resale in the United States or to "U.S. Persons" (as defined in Regulation S) in the absence of an exemption from registration under the U.S. Securities Act. It is the Company's current intention to authorize the removal of the Regulation S legend from all shares currently bearing the legend on May 28, 1998. After May 28, 1998, all shares that are then freely tradeable on The Toronto Stock Exchange will trade under the symbol "SLX". Prior to May 28, 1998, shareholders may request that the Company remove applicable legends in connection with resales on The Toronto Stock Exchange, subject to the shareholder's ability to establish, to the satisfaction of the Company and its legal counsel, that such shares may be resold in the United States in compliance with the requirements of the

U.S. Securities Act. Following removal of the legend, such Common Shares will be freely tradeable in the United States without restriction or further registration under the U.S. Securities Act, except for shares held by "affiliates" of the Company as that term is defined in Rule 144 under the U.S. Securities Act.

Of the 7,118,173 Common Shares outstanding prior to the completion of this offering, except for shares purchased by affiliates of the Company, (i) the 2,200,000 Common Shares issued in connection with the Canadian IPO and approximately 500,000 Common Shares issued in other transactions will be available for resale in accordance with Regulation S at any time on The Toronto Stock Exchange, subject to the legend removal conditions set forth above, and (ii) approximately 1,165,000 Common Shares will be available for resale only in compliance with Rule 144(k) or another exemption under the U.S. Securities Act. Approximately 3,259,000 Common Shares are held by affiliates of the Company and are subject to additional legal and contractual restrictions on resale. See "--Price Volatility; Limited Trading Volume" and "Shares Eligible for Future Sale".

Price Volatility; Limited Trading Volume. The securities markets have from time to time experienced significant price and volume fluctuations that may be unrelated to the operating performance of particular companies. In addition, the market prices of the common stock of many publicly traded pharmaceutical and biotechnology companies have in the past and can in the future be expected to be especially volatile. Announcements of technological innovations or new products by the Company or its competitors, developments or disputes concerning proprietary rights, publicity regarding actual or potential medical results relating to products under development by the Company or its competitors, regulatory developments in both the United States and other countries, public concern as to the safety of pharmaceutical products and economic and other external factors, as well as period-to-period fluctuations in the Company's financial results, may have a significant impact on the market price of the Company's Common Shares. The Company's Common Shares have been traded on The Toronto Stock Exchange since May 1996. Prior to this offering, the Common Shares have not been freely tradable in the United States, and after this offering, no public trading market will exist for the Common Shares in the United States. In addition, trading volume in the Common Shares on The Toronto Stock Exchange has been low, and there can be no assurances that an active trading market will develop or be sustained on The Toronto Stock Exchange, or any other exchange or dealer quotation system, following this offering. See "Price Range of Common Shares".

Currency Risk to Non-Canadian Investors. The Common Shares offered hereby will be sold in Canadian dollars and will trade in Canadian dollars on The Toronto Stock Exchange. In addition to the general market risks associated with ownership of equity securities and the more specific risks of ownership of the Common Shares as set forth herein, non-Canadian purchasers will also bear exchange rate risks resulting from fluctuations in the relative values of the Canadian dollar and foreign currencies. The value of the Canadian dollar has fluctuated substantially in the past relative to the United States dollar and other currencies and may continue to do so in the future. As a result, for non-Canadian investors, the value of the Common Shares in United States dollars and other currencies may vary independent of changes in the trading price of the Common Shares on The Toronto Stock Exchange and for reasons unrelated to the Company or its business, results of operations, or financial condition.

Foreign Corporation Risks. The Company is an International Business Company incorporated under the laws of the British Virgin Islands. Accordingly, principles of law relating to such matters as the validity of corporate procedures, the fiduciary duties of management and the rights of the Company's shareholders and other stakeholders may differ from those that would apply if the Company were incorporated in a jurisdiction within the United States or Canada. The shareholders and other stakeholders of Salix may have more difficulty in protecting their interests in the face of actions by the Board of Directors of the Company or a majority shareholder than they might have with respect to a corporation incorporated in a jurisdiction in the United States or Canada. See "Comparison of Canadian, United States and British Virgin Islands Corporate Laws".

Immediate and Substantial Dilution. The estimated offering price of the Company's Common Shares in this offering is substantially higher than the book value per Common Share. Investors purchasing shares in this offering will, therefore, incur immediate dilution of Cdn. $5.83 (U.S. $ 4.18) in net tangible book value per Common Share from the estimated offering price after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company and will be subject to additional dilution upon the exercise of outstanding stock options. See "Dilution".

Discretion as to Use of Proceeds. Although the Company presently intends to apply the net proceeds of this offering in the manner described under "Use of Proceeds", it has broad discretion within such proposed uses as to the allocation of the net proceeds, the timing of expenditures, and all other aspects relating to the application of such proceeds. The Company reserves the right to reallocate the net proceeds of this offering as management, in its discretion, deems necessary or advisable. There can be no assurance that the actual allocation of the offering proceeds will not differ materially from their currently anticipated use.

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 3,000,000 Common Shares offered hereby are estimated to be approximately Cdn. $22,622,575 (approximately Cdn. $26,198,950 if the Underwriters' over-allotment option is exercised in full) at an assumed public offering price (which is not indicative of the actual offering price of the Common Shares) of Cdn. $8.50 per share and after deducting estimated underwriting discounts and commissions and offering expenses payable by the Company. The Underwriters will pay the proceeds of the offering to the Company in Canadian dollars. The Company will convert such proceeds to United States dollars as soon as practicable after the offering. Based on an assumed exchange rate of Cdn. $1.3942 per U.S.$1.00, the net proceeds to the Company from the sale of the 3,000,000 Common Shares offered hereby are estimated to be approximately U.S.$16,226,205 (approximately U.S.$18,791,386 if the Underwriters' over-allotment option is exercised in full).

The Company intends to use the net proceeds of the offering for working capital and other general corporate purposes, including to fund research and development activities and capital expenditures. Of the offering proceeds, the Company expects to apply approximately Cdn. $4,000,000 (U.S.$2,869,029) toward the commercialization of Colazide in the United Kingdom and obtaining regulatory approval in the United States, approximately Cdn. $15,622,575 (U.S.$11,205,404) toward the Company's other product development and clinical programs, and approximately Cdn. $3,000,000 (U.S.$2,151,772) for other working capital and general corporate purposes. The Company's allocation of offering proceeds to other product development and clinical programs will be increased by the amount of any net proceeds resulting from the exercise of the Underwriters' over-allotment option. The amount and timing of these expenditures will depend on numerous factors either outside of or only partially within the Company's control, including the results of the Company's research and development programs, the regulatory approval process, technological advances by the Company and other pharmaceutical companies, the terms of collaborative agreements entered into by the Company and the status of competitive products. As a result, there can be no assurance that the actual allocation of the net proceeds of this offering will not differ materially from their currently anticipated use. The Company may also use a portion of the net proceeds for the acquisition of technologies, businesses or products that are complementary to those of the Company, although the Company does not presently have any agreements to effect any such acquisitions, and no portion of the net proceeds has been allocated for any specific acquisition. Pending such uses, the net proceeds of this offering will be invested in short-term, interest-bearing, investment grade securities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources".

PRICE RANGE OF COMMON SHARES

The Company's Common Shares have been quoted on The Toronto Stock Exchange under the symbol "SLX.s" since the Company's Canadian IPO in May 1996. The 3,000,000 Common Shares offered hereby will be quoted on The Toronto Stock Exchange under the symbol "SLX". Beginning on May 28, 1998, all the Company's Common Shares available for resale on The Toronto Stock Exchange will trade under the symbol "SLX". See "Shares Eligible for Future Sale". The following is a summary of the market price range in Canadian dollars and the aggregate volume for the Common Shares as reported on The Toronto Stock Exchange for the periods indicated.

                                                                         SHARE
                                              HIGH (CDN.$) LOW (CDN.$)  VOLUME
                                              ------------ ----------- ---------
Fiscal Year ending December 31, 1997
  August 1, 1997 to August 13, 1997..........    $8.80        $8.40       24,550
  July 1997..................................     9.00         7.75      129,479
  June 1997..................................     9.25         7.60      267,860
  May 1997...................................     9.95         8.80      207,761
  April 1997.................................     9.40         8.90      164,662
  Second Quarter 1997........................     9.95         7.60      640,283
  First Quarter 1997.........................     9.35         4.25    1,016,263
Fiscal Year ended December 31, 1996
  Fourth Quarter.............................     5.95         4.50      625,388
  Third Quarter..............................     6.60         5.00      428,425
  Second Quarter (from May 27, 1996).........     7.50         6.20      241,800

On August 13, 1997, the closing price for the Common Shares as reported on The Toronto Stock Exchange was Cdn. $8.50 per share. As of July 31, 1997, there were 76 shareholders of record.

DIVIDEND POLICY

The Company has never declared or paid cash dividends on its share capital. The Company currently expects to retain future earnings, if any, for use in the operation and expansion of its business and does not anticipate paying any cash dividends in the foreseeable future.

CAPITALIZATION

The following table sets forth, as of June 30, 1997, the capitalization of the Company, both actual and as adjusted to give effect to the Company's receipt of net proceeds from the sale of the 3,000,000 Common Shares offered hereby at an assumed public offering price (which is not indicative of the actual offering price of the Common Shares) of Cdn. $8.50 per share (and an assumed exchange rate of Cdn. $1.3942 per U.S. $1.00) and the application of the estimated net proceeds therefrom. The capitalization information set forth below should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus.

                                                             JUNE 30, 1997
                                                          ---------------------
                                                           ACTUAL   AS ADJUSTED
                                                          --------  -----------
                                                              (UNAUDITED)
                                                             (IN THOUSANDS)
Shareholders' equity:
  Common shares, no par value; 20,000,000 shares
   authorized, 7,118,173 shares issued and outstanding,
   actual; 20,000,000 shares authorized, 10,118,173
   shares issued and outstanding, as adjusted(/1/)....... $ 14,257   $ 30,483
  Accumulated deficit....................................  (11,076)   (11,076)
                                                          --------   --------
    Total shareholders' equity...........................    3,181     19,407
                                                          --------   --------
      Total capitalization............................... $  3,181   $ 19,407
                                                          ========   ========

(1) Excludes (i) 713,500 Common Shares issuable upon exercise of options outstanding as of June 30, 1997 under the Stock Plans, with a weighted average exercise price of $3.72 per Common Share, (ii) 303,362 Common Shares reserved for issuance under future option grants as of June 30, 1997 under the Stock Plans, and (iii) 602,331 Common Shares issuable upon exercise of outstanding warrants as of June 30, 1997 at an exercise price of $3.00 per Common Share. See "Management--Stock Plans", "Description of Share Capital" and Notes 8 and 10 of Notes to Consolidated Financial Statements.

DILUTION

The net tangible book value of the Company as of June 30, 1997 was approximately $3.2 million or $0.45 per Common Share. "Net tangible book value" per share represents the amount of total tangible assets less total liabilities, divided by the number of Common Shares outstanding. After giving effect to the receipt of the net proceeds from the sale of the 3,000,000 Common Shares offered by the Company hereby at an assumed public offering price (which is not indicative of the actual offering price of the Common Shares) of Cdn. $8.50 per Common Share, equal to approximately U.S. $6.10, the Company's net tangible book value as of June 30, 1997 would have been $19.4 million, or $1.92 per Common Share (after deducting estimated underwriting discounts and commissions and offering expenses payable by the Company). This represents an immediate increase in net tangible book value of $1.47 per Common Share to existing shareholders and an immediate dilution of $4.18 per Common Share to new investors. The following table illustrates this per share dilution (in both U.S. and Canadian dollars, based on an assumed exchange rate of Cdn. $1.3942 per U.S. $1.00):(/1/)

                                                        U.S. $       CDN. $
                                                      -----------  -----------
Assumed public offering price per Common Share.......       $6.10        $8.50
  Net tangible book value per share as of
   June 30, 1997..................................... $0.45        $0.62
                                                      -----        -----
  Increase in net tangible book value per share
   attributable to the offering......................  1.47         2.05
                                                      -----        -----
Pro forma net tangible book value per share after
 the offering........................................        1.92         2.67
                                                            -----        -----
Dilution per share to new investors..................       $4.18        $5.83
                                                            =====        =====
Percentage dilution in relation to offering price....        68.5%        68.5%

The following table summarizes, on a pro forma basis as of June 30, 1997, the difference between the number of Common Shares purchased from the Company, the total consideration paid and the average price per Common Share paid by the existing shareholders and by new public investors purchasing Common Shares in this offering at an assumed public offering price (which is not indicative of the actual offering price of the Common Shares) of Cdn. $8.50 per share, equal to approximately U.S. $6.10 (before deducting estimated underwriting discounts and commissions and offering expenses payable by the Company).

                                                                          AVERAGE PRICE
                         SHARES PURCHASED(/1/)      TOTAL CONSIDERATION     PER SHARE
                         ------------------------------------------------ -------------
                            NUMBER      PERCENT   AMOUNT (U.S. $) PERCENT U.S. $ CDN. $
                         ------------- -------------------------- ------- ------ ------
Existing shareholders...     7,118,173      70.4%   $15,729,934     46.2% $2.21  $3.08
New investors...........     3,000,000      29.6     18,300,000     53.8   6.10   8.50
                         -------------  --------    -----------    -----
  Total.................    10,118,173     100.0%   $34,029,934    100.0%
                         =============  ========    ===========    =====

(1)The foregoing computations assume no exercise of stock options after June 30, 1997. As of June 30, 1997, there were outstanding options to purchase 713,500 Common Shares, with a weighted average exercise price of $3.72 per Common Share. In addition, as of June 30, 1997, there were 303,362 Common Shares reserved for issuance under future option grants under the Company's Stock Plans, and 602,331 Common Shares issuable upon exercise of outstanding warrants at an exercise price of $3.00 per Common Share. To the extent that any shares available for issuance upon exercise of outstanding options or warrants or reserved for future issuance under the Company's Stock Plans are issued, there will be further dilution to new public investors. See "Management--Stock Plans" and "Description of Share Capital".

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and the Notes thereto included elsewhere in this Prospectus. The statement of operations data for each of the five years in the period ended December 31, 1996, and the balance sheet data as of December 31, 1996 and 1995, are derived from financial statements of the Company that have been audited by Ernst & Young LLP, independent auditors, and are included elsewhere in this Prospectus. The balance sheet data as of December 31, 1994, 1993 and 1992 are derived from audited financial statements of the Company that are not included in this Prospectus. The consolidated statement of operations data for the six- month periods ended June 30, 1997 and 1996 and the balance sheet data as of June 30, 1997 are derived from unaudited financial statements included elsewhere in this Prospectus. The unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company's consolidated operating results and financial position for such periods. The consolidated operating results for the six months ended June 30, 1997 are not necessarily indicative of the results to be expected for any other interim period or any future fiscal year. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". The Company has paid no cash dividends.

                           SIX MONTHS
                         ENDED JUNE 30,           YEAR ENDED DECEMBER 31,
                         ----------------  ------------------------------------------
                          1997     1996     1996     1995     1994     1993    1992
                         -------  -------  -------  -------  -------  ------  -------
                           (UNAUDITED)
                                 (IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT
 OF OPERATIONS DATA:
 Revenues:
   License revenue...... $    --  $    --  $ 1,186  $    --  $    --  $1,000  $ 1,712
   Revenues from
    collaborative
    agreements
    and other...........      21      384      634    1,990    2,827   3,439    1,212
                         -------  -------  -------  -------  -------  ------  -------
     Total revenues.....      21      384    1,820    1,990    2,827   4,439    2,924
 Expenses:
   License fees.........      50       50      605      100       --      --       --
   Research and
    development.........   1,315    1,037    2,053    2,888    3,199   4,321    3,539
   General and
    administrative......   1,231      740    1,731    1,334    1,125     873      408
                         -------  -------  -------  -------  -------  ------  -------
     Total expenses.....   2,596    1,827    4,389    4,322    4,324   5,194    3,947
                         -------  -------  -------  -------  -------  ------  -------
 Loss from operations...  (2,575)  (1,443)  (2,569)  (2,332)  (1,497)   (755)  (1,023)
 Interest income........     122       45      290       18       48      48       15
 Interest expense.......     (22)    (173)    (172)    (106)      (3)     (7)      (3)
                         -------  -------  -------  -------  -------  ------  -------
 Net loss............... $(2,475) $(1,571) $(2,451) $(2,420) $(1,452) $ (714) $(1,011)
                         =======  =======  =======  =======  =======  ======  =======
 Net loss per
  share(/1/)............ $ (0.35) $ (0.41) $ (0.46) $ (0.77) $ (0.46) $(0.23) $ (0.38)
                         =======  =======  =======  =======  =======  ======  =======
 Shares used in
  computing net loss
  per share(/1/)........   6,975    3,877    5,365    3,149    3,144   3,144    2,688
                         =======  =======  =======  =======  =======  ======  =======

                                                   DECEMBER 31,
                           JUNE 30,   -------------------------------------------
                             1997      1996     1995     1994     1993     1992
                          ----------- -------  -------  -------  -------  -------
                                            (IN THOUSANDS)
                          (UNAUDITED)
CONSOLIDATED BALANCE
 SHEET DATA:
 Cash and cash
  equivalents...........   $  3,657   $ 5,624  $   188  $   329  $ 1,552  $   929
 Working capital
  (deficit).............      2,986     4,438   (3,432)  (3,061)  (1,570)    (729)
 Total assets...........      4,250     5,858      433      593    1,967    1,013
 Long-term liabilities..         --        --    2,005       --       --       --
 Accumulated deficit....    (11,076)   (8,601)  (6,150)  (3,729)  (2,278)  (1,564)
 Shareholders' equity
  (net capital
  deficiency)...........      3,181     4,593   (5,226)  (2,813)  (1,372)    (659)

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

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements relating to future events or the future financial performance of the Company, which involve risks and uncertainties. The Company's actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus.

OVERVIEW

The Company's principal focus is to identify and acquire gastrointestinal products that have near-term commercial potential and to apply its product development expertise to commercialize these products. The Company selects products that it believes serve a gastrointestinal disease in need of new treatments, have the potential for rapid regulatory approval, and are marketable to a small group of specialized physicians. Salix believes this strategy will reduce the expense, time and risk normally associated with pharmaceutical development. The Company believes that its first two products, Colazide and rifaximin, will demonstrate the Company's ability to execute this strategy.

The Company has generated no revenues to date from the sales of products, and it has been unprofitable since inception. The Company expects to continue to incur substantial and increasing losses and expects its operating expenses to increase as the Company commences its Colazide commercialization efforts in the United Kingdom and, subject to regulatory approval, elsewhere in Europe and continues its product development and clinical programs for other products. The Company does not expect to achieve profitability on an annual basis before 2000. As of June 30, 1997, the Company had accumulated losses of approximately $11.1 million. Over the five and a half years ended on June 30, 1997, the Company has financed its operations principally through reimbursement payments, license fees and milestone revenues, totaling approximately $14.0 million under collaborative research and licensing agreements, and sales of equity and convertible debt securities totaling approximately $14.2 million. Over the same period, the Company has recorded expenses totaling $24.8 million, of which $17.3 million were in research and development expenses and $0.8 million in license fees to licensors. The Company's alliances with AB Astra ("Astra") and a division of Menarini Pharmaceutical Industries s.r.l. ("Menarini") have allowed Salix to fund the development of Colazide, to in-license other gastrointestinal products, and to help establish itself with a relatively small amount of outside capital.

The Company's collaborative research and licensing agreements provide for payments in support of the Company's research activities, as well as additional payments for licensing fees and upon the attainment of specified milestones. Research reimbursements under these agreements are recorded when earned based on contract costs incurred to date compared with total estimated contract costs. License fees and milestone revenues are recognized according to contract terms. Amounts received in advance of the applicable research activities are deferred as unearned revenue. Amounts received which are refundable until the milestones are achieved are deferred as advances from licensees until earned.

The Company licensed balsalazide from Biorex Laboratories Limited ("Biorex") in exchange for participation in future milestone revenues and profits. The Company will sell Colazide, the disodium salt of balsalazide, which is manufactured by third parties under contract with the Company, to its distribution partners, Astra and Menarini, at a formula price. The Company received approval in July 1997 to market Colazide in the United Kingdom for the treatment of acute ulcerative colitis. The commercial launch of Colazide by Astra in the United Kingdom is expected in October 1997, with launches in other European countries by Astra and Menarini in 1998, subject to receipt of necessary regulatory approvals. The Company expects to realize product revenues from Astra's sales of Colazide in 1997 and sales of

Colazide by Menarini in 1998. The selling price of Colazide to Astra outside the United Kingdom has not been determined, and the Company will be obligated to pay to Biorex, the original licensor of the product, a portion of any gross profit on Colazide sales to Astra and Menarini outside the United States. In addition, the Company anticipates high initial product launch costs due to the cost of scaling up manufacturing processes for commercial distribution.

The Company's second product, rifaximin, is currently under development. The Company obtained the rights to develop, make, use and sell rifaximin in Canada and the United States from Alfa Wassermann S.p.A. ("Alfa Wassermann") in exchange for future royalties and milestone payments. Under a separate agreement, Alfa Wassermann will supply Salix with bulk active ingredient rifaximin at a fixed price. If regulatory approvals are obtained, the Company intends to establish its own direct sales force to market rifaximin. This strategy for rifaximin represents the business model that the Company intends to adopt for future product development and commercialization. Although the creation of an independent sales organization will require a substantial investment by the Company, the Company anticipates that the financial results from rifaximin and future products will be more favorable to the Company than those anticipated from the sale of Colazide by Astra and Menarini.

The Company intends to pursue regulatory approvals for two initial indications for rifaximin, hepatic encephalopathy and antibiotic associated colitis. The Company plans further development of rifaximin for several other possible indications. The Company plans to submit an application to the FDA seeking Orphan Drug Status for rifaximin to treat hepatic encephalopathy. Orphan Drug Status, if granted, can entail certain possible advantages in the testing and approval process for the drug. See "Business--Products Under Development" and "Business--Government Regulation". Should rifaximin be designated Orphan Drug Status, costs incurred through submission of an NDA for the hepatic encephalopathy indication may be expected to be significantly reduced. Salix also intends to begin clinical trials using rifaximin to treat antibiotic associated colitis later this year with the full costs to be borne by Salix.

RESULTS OF OPERATIONS

Six Months Ended June 30, 1997 and 1996

Because certain clinical trials for Colazide were completed in 1996, product development revenues for the six months ended June 30, 1997 were minimal. Revenues for the six months ended June 30, 1996 were comprised primarily of revenue recognized from collaborative agreements for product development of Colazide.

Operating expenses were $2.6 million and $1.8 million for the six months ended June 30, 1997 and 1996, respectively. The increase in operating expenses is due to increases of $0.3 million in research and development expenses and $0.5 million in general and administrative expenses. The increase in research and development expenses is due primarily to increased regulatory affairs activities for the preparation of the NDA filing in the United States. The increase in general and administrative expenses of $0.5 million is due mainly to the addition of key personnel and the increased administrative costs related to becoming a public company in Canada.

Interest expense decreased from $173,000 to $22,000, and interest income increased from $45,000 to $122,000 due primarily to interest income derived from the Company's initial public offering in Canada and the conversion of outstanding debentures as a result of the public offering.

The Company incurred net losses of $2.5 million and $1.6 million for the six months ended June 30, 1997 and 1996, respectively.

Years Ended December 31, 1996, 1995, and 1994

Revenues totaled $1.8 million, $2.0 million and $2.8 million for 1996, 1995 and 1994, respectively. For 1996, license revenues were $1.2 million and revenue from collaborative agreements for product

development was $0.6 million. In 1996 revenues from collaborative agreements for product development decreased as certain clinical trials for Colazide were completed. Revenues in 1994 and 1995 were comprised primarily of revenue recognized from collaborative agreements for product development. The decline in revenues over the three fiscal periods corresponds to the reductions in the level of the clinical trial efforts in the United States and Europe.

License fee expenses in 1996 of $0.6 million relate primarily to payments made to Biorex under the terms of the Colazide license agreement.

Research and development expenses through 1996 are primarily for clinical trials and both domestic and foreign regulatory affairs activities related to the development of Colazide. Research and development expenditures were $2.1 million, $2.9 million and $3.2 million for 1996, 1995 and 1994, respectively. The decrease in research and development expenses of $0.8 million from 1995 to 1996 is due to the completion of certain clinical trials for Colazide in 1996, partially offset by increased regulatory affairs activities for the preparation of the NDA filing in the United States. The $0.3 million decrease in research and development expenditures from 1994 to 1995 relates to decreased regulatory affairs activities, as the Company had filed a marketing authorization application in the United Kingdom in early 1995, which expenditures were partially offset by increased clinical trial expenses associated with the United States development efforts.

General and administrative expenses were $1.7 million, $1.3 million and $1.1 million for 1996, 1995 and 1994, respectively. The increase of $0.4 million in 1996 from 1995 was due mainly to the addition of key personnel throughout the year and the increased administrative costs related to being a public company. The $0.2 million increase in 1995 from 1994 was comprised of personnel-related expenses and professional fees related to corporate development activities.

The Company has experienced net losses of $2.5 million, $2.4 million and $1.5 million for 1996, 1995 and 1994, respectively.

At December 31, 1996, the Company had net operating loss carryforwards of approximately $5.6 million for United States income tax purposes. These carryforwards will expire in varying amounts through 2011. As the Company adds new investors, utilization of the current loss carryforwards may be limited if, under United States Internal Revenue Code Section 382, a change in ownership is deemed to have occurred within the three most recent fiscal years.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company has financed product development, operations and capital expenditures primarily from funding arrangements with collaborative partners and from public and private sales of debt and equity securities.

As of June 30, 1997, the Company had approximately $3.7 million in cash and cash equivalents. The decrease of $1.9 million from December 31, 1996 was due primarily to cash used in operating activities of $3.0 million partially offset by cash provided by financing activities of $1.1 million from issuance of Common Shares upon exercise of warrants.

As of June 30, 1997, the Company had no long term obligations. The Company has non-cancelable purchase order commitments for inventory purchases of $0.4 million.

The Company's purchases of raw materials are, and its future product sales to its European distribution partners will be, denominated in Pounds Sterling. Translation into the Company's reporting currency, the United States dollar, has not historically had a material impact on the Company's financial position. Additionally, the Company's net assets denominated in currencies other than the functional

currency have not exposed the Company to material risk associated with fluctuations in currency rates. Given these facts, the Company has not considered it necessary to use foreign currency contracts or other derivative instruments to manage changes in currency rates.

The Company has sustained continuing operating losses and expects to incur substantial and increasing losses until product approvals are obtained and product revenues reach a sufficient level to support ongoing operations. The Company believes that the anticipated net proceeds from this offering, together with the Company's existing cash reserves and cash flow from operations, should be sufficient to satisfy the cash requirements of the Company's product development programs through at least 1998. The Company's actual cash requirements may vary materially from those now planned because of a number of factors, including the results of research and development activities, FDA and foreign regulatory processes, establishment of and changes in relationships with strategic partners, technological advances by the Company and other pharmaceutical companies, the terms of the Company's collaboration arrangements with strategic partners, and the status of competitive products. The Company anticipates that it will need to raise additional funds in the form of debt or equity financing to fund future licensing, development, and commercialization of new products. The Company may also enter into collaborative arrangements with corporate partners that could provide the Company with additional funding in the form of equity, debt, licensing, milestone and/or royalty payments. There can be no assurance that the Company will be able to enter into such arrangements or raise any additional funds on terms favorable to the Company.

BUSINESS

The following Business section contains forward-looking statements relating to future events or the future financial performance of the Company, which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus.

OVERVIEW

The Company identifies and in-licenses gastrointestinal products that have near-term commercial potential and applies its product development expertise to accelerate the commercialization of these products. The Company's business strategy is to select and in-license gastrointestinal products that have the potential for rapid regulatory approval. By in-licensing drugs with late-stage clinical data and developing these drugs for diseases that are in need of new pharmaceutical treatments, the Company believes that it can significantly reduce the risk, time and investment normally associated with the development and commercialization of pharmaceuticals products.

The Company has also in-licensed a second product, rifaximin, and intends to pursue regulatory approvals for the drug in the treatment of two initial indications, hepatic encephalopathy and antibiotic associated colitis. The Company presently expects to submit an application to the FDA in the fourth quarter of 1997 seeking Orphan Drug Status for rifaximin for the treatment of hepatic encephalopathy. If the Company's application is approved, rifaximin could receive priority review from the FDA following completion of clinical trials for the drug and filing of an NDA for marketing approval. It is not currently expected that the Company will be in a position to file an NDA for rifaximin prior to mid-1998.

In the course of its transition to a commercial stage company, the Company has leveraged its resources by establishing strategic alliances with companies that have significant resources in clinical monitoring and manufacturing. In anticipation of the commercial release of Colazide in the United Kingdom in October 1997, the Company has entered into manufacturing arrangements with Courtaulds Chemicals (Holdings) Limited and Anabolic, Inc., each of which is a commercially established pharmaceutical manufacturer.

DISEASE BACKGROUND

Gastrointestinal Disease Overview

Gastrointestinal diseases have a major impact in the United States and across the world. According to the National Institutes of Health, more than 60 million cases of gastrointestinal disease are reported annually in the United States alone, resulting in more than 200 million days of restricted activity, 50 million visits to physicians, 10 million hospitalizations, and nearly 200,000 deaths. Current treatments for gastrointestinal disease in many instances either have serious side effects or provide only partial symptomatic relief. The Company believes there is significant need for new pharmaceutical therapies to improve treatment of gastrointestinal diseases.

The Company is pursuing product indications for select gastrointestinal conditions, including ulcerative colitis, hepatic encephalopathy, antibiotic associated colitis, colonic polyps, familial adenomatous polyposis, diverticular disease of the colon, infectious diarrhea, and ulcers.

Inflammatory Bowel Disease/Ulcerative Colitis

Inflammatory bowel disease ("IBD") is a condition that covers both ulcerative colitis and Crohn's disease. The cause of IBD is unknown and onset can occur at any age but is most prevalent between the ages of 15 and 25. The symptoms of ulcerative colitis and Crohn's disease are similar, but ulcerative colitis affects the large colon while Crohn's disease can affect any part of the gastrointestinal tract. These debilitating diseases are usually lifelong, and there is currently no cure.

The Crohn's and Colitis Foundation of America estimates that IBD afflicts two million people in the United States. Sales of drugs used to treat IBD worldwide totaled approximately $550 million in 1996 and have reflected a compound annual growth rate of approximately 20% between 1987 and 1996.

Ulcerative colitis is a chronic disease which causes ulceration of the inner lining of the colon and rectum. Symptoms include diarrhea, abdominal pain, rectal bleeding and fever. Decreased appetite and weight loss are also common. As with many chronic illnesses, ulcerative colitis also can have serious emotional side effects, including depression, anxiety and reduced self-esteem, typically resulting from the painful and embarrassing symptoms caused by the disease.

Medical treatment of ulcerative colitis over the past 50 years has generally consisted of corticosteroids, which are typically unsuitable for long-term treatment because of their significant side effects, and 5-aminosalicylic-acid ("5-ASA") drugs. To be effective, these drugs must travel through the stomach and small intestine to the colon and be released in the colon without significant quantities being absorbed in the bloodstream. Sulfasalazine ("SASP"), which is taken orally, is the original 5-ASA drug and is considered the current "gold standard" treatment (i.e., the most effective available treatment). SASP is effective in reaching the colon with only low absorption rates in the bloodstream. However, SASP also contains a carrier molecule (sulfapyridine) which is toxic and results in a high incidence of side effects such as nausea, headache, dizziness, anemia or other blood disorders, and skin rashes. In approximately

30% of IBD patients who attempt treatment with SASP, these side effects are so severe that the patient cannot tolerate continued treatment.

In the early 1980s, pharmaceutical companies began developing new drugs designed to deliver 5-ASA to the colon without the side effect profile of SASP, and these drugs, including mesalamine, first appeared in the United States market in the early 1990s. While the new drugs are generally better tolerated than SASP, they continue to be limited in use because significant amounts of the drugs may be absorbed in the bloodstream before reaching the colon. In other cases, the drugs may not dissolve in the body, in which case they may remain whole when passed through the bowel and are, therefore, not absorbed in the colon. One of these drugs is mesalamine, the current market leader when measured by sales of drugs to treat IBD.

An alternative treatment for ulcerative colitis where drug intervention is ineffective is surgical removal of the large bowel. This procedure effectively eliminates ulcerative colitis but with substantial physical and emotional consequences for the patient, who must carry an external bag or have an internal pouch constructed to collect waste.

Hepatic Encephalopathy

Hepatic encephalopathy, a neuropsychiatric syndrome caused by the build-up of toxic products, such as ammonia, in the bloodstream, is a common complication of acute or chronic liver disease. Causes of liver disease include alcohol abuse and hepatitis due to viruses, drug abuse or toxins. The liver plays a key role in removing certain toxins found in the digestive tract from the blood. In severe liver disease, the liver does not effectively remove ammonia from the blood. As a result, ammonia accumulates in the bloodstream and travels to the brain, potentially causing personality changes, impaired consciousness, agitation or mania, and coma. Hepatic encephalopathy affects approximately 160,000 people in North America. Approximately 30% of hepatic encephalopathy patients go into coma, which is fatal in up to 80% of these patients, despite aggressive intervention.

To date, no product has been approved in North America to treat hepatic encephalopathy. Existing non-approved treatment strategies, including antibiotics, focus on reducing levels of ammonia in the bloodstream. The Company believes that current antibiotic therapies, including neomycin and metronidazole, are inadequate treatments, however, due to their limited antibacterial spectrum and side effects. Oral lactulose is also used to reduce the amount of ammonia accumulated in the intestine by increasing the number of bowel movements per day.

In spite of the small number of people afflicted with hepatic encephalopathy, the Company believes that a significant market opportunity exists for a drug that offers a more effective therapy than currently available treatments. In addition, because hepatic encephalopathy affects a relatively small number of patients, the Company believes the FDA will permit drugs that treat hepatic encephalopathy to qualify for Orphan Drug Status. In practice, Orphan Drug Status is available for therapies addressing indications affecting less than 200,000 people, may allow the drug to receive a priority review by the FDA, provides the product seven years of market exclusivity for the orphan indication regardless of the drug's patent status, and may allow the FDA to rely only on a single pivotal trial in approving an NDA. See "-- Government Regulation".

Antibiotic Associated Colitis

Antibiotic associated colitis ("AAC") can be caused by taking certain antibiotics to treat a variety of illnesses. These antibiotics can cause a reduction in the presence of normal bacteria in the colon, a condition which promotes overgrowth of the bacterium Clostridium difficile ("C. difficile"). C. difficile produces toxins that cause severe diarrhea and inflammation of the colon. If untreated, these symptoms can lead to toxic megacolon, colonic perforation and death. Institutionalized patients, such as patients in

nursing homes, have a high risk of developing AAC. Independent research indicates that up to 2,000,000 people develop AAC each year in North America.

Until recently, oral vancomycin was the preferred treatment for AAC. However, the widespread use of vancomycin for treating enterococcal infections has resulted in the development of vancomycin-resistant organisms (organisms that do not respond to vancomycin therapy). Vancomycin resistant genes may also be transferred to other microorganisms such as Staphylococcus aureus, an organism responsible for many common infections. The emergence of these resistant organisms has led the United States Centers for Disease Control and Prevention to recommend that vancomycin be used for treatment of AAC only in cases which fail to respond to metronidazole therapy or are severe and potentially life-threatening.

Metronidazole, although not approved for AAC, is now the preferred treatment for AAC. Although metronidazole is less costly than vancomycin, the drug is absorbed not only in the digestive tract but also in the bloodstream following drug administration. In addition, the safety and effectiveness of metronidazole in treating AAC has not been confirmed by the FDA through the NDA clearance process.

Colorectal Cancer/Colonic Polyp

A polyp is a growth that projects, often on a stalk, from the interior lining of the intestine or rectum. Approximately 30% of individuals in Western countries have polyps. Based on population indices, this equates to approximately 80 million persons in the United States and 95 million in Europe. In addition, the probability of having polyps increases with age. For individuals age 45, the probability is approximately 45% and increases to nearly 100% by age 70. When a polyp is diagnosed, it is normally removed surgically through a procedure known as polypectomy. Polyp recurrence rates following polypectomy average 45% after 24 months. Currently, no proven pharmaceutical treatment is available for the common polyp patient.

All colorectal cancer starts as a polyp. Conversion of benign polyps to neoplastic or metaplastic tissue (cancer) occurs in approximately five percent of polyp patients. Colorectal cancer includes cancer of the colon and rectum and is the third most common cancer in men and the fourth most common cancer in women. Cancers of the colon and rectum may be present for as long as five years before symptoms appear. Common symptoms include rectal bleeding, anemia, constipation, abdominal pain, diarrhea, weight loss and fatigue. Patients with diagnosed colon cancer have a five year survival rate of less than 50%. Current standard treatment includes surgical removal of the colon combined with chemotherapy. This treatment regimen has helped improve survival rates for early and mid-stage cancers but not for late stage, invasive cancers.

The Company believes that managing polyp recurrence will help decrease the incidence of polyp progression to colorectal cancer.

Familial Adenomatous Polyposis

Familial Adenomatous Polyposis ("FAP") is a hereditary condition that predisposes patients to a large number of colonic polyps. Studies estimate that approximately 40,000 people in the United States have the genetic abnormality that causes FAP. Colorectal cancer is considered an inevitable consequence in patients with FAP, and most FAP patients develop colorectal cancer by age 40. Due to the small number of patients with FAP, drugs to treat FAP may be eligible for Orphan Drug Status by the FDA.

Diverticular Disease of the Colon

Diverticular disease of the colon results from an acquired deformity of the colon (diverticulosis) that leads to subsequent complications. The deformity results in a build-up of fecal matter in the colon, which causes symptoms such as pain and fever. If not treated, these symptoms can progress and result in

additional complications such as intra-abdominal abscess, bowel obstruction and possible bowel perforation. Because this fecal build-up contains entrapped bacteria, it creates an environment susceptible to infection, suggesting that this symptom of diverticulosis can be treated with antibiotic therapy. The disease is common in Western societies, afflicting more than 25 million people in the United States and more than 35 million people in Western Europe. Of those people affected by diverticular disease, approximately 20% will develop symptoms that require therapy.

Infectious Diarrhea

Diarrhea is a leading cause of death in most developing countries, with the greatest impact seen in infants and children. In the United States, children under 5 years of age average two episodes of diarrhea per year. In developing countries, the rate is two to three times higher. Overall, physicians in the United States are consulted annually for 8.2 million diarrhea episodes. Primary therapy for infectious diarrhea is antibiotics, with the choice of antibiotic made on the basis of effectiveness against the specific bacterial cause in each case or in similar local cases. Antibiotic development in recent years has tended to focus on broad spectrum antibiotics to cover the widest possible range of bacterial forms. As new bacterial forms mutate and develop resistance to currently available antibiotics, there is ongoing effort to develop more effective antibiotic therapies.

Ulcers

Peptic ulcer is a chronic inflammatory condition of the stomach and small intestine. The bacterium Helicobacter pylori ("H. pylori") is considered to be the underlying cause of most peptic ulcers, suggesting that antibiotics could be used to treat infected ulcer patients. It is estimated that at least half of the world's population and 25% of people in the United States are infected with the H. pylori organism. Studies have shown that eradication of H. pylori may reduce the rate of ulcer recurrence.

BUSINESS STRATEGY

The Company's objective is to become a leading gastrointestinal pharmaceutical company. The Company believes that by implementing the strategies summarized below it will reduce significantly the risk, time and investment normally associated with development and commercialization of pharmaceuticals.

In-license proprietary gastrointestinal products with near-term commercial potential. The Company's principal focus is to identify and in-license gastrointestinal products that have near-term commercial potential, and to apply its product development expertise to commercialize these products. In pursuing this strategy, the Company evaluates each product based on the following:

. The product must treat gastrointestinal diseases that are in need of new pharmaceutical therapies. The Company believes the gastrointestinal disease market is in need of new or more effective pharmaceutical treatments and will provide the Company with a significant return on investment. The Company also believes that by establishing itself as a recognized leader in the gastrointestinal disease market, it will enhance its ability to attract future in-licensing product opportunities.

. The product must have a substantial base of positive late-stage clinical research data in humans and have the potential for rapid regulatory approval. The Company will carefully evaluate and in-license only products that have an existing base of positive late-stage data in humans and that the Company believes demonstrate safety and efficacy. By in-licensing drugs with a substantial base of late-stage clinical data and developing these drugs for diseases that are in need of new or more effective pharmaceutical treatments, the Company believes that it will be able to minimize the costs and risk associated with inventing a drug and conducting early-stage clinical trials needed to

determine if a drug is safe and effective in humans. The Company also believes that its strategy can significantly reduce the time and risk of obtaining regulatory clearances.

. The product must be available to the Company on acceptable licensing terms. The Company believes that there are significant opportunities to in- license or acquire gastrointestinal products from pharmaceutical companies in the United States and internationally. This includes products developed by companies that lack either the expertise or resources to pursue regulatory approvals in the United States and certain other territories. In addition, the Company believes that large pharmaceutical companies are willing to out-license or sell products and technologies that do not fit their product portfolios or fail to meet their business or market criteria.

Establish a small, specialized sales force to market to a targeted group of physicians. Of the 738,000 physicians in the United States, gastrointestinal diseases are treated primarily by approximately 9,700 gastroenterologists. The Company believes that it can effectively reach this small number of physicians through a small, specialized sales and marketing group, without the investment needed to develop and maintain the large sales force typically required in the pharmaceutical industry. This direct sales force model will be the basis for the Company's commercialization of rifaximin and future products in the United States. The Company expects that, once fully established and operational, a sales and marketing model premised on a domestic direct sales force will result in higher operating margins than the distribution partner model that the Company has established for Colazide sales. See "--Marketing and Sales".

In the case of Colazide, the alliances with Astra and Menarini have provided the Company funding needed to complete late-stage development of Colazide, to in-license other gastrointestinal products and to help establish the Company as a viable gastrointestinal pharmaceutical company. The Company received the necessary funding in exchange for the grant of exclusive distribution rights in certain territories to Astra and Menarini. The Company plans to implement future North American product sales and marketing based on the direct sales force model. See "--Strategic Alliances".

Enhance market potential of products through development of additional indications. Where appropriate, the Company intends to conduct clinical trials for multiple indications to expand the approved use of its products. The Company believes that both balsalazide and rifaximin have potential applications in other disease indications which, if developed by the Company and approved by regulatory authorities, will significantly enhance the commercial potential of such products. In the case of Colazide, which has been approved in the United Kingdom for the treatment of acute ulcerative colitis and for which the Company has submitted an NDA with the FDA for the same indication, the Company believes that balsalazide, the active ingredient in Colazide, may also have therapeutic applications for reduction of colonic polyps. Similarly, rifaximin may be developed in the future for potential use in treating infectious diarrhea, diverticular disease and other gastrointestinal diseases. Currently, Alfa Wassermann, one of the Company's partners, is conducting a Phase III clinical trial in Spain relating to rifaximin as a therapy for hepatic encephalopathy, and the Company expects to commence Phase II/III clinical trials in the United States for rifaximin as a treatment for AAC in the fourth quarter of 1997. The Company believes that the strategy of commercializing products for initial indications will enable it to begin realizing product revenues while completing the development of multiple indications. See "--Products Under Development".

Enhance research and manufacturing capabilities through strategic partnerships. The Company has established strategic relationships with companies it believes have proven expertise in clinical monitoring and manufacturing. The Company uses CROs to manage its clinical trials, thus enabling the Company to reduce its fixed overhead costs and to leverage its management resources. In anticipation of the commercial release of Colazide in the United Kingdom in October 1997, the Company has entered into pharmaceutical manufacturing arrangements with Courtaulds Chemical (Holdings) Limited for bulk drug substance and Anabolic, Inc. for finished dosage forms. See "--Manufacturing".

PRODUCTS UNDER DEVELOPMENT

The Company's principal focus is on gastrointestinal products with late- stage clinical data on human safety and efficacy. The following table summarizes Salix's current products in development.

     PRODUCT              INDICATION                        STATUS
-------------------------------------------------------------------------------
                                               . Approved in United Kingdom in
  Colazide(/1/) Acute ulcerative colitis         July 1997
                                               . NDA submitted in United States
                                                 on June 23, 1997(/2/)
                                               . European submissions to occur
                                                 through mutual recognition
                                                 procedure of European Union in
                                                 1997 and 1998
                                               . Additional Phase III/IV
                                                 clinical study scheduled to
                                                 commence in the fourth quarter
                                                 of 1997
-------------------------------------------------------------------------------
                                               . European clinical studies
  Colazide(/1/) Ulcerative colitis maintenance   ongoing
-------------------------------------------------------------------------------
                                               . Phase III clinical trial
  Rifaximin     Hepatic encephalopathy           ongoing(/3/)
                                               . Orphan drug application to be
                                                 submitted in the fourth
                                                 quarter of 1997 as supplement
                                                 to IND
-------------------------------------------------------------------------------
  Rifaximin     Antibiotic associated colitis  . IND submitted in April 1997
                                               . Phase II/III clinical trials
                                                 scheduled to commence in the
                                                 fourth quarter of 1997
-------------------------------------------------------------------------------
  Rifaximin     H. pylori                      . IND planned for later date
-------------------------------------------------------------------------------
  Rifaximin     Diverticulitis                 . IND planned for later date
-------------------------------------------------------------------------------
  Rifaximin     Infectious diarrhea            . IND planned for later date
-------------------------------------------------------------------------------
  BX-661A       Familial adenomatous polyposis . Orphan Drug Status application
                                                 to be submitted in 1998
                                               . IND filing and Phase II/III
                                                 clinical trials planned in
                                                 1998
-------------------------------------------------------------------------------
  BX-661C       Colonic polyp reduction        . Pre-clinical development
-------------------------------------------------------------------------------

(1) Astra has exclusive commercial rights in all countries excluding Italy, Spain, Portugal, Greece, Japan, Taiwan, and Korea. Menarini has exclusive commercial rights in Italy, Spain, Portugal and Greece. See "--Strategic Alliances" and "--Marketing and Sales".
(2) The NDA for Colazide is subject to acceptance for filing by the FDA to determine whether it can be substantively reviewed. The FDA has 60 days following the Company's submission of the NDA to make its determination.
(3) This trial is being conducted by Alfa Wassermann in Spain. The data obtained in this trial may be used in partial support of an NDA filing, subject to the Company's audit of the clinical protocols, data collection procedures and methodology established by Alfa Wassermann as well as the outcome of the trial.

Colazide

Colazide (balsalazide disodium) is an orally administered, anti-inflammatory drug designed to act in the gastrointestinal tract and specifically in the colon. The Company recently obtained authorization to market Colazide in the United Kingdom for the treatment of acute ulcerative colitis. The Company believes that Colazide is also a potential treatment for large bowel Crohn's disease and other inflammatory bowel disease conditions. Salix licensed Colazide from Biorex and will sell Colazide, manufactured by third parties under contract with the Company, to its distribution partners, Astra and Menarini. Astra has announced that Colazide will be one of its major product launches in 1997. Sales of drugs used to treat

IBD worldwide totaled approximately $550 million in 1996 and have reflected a compound annual growth rate of approximately 20% between 1987 and 1996. See "--Strategic Alliances".

Colazide was developed after careful evaluation of the benefits and side effects of existing therapies. Colazide is an orally administered drug therapy that the Company believes is superior in delivering drug directly to the colon. Medical treatment of ulcerative colitis over the past 50 years has consisted of corticosteroids, which are typically unsuited for long-term treatments because of their significant side effect profile, and 5-ASA drugs. To be effective, these drugs must travel through the stomach and small intestine to the colon and be released in the colon without significant quantities being absorbed in the bloodstream. SASP, which is taken orally, is the original 5-ASA drug and is effective in reaching the colon with only low absorption rates in the bloodstream. However, SASP also contains a carrier molecule (sulfapyridine) which is toxic and results in a high incidence of side effects such as nausea, headache, dizziness, anemia or other blood disorders, and skin rashes. In approximately 30% of IBD patients who attempt treatment with SASP, these side effects are so severe that the patient cannot tolerate continued treatment.

In the early 1980s, pharmaceutical companies began developing new drugs to deliver 5-ASA to the colon without the side effect profile of SASP. These drugs first appeared in the United States market in the early 1990s. While the new drugs, including mesalamine, are generally better tolerated than SASP, they continue to be limited in use because significant amounts of the drugs may be absorbed in the bloodstream before reaching the colon. In other cases, the drugs may not dissolve in the body, in which case they may remain whole when passed through the bowel and are therefore not absorbed in the colon. See "--Inflammatory Bowel Disease/Ulcerative Colitis".

Colazide is a new chemical entity that consists of two molecular structures. The first molecule, 5-ASA, is the active drug and responsible for the actual therapeutic effect. The second molecule, 4-ABA, is a non-toxic carrier molecule that enables the 5-ASA molecule to travel to the colon without being absorbed in the bloodstream. The combination of these two molecules into one chemical compound is designed to deliver the therapeutic agent to the disease site and has a favorable side effect profile.

In June 1997, the Company submitted an NDA to the FDA seeking approval in the United States for Colazide as a treatment for acute ulcerative colitis. In July 1997, the Company received marketing authorization in the United Kingdom for acute ulcerative colitis from the Medicines Control Agency (the "MCA"). Under new mutual recognition procedures of the European Union, the Company's marketing partners, Astra and Menarini, have informed the Company that they will file submissions during 1997 and 1998, based on the MCA authorization, seeking marketing approval for Colazide in Germany, France, Italy, Spain and certain other member countries of the European Union. The Company believes that approvals through these mutual recognition procedures will be received in 1998.

The FDA is in the process of reviewing the Company's NDA, which was filed in June 1997, to determine if it can be accepted for filing. The FDA has 60 days following submission of the NDA to make its determination. Once filed, this NDA can be approved only if the FDA determines that the NDA contains substantial evidence from clinical trials that the drug is safe and effective for its intended use. The Company submitted the NDA following completion of five double-blind, randomized, controlled, safety and efficacy studies evaluating Colazide as a treatment for acute ulcerative colitis. Two pivotal Phase III studies were completed in March 1995 and March 1996, respectively.

The multi-center Phase III study conducted in the United States, which evaluated 150 recently relapsed patients with long-standing disease symptoms, was completed in March 1996. The proposed marketing dose (6.75 grams per day) of Colazide was compared to a lower dose of Colazide (2.25 grams per day) and to mesalamine over an eight week treatment period. The study demonstrated a statistically significant dose-response between the two Colazide doses for the primary endpoint of symptom improvement, including stool frequency, rectal bleeding, sigmoidoscopic score and physician's global

assessment. Although the primary measure of symptom improvement was not statistically significantly different between Colazide and mesalamine, symptom improvement was noticeably favorable for Colazide. Secondary measures of study-end symptom scores were also significantly more favorable for Colazide than mesalamine with respect to rectal bleeding, sigmoidoscopic score and physician's global assessment.

A trial completed in March 1995 evaluated 100 patients, most of whom had been recently diagnosed with acute ulcerative colitis, over a 12 week treatment period at multiple centers in the United Kingdom. The primary study endpoint measured patient tolerance of Colazide versus mesalamine. While only one patient in each group withdrew due to intolerance, patients treated with Colazide had statistically significantly fewer side effects than those treated with mesalamine. The secondary endpoint of the trial measured the efficacy of Colazide relative to mesalamine and included primary measures of complete remission, symptomatic remission, and median time to complete relief of symptoms. Colazide proved statistically significantly more effective than mesalamine for the endpoints of complete remission, symptomatic remission, and median time to complete relief of symptoms.

In addition to the two pivotal Phase III trials, the Company completed another trial in February 1996, comparing two doses of Colazide to placebo and evaluating 180 patients at multiple centers in the United States. Due to ethical concerns regarding treatment of active-disease patients with placebo, the Company limited the study to four weeks, which reduced the opportunity for Colazide to demonstrate its full therapeutic effect and no significant difference between placebo and Colazide for the primary efficacy endpoint was found. However, patients treated with Colazide showed statistically significantly fewer side effects than patients treated with placebo. In addition, the Company believes the lack of difference in efficacy between the two treatments is attributable to the nature of the patients enrolled and the short duration of the trial. Many of the patients enrolled had previously failed treatment with other therapies, including 5-ASA containing products such as mesalamine.

The Company and its distribution partners are planning to conduct a Phase III/IV clinical study of Colazide in the treatment of acute ulcerative colitis, which is scheduled to begin in the fourth quarter of 1997.

Rifaximin

Rifaximin, a new antibiotic, belongs to the rifamycin class of antibiotics and distinguishes itself from others of analogous structure due to its almost complete lack of absorption by gastroenteric mucosa, which allows high concentrations of the active drug to reach and be maintained in the digestive tract. The Company licensed rights in the United States and Canada to rifaximin from Alfa Wassermann, which developed and currently markets the product in Italy for hepatic encephalopathy and chronic intestinal infections as well as for prophylactic use with infective complications of gastrointestinal surgery. The Company currently has full commercial rights for rifaximin in the United States and Canada and intends to establish an independent sales and marketing organization for the purpose of fully exploiting these rights. The Company believes that a business model premised on a direct sales force will result in higher operating margins than the distribution partner model that the Company has established for Colazide.

The Company intends to pursue regulatory approvals for rifaximin for two initial indications, hepatic encephalopathy and AAC. In the future, the Company plans to develop rifaximin for other potential indications, including infectious diarrhea, diverticular disease, peptic ulcer treatment through H. pylori eradication, other gastrointestinal infections, and for perioperative prophylaxis of septic complications of large bowel surgery.

Hepatic encephalopathy is a neuro-psychiatric syndrome caused by the build- up of ammonia in the blood. When ammonia is not removed from the body, it travels to the brain and causes the neuropsychiatric syndrome known as hepatic encephalopathy. The Company believes that antibiotic treatment for hepatic encephalopathy may prevent the accumulation of ammonia in the bloodstream.

The Company plans to submit an application to the FDA in the fourth quarter of 1997 seeking Orphan Drug Status for rifaximin to treat hepatic encephalopathy. Orphan drug status is generally available for indications affecting less than 200,000 patients. In practice, it may allow an NDA to receive a priority review by the FDA, gives the product seven years of market exclusivity for the orphan indication regardless of the drug's patent status, and may allow the FDA to permit approval of an NDA based on a single pivotal Phase III trial. See "--Government Regulation". The Company believes that approximately 160,000 persons currently suffer from hepatic encephalopathy in North America.

As part of its agreement with Alfa Wassermann, the Company obtained clinical trial data for rifaximin. In addition to previous studies, Alfa Wassermann is currently conducting a study in Spain which may provide the Company with data in support of an NDA filing in the United States for hepatic encephalopathy. The validity of this data is subject to the Company's audit of the clinical protocol, data collection procedures and methodology established by Alfa Wassermann in conducting this study. Previous studies in patients with hepatic encephalopathy include open-label trials and randomized, double-blind, comparative trials in patients with hepatic encephalopathy. In these studies, a total of 237 patients were treated with rifaximin and 149 patients with comparative agents (other antibiotics and lactulose). In the comparative studies with lactulose, rifaximin was comparable to or more effective than lactulose for the improvement of signs and symptoms of hepatic encephalopathy and had a superior side effect profile.

The Company intends to conduct its own clinical trials using rifaximin to treat AAC caused by C. difficile, a gram negative bacterium for which there are currently few effective therapies. The Company has received allowance from the FDA to begin these clinical trials, which the Company expects to begin in the fourth quarter of 1997. Based on research conducted by Alfa Wassermann, the Company believes that rifaximin has broad spectrum activity and may be shown to be effective against C. difficile. Oral vancomycin was until recently the preferred treatment for AAC. However, the emergence of vancomycin- resistant bacteria has prompted the United States Centers for Disease Control and Prevention to recommend limited use of vancomycin. No other therapy has been approved for the treatment of AAC in the United States. Independent research indicates that up to 2,000,000 people develop AAC each year in North America.

Given the extremely low gastrointestinal absorption of rifaximin and a promising cross-resistance profile, the Company believes rifaximin may be more effective in eradicating H. pylori than other more commonly used antibiotics. Alfa Wassermann has conducted a single non-comparative trial in Italy to assess the efficacy of rifaximin in treating H. pylori induced peptic ulcers and is currently organizing a co-operative study to supplement the earlier findings.

BX-661A (Balsalazide Disodium) and BX-661C (Balsalazide Calcium)

Based on a preclinical evaluation of BX-661A, the Company believes that the drug may be shown to be a chemopreventive agent to reduce colonic polyp growth and believes that the drug may have potential for this indication. All colorectal cancer starts as a polyp, and eventually all FAP patients develop colorectal cancer. There are approximately 40,000 people in the United States that have the genetic abnormality that causes FAP. Because this patient population is genetically predisposed to polyp growth consistently throughout life, they are an important subset of the general population who would be eligible for therapy to retard polyp growth. Currently, the Company intends to apply to the FDA for Orphan Drug Status for BX-661A (balsalazide disodium) to treat FAP. The Company plans to begin Phase III clinical trials of BX-661A in 1998 to measure its ability to prevent the recurrence of rectal polyps in patients with FAP who have had partial or total colectomy.

Subsequently, the Company intends to pursue the possibility for a broader indication of colonic polyp reduction in the general population with BX-661C (balsalazide calcium) should the data from the BX-661A prove positive. The Company estimates that approximately 80 million persons in the United States and 95 million persons in Europe have colonic polyps, although the number of persons who seek diagnosis and treatment for the condition is unknown.

The Company believes that balsalazide has anti-inflammatory and antioxidant properties that are similar to non-steroidal anti-inflammatory drugs ("NSAIDs") but lack NSAIDs' upper gastrointestinal ulcerogenic activity. In addition, the Company believes that the colonic-specific delivery mechanism for the drug results in very low systemic absorption significantly reducing the possibility of renal side effects. In clinical studies evaluating a total of more than 900 patients treated with balsalazide for a mean duration of 1.5 years, no cases of gastrointestinal ulceration or renal side effects have been reported.

In collaboration with scientists at the University of California at San Francisco ("UCSF") and the San Francisco Veterans Administration Medical Center ("VA Medical Center"), balsalazide and a newly discovered metabolite of balsalazide were shown in early studies to inhibit human colon cancer cell proliferation in culture and to inhibit in animals one of the earliest steps in colon polyp and cancer formation.

Further pre-clinical studies performed by the Company, using a genetic strain of mice which develop multiple intestinal tumors and die before 5 months of age, showed that balsalazide prevented the formation of greater than 75% of these tumors in the colon. Based on these preliminary results, the Company and scientists at UCSF and the VA Medical Center in San Francisco have responded to a request from the National Cancer Institute ("NCI") to submit a grant proposal to fund a clinical trial to test the effectiveness of balsalazide in patients who are at increased risk of developing colorectal cancer. The target patients are those who have had polyps removed and are undergoing surveillance for polyp occurrence. The Company plans to commence this study after receiving grant approval from the NCI and obtaining necessary FDA clearance.

STRATEGIC ALLIANCES

The Company enters into various collaborations with corporate partners, licensors, licensees and others. To date, the Company has entered into the following strategic alliances:

Biorex Laboratories Limited

The Company in-licensed balsalazide and all its salts, including the Company's first product, Colazide (balsalazide disodium), from Biorex, a private, independent drug company headquartered in England. Biorex developed Colazide and completed limited Phase III clinical trials. Under its agreements with the Company, Biorex will participate in future milestone revenues and profits from Colazide.

Pursuant to an agreement between Biorex and the Company, Biorex granted the Company the exclusive worldwide right (other than Japan, Taiwan, Korea, and the United States) to develop, manufacture and sell balsalazide for all disease indications for a period of 15 years from the date of commercial launch, subject to early termination in certain circumstances. Under a separate agreement, Biorex granted the Company the exclusive right to develop, manufacture and sell balsalazide for all disease indications in the United States for a period of nine years from the date of commercial launch or the term of the applicable patent, whichever is longer. Under these agreements, the Company paid Biorex fees upon entering into the agreements and is obligated to make additional milestone and royalty payments for the drug. Pursuant to such agreements, the Company is responsible for completion of preclinical testing, clinical trials and regulatory approvals for balsalazide.

Alfa Wassermann S.p.A.

The Company in-licensed rifaximin from Alfa Wassermann, a privately held pharmaceutical company headquartered in Italy. Alfa Wassermann has developed several glycosaminoglycans, rifaximin and alpha-interferon from human leukocytes. Alfa Wassermann's principal areas of therapeutic focus include anti-thrombotics, antibiotics, gastrointestinal products, NSAIDs, immunomodulators, anti-hypertensives, and bronchopulmonary products. During recent years, Alfa Wassermann has formed alliances with international partners to expand and strengthen its marketing and research activities.

Pursuant to an agreement with the Company, Alfa Wassermann granted the Company, in exchange for certain royalties, the exclusive right in the United States and Canada to develop, make, use and sell or have sold rifaximin for the treatment of gastrointestinal and respiratory tract diseases. Alfa Wassermann has agreed separately to supply the Company with bulk active ingredient rifaximin at a fixed price.

AB Astra

Astra, an international pharmaceutical company headquartered in Sweden, has extensive experience developing and marketing therapies for gastrointestinal diseases. The Company's alliance with Astra partially funded the development of Colazide. Through June 30, 1997, Salix had received revenues for milestone payments and product development funding of approximately $10.8 million out of a total of $16.0 million payable upon achievement of certain milestones under its agreements with Astra. The remaining milestone revenues relate to European marketing approvals, the Company's recent NDA submission for Colazide and FDA approval of the NDA. Under the terms of agreements between the Company and Astra, the Company will sell encapsulated Colazide to Astra for marketing and distribution in its territories at a price based on a percentage of Astra's average ex-factory sales price. Astra has announced that commercial sales of Colazide will begin in the United Kingdom in October 1997.

Pursuant to contracts between the Company and Astra, the two companies agreed to collaborate in developing and obtaining regulatory approval of Colazide in all the countries of the world excluding Italy, Spain, Portugal, and Greece (collectively, "Southern Europe") and Japan, Taiwan and Korea (collectively, "East Asia"). Under these agreements, the Company granted Astra exclusive distribution rights to Colazide disodium in all markets (except for Southern Europe and East Asia) for specified indications. In addition, the companies agreed to collaborate on development and promotional plans for Colazide in the United States market. Astra is obligated to provide the Company with milestone, license and development payments, and has agreed to purchase encapsulated product from the Company at a transfer price based on a percentage of Astra's selling price. In addition, the Company granted Astra certain rights of first negotiation with respect to the development and exploitation of additional indications for balsalazide disodium and a right of first refusal to obtain marketing rights in the United States for gastrointestinal products for which Salix chooses not to assume the sole and exclusive responsibility for marketing. For new indications for Colazide, the agreements provide that the Company cannot market Colazide, either directly or through third parties, without the prior consent of Astra.

Menarini Pharmaceutical Industries s.r.l.

Menarini, headquartered in Italy, is the largest manufacturer and distributor of pharmaceuticals in Southern Europe. Menarini also has extensive experience developing and marketing therapies for gastrointestinal disease in its markets. Under its agreements with Menarini, the Company granted Menarini certain manufacturing rights and exclusive distribution rights with respect to Colazide in Italy, Spain, Portugal and Greece. Through June 30, 1997 the Company has received revenues as partial contribution to research and development costs borne by the Company of approximately $1.2 million. The agreement calls for additional milestone revenues of $0.5 million to be paid to Salix relating to European marketing approvals in the Menarini territories. The funding provided through this alliance has allowed Salix to fund partially the development of Colazide. Under the terms of its agreements, Salix will sell bulk active ingredient Colazide to Menarini for marketing and distribution in its territories at cost plus a sales-based royalty.

MANUFACTURING

The Company has in the past used and will continue to use third party manufacturers to produce material for use in clinical trials and for commercial product. This manufacturing strategy enables the Company to direct its financial resources to product in-licensing and acquisition, product development, and sales and marketing efforts, without devoting resources to the time and cost associated with building large manufacturing plants. The Company chooses manufacturers who have demonstrated the ability to manufacture products in accordance with Good Manufacturing Practice regulations and who have manufactured products that have passed an FDA inspection.

Currently, bulk active ingredient Colazide is being manufactured for the Company by Courtaulds Chemicals (Holdings) Limited in Scotland and is being encapsulated for the Company by Anabolic, Inc. in Irvine, California.

Under its supply agreement with the Company, Alfa Wassermann is obligated to supply the Company with bulk active ingredient rifaximin. Currently, Alfa Wassermann manufactures rifaximin for the Italian and other European markets.

MARKETING AND SALES

The Company has retained marketing rights in the United States and Canada to rifaximin and plans to establish its own marketing and sales organization for rifaximin and future products. The Company intends to establish a small, specialized sales force to market rifaximin to the limited group of approximately 9,700 gastroenterologists in the United States who are responsible for treating most gastrointestinal disease. The Company believes that a domestic direct sales force can effectively reach this small number of physicians without the investment needed to develop and maintain a large sales force. This direct sales force model will be the basis for the commercialization of rifaximin and future products in the United States.

The Company has licensed the exclusive distribution rights for Colazide to Astra and Menarini. The commercial relationships with Astra and Menarini have provided the Company money needed to fund the late-stage development of Colazide, to in-license other gastrointestinal products and to help establish the Company as a viable gastrointestinal pharmaceutical company. The Company received the necessary funding in exchange for the grant of exclusive distribution rights to Astra and Menarini. The Company plans to implement future North American product sales and marketing based on the direct sales force model. See "--Strategic Alliances".

PATENTS AND PROPRIETARY RIGHTS

General

As with all pharmaceutical companies, the Company's success will depend on its ability to maintain patent protection for its products, preserve trade secrets, prevent third parties from infringing upon its proprietary rights, and operate without infringing upon the proprietary rights of others, both in the United States and internationally.

Colazide

The active ingredient of Colazide, balsalazide, and the method of treating ulcerative colitis with Colazide are the subject of composition of matter patents which have been issued to Biorex in the United States (expiring July 2001), the United Kingdom (expiring February 2002), France (expiring May 2002), Italy (expiring July 2001), and Germany (expiring April 2002). The Company holds exclusive worldwide rights under the issued patents, excluding Japan, Korea and Taiwan. The patents claim balsalazide disodium as well as several variant molecules.

Additional patent applications have been filed by the Company in its own name covering the use of balsalazide or any metabolite thereof for colorectal cancer chemoprevention. A patent for the method of treating colon cancer was issued in the United States to the Company in March 1996 and expires in January 2014. Assuming patents issue for pending applications, patents for the method of treating colon cancer will expire in January 2015 in various countries in Europe, Asia, and North America. Claims to additional metabolites are still pending in subsequent filings worldwide. No assurances can be given that such additional patents will issue or, if issued, that they will provide protection against similar or competing products.

Rifaximin

Rifaximin is covered by substance of matter patents which have issued in the United States and major market territories of Europe. The original United States composition-of-matter patent, which also covers the process of making rifaximin and the use of rifaximin for the treatment of gastrointestinal infectious diseases, expires in May 2001. A related Canadian patent also expires in May 2001. Additional patents on a manufacturing process and on the use of rifaximin for the treatment of H. pylori infections have been issued in the United States to Alfa Wassermann and such patents expire in April 2005 and June 2013, respectively. Related Canadian patents expire in April 2005 and February 2014, respectively.

Patent Term Extensions

The Company believes that some of these patents may be eligible for extensions of up to five years based upon patent term restoration procedures in Europe and in the United States under the Waxman-Hatch Act. Under the Waxman-Hatch Act, the United States Patent and Trademark Office is directed to extend the term of an eligible patent for a time equal to the "regulatory review period for the approved product". This time period is generally one- half the length of time between the effective date of the IND and submission of the NDA, plus the length of time between filing and approval of the NDA, up to a total possible extension of five years. Periods during which the applicant did not act with "due diligence" are subtracted from the regulatory review period. Under this law, the Colazide patent in the United States could be extended by up to five years, giving the product patent protection until as late as 2006 if approval in the United States is received before expiration of the original patent term in 2001. In addition, the Company intends to seek patent extensions under similar laws in effect in the European Union, which could give Colazide extended patent protection in these jurisdictions until as late as 2006.

GOVERNMENT REGULATION

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

The steps ordinarily required before a new pharmaceutical product may be marketed in the United States include: (i) preclinical laboratory tests, preclinical studies in animals and formulation studies; (ii) the submission to the FDA of a notice of claimed investigational exemption for a new drug or antibiotic, which must become effective before clinical testing may commence;
(iii) adequate and well-controlled clinical human trials to establish the safety and efficacy of the drug for each indication; (iv) the submission of an NDA to the FDA; and (v) FDA review and approval of the NDA prior to any commercial sale or shipment of the drug. Preclinical tests include laboratory evaluation of product chemistry and formulation,

as well as animal studies to assess the potential safety and efficacy of the product. Preclinical tests must be conducted in compliance with Good Laboratory Practice regulations. The results of preclinical testing are submitted to the FDA as part of an IND. A 30-day waiting period after the filing of each IND is required prior to the commencement of clinical testing in humans. In addition, the FDA may, at any time during this 30-day period or at any time thereafter, impose a clinical hold on proposed or ongoing clinical trials. If the FDA imposes a clinical hold, clinical trials cannot commence or recommence without FDA authorization and then only under terms authorized by the FDA. In some instances, the IND application process can result in substantial delay and expense.

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

After successful completion of the required clinical testing, generally an NDA is submitted. FDA approval of the NDA is required before marketing may begin in the United States. The FDA reviews all NDAs submitted before it accepts them for filing and may request additional information rather than accepting an NDA for filing. In such an event, the NDA must be resubmitted with the additional information and, again, is subject to review before filing. Once the submission is accepted for filing, the FDA begins an in-depth review of the NDA. Under the FDC Act, the FDA has 180 days in which to review the NDA and respond to the applicant. The review process is often significantly extended by FDA requests for additional information or clarification regarding information already provided in the submission. The FDA may refer the application to an appropriate advisory committee, typically a panel of clinicians, for review, evaluation and a recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee. If FDA evaluations of the NDA and the manufacturing facilities are favorable, the FDA may issue either an approval letter or an approvable letter, which usually contains a number of conditions that must be met in order to secure final approval of the NDA. When and if those conditions have been met to the FDA's satisfaction, the FDA will issue an approval letter, authorizing commercial marketing of the drug for certain indications. If the FDA's evaluation of the NDA submission or manufacturing facilities is not favorable, the FDA may refuse to approve the NDA or issue a not approvable letter, outlining the deficiencies in the submission and often requiring additional testing or information. If regulatory approval of Colazide or any other product is granted, such approval will be limited to those disease states and conditions for which the product has been found by the FDA to be safe and effective, as demonstrated through well controlled clinical studies. Even if such regulatory approval is obtained, a marketed product, its manufacturer and its manufacturing facilities are subject to continual review and periodic inspections. In addition, identification of certain side effects after a drug is on the market or the occurrence of manufacturing problems could cause subsequent withdrawal of approval, reformulation of the drug, additional preclinical testing or clinical trials and changes in labeling of the product.

For antibiotic drug products such as rifaximin, FDA testing and approval procedures are analogous to those applicable to non-antibiotic drugs except that approval also requires the establishment of an antibiotic monograph setting forth the tests and specifications for the drug, which are published by the FDA as a regulation and codified in the Code of Federal Regulations.

On June 23, 1997, the Company submitted an NDA to the FDA covering the use of Colazide as a therapy for acute ulcerative colitis. The NDA is subject to acceptance for filing by the FDA by August 22, 1997. If accepted for filing, the NDA can be approved only if the FDA determines that the NDA contains substantial evidence from clinical trials that the drug is safe and effective for its intended use. There can be no assurance that the results of the Company's preclinical or clinical studies, including its United States Phase III clinical testing in combination with the results from a European safety and efficacy study, will demonstrate, to the FDA's satisfaction, substantial evidence that the drug is safe and effective. If clinical data, in addition to that filed in the NDA, is requested from the Company to support approval of Colazide, such a request is likely to significantly delay approval of the product, if approval is granted at all. If regulatory approval of Colazide or any other product is granted, such approval will be limited to those disease states and conditions for which the product has been shown to be safe and effective, as demonstrated to the FDA's satisfaction through well controlled clinical studies. Furthermore, approval may entail ongoing requirements for post-marketing studies. Even if such regulatory approval is obtained, a marketed product, promotional activities for the product, its manufacturer and its manufacturing facilities are subject to continual review and periodic inspections. In addition, identification of certain side effects after a drug is on the market or the occurrence of manufacturing problems could cause subsequent withdrawal of approval, reformulation of the drug, additional preclinical testing or clinical trials and changes in labeling of the product. The Company does not expect to file an NDA for rifaximin prior to mid-1998 and will do so only if the clinical trials support such a filing.

Under the Orphan Drug Act, the FDA may designate a product as an orphan drug if it is a drug intended to treat a "rare disease or condition", which is a disease or condition that affects populations of fewer than 200,000 individuals in the United States or a disease whose incidence rates number more than 200,000 where the sponsor establishes that it does not realistically anticipate that its product sales will be sufficient to recover its costs. The sponsor that obtains the first marketing approval for a designated orphan drug for a given rare disease is eligible to receive marketing exclusivity for use of that drug for the orphan indication for a period of seven years. The Company may apply for orphan drug designation for some of its products and indications in development. There is no assurance that the FDA would grant orphan drug designation or marketing exclusivity for any such indications or products or that, if granted, such exclusivity would effectively protect the product from competition.

Drug manufacturing establishments are subject to periodic inspection by regulatory authorities and must comply with Good Manufacturing Practice regulations. The Company or its third party manufacturer must pass a preapproval inspection of its manufacturing facilities by the FDA before obtaining marketing approval of any products for sale in the United States. These manufacturers are also subject to periodic FDA inspections. In the event that violations of applicable standards are found, the Company may be required to cease distribution of some or all products and may be required to recall products already distributed.

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

COMPETITION

Competition in the pharmaceutical industry is intense and characterized by extensive research efforts and rapid technological progress. The Company believes that there are numerous pharmaceutical and biotechnology companies, both public and private and including large well known pharmaceutical companies, as well as academic research groups that are engaged in research and development efforts for gastrointestinal diseases and conditions addressed by the Company's current and potential products. In particular, the Company is aware of products in research or development by competitors that address the diseases being targeted by the Company's products. There can be no assurance that developments by others will not render the Company's current and potential products obsolete or noncompetitive. Competitors may be able to complete the development and regulatory approval process sooner and, therefore, market their products earlier than the Company. Many of the Company's competitors have substantially greater financial, marketing and human resources and development capabilities than the Company. For example, many large, well capitalized companies already offer products in the United States and Europe that will compete with the Company's proposed therapeutic applications of Colazide, including mesalamine (SmithKline Beecham plc, Dr. Falk Pharma GmbH, Pharmacia & Upjohn, Inc., Solvay S.A., The Procter & Gamble Company, and Hoechst Marion Roussel, Inc.), sulfasalazine (Pharmacia & Upjohn, Inc.), and olsalazine (Pharmacia & Upjohn, Inc.). Technological developments by competitors, earlier regulatory approval for marketing competitive products, or superior marketing capabilities possessed by competitors could adversely affect the commercial potential of the Company's products, including Colazide, and could have a material adverse effect on the Company's business, financial condition, and results of operations. In addition, manufacturers of generic drugs may seek to compete directly with the Company's products in the absence of effective patent protection or non-patent exclusivity protections.

FACILITIES

The Company occupies approximately 7,500 square feet of office space in Palo Alto, California, approximately 200 square feet of office space in Hamilton, Bermuda, and approximately 260 square feet of office space in Dorset, England. The Palo Alto facility's lease extends through August 31, 2001. The Company considers this space adequate for its anticipated needs into the foreseeable future.

EMPLOYEES

As of June 30, 1997, the Company had 17 employees. The Company believes that its future success will depend in part on its continued ability to attract, hire, and retain qualified personnel. Competition for such personnel is intense, and there can be no assurance that the Company will be able to identify, attract, and retain such personnel in the future. None of the Company's employees is represented by a labor union. The Company has not experienced any work stoppages and considers its relations with its employees to be good.

MANAGEMENT

EXECUTIVE OFFICERS, DIRECTORS, AND KEY EMPLOYEES

The following table sets forth certain information concerning the executive officers, directors, and certain key employees of the Company and its subsidiaries, including their ages as of July 31, 1997 and their place of residence:

          NAME           AGE           POSITION                      RESIDENCE
          ----           ---           --------                      ---------
Randy W. Hamilton.......  44 Chairman, President and      Los Altos, California, U.S.A.
                             Chief Executive Officer
David Boyle.............  43 Vice President, Finance &    Cupertino, California, U.S.A.
                             Administration, and Chief
                             Financial Officer
John Brough.............  44 President, Glycyx            Southampton, Bermuda
                             Pharmaceuticals, Ltd.
Alvaro E. Carvajal......  54 Vice President, Information  San Francisco, California,
                             Systems (Salix               U.S.A.
                             Pharmaceuticals)
Lorin K. Johnson,         44 Vice President, Research,    Pleasanton, California, U.S.A.
 Ph.D...................     and Director
Robert P. Ruscher.......  37 Vice President, Business     Raleigh, North Carolina, U.S.A.
                             Development
James G. Shook, Ph.D....  57 Senior Vice President,       Redwood City, California, U.S.A.
                             Development (Salix
                             Pharmaceuticals)
Jay A. Lefton...........  41 Corporate Secretary          Toronto, Ontario, Canada
Lily Baxendale,
 F.R.S.C................  72 Director                     London, United Kingdom
Lawrance A. Brown,
 Jr.(/1/)(/2/)..........  69 Director                     Palo Alto, California, U.S.A.
John F.                   60 Director                     Gladwyne, Pennsylvania, U.S.A.
 Chappell(/1/)(/2/).....
Nicholas M. Ediger......  69 Director                     Fredericton, New Brunswick,
                                                          Canada
David E. Lauck..........  62 Director                     Florence, Oregon, U.S.A.

(1) Member of Audit Committee.
(2) Member of Compensation Committee.

Randy W. Hamilton is a co-founder of the Company and has served as Chairman of its Board of Directors and President and Chief Executive Officer since December 1993. From November 1989 to December 1993, Mr. Hamilton served as President and Chief Executive Officer and as a director of Salix Pharmaceuticals, Inc. Prior to 1989, Mr. Hamilton served as Director of Planning and Business Development with SmithKline Diagnostics, Inc., a medical diagnostic subsidiary of SmithKline Beecham plc, a pharmaceutical company, and as head of Asian business development for California Biotechnology Inc. (now Scios, Inc.), a biotechnology company.

David Boyle has served as the Company's Vice President, Finance and Administration, and Chief Financial Officer since November 1996. From May 1992 to October 1996, Mr. Boyle was employed by Ares Serono Group, a Swiss pharmaceutical company, most recently as Vice President, Finance and Administration (North America), and previously as Director, Business Analysis Group. Prior to joining Ares Serono, Mr. Boyle held various accounting and finance positions with Ernst & Young LLP.

John Brough has served as President of Glycyx Pharmaceuticals, Ltd. since July 1996. From April 1995 to April 1996, he served as President, and from May 1989 to April 1995 as Director, Finance and Administration, of Syntex Pharmaceuticals International Ltd., a subsidiary of Syntex Corporation ("Syntex"), a pharmaceutical company acquired in 1994 by The Roche Group.

Alvaro E. Carvajal has served as the Vice President, Information Systems of Salix Pharmaceuticals since August 1997. From January 1994 to August 1997, Mr. Carvajal served as the Director, Information Systems of Salix Pharmaceuticals. From 1989 to January 1994, he served as an international systems consultant for Syntex.

Lorin K. Johnson, Ph.D. is a co-founder of the Company and has served as the Company's Vice President, Research, and as a member of its Board of Directors since December 1993. From November 1989 to December 1993, Dr. Johnson held the same positions at Salix Pharmaceuticals, Inc. Prior to co-founding Salix, Dr. Johnson served as Director of Scientific Operations at California Biotechnology Inc. Prior to joining California Biotechnology, Dr. Johnson was assistant Professor of Pathology at Stanford University Medical Center.

Robert P. Ruscher has served as the Company's Vice President, Business Development, and General Counsel since February 1996. From May 1996 to November 1996, he also served as the Company's Chief Financial Officer. Since April 1994, Mr. Ruscher has been associated with the law firm of Wyrick, Robbins, Yates & Ponton, L.L.P. in Raleigh, North Carolina. From February 1993 to April 1994, Mr. Ruscher was an associate at the law firm Venture Law Group in Menlo Park, California, and from August 1989 to February 1993, he was an associate at the law firm Wilson Sonsini Goodrich & Rosati in Palo Alto, California.

James G. Shook, Ph. D. has served as the Senior Vice President, Development of Salix Pharmaceuticals, Inc. since April 1997. From August 1994 to April 1997, Dr. Shook served as Vice President, Research and Development of Fujisawa Pharmaceuticals U.S.A., a pharmaceutical company. From September 1993 to August 1994, Dr. Shook served as Acting Vice President, Research and Development, and Vice President, Research and Development Operations at Fujisawa and from June 1992 to September 1993 as Vice President, Research and Development Operations and Project Director, Immunology.

Jay A. Lefton has served as the Company's Corporate Secretary since April 1997. Mr. Lefton has been a partner of the law firm of Aird & Berlis in Toronto, Ontario since 1986, where he specializes in corporate and securities law. He is also a member of the Board of Directors of International Murex Technologies Corporation, a publicly-traded company on The Nasdaq National Market, and Harley Street Software Ltd. and Sumtra Diversified Inc., each of which is publicly-traded in Canada. Aird & Berlis has and is currently providing legal counsel to the Company in Canada.

Lily Baxendale, F.R.S.C., has served as a director of the Company since July 1995. Miss Baxendale has served since 1983 as Managing Director of Biorex, a pharmaceutical development company, which she co-founded in 1950. Prior to 1983, Miss Baxendale served as a director and secretary of Biorex. Miss Baxendale is a Fellow of the Royal Society of Chemists.

Lawrance A. Brown, Jr. has served as a director of the Company since October 1994 and as a member of its audit and compensation committees since December 1994. Since 1992, Mr. Brown has been a self-employed consultant. Prior to 1992, Mr. Brown was a General Partner of Continental Capital and, subsequently, a consultant to MBW Ventures. Before his venture capital activities, Mr. Brown worked for SmithKline Corporation, a pharmaceutical company, retiring as a Group Vice President.

John F. Chappell has served as a director of the Company since September 1990 and as a member of its audit and compensation committees since December 1994. Since December 1990, Mr. Chappell has been President of Plexus Ventures, Inc., a private consulting firm specializing in advising early stage pharmaceutical companies. Prior to 1990, Mr. Chappell served in various capacities at SmithKline Beecham plc, most recently as Chairman, Worldwide Pharmaceuticals and a member of its Board of Directors. Mr. Chappell also serves as a director of Aronex Pharmaceuticals Inc., Neurex Corporation, Ribi ImmunoChem Research, Inc. and Zynaxis, Inc. Mr. Chappell serves on the Compensation Committee of the Board of Directors of Aronex Pharmaceuticals Inc. and Ribi ImmunoChem Research, Inc.

Nicholas M. Ediger has served as a director of the Company since February 1997. Since October 1988, Mr. Ediger has served as Managing Director of Sentinel Associates, a finance and energy consulting firm. Prior to joining Sentinel, Mr. Ediger served for 14 years as President and Chief Executive Officer of Eldorado Resources Ltd., an energy and mineral company. Prior to joining Eldorado, Mr. Ediger worked for 25 years with Gulf Oil Corporation, including as Chief Operating Officer of Gulf Minerals Canada Ltd.

David E. Lauck is a co-founder of the Company and has served as a director since December 1993. Mr. Lauck served as the Company's Vice President, Development from February 1994 until June 1997 and has been working as a part time employee with the Company since such time. From December 1993 to January 1994, he was the Company's Director of European Development. Prior to December 1993, Mr. Lauck served as an officer and director of Salix Pharmaceuticals including in the positions of Director/Europe from October 1992 to December 1993 and Vice President of Regulatory Affairs from November 1989 to September 1992.

All directors are elected at the annual meeting of shareholders and hold office until the election and qualification of their successors at the next annual meeting of shareholders. Officers of the Company serve at the discretion of the Board of Directors.

SCIENTIFIC ADVISORY BOARD

The Company assembles teams of scientific and medical advisors to advise the Company on issues related to specific pharmaceutical products. The Company's current group of advisors are experts in gastrointestinal disease and specifically inflammatory bowel disease and colorectal cancer. The Company plans to assemble different advisory groups specific to other products under development. In certain cases, these advisors have agreed to be available for consultation for a specified number of days each year, but individuals may consult and meet informally with the Company on a more frequent basis. All of the Company's scientific and medical advisors are employed by major medical schools, research institutions, hospitals or other institutions and may have other commitments that may limit their availability to the Company. Salix's current advisory group is as follows:

                 NAME                                 POSITION
                 ----                                 --------
Marvin H. Sleisenger, M.D., M.A.C.P... Consulting Medical Director of Salix
                                       and Professor of Medicine, University
                                       of California, San Francisco
J.E. Lennard-Jones, M.D., F.R.C.P..... Professor Emeritus of
                                       Gastroenterology, University of
                                       London, England
Young S. Kim, M.D..................... Professor of Medicine, University of
                                       California,
                                       San Francisco
Stephen B. Hanauer, M.D............... Director, Gastrointestinal Clinical
                                       Research Center, University of Chicago
James L. Madara, M.D.................. Professor of Pathology, Harvard
                                       Medical School
Robert W. Beart, Jr., M.D............. Professor of Surgery, University of
                                       Southern California
James M. Church, M.D.................. Member, Department of Colorectal
                                       Surgery,
                                       Cleveland Clinic
Robert D. Madoff, M.D................. Clinical Assistant Professor of
                                       Surgery, Director of Research,
                                       University of Minnesota Medical School

Marvin H. Sleisenger, M.D., MACP is the Consulting Medical Director of the Company and past Chairman of the Company's Scientific and Medical Advisory Board. Dr. Sleisenger is Professor of Medicine and Director, Cancer Research Institute at the University of California, San Francisco. He is author of Gastrointestinal Disease, a widely used medical textbook. Dr. Sleisenger is past President of the American Gastroenterological Association, a Fellow of the Royal College of Physicians (London) and a Master of the American College of Physicians.

J.E. Lennard-Jones, M.D., FRCP, FRCS is Professor Emeritus of Gastroenterology at the University of London, England. Until recently, Dr. Lennard-Jones was a consulting gastroenterologist at St. Mark's Hospital in London, and he is Professor Emeritus at the London Hospital Medical College. He is past President of the British Society of Gastroenterology and President of the British Digestive Foundation. He has contributed to numerous scientific publications, primarily on topics related to inflammatory bowel disease.

Young S. Kim, M.D. is a Professor of Medicine at the University of California at San Francisco, where he is also Scientific Director of the Colorectal Cancer Program. Dr. Kim is also Director of the Gastrointestinal Research Laboratory at the San Francisco Veterans Administration Medical Center. He has been associated with both of these institutions since 1968. Dr. Kim's major research interests are in the areas of experimental pathology in gastrointestinal neoplasms, glycoprotein biochemistry, and enzymology and membrane biochemistry of the gut. Dr. Kim has authored numerous articles in his areas of study and currently serves on the editorial boards of The International Journal of Experimental and Clinical Gastroenterology, Tumor Biology and Pancreas.

Stephen B. Hanauer, M.D. has served as Director of the Gastrointestinal Clinical Research Center at the University of Chicago since 1983 and is co- director of the Inflammatory Bowel Disease Research Center at the University of Chicago. He was Chairman of the Clinical Affairs/Professional Education Committee of the Crohns & Colitis Foundation of America and has served on numerous other national committees in the field of gastroenterology. Dr. Hanauer served as a member of the FDA Advisory Panel for gastrointestinal products and has authored the FDA guidelines for the clinical evaluation of drugs for patients with inflammatory bowel disease. He has authored numerous articles in the field and is a reviewer for publications including the New England Journal of Medicine, Gastroenterology, the American Journal of Gastroenterology and the Annals of Internal Medicine. He is a member of the editorial board for the American Journal of Gastroenterology, Alimentary Pharmacology & Therapeutics, and the Journal of Inflammatory Bowel Disease.

James L. Madara, M.D. is Associate Professor of Pathology and Associate Professor of Health Sciences and Technology at Harvard University. Dr. Madara has been associated with the Harvard Medical School since 1978. His major research interests are in the areas of regulation of intestinal epithelial permeability, inflammation of the intestinal epithelium and repair of epithelial wounding. He is an author of numerous articles in gastroenterological research and holds or has held editorial positions with Gastroenterology, The American Journal of Physiology (Cell), Epithelial Cell Biology, the Journal of Clinical Investigation and The American Journal of Pathology.

Robert W. Beart, Jr., M.D. is currently a Professor of Surgery, specializing in colon and rectal surgery, at the University of Southern California in Los Angeles. His major research interests include prevention and management of recurrent colorectal cancer, fecal continence preservation, and related areas of gastrointestinal medicine. Previous academic appointments have included several positions with the Mayo Clinic School of Medicine. He has served as President of the American Society of Colon and Rectal Surgeons and has served on the editorial board of several medical journals in the fields of surgery, oncology and gastroenterology.

James M. Church, M.D. is currently a member of the Colorectal Surgery Department of the Cleveland Clinic in Cleveland, Ohio. His major research interests include chemoprevention of colonic polyps, familial adenomatous polyposis, desmoid tumors, management of recurrent colorectal cancer, and related areas of colorectal surgery and medicine. Previous appointments have included positions at the University of Auckland in New Zealand. Dr. Church has been the recipient of numerous fellowships and awards and has published extensively in the field of colorectal disease and surgery.

Robert D. Madoff, M.D. is currently a Clinical Assistant Professor of Surgery and Director of Research in the Division of Colon and Rectal Surgery at the University of Minnesota Medical School. His major research interests include management of polyps, inflammatory bowel disease, diverticular disease, colorectal cancer, fecal incontinence, and rectal prolapse. Previous appointments have included positions at the University of Massachusetts Medical School. He has served as Chief of the Colorectal Surgery Section of the Veterans Administration Medical Center in Minneapolis. Dr. Madoff has published and presented numerous papers in the field of colorectal disease and surgery.

DIRECTOR COMPENSATION

The Company reimburses each member of the Company's Board of Directors for out-of-pocket expenses incurred in connection with attending Board meetings. In addition, directors Nicholas M. Ediger and Lawrance A. Brown are compensated $1,000 for each meeting of the Board they attend in person. Other than Messrs. Ediger and Brown, all directors are either employed by the Company and/or hold a substantial equity position in the Company, and no member of the Board of Directors currently receives any additional cash compensation for his or her service as director. In February 1997, Mr. Ediger was granted a non-qualified stock option under the Company's 1996 Stock Option Plan to purchase 10,000 Common Shares at an exercise price equal to the fair market value of the Common Shares on the date of grant. Such option vests at the rate of 1/36th of the shares subject to option per month. In addition, the Company paid Mr. Brown $11,500 during the year ended December 31, 1996 in connection with a consulting arrangement with the Company. Directors may from time to time provide services as consultants that may provide for additional consulting services at agreed upon rates.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee is responsible for determining salaries, incentives and other forms of compensation for executive officers of the Company and administers various incentive compensation and benefit plans. The Compensation Committee consists of directors Lawrance A. Brown and John F. Chappell. Randy W. Hamilton, President and Chief Executive Officer of the Company, participates in all discussions and decisions regarding salaries and incentive compensation for all executive officers of the Company, except that he is excluded from discussions regarding his own salary and incentive stock compensation. No interlocking relationship exists between any member of the Company's Compensation Committee and any member of any other company's board of directors or compensation committee.

EXECUTIVE COMPENSATION

The following table sets forth information concerning the compensation awarded to, earned by, or paid for services rendered to the Company in all capacities during each of the fiscal years in the three year period ended December 31, 1996, by (i) the Company's Chief Executive Officer and (ii) the Company's executive officers whose salary and bonus for fiscal year 1996 exceeded Cdn. $100,000, which totals approximately U.S. $73,000 based on a December 31, 1996 exchange rate of Cdn. $1.3696 per U.S. $1.00. The officers of the Company listed on the table set forth below are referred to collectively in this Prospectus as the "Named Executive Officers".

SUMMARY COMPENSATION TABLE

                                                                      LONG-TERM
                                                                     COMPENSATION
                                                                        AWARDS
                                                                     ------------
                                      ANNUAL COMPENSATION (/1/)       SECURITIES    ALL OTHER
                             FISCAL --------------------------------  UNDERLYING   COMPENSATION
NAME AND PRINCIPAL POSITION   YEAR  SALARY (U.S. $)   BONUS (U.S. $) OPTIONS (#)  (U.S. $) (/2/)
---------------------------  ------ ---------------   -------------- ------------ --------------
Randy W. Hamilton.........    1996     $216,000            $--              --         $998
  Chairman, President and     1995       78,000             --              --           --
   Chief Executive Officer    1994      119,167             --              --           --
Lorin K. Johnson..........    1996      182,333             --              --          837
  Vice President, Research    1995       66,000             --              --           --
   and Director               1994      100,833             --              --           --
David E. Lauck(/3/).......    1996      181,113             --              --           --
  Former Vice President,      1995       63,308             --              --           --
   Development                1994       95,854             --              --           --
Robert P. Ruscher(/4/)....    1996      136,086             --              --          787
  Vice President, Business    1995       52,677(/5/)        --          60,000           --
   Development                1994       12,500(/6/)        --           2,825           --

(/1/) Other than the salary described herein, the Company did not pay any Named Executive Officer any fringe benefits, perquisites, or other compensation in excess of 10% of such executive officer's salary and bonus during fiscal years 1994, 1995 or 1996.
(/2/) Represents matching contributions under the Company's 401(k) retirement plan.
(/3/) Mr. Lauck resigned as the Company's Vice President, Development in June 1997.
(/4/) Mr. Ruscher became the Company's Vice President, Business Development in February 1996.
(/5/) Represents compensation paid to Mr. Ruscher as Director of Corporate Affairs and General Counsel.
(/6/) Represents compensation paid to Mr. Ruscher as a consultant to the Company.

OPTION GRANTS IN FISCAL YEAR 1996

No stock options were granted to any Named Executive Officer during the fiscal year ended December 31, 1996.

AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES

Options to purchase an aggregate of 2,825 Common Shares were exercised by a Named Executive Officer during the fiscal year ended December 31, 1996. The following table sets forth certain information regarding the exercise of stock options by the Named Executive Officers during the fiscal 1996 and stock options held as of December 31, 1996 by the Named Executive Officers.

                                                   NUMBER OF SECURITIES
                          SHARES                  UNDERLYING UNEXERCISED         VALUE OF UNEXERCISED
                         ACQUIRED                       OPTIONS AT             IN-THE-MONEY OPTIONS AT
                            ON        VALUE         DECEMBER 31,1996(#)     DECEMBER 31, 1996(U.S. $)(/2/)
                         EXERCISE   REALIZED    --------------------------- ----------------------------------
NAME                       (#)    (U.S. $)(/1/) EXERCISABLE  UNEXERCISABLE   EXERCISABLE        UNEXERCISABLE
----                     -------- ------------- ------------ -------------- ---------------    ---------------
Randy W. Hamilton.......     --      $   --            --            --               $    --             $    --
Lorin K. Johnson........     --          --            --            --                    --                  --
David E. Lauck..........     --          --            --            --                    --                  --
Robert P. Ruscher.......  2,825       2,825        25,000        35,000                66,250              92,750

(1) Based on the fair market value of the Common Shares on the date of exercise minus the exercise price.
(2) Based on the closing sales price in trading on The Toronto Stock Exchange on December 31, 1996 as converted to U.S. dollars at the exchange rate of Cdn. $1.3696 to U.S. $1.00 minus the exercise price for the applicable options.

STOCK PLANS

The Company's 1996 Stock Option Plan (the "1996 Plan") was adopted by the Board of Directors and approved by the Company's shareholders in February 1996. The 1996 Plan provides for the grant of incentive stock options to employees (including officers and employee directors) and for the grant of non-statutory stock options to eligible participants. A total of 1,150,000 Common Shares have been reserved for issuance under the 1996 Plan; provided, however, that the number of Common Shares that may be optioned and sold under the 1996 Plan must not exceed the sum of (i) 711,175 Common Shares plus (ii) such number of Common Shares as are subject to outstanding and unexercised options under the Company's 1994 Stock Plan (the "1994 Plan"). Unless terminated sooner, the 1996 Plan will terminate automatically in 2006. The 1996 Plan replaced the 1994 Plan. Options and share purchase rights previously issued under the 1994 Plan shall be exercisable according to their terms.

The 1996 Plan provides for administration by the Board of Directors of Company or by a committee approved by the Board (as applicable, the "Administrator"), in either case, in a manner that complies with requirements under the applicable state and federal corporate and securities laws, the Internal Revenue Code of 1986, as amended (the "Code"), and any applicable stock exchange. If permitted by Rule 16b-3 of the Exchange Act, the 1996 Plan may be administered by different bodies with respect to directors, officers and employees who are neither directors nor officers. The interpretation and construction of any provision of the 1996 Plan will be determined by the Administrator whose determination will be final and conclusive. The Administrator has the power to determine the terms of the options granted, including the exercise price of the option, the number of shares subject to each option, the exercisability thereof, and the form of consideration payable upon such exercise. However, no participant may be granted (i) more than 50% of the total number of shares reserved under the 1996 Plan within any twelve calendar month period, or (ii) options covering a number of shares that exceed 5% of the issued and outstanding Common Shares at the time of grant. With respect to grants to officers, the following limitations shall apply: (i) the maximum number of shares which may be granted under options held by all officers of the Company may not exceed 10% of the issued and outstanding shares of Common Shares at the time of grant (excluding shares issued pursuant to share compensation arrangements over the preceding 12-month period); (ii) the maximum number of shares which may be granted under options to any one officer and such officer's associates in any 12-month period shall be 5% of the issued and outstanding Common Shares at the time

of grant (excluding shares issued pursuant to share compensation arrangements over the preceding 12-month period); and (iii) the maximum number of shares which may be granted under options to officers in any 12-month period shall be 10% of the issued and outstanding Common Shares at the time of grant (excluding shares issued pursuant to share compensation arrangements over the preceding 12-month period). In addition, the Administrator has the authority to amend, suspend or terminate the 1996 Plan, provided that no such action may affect any Common Shares previously issued and sold or any option previously granted under the 1996 Plan.

Options granted under the 1996 Plan are not transferable by the optionee. Options granted under the 1996 Plan must generally be exercised within 90 days after the end of optionee's status as an employee or consultant of the Company, or within 12 months after such optionee's termination by death or disability, but in no event later than the expiration of the option's term.

The exercise price of all incentive stock options granted under the 1996 Plan must be at least equal to the fair market value of the Common Shares on the date of grant. The exercise price of nonstatutory stock options granted under the 1996 Plan is determined by the Administrator, but with respect to nonstatutory stock options granted to officers, the exercise price must at least be equal to the fair market value of the Common Shares on the date of grant. With respect to any participant who owns shares possessing more than 10% of the voting power of all classes of the Company's outstanding share capital, the exercise price of any incentive stock option granted must equal at least 110% of the fair market value on the grant date and the term of such incentive stock option must not exceed five years. The term of all other options granted under the 1996 Plan may not exceed 10 years.

The 1996 Plan provides that in the event of a merger of the Company with or into another corporation, or a sale of substantially all of the Company's assets, each option shall be assumed or an equivalent option substituted for by the successor corporation. If the outstanding options are not assumed or substituted for by the successor corporation, the Administrator shall provide for the optionee to have the right to exercise the option as to all of the optioned shares, including shares as to which it would not otherwise be exercisable. If the Administrator makes an option exercisable in full in the event of a merger or sale of assets, the Administrator shall notify the optionee that the option shall be fully exercisable for a period of 10 days from the date of such notice, and the option will terminate upon the expiration of such period.

Options granted under the 1994 Plan must generally be exercised within three months of the end of the Optionee's status as an employee or consultant of the Company, within six months of such optionee's termination by disability or within six months after such optionee's death but in no event later than the expiration of 10 years from the grant of such options. Options granted under the 1994 Plan provide that in the event of a proposed sale of all or substantially all of the Company's assets or a merger of the Company with or into another corporation each outstanding option shall be assumed or an equivalent option substituted for by the successor corporation. If the successor corporation does not assume such option or substitute an equivalent option, the option shall vest in its entirety and become fully exercisable. If the option becomes fully exercisable in such case, the Board of Directors shall notify such optionee and the option shall be exercisable for a period of 10 days from the date of such notice, and will terminate upon the expiration of such period.

As of June 30, 1997, an aggregate of 133,138 Common Shares had been issued upon exercise of options outstanding under the Stock Plans, and 7,000 Common Shares had been issued to consultants outside of the Stock Plans. Options to purchase an aggregate of 713,500 Common Shares at a weighted average exercise price of $3.72 were outstanding under the Stock Plans as of June 30, 1997. As of June 30, 1997, 303,362 Common Shares are available for issuance under future option grants. No share purchase rights remain outstanding under the 1994 Plan.

As of June 30, 1997, there were outstanding options under the Stock Plans entitling the holders to acquire up to 713,500 Common Shares, all of which expire 10 years from the date of grant, as set out below:

                                                     EXERCISE  MARKET VALUE  MARKET VALUE OF
                                         NUMBER OF   PRICE PER OF SECURITIES   SECURITIES
 NAME OR DESCRIPTION                   COMMON SHARES  COMMON    OPTIONED AT    OPTIONED AT
  OF OPTION HOLDER      DATE OF GRANT  UNDER OPTION  SHARE(1)  DATE OF GRANT  JUNE 30, 1997
----------------------  -------------- ------------- --------- ------------- ---------------
Executive Officers      April 1994         40,000    Cdn.$1.35   Cdn.$1.35      Cdn.$8.50
 (5 persons)            July 1995          60,000    Cdn.$1.35   Cdn.$1.35      Cdn.$8.50
                        December 1996     120,000    Cdn.$5.00   Cdn.$5.00      Cdn.$8.50
                        April 1997        200,000    Cdn.$8.95   Cdn.$8.95      Cdn.$8.50
Directors               February 1997      10,000    Cdn.$4.80   Cdn.$4.80      Cdn.$8.50
 (1 person)
Employees who are not   April 1994        188,000    Cdn.$1.38   Cdn.$1.38      Cdn.$8.50
 Executive Officers or  May 1996           13,000    Cdn.$7.00   Cdn.$7.00      Cdn.$8.50
 Directors              May 1997           22,500    Cdn.$9.75   Cdn.$9.75      Cdn.$8.50
                        June 1997          60,000    Cdn.$8.70   Cdn.$8.70      Cdn.$8.50
 Total                                    713,500

(1) The option agreements under the Company's Stock Plans provide for the payment of the applicable exercise price in United States dollars. For all options granted after May 1996, the exercise price is based on the fair market value of the Company's Common Shares on the last business day preceding the date of grant, as determined in trading on The Toronto Stock Exchange and converted into U.S. dollars at the then-applicable exchange rates.

401(k) Plan. Salix Pharmaceuticals participates in a tax-qualified employee savings and retirement plan (the "401(k) Plan") which covers all of the Company's full-time employees. Pursuant to the 401(k) Plan, employees may elect to reduce their current compensation by up to the lower of 15% or the statutorily prescribed annual limit and have the amount of such reduction contributed to the 401(k) Plan. The Company makes matching contributions on behalf of all participants in the 401(k) Plan in the amount of 25% of employee contributions, provided, however, that for purposes of calculating such matching contributions, the employee's contribution shall be treated as not exceeding 6% of the employee's compensation. The Company may make additional discretionary contributions on an annual basis. The 401(k) Plan is intended to qualify under Section 401 of the Code so that contributions by employees or by the Company to the 401(k) Plan, and income earned on plan contributions, are not taxable to employees until withdrawn from the 401(k) Plan, and so that contributions by the Company, if any, will be deductible by the Company when made. The trustee under the 401(k) Plan, at the direction of each participant, invests the assets of the 401(k) Plan in any of a number of investment options.

EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS

The Company does not currently have any employment contracts in effect with any Named Executive Officer.

Under the Stock Plans, in the event of a merger or a change in control of the Company, under certain circumstances, vesting of options outstanding under the Stock Plans will automatically accelerate such that outstanding options will become fully exercisable, including with respect to shares for which such shares would be otherwise unvested. See "Stock Plans".

LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS

The Company has adopted provisions in its Memorandum and Articles of Association that eliminate to the fullest extent permissible under British Virgin Islands law the liability of its directors to the Company for monetary damages. Such limitation of liability does not affect the availability of equitable remedies such as injunctive relief or rescission. The Company has entered into indemnification agreements with its officers and directors containing provisions which may require the Company, among other things, to indemnify the officers and directors against certain liabilities that may arise by reason of their status or service as directors or officers (other than liabilities arising from willful misconduct of a culpable nature), and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified.

At the present time, there is no pending litigation or proceeding involving a director, officer, employee or other agent of the Company in which indemnification would be required or permitted. The Company is not aware of any threatened litigation or proceeding which may result in a claim for such indemnification.

PRINCIPAL SHAREHOLDERS

The following table sets forth certain information with respect to the beneficial ownership of the Company's Common Shares as of June 30, 1997 and as adjusted to reflect the sale of the 3,000,000 Common Shares offered by the Company hereby: (i) by each person or entity who is known by the Company to own beneficially more than 5% of the Common Shares; (ii) by each director of the Company; (iii) by the Named Executive Officers; and (iv) by all directors and executive officers of the Company as a group.

                                                  PERCENTAGE TOTAL SHARES(/2/)
                               NUMBER OF SHARES  ------------------------------
NAME AND ADDRESS(/1/)         BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING
---------------------         ------------------ --------------- --------------
Randy W. Hamilton(/3/).......     1,038,982           14.6%           10.3%
Lorin K. Johnson(/4/)........       745,693           10.4%            7.3%
David E. Lauck...............       300,000            4.2%            3.0%
Robert P. Ruscher(/5/).......        39,435              *               *
Lily Baxendale(/6/)..........       323,124            4.5%            3.2%
Lawrance A. Brown, Jr........        37,668              *               *
John F. Chappell(/7/)........       879,494           12.3%            8.7%
Nicholas M. Ediger(/8/)......         1,667              *               *
All current executive
 officers and directors
 as a group (12
 persons)(/9/)...............     3,429,396           47.0%           33.3%

* Less than 1%.

(1) The address of each listed shareholder is c/o Salix Holdings, Ltd., 3600 West Bayshore Road, Suite 205, Palo Alto, California 94303.
(2) Applicable percentage ownership is based on 7,118,173 Common Shares outstanding as of June 30, 1997 and 10,118,173 Common Shares outstanding immediately following the completion of this offering, together with applicable options for such shareholder. Beneficial ownership is determined in accordance with the rules of the United States Securities and Exchange Commission, based on factors including voting and investment power with respect to shares, subject to community property laws, where applicable. Common Shares subject to options or warrants currently exercisable, or exercisable within 60 days after June 30, 1997, are deemed outstanding for the purpose of computing the percentage ownership of the person holding such options or warrants, but are not deemed outstanding for computing the percentage ownership of any other person. To the extent that any shares are issued upon exercise of options, warrants, or other rights to acquire the Company's share capital that are presently outstanding or granted in the future or reserved for future issuance under the Company's Stock Plans, there will be further dilution to new investors.
(3) Includes 1,677 Common Shares issuable upon exercise of outstanding warrants which are presently exercisable or will become exercisable within 60 days of June 30, 1997. Also includes 190,000 shares held by Mr. Hamilton's spouse, for which Mr. Hamilton disclaims beneficial ownership.
(4) Includes 33,333 Common Shares issuable upon exercise of outstanding warrants which are presently exercisable or will become exercisable within 60 days of June 30, 1997. Also includes 674,500 shares held by a trust for the benefit of Dr. Johnson and his wife and 37,860 Common Shares held by a family trust, the beneficiaries of which include Dr. Johnson's minor children. Dr. Johnson's wife is the trustee of both trusts.
(5) Includes 35,000 Common Shares issuable upon exercise of outstanding options and 833 Common Shares issuable upon exercise of outstanding warrants, which are presently exercisable or will become exercisable within 60 days of June 30, 1997.
(6) Represents 306,457 Common Shares held by Biorex Laboratories Limited and 16,667 Common Shares issuable upon exercise of outstanding warrants held by Biorex Laboratories Limited which are presently exercisable or will become exercisable within 60 days of June 30, 1997. Miss Baxendale is the Managing Director and a co-founder of Biorex Laboratories Limited.
(7) Includes 10,000 Common Shares issuable upon exercise of outstanding warrants which are presently exercisable or will become exercisable within 60 days of June 30, 1997.
(8) Represents 1,667 Common Shares issuable upon exercise of outstanding options which are presently exercisable or will become exercisable within 60 days of June 30, 1997.
(9) Includes 100,000 Common Shares issuable upon exercise of outstanding options and 70,833 Common Shares issuable upon exercise of outstanding warrants which are presently exercisable or will become exercisable within 60 days of June 30, 1997.

DESCRIPTION OF SHARE CAPITAL

GENERAL

The Company is authorized to issue 20,000,000 Common Shares, no par value, and 5,000,000 undesignated Preferred Shares, no par value.

COMMON SHARES

As of June 30, 1997, there were 7,118,173 Common Shares outstanding held of record by approximately 76 shareholders. As of June 30, 1997, options to purchase an aggregate of 713,500 Common Shares and warrants to purchase an aggregate of 602,331 Common Shares were also outstanding. See "Management-- Stock Plans".

The holders of Common Shares are entitled to one vote per share on all matters to be voted on by shareholders and have cumulative voting rights with respect to the election of directors. Subject to the prior rights of holders of Preferred Shares, if any, the holders of Common Shares are entitled to receive such dividends, if any, as may be declared from time to time by the Board of Directors in its discretion from funds legally available therefor. Upon liquidation or dissolution of the Company, the remainder of the assets of the Company will be distributed ratably among the holders of Common Shares after payment of liabilities and the liquidation preferences of any outstanding shares of Preferred Shares. The Common Shares have no preemptive or other subscription rights and there are no conversion rights or redemption or sinking fund provisions with respect to such shares. All of the outstanding Common Shares are, and the shares to be sold in this offering will be, fully paid and nonassessable.

PREFERRED SHARES

The Company is authorized to issue 5,000,000 undesignated Preferred Shares. The Board of Directors has the authority to issue the Preferred Shares in one or more series and to fix the price, rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting a series or the designation of such series, without any further vote or action by the Company's shareholders. The issuance of Preferred Shares, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of delaying, deferring or preventing a change in control of the Company without further action by the shareholders and may adversely affect the market price of, and the voting and other rights of, the holders of Common Shares. The Company has no current plans to issue any Preferred Shares.

WARRANTS

As of June 30, 1997, there were outstanding warrants to purchase an aggregate of 602,331 Common Shares at an exercise price of $3.00. Warrants to purchase 399,999 Common Shares may be exercised at any time on or before the earliest to occur of the following: (i) July 25, 2003 or (ii) the closing of the Company's sale or acquisition of all or substantially all of its assets or the acquisition of the Company by another entity by means of a merger or other transaction the result of which is that shareholders of the Company immediately prior to such acquisition possess a minority of the voting power of the acquiring entity immediately following such acquisition (an "Acquisition"). Warrants to purchase 202,332 Common Shares are exercisable at any time on or before the earliest to occur of (i) January 17, 2000 or (ii) an Acquisition. The warrants to purchase 399,999 Common Shares described above include a net exercise provision that permits the holders to exercise the warrant without payment of cash by surrendering the warrant and receiving Common Shares equal to the value of the warrant surrendered in accordance with a formula set forth in the warrants. The warrants to purchase 202,332 Common Shares described above may be net exercised only following the Company's delivery of notice of an Acquisition. All outstanding warrants contain provisions for the adjustment of the exercise price and the aggregate number of shares issuable upon exercise under certain circumstances, including share dividends, share splits, reorganizations, reclassifications or consolidations.

PRIOR SALES OF SECURITIES

The following table sets forth the particulars of prior sales of equity securities of the Company since July 31, 1996 other than options granted and the Common Shares offered hereby.

                                           NUMBER OF  PRICE PER   AGGREGATE
DATE OF ISSUE                  SECURITY    SECURITIES SECURITY     PROCEEDS
-------------                  --------    ---------- --------- --------------
August 1996 and February
 1997(/1/).................. Common Shares   70,313       $1.00        $70,313
March and May 1997(/2/)..... Common Shares  200,000   Cdn.$5.25 Cdn.$1,400,000

(1) Common Shares issued upon exercise of options to purchase Common Shares under the Company's Stock Plans.
(2) Common Shares issued upon exercise of warrants to purchase Common Shares granted to the underwriters in connection with the Canadian initial public offering in May 1996.

COMPARISON OF CANADIAN, UNITED STATES AND BRITISH VIRGIN ISLANDS CORPORATE
LAWS

Under the laws of many jurisdictions in the United States and Canada, majority and controlling shareholders generally have certain "fiduciary" responsibilities to the minority shareholders. Shareholder action must be taken in good faith and actions by controlling shareholders which are obviously unreasonable may be declared null and void. British Virgin Islands law protecting the interests of minority shareholders may not be as protective in all circumstances as the law protecting minority shareholders in jurisdictions in the United States and Canada.

While British Virgin Islands law does permit a shareholder of a British Virgin Islands corporation to sue its directors derivatively (i.e., in the name of and for the benefit of the corporation) and to sue the corporation and its directors for the shareholder's benefit and for the benefit of other similarly situated, the circumstances in which any such action may be brought, and the procedures and defenses that may be available in respect of any such action, may result in the rights of shareholders of a British Virgin Islands corporation being more limited than those of shareholders of a corporation organized in the United States or Canada.

Directors of the Company have the power to take certain actions without shareholder approval, including an amendment of the Company's Memorandum of Association or Articles of Association or an increase or reduction in the Company's authorized capital, which would require shareholder approval under the laws of most jurisdictions in Canada and the United States. In addition, the directors of a British Virgin Islands corporation, subject to court approval but without shareholder approval (unless the court requires shareholder approval), may, among other things, implement a reorganization; certain mergers or consolidations; certain sales, transfers, exchanges or dispositions of assets, property, parts of the business or securities of the corporation; the winding-up or dissolution of the corporation, or any combination thereof, if they determine any such action is in the best interests of the corporation, its creditors, or its shareholders. The ability of directors to commence a winding up of a company under British Virgin Islands law may be restricted by the Company's Memorandum of Association and Articles of Association so that a company that has issued shares may only commence to wind-up and dissolve with the approval of the shareholders. In addition, where there is a proposal to dispose of more than 50% of the assets of a company (outside the ordinary course of business), British Virgin Islands law requires shareholder consent to render such disposition valid.

As in most jurisdictions in the United States and Canada, the board of directors of a British Virgin Islands corporation is charged with the management of affairs of the corporation. In most jurisdictions in the United States and Canada, directors owe a fiduciary duty to the corporation and its shareholders, including a duty of care, pursuant to which directors must properly apprise themselves of all reasonably available information, and a duty of loyalty, pursuant to which they must protect the interests of the corporation and refrain from conduct that injures the corporation or its shareholders or that deprives the corporation or its shareholders of any profit or advantage. Many U.S. and Canadian jurisdictions have enacted various statutory provisions which permit the monetary liability of directors to be eliminated or limited. Under British Virgin Islands law, the liability of a corporate director to the corporation is limited to cases where the director has not acted honestly and in good faith and with a view to the best interests of the corporation or to cases where the director has not exercised the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Under its Articles of Association, the Company is authorized to indemnify any person who is made or threatened to be made a party to a legal or administrative proceeding by virtue of being a director, officer or agent of the Company, provided such person acted honestly and in good faith and with a view to the best interest of the Company and, in the case of a criminal proceedings, such person had no reasonable cause to believe that his conduct was unlawful. The Company's Articles of Association also obligate the Company to indemnify any director, officer or agent of the Company who was successful in any proceeding against expenses and judgments,

fines and amounts paid in settlement and reasonably incurred in connection with the proceeding, regardless of whether such person met the standard of conduct described in the preceding sentence.

The foregoing description of certain differences between Canadian, United States and British Virgin Islands corporate laws is only a summary and does not purport to be complete or to address every applicable aspect of such laws.

APPLICABILITY OF CALIFORNIA LAW

Section 2115 of the California General Corporate Law (the "California Corporate Law") makes substantial portions of the California Corporate Law applicable, with limited exceptions, to foreign corporations (i.e., any corporation domiciled outside the State of California) with more than half of their outstanding capital stock held of record by persons having addresses in California and more than half of the corporation's business conducted in the State of California (as measured by factors based on the corporations levels of property, payroll, and sales determined for California franchise tax purposes). Although the Company is incorporated in the British Virgin Islands, pursuant to Section 2115, certain provisions of the California Corporate Law apply to the Company. The statutory provisions of the California Corporate Law to which the Company is subject include, but are not limited to, provisions governing a director's standard of care in performing the duties of a director, the right of shareholders to vote cumulatively in the election of directors, the right of a director or shareholder to inspect corporate records, the ability of a corporation to indemnify officers, directors, and others, and the corporate requirements to effect a corporate reorganization (including mergers and acquisitions). Under Section 2115, the provisions of the California Corporate law made applicable to a foreign corporation apply to the exclusion of the law of the jurisdiction of incorporation of the foreign corporation.

CERTAIN TAX CONSIDERATIONS

The following is a general summary of certain British Virgin Islands, Canadian and United States federal tax consequences of the purchase, ownership and disposition of shares by prospective purchasers of Common Shares. This summary is of a general nature only and prospective purchasers of Common Shares are advised to consult their own tax advisors with respect to the tax consequences, as well as with respect to the tax consequences in other jurisdictions, of the ownership of Common Shares applicable in their particular tax situations.

The summary set forth below is based on the laws in force and as interpreted by the relevant taxation authorities as of the date of this Prospectus and are subject to any changes in such law, or in the interpretation thereof by the relevant taxation authorities, occurring after such date.

BRITISH VIRGIN ISLANDS TAXATION

At the present time, there is no British Virgin Islands income, corporation or profits tax, withholding tax, capital gains tax, capital transfer tax, estate duty or inheritance tax payable by the Company or its shareholders, other than shareholders that are ordinarily resident in the British Virgin Islands.

CANADIAN FEDERAL INCOME TAX CONSIDERATIONS

The following is a general summary of the principal Canadian federal income tax consequences under the Income Tax Act (Canada) (the "Canadian Act") to purchasers of Common Shares pursuant to this offering who, for purposes of the Canadian Act, are resident in Canada, deal at arm's length with the Company and acquire and hold their Common Shares as capital property (a "Canadian Holder"). The Canadian Act contains provisions relating to the tax consequences to a taxpayer who holds shares in a "foreign affiliate" (the "Foreign Affiliate Rules"). Generally, a "foreign affiliate" (as defined in the Canadian Act) is a non-resident corporation in which the taxpayer owns at least a 1% equity percentage and, either alone, or together with related persons, owns at least a 10% equity percentage. The Canadian Act also contains provisions relating to securities held by certain financial instructions (the "Mark-to-Market Rules"). This summary does not take into account either the Foreign Affiliate Rules or the Mark-to-Market Rules and Canadian Holders in respect of which the Company is a "foreign affiliate" or that are "financial institutions" should consult their own tax advisors.

This summary is based upon and takes into account the current provisions of the Canadian Act, the regulations thereunder (the "Regulations"), all specific proposals to amend the Canadian Act and the Regulations publicly announced by the Minister of Finance prior to the date hereof (the "Amendments"), and the Company's understanding of the current administrative practices published by Revenue Canada. This summary does not otherwise take into account or anticipate any changes in law, whether by judicial, governmental or legislative decision or action, nor does it take into account tax laws or considerations of any province or territory of Canada or any jurisdiction outside Canada. Moreover, there can be no assurance that the Amendments will be enacted as proposed or that the Canadian Act, the Regulations or administrative practices of Revenue Canada, respectively, will not change in a manner which will affect the tax consequences of the transactions to Canadian Holders.

THIS SUMMARY IS OF A GENERAL NATURE ONLY, IS NOT EXHAUSTIVE OF ALL POTENTIALLY RELEVANT CANADIAN FEDERAL INCOME TAX CONSIDERATIONS AND IS NOT INTENDED TO BE, NOR SHOULD IT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR HOLDER OF COMMON SHARES. THEREFORE, SUCH PERSONS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THEIR PARTICULAR CIRCUMSTANCES.

Dividends Received on Common Shares

Dividends, if any, received by Canadian Holders on Common Shares must be included in computing their income. Canadian Holders who are individuals will not be entitled to the benefit of the gross-up and dividend tax credit rules in the Canadian Act. Canadian Holders which are corporations will not be entitled to deduct an amount in respect of such dividends in computing taxable income.

A refundable tax of 6 2/3% is payable on investment income earned by a Canadian-controlled private corporation (as defined in the Canadian Act) which tax will be refunded when the corporation pays taxable dividends (at a rate of Cdn. $1.00 for every Cdn. $3.00 of taxable dividends paid). For this purpose, investment income includes dividends on the Common Shares and a portion of any taxable capital gain arising on a disposition of the Common Shares.

Disposition of Common Shares

A disposition or deemed disposition of a Common Share by a Canadian Holder will give rise to a capital gain (or a capital loss) equal to the amount by which the actual or deemed proceeds of disposition, less the reasonable costs of disposition, exceed (or are exceeded by) the adjusted cost base of the Common Share to the Canadian Holder at such time. Where a Canadian Holder who holds previously acquired Common Shares acquires any Common Shares under this offering all such shares will be considered to be identical properties for the purposes of the Canadian Act. Accordingly, the cost of all such Common Shares must be averaged for the purpose of determining their adjusted cost base to the Canadian Holder.

Generally, three-quarters of any capital gain realized will be required to be included in income as a taxable capital gain and three-quarters of any capital loss will be deductible, subject to certain limitations, from taxable capital gains in the year of disposition or the three preceding years or any subsequent year.

Information Reporting

Certain Canadian Holders of Common Shares whose total cost amount (as defined in the Canadian Act) of "specified foreign property" (as defined in the Canadian Act), including the Common Shares, in a taxation year exceeds Cdn. $100,000 will be required to file an information return in respect of such specified foreign property. This reporting requirement applies for taxation years commencing after 1995; however, information returns are not required to be filed for the 1996, 1997 and 1998 taxation years before the later of April 30, 1998 and the day on or before which the return for the taxation year is otherwise required to be filed. Canadian Holders should consult their own advisors with respect to the application of this reporting requirement.

UNITED STATES FEDERAL INCOME TAXATION

The following discussion is applicable to prospective purchasers of the Common Stock that are "U.S. Holders". For purposes of this discussion, a "U.S. Holder" means an individual citizen or resident of the United States for United States federal income tax purposes, a corporation or partnership created or organized under the laws of the United States or any State thereof, or an estate or trust the income of which is subject to United States federal income taxation regardless of its source.

The following summary does not address the tax treatment of U.S. Holders who own, actually or constructively, 10% or more of the Company's outstanding voting stock and certain United States Holders (including, but not limited to, insurance companies, tax-exempt organizations, financial institutions and persons subject to the alternative minimum tax) who may be subject to special rules not discussed below.

Taxation of Dividends. For United States federal income tax purposes, a U.S. Holder receiving a distribution with respect to the Common Stock generally will be required to include such distribution in gross income as a taxable foreign source dividend to the extent such distribution is paid from current or accumulated earnings and profits of the Company. Dividends received by United States corporate shareholders will not be eligible for the dividends received deduction allowed to United States corporations.

Taxation of Capital Gains. Subject to the discussion below under the heading "Passive Foreign Investment Company Considerations", a U.S. Holder will be liable for United States federal income tax on gains realized from the sale, exchange or other disposition of Common Stock to the same extent as on any other gains from sales, exchanges or disposition of shares. If the Common Stock constitutes a capital asset in the hands of the U.S. Holder, gain or loss generally will be capital gain or loss.

Under the "Taxpayer Relief Act of 1997" (the "Taxpayer Act") the maximum rate applicable to long-term capital gains of individuals has been reduced to 20%. However, the Taxpayer Act also extends the holding period for long-term capital gains to 18 months for capital assets disposed of after July 28, 1997. Gain on capital assets held between 12 months and 18 months are subject to tax at a maximum rate of 28%.

Personal Holding Companies. A non-United States corporation may be classified as a personal holding company (a "PHC") for United States federal income tax purposes if both of the following two tests are satisfied: (i) if at any time during the last half of the company's taxable year, five or fewer individuals (without regard to their citizenship or residency) own or are deemed to own (under certain attribution rules) more than 50% of the stock of the corporation by value (the "PHC Ownership Test") and (ii) such non-United States corporation receives 60% or more of its United States related gross income, as specifically adjusted, from certain passive sources such as royalty payments (the "PHC Income Test"). Such a corporation is taxed (currently at a rate of 39.6%) on certain of its undistributed United States source income (including certain types of foreign source income which are effectively connected with the conduct of a United States trade or business) to the extent amounts at least equal to such income are not distributed to shareholders.

The Company does not believe that it currently satisfies either the PHC Ownership Test or the PHC Income Test and intends to manage its affairs so as to avoid becoming a PHC, to the extent consistent with its business goals.

Foreign Personal Holding Companies. A non-United States corporation will be classified as a foreign personal holding company (an "FPHC") for United States federal income tax purposes if both of the two following tests are satisfied:
(i) five or fewer individuals who are United States citizens or residents own or are deemed to own (under certain attribution rules) more than 50% of all classes of the corporation's stock measured by voting power or value (the "FPHC Ownership Test") and (ii) the corporation receives at least 60% (50% in later years) of its gross income (regardless of source), as specifically adjusted, from certain passive sources (the "FPHC Income Test").

If the Company is classified as an FPHC, a portion of its "undistributed foreign personal holding company income" (as defined for United States federal income tax purposes) would be imputed to all of its shareholders who are United States holders of Common Shares on the last taxable day of the Company's taxable year, or, if earlier, the last day on which it is classified as an FPHC. Such income would be taxable as a dividend, even if no cash dividend is actually paid. United States holders who dispose of their Common Shares prior to such date would not be subject to tax under these rules.

The Company does not believe that it currently satisfies either the FPHC Ownership Test or the FPHC Income Test and intends to manage its affairs so as to avoid becoming a FPHC, to the extent consistent with its business goals.

Passive Foreign Investment Companies. The Company may be classified as a passive foreign investment company ("PFIC") for United States federal income tax purposes if certain tests are met. The Company will be a PFIC with respect to a U.S. Holder if for any taxable year in which the U.S. held the Common Stock either (i) 75% or more of its gross income is passive income or (ii) on average for the taxable year, 50% or more of its assets (by value or, if the Company so elects, by adjusted basis) produce or are held for the production of passive income.

Based on the anticipated sources of revenue of the Company in 1997, the Company does not believe that it will satisfy either of the tests for PFIC status for the taxable year ended December 31, 1997. However, there can be no assurance that the Internal Revenue Service will not challenge the Company's determination. In addition, because the determination of whether the Common Shares constitutes shares of a PFIC will be based upon the nature of the income and assets of the Company from time to time, there can be no assurance that the Company will not be considered a PFIC for any future taxable year. If the Company is a PFIC for any taxable year, U.S. Holders would be required to either (i) pay an interest charge together with tax calculated at maximum ordinary income rates on certain "excess distributions" (defined to include gain on a sale or other disposition of Common Shares) or (ii) if a Qualified Electing Fund ("QEF") election is made, to include in their taxable income certain undistributed amounts of the Company's income. Each U.S. Holder should consult its own tax advisor regarding the advisability of making the QEF election.

United States Information Reporting and Backup Withholding. Generally the amount of dividends paid to U.S. Holders of Common Shares, the name and address of the recipient and the amount if any, of tax withheld must be reported annually to the Internal Revenue Service. A similar report is sent to the holder.

Backup withholding tax at the rate of 31% will apply to certain payments made to U.S. Holders who fail to furnish certain identifying information under the United States information reporting rules. Amounts withheld from payments will be allowed as a credit against such U.S. Holders' United States Federal income tax liability.

SHARES ELIGIBLE FOR FUTURE SALE

Although the Common Shares offered hereby will be registered for sale under the United States Securities Act of 1933, as amended (the "U.S. Securities Act"), there is no public trading market for the Common Shares of the Company in the United States. After this offering, the 3,000,000 Common Shares offered hereby will trade only in Canada on The Toronto Stock Exchange under the symbol "SLX". No prediction can be made regarding the effect, if any, that market sales of Common Shares or the availability of Common Shares for sale will have on the prevailing market price of the Common Shares from time to time. As described below, certain outstanding Common Shares are subject to contractual and legal restrictions on resale. Sales of substantial amounts of Common Shares in the public market after the restrictions lapse could adversely affect the prevailing market price of the Company's securities on The Toronto Stock Exchange.

Upon completion of this offering, the Company will have approximately 10,118,173 Common Shares outstanding (assuming no exercise of the Underwriters' over-allotment option). Of these shares, all of the 3,000,000 Common Shares sold in this offering will be freely tradeable in the United States without restriction (unless such shares are held by an "affiliate" of the Company as such term is defined in the U.S. Securities Act). An additional 2,200,000 Common Shares were issued in connection with the Company's initial public offering in Canada in May 1996 (the "Canadian IPO"). The Common Shares issued in the Canadian IPO and all other outstanding Common Shares available for resale under applicable securities laws currently trade on The Toronto Stock Exchange under the symbol "SLX.s", carry a legend reflecting the Company's reliance, in connection with the Canadian IPO, on the exemption from the registration requirements of the U.S. Securities Act set forth in Regulation S thereunder, and are not presently available for resale in the United States or to "U.S. Persons" (as defined in Regulation S) in the absence of an exemption from registration under the U.S. Securities Act. It is the Company's current intention to authorize the removal of the Regulation S legend from all shares currently bearing such legend on May 28, 1998. After May 28, 1998, all shares that are then freely tradeable on The Toronto Stock Exchange will trade under the symbol "SLX". Prior to May 28, 1998, shareholders may request that the Company remove applicable legends in connection with resales on The Toronto Stock Exchange, subject to the shareholder's ability to establish, to the satisfaction of the Company and its legal counsel, that such shares may be resold in the United States in compliance with the requirements of the U.S. Securities Act. Following removal of the legend, such Common Shares will be freely tradeable in the United States without restriction or further registration under the U.S. Securities Act (except for shares that are held by an affiliate of the Company as that term is defined in Rule 144 under the U.S. Securities Act).

Of the 7,118,173 Common Shares outstanding prior to the completion of this offering, except for shares purchased by affiliates of the Company, (i) the 2,200,000 Common Shares issued in connection with the Canadian IPO and approximately 500,000 Common Shares issued in other transactions will be available for resale in accordance with Regulation S at any time on The Toronto Stock Exchange, subject to the legend removal conditions set forth above, and (ii) approximately 1,165,000 Common Shares will be available for resale only in compliance with Rule 144(k) or another exemption under the U.S. Securities Act. Approximately 3,259,000 Common Shares are held by affiliates of the Company and are subject to additional legal and contractual restrictions on resale. See "Risk Factors--Price Volatility; Limited Trading Volume".

Outstanding Common Shares will generally be available for resale pursuant to Rule 144(k) under the U.S. Securities Act if the holder is not an affiliate of the Company and has held the Common Shares for at least two years (including the holding period of any prior holder other than an affiliate) from the later to occur of the date on which the shares were purchased or the date on which the purchaser paid the full consideration for the shares. In general, under Regulation S as currently in effect, outstanding Common Shares issued and sold by the Company in reliance on the exemption under Regulation S will be eligible for legend removal and resale in the United States or to U.S. Persons if the Common Shares have been held for at least one year from the date of purchase in a transaction meeting the requirements of

Regulation S. The United States Securities and Exchange Commission (the "SEC") is currently evaluating a proposal that would, among other things, classify all equity securities of domestic issuers placed offshore under Regulation S as "restricted securities" under Rule 144 of the U.S. Securities Act. Such a proposal, if adopted, would reinforce the SEC's current view that any person who would be considered an "underwriter" within the meaning of the U.S. Securities Act may not resell securities sold in reliance on Regulation S following expiration of the applicable Regulation S restricted period in the absence of registration or an exemption therefrom. In particular, such persons may not assume the availability of the exemption set forth in Section 4(1) of the U.S. Securities Act with respect to resales of securities in the United States or to U.S. Persons. The Company's decision to refrain from removing any Regulation S legend on the Common Shares prior to May 28, 1998 except upon satisfaction of the conditions described above is subject to change in the event of further regulation or guidance from the SEC.

In connection with the completion of this offering, Biorex and certain executive officers and directors of the Company holding 3,035,626 Common Shares are expected to agree with the Underwriters not to sell, transfer, or assign any Common Shares or any securities convertible or exercisable or exchangeable for Common Shares, held or controlled, directly or indirectly, by such shareholders, without the prior written consent of Levesque Beaubien Geoffrion Inc. on behalf of the Underwriters, which consent will not be unreasonably withheld, for a period of 90 days following the anticipated closing date of the offering. The Company has agreed to a similar 90-day restriction with respect to the issuance of new Common Shares. The Company may, however, grant options to purchase Common Shares pursuant to the Stock Plans and may issue Common Shares pursuant to the exercise of granted options and outstanding warrants, as well as in connection with licensing arrangements or other acquisitions by the Company of assets or rights in the ordinary course of business.

In addition to the foregoing restrictions, pursuant to an escrow agreement dated May 10, 1996, among Randy W. Hamilton, Lorin K. Johnson, David E. Lauck, John F. Chappell and Biorex (collectively, the "Escrowed Shareholders"), the Company and Montreal Trust Company of Canada (the "Escrow Agent"), 2,747,753 Common Shares (the "Escrowed Shares") were placed in escrow by the Escrowed Shareholders. The Escrowed Shares are subject to release from escrow as follows: 10% of the Escrowed Shares were released nine months after May 17, 1996, (the date of the issuance by the securities regulatory authorities in the applicable provinces of a receipt for the Prospectus relating to the Company's initial public offering of shares in Canada (the "Initial Release Date"); a further 20% of the Escrowed Shares will be released on each of the first, second and third anniversaries of the Initial Release Date; and 30% of the Escrowed Shares will be released on the fourth anniversary date of the Initial Release Date.

OPTIONS

As of June 30, 1997, options to purchase 713,500 Common Shares were outstanding, of which options to purchase approximately 264,111 Common Shares were then vested and exercisable. In addition, 133,138 Common Shares were issued and outstanding under the Stock Plans, and an additional 7,000 Common Shares had been issued to consultants outside of the Stock Plans. Concurrently with the effectiveness of the offering contemplated by this Prospectus, the Company intends to file a Registration Statement on Form S-8/S-3 covering the 1,150,000 Common Shares reserved for issuance under the Stock Plans and covering for resale approximately 1,960,000 Common Shares issued under the Stock Plans or to consultants outside of the Stock Plans and pursuant to founders' Stock Purchase Agreements.

PLAN OF DISTRIBUTION

Pursuant to an underwriting agreement (the "Underwriting Agreement") dated , 1997 between the Company and Levesque Beaubien Geoffrion Inc., Yorkton Securities Inc., Marleau, Lemire Securities Inc. and Midland Walwyn Capital Inc. (collectively, the "Underwriters"), the Company has agreed to issue and sell and the Underwriters have severally agreed to purchase on , 1997, or on such other date, not later than , 1997, as may be agreed upon, subject to the terms and conditions stated therein, the number of Common Shares (the "Offered Shares") set forth opposite their names below at a price of Cdn.$ per Common Share, payable against delivery of certificates for such Common Shares. The Company has agreed to pay the Underwriters a fee of Cdn.$ per share for their services in connection with this offering.

                                                                   NUMBER OF
       UNDERWRITER                                                  SHARES
       -----------                                                 ---------
Levesque Beaubien Geoffrion Inc...................................
Yorkton Securities Inc............................................
Marleau, Lemire Securities Inc....................................
Midland Walwyn Capital Inc........................................
                                                                   ---------
 Total............................................................ 3,000,000
                                                                   =========

The Underwriters will offer the Offered Shares in Canada and elsewhere outside the United States, and, through their respective United States broker- dealer affiliates, in the United States. The respective United States broker- dealer affiliates of the Underwriters are NBC Levesque International Ltd., Yorkton Capital Inc., Marleau Lemire Securities (USA), Inc., and Midland Walwyn Capital Corporation.

The obligations of the Underwriters under the Underwriting Agreement are several and may be terminated at their discretion on the basis of their assessment of the state of the financial markets and may also be terminated upon the occurrence of certain stated events. If any of the Offered Shares are purchased pursuant to the Underwriting Agreement, the Underwriters will be obligated to take up and pay for all of the Offered Shares.

Pursuant to policy statements of the Ontario Securities Commission and the Commission des valeurs mobilieres du Quebec, the Underwriters may not, during the period of distribution under this Prospectus, bid for or purchase Common Shares. The foregoing restriction is subject to certain exceptions, as long as the bid of purchase is not engaged in for the purpose of creating actual or apparent active trading in or raising the market price of the Common Shares. These exceptions include a bid or purchase permitted under the rules and by- laws of The Toronto Stock Exchange relating to market stabilization and passive market making activities and a bid or purchase made for and on behalf of a customer where the order was not solicited during the period of distribution. Pursuant to the first mentioned exception, in connection with this offering, the Underwriters may over-allot or effect transactions which stabilize or maintain the market price of the Common Shares at levels other than those which otherwise might prevail on the open market. Such transactions may be commenced or interrupted at any time during the period of distribution.

The Underwriters have further advised the Company that, pursuant to Regulation M under the U.S. Securities Act, certain persons participating in the offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids, which may have the effect of stabilizing or maintaining the market price of Common Shares at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of the Common Shares on behalf of the Underwriters for the purpose of fixing or maintaining the price of the Common Shares. A "syndicate covering transaction" is the bid for or the purchase of the Common Shares on behalf of the Underwriters to reduce a short position incurred by the Underwriters in connection with the offering. A "penalty bid" is an arrangement permitting the Underwriters to reclaim the selling concession

otherwise accruing to an Underwriter or syndicate member in connection with the offering if the Common Shares originally sold by such Underwriter or syndicate member is purchased by the Underwriters in a syndicate covering transaction and has therefore not been effectively placed by such Underwriter or syndicate member. The Underwriters have advised the Company that such transactions may be effected on The Toronto Stock Exchange or otherwise and, if commenced, may be discontinued at any time.

The Company has granted to the Underwriters, an option, exercisable during the 60-day period following the date of closing of this offering, to purchase up to 450,000 additional Common Shares at the price set forth on the front cover page of this Prospectus payable in cash to the Company against delivery of the certificates representing those Common Shares, to cover over- allotments, if any. Such option may be exercised in whole or in part at any time until the close of business on the 60th day after the date of the closing of this offering. The Company has agreed to pay the Underwriters a fee of Cdn.$ per Common Share in respect of such additional Common Shares. The Common Shares received by the Underwriters on exercise of the over-allotment option will be qualified in Canada by this Prospectus and registered in the United States pursuant to the registration statement of which this Prospectus forms a part.

The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the U.S. Securities Act and under Canadian securities legislation, and to contribute to payments that the Underwriters may be required to make in respect thereof.

The Underwriters have advised the Company that they do not intend to confirm sales to any accounts over which they exercise discretionary authority in excess of 5% of the number of Common Shares offered hereby.

Purchasers are required to pay for the Common Shares in Canadian dollars. The Underwriters have arranged, subject to applicable laws or regulations, for the conversion of United States dollars into Canadian dollars to enable United States purchasers to pay for the Common Shares. Such conversion will be made by the Underwriters on such terms and subject to such conditions, limitations and charges as the Underwriters establish in accordance with their foreign exchange practices. All costs of exchange will be borne by the purchasers of the Common Shares.

The foregoing is a brief summary of the Underwriting Agreement and is qualified in its entirety by the Underwriting Agreement.

LEGAL MATTERS

Certain legal matters relating to the distribution of the Common Shares in Canada will be passed upon for the Company by Aird & Berlis, Barristers and Solicitors, Toronto, Ontario and for the Underwriters by McCarthy Tetrault, Barristers and Solicitors, Toronto, Ontario.

The validity of the Common Shares offered hereby will be passed upon for the Company by Harney, Westwood and Riegels, Road Town, Tortola, British Virgin Islands. Certain U.S. legal matters in connection with this offering will be passed upon for the Company by Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto, California and for the Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, Toronto, Ontario.

EXPERTS

The consolidated financial statements of the Company at December 31, 1995 and 1996 and for each of the five years in the period ended December 31, 1996, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing.

TRANSFER AGENT

The transfer agent for the Common Shares is Montreal Trust Company of Canada, at its principal offices in Toronto, Ontario and Vancouver, British Columbia.

MATERIAL CONTRACTS

Except as indicated below, each of the following contracts is material to the Company's business and has been filed as an exhibit to the Company's Registration Statement on Form S-1 with the SEC in accordance with the rules and regulations of the SEC. In addition, the material contracts identified in items 1 through 3 below were entered into outside the ordinary course of the Company's business within the prior two years and are required to be disclosed and made available to Canadian investors in accordance with the rules of certain Canadian securities regulators:

1. Underwriting Agreement dated as of , 1997 by and among the Company, Levesque Beaubien Geoffrion Inc., Yorkton Securities Inc., Marleau, Lemire Securities Inc., and Midland Walwyn Capital Inc;**

2. Agency Agreement dated May 15, 1996 among the Company and Haywood Securities Inc., Dlouhy Investments Inc., and Moss, Lawson & Co. Limited;+

3. Warrant Indenture between the Company and the Trustee, dated as of January 12, 1996;+

4. Form of Indemnification Agreement between the Company and each of its officers and directors;

5. Form of 1994 Stock Plan for Salix Holdings, Ltd. and form of Stock Option and Restricted Stock Purchase Agreements thereunder;

6. Form of 1996 Stock Plan for Salix Holdings, Ltd. and form of Stock Option Agreement thereunder;

7. Amendment Agreement effective as of September 17, 1992 by and among Glycyx Pharmaceuticals, Ltd., Salix Pharmaceuticals, Inc. and Biorex Laboratories Limited;*

8. License Agreement dated September 17, 1992, between Biorex Laboratories Limited and Glycyx Pharmaceuticals, Limited, and letter agreement amendments thereto;*

9. Research and Development Agreement dated September 21, 1992 between Glycyx Pharmaceuticals, Ltd. and AB Astra and letter agreement amendments thereto;*

10. Distribution Agreement dated September 21, 1992 between Glycyx Pharmaceuticals, Ltd. and AB Astra;*

11. Amended and Restated License Agreement by and between Salix Pharmaceuticals, Inc. and Biorex Laboratories Limited, dated April 16, 1993;*

12. Co-Participation Agreement dated April 30, 1993, between Salix Pharmaceuticals, Inc. and AB Astra, as amended by Amendment No. 1 thereto, effective September 30, 1993;*

13. Manufacturing Agreement dated September 15, 1993 between Courtaulds Chemicals (Holdings) Limited and Glycyx Pharmaceuticals, Ltd.;*

14. Distribution Agreement dated September 23, 1994, between Glycyx Pharmaceuticals, Ltd, and Menarini International Operations Luxembourg SA and amendments thereto;*

15. License Agreement dated June 24, 1996 between Alfa Wassermann S.p.A. and Salix Pharmaceuticals, Inc.;*

16. Supply Agreement dated June 24, 1996 between Alfa Wassermann S.p.A. and Salix Pharmaceuticals, Inc.;* and

17. Forms of Warrant issued by the Company January 17, 1995 and July 25, 1995.
+ This agreement has not been filed with the SEC.

* Confidential treatment has been requested with respect to certain portions of this agreement pursuant to a request for confidential treatment filed with the SEC. Portions omitted from the Company's SEC filing have been submitted separately to the SEC. ** To be filed with the SEC by amendment.

Copies of each of the foregoing agreements filed with the SEC are available on the SEC's worldwide web site at http://www.sec.gov, at the offices of the SEC, and at the offices of the National Association of Securities Dealers, Inc. See "Additional Information". Copies of the agreements numbered 1-3 above, being material contracts entered into outside the ordinary course of the Company's business within the prior two years, will be made available to Canadian investors during normal business hours at any time during the period of the distribution of the Common Shares offered by this Prospectus and for a period of 30 days thereafter at the offices of Aird & Berlis, Barristers and Solicitors, BCE Place, Suite 1800, Box 754, 181 Bay Street, Toronto, Ontario
M5J 2T9.

CANADIAN PURCHASERS' STATUTORY RIGHTS

Securities legislation in certain of the provinces of Canada provides purchasers with the right to withdraw from an agreement to purchase securities within two business days after receipt or deemed receipt of a prospectus and any amendment. In several of the provinces, securities legislation further provides a purchaser with remedies for rescission or, in some jurisdictions, damages where the prospectus and any amendment contains a misrepresentation or is not delivered to the purchasers, but such remedies must be exercised by the purchaser within the time limit prescribed by the securities legislation of his or her Province. The purchaser should refer to the applicable provisions of the securities legislation of his or her Province for the particulars of these rights or consult with a legal advisor.

ADDITIONAL INFORMATION

The Company has filed with the SEC a Registration Statement on Form S-1 (the "Registration Statement") under the U.S. Securities Act, with respect to the securities offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the Common Shares, reference is made to the Registration Statement and the exhibits and schedules filed as a part thereof. Statements contained in this Prospectus as to the contents of any contract or any other document referred to are not necessarily complete. In each instance, reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement, and each such statement is qualified in all respects by such reference. The Registration Statement, including exhibits and schedules thereto, may be inspected without charge at the public reference facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the SEC located at Seven World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such materials may be obtained from the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates and through the National Association of Securities Dealers, Inc. located at 1735 K Street, N.W., Washington, D.C. 20006. The SEC maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of the SEC's Web site is http://www.sec.gov.

GLOSSARY

4-ABA................... 4 aminobenzoyl alanine, the carrier molecule in
                         Colazide.
5-ASA................... 5-aminosalicylic-acid, the active ingredient in
                         Colazide and some other Inflammatory Bowel Disease
                         drugs.
Acute ulcerative         An acute episode of ulcerative colitis often associated
 colitis................ with diarrhea, rectal bleeding and abdominal pain.
Antibiotic.............. An agent that kills microorganisms or suppresses their
                         multiplication or growth.
Antibiotic associated    An acute inflammatory bowel disorder associated with
 colitis (AAC).......... antibiotic use.
C. difficile............ Clostridium difficile, a bacterium that is associated
                         with certain infectious gastrointestinal diseases.
Balsalazide............. The generic name for the Company's initial licensed
                         inflammatory bowel disease product, of which the first
                         drug developed therefrom is balsalazide disodium.
Chronic ulcerative
 colitis................ See Ulcerative Colitis.
Colazide................ Trade name of the Company's initial licensed and
                         developed drug, balsalazide disodium.
Colectomy............... Surgical removal of the entire colon.
Colonic Polyps ......... Polyps occurring in the colon.
Corticosteriods......... Any of the steroid chemical compounds produced by the
                         adrenal cortex, or their synthetic equivalents.
Crohn's disease......... A disease characterized by chronic inflammation of the
                         colon, small intestine, and gastrointestinal tract,
                         often associated with diarrhea, rectal bleeding and
                         abdominal pain.
Diverticular disease.... Sacs or pouches of variable size created by herniations
                         of the inner lining of the colon through defects in the
                         outer muscular wall of the colon.
Diverticulitis.......... Inflammation of a diverticulum which may undergo
                         perforation and abscess formation.
Familial adenomatous
 polyposis (FAP)........ A hereditary condition associated with the rapid
                         development of vast numbers of colonic polyps.
FDA..................... The United States Food and Drug Administration.
Good Clinical Practice   Good Clinical Practice regulations--the minimum
 (GCP).................. standards as set by the FDA required in the conduct and
                         monitoring of clinical trials to ensure the protection
                         of the rights and safety of subjects.
Good Manufacturing       Good Manufacturing Practice regulations--the minimum
 Practice (GMP)......... standards as set by the FDA required for the
                         manufacture, processing, packaging or holding of a drug
                         to ensure that the drug meets the requirements of
                         safety, identity, strength, quality and purity.

Hepatic encephalopathy..  A neuropsychiatric syndrome due to liver disease.
H. pylori...............  Helicobacter pylori, the bacterium that is believed to
                          be the underlying cause of most peptic ulcers.
Immunosuppressive         Drugs that artificially prevent or diminish the body's
 drugs..................  immune response; can be used to prevent organ
                          transplant rejection and to treat certain inflammation
                          disease.
Investigational New Drug  Investigational New Drug application--the application
 (IND)..................  required in order to conduct clinical trials with an
                          investigational drug in the United States.
Inflammatory Bowel        A collective term for two chronic diseases of the
 Disease (IBD)..........  gastrointestinal tract: ulcerative colitis and Crohn's
                          disease.
Infectious diarrhea.....  Increased volume, fluidity or frequency of bowel
                          movements caused by the presence of pathogenic bacteria
                          in the gastrointestinal tract.
MCA.....................  The Medicines Control Agency, an administrative agency
                          regulating the marketing of pharmaceutical products in
                          the United Kingdom.
New Drug Application      An application requesting approval from the FDA to
 (NDA)..................  market a drug in the United States.
NSAIDs..................  Non-steroidal anti-inflammatory drugs.
Peptic ulcer............  An erosion of the lining of the stomach, esophagus, or
                          duodenum (upper portion of the small bowel) caused by
                          the action of stomach acids.
Perioperative             Measures taken before, during and immediately after a
 prophylaxis............  surgical procedure to prevent or minimize the infection
                          of a surgical wound.
Polyp...................  Benign or cancerous growths, protruding from a mucous
                          membrane.
Polypectomy.............  Surgical removal of polyps from the colon.
Rifaximin ..............  The generic name for a broad spectrum, bactericidal,
                          semi-synthetic antibiotic used to treat various
                          gastrointestinal infections.
Rifamycin class of        A class of antibiotics with broad spectrum
 antibiotics............  antibacterial activity.
Sulfasalazine...........  The original azo-bonded, 5-ASA-containing therapeutic
                          used to treat ulcerative colitis.
Ulcerative colitis......  A disease characterized by chronic inflammation of the
                          colon, often associated with diarrhea, rectal bleeding
                          and abdominal pain.

SALIX HOLDINGS, LTD.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

CONTENTS

                                                                           PAGE
                                                                           ----
AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FIVE YEARS ENDED
 DECEMBER 31, 1996
Report of Independent Auditors...........................................   F-2
Consolidated Balance Sheets..............................................   F-3
Consolidated Statements of Operations....................................   F-4
Consolidated Statement of Shareholders' Equity (Net Capital Deficiency)..   F-5
Consolidated Statements of Cash Flows....................................   F-6
Notes to Consolidated Financial Statements...............................   F-7
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX-MONTH
 PERIODS ENDED JUNE 30, 1997 AND 1996
Condensed Consolidated Balance Sheets....................................  F-17
Condensed Consolidated Statements of Operations..........................  F-18
Condensed Consolidated Statement of Shareholders' Equity.................  F-19
Condensed Consolidated Statements of Cash Flows..........................  F-20
Notes to Condensed Consolidated Financial Statements.....................  F-21

F-1

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors
Salix Holdings, Ltd.

We have audited the accompanying consolidated balance sheets of Salix Holdings, Ltd. as of December 31, 1996 and 1995 and the related consolidated statements of operations, shareholders' equity (net capital deficiency), and cash flows for each of the five years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Salix Holdings, Ltd. at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the five years in the period ended December 31, 1996, in conformity with accounting principles generally accepted in the United States.

(Signed) Ernst & Young LLP

Palo Alto, California
March 18, 1997

F-2

SALIX HOLDINGS, LTD.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

(EXPRESSED IN U.S. DOLLARS)

                                                                DECEMBER 31,
                                                               ----------------
                                                                1996     1995
                                                               -------  -------
ASSETS
Current assets:
  Cash and cash equivalents (Note 2).........................  $ 5,624  $   188
  Other current assets.......................................       79       34
                                                               -------  -------
    Total current assets.....................................    5,703      222
Property and equipment, net (Note 2).........................      145      179
Other assets.................................................       10       32
                                                               -------  -------
                                                               $ 5,858  $   433
                                                               =======  =======
LIABILITIES AND SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
  Accounts payable...........................................  $   667  $   881
  Secured promissory note....................................      --       363
  Accrued salaries...........................................      --       297
  Other current liabilities..................................       43      328
  Advances from licensees (Note 6)...........................      --     1,186
  Unearned revenue (Note 6)..................................      --       599
  Amount due licensor (Note 5)...............................      555      --
                                                               -------  -------
    Total current liabilities................................    1,265    3,654
Convertible unsecured promissory notes (Note 10).............      --       607
Unsecured promissory notes (Note 10).........................      --     1,200
Accrued interest.............................................      --        98
Amount due to licensor (Note 5)..............................      --       100
Commitments (Note 7)
Shareholders' equity (net capital deficiency) (Note 8):
  Preferred stock, issuable in series, no par value;
   5,000,000 shares authorized; 466,445 convertible preferred
   shares, issued and outstanding at December 31, 1995 (none
   at December 31, 1996).....................................      --       845
  Common stock, no par value; 20,000,000 and 15,000,000
   shares authorized at December 31, 1996 and 1995,
   respectively; 6,858,173 shares and 3,150,965 shares issued
   and outstanding at December 31, 1996 and 1995,
   respectively..............................................   13,194       79
  Accumulated deficit........................................   (8,601)  (6,150)
                                                               -------  -------
    Shareholders' equity (net capital deficiency)............    4,593   (5,226)
                                                               -------  -------
                                                               $ 5,858  $   433
                                                               =======  =======

  ON BEHALF OF THE BOARD:

(Signed) LAWRANCE A. BROWN, JR.           (Signed) NICHOLAS M. EDIGER
            Director                                Director

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

F-3

SALIX HOLDINGS, LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(EXPRESSED IN U.S. DOLLARS)

                                           YEARS ENDED DECEMBER 31,
                                    ------------------------------------------
                                     1996     1995     1994     1993    1992
                                    -------  -------  -------  ------  -------
Revenues:
  License revenue (Note 6)......... $ 1,186  $   --   $   --   $1,000  $ 1,712
  Revenue from collaborative
   agreements (Note 6).............     634    1,990    2,827   3,439    1,212
                                    -------  -------  -------  ------  -------
    Total revenues.................   1,820    1,990    2,827   4,439    2,924
                                    -------  -------  -------  ------  -------
Expenses:
  License fees (Note 5)............     605      100      --      --       --
  Research and development (Note
   2)..............................   2,053    2,888    3,199   4,321    3,539
  General and administrative.......   1,731    1,334    1,125     873      408
                                    -------  -------  -------  ------  -------
    Total expenses.................   4,389    4,322    4,324   5,194    3,947
                                    -------  -------  -------  ------  -------
Loss from operations...............  (2,569)  (2,332)  (1,497)   (755)  (1,023)
Interest income....................     290       18       48      48       15
Interest expense...................    (172)    (106)      (3)     (7)      (3)
                                    -------  -------  -------  ------  -------
    Net loss....................... $(2,451) $(2,420) $(1,452)   (714)  (1,011)
                                    =======  =======  =======  ======  =======
Net loss per share................. $ (0.46) $ (0.77) $ (0.46) $(0.23) $ (0.38)
                                    =======  =======  =======  ======  =======
Shares used in computing net loss
 per share.........................   5,365    3,149    3,144   3,144    2,688
                                    =======  =======  =======  ======  =======

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

F-4

SALIX HOLDINGS, LTD.

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

(EXPRESSED IN U.S. DOLLARS)

                         PREFERRED                                            SHAREHOLDERS'
                           STOCK     COMMON STOCK        NOTE                    EQUITY
                         --------- -----------------  RECEIVABLE  ACCUMULATED (NET CAPITAL
                          AMOUNTS   SHARES   AMOUNTS FROM OFFICER   DEFICIT    DEFICIENCY)
                         --------- --------- ------- ------------ ----------- -------------
Balance at December 31,
 1991...................   $ 395   1,207,500 $    32    $ --        $  (553)     $  (126)
 Issuance of Salix
  common stock for cash
  and notes receivable..     --      131,260      26      (11)          --            15
 Issuance of Salix
  Series C preferred
  stock for cash........     450         --      --       --            --           450
 Issuance of Glycyx
  common stock for
  cash..................     --    1,805,205      14      --            --            14
 Net loss...............     --          --      --       --         (1,011)      (1,011)
                           -----   --------- -------    -----       -------      -------
Balance at December 31,
 1992...................     845   3,143,965      72      (11)       (1,564)        (658)
 Net loss...............     --          --      --       --           (714)        (714)
                           -----   --------- -------    -----       -------      -------
Balance at December 31,
 1993...................     845   3,143,965      72      (11)       (2,278)      (1,372)
 Repayment of note
  receivable............     --          --      --        11           --            11
 Net loss...............     --          --      --       --         (1,452)      (1,452)
                           -----   --------- -------    -----       -------      -------
Balance at December 31,
 1994...................     845   3,143,965      72      --         (3,730)      (2,813)
 Issuance of common
  stock.................     --        7,000       7      --            --             7
 Net loss...............     --          --      --       --         (2,420)      (2,420)
                           -----   --------- -------    -----       -------      -------
Balance at December 31,
 1995...................     845   3,150,965      79      --         (6,150)      (5,226)
 Issuance of common
  stock for conversion
  of debentures,
  including accrued
  interest..............     --    1,167,625   3,503      --            --         3,503
 Issuance of common
  stock for conversion
  of Series A, B and C
  convertible preferred
  stock.................    (845)    466,445     845      --            --           --
 Issuance of common
  stock in connection
  with the Company's
  initial public
  offering of
  securities, net of
  issuance costs of
  $1,473................     --    2,000,000   8,694      --            --         8,694
 Issuance of common
  stock upon exercise of
  stock options.........     --       73,138      73      --            --            73
 Net loss...............     --          --      --       --         (2,451)      (2,451)
                           -----   --------- -------    -----       -------      -------
Balance at December 31,
 1996...................   $ --    6,858,173 $13,194    $ --        $(8,601)     $ 4,593
                           =====   ========= =======    =====       =======      =======

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

F-5

SALIX HOLDINGS, LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

(IN THOUSANDS)

(EXPRESSED IN U.S. DOLLARS)

                                            YEARS ENDED DECEMBER 31,
                                     ------------------------------------------
                                      1996     1995     1994     1993    1992
                                     -------  -------  -------  ------  -------
CASH FLOWS FROM OPERATING
 ACTIVITIES
 Net loss..........................  $(2,451) $(2,420) $(1,452) $ (714) $(1,011)
 Adjustments to reconcile net loss
  to net cash provided by (used in)
  operating activities:
  Depreciation and amortization....       55       59       42      27        2
  Changes in assets and
   liabilities:
   Refundable income tax...........      --       --       130    (130)     --
   Other current assets and other
    assets.........................      (22)     (37)      72     (81)     (13)
   Accounts payable and other
    current liabilities............     (673)   1,223      (27)    459      172
   Advances from licensees.........   (1,186)     910      --       76      200
   Unearned revenue................     (599)  (1,687)      94   1,133    1,059
   Amount due licensor.............      555      --       --      --       --
                                     -------  -------  -------  ------  -------
    Net cash provided by (used in)
     operating activities..........   (4,321)  (1,952)  (1,141)    770      409
CASH FLOWS FROM INVESTING
 ACTIVITIES
 Purchases of property and
  equipment........................      (21)      (3)     (93)   (148)     (64)
CASH FLOWS FROM FINANCING
 ACTIVITIES
 Proceeds from issuance of
  convertible promissory notes.....      --       607      --      --       --
 Proceeds from issuance of
  promissory notes.................      --     1,200      --      --       --
 Proceeds from issuance of
  convertible debentures...........    1,375      --       --      --       --
 Proceeds from issuance of
  convertible preferred stock......      --       --       --      --       450
 Proceeds from issuance of common
  stock............................    8,767        7      --      --        29
 Repayment of note receivable from
  officer..........................      --       --        11     --       --
 Payments of principal on secured
  promissory note..................     (364)     --       --      --       --
                                     -------  -------  -------  ------  -------
    Net cash provided by financing
     activities....................    9,778    1,814       11     --       479
                                     -------  -------  -------  ------  -------
Net increase (decrease) in cash and
 cash equivalents..................    5,436     (141)  (1,223)    622      824
Cash and cash equivalents at
 beginning of year.................      188      329    1,552     930      105
                                     -------  -------  -------  ------  -------
Cash and cash equivalents at end of
 year..............................  $ 5,624  $   188  $   329  $1,552  $   929
                                     =======  =======  =======  ======  =======
SUPPLEMENTAL DISCLOSURE OF CASH
 FLOW INFORMATION
 Cash paid for interest............  $    13  $     5  $     9  $    7  $   --
                                     =======  =======  =======  ======  =======
NONCASH FINANCING ACTIVITIES
 Issuance of common stock in
  exchange for note receivable.....  $   --   $   --   $   --   $  --   $    11
                                     =======  =======  =======  ======  =======
 Issuance of convertible debentures
  for promissory notes.............  $ 1,807  $   --   $   --   $  --   $   --
                                     =======  =======  =======  ======  =======
 Issuance of convertible debentures
  for interest on promissory
  notes............................  $    98  $   --   $   --   $  --   $   --
                                     =======  =======  =======  ======  =======
 Issuance of convertible debentures
  for amount due licensor..........  $   100  $   --   $   --   $  --   $   --
                                     =======  =======  =======  ======  =======
 Issuance of common stock for
  convertible debentures...........  $ 3,380  $   --   $   --   $  --   $   --
                                     =======  =======  =======  ======  =======
 Issuance of common stock for
  interest on convertible
  debentures.......................  $   123  $   --   $   --   $  --   $   --
                                     =======  =======  =======  ======  =======
 Issuance of common stock for
  preferred stock..................  $   845  $   --   $   --   $  --   $   --
                                     =======  =======  =======  ======  =======

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

F-6

SALIX HOLDINGS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1996
(EXPRESSED IN U.S. DOLLARS)

1. Organization and Basis of Presentation

Salix Holdings, Ltd. (the "Company") was incorporated in the British Virgin Islands in December 1993 for the purpose of acquiring all of the outstanding capital stock of Salix Pharmaceuticals, Inc., a California corporation ("Salix"), and Glycyx Pharmaceuticals, Ltd., a Bermuda corporation ("Glycyx"). Salix was incorporated in California in 1989 and Glycyx was incorporated in Bermuda in 1992. The Company is developing new pharmaceuticals, primarily focused in the area of gastrointestinal disease.

In March 1994, Salix Holdings, Ltd. entered into an agreement with the shareholders of Salix and Glycyx, whereby it issued shares in exchange for the shareholders' interests in Salix and Glycyx. As a result of the exchange, Salix and Glycyx became wholly owned subsidiaries of the Company. Each share of Salix common and preferred stock was exchanged on a one-for- one basis for a similar share of the Company's common and preferred stock, respectively. Each share of Glycyx common stock was exchanged on a one-for- one basis for a share of the Company's common stock plus $0.001 per share of Glycyx common stock exchanged. These transactions have been accounted for in a manner similar to a pooling of interests to reflect the continuity of the Company's shareholders' interests in Salix and Glycyx. Accordingly, the consolidated balance sheets include the assets and liabilities of the combined companies and the consolidated statements of operations, shareholders' equity (net capital deficiency) and cash flows include their operations for all of the years presented. The Company, as used herein, refers to Salix Holdings, Ltd. and its subsidiaries.

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. These statements are stated in United States dollars and are prepared under accounting principles generally accepted in the United States. All significant intercompany balances and transactions have been eliminated. In 1992 and 1993, Salix and Glycyx were presented as combined entities, which included the elimination of all intercompany transactions, due to common ownership.

The Company has sustained continuing operating losses and expects such losses to continue until product approvals are obtained and product revenues reach a sufficient level to support ongoing operations. There can be no assurance that such product approvals and revenues will be obtained on a timely basis, if at all. The Company believes that its current cash reserves should be sufficient to satisfy the cash requirements of product development programs for at least the next year. The Company's actual cash requirements may vary materially from those now planned because of results of research and development activities, establishment of and changes in relationships with strategic partners, changes in focus and direction of the Company's research and development programs, the FDA regulatory process, and other factors. To the extent that the Company proceeds with the development and licensing of new products, the Company anticipates that it will need to raise additional funds in the form of debt or equity financing to fund its future operations. The Company may also enter into collaborative arrangements with corporate partners that could provide the Company with additional funding in the form of equity, debt, licensing, milestone and/or royalty payments. There can be no assurance that the Company will be able to enter into such arrangements or raise any additional funds on terms favorable to the Company, or at all. If adequate capital is unavailable, the Company may have to reduce substantially or eliminate expenditures for research and development of new products and indications.

F-7

SALIX HOLDINGS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1996
(EXPRESSED IN U.S. DOLLARS)

2. Summary of Significant Accounting Policies

These statements have been prepared in accordance with accounting principles generally accepted in the United States. The application of these principles conforms in all material respects with financial statements prepared using accounting principles generally accepted in Canada.

USES OF ESTIMATES

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

FAIR VALUE OF CASH AND CASH EQUIVALENTS AND PROMISSORY NOTES

For these short-term instruments, the carrying value approximates fair value at December 31, 1995 and 1996, respectively.

REVENUE RECOGNITION

The Company's collaborative research and licensing agreements with its license partners provide for payments in support of the Company's research activities and additional payments upon the attainment of specified milestones. Research reimbursements under these agreements are recorded when earned based on contract costs incurred to date compared with total estimated contract costs. License fees and milestone revenues are recognized according to contract terms. Amounts received in advance of the applicable research activities are deferred as unearned revenue. Amounts received which are subject to refundability until the point at which milestones are achieved are deferred as advances from licensees, until earned.

RESEARCH AND DEVELOPMENT

Research and development costs are expensed as incurred. Research and development expense included a payment to a licensor totaling $1,064,000 in 1992.

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 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.

F-8

SALIX HOLDINGS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1996
(EXPRESSED IN U.S. DOLLARS)

2. Summary of Significant Accounting Policies, continued

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost and depreciated over the estimated useful lives of the assets, generally five years, using the straight-line method. Property and equipment consist of the following at December 31 (in thousands):

                                                                   1996 1995
                                                                   ---- ----
Cost:
  Furniture and equipment......................................... $105 $101
  Computer equipment..............................................  122  105
  Laboratory equipment............................................  106  106
                                                                   ---- ----
                                                                    333  312
Accumulated depreciation:
  Furniture and equipment.........................................   64   37
  Computer equipment..............................................   67   54
  Laboratory equipment............................................   57   42
                                                                   ---- ----
                                                                    188  133
                                                                   ---- ----
Net property and equipment........................................ $145 $179
                                                                   ==== ====

FOREIGN CURRENCY TRANSLATION

The functional currency for the Company is the United States dollar. The adjustment resulting from translating the financial statements of the Company and its foreign subsidiaries is reflected in operations. A foreign currency transaction gain of $78,717 was incurred in the year ended December 31, 1996. Foreign currency transaction losses of $7,066, $45,072, $36,166 and $76,554 were incurred in the years ended December 31, 1995, 1994, 1993 and 1992, respectively, and are included in the results of operations.

RECLASSIFICATIONS

Certain previously reported amounts have been reclassified to conform to the 1996 consolidated financial statement presentation.

NET LOSS PER COMMON SHARE

Net loss per common share is computed using the weighted-average number of common shares outstanding during each year. Common equivalent shares are excluded from the computation as their effect is antidilutive.

3. Initial Public Offering

In May 1996, the Company completed its initial public offering, listed on The Toronto Stock Exchange, and issued 2,000,000 shares of its common stock at a price of Cdn. $7.00 (U.S. $5.25) per share. The Company received approximately $8.7 million in cash, net of underwriting discounts, commissions and other offering costs. Simultaneously with the closing of the initial public offering, each outstanding share of convertible preferred stock was automatically converted into one share of

F-9

SALIX HOLDINGS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1996
(EXPRESSED IN U.S. DOLLARS)

3. Initial Public Offering, continued

common stock, and $3.5 million principal and accrued interest of convertible debentures issued in January and February 1996 were converted into 1,167,625 "units" consisting of one common share and one-half of one common share purchase warrant (see Note 10).

4. Foreign Subsidiaries

Glycyx, a wholly owned subsidiary incorporated in Bermuda, recognized net losses of $38,567, $1,617,050, $1,213,621, $1,169,777 and $750,296 in the years ended December 31, 1996, 1995, 1994, 1993 and 1992, respectively. Salix, a wholly owned subsidiary incorporated in the United States, recognized net losses (income) of $2,053,899, $498,752, $238,016, $(456,259) and $260,593 in the years ended December 31, 1996, 1995, 1994, 1993 and 1992, respectively.

5. Technology Licensing

In January 1991 and March 1992, the Company entered into license agreements with a company possessing certain patents relating to balsalazide, a therapeutic agent with potential use in the treatment of ulcerative colitis and other diseases. Under the agreements, the Company will pay the licensor, which is also a shareholder in the Company, a royalty based on a percentage of gross profit on the drug in one defined territory and a sales-based royalty in other territories. In addition, milestone payments from the Company to the licensor will be paid to the licensor based upon development efforts. In the January 1991 agreement, as amended, the Company obtained the exclusive right to develop and market balsalazide in the United States. In the March 1992 agreement, as amended, the Company licensed the exclusive right to develop, manufacture and market the same drug in the rest of the world excluding Japan, Taiwan and Korea. The first product under development pursuant to these licenses is Colazide, a form of balsalazide proposed for the treatment of ulcerative colitis. At December 31, 1995, a total of $100,000 was due to the licensor. Such amount was converted to convertible debentures issued in January 1996. At December 31, 1996, a total of $555,000 was due the licensor. Such amount was paid in February 1997.

6. License Revenue and Revenue from Collaborative Agreements

In September 1992, the Company entered into research, development and distribution agreements whereby the Company granted its partner an exclusive right to promote, market, distribute and sell Colazide in certain territories outside of the United States. The research under this agreement took place through December 1993 and revenue from research funding was recognized as earned.

In 1992, the Company received a portion of the license fees payable under the agreement, with the remaining payments due upon the receipt of approval to market the product by the relevant regulatory authorities in five principal territories. Under the distribution agreement, the partner will purchase product from the Company at an agreed upon price based on a percentage of the partner's selling price of the product. The licensee has the right to offset (Pounds)750,000 (approximately $1,284,000 at December 31, 1996 exchange rates) previously paid to the Company against future royalties.

F-10

SALIX HOLDINGS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1996
(EXPRESSED IN U.S. DOLLARS)

6. License Revenue and Revenue from Collaborative Agreements, continued

In April 1993, Salix entered into a collaborative agreement with the above-mentioned partner covering pharmaceutical product development and marketing of Colazide in the United States. In consideration for the rights granted, the partner agreed to pay the Company a specified licensing fee and to fund development up to a specified amount. The Company recognized development revenue of $599,000, $1,687,000, $2,252,000, $962,000 and $1,212,190 in 1996, 1995, 1994, 1993 and 1992, respectively, under these agreements. License fee revenue of $1,000,00 and $1,712,000 was recognized in 1993 and 1992, respectively.

In October 1992, the Company entered into a distribution agreement with a second licensee for Colazide in southern Europe. This agreement calls for payments to the Company in support of clinical trials and upon the achievement of certain milestones. Under this agreement, the partner will purchase product when approved from the Company at an agreed upon price. Revenues recognized under this arrangement were $78,000 in 1994 (none in 1992, 1993, 1995 or 1996). Additional monies received under this agreement were deferred as advances from licensees pending achievement of specified technological milestones. The amount deferred was $1,186,400 at December 31, 1995. Such milestones were achieved and accepted by the licensee in 1996 and revenue of $1,186,400 was recognized.

In July 1993, the Company entered into a collaborative relationship with a company which owns the rights to balsalazide in Japan, Taiwan and Korea. In return for access to drug data the Company received milestone payments of $170,000, $296,000 and $452,000, which were recognized as revenue in 1995, 1994 and 1993, respectively.

7. Commitments

The Company leases an office facility. Rent expense was approximately $112,000, $81,000, $85,000, $98,000 and $19,000 for the years ended December 31, 1996, 1995, 1994, 1993 and 1992, respectively.

In June 1996, the Company amended the lease related to its office facility to extend through July 2000. Future payments for operating leases at December 31, 1996 are as follows (in thousands):

                                                                    OPERATING
                                                                     LEASES
                                                                    ---------
Years ending December 31,
  1997.............................................................   $140
  1998.............................................................    144
  1999.............................................................    159
  2000.............................................................     93
                                                                      ----
Total minimum payments required....................................   $536
                                                                      ====

In October 1996, the Company entered into a binding purchase order commitment for inventory purchases aggregating $674,000 to be delivered in 1997.

F-11

SALIX HOLDINGS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1996
(EXPRESSED IN U.S. DOLLARS)

8. Shareholders' Equity (Net Capital Deficiency)

PREFERRED STOCK

On May 15, 1996, the Company closed its initial public offering of its common stock. At that time, all issued and outstanding shares of the Company's Series A, B and C convertible preferred stock were converted into 466,445 shares of the Company's common stock. A total of 5,000,000 shares of preferred stock are authorized and issuable in series. No shares of preferred stock were issued as of December 31, 1996.

STOCK OPTION PLANS

The Company's 1994 Stock Plan (the "Plan") was adopted by the board of directors in March 1994 and approved by the shareholders in March 1995. The Company's 1996 Stock Option Plan (the "1996 Plan") was adopted by the board of directors and approved by the Company's shareholders in February 1996. The options granted under the Plan and the 1996 Plan may be either incentive stock options or nonstatutory stock options. Options granted expire no later than ten years from the date of grant. For incentive stock options, the option price shall be at least 100% of the fair market value on the date of grant, and no less than 85% of the fair market value for nonqualified stock options. If, at the time the Company grants an option, the optionee directly or by attribution owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company, the option price shall be at least 110% of the fair market value and shall not be exercisable more than five years after the date of grant. The options generally become exercisable in increments of 1/48th per month over a period of 48 months from the date of grant. Options may be granted with different vesting terms as determined by the board of directors.

At December 31, 1996, the Company has reserved 1,076,862 shares of common stock for issuance to eligible participants under the two plans.

F-12

SALIX HOLDINGS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1996
(EXPRESSED IN U.S. DOLLARS)

8. Shareholders' Equity (Net Capital Deficiency), continued

Aggregate option activity is as follows:

                                                       OUTSTANDING OPTIONS
                                                     ------------------------
                                           SHARES                WEIGHTED-
                                          AVAILABLE  NUMBER OF    AVERAGE
                                          FOR GRANT   SHARES   EXERCISE PRICE
                                          ---------  --------- --------------
  Shares authorized......................  400,000        --         --
  Options granted........................ (365,825)   365,825      $1.00
                                          --------    -------      -----
Balance at December 31, 1994.............   34,175    365,825      $1.00
  Additional shares authorized...........  100,000        --         --
  Options granted........................  (60,000)    60,000      $1.00
                                          --------    -------      -----
Balance at December 31, 1995.............   74,175    425,825      $1.00
  Additional shares authorized...........  650,000        --         --
  Options granted........................ (133,000)   133,000      $3.82
  Options exercised......................      --     (73,138)     $1.00
  Options canceled.......................    4,687     (4,687)     $1.00
                                          --------    -------      -----
Balance at December 31, 1996.............  595,862    481,000      $1.78
                                          ========    =======      =====

At December 31, 1995, options were exercisable to purchase 240,013 shares at a weighted-average exercise price of $1.00 per share. At December 31, 1996, options were exercisable to purchase 272,167 shares at a weighted- average exercise price of $1.21 per share.

Exercise prices for options outstanding as of December 31, 1996 ranged from $1.00 to $5.25 per share. The weighted-average remaining contractual life of those options is 7.8 years.

               OPTIONS OUTSTANDING                             EXERCISABLE OPTIONS
--------------------------------------------------------     --------------------------
                                              WEIGHTED-
                             WEIGHTED-         AVERAGE                       WEIGHTED-
 EXERCISE                     AVERAGE         REMAINING                       AVERAGE
  PRICE                      EXERCISE        CONTRACTUAL                     EXERCISE
  RANGE        NUMBER          PRICE            LIFE           NUMBER          PRICE
--------------------------------------------------------     --------------------------
                                       (IN YEARS)
  $1.00        348,000         $1.00             7.0           256,000         $1.00
  $3.67        120,000         $3.67            10.0             7,500         $3.67
  $5.25         13,000         $5.25             9.1             8,667         $5.25
            --------------------------------------------------------------------------
               481,000         $1.78             7.8           272,167         $1.21
            ==========================================================================

The weighted-average fair value of options granted in fiscal 1996 and 1995 was $2.01 and $0.29, respectively.

STOCK-BASED COMPENSATION

As permitted under FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("FASB 123"), the Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") in accounting for stock-based awards to employees. Under APB 25, the Company generally recognizes no compensation expense with respect to such awards.

Pro forma information regarding net loss and net loss per share is required by FASB 123 for awards granted after December 31, 1994 as if the Company had accounted for its stock-based awards

F-13

SALIX HOLDINGS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1996
(EXPRESSED IN U.S. DOLLARS)

8. Shareholders' Equity (Net Capital Deficiency), continued

to employees under the fair value method of FASB 123. The fair value of the Company's stock-based awards to employees was estimated using a Black- Scholes option pricing model (minimum value model for awards prior to the Company's initial public offering). The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, the Black-Scholes model requires the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock- based awards to employees have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards to employees. The fair value of the Company's stock-based awards to employees was estimated assuming no expected dividends and the following weighted-average assumptions:

                                            OPTIONS
                                           ----------
                                           1996  1995
                                           ----  ----
Expected life (years).....................    5     5
Expected volatility.......................  0.6   --
Risk-free interest rate................... 6.13% 7.00%

The effect of applying the FASB 123 Black-Scholes option valuation model (minimum value model for awards prior to the Company's initial public offering) to the Company's stock option grants did not result in pro forma net loss and loss per share amounts that are materially different from historical amounts reported. Therefore, such pro forma information is not separately presented herein. Because FASB 123 is applicable only to awards granted subsequent to December 31, 1994, its pro forma effect will not be fully reflected until approximately 1998. Future pro forma net income
(loss) and earnings (loss) per share results may be materially different from actual amounts reported.

401(k) Plan
In 1996, the Company adopted the Salix Pharmaceuticals, Inc. 401(k) Retirement Plan. Eligible participants may elect to defer a percentage of their compensation. The Company matches up to 25% of such participant deferrals, provided that such deferrals do not exceed 6% of the participant's compensation. The Company's total matching contribution for all participants in fiscal 1996 was $4,333. Additional discretionary employer contributions may be made on an annual basis.

9. Income Taxes

As of December 31, 1996, the Company has a U.S. federal net operating loss carryforward of approximately $5,600,000 related to its U.S. subsidiary, Salix Pharmaceuticals, Inc. This will expire on various dates beginning in 2004 through 2011, if not utilized.

F-14

SALIX HOLDINGS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1996
(EXPRESSED IN U.S. DOLLARS)

9. Income Taxes, continued

Significant components of the Company's deferred tax assets and liabilities for federal and state income taxes are as follows (in thousands):

                                                            1996     1995
                                                           -------  -------
Deferred tax assets:
  Net operating loss carryforwards........................ $ 2,000  $   900
  Research credit carryforwards (expiring 2004 to 2010)...     100      150
  Capitalized research and development expenses...........     100      100
  Deferred revenue........................................     --       200
  Other...................................................     100      100
                                                           -------  -------
    Total deferred tax assets.............................   2,300    1,450
Valuation allowance.......................................  (2,300)  (1,450)
                                                           -------  -------
    Net deferred taxes                                     $   --   $   --
                                                           =======  =======

Because of the Company's lack of earnings history, the deferred tax asset has been fully offset by a valuation allowance. The valuation allowance increased by $113,000 during the year ended December 31, 1995.

Utilization of the federal net operating loss and credit carryforwards may be subject to a substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986. The annual limitation may result in the expiration of net operating losses and credits before utilization.

The Company's Bermuda subsidiary, Glycyx, has a cumulative loss of approximately $2,200,000. Because Glycyx is domiciled in Bermuda where the effective tax rate is zero, the Company expects to receive no future tax benefit from these net operating losses.

10.Promissory Notes and Warrants

In January and March 1995, the Company issued $607,000 of convertible promissory notes to certain investors. In connection with the issuance of the above convertible promissory notes, the Company issued to the note holders warrants to purchase up to 202,332 shares of common stock at a purchase price of $0.001 per share of common stock exercisable thereunder. These warrants are immediately exercisable at $3.00 per share and expire in 2000.

In July and October 1995, the Company issued additional promissory notes in the amount of $1,200,000 together with warrants to purchase 399,999 shares of common stock. Each of the warrants allow for the purchase of one share of common stock at an exercise price of $3.00 per share, subject to adjustment in certain circumstances, and expire in 2003.

On January 12, 1996 and February 2, 1996, the Company completed the private placement of an aggregate principal amount of $3,379,500 of 10% convertible secured debentures maturing on December 31, 1998 to certain new and existing investors. As part of the financing, holders of all of the outstanding $607,000 of convertible promissory notes and $1,200,000 promissory notes

F-15

SALIX HOLDINGS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1996
(EXPRESSED IN U.S. DOLLARS)

10. Promissory Notes and Warrants, continued

previously issued by the Company converted the principal and accrued interest on such notes into debentures. In addition, $100,000 owed by the Company to a licensor as of December 31, 1995 was converted into debentures as part of this financing.

Upon the completion of the initial public offering, the debentures were converted at the option of the holder into units comprised of one share of common stock and one-half of one common stock purchase warrant, as referred to in Note 3. The conversion price for such units was Cdn. $4.00 (U.S. $3.00 at the May 15, 1996 exchange rate). The 583,851 common stock purchase warrants were immediately exercisable at Cdn. $7.00 (U.S. $5.25) per share and expired unexercised in January 1997. Also, in connection with the initial public offering, the Company issued to the underwriters common share purchase warrants, exercisable into 200,000 common shares at a price of Cdn $7.00 (U.S. $5.25). Such purchase warrants are exercisable through May 1997.

At December 31, 1996, 1,386,182 shares of common stock are reserved for issuance upon the exercise of the aforementioned warrants.

SECURED PROMISSORY NOTE

In June 1995, the Company provided a vendor with a secured promissory note and related security agreement, wherein the Company agreed to pay (Pounds)234,036 ($363,458 at December 31, 1995 exchange rates) at specified times in payment of trade debts incurred for services provided. The collateral that was subject to the security interest created consisted of future milestone payments due the Company from one of its distribution partners. This secured promissory note was paid-in-full in September 1996.

11. Revenues From Significant Customers

Revenues from three customers represented the following percentages of total revenues during fiscal 1996, 1995, 1994, 1993 and 1992:

CUSTOMER         1996              1995              1994              1993              1992
           -----------------------------------------------------------------------------------
  A              32.8%             85.5%             79.7%             75.2%             41.5%
  B               -- %             10.1%             10.4%             10.1%              -- %
  C              65.2%              1.1%              -- %             14.7%             58.5%

All revenue is associated with the development of a single product, Colazide.

F-16

SALIX HOLDINGS, LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

(EXPRESSED IN U.S. DOLLARS)

                                                         JUNE 30,  DECEMBER 31,
                                                           1997        1996
                                                         --------  ------------
                                                              (UNAUDITED)
ASSETS
Current assets:
  Cash and cash equivalents............................. $  3,657    $ 5,624
  Other current assets..................................      398         79
                                                         --------    -------
    Total current assets................................    4,055      5,703
Property and equipment, net.............................      152        145
Other assets............................................       43         10
                                                         --------    -------
                                                         $  4,250    $ 5,858
                                                         ========    =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable...................................... $    954    $   667
  Other current liabilities.............................       65         43
  Amount due licensor...................................       50        555
                                                         --------    -------
    Total current liabilities...........................    1,069      1,265
Shareholders' equity:
  Preferred stock, issuable in series, no par value;
   5,000,000 shares authorized; none issued and
   outstanding..........................................       --         --
  Common stock, no par value; 20,000,000 shares autho-
   rized; 7,118,173 shares and 6,858,173 shares issued
   and outstanding at June 30, 1997 and December 31,
   1996, respectively...................................   14,257     13,194
  Accumulated deficit...................................  (11,076)    (8,601)
                                                         --------    -------
    Shareholders' equity................................    3,181      4,593
                                                         --------    -------
                                                         $  4,250    $ 5,858
                                                         ========    =======

  ON BEHALF OF THE BOARD:

(Signed) LAWRANCE A. BROWN, JR.           (Signed) NICHOLAS M. EDIGER
            Director                                Director

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

F-17

SALIX HOLDINGS, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(EXPRESSED IN U.S. DOLLARS)

                                                            SIX MONTHS ENDING
                                                                JUNE 30,
                                                            ------------------
                                                              1997      1996
                                                            --------  --------
                                                               (UNAUDITED)
Revenue:
  Revenue from collaborative agreements and other.......... $     21  $    384
Expenses:
  License fees.............................................       50        50
  Research and development.................................    1,315     1,037
  General and administrative...............................    1,231       740
                                                            --------  --------
    Total expenses.........................................    2,596     1,827
                                                            --------  --------
Loss from operations.......................................   (2,575)   (1,443)
Interest income............................................      122        45
Interest expense and other.................................      (22)     (173)
                                                            --------  --------
    Net loss............................................... $ (2,475) $ (1,571)
                                                            ========  ========
Net loss per share......................................... $  (0.35) $  (0.41)
                                                            ========  ========
Shares used in computing net loss per share................    6,975     3,877
                                                            ========  ========

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

F-18

SALIX HOLDINGS, LTD.

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

(EXPRESSED IN U.S. DOLLARS)

                                     COMMON STOCK
                                   ----------------- ACCUMULATED SHAREHOLDERS'
                                    SHARES   AMOUNTS   DEFICIT      EQUITY
                                   --------- ------- ----------- -------------
Balance at December 31, 1996...... 6,858,173 $13,194  $ (8,601)     $4,593
Issuance of common stock upon
 exercise of warrants
 (unaudited)......................   200,000   1,003       --        1,003
Issuance of common stock upon
 exercise of stock options
 (unaudited)......................    60,000      60       --           60
Net loss (unaudited)..............       --      --     (2,475)     (2,475)
                                   ========= =======  ========      ======
Balance at June 30, 1997
 (unaudited)...................... 7,118,173 $14,257  $(11,076)     $3,181
                                   ========= =======  ========      ======

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

F-19

SALIX HOLDINGS, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(EXPRESSED IN U.S. DOLLARS)

                                                            SIX MONTHS ENDING
                                                                JUNE 30,
                                                            ------------------
                                                              1997      1996
                                                            --------  --------
                                                               (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
  Net loss................................................. $ (2,475) $ (1,571)
  Adjustments to reconcile net loss to net cash used in
   operating activities:
    Depreciation and amortization..........................       32        27
  Changes in assets and liabilities:
    Other current assets and other assets..................     (352)      (29)
    Accounts payable and other current liabilities.........      309      (125)
    Unearned revenue.......................................      --       (374)
    Amount due licensor....................................     (505)      --
                                                            --------  --------
      Net cash used in operating activities................   (2,991)   (2,072)
CASH FLOWS FROM INVESTING ACTIVITIES
  Purchases of property and equipment......................      (39)       (6)
CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from issuance of stock (net of offering costs)..    1,063     8,697
  Proceeds from issuance of convertible secured
   debentures..............................................      --      1,375
                                                            --------  --------
      Net cash provided by financing activities............    1,063    10,072
                                                            --------  --------
Net increase (decrease) in cash and cash equivalents.......   (1,967)    7,994
Cash and cash equivalents at beginning of period...........    5,624       188
                                                            --------  --------
Cash and cash equivalents at end of period................. $  3,657  $  8,182
                                                            ========  ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
  Cash paid for interest................................... $    --   $     13
                                                            ========  ========
NONCASH FINANCING ACTIVITIES
  Issuance of convertible debentures for promissory notes.. $    --   $  1,807
                                                            ========  ========
  Issuance of convertible debentures for interest on
   promissory notes........................................ $    --   $     98
                                                            ========  ========
  Issuance of convertible debentures for amount due
   licensor................................................ $    --   $    100
                                                            ========  ========
  Issuance of common stock for convertible debentures...... $    --   $  3,380
                                                            ========  ========
  Issuance of common stock for interest on convertible
   debentures.............................................. $    --   $    123
                                                            ========  ========
  Issuance of common stock for preferred stock............. $    --   $    845
                                                            ========  ========

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

F-20

SALIX HOLDINGS, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

JUNE 30, 1997
(UNAUDITED)

1. Organization and Basis of Presentation

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. These statements are stated in United States dollars.

The accompanying unaudited condensed consolidated financial statements include all adjustments (consisting only of normal recurring items) which, 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 Management's Discussion and Analysis of Financial Condition and Results of Operations and the audited financial statements for the fiscal year ended December 31, 1996 included elsewhere in this Prospectus. The results of operations for interim periods are not necessarily indicative of results to be expected for a full year.

2. Net Loss Per Common Share

In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share" ("SFAS 128"). The Statement is effective for both interim and annual financial statements for periods ending after December 15, 1997. Under the Statement, primary earnings per share ("EPS") computed in accordance with Accounting Principle Board Opinion No. 25 will be replaced with a new simpler calculation called "basic EPS" and the Company will be required to restate EPS amounts for all prior periods. Under the new requirements, basic loss per share for the six months ended June 30, 1997 and 1996 would be unchanged from the reported loss per share amounts.

3. License Revenue and Revenue from Collaborative Agreements

In April 1993, Salix entered into a collaborative agreement with a partner covering pharmaceutical product development and marketing of Colazide in the United States. In consideration for the rights granted, the partner agreed to pay the Company a specified licensing fee and to fund development up to a specified amount. The Company recognized development revenue of $374,000 in the six-month period ending June 30, 1996, under this agreement.

F-21

SALIX HOLDINGS, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

JUNE 30, 1997
(UNAUDITED)

4. Commitments

In October 1996, the Company entered into a binding purchase order commitment for inventory purchases aggregating $674,000 to be delivered in 1997. At June 30, 1997, inventory of approximately $249,000 had been received against this commitment.

5. Shareholders' Equity

In May 1996, the Company closed its initial public offering of its common stock. In connection with that offering, the Company issued to the underwriters common share purchase warrants, exercisable into 200,000 common shares at a price of Cdn $7.00. All such purchase warrants were exercised in 1997 raising proceeds to the Company of approximately Cdn $1,400,000 (U.S. $1,003,000).

In addition, an option for 60,000 shares of common stock was exercised in February 1997.

6. Revenues from Significant Customers

One customer represented 97% of total revenues during the six-month period ended June 30, 1996.

7. Subsequent Event

On August 11, 1997, the Company's Board of Directors authorized management to commence a public offering of securities in Canada together with a concurrent offering in the United States.

F-22

[LOGO]

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+THIS IS A PRELIMINARY PROSPECTUS RELATING TO THESE SECURITIES, A COPY OF +
+WHICH HAS BEEN FILED WITH THE APPROPRIATE SECURITIES COMMISSION OR SIMILAR +
+REGULATORY AUTHORITY IN EACH OF THE PROVINCES OF CANADA BUT WHICH HAS NOT YET +
+BECOME FINAL FOR THE PURPOSE OF A DISTRIBUTION TO THE PUBLIC. INFORMATION +
+CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. THESE SECURITIES MAY +
+NOT BE SOLD, NOR MAY OFFERS TO BUY BE ACCEPTED IN ANY SUCH PROVINCE, PRIOR TO +
+THE TIME A RECEIPT IS OBTAINED FOR THE FINAL PROSPECTUS FROM THE APPROPRIATE +
+SECURITIES COMMISSION OR SIMILAR REGULATORY AUTHORITY OF SUCH PROVINCE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ PRELIMINARY PROSPECTUS DATED AUGUST 15, 1997

THIS PROSPECTUS HAS BEEN FILED UNDER PROCEDURES IN THE PROVINCES OF BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN, MANITOBA, ONTARIO, QUEBEC, NOVA SCOTIA, NEW BRUNSWICK, NEWFOUNDLAND AND PRINCE EDWARD ISLAND WHICH PERMIT CERTAIN INFORMATION WITH RESPECT TO THESE SECURITIES TO BE DETERMINED AFTER THE PROSPECTUS HAS BECOME FINAL AND PERMIT THE OMISSION FROM THIS PROSPECTUS OF SUCH INFORMATION. SUCH PROCEDURES REQUIRE THE DELIVERY TO PURCHASERS OF A PROSPECTUS OR A PROSPECTUS SUPPLEMENT CONTAINING THIS OMITTED INFORMATION WITHIN A SPECIFIED PERIOD OF TIME AFTER AGREEING TO PURCHASE ANY OF THESE SECURITIES.

This prospectus constitutes a public offering of these securities only in those jurisdictions where they may be lawfully offered for sale and therein only by persons permitted to sell such securities. No securities commission or similar authority in Canada has in any way passed upon the merits of the securities offered hereunder and any representation to the contrary is an offence.

New Issue

[LOGO]

Cdn. $

Common Shares

This prospectus offering consists of an offering of common shares (the "Common Shares") issued by Salix Holdings, Ltd. (the "Company") at a price of Cdn. $ per Common Share. The price at which the Common Shares are offered hereby was established by negotiation between the Company and Levesque Beaubien Geoffrion Inc., Yorkton Securities Inc., Marleau, Lemire Securities Inc. and Midland Walwyn Capital Inc. (collectively, the "Underwriters"). See "Plan of Distribution".

AN INVESTMENT IN THE COMMON SHARES MAY BE REGARDED AS SPECULATIVE AND SUBJECT TO A HIGH DEGREE OF RISK. AFTER GIVING EFFECT TO THIS OFFERING, THE OFFERING PRICE FOR EACH COMMON SHARE EXCEEDS THE CONSOLIDATED NET TANGIBLE BOOK VALUE PER COMMON SHARE AS AT JUNE 30, 1997 BY $ , REPRESENTING A DILUTION OF %. SEE "DILUTION".

PRICE: CDN. $ PER COMMON SHARE

                                     PRICE TO  UNDERWRITERS'    NET PROCEEDS
                                    THE PUBLIC      FEE      TO THE COMPANY(/1/)
                                    ---------- ------------- -------------------
Per Common Share................... Cdn. $       Cdn. $           Cdn. $
Total(/2/)......................... Cdn. $       Cdn. $           Cdn. $

NOTES:

(1) The Company has granted to the Underwriters a 60-day option to purchase up to an additional Common Shares, solely to cover over-allotments, if any. See "Plan of Distribution". If such option is exercised in full, the total Price to the Public, Underwriters' Fee and Net Proceeds to the Company will be Cdn. $ , Cdn. $ and Cdn. $ , respectively.

(2) Before deducting expenses payable by the Company, estimated at Cdn. $ .

The Underwriters, as principals, conditionally offer the Common Shares, subject to prior sale, if, as and when issued and sold by the Company and accepted by the Underwriters in accordance with the terms and conditions contained in the Underwriting Agreement referred to under "Plan of Distribution" and subject to the approval of certain Canadian legal matters on behalf of the Company by Aird & Berlis and on behalf of the Underwriters by McCarthy Tetrault and of certain United States legal matters on behalf of the Company by Wilson Sonsini Goodrich & Rosati, P.C. and on behalf of the Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP.

Subscriptions for the Common Shares will be received subject to rejection or allotment in whole or in part and the right is reserved to close the subscription books at any time without notice. It is expected that the definitive certificates evidencing the Common Shares will be available for delivery on the closing of the offering, which is anticipated to occur on or about , 1997, or on such later date as the Company and the Underwriters may agree, but in any event no later than , 1997.

TABLE OF CONTENTS

                                                                          PAGE
                                                                          ----
Exchange Rates...........................................................   4
Eligibility for Investment...............................................   4
Summary..................................................................   5
Risk Factors.............................................................   9
Use of Proceeds..........................................................  20
Price Range of Common Shares.............................................  21
Dividend Policy..........................................................  21
Capitalization...........................................................  22
Dilution.................................................................  23
Selected Consolidated Financial Data.....................................  24
Management's Discussion and Analysis of Financial Condition and Results
 of Operations...........................................................  25
Business.................................................................  29
Management...............................................................  46
Principal Shareholders...................................................  56
Description of Share Capital.............................................  57
Prior Sales of Securities................................................  58
Comparison of Canadian, United States and British Virgin Islands
 Corporate Law...........................................................  59
Certain Tax Considerations...............................................  61
Shares Eligible for Future Sale..........................................  65
Plan of Distribution.....................................................  67
Legal Matters............................................................  69
Experts..................................................................  69
Transfer Agent...........................................................  69
Material Contracts.......................................................  70
Canadian Purchasers' Statutory Rights....................................  71
Additional Information...................................................  71
Glossary.................................................................  72
Index to Consolidated Financial Statements............................... F-1
Certificate of the Company............................................... C-1
Certificate of the Underwriters.......................................... C-2

The Company exists under the laws of the British Virgin Islands and its principal office is located in Palo Alto, California. Most of the directors and officers of the Company reside outside of Canada and substantially all of their assets and those of the Company are located there. The Company and the directors submit to the non-exclusive jurisdiction of the courts of each of the Provinces of Canada and have appointed or will appoint Aird & Berlis as agent for service of process in Canada. Service of process may be effected at the offices of Aird & Berlis in Toronto, Ontario at Suite 1800, BCE Place, 181 Bay Street, Toronto, Ontario, Attention: Jay A. Lefton. However, it may not be possible for purchasers of securities hereunder to effect service of process within Canada upon directors and officers who reside outside of Canada. It may also not be possible to enforce judgments obtained in Canadian courts predicated on the civil liability provisions of the securities laws of certain provinces of Canada against the Company or its directors and officers who reside outside of Canada. The Company intends to comply with all relevant requirements of Canadian securities legislation.

CERTIFICATE OF THE COMPANY

DATED: AUGUST 15, 1997

The foregoing, together with the documents incorporated herein by reference and the information deemed to be incorporated herein by reference, as of the date of the supplemented prospectus providing the information permitted to be omitted from this prospectus, will constitute full, true and plain disclosure of all material facts relating to the securities offered by this prospectus as required by Part 7 of the Securities Act (British Columbia), by Part 8 of the Securities Act (Alberta), by Part XI of the Securities Act, 1988 (Saskatchewan), by Part VII of The Securities Act (Manitoba), by Part XV of the Securities Act (Ontario), by the Securities Act (Nova Scotia), by section 13 of the Securities Act (New Brunswick), by Part II of the Securities Act (Prince Edward Island) and by Part XIV of The Securities Act, 1990 (Newfoundland) and the respective regulations thereunder. This prospectus, as required by the Securities Act (Quebec) and the regulations thereunder, will not contain any misrepresentation likely to affect the value of the market price of the securities to be distributed.

"Randy W. Hamilton" (Signed) RANDY W.   "David Boyle" (Signed) DAVID BOYLE
              HAMILTON
    Chairman, President and Chief           Vice President, Finance and
          Executive Officer             Administration and Chief Financial
                                                      Officer

ON BEHALF OF THE BOARD OF DIRECTORS

"Lawrance A. Brown, Jr." (Signed)   "Nicholas M. Ediger" (Signed) NICHOLAS
     LAWRANCE A. BROWN, JR.                        M. EDIGER
            Director                               Director

C-1

CERTIFICATE OF THE UNDERWRITERS

DATED: AUGUST 15, 1997

To the best of our knowledge, information and belief, the foregoing, together with the documents incorporated herein by reference and the information deemed to be incorporated herein by reference, as of the date of the supplemented prospectus providing the information permitted to be omitted from this prospectus, will constitute full, true and plain disclosure of all material facts relating to the securities offered by this prospectus as required by

Part 7 of the Securities Act (British Columbia), by Part 8 of the Securities

Act (Alberta), by Part XI of The Securities Act, 1988 (Saskatchewan), by Part VII of The Securities Act (Manitoba), by Part XV of the Securities Act (Ontario), by the Securities Act (Nova Scotia), by section 13 of the Securities Act (New Brunswick), by Part II of the Securities Act (Prince Edward Island) and by Part XIV of The Securities Act, 1990 (Newfoundland) and the respective regulations thereunder. To the best of our knowledge, this prospectus, as required by the Securities Act (Quebec) and the regulations thereunder, will not contain any misrepresentation likely to affect the value or the market price of the securities to be distributed.

LEVESQUE BEAUBIEN GEOFFRION INC. YORKTON SECURITIES INC.

"Jacques Lemay" Per: (Signed) JACQUES "Cathy R. Steiner" Per: (Signed) CATHY

               LEMAY                               R. STEINER

  MARLEAU, LEMIRE SECURITIES INC.          MIDLAND WALWYN CAPITAL INC.

"William A. Tebbutt" Per: (Signed)    "John D. Grant" Per: (Signed) JOHN D.
        WILLIAM A. TEBBUTT                            GRANT

The following includes the name of each person having an interest, either directly or indirectly, to the extent of not less than 5% in the capital of:

LEVESQUE BEAUBIEN GEOFFRION INC.: a wholly-owned subsidiary of Levesque, Beaubien and Company Inc., a majority-owned subsidiary of a Canadian chartered bank.

YORKTON SECURITIES INC.: a wholly-owned subsidiary of Yorkton Holdings Limited.

MARLEAU, LEMIRE SECURITIES INC.: a wholly-owned subsidiary of Marleau, Lemire Inc.

MIDLAND WALWYN CAPITAL INC.: a wholly-owned subsidiary of Midland Walwyn Inc.

C-2

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth all expenses, other than underwriting discounts and commissions, payable by the Company in connection with the sale of the Common Shares being registered. All of the amounts shown are estimates except for the SEC registration fee.

                                                                     AMOUNT
                                                                   TO BE PAID
                                                                   ----------
SEC Registration Fee..............................................  $  6,409
Fees payable in connection with Canadian filings..................    18,100
NASD Filing Fee...................................................     2,615
The Toronto Stock Exchange Listing Fee............................    11,575
Blue Sky Qualification Fees and Expenses..........................    10,000
Printing and Engraving Expenses...................................   200,000
Legal Fees and Expenses...........................................   425,000
Accounting Fees and Expenses......................................   110,000
Directors' and Officers' Insurance................................    25,000
Miscellaneous.....................................................    66,301
                                                                    --------
   TOTAL..........................................................  $875,000
                                                                    ========

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Registrant's Articles of Association provide that the Registrant may indemnify against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with legal, administrative or investigate proceedings of any person who is or was a party or is threatened to be made a party to any threatened, pending or completed proceedings, whether civil, criminal, or administrative or investigative, by reason of the fact that the person is or was a director, an officer or a liquidator of the Registrant; or is or was, at the request of the Registrant, serving as a director, officer or liquidator of, or in any other capacity is or was acting for, another company or a partnership, joint venture, trust or other enterprise. The Registrant may only indemnify a person if the person acted honestly and in good faith and with a view to the best interests of the Registrant and, in the case of criminal proceedings, the person had no reasonable cause to believe that his or her conduct was unlawful.

In addition to the foregoing, the Underwriting Agreement provides for indemnification by the Underwriters of the Registrant, its directors and officers, and by the Registrant of the several Underwriters, against certain liabilities, including liabilities arising under the Securities Act.

At present, there is no pending litigation or proceeding involving a director, officer, employee or other agent of the Registrant in which indemnification is being sought, nor is the Registrant aware of any threatened litigation that may result in a claim for indemnification by any director, officer, employee or other agent of the Registrant.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Since July 1994, the Registrant has issued and sold the following unregistered securities:

1. On May 26, 1996, the Registrant sold 2,000,000 Common Shares (the "IPO") for an aggregate offering price of Cdn. $7.00 in a public offering in Canada. The offering was managed by Haywood Securities, Inc., Dlouhy Investments Inc. and Moss, Lawson & Co. Limited.

II-1

2. In March and May 1997 the Registrant issued an aggregate of 200,000 Common Shares to the principal underwriters of its Canadian public offering upon exercise of warrants to purchase such Common Shares at an exercise price of Cdn. $7.00 issued to the Underwriters at the time of and in connection with the IPO.

3. In January 1996, the Registrant sold in two transactions to a group of private investors 10% Convertible Debentures in the aggregate principal amount of $4,506,000. In connection with the IPO, all such Debentures converted into an aggregate of 1,167,625 Common Shares.

4. In July and October 1995, the Registrant sold notes and warrants with an exercise price of $3.00 to private investors and venture capitalists for an aggregate purchase price of approximately $1.2 million.

5. In January and March 1995, the Registrant sold notes and warrants with an exercise price of $3.00 to private investors and venture capitalists for an aggregate purchase price of approximately $607,202.

6. Between April 1994 and June 1997, the Registrant issued and sold 140,138 Common Shares to employees, directors and consultants at a price of U.S. $1.00 per share upon exercise of stock options pursuant to the Registrant's stock plans.

The sales of the above securities were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, or Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b) of the Securities Act, as transactions by an issuer not involving a public offering or transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under such Rule 701. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof. All recipients either received adequate information about the Registrant or had access through employment or other relationships, to such information. In addition in connection with the transactions described in items 1, 2, 3, 4 and 5 above, certain of the sales and issuances were deemed to be exempt from registration under the Securities Act in reliance on Regulation S promulgated thereunder.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits

 1.1* Form of Underwriting Agreement.
 3.1  Memorandum of Association of Salix Holdings, Ltd.
 3.2  Articles of Association of Salix Holdings, Ltd.
 4.1* Form of Common Share Certificate.
 4.2  Form of Warrant to purchase Common Shares.
 4.3  Form of Warrant to purchase Common Shares.
 5.1* Opinion of counsel regarding legality of the Common Shares.
10.1  Form of Indemnification Agreement between the Registrant and each of its officers
      and directors.

II-2

10.2 Form of 1994 Stock Plan for Salix Holdings, Ltd. and form of Stock Option and
Restricted Stock Purchase Agreements thereunder.
10.3 Form of 1996 Stock Plan for Salix Holdings, Ltd. and form of Notice of Stock Option
Grant and Stock Option Agreement thereunder.
10.4+ Amendment Agreement effective as of September 17, 1992 by and among Glycyx
Pharmaceuticals, Ltd., Salix Pharmaceuticals, Inc. and Biorex Laboratories, Ltd.
10.5+ License Agreement, dated September 17, 1992 between Biorex Laboratories Limited and
Glycyx Pharmaceuticals Limited and letter agreement amendments thereto.
10.6+ Research and Development Agreement dated September 21, 1992 between Glycyx
Pharmaceuticals, Ltd. and AB Astra and letter agreement amendments thereto.
10.7+ Distribution Agreement dated September 21, 1992 between Glycyx Pharmaceuticals, Ltd.
and
AB Astra.
10.8+ Amended and Restated License Agreement by and between Salix Pharmaceuticals, Inc.
and Biorex Laboratories, Limited, dated April 16, 1993.
10.9+ Co-Participation Agreement, dated April 30, 1993 between Salix Pharmaceutical, Inc.
and AB Astra as amended by Amendment No. 1 thereto effective September 30, 1993.
10.10+ Manufacturing Agreement, dated September 15, 1993 between Courtaulds Chemicals
Limited and Glycyx Pharmaceuticals, Limited.
10.11+ Distribution Agreement, dated September 23, 1994 between Glycyx Pharmaceuticals,
Ltd. and Menarini International Operations Luxembourg SA and amendments thereto.
10.12+ License Agreement, dated June 24, 1996 between Alfa Wassermann S.p.A. and Salix
Pharmaceuticals, Inc.
10.13+ Supply Agreement, dated June 24, 1996 between Alfa Wassermann S.p.A. and Salix
Pharmaceuticals, Inc.
10.14 Lease dated January 1, 1992 by and between Kontrabecki-Mason Developers and Salix
Pharmaceuticals, Inc., as amended.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2* Consent of Counsel (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule.

* To be supplied by amendment.

+ Confidential treatment has been requested with respect to certain portions of this exhibit pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission.

(b) Financial Statement Schedules:

All Schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.

ITEM 17. UNDERTAKINGS

The Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each Purchaser.

II-3

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the California General Corporation Law, the Articles of Incorporation or the Bylaws of the Registrant, the Underwriting Agreement, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer of controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

The Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

II-4

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Palo Alto, State of California, on the 15th day of August, 1997.

Salix Holding Ltd

       /s/ Randy W. Hamilton
By: _________________________________
          (RANDY W. HAMILTON)
   CHAIRMAN OF THE BOARD, PRESIDENT
      AND CHIEF EXECUTIVE OFFICER

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Randy W. Hamilton and David Boyle, and each one of them, acting individually and without the other, as his or her attorney-in-fact, each with full power of substitution, for him or her in any and all capacities, to sign any and all amendments to this Registration Statement (including post-effective amendments), and to sign any registration statement for the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and all post-effective amendments thereto, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof.

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED

              SIGNATURE                     TITLE                     DATE
              ---------                     -----                     ----

      /s/ Randy W. Hamilton        Chairman of the Board of      August 15, 1997
---------------------------------  Directors, President and
       (RANDY W. HAMILTON)         Chief Executive Officer
                                   (Principal Executive Officer)

         /s/ David Boyle           Vice President, Finance &     August 15, 1997
---------------------------------  Administration, and Chief
          (DAVID BOYLE)            Financial Officer (Principal
                                   Financial and Accounting
                                   Officer)

      /s/ Lorin K. Johnson         Vice President, Research,     August 15, 1997
---------------------------------  and Director
       (LORIN K. JOHNSON)

       /s/ David E. Lauck          Director                      August 15, 1997
---------------------------------
        (DAVID E. LAUCK)

                                     II-5

              SIGNATURE                     TITLE                     DATE
              ---------                     -----                     ----

       /s/ Lily Baxendale                  Director              August 15, 1997
---------------------------------
        (LILY BAXENDALE)

     /s/ Nicholas M. Ediger                Director              August 15, 1997
---------------------------------
      (NICHOLAS M. EDIGER)

   /s/ Lawrance A. Brown, Jr.              Director              August 15, 1997
---------------------------------
    (LAWRANCE A. BROWN, JR.)

      /s/ John F. Chappell                 Director              August 15, 1997
---------------------------------
       (JOHN F. CHAPPELL)

II-6

EXHIBIT INDEX

1.1* Form of Underwriting Agreement.
3.1 Memorandum of Association of Salix Holdings, Ltd.
3.2 Articles of Association of Salix Holdings, Ltd.
4.1* Form of Common Share Certificate.
4.2 Form of Warrant to purchase Common Shares.
4.3 Form of Warrant to purchase Common Shares.
5.1* Opinion of counsel regarding legality of the Common Shares.
10.1 Form of Indemnification Agreement between the Registrant and each of its officers
and directors.
10.2 Form of 1994 Stock Plan for Salix Holdings, Ltd. and form of Stock Option and
Restricted Stock Purchase Agreements thereunder.
10.3 Form of 1996 Stock Plan for Salix Holdings, Ltd. and form of Notice of Stock Option
Grant and Stock Option Agreement thereunder.
10.4+ Amendment Agreement effective as of September 17, 1992 by and among Glycyx
Pharmaceuticals, Ltd., Salix Pharmaceuticals, Inc. and Biorex Laboratories, Ltd.
10.5+ License Agreement, dated September 17, 1992 between Biorex Laboratories Limited and
Glycyx Pharmaceuticals Limited and letter agreement amendments thereto.
10.6+ Research and Development Agreement dated September 21, 1992 between Glycyx
Pharmaceuticals, Ltd. and AB Astra and letter agreement amendments thereto.
10.7+ Distribution Agreement dated September 21, 1992 between Glycyx Pharmaceuticals, Ltd.
and AB Astra.
10.8+ Amended and Restated License Agreement by and between Salix Pharmaceuticals, Inc.
and Biorex Laboratories, Limited, dated April 16, 1993.
10.9+ Co-Participation Agreement, dated April 30, 1993 between Salix Pharmaceutical, Inc.
and AB Astra as amended by Amendment No. 1 thereto effective September 30, 1993.
10.10+ Manufacturing Agreement, dated September 15, 1993 between Courtaulds Chemicals
Limited and Glycyx Pharmaceuticals, Limited.
10.11+ Distribution Agreement, dated September 23, 1994 between Glycyx Pharmaceuticals,
Ltd. and Menarini International Operations Luxembourg SA and amendments thereto.
10.12+ License Agreement, dated June 24, 1996 between Alfa Wassermann S.p.A. and Salix
Pharmaceuticals, Inc.
10.13+ Supply Agreement, dated June 24, 1996 between Alfa Wassermann S.p.A. and Salix
Pharmaceuticals, Inc.
10.14 Lease dated January 1, 1992 by and between Kontrabecki-Mason Developers and Salix
Pharmaceuticals, Inc., as amended.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2* Consent of Counsel (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule.

* To be supplied by amendment.

separately with the Commission.

EXHIBIT 3.1

SALIX HOLDINGS, LTD.

(IBC No. 103705)

CERTIFIED COPY OF RESOLUTIONS OF THE DIRECTORS AND
SHAREHOLDERS
ADOPTED ON 7TH FEBRUARY, 1996

"AMENDMENT TO THE MEMORANDUM OF ASSOCIATION- Preferred Stock

RESOLVED: It is deemed to be in the best interests of this Company and its stockholders that the Company amend its Memorandum of Association to provide that the outstanding shares of Preferred Stock shall automatically convert into shares of the Company's Common Stock upon the closing of a public offering of the Company's Common Stock (the "PUBLIC OFFERING"), and to make certain other changes.

RESOLVED FURTHER: That the amended and restated Memorandum of Association in substantially the form attached hereto as Exhibit A, together with any changes thereto determined by the President or any Vice President of the Company to be desirable, is hereby approved."

Dated the 29th day of February, 1996.

[SIGNATURE ILLEGIBLE]

HWR Services Limited Registered Agent

EXHIBIT B

TERRITORY OF THE BRITISH VIRGIN ISLANDS,

THE INTERNATIONAL BUSINESS COMPANIES ACT
(CAP 291)

AMENDED AND RESTATED MEMORANDUM OF ASSOCIATION

SALIX HOLDINGS LTD.

NAME

1. The name of the Company is Salix Holdings, Ltd.

REGISTERED OFFICE

2. The Registered Office of the Company will be at Craigmuir Chambers, P.O.
Box 71, Road Town, Tortola, British Virgin Islands.

REGISTERED AGENT

3. The Registered Agent of the Company will be HWR Services Limited of Craigmuir Chambers, P.O. Box 71, Road Town, Tortola, British Virgin Islands.

GENERAL OBJECTS AND POWERS

4. (1) The object of the Company is to engage in any act or activity that is not prohibited under any law for the time being in force in the British Virgin Islands.

(2) The Company may not

(a) carry on business with persons resident in the British Virgin Islands;

(b) own an interest in real property situate in the British Virgin Islands, other than a lease referred to in paragraph (e) of subclause (3);

(d) carry on business as an insurance or reinsurance company, insurance agent or insurance broker, unless it is licensed under an enactment authorizing it to carry on that business;

(e) carry on the business of company management, unless it is licensed under the Company Management Act, 1990; or

(f) carry on the business of providing the registered office or the registered agent for companies incorporated in the British Virgin Islands.

(3) For purposes of paragraph (a) of subclause, (2), the Company shall not be treated as carrying on business with persons resident in the British Virgin Islands if

(a) it makes or maintains deposits with a person carrying on banking business within the British Virgin Islands;

(b) it makes or maintains professional contact with solicitors, barristers, accountants, bookkeepers, trust companies, administration companies, investment advisers or other similar persons carrying on business within the British Virgin Islands;

(d) it holds, within the British Virgin Islands, meetings of its directors or members;

(e) it holds a lease of property for use as an office from which to communicate with members or where books and records of the Company are prepared or maintained;

(f) it holds shares, debt obligations or other securities in a company incorporated under the International Business Companies Act or under the Companies Act; or

(g) shares, debt obligations or other securities in the Company are owned by any person resident in the British Virgin Islands or by any company incorporated under the International Business Companies Act or under the Companies Act.

(h) The Company shall have all such powers as are permitted by law for the time being in force in the British Virgin Islands, irrespective of corporate benefit, to perform all acts and engage in all activities necessary or conducive to the conduct, promotion or attainment of the object of the Company.

CURRENCY

5. Shares in the Company shall be issued in the currency of United States of America.

NO AUTHORIZED CAPITAL

6. The Company shall have no authorized capital.

CLASSES, NUMBER AND PAR VALUE OF SHARES

7. The Company is authorized to issue two classes of shares designated "Preferred Stock" and "Common Stock," respectively. The total number of shares which the Company shall have authority to issue is Twenty Five Million (25,000,000), none of which has any par value. The number of shares of Preferred Stock authorized to be issued is Five Million (5,000,000), and the number of shares of Common Stock authorized to be issued is Twenty Million (20,000,000). The Preferred Stock may be issued from time to time in three series. The first series shall be designated Series A Preferred Stock (the "Series A Preferred") and shall consist of One Hundred Fifteen Thousand (115,000) shares with the rights, preferences, privileges and restrictions set forth in clause 8. The second series shall be designated Series B Preferred Stock (the "Series B Preferred") and shall consist of One Hundred Twenty-Six Thousand Four Hundred Forty-Five (126,445) shares with the rights, preferences, privileges restrictions set forth in Clause 8. The third series shall be designated Series C Preferred Stock (the "Series C Preferred") and shall consist of five hundred thousand (500,000) shares with the rights, preferences, privileges and restrictions set forth in Clause 8.

DESIGNATIONS, POWERS, PREFERENCES, ETC. OF PREFERRED SHARES

8. The definitions, powers, preferences, privileges, rights, qualifications, limitations and restrictions granted to or imposed an the Preferred Stock and the holders thereof are as follows:

(1) Dividends

(a) The holders of outstanding Preferred Stock shall be entitled to receive in any fiscal year, when and as declared by the Board of Directors, out of any assets at the time legally available therefor, dividends in cash at the rate of $0.0957 per share of Series A Preferred, $0.225 per share of series B Preferred and $0.20 per share of Series C Preferred, per annum, before any cash dividend is paid on Common Stock. Such dividend may be payable annually or otherwise as the Company may from time to time by resolution of directors determine. Dividends may be declared and paid upon shares of Preferred Stock in any fiscal year of the Company only if dividends shall have been paid on or declared and set apart upon all shares of Preferred Stock at such annual rates; and no further dividends shall be paid to holders of shares of Preferred Stock in excess of such annual rate in any fiscal year unless at the same time equivalent dividends are paid to holders of Common Stock. The right to such dividends on shares of Preferred Stock shall not be cumulative and no right shall accrue to holders of shares of Preferred Stock by reason of the fact that dividends on such shares are not declared in any prior year, nor shall any undeclared or unpaid dividend bear or accrue interest.

(b) In the event the Company shall declare a dividend payable in securities of other persons, evidences of indebtedness issued by the Company or other persons, assets (excluding cash dividends) or options or rights to purchase any such securities or evidences of indebtedness, then, in each such case the holders of the Preferred Stock shall be entitled to a proportionate share of any such distribution as though the holders of the Preferred Stock were the holders of the number of shares of Common Stock of the Company into which their respective shares of Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the Company entitled to receive such dividend.

(2) Voting Rights

Each holder of shares of Preferred Stock shall be entitled to the number of votes equal to the number oft shares of Common Stock into which such shares of Preferred Stock could be converted on the record date for the vote or consent of shareholders and shall have voting rights and powers equal to the voting rights and powers of the Common Stock. The holder of each share of Preferred Stock shall be entitled to notice of any shareholder's, meeting in accordance with the Articles of Association annexed hereto (the "Articles of Association") and shall vote with holders of the Common Stock upon any matter submitted to a vote of shareholders, except those matters required by law to be submitted to a class vote. Fractional votes by the holders of Preferred Stock shall not, however, be permitted and any fractional voting rights resulting from the above formula (after aggregating all shares into which shares of Preferred Stock held by each holder could be converted) shall be rounded to the nearest whole number.

(3) Conversion

The holders of the Preferred Stock shall have conversion rights as follows (the "Conversion Rights"):

(a) Right to Convert

(i) Each share of Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share, at the office of the company or any transfer agent for the Preferred Stock, into Common Stock at the initial conversion rate of one fully paid and nonassessable share of Common Stock for each share of Preferred Stock subject, however, to the adjustments described below. (The number of shares of Common Stock into which each

share of Series A Preferred may be converted is hereinafter referred to as the "Series A Conversion Rate," the number of shares of Common stock into which each share of Series B Preferred may be converted is hereinafter referred to as the "Series B Conversion Rate" and the number of shares of Common Stock into which each share of Series C Preferred may be converted is hereinafter referred to as the "Series C Conversion Rate.")

(ii) Each share of Preferred Stock shall automatically converted into shares of Common Stock at the then effective Applicable Conversion Rate immediately upon the consummation of the Company's initial public offering of Common Stock.

(iii) No fractional shares of Common Stock shall be issued upon conversion of the Preferred Stock and any shares of Preferred Stock surrendered for conversion which would otherwise result in a fractional share of Common Stock shall be redeemed for the then fair market value thereof, as determined by the Company's Board of Directors in good faith, payable as promptly as possible whenever funds are legally available therefor. If more than one share of Preferred Stock is surrendered for conversion at any one time by the same holder, the number of full shares of Common Stock to be issued upon conversion shall be computed on the basis of the aggregate number of shares of Preferred Stock so surrendered.

(b) Mechanics of Conversion

Before any holder of Preferred Stock shall be entitled to convert the same into shares of Common Stock, such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Company or of any transfer agent for the Preferred Stock and shall give written notice to the Company at such office that such holder elects to convert the same and shall state therein the name or names in which such holder wishes the certificate or certificates for shares of Common Stock to be issued. The Company shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Preferred stock, or to such holder's nominee or nominees, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Preferred Stock to be converted, and the

person or persons entitled to receive the shares of common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. If the conversion is in connection with an initial public offering of securities, the conversion may, at the option of any holder tendering Preferred Stock for conversion, be conditioned upon the closing of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the Common Stock issuable upon such conversion of the Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of such sale of securities.

Common Stock

In the event the Company at any time or from time to time after the date of the initial issuance of Series A Preferred (hereinafter referred to as the "Series A Original Issue Date"), the initial issuance of Series B Preferred (hereinafter referred to as the "Series B Original Issue Date") or the initial issuance of Series C Preferred (hereinafter referred to as the "Series C Original Issue Date"), as applicable, effects a subdivision or combination of its outstanding Common Stock into a greater or lesser number of shares without a proportionate and corresponding subdivision or combination of its outstanding Series A Preferred, Series B Preferred or Series C Preferred, as applicable, then and in each such event the Series A Conversion Rate, Series B Conversion Rate and/or the Series C conversion Rate, as applicable, shall be increased or decreased proportionately.

(d) Adjustment of Conversion Rate for Dividends, and Common Stock

Equivalents

In the event the Company at any time or from time to time after the Series A Original Issue Date, Series B Original Issue Date or Series C Original Issue Date, as applicable, shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock or other securities or rights (hereinafter referred to as "Common Stock Equivalents") convertible into or entitling the holder thereof to receive additional shares of Common Stock without payment of any consideration by, such holder, for such Common Stock Equivalents or the additional shares of Common Stock, then and in each such event the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein for a subsequent adjustment

of such number) of Common Stock issuable in payment of such dividend or upon conversion or exercise of such Common Stock Equivalents shall be deemed to be issued and outstanding as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date. In each such event the Series A Conversion Rate, Series B Conversion Rate and/or the Series C Conversion Rate, an applicable, shall be increased as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date, by multiplying the applicable Conversion Rate for the series of Preferred Stock by a fraction,

(i) the numerator of which shall be the total number of shares of Common Stock issued and outstanding or deemed to be issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or upon conversion or exercise of such Common Stock Equivalents; and

(ii) the denominator of which shall be the total number of shares of Common Stock issued and outstanding or deemed to be issued and outstanding immediately prior to the time of such issuance or the close of business on such record date provided, however, (A) if such record date shall have been fixed and such dividend is not fully paid or fully made on the date fixed therefor, the Conversion Rate for the Preferred Stock being adjusted shall be recomputed accordingly as of the close of business on such record date and thereafter the Conversion Rate for the series of Preferred stock being adjusted shall be adjusted pursuant to this paragraph as of the time of actual payment of such dividends or distribution; (B) if Common Stock Equivalents provide, with the passage of time or otherwise, for any decrease in the number of shares of Common Stock issuable upon conversion or exercise thereof, the applicable Conversion Rate for the Preferred Stock shall, upon any such decrease becoming effective, be recomputed to reflect such decrease insofar it affects the rights of conversion or exercise of the Common Stock Equivalents then outstanding, and (C) upon the expiration of any rights of conversion or exercise under Common Stock Equivalents, the applicable Conversion Rate for the Preferred Stock computed upon the original issue thereof

shall, upon such expiration, be recomputed as if the only additional shares of Common Stock issued were the shares of such stock, if any, actually issued upon the conversion or exercise of such Common Stock Equivalents.

(e) Certificate as to Adjustments

Upon the occurrence of each adjustment or readjustment of any Conversion Rate pursuant to this subsection, the Company at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Company shall, upon the written request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth

(i) such adjustments and readjustments,

(ii) the Conversion Rates at the time in effect, and

(iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the-conversion of Preferred Stock.

(f) Notices of Record Date

In the event that the Company shall propose at any time:

(i) to declare any dividend upon its common Stock, whether in cash, property, stock or other securities, whether or not a regular cash dividend and whether or not out of earnings or earned surplus;

(ii) to offer for subscription pro rata to the holders of any class or series of its shares any additional shares of stock of any class or series or other rights;

(iii) to effect any reclassification or recapitalization of its Common stock outstanding (excluding stock splits or reverse stock splits) involving a change in the Common Stock; or

(iv) to merge with or into any other corporation, or sell. lease or convey all or substantially

all its property or business, or to liquidate dissolve or wind up;

then, in connection with each such event, the Company shall send to the holders of the Preferred Stock

(A) at least 20 days' prior written notice of the date on which a record shall be taken for such dividend or subscription rights (and specifying the date on which the holders of Common Stock shall be entitled thereto) or for determining rights to vote in respect of the matters referred to in
(iii) and (iv) above; and

(B) in the case of the matters referred to in paragraphs (iii)

and (iv) , at least 20 days' prior written notice of the
date when the same shall take place (and specifying the date
on which the holders of Common Stock shall be entitled to
exchange their Common Stock for securities or other property
deliverable upon the occurrence of such event).

Each such written notice shall be given postage prepaid, addressed to the holders of Preferred Stock at the address for each such holder as shown on the books of the Company.

(g) Reservation of Stock Issuable Upon Conversion

The company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all then outstanding shares of the Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Preferred Stock, the Company will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose.

(4) Liquidation Preference

In the event of any liquidation, dissolution and winding up of the Company, either voluntary or involuntary, distributions to the shareholders of the Company shall be made in the following manner:

(a) The holders of the Preferred Stock shall be entitled to receive, prior and in preference to any distribution of

any of the assets or surplus funds of the Company to the holders of the Common Stock by reason of their ownership of such stock, the amount of $0.957 per share for each share of Series A Preferred then held by them, the amount of $2.25 per share for each share or Series B Preferred then held by them and the amount of $2.00 per share for each share of Series C Preferred then held by them (in each case, appropriately adjusted for any combinations, stock splits or stock dividends with respect to such shares) plus, an amount equal to all declared but unpaid dividends, if any, on the respective shares of Series A, Series B and Series C Preferred Stock then held by them. If, upon the occurrence of such event, the assets and property legally available to be distributed among the holders of the Series A, Preferred, Series B Preferred and Series C Preferred shall be insufficient to permit the payment to such holders of the full preferential amount an aforesaid, then the entire assets and property of the Company legally available for distribution shall be distributed ratably among the holders of Preferred Stock as follows:

(i) as among the series of Preferred Stock, the entire assets and property of the Company legally available for distribution shall be distributed among the respective series in proportion to the aggregate preferential amount fixed for the then outstanding shares of each series upon a liquidation, dissolution or winding up, and

(ii) as among the holders of Preferred Stock of any one series, the aggregate amount of assets and property available for distribution to such holders in accordance with subparagraph (i) shall be distributed among such holders pro rata based on the number of shares then held; and no amount shall be paid or set apart for payment on any series of Preferred Stock unless, at the same time, amounts in proportion to the respective preferential amounts to which the other series of Preferred Stock are entitled (in accordance with subparagraph (i)) shall be paid or set apart for payment.

(b) After payment has been made to the holders of the Preferred Stock of the full preferential amounts to which they shall be entitled, if any, as aforesaid, the holders of the Common Stock shall be entitled to share rateably in all remaining assets to be distributed, based upon the number of shares of Common Stock then held.

(c) For purposes of this subclause, a merger of the Company with or into any other corporations or companies into the Company, in which merger the shareholders of the Company receive distributions in cash or securities of another corporation or corporations as a result of such merger (unless the shareholders of the Company hold more than a majority of the voting equity securities of the surviving corporation), or a sale, conveyance or disposition of all or substantially all of the assets of the Company shall not be treated as a liquidation, dissolution or winding up of the Company.

(5) Covenants

In addition to any other rights provided by law, so long as any Preferred Stock shall be outstanding, the Company shall not, without first obtaining the affirmative vote or written consent of the holders of not less than a majority (determined on the basis of assumed conversion of all Preferred Stock into Common Stock) of the outstanding shares of Preferred Stock, voting together as a class:

(a) amend or repeal any provision of, or add any provision to, this Company's Memorandum of Association or the Articles of Association if such action would materially and adversely alter or change the rights, preferences, privileges or restrictions of any outstanding Preferred Stock;

(b) authorize or issue shares of any class having any preference or priority as to dividends or assets superior to or on a parity with any such preference or priority of the outstanding Preferred Stock or authorize or issue shares of any class or any bonds, debentures, notes or other obligations convertible into or exchangeable for, or having option rights to purchase, any shares of the Company having any preference or priority as to dividends or assets superior to or on a parity with any such preference or priority of the outstanding Preferred Stock;

(c) reclassify any shares of Common Stock into shares having any preference or priority as to dividends or assets superior to or on a parity with any such preference or priority of the outstanding Preferred Stock;

(d) apply any of its assets to the redemption, retirement, purchase or acquisition, directly or indirectly, through subsidiaries or otherwise, of any shares of Common Stock, except from officers, directors, employees or consultants of the Company upon termination of the employment or consulting relationship between the Company or its subsidiaries and such persons pursuant to

the terms of restrictive stock agreements providing for such repurchase of such shares of Common Stock between the Company and such persons; or

(e) increase the authorized number of shares of Preferred Stock.

Any of the foregoing obligations may be amended or waived only by the holders of not less than a majority of the outstanding shares of Preferred Stock, voting together as a class.

DESIGNATIONS, POWERS, PREFERENCES, ETC. OF COMMON SHARES

9. All rights accruing to the outstanding shares Of the Company not expressly provided for to the contrary in this Memorandum of Association shall be vested in the Common Stock. The holder or each share of Common Stock shall have the right to one vote per share.

REGISTERED SHARES

10. Shares in the Company may only be issued as registered shares and may not be exchanged for shares issued to bearer.

AMENDMENT OF MEMORANDUM AND ARTICLES OF ASSOCIATION

11. Subject to the provisions of Clause 8(5), the Company may amend its Memorandum of Association and Articles of Association by a resolution of shareholders or by a resolution of directors.

DEFINITIONS

12. The meanings of words in this Memorandum of Association are as defined in the Articles of Association,

We, HWR SERVICES LIMITED of Craigmuir Chambers, Road Town, Tortola, British Virgin Islands for the purpose of incorporating an International Business Company under the laws or the British Virgin Islands hereby subscribe our name to this Memorandum of Association the 24th day of December, 1993 in the presence of:

Witness                             Subscriber


Sgd. Lavida Cottoy                  Sgd. Richard A. Peters
........................            ............................
Craigmuir Chambers                  Authorised Signatory
Road Town, Tortola                  HWR Services Limited
Company Administrator

EXHIBIT 3.2

TERRITORY OF THE BRITISH VIRGIN ISLANDS

THE INTERNATIONAL BUSINESS COMPANIES ACT
(CAP 291)

ARTICLES OF ASSOCIATION

SALIX HOLDINGS, LTD.

ARTICLE I

CORPORATE OFFICES

1.1 PRINCIPAL OFFICE

The Board of Directors shall fix the location of a principal executive office of the Company at any place within or outside the British Virgin Islands.

1.2 OTHER OFFICES

The Board of Directors may at any time establish branch or subordinate offices at any place or places where the Company is qualified to do business.

ARTICLE II

MEETINGS OF SHAREHOLDERS

2.1 PLACE OF MEETINGS

Meetings of shareholders shall be held at any place within or outside the British Virgin Islands designated by the Board of Directors. In the absence of any such designation, meetings of shareholders shall be held at the principal executive office of the Company.

2.2 ANNUAL MEETING

An annual meeting of shareholders shall be held each year on a date and at a time designated by the Board of Directors. In the absence of such designation, the annual meetings shareholders shall be held on the second Tuesday of May in each year at 2:00 p.m. However, if such day falls on a legal holiday, then the meeting shall be held at the same time and place on the next succeeding full business day. At the annual meeting of shareholders directors shall be elected, and any other proper business may be transacted.

2.3 SPECIAL MEETING

A special meeting of shareholders may be called at any time by the Board of Directors, by the Chairman of the Board, the President or by one or more shareholders holding shares in the aggregate entitled to cast not less than ten percent (10%) of the votes at that meeting.

If a special meeting is called by any person or persons other than the Board of Directors, the President or the Chairman of the Board, then the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the Chairman of the Board, the President, any Vice-president or the Secretary of the Company. The officer receiving the request shall cause notice to be given promptly to the shareholders entitled to vote, in accordance with the provisions of Sections 2.4 and 2.5 of these Articles, that a meeting will be held at the time requested by the person or persons calling the meeting, so long as that time is not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, then the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 2.3 shall be construed as limiting, fixing or affecting the time when a meeting of shareholders called by action of the Board of Directors may be held.

2.4 NOTICE OF SHAREHOLDERS' MEETINGS

All notices of meetings of shareholders shall be given not less than ten
(10) nor more than sixty (60) days before the date of the meeting. The notice shall specify the place, date, and hour of the meeting and (i) in the case of a special meeting, the general nature of the business to be transacted (no business other than that specified in the notice may be transacted) or (ii) in the case of the annual meeting, those matters which the Board of Directors, at the time of giving the notice, intends to present for action by the shareholders (but subject to the Act any proper matter may be presented at the meeting for such action). The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees who, at the time of the notice, the Board of Directors intends to present for election.

2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE

Written notice of any meeting of shareholders shall be given (i) personally, (ii) by mail or (iii) by telegraphic or other written communication. Notices not personally delivered shall be sent charges prepaid and shall be addressed to the shareholder at the address of that

shareholder appearing in the share register of the Company or given by the shareholder to the Company for the purpose of notice. If no such address appears on the Company's books or is given, notice shall be deemed to have been given if sent to that shareholder by mail, telegraphic or other written communication to the Company's principal executive office, or if published at least once in a newspaper of general circulation in the country where that office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication.

If any notice addressed to a shareholder at the address of that shareholder appearing in the share register of the Company is returned to the Company by the postal service marked to indicate that the postal service is unable to deliver the notice to the shareholder at that address, then all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available to the shareholder on written demand of the shareholder at the principal executive office of the Company for a period of one (1) year from the date of the giving of the notice.

An affidavit of the mailing or other means of giving any notice of any shareholders' meeting, executed by the Secretary, Assistant Secretary or any Transfer Agent of the Company giving the notice, shall be prima facie evidence of the giving of such notice.

2.6 QUORUM

The presence in person or by proxy of the holders of a majority of the shares entitled to vote thereat constitutes a quorum for the transaction of business at all meetings of shareholders. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum.

2.7 ADJOURNED MEETING; NOTICE

Any meeting of shareholders, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of the majority of the shares represented at that meeting, either in person or by proxy. In the absence of a quorum, no other business may be transacted at that meeting except as provided in Section 2.6 of these Articles.

When any meeting of shareholders, either annual or special is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place are announced at the meeting at which the adjournment is taken.

However, if a new record date for the adjourned meeting is fixed or if the adjournment is for more than forty-five (45) days from the date set for the original meeting, then notice of the adjourned meeting shall be given. Notice of any such adjourned meeting shall be given to each shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 2.4 and 2.5 of these Articles. At any adjourned meeting the Company may transact any business which might have been transacted at the original meeting.

2.8 VOTING

The shareholders entitled to vote at any meeting of shareholders shall be determined in accordance with the provisions of the Act.

The shareholders' vote may be by voice vote or by ballot; provided, however, that any election for directors must be by ballot if demanded by any shareholder at the meeting and before the voting has begun.

Except as provided in the last paragraph of this Section 2.8, or as may be otherwise provided in the Memorandum, each outstanding share, regardless of class, shall be entitled to one vote an each matter submitted to a vote of the shareholders. Shareholders entitled to vote on any matter may vote part of the shares in favour of the proposal and refrain from voting the remaining shares or, except when the matter is the election of directors, may vote them against the proposal; but, if the shareholder fails to specify the number of shares which the shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares which the shareholder is entitled to vote.

If a quorum is present, the affirmative vote of the majority of the shares represented and voting at a duly held meeting (which shares voting affirmatively also constitute at least a majority of the required quorum) shall be the act of the shareholders, unless the vote of a greater number or a vote by classes is required by the Act or by the Memorandum.

At a meeting of shareholders at which directors are to be elected, a shareholder shall be entitled to cumulate votes (i.e. cast for any candidate a number of votes greater than the number of votes which such shareholder normally is entitled to cast) if the candidates, names have been placed in nomination prior to commencement of the voting and the shareholder has given notice prior to commencement of the voting of the shareholder's intention to cumulate votes. If any shareholder has given such a notice, then every shareholder entitled to vote may cumulate votes for candidates in nomination either (i) by giving one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which that

shareholder's shares are normally- entitled or (ii) by distributing the shareholder's votes on the same principle among any or all of the candidates, as the shareholder thinks fit. The candidates receiving the highest number of affirmative votes, up to the number of directors to be elected, shall be elected; votes against any candidate and votes withheld shall have no legal effect.

2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT

The transactions of any meeting of shareholders, either annual or special, however called and however notice thereof was given, and wherever held, shall be as valid as though they had been taken at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each person entitled to vote, who was not present in person or by proxy, signs a written waiver of notice or a consent to the holding (of the meeting or an approval of the minutes thereof. The waiver of notice or approval need not specify either the business to be transacted or the purpose of any annual or special meeting of shareholders, except as required by the Act. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting.

Attendance by a person at a meeting shall also constitute a waiver of notice of and presence at that meeting, except when the person objects at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. Attendance at a meeting is not a waiver of any right to object to the consideration of matters required by the Act to be included in the notice of the meeting but not so included, if that objection is expressly made at the meeting.

2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING

Any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action to be taken, is signed by the requisite number of outstanding shares as described in Section 8.6 of Article VIII.

In the case of election of directors, such a consent shall be effective only if signed by the holders of all outstanding shares entitled to vote for the election of directors. However, a director may be elected at any time to fill any vacancy on the Board of Directors by the written consent of the holders of a majority of the outstanding shares entitled to vote for the election of directors provided that it was not created by removal of a director and that it has not been filled by the directors.

All such consents shall be maintained in the corporate records of the Company. Any shareholder giving a written consent, or the shareholder's proxy holders, or a transferee of the shares, or a personal representative of the shareholder, or their respective proxy holders, may revoke the consent by a written instrument received by the Secretary of the Company- before written consents of the 'number of shares required to authorize the proposed action have been filed with the Secretary.

If the consents of all shareholders entitled to vote have not been solicited in writing and if the unanimous written consents of all such shareholders have not been received, then the Secretary shall give prompt notice of the corporate action approved by the shareholders without a meeting. Such notice shall be given to those shareholders entitled to vote who have not consented in writing and shall be given in the manner specified in Section 2.5 of these Articles.

2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS

For purposes of determining the shareholders entitled to notice of any meeting or to vote thereat or entitled to give consent to corporate action without a meeting, the Board of Directors may fix, in advance, the date notice is given as the record date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of any such meeting nor more than sixty (60) days before any such action without a meeting, and in such event only shareholders of record on the date so fixed are entitled to notice and to vote or to give consents, as the case may be, notwithstanding any transfer of any shares in the share register of the Company after the record date, except as otherwise provided in the Act.

If the Board of Directors does not so fix a record date:

(a) the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held; and

(b) the record date for determining shareholders entitled to give consent to corporate action in writing without a meeting (i) when no prior action by the Board has been taken, shall be the day on which the first written consent is given, or (ii) when prior action by the Board has been taken, shall be at the close of business on the day on which the Board adopts the resolution relating to that action, or the sixtieth (60th) day before the date of such other action, whichever is later.

The record date for any other purpose shall be as provided in Article VIII of these Articles.

The following shall apply in respect of joint ownership of shares:

(a) if two or more persons hold shares jointly each of them may be present in person or by proxy at a meeting of shareholders and may speak as a shareholder;

(b) if only one of the joint owners is present in person or by proxy he may vote on behalf of all joint owners, and

2.12 PROXIES

Every shareholder entitled to vote shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the secretary of the Company. A proxy shall be deemed signed if the shareholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the shareholder or the shareholder's attorney-in-fact. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) the person who executed the proxy revokes it prior to the time of voting by delivering an instrument in writing to the Company stating that the proxy is revoked or by executing a subsequent proxy and presenting it to the meeting or by voting in person at the meeting, or (ii) written notice of the death or incapacity of the maker of that proxy is received by the Company before the vote pursuant to that proxy is counted; provided, however that no proxy shall be valid after the expiration of eleven (11) months from the date of the proxy, unless otherwise provided in the proxy. The dates contained on the forms of proxy presumptively determine the order of execution, regardless of the postmark dates on the envelopes in which they are mailed.

2.13 INSPECTORS OF ELECTION

Before any meeting of shareholders, the board of directors may appoint an inspector or inspectors of election to act at the meeting or its adjournment. If no inspector of election is so appointed, then the chairman of the meeting may and on the request of any shareholder or a shareholder's proxy shall, appoint an inspector of election to act at the meeting. The number of inspectors shall be either one (1) or three (3). If an inspector is appointed at a meeting pursuant to the request of one (1) or more shareholders or proxies, then the holders of a majority of shares or their proxies present at the meeting shall determine whether one

(1) or three (3) inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, then the chairman of the meeting may and upon the request of any shareholder or a shareholder's proxy shall, appoint a person to fill that vacancy.

Such inspectors shall:

(a) determine the number of shares outstanding and the voting power of each, the number of shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies;

(b) receive votes, ballots or consents;

(d) count and tabulate all votes or consents;

(e) determine when the polls shall close;

(f) determine the result; and

(g) do any other acts that may be proper to conduct the election or vote with fairness to all shareholders.

ARTICLE III

DIRECTORS

3.1 POWERS

Subject to the provisions of the Act and any limitations in the Memorandum and these Articles relating to action required to be approved by the shareholders or by the outstanding shares, the business and affairs of the Company shall be managed and all corporate powers shall be exercised by or under the direction of the Board of Directors.

3.2 NUMBER OF DIRECTORS

The number of directors of the Company shall be four (4). This number may be changed by a duly adopted amendment to this Section 3.2 adopted by resolution of shareholders or by resolution of directors.

No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires.

3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS

Directors shall be elected at each annual meeting of shareholders to hold office until the next annual meeting. Each director, including a director elected to fill a

vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified.

3.4. RESIGNATION AND VACANCIES

Any director may resign effective on giving written notice to the Chairman of the Board, the President, the Secretary or the Board of Directors, unless the notice specifies a later time for that resignation to become effective. If the resignation of a director is effective at a future time, the Board of Directors may elect a successor to take office when the resignation becomes effective.

Vacancies in the Board of Directors may be filled by a majority of the remaining directors, even if less than a quorum, or by a sole remaining director; however, a vacancy created by the removal of the director by the vote or written consent of the shareholders or by court order may be filled only by the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute a majority of the required quorum) , or by the unanimous written consent of all shares entitled to vote thereon. Each director so elected shall hold office until the next annual meeting of the shareholders and until a successor has been elected and qualified.

A vacancy or vacancies in the Board of Directors shall be deemed to exist
(i) in the event of the death, resignation or removal of any director, (ii) if the Board of Directors by resolution of directors declares vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony, (iii) if the authorized number of directors is increased or (iv) if the shareholders fail, at any meeting of shareholders at which any director or directors are elected, to elect the number of directors to be elected at that meeting,

The shareholders may elect a director at any time to fill any vacancy not filled by the directors, but any such election other than to fill a vacancy created by removal, if by written consent, shall require the consent of the holders of a majority of the outstanding shares entitled to vote thereon.

3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE

Regular meetings of the Board of Directors may be held at any place within or outside the British Virgin Islands that has been designated from time to time by resolution of the Board. In the absence of such a designation, regular meetings shall be held at the principal executive office of the Company. Special meetings of the Board may be held at any place within or outside the British Virgin Islands that

has been designated in the notice of the meeting or, if not stated in the notice or if there is no notice, at the principal executive office of the Company.

Any meeting, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating in the meeting can hear one another; and all such directors shall be deemed to be present in person at the meeting.

3.6 REGULAR MEETINGS

Regular meetings of the Board of Directors may be held without notice if the times of such meetings are fixed by the Board of Directors.

3.7 SPECIAL MEETINGS; NOTICE

Special meetings of the Board of Directors for any purpose or purposes may be called at any time by the Chairman of the Board, the President, any Vice President, the Secretary or any two directors.

Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the Company. Notice of meetings of directors shall be given at least three (3) days prior to the Meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the Company.

3.8 QUORUM

A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as provided in Section 3.10 of these Articles. Every act or decision done or made by a majority of the directors present at a duly held meeting at which a quorum is present shall be regarded as the act of the Board of Directors, subject to the provisions of the Act.

A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a of the required quorum for that meeting.

3.9. WAIVER OF NOTICE

A meeting of directors is valid without the requisite notice having been given to any director (i) who sign a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, whether before or after the meeting, or (ii) who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such directors. All such waivers, consents, and approvals shall be filed with the corporate records or made part of the minutes of the meeting. A waiver of notice need not specify the purpose of any regular or special meeting of the Board of Directors.

3.10 ADJOURNMENT

A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting to another time or place.

3.11 NOTICE OF ADJOURNMENT

Notice of the time and place of holding an adjourned meeting need not be given unless the meeting is adjourned for more than twenty-four (24) hours. If the meeting is adjourned for more than twenty-four (24) hours, then notice of the time and place of the adjourned meeting shall be given before the adjourned meeting takes place, in the manner specified in Section 3.7 of these Articles, to the directors who were not present at the time of the adjournment.

3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING

Any action required or permitted to be taken by the Board of Directors may be taken without a meeting, provided that all members of the Board individually or collectively consent in writing to that action. Such action by written consent shall have the same force and effect as a unanimous vote of the Board of Directors. Such written consent and any counterparts thereof shall be filed with the minutes of the proceedings of the Board.

3.13 FEES AND COMPENSATION OF DIRECTORS

Directors and members of committees may receive such compensation, if any, for their services and such reimbursement of expenses as may be fixed or determined by resolution of directors. This Section 3.13 shall not be construed to preclude any director from serving the Company in any other capacity as an officer, agent, employee or otherwise and receiving compensation for those services.

3.14 APPROVAL OF LOANS TO OFFICERS

The Company may by resolution of directors make loans of money or property to, or guarantee the obligations of, any officer of the Company or its parent or subsidiary, whether or not a director, or adopt an employee benefit plan or plans authorizing such loans or guarantees provided that
(i) the Board of Directors determines that such a loan or guaranty or plan may reasonably be expected to benefit the Company, and (ii) the approval of resolution of directors with respect to such loans or guarantees is by a vote sufficient without counting the vote of any interested director or directors.

ARTICLE IV

COMMITTEES

4.1 COMMITTEES OF DIRECTORS

The Company may by resolution of directors designate one (1) or more committees, each consisting of one (1) or more directors to serve at the pleasure of the Board. The Board may designate one (1) or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors. Any committee, to the extent provided in the resolution of the board, shall have all the authority of the Board, except with respect to:

(a) the approval of any action which, under the Act, also requires approval by resolution of shareholders;

(b) the filling of vacancies on the Board of Directors or in any committee;

(d) the amendment or repeal of these Articles or the adoption of new Articles;

(e) the amendment or repeal of any resolution of directors which by its express terms is not so amendable or repealable;

(f) a distribution to the shareholders of the Company, except at a rate or in a periodic amount or within a price range determined by the Board of Directors; or

(g) the appointment of any other committees of the Board of Directors or the members of such committees.

4.2 MEETINGS AND ACTION OF COMMITTEES

Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these Articles,
Section 3.5 (place of meetings), Section 3.6 (regular meetings), Section
3.7 (special meetings and notice) , Section 3.8 (quorum) Section 3.9 (waiver of notice), Section 3.10 (adjournment) Section 3.11 (notice of adjournment), and Section 3.12 (action without meeting), with such changes in the context of those Articles as are necessary to substitute the committee and its members for the Board of Directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of directors or by resolution of the committee of directors, that special meetings of committees may also be called by resolution of directors, and that notice of special meetings of committees of directors shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The Board of Directors may adopt rules for the government of any committee not inconsistent with the provisions of these Articles and the Act.

ARTICLE V

OFFICERS

5.1 OFFICERS

The officers of the Company shall be a President, a Secretary and a Chief Financial Officer. The Company may also have, at the discretion of the Board of Directors, a Chairman of the Board, one or more Vice Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers and such other officers as may be appointed in accordance with the provisions or Section 5.3 of these Articles. Any number of offices may be held by the same person.

5.2 ELECTION OF OFFICERS

The officers of the Company, except such officers as may be appointed in accordance with the provisions of Section 5.3 or Section 5.5 of these Articles, shall be appointed by resolution of directors, subject to the rights, if any, of an officer under any contract of employment.

5.3 SUBORDINATE OFFICERS

The Board of Directors may by resolution of directors appoint such other officers as the business of the Company may require, each of whom shall hold office for such period have such authority and perform such duties as are provided in these Articles or as the Board of Directors.

5.4. REMOVAL AND RESIGNATION OF OFFICERS

Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by resolution of directors.

Any officer may resign at any time by giving written notice to the Company. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the Company under any contract to which the officer is a party.

5.5 VACANCIES IN OFFICES

A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these articles for regular appointments to that office.

5.6 CHAIRMAN OF THE BOARD

The Chairman of the Board, if such an officer be elected, shall, if present, preside at meetings of the Board of Directors and exercise and perform such other powers and duties as may from time to time be assigned to him by resolution of directors or as may be prescribed by these Articles. If there is no President, then the Chairman of the Board shall also be the President of the Company and shall have the powers and duties prescribed in Section 5.7 of these Articles.

5.7 PRESIDENT

Subject to such supervisory powers, if any, as may be given by resolution of directors to the Chairman of the Board, if there be such an officer, the President shall be the Chief Executive Officer of the Company and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and the officers of the Company. He shall preside at all meetings of the shareholders and, in the absence or nonexistence of a Chairman of the Board, at all meetings of the directors. He shall have the general powers and duties of management usually vested in the office of President of a corporation and shall have such other powers and duties as may be prescribed by resolution of directors or these Articles.

5.8 VICE PRESIDENTS

In the absence or disability of the President, the Vice Presidents, if any, in order of their rank as fixed by resolution of directors or, if not ranked, a Vice President

designated by resolution of directors, shall perform all the duties of the President and when so acting shall have all the powers of, and be subject to all the restrictions upon, the President. The Vice Presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by resolution of directors or these Articles.

5.9 SECRETARY

The Secretary shall keep or cause to be kept, at the principal executive office of the Company or such other place as the Board of Directors may direct, a book of minutes of all meetings and actions of directors, committees of directors and shareholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how authorized and the notice given), the names of those present at meetings of directors or committee meetings, the number of shares present or represented at shareholders, meetings of shareholders, and the proceedings thereof.

The Secretary shall keep, or cause to be kept at the registered office and at the principal executive office of the Company or at the office of the Company's transfer agent or registrar, as determined by resolution of directors, a share register, or a duplicate share register, showing the names of all shareholders and their addresses, the number and classes of shares held by each, the date on which the name of each shareholder was entered in the register and the date on which any shareholder ceased to be a shareholder.

The Secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the Board of Directors required to be given by law or by these Articles. He shall keep the seal of the Company in safe custody and shall have such other powers and perform such other duties as may be prescribed by resolution of directors or by these Articles.

5.10 CHIEF FINANCIAL OFFICER

The Chief Financial Officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records accounts of the properties and business transactions of the Company, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings and shares. The books of account shall at all reasonable times be open to inspection by any director.

The Chief Financial Officer shall deposit all money and other valuables in the name and to the credit of the company with such depositors as may be designated by the Board of Directors. He shall disburse the funds of the Company's as may be ordered by the Board of Directors, shall render to the

President and directors, whenever they request it, an account of all of his transactions as Chief Financial Officer and of the financial condition of the Company and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or these Articles

ARTICLE VI

INDEMNIFICATION OF DIRECTORS, OFFICERS, LIQUIDATORS,
EMPLOYEES AND OTHER AGENTS

6.1 INDEMNIFICATION OF DIRECTORS, OFFICERS AND LIQUIDATORS

Subject to the limitations hereinafter provided the Company may indemnify against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with legal, administrative or investigative proceedings any person who

(a) is or was a party or is threatened to be made a party to any threatened, pending or completed proceedings, whether civil, criminal, administrative or investigative, by reason of the fact that the person is or was a director, an officer or a liquidator of the Company; or

(b) is or was, at the request of the Company, serving as a director, officer or liquidator of, or in any other capacity is or was acting for, another company or a partnership, joint venture, trust or other enterprise.

6.2 CONDITIONS FOR INDEMNIFICATION

The Company may only indemnify a person if the person acted honestly and in good faith with a view to the best interests of the Company and, in the case of criminal proceedings, the person had no reasonable cause to believe that his conduct was unlawful.

6.3 DIRECTOR TO DETERMINE IF PERSON MEETS CONDITIONS

The decision of the directors as to whether the person acted honestly and in good faith and with a view to the best interests of the Company and as to whether the person had no reasonable cause to believe that his conduct was unlawful is, in the absence of fraud, sufficient for the purposes of these Articles, unless a question of law is involved.

6.4 TERMINATION OF PROCEEDINGS

The termination of any proceedings by any judgment, order, settlement, conviction or the entering of a nolle prosequi does not, by itself, create a presumption that the person

did not act honestly and in good faith and with a view to the best interests of the Company or that the person had reasonable cause to believe that his conduct was unlawful.

6.5 SUCCESS IN PROCEEDINGS

If a person to be indemnified has been successful in defence of any proceedings referred to above the person is entitled to be indemnified against all expenses, including legal fees, and against all amounts reasonably incurred by the person in connection with the proceedings.

6.6 INDEMNITY NOT EXCLUSIVE

The indemnification provided by this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any agreement, vote of shareholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office.

6.7. INDEMNIFICATION OF OTHERS

The company shall save the power, to the extent and in the manner permitted by the Act to indemnify each of its employees and agents (other than directors, officers and liquidators) against expenses, judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding arising by reason of the fact that such person is or was an employee or agent of the Company.

6.8 INSURANCE

The Company may purchase and maintain insurance in relation to any person who is or was a director, an officer, employee, agent or a liquidator of the Company, or who at the request of the Company is or was serving as a director, an officer, employee, agent or a liquidator of, or in any other capacity is or was acting for, another company or a partnership, joint venture, trust or other enterprise, against any liability asserted against the person and incurred by the person in that capacity, whether or not the Company has or would have had the power to indemnify the person against the liability as provided in these Articles.

ARTICLE VII

RECORDS AND REPORTS

7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER

The Company shall keep at its principal executive office or at the office of its transfer agent or registrar (if either be appointed), as determined by resolution of directors, a share register listing the names and address of all

shareholders, the number and class of shares held by each shareholder, the date on which the name of each shareholder was entered in the register and the date on which any shareholder ceased to be a shareholder.

A shareholder or shareholders of the Company who hold or holds at least five percent (5%) in the aggregate of the outstanding voting shares of the Company or who holds at least one percent (1%) of such voting shares and has filed a Schedule 14B with the Securities and Exchange Commission of the United States of America relating to the election of directors, may (i) inspect and copy the records of shareholders' names, addresses and shareholdings during usual business hours on five (5) days prior written demand on the Company, (ii) obtain from the transfer agent of the Company, on written demand and on the tender of such transfer agent's usual charges for such list, a list of the names and addresses of the shareholders who are entitled to vote for the election of directors, and their shareholdings, as of the most recent record date for which that list has been compiled or as of a date specified by the shareholder after the date of demand. Such list shall be made available to any such shareholder by the transfer agent on or before the later of five (5) days after the demand is received or five (5) days after the date specified in the demand as the date as of which the list is to be compiled.

The record of shareholders shall also be open to inspection on the written demand of any shareholder or holder of a voting trust certificate, at any time during usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as the holder of a voting trust certificate.

Any inspection and copying under this Section 7.1 may be made in person or by an agent or attorney of the shareholder or holder of a voting trust certificate making the demand.

7.2 MAINTENANCE AND INSPECTION OF MEMORANDUM AND ARTICLES

The Company shall keep at its principal executive office the original or a copy of the Memorandum and these Articles as amended to date, which Memorandum and Articles shall be open to inspection by the shareholders at all reasonable times during office hours. The Secretary shall, upon the written request of any shareholder, furnish to that shareholder a copy of the Memorandum and these Articles as amended to date.

7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS

The accounting books and records and the minutes of meetings of the shareholders, of the Board of Directors and of any committee on committees of the Board of Directors shall be kept at such place or places as are designated by resolution of directors or, in absence of such designation, at the

principal executive office of the Company. The minutes shall be kept in written form, and the accounting books and records shall be kept either in written form or in any other form capable of being converted into written form.

The minutes and accounting books and records shall be open to inspection upon the written demand of any shareholder or holder of a voting trust certificate, at any reasonable time during usual business hours, for a purpose reasonably related to the interests as a shareholder or as the holder of a voting trust certificate. The inspection may be made in person or by an agent or attorney and shall include the right to copy and make extracts. Such rights of inspection shall extend to the records of each subsidiary corporation of the Company.

7.4 INSPECTION BY DIRECTORS

Every director shall have the absolute right at any reasonable time to inspect all books, records and documents of every kind as well as the physical properties of the

Company and each of its subsidiary corporations. Such inspection by a director may be made in person or by an agent or attorney, The right of inspection includes the right to copy and make extracts of documents.

7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER

The Board of Directors shall cause an annual report to be sent to the shareholders not later than one hundred twenty (120) days after the close of the fiscal year adopted by the Company. Such report shall be sent at least fifteen (15) days before the annual meeting of shareholders to be held during the next fiscal year and in the manner specified in Section 2.5 of these Articles for giving notice to shareholders of the Company,

The annual report shall contain (i) a balance sheet as of the end of the fiscal year, (ii) an income statement, (iii) a statement of cash flow for the fiscal year, and (iv) any report of independent accountants or, if there is no such report, the certificate of an authorized officer of the Company that the statements were prepared without audit from the books and records of the Company.

The foregoing requirement of an annual report shall be waived so long as the shares of the Company are held by fewer than one hundred (100) holders of record.

7.6 FINANCIAL STATEMENTS

If no annual report for the fiscal year has been sent to shareholders, then the Company shall, upon the written request of any shareholder made more than one (120) days after the close of such fiscal year, deliver or mail to the person making the request, within thirty (30)

days thereafter, a copy of a balance sheet as of the end of such fiscal year and an income statement and statement of changes in financial position for such fiscal year.

If a shareholder or shareholders holding at least five percent (5%) of the outstanding shares of any class of stock of the Company makes a written request to the Company for an income statement of the Company for the three-month, six-month or nine-month period of the then current fiscal year ended more than thirty (30) days before the date of the request, and for a balance sheet of the Company as of the end of that period, then the Chief Financial Officer shall cause that statement to be prepared, if not already prepared, and shall deliver personally or- mail that statement or statements to the person making the request within thirty (30) days after the receipt of the request. If the Company has not sent to the shareholders its annual report for the last fiscal year, the statements referred to in the first paragraph of this Section 7.6 shall likewise be delivered or mailed to the shareholder or shareholders within thirty (30) days after the request.

The quarterly income statements and balance sheets referred to in this section shall be accompanied by the report, if any, of any independent accountants engaged by the company or by the certificate of an authorized officer of the Company that the financial statements were prepared without audit from the books and records of the Company.

7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS

The Chairman of the Board, the President, any Vice President, the Chief Financial Officer, the Secretary or any Assistant Secretary of this Company, or any other person authorized by resolution of directors is authorized to vote, represent and exercise on behalf of the Company all rights incident to any and all shares of any other corporation standing in the name of the Company. The authority herein granted may be exercised either by such person directly or by any other person authorized to do go by proxy or power of attorney duly executed by such person having the authority.

ARTICLE VIII

GENERAL MATTERS

8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING

For purposes of determining the shareholders entitled to receive payment of any dividend or other distribution or assignment of any rights or the shareholders entitled to exercise and rights in respect of any other lawful action (other than action by shareholders by written consent without a meeting), the Board of Directors may fix, in advance a record date which shall not be more than sixty

(60) days before any such action. In that case only shareholders of record at the close of business on the date so fixed shall be entitled to receive the dividend or allotment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any shares an the books of the Company after the record date so fixed, except as otherwise provided in the Act.

If the Board of Directors does not so fix a record date, then the record date for determining shareholders for any such purpose shall be at the close of business an the date on which the board adopts the applicable resolution or the sixtieth (60th) day before the date of that action, whichever is later.

8.2 CHEQUES, DRAFTS; EVIDENCES OF INDEBTEDNESS

From time to time the Board of Directors shall determine by resolution of directors which person or persons may sign or endorse all cheques, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the Company, and only the persons so authorized shall sign or endorse those instruments.

8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED

The Board of Directors, except as otherwise provided in these Articles, may by resolution of directors authorize any officer or agent to enter into any contract or execute any instrument in the name of and on behalf of the Company; such authority may be general or confined to specific instances. Unless so authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the Company by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount.

8.4 CERTIFICATES FOR SHARES

A certificate for shares of the company shall be issued to each shareholder when any of such shares are issued. All certificates shall be signed in the name of the Company by the Chairman of the Board, the Vice Chairman of the Board, the President or a Vice President and by the Chief Financial Officer, an Assistant Treasurer, the Secretary or an Assistant Secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be facsimile.

In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed on a certificate ceases to be an officer, transfer agent or registrar before that certificate is issued, it may be

issued by the Company with the same effect as if that person were an officer, transfer agent or registrar at the date of issue.

8.5 LOST CERTIFICATES

Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the Company and canceled at the same time. The Board of Directors may, in case any share certificate or certificate for any other security is lost, stolen or destroyed, authorize the issuance of replacement certificates on such terms and conditions as the Board may require; the Board may require indemnification of the Company secured a bond or other adequate security sufficient to protect the Company against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft or destruction of the certificate or the issuance of the replacement certificate.

8.6 PRELIMINARY

In these Articles, if not inconsistent with the subject or context, the words and expressions standing in the first column of the following table shall bear the meanings set opposite them respectively in the second column thereof.

Words                          Meaning
-----                          -------
capital                        The sum of the aggregate par value of all
                               outstanding shares with par value of the
                               Company and shares with par value held by
                               the Company as treasury shares plus

                               (a)  the aggregate of the amounts designated
                                    as capital of all outstanding shares
                                    without par value of the Company and
                                    shares without par value held by the
                                    Company as treasury shares, and

                               (b)  the amounts as are from time to time
                                    transferred from surplus to capital by
                                    a resolution of directors.

member                         A person who holds shares in the Company.

person                         An individual, a corporation, a trust, the
                               estate of a deceased individual, a
                               partnership or an unincorporated association
                               of persons.

                                 22

resolution of                  (a)  A resolution approved at a duly
directors                           convened and constituted meeting of
                                    directors of the or of a committee of
                                    directors of the Company by the
                                    affirmative vote of a simple majority
                                    of the directors present at the meeting
                                    who voted and did not abstain; or

                               (b)  a resolution consented to in writing by
                                    all directors or of all members of the
                                    committee, as the case may be;

                               except that where a director is given more
                               than one vote, he shall be counted by the
                               number of votes he casts for the purpose of
                               establishing a majority.

resolution of                  (a)  A resolution approved at a duly
shareholders                        convened and constituted meeting of the
                                    shareholders of the Company by the
                                    affirmative vote of

                                    (i)  a simple majority of the votes of
                                         the shares entitled to vote
                                         thereon which were present at the
                                         meeting and were voted and not
                                         abstained, or

                                    (ii) a simple majority of the votes of
                                         each class or series of shares
                                         which were present at the meeting
                                         and entitled to vote thereon as a
                                         class or series and were voted and
                                         not abstained and of a simple
                                         majority of the votes of the
                                         remaining shares entitled to vote
                                         thereon which were present at the
                                         meeting and were voted and not
                                         abstained; or

                               (b)  a resolution consented to in writing by

                                    (i)  an absolute majority of the votes
                                         of shares entitled to vote
                                         thereon, or

                                    (ii) an absolute majority of the votes
                                         of each class or series of shares
                                         entitled to vote thereon as a
                                         class or series and of an absolute
                                         majority of

                                 23

                                         the votes of the remaining shares
                                         entitled to vote thereon;

reverse stock                  Where the number of shares is reduced to a
split                          number of shares thereby increasing the
                               value of each share which involves calling
                               in all shares that are issued.

securities                     Shares and debt obligations of every kind,
                               and options, warrants and rights to acquire
                               shares, or debt obligations.

shareholder                    A member.

stock split                    where one share is split into a larger
                               number of shares by reducing the value of
                               each individual share.

surplus                        The excess, if any, at the time of the
                               determination of the total assets of the
                               Company over the aggregate of its total
                               liabilities, as shown in its books of
                               account, plus the Company's capital.

the Act                        The International Business Companies Act
                               (Cap. 291) including any modification,
                               extension, re-enactment or renewal thereof
                               and any regulations made thereunder.

the Memorandum                 The Memorandum of Association of the company
                               as originally framed or as from time to time
                               amended.

the Seal                       Any Seal which has been duly adopted as the
                               Seal of the Company.

these Articles                 These Articles of Association as originally
                               framed or as from time to time amended.

treasury shares                Shares in the Company that were previously
                               issued but were repurchased, redeemed or
                               otherwise acquired by the Company and not
                               canceled.

"Written" or any term of like import includes words typewritten, printed, painted engraved, lithographed, photographed or represented or reproduced by any mode of reproducing words in a visible form including telex, facsimile, telegram, cable or other from of writing produced by electronic communication.

Save as aforesaid any words or expressions defined in the Act shall bear the same meaning in these Articles.

Whenever the singular or plural number, or the masculine, feminine or neuter gender is used in these Articles, it shall equally, where the context admits, include the others.

A reference in these Articles to voting in relation to shares shall be construed as a reference to voting by members holding the shares except that it is the votes allocated to the shares that shall be counted and not the number of members who actually voted and a reference to shares being present at a meeting shall be given a corresponding construction.

A reference to money in these Articles is, unless otherwise stated, a reference to the currency in which shares in the Company, shall be issued according to the provisions of the Memorandum.

ARTICLE IX

9.1 AMENDMENT BY SHAREHOLDERS

New Articles may be adopted or these Articles may be amended or repealed by the vote or written consent of holders of a majority of the outstanding shares entitled to vote.

9.2 AMENDMENT BY DIRECTORS

Subject to the rights of the shareholders as provided in Section 9.1 of these Articles, new Articles may be adopted or these Articles may be amended or repealed by the resolution of directors.

We, HWR SERVICES LIMITED, of Craigmuir Chambers, Road Town, Tortola, British Virgin Islands for the purpose of incorporating an International Business Company under the laws of the British Virgin Islands hereby subscribe our name to these Articles of Association the 24th day of December, 1993 in the presence of:

Witness                             Subscriber



(Sgd.) Lavida Cottoy                (Sgd.) Richard A. Peters
........................            ...........................
Craigmuir Chambers                  Authorized Signatory
Road Town, Tortola                  HWR Services
Company Administrator

EXHIBIT 4.2

THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), APPLICABLE STATE SECURITIES LAWS, OR APPLICABLE LAWS OF ANY FOREIGN JURISDICTION. THIS WARRANT AND SUCH UNDERLYING SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAY NOT BE OFFERED, SOLD, PLEDGED, HYPOTHECATED, RENOUNCED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS AND IN THE ABSENCE OF COMPLIANCE WITH APPLICABLE LAWS OF ANY FOREIGN JURISDICTION, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IN NOT REQUIRED AND SUCH FOREIGN JURISDICTION LAWS HAVE BEEN SATISFIED.

SALIX HOLDINGS, LTD.
COMMON STOCK PURCHASE WARRANT

1. Number and Price of Shares Subject to Warrant. Subject to the terms and conditions herein set forth, __________(the "HOLDER"), is entitled to purchase from SALIX HOLDINGS, LTD, a British Virgin Islands corporation (the "COMPANY"), at any time on or before the earliest to occur of the following: (i) January 17, 2000, or (ii) the closing of the Company's sale of all or substantially all of its assets or the acquisition of the Company by another entity by means of merger or other transaction as a result of which shareholders of the Company immediately prior to such acquisition possess a minority of the voting power of the acquiring entity immediately following such acquisition (the "ACQUISITION"), _________ shares (which number of shares is subject to adjustment as described below) of fully paid and nonassessable Common Stock of the Company (the "SHARES") upon surrender hereof at the principal office of the Company, and upon payment of the purchase price at said office in cash, by check, by wire transfer or by cancellation of indebtedness. The Company shall give notice to the Holder of an Acquisition at least thirty (30) days prior to the closing of such Acquisition. Subject to adjustment as hereinafter provided, the exercise price for one share of Common Stock (or such securities as may be substituted for one share of Common Stock pursuant to the provisions hereinafter set forth) shall be $3.00. The exercise price for one share of Common Stock (or such securities as may be substituted for one share of Common Stock pursuant to the provisions hereinafter set forth) payable from time to time upon the exercise of this Warrant (whether such price be the price specified above or an adjusted price determined as hereinafter provided) is referred to herein as the "WARRANT PRICE."

2. Adjustment of Warrant Price and Number of Shares. The number and kind of securities issuable upon the exercise of this Warrant shall be subject to adjustment from time to time and the

Company agrees to provide notice upon the happening of certain events as follows:

(a) Adjustment for Dividends in Stock. In case at any time or from time to time on or after the date hereof the holders of the Common Stock of the Company (or any shares of stock or other securities at the time receivable upon the exercise of this Warrant) shall have received, or, on or after the record date fixed for the determination of eligible stockholders, shall have become entitled to receive, without payment therefor, other or additional securities or other property of the Company by way of dividend or distribution, then and in each case, the holder of this Warrant shall, upon the exercise hereof, be entitled to receive, in addition to the number of shares of Common Stock receivable thereupon, and without payment of any additional consideration therefor, the amount of such other or additional securities or other property of the Company which such holder would hold on the date of such exercise had it been the holder of record of such Common Stock on the date hereof and had thereafter, during the period from the date hereof to and including the date of such exercise, retained such shares and/or all other additional securities or other property receivable by it as aforesaid during such period, giving effect to all adjustments called for during such period by this paragraph (a) and paragraphs (b) and (c) of this paragraph 2.

(b) Adjustment for Reclassification or Reorganization. In case of any reclassification or change of the outstanding securities of the Company or of any reorganization of the Company (or any other corporation the stock or securities of which are at the time receivable upon the exercise of this Warrant) on or after the date hereof, then and in each such case the Company shall give the holder of this Warrant at least thirty (30) days notice of the proposed effective date of such transaction, and the holder of this Warrant, upon the exercise hereof at any time after the consummation of such reclassification, change or reorganization, shall be entitled to receive, in lieu of the stock or other securities and property receivable upon the exercise hereof prior to such consummation, the stock or other securities or property to which such holder would have been entitled upon such consummation if such holder had exercised this Warrant immediately prior thereto, all subject to further adjustment as provided in paragraphs (a) and (c).

(c) Stock Splits and Reverse Stock Splits. If at any time on or after the date hereof the Company shall subdivide its outstanding shares of Common Stock into a greater number of shares, the Warrant Price in effect immediately prior to such subdivision shall thereby be proportionately reduced and the number of shares receivable upon exercise of this Warrant shall thereby be proportionately increased; and, conversely, if at any time on or after the date hereof the outstanding number Of shares of Common Stock shall be combined into a smaller number of shares, the Warrant Price in effect immediately prior to such

combination shall thereby be proportionately increased and the number of shares receivable upon exercise of this Warrant shall thereby be proportionately decreased.

3. No Fractional Shares. No fractional shares of Common Stock will be issued in connection with any subscription hereunder. In lieu of any fractional shares which would otherwise be issuable, the Company shall pay cash equal to the product of such fraction multiplied by the fair market value of one share of Common Stock on the date of exercise, as determined in good faith by the Company's Board of Directors.

4. No Stockholder Rights. This Warrant as such shall not entitle its holder to any of the rights of a stockholder of the company until the holder has exercised this Warrant in accordance with Section 6 or Section 7 hereof.

5. Reservation of Stock. The Company covenants that during the period this Warrant is exercisable, the Company will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of Common Stock upon the exercise of this Warrant, The Company agrees that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Common Stock upon the exercise of this Warrant.

6. Exercise of Warrant.

(a) This Warrant may be exercised by Holder by the surrender of this Warrant at the principal office of the Company, accompanied by payment in full of the purchase price of the Shares purchased thereby, as described above. This Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and the person entitled to receive the Shares or other securities issuable upon such exercise shall be treated for all purposes as the holder of such shares of record as of the close of business on such date. As promptly as practicable, the Company shall issue and deliver to the person or persons entitled to receive the same a certificate or certificates for the number of full shares of Common Stock issuable upon such exercise, together with cash in lieu of any fraction of a share as provided above.

7. Right to Convert Warrant for Common Stock.

restrictions set forth in subsection (c) hereof. Upon exercise of the Conversion Rightwith respect to a particular number of shares subject to this Warrant (the "CONVERTED WARRANT SHARES"), the Company shall deliver to the Holder (without payment by the Holder of any cash or other consideration) that number of shares of Common stock equal to the quotient obtained by dividing (x) the value of this Warrant (or the specified portion hereof) on the Conversion Date (as defined in subsection (b) hereof ), which value shall be determined by subtracting (A) the aggregate Warrant Price of the Converted Warrant Shares immediately prior to the exercise of the Conversion Right from (B) the aggregate fair market value of the Converted Warrant Shares issuable upon exercise of this Warrant (or the specified portion hereof) on the Conversion Date (as herein defined) by (y) the fair market value of one share of Common Stock on the Conversion Date (as herein defined). No fractional shares shall be issuable upon exercise of the Conversion Right, and if the number of shares to be issued determined in accordance with the foregoing formula is other than a whole number, the Company shall pay to the Holder an amount in cash equal to the fair market value of the resulting fractional share on the Conversion Date (as herein defined).

(b) Method of Exercise. The Conversion Right may be exercised by the Holder by the surrender of this Warrant prior to its expiration and after the Company shall have given the Holder notice pursuant to Section 1 of an Acquisition, at the principal office of the Company together with a written statement specifying that the Holder thereby intends to exercise the Conversion Right immediately prior to the expiration of this Warrant and indicating the number of shares subject to this Warrant which are being surrendered (referred to in subsection (a) hereof as the Converted Warrant Shares) in exercise of the Conversion Right. Such conversion shall be effective immediately prior to the expiration of this Warrant (the "CONVERSION DATE"). Certificates for the shares of Common Stock issuable upon exercise of the Conversion Right (or any other securities deliverable in lieu thereof under Section 2 (b)) shall be issued as of the Conversion Date and shall be delivered to the Holder immediately following the Conversion Date.

(c) Restrictions on Conversion Right. In the event that the Conversion Right contained herein would, at any time this Warrant remains outstanding, be deemed by the Company's independent certified public accountants to trigger a charge to the Company's earnings for financial reporting purposes, then the Conversion Right shall automatically terminate upon the Company's written notice to the Holder of such adverse accounting treatment.

(d) Determination of Fair Market Value. For purposes of this Section 7, fair market value of a share of Common Stock as of a particular date (the "DETERMINATION DATE") shall mean the effective per share consideration to be received in an Acquisition by holders of the Common Stock, which price shall be

as specified in the agreement entered into with respect to such Acquisition and determined assuming receipt of the aggregate exercise price of all outstanding warrants to purchase Common Stock (the "OUTSTANDING WARRANTS"), or if no such price is set forth in the agreement concerning the Acquisition, then as determined in good faith by the Company's Board of Directors upon a review of relevant factors, including the aggregate exercise price of all Outstanding Warrants.

8. Certificate of Adjustment. Whenever the Warrant Price or number or type of securities issuable upon exercise of this Warrant is adjusted, as herein provided, the Company shall promptly deliver to the record holder of this Warrant a certificate of an officer of the Company setting forth the nature of such adjustment and a brief statement of the facts requiring such adjustment.

9. Notice of Proposed Transfers. Prior to any proposed transfer of this Warrant or the shares of Common Stock received on the exercise of this Warrant (the "SECURITIES"), unless there is in effect a registration statement under the Securities Act of 1933, as amended (the "SECURITIES ACT"), covering the proposed transfer, the Holder thereof shall give written notice to the Company of such Holder's intention to effect such transfer. Each such notice shall describe the manner and circumstances of the proposed transfer in sufficient detail, and shall, if the Company so requests, be accompanied (except in transactions in compliance with Rule 144) by either (i) an unqualified written opinion of legal counsel who shall be reasonably satisfactory to the Company addressed to the Company and reasonably satisfactory in form and substance to the Company's counsel, to the effect that the proposed transfer of the Securities may be effected without registration under the Securities Act, or (ii) a "no action" letter from the Securities Exchange Commission (the "COMMISSION") to the effect that the transfer of such Securities without registration will not result in a recommendation by the staff of the Commission that action be taken with respect thereto, whereupon the Holder of the Securities shall be entitled to transfer the Securities in accordance with the terms of the notice delivered by the Holder to the Company; provided, however, no such registration statement or opinion of counsel shall be necessary for a transfer by a Holder to any affiliate of such Holder, or a transfer by a Holder which is a partnership to a partner of such partnership or a retired partner of such partnership who retires after the date hereof, or to the estate of any such partner or retired partner or the transfer by gift, will or intestate succession of any partner to his spouse or lineal descendants or ancestors, if the transferee agrees in writing to be subject to the terms hereof to the same extent as if such transferee were the original Holder hereunder. Each certificate evidencing the Securities transferred as above provided shall bear the appropriate restrictive legend set forth above, except that such certificate shall not bear such restrictive legend if in the opinion of counsel for the Company

such legend is not required in order to establish compliance with any provisions of the Securities Act.

10. Miscellaneous. This Warrant is issued under, and is subject to the terms of, that certain Note and Warrant Purchase Agreement dated January 17, 1995 between the Company and Purchasers described therein, as amended (the "AGREEMENT"). This Warrant shall be governed by the laws of the State of California. The headings in this Warrant are for purposes of convenience of reference only, and shall not be deemed to constitute a part hereof. All notices and other communications from the Company to the holder of this Warrant shall be delivered personally or mailed by first class mail, postage prepaid, to the address furnished to the Company in writing by the last holder of this warrant who shall have furnished an address to the Company in writing, and if mailed shall be deemed given three days after deposit in the U.S. Mail.

11. Taxes. The Company shall pay all taxes and other governmental charges that may be imposed in respect of the issuance or delivery of the Shares or any portion thereof.

12. Amendment. Any term of this Warrant may be amended with the written consent of the Company and the holders of warrants representing not less than seventy-five percent (75%) of the shares of Common Stock issuable upon exercise of any and all outstanding warrants issued pursuant to the Agreement (the "BRIDGE WARRANTS"), even without the consent of the holder hereof. Any amendment effected in accordance with this Section 12 shall be binding upon each holder of any Bridge Warrant, each future holder of all such Bridge Warrants, and the Company; provided, however, that no special consideration or inducement may be given to any such holder in connection with such consent that is not given ratably to all such holders, and that such amendment must apply to all such holders ratably in accordance with the number of shares of Common Stock issuable upon exercise of their outstanding Bridge Warrants. The Company shall promptly give notice to all holders of outstanding Bridge Warrants of any amendment effected in accordance with this Section 12.

ISSUED this ______ day of ___________, 1995.

SALIX HOLDINGS, LTD.,
a British Virgin Islands corporation

By:_________________________________
Randy W. Hamilton, President

EXHIBIT 4.3
EXHIBIT C
FORM OF WARRANT

THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). APPLICABLE STATE SECURITIES LAWS, OR APPLICABLE LAWS OF ANY FOREIGN JURISDICTION. THIS WARRANT AND SUCH UNDERLYING SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAY NOT BE OFFERED, SOLD PLEDGED, HYPOTHECATED, RENOUNCED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS AND IN THE ABSENCE OF COMPLIANCE WITH APPLICABLE LAWS OF ANY FOREIGN JURISDICTION, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED AND SUCH FOREIGN JURISDICTION LAWS HAVE BEEN SATISFIED.

SALIX HOLDINGS, LTD.
COMMON STOCK PURCHASE WARRANT

NO. W- Shares

1. Number and Price of Shares Subject to Warrant. Subject to the terms and conditions herein set forth, ___________ or permitted assigns (the "HOLDER") is entitled to purchase from SALIX HOLDINGS, LTD., a British Virgin Islands corporation (the "COMPANY"), at any time on or before the earliest to occur of the following: (i) July 25, 2003, or (ii) the closing of the Company's sale of all or substantially all of its assets or the acquisition of the Company by another entity by means of merger or other transaction as a result of which shareholders of the Company immediately prior to such acquisition possess a minority of the voting power of the acquiring entity immediately following such acquisition (the "ACQUISITION"), ________________ (_____) shares(which number of shares is subject to adjustment as described below) of fully paid and nonassessable Common Stock of the Company (the "SHARES") upon surrender hereof at the principal office of the Company, and upon payment of the aggregate Warrant Price (as hereafter defined) of the Shares so purchased, at said office in cash, by check, by wire transfer or by cancellation of indebtedness. The Company shall give notice to the Holder of an Acquisition at least thirty (30) days prior to the closing of such Acquisition. Subject to adjustment as hereinafter provided, the exercise price for one share of Common Stock (or such securities as may be substituted for one share of Common Stock pursuant to the provisions hereinafter set forth) shall be $3.00. The exercise price for one share of Common Stock (or such securities as may be substituted for one share of Common Stock pursuant to the provisions hereinafter set forth) payable from time to time upon the exercise of this Warrant (whether such price be the price specified above or an adjusted price determined as hereinafter provided) is referred to herein as the "WARRANT PRICE."

2. Adjustment of Warrant Price and Number of Shares. The Warrant Price and the number and kind of securities issuable upon the exercise of this Warrant shall be subject to adjustment from time to time, and the Company agrees to provide notice upon the happening of certain events, as follows:

other or additional securities or other property of the Company which such holder would hold on the date of such exercise had it been the holder of record of such Common Stock on the date hereof and had thereafter, during the period from the date hereof to and including the date of such exercise, retained such shares and/or all other additional securities or other property receivable by it as aforesaid during such period, giving effect to all adjustments called for during such period by this paragraph (a) and paragraphs (b) and (c) of this paragraph 2.

(b) Adjustment for Reclassification or Reorganization. In case of any reclassification or similar change of the outstanding securities of the Company or of any reorganization of the Company (or any other corporation the stock or securities of which are at the time receivable upon the exercise of this Warrant) on or after the date hereof (excluding an Acquisition), then and in each such case the Company shall give the Holder of this Warrant at least thirty
(30) days notice of the proposed effective date of such transaction, and the Holder of this Warrant, upon the exercise hereof at any time after the consummation of such reclassification, change or reorganization, shall be entitled to receive in lieu of the stock or other securities and property receivable upon the exercise hereof prior to such consummation, the stock or other securities or property to which such holder would have been entitled upon such consummation if such holder had exercised this Warrant immediately prior thereto, all subject to further adjustment as provided in paragraphs (a) and (c).

(c) Stock Splits and Reverse Stock Splits. If at any time on or after the date hereof the Company shall subdivide its outstanding shares of Common Stock into a greater number of shares, the Warrant Price in effect immediately prior to such subdivision shall thereby be proportionately reduced and the number of shares receivable upon exercise of this Warrant shall thereby be proportionately increased; and, conversely, if at any time on or after the date hereof the outstanding number of shares of Common Stock shall be combined into a smaller number of shares, the Warrant Price in effect immediately prior to such combination shall thereby be proportionately increased and the number of shares receivable upon exercise of this Warrant shall thereby be proportionately decreased.

(d) Price-Based Anti-dilution. If, at any time within the two (2) year period commencing on the date thereof the Company shall issue or sell any shares of its capital stock or debt securities convertible into shares of its Capital stock (excluding any shares or options issued to employees, officers, agents or consultants) in a financing resulting in gross proceeds to the Company of at least $250,000 and at a purchase price per share of capital stock or conversion price in the case of convertible debt (in either case calculated as set forth below, hereafter referred to as the "FINANCING PRICE") less than the Warrant Price in effect immediately prior to such financing (a "DILUTIVE FINANCING"), the Warrant Price shall be adjusted to a number equal to the lesser of (1) $3.00 or (2) one hundred ten percent (110%) of the Financing Price in such Dilutive Financing, and the number of shares issuable upon exercise of this Warrant shall thereby be increased to a number equal to (i) three (3) times the number of Shares originally set forth in Section 1 above, divided by (ii) the Financing Price for the Dilutive Financing giving rise to such calculation. The Financing Price in connection with a Dilutive Financing shall equal:

(1) the total amount, if any, received by the Company in consideration of the capital stock and/or convertible debt issued in such Dilutive Financing, plus the consideration payable to the Company upon the exercise of any options, warrants or other securities convertible or exercisable into shares of the Company's capital stock and which were issued in connection with the Dilutive Financing (excluding options, warrants or other securities issued to financial intermediaries for services rendered in connection with such Dilutive Financing), divided by

(2) the number of shares issued in connection with such Dilutive Financing, plus the number of shares issuable upon the exercise of any options, warrants or other securities convertible or exercisable into shares of the Company's capital stock which were issued in connection with the Dilutive Financing (excluding options, warrants or other securities issued to financial intermediaries for services rendered in connection with such Dilutive Financing).

3. Partial Exercise, Fractional Shares.

(a) If this Warrant is exercised in part, this Warrant must be exercised for a whole number of shares of Common Stock, and the Holder shall be entitled to receive a new Warrant covering the Shares which have not be exercised.

(b) No fractional shares of Common Stock will be issued in connection with any exercise hereunder. In lieu of any fractional shares which would otherwise be issuable, the Company shall pay cash equal to the product of such fraction multiplied by the fair market value of one share of Common Stock on the date of exercise, as determined in good faith by the Company's Board of Directors.

4. No Stockholder Rights. This Warrant as such shall not entitle its holder to any of the rights of a stockholder of the Company until the holder has exercised this Warrant in accordance with Section 6 or Section 7 hereof.

5. Reservation of Stock. The Company covenants that during the period this Warrant is exercisable, the Company will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of Common Stock upon the exercise of this Warrant. The Company agrees that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Common Stock upon the exercise of this Warrant.

6. Exercise of Warrant. This Warrant may be exercised by Holder by the surrender of this Warrant at the principal office of the Company, accompanied by payment in full of the Warrant Price of the Shares purchased thereby, as described above. This Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and the person entitled to receive the Shares or other securities issuable upon such exercise shall be treated for all purposes as the holder of such shares of record as of the close of business on such date. As promptly as practicable, the Company shall issue and deliver to the person or persons entitled to receive the same a certificate or certificates for the number of full shares of Common Stock or other securities issuable upon such exercise, together with cash in lieu of any fraction of a share as provided above.

7. Right to Convert Warrant for Common Stock.

(a) Right to Convert. In addition to and without limiting the rights of the Holder under the terms of this Warrant, the Holder shall have the right to convert this Warrant or any portion hereof (the "CONVERSION RIGHT") into shares of Common Stock as provided in this Section 7 prior to its expiration and after the earlier to occur of (i) the Company's delivery to the Holder of the notice of an Acquisition pursuant to Section 1 or (ii) the closing of an initial public offering of shares of the Company's capital stock pursuant a registration statement filed pursuant to the Securities Act of 1933, as amended (the "SECURITIES ACT"), or similar registration and public offering outside of the United States (collectively, a "PUBLIC OFFERING"), subject to the restrictions set forth in subsection (c) hereof. Upon exercise of the Conversion Right with respect to a particular number of shares subject to this Warrant (the "CONVERTED WARRANT SHARES"), the Company shall deliver to the Holder (without payment by the Holder of any cash or other consideration) that number of shares of Common stock equal to the quotient obtained by dividing (x) the value of this Warrant (or the specified portion hereof) on the Conversion Date (as defined in subsection (b) hereof ), which value shall be determined by subtracting (A) the aggregate Warrant Price of the Converted Warrant Shares immediately prior to the exercise of the Conversion Right from (B) the aggregate fair market value of the Converted Warrant Shares issuable upon exercise of this Warrant (or the specified portion hereof) on the Conversion Date (as herein defined) by (y) the fair market value of one share of Common Stock on the Conversion Date (as herein defined). No fractional shares shall be issuable upon exercise of the Conversion Right, and if the number of shares to be issued determined in accordance with the foregoing formula is other than a whole number, the Company shall pay to the Holder an amount in cash equal to the fair market value of the resulting fractional share on the Conversion Date (as herein defined).

(b) Method of Exercise. The Conversion Right may be exercised by the Holder by the surrender of this Warrant, within the time frames set forth above, at the principal office of the Company, together with a written statement specifying that the Holder thereby intends to exercise the Conversion Right and indicating the number of shares subject to this Warrant which are being surrendered (referred to in subsection (a) hereof as the Converted warrant Shares) in exercise of the Conversion Right. Such conversion shall be effective immediately upon delivery of this Warrant and such written statement (the "CONVERSION DATE"). Certificates for the shares of Common Stock issuable upon exercise of the Conversion Right (or any other securities deliverable in lieu thereof under Section 2(b)) shall be issued as of the Conversion Date and shall be delivered to the Holder immediately following the Conversion Date.

(d) Determination of Fair Market Value. For purposes of this Section 7, fair market value of a share of Common Stock as of a particular date (the "DETERMINATION DATE") shall mean:

(1) the average of the last sale prices of the Company's Common Stock for the five trading days prior to the Determination Date, or in case no such reported sales take place on any such day, the average of the last reported bid and asked prices of the Common Stock on such day, in either case on the principal national securities exchange on which the Company's Common Stock is admitted to trading or listed, or if not listed or admitted to trading on any such exchange, the representative closing bid price of the Common Stock as reported by NASDAQ or similar organization), or, if the Common Stock is not reported on NASDAQ (or similar organization), the high per share bid price for the Common Stock in the over-the-counter market as reported by the National Quotation Bureau or similar organization, or if not so available, then as determined in good faith by the Company's Board of Directors upon a view of relevant factors, or:

(2) in the case of the termination of this Warrant due to an Acquisition, the effective per share consideration to be received in such Acquisition by holders of the Common Stock, which price shall be as specified in the agreement entered into with respect to such Acquisition and determined assuming receipt of the aggregate exercise price of all outstanding warrants to purchase Common Stock (the "OUTSTANDING WARRANTS"), or if no such price is set forth in the agreement concerning the Acquisition, then as determined in good faith by the Company's Board of Directors upon a review of relevant factors, including the aggregate exercise price of all Outstanding Warrants.

9. Restriction on Transfers. Prior to any proposed transfer of this Warrant or the shares of Common Stock or other securities received on the exercise of this Warrant (collectively, the "SECURITIES"), unless there is in effect a registration statement under the Securities Act covering the proposed transfer, the Holder thereof shall give written notice to the Company of such Holder's intention to effect such transfer. Each such notice shall describe the manner and circumstances of the proposed transfer in sufficient detail, and shall, if the Company so requests, be accompanied (except in transactions in compliance with Rule 144) by either (i) an unqualified written opinion of legal counsel who shall be reasonably satisfactory to the Company, addressed to the Company and reasonably satisfactory in form and substance to the Company's counsel, to the effect that the proposed transfer of the Securities may be effected without registration under the Securities Act, or (ii) a "no action" letter from the Securities Exchange Commission (the "COMMISSION") to the effect that the transfer of such Securities without registration will not result in a recommendation

by the staff of the Commission that action be taken with respect thereto, whereupon the Holder of the Securities shall be entitled to transfer the Securities in accordance with the terms of the notice delivered by the Holder to the Company, provided, however, no such registration statement or opinion of counsel shall be necessary for a transfer by a Holder to any affiliate of such Holder, or a transfer by a Holder which is a partnership to a partner of such partnership or a retire partner of such partnership who retires after the date hereof, or to the estate of any such partner or retired partner or the transfer by gift, will or intestate succession of any Holder to his or her spouse or lineal descendants or ancestors, if the transferee agrees in writing to be subject to the terms hereof to the same extent as if such transferee were the original Holder hereunder. Notwithstanding the foregoing, this Warrant shall be transferred only one time, if the transferee agrees in writing to be subject to the terms hereof to the same extent as if such transferee were the original Holder hereunder; provided that, subject to the provisions of the prior sentence, this Warrant will also be transferable by will or the laws of descent and distribution. Each certificate evidencing the Securities transferred as above provided shall bear the appropriate restrictive legend set forth above, except that such certificate shall not bear such restrictive legend if in the opinion of counsel for the Company such legend is not required in order to establish compliance with any provisions of the Securities Act.

10 Miscellaneous. This Warrant is issued under, and is subject to the terms of, that certain Note and Warrant Purchase Agreement dated July 25, 1995 between the Company and Purchasers described therein, as amended (the "AGREEMENT"). This Warrant shall be governed by the laws of the State of California. The headings in this Warrant are for purposes of convenience of reference only, and shall not be deemed to constitute a part hereof. All notices and other communications from the Company to the Holder of this Warrant shall be delivered personally or mailed by first class mail, postage prepaid, to the address furnished to the Company in writing by the last Holder of this Warrant who shall have furnished an address to the Company in writing, and if mailed shall be deemed given three days after deposit in the U.S. Mail.

11 Taxes. The Company shall pay all taxes and other governmental charges that may be imposed in respect of the issuance or delivery of the Shares or any portion thereof

12 Amendment. Any term of this Warrant may be amended with the written consent of the Company and the holders of warrants representing not less than seventy-five percent (75%) of the shares of Common Stock issuable upon exercise of any and all outstanding warrants issued pursuant to the Agreement (the "SENIOR DEBT WARRANTS"), even without the consent of the Holder hereof. Any amendment effected in accordance with this Section 12 shall be binding upon each holder of any Senior Debt Warrant, each future holder of all such Senior Debt Warrants, and the Company provided, however, that no special consideration or inducement may be given to any such holder in connection with such consent that is not given ratably to all such holders, and that such amendment must apply to all such holders ratably in accordance with the number of shares of Common Stock issuable upon exercise of their outsanding Senior Debt Warrants. The Company shall promptly give notice to all holders of outstanding Senior Debt Warrants of any amendment effected in accordance with this Section 12.

ISSUED this ________ day of ________ 1995.

SALIX HOLDINGS, LTD.,
a British Virgin Islands corporation

By:______________________________________

Randy W. Hamilton, President

EXHIBIT 10.1

SALIX HOLDINGS, LTD.

INDEMNIFICATION AGREEMENT

This Indemnification Agreement (the "AGREEMENT") is made as of __________ by and between Salix Holdings, Ltd. (the "COMPANY"), a corporation incorporated in the Territory of the British Virgin Islands ("BVI"), and ________________________ ("INDEMNITEE").

WHEREAS, the Company and Indemnitee recognize the increasing difficulty in obtaining directors' and officers' liability insurance, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance;

WHEREAS, the Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting officers and directors to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited.

WHEREAS, Indemnitee does not regard the current protection available as adequate under the present circumstances, and Indemnitee and other officers and directors of the Company may not be willing to continue to serve as officers and directors without additional protection; and

WHEREAS, the Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, to serve as officers and directors of the Company and to indemnify its officers and directors so as to provide them with the maximum protection permitted by law.

NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:

1. INDEMNIFICATION.

(a) Third Party Proceedings. The Company shall indemnify Indemnitee if Indemnitee is or was a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while an officer or director or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) actually and reasonably incurred by Indemnitee in connection with such action, suit or proceeding if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe Indemnitee's conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a

presumption that Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, or, with respect to any criminal action or proceeding, that Indemnitee had reasonable cause to believe that Indemnitee's conduct was unlawful.

(b) Proceedings By or in the Right of the Company. The Company shall indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made a party to any threatened, pending or completed action or proceeding by or in the right of the Company or any subsidiary of the Company to procure a judgment in its favor by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while an officer or director or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) and, to the fullest extent permitted by law, amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld), in each case to the extent actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such action or suit if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company and its shareholders, except that no indemnification shall be made in respect of any claim, issue or matter as to which Indemnitee shall have been finally adjudicated by court order or judgment to be liable to the Company in the performance of Indemnitee's duty to the Company and its shareholders unless and only to the extent that the court in which such action or proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper.

(c) Mandatory Payment of Expenses. To the extent that Indemnitee has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 1 (a) or Section 1 (b) or the defense of any claim, issue or matter therein, Indemnitee shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by Indemnitee in connection therewith.

2. AGREEMENT TO SERVE. In consideration of the protection afforded by this Agreement, if Indemnitee is a director of the Company he or she agrees to serve at least for the balance of the current term as a director and not to resign voluntarily during such period without the written consent of a majority of the Board of Directors. If Indemnitee is an officer of the Company not serving under an employment contract, he or she agrees to serve in such capacity at least for the balance of the current fiscal year of the Company and not to resign voluntarily during such period without the written consent of a majority of the Board of Directors. Following the applicable period set forth above, Indemnitee agrees to continue to serve in such capacity at the will of the Company (or under separate agreement, if such agreement exists) so long as he is duly appointed or elected and qualified in accordance with the applicable provisions of the Articles of Association of the Company or any subsidiary of the Company or until such time as he or she tenders his or her resignation in writing. Nothing contained in this Agreement is intended to create in Indemnitee any right to continued employment.

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3. EXPENSES; INDEMNIFICATION PROCEDURE.

(a) Advancement of Expenses. The Company shall advance all expenses incurred by Indemnitee in connection with the investigation, defense, settlement or appeal of any civil or criminal action, suit or proceeding referred to in
Section 1(a) or Section 1 (b) hereof (but not amounts actually paid in settlement of any such action, suit or proceeding). Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall ultimately be determined that Indemnitee is not entitled to be indemnified by the Company as authorized hereby. The advances to be made hereunder shall be paid by the Company to Indemnitee within twenty (20) days following delivery of a written request therefor by Indemnitee to the Company.

(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition precedent to his or her right to be indemnified under this Agreement, give the Company notice in writing as soon as practicable of any claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the Chief Executive Office of the Company at the address shown on the signature page of this Agreement (or such other address as the Company shall designate in writing to Indemnitee). Notice shall be deemed received on the third business day after the date postmarked if sent by domestic certified or registered mail, properly addressed; otherwise notice shall be deemed received when such notice shall actually be received by the Company. In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee's power.

(c) Procedure. Any indemnification and advances provided for in Section 1 and this Section 3 shall be made no later than forty-five (45) days after receipt of the written request of Indemnitee. If a claim under this Agreement, under any statute, or under any provision of the Company's charter documents providing for indemnification, is not paid in full by the Company within forty-five (45) days after a written request for payment thereof has first been received by the Company, Indemnitee may, but need not, at any time thereafter bring an action against the Company to recover the unpaid amount of the claim and, subject to Section 13 of this Agreement, Indemnitee shall also be entitled to be paid for the expenses (including attorneys' fees) of bringing such action. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in connection with any action, suit or proceeding in advance of its final disposition) that Indemnitee has not met the standards of conduct which make it permissible under applicable law for the Company to indemnify Indemnitee for the amount claimed, but the burden of proving such defense shall be on the Company and Indemnitee shall be entitled to receive interim payments of expenses pursuant to Section 3(a) unless and until such defense may be finally adjudicated by court order or judgment from which no further right of appeal exists. It is the parties' intention that if the Company contests Indemnitee's right to indemnification, the question of Indemnitee's right to indemnification shall be for the court to decide, and neither the failure of the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its shareholders) to have made a determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct required by applicable law, nor an actual determination by the Company (including its Board of Directors, any committee or subgroup of

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the Board of Directors, independent legal counsel, or its shareholders) that Indemnitee has not met such applicable standard of conduct, shall create a presumption that Indemnitee has or has not met the applicable standard of conduct.

(d) Notice to Insurers. If, at the time of the receipt of a notice of a claim pursuant to Section 3(b) hereof, the Company has director and officer liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies.

(e) Selection of Counsel. In the event the Company shall be obligated under Section 3(a) hereof to pay the expenses of any proceeding against Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such proceeding, with counsel approved by Indemnitee, upon the delivery to Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same proceeding, provided that (i) Indemnitee shall have the right to employ counsel in any such proceeding at Indemnitee's expense; and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense or (C) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, then the fees and expenses of Indemnitee's counsel shall be at the expense of the Company.

4. ADDITIONAL INDEMNIFICATION RIGHTS; NONEXCLUSIVITY.

(a) Scope. Notwithstanding any other provision of this Agreement, the Company hereby agrees to indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company's Memorandum and Articles of Association or by statute. In the event of any change, after the date of this Agreement, in any applicable law, statute, or rule which expands the right of a BVI corporation to indemnify a member of its board of directors or an officer, such changes shall be, ipso facto, within the purview of Indemnitee's rights and the Company's obligations under this Agreement. In the event of any change in any applicable law, statute or rule which narrows the right of a BVI corporation to indemnify a member of its board of directors or an officer, such changes, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement shall have no effect on this Agreement or the parties' rights and obligations hereunder.

(b) Nonexclusivity. The indemnification provided by this Agreement shall not be deemed exclusive of any rights to which Indemnitee may be entitled under the Company's Memorandum and Articles of Association, any agreement, any vote of shareholders or disinterested members of the Company's Board of Directors, the corporation law of the Territory of BVI, or otherwise, both as to action in Indemnitee's official capacity and as to action in another capacity while holding such office. The indemnification provided under this Agreement shall

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continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though he may have ceased to serve in an such capacity at the time of any action, suit or other covered proceeding.

5. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the expenses, judgments, fines or penalties actually or reasonably incurred in the investigation, defense, appeal or settlement of any civil or criminal action, suit or proceeding, but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such expenses, judgments, fines or penalties to which Indemnitee is entitled.

6. MUTUAL ACKNOWLEDGMENT. Both the Company and Indemnitee acknowledge that in certain instances, Federal law of the United States or of any foreign jurisdiction or public policy may override applicable law and prohibit the Company from indemnifying its directors and officers under this Agreement or otherwise. For example, the Company and Indemnitee acknowledge that the Securities and Exchange Commission of the United States (the "SEC") has taken the position that indemnification is not permissible for liabilities arising under certain federal securities laws, and federal legislation prohibits indemnification for certain ERISA violations. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the SEC to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee.

7. OFFICER AND DIRECTOR LIABILITY INSURANCE. The Company shall, from time to time, make the good faith determination whether or not it is practicable for the Company to obtain and maintain a policy or policies of insurance with reputable insurance companies providing the officers and directors of the Company with coverage for losses from wrongful acts, or to ensure the Company's performance of its indemnification obligations under this Agreement. Among other considerations, the Company will weigh the costs of obtaining such insurance coverage against the protection afforded by such coverage. In all policies of director and officer liability insurance, Indemnitee shall be named as an insured in such a manner as to provide Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors, if Indemnitee is a director; or of the Company's officers, if Indemnitee is not a director of the Company but is an officer; or of the Company's key employees, if Indemnitee is not an officer or director but is a key employee. Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain such insurance if the Company determines in good faith that such insurance is not reasonably available, if the premium costs for such insurance are disproportionate to the amount of coverage provided, if the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, or if Indemnitee is covered by similar insurance maintained by a parent or subsidiary of the Company.

8. SEVERABILITY. Nothing in this Agreement is intended to require or shall be construed as requiring the Company to do or fail to do any act in violation of applicable law. The Company's inability, pursuant to court order, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. The provisions of this Agreement shall be severable as provided in this Section 8. If this Agreement or any portion hereof shall be invalidated on any

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ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms.

9. EXCEPTIONS. Any other provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement:

(a) Claims Initiated by Indemnitee. To indemnify or advance expenses to Indemnitee with respect to proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except with respect to proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under applicable law, but such indemnification or advancement of expenses may be provided by the Company in specific cases if the Board of Directors finds it to be appropriate; or

(b) Lack of Good Faith. To indemnify Indemnitee for any expenses incurred by Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by Indemnitee in such proceeding was not made in good faith or was frivolous;

(c) Insured Claims. To indemnify Indemnitee for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) which have been paid directly to Indemnitee by an insurance carrier under a policy of officers' and directors' liability insurance maintained by the Company.

(d) Claims under Section 16(b). To indemnify Indemnitee for expenses or the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934 of the United States, as amended, or any similar successor statute.

10. CONSTRUCTION OF CERTAIN PHRASES.

(a) For purposes of this Agreement, references to the "Company" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that if Indemnitee is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued.

(b) For purposes of this Agreement, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to "serving at the request of

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the Company" shall include any service as a director, officer, employee or agent of the Company which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants, or beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the best interests of the Company" as referred to in this Agreement.

11. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall constitute an original.

12. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the Company and its successors and assigns, and shall inure to the benefit of Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns.

13. ATTORNEYS' FEES. In the event that any action is instituted by Indemnitee under this Agreement to enforce or interpret any of the terms hereof, Indemnitee shall be entitled to be paid all court costs and expenses, including reasonable attorneys' fees, incurred by Indemnitee with respect to such action, unless as a part of such action, the court of competent jurisdiction determines that each of the material assertions made by Indemnitee as a basis for such action were not made in good faith or were frivolous. In the event of an action instituted by or in the name of the Company under this Agreement or to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be paid all court costs and expenses, including attorneys' fees, incurred by Indemnitee in defense of such action (including with respect to Indemnitee's counterclaims and cross-claims made in such action), unless as a part of such action the court determines that each of Indemnitee's material defenses to such action were made in bad faith or were frivolous.

14. NOTICE. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and a receipt is signed by the party addressee, on the date of such receipt, or (ii) if mailed by certified or registered mail with postage prepaid, on the tenth business day after the date postmarked. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice.

15. CONSENT TO JURISDICTION. The Company and the Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the State of Delaware for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be brought only in the courts of the State of Delaware.

16. CHOICE OF LAW. This Agreement shall be governed by and its provisions construed in accordance with the laws of the State of Delaware.

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

SALIX HOLDINGS, LTD.

By:______________________________

Its:_____________________________

3600 W. Bayshore Blvd., Suite 205
Palo Alto, CA 94306

AGREED TO AND ACCEPTED:

INDEMNITEE: [Indemnitee]

(Signature)

Address: _________________________

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EXHIBIT 10.2

SALIX HOLDINGS, LTD.

1994 STOCK PLAN

1. Purposes of the Plan. The purposes of this 1994 Stock Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees and Consultants of the Company and its Subsidiaries, and to promote the success of the Company's business. Options granted under the Plan may be incentive stock options (as defined under Section 422 of the Code) or non-statutory stock options, as determined by the Administrator at the time of grant of an option and subject to the applicable provisions of Section 422 of the Code, as amended, and the regulations promulgated thereunder. Stock purchase rights may also be granted under the Plan.

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

(a) "Administrator" means the Board or any of its Committees appointed pursuant to Section 4 of the Plan.

(b) "Board" means the Board of Directors of the Company.

(d) "Committee" means the Committee appointed by the Board of Directors in accordance with Section 4(a) of the Plan.

(e) "Common Stock" means the Common Stock of the Company.

(f) "Company" means Salix Holdings, Ltd., a British Virgin Islands corporation.

(g) "Consultant" means any person, including an advisor, who is engaged by the Company or any Parent or Subsidiary of the Company to render services and is compensated for such services, and any director of the Company whether compensated for such services or not, provided that if and in the event the Company registers any class of any equity security pursuant to the Exchange Act, the term Consultant shall thereafter not include directors who are not compensated for their services or are paid only a director's fee by the Company.

(h) "Continuous Status as an Employee or Consultant" means the absence of any interruption or termination of service as an Employee or Consultant. Continuous Status as an Employee or Consultant shall not be considered interrupted in the case of: (i) sick leave; (ii) military leave; (iii) any other leave of absence approved by the Administrator, provided that such leave is for a period of not more than ninety (90) days, unless reemployment upon the expiration of such leave is guaranteed by contract or statute, or unless provided otherwise pursuant to Company policy adopted from time to time; or (iv) transfers between locations of the Company or between the Company, its Subsidiaries or their respective successors. For purposes of this Plan, a change in status from an Employee to a consultant or from a consultant to an Employee will not constitute a termination of employment.

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(i) "Employee" means any person, including officers and directors, employed by the Company or any Parent or Subsidiary of the Company, with the status of employment determined based upon such minimum number of hours or periods worked as shall be determined by the Administrator in its discretion, subject to any requirements of the Code. The payment of a director's fee by the Company shall not be sufficient to constitute "employment" by the Company.

(j) "Exchange Act" means the Securities Exchange Act of 1934, as amended.

(k) "Fair Market Value" means, as of any date, the fair market value of Common Stock determined as follows:

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

(ii) If the Common Stock is quoted on the NASDAQ System (but not on the National Market System thereof) or regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high bid and low asked prices for the Common Stock for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or

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

(1) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code, or any successor provision.

(m) "Nonstatutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option.

(n) "Option" means a stock option granted pursuant to the Plan.

(o) "Optioned Stock" means the Common Stock subject to an Option or a Stock Purchase Right.

(p) "Optionee" means an Employee or Consultant who receives an Option or a Stock Purchase Right.

(q) "Parent" means a "parent corporation", whether now or hereafter existing, as defined in Section 424(e) of the Code, or any successor provision.

(r) "Plan" means this 1994 Stock Plan.

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(s) "Reporting Person" means an officer, director, or greater than ten percent shareholder of the Company within the meaning of Rule 16a-2 under the Exchange Act, who is required to file reports pursuant to Rule 16a-3 under the Exchange Act, or any successor provision.

(t) "Restricted Stock" means shares of Common Stock acquired pursuant to a grant of a Stock Purchase Right under Section 10 below.

(u) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act, as the same may be amended from time to time, or any successor provision.

(v) "Share" means a share of the Common Stock, as adjusted in accordance with Section 12 of the Plan.

(w) "Stock Exchange" means any stock exchange or consolidated stock price reporting system on which prices for the Common Stock are quoted at any given time.

(x) "Stock Purchase Right" means the right to purchase Common Stock pursuant to Section 10 below.

(y) "Subsidiary" means a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Code, or any successor provision.

3. Stock Subject to the Plan. Subject to the provisions of Section 12 of the Plan, the maximum aggregate number of shares that may be optioned and sold under the Plan is 400,000 shares of Common Stock. The shares may be authorized, but unissued, or reacquired Common Stock. If an Option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares that were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan. If the Company shall repurchase unvested shares of Restricted Stock, such repurchased Shares that were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan. In addition, any shares of Common Stock which are retained by the Company upon exercise of an Option or Stock Purchase Right in order to satisfy the exercise or purchase price for such Option or Stock Purchase Right or any withholding taxes due with respect to such exercise shall be treated as not issued and shall continue to be available under the Plan.

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4. Administration of the Plan.

(a) Procedure.

(i) Multiple Administrative Bodies. If permitted by Rule 16b-3, the Plan may be administered by different bodies with respect to directors, non- director officers and Employees or Consultants who are not Reporting Persons.

(ii) Administration With Respect to Reporting Persons. With respect to grants of Options or Stock Purchase Rights to Employees who are Reporting Persons, the Plan shall be administered by (A) the Board if the Board may administer the Plan in compliance with Rule l6b-3 with respect to a plan intended to qualify thereunder as a discretionary plan, or (B) a committee designated by the Board to administer the Plan, which committee shall be constituted in such a manner as to permit the Plan to comply with Rule 16b-3 with respect to a plan intended to qualify thereunder as a discretionary plan. Once appointed, such committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of the committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies, however caused, and remove all members of the committee and thereafter directly administer the Plan, all to the extent permitted by Rule 16b-3 with respect to a plan intended to qualify thereunder as a discretionary plan. No person serving as a member of an Administrator that has authority with respect to grants to Reporting Persons shall be eligible to receive any grant under the Plan which would cause such member to cease to be "disinterested" within the meaning of Rule 16b-3.

(iii) Administration With Respect to Consultants and Other Employees. With respect to grants of Options or Stock Purchase Rights to Employees or Consultants who are not Reporting Persons, the Plan shall be administered by (A) the Board or (B) a committee designated by the Board, which committee shall be constituted in such a manner as to satisfy the legal requirements relating to the administration of incentive stock option plans, if any, of applicable state and federal corporate and securities laws, of the Code and of any applicable Stock Exchange (collectively, the "APPLICABLE LAWS"). Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies, however caused, and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by the Applicable Laws.

(b) Powers of the Administrator. Subject to the provisions of the Plan and in the case of a Committee, the specific duties delegated by the Board to such Committee, and subject to the approval of any relevant authorities, including the approval, if required, of any Stock Exchange, the Administrator shall have the authority, in its discretion:

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

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

(iii) to determine whether and to what extent Options and Stock Purchase Rights or any combination thereof are granted hereunder;

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

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

(vi) to determine the terms and conditions, not inconsis tent with the terms of the Plan, of any award granted hereunder;

(vii) to determine whether and under what circumstances an Option may be settled in cash under Section 9(f) instead of Common Stock;

(viii) to accelerate the exercisability of any Option or Stock Purchase Right;

(ix) to determine the terms and restrictions applicable to Stock Purchase Rights and the Restricted Stock purchased by exercising such Stock Purchase Rights;

(x) in order to fulfill the purposes of the Plan and without amending the Plan, to modify grants of Options or Stock Purchase Rights to participants who are foreign nationals or employed outside of the United States in order to recognize differences in local law, tax policies or customs;

(xi) to accelerate the vesting of any Option or Stock Purchase Right or waive forfeiture restrictions with respect thereto; and

(xii) to make all other determinations, not inconsistent with the terms of the Plan, deemed necessary or advisable for administering the Plan.

(c) Effect of Administrator's Decision. All decisions, determinations and interpretations of the Administrator shall be final and binding on all holders of Options or Stock Purchase Rights.

5. Eligibility.

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

(b) Each Option shall be designated in the written option agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such

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designations, to the extent that the aggregate Fair Market Value of the Shares with respect to which Options designated as Incentive Stock Options are exercisable for the first time by any Optionee during any calendar year (under all plans of the Company or any Parent or Subsidiary) exceeds $100,000, such excess Options shall be treated as Nonstatutory Stock Options.

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

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

6. Term of Plan. The Plan shall become effective upon the earlier to occur of its adoption by the Board of Directors or its approval by the shareholders of the Company as described in Section 19 of the Plan. It shall continue in effect for a term of ten (10) years unless sooner terminated under
Section 15 of the Plan.

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

8. Option Exercise Price and Consideration.

(a) The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be such price as is determined by the Board, but shall be subject to the following:

(i) In the case of an Incentive Stock Option that is:

(A) granted to an Employee who, at the time of the grant of such Incentive Stock Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant.

(B) granted to any other Employee, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant.

(ii) In the case of a Nonstatutory Stock Option that is:

(A) granted to a person who, at the time of the grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes

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of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of the grant.

(B) granted to any other person, the per Share exercise price shall be no less than 85% of the Fair Market Value per Share on the date of grant.

(b) The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant) and may consist entirely of (1) cash, (2) check, (3) promissory note, (4) other Shares that (x) in the case of Shares acquired upon exercise of an Option, have been owned by the Optionee for more than six months on the date of surrender or such other period as may be required to avoid a charge to the Company's earnings, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which such Option shall be exercised, (5) authorization for the Company to retain from the total number of Shares as to which the Option is exercised that number of Shares having a Fair Market Value on the date of exercise equal to the exercise price for the total number of Shares as to which the Option is exercised, (6) delivery of a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price and any applicable income or employment taxes, (7) delivery of an irrevocable subscription agreement for the Shares that irrevocably obligates the option holder to take and pay for the Shares not more than twelve months after the date of delivery of the subscription agreement, (8) any combination of the foregoing methods of payment, or (9) such other consideration and method of payment for the issuance of Shares to the extent permitted under Applicable Laws. In making its determination as to the type of consideration to accept, the Administrator shall consider if acceptance of such consideration may be reasonably expected to benefit the Company.

9. Exercise of Option.

(a) Procedure for Exercise; Rights as a Shareholder. Any Option granted hereunder shall be exercisable at such times and under such conditions as determined by the Administrator, including performance criteria with respect to the Company and/or the Optionee, and as shall be permissible under the terms of the Plan; provided that such Option shall become exercisable at the rate of at least twenty percent (20%) per year over five (5) years from the date the Option is granted.

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

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right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly upon exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 12 of the Plan.

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

(b) Termination of Employment or Consulting Relationship. Subject to Section 9(c), in the event of termination of an Optionee's consulting relationship or Continuous Status as an Employee with the Company, such Optionee may, but only within three (3) months (or such other period of time not less than thirty (30) days as is determined by the Administrator, with such determination in the case of an Incentive Stock Option being made at the time of grant of the Option and not exceeding three (3) months) after the date of such termination (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), exercise his or her Option to the extent that the Optionee was entitled to exercise it at the date of such termination. To the extent that Optionee was not entitled to exercise the Option at the date of such termination, or if Optionee does not exercise such Option to the extent so entitled within the time specified herein, the Option shall terminate. No termination shall be deemed to occur and this Section 9(b) shall not apply if (i) the Optionee is a Consultant who becomes an Employee within the time specified herein; or (ii) the Optionee is an Employee who becomes a Consultant within the time specified herein.

(c) Disability of Optionee. Notwithstanding the provisions of Section 9(b) above, in the event of termination of an Optionee's consulting relationship or Continuous Status as an Employee as a result of his or her total and permanent disability (as defined in Section 22(e)(3) of the Code, or any successor provision), the Optionee may, but only within six (6) months (or such other period of time not exceeding twelve (12) months as is determined by the Board, with such determination in the case of an Incentive Stock Option being made at the time of the grant of the option) from the date of such termination (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), exercise the Option to the extent otherwise entitled to exercise it at the date of such termination. To the extent that Optionee was not entitled to exercise the Option at the date of termination, or if Optionee does not exercise such Option to the extent so entitled within the time specified herein, the Option shall terminate.

(d) Death of Optionee. In the event of the death of an Optionee (i) during the period of Continuous Status as an Employee or any consulting relationship or (ii) within thirty (30) days following the termination of the Optionee's Continuous Status as an Employee or consulting relationship, the Option may be exercised, at any time within six (6) months (or such other period of time not exceeding twelve (12) months as is determined by the Board, with such determination in the case of an Incentive Stock Option being made at the time of the grant of the option) following the date of death (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), by the Optionee's estate or by a person who

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acquired the right to exercise the Option by bequest or inheritance, but only to the extent the Optionee was entitled to exercise the Option at the date of death or, if earlier, the date of termination of the consulting relationship or Continuous Status as an Employee. To the extent that Optionee was not entitled to exercise the Option at the date of death or termination, as the case may be, or if Optionee does not exercise such Option to the extent so entitled within the time specified herein, the Option shall terminate.

(e) Rule 16b-3. Options granted to Reporting Persons shall comply with Rule l6b-3 and shall contain such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption for Plan transactions.

(f) Buyout Provisions. The Administrator may at any time offer to buy out for a payment in cash or Shares, an Option previously granted, based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made.

10. Stock Purchase Rights.

(a) Rights to Purchase. Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing of the terms, conditions and restrictions related to the offer, including the number of Shares that such person shall be entitled to purchase, the price to be paid (which price shall not be less than 85% of the Fair Market Value of the Shares as of the date of the offer), and the time within which such person must accept such offer, which shall in no event exceed thirty (30) days from the date upon which the Administrator made the determination to grant the Stock Purchase Right. The offer shall be accepted by execution of a Restricted Stock purchase agreement in the form determined by the Administrator.

(b) Repurchase Option. Unless the Administrator determines otherwise, the Restricted Stock purchase agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's employment with the Company for any reason (including death or disability). The purchase price for Shares repurchased pursuant to the Restricted Stock purchase agreement shall be the original purchase price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company.

(c) Other Provisions. The Restricted Stock purchase agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. In addition, the provisions of Restricted Stock purchase agreements need not be the same with respect to each purchaser.

(d) Rights as a Shareholder. Once the Stock Purchase Right is exercised, the purchaser shall have the rights equivalent to those of a shareholder, and shall be a shareholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment will be made for a dividend or other right for which the record date is

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prior to the date the Stock Purchase Right is exercised, except as provided in
Section 12 of the Plan.

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

Any surrender by a Reporting Person of previously owned Shares to satisfy tax withholding obligations arising upon exercise of this Option must comply with the applicable provisions of Rule l6b-3 and shall be subject to such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions.

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

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

(b) once made, the election shall be irrevocable as to the particular Shares of the Option or Stock Purchase Right as to which the election is made;

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

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which the Option or Stock Purchase Right is exercised but such Optionee shall be unconditionally obligated to tender back to the Company the proper number of Shares on the Tax Date.

12. Adjustments Upon Changes in Capitalization, Merger or Certain Other
Transactions.

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

(b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Board shall notify the Optionee at least fifteen (15) days prior to such proposed action. To the extent it has not been previously exercised, the Option or Stock Purchase Right will terminate immediately prior to the consummation of such proposed action.

(c) Merger or Sale of Assets. In the event of a proposed sale of all or substantially all of the Company's assets or a merger of the Company with or into another corporation where the successor corporation issues its securities to the Company's shareholders, each outstanding Option or Stock Purchase Right shall be assumed or an equivalent option or right shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless the successor corporation does not agree to assume the Option or Stock Purchase Right or to substitute an equivalent option or right, in which case such Option or Stock Purchase Right shall vest in its entirety and become exercisable as follows prior to the consummation of the merger or sale of assets. If the Option becomes fully exerciseable in lieu of assumption or substitution in the event of a merger or sale of assets in as provided in the preceding sentence, the Board shall notify the Optionee and the Option shall be fully exerciseable for a period of ten (10) days from the date of such notice, and will terminate upon the expiration of such period.

(d) Certain Distributions. In the event of any distribution to the Company's shareholders of securities of any other entity or other assets (other than dividends payable in cash

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or stock of the Company) without receipt of consideration by the Company, the Administrator may, in its discretion, appropriately adjust the price per share of Common Stock covered by each outstanding Option or Stock Purchase Right to reflect the effect of such distribution.

13. Non-Transferability of Options, Stock Purchase Rights and Restricted
Stock. Options and Stock Purchase Rights may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised or purchased during the lifetime of the Optionee only by the Optionee.

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

15. Amendment and Termination of the Plan.

(a) Amendment and Termination. The Board may at any time amend, alter, suspend or discontinue the Plan, but no amendment, alteration, suspension or discontinuation shall be made that would impair the rights of any Optionee under any grant theretofore made, without his or her consent. In addition, to the extent necessary and desirable to comply with Rule l6b-3 or with Section 422 of the Code (or any other applicable law or regulation, including the requirements of any Stock Exchange), the Company shall obtain shareholder approval of any Plan amendment in such a manner and to such a degree as required.

(b) Effect of Amendment or Termination. No amendment or termination of the Plan shall adversely affect Options or Stock Purchase Rights already granted, unless mutually agreed otherwise between the Optionee and the Board, which agreement must be in writing and signed by the Optionee and the Company.

16. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant to the exercise of an Option or Stock Purchase Right unless the exercise of such Option or Stock Purchase Right and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any Stock Exchange.

As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by law.

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17. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.

18. Agreements. Options and Stock Purchase Rights shall be evidenced by written agreements in such form as the Administrator shall approve from time to time.

19. Shareholder Approval. Continuance of the Plan shall be subject to approval by the shareholders of the Company within twelve (12) months before or after the date the Plan is adopted. Such shareholder approval shall be obtained in the degree and manner required under applicable state and federal law and the rules of any applicable Stock Exchange. All Options and Stock Purchase Rights issued under the Plan shall become void in the event such approval is not obtained.

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SALIX HOLDINGS, LTD.

1994 STOCK PLAN

NOTICE OF STOCK OPTION GRANT

Optionee's Name and Address:

[name]

You have been granted an option to purchase Common Stock of Salix Holdings, Ltd., a British Virgin Islands corporation (the "COMPANY") as follows:

Date of Grant:                           [date]
Option Price Per Share:                  $[price]
Total Number of Shares Granted:          [number]
Total Price of Shares Granted:           $[price2]
Type of Option:                          ___ Incentive Stock Option
                                         ___ Nonstatutory Stock Option
Term/Expiration Date:                    [date2]
Vesting Commencement Date:               [date3]
Vesting Schedule:                        [vesting]

Termination Period: Option may be exercised for a period of ______________(3 months maximum for Incentive Stock Options) after termination of employment or consulting relationship except as set out in Sections 7 and 8 of the Stock Option Agreement (but in no event later than the Expiration Date).

By your signature and the signature of the Company's representative below, you and the Company agree that this option is granted under and governed by the terms and conditions of the 1994 Stock Plan and the Stock Option Agreement, all of which are attached and made a part of this document.

OPTIONEE:                                     SALIX HOLDINGS, LTD.



________________________________              By:______________________________
Signature


________________________________              Title:___________________________
Print Name

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SALIX HOLDINGS, LTD.

1994 STOCK PLAN

STOCK OPTION AGREEMENT

1. Grant of Option. Salix Holdings, Ltd., a British Virgin Islands corporation (the "COMPANY"), hereby grants to the Optionee named in the Notice of Grant (the "OPTIONEE"), an option (the "OPTION") to purchase a total number of shares of Common Stock (the "SHARES") set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the "EXERCISE PRICE") subject to the terms, definitions and provisions of the Company's 1994 Stock Plan (the "PLAN") adopted by the Company, which is incorporated herein by reference. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Option.

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

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

(i) Right to Exercise.

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

(b) In the event of Optionee's death, disability or other termination of employment, the exercisability of the Option is governed by Sections 6, 7 and 8 below, subject to the limitation contained in subsection 2(i)(c).

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

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

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

3. Optionee's Representations. In the event the Shares purchasable pursuant to the exercise of this Option have not been registered under the Securities Act of 1933, as amended, at the time this Option is exercised, Optionee shall, if required by the Company, concurrently with the exercise of all or any portion of this Option, deliver to the Company Optionee's Investment Representation Statement in the form attached hereto as Exhibit B, and, if applicable, shall read the rules of the Commissioner of Corporations attached to such Investment Representation Statement.

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

(i) cash; or

(ii) check; or

(iii) surrender of other shares of Common Stock of the Company which (A) in the case of Shares acquired pursuant to the exercise of a Company option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (B) have a fair market value on the date of surrender equal to the Exercise Price of the Shares as to which the Option is being exercised; or

(iv) delivery of a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price.

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

6. Termination of Relationship. In the event of termination of Optionee's consulting relationship or Continuous Status as an Employee, Optionee may, to the extent otherwise so entitled at the date of such termination (the "TERMINATION DATE"), exercise this Option during the Termination Period set out in the Notice of Grant. To the extent that Optionee was not entitled to

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exercise this Option at the date of such termination, or if Optionee does not exercise this Option within the time specified herein, the Option shall terminate.

7. Disability of Optionee. Notwithstanding the provisions of Section 6 above, in the event of termination of Optionee's consulting relationship or Continuous Status as an Employee as a result of total and permanent disability (as defined in Section 22(e)(3) of the Code), Optionee may, but only within six
(6) months from the date of termination of employment (but in no event later than the date of expiration of the term of this Option as set forth in Section 10 below), exercise the Option to the extent otherwise so entitled at the date of such termination. To the extent that Optionee was not entitled to exercise the Option at the date of termination, or if Optionee does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate.

8. Death of Optionee. In the event of the death of Optionee, the Option may be exercised at any time within six (6) months following the date of death (but in no event later than the date of expiration of the term of this Option as set forth in Section 10 below), by Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent the Optionee could exercise the Option at the date of death. To the extent that Optionee was not entitled to exercise the Option at the date of death, or if Optionee does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate.

9. Non-Transferability of Option. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by Optionee. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee.

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

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

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surrendering to the Company Shares which (a) in the case of Shares previously acquired from the Company, have been owned by the Optionee for more than six months on the date of surrender, and (b) have a fair market value on the date of surrender equal to or greater than Optionee's marginal tax rate times the ordinary income recognized, or (iv) by electing to have the Company withhold from the Shares to be issued upon exercise of the Option that number of Shares having a fair market value equal to the amount required to be withheld. For this purpose, the fair market value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined (the "TAX DATE").

If the Optionee is subject to Section 16 of the Exchange Act (an "INSIDER"), any surrender of previously owned Shares to satisfy tax withholding obligations arising upon exercise of this Option must comply with the applicable provisions of Rule l6b-3 promulgated under the Exchange Act ("RULE 16B-3") and shall be subject to such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions.

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

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

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

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

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

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

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

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

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

SALIX HOLDINGS, LTD.
a British Virgin Islands corporation

By:_______________________________

Title:____________________________

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

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

Dated:_________________________ ________________________________ Optionee

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EXHIBIT A

1994 STOCK PLAN

EXERCISE NOTICE

Salix Holdings, Ltd.
3600 W. Bayshore Road
Suite 205
Palo Alto, California 94303
Attention: Chief Financial Officer

1. Exercise of Option. Effective as of today, ____________________19___, the undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase __________ shares of the Common Stock (the "Shares") of Salix Holdings, Ltd. (the "Company") under and pursuant to the Company's 1994 Stock Plan, as amended (the "Plan") and the [ ] Incentive [ ] Nonstatutory Stock Option Agreement dated ___________________ (the "Option Agreement").

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

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

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

5. Rights as Shareholder. Until the stock certificate evidencing such Shares is issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 12 of the Plan.

Optionee shall enjoy rights as a shareholder until such time as Optionee disposes of the Shares or the Company and/or its assignee(s) exercises the Right of First Refusal hereunder and delivers payment for such Shares. Upon such exercise, Optionee shall forthwith cause the certificate(s) evidencing the Shares so purchased to be surrendered to the Company for transfer or cancellation upon delivery of payment thereafter, after which transfer or cancellation Optionee shall have no further rights as a holder of the Shares.

6. Company's Right of First Refusal. Before any Shares held by Optionee or any transferee (either being sometimes referred to herein as the "Holder") may be sold or otherwise transferred (including transfer by gift or operation of law), the Company or its assignee(s) shall have a right of first refusal to purchase the Shares on the terms and conditions set forth in this Section (the "Right of First Refusal").

(a) Notice of Proposed Transfer. The Holder of the Shares shall deliver to the Company a written notice (the "Notice") stating: (i) the Holder's bona fide intention to sell or otherwise transfer such Shares; (ii) the name of each proposed purchaser or other transferee ("Proposed Transferee"); (iii) the number of Shares to be transferred to each Proposed Transferee; and (iv) the bona fide cash price or other consideration for which the Holder proposes to transfer the Shares (the "Offered Price"), and the Holder shall offer the Shares at the Offered Price to the Company or its assignee(s).

(b) Exercise of Right of First Refusal. At any time within thirty
(30) days after receipt of the Notice, the Company and/or its assignee(s) may, by giving written notice to the Holder, elect to purchase all, but not less than all, of the Shares proposed to be transferred to any one or more of the Proposed Transferees, at the purchase price determined in accordance with subsection (c) below.

(c) Purchase Price. The purchase price ("Purchase Price") for the Shares purchased by the Company or its assignee(s) under this Section shall be the Offered Price. If the Offered Price includes consideration other than cash, the cash equivalent value of the non-cash consideration shall be determined by the Board of Directors of the Company in good faith; provided, however, that if the Holder does not agree with the valuation of the consideration as determined by the Board of Directors of the Company, the Holder shall be entitled to have the valuation determined by an independent appraiser to be mutually agreed upon by the Company and the Holder and whose fees shall be borne equally by the Company and the Holder.

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(d) Payment. Payment of the Purchase Price shall be made, at the option of the Company or its assignee(s), in cash (by check), by cancellation (with the prior written consent of the Holder) of all or a portion of any outstanding indebtedness of the Holder to the Company (or, in the case of repurchase by an assignee, to the assignee), or by any combination thereof within 30 days after receipt of the Notice or in the manner and at the times set forth in the Notice.

(e) Holder's Right to Transfer. If the Shares proposed in the Notice to be transferred are not purchased by the Company and/or its assignee(s) as provided in this Section, then the Holder may sell or otherwise transfer such Shares to the Proposed Transferee(s) at the Offered Price or at a higher price, provided that such sale or other transfer is consummated within 120 days after the date of the Notice and, provided further, that any such sale or other transfer is effected in accordance with any applicable securities laws and the Proposed Transferee agrees in writing that the provisions of this Section shall continue to apply to the Shares in the hands of such Proposed Transferee. If the Shares described in the Notice are not transferred to the Proposed Transferee within such period, a new Notice shall be given to the Company, and the Company and/or its assignees shall again be offered the Right of First Refusal before any Shares held by the Holder may be sold or otherwise transferred.

(f) Exception for Certain Family Transfers. Anything to the contrary contained in this Section notwithstanding, the transfer of any or all of the Shares during the Optionee's lifetime or on the Opionee's death by will or intestacy to the Optionee's immediate family or a trust for the benefit of the Optionee's immediate family shall be exempt from the provisions of this Section. "Immediate Family" as used herein shall mean spouse, lineal descendant or antecedent, father, mother, brother or sister. In such case, the transferee or other recipient shall receive and hold the Shares so transferred subject to the provisions of this Section, and there shall be no further transfer of such Shares except in accordance with the terms of this Section.

(g) Termination of Right of First Refusal. The Right of First Refusal shall terminate as to any Shares ninety (90) days after the first sale of Common Stock of the Company to the general public pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission under the 1933 Act.

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

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8. Restrictive Legends and Stop-Transfer Orders.

(a) Legends. Optionee understands and agrees that the Company shall cause the legends set forth below, or legends substantially equivalent thereto, to be placed upon any certificate(s) evidencing ownership of the Shares together with any other legends that may be required by state or federal securities laws:

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OF, IN THE OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH.

THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND RIGHT OF FIRST REFUSAL OPTIONS HELD BY THE ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN THE EXERCISE NOTICE BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH TRANSFER RESTRICTIONS AND RIGHT OF FIRST REFUSAL ARE BINDING ON TRANSFEREES OF THESE SHARES.

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

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

9. Market Standoff Agreement. In connection with the initial public offering of the Company's securities and upon request of the Company or the underwriters managing any underwritten offering of the Company's securities, Optionee hereby agrees not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Shares (other than those included in the registration) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed 180 days) from the effective date of such registration as may be requested by the Company or such managing underwriters; provided, however, that the Optionee need not so agree unless a majority of the Company's officers

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and directors and a majority of the holders of at least 5% of the Company's outstanding securities also agree to be similarly bound.

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

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

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

13. Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States mail by certified mail, with postage and fees prepaid, addressed to the other party at its address as shown below beneath its signature, or to such other address as such party may designate in writing from time to time to the other party.

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

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

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

Submitted by: Accepted by:

OPTIONEE: SALIX HOLDINGS, LTD.

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__________________________________     By:____________________________________
Signature
                                       Its:___________________________________

Name:_____________________________
Address:__________________________     Address: 3600 W. Bayshore Road,Suite 205
__________________________________              Palo Alto, CA 94303
__________________________________              Attn: Chief Financial Officer

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                                   EXHIBIT B
                                   ---------

                      INVESTMENT REPRESENTATION STATEMENT

OPTIONEE  :
COMPANY   :    SALIX HOLDINGS, LTD.
SECURITY  :    COMMON STOCK
AMOUNT    :

DATE :

In connection With the purchase of the above-listed Securities, I, the Optionee, represent to Salix Holdings, Ltd. (the "COMPANY") the following:

(a) I am aware of the Company's business affairs and financial condition, and have acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. I am purchasing these Securities for my own account for investment purposes only and not with a view to, or for the resale in connection with, any "distribution" thereof for purposes of the Securities Act of 1933, as amended (the "SECURITIES ACT").

(b) I understand that the Securities have not been registered under the Securities Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of my investment intent as expressed herein. In this connection, I understand that, in the view of the Securities and Exchange Commission (the "SEC"), the statutory basis for such exemption may be unavailable if my representation was predicated solely upon a present intention to hold these Securities for the minimum capital gains period specified under tax statutes, for a deferred sale, for or until an increase or decrease in the market price of the Securities, or for a period of one year or any other fixed period in the future.

(c) I further understand that the Securities must be held indefinitely unless subsequently registered under the Securities Act or unless an exemption from registration is otherwise available. Moreover, I understand that the Company is under no obligation to register the Securities. In addition, I understand that the certificate evidencing the Securities will be imprinted with a legend which prohibits the transfer of the Securities unless they are registered or such registration is not required in the opinion of counsel for the Company.

(d) I am familiar with the provisions of Rule 701 and Rule 144, each promulgated under the Securities Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof, in a non-public offering subject to the satisfaction of certain conditions. Rule 701 provides that if the issuer qualifies under Rule 701 at the time of issuance of the Securities, such issuance will be exempt from registration under the Securities

Act. In the event the Company later becomes subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, ninety (90) days thereafter the securities exempt under Rule 701 may be resold, subject to the satisfaction of certain of the conditions specified by Rule 144, including among other things: (1) the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934); and, in the case of an affiliate, (2) the availability of certain public information about the Company, and the amount of securities being sold during any three month period not exceeding the limitations specified in Rule 144(e), if applicable. Notwithstanding this paragraph (d), I acknowledge and agree to the restrictions set forth in paragraph (e) hereof.

In the event that the Company does not qualify under Rule 701 at the time of issuance of the Securities, then the Securities may be resold in certain limited circumstances subject to the provisions of Rule 144, which requires among other things: (1) the availability of certain public information about the Company, (2) the resale occurring not less than two years after the party has purchased, and made full payment for, within the meaning of Rule 144, the securities to be sold; and, in the case of an affiliate, or of a non-affiliate who has held the securities less than three years, (3) the sale being made though a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934) and the amount of securities being sold during any three month period not exceeding the specified limitations stated therein, if applicable.

(e) I further understand that in the event all of the applicable requirements of Rule 144 or Rule 701 are not satisfied, registration under the Securities Act, compliance with Regulation A, or some other registration exemption will be required; and that, notwithstanding the fact that Rule 144 and Rule 701 are not exclusive, the Staff of the SEC has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rule 144 or Rule 701 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk.

(f) I understand that the certificate evidencing the Securities may be imprinted with a legend which prohibits the transfer of the Securities without the consent of the Commissioner of Corporations of California. I have read the applicable Commissioner's Rules with respect to such restriction, a copy of which is attached.

Signature of Optionee:

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TITLE 10. INVESTMENT - CHAPTER 3. COMMISSIONER OF CORPORATIONS

260.141.11: Restriction on Transfer. (a) The issuer of any security upon which a restriction on transfer has been imposed pursuant to Sections 260.102.6, 260.141.10 or 260.534 shall cause a copy of this section to be delivered to each issuee or transferee of such security at the time the certificate evidencing the security is delivered to the issuee or transferee.

(b) STATE OF CALIFORNIA - CALIFORNIA ADMINISTRATIVE CODE

It is unlawful for the holder of any such security to consummate a sale or transfer of such security, or any interest therein, without the prior written consent of the Commissioner (until this condition is removed pursuant to Section 260.141.12 of these rules), except:

(1) to the issuer; (2) pursuant to the order or process of any court; (3) to any person described in Subdivision (i) of Section 25102 of the Code or Section 260.105.14 of these rules;
(4) to the transferor's ancestors, descendants or spouse, or any custodian or trustee for the account of the transferor or the transferor's ancestors, descendants, or spouse; or to a transferee by a trustee or custodian for the account of the transferee or the transferee's ancestors, descendants or spouse;
(5) to holders of securities of the same class of the same issuer;
(6) by way of gift or donation inter vivos or on death;
(7) by or through a broker-dealer licensed under the Code (either acting as such or as a finder) to a resident of a foreign state, territory or country who is neither domiciled in this state to the knowledge of the broker-dealer, nor actually present in this state if the sale of such securities is not in violation of any securities law of the foreign state, territory or country concerned;
(8) to a broker-dealer licensed under the Code in a principal transaction, or as an underwriter or member of an underwriting syndicate or selling group;
(9) if the interest sold or transferred is a pledge or other lien given by the purchaser to the seller upon a sale of the security for which the Commissioner's written consent is obtained or under this rule not required; (10) by may of a sale qualified under Sections 25111, 25112, 25113 or 25121 of the Code, of the securities to be transferred, provided that no order under
Section 25140 or Subdivision (a) of Section 25143 is in effect with respect to such qualification;
(11) by a corporation to a wholly owned subsidiary of such corporation, or by a wholly owned subsidiary of a corporation to such corporation; (12) by way of an exchange qualified under Section 25ll1, 25112 or 25113 of the Code, provided that no order under Section 25140 or Subdivision (a) of
Section 25143 is in effect with respect to such qualification;
(13) between residents of foreign states, territories or countries who are neither domiciled nor actually present in this state;
(14) to the State Controller pursuant to the Unclaimed Property Law or to the administrator of the unclaimed property law, of another state;
(15) by the State Controller pursuant to the Unclaimed Property Law or by the administrator of the unclaimed law of another state if, in either such case, such person (i) discloses to potential purchasers at the sale the transfer of the securities is restricted under this rule, (ii) delivers to each purchaser a copy of this rule, and (iii) advises the Commissioner of the name of each purchaser;
(16) by a trustee to a successor trustee when such transfer does not involve a change in the beneficial ownership of the securities; or (17) by way of an offer and sale of outstanding securities in an issuer transaction that is subject to the qualification requirement of Section 25110 of the Code but exempt from that qualification requirement by subdivision (f) of
Section 25102; provided that any such transfer is on the condition that any certificate evidencing the security issued to such transferee shall contain the legend required by this section.

(c) The certificates representing all such securities subject to such a restriction on transfer, whether upon initial issuance or upon any transfer thereof, shall bear on their face a legend, prominently stamped or printed thereon in capital letters of not less than 10-point size, reading as follows:

"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OR CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES."

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SALIX HOLDINGS, LTD.

1994 STOCK PLAN

RESTRICTED STOCK PURCHASE AGREEMENT

This Restricted Stock Purchase Agreement ("AGREEMENT") is made as of__________,19__, by and between Salix Holdings, Ltd., a British Virgin Islands corporation (the "COMPANY"), and [nameofpurchaser] ("PURCHASER") pursuant to the Company's 1994 Stock Plan.

1. Sale of Stock. Subject to the terms and conditions of this Agreement, on the Closing Date the Company will issue and sell to Purchaser, and Purchaser agrees to purchase from the Company, [numberofshares] shares of the Company's Common Stock (the "SHARES") at a purchase price of $[pricepershare] per Share for a total purchase price of $[totalpurchaseprice]. The term "Shares" refers to the purchased Shares and all securities received in replacement of Shares or as stock dividends or splits, all securities received in replacement of the Shares in a recapitalization, merger, reorganization, exchange or the like, and all new, substituted or additional securities or other properties to which Purchaser is entitled by reason of Purchaser's ownership of the Shares.

2. Closing; Security Interest.

(a) The closing of the purchase and sale of the Shares under this Agreement (the "CLOSING") shall be held at the principal office of the Company simultaneously with the execution of this Agreement by the parties or on such other date as they agree (the "CLOSING DATE").

(b) At the Closing, the Company will deliver to Purchaser a certificate representing the Shares to be purchased by him or her (which shall be issued in Purchaser's name) against payment of the purchase price therefor. The purchase price for the Shares shall be paid to the Company by check rendered to the Company in the amount of $[amountofcheck] and by delivery to the Company of Purchaser's full recourse promissory note (the "NOTE") for the balance of the purchase price, if any, in the form attached to this Agreement as Exhibit A.

(1) The Note shall become payable in full upon the voluntary or involuntary termination or cessation of Purchaser's employment or consulting relationship with the Company, for any reason, with or without cause (including death or disability).

(2) Purchaser shall deliver to the Secretary of the Company, or his or her designee (hereinafter referred to as the "Pledge Holder"), all certificates representing the Shares, together with (i) an Assignment Separate from Certificate in the form attached to this Agreement as Exhibit B executed by Purchaser and by Purchaser's spouse (if required for transfer), in blank, for use in transferring all or a portion of said Shares to the Company if, as and

when required under this Section 2(c) or under any other provision of this Agreement including, without limitation, Section 3. In addition, Purchaser's spouse, if any, shall execute and deliver to the Company the Consent of Spouse attached to this Agreement as Exhibit C.

(3) As security for the payment of the Note and any renewal, extension or modification of the Note, Purchaser hereby grants to the Company a security interest in and pledges with and delivers to the Company Purchaser's Shares (sometimes referred to herein as the "COLLATERAL").

In the event that Purchaser prepays all or a portion of the Note, in accordance with the provisions thereof, Purchaser intends, unless written notice to the contrary is delivered to the Pledge Holder, that the Shares represented by the portion of the Note so repaid, including annual interest thereon, shall continue to be so held by the Pledge Holder, to serve as independent collateral for the outstanding portion of the Note for the purpose of commencing the holding period set forth in Rule 144(d) promulgated under the Securities Act of 1933, as amended (the "SECURITIES ACT").

(4) In the event of any foreclosure of the security interest, the Company may sell the Shares at a private sale or may repurchase the Shares itself. The parties agree that, prior to the establishment of a public market for the Shares of the Company, the securities laws affecting sale of the Shares make a public sale of the Shares commercially unreasonable. The parties further agree that the repurchasing of such Shares by the Company, or by any person to whom the Company may have assigned its rights under this Agreement is commercially reasonable if made at a price determined by the Board of Directors in its discretion, fairly exercised, representing what would be the fair market value of the Shares reduced by any limitation on transferability, whether due to the size of the block of Shares or the restrictions of applicable securities laws.

(5) In the event of default in payment when due of any indebtedness under Purchaser's Note, the Company may elect then, or at any time thereafter, to exercise all rights available to a Secured Party under the California Commercial Code including the right to sell the Collateral at a private or public sale or repurchase the Shares as provided above. The proceeds of any sale shall be applied in the following order:

(i) To the extent necessary, proceeds shall be used to pay all reasonable expenses of the Company in enforcing this Agreement, including, without limitation, reasonable attorney's fees and legal expenses incurred by the Company.

(ii) To the extent necessary, proceeds shall be used to satisfy any remaining indebtedness under Purchaser's Note.

(iii) Any remaining proceeds shall be delivered to Purchaser.

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(6) Upon full payment by Purchaser of all amounts due on the Now, Pledge Holder shall deliver to Purchaser a Shares in Pledge Holder's possession belonging to Purchaser, and Pledge Holder shall thereupon be discharged of all further obligations under this Agreement; provided, however, that Pledge Holder shall nevertheless retain said Shares as escrow agent if at the time of full payment by Purchaser said Shares are still subject to restrictions under Section 3 of this Agreement.

3. Limitations on Transfer.

In addition to any other limitation on transfer created by applicable securities laws, Purchaser shall not assign, encumber or dispose of any interest in the Shares while the Shares are subject to the Company's repurchase option, except as provided in Section 3(h) below. After any Shares have been released from such repurchase option, Purchaser shall not assign, encumber or dispose of any interest in such Shares except in compliance with Sections 3(b) and 3(c) below and applicable securities laws:

(a) Repurchase Option. In the event of the voluntary or involuntary termination of Purchaser's employment or consulting relationship with the Company for any reason, with or without cause (including death or disability), the Company shall, upon the date of such termination, have an irrevocable, exclusive option for a period of 60 days from such date to repurchase all or none of the Shares held by Purchaser as of such date which have not yet been released from the Company's repurchase option, at the original purchase price per Share specified in Section 1. The option shall be exercised by the Company by written notice to Purchaser or Purchaser's executor and, at the Company's option, (i) by delivery to the Purchaser or Purchaser's executor with such notice of a check in the amount of the purchase price for the Shares being purchased, or (ii) in the event the Purchaser is indebted to the Company, by cancellation by the Company of an amount of such indebtedness equal to the purchase price for the Shares being repurchased, or (iii) by a combination of
(i) and (ii) so that the combined payment and cancellation of indebtedness equals such purchase price. Upon delivery of such notice and payment of the purchase price in any of the ways described above, the Company shall become the legal and beneficial owner of the Shares being repurchased and all rights and interest therein or related thereto, and the Company shall have the right to transfer to its own name the number of Shares being repurchased by the Company, without further action by Purchaser. One hundred percent (100%) of the Shares purchased by Purchaser shall initially be subject to the Company's repurchase option as set forth above. Thereafter, the Shares held by Purchaser shall be released from the Company's repurchase option under this Section 3(a) as follows (provided in each case that Purchaser's employment or consulting relationship with the Company has not been terminated prior to the date of any such release):
___ of the total number of Shares shall be released from the repurchase option on the ___-month anniversary of the Vesting Commencement Date (as set forth on the signature page of this Agreement), and an additional ___ of the total number of Shares shall be released from the repurchase option each month thereafter on the Monthly Vesting Date (as set forth on the signature page of this Agreement), until all Shares are released from the repurchase option. Fractional shares shall be rounded to the nearest whole share.

(b) Right of First Refusal. In the event, at any time after the date of this Agreement, the Purchaser or Purchaser's transferee desires to sell or transfer in any manner the

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Shares as to which the option provided in Section 3(a) above is not applicable or has not been exercised, Purchaser shall first offer such Shares for sale to the Company at the same price, and upon the same terms (or terms as similar as reasonably possible) upon which Purchaser is proposing or is to dispose of said Share. Said right of first refusal shall be provided to the Company for a period of thirty (30) days following receipt by the Company of written notice by the Purchaser of the terms and conditions of said proposed sale or transfer and the name, address and phone number of each proposed buyer or transferee. If the Company desires to exercise such right of first refusal as to all but not less than all of the Shares proposed to be transferred, it shall notify Purchaser in writing within such thirty day period. In the event the Shares are not disposed of on such terms within thirty (30) days following lapse of the period of the right of first refusal provided to the Company, or if the Purchaser proposes to change the price or other terms to make them more favorable to the buyer, they shall once again be subject to the right of first refusal herein provided.

(c) Involuntary Transfer. In the event, at any time after the date of this Agreement, of any transfer by operation of law or other involuntary transfer (including death or divorce) of all or a portion of the Shares by the record holder thereof, the Company shall have an option to purchase all of the Shares transferred at the greater of the purchase price paid by Purchaser pursuant to this Agreement or the fair market value of the Shares on the date of transfer. Upon such a transfer, the person acquiring the Shares shall promptly notify the Secretary of the Company of such transfer. The right to purchase such Shares shall be provided to the Company for a period of thirty (30) days following receipt by the Company of written notice by the person acquiring the Shares.

(d) Price for Involuntary Transfer. With respect to any stock to be transferred pursuant to Section 3(c), the price per Share shall be a price set by the Board of Directors of the Company that will reflect the current value of the stock in terms of present earnings and future prospects of the Company. The Company shall notify Purchaser or his or her executor of the price so determined within thirty (30) days after receipt by it of written notice of the transfer or proposed transfer of Shares. The decision of the Board of Directors as to the purchase price shall be final.

(e) Assignment. The right of the Company to purchase any part of the Shares may be assigned in whole or in part to any shareholder or shareholders of the Company or other persons or organizations.

(f) Restrictions Binding on Transferees. All transferees of Shares or any interest therein will receive and hold such Shares or interest subject to the provisions of this Agreement, including, insofar as applicable, the Company's option to repurchase under Section 3 and the Company's rights under
Section 2. Any sale or transfer of the Company's Shares shall be void unless the provisions of this Agreement are met.

(g) Termination of Rights. The right of first refusal granted the Company by Section 3(b) above and the option to repurchase the Shares in the event of an involuntary transfer granted the Company by Section 3(c) above shall terminate at such time as a public market exists for the Company's capital stock (or any other stock issued to purchasers in exchange for the

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Shares purchased under this Agreement). For the purpose of this Agreement, a "PUBLIC MARKET" shall be deemed to exist if (i) such stock is listed on a national securities exchange (as that term is used in the Securities Exchange Act of 1934) or (ii) such stock is traded on the over-the-counter market and prices are published daily on business days in a recognized financial journal.

Upon termination of the right of first refusal imposed by this Agreement and the expiration or exercise of the Company's repurchase option described in Section 3(a) above, a new certificate or certificates representing the Shares not repurchased shall be issued, on request, without the legend referred to in Section 6(b) herein and delivered to Purchaser.

(h) Exempt Transfers. The restrictions on transfer of this Section 3 shall not apply to a transfer to Purchaser's ancestors or descendants or spouse or to a trustee for their benefit, provided that such transferee shall agree in writing to take such Shares subject to all the terms of this Agreement, including restrictions on further transfer.

4. Escrow. For purposes of facilitating the enforcement of the provisions of Section 3 above, Purchaser agrees, immediately upon receipt of the certificate(s) for Purchaser's Shares, to deliver such certificate(s), together with an Assignment Separate from Certificate in the form attached to this Agreement as Exhibit B executed by Purchaser and by Purchaser's spouse (if required for transfer), in blank, to the Secretary of the Company, or Purchaser's designee, to hold such certificate(s) and Assignment Separate from Certificate in escrow and to take all such actions and to effectuate all such transfers and/or releases as are in accordance with the terms hereof. Purchaser hereby acknowledges that the Secretary of the Company, or his or her designee, is so appointed as the escrow holder with the foregoing authorities as a material inducement to make this Agreement and that said appointment is coupled with an interest and is accordingly irrevocable. Purchaser agrees that said escrow holder shall not be liable to any party hereof (or to any other party) for any actions or omissions unless such escrow holders grossly negligent relative thereto. The escrow holder may rely upon any letter, notice or other document executed by any signature purported to be genuine and may resign at any time. Purchaser agrees that if the Secretary of the Company, or his or her designee, resigns as escrow holder for any or no reason, the Board of Directors of the Company shall have the power to appoint a successor to serve as escrow holder pursuant to the terms of this Agreement.

5. Investment Representations

In connection with the purchase of the Shares, Purchaser represents to the Company the following:

(a) Purchaser is aware of the Company's business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the securities. Purchaser is purchasing these securities for investment for his or her own account only and not with a view to, or for resale in connection with, any "distribution" thereof within the meaning of the Securities Act.

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(b) Purchaser understands that the securities have not been registered under the Securities Act by reason of a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of Purchaser's investment intent as expressed herein.

(c) Purchaser further acknowledges and understands that the securities must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. Purchaser further acknowledges and understands that the Company is under no obligation to register the securities. Purchaser understands that the certificate evidencing the securities will be imprinted with a legend which prohibits the transfer of the securities unless they are registered or such registration is not required in the opinion of counsel for the Company.

(d) Purchaser is familiar with the provisions of Rules 144 and 701, each promulgated under the Securities Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof (or from an affiliate of such issuer), in a non-public offering subject to the satisfaction of certain conditions. In the event the Company becomes subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the securities exempt under Rule 701 may be resold by the Purchaser ninety (90) days thereafter, subject to the satisfaction of certain of the conditions specified by Rule 144, including, among other things: (1) the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934); and (2) in the case of an affiliate, the availability of certain public information about the Company, and the amount of securities being sold during any three month period not exceeding the limitations specified in Rule 144(e), if applicable.

If the Company does not qualify under Rule 701 at the time of purchase, then the securities may be resold by the Purchaser in certain limited circumstances subject to the provisions of Rule 144, which requires, among other things: (1) the availability of certain public information about the Company;
(2) the resale occurring not less than two years after the party has purchased, and made full payment of (within the meaning of Rule 144), the securities to be sold; and (3) in the case of an affiliate, or of a non-affiliate who has held the securities less than three years, the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934) and the amount of securities being sold during any three month period not exceeding the specified limitations stated therein, if applicable. PURCHASER UNDERSTANDS THAT PAYMENT BY NOTE IS NOT DEEMED TO BE FULL PAYMENT UNDER RULE 144 UNLESS IT IS SECURED BY ASSETS OTHER THAN THE SHARES.

(e) Purchaser further understands that at the time he or she wishes to sell the securities there may be no public market upon which to make such a sale, and that, even if such a public market then exists, the Company may not be satisfying the current public information requirements of Rule 144 or 701, and that, in such event, Purchaser would be precluded from selling the securities under Rule 144 or 701 even if the two-year minimum holding period had been satisfied.

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(f) Purchaser farther understands that in the event all of the applicable requirements of Rule 144 or 701 are not satisfied, registration under the Securities Act, compliance with Regulation A, or some other registration exemption will be required; and that, notwithstanding the fact that Rules 144 and 701 are not exclusive, the Staff of the SEC has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rule 144 or 701 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk.

6. Legends.

The certificate or certificates representing the Shares shall bear the following legends (as well as any legends required by applicable state and federal corporate and securities laws):

(a) "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL FOR THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933."

(b) "THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE COMPANY AND THE SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY."

7. No Employment Rights.

Nothing in this Agreement shall affect in any manner whatsoever the right or power of the Company, or a parent or subsidiary of the Company, to terminate Purchaser's employment or consulting relationship, for any reason, with or without cause.

8. Section 83(b) Election.

Purchaser understands that Section 83(a) of the Internal Revenue Code of 1986, as amended (the "Code"), taxes as ordinary income the difference between the amount paid for the Shares and the fair market value of the Shares as of the date any restrictions on the Shares lapse. In this context, "restriction" means the right of the Company to buy back the Shares pursuant to the repurchase option set forth in Section 3(a) of this Agreement. Purchaser understands that Purchaser may elect to be taxed at the time the Shares are purchased, rather than when and as the repurchase option expires, by filing an election under Section 83(b) of the Code with the Internal Revenue Service within 30 days from the date of purchase. Even if the fair market value of the Shares at the time of the execution of this Agreement equals the amount paid for the Shares, the

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election must be made to avoid tax treatment under Section 83(a) in the future. The form for making Purchaser's election is attached to this Agreement. Purchaser understands that his or her failure to file such an election in a timely manner may result in adverse tax consequences for Purchaser. Purchaser further understands that an additional copy of such election form should be filed with his or her federal income tax return for the calendar year in which the date of this Agreement falls.

9. Stand-off Agreement. In connection with the initial public offering of the Company's securities and upon request of the Company or the underwriters managing any underwritten offering of the Company's securities, Purchaser agrees not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Shares (other than those included in the registration) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed 180 days) from the effective date of such registration as may be requested by the Company or such managing underwriters; provided, however, that Purchaser need not so agree unless a majority of the Company's officers and directors and a majority of the holders of at least 5% of the Company's outstanding securities also agree to be similarly bound.

10. Miscellaneous.

(a) This Agreement may be amended by written agreement between the Company and Purchaser.

(b) Any notice, demand or request required or permitted to be given under this Agreement shall be in writing and shall be deemed sufficient when delivered personally or sent by telecopy or forty-eight (48) hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, and addressed, if to the Company, at its principal place of business, attention the President, and if to Purchaser, at Purchaser's address as shown on the stock records of the Company.

(c) The rights and benefits of this Agreement shall inure to the benefit of, and be enforceable by the Company's successors and assigns. The rights and obligations of Purchaser under this Agreement may only be assigned with the prior written consent of the Company.

(d) Both parties agree to execute any additional documents necessary to carry out the purposes of this Agreement.

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first set forth above.

SALIX HOLDINGS, LTD,

BY:_______________________________

Title:____________________________

PURCHASER:

[nameofpurchaser]

(Signature)

Address:
[addpurch1]
[addpurch2]

Vesting Commencement
Date: [vestcomdate]

Monthly Vesting
Date: [movestdate]

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EXHIBIT A

PROMISSORY NOTE

$_________ _____________________, California ________________, 19___

At the times hereinafter stated, for value received, the undersigned promises to pay Salix Holdings, Ltd., a British Virgin Islands corporation (the "Company"), or order, at its principal office the principal sum of $_____________ with interest from the date hereof at a rate of__% per annum, compounded semi-annually, on the unpaid balance of said principal sum. Said principal and interest shall be due and payable on ___________, 19____.

If the undersigned's employment by or association with the Company is terminated prior to payment in full of this Note, this Note shall be immediately due and payable.

Principal and interest are payable in lawful money of the United States of
America. AT ANY TIME, THE PRIVILEGE IS RESERVED TO PAY MORE THAN THE SUM DUE.

Should suit be commenced to collect this Note or any portion thereof, such sum as the Court may deem reasonable shall be added hereto as attorneys' fees. The makers and endorsers have severally waived presentment for payment, protest, notice of protest, and notice of nonpayment of this Note.

This Note, which is full recourse, is secured by a pledge of certain shares of Common Stock of the Company and is subject to the terms of a Restricted Stock Purchase Agreement between the undersigned and the Company of even date herewith.

PROMISSORY NOTE

$((amountofpromote)) ______________, California _____________, 19____

At the times hereinafter stated, for value received, the undersigned promises to pay to Salix Holdings, Ltd., a British Virgin Islands corporation (the "Company"), or order, at its principal office the principal sum of $((amountofpromnote)) with interest from the date hereof at a rate of ((intonnote))% per annum, compounded semi-annually, on the unpaid balance of said principal sum. Said principal and interest shall be due and payable on ((duedateonnote)).

If the undersigned's employment by or association with the Company is terminated prior to payment in full of this Note, this Note shall be immediately due and payable.

Principal and interest are payable in lawful money of the United States of
America. AT ANY TIME, THE PRIVILEGE IS RESERVED TO PAY MORE THAN THE SUM DUE.

[nameofpurchaser]

EXHIBIT B

ASSIGNMENT SEPARATE FROM CERTIFICATE

FOR VALUE RECEIVED and pursuant to that certain Restricted Stock Purchase Agreement between the undersigned ("Purchaser") and Salix Holdings, Ltd. dated ___________, 19__ (the "Agreement"), Purchaser hereby sells, assigns and transfers unto ____________________________ (__________) shares of the Common Stock of Salix Holdings, Ltd. standing in Purchaser's name on the books of said corporation represented by Certificate No.__ herewith and does hereby irrevocably constitute and appoint ____________________________________________ to transfer said stock on the books of be within-named corporation with full power of substitution in the premises. THIS ASSIGNMENT MAY ONLY BE USED AS AUTHORIZED BY THE AGREEMENT AND THE EXHIBITS THERETO.

Dated:________________, 19 ___.

Signature:

Instruction: Please do not fill in any blanks other than the signature line. The purpose of this assignment is to enable the Company to exercise its repurchase option set forth in the Agreement without requiring additional signatures on the part of Purchaser.

ASSIGNMENT SEPARATE FROM CERTIFICATE

FOR VALUE RECEIVED and pursuant to that certain Restricted Stock Purchase Agreement between the undersigned ("Purchaser") and Salix Holdings, Ltd. dated _________, 19__ (the "Agreement"), Purchaser hereby sells, assigns and transfers unto ______________________________________________ (_____________) shares of the Common Stock of Salix Holdings, Ltd. standing in Purchaser's name on the books of said corporation represented by Certificate No.___ herewith and does hereby irrevocably constitute and appoint ______________________________ to transfer said stock on the books of the within-named corporation with full power of substitution in the premises. THIS ASSIGNMENT MAY ONLY BE USED AS AUTHORIZED BY THE AGREEMENT AND THE EXHIBITS THERETO.

Dated:________________, 19 ___

Signature:

[nameofpurchaser]

EXHIBIT C

CONSENT OF SPOUSE

I, _________________________________, spouse of ________________________, have read and hereby approve the foregoing Agreement. In consideration of the Company's granting my spouse the right to purchase the Shares as set forth in the Agreement, I hereby agree to be irrevocably bound by the Agreement and further agree that any community property or other such interest shall be similarly bound by the Agreement. I hereby appoint my spouse as my attorney-in- fact with respect to any amendment or exercise of any rights under the Agreement.

Spouse of Purchaser

CONSENT OF SPOUSE

I, [nameofspouse], spouse of [nameofpurchaser], have read and hereby approve the foregoing Agreement. In consideration of the Company's granting my spouse the right to purchase the Shares as set forth in the Agreement, I hereby agree to be irrevocably bound by the Agreement and further agree that any community property or other such interest shall be similarly bound by the Agreement. I hereby appoint my spouse as my attorney-in-fact with respect to any amendment or exercise of any rights under the Agreement.

Spouse of Purchaser

ELECTION UNDER SECTION 83(b)
OF THE INTERNAL REVENUE CODE OF 1986

The undersigned taxpayer hereby elects, pursuant to the Internal Revenue Code, to include in his or her gross income for the current taxable year, the amount of any compensation taxable to him or her in connection with his or her receipt of the property described below:

1. The name, address, taxpayer identification number and taxable year of the undersigned are as follows:

NAME : TAXPAYER: [nameofpurchaser] SPOUSE: [nameofspouse]

ADDRESS: [addpurchl]
[addpurch2]

IDENTIFICATION NO.: TAXPAYER: [idpurch] SPOUSE: [idofspouse]

TAXABLE YEAR: 19___

2. The property with respect to which the election is made is described as follows:

[numberofshares] shares of the Common Stock (the "Shares"), $0.001 par value, of Salix Holdings, Ltd., a British Virgin Islands corporation.

3. The date on which the property was transferred is: _____________, 19__

4. The property is subject to the following restrictions:

Repurchase option at cost in favor of Salix Holdings, Ltd. upon termination of taxpayer's employment, consulting, officer or director relationship.

5. The fair market value at the time of transfer, determined without regard to any restriction other than a restriction which by its terms will never lapse, of such property is: $[totalpurchaseprice]

6. The amount (if any) paid for such property: $[totalpurchaseprice]

The undersigned has submitted a copy of this statement to the person for whom the services were performed in connection with the undersigned's receipt of the above-described property. The transferee of such property is the person performing the services in connection with the transfer of said property.

The undersigned understands that the foregoing election may not be revoked
except with the consent of the Commissioner.

Dated:_________, 19 ___ Taxpayer

The undersigned spouse of taxpayer joins in this election.

Dated:_________, 19 ___ __________________________________ Spouse of Taxpayer

RECEIPT

Salix Holdings, Ltd. hereby acknowledges receipt of a check for $[amountofcheck] and a promissory note for $[amountofpromnote] (if applicable) given by [nameofpurchaser] as consideration for certificate number [certnumber] for [numberofshares] shares of Common Stock of Salix Holdings, Ltd.

Dated:____________, 19 ____

SALIX HOLDINGS,LTD.

By:_______________________________

Title:____________________________

RECEIPT AND CONSENT

The undersigned hereby acknowledges receipt of a photocopy of certificate number [certnumber] for [numberofshares] shares of Common Stock of Salix Holdings, Ltd. (the "Company").

The undersigned further acknowledges that the Secretary of the Company, or his or her designee, is acting as escrow holder pursuant to the Restricted Stock Purchase Agreement he/she has previously entered into with the Company. As escrow holder, the Secretary of the Company, or his or her designee, holds the original of the aforementioned certificate issued in the undersigned's name.

Dated:_____________, 19 ____

[nameofpurchaser]

SALIX HOLDINGS, LTD.

CHECKLIST
STOCK ISSUANCE FOR
[nameofpurchaser]

____ Stock Issuance Code Form received
____ Documents prepared in word processing ____ Documents reviewed
____ Board consent obtained
____ Securities issued pursuant to valid permit ____ Stock Certificate prepared
____ Stock Package sent to Client for signature (see below) ____ Documents received back from Client ____ Documents reviewed
____ 83(b) filing made
____ Copies of documents sent to Client
____ Documents filed in escrow

STOCK PACKAGE CHECKLIST

____ Corporate summary updated
____ Cover Letter                         (1 original)
____ Stock Purchase Agreement             (2 originals)
     and Consent of Spouse
____ Assignment Separate                  (2 originals)
     from Certificate
____ Employment or Consulting Agreement   (2 originals)
____ 83(b) Election                       (4 originals)
____ Receipt                              (2 originals)
____ Stock Certificate                    (1 original)
____ Promissory Note (if applicable)      (1 original)

Legends to be used:

     ____ '33 Act
     ____ Agreement
     ____ Commissioner's
     ____ ROFR
     ____ Articles

SALIX HOLDINGS, LTD.

MERGE INFORMATION

[nameofpurchaser]               [Name of Purchaser]

[numberofshares]                [Number of Shares)

[pricepershare]                 [Price Per Share]

[totalpurchaseprice]            [Total Purchase Price]

[amountofcheck]                 [Amount of Check]

[amountofpromnote]              [Amount of Promissory Note]

[addpurch1]                     [Street Address of Purchaser]

[addpurch2]                     [City, State and Zip Code of Purchaser]

[idpurch]                       [Purchaser's Taxpayer Identification Number]

[vestcomdate]                   [Vesting Commencement Date]

[movestdate]                    [Monthly Vesting Date]

[certnumber]                    [Certificate Number]

[nameofspouse]                  [Name of Purchaser's Spouse]

[idofspouse]                    [Taxpayer Identification Number of Spouse]

[intonnote]                     [Interest Rate on Promissory Note]

[duedateonnote]                 [Due Date of Promissory Note]

SALIX HOLDINGS, LTD.

STOCK PURCHASE ISSUANCE FORM

(1)       Purchaser's Name                       ____________________________
          (state as first, initial, last)

(2)       Number of Shares Purchased             Share Quantity:_____________

(3)       Price per Share                        Share Price:$_______________

(4)       Total Purchase Price                   Aggregate Price:$___________
          (2) x (3)

(5)       Amount Paid by Check                   Check Amount:$______________

(6)       Amount Paid by Promissory Note         Note Amount:________________

(7)&      Taxpayer (home) address                Address:____________________
(8)       State as: Street Address               ____________________________
          City, State, Zip                       ____________________________

(9)       Purchaser Social Security Number of    S.S.#:______________________

(10)      Vesting Commencement Date              Date:_______________________
          (state as month, day, year)

(11)      Certificate Number                     Number:_____________________

(12)      Spouse's Name                          Full Name:__________________
          (State as first, initial, last)

(13)      Spouse's Social Security No.           S.S.#:______________________

(14)      Interest Rate                          ____________________________%

(15)      Note Payment Date                      ____________________________
          (Item 10+4 years)
          (state as month, day, year)

(16)      Status of Purchaser                    ____________________________
          (employee, consultant,
          officer, director, etc.)

(17)      How will title to the Company's          _________________________
          securities be taken? (Please show        _________________________
                                -----------        _________________________
          exactly)
          -------

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STATE OF CALIFORNIA - CALIFORNIA ADMINISTRATIVE CODE

Title 10. Investment - Chapter 3. Commissioner of Corporations

260.141.11: Restriction on Transfer.

(a) The issuer of any security upon which a restriction on transfer has been imposed pursuant to Sections 260.102.6, 260.141.10 or 260.534 shall cause a copy of this section to be delivered to each issuee or transferee of such security at be time the certificate evidencing the security is delivered to the issuee or transferee.

(b) It is unlawful for the holder of any such security to consummate a sale or transfer of such security, or any interest therein, without the prior written consent of the Commissioner (until this condition is removed pursuant to Section 260.141.12 of these rules), except:

(1) to the issuer; (2) pursuant to the order or process of any court; (3) to any person described in Subdivision (i) of Section 25102 of the Code or Section 260.105.14 of these rules;
(4) to the transferor's ancestors, descendants or spouse, or any custodian or trustee for the account of the transferor or the transferor's ancestors, descendants, or spouse; or to a transferee by a trustee or custodian for the account of the transferee or the transferee's ancestors, descendants or spouse;
(5) to holders of securities of the same class of the same issuer;
(6) by way of gift or donation inter vivos or on death;
(7) by or through a broker-dealer licensed under the Code (either acting as such or as a finder) to a resident of a foreign state, territory or country who is neither domiciled in the state to the knowledge of the broker-dealer, nor actually present in this state if the sale of such securities is not in violation of any securities law of the foreign state, territory or country concerned;
(8) to a broker-dealer licensed under the Code in a principal transaction, or as an underwriter or member of an underwriting syndicate or selling group;
(9) if the interest sold or transferred is a pledge or other lien given by the purchaser to the seller upon a sale of the security for which the Commissioner's written consent is obtained or under this rule not required; (10) by way of a sale qualified under Sections 25111, 25112, 25113 or 25121 of the Code, of the securities to be transferred, provided that no order under Section 25140 or Subdivision (a) of Section 25143 is in effect with respect to such qualification;
(11) by a corporation to a wholly owned subsidiary of such corporation, or by a wholly owned subsidiary of a corporation to such corporation; (12) by way of an exchange qualified under Section 25lll, 25112 or 25113 of the Code, provided that no order under Section 25140 or Subdivision (a) of Section 25143 is in effect with respect to such qualification;
(13) between residents of foreign states, territories or countries who are neither domiciled nor actually present in this state;
(14) to the State Controller pursuant to the Unclaimed Property Law or to the administrator of the unclaimed property law of another state;
(15) by the State Controller pursuant to the Unclaimed Property Law or by the administrator of the unclaimed property law of another state if, in either such case, such person (i) discloses to potential purchasers at the sale that transfer of the securities is restricted under his rule, (ii) delivers to each purchaser a copy of this rule, and (iii) advises the Commissioner of the name of each purchaser;
(16) by a trustee to a successor trustee when such transfer does not involve a change in the beneficial ownership of the securities; or
(17) by way of an offer and sale of outstanding securities in an issuer transaction that is subject to the qualification requirement of Section 25110 of the Code but exempt from that qualification requirement by subdivision (f) of Section 25102;

provided that any such transfer is on the condition that any certificate evidencing the security issued to such transferee shall contain the legend required by this section.

CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES."

EXHIBIT 10.3

SALIX HOLDINGS, LTD.
1996 STOCK OPTION PLAN

1. Purposes of the Plan. The purposes of this 1996 Stock Option Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to the Employees and Consultants of the Company and to promote the success of the Company's business.

Options granted hereunder may be either Incentive Stock Options or Nonstatutory Stock Options, at the discretion of the Board and as reflected in the terms of the written option agreement.

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

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

(b) "Applicable Laws" shall have the meaning set forth in Section 4(a) below.

(d) "Code" shall mean the Internal Revenue Code of 1986, as amended,

or any successor thereto.

(e) "Committee" shall mean the Committee appointed by the Board of Directors in accordance with Section 4(a) of the Plan, if one is appointed.

(f) "Common Stock" shall mean the Common Stock of the Company.

(g) "Company" shall mean Salix Holdings, Ltd., a British Virgin Islands International Business Company.

(h) "Consultant" shall mean any person who is engaged by the Company or any Parent or Subsidiary to render consulting services and is compensated for such consulting services, and any director of the Company whether compensated for such services or not; provided that if and in the event the Company registers any class of any equity security pursuant to Section 12 of the Exchange Act, the term Consultant shall thereafter not include directors who are not compensated for their services or are paid only a director's fee by the Company.

(i) "Continuous Status as an Employee or Consultant" shall mean the absence of any interruption or termination of service as an Employee or Consultant. Continuous Status as an Employee or Consultant shall not be considered interrupted in the case of sick leave, military leave, or any other leave of absence approved by the Administrator; provided that such leave is for a period of not more than 90 days or reemployment upon the expiration of such leave is

guaranteed by contract or statute. For purposes of this Plan, a change in status from an Employee to a Consultant or from a Consultant to an Employee will not constitute a termination of employment.

(j) "Director" shall mean a member of the Board.

(k) "Employee" shall mean any person, including officers and Named Executives (including officers and Named Executives who are also directors), employed by the Company or any Parent or Subsidiary of the Company. The payment of a director's fee by the Company shall not be sufficient to constitute "employment" by the Company.

(l) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.

(m) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows:

(i) The fair market value shall be determined by the Board in its discretion; provided, however, that where there is a public market for the Common Stock, the fair market value per Share shall not be less than the closing price of the Common Stock on the Toronto Stock Exchange on the last business day preceding the date of grant. Such fair market value shall be priced in United States dollars converted at the then prevailing exchange rate between Canada and the United States.

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

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

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

(p) "Nonstatutory Stock Option" shall mean an Option not intended to qualify as an Incentive Stock Option.

(q) "Officer" shall mean a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder, or any successor thereto.

(r) "Option" shall mean a stock option granted pursuant to the Plan.

(s) "Optioned Stock" shall mean the Common Stock subject to an Option.

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(t) "Optionee" shall mean an Employee or Consultant who receives an Option.

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

(v) "Plan" shall mean this 1996 Stock Option Plan.

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

(x) "Share" shall mean a share of the Common Stock, as adjusted in accordance with Section 14 of the Plan.

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

3. Stock Subject to the Plan. Subject to the provisions of Section 14 of the Plan, the maximum aggregate number of shares that may be optioned and sold under the Pl an is 1,150,000; provided that in no event shall the number of shares that may be optioned and sold under the Plan exceed the sum of (i) 711,175 shares of Common Stock plus (ii) such number of shares as are subject to outstanding and unexercised stock options under the Company's 1994 Stock Plan, as of the date of adoption of this Plan by the stockholders, which options are thereafter canceled or otherwise terminated without exercise. The Shares may be authorized, but unissued, or reacquired Common Stock.

If an Option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares that were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan. Notwithstanding any other provision of the Plan, shares issued under the Plan and later repurchased by the Company shall not become available for future grant or sale under the Plan.

4. Administration of the Plan.

(a) Composition of Administrator.

(i) Multiple Administrative Bodies. If permitted by Rule 16b-3, and by the legal requirements relating to the administration of incentive stock option plans, if any, of applicable securities laws and the Code (collectively, the "APPLICABLE LAWS"), the Plan may (but need not) be administered by different administrative bodies with respect to directors, officers who are not directors and Employees who are neither directors nor officers.

(ii) Administration with respect to Directors and Officers. With respect to grants of Options to Employees or Consultants who are also officers or directors of the Company, the Plan shall be administered by (A) the Board, if the Board may administer the Plan

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in compliance with Rule 16b-3 as it applies to a plan intended to qualify thereunder as a discretionary plan and Section 162(m) of the Code as it app lies so as to qualify grants of Options to Named Executives as performance-based compensation, or (B) a Committee designated by the Board to administer the Plan, which Committee shall be constituted (I) in such a manner as to permit the Plan to comply with Rule 16b-3 as it applies to a plan intended to qualify thereunder as a discretionary plan, (II) in such a manner as to qualify grants of Options to Named Executives as performance-based compensation under Section 162(m) of the Code and (III) in such a manner as to satisfy the Applicable Laws.

(iii) Administration with respect to Other Persons. With respect to grants of Options to Employees or Consultants who are neither directors nor officers of the Company, the Plan shall be administered by (A) the Board or (B) a Committee designated by the Board, which Committee shall be constituted in such a manner as to satisfy the Applicable Laws.

(iv) General. Once a Committee has been appointed pursuant to subsection (ii) or (iii) of this Section 4(a), such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of any Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies (however caused) and remove all members of a Committee and thereafter directly administer the Plan, all to the extent permitted by the Applicable Laws and, in the case of a Committee appointed under subsection (ii), to the extent permitted by Rule 16b-3 as it applies to a plan intended to qualify thereunder as a discretionary plan, and to the extent required under Section 162(m) of the Code to qualify grants of Options to Named Executives as performance-based compensation.

(b) Powers of the Administrator. Subject to compliance with the bylaws, rules, policies and requirements of the Alberta Stock Exchange or the Toronto Stock Exchange, as applicable, and further subject to the provisions of the Plan and in the case of a Committee, the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion:

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

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

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

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

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

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

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

(viii) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option shall have declined since the date the Option was granted;

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

5. Eligibility.

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

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

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

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

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(e) The terms of any Option shall comply with the rules and policies of any stock exchange on which the shares of the Company are then listed.

(f) Not more than 50% of the total number of shares reserved under the Plan shall be allocated to any one participant under the Plan within any twelve calendar month period.

(g) The maximum number of shares that may be allocated to any one participant upon the grant of stock Options may not exceed 5% of the issued and outstanding Common Stock at the time of grant.

6. Term of Plan. The Plan shall become effective upon the earlier to occur of its adoption by the Board of Directors or its approval by the stockholders of the Company. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 16 of the Plan.

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

8. Limitation on Grants to Officers. Subject to adjustment as provided in this Plan and subject to the other limitations set forth herein:

(a) The maximum number of Shares which may be granted under Options held by all Officers of the Company may not exceed 10% of the issued and outstanding shares of Common Stock at the time of grant (excluding shares issued pursuant to share compensation arrangements over the preceding 12-month period).

(b) The maximum number of Shares which may be granted under Options to any one Officer and such Officer's associates in any 12 month period shall be 5% of the issued and outstanding Common Stock at the time of grant (excluding shares issued pursuant to share compensation arrangements over the preceding 12- month period).

(c) The maximum number of Shares which may be granted under Options to Officers in any 12 month period shall be 10% of the issued and outstanding Common Stock at the time of grant (excluding shares issued pursuant to share compensation arrangements over the preceding 12-month period).

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9. Option Exercise Price and Consideration.

(a) The per Share exercise price for the Shares to be issued pursuant to exercise of an Option shall be such price as is determined by the Administrator, but shall be subject to the following:

(i) In the case of an Incentive Stock Option

(B) granted to any Employee, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant.

(ii) In the case of a Nonstatutory Stock Option granted to a person who, at the time of the grant of such Option, is a Named Executive of the Company, the per share Exercise Price shall be no less than 100% of the Fair Market Value on the date of grant;

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

10. Exercise of Option.

(a) Procedure for Exercise; Rights as a Stockholder. Any Option granted hereunder shall be exercisable at such times and under such conditions as determined by the

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Administrator, including performance criteria with respect to the Company and/or the Optionee, and as shall be permissible under the terms of the Plan.

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

An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may, as authorized by the Administrator, consist of any consideration and method of payment allowable under Section 9(b) of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly upon exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in
Section 14 of the Plan.

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

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

(c) Disability of Optionee. Notwithstanding the provisions of Section 10(b) above, in the event of termination of an Optionee's Continuous Status as an Employee or Consultant as a result of his or her disability, he or she may, but only within twelve (12) months (or such other period of time not exceeding twelve (12) months as is determined by the Administrator, with such determination in the case of an Incentive Stock Option being made at the time of grant of the Option) from the date of such termination (but in no event later than the date of expiration of the term of such Option as set forth in the Option Agreement), exercise his or her Option to the extent he or she was entitled to exercise it at the date of such termination. To the extent that he or she was not entitled to exercise the Option at the date of termination, or if

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he does not exercise such Option (which he was entitled to exercise) within the time specified herein, the Option shall terminate.

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

(i) during the term of the Option who is at the time of his death an Employee or Consultant of the Company and who shall have been in Continuous Status as an Employee or Consultant since the date of grant of the Option, the Option may be exercised, at any time within six (6) months (or such other period of time, not exceeding six (6) months, as is determined by the Administrator, with such determination in the case of an Incentive Stock Option being made at the time of grant of the Option) following the date of death (but in no event later than the date of expiration of the term of such Option as set forth in the Option Agreement), by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance but only to the extent of the right to exercise that would have accrued had the Optionee continued living and remained in Continuous Status as an Employee or Consultant three (3) months (or such other period of time as is determined by the Administrator as provided above) after the date of death, subject to the limitation set forth in Section 5(b); or

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

(e) Rule 16b-3. Options granted to persons subject to Section 16(b) of the Exchange Act must comply with Rule 16b-3 and shall contain such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions.

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

12. Stock Withholding to Satisfy Withholding Tax Obligations. At the discretion of the Administrator, Optionees may satisfy withholding obligations as provided in this paragraph. When an Optionee incurs tax liability in connection with an Option which tax liability is subject to tax withholding under applicable tax laws, and the Optionee is obligated to pay the Company an amount required to be withheld under applicable tax laws, the Optionee may satisfy the withholding tax obligation by one or some combination of the following methods: (a) by cash payment, or (b) out of Optionee's current compensation, (c) if permitted by the Administrator, in

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its discretion, by surrendering to the Company Shares that (i) in the case of Shares previously acquired from the Company, have been owned by the Optionee for more than six months on the date of surrender, and (ii) have a fair market value on the date of surrender equal to or less than Optionee's marginal tax rate times the ordinary income recognized, or (d) by electing to have the Company withhold from the Shares to be issued upon exercise of the Option that number of Shares having a fair market value equal to the amount required to be withheld. For this purpose, the fair market value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined (the "TAX DATE").

Any surrender by an Officer or Director of previously owned Shares to satisfy tax withholding obligations arising upon exercise of this Option must comply with the applicable provisions of Rule 16b-3 and shall be subject to such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions.

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

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

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

In the event the election to have Shares withheld is made by an Optionee and the Tax Date is deferred under Section 83 of the Code because no election is filed under Section 83(b) of the Code, the Optionee shall receive the full number of Shares with respect to which the Option is exercised but such Optionee shall be unconditionally obligated to tender back to the Company the proper number of Shares on the Tax Date.

13. Non-Transferability of Options. The Option may not be sold, pledged,assigned, hypothecated, transferred, or disposed of in any manner.

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14. Adjustments Upon Changes in Capitalization or Merger.

(a) Changes in Capitalization. Subject to any required action by the stockholders of the Company, the number of shares of Common Stock covered by each outstanding Option, the number of shares of Common Stock that have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, the maximum number of shares of Common Stock for which Options may be granted to any employee under Section 8 of the Plan, and the price per share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Administrator, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option.

(b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Board shall notify the Optionee at least fifteen (15) days prior to such proposed action. To the extent it has not been previously exercised, the Option will terminate immediately prior to the consummation of such proposed action.

(c) Merger or Sale of Assets. In the event of a proposed sale of all or substantially all of the Company's assets or a merger of the Company with or into another corporation where the successor corporation issues its securities to the Company's shareholders, each outstanding Option shall be assumed or an equivalent option or right shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless the successor corporation does not agree to assume the Option or to substitute an equivalent option or right, in which case such Option shall vest in its entirety and become exercisable as follows prior to the consummation of the merger or sale of assets. If the Option becomes fully exerciseable in lieu of assumption or substitution in the event of a merger or sale of assets in as provided in the preceding sentence, the Administrator shall notify the Optionee and the Option shall be fully exerciseable for a period of ten (10) days from the date of such notice, and will terminate upon the expiration of such period.

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

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

16. Amendment and Termination of the Plan.

(a) Amendment and Termination.

(i) The Board may amend or terminate the Plan from time to time in such respects as the Board may deem advisable; provided that, the following revisions or amendments shall require approval of the stockholders of the Company in the manner described in Section 20 of the Plan:

(1) any revision or amendment requiring stockholder approval in order to preserve the qualification of the Plan under Rule 16b-3; or

(2) any change in the limitation on grants to employees as described in Section 8 of the Plan or other changes which would require stockholder approval to qualify Options granted hereunder as performance-based compensation under Section 162(m) of the Code.

(ii) The President and Chief Financial Officer may amend the Plan without approval of the Board in order to comply with the requirements of any stock exchange on which the Common Stock is listed, provided that any necessary prior approval of such stock exchange or under applicable securities laws is obtained.

(b) Stockholder Approval. If any amendment requiring stockholder approval under Section 13(a) of the Plan is made subsequent to the first registration of any class of equity securities by the Company under Section 12 of the Exchange Act, such stockholder approval shall be solicited as described in Section 20 of the Plan.

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

17. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended (or any successor thereto), the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange

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upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance.

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

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

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

20. Stockholder Approval.

(a) Continuance of the Plan shall be subject to approval by the stockholders of the Company within twelve (12) months before or after the date the Plan is adopted. Such stockholder approval shall be obtained in the manner and to the degree required under applicable federal and state law.

(b) In the event that the Company registers any class of equity securities pursuant to Section 12 of the Exchange Act, any required approval of the stockholders of the Company obtained after such registration shall be solicited substantially in accordance with Section 14(a) of the Exchange Act and the rules and regulations promulgated thereunder.

(c) If any required approval by the stockholders of the Plan itself or of any amendment thereto is solicited at any time otherwise than in the manner described in Section 20(b) hereof, then the Company shall, at or prior to the first annual meeting of stockholders held subsequent to the later of (1) the first registration of any class of equity securities of the Company under
Section 12 of the Exchange Act or (2) the granting of an Option hereunder to an officer or director after such registration, do the following:

(i) furnish in writing to the holders entitled to vote for the Plan substantially the same information that would be required (if proxies to be voted with respect to approval or disapproval of the Plan or amendment were then being solicited) by the rules and

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regulations in effect under Section 14(a) of the Exchange Act at the time such information is furnished; and

(ii) file with, or mail for filing to, the Securities and Exchange Commission four copies of the written information referred to in subsection (i) hereof not later than the date on which such information is first sent or given to stockholders.

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SALIX HOLDINGS, LTD.
1996 STOCK OPTION PLAN
NOTICE OF STOCK OPTION GRANT

You have been granted an option to purchase Common Stock of Salix Holdings, Ltd. (the "COMPANY") as follows:

Date of Grant                     ______________________

Vesting Commencement Date         ______________________

Exercise Price per Share          US$ __________________

Total Number of Shares Granted    ______________________

Total Exercise Price              US$ __________________

Type of Option:                   _________  Incentive Stock Option ("ISO")
                                  _________  Nonstatutory Stock Option ("NSO")

Term/ Expiration Date:            ____________________________________________

Vesting Schedule:   This Option may be exercised, in whole or in part, in
                    accordance with the following schedule:  _________________

                    __________________________________________________________

                    __________________________________________________________

Termination Period: Option may be exercised for 90 days after termination of Continuous Status as an Employee or Consultant except as set out in Sections 7 and 8 of the Stock Option Agreement (but in no event later than the Expiration Date).

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

OPTIONEE:                     SALIX HOLDINGS, LTD.

                              By:
________________________         ______________________________

                              Title:
________________________            ___________________________
Print Name

SALIX HOLDINGS, LTD.

1996 STOCK OPTION PLAN
STOCK OPTION AGREEMENT

1. Grant of Option. Salix Holdings, Ltd. a British Virgin Islands International Business Company (the "COMPANY"), hereby grants to the Optionee named in the Notice of Grant (the "OPTIONEE"), an option (the "OPTION") to purchase a total number of shares of Common Stock (the "SHARES") set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the "EXERCISE PRICE") subject to the terms, definitions and provisions of the Salix Holdings, Ltd. 1996 Stock Option Plan (the "PLAN") adopted by the Company, which is incorporated herein by reference. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Option.

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

2. Exercise of Option. This Option shall be exercisable during its term in accordance with the Vesting Schedule set out in the Notice of Grant and with the provisions of Section 10 of the Plan as follows:

(i) Right to Exercise.

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

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

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

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

No Shares will be issued pursuant to the exercise of an Option unless such issuance and such exercise shall comply with all relevant provisions of law and the requirements of any stock

exchange upon which the Shares may then be listed. Assuming such compliance, for income tax purposes the Shares shall be considered transferred to the Optionee on the date on which the Option is exercised with respect to such Shares.

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

i. cash; or

ii. check; or

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

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

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

vi. any combination of the foregoing methods of payment.

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

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

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6. Disability of Optionee. Notwithstanding the provisions of Section 5 above, in the event of termination of Optionee's Continuous Status as an Employee or Consultant as a result of his or her disability, Optionee may, but only within twelve (12) months from the date of termination of employment (but in no event later than the date of expiration of the term of this Option as set forth in Section 9 below), exercise this Option to the extent he or she was entitled to exercise it at the date of such termination. To the extent that Optionee was not entitled to exercise the Option at the date of termination, or if Optionee does not exercise such Option (which he was entitled to exercise) within the time specified herein, the Option shall terminate.

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

(i) during the term of this Option and while an Employee or Consultant of the Company and having been in Continuous Status as an Employee or Consultant since the date of grant of the Option, the Option may be exercised at any time within six (6) months following the date of death (but in no event later than the date of expiration of the term of this Option as set forth in Section 9 below), by Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that would have accrued had the Optionee continued living and remained in Continuous Status as an Employee or Consultant three (3) months after the date of death; or

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

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

9. Term of Option. This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option. The limitations set out in Section 8 of the Plan regarding Options designated as Incentive Stock Options and Options granted to more than ten percent (10%) shareholders shall apply to this Option.

10. Taxation Upon Exercise of Option. Optionee understands that, upon exercising a Nonstatutory Stock Option, he or she will recognize income for tax purposes in an amount equal to the excess of the then fair market value of the Shares over the exercise price. However, the timing of this income recognition may be deferred for up to six months if Optionee is subject to Section 16 of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"). If the Optionee is an employee, the Company will be required to withhold from Optionee's compensation, or collect from Optionee and pay to the applicable taxing authorities, an amount equal to a percentage of this compensation income. Additionally, the Optionee may at some point be required to satisfy tax

-3-

withholding obligations with respect to the disqualifying disposition of an Incentive Stock Option. The Optionee shall satisfy his or her tax withholding obligation arising upon the exercise of this Option by one or some combination of the following methods: (i) by cash payment, or (ii) out of Optionee's current compensation, or (iii) if permitted by the Administrator, in its discretion, by surrendering to the Company Shares which (a) in the case of Shares previously acquired from the Company, have been owned by the Optionee for more than six months on the date of surrender, and (b) have a fair market value on the date of surrender equal to or greater than Optionee's marginal tax rate times the ordinary income recognized, or (iv) by electing to have the Company withhold from the Shares to be issued upon exercise of the Option that number of Shares having a fair market value equal to the amount required to be withheld. For this purpose, the fair market value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined (the "TAX DATE").

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

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

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

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

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

(i) Exercise of ISO. If this Option qualifies as an ISO, there will be no regular U.S. federal income tax liability or California income tax liability upon the exercise of the

-4-

Option, although the excess, if any, of the fair market value of the Shares on the date of exercise over the Exercise Price will be treated as an adjustment to the alternative minimum tax for federal tax purposes and may subject the Optionee to the alternative minimum tax in the year of exercise.

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

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

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

Salix Holdings, Ltd.

a British Virgin Islands International Business
Company

By:

Title:

-5-

IN THIS AGREEMENT, NOR IN THE COMPANY'S STOCK OPTION PLAN WHICH IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR WITHOUT CAUSE.

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

Dated:

Signature of Optionee

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EXHIBIT A

SALIX HOLDINGS, LTD.
1996 STOCK OPTION PLAN

EXERCISE NOTICE

Salix Holdings, Ltd.
3600 W. Bayshore Road, Suite 205
Palo Alto, CA 94303
Attention: Chief Financial Officer

1. Exercise of Option. Effective as of today, __________________________, 19__, the undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase ___________ shares of the Common Stock (the "Shares") of Salix Holdings, Ltd. (the "Company") under and pursuant to the Company's 1996 Stock Option Plan, as amended (the "Plan") and the [ ] Incentive [ ] Nonstatutory

Stock Option Agreement dated _____________________________ (the "Option Agreement").

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

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

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

7. Restrictive Legends and Stop-Transfer Orders.

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR, IN THE OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH.

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

8. Market Standoff Agreement. In connection with an underwritten public offering of the Company's securities and upon request of the Company or the underwriters managing any underwritten offering of the Company's securities, Optionee hereby agrees not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Shares (other than

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those included in the registration) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed 180 days) from the effective date of such registration as may be requested by the Company or such managing underwriters; provided, however, that the Optionee need not so agree unless a majority of the Company's officers and directors and a majority of the holders of at least 5% of the Company's outstanding securities also agree to be similarly bound.

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

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

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

12. Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States mail by certified mail, with postage and fees prepaid, addressed to the other party at its address as shown below beneath its signature, or to such other address as such party may designate in writing from time to time to the other party.

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

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

15. Entire Agreement. The Plan and Notice of Grant/Option Agreement are incorporated herein by reference. This Agreement, the Plan and the Notice of Grant/Option Agreement constitute

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the entire agreement of the parties and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and is governed by California law except for that body of law pertaining to conflict of laws.

Submitted by:                       Accepted by:

OPTIONEE:                           SALIX HOLDINGS, LTD.



__________________________________  By:
Signature                               _____________________________

                                    Its:
                                         ____________________________


Name:
     _____________________________
                                    Address:   3600 W. Bayshore Rd, Suite 205
Address: _________________________             Palo Alto, CA 94303
                                               Attn: Chief Financial Officer

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EXHIBIT 10.4

DATED 17th SEPTEMBER 1992

GLYCYX PHARMACEUTICALS, LTD

SALIX PHARMACEUTICALS, INC.

BIOREX LABORATORIES, LTD

AMENDMENT AGREEMENT

HEWITSON BECKE + SHAW
4/5 Church Street
Peterborough
PE1 1XB

* CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

- 1 -

THIS AMENDMENT AGREEMENT, effective as of September 17th 1992 by and among GLYCYX PHARMACEUTICALS, LTD., a Bermuda corporation having its registered offices at Cedar House, 41 Cedar Avenue, Hamilton, HM-12, Bermuda, ("Glycyx"), SALIX PHARMACEUTICALS, INC., a California corporation having its principal place of business at 3600 W. Bayshore Road, Palo Alto, California 94303 ("Salix") and BIOREX LABORATORIES, LTD, a United Kingdom corporation having its principal place of business at 2 Crossfield Chambers, Gladbeck Way, Enfield, Middlesex EN2 7HT ("Biorex").

WITNESSETH:

WHEREAS, Salix has licensed from Biorex the right to make, use and sell in the United States, Canada and Mexico a therapeutic pharmaceutical product based upon the compound Balsalazide pursuant to the terms of a License Agreement dated as of January 17, 1991 between Biorex and Salix (the "Salix License Agreement"); and

WHEREAS, Glycyx has licensed from Biorex the right to make, use and sell in territories throughout the world (excluding the United States, Canada, Mexico, Japan, Korea and Taiwan) a therapeutic pharmaceutical product based upon the compound Balsalazide pursuant to the terms of a License Agreement dated as of March 18, 1992 between Biorex and Glycyx (the "Original Agreement"); and

WHEREAS, Glycyx is interested in licensing to AB Astra ("Astra") certain rights to distribute in certain territories therapeutic pharmaceutical products based upon the compound Balsalazide upon the terms contained in a Distribution Agreement and a Research and Development both between Glycyx and Astra and Astra has requested that such territories include Mexico and Canada, the rights of which currently belong to Salix; and

WHEREAS, Biorex and Glycyx have agreed to supersede and replace in its entirety the Original Agreement by an agreement of even date hereof (the "Glycyx License Agreement"); and

WHEREAS, Salix and Biorex desire to amend the Salix License Agreement to provide that the territories of Canada and Mexico shall be removed from the Salix License Agreement and Glycyx and Biorex desire to have Canada and Mexico added to the Glycyx License Agreement.

NOW, THEREFORE, in consideration of good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto mutually agree as follows:

1. AMENDMENT TO SALIX LICENSE AGREEMENT

1.1 Salix and Biorex acknowledge and agree that Section 1.10 of the Salix License Agreement is hereby amended and restated in its entirety to read as follows:-

1.10 "Territory" means the United States (including its territories, possessions and the Commonwealth of Puerto

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Rico).

1.2 Salix and Biorex acknowledge and agree that the calculation of royalties payable by Salix to Biorex pursuant to Section 7 of the Salix License Agreement shall not include amounts attributable to sales of Products (as defined therein) by any person in Canada or Mexico.

2. AMENDMENT TO GLYCYX LICENSE AGREEMENT

2.1 Definitions

2.1.1     "Profits", "Initial License Fees" and "Biorex Profits" shall have
          the meaning given to them in the Glycyx License Agreement.

2.1.2     "Astra Territory" shall mean all countries throughout the world
          (excluding the United States, Japan, Korea, Taiwan, Italy, Spain,
          Portugal and Greece.

2.1.3     "Canada-Mexico Fees" small mean [*] of Initial Licence Fees paid
          to Glycyx in respect of all (and not part of) the Astra
          Territory.

2.1.4     "Canada-Mexico Profit" shall mean [*] of Profits realized by
          Glycyx attributable to the Astra Territory.

2.1.5     "Net Canada Mexico Profit" shall mean [*] of Canada Mexico
          Profit.

2.2 Glycyx and Biorex acknowledge and agree that the definition of Territory in the Glycyx License Agreement is hereby amended and restated in its entirety to read as follows:

"Territory" means the entire world, but excluding the following countries: United States (including its territories, possessions and the Commonwealth of Puerto Rico), Japan, Korea and Taiwan.

2.3 For the purposes of section 7.1 of the Glycyx Licence Agreement the term "Initial Licence Fees" shall mean Initial Licence Fees (as defined in Article 1 of the Glycyx Licence Agreement) less the Canada-Mexico Fees, and Biorex Fees shall be calculated accordingly.

2.4 The amount of Net Canada-Mexico Profit paid to Salix by Glycyx pursuant to section 3.2.2 shall be paid out of Glycyx [*] under section 7.2 of the Glycyx Licence Agreement. Biorex Profit shall not be reduced as a result of any payments made pursuant to section 3.1 and/or section 3.2.2.

3. PAYMENTS FROM GLYCYX TO SALIX

In consideration for Salix agreeing to give up its rights under the Salix License Agreement to the territories of

* CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

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Mexico and Canada and in consideration for Glycyx agreeing to assume the obligations under the Glycyx License Agreement with respect to such territories, Glycyx hereby agrees to pay to Salix the amounts set forth below:-

3.l Milestone Payments

[*]

3.2 Sublicense Fees: Profit Sharing

3.2.1     Sublicense Fees: Glycyx shall pay to Salix the Canada-Mexico Fees
          ---------------
          arising from the Astra Territory (the "Salix Fees").

3.2.2     Profit Sharing: In addition to the Salix Fees to be paid to Salix
          --------------
          under 3.2.1 above, Glycyx agrees to pay to Salix [*]. Such
          payments shall be payable for so long as Glycyx is making
          payments to Biorex pursuant to Section 7.2.2 of the Glycyx
          License Agreement. Such amounts shall be paid to Salix quarterly
          in accordance with Section 5.1 below, on the basis of unaudited
          financial statements of Glycyx for the applicable quarter.
          However, the payment to Salix for the final quarter of a Glycyx
          fiscal year shall be made on the basis of Glycyx's audited
          financial statements for such fiscal year, and such payment shall
          be adjusted for the difference between the Profit as calculated
          during the year and as reflected in such audited financial
          statements. Notwithstanding Section 5.1 below, the report and
          payment due under this Section 3.2.2 for the final quarter of a
          Glycyx fiscal year shall not be due until ninety (90) days after
          the end of such quarter.

3.3 Combination Product: In the event a Product (as defined in the Glycyx License Agreement) is sold in a combination product with other biologically active components, Profits, for purposes of calculating payments due to Salix on the combination product, shall be calculated by multiplying the Profits of that combination product by the fraction A/B, where A is the gross selling price of the Product sold separately and B is the gross selling price of the combination product. In the event that no such separate sales are made by Glycyx or a permitted sublicensee, Profits

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

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shall be reasonably allocated between such Product and such other component, as mutually agreed by Glycyx and Salix. In the event Glycyx receives Sublicense Fees from such a combination product, the amounts attributable to the Product shall be reasonably allocated by Glycyx on a similar basis.

4. REPRESENTATIONS AND WARRANTIES

4.1 Authorization: Each of Salix, Glycyx and Biorex represents and warrants that it has the full right and authority to enter into this Agreement and perform its obligations hereunder.

4.2 No Other Representations: Except to the extent provided in this Clause 4 or as contained in the Salix License Agreement and the Glycyx License Agreement, Salix, Glycyx and Biorex make no representations and extend no warranties of any kind, either expressed or implied Provided That the representations and warranties and indemnities given by Biorex in the Glycyx License Agreement shall be extended in favour of Glycyx in relation to Canada and Mexico. THE WARRANTIES EXPRESSLY SET FORTH IN THIS CLAUSE 4 BY EACH PARTY ARE EXCLUSIVE AND NO OTHER WARRANTY, WRITTEN OR ORAL, INCLUDING WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, IS EXPRESSED OR IMPLIED.

5. REPORTS AND ACCOUNTING

5.1 Reports: During the term during which Glycyx is obligated to make payments to Salix pursuant to Section 3.2.2 of this Agreement, after the Commercial Introduction of a Product (as defined in the Glycyx License Agreement), Glycyx shall furnish to Salix on a quarterly basis a written report covering Glycyx's fiscal quarters showing, on a country by country basis,
(i) the Sublicense Fees received by Glycyx during the reporting period;
(ii) the Salix Fees and Profits payable in US Dollars which shall have accrued hereunder in respect of such quarter; (iii) withhold taxes, if any, required by law to be deducted in respect of such amounts; and (iv) the dates of the Commercial Introductions of any Products in any country in the Territory during the reporting period (as such terms are defined in the Glycyx License Agreement). Except as provided in 3.2.2 above, reports shall be due forty-five (45) days following the close of each respective quarter. in case no payments are due for any payment period hereunder, Glycyx shall so report. Glycyx shall keep accurate records in sufficient detail to enable the amounts payable hereunder to be determined.

5.2  Audits:
     -------

     5.2.1     Upon the written request of Salix, at Salix's expense and not
               more than once each Glycyx fiscal year, Glycyx shall permit or
               procure an independent public accountant selected by Salix and
               reasonably acceptable to Glycyx to have access during normal
               business hours to such of the

- 5 -

          records of Glycyx, its sub-licensees and Affiliates as may be
          reasonably necessary to verify the accuracy of the reports
          hereunder made not more than thirty-six (36) months prior to the
          date of such request.

5.2.2     In the event such accountant concludes that additional amounts
          were owed during such period, the additional amount shall be paid
          promptly. The fees charged by such accountant shall be paid by
          Salix unless the audit establishes that the amounts payable by
          Glycyx for the audited period are more than one hundred and five
          percent (105%) of the amounts actually paid for such period, in
          which case Glycyx shall pay the reasonable fees and expenses
          charged by the accountant.

5.2.3     Upon the expiration of thirty-six (36) months following the date
          of any payment report hereunder, the calculation of amounts
          payable with respect to the quarter covered by such report shall
          be binding and conclusive upon Salix; and Glycyx shall be
          released from any liability or accountability with respect to
          payments for such year.

5.3 Confidential Financial Information: Salix agrees that all information subject to review under this Clause 5 is confidential and shall cause its accountant to retail all such information in confidence except for discussions with Glycyx.

6. PAYMENTS

6.1 Payment Terms: Amounts shown to have accrued by each report provided for under Clause 5 of this Agreement shall be due and payable on the date such report is due; provided, however that payments of Salix's share of Profits under Section 3.2.2 shall not be due until such Profits are actually received by Glycyx. Glycyx shall use commercially reasonable efforts to ensure prompt receipt of such Profits. Payment of such amounts in whole or in part may be made in advance of such due date. Amounts determined to be owing, and any overpayments to be credited, with respect to any prior quarter shall be added, together with interest thereon under Section 6.4 below from the date of the report for the quarter for which such amounts are owing, or the date of such overpayment, as the case may be, to the next quarterly payment hereunder.

6.2 Currency: All payments to Salix shall be made in US Dollars. Sublicense Fees shall be first determined in the currency in which such amounts are received by Glycyx and then converted to its equivalent in US Dollars. The midpoint between the buying and selling rates of exchange for such currency in US Dollars, as quoted in The Wall Street Journal (US edition) as of the last business day of the quarter for which the calculation is made, shall be used

- 6 -

for such conversion.

6.3 Exchange control: Notwithstanding sections 6.1 and 6.2 above, if at any time legal restrictions prevent the prompt remittance of part or all royalties or other payments with respect to any country of the Territory where the Product is sold (as such terms are defined in the Glycyx License Agreement), payment shall be made through such lawful means or methods as Salix may designate.

6.4 Late Payments: Any payments that are not paid on or before the date such payments are due under this Agreement shall bear interest to the extent permitted by applicable law at the time by the prime rate laid down from time to time by the Bank of England plus one percent, calculated on the number of days such payment is delinquent. This Section 6.4 shall in no way limit any other remedy available to either party.

6.5 Terms of this Agreement: Glycyx, Salix and Biorex agree not to discuss the financial terms or conditions of this Agreement to any third party without the prior written consent of the other parties hereto (which consent shall not be unreasonably withheld), except as required by applicable law, or to professional advisers, or to persons with whom Biorex, Salix or Glycyx has entered into or proposes to enter into a business relationship for the purposes of raising capital to run their business, and then only under conditions of confidence.

7. FORCE MAJEURE No party shall be held liable or responsible to the other parties nor be deemed to have defaulted under or breached this Agreement for failure or delay in fulfilling or performing any term of this Agreement when such failure or delay is caused by or results from causes beyond the reasonable control of the affected party or from fire, floods, embargoes, war, acts of war (whether war be declared or not), insurrections, riots, civil commotions, strikes, lockouts or other labor disturbances, acts of God or acts, omissions or delays in acting by any governmental authority or the other parties.

8. MISCELLANEOUS

8.1 Notices. Any notice or report required or permitted to be given or made under this Agreement by one of the parties hereto to the other shall be in writing, delivered personally or by facsimile (and promptly confirmed by personal delivery or courier) or courier, postage prepaid, addressed to such other party at its address indicated above, or to such other address as the addressee shall have last furnished in writing to the addressor and shall be effective upon receipt by the addressee.

8.2 Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of England, without

- 7 -

regard to conflicts of laws provisions.

8.3 No Consequential Damages. IN NO EVENT SHALL EITHER SALIX, GLYCYX OR BIOREX OR THEIR AFFILIATES BE LIABLE FOR SPECIAL INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING WITHOUT LIMITATION DAMAGES FOR LOSS OF PROFITS, PRODUCTION, USE OR SALES) BASED ON CONTRACT, TORT OR ANY OTHER LEGAL THEORY.

8.4 Entire Agreement. This Agreement contains the entire understanding of the parties with respect to the subject matter hereof. All express or implied agreements and understandings, either oral or written, heretofore made are expressly excluded. This Agreement may be amended, or any term hereof modified, only by a written instrument duly executed by all of the parties hereto.

8.5 Headings. The captions to the several Articles and Sections hereof are not a part of this Agreement, but are merely guides or labels to assist in locating and reading the several Articles and Sections hereof.

8.6 Independent Contractors. It is expressly agreed that Glycyx, Salix and Biorex shall be independent contractors and that the relationship between the three parties shall not constitute a partnership, joint venture or agency. Neither Glycyx, Salix nor Biorex shall have the authority to make any statements, representations or commitments of any king, or to take any action, which shall be binding on the other, without the prior written authorisation of the other party to do so.

8.7 Waiver. The waiver by a party hereto of any right hereunder or the failure to perform or of a breach by the other parties shall not be deemed a waiver of any other right hereunder or of any other breach or failure by said other parties whether of a similar nature or otherwise.

8.8 Further Assurances. Glycyx shall use commercially reasonable efforts to ensure that each of its sublicensees and subcontractors shall observe and perform all the obligations and restrictions applicable to it under this Agreement.

8.9 Severability. In case any one or more of the provisions contained in this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions hereof, but this Agreement shall be construed as if such invalid or illegal or unenforceable provisions had never been contained herein.

8.10 Effect of Agreement. Except as specifically amended by Sections 1.1 and 2.2 the rights, obligations and provisions of the Salix License Agreement and Glycyx License Agreement shall remain in full force and effect.

- 8 -

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

BIOREX LABORATORIES, LTD

By /s/ Lily Baxendale
   -------------------------

Title /s/ Managing Director
      ----------------------

GLYCYX PHARMACEUTICALS, LTD

By /s/ Randy Hamilton
   -------------------------
Title /s/ President
      ----------------------

SALIX PHARMACEUTICALS, INC.

By /s/ Randy Hamilton
   -------------------------
Title /s/ President

      ----------------------

EXHIBIT 10.5

DATED 17th September 1992

BIOREX LABORATORIES LIMITED

- and -

GLYCYX PHARMACEUTICALS LIMITED

LICENSE AGREEMENT

Bristows, Cooke & Carpmael 10 Lincoln's Inn Fields London WC2A 3BP

Ref: 382/M/0089-001-2
WP Ref: LICAGR3N/MW

[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

I N D E X

                                                                   Page No.
                                                                   ---------
PARTIES                                                              1

RECITALS                                                             1

1.   DEFINITIONS                                                     1 -  5

2.   REPRESENTATIONS AND WARRANTIES
     2.1  Authorisation                                              5
     2.2  No Other Representations                                   6

3.   GRANT
     3.1  Grant                                                      6
     3.2  Sublicenses                                                6 -  7
     3.3  Documentation                                              7

4.   DEVELOPMENT
     4.1  Clinical Development and
          Regulatory Approvals                                       7 -  8
     4.2  Technical Information                                      8
     4.3  Exchange of Data                                           8 -  9
     4.4  Visit of Facilities                                        9
     4.5  Conferences                                                9
     4.6  Technical Assistance                                       9 - 10
     4.7  Progress Reports                                          10

5.   COMMERCIALISATION
     5.1  Marketing                                                 10
     5.2  Termination for Failure to Market                         10 - 11
     5.3  Sole Remedy for Failure to Market                         11
     5.4  Excused Performance                                       11

6.   MANUFACTURING:  TRADE MARK LICENSE
     6.1  Clinical Materials                                        11
     6.2  Manufacturing Technology                                  12
     6.3  Trade Marks                                               12 - 13

7.   PAYMENTS TO BIOREX
     7.1  Biorex Fees                                               13
     7.2  Profit Sharing                                            13 - 14
     7.3  Sublicensee Retentions                                    14
     7.4  Minumum Payments                                          14 - 17
     7.5  Combination Product                                       17
     7.6  No Patent Protection                                      17
     7.7  Third Party Royalties                                     17

8.   REPORTS AND ACCOUNTING
     8.1  Reports                                                   18
     8.2  Audits                                                    18 - 19
     8.3  Confidential Financial Information                        19

9.   PAYMENT TERMS
     9.1    Payment of Biorex Profit                                19
     9.2    Payment of Biorex Fees                                  19
     9.3    Currency Conversion                                     19 - 20
     9.4    Exchange Control                                        20
     9.5    Late Payments                                           20

10.  INFRINGEMENT
     10.1   Infringement Rights                                     20
     10.2   Enforcement of Patent Rights                            20 - 21
     10.3   Third Party Claims                                      21

ll.  CONFIDENTIALITY
     11.1   General                                                 21 - 22
     11.2   Exceptions                                              22
     11.3   Licensed Information                                    22
     11.4   Terms of this Agreement                                 22 - 23

12.  PATENT PROSECUTION AND MAINTENANCE
     12.1   Control                                                 23
     12.2   Expenses                                                23
     12.3   Co-operation                                            23

13.  TERM AND TERMINATION
     13.1   Expiration                                              23 - 24
     13.2   Termination for Cause                                   24
     13.3   Termination by Glycyx                                   24
     13.4   Termination by Biorex                                   24 - 25
     13.5   Effect of Termination                                   25 - 26

14.  INDEMNITY
     14.1   Glyxyx                                                  26 - 27
     14.2   Biorex                                                  27
     14.3   Procedure                                               27 - 28

15.  FORCE MAJEURE                                                  28

16.  ASSIGNMENT                                                     28 - 29

17.  MISCELLANEOUS
      17.1  Notices                                                 29
      17.2  Applicable Law                                          29
      17.3  Export Laws                                             29
      17.4  No Consequential Damages                                29
      17.5  Entire Agreement                                        30
      17.6  Headings                                                30
      17.7  Independent Contractors                                 30
      17.8  Waiver                                                  30
      17.9  Further Assurances                                      30
     17.10  Severability                                            31

SIGNATURES                                                          31

EXHIBIT A - Patents and Patent Applications                         32
EXHIBIT B - Regional Minimums                                       33
EXHIBIT C - Trade Mark Registrations and
              Applications                                          34

This Agreement is made the 17th day of September 1992
B E T W E E N:

(1) BIOREX LABORATORIES LIMITED ("Biorex") a company incorporated in England and Wales having its registered office at 2 Crossfield Chambers, Gladbeck Way, Enfield, Middlesex, EN2 7HP, England; and

(2) GLYCYX PHARMACEUTICALS LIMITED ("Glycyx") a company incorporated in Bermuda having its registered office at Cedar House, 41 Cedar Avenue, Hamilton, HM12, Bermuda.

W H E R E A S:

A. By an agreement dated 18th March 1992 between Biorex and Glycyx (the "Original Agreement"), Biorex granted to Glycyx an exclusive licence to make, have made, use, sell and have sold products in the territory (the terms products and territory being defined in the Original Agreement).

B. Biorex and Glycyx now wish to replace the provisions of the Original Agreement in their entirety with the provisions of this Agreement.

IT IS AGREED AS FOLLOWS:

1. DEFINITIONS

For the purposes of this Agreement, the terms defined in this Article shall have the meanings specified below:

1.1 "Affiliate" means any corporation or other entity which controls, is controlled by, or is under common control with, a party to this Agreement. A corporation or other entity shall be regarded as in control of another corporation or entity if it owns or directly or indirectly controls more than fifty percent (50%) of the voting stock or other ownership interest of the other corporation or entity, or if it possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of the corporation or other entity.

1.2 "Balsalazide" means 5-[4(2-Carboxyethelcarbamoyl)-phenylazo]- salicylic acid disodium salt dihydrate.

1.3 "Biorex Fees" means the fees payable to Biorex under Section 7.1.

1.4 "Biorex Profit" shall mean the share of the Profit payable to Biorex under Section 7.2.

1.5       "Canada-Mexico Agreement" means an agreement of even date with this
          Agreement between Salix, Glycyx and Biorex.

1.6       "Commercial Introduction" of any Product shall mean the first sale for
          use or consumption by the general public of such Product in a country
          within the Territory after required marketing and, if required,
          pricing approval has been granted by the governing health authority of
          such country.

1.7       "Development Payments" means payments made to Glycyx by Third Parties
          exclusively for

          (a)  development work and/or
          (b)  supply of materials provided by Glycyx

          provided that such development work and/or supply
          of materials are exclusively for the purposes of

          (a)  obtaining regulatory approval of the Products and/or
          (b)  conducting clinical trials or clinical studies to promote the
               Products

          in any region within the Territory.

1.8       "Factory Sale Price" means the ex factory sales price of each Product
          actually charged by Glycyx or its Sublicensees (or any Affiliate of
          Glycyx or its Sublicensees) for each shipment of Product on an arms
          length open market basis to any Third Party (other than a Sublicensee
          or Affiliate of a Sublicensee) net only of sales and purchase taxes,
          customs or import duties, delivery charges and returns and allowances,
          actually charged on each such shipment.

1.9       "Initial License Fees" shall mean any initial license fees received by
          Glycyx in consideration of the grant of a Sublicense in the Territory
          and shall not include Development Payments.

1.10      "Launch" means a commercial launch of the Product in a Principal
          Market supported by such marketing expense and support and launched in
          such quantities as may be appropriate for the Product to have a
          significant effect on total sales of any similar or competitive
          product in such Principal Market.

1.11      "MAA" means a product license application filed with the Medicines
          Control Agency in the United Kingdom, or counterpart application for
          marketing approval in any other country in the Territory, with respect
          to a Product.

1.12      "Manufacturing Technology" shall mean all methods, processes, designs,
          data, procedures and other

                                       2

          information owned by or licensed to Biorex or its Affiliates during
          the term of this Agreement that are reasonably required for pilot
          production or commercial manufacturing of Products, including, without
          limitation, final quality assurance-quality control procedures,
          manufacturing procedures (including conditions times, temperatures,
          pressures and rates), product and raw material specifications, and
          other technology related thereto, including all patent and other
          intellectual property rights thereto.

1.13      "Patent Rights" means all rights of Biorex in the Territory to any
          subject matter claimed in or covered by any of the following:

1.13.1    The patents and applications listed in Exhibit A hereto, and any
          continuations, continuations-in-part, divisions, substitutions,
          renewals, reissues and extensions thereof.

1.13.2    Any and all other patent rights, now existing or hereafter acquired
          (including applications therefore), pertaining to the subject matter
          described in Section 1.13.1 above, or that are otherwise related to
          Balsalazide, or to prodrugs, analogs or isomers thereof or
          improvements of any of the foregoing, obtained in any country within
          the Territory.

1.14      "Principal Markets" means United Kingdom, Sweden, Finland, Norway,
          Switzerland, Austria, Denmark, Germany, Belgium, Netherlands,
          Luxembourg, France, Republic of Ireland, South Africa, Australia, New
          Zealand, Canada, Italy and Spain.

1.15      "Products" means products incorporating Balsalazide, whether or not
          such products are covered by the Patent Rights, or any other material
          whose manufacture, use or sale by an unlicensed third party would
          constitute an infringement of any valid Claim (as defined below)
          included within the Patent Rights.

1.16      "Profit" shall mean Glycyx' Net Sales Value of Supplies plus any
          royalties or other fees or sums paid to Glycyx by Third Parties
          relating to manufacture, use and/or sales of Products and/or use of
          the Trade Marks, within the Territory; less Glycyx' Manufacturing
          Costs of such Supplies. Notwithstanding the foregoing, "Profit" shall
          not include Initial Licence Fees or Development Payments.

1.16.1    In Section 1.16, "Net Sales Value" means Glycyx' sales to Third
          Parties, less, to the extent such amounts are included in the invoiced
          sales price:
          (a) actual credited allowance to such Third Parties

                                       3

          for spoiled, damaged, out-dated and returned Supplies; (b) freight and
          insurance costs incurred in transporting such Supplies to such Third
          Party: (c) value-added and other direct taxes; and (d) customs duties
          and surcharges and other governmental charges.

1.16.2    In Section 1.16, "Manufacturing Costs" of Supplies shall mean (i)
          reasonable amounts paid by Glycyx to Third Party manufacturers for
          such Supplies and (ii) those costs incurred by Glycyx in its own
          manufacture of such Supplies which could be capitalised as inventory,
          including raw material and actual direct labour costs and a proper
          accounting of actual manufacturing overhead allocated to such units.
          In each case, manufacturing costs shall also include costs incurred by
          Glycyx in the processing of orders, shipments, and accounting for
          Supplies sold by Glycyx.

1.17      "Report" means any report prepared pursuant to Section 8.1.

1.18      "Salix" means Salix Pharmaceuticals Inc., a company incorporated under
          the laws of California having its principal place of business at 3600
          W. Bayshore Road, Palo Alto, California 94303.

1.19      "Sublicense" and "Sublicensee" have the meanings given by Sections
          3.2.3 and 3.2.4.

1.20      "Sublicensee Retention" has the meaning given in Section 7.3.

1.21      "Supplies" means any and all of the following:-
          (a)  Products, and
          (b)  components of Products including without limitation ingredients,
               intermediates, Balsalazide chemical or pharmaceutical dosage
               forms of Products sold by Glycyx to Third Parties for (i) further
               processing or packaging, and/or (ii) sale by Third Parties.

1.22      "Technical Information" means all formulae, raw material and product
          specifications, designs and procedures, formulation data, processes
          and methods, pharmacology, toxicology and other preclinical tests
          results, clinical trials data and results, know-how, trade secrets,
          inventions and other scientific, medical, technical and marketing data
          and information, including all patent and other intellectual property
          rights thereto, which: (a) are owned or controlled by, or licensed to,
          Biorex or its Affiliates during the term of this Agreement, and (b)
          that are reasonably necessary for the development, manufacture, sale
          or use of Products. Technical Information shall include

                                       4

          information and methods relating to the characterisation, synthesis,
          formulation, stability, manufacture or assay of Balsalazide.

1.23      "Territory" means the entire world, but excluding the following
          countries: United States (including its territories, possessions and
          the Commonwealth of Puerto Rico), Japan, Korea and Taiwan. Subject to
          the terms of Canada-Mexico Agreement, Canada and Mexico are included
          in the Territory.

1.24      "Third Party" means any entity other than Glycyx or Biorex and their
          respective Affiliates.

1.25      "Trade Mark" means the trade mark "Colazide" which Biorex has register
          as a trade mark within the Territory in the countries set out in
          Exhibit C.

1.26      "Trade Mark Royalties" shall mean the royalties payable to Biorex by
          Glycyx pursuant to Section 6.3.5.1.

1.27      "Valid Claim" means a Claim of an issued and unexpired patent included
          within the Patent Rights, which has not been held permanently revoked,
          unenforceable or invalid by a decision of a court or other
          governmental agency of competent jurisdiction, unappealable or
          unappealed within the time allowed for appeal, and which has not been
          admitted to be invalid or unenforceable through reissue or disclaimer
          or otherwise.

2.        REPRESENTATIONS AND WARRANTIES
          ------------------------------

Authorisation

2.1 Biorex represents and warrants that (i) it has the full right and authority to grant the licenses provided in the Agreement and perform its obligations hereunder; (ii) to the best of Biorex's knowledge, Glycyx may exercise the licenses granted to it under the Agreement without conflict with or infringement of any rights or alleged rights of any person or entity; (iii) Biorex has not, and will not during the term of this Agreement, make any commitment or incur any obligation in conflict with the licenses granted in the Agreement; (iv) Biorex is, at the date of this Agreement, the sole legal owner of the patents and patent applications set out in Exhibit A and the trade mark registrations and applications set out in Exhibit C; and (v) as of the date of this Agreement, Biorex and its Affiliates have no patents or patent applications within the Territory, other than those listed in Exhibit A hereto, related to Balsalazide, or to prodrugs, analogs or isomers thereof, or improvements or any of the foregoing.

No Other Representations

2.2 Except to the extent provided in this Article 2, Biorex makes no representations, extends no warranties of any kind, either expressed or implied, with respect to use, sale, or other disposition by Glycyx or its Sublicensees or its vendees or other transferees of Products incorporating or made by use or subject matter licensed under this Agreement. THE WARRANTIES EXPRESSLY SET FORTH IN THIS ARTICLE 2 BY EITHER PARTY ARE EXCLUSIVE AND NO OTHER WARRANTY, WRITTEN OR ORAL, INCLUDING WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, IS EXPRESSED OR IMPLIED.

3. GRANT

Grant
-----

3.1       Biorex hereby grants to Glycyx the exclusive right and license under
          the Patent Rights, the Technical Information and Manufacturing
          Technology to develop, have developed, make, have made, use, sell and
          have sold Products within the Territory. Notwithstanding the
          foregoing, Biorex may authorise third parties to manufacture
          Balsalazide within the Territory solely for sale and use outside of
          the Territory.

3.2       Sublicenses
          -----------

3.2.1     The license granted to Glycyx under Section 3.1 above shall include
          the right to grant Sublicenses within the Territory. Glycyx shall
          provide Biorex with a copy of any Sublicense issued hereunder, which
          copy shall be maintained in confidence pursuant to Section 11 hereof.
          Notwithstanding the foregoing, except as provided in Section 3.2.4
          below Glycyx shall not grant to any Third Party a Sublicence or
          marketing rights for the manufacture or sale of a Product in any other
          country within the Territory without first obtaining Biorex's consent,
          which shall not be withheld unreasonably.

3.2.2     In the event that Glycyx receives from a Sublicensee hereunder notice
          of a default by Glycyx that would give rise to a termination of the
          Sublicense agreement, Glycyx shall promptly provide such notice to
          Biorex. Except where Biorex enters into an agreement with the
          Sublicensee to provide an alternative arrangement in such
          circumstances, Glycyx shall ensure that the Sublicense agreement shall
          provide that, in the event of such a breach by Glycyx and a failure
          by, Glycyx to cure the breach within the cure period specified in the
          Sublicense agreement, Biorex will have an additional period to cure
          the breach and to assume

                                       6

          Glycyx's rights and obligations under the Sublicense agreement.

3.2.3     Subject to Clause 3.2.4, in this Agreement the term "Sublicense" shall
          mean any agreement under which Glycyx grants to a Third Party (the
          "Sublicensee") rights to

          (a)  market, promote, and/or distribute Products in the Territory
               using Supplies purchased from Glycyx; and/or

          (b)  make, have made, use and/or sell or have sold Products in the
               Territory.

3.2.4     The following types of arrangements shall not be Sublicenses
          hereunder:

          (a)  subcontracting of Third Parties to develop the Product or new
               Products for Glycyx; or

          (b)  subcontracting of Third Parties to manufacture the Products or
               ingredients for supply to Glycyx or its Sublicensees only.

Documentation

3.3 Glycyx and Biorex agree to execute and file such formal patent licenses and similar instruments as the other party may reasonably request to evidence or perfect the licenses granted herein.

4. DEVELOPMENT

4.1       Clinical Development and Regulatory Approvals
          ---------------------------------------------

4.1.1     Biorex shall assist in the completion of the clinical development and
          in the obtaining of the necessary regulatory approvals in Biorex's
          name to market a Product containing Balsalazide for the treatment of
          ulcerative colitis in the United Kingdom; provided that Glycyx shall
          be responsible for the preparation of all necessary experts' reports
          to be included in any application for regulatory approval of a Product
          pursuant to this paragraph. Glycyx shall procure that it and its
          Sublicensees shall use commercially reasonable efforts to obtain all
          necessary regulatory approvals to market a Product in each other
          country within the Territory.

4.1.2     Subject to Section 5.4 below, if Glycyx or its Sublicensee has not
          sought regulatory approval to market one or more Products in a country
          within five (5) years after approval of the first MAA within the
          Territory, and Glycyx does not, within one hundred and eighty (180)
          days after receiving a written request from Biorex to do so, undertake

                                       7

          commercially reasonable efforts to obtain such approval and thereafter
          continue such efforts, Biorex shall have the right to terminate
          Glycyx's license under Section 3.1 above in respect of such country
          upon written notice to Glycyx. The foregoing sets forth Biorex's sole
          remedy for a failure by Glycyx to meet its obligations under this
          Section 4.1.

4.1.3     Biorex and Glycyx acknowledge that additional pre-clinical and
          clinical studies may be necessary in order to apply for and obtain
          regulatory approvals in any country in the Territory, and hereby agree
          to discuss plans for such studies should they be necessary and to
          negotiate in good faith their respective rights and obligations
          relative to conducting or having such studies conducted.

Technical Information

4.2 Biorex shall promptly provide to Glycyx, and in any event at least semi-annually, all Technical Information (including such regulatory filings) and information that it develops or acquires after the date hereof. In addition Biorex shall use all reasonable efforts to so provide to Glycyx all similar items and information generated or developed by or for other licensees of Biorex and to permit Glycyx to use such items and information to the same extent it may use Technical Information hereunder. Glycyx and Sublicensees hereunder shall have a right to use all such Technical Information and information of such other licensees for purposes of this Agreement, and to cross-reference all such regulatory filings. In the event that Biorex does not obtain from any other licensee of Biorex the right to permit Glycyx to use such items or information, Biorex shall not provide to such licensee any information of Glycyx provided to Biorex under Section 4.3 below.

Exchange of Data

4.3 Each party shall keep the other informed as to its progress in the development and testing of all Products and the preparing, filing and obtaining of the approvals necessary for marketing such Products. Each party shall notify the other at least thirty (30) days in advance of, and make available to the other party for review prior to submittal, all filings and correspondence to be submitted by such party (but not by Third Parties) to regulatory authorities with respect to marketing approval of such a Product, and all proposed publications by such party of test data or results related to such Products. Such items shall be made available at such party's principal place of

business, or if reasonable to do so, they shall be sent to the other party. Glycyx will provide Biorex with copies of any similar filings, correspondence and proposed publications which it receives from its Sublicensees. In addition, each party shall provide the other with copies of such other documents as it reasonably requests promptly after such request. Until the date of the Commercial Introduction of each such Product, each party shall provide to the other semi-annual reports summarising in reasonable detail its activities related to the development and securing of the requisite marketing and other regulatory approvals for such Products. After the Commercial Introduction of any such Product, each party shall keep the other informed of any further communications or activities concerning such Products by, with or involving governmental health agencies. Throughout the term of this Agreement, each party shall promptly supply the other with all information regarding adverse drug experiences.

Visit of Facilities

4.4 Representatives of Glycyx and Biorex may, upon reasonable notice and at times reasonably acceptable to the other party (a) visit the facilities where the preclinical tests or clinical trials are being conducted with respect to Products, and the facilities where the other party manufactures any Product, or active compound contained therein (or has such a product or compound manufactured, but subject always to the consent of the relevant Sublicensee or subcontractor) to the extent relating to such product or compound; and (b) consult informally, during such visits and by telephone, with personnel of the other party performing work on such tests, trials or manufacturing.

Conferences

4.5 The parties shall meet periodically, at times and locations to be agreed, to discuss their respective development programmes with respect to such Product.

Technical Assistance

4.6 Biorex shall provide to Glycyx such reasonable technical assistance as is in Biorex's control, with respect to the development, preclinical and clinical testing and manufacturing of Products. In addition, Biorex agrees to use all reasonable efforts to provide technical support and assistance to Sublicensees hereunder, including assisting in prospective Sublicensees' evaluation of the Products. Biorex will be reimbursed by Glycyx or

such Sublicensee for its out-of-pocket expenses incurred in rendering such assistance.

Progress Reports

4.7 Glycyx shall provide to Biorex quarterly reports describing in reasonable detail its progress and its Sublicensees' progress in developing and securing marketing and regulatory approval of Products hereunder. Such obligation shall continue until the Commercial Introduction of the first Product, after which such reports shall be provided semi-annually.

5. COMMERCIALISATION

Marketing

5.1       Subject to Sections 5.2 and 5.3 below, with respect to each Product
          for which Glycyx or its relevant Sublicensee has received necessary
          regulatory approvals to market such Product in a country within the
          Territory, Glycyx shall itself or shall procure that its relevant
          Sublicensee uses commercially reasonable efforts to procure:

5.1.1     the commencement of marketing of such Product in such country within
          one hundred and eighty days (180) days of receiving approval
          (including, if required, pricing and reimbursement approval) to market
          such Product in that country; and

5.1.2     after commencing marketing of such Product in such country, to meet
          and develop the market demand for such Product in such country.

Termination for Failure to Market

5.2       If Glycyx or its relevant Sublicensee fails to fulfil the Section 5.1
          obligations with respect to any Principal Market for which Glycyx or
          its relevant Sublicensee has received necessary regulatory approvals
          to market the Products then:-

5.2.1     If Glycyx or its relevant Sublicensee does not remedy such failure
          within one hundred and twenty (120) days after receiving a written
          request to do so, Biorex shall have the right to terminate Glycyx's
          exclusive rights (other than Glycyx's exclusive right under Section
          6.3 to use the Trade Mark) in that Principal Market upon written
          notice to Glycyx; provided that this provision shall not apply to
          countries in respect of which a minimum royalty or payment is being
          paid under Section 7.4 as specified in Exhibit B; and

5.2.2     If Glycyx or its relevant Sublicensee has not fulfilled the Section
          5.1 obligations within twelve

                                       10

          (12) months after receiving approvals, Biorex may terminate Glycyx's
          rights in that Principal Market, including rights to use the Trade
          Mark, provided that Biorex will not grant use of the Trade Mark by a
          Third Party within that Principal Market.

Sole Remedy for Failure to Market

5.3 Section 5.2 sets forth Biorex's sole remedies for a failure by Glycyx to meet its obligations under Section 5.2.

Excused Performance

5.4 In addition to the provisions of Article 15, Glycyx's obligations with respect to any Product under Section 4.1. 7,4 or this Article 5 are expressly conditioned upon the continuing absence of any adverse condition relating to the safety, quality or efficacy of that Product or any other restrictions or delays imposed or caused by governmental authorities, or other condition or event beyond Glycyx's control that would reasonably justify Glycyx, after consulting with Biorex, in exercising prudent and justifiable business judgment, to conclude that development or marketing of such Product should be delayed, suspended or stopped altogether, and Glycyx's obligation to develop or market any such Product shall be delayed or suspended so long as any such condition or event exist, but for a maximum of five (5) years from the commencement of such delay or suspension. In addition, Glycyx shall not be responsible for any delays caused by failure of any health regulatory agency to accept data provided by Biorex or by inability of Glycyx to obtain, or delays in obtaining, sufficient quantities of clinical materials on reasonable terms.

6. MANUFACTURING: TRADE MARK LICENSE

Clinical Materials

6.1 Prior to the time that Glycyx has received adequate supply of Products, Biorex shall use its commercially reasonable efforts to supply, or to arrange for others to supply, Glycyx's requirements of Products for preclinical tests and human clinical trails on reasonable terms and conditions. In the event that Biorex arranges for Third Parties to develop formulations of, or supply, Products to Biorex under this Section 6.1, Biorex shall use commercially reasonable efforts to acquire the right to include the manufacturing processes and technology used by such Third Party for such Product in the Technical Information, Manufacturing Technology or the Patent Rights, so that Glycyx may use such process to manufacture such Product.

Manufacturing Technology

6.2       As soon as practicable following a request by Glycyx, Biorex shall
          disclose to Glycyx all Manufacturing Technology in existence at such
          time, and shall hereafter promptly (and in any event at least
          quarterly) provide Glycyx with updates or additions to such
          Manufacturing Technology that are subsequently developed or acquired
          by Biorex or its Affiliates. In addition, Biorex shall use all
          reasonable efforts to so provide to Glycyx all similar items and
          information generated or developed by or for other licensees of Biorex
          and to permit Glycyx to use such items and information to the same
          extent it may use Manufacturing Technology hereunder.

6.3       Trade Marks
          -----------

6.3.1     Subject to the provisions of this Agreement, Biorex hereby grants to
          Glycyx the exclusive right and license to use the Trade Mark in
          connection with the exploitation of the Products in the Territory
          throughout the term of this Agreement.

6.3.2     Glycyx shall have the right to grant Sublicensees the right to use the
          Trade Mark in connection with the exploitation of the Products in the
          Territory throughout the terms of this Agreement, subject to the
          provisions of this Agreement.

6.3.3     Subject to the laws of the country concerned, Glycyx shall have an
          exclusive right to institute and pursue actions to prevent misuse of
          the Trade Mark throughout the Territory.

6.3.4     Biorex, Glycyx and its Sublicensees shall at the expense of Glycyx
          execute such instruments and trade mark user agreements as are
          necessary to enable Glycyx to exercise its rights under Clause 6.3.1
          and to satisfy the requirements of national trade mark laws in respect
          of trade mark user agreements.

6.3.5     The following provisions shall apply on the expiry of this Agreement
          pursuant to Section 13.1.

6.3.5.1   Glycyx shall (subject to Section 6.3.5.2) pay to Biorex a royalty
          equal to [*] of all Products supplied by Glycyx, Affiliates of Glycyx,
          Sublicensees, or Affiliates of Sublicensees for consumption in the
          Territory which are supplied by reference to the Trade Mark (the
          "Trade Mark Royalties"). These Trade Mark Royalties shall continue to
          be paid for as long as the Trade Mark is registered in any country in
          the Territory.

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN

REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

6.3.5.2   Glycyx shall not be under any obligation to pay Trade Mark Royalties
          in respect of Products supplied by a Sublicensee until Glycyx has
          received equivalent royalties in respect of such Products from its
          Sublicensee. Provided that Glycyx shall use all reasonable commercial
          efforts to obtain prompt payment from its Sublicensees of such
          equivalent royalties.

6.3.5.3   Glycyx shall itself, and shall procure that its Sublicensees, keep
          true and accurate records of all Products supplied bearing the Trade
          Mark and Glycyx shall within ninety days of the end of each semi-
          annual period ending on 30th June and 31st December send Glycyx a full
          statement showing the calculation of the Trade Mark Royalties due and
          owing to Biorex.

6.3.5.4   Glycyx shall on the date such statement is due pay to Biorex the Trade
          Mark Royalties due in respect of the semi-annual period covered by the
          statement, in pounds sterling by express payment through the banking
          system in such bank account as Biorex shall designate from time to
          time for the purposes of receiving such payment.

6.3.5.5   The provisions of Sections 8.2.1, 8.2.2, 9.3, 9.4 and 9.5 shall apply
          in relation to payment of the Trade Mark Royalties.

7.        PAYMENTS TO BIOREX
          ------------------

Biorex Fees

7.1 Subject to Clause 2.3 of the Canada-Mexico Agreement Glycyx shall pay to Biorex [*] received by Glycyx. The share of Initial License Fees payable to Biorex under this Section 7.1 shall be referred to in this Agreement as "Biorex Fees". It is understood that Glycyx may permit Sublicensees to credit [*] against other amounts owing to Glycyx under the Sublicense, provided that such credits are taken within the first
[*] after Commercial Introduction of the applicable Product by the Sublicensee.

Profit Sharing

7.2 In addition to the Biorex Fees to be paid to Biorex under 7.1 above and subject to Clause 7.3, Glycyx shall pay to Biorex [*] from the sale of Supplies for consumption in countries within the Territory. The share of the Profit payable to Biorex under this Section 7.2 shall be referred to in this Agreement as "Biorex Profit". Biorex Profit shall

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

be paid to Biorex quarterly in accordance with Sections 8.1 and 9.1 below, on the basis of unaudited financial statements of Glycyx for the applicable quarter. However, the payment to Biorex for the final quarter of a Glycyx fiscal year shall be made on the basis of Glycyx's audited financial statements for such fiscal year, and such payment shall be adjusted for the difference between the Profit as calculated during the year and as reflected in such audited financial statements. Notwithstanding Section 8.1 below, the Report and payment due under this Section 7.2 for the final quarter of a Glycyx fiscal year shall not be due until ninety (90) days after the end of such quarter.

Sublicensee Retentions

7.3 Where Development Payments are made by a Sublicensee, Glycyx may allow that Sublicensee to credit a proportion of such Development Payments
[*] against amounts owing to Glycyx under the Sublicense. Such amounts credited in any quarter period shall be referred to in this Agreement as "Sublicensee Retention". In such cases:-

(a) For the purpose of Clause 7.2 the term "Profit" shall mean the Profit (as defined in Section 1.16) plus the Sublicensee Retention, and Biorex Profit shall be calculated accordingly.

(b) Glycyx shall be entitled to deduct [*] the Sublicensee Retention in respect of the relevant quarter from Biorex Profit.

[*]

7.4 Minimum Payments

Aggregate Minimum

7.4.1     Glycyx shall pay to Biorex the amounts set forth in the table below
          upon the earlier to occur of the corresponding Glycyx milestone or
          date in such table, subject to Section 7.4.3 below. However, if Biorex
          does not meet its corresponding obligation, the date by which the
          milestone payment (and any

                                       14

[*]  CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
     THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
     REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

          subsequent milestone payments) must be paid shall be delayed by the
          amount of time of Biorex's delay.

                              MILESTONE/OBLIGATION
                              --------------------

Amount                       Date            Glycyx Milestone                   Biorex Obligation
------                       ----            ----------------                   -----------------
[*]

In the event that Glycyx fails to meet the minimum payment obligations under this Section 7.4.1, Glycyx shall pay to Biorex [*] (and pro rata for any lesser period) until such failure is cured. In the event that Glycyx fails to pay any of the amounts specified in this Section 7.4.1 within six (6) months of the due date, Biorex shall have the right to terminate this Agreement on thirty (30) days written notice, with respect to all countries in the Territory.

Regional Minimums

7.4.2     Glycyx agrees that the aggregate Biorex Fees and Biorex Profit paid to
          Biorex under Section 7.1 and 7.2 above (as the case may be) for each
          region within the Territory shall equal at least the amounts set forth
          in Exhibit B hereto. In the event Glycyx grants a single Sublicense
          which includes rights to more than one region the amounts set forth in
          Exhibit B shall be aggregated in respect of all regions under such
          Sublicense for

                                       15

[*]  CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
     THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
     REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

          the purposes of determining Glycyx's obligation and performance under
          this Section 7.4.2. In the event that such Biorex Fees and Biorex Prof
          it in any Glycyx fiscal year for a particular region do not equal or
          exceed the minimum amounts for such year, the Report provided for the
          final quarter of such year shall include a payment so that the total
          amount paid for such region equals the minimum amounts for such year.
          In the event that Glycyx does not pay such amount by the date such
          Report is due, Biorex shall have the right to terminate Glycyx's
          licenses in that region by giving Glycyx at least thirty (30) days
          written termination notice within ninety (90) days after the due date
          of such report. Glycyx may cure any such failure by paying the minimum
          amount within such ninety (90) day period (or if longer, within the
          30-day notice period), in which case Biorex's right to so terminate
          Glycyx's license as a result of such nonpayment shall cease.

Credits
-------

7.4.3     Payments under this Section 7.4 and the Biorex Fees and Biorex Profit
          paid to Biorex under Section 7.1 and 7.2 above, shall be offset
          against each other as follows:

(a)       Aggregate Minimums.  The payments made to Biorex under Section 7.4.1
          ------------------
          above may be carried forward and offset by Glycyx against Biorex Fees
          and Biorex Profit.  Similarly, any amounts actually paid to Biorex
          under Sections 7.1 and 7.2 (net of such offsets) or 7.4.2 may be
          carried forward and offset against payments subsequently due under
          Section 7.4.1.

(b)       Regional Minimums.  Any amount paid to Biorex under Section 7.4.2
          ------------------
          above with respect to a particular region may be carried forward and
          offset by Glycyx against any Biorex Fees and Biorex Profit owing to
          Biorex under Section 7.1 or 7,2 for the same region in any of the
          three subsequent years which are in excess of the applicable minimum.
          It is understood that amounts paid under Sections 7.1, 7.2 and 7.4.2
          may be used as a credit under both subparagraphs (a) and (b) of this
          Section 7.4.3 except as provided for in subparagraph (a).

No Other Remedies

7.4.4. The remedies specified in this Section 7.4 are Biorex's sole remedies with respect to Glycyx's failure to meet the agreed minimum payments. In addition, Glycyx's obligation to meet the minimum payments set forth in this Section 7.4 shall be

conditioned upon Biorex not unreasonably withholding or delaying consent to any Sublicense proposed by Glycyx under Section 3.2 above.

Combination Product

7.5 In the event a Product is sold in a combination product with other biologically active components, Profit, for purposes of calculating Biorex Profit on the combination product, shall be calculated by multiplying the Profit (as the case may be) of the combination by the fraction A/B, where A is the gross selling price of the Product sold separately and B is the gross selling price of the combination product. In the event that no such separate sales are made by Glycyx or a permitted Sublicensee, Profit shall be reasonably allocated between such Product and such other component, as mutually agreed by Glycyx and Biorex. In the event Glycyx receives Initial License Fees from such a combination product, the amounts attributable to the Product shall be reasonably allocated by Glycyx on a similar basis.

No Patent Protection

7.6 If Glycyx's first Product in a region is not covered by a Valid Claim within the Patent Rights in any year, and significant sales are being made by Third Parties (other than Sublicensees) in such region of a substantially equivalent product that would infringe a Valid Claim in another country within the Territory, [*] (even though the Product is made in a country in which such manufacture infringes a Valid Claim) provided that such significant sales of the substantially equivalent product continue throughout the year in question.

Third Party Royalties

7.7 In the event that Glycyx is required to pay to a Third Party any royalties on a Product with respect to technology incorporated in such Product other than the technology licensed hereunder, Glycyx may deduct from Biorex Profit with respect to such Product [*] with respect to such Product in any quarter period. For the avoidance of doubt any such royalties paid to Third Parties shall not be included as Manufacturing Costs as defined in Section 1.16.2.

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

8. REPORTS AND ACCOUNTING

Reports

8.1 After the Commercial Introduction of a Product, Glycyx shall furnish to Biorex on a quarterly basis a written report-covering Glycyx's fiscal quarters showing, on a country by country basis, (i) the initial License Fees and the Development Payments received by Glycyx during the reporting period; (ii) Biorex Profit payable in British Pounds Sterling, which shall have accrued hereunder in respect of such quarter; (iii) withholding taxes, if any, required by law to be deducted in respect of such amounts; and (iv) the dates of the Commercial Introductions of any Products in any country in the Territory during the reporting period. Except as provided in 7.2 above, Reports shall be due forty-five (45) days following the close of each respective quarter. Glycyx shall keep accurate records in sufficient detail to enable the Profit to be determined. For the avoidance of doubt, Glycyx shall be entitled to enter into Sublicenses in which the Sublicensee is required to pay royalties on a semi-annual basis. In case no Biorex Profit is due for any quarter period hereunder, Glycyx shall so report.

8.2       Audits
          ------

8.2.1     Upon the written request of Biorex, at Biorex's expense and not more
          than once each Glycyx fiscal year, Glycyx shall permit or procure an
          independent public accountant selected by Biorex and reasonably
          acceptable to Glycyx to have access during normal business hours to
          such of the records of Glycyx, its Sublicensees and Affiliates as may
          be reasonably necessary to verify the accuracy of the Reports made not
          more than thirty-six (36) months prior to the date of such request.
          Biorex may, at its discretion, require Glycyx to arrange such
          verification of Sublicensee reports, Provided that Biorex shall only
          have the above right of access to a Sublicensee's records in
          circumstances where the amount of payments to be made by Glycyx to
          Biorex is calculated wholly or partly by reference to the quantity or
          price of Product manufactured or supplied by the Sublicensee (and/or
          in the case of Trade Mark Royalties supplied by reference to the Trade
          Mark).

8.2.2     In the event such accountant concludes that additional amounts were
          owed daring such period, the additional amounts shall be paid
          promptly, The fees charged by such accountant shall be paid by Biorex
          unless the audit establishes that the amounts payable by Glycyx for
          the audited period are more than one hundred and five percent (105%)

                                       18

          of the amounts actually paid for such period, in which case Glycyx
          shall pay the reasonable fees and expenses charged by the accountant.

8.2.3     Upon the expiration of thirty-six (36) months following the date of
          any Report, the calculation of Biorex Fees and Biorex Profit payable
          with respect to the quarter covered by such Report shall be binding
          and conclusive upon Biorex; and Glycyx shall be released from any
          liability or accountability with respect to Biorex Fees and Biorex
          Profit for such year.

Confidential Financial Information

8.3 Biorex agrees that all information subject to review under this Article 8 is confidential and shall cause its accountant to retain all such information in confidence except for discussions with Biorex.

9. PAYMENT TERMS

Payment of Biorex Profit

9.1 Subject to Section 9.2, amounts shown to have accrued by each Report shall be due and payable on the date such Report is due; provided that payments of Biorex Profit shall not be due until such Profit is actually received by Glycyx. Glycyx shall use commercially reasonable efforts to ensure prompt receipt of such Profits, Payment of such amounts in whole or in part may be made in advance of such due date. Amounts determined to be owing, and any overpayments to be credited, with respect to any prior quarter shall be added, together with interest thereon under Section 9.5 below from the date of the report for the quarter for which such amounts are owing, or the date of such overpayment, as the case may be, to the next quarterly payment hereunder.

Payment of Biorex Fees

9.2 Glycyx shall forthwith upon receipt of any Initial Licence Fees pay to Biorex the corresponding Biorex Fees by express payment through the banking system into such bank account as Biorex shall designate from time to time for the receipt of such payments. In the period between the receipt of any Initial License Fees by Glycyx and the despatch to Biorex of the corresponding Biorex Fees, Glycyx shall hold Biorex Fees as trustee for Biorex.

Currency Conversion

9.3 All payments to Biorex shall be made in British

Pounds. Biorex Fees shall be first determined in the currency in which such amounts are received by Glycyx and then converted to its equivalent in British Pounds. The midpoint between the buying and selling rates of exchange for such currency in British Pounds, as quoted, in The Wall Street Journal (U.S. edition) as of the last business day of the quarter for which the calculation is made, shall be used for such conversion, or such other benchmark as may be agreed in writing between Biorex and Glycyx from time to time.

Exchange Control

9.4 Notwithstanding 9.1, 9.2 and 9.3 above, if at any time legal restrictions prevent the prompt remittance of part or all payments with respect to any country of the Territory where the Product is sold, payment shall be node through such lawful means or methods as Biorex may designate.

Late Payments

9.5 Any payments that are not paid on or before the date such payments are due under this Agreement shall bear interest to the extent permitted by applicable law at the time by the prime rate laid down from time to time by the Bank of England plus one percent, calculated on the number of days such payment is delinquent. This Section 9.5 shall in no way limit any other remedy available to either party.

10. INFRINGEMENT

Infringement Rights

10.1      The provisions of this Article 10 shall govern the parties' rights and
          obligations, as between themselves, with respect to actions Against
          and by Third Parties for infringement of patents licensed under this
          Agreement or owned by such Third Parties, In the event that either
          party learns of a significant infringement of the Patent Rights within
          the Territory, it shall promptly notify the other party.

10.2      Enforcement of Patent Rights
          ----------------------------

10.2.1    Glycyx and its Sublicensees shall have the exclusive right to bring,
          direct and control any action to enforce the Patent Rights against
          infringers within the Territory.

10.2.2    Glycyx nay deduct from Biorex Fees owing under Section 7.1 above for a
          particular region all of its costs and expenses incurred in any
          quarterly

                                      20

          period in enforcing the Patent Rights in such region, up to [*]
          amounts owing to Biorex for that region in that period. Any remaining
          undeducted costs and expenses may be carried forward and deducted
          under the same conditions, for up to four (4) subsequent quarters
          after the quarter in which they were incurred, from the Biorex Fees
          owed under Section 7.1 with respect to such region in such subsequent
          quarters. Thereafter, such costs and expenses shall be deducted from
          Profits from such region prior to calculating the amounts owed to
          Biorex under 7.2 above.

10.2.3    After reimbursement to Glycyx for its unreimbursed expenses, all
          damages and other payments recovered by Glycyx from such infringing
          parties shall be included in Profits, Biorex shall cooperate with
          Glycyx, at Glycyx's expense, in connection with any such litigation,
          including without limitation by joining as a party if necessary or
          appropriate and executing such documents as Glycyx may reasonably
          request.

Third Party Claims

10.3      In the event that Glycyx is sued by a Third Party alleging that the
          manufacture, sale or use of a Product infringes patent rights of such
          Third Party, then Glycyx may withhold up to [*] payable in any quarter
          with respect to the region involved in such suit and apply such
          amounts to any damages, costs, liabilities or expenses (including the
          reasonable fees of attorneys and other professionals) incurred as a
          result of such claim, up to [*] of such damages, costs, liabilities
          and expenses. All unreimbursed damages, costs liabilities and expenses
          shall thereafter be deducted from Profit earned in such region for
          purposes of determining Biorex Profit.

11.       CONFIDENTIALITY
          ---------------

General
-------

11.1      Except as expressly otherwise provided in this Agreement, each party
          shall hold in confidence and not use or disclose to any Third Party
          (other than employees, consultants, advisors, permitted Sublicensees
          and Third Parties with whom such party is considering entering into a
          business relationship who are similarly bound in writing) any product,
          technical, manufacturing, process, marketing, financial, business or
          other information, ideas, or know-how of the other party that is
          identified in writing by the other party as confidential ("Proprietary
          Information") at the

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN

REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

          time of its disclosure or within thirty (30) days thereafter;
          provided, however, that Proprietary Information of a party shall not
          include:

11.1.1    Items which at the time of disclosure are published or otherwise
          generally available to the public;

11.1.2    Items which, after disclosure to the other party, are published or
          become generally available to the public through no breach of this
          Agreement by the other party or the other party's employees or agents;
          or

11.1.3    Items which the other can document were or are (i) in its possession
          at the time of disclosure and was not acquired directly or indirectly
          from such party, (ii) independently developed.

Exceptions
----------

11.2      A party may disclose Proprietary Information of the other:

11.2.1    In connection with the order of a court of law or in compliance with
          laws or regulations relating to registrations or sale of securities or
          product approval, or

11.2.2    If such information is also rightfully acquired from a Third Party
          who, to the best of such party's knowledge and belief, is entitled to
          rightfully make such disclosure, but only to the extent such party
          complies with any restrictions imposed by the Third Party

11.2.3    After five (5) years from the date such information is disclosed to it
          hereunder.

Licensed Information

11.3      Any Proprietary Information of or used by Biorex which is or may be
          subject to an exclusive licence to Glycyx hereunder, shall not be
          disclosed by Biorex to any Third Party for use in the Territory except
          for purposes not inconsistent with such exclusive license and only
          pursuant to confidentiality and non-use restrictions at least as
          restrictive as those provided herein.

Terms of this Agreement

11.4      Glycyx and Biorex agree not to disclose the financial terms or
          conditions of this Agreement to any Third Party without the prior
          written consent of the other party hereto (which consent shall not be
          unreasonably withheld), except as required by applicable law, or to
          professional advisers, or to persons with whom Biorex or Glycyx has
          entered into

                                      22

          or proposes to enter into a business relationship for the purposes of
          raising capital to run their business, and then only under conditions
          of confidence.

12.       PATENT PROSECUTION AND MAINTENANCE
          ----------------------------------

Control
-------

12.1      Glycyx shall have the right to take such actions as are necessary or
          appropriate, with counsel of its choosing, to effect the patent
          applications within the Patent Rights and to obtain patent protection
          with respect to the subject matter therein in any country within the
          Territory. In the event that Glycyx or a Sublicensee elects not to
          prosecute or maintain a patent application or patent within the Patent
          Rights, Biorex shall have the right to do so at its own expense.

Expenses
--------

12.2      The cost of Glycyx's preparing, filing, prosecuting and maintaining
          all patent applications and patents contemplated by this Agreement
          shall be borne by Glycyx.

Co-operation

12.3      Glycyx shall provide Biorex with copies of all material documentation
          after Glycyx's receipt from or prior to submission to any governmental
          agency with jurisdiction to issue such patents, as appropriate, so
          that Biorex may be informed and appraised of the continuing
          prosecution. Glycyx shall consult with Biorex and its counsel
          concerning prosecution of any patent application and adopt reasonable
          suggestions made with respect thereto, and shall use its best efforts
          to amend any patent application to include claims reasonably requested
          by Biorex and required to protect the product contemplated to be sold
          under this Agreement. Biorex shall make available to Glycyx or its
          authorised attorneys, agents or representatives, Biorex's employees,
          agents or consultants necessary or appropriate to enable Glycyx to
          file, prosecute and maintain patent applications and resulting patents
          within the Patent Rights. Biorex shall sign or cause to have signed
          all documents relating to said patent applications or patents at no
          charge to Glycyx.

13.       TERM AND TERMINATION
          --------------------

Expiration
----------

13.1      Unless terminated earlier pursuant to Section 13.2, 13.3 or 13.4
          below, this Agreement shall expire

                                      23

          fifteen (15 years) from the date of Launch. Upon expiration of this
          Agreement, Glycyx shall have the following irrevocable, licences (with
          right to sublicense): (a) a non-exclusive royalty-free licence under
          the Technical Information and Manufacturing Technology to make, have
          made, use, sell and have sold Products in the Territory; and (b) the
          exclusive right and license to use the Trade Mark in accordance with
          the terms of Sections 6.3.2, 6.3.3 and 6.3.4 in connection with the
          marketing and sale of such Products in the Territory, subject to the
          provisions of Section 6.3.5.

Termination for Cause

13.2      Either party may terminate this Agreement following the material
          breach of any material provision of this Agreement by the other party
          if the breaching party has not commenced to cure such breach within
          ninety (90) days after written notice thereof by the other party and
          thereafter proceeded diligently to cure such breach within a
          reasonable time; provided, that in no event shall such reasonable time
                           --------
          to cure such breach exceed one hundred eighty (180) days from the date
          of such notice. In determining whether there has been a material
          breach of a material provision of this Agreement for purposes of this
          Section 13.2, all of the circumstances of the breach shall be
          considered, including the breaching party's conduct, the hardship of
          termination, the extent to which the breaching party has performed its
          obligations, the extent to which the non-breaching party will obtain
          the benefits it reasonably anticipated, and similar factors.

Termination by Glycyx

13.3      Glycyx shall have the right to terminate this Agreement and the
          licences granted herein, in whole or as to any specified Product or
          country, at any time, and from time to time, by giving notice in
          writing to Biorex. Such termination shall be effective ninety (90)
          days from the date Biorex receives such notice and all Glycyx's rights
          associated therewith shall cease as of that date; provided, however,
          that if Glycyx revokes in writing its notice of termination before the
          end of such 90 day period, such notice of termination shall have no
          effect and the rights specified in such notice of termination shall
          not terminate.

Termination by Biorex

13.4      Without prejudice to any other rights Biorex may have to terminate
          under this Agreement, in the event that:-

                                      24

13.4.1    Salix ceases business or seeks protection from its creditors pursuant
          to Chapter 11 of the U.S. Bankruptcy Code or files or has filed
          against it a voluntary or involuntary bankruptcy procedure that is not
          dismissed within sixty (60) days or a receiver or assignee is
          appointed for the benefit of its creditors or if it takes or suffers
          any similar action in consequence of debt with respect to all or
          substantially all of its assets; THEN Biorex shall have the right to
          terminate this Agreement forthwith.

13.4.2    (a)  a Sublicensee terminates its Sublicense with Glycyx and

          (b)  Biorex and the Sublicensee have either:

               (i)  prior to the date of the relevant Sublicense agreement; or
              (ii)  on the same day as the date of the relevant Sublicense
                    agreement; or
             (iii)  after the date of the relevant Sublicense agreement and with
                    the consent of Glycyx, such consent not to be delayed or
                    unreasonably withheld

               entered into an agreement under which Biorex agrees, in the event
               of termination of the Sublicense, to grant a licence directly to
               the Sublicensee;

          THEN Glycyx's rights and licenses under this Agreement shall terminate
          forthwith automatically in respect of the region covered by the
          relevant Sublicense.

13.4.3    (a)  by reason of any act or omission on the part of Glycyx, a
               Sublicensee is entitled to a royalty-free licence to manufacture
               Products; and

          (b)  the Sublicensee exercises such right, and such licence continues
               for more than 180 days

          THEN Biorex shall have the right to terminate Glycyx's rights and
          licenses under this Agreement forthwith in respect of the region
          covered by the relevant Sublicense.

13.5      Effect of Termination
          ---------------------

13.5.1    Upon a termination of this Agreement by Glycyx under Section 13.3
          above, or by Biorex under Section 13.4 above, or by reason of a
          material breach by Glycyx, all licenses granted to Glycyx hereunder
          (or in the event of a partial termination the licenses to the Products
          and countries to which such termination pertains) shall terminate. In
          the event of such a termination, Glycyx shall (to the

                                      25

          extent that any applicable Sublicense agreement allows) assign to
          Biorex filings made in Glycyx's or its Sublicensees name with the
          health regulatory authorities within the terminated country that
          pertain to the Products.

13.5.2    Expiration or termination of this Agreement shall not relieve the
          parties of any obligation accruing prior to such expiration or
          termination.

13.5.3    Upon termination of this Agreement by either party Glycyx shall
          provide Biorex with a written inventory of all Products in process of
          manufacture or in stock, and Glycyx (and its Affiliates and
          Sublicensees) shall have the privilege of disposing of such Products
          within a period of one hundred eighty (180) days; provided, however,
          that Glycyx shall pay Biorex Profit on any sales of such Products at
          the rate and at the time herein provided and shall render Reports
          thereon.

13.5.4    In event of any termination of this Agreement or any licenses granted
          hereunder, whether in whole or in part, any Sublicense, marketing or
          other distribution rights granted by Glycyx hereunder shall survive,
          and the relevant Sublicense and/or distribution agreements, if any,
          shall be deemed assigned to Biorex, except where Biorex and the
          relevant Sublicensee enter into an agreement to provide an alternative
          arrangement in the event of such termination.

13.5.5    Upon the expiration or termination of this Agreement for any reason,
          the parties' rights and obligations under the following provisions
          shall survive: Article 1, Sections 6.3, 8.2, 8.3 and Articles 9, 11,
          13, 14 and 17; provided that the indemnification provision of Article
          14 shall survive only with respect to claims that are made prior to
          three (3) years after expiration or termination of this Agreement. In
          addition, upon expiration of this Agreement under Section 13.1 above,
          the parties rights and obligations under Article 4 and Section 6.2
          shall survive.

14.       INDEMNITY
          ---------

Glycyx
------

14.1      Subject to Biorex's compliance with its obligations set forth in
          Section 14.3 below, Glycyx agrees to indemnify and hold Biorex, its
          Affiliates and their employees and agents harmless from and against
          any losses, claims, damages, liabilities or actions (including
          reasonable attorneys' fees and court and other expenses of litigation)
          (collectively, the "Liabilities") suffered or incurred in connection
          with Third Party claims for personal injuries or

                                      26

          any product recall to the extent caused by: (a) any failure to test
          for or provide adequate warnings of adverse side effects to the extent
          such failure arises out of acts or omissions in connection with the
          performance of Glycyx's preclinical or clinical testing obligations
          hereunder, (b) any manufacturing defect in any Product or other
          material manufactured by Glycyx or its subcontractors, or (c) any
          other act or omission (without regard to culpable conduct) of Glycyx
          or its subcontractors in connection with the activities contemplated
          under this Agreement, except to the extent such Liabilities resulted
          from negligence, recklessness or intentional misconduct of Biorex.

Biorex
------

14.2      Subject to Glycyx's compliance with its obligations set forth in
          Section 14.3, Biorex agrees to indemnify and hold Glycyx, its
          Affiliates, and Sublicensees and their employees and agents harmless
          from and against any Liabilities suffered or incurred in connection
          with third party claims for personal injuries or any product recall to
          the extent caused by: (a) any failure to test for or provide adequate
          warnings of adverse side effects to the extent such failure arises out
          of acts or omissions in connection with Biorex's preclinical or
          clinical testing obligations hereunder, (b) any manufacturing defect
          in any Product or other material manufactured by Biorex or its
          subcontractors, or (c) any other act or omission (without regard to
          culpable conduct) of Biorex or its subcontractors in connection with
          the activities contemplated under this Agreement, except to the extent
          such Liabilities resulted from negligence, recklessness or intentional
          misconduct of Glycyx or its Affiliates, sublicensees or
          subcontractors. Notwithstanding the foregoing, Biorex shall not be
          obligated to indemnify Glycyx or its Affiliates, Sublicensees or
          subcontractors with respect to Liabilities incurred in the course of
          human clinical trials conducted by Glycyx (itself or through
          subcontractors), or with respect to Liabilities resulting from the use
          of Products supplied by Biorex as clinical trials materials for use in
          such clinical trials.

Procedure
---------

14.3      A party (the "Indemnitee") that intends to claim indemnification under
          this Article 14 shall promptly notify the other party (the
          "Indemnitor") in writing of any loss, claim, damage, liability or
          action in respect of which the Indemnitee or any of its Affiliates,
          employees or agents intend to claim such indemnification, and the
          Indemnitor shall have

                                      27

          the right to participate in, and, to the extent the Indemnitor so
          desires, jointly with any other Indemnitor similarly noticed, to
          assume the defence thereof with counsel mutually satisfactory to the
          parties; provided, however, that an Indemnitee shall have the right to
                   --------
          retain its own counsel, with the fees and expenses to be paid by the
          Indemnitee, if representation of such Indemnitee by the counsel
          retained by the Indemnitor would be inappropriate due to actual or
          potential differing interests between such Indemnitee and any other
          party represented by such counsel in such proceeding. The indemnity
          agreement in this Article 14 shall not apply to amounts paid in
          settlement of any loss, claim, damage, liability or action if such
          settlement is effected without the consent of the Indemnitor, which
          consent shall not be withheld unreasonably. The failure to deliver
          written notice to the Indemnitor within a reasonable time after the
          commencement of any such action, if prejudicial to its ability to
          defend such action, shall relieve such Indemnitor of any liability to
          the Indemnitee under this Article 14, but the omission so to deliver
          written notice to the Indemnitor shall not relieve it of any liability
          that it may have to any Indemnitee otherwise than under this Article
          14. The Indemnitee under this Article 14, its employees and agents,
          shall cooperate fully with the Indemnitor and its legal
          representatives in the investigation of any action, claim or liability
          covered by this indemnification.

15.       FORCE MAJEURE
          -------------

Neither party shall be held liable or responsible to the other party nor be deemed to have defaulted under or breached this Agreement for failure or delay in fulfilling or performing any term of this Agreement when such failure or delay is caused by or results from causes beyond the reasonable control of the affected party or from fire, floods, embargoes, war, acts of war (whether war be declared or not), insurrections, riots, civil commotions, strikes, lockouts or other labour disturbances, acts of God or acts, omissions or delays in acting by any governmental authority or the other party.

16. ASSIGNMENT

This Agreement may not be assigned or otherwise transferred, nor, except as expressly provided hereunder, may any right or obligations hereunder to assigned or transferred, by either party without the written consent of the other party; provided, however that either Biorex or Glycyx may, without such consent, assign this Agreement and its rights and obligations hereunder in connection with the transfer or sale of all or substantially all of its business, if such assets include substantially all of the assets relating to

its performance of its respective obligations hereunder, or in the event of its merger or consolidation with another company at any time during the term of this Agreement. Any purported assignment in violation of the preceding sentence shall be void. Any permitted assignee shall assume all obligations of its assignor under this Agreement. No assignment shall relieve either party of responsibility for the performance of any accrued obligation which such party then has hereunder.

17. MISCELLANEOUS

Notices
-------

17.1      Any notice or report required or permitted to be given or made under
          this Agreement by one of the parties hereto to the other shall be in
          writing, delivered personally or by facsimile (and promptly confirmed
          by personal delivery or courier) or courier, postage prepaid,
          addressed to such other party at its address indicated below, or to
          such other address a the addressee shall have last furnished in
          writing to the addressor and shall be effective upon receipt by the
          addressee.

          Glycyx Pharmaceuticals Ltd
          Cedar House
          41 Cedar Avenue
          Hamilton, Hm-12, Bermuda
          Attention: Managing Director

          Biorex Laboratories, Ltd
          2 Crossfield Chambers
          Gladbeck Way
          Enfield, Middlesex EN2 7HT
          Attention: Managing Director

Applicable Law

17.2 This Agreement shall be governed by and construed in accordance with the laws of England, without regard to conflicts of laws provisions.

Export Laws

17.3      Biorex shall procure and maintain all U.K. export licenses required
          for it to transfer to Glycyx and its Sublicensees all Technical
          Information, Patent Rights, Manufacturing Technology and other
          technical data, and shall comply with all other U.K. laws, regulations
          and governmental directives relating to the export of technical data,
          goods and services.

No Consequential Damages

17.4      EXCEPT AS PROVIDED IN SECTION 14 IN NO EVENT SHALL EITHER GLYCX OR
          BIOREX OR THEIR AFFILIATES BE

                                      29

          LIABLE FOR SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES
          (INCLUDING WITHOUT LIMITATION DAMAGES FOR LOSS OF PROFITS, PRODUCTION,
          USE OR SALES) BASED ON CONTRACT, TORT OR ANY OTHER LEGAL THEORY.

Entire Agreement

17.5      This Agreement contains the entire understanding of the parties with
          respect to the subject matter hereof. All express or implied
          agreements and understandings, either oral or written heretofore made
          (including without limitation the Original Agreement which is
          superseded in its entirety by this Agreement) are expressly excluded.
          This Agreement may be amended, or any term hereof modified, only by a
          written instrument duly executed by both parties hereto.

Headings
--------

17.6      The captions to the several Articles and Sections hereof are not a
          part of this Agreement, but are merely guides or labels to assist in
          locating and reading the several Articles and sections hereof.

Independent Contractors

17.7      It is expressly agreed that Glycyx and Biorex B shall be independent
          contractors and that the relationship between the two parties shall
          not constitute a partnership, joint venture or agency. Neither Glycyx
          nor Biorex shall have the authority to make any statements,
          representations or commitments of any hand, or to take any action,
          which shall be binding on the other, without the prior written
          authorisation of the other party to do so.

Waiver
------

17.8      The waiver by either party of any right hereunder or 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.

Further Assurances

17.9      Glycyx shall use commercially reasonable efforts to ensure that each
          of its Sublicensees and subcontractors shall observe and perform all
          the obligations and restrictions applicable to it under this
          Agreement.

Severability

17.10     In case any one or more of the provisions contained in this Agreement
          shall for any reason be held to be invalid, illegal or unenforceable
          in any respect, such invalidity, illegality or unenforceability shall
          not affect any other provisions hereof, but this Agreement shall be
          construed as if such invalid or illegal or unenforceable provisions
          had never been contained herein.

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

GLYCYX PHARMACEUTICALS LTD              BIOREX LABORATORIES LTD


/s/ Randy Hamilton                      /s/ Lily Baxendale
----------------------------            -------------------------
     SIGNED                                       SIGNED


  President                                Managing Director
----------------------------            -------------------------
     TITLE                                        TITLE

EXHIBIT A

Patents and Patent Applications

Patent      Number       Filing Date     Grant Date         Due to Expire
------      ------       -----------     ----------         -------------
UK          2,080,796    Complete                           7 July 2001
                         Specification
                         7 July 1981

France      1,493,313    21 July 1981                       21 July 2001

Italy       1,138,450    10 July 1981    17 December 1986   10 July 2001

F.R.G.      3,120,019    21 July 1981    15 February 1990   21 July 2001

EXHIBIT B

Regional Minimums

Year After Commercial Introduction of
First Product in Corresponding Region

                 First Year         Second Year        Third, Fourth, and
                                                       Fifth Years

               ((POUNDS)000)       ((POUNDS)000)       ((POUNDS)000)
               -------------       -------------       -------------
Region
------

[*]

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

EXHIBIT C

Trade Mark "COLAZIDE"

REGISTRATIONS

Country                                           Number
-------                                           ------
Australia                                         A455069
Benelux                                           428853
Denmark                                           04083-1988
Finland                                           103862
German FR                                         1157517
Great Britain                                     1234695
Greece                                            93779
Iceland                                           837/1989
Ireland                                           120566
Italy                                             512161
New Zealand                                       168967
Norway                                            138374
South Africa                                      867518
Sweden                                            221326
Switzerland                                       371887

Applications
------------

Country                                           Number
-------                                           ------

Austria                                           117587
Canada                                            643826
France                                            1396079

[LETTER HEAD OF BIOREX]

Glycyx Pharmaceuticals Ltd
Cedar House
41 Cedar Avenue
Hamilton HM12
Bermuda

LETTER OF AGREEMENT

Background

A. By an agreement dated 18th March 1992 between Glycyx Pharmaceuticals, Ltd. ("Glycyx") and Biorex Laboratories Limited ("Biorex"), Biorex granted to Glycyx an exclusive licence to make, have made, use, sell and have sold Products in the Territory (the terms "Products" and Territory" being defined in the agreement).

B. An agreement dated 17th September 1992 (the "Agreement") between Biorex and Glycyx replaced the agreement dated 18th March 1992 in its entirety.

C. Section 4.1.1 of the Agreement provides as follows:-

"4.1.1    Biorex shall assist in the completion of the clinical
          development and in the obtaining of the necessary regulatory
          approvals in Biorex's name to market a Product containing
          Balsalazide for the treatment of ulcerative colitis in the

United Kingdom;..."

D. Notwithstanding the provisions of section 4.1 1 of the Agreement referred to in C. above,, Biorex prepared to permit Glycyx to obtain in its own name the necessary regulatory approvals to market a Product containing Balsalazide for the treatment of ulcerative colitis in the United Kingdom on and subject to the provisions of this Letter of Agreement. The terms "Product" and "Balsalazide" having the meanings given to them in the Agreement.

It is agreed that:-

1. Biorex shall waive its right under section 4.1.1 of the Agreement to have the necessary regulatory approvals to market a Product containing Balsalazide for the treatment of ulcerative colitis in the United Kingdom in its (own name, and agrees that Glycyx shall be entitled to obtain such approval in Glycyx's name on and subject to the provisions of this Letter of Agreement.

2. If, and only if:-

i) the Agreement is terminated by Biorex pursuant to section 13.2 and/or section 13.4 of the Agreement; and/or

ii) during such time as:-

(a) Glycyx is required to make payments to Biorex under the Agreement; or

(b) Glycyx would be required to make payments to Biorex under the Agreement were Glycyx and/or its, Sublicensees to make, have made, use, sell and/or have sold Products within the Territory.

Salix Holdings, Ltd. and/or Glycyx shall cease business or seek protection from their creditors pursuant to Chapter 11 of the US Bankruptcy Code or file or have filed against them voluntary or involuntary bankruptcy procedure that is not dismissed within 60 days or if a receiver or assignee is appointed for the benefit of their creditors or if they take or suffer any similar action in consequence of debt with respect to all or substantially all of their assets;

then Biorex, upon 30 days notice to Glycyx, shall be entitled to fill ill in the Product Licence Number to date and send the letter attached to this Letter of Agreement (the "Letter of Authority") to the Medicines Control Agency (or its successor)

3. If Biorex shall be entitled to send the Letter of Authority pursuant to paragraph 2 above, then at the cost of Biorex, Glycyx shall promptly do all things necessary and provide Biorex with all reasonable assistance to enable Biorex or its nominee to obtain regulatory approvals in the United Kingdom equivalent to those obtained by Glycyx pursuant to paragraph 1 of this Letter of Agreement.

4. Glycyx shall not do anything to reduce or limit the effectiveness of the Letter of Authority and in particular shall not purport to withdraw or cancel the Letter of Authority.

5. Except as specifically stated in paragraph 1 of this Letter of Agreement, all the provisions of the Agreement shall continue in full force and effect.

6. The provisions of this Letter of Agreement shall take effect on the date set out at the start of this Letter of Agreement.

7. This Letter of Agreement shall be governed by and construed in accordance with the laws of England.

Agreed for and on behalf of                  Agreed for and on behalf of
Glycyx Pharmaceuticals, Ltd                  Biorex Laboratories Limited
by its duly authorised                       by its duly authorised
representative                               representative



/s/ Randy Hamilton                           /s/ Lily Baxendale
..........................                   ............................
Signed                                       Signed

President Managing Director .......................... ............................ Title Title

[LETTER HEAD OF GLYCYX PHARMACEUTICALS, LTD]

Dated:

The Medicines Control Agency

Dear Sir:

PRODUCT LICENCE NUMBER

We, the proprietors of the above product licence, hereby authorise the Medicines Control Agency (or its successor) to refer to the information and data supplied to the Medicines Control Agency in respect of our product licence when assessing product licence applications made by Biorex Laboratories Limited or its nominee.

We hereby request and authorise the Medicines Control Agency (or its successor) to cancel our product licence once Biorex Laboratories Limited or its nominee has been granted a product licence equivalent to our product licence.

We confirm that once our product licence has been cancelled we shall no longer supply products covered by it or any products under the name "Colazide".

Yours faithfully,

/s/ Randy Hamilton
---------------------------------------
President, Glycyx Pharmaceuticals, Ltd.

[LETTER HEAD OF GLYCYX PHARMACEUTICALS, LTD]

From: Glycyx Pharmaceuticals Ltd.

To: Biorex Laboratories Limited

Dear Sirs:

RE: License Agreement dated 17th September 1992 between Biorex Laboratories
Limited ("Biorex") and Glycyx Pharmaceuticals, Ltd. ("Glycyx")

I write for and on behalf of Glycyx in connection with the above license agreement ("the License") and in particular, in connection with Section 13 of the Agreement concerning term and termination.

Glycyx and Biorex agree as follows:-

(i) That the first word of section 13.4.1, "Salix" shall be deleted and replaced by word "Glycyx; and

(ii) That Section 13.4 of the License shall be amended by the addition of the new section 13.4.4 to read as follows:-

"13.4.4(a) by reason of any act or omission of Glycyx (including without limitation any breach of the provisions of any Sublicense) any Sublicensee appointed in respect of the territory of Italy, Spain, Greece and/or Portugal is entitled (or otherwise obtains any right) to manufacture or have manufactured on its behalf by a third party Products and/or sell in such part or parts of the Territory such Products manufactured by it or an its behalf upon terms whereby Biorex is to receive a royalty of [*] of each Product manufactured and/or sold by such Sublicensee; and

(b) The Sublicensee or a third party for and on behalf of the Sublicensee commences manufacture of Products;

THEN Biorex shall have the right to terminate Glycyx's rights and licenses under this Agreement forthwith in respect of such part or parts of the Territory.

For the avoidance of doubt for the purposes of this Section 13.4.4 "manufacture" shall mean the manufacture of Bulk Balsalazide or the Bulk Active Ingredient for Balsalazide (4ABA) by such Sublicensee or an behalf of any such Sublicensee by a third party."

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

Please confirm your agreement to the amendment to the License as set out in this letter by signing and returning the enclosed copy letter.

Yours faithfully,

/s/ Randy Hamilton
Randy Hamilton, President
Signed for an on behalf of
Glycyx Pharmaceuticals Ltd.

Biorex Laboratories Limited hereby confirms its agreement to the amendment to the License set out above.

Lily Baxendale
Signed for an on behalf of

Biorex Laboratories Limited.

EXHIBIT 10.6

Dated 1992

         GLYCYX PHARMACEUTICALS, LTD  (1)



                    -and-


                  AB ASTRA            (2)


--------------------------------------------

RESEARCH AND DEVELOPMENT
AGREEMENT

Hewitson Becke + Shaw 4/5 Church Street Peterborough
PE1 1XB

- 1 -

THIS AGREEMENT is made the 21st day of September 1992

BETWEEN:

(1) GLYCYX PHARMACEUTICALS, LTD a company incorporated under the laws of Bermuda and whose registered office is at 41 Cedar Avenue, Hamilton, HM12, Bermuda ("Glycyx"); and

(2) AB ASTRA a company incorporated under the laws of Sweden whose principal place of business is at Kvarnbergagatan 16, S-151 85 Sodertalje, Sweden ("Astra").

WHEREAS:

A. By an agreement dated 18th March, 1992 and made between Glycyx of the one part and Biorex Laboratories Limited ("Biorex") of the other part Biorex granted Glycyx an exclusive license to develop, manufacture use and sell pharmaceutical products incorporating Balsalazide under patents granted to Biorex upon the terms of such licence.

B. Glycyx and Astra have agreed to collaborate in the programme of development of such pharmaceutical products for the creation of a Dossier to be registered in the countries within the Territory (as hereinafter defined).

NOW IT IS HEREBY AGREED as follows:

1. DEFINITIONS

1.1 In this Agreement the following words shall have the following meanings:

"the Applications"             means:-

                               (1) the remission of acute relapse in
                               ulcerative colitis; and

                               (2) the maintenance of remission in
                               ulcerative colitis

"the Astra Specialists"        shall mean three specialists nominated and
                               appointed from time to time by Astra to the
                               Project Team


"Balsalazide"                   means 5- [4(2- Carboxyethyl carbamoyl) -
                                phenylazo]-salicylic acid disodium salt
                                dihydrate


"Biorex"                        shall mean Biorex Laboratories Limited a
                                company incorporated in England under
                                Company Registration Number 390233

                                 -2-


                               whose registered office is at 2 Crossfield
                               Chambers, Gladbeck Way, Enfield, Middlesex
                               EN2 7HT

"Biorex Agreement"             means an agreement dated 18th March 1992
                               between Glycyx and Biorex

"Biorex/Astra Agreement"       means an agreement of even date herewith
                               entered into between Biorex and Astra

"Distribution Agreement"       means the agreement entered into on even
                               date herewith between Glycyx and Astra in
                               the approved form

"the Dossier"                  means the Master Regulatory Dossier relating
                               to the Product which shall be prepared
                               during the Project and which shall in the
                               reasonable opinion of Glycyx and the Project
                               Team be

                               (1) in accordance with the published
                               standards required for master regulatory
                               dossiers by the European Commission as at
                               the date of completion of the Dossier; and

                               (2) in a form suitable for submission to and
                               suitable for approval by the relevant
                               regulatory authorities in connection with
                               obtaining health registration for the
                               Product in each of the Principal Markets

"the Excluded Territory"       shall mean the United States of America,
                               Italy, Spain, Portugal and Greece

"Force Majeure"                means in relation to either party any
                               circumstances beyond the reasonable control
                               of that party (including but not limited to
                               strike, lock out or other form of industrial
                               action, act of God, war, riot, accident,
                               breakdown in plant or machinery, fire,
                               flood, explosion, government action)

-3-

"Patents"                      shall mean the patents and applications
                               therefor for Balsalazide listed in Schedule
                               1

"the Principal Markets"        means United Kingdom, Sweden, Finland,
                               Norway, Switzerland, Austria, Denmark,
                               Germany, the Benelux countries, France,
                               Eire, South Africa, Australia, New Zealand
                               and Canada

"Product"                      means a pharmaceutical preparation for the
                               Applications containing Balsalazide
                               previously developed by Biorex and licensed
                               to Glycyx pursuant to the Biorex Agreement

"Product Information"          means the chemical, pharmaceutical, pre-
                               clinical, clinical and other information
                               relating to the Product and Balsalazide
                               delivered to Astra by Glycyx in full or in
                               summary form or as expert opinion of the
                               data prior to the date hereof as identified
                               and listed in Schedule 2

"the Project"                  means the development programme in
                               connection with the development of the
                               Product the preparation and completion of
                               the Dossier and obtaining the grant of
                               approval to market the Product in at least
                               one Principal Market conducted in accordance
                               with the terms of this Agreement and as
                               summarised in Schedule 2

"the Project Team"             means the team of experts appointed by
                               Glycyx from time to time in connection with
                               the Project and the Astra Specialists

"the Territory"                means all the countries in the world
                               excluding only Italy, Spain, Portugal,
                               Greece, United States of America, Japan,
                               Taiwan and

-4-

                               Korea

"the Trademark"                means the trade name "Colazide" registered
                               as a trademark for use on pharmaceutical
                               preparations in the United Kingdom and
                               elsewhere and any other tradename designated
                               by Glycyx for use in connection with the
                               Product in any part of the Territory where
                               use of the tradename 'Colazide' is
                               inappropriate for such part of the Territory
                               or where Astra reasonably considers that the
                               use of another tradename (in addition to the
                               tradename "Colazide") may be commercially
                               advantageous.

1.2 The headings in this Agreement are for convenience only and shall not affect its interpretation.

1.3 Reference to any document in the approved form shall be reference to the document agreed between the parties and initialled for the purposes of identification by each party.

2. GLYCYX'S OBLIGATIONS AND THE PRODUCT

2.1 Glycyx shall manage the Project Team and conduct or procure the conduct of the Project in a competent manner and shall use all reasonable endevours to prepare and/or procure the preparation of the Dossier.

2.2 The Project shall be conducted in respect of and relate only to the Product as defined herein (and notwithstanding the wider definition of the Product contained in the Distribution Agreement).

2.3 Glycyx shall conduct and manage the Project in close liaison with the Project Team and Glycyx shall keep Astra fully informed of the progress costs and conduct of the Project and shall take account of comments and proposals made by the Project Team with regard to the scientific content and methods involved in the Project.

2.4 Without prejudice to the generality of the foregoing Glycyx hereby agrees:-

2.4.1     that Glycyx shall use all reasonable endeavours to complete the
          Project on or before 31st December 1993; and

2.4.2     that the nature and procedures of any clinical trials conducted
          or required to be conducted as part of the Project by Glycyx (or
          by any third party duly authorised by Glycyx) will be agreed in

-5-

          advance with Astra and Glycyx shall procure that the results of
          any such trials or other clinical data relating to such trials
          shall be made freely available to Astra as soon as is reasonably
          practicable; and

2.4.3     to manage the Project Team and to procure that the Project Team
          shall meet at least once in every twelve (12) week period during
          the Project to review and co-ordinate the Project and to share
          and exchange all information relating to the Project; and

2.4.4     to prepare a quarterly written report on the progress of the
          Project and to submit such report to Astra each calendar quarter.
          (The first report shall be submitted to Astra within one calendar
          quarter from the date of this Agreement); and

2.4.5     to use reasonable endevours to procure that all the contractors
          working in the Project (including without limitation the members
          of the Project Team (excluding the Astra Specialists)) at the
          date of this Agreement are either recruited as employees of
          Glycyx or enter into contracts for the supply of their services
          to Glycyx; and

2.4.6     to co-ordinate all documentation in connection with the Project.

2.5 Astra hereby confirms and acknowledges that any information, assistance, representation or warranty given or made by Astra or any of its representatives or any Astra Specialists may be accepted by and used by Glycyx in the performance of the Project Provided Always that Glycyx shall remain solely responsible for the performance of the Project and shall not be entitled to rely upon any representation warranty or information supplied by any such Astra representative or any Astra Specialist.

2.6 Upon completion of the Dossier Glycyx shall file the Dossier with the relevant regulatory authorities in at least one Principal Market and shall apply for and pursue to grant approval to the marketing and sale of the Product in such Principal Market.

2.7 The conduct of the Project and the preparation of the Dossier in accordance with the terms hereof shall include the undertaking by Glycyx to perform all pre-clinical trials and human pharmacokinetics trials and such limited clinical trials for the Product as defined in Schedule 2 necessary to obtain approval in any Principal Market pursuant to Clause 2.6 but shall not include any obligation on Glycyx to undertake any other clinical trials whatsoever.

3. COMPLETION OF THE PROJECT

3.1 Upon any application for approval in a Principal Market made

-6-

by Glycyx under Clause 2.6 Glycyx (or any nominee appointed by it, including Biorex) shall be named as applicant and shall name in such application Astra as assembler and distributor for the Product in such Principal market and shall supply confirmation to Astra that the interests of Astra in the Product pursuant to the Distribution Agreement shall have been notified to the relevant regulatory authorities in such Principal Market upon such submission and application.

3.2 Glycyx shall use all reasonable endeavours to procure that the relevant regulatory authorities in such Principal Market shall (in addition to the product licence issued to the applicant) issue a duplicate product license in favour of Astra.

3.3 Glycyx shall procure that the applicant named pursuant to Clause 3.1 in connection with the submission of the Dossier to such regulatory authorities shall not during the term of the Distribution Agreement use any product license issued to it as applicant for the Product in any manner which may be in derogation of the rights granted to Astra under the Distribution Agreement.

4. ASTRA'S OBLIGATIONS

4.1 Astra shall be solely responsible for all costs and expenses incurred by or payable to any Astra Specialist in connection with the Project.

4.2 Astra acknowledges that the Project meetings under Clause 2.4.3 shall take place in the United Kingdom at such places as shall be reasonably nominated by Glycyx. Astra hereby agrees to bear the entire cost and expense in connection with the attendance at such meetings of any Astra representative and the Astra Specialists.

4.3 In the event that by agreement between the parties Astra shall during the term of the Project conduct any clinical trial work for registration purposes in connection with the Project Astra confirms that it shall bear all direct internal costs incurred by it in the performance of such clinical work but shall be entitled to invoice Glycyx [*] for those expenses and costs actually paid to any third party, upon terms to be agreed between the parties.

5. CLINICAL TRIALS

5.1 Astra agrees to undertake any human clinical trials for the Product (beyond the clinical trials conducted as part of the Project as specified in Clause 2.6) in connection with the submission of the Dossier in any part of the Territory or otherwise in connection with the application for or obtaining regulatory approval for the Product from any relevant regulatory authorities in any Part of the Territory (including but not limited to Phase III and Phase IV studies) at Astra's sole cost and expense Provided Always

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN

REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

-7-

that:

5.1.1  the trials, are planned, organised and carried out solely by Astra;
       and

5.1.2  prior to the conduct of the trials the clinical trial objectives and
       the clinical trial protocols are agreed in writing between Astra and
       Glycyx (such agreement not to be unreasonably withheld or delayed
       and Provided Always that such agreement shall be deemed to have been
       given by Glycyx in the event that no response is received by Astra
       from Glycyx within 20 working days of receipt by Glycyx of any
       request from Astra for approval); and

5.1.3  Astra shall provide all medical resources and clinical trials
       monitors at its own cost and expense; and

5.1.4  Astra shall bear all the costs and expenses associated with such
       clinical trials including but without limitation the costs of
       documentation and administrative payments to trialists; and

5.1.5  Glycyx shall [*] provide such supplies of finished capsules of
       Product to Astra as Astra may reasonably require for the conduct of
       such trials; and

5.1.6  Unless otherwise agreed by Glycyx, Astra shall use and promote the
       Trademark in connection with such trials.

5.2 In the event that any clinical trials are conducted by Astra pursuant to Clause 5.1 Astra undertakes:-

5.2.1     to keep Glycyx fully informed as to the conduct of such clinical
          trials and to provide to Glycyx full unrestricted access to such
          results; and

5.2.2     to permit Glycyx to use such results and to disclose the same to
          third parties in connection with the use and sale of the Product
          in the Excluded Territory

Provided Always that Glycyx shall procure full unrestricted access to Astra to the results of any clinical trials and other studies conducted by Glycyx and/or any authorized third party in connection with the use and sale of the Product in the Excluded Territory.

6. COSTS AND FUNDING

6.1 Schedule 3 contains an estimate prepared by Glycyx of the costs which may be incurred in the performance of the Project. Glycyx acknowledges that the total estimated costs for completion of the Project is [*] (as at 31st August 1992) which is in accordance with the cost scheme in

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

-8-

Schedule 3.

6.2 Astra hereby agrees that it shall be responsible for all the costs and expenses of whatsoever nature and by whomsoever incurred in connection with the Project up to [*] and Astra agrees to remit monies to Glycyx (for such costs and expenses incurred by Glycyx in the performance of the Project) into Glycyx's bank account (details of which are set out below) in respect of such costs and expenses in accordance with Schedule 3 to this Agreement

[*]

Glycyx confirms and acknowledges the receipt of [*] paid by Astra on July 3, 1992 as an advance payment hereunder and [*]

Provided Always that any payments costs and expenses expressly stated in this Agreement to be the sole responsibility of Astra shall be paid over and above such [*] and such costs shall not be taken into account in calculating such maximum.

6.3 Glycyx shall be solely responsible for funding the difference between the actual costs for completion of the Project and Astra's contribution under Article 6.2.

6.4 Glycyx represents that all payments made by Astra to the bank account under Article 6.2 will be used exclusively for payments to third parties in connection with the Project and Glycyx is solely responsible for the maintenance of this Account. Glycyx shall be solely responsible for making all payments to all third parties working in the Project and Glycyx shall maintain detailed and accurate accounts and records in connection with all such payments.

6.5 Glycyx shall submit a copy of all accounts and records maintained by it in connection with the conduct of the Project on a calendar quarterly basis. The first set of accounts and records shall be submitted to Astra three calendar months from the date of this Agreement.

6.6 In the event that the actual costs incurred by Glycyx in the performance of the Project shall exceed the total estimated costs under Clause 6.1 Glycyx shall be solely liable for any excess costs incurred Provided Always that in the event that

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

-9-

Glycyx shall at any time (in its sole discretion) decide that it is unable or unwilling to incur expenses in excess of such estimate and to complete the Project in accordance with the terms of this Agreement it shall forthwith notify Astra in writing and Astra may at its sole option (exercised by 30 days notice in writing to Glycyx served within 15 days of receipt of any such notice from Glycyx) assume all obligations in connection with the conduct and completion of the Project the filing of the Dossier in accordance with Clause 3.1 hereof and obtaining regulatory approval under Clause 2.6 whereupon;

     6.6.1     this Agreement shall terminate; and

     6.6.2     the rights of Astra to distribute the Product under the
               Distribution Agreement will remain and for the avoidance of doubt
               payments under Clause 7.1.2 of the Distribution Agreement shall
               remain due and payable in accordance with the terms of such
               Clause 7.1.2; and

     6.6.3     the right of Astra to manufacture Product pursuant to Clause 13
               of the Distribution Agreement shall be deemed to be granted
               pursuant to Clause 13.2.2 thereof; and

     6.6.4     Astra shall have no claim against Glycyx and Glycyx shall not be
               liable for any breach by it of its obligations to complete the
               Project in accordance with the terms of this Agreement; and

     6.6.5     Astra may in its sole discretion supply information relating to
               or arising in the Project to third parties exploiting the Product
               in the Excluded Territory but shall not be under any obligation
               to do so and such supply may be upon such terms as may be agreed
               between Astra and such third party.

7.   TERM
     ----

7.1 This Agreement shall have effect from the date hereof unless and until terminated pursuant to this Clause 7.

7.2 This Agreement shall terminate

7.2.1     upon completion of the Project by Glycyx in accordance with the
          terms of this Agreement (and in particular the terms of Clause
          2.6) and payment by Astra to Glycyx of all sums due hereunder;
          and

7.2.2     Forthwith upon written notice from Astra of the exercise of its
          option under Clause 6.6.

7.3 This Agreement may be terminated at any time during the Project by the mutual agreement of Astra and Glycyx provided always that the Distribution Agreement shall terminate forthwith upon any such termination.

-10-

7.4 Either party to this Agreement shall be entitled to terminate this Agreement forthwith by notice in writing to the other in the event that:-

7.4.1  the other party shall fail to pay any sum due hereunder on the due
       date and shall fail to remedy such breach within 30 days of being
       required in writing by the other party so to do; or

7.4.2  the other party shall commit a material breach of any of the terms
       and conditions of this agreement and shall fail to remedy the same
       (if capable of remedy) within ninety (90) days of being required in
       writing by the other party so to do; or

7.4.3  the other party shall enter into liquidation (either voluntary or
       compulsory) or shall be the subject of any petition for winding up;
       or

7.4.4  the other party shall make any assignment or arrangement for the
       benefit of its creditors or cease or threaten to cease to carry on
       its business in the ordinary course; or

7.4.5  a receiver, administrative receiver, or receiver and manager, or
       judicial manager or administrator is appointed over the whole or any
       part of the assets of either party or if any court proceedings are
       commenced for the appointment of an administrator or receiver to
       either party; or

7.4.6  the other party shall become unable to pay its debts as they become
       due in the ordinary course of business or shall otherwise become
       subject to or seek relief under any law relating to insolvency in
       any jurisdiction relevant to such other party.

7.5 Any waiver by either party of a breach of any provision of this agreement shall not be considered as a waiver of any subsequent breach of the same or any provisions of this Agreement.

7.6 Any termination of this Agreement shall be without prejudice to the right of either party to recover any monies due to it under this Agreement or to the rights or remedies of either party in respect of any breach prior to the date of termination of this Agreement.

7.7 Glycyx undertakes that during the term of this Agreement it shall not exercise any right which it may have (or may acquire) to terminate the Biorex Agreement without prior consultation with Astra and without taking such action as may be appropriate to ensure that the rights granted to Astra hereunder are not prejudiced to any material extent by any such termination of the Biorex Agreement by Glycyx.

-11-

8. CONSEQUENCES OF TERMINATION

8.1 In the event of termination of this Agreement pursuant to Clause 7.3 or termination by Glycyx pursuant to Clause 7.4 (howsoever arising or caused) each party shall immediately

8.1.1     return to the other all material information, data, or samples
          (including without limitation all scientific medical and safety
          data relating to the Product) relating to the Product or the
          Project which is of a confidential nature and shall have been
          supplied to it in confidence in connection with this Agreement
          together with all copies thereof (other than correspondence
          between the parties) which either party may have in its
          possession or under its control as at the date of termination;
          and

8.1.2     cease all use of any such confidential information of the other
          party supplied to or obtained by it in connection with the
          Project or this Agreement; and

8.1.3     undertake a full financial audit of the accounts of the Project
          and agree such payments and reimbursements as may be required to
          give effect to the provisions of Clause 6 and to ensure that
          Glycyx obtains reimbursement of all costs incurred by or
          committed to Glycyx prior to the date of termination (subject to
          the maximum in Clause 6.2). If the parties cannot agree on the
          amounts of any payments or re-imbursements within 28 days of the
          date of termination of this Agreement then either party may
          instruct the President for the time being of the Pharmaceutical
          Society of Great Britain to appoint an independent auditor
          (acting as an expert and not an arbitrator) to prepare the said
          audit and his determination as to payments or re-imbursements to
          either party, shall (in the absence of manifest error), be final
          and binding on the parties and his costs and expenses shall be
          borne by the parties hereto in such proportions as he shall in
          his absolute discretion determine

8.2 In the event of termination of this Agreement by Astra under the provisions of Clause 7.4 the rights and obligations of Astra under this Agreement shall continue subject always to the terms of the Biorex/Astra Agreement.

8.3 In the event of termination under Clause 7.2 it is acknowledged that Clauses 3.3, and 11 and any provision which by its nature is intended to survive termination of this Agreement will survive any such termination.

9. CONFIDENTIAL INFORMATION

9.1 Astra hereby agrees and undertakes that during the term of this Agreement and for a period of ten years thereafter

-12-

(howsoever termination may be caused or arise) it shall keep confidential and shall not without the prior written consent of Glycyx disclose to any third party any information of a confidential nature belonging to Glycyx or Biorex including trade secrets and information of commercial value) which may become known to Astra from Glycyx in connection with this Agreement Provided Always that such obligation of confidentiality shall not extend to any part of such confidential information which:

9.1.1     shall otherwise than by reason of any default by Astra became
          freely available to the general public; or

9.1.2     Astra can show by documentary evidence was in its possession or
          control prior to disclosure free of any obligation of
          confidentiality; or

9.1.3     Astra can show by documentary evidence shall have come into the
          possession or control of Astra from a third party free of any
          obligation of confidentiality subsequent to disclosure hereunder;
          or

9.1.4     Astra is obliged by law or regulation to disclose to a third
          party provided that such disclosure shall only be made to the
          extent actually required by law or regulation.

9.2 Astra shall ensure that the Astra Specialists, or any other employee of or consultant to Astra who shall obtain any confidential information in connection with the Project or otherwise the performance of this Agreement shall be bound by obligations of confidentiality substantially similar to the provisions of Clause 9.1.

10. ASSIGNMENT

10.1 The benefit of this Agreement is personal to Astra and to Glycyx and shall not be capable of assignment by either of them under any circumstances without the prior consent in writing of the other party (such consent not to be unreasonably withheld or delayed) save only for an assignment made between Glycyx and Salix Pharmaceuticals Inc which may be effected without the prior consent or approval of Astra.

10.2 Performance of any of Astra's obligations hereunder may be effected by any wholly-owned subsidiary of Astra within the Territory Provided Always that Astra shall remain solely liable for the proper performance of all such obligations.

11. INTELLECTUAL PROPERTY RIGHTS AND WARRANTIES

11.1 Glycyx hereby represents and warrants to Astra as at the date of this Agreement (with the intent that Astra has relied upon such representations and warranties in entering into this Agreement and the Distribution Agreement) that:-

-13-

11.1.1    the Biorex Agreement (which has been disclosed to Astra) contains
          all the terms concerning the arrangements between Biorex and
          Glycyx and that there is no other fact or circumstances relating
          to the Biorex Agreement that is material to the Project and/or
          the Distribution Agreement and which might reasonably be expected
          to affect the decision of Astra to enter into this agreement or
          the Distribution Agreement which has not been disclosed to Astra
          by Glycyx; and

11.1.2    Biorex is the sole legal owner of the Patents; and

11.1.3    so far as Glycyx is aware the Patents are valid and subsisting;
          and

11.1.4    so far as Glycyx is aware and save as indicated therein the
          Product Information is accurate and complete in all material
          respects and there is nothing contained therein which might
          render the Product Information misleading in any material
          respect; and

11.1.5    so far as Glycyx is aware the Trademark is available for use in
          connection with the Product in each of the Principal Markets and
          does not infringe the rights of any third party;

Provided Always That Glycyx shall not be liable in any respect for any breach of the warranties contained in clauses 11.1.1 to 11.1.5 unless notice in writing specifying details of such breach shall have been served on Glycyx by Astra prior to the twelfth anniversary of the date of this Agreement.

11.2 Astra acknowledges that save as expressly provided in the Distribution Agreement or as may be required in connection with the performance by Astra of its obligations hereunder, Astra shall have no right title interest or licence in or to the Patents or otherwise any intellectual property rights of Biorex or Glycyx in Balsalazide or the Product.

12. COSTS

12.1 Each party hereto shall bear its own costs in relation to the negotiation, drafting, preparation and, execution of this Agreement.

13. CONFIDENTIALITY OF THIS AGREEMENT

13.1 The contents of this Agreement shall remain confidential as between the parties. Neither party shall, without the prior written consent of the other (such consent not to be unreasonably withheld without justification) reveal any of the financial terms of this Agreement to any other person, firm or company save for:-

-14-

13.1.1    disclosure by Glycyx to Biorex or Salix Pharmaceuticals Inc in
          circumstances where such third party shall have accepted
          obligations of confidentiality in respect of the information
          disclosed; or

13.1.2    such disclosure as may be required to be made by either party by
          any relevant law or regulatory authority to the extent required
          by such relevant or regulatory authority.

14. FORCE MAJEURE

14.1 If the performance of any obligations under the Agreement by either party is affected by Force Majeure such party shall forthwith notify the other party of the nature and extent thereof.

14.2 Neither party shall be deemed to be in breach of this Agreement or otherwise be liable to the other by reason of any delay in performance or non-performance of any of its obligations hereunder to the extent that such delay or non-performance is due to any Force Majeure which has been notified to the other party in writing.

15. NATURE OF THE AGREEMENT

15.1 Nothing in this Agreement shall create or be deemed to create any partnership, joint venture or the relationship of principal and agent between the parties.

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

15.3 This Agreement (including the Schedules) together with the Distribution Agreement (and any agreements entered into pursuant to the Distribution Agreement) constitutes the entire understanding and agreement between the parties with respect to the subject matter of this Agreement and supersedes all prior agreements, negotiations and discussions between the parties relating to this Agreement.

15.4 This Agreement may not be released, discharged, abandoned, charged or modified, in any manner, except by an instrument in writing signed by a duly authorised officer or representative from each of the parties hereto.

15.5 This Agreement shall be governed by and construed in all respects in accordance with the laws of England and each party hereby submits to the exclusive jurisdiction of the English courts. For the purpose of accepting service of process in connection with any action commenced before the

-15-

High Court in England the parties hereto hereby absolutely, unconditionally and irrevocably appoint the following agents to accept process on their behalf it being unconditionally agreed that for this purpose such process will be properly and effectively served if the same is left at the offices of the agent at the address set out below

Astra:         F.A.O.  The Managing Director
               Astra Pharmaceuticals Limited
               Home Park Estate
               Kings Langley
               Herts
               WD4 8DH

Glycyx:        F.A.O.  Glycyx Pharmaceuticals Limited
               Camas Partners Limited
               Camas House
               23 Park Lane
               Blunham
               Bedfordshire
               MK44 3NH

15.6 Any dispute arising out of or in connection with this Agreement as shall relate to technical quality specification or otherwise to any defect in the Product only shall be referred to arbitration in London before an arbitrator (with suitable technical knowledge) appointed by agreement between the parties or, in default of agreement, nominated on the application of either party by the President for the time being of the Royal Pharmaceutical Society of Great Britain.

16. NOTICES

16.1 All notices to be served by the parties to this Agreement shall be served only in the English language.

16.2 Notices shall be sufficiently served if dispatched by first class or express post (meaning the fastest normal method of mail transmit in the country of dispatch) to the address of the receiving party set out below;

Glycyx         3600 W Bayshore Road
               Suite 202
               Palo Alto
               CA 94303 U.S.A.
               F.A.O.  R W Hamilton

Astra          Kvarnbergagatan 16
               S-151 85 Sodertalje
               Sweden
               F.A.O.  Vice President Legal Affairs

Any modification to this address must in itself be notified in writing to the other party in accordance with the terms of this sub-clause.

16.3 In the absence of proof to the contrary notices properly sent hereunder shall be deemed to have been duly served five

-16-

working days after the date of dispatch.

16.4 It shall be permitted for notices to be served hereunder by facsimile transmission and for this purpose the fax numbers below shall apply:

16.4.1  in the case of Glycyx at 3600 W Bayshore Road Suite 202 Palo Alto
        CA 94303 USA facsimile transmission number 415-856-1555 and marked
        for the attention of R W Hamilton

16.4.2  in the case of Astra at Kvarnbergagatan 16, S-151 85 Sodertalje,
        Sweden facsimile transmission number +46 855 32 90 00 and marked
        for the attention of Vice President Legal Affairs

provided that receipt of such facsimile transmission is confirmed by return facsimile and shall be deemed served 24 hours after the time of receipt of the return facsimile.

AS WITNESS the hands of the duly authorised representatives of the parties hereto the date and year first above written

-17-

SCHEDULE 1

PATENTS

PATENT       NUMBER     FILING DATE    GRANT DATE     DUE TO EXPIRE

UK          2,080,796    Complete                        07/07/2001
                         Specification
                         07.07.1981

France      1,493,313    21.07.1981                      21.07.2001

Italy       1,138,450    10.07.1981                      10.07.2001

Japan       1,433,303    16.07.1981                      07.04.2001

U.S.A.      4,412,992    08.07.1981                      01.11.2000

F.R.G.      3,120,019    21.07.1981        15.02.90      21.07.2001

R&D Schedule 1 (continued) (pages 1 to 27)

(after one page patents list)

[SEAL OF THE PATENT OFFICE]

(12) UK Patent (19) GB (11) 2 080 796 B

(54) Title of invention 2-hydroxy-5-phenylazobenzoic acid derivatives and pharmaceutical compositions containing them

(51) INTCL/3/;C07C107/06 A61K 31/60 31/63 C07C l43/54 143/78

(21)      Application No                 (73) Proprietor
          8120914                             Biorex Laboratories Limited.
                                              Biorex House,
                                              Canonbury Villas,
(22)      Date of filing                      London N1 2HB.
          7 Jul 1981

(30)      Priority data

    (31)     8023826

    (32)     21 Jul 1980

    (33)     United Kingdom (GB)

                                         (72) Inventors
                                              Rosalind Po Kuen Chan

(43) Application published 10 Feb 1982

(45) Patent published 12 Oct 1983

(52) Domestic classification C2C 220 227 22Y 270 280 292 29X 29Y 30Y 321 323 325 32Y 332 342

     34Y 360 361 365 366 367 368 36Y     (74) Agent and/or Address for Service
     385 394 39Y 510 51X 534 583 60Y          Venner Shipley and Co.,
     620 621 623 628 62X 630 638 650          368, City Road,
     652 658 660 661 662 668 699 802          London EC1V 2QA.
     80Y AA KH KJ KN KR KT RC SG
     U1S 1318 C2C

(56) Documents cited
     None

(58) Field of search
     C2C

LONDON THE PATENT OFFICE

(R&D Schedule 1 cont ...)

"2-Hydroxy-5-phenylazobenzoic acid derivatives and pharmaceutical compositions containing them."

(R&D Schedule 1 cont...)

-2-

The present invention is concerned with new pharmaceutical compositions containing derivatives of 2-hydroxy-5-phenylazobenzoic acid, most of which are new.

Ulcerative colitis is a disease of increasing prevalence for which at present the only satisfactory treatment is the administration of salazopyrin, which has the following structural formula:

[FORMULA OMITTED]

However, one serious disadvantage of salazopyrin is that it is broken down in the intestinal tract to give sulphapyridine which gives rise to undesirable side effects. Furthermore, salazopyrin is insoluble in water.

We have now found that when the pyridylsulphamoyl moiety of salazopyrin is replaced by certain nonheterocyclic organic radicals, compounds are obtained which are very useful for the treatment of ulcerative colitis, and have the great advantage that breakdown thereof in the intestinal tract does not give rise to undesirable metabolic products. Furthermore, many of them are soluble in water, which is advantageous for ease of administration, and have a very low acute toxicity.

(R&D Schedule 1 cont...)

-3-

Thus, according to the present invention, there are provided pharmaceutical compositions containing at least one compound of the general formula:-

[FORMULA OMITTED]

wherein X is an -SO2 or -CO- group and R is either a non-heterocyclic aromatic ring system, preferably a benzene ring, optionally substituted by a radical of the general formula -(CH2)-n-Y or is a radical of the general formula -(CH2)n-Y, in which Y is a hydroxyl group, an unsubstituted or substituted amino group or a carboxylic or sulphonic acid group and n is a whole number of from 1 to 6 and in

which one or more hydrogen atoms in the alkylene radical can be replaced by unsubstituted or substituted amino groups or alkyl radicals; and/or containing at least one ester thereof and/or at least one non-toxic, pharmaceutically acceptable salt thereof, in admixture with a solid or liquid pharmaceutical diluent or carrier.

Most of the compounds of general formula (I) are new. Consequently, the present invention also provides new compounds of the general formula:-

[FORMULA OMITTED]

(R&D Schedule 1 cont...)

-4-

wherein X is an -SO\2\- or -CO- group and R is either a non-heterocyclic aromatic ring system, preferably a benzene ring, optionally substituted by a radical of the general formula -(CH\2\)\n\-Y or is a radical of the general formula -(CH\2\)\n\-Y, in which Y is a hydroxyl group or an unsubstituted or substituted amino group or a carboxylic or sulphonic acid group and n is a whole number of from 1 to 6 and

in which one or more of the hydrogen atoms in the alkylene radical can be replaced by unsubstituted or substituted amino groups or alkyl radicals, with the proviso that R-NH-X- is other than a -CO-NH-CH\2\-COOH radical: and the esters and the non-toxic, pharmacologically acceptable salts thereof, for example the salts with alkali metals and alkaline earth metals or with non-toxic amines.

Substituted amino groups present in the compounds according to the present invention are preferably mono- or dialkylamino radicals, the alkyl moieties of which contain up to 6 and preferably up to 3 carbon atoms, methyl and ethyl being especially preferred.

The compounds of general formula (I) can be prepared by diazotising an amine of the general formula:-

[Formula OMITTED]

(R&D Schedule 1 cont...)

-5-

in which R and X have the same meaning as above, followed by coupling with salicylic acid, whereafter, if desired, the compound obtained is salified with a non-toxic inorganic or organic base.

The following Examples are given for the purpose of illustrating the present invention:-

Example 1.

a) A mixture of 100 g. N-acetylsulphanilyl chloride, 80 g. aniline sulphate and 80 g. sodium carbonate in 500 ml. acetone was heated under reflux while stirring, for 5 hours, cooled and then added to a mixture of dilute hydrochloric acid and ice. The precipitate obtained was filtered off, washed with water and diethyl ether and dried in a vacuum at 50 degrees C. to give 110 g. of almost pure N-acetylsulphanilylanilide; m.p. 212 - 215 degrees C.

b) 100 g. N-Acetylsulphanilylanilide was heated under reflux for 3 hours in 150 ml. aqueous hydrochloric acid (1:1 v/v). After cooling, the reaction mixture was diluted with water and further cooled to 0 degrees C. The 90 g. of sulphanilylanilide hydrochloride which deposited were filtered off, washed with ice-cold water and recrystallised from ethanol: m.p. 191 - 193.5 degrees C.

c) 10 g. Sulphanilylanilide hydrochloride and 10 ml. concentrated hydrochloric acid in 600 ml. ethanol were gently warmed to dissolve, then cooled to 5 degrees C. and treated dropwise with 30 ml. of a 10% aqueous solution

(R&D Schedule 1 cont...)

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of sodium nitrite. The reaction mixture was left to stand for 1 hour at 0 to 5 degrees C. and then filtered. While maintaining the temperature at 0 to 5 degrees C., the filtrate was added dropwise to a solution of 5 g. salicylic acid in 100 ml. of an aqueous solution containing 4 g. sodium carbonate and 7 g. sodium hydroxide cooled to 0 degrees C. The reaction mixture was left to stand for 3 hours at 0 degrees C. and at ambient temperature for 20 hours, while maintaining a pH of greater than 8, whereafter it was concentrated on a rotavapor apparatus and acidified. The gummy precipitate obtained was separated off and boiled with water several times to remove excess salicylic acid. The residue was dissolved in diethyl ether and the ethereal solution was washed with water, dried over anhydrous sodium sulphate and treated with charcoal. After filtering and removing the diethyl ether, the crude product obtained was dissolved in the minimum amount of acetone and ten times the volume of diethyl ether added thereto. Upon cooling, there were obtained 3.5 g. 5-(4- phenylsulphamoylphenylazo)-salicylic acid; m.p. 232 -234 degrees C.

d) 11 g. 5-(4- Phenysulphamoylphenylazo)-salicylic acid in 100 ml. ethanol were treated with an ethanolic solution of an equivalent amount of sodium hydroxide. The resulting solution was concentrated to a small volume at 30 degrees C. and 20 mm.Hg, whereafter an equal volume of diethyl ether was added to the concentrate. Upon

(R&D Schedule 1 cont...)

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cooling, sodium 5-(4-phenylsulphamoylphenylazo)-salicylate deposited, which was filtered off, washed with diethyl ether and petroleum ether (b.p. 40 - 60 degrees C.) and dried at 50 degrees C. in a vacuum m.p. 257 - 259 degrees C. The yield was 12 g.

Example 2

a) A solution of 22 g. 4-aminohippuric acid in 20 ml. hydrochloric acid and 200 ml. water was cooled to 0 degrees C. and treated dropwise, while stirring, with 80 ml. of a 10% aqueous solution of sodium nitrite. The reaction mixture was then stirred for 1 hour, whereafter a solution of 14 g. salicylic acid in 150 ml. 2N aqueous sodium hydroxide solution containing 15 g. sodium carbonate and cooled to 0 degrees C. was added dropwise thereto. The reaction mixture was left to stand overnight at ambient temperature and then poured into a mixture of ice and dilute hydrochloric acid. The fine precipitate obtained was extracted with boiling ethyl acetate and the solution treated with charcoal. After filtering, the filtrate was evaporated to remove the solvent and the residue was crystallised from boiling ethanol to give 30 g. 5-(4- carboxymethylcarbamoylphenylazo)-salicylic acid; m.p. 260 - 262 degrees C.

b) A solution of 11 g. 5-(4-carboxymethylcarbamoylphenylazo)-salicylic acid in 500 ml. warm ethanol was treated with an ethanolic solution containing two equivalents of sodium hydroxide and the deposit obtained

(R&D Schedule 1 cont...)

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was filtered off, washed with ethanol and diethyl ether and dried in a vacuum at 50 degrees C. There were obtained 12.5 g of the disodium salt 5-(4- carboxymethylcarbamoylphenylazo)-salicylic acid; m.p. greater than 360 degrees C.

Example 3.

9.71 g. Aminohippuric acid were dissolved in a mixture of 40 ml. 2.5N hydrochloric acid and 10 ml. 2.5N sulphuric acid and 50 g. ice added thereto. A solution of 3.5 g. sodium nitrite in 15 ml. water were added steadily at 0 degrees C., the reaction mixture being well stirred during the addition. After 75 minutes at 0 degrees C., the reaction mixture was added to a solution of 6.9
g. salicylic acid in 37 ml. of a mixture of 9 parts by volume of 5N aqueous sodium hydroxide solution and 1 part by volume of 5N aqueous sodium carbonate solution, the temperature being kept at 0 degrees C. by the addition of ice.

After 15 minutes, 23 ml. of a mixture of 4 parts by volume of 5N hydrochloric acid and 1 part by volume of 5N acetic acid was slowly added, while stirring. The precipitate obtained was filtered off, washed with distilled water and dried in a vacuum at 30 degrees C. to give 17.2 g. (100% of theory) 5-(4- carboxymethylcarbamoylphenylazo)-salicylic acid, which can be recrystallised from 80% acetic acid, aqueous acetone or aqueous dimethylformamide to give a yellow, crystalline product of at least 99% purity in a yield of so to 95%; m.p. 260 - 262 degrees C.

(R&D Schedule 1 cont...)

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Example 4.

a) 125 g, Finely powdered 4-nitrobenzoyl chloride were added portionwise while stirring, to a solution of 70 g, (B)-alanine in 500 ml. water containing 65 g. sodium hydroxide and cooled to 5 degrees C. The reaction mixture was stirred for 3 hours and then added to a mixture of ice and hydrochloric acid. The precipitate obtained was filtered off, washed with water and dried by suction. After crystallisation of the dried product from hot acetone, there were obtained 130 g. 4-nitro-benzoyl-(B)-alanine; m.p. 164 - 166 degrees C.

b) A suspension of 15 g. finely powdered 4-nitrobenzoyl-8-alanine in 200 ml. ethanol was stirred in an atmosphere of hydrogen in the presence of 1 g. of palladium-charcoal (5%), while cooling gently. When the absorption of hydrogen had ceased, the reaction mixture was filtered and the filtrate concentrated to a small volume. Upon adding diethyl ether and cooling, 4-aminobenzoyl-(B)-alanine was obtained. The yield was 11.5 g.; m.p. 156 - 158 degrees C.

c) 8.8g. 4-Aminobenzoyl-B-alanine were triturated with 12 ml. hydrochloric acid and the paste obtained was dissolved in 100 ml. water. The solution was cooled to -5 degrees C. and a solution of 3 g. sodium nitrite in 20 ml. water, cooled to 0 degrees C., was added dropwise, while stirring. The diazotised solution was left for 1 hour at 0 degrees C. and was then added dropwise at -5 degrees C. to a solution

(R&D Schedule 1 cont...)

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of 6 g. salicylic acid in 70 ml. water containing 3.6 g. sodium hydroxide and 7
g. sodium carbonate. The final reaction mixture was adjusted to a pH of about 8, stirred for 2 to 3 hours and added to a mixture of dilute hydrochloric acid and ice. The precipitate obtained was filtered off, washed with water and suction dried. Crystallisation from hot ethanol gave 11.9 g. 5-(4- carboxyethylcarbamoylphenylazo)-salicylic acid; m.p. 254 - 255 degrees C.

10.7 g. of the free acid were dissolved in 300 ml. warm ethanol and treated with a solution of 2.4 g. sodium hydroxide in 25 ml. ethanol. The precipitate obtained was filtered off, washed with ethanol and diethyl ether and dried in a vacuum at 50 degrees C. to give 11.5 g. of the disodium salt of 5-(4- carboxyethylcarbamoylphenylazo)-salicylic acid; m.p. greater than 350 degrees C.

Example 5.

a) 20 g. Finely powdered 4-nitrobenzoyl chloride were added portionwise to 12.5 g. taurine in a solution of 8 g. sodium hydroxide in 50 ml. water. The reaction mixture was stirred for 3 hours and then acidified. Precipitated 4- nitrobenzoic acid was filtered off and the filtrate distilled to dryness at a pressure of 15 mm.Hg. The residue was extracted with boiling ethanol and the extract then cooled to give a yield of 23.6 g. 4-nitrobenzoyltaurine; m.p. 278 - 280 degrees C.

(R&D Schedule 1 cont...)

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b) A solution of 17 g. 4-nitrobenzoyltaurine in 100 ml. water was stirred in an atmosphere of hydrogen in the presence of 1 g. palladium-charcoal (5%) until the absorption of hydrogen ceased. The reaction mixture was then filtered, the filtrate was mixed with 20 ml. hydrochloric acid and the suspension of the hydrochloride obtained cooled to -5 degrees C. This was added dropwise, while stirring, to a solution of 5 g. sodium nitrite in 30 ml. water. The diazotised solution thus obtained was stirred for 30 minutes and then added to 9.5 g. salicylic acid in a solution of 11 g. sodium hydroxide in 100 ml. water, cooled to -2 degrees C. The mixture was stirred for 3 hours, poured into a mixture of ice and 15 ml. hydrochloric acid and stirred at 0 degrees C. for 30 minutes. The precipitate obtained was filtered off and washed with ice-cold water. Crystallisation from 20% aqueous ethanol gave 18.2 g. 5-(4- sulphoethylcarbamoylphenylazo)-salicylic acid; m.p. greater than 350 degrees C. (decomp.).

Example 6

a) A solution of 10 ml. ethanolamine in 120 ml. 10% aqueous sodium hydroxide solution was cooled to 5 degrees C. and 30 g. finely powdered 4-nitrobenzoyl chloride added thereto portionwise. The reaction mixture was stirred for 24 hours and filtered. The solid obtained, which mainly consisted of bis-(4- nitrobenzoyl)-ethanol-amine, was hydrolysed with 200 ml. of 4% aqueous

(R&D Schedule 1 cont...)

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ethanolic sodium hydroxide at ambient temperature for 24 hours. The reaction mixture was added to the above filtrate, acidified and the precipitated 4- nitrobenzoic acid was filtered off. The filtrate was concentrated and the 13 g. of precipitated N-(4-nitrobenzoyl)ethanolamine isolated. The mother liquor was distilled to dryness and the residue was boiled with ethanol. Concentration of the ethanolic extract gave a further 5.3 g. of product; m.p. 134 - 135 degrees C.

b) A solution of 21 g. of N-(4-nitrobenzoyl)ethanolamine in 400 ml. ethanol was stirred in an atmosphere of hydrogen in the presence of 1 g. palladium- charcoal (5%) until the absorption of hydrogen had ceased. The catalyst was filtered off and the ethanolic solution was evaporated to dryness to give a thick oil which slowly solidified. Thin layer chromatography showed that the N- (4-aminobenzoyl)-ethanolamine thus obtained had a purity of more than 99%: it was used as such for the next stage of the synthesis.

c) A solution of 16 g. N-(4- aminobenzoyl)-ethanol-amine in 20 ml. hydrochloric acid and 150 ml. water was cooled to -5 degrees C. and treated dropwise, while stirring, with a solution of 7 g. sodium nitrite in 50 ml. water. The reaction mixture was further stirred for 1 hour and then added dropwise to 120 ml. of 10% aqueous sodium hydroxide solution containing 13 g. salicylic acid and cooled to -2 degrees C. The reaction mixture was

(R&D Schedule 1 cont...)

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stirred for 3 hours and the precipitate obtained filtered off, washed with ice- cold water, suction dried and crystallised from hot ethanol to give 11 g. sodium 5-(4-hydroxyethylcarbamoylphenylazo)-salicylate; m.p. 286 - 288 degrees C. (decomp.).

The filtrate from which the sodium salt had been removed was acidified. The precipitate obtained was filtered off, washed with water, suction dried, charcoaled in ethyl acetate-methanol (2:1 v/v) and concentrated to give 2.7 g. 5-(4-hydroxyethylcarbamoylphenylazo)-salicylic acid which was identical in all respects to the free acid regenerated from the sodium salt; m.p. 225 - 226 degrees C. (decomp.).

Example 7.

a) A solution of 7 g. alanine in 65 ml. of 10% aqueous sodium hydroxide solution was treated portionwise, while stirring, with 12.5 g. finely powdered 4-nitrobenzoyl chloride. The reaction mixture was stirred at 5 degrees C. for 20 hours, acidified and the precipitate isolated, washed with water and suction dried. Repeated fractional crystallisation from acetone-diethyl ether (2:1 v/v) gave 4-nitrobenzoylalanine; m.p. 199 - 200 degrees C.

b) 2 g. 4-Nitrobenzoylalanine in 50 ml. ethanol were hydrogenated in the presence of 0.2 g. palladium-charcoal (5%). Removal of the catalyst and of the solvent gave a solid which was crystallised from

(R&D Schedule 1 cont...)

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ethanol-diethyl ether (1:2 v/v) to give 4-aminobenzoyl alanine; m.p. 198 - 199 degrees C.

c) A solution of 0.8 g. 4-aminobenzoyl alanine in 15 ml. 1N hydrochloric acid was cooled to -5 degrees C. and diazotised with 5 ml. of 10% aqueous sodium nitrite solution for 30 minutes. The reaction mixture was then added to a solution of O.7 g. salicylic acid in 15 ml. of water containing 0.8 g. sodium hydroxide and 0.5 g. sodium carbonate. After 2 hours, the reaction mixture was acidified and the precipitate obtained was isolated, dissolved in ethyl acetate and the solution was washed, dried and charcoaled. The solution was then concentrated and cooled to give 0.9 g. 5-[4-(a-methylcarboxymethylcarbamoyl)- phenylazo]-salicylic acid; m.p. 252 - 254 degrees C.

Example 8.

a) 20 g. Acetylsulphanilyl chloride were added portionwise at 5 degrees C., with stirring, to a solution of 15 g. 4-aminophenylacetic acid in 10% aqueous sodium hydroxide solution. The reaction mixture was further stirred for 4 hours and then added to a mixture of dilute hydrochloric acid and ice. The precipitate obtained was isolated, taken up in ethyl acetate, washed with water, dried and evaporated to give 22 g. acetylsulphanilyl-4-(carboxymethyl)-anilide.

b) 3.5 g. Acetylsulphanilyl-4-(carboxymethyl)-anilide in 7 ml. 5N hydrochloric acid were heated under

(R&D Schedule 1 cont...)

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reflux for 2 hours, cooled, diluted with 20 ml. ice and water and cooled to -5 degrees C. 8 ml. of 10% aqueous sodium nitrite solution were added thereto and after 30 minutes the diazotised solution was added to 1.4 g. salicylic acid in 20 ml. of an aqueous solution of 2 g. sodium hydroxide and 2 g. sodium carbonate cooled to below 0 degrees C. The reaction mixture was stirred for 2 hours and then added to a mixture of hydrochloric acid and ice. The precipitate obtained was isolated and dissolved in ethyl acetate and the solution washed with water, dried and charcoaled. Upon concentrating the filtered solution and adding an equal volume of diethyl ether to the filtrate, the desired product slowly crystallised out. There were obtained 3 g. 5-[4-(4-carboxymethylphenyl)- isulphamoylphenylazo]-salicylic acid; m.p. 252 - 254 degrees C.

Example 9.

a) A solution of 12 g. 6-aminohexanoic acid in 60 ml. of 10% aqueous sodium hydroxide solution was treated portionwise with 9 g. finely powdered 4- nitrobenzoyl chloride. After 4 hours, the reaction mixture was added to a mixture of dilute hydrochloric acid and ice. The precipitate obtained was isolated, washed with water and crystallised from acetone to give 12.6 g. 6-(4- nitrobenzoylamino)-hexanoic acid; m.p. 148 - 150 degrees C.

(R&D Schedule 1 cont...)

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b) A solution of 6 g. 6-(4-nitrobenzoylamino)-hexanoic acid in 150 ml. ethanol was hydrogenated in the presence of 0.5 g. palladium-charcoal (5%) until the reaction was complete. The catalyst and solvent were removed and the residue was crystallised from ethanol-diethyl ether (1:1 v/v) to give 4.7 g. 6-(4- aminobenzoylamino)-hexanoic acid; m.p. 132 - 134 degrees C.

c) A solution of 2.5 g. 6-(4-aminobenzoylamino)-hexanoic acid in 15 ml. 2N hydrochloric acid was cooled to -5 degrees C. and treated dropwise, while stirring, with 8 ml. of a 10% aqueous solution of sodium nitrite. The reaction mixture was stirred for 30 minutes and then added at -5 degrees C. to salicylic acid in 20 ml. of water containing 2 g. sodium hydroxide and 1 g. sodium carbonate. After 3 hours, the reaction mixture was acidified and the precipitate obtained was isolated by centrifuging, dissolved in ethyl acetate, washed, dried and concentrated to a small volume. Upon cooling, there were obtained 2.7 g. 5- (4-carboxypentylcarbamoylphenylazo)-salicylic acid; m.p. 238 - 239 degrees C.

Example 10.

a) A solution of 13 g. copper sulphate in 60 ml. water and a solution of 2 g. sodium hydroxide in 30 ml. water were added simultaneously to a solution of 7.5
g. lysine in 50 ml. water, followed by the addition of 50 ml. of 10% aqueous sodium bicarbonate solution.

(R&D Schedule 1 cont...)

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The precipitated salt was filtered off and the blue filtrate was added, with vigorous stirring, to a solution of 7 g. 4-nitrobenzoyl chloride in 50 ml. acetone. The reaction mixture was stirred for 20 hours and the precipitate obtained was filtered off, washed with water, methanol and diethyl ether and dried in a vacuum at 50 degrees C. to give the copper salt of (E)-(4- nitrobenzoyl)-lysine.

b) A suspension of 7 g. of the copper salt of (E)-(4-nitrobenzoyl)-lysine in 30 ml. water was stirred with 6 ml. hydrochloric acid until dissolution was complete. Hydrogen sulphide was passed in for 1 hour and precipitated copper sulphide then filtered off. The filtrate was evaporated to dryness and the residue was taken up in 20 ml. methanolic hydrogen chloride and heated under reflux for 3 hours. The cooled reaction mixture was diluted with water, rendered alkaline with sodium carbonate and extracted with ethyl acetate to give 4.8 g. (E)-(4-nitrobenzoyl)-lysine methyl ester in the form of a yellow oil.

c) A solution of 1 g. (E)-(4-nitrobenzoyl)-lysine methyl ester in 2 ml. methyl iodide and 0.2 ml. acetone was left to stand for 20 hours at ambient temperature, whereafter the NMR showed the reaction to be complete. The volatile materials were evaporated off to leave (E)-(4-nitrobenzoyl)-(a),(a)-dimethyl lysine methyl ester in the form of an oil.

(R&D Schedule 1 cont...)

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d) 1 g. (E)-(4-nitrobenzoyl)-a,a-dimethyllysine methyl ester in 20 ml. ethanol was hydrogenated in the presence of 0.1 g. palladium-charcoal (5%) until the absorption of hydrogen had ceased. The catalyst was filtered off and the filtrate evaporated to dryness. The residue was taken up in 5 ml. 2N hydrochloric acid, cooled to -5 degrees C. and treated with 2.5 ml. of 10% aqueous sodium nitrite solution. After standing for 30 minutes, the clear solution was added at -5 degrees C. to a solution of 0.5 g. salicylic acid in 20 ml. of a 1N aqueous sodium hydroxide solution. After subsequently standing for 3 hours at 20 degrees C., the reaction mixture was acidified and extracted with diethyl ether to remove unreacted salicylic acid. The aqueous phase was adjusted to pH 7 by adding 1N aqueous sodium hydroxide solution and the resulting solution was evaporated to dryness. The residue was further dried by adding toluene and subsequently evaporating it and the residue then extracted with methanol. The methanolic solution was concentrated to a small volume. After adding diethyl ether and cooling, the disodium salt of 5-(4-(a- dimethylaminocarboxypentylcarbamoyl)-phenylazo]-salicylic acid separated out;
m.p. (greater than) 210 degrees C. (decomp.).

Example 11.
a) A solution of 30 ml. N,N-diethylethylenediamine in 100 ml. water was treated portionwise, while

(R&D Schedule 1 cont...)

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stirring, with 15 g. finely powdered 4-nitrobenzoyl chloride. The reaction mixture was stirred for 20 hours and the precipitate obtained was filtered off, washed with water and aqueous sodium carbonate solution and crystallised from petroleum ether-diethyl ether (1:1 v/v) to give 6 g. N,N-diethyl-N'-(4- nitrobenzoyl)-ethylenediamine; m.p. 49 - 51 degrees C.

b) A solution of 5 g. N,N-diethyl-N'-(4-nitrobenzoyl)-ethylenediamine in 40
ml. ethanol was hydrogenated in the presence of 0.3 g. palladium-charcoal (5%) until the reaction was complete. The catalyst and solvent were removed to give 5 g. N,N-diethyl-N'-(4-aminobenzoyl)-ethylenediamine in the form of an oil.

c) A solution of 2.35 g. N,N-diethyl-N'-(4-aminobenzoyl)-ethylenediamine in 20
ml. 2N hydrochloric acid was cooled to -5 degrees C. and treated with 8 ml. of a 10% aqueous solution of sodium nitrite. The reaction mixture was stirred for 30 minutes and added to 1.4 g. salicylic acid in a solution of 1.6 g. sodium hydroxide and 2 g. sodium carbonate in 20 ml. water. After 3 hours at 0 to 20 degrees C., sodium chloride was added to the reaction mixture to salt out the desired diazo compound. This was filtered off, washed with water and hot methanol and dried to give 2.3 g. 5-(4-diethyl-aminoethylcarbamoylphenylazo)- salicylic acid; m.p. 252 - 254 degrees C. (decomp.).

The pharmaceutical compositions according to the present invention contain at least one of the compounds

(R&D Schedule 1 cont...)

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(I) in admixture with a solid or liquid pharmaceutical carrier.

Solid compositions for oral administration include compressed tablets, pills, dispersible powders and granules. In such solid compositions, one of the compounds (I) is admixed with at least one inert diluent, such as calcium carbonate, starch, alginic acid or lactose. The compositions may also comprise, as is normal practice, additional substances other than inert diluents, for example, lubricating agents, such as magnesium stearate.

Liquid compositions for oral administration include pharmaceutically acceptable emulsions, solutions, suspensions, syrups and elixirs containing inert diluents commonly used in the art, such as water and liquid paraffin. Besides inert diluents, such compositions may also comprise adjuvants, such as wetting and suspension agents, and sweetening and flavouring agents.

The compositions according to the present invention for oral administration, include capsules of absorbable material, such as gelatine, containing at least one of the compounds (I), with or without the addition of diluents or excipients.

The percentage of active material in the compositions of the present invention may be varied, it being necessary that it should constitute a proportion such that a suitable dosage for the desired therapeutic

(R&D Schedule 1 cont...)

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effect shall be obtained. In general, the preparations of the present invention should be administered orally or parenterally to humans to give 500 to 5000 mg. and preferably 500 to 2000 mg. of active substance per day.

The following Examples illustrate pharmaceutical compositions according to the present invention:

Example 12.
-----------
          600 mg. tablets are prepared containing:

          disodium salt of 5-(4-carboxyethyl-
          carbamoylphenylazo)-salicylic acid                       500 mg.

          starch                                                    50 mg.

          lactose                                                   45 mg.

          magnesium stearate                                         5 mg.

Example 13.
-----------

          450 mg. tablets are prepared containing:

          disodium salt of 5-(4-carboxymethyl-
          carbamoylphenylazo)-salicylic acid                       250 mg.

          starch                                                   100 mg.

          lactose                                                   95 mg.

          magnesium stearate                                         5 mg.

The tablets according to Examples 12 and 13 are intended for administration to humans for the treatment of ulcerative colitis.

An attempt was made to establish an acute oral toxicity profile for the disodium salts of 5-(4-carboxymethylcarbamoylphenylazo)-salicylic acid and of 5- (4-carboxyethylcarbamoylphenylazo)-salicylic

(R&D Schedule 1 cont...)

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acid, using rats and mice as experimental animals but this was not possible due to their low toxicity. No deaths were observed with the carboxymethyl compound when administered to mice at a dosage of 3 g./kg. and to rats at a dosage of 2
g./kg. and no deaths were observed with the carboxy-ethyl compound when administered to mice at a dosage of 4 g.Pkg. and to rats at a dosage of 2 g./kg.

Experiments have also been carried out on groups of 6 male Wistar rats in order to ascertain whether the new compounds according to the present invention split in the same manner as sulphasalazine to liberate 5-aminosalicylic acid (5- ASA). The test compounds were administered in an amount of 45 to 50 mg./kg. The results obtained are set out in the following Table:-

-------------------------------------------------------------------------------------
test compound                         % of dose measured as 5-ASA
                    -----------------------------------------------------------------
                              faeces              urine                   total
--------------------------------------------------------------------------------------
sulphasalazine      26 plus minus 4          17 plus minus 2         43 plus minus 4
======================================================================================
   Example 1        24 plus minus 3          19 plus minus 3         43 plus minus 3
   Example 2        17 plus minus 3          17 plus minus 6         34 plus minus 5
   Example 4        22 plus minus 2          14 plus minus 2         36 plus minus 3
   Example 5        26 plus minus 3          15 plus minus 2         41 plus minus 5
   Example 6        22 plus minus 2          19 plus minus 3         41 plus minus 4
--------------------------------------------------------------------------------------

(R&D Schedule 1 cont...)

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The above results clearly demonstrate that the new compounds of the present invention split in the same manner as sulphasalazine and can be expected to exert at least as beneficial an effect as sulphasalazine but without the disadvantage of giving rise to other compounds which exert undesirable side effects, such as the sulphapyridine formed from sulphasalazine.

(R&D Schedule 1 cont...)

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Patent Claims

1. 2-Hydroxy-5-phenylazobenzoic acid derivatives of the general formula:-

[FORMULA OMITTED]

wherein X is an -SO\\2\\- or -CO- group and R is either a non-heterocyclic aromatic ring system optionally substituted by a radical of the general formula- (CH\\2\\)\\n\\-Y or is a radical of the general formula -(CH\\2\\)\\n\\-Y, in which Y is a hydroxyl group, an unsubstituted or substituted amino group or a carboxylic or sulphonic acid group and n is a whole number of from l to 6 and in which one or more of -

the hydrogen atoms in the alkylene radical can be replaced by unsubstituted or substituted amino groups or alkyl radicals, with the proviso that R-NH-X- is other than a -CO-NH-CH\\2\\-COOH radical; and the esters and non-toxic, pharmacologically acceptable salts thereof.

2. 5-(4-Phenylsulphamoylphenylazo)-salicylic acid and the sodium salt thereof.

3. Disodium salt of 5-(4-darboxymethylcarbamoylphenylazo)-salicylic acid.

4. 5-(4-Carboxyethylcarbamoylphenylazo)-salicylic acid and the disodium salt thereof.

(R&D Schedule 1 cont...)

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5. 5-(4-Sulphoethylcarbamoylphenylazo)-salicylic acid.

6. 5-(4-Hydroxyethylcarbamoylphenylazo)-salicylic acid and the sodium salt thereof.

7. 5-[4-(4-Methylcarboxymethylcarbamoyl)-phenylazo]-salicylic acid.

8. 5-[4-(4-Carboxymethylphenyl)-sulphamoylphenylazo salicylic acid.

9. 5-(4-Carboxypentylcarbamoylphenylazo)-salicylic acid.

10. 5-[4-(a-Dimethylaminocarboxypentylcarbamoyl)-phenylazo]-salicylic acid and the disodium salt thereof.

l1. 5-(4-Diethylaminoethylcarbamoylphenylazo)-salicylic acid.

12. A pharmaceutical composition containing at least one compound of the general formula:-

[FORMULA OMITTED]

wherein X is an -SO\\2\\-or -CO- group and R is either a non-heterocyclic aromatic ring system optionally substituted by a radical of the general formula- (CH\\2\\)\\n\\-Y- or is a radical of the general formula -(CH\\2\\)\\n\\-Y, in which Y is a hydroxyl group, an unsubstituted or substituted amino group or a carboxylic or sulphonic acid group and n is a whole number of from 1 to 6 and

(R&D Schedule 1 cont...)

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in which one or more hydrogen atoms in the alkylene radical can be replaced by unsubstituted or substituted amino groups or alky1 radicals, and/or containing at least one ester thereof and/or at least one non-toxic, pharmaceutically acceptable salt thereof, in admixture with a solid or liquid pharmaceutical diluent or carrier.

13. Pharmaceutical compositions according to claim 12, substantially as hereinbefore described and exemplified.

14. Process for the preparation of compounds of the general formula given in claim 12, wherein an amine of the general formula:-

[FORMULA OMITTED]

in which R and X have the same meanings as above, is diazotised and coupled with salicylic acid, whereafter, if desired, the compound obtained is salified with a non-toxic inorganic or organic base.

15. Process for the preparation of compounds of the general formula given in claim 12 and of the salts thereof, substantially as hereinbefore described and exemplified.

16. Compounds of the general formula given in claim 12, whenever prepared by the process according to claim 14 or 15.

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SCHEDULE 2

LIST OF DATA SUPPLIED BY GLYCYX TO ASTRA

R&D Schedule 2 (page 1 to 10)

LISTING OF COMPLETED AND PLANNED PHARMACOKINETIC STUDIES WITH BALSALAZIDE.

Requested by R. A. Onyett, CAMAS Partners, 31 August 1992. Prepared by J. G. Allen, Pharmac Consultants, 1 September 1992.

1. A list of the non-clinical studies "completed by Biorex" has been prepared by Glycyx Pharmaceuticals Ltd., in their COLAZIDE - INVENTORY OF STUDIES, (annotated copy attached). None of these have, in fact, been written up as formal reports; therefore, they all need to be "reconstructed". The possible use of a standard format for the preclinical reports has been discussed with T. L. Hardy Consultancy, who are exploring this. When they are complete, however, the kinetic reports will only provide limited support the NDA. All of the studies listed as "pharmacokinetics and distribution" under PART IIIG (categories 1-3) only involve the measurement of radioactivity, and in many cases this is complicated by the simultaneous use of two different /3/H-forms of BSZ and/or failure to separate out the tritiated water. Reports of all the studies are however required to provide some data for the ferret, mouse and rabbit, and supportive information for the new rat data.

2. The Biorex results in rats and ferrets suggest that both balsalazide and 4- ABA are highly cleared; therefore, the exposure of organs and tissues should be low. Data in the rat also suggest that the systemic exposure to balsalazide and its metabolites, after administration of the lowest dose used in the toxicity studies, may be lower than that achieved with therapeutic doses in patients. New ADME studies are planned in the rat to confirm this. Similar studies are planned to determine whether this will also apply to the dog, which has been selected as an additional "non- rodent" for toxicology. These are listed, as an attachment. Limited studies may also be required in the mouse and rabbit, depending upon the rewrites.

3. If it is confirmed that the clearance of balsalazide and/or metabolites is higher in laboratory animals than humans, reasoned arguments to justify the validity of the toxicology will need to be included in the NDA [e.g. exposure of the colon (the primary target organ) is related to total dose and the expected secondary effect is the salicylate-like action of 5-ASA on the kidney, which will be determined by species sensitivity and/or total renal clearance of active metabolite rather than plasma concentrations]. Comparative protein binding data ("free drug fractions") may also need to be determined in this context.

(R&D Schedule 2 cont...)

Listing of Completed and Planned Pharmacokinetic Studies with Balsalazide
cont.

4. The dog was selected as the "non-rodent" for toxicology on the basis that it is one of the species recommended by various regulatory authorities, and because it was used for the recently submitted applications for olsalazine and mesalazine (FDA Summary Basis of Approval). However the metabolism of both 5-ASA and 4-ABA in this species is unlikely to reflect that in man, where N-acetylation is expected to be the major route. This can probably be justified for 5-ASA, because the dog's lack of secondary metabolism will maximise exposure to the active and potentially (salicylate) toxic moiety. Exposure to the N-acetyl metabolite of 4-ABA is likely, however, to only be covered in the rat. If this proves to be very low relative to that in humans, additional (short-term) toxicology, either with this metabolite or in a further species, may need to be considered.

5. I am aware of 3 Biorex human pharmacokinetic studies: (i) the comparative study with sulphasalazine (which was written up as a publication, and for the UK submission in 1985) (ii) a single dose bioequivalence comparison of solution and capsules and (iii) monitoring of Nottingham study, in patients receiving escalating doses. The last two studies also need to be reported formally, as supportive data for the NDA.

6. To date, two new human studies (shown in the Glycyx inventory) have been planned. The need for further kinetic studies will depend upon the outcome of this program; for example, a randomised dose proportionality study could be required, if the repeat dose fails to reassure authorities (especially the FDA). In addition: further patient monitoring data will be required, plus possibly a single dose human radiolabelled study (depending upon results from the metabolic studies in animals). Bioequivalence studies may also be needed, depending upon changes in formulations, suppliers etc.

/s/ J. G. ALLEN
-------------------------------

(R&D Schedule 2 cont...)

Summary of Preclinical ADME Studies planned for Balsalazide.

Balsalazide and 4-ABA, randomly labelled with Carbon-14 in the aromatic ring are being prepared by Amersham International, for ADME studies at Hazleton U. K. These materials will be used for:

1. A quantitative whole body autoradiographic study with /14/C-balsalazide in pregnant pigmented rats, to determine (i) general distribution after oral administration, (ii) placental transfer and foetal penetration and (iii) melanin binding after a single oral administration by gavage.

2. Absorption, distribution, metabolism and excretion of single doses of /14/C-balsalazide administered to male rats intravenously (one dose level) and orally by gavage (two dose levels, corresponding to the high and low doses used for 26 week toxicology).

3. Absorption, distribution, metabolism and excretion of single doses of /14/C-ABA administered to male rats intravenously (one dose level) and orally by gavage (one dose level, equivalent to the low dose used for 26 week toxicology).

4. Absorption, distribution, metabolism and excretion of single doses of /14/C-balsalazide administered to beagles intravenously (one dose level) and orally by gavage (two dose levels, corresponding to the high and low doses used for 26 week toxicology).

In addition, monitoring of the rat and dog MTD, 26 week toxicology and rat carcinogenicity will be used to assess dose-proportionality of absorption and elimination during repeated oral administration. Notification has also been received recently from Biorex that 30 mCi of tritiated balsalazide were held at University of Surrey; arrangements to transfer this material to HUK have been made, as a contingency measure.

(R&D Schedule 2 cont...)

T. L. HARDY CONSULTANCY

--------------------------------------------------------------------------------
Tel: (0929) 48 1197                                "Badgers"
Fax: (0929) 48 1197                                South Street,
                                                   Kingston,
                                                   Corfe Castle,
                                                   Wareham,
                                                   Dorset BH20 5LL
                                                   England

re: Balsalazide

Non-Clinical Safety Evaluation Studies - Toxicology

I have examined the animal toxicology studies and genetic toxicology conducted by and on behalf of Biorex laboratories Ltd. of Crossfield Chambers, Gladbeck Way, Enfield, Mddx. England and which were conducted to December 1991.

Although many of the studies were not conducted to the format and conditions now expected by Regulatory Agencies, it is my opinion that the data shows that balsalazide has a low order of toxicity and that the signs and reactions to dosage as seen in the animal species studied are compatible with the pharmacology of the product administered. No adverse toxicities are clearly apparent within the reports which I have examined which are aberrant in consideration of the chemical nature of the principal metabolite, 5. ASA. The studies refered to include long term administration to rats and ferrets and carcinogenicity studies in the mouse and rat.

Notwithstanding the above, a programme of toxicological evaluation of balsalazide has been designed to fulfil the present day requirements of the major Regulatory Agencies World Wide. This programme includes re-evaluation of the consequences of repeated administration to rodents and non-rodents, reproduction toxicology and necessary toxicokinetics to enable overall evaluation.

To date the initial findings in preliminary studies using high doses of balslazide at large multiples of the proposed dose for man, are substantiating the balsalazide has a low order of toxicity.

/s/ Terry Hardy

Terry L.Hardy.


           Dated: 31st.  August, 1992.

ADVISOR ON TOXICOLOGY AND SAFETY EVALUATION

(R&D Schedule 2 cont ...)

                    COLAZIDE (R) DEVELOPMENT - COMPLETED STUDIES AND ADDITIONAL WORK
                    ----------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
                                                                                          Glycyx
                                                                      Completed   ------------------------
                   EC Registration Dossier Headings                   by Biorex   Repeat/New Reconstruct
----------------------------------------------------------------------------------------------------------
-----------------------------------
PART IIIA SINGLE DOSE TOXICITY
-----------------------------------
  - Mouse, oral                                                           .
  - Mouse, ip                                                             .
  - Rat, oral                                                             .         *
  - Rat, ip (iv)                                                          .         *

  - Mouse, oral: 4-ABA                                                    .
  - Rat, oral: 4-ABA                                                      .
  - Mouse, oral: 5-ASA                                                    .
  - Rat, oral: 5-ASA                                                      .
  - Mouse, oral: 5-ASA/4-ABA                                              .
  - Rat, oral: 5-ASA/4-ABA                                                .
  - Mouse, oral: BSZ impurity                                             .
  - Mouse, ip: BSZ impurity                                               .
  - Mouse, ip: Colazide                                                   .

-----------------------------------
PART IIIB - REPEATED DOSE TOXICITY
-----------------------------------

 Max. Tolerated Dose
 -------------------
   - Dog                                                                            .

 Subacute
 --------
   - Rat, 14 days, oral                                                   .         .         *
   - Mouse, 7 days, oral: BSZ                                             .                   *
   - Mouse, 28 day, oral BSZ                                              .                   *
   - Rat, 7 days, oral: BSZ                                               .                   *
   - Rat, 28 day, oral: BSZ                                               .                   *
   - Dog, 28 days, oral                                                             .

 Chronic
 -------
   - Rat, 96 week, oral                                                   .                   .
   - Ferret, 26 week, oral                                                .                   .
   - Dog, 26 week, gavage                                                           .
   - Rat 26 week, gavage                                                            .

-----------------------------------
PART IIIC Reproduction Studies
-----------------------------------

 1. Fertility and general reproductive
 -------------------------------------
 performance
 -----------
   -  Rat fertility, oral                                                 .         .

   -  Rat, comparative fertility with                                     .
       sulphasalazine oral

   -  Mouse, comparative fertility with                                   .
       sulphasadazine, oral
----------------------------------------------------------------------------------------------------------

PAGE 1 * under consideration

(R&D Schedule 2 cont ...)

                  COLAZIDE (R) DEVELOPMENT - COMPLETED STUDIES AND ADDITIONAL WORK
                  ----------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
                                                                                         Glycyx
                                                                      Completed   ------------------------
                   EC Registration Dossier Headings                   by Biorex   Repeat/New Reconstruct
----------------------------------------------------------------------------------------------------------
 2. Embryotoxicity
 -----------------

   - Mouse teratology, oral                                               .
   - Rat teratology                                                                 .
   - Rabbit teratology, oral                                              .         .

 3. Peri-/postnatal potential
 ----------------------------

   - Mouse perinatal, oral                                                .
   - Rat peri-/post natal                                                           .

-----------------------------
PART IIID Mutagenic Potential
-----------------------------

  In vitro
  --------
   - Ames test                                                            .
   - Cultured human lymphocytes                                           .
   - HGPRT1 locus Chinese hamster V79 cells                               .

  In vivo
  -------
   - Micronucleus test                                                    .

--------------------------------------------
PART IIIE - Oncogenic/carcinogenic potential
--------------------------------------------

   - Mouse carcinogenicity, oral                                          .                   .
   - Rat carcinogenicity, oral                                            .         .         .
     (new study is 104 week)

------------------------------
PART IIIF General Pharmacology
------------------------------

 1. Pharmacodynamic effects relating to proposed
 -----------------------------------------------
 indications
 -----------

   - Carrageenin-induced ulcerative colitis                               .                   *
   -------------------------------------------------------------------------------------------------------
   - Gastrointestinal studies
     - Ulcerogenic potential                                              .                   *
     - GI motility and smooth muscle activity                             .                   *
     - Ethanol-induced gastric necrosis in rats                           .                   *
     - Effect of BSZ on GSH levels in rectocolonic mucosa                 .                   *
     - Effect of BSZ on ethanol-induced rectocolonic                      .                   *
       damage
     - Effect of BSZ and metabolites on ethanol-                          .                   *
       induced gastric necrosis
     - Effect of BSZ on eicosanoid release                                .                   *
     - Effect of BSZ and SASP on rectocolonic lesions                     .                   *

   -------------------------------------------------------------------------------------------------------
   - Anti-inflammatory activity                                           .                   *
   -------------------------------------------------------------------------------------------------------
   - Analgesic activity
     - Acetic acid-induced writhing test                                  .                   *
     - Hyperalgesia test in rats                                          .                   *
   -------------------------------------------------------------------------------------------------------
   - Yeast-induced pyrexia                                                .                   *
   -------------------------------------------------------------------------------------------------------

PAGE 2 * under consideration

(R&D Schedule 2 cont ...)

                   COLAZIDE (R) DEVELOPMENT - COMPLETED STUDIES AND ADDITIONAL WORK
                   ----------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
                                                                                          Glycyx
                                                                      Completed   ------------------------
                   EC Registration Dossier Headings                   by Biorex   Repeat/New Reconstruct
----------------------------------------------------------------------------------------------------------
 2. General Pharmacodynamics
 ---------------------------
  --------------------------------------------------------------------------------------------------------
  * Central nervous system
   - Barbiturate-induced sleeping time                                    .                   *
   - Spontaneous locomotor activity                                       .                   *
  --------------------------------------------------------------------------------------------------------
  * Endocrine system
   - Vaginal cornification test                                           .                   *
   - Uterine weight response                                              .                   *
  --------------------------------------------------------------------------------------------------------
  * Cardiovascular system
   - Effect of BSZ on CV system and respiration in ferrets                .                   *
   - Effect of BSZ on cat BP and respiration                              .                   *
   - Effect of BSZ (I.V.) on BP, HR and respiration                       .                   *
     in anesthetized male cat
   - Effect of BSZ on BP, HR and respiration                              .                   *
     in anesthetized rats
   - Effect of BSZ on BP, HR and respiration                              .                   *
     of ferrets
   - Effect of impurity (BX769A) on rat BP,                               .                   *
     HR and respiration
   - Effect of impurity(BX769A) (I.V.)on BP,                              .                   *
     FIR and respiration of anesthetized rats
   - Effect of BSZ metabolites on BP, HR and                              .                   *
     respiration of anesthetized cats
  --------------------------------------------------------------------------------------------------------
  *  Electrolyte Excretion
   - Diuretic test                                                        .                   *
   - Effect of BSZ and related compounds on water                         .                   *
     induced diuresis in the rat
----------------------------------------------------------------------------------------------------------
  * Other Systems
   - Effects of BSZ on rat peritoneal mast cell                          .                    *
     degranulation
   - Effects of BSZ in vitro on erythrocyte membrane                     .                    *
     stabilization                                                       .                    *
   - Effect of BSZ and its impurity (BX769A) on                          .                    *
     erythrocyte membrane stabilization
   - Effect of SASP and BSZ on cell membrane stability                   .                    *
     and histamine release
   - Possible anti-microbial activity of BSZ and related                 .                    *
     compounds on organisms of gut microflora
   - Comparative suppression of lymphocyte                               .                    *
     transformation by SASP analogues

2. Drug Interactions
--------------------

     - No studies

----------------------------------------------------------------------------------------------------------

PAGE 3 * under consideration

(R&D Schedule 2 cont ...)

                   COLAZIDE (R) DEVELOPMENT - COMPLETED STUDIES AND ADDITIONAL WORK
                   ----------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
                                                                                         Glycyx
                                                                      Completed   ------------------------
                   EC Registration Dossier Headings                   by Biorex   Repeat/New Reconstruct
----------------------------------------------------------------------------------------------------------
PART IIIG - Pharmacokinetics
----------------------------

  1. Pharmacokinetics after a single dose
     ------------------------------------

     .  Drug excretion in rat and ferret                                   .                      .
     .  Rat blood concentrations, oral and iv                              .                      .
     .  Rat bioavailability, oral liquid vs solid dose                     .                      .
     .  Ferret blood concentrations, oral and iv                           .                      .
     .  Ferret blood concentrations, dietary dosing                        .                      .


  2. Pharmacokinetics after repeated administration
     ----------------------------------------------

     .  Rat blood concentrations, oral, 28 days dosing                     .                      .
     .  Ferret blood concentrations, oral 28 days dosing                   .                      .

  3. Distribution in normal and pregnant animals
     -------------------------------------------

     .  Rat tissue concentrations, oral                                    .                      .
     .  Feret tissue concentrations, oral                                  .                      .
     .  Rat QWBA                                                                       .

  4. Biotransformation
     -----------------

     .  Mouse excretion, oral                                              .                      .
     .  Rat excretion, oral                                                .                      .
     .  Rat biliary excretion, oral                                        .                      .
     .  Ferret excretion, oral                                             .                      .
     .  Ferret biliary excretion, oral                                     .                      .
     .  Rat ADME, iv and gavage                                                        .
     .  Rat ADME (4-ABA), iv and gavage                                                .
     .  Dog ADME, iv and gavage                                                        .

 Comparison pharmacokinetics rat & ferret                                  .

-----------------------------------------
PART IIIH -- Local Tolerance
-----------------------------------------

     .  No studies

-----------------------------------------
PART IIIQ - Other Information
-----------------------------------------
.  No studies
----------------------------------------------------------------------------------------------------------

PAGE 4 * under consideration

R&D Schedule 2 cont ...)

COLAZIDE(R) DEVELOPMENT - COMPLETED STUDIES AND ADDITIONAL WORK

----------------------------------------------------------------------------------------------------------
Glycyx
Completed ------------------------
EC Registration Dossier Headings by Biorex Repeat/New Reconstruct
----------------------------------------------------------------------------------------------------------
PART IV A Clinical Pharmacology
-------------------------------

1. Pharmacodynanics
--------------------

2. Pharmacokinetics
--------------------

. Serum concentrations of BX661A, sulphasalazine and .
metabolites in man

. Comparative tolerability and pharmacokinetic .
study of balsalazide, sulpphasalazine and
mesalazine following a single oral dose

. Single dose bioequivalence . .

. Tolerability and pharmacokinetic study of
balsalazide following repeated oral doses .

. High dose patient monitoring . .

PART IV B - Clinical Experience
-------------------------------

1. Clinical trials
------------------

DOUBLE BLIND, CONTROLLED STUDIES IN ACUTE
ACTIVE ULCERATIVE COLITIS

. Balsalazide 6.75g/d vs SASP 3g/d in the .
treatment of mild first episode ulcerative
colitis (Protocol 028/011)

. Balsalazide 6.75g/d vs SASP 3g/d in the treatment of .
acute relapse or first episode ulcerative
colitis (Protocol 028/017)

DOUBLE-BLIND, CONTROLLED STUDIES IN MAINTENANCE
OF REMISSION OF ULCERATIVE COLITIS

LOW DOSE PILOT (6 MONTH) STUDY:
. Balsalazide 2g/d vs SASP 2g/d in the maintenance of .
remission of patients with ulcerative colitis.
(Protocol: 028/001)

MEDIUM DOSE SUBCHRONIC (12 MONTH) STUDY:
. Balsalazide 2g/d vs 4g/d in the maintenance of remission .
of patients with ulcerative colitis (Protocol 028/005)

PAGE 5 * under consideration

(R&D Schedule 2 cont ...)

COLAZIDE(R) DEVELOPMENT - COMPLETED STUDIES AND ADDITIONAL WORK

----------------------------------------------------------------------------------------------------------
Glycyx
Completed ------------------------
EC Registration Dossier Headings by Biorex Repeat/New Reconstruct
----------------------------------------------------------------------------------------------------------
HIGH DOSE CHRONIC (24 MONTH) STUDY
. Balsabalazide 3g/d vs 6g/d in the maintenance of .
remission of patients with ulcerative colitis.
Protocols 028/010 and 028/016)

OPEN STUDIES IN NAMED PATIENTS

. Open assessment of balsalazide in the .
maintenance of patients with ulcerative colitis

. Male patients infertile on sulfasalazine: .
McIntyre and Lennard-Jones (1980

----------------------------------------------------------------------------------------------------------
. Patients intolerant to sulfasalazine .
----------------------------------------------------------------------------------------------------------

2. Additional Registration Studies
----------------------------------

Comparison in acute U.C. against 'ASACOL'
mesalazine 8 week. Single blinded (UK) .

Comparison in maintenance of remission
against 'SALOFALK' mesalazine. 6 month .
blinded, 6 months open tolerance study.
(Germany & Sweden)

3. Post Marketing Experience.
-----------------------------

None

PAGE 6 * under consideration

-19-

SCHEDULE 3

PROJECT COSTS

R&D Schedule 3 (pages 1 to 4)

GLYCYX DEVELOPMENT BUDGET AS AT 31.08.92.

STUDY NO.                STUDY TYPE                ESTIMATE   INVOICED     BALANCE
                                                               TO DATE      TO PAY
[*]

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

(R&D Schedule 3 cont ...)

GLYCYX DEVELOPMENT BUDGET AS AT 31.08.92.

STUDY NO.        STUDY TYPE                ESTIMATE   INVOICED   BALANCE
                                                       TO DATE    TO PAY
[*]

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN

REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

(R&D Schedule 3 cont ...)

GLYCYX DEVELOPMENT BUDGET AS AT 31.08.92.

STUDY NO.                   STUDY TYPE          ESTIMATE   INVOICED     BALANCE
                                                            TO DATE      TO PAY
SUMMARY
=======
[*]

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

SCHEDULE 1 ASTRA PAYMENTS SCHEDULE

IN RESPECT OF BALSALAZIDE R & D PROJECT

[*]

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

-20-

SIGNED by                      )
for and on behalf of GLYCYX    )
PHARMACEUTICALS, LTD in the    )   /s/ Randy Hamilton
presence of:-                  )

           /s/ Lorin K. Johnson

SIGNED by                      )
for and on behalf of AB ASTRA  )   /s/ Haken Mogren
in the presence of:-           )   President and Group
                                   Chief Executive Officer

/s/ Olof Ljungstrand
----------------------------
    Olof Ljungstrand
    Legal Counsel

                                                                        AB Astra
                                                             S-151 85 Sodertalje
                                                                          Sweden

Salix Pharmaceuticals, Inc.
3600 W. Bayshore Road
Suite 202
Palo Alto

CA 94303
U.S.A.

21st September 1992

Dear Sirs

I write on behalf of AB Astra ("Astra") in connection with a Research and Development Agreement and a Distribution Agreement proposed to be entered into between Glycyx Pharmaceuticals Limited and Astra concerning the manufacture and distribution of a product incorporating Balsalazide in Western Europe and elsewhere.

Astra is aware that Salix Pharmaceuticals, Inc. ("Salix") has been granted exclusive rights to product incorporating Balsalazide for marketing and distribution in the territory of the United States of America.

Under Clause 6.6 of the Research and Development Agreement (a copy of which is attached) Astra may obtain rights to complete research and development into the product and to complete and file the relevant dossier in order to obtain regulatory approval in its territories. In such circumstances, it is acknowledged that Salix will get access to all data generated in connection with such research and development and the completion of the dossier in order that Salix might use such data in obtaining appropriate regulatory approvals within the territory of the USA.

Astra agrees that in the event that the provisions of Clause 6.6 of the Research and Development Agreement shall become effective it will supply to Salix copies of all data, information, trial results and know-how obtained or developed during the conduct and completion of the Project (as defined in the Research and Development Agreement) by Astra and such other data, information, trial results and know-how as may be generated by Astra in connection with Balsalazide or any product incorporating Balsalazide. Salix agrees that in consideration of the supply by Astra to it of such valuable information it will pay to Astra a royalty [*] for the treatment of Diseases of Digestive System according to WHO classification of diseases Class 52 in the territory of the

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

Continued/... Page 2

United States of America net only of purchase/sales taxes, customs or import duties, delivery charges, returns and allowances actually charged on each sale or shipment.

This letter is intended to evidence a binding Agreement between Salix and Astra in this respect and is intended to become effective forthwith upon execution by Glycyx and Astra of the proposed Research and Development Agreement and Distribution Agreement.

Please sign and return the enclosed copy letter in order to evidence your agreement to the terms as set out in this letter.

Yours faithfully

/s/ Hakan Mogren

Hakan Mogren, President and Group Chief Executive Officer
SIGNED FOR AND BEHALF OF
ASTRA AB

On copy:

Salix Pharmaceuticals, Inc hereby confirms and acknowledges the agreement as set out in the above letter.

Signed: /s/ Randy W. Hamilton
       ------------------------

        Director

EXHIBIT 10.7

Dated 21st September 1992

GLYCYX PHARMACEUTICALS, LTD (1)

- and -

AB ASTRA (2)

DISTRIBUTION AGREEMENT

Hewitson Becke + Shaw 4/5 Church Street Peterborough
PE1 1XB

-1-

THIS AGREEMENT is made 21st day of September 1992

BETWEEN:

(1) GLYCYX PHARMACEUTICALS, LTD a company incorporated under the laws of Bermuda and whose registered office is at 41 Cedar Avenue, Hamilton, HM12, Bermuda("Glycyx"); and

(2) AB ASTRA a company incorporated under the laws of Sweden whose principal place of business is at Kvarnbergagatan 16, S-151 85 Sodertalje, Sweden ("Astra").

WHEREAS:

A. Biorex Laboratories Limited ("Biorex") has developed and owns all intellectual property rights in a therapeutic pharmaceutical product for treatment and maintenance of colitis based upon the compound Balsalazide and by an agreement dated 18th March 1992 and made between Biorex and Glycyx ("the Biorex Agreement") Biorex granted to Glycyx the exclusive right and licence to manufacture, or have manufactured, use sell or have sold products incorporating Balsalazide.

B. Glycyx wishes to grant to Astra (who in turn wishes to accept) the exclusive right to promote market distribute and sell the Product in the Territory on the terms and subject to the conditions of this Agreement.

NOW IT IS HEREBY AGREED as follows:-

1. DEFINITIONS

1.1 In this Agreement the following words shall have the following meanings:

"the Applications"                  means the treatment of Diseases of
                                    Digestive System according to WHO
                                    classification of diseases Class 52

"Astra Associate"                   means any company which is a holding
                                    company of Astra or a subsidiary of
                                    Astra and any other subsidiary of any
                                    such holding company or subsidiary and
                                    for this purpose:-

                                    - a company shall be deemed to be a
                                    "subsidiary" of another if that other
                                    either:-

                                         (a) is a member of it and controls
                                    the composition of its board of
                                    directors (and for such purpose the
                                    composition of a company's

-2-

                                    board of directors is deemed to be
                                    controlled by another company if that
                                    other company by the exercise of some
                                    power exercisable by it without the
                                    consent or concurrence of any other
                                    person can appoint or remove the
                                    holders of all or a majority of the
                                    directorships); or

                                         (b) holds more than half in
                                    nominal value of its equity share
                                    capital; and

                                    -    a company is deemed to be
                                    another's holding company if the other
                                    is its subsidiary

"Balsalazide"                       means 5- [4 (2- carboxyethyl
                                    carbamoyl)-phenylazo]-salicylic acid
                                    disodium salt dihydrate

"Biorex"                            shall mean Biorex Laboratories Limited
                                    a company incorporated in England under
                                    Company Registration Number 390233
                                    whose registered office is at 2
                                    Crossfield Chambers, Gladbeck Way,
                                    Enfield, Middlesex EN2 7HT

"Biorex Agreement"                  means the agreement dated 18th March
                                    1992 between Glycyx and Biorex

"Biorex/Astra Agreement"            means an agreement of even date
                                    herewith entered into between Biorex
                                    and Astra

"Dossier"                           shall mean the master regulatory
                                    dossier relating to the Product
                                    prepared under and in accordance with
                                    the terms of the Research Agreement

"Excluded Territory"                the United States of America, Italy,
                                    Spain, Portugal and Greece

"Factory Sale Price"                means the ex factory sales price of
                                    each Product actually charged by Astra
                                    (or any Astra Associate) for each
                                    shipment of Product on an arms length
                                    open market basis to any third party
                                    (being a person firm or

-3-

                                    company which is not an Astra
                                    Associate) net only of sales and
                                    purchase taxes, customs or import
                                    duties, delivery charges, and returns
                                    and allowances actually charged on each
                                    such shipment

"Filing Date"                       means the date upon which the Dossier
                                    (completed in accordance with the terms
                                    of the Research Agreement) shall be
                                    submitted by Glycyx for registration
                                    within one of the Principal Markets
                                    under Clause 3.1 of the Research
                                    Agreement

"Force Majeure"                     means in relation to either party any
                                    circumstances beyond the reasonable
                                    control of that party (including but
                                    not limited to strike, lock out or
                                    other form of industrial action, act of
                                    God, war, riot, accident, breakdown in
                                    plant or machinery, fire, flood,
                                    explosion or government action)

"Launch"                            means a commercial launch by Astra (or
                                    any Astra Associate) of the Product in
                                    a Principal Market supported by such
                                    marketing expense and support and
                                    launched in such quantities as may
                                    reasonably be appropriate for the
                                    Product to have a significant effect on
                                    total sales of any similar or
                                    competitive product in such Principal
                                    Market

"the Patents"                       means the patents and applications
                                    therefor relating to Balsalazide listed
                                    in Schedule 1 to this Agreement

"the Principal Markets"             means the United Kingdom, Sweden,
                                    Finland, Norway, Switzerland, Austria,
                                    Denmark, Germany, the Benelux
                                    Countries, France, Eire, South Africa,
                                    Australia, New Zealand and Canada

"Product"                           means a pharmaceutical preparation in
                                    capsule form containing Balsalazide for
                                    the

-4-

                                    Applications and such other
                                    pharmaceutical preparations containing
                                    Balsalazide for the Applications as may
                                    be developed by Glycyx during the term
                                    of this Agreement

"the Research Agreement"            means the research and development
                                    agreement entered into between Astra
                                    and Glycyx on even date herewith in the
                                    approved form

"the Territory"                     means all the countries in the world
                                    except Italy, Spain, Portugal, Greece,
                                    United States of America, Japan, Taiwan
                                    and Korea

"the Trade Mark"                    means the trade name "Colazide"
                                    registered as a trademark for use on
                                    pharmaceutical preparations in the
                                    United Kingdom and elsewhere and any
                                    other tradename designated by Glycyx
                                    for use in connection with the Product
                                    in any part of the Territory where use
                                    of the tradename "Colazide" is
                                    inappropriate for such part of the
                                    Territory or where Astra reasonably
                                    considers that the use of another
                                    tradename (in addition to the tradename
                                    "Colazide") may be commercially
                                    advantageous.

1.2 The headings in this Agreement are for convenience only and shall not affect its interpretation.

1.3 References to documents in the approved form shall be references to documents in the form agreed between the parties and initialled by both parties for the purposes of identification.

2. APPOINTMENT OF ASTRA

2.1 With effect from the date of this Agreement and in accordance with the terms and conditions contained in this Agreement Glycyx hereby appoints Astra as its exclusive distributor for the Product within and throughout the Territory.

2.2 The rights granted hereunder to Astra shall be in respect of the Product only. In the event that either party shall become aware of any indications or applications for Balsalazide other than the Applications it shall forthwith

-5-

notify the other party and shall supply the other party with such details of the other indications and applications as may be available to it Provided Always That:-

2.2.1  Astra shall have a first option to enter into good faith
       negotiations with Glycyx during the period six months from the
       supply of such details in respect of an agreement concerning the
       development of such other indications and applications and the grant
       to Astra of the right to exploit the same in the Territory; and

2.2.2  Astra shall have no right whatsoever to use and exploit Balsalazide
       in any such other indications and/or applications unless and until
       completion of such good faith negotiations and the execution of a
       written agreement in respect thereof; and

2.2.3  during such period in which Astra shall continue to negotiate in
       good faith Glycyx shall not disclose details of such other
       indications and/or applications to any third party or grant any
       third party any rights therein in the Territory provided that Glycyx
       shall not be prevented or precluded from disclosing the same to any
       third party which shall have entered good faith negotiations for the
       acquisition of the right to exploit such other indications and/or
       applications outside the Territory; and

2.2.4  in respect of any such other applications and indications disclosed
       by Astra to Glycyx Glycyx shall not use or exploit the same (either
       itself or through any third party) whether in the Territory or
       elsewhere without the prior consent of Astra (such consent not to be
       unreasonably withheld or delayed); and

2.2.5  in respect of any such other applications and indications disclosed
       by Glycyx to Astra, Glycyx shall not use or exploit the same (either
       itself or through any third party) in the Territory without the
       prior consent of Astra (such consent not to be unreasonably withheld
       or delayed).

3. REGULATORY APPROVALS

3.1 It is acknowledged and confirmed by Astra and Glycyx that Astra shall not be able to exercise its rights hereunder unless and until the Dossier (as defined in the Research Agreement) shall have been completed and is available for filing with the relevant regulatory authority in the Territory.

3.2 Astra undertakes to use all reasonable endeavours to file the Dossier and to apply for and obtain all relevant regulatory health and price approvals for the marketing and use of the Product in the Territory as soon as reasonably

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practicable after the Filing Date.

3.3 Astra undertakes to use its best endeavours to apply for and obtain all relevant regulatory health and price approvals for the marketing and use of the Product in each of the Principal Markets and to effect Launch of the Product in each of the Principal Markets within 90 days of the Filing Date.

3.4 Astra shall be solely responsible for effecting (at its sole cost and expense) such amendments and translations to the Dossier as may be required to procure that the Dossier complies with and satisfies the requirements of any regulatory or approval authority within any particular part of the Territory and Glycyx shall not be obliged to incur any cost or conduct any further test or development work or otherwise amend or translate the Dossier whether before or after the Filing Date.

3.5 In the event that Astra shall fail to effect Launch in any Principal Market within a period of 180 days after the grant of all necessary registrations, approvals, price approvals, and reimbursements, then Glycyx may in its absolute discretion serve written notice on Astra (within 30 days of the expiry of such period of 180 days) amending the rights of Astra granted hereunder in respect of any such Principal Market to those of a non-exclusive distributor for the Product for such Principal Market only. Thereafter Glycyx for the avoidance of doubt shall also be entitled to exploit such rights and to market and exploit the Product in such Principal Market (whether directly or indirectly through any agent, contractor or licensee) in such manner as it may in its sole discretion think fit Provided Always that Astra will retain exclusive rights to use the Trademark.

3.6 In the event that Astra's failure to effect Launch as stated in Clause 3.5 exceeds a period of twelve months from the grant of all necessary registrations, approvals, price approvals and reimbursements in any Principal Market Glycyx may at its sole discretion serve written notice on Astra (within 90 days of the expiry of such period of 180 days) terminating all rights granted hereunder to Astra in respect of such Principal Market only and thereafter Glycyx for the avoidance of doubt shall be entitled to exploit such rights and to market and exploit the Product in such Principal Market (whether directly or indirectly through any agent, contractor or licensee) in such manner as it may in its sole discretion think fit free of any obligation to Astra Provided Always that Glycyx shall not use or grant any third party the right to use the Trademark in such Principal Territory either on the Product or otherwise and the exclusive rights to such Trademark granted hereunder to Astra shall continue provided that Astra shall not thereafter use the Trademark in any manner in such Principal Territory.

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4. EFFECTIVE DATE

4.1 This Agreement shall come into effect forthwith upon the date hereof Provided Always That the rights to distribute the Product in any part of the Territory shall become exercisable only as provided in Clause 3 hereof.

5. ASTRA'S UNDERTAKINGS

5.1 Astra shall use its best endeavours to promote, market and sell the Product and maximise sales thereof throughout the Principal Markets.

5.2 Astra shall use all reasonable endeavours to promote market and sell the Product in such parts of the Territory outside the Principal Markets where the Product in the reasonable opinion of the parties is deemed to have a sales potential.

5.3 Without prejudice to the generality of Clauses 5.1 and 5.2 Astra undertakes to allocate such promotional and sales resources and such technical support for the promotion, marketing and sales of the Product as may reasonably be required to maximise sales of the Product in all Principal Markets.

5.4 Astra shall promote market and sell the Product in the Territory entirely in accordance with the terms of any product licence, price approval (where applicable), and other restrictions and regulations for the Product as may be relevant and applicable in each country within the Territory.

5.5 Astra further undertakes:-

5.5.1  to promote, market and sell the Product in the Territory under the
       Trade Mark only and not to use any other trade name, trademark or
       logo for or on the Product (Provided That the name "Balsalazide" may
       be used but only as a generic name for the Product in accordance
       with and as required by applicable laws and regulations); and

5.5.2  to enter into Trade Mark user agreements and such other agreements
       (whether relating to the Trade Mark, Technical Standards or
       otherwise) as may reasonably be required by Glycyx or is required by
       applicable regulations in any part of the Territory in connection
       with the exploitation by Astra of the Product and/or the use by
       Astra of the Trade Mark; and

5.5.3  to notify Glycyx immediately of any improper or wrongful use of the
       Trade Mark, the Patents or otherwise any proprietary or confidential
       information of Glycyx or Biorex relating to the Product coming to
       Astra's knowledge; and

5.5.4 forthwith to refer to Glycyx all enquiries

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       received for the supply of the Product outside the Territory; and

5.5.5  not actively to seek customers for the Product outside the
       Territory; and

5.5.6  to develop and design packaging for the Product in each part of the
       Territory at its sole cost and expense Provided Always That the
       general quality design and content of such packaging and any
       information supplied with the Product by Astra shall be subject to
       prior approval by Glycyx; and

5.5.7  not to use any misleading statements or misrepresentations on the
       Product packaging or use any defective packaging materials and to
       comply in all respects with all local regulations and laws in
       connection with the Product packaging and the information provided
       thereon; and

5.5.8  in the sale and use of the Product in each part of the Territory to
       comply with all relevant regulatory health and pricing regulations
       and approvals in such part of the Territory.  For the avoidance of
       doubt Glycyx shall not be responsible or liable in any manner
       whatsoever for compliance with any such regulations and approvals
       (whether or not it shall have assisted Astra in or approved the sale
       or use of the Product in such part of the Territory); and

5.5.9  not to use any packaging which may adversely affect the Product in
       any way whatsoever including but without limitation the Product's
       approved shelf-life; and

5.5.10 not to incur any liability on behalf of Glycyx or in any manner pledge or purport to pledge Glycyx's credit or accept any order or make any contract binding on Glycyx or give or make any representation, warranties or conditions or quantities with reference to the Product on behalf of Glycyx. Astra is not and shall not be deemed to be the agent of Glycyx and in all correspondence and dealings with third parties shall clearly indicate that it is acting as principal; and

5.5.11 to be solely responsible for the acts and omissions of its employees and representatives in connection with the performance of its rights and obligations hereunder.

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5.6 Astra shall be entirely responsible for the collection of debts due to it and shall bear all losses owing to its failure so to do.

6. PRODUCT DATABASE AND ADVERSE REACTIONS REPORTING

6.1 Glycyx shall maintain a database of all adverse and other reactions or events occurring in connection with the Product in any part of the Territory or the Excluded Territory and shall use reasonable endeavours to procure that any such adverse and other reactions are notified to it in a timely manner by any sub-licensee and/or distributor of the Product in the Territory and the Excluded Territory.

6.2 Astra undertakes to notify Glycyx:-

6.2.1  forthwith in the event that it becomes aware of any serious or
       previously unknown adverse reaction or contra indications to the
       Product; and

6.2.2  within three months, on a quarterly basis of other adverse reactions
       or contra indications to the Product other than stated under 6.2.1.

6.3 Glycyx undertakes to notify Astra:-

6.3.1  forthwith in the event that it becomes aware of any serious or
       previously unknown adverse reaction or contra indications to the
       Product in any part of the Territory and the Excluded Territory; and

6.3.2  within three months, on a quarterly basis of other adverse reactions
       or contra indications to the Product other than stated under 6.2.1.

6.4 In the event that Glycyx or any third party shall conduct clinical studies in support of any promotional or marketing activities of Glycyx or such third party within the Territory or the Excluded Territory, Glycyx shall use reasonable endeavours to grant or procure the grant to Astra of full unrestricted access to the results of such trials so that Astra shall be entitled to use such results in connection with the marketing, sale and use of the Product in the Territory.

7. CONSIDERATION

7.1 In consideration of the rights hereby granted by Glycyx to Astra Astra hereby agrees to pay to Glycyx a sum of [*] such sum to be payable to Glycyx as follows:-

7.1.1 [*]

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7.1.2 [*]

7.2 Glycyx hereby agrees that it shall reimburse to Astra the sum of
[*] paid by Astra under the terms of the Research Agreement by way of (and not otherwise in any manner whatsoever) a retention by Astra of either:-

7.2.1  [*] of the price charged by Glycyx under Clause 10 to Astra on each
       of Astra's orders for bulk quantities of capsules containing the
       Product (net of all sales taxes, discounts, credits, insurance and
       delivery charges); or

7.2.2  in the event that Astra shall have commenced manufacture of the
       Product under the provisions of Clause 13.2, [*] of all fees due to
       Glycyx from Astra under paragraph 6 of Schedule 2

until the said sum shall have been reimbursed in full to Astra whereupon all such retentions shall cease forthwith.

8. CLINICAL TRIALS AND DEVELOPMENTS

8.1 Astra is authorised by Glycyx to undertake clinical studies after the Filing Date in support of Astra's regulatory, promotional and marketing activities and to enhance the Product's approval and/or use within the Applications Provided Always That:-

8.1.1  such trials are conducted solely for such purposes and not for any
       other purpose whatsoever; and

8.1.2  prior to the conduct of such trials the trial objectives and
       protocols are approved by Glycyx (such approval not to be
       unreasonably withheld or delayed and Provided Always That such
       approval

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REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

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       shall be deemed given by Glycyx in the event that no response is
       received by Astra from Glycyx within 20 working days of receipt by
       Glycyx of any request for approval); and

8.1.3  Astra shall keep Glycyx fully informed as to the conduct progress
       and results of such trials; and

8.1.4  Glycyx shall have full unrestricted access to the results of such
       trials and shall be entitled to disclose the same to third parties
       for use in connection with the registration marketing sale and use
       of the Product in the Excluded Territory only; and

8.1.5  save as provided in Clause 10.6 Astra shall bear all the costs and
       expenses associated with such trials (including but without
       limitation the costs of documentation and administrative payments to
       trialists); and

8.1.6  such trials shall be conducted only in accordance with any
       regulatory permissions and/or approvals granted for the Product in
       such part of the Territory in which the trials are conducted.

8.2 It is anticipated that Astra shall support any symposia organised, arranged or sponsored by Glycyx involving areas of medicine relating to diseases of the gastrointestinal tract and similar conditions and shall nominate and sponsor key physicians in the said field of medicine to attend at those symposia (and in particular shall sponsor those physicians presenting the results of clinical research studies relating to the Product).

9. SUPPLY OF PRODUCT

9.1 Astra shall notify Glycyx in writing of its forecast requirements for quantities of the Product (in the form of bulk filled capsules) and details of its proposals for Launch in each of the Principal Markets on or before June 30th 1993. With such forecast Astra shall deliver a detailed forecast of its requirements for the Product during 1994 and in January, April, July and October in each year shall deliver to Glycyx revised forecasts for the subsequent 12 month period commencing on the subsequent April 1st, July 1st, October 1st and January 1st respectively.

9.2 Glycyx shall fulfill all written orders placed on it by Astra for the Product in the form of bulk filled capsules.

9.3 Whilst the forecasts delivered by Astra to Glycyx under Clause 9.1 shall be non-binding and will not place any obligation on either Astra to order such quantities or Glycyx to deliver such quantities:-

9.3.1 Astra shall use all reasonable endeavours to

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       estimate accurately in such forecasts its requirements for the
       Product; and

9.3.2  Astra shall ensure that all written orders are placed permitting a
       lead time for manufacturing of the Product of not less than 16
       weeks; and

9.3.3  Astra acknowledges that Glycyx shall not be obliged to fulfill any
       firm written orders placed on it that may be in excess of [*] of
       the last forecast quantities (in accordance with Clause 9.1) for
       such period; and

9.3.4  Astra undertakes to place written orders and accept delivery of
       quantities of the Product that are not less than [*] of the last
       forecast quantities (in accordance with Clause 9.1) for such period.

9.4 During the term of the Research Agreement Glycyx shall supply Astra with such quantities of the Product as Astra may reasonably require (in bulk filled capsule form) for clinical trials undertaken by Astra under the terms of the Research Agreement. Astra shall endeavour to provide Glycyx with the maximum period of notice of such requirements and in any event shall place firm written orders on Glycyx therefor not less than 90 days before any requested delivery date.

9.5 After the termination of the Research Agreement Glycyx shall supply Astra with such quantities of the Product in bulk filled capsule form as Astra shall reasonably require for use as product samples and clinical trial samples and as shall have been forecast and ordered by Astra in accordance with Clauses 9.1 to 9.3.

9.6 Glycyx hereby warrants and undertakes that all quantities of the Product (in bulk filled capsule form) supplied by it to Astra under the terms of this Agreement shall as at the date of delivery be supplied fully in accordance with the Bulk Product Specification and the Finished Product Specification contained in Schedule 3 and shall have been manufactured in accordance with European Community Good Manufacturing Practice and the Drug Master File for the Product.

9.7 Upon the receipt of any delivery of the Product from Glycyx Astra shall test such Product (in accordance with the Quality Test Procedures to be agreed and incorporated into Schedule 4 to this Agreement after execution of this Agreement) and in the event that such Quality Test Procedures reveal any breach of the warranty given in Clause 9.6 Astra shall be entitled to reject the full shipment of the Product within 45 days of receipt of such shipment by notice in writing to Glycyx.

9.8 In the event of any dispute between the parties concerning any allegation of breach of the warranty contained in clause 9.6 or concerning any rejection or purported rejection of

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any shipment of the Product a sample quantity of the Product in question shall (at the joint cost and expense of the parties) be delivered to an independent laboratory (nominated by the agreement of the parties or in the absence of agreement on the application of either party by the President for the time being of the Royal Pharmaceutical Society of Great Britain) which shall be supplied with copies of the Bulk Product Specification, the Finished Product Specification and the Drug Master File and shall carry out testing in accordance with the Quality Test Procedures and whose decision as to the quality of such Product and as to any breach of warranty by such Product, shall in the absence of manifest error be final and binding on the parties.

9.9 The terms and conditions relating to the supply of the Product by Glycyx to Astra shall be as set out in this Agreement and each written order placed on Glycyx by Astra shall form a separate contract for the supply of the Product.

9.10 The parties undertake to execute an agreement relating to the manufacture and supply of Product for the purpose of disclosure to the relevant regulatory authorities in the Territory substantially in the form contained in Schedule 4 on or before the Filing Date. In the event that such agreement is entered into by any Astra Associate in place of Astra Astra undertakes to guarantee and procure the proper performance by such Astra Associate of all its obligations under such agreement.

10. PRICE

10.1 The price charged for the Product by Glycyx to Astra shall (save as provided in Clause 10.6 and 10.7) be established in Sterling Pounds as follows:

10.1.1 the price for the Product shall be finally determined by the end of March and September of each calendar half-year for the preceding July-December and January-June and shall (subject to Clause 10.1.5) equal [*] for the Product in the Territory during the calendar half-year in question;

10.1.2 for the conversion of the relevant currencies into Sterling Pounds under Article 10.1.1 the official average exchange rates for the sale and purchase of foreign currency at the SE-Banken, Stockholm on the last banking day of the calendar half-year in question shall be applied. With respect to currencies not quoted by the SE-Banken the average rate for purchasing Sterling Pounds in the respective country as published by any leading London Bank shall apply;

10.1.3 until the price can be finally determined in accordance with Article 10.1.1 the Product will be

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supplied at provisional prices fixed by Glycyx and Astra based on historical figures, forecasts and best estimates;

10.1.4 any balance resulting from differences between the provisional and the final prices shall be settled by April 15 and October 15 of the calendar half-year in which the final prices are established;

10.1.5 in the event that the [*] of all Product sold by Astra (and any Astra Associate) in Germany after Launch in Germany shall exceed [*] the price charged by Glycyx to Astra for supplies of the Product (for Germany and elsewhere) after the month in which said sales level for any such [*] is achieved shall be permanently increased thereafter to equal [*] under Article 10.1.1 above.

10.2 In order to calculate the price charged by Glycyx to Astra pursuant to Clause 10.1 Astra shall notify Glycyx for a six month period of its best available estimate of the Factory Sales Prices (calculated by reference to estimated sales in the Principal Markets and weighted by reference to estimated quantities to be sold at such prices) which it reasonably considers will be obtained for total sales of the Product by Astra in the Territory.

10.3 Astra shall keep Glycyx informed of any material movement in the Factory Sales Prices for the Product achieved on sales into any Principal Market during any six month period.

10.4 Astra shall keep full proper and up-to-date books of account and records showing clearly all transactions relating to the calculation of the Factory Sales Price.

10.5 Astra shall allow Glycyx or its auditors or representative reasonable access during normal business hours to inspect the books of account of Astra (or any Astra Associate) in order to verify the Factory Sales Prices and the prices changed by Glycyx to Astra under this Clause 10 Provided That such verification shall be at the sole cost and expense of Glycyx.

10.6 Glycyx shall at its own cost and expense provide such supplies of the Product to Astra as Astra may reasonably require for the conduct of clinical trials.

10.7 In each country within the Territory Astra shall use all reasonable endeavours to obtain the most favourable Factory Sales Price which is consistent with competitive market characteristics and the demonstrated advantages of the Product and presenting the Product as a new chemical entity within such country.

10.8 The Product supplied by Glycyx to Astra in respect of any

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Principal Market for the purpose of Product samples shall be supplied to Astra [*] for a period of [*] from the date of Launch in each such Principal Market Provided That:-

10.8.1 the quantities so delivered in any one year shall not exceed [*] of the total aggregate Product sold by Astra in such Principal Market in such year; and

10.8.2 for the purpose of determining [*] it is understood that this shall include direct costs of material, labour and interest and direct manufacturing overhead but shall not in any circumstances exceed [*] of such Product in such Principal Market; and

10.8.3 Clauses 10.4 and 10.5 shall apply mutatis mutandis with respect to Glycyx for the purpose of verifying [*] prices charged

Provided Further That for the avoidance of doubt Glycyx shall be entitled to charge and receive the price calculated in accordance with Clause 10.1 in respect of any supplies of Product samples for any Principal Market made after such [*] period or made during such [*] period which are in excess of such [*] figure.

11. TERMS OF PAYMENT

11.1 Payment is strictly net cash to be paid to Glycyx within thirty (30) days from the date of invoice in pounds sterling. Such payment shall be made by express payment through the banking system into such bank account as Glycyx shall designate for such purpose.

11.2 If payment is not made as set out in Clause 11.1 for any bulk delivery of the Product to Astra Glycyx reserves the right;

11.2.1 to charge interest to Astra at the rate of 2% (two per cent) per annum above the base rate for the time being of Barclays Bank plc on the unpaid balance (such interest to accrue on a day-to-day basis from the date of payment (as well after as before any judgment)); and

11.2.2 to require payment in advance for any delivery of the Product made prior to receipt of such payment in full.

12. DELIVERY

12.1 Delivery of the Product to Astra by Glycyx shall be Ex-Works any of the European manufacturing plants designated by Glycyx (Incoterms 1990) and otherwise as specified in the agreement entered into pursuant to Clause 9.10.

12.2 The Product shall be shipped to Astra by such method of

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transport as Astra shall nominate and such transport shall be arranged and paid for by Astra. Glycyx does not accept any liability for loss of or damage to the Product after delivery and whilst in transit.

12.3 Risk in the Product shall pass to Astra on delivery and Astra shall be responsible for insuring the Product from the date of delivery and in transit at its own cost and expense.

13. LICENCE TO MANUFACTURE

13.1 Save only in the circumstances set out below, Glycyx shall manufacture the Product and shall supply Astra with such quantities of the Product as it shall require and (save as expressly provided in this Clause 13) Astra shall have no right title or interest in any of the Patents or proprietary rights relating to the Product and is entitled to use the same only under the terms of this Agreement.

13.2 In the event that Glycyx shall

13.2.1 be in breach of its obligations to supply the Product in the form and manner specified in Clause 9 or otherwise in accordance with forecast schedules and written orders placed on it by Astra and shall fail to remedy such breach within 90 days of written notice from Astra requiring remedy; or

13.2.2 give Astra 180 days notice in writing of its intention to cease to supply Astra with the Product; or

13.2.3 by reason of Force Majeure be prevented from supplying the Product to Astra for a period exceeding 180 days

Astra shall be entitled by service of notice in writing forthwith to acquire a licence to manufacture the Product. Such licence shall commence upon the effective date of such notices and shall be granted and continue upon the terms and conditions contained in Schedule 2.

13.3 In the event that during any period in which Glycyx shall fail to supply the Product to Astra by reason of:-

13.3.1 any breach by Glycyx in respect of which notice shall have been served under Clause 13.2.1; or

13.3.2 any Force Majeure notified by Glycyx to Astra under Clause 13.2.3

Astra wishes to manufacture quantities of the Product to satisfy requirements for the Product in the Territory Astra shall (by notice in writing to Glycyx) forthwith be entitled to a temporary licence to manufacture the Product during such period only and Provided That:-

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13.3.3 such licence shall be upon the terms specified in Schedule 2; and

13.3.4 such licence shall permit manufacture by Astra of only such quantities of the Product as may reasonably be required to fulfill actual and reasonably anticipated orders on Astra for the Product during such period and a reasonable period thereafter.

13.4 In order to satisfy itself of its ability to manufacture the Product Astra shall be entitled at any time during the term of this Agreement to effect a trial manufacture of bulk quantity of the Product Provided Always That:-

13.4.1 Glycyx shall provide such assistance and technical information as Astra may reasonably require for such trial; and

13.4.2 Glycyx shall be entitled to attend and observe such trial; and

13.4.3 such trial shall be conducted at the sole cost and expense of Astra but Glycyx shall if such trial quantity is used by Astra for commercial purposes be entitled to charge Astra for the Product produced as if it were Product sold by Glycyx to Astra under this Agreement at a price calculated [*] obtained by Glycyx on the supply of Product under the terms of this agreement [*] in the Principal Markets or such higher figure as Glycyx may show by documentary evidence [*].

13.4.4 Astra shall be solely responsible and liable for the quality of the Product produced in the trial; and

13.4.5 Astra shall be licensed to use the Patents and any intellectual property rights existing in the Product for such trial only; and

13.4.6 Astra shall not use all or any information received for the purpose of the trial for any other purpose whatsoever and shall not use the same after the trial unless and until a licence to manufacture shall become effective under the terms of Clauses 13.2 or 13.3; and

13.4.7 Glycyx shall procure registration of Astra as a supplier under the Drug Master File for the Product Provided Always That Astra shall not exercise any right as such a registered supplier unless and until a manufacturing licence shall become effective under Clauses 13.2 or 13.3.

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14. TRADEMARK LICENCE

14.1 Glycyx hereby grants to Astra a sole and exclusive licence to use the Trademark on the Product and in connection with the marketing and exploitation of the Product in the Territory only.

14.2 Glycyx undertakes to procure the grant of such rights and licence as may reasonably be required to give effect to Clause 14.1 from the Trademark owner, Biorex, and shall obtain Biorex's execution of such agreements as are referred to in Clause 5.5.2.

14.3 Astra hereby confirms and acknowledges that it is licensed to use the Trademark only as set out in this Agreement and Astra further acknowledges:-

14.3.1 that all goodwill in the Trademark in any part of the Territory (whether or not generated by the activities of Astra under this Agreement) shall vest in Biorex; and

14.3.2 that any application for registration of the Trademark shall be made in the name of Biorex only; and

14.3.3 undertakes to transfer and assign to Glycyx (or as it may direct) any right, title or interest required by Glycyx or Biorex for registration of the Trademark in any part of the Territory in the name of Biorex and for all goodwill in the Territory to vest in Biorex.

14.4 In consideration of the rights and licence granted to Astra by Glycyx in respect of the Trademark Astra shall pay to Glycyx a licence fee at the rate of [*] of all Product bearing the Trademark supplied by Astra (or any Astra Associate) to any third party. Such licence fee shall commence on the date of this Agreement and shall continue to be payable for such period of time in which Astra shall continue to use the Trademark under the licence hereby granted.

15. LICENCE PAYMENT

15.1 Astra shall keep true and accurate records of the sales of all Product manufactured by it pursuant to any licence granted under Clauses 13.2 or 13.3 and of all Product sold by it at any time bearing the Trade Mark and Astra shall within ninety (90) days of the end of each period of six months (such periods to end on 30 June and 31 December) send Glycyx a full statement showing the calculation of all sums due and owing to Glycyx

15.1.1 in respect of the manufacturing licence under the provisions of Clause 6 of Schedule 2; and

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15.1.2 in respect of the Trade Mark Licence under the provisions of Clause

and with such statement shall make payment in pounds sterling by express payment through the banking system into such bank account as Glycyx shall designate for such purpose, of such sum as is shown as due on the statement. The provisions of Clause 10.1.2 shall apply in calculating the applicable exchange rate.

15.2 Astra shall allow Glycyx or its auditors or representative reasonable access during normal business hours to inspect the books of account of Astra or any Astra Associate in order to verify the accuracy and calculation of any statements delivered under Clause 15.1 Provided That such verification shall be at the sole cost and expense of Glycyx.

15.3 In the event of any dispute between the parties concerning the calculation and/or payment of any fee due under this Clause 15 an independent auditor shall be appointed by the agreement of the parties or in the absence of agreement at the request of either party by the President for the time being of the Institute of Chartered Accountants in England and Wales who acting as an expert and not as an arbitrator shall have full and free access to all relevant information and data and shall be asked to determine and settle any such dispute and in the absence of manifest error his decision shall be final and binding on the parties. The independent auditor's fees shall be paid by the parties in such proportions as he shall direct.

15.4 Interest shall be payable to Glycyx by Astra at a rate of two per cent (2%) above the base lending rate from time to time of Barclays Bank plc on all outstanding fees due and payable by Astra to Glycyx under the provisions of this Clause 15 both before and after judgment.

16. PRODUCT LIABILITY

16.1 Glycyx hereby agrees to indemnify Astra against any action, claim, loss and damage suffered by or awarded against Astra in connection with any claim against Astra from a third party arising from any breach by Glycyx (or its subcontractors or nominees) of the warranty and undertaking contained in clause 9.6 Provided Always That such indemnity shall not extend to any liability, cost, expense or damage suffered or incurred by reason of any defect in any Product which was detected or should have been detected by Astra by means of the Quality Test Procedures applied (or which should have been applied) by Astra within 45 days of the date of delivery of the Product under the provisions of Clause 9.7.

16.2 Astra undertakes to indemnify and hold Glycyx harmless against all and any loss, damage, claim or liability suffered or incurred by Glycyx in any circumstances

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whatsoever save only where Glycyx is liable under Clause 16.1.

17. CONFIDENTIAL INFORMATION

17.1 Astra hereby agrees and undertakes that during the application of this Clause 17 and for a period of ten years thereafter (howsoever termination may be caused or arise) it shall keep confidential and shall not without the prior written consent of Glycyx disclose to any third party any information of a confidential nature belonging to Glycyx or Biorex (including trade secrets and information of commercial value) which may become known to Astra from Glycyx in connection with this Agreement and/or the Research Agreement Provided Always That such obligation of confidentiality shall not extend to any part of such confidential information which:

17.1.1 shall otherwise than by reason of any default by Astra become freely available to the general public; or

17.1.2 Astra can show by documentary evidence was in its possession or control prior to disclosure free of any obligation of confidentiality; or

17.1.3 Astra can show by documentary evidence shall have come into the possession or control of Astra from a third party free of any obligation of confidentiality subsequent to disclosure hereunder; or

17.1.4 Astra is obliged by law or regulation to disclose to a third party provided that such disclosure shall only be to the extent required by such law or regulation.

and Provided Further that in the event that this Agreement is terminated by Glycyx Astra shall forthwith cease any use of such information for any purpose whatsoever

17.2 Astra shall ensure that any employee of, or consultant to, Astra who shall obtain any confidential information in connection with the performance of this Agreement shall be bound by obligations of confidentiality substantially similar to the provisions of Clause 17.1.

17.3 Glycyx acknowledges the importance of keeping all material information relating to the Product confidential and Glycyx will use all reasonable endeavours to make sure that no such information is made public or otherwise made available to third parties in any manner which would jeopardize the exclusivity in the Territory granted to Astra hereunder.

18. INTELLECTUAL PROPERTY

18.1 Astra acknowledges that save as expressly provided herein or as may be required in connection with the performance by

-21-

Astra of any obligations under the Research Agreement Astra shall have no right, title, interest or licence in or to the Patents or otherwise any intellectual property rights of Biorex or Glycyx in Balsalazide or the Product,

18.2 In the event that either party becomes aware of any infringement by any third party within the Territory of any intellectual property rights of Glycyx and/or Biorex in the Patents, Balsalazide, the Product or the Trademark it shall forthwith notify the other party. Glycyx shall be entitled to take such action (or procure such action by Biorex) as it may in its sole discretion consider appropriate against any such third party infringer Provided Always That:-

18.2.1 Astra shall give such assistance as Glycyx may reasonably require in connection with any such action (subject to reimbursement by Glycyx of all costs reasonably incurred by Astra); and

18.2.2 Glycyx shall keep Astra informed of the conduct and progress of such action but shall be entitled to conduct, pursue and settle such action in such manner as it shall reasonably consider appropriate and to retain any damages awarded against any such infringer;

in the event that such infringement shall continue and Glycyx shall fail to take or procure any action to prevent any continued infringement Astra may (in its sole discretion) at its sole expense initiate and pursue such action as it considers appropriate to prevent any continued infringement Provided Further That:-

18.2.3 Glycyx shall give (and shall use reasonable endeavours to procure from Biorex) such assistance as Astra may reasonably require in connection with any such action (subject to reimbursement by Astra of all costs reasonably incurred by Glycyx and/or Biorex); and

18.2.4 Astra shall keep Glycyx informed of the conduct and progress of such action but shall be entitled to conduct, pursue and settle such action in such manner as it shall reasonably consider appropriate (having regard to the continuing value of any such intellectual property rights to Glycyx and/or Biorex and the effect which any such infringement shall have had or will have on the exploitation in the Territory by Astra of the Product) and to retain any damages awarded against any such infringer.

18.3 In the event that any claim is made against Astra by any third party alleging infringement of any rights of any third party by the use and exploitation of the Product by Astra shall be entitled at its sole cost and expense to defend any such claim in such manner as it may in its sole discretion consider appropriate Provided Always That

-22-

18.3.1 Glycyx shall give (and shall use reasonable endeavours to procure from Biorex) such assistance as Astra may reasonably require in such action (subject to reimbursement by Astra of all costs reasonably incurred by Glycyx and/or Biorex); and

18.3.2 Astra shall keep Glycyx informed of the conduct and progress of such action but shall be entitled to conduct, pursue and settle such action in such manner as it shall reasonably consider appropriate (having regard to the continuing value of any such intellectual property rights to Glycyx and/or Biorex and the effect which any such infringement shall have had or will have on the exploitation in the Territory by Astra of the Product) and to retain any damages awarded against any such infringer; and

18.3.3 (save only for any liability arising by reason of any breach by Glycyx of the warranties contained in Clause 11.1 of the Research Agreement) Glycyx shall not be liable in any manner whatsoever to Astra for any loss or damages suffered incurred or awarded against Astra in connection with any such claim.

19. SUB-DISTRIBUTORS AND SUB-LICENSEES

19.1 Astra is hereby granted the right to appoint sub-distributors for the Product in countries within the Territory Provided Always That

19.1.1 Astra shall remain solely liable for the performance of its obligations hereunder in each part of the Territory; and

19.1.2 in any part of the Territory where there is resident an Astra Associate any sub-distributor appointed shall only be such Astra Associate.

20. TERMINATION

20.1 The rights and obligations of the parties contained in Clauses 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 17, 18, 19 and 22 shall cease forthwith upon the date of expiry of a period of 15 years from the date of first Launch Provided Always That

20.1.1 the Trademark Licence granted under Clause 14 shall continue thereafter in accordance with its terms and Clause 15 will remain valid with respect to Clause 14; and

20.1.2 any licence granted to Astra to manufacture under Clause 13.2 shall continue indefinitely thereafter in accordance with Clause 6.4 of Schedule 2; and

20.1.3 any licence or interest in all or any part of the Patents, Balsalazide and/or the Product shall continue indefinitely thereafter.

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20.2 Either party to this Agreement shall be entitled to terminate this Agreement forthwith by notice in writing to the other in the event that:-

20.2.1 the other party shall fail to pay any sum due hereunder on the due date and shall fail to remedy such breach within (30) thirty days of being required in writing by the other party so to do; or

20.2.2 the other party shall commit a material breach of any of the terms and conditions of this Agreement and shall fail to remedy the same (if capable of remedy) within ninety (90) days of being required in writing by the other party so to do provided that such right of termination shall not arise in the event of any breach by Glycyx of its obligations under Clause 9 which circumstance is governed by the provisions of Clause 13 only; or

20.2.3 the other party goes into liquidation (either voluntary or compulsory) or shall be the subject of any petition for winding up; or

20.2.4 the other party shall make any assignment or arrangement for the benefit of its creditors or cease or threaten to cease to carry on its business in the ordinary course; or

20.2.5 a receiver, administrative receiver, or receiver and manager, or judicial manager or administrator is appointed over the whole or any part of the assets of either party or if any court proceedings are commenced for the appointment of an administrator or receiver to either party; or

20.2.6 the other party shall become unable to pay its debts as they become due in the ordinary course of business or shall otherwise become subject or seek relief under any law relating to insolvency in any jurisdiction relevant to such other party; or

20.2.7 the party serving such notice shall have served notice of termination on such other party under the provisions of Clause 7.4 of the Research Agreement provided that in the event that Astra assumes all obligations in connection with the conduct and completion of the Project in accordance with Clause 6.6 of the Research Agreement no event referred to in such Clause 6.6 shall constitute grounds for breach under this Agreement or the Research Agreement.

20.3 Any waiver by either party of a breach of any provision of this Agreement shall not be considered as a waiver of any subsequent breach of the same or any provisions of this Agreement.

20.4 Any termination of this Agreement shall be without prejudice

-24-

to the right of either party to recover any monies due to it under this Agreement or the rights or remedies of either party in respect of any breach prior to the effective date of termination of this Agreement.

20.5 Glycyx and Astra each undertake to the other that during the term of this Agreement it shall not exercise any right which it may have (or may acquire) to terminate the Biorex Agreement without prior consultation with the other and without taking such action as may be appropriate to ensure that the rights granted to such other hereunder are not prejudiced to any material extent.

21. CONSEQUENCES OF TERMINATION

21.1 In the event of termination of this Agreement under Clause 20.2 by Glycyx prior to the expiry of a period of 15 years from date of Launch Astra shall:

21.1.1 forthwith, cease all marketing, sale and promotion of the Product; and

21.1.2 immediately telegraphically transfer all monies due and payable to Glycyx as at the date of termination into Glycyx's bank account designated under Clause 11.1; and

21.1.3 immediately return to Glycyx all information and data of whatsoever nature relating to the Product together with all copies thereof (other than correspondence between Glycyx and Astra) which Astra may have in its possession or under its control including but without limitation all scientific, medical and safety data relating to the Product; and

21.1.4 immediately cease use of all or any confidential information of Glycyx delivered in connection with this Agreement and the Trademark; and

21.1.5 take all such steps as may reasonably be required to transfer or procure the transfer to Glycyx (or its nominee) of all such produce licences and approvals as may have been obtained for the marketing and sale of the Product in any part of the Territory; and

21.1.6 Glycyx shall purchase such stocks of the Product (inclusive of packaging) as Astra shall still have in its possession once it has fulfilled all orders outstanding as at the date of termination at a price calculated as cost price to Astra Provided That Glycyx shall not be obliged to purchase any of the stocks of the Product which do not have at least two thirds of its approved shelf life unexpired or are otherwise not of merchantable quality.

21.2 In the event of termination of this Agreement under Clause 20.2 by Astra prior to the expiry of a period of fifteen years from the date of Launch the rights and obligations of

-25-

Astra under this Agreement shall continue subject always to the terms of the Biorex/Astra Agreement.

22. ASSIGNMENT

22.1 The benefit of this Agreement is personal to Astra and to Glycyx and shall not be capable of assignment by either of them without the prior consent in writing of the other party (such consent not to be unreasonably withheld or delayed).

23. FORCE MAJEURE

23.1 If the performance of any obligations under this Agreement by either party is affected by Force Majeure it shall forthwith notify the other party of the nature and extent thereof.

23.2 Neither party shall be deemed to be in breach of this Agreement or otherwise be liable to the other by reason of any delay in performance or non-performance of any of its obligations hereunder to the extent that such delay or non-performance is due to any Force Majeure which has been notified to the other party in writing.

24. COSTS

24.1 Each party hereto shall bear its own costs in relation to the negotiation, drafting, preparation, and execution of this Agreement.

25. CONFIDENTIALITY OF THIS AGREEMENT

25.1 The contents of this Agreement shall remain confidential as between the parties. Neither party shall, without the prior written consent of the other (such consent not to be unreasonably withheld without justification), disclose any of the financial terms of this Agreement to any other person, firm or company save for

25.1.1 disclosure by Glycyx to Biorex and Salix Pharmaceuticals Inc. in circumstances where such third party shall have accepted obligations of confidentiality in respect of the information disclosed; and

25.1.2 such disclosure as may be required by any relevant law or regulatory authority.

26. NATURE OF THE AGREEMENT

26.1 Nothing in this Agreement shall create or be deemed to create any partnership, joint venture or the relationship of principal and agent between the parties.

26.2 Each party acknowledges that, in entering into this Agreement, it does not do so on the basis of, and does not rely on, any representation, warranty or other provision (except as expressly provided herein or in the Research

-26-

Agreement) and all conditions, warranties or other terms implied by Statute or common law are hereby excluded to the fullest extent permitted by law.

26.3 This Agreement (including all the Schedules) together with the Research Agreement and any agreements entered into pursuant to this Agreement constitutes the entire understanding and agreement between the parties with respect to the subject matter of this Agreement and supersedes all prior agreements, negotiations and discussions between the parties relating to this Agreement.

26.4 This Agreement may not be released, discharged, abandoned, charged or modified, in any manner, except by an instrument in writing signed by a duly authorised officer or representative from each of the parties hereto.

26.5 This Agreement shall be governed by and construed in all respects in accordance with the laws of England and each party hereby submits to the exclusive jurisdiction of the English courts. For the purpose of accepting service of process in connection with any action commenced before the High Court in England the parties hereto hereby absolutely, unconditionally and irrevocably appoint the following agents to accept process on their behalf it being unconditionally agreed that for this purpose such process will be properly and effectively served if the same is left at the addresses set out below:-

Astra: F.A.O. The Managing Director Astra Pharmaceuticals Limited Home Park Estate
Kings Langley
Herts
WD4 8DH

Glycyx: F.A.O., Glycyx Pharmaceuticals Limited Camas Partners Limited
Camas House
23 Park Lane
Blunham
Bedfordshire

MK44 3NH

27. NOTICES

27.1 All notices to be served by the parties to this Agreement shall be served only in the English language.

27.2 Notices shall be sufficiently served if dispatched by first class or express post (meaning the fastest normal method of mail transmit in the country of dispatch) to the address of the receiving party set out below

Glycyx         3600 W Bayshore Road
               Suite 202
               Palo Alto
               CA 94303 U.S.A.

-27-

               F.A.O. R W Hamilton

Astra          Kvarnbergagatan 16
               S-151 85 Sodertalje
               Sweden
               F.A.O. Vice President Legal Affairs

Any modification to this address must in itself be notified in writing to the other party in accordance with the terms of this sub-clause.

27.3 In the absence of proof to the contrary notices properly sent hereunder shall be deemed to have been duly served 10 days after the date of dispatch.

27.4 It shall be permitted for notices to be served hereunder by facsimile transmission and for this purpose the following fax number below shall apply:

27.4.1 in the case of Glycyx at 3600 W Bayshore Road Suite 202 Palo Alto CA 94303 USA facsimile transmission number 415-856-1555 and marked for the attention of R W Hamilton

27.4.2 in the case of Astra at Kvarnbergagatan 16, S-151 85 Sodertalje, Sweden facsimile transmission number +46 855 32 90 00 and marked for the attention of Vice President Legal Affairs

provided that such notice is confirmed by return facsimile and shall be deemed served 24 hours after the time of receipt of such return facsimile.

AS WITNESS the hands of the duly authorised representatives of the parties hereto the day and year first above written.

-28-

SCHEDULE 1

THE PATENTS

Distribution Schedule 1 (Pages 1 to 28)

SCHEDULE I

PATENTS

PATENT       NUMBER     FILING DATE    GRANT DATE     DUE TO EXPIRE

UK          2,080,796   Complete                         07/07/2001
                        Specification
                        7.07.1981

France      1,493,313    21.07.1981                      21.07.2001

Italy       1,138,450    10.07.1981                      10.07.2001

Japan       1,433,303    16.07.1981                      07.04.2001

U.S.A.      4,412,992    08.07.1981                      01.11.2000

F.R.G.      3,120,019    21.07.1981        15.02.90      21.07.2001

(Distribution Schedule 1 cont...)

[SEAL] (12) UK Patent (19) GB (11) 2 080 796 B

(54) Title of invention 2-hydroxy-5-phenylazobenzoic acid derivatives and pharmaceutical compositions containing them

(51) INTCL/3/:C07C 107/06A61K 31/60 31/63 C07C l43/54 143/78

-----------------------------------------------------------------------
(21) Application No                   (73) Proprietor
     8120914                               Biorex laboratories Limited.
                                           Biorex House,
                                           Canonbury Villas,
(22) Date of filing                        London N1 2HB.
     7 Jul 1981

(30) Priority data

     (31) 023826

     (32) 21 Jul 1980

     (33) Untied Kingdom (GB)

                                      (72) Inventors
                                           Rosalind Po Kuen Chan
(43) Application published
     10 Feb 1982

--------------------------------
(45) Patent finished
     12 Oct 1983

(52) Domestic classification
     C2C 220 227 22Y 270 280 292 29X
     29Y 30Y 321 323 325 32Y 332 342
     34Y 360 361 365 366 367 368 36Y  (74) Agent and or Address for
     385 394 39Y 510 51X 534 583 60Y        Service
     620 621 623 628 62X 630 638 650       Venner Shipley and Co.,
     652 658 660 661 662 668 699 802       368, City Road,
     8OY AA KH KJ KN KR KT RC SG           London EC1V 2QA.
     U1S 1318 C2C

(56) Documents Cited
     None

(58) Field of search
     C2C

LONDON THE PATENT OFFICE

(Distribution Schedule 1 cont...)

-1-

"2-Hydroxy-5-phenylazobenzoic acid derivatives and pharmaceutical compositions containing them".

(Distribution Schedule 1 cont...)

-2-

The present invention is concerned with new pharmaceutical compositions containing derivatives of 2-hydroxy-5-phenylazobenzoic acid, most of which are new.

Ulcerative colitis is a disease of increasing prevalence for which at present the only satisfactory treatment is the administration of salazopyrin, which has the following structural formula:

[FORMULA OMITTED]

We have now found that when the pyridylsulphamoyl moiety of salazopyrin is replaced by certain nonheterocyclic organic radicals, compounds are obtained which are very useful for the treatment of ulcerative colitis and have the great advantage that breakdown thereof in the intestinal tract does not give rise to undesirable metabolic products. Furthermore, many of them are soluble in water, which is advantageous for ease of administration, and have a very low acute toxicity.

(Distribution Schedule 1 cont...)

-3-

          Thus, according to the present invention, there are provided
     pharmaceutical compositions containing at least one compound of the general
     formula:

                               [FORMULA OMITTED]

 5   wherein X is an -SO\\2\\-or -CO- group and R is either a non-heterocyclic
     aromatic ring system, preferably a benzene ring, optionally substituted by
     a radical of the general formula -(CH\\2\\)\\n\\-Y or is a radical of the
     general formula-(CH\\2\\)\\n\\-Y, in which Y is a hydroxyl group, an
10   unsubstituted or substituted amino group or a carboxylic or sulphonic acid
     group and n is a whole number of from 1 to 6 and in which one or more
               -
     hydrogen atoms in the alkylene radical can be replaced by unsubstituted or
     substituted amino groups or alkyl radicals: and/or containing at least one
15   ester thereof and/or at least one non-toxic, pharmaceutically acceptable
     salt thereof, in admixture with a solid or liquid pharmaceutical diluent or
     carrier.

16        Most of the compounds of general formula (I) are new. Consequently,
     the present invention also provides new compounds of the general formula:-

                               [FORMULA OMITTED]

                       (Distribution Schedule 1 cont...)

-4-

wherein X is an -SO\\2\\- or -CO- group and R is either a non-heterocyclic aromatic ring system, preferably a benzene ring, optionally substituted by a radical of the general formula -(CH\\2\\)\\n\\-Y or is a radical of the 5 general formula -(CH\\2\\)-\\n\\-Y, in which Y is a hydroxyl group or an unsubstituted or substituted amino group or a carboxylic or sulphonic acid group and n is a whole number of from 1 to 6 and in which one or more of

the hydrogen atoms in the alkylene radical can be replaced by unsubstituted 10 or substituted amino groups or alkyl radicals, with the proviso that R-NH-X-is other than a -CO-NH-CH\\2\\-COOH radical: and the esters and the non-toxic, pharmacologically acceptable salts thereof, for example the salts with alkali metals and alkaline earth metals or with non-toxic 15 amines.

Substituted amino groups present in the compounds according to the present invention are preferably mono or dialkylamino radicals, the alkyl moieties of which contain up to 6 and preferably up to 3 carbon atoms, 20 methyl and ethyl being especially preferred.

The compounds of general formula (I) can be prepared by diazotising an amine of the general formula:-

[FORMULA OMITTED]

(Distribution Schedule 1 cont...)

-5-

in which R and X have the same meaning as above, followed by coupling with salicylic acid, whereafter, if desired, the compound obtained is salified with a non-toxic inorganic or organic base.

The following Examples are given for the purpose of illustrating the present invention:-

Example 1.

a) A mixture of 100 g. N-acetylsulphanilyl chloride, 80 g. aniline sulphate and 80 g. sodium carbonate in 500 ml. acetone was heated under reflux while stirring, for 5 hours, cooled and then added to a mixture of dilute hydrochloric acid and ice. The precipitate obtained was filtered off, washed with water and diethyl ether and dried in a vacuum at 50deg.C. to give 110 g. of almost pure N-acetylsulphanilylanilide; m.p. 212 - 215deg.C.

b) 100 g. N-Acetylsulhanilylanilide was heated under reflux for 3 hours in 150 ml. aqueous hydrochloric acid (1:1 v/v). After cooling, the reaction mixture was diluted with water and further cooled to 0deg.C. The 90 g. of sulphanilylanilide hydrochloride which deposited were filtered off, washed with ice-cold water and recrystallised from ethanol: m.P. 191 - 193.5deg.C.

c) 10g. Sulphanilylanilide hydrochloride and 10 ml. concentrated hydrochloric acid in 600 ml. ethanol were gently warmed to dissolve, then cooled to 5deg.C. and treated dropwise with 30 ml. of a 10% aqueous solution

(Distribution Schedule 1 cont...)

-6-

of sodium nitrite. The reaction mixture was left to stand for 1 hour at 0 to 5deg.C. and then filtered while maintaining the temperature at 0 to 50deg.C., the filtrate was added dropwise to a solution of 5 g. salicylic acid in 100 ml. of an aqueous solution containing 4 g. sodium carbonate and 7 g. sodium hydroxide cooled to 0deg.C. The reaction mixture was left to stand for 3 hours at 0deg.C. and at ambient temperature for 20 hours, while maintaining a pH of (greater than) 8 whereafter it was concentrated on a rotavapor apparatus and acidified. The gummy precipitate obtained was separated off and boiled with water several times to remove excess salicylic acid. The residue was dissolved in diethyl ether and the ethereal solution was washed with water, dried over anhydrous sodium sulphate and treated with charcoal. After filtering and removing the diethyl ether, the crude product obtained was dissolved in the minimum amount of acetone and ten times the volume of diethyl ether added thereto. Upon cooling, there were obtained 3.5 g. 5-(4-phenylsulphamoylphenylazo)-salicylic acid; m.p:
232-234 deg.C.

d) 11 g. 5-(4-Phenylsulphamoylphenylazo)-salicylic acid in 100 ml. ethanol were treated with an ethanolic solution of an equivalent amount of sodium hydroxide. The resulting solution was concentrated to a small volume at 30deg.C. and 20 mm. Hg, whereafter an equal volume of diethyl ether was added to the concentrate. Upon

(Distribution Schedule 1 cont...)

-7-

cooling, sodium 5-(4-phenylsulphamoylphenylazo)-salicylate deposited, which was filtered off, washed with diethyl ether and petroleum ether (b.p. 40 - 60deg.C.) and dried at 50deg.C. in a vacuum: m.p. 257 - 259deg.C. The yield was 12 g.

Example 2

a) A solution of 22 g. 4-aminohippuric acid in 20 ml. hydrochloric acid and 200 ml. water was cooled to 0deg.C. and treated dropwise, while stirring, with 80 ml. of a 10% aqueous solution of sodium nitrite. The reaction mixture was then stirred for 1 hour, whereafter a solution of 14
g. salicylic acid in 150 ml. 2N aqueous sodium hydroxide solution containing 15 g. sodium carbonate and cooled to 0deg.C. was added dropwise thereto. The reaction mixture was left to stand overnight at ambient temperature and then poured into a mixture of ice and dilute hydrochloric acid. The fine precipitate obtained was extracted with boiling ethyl acetate and the solution treated with charcoal. After filtering, the filtrate was evaporated to remove the solvent and the residue was crystallised from boiling ethanol to give 30 g. 5-(4- carboxymethylcarbamoylphenylazo)salicylic acid; m.p. 260 - 262deg.C.

(Distribution Schedule 1 cont...)

-8-

was filtered off, washed with ethanol and diethyl ether and dried in a vacuum at 50deg.C. There were obtained 12.5 g of the disodium salt 5-(4- carboxymethylcarbamoylphenylazo)-salicylic acid; m.p. greater than 360deg.C.

Example 3.

9.71 g. Aminohippuric acid were dissolved in a mixture of 40 ml. 2.5N hydrochloric acid and 10 ml. 2.5N sulphuric acid and 50 g. ice added thereto. A solution of 3.5 g. sodium nitrite in 15 ml. water were added steadily at 0deg.C., the reaction mixture being well stirred during the addition. After 75 minutes at 0deg.C., the reaction mixture was added to a solution of 6.9 g. salicylic acid in 37 ml. of a mixture of 9 parts by volume of 5N aqueous sodium hydroxide solution and 1 part by volume of 5N aqueous sodium carbonate solution, the temperature being kept at 0deg.C. by the addition of ice.

After 15 minutes, 23 ml. of a mixture of 4 parts by volume of 5N hydrochloric acid and 1 part by volume of 5N acetic acid was slowly added, while stirring. The precipitate obtained was filtered off, washed with distilled water and dried in a vacuum at 80deg.C. to give 17.2 g. (100% of theory) 5-(4-carboxymethylcarbamoylphenylazo)-salicylic acid, which can be recrystallised from 80% acetic acid, aqueous acetone or aqueous dimethylformamide to give a yellow, crystalline product of at least 99% purity in a yield of 80 to 95%; m.p. 260 - 262deg.C.

(Distribution Schedule 1 cont...)

-9-

Example 4.

a) 125 g. Finely powdered 4-nitrobenzoyl chloride were added portionwise while stirring, to a solution of 70 g, b-alanine in 500 ml, water containing 65 g. sodium hydroxide and cooled to 50deg.C. The reaction mixture was stirred for 3 hours and then added to a mixture of ice and hydrochloric acid. The precipitate obtained was filtered off, washed with water and dried by suction. After crystallisation of the dried product from hot acetone, there were obtained 130 g. 4-nitro-benzoyl-B-alanine: m.p. 164 -166deg.C.

b) A suspension of 15 g. finely powdered 4-nitrobenzoyl-B-alanine in 200
ml.ethanol was stirred in an atmosphere of hydrogen in the presence of 1 g. of palladium-charcoal (5%) while cooling gently. When the absorption of hydrogen had ceased, the reaction mixture was filtered and the filtrate concentrated to a small volume. Upon adding diethyl ether and cooling, 4- aminobenzoyl-B-alanine was obtained. The yield was 11.5 g.; m.p. 156 - 158 deg.C.

c) 8.8g. 4-Aminobenzoyl-B-alanine were triturated with 12 ml. hydrochloric acid and the paste obtained was dissolved in 100 ml. water. The solution was cooled to -5deg.C. and a solution of 3 g. sodium nitrite in 20 ml. water, cooled to 0deg.C., was added dropwise, while stirring. The diazotised solution was left for 1 hour, at 0deg.C. and was then added dropwise at -5deg.C. to a solution

(Distribution Schedule 1 cont...)

-10-

     of 6 g. salicylic acid in 70 ml, water containing 3.6 g. sodium hydroxide
     and 7 g. sodium carbonate. The final reaction mixture was adjusted to a pH
     of about 8, stirred for 2 to 3 hours and added to a mixture of dilute
 5   hydrochloric acid and ice. The precipitate obtained was filtered off,
     washed with water and suction dried. Crystallisation from hot ethanol gave
     11.9 g. 5-(4-carboxyethylcarbamoylphenylazo)-salicylic acid; m.p. 254 -
     255deg.C.

10        10.7 g. of the free acid were dissolved in 300 ml. warm ethanol and
     treated with a solution of 2.4 g. sodium hydroxide in 25 ml. ethanol. The
     precipitate obtained was filtered off, washed with ethanol and diethyl
     ether and dried in a vacuum at is 50deg.C. to give 11.5 g. of the disodium
15   salt of 5-(4-carboxyethylcarbamoylphenylazo)-salicylic acid; m.p. (greater
     than) 350deg.C.

     Example 5.
     ----------

20   a)   20 g. Finely powdered 4-nitrobenzoyl chloride were added portionwise
     to 12.5 g. taurine in a solution of 8 g. sodium hydroxide in 50 ml. water.
     The reaction mixture was stirred for 3 hours and then acidified.
     Precipitated 4-nitrobenzoic acid was filtered off and the filtrate
25   distilled to dryness at a pressure of 15 mm, Hg. The residue was extracted
     with boiling ethanol and the extract then cooled to give a yield of 23.6 g.
     4-nitrobenzoyltaurine; m.p. 278 -280deg.C.

                       (Distribution Schedule 1 cont...)

-11-

b) A solution of 17 g. 4-nitrobenzoyltaurine in 100 ml. water was stirred in an atmosphere of hydrogen in the presence of 1 g. palladium-charcoal (5%) until the absorption of hydrogen ceased. The reaction mixture was then 5 filtered, the filtrate was mixed with 20 ml. hydrochloric acid and the suspension of the hydrochloride obtained cooled to -5deg.C. This was added dropwise, while stirring, to a solution of 5 g. sodium nitrite in 30 ml. water. The diazotised solution thus obtained was stirred for 30 minutes and 10 then added to 9.5 g, salicylic acid in a solution of 11 g. sodium hydroxide in 100 ml. water, cooled to -2deg.C. The mixture was stirred for 3 hours, poured into a mixture of ice and 15 ml. hydrochloric acid and stirred at 0deg.C. for 30 minutes. The precipitate obtained was filtered off and 15 washed with ice-cold water. Crystallisation from 20% aqueous ethanol gave 18.2 g. 5-(4-sulphoethylcarbamoylphenylazo)-salicylic acid; m.p. (greater than) 350deg.C. (decomp.).

20 Example 6

a) A solution of 10 ml. ethanolamine in 120 ml. 10% aqueous sodium hydroxide solution was cooled to 5deg.C. and 30 g. finely powdered 4- nitrobenzoyl chloride added thereto portionwise. The reaction mixture was 25 stirred for 24 hours and filtered, The solid obtained, which mainly consisted of bis-(4-nitrobenzoyl)-ethanol-amine, was hydrolysed with 200 ml, of 4% aqueous

(Distribution Schedule 1 cont...)

-12-

ethanolic sodium hydroxide at ambient temperature for 24 hours. The reaction mixture was added to the above filtrate, acidified and the precipitated 4-nitrobenzoic acid was filtered off. The filtrate was 5 concentrated and the 13 g. of precipitated N-(4-nitrobenzoyl)-ethanolamine isolated. The mother liquor was distilled to dryness and the residue was boiled with ethanol. Concentration of the ethanolic extract gave a further 5.3 g. of product: m.p. 134 - 135deg.C.

10 b) A solution of 21 g. of N-(4-nitrobenzoyl)-ethanolamine in 400 ml.
ethanol was stirred in an atmosphere of hydrogen in the presence of 1 g. palladium-charcoal (5%) until the absorption of hydrogen had ceased. The catalyst was filtered of and the ethanolic solution was evaporated to 15 dryness to give a thick oil which slowly solidified. Thin layer chromatography showed that the N-(4-aminobenzoyl)-ethanolamine thus obtained had a purity of more than 99%: it was used as such for the next stage of the synthesis.

20 c) A solution of 16 g. N-(4- aminobenzoyl)-ethanol-amine in 20 ml.
hydrochloric acid and 150 ml. water was cooled to -5deg.C. and treated dropwise, while stirring, with a solution of 7 g. sodium nitrite in 50 ml. water. The reaction mixture was further stirred for 1 hour and then added 25 dropwise to 120 ml. of 10% aqueous sodium hydroxide solution containing 13
g. salicylic acid and cooled to -2deg.C. The reaction mixture was

(Distribution Schedule 1 cont...)

-13-

stirred for 3 hours and the precipitate obtained filtered off, washed with ice-cold water, suction dried and crystallised from hot ethanol to give 11
g. sodium 5-(4-hydroxyethylcarbamoylphenylazo)-salicylate: m.p. 286 - 288deg.C. (decomp.).

Example 7.

a) A solution of 7 g. alanine in 65 ml. of 10% aqueous sodium hydroxide solution was treated portionwise, while stirring, with 12.5 g. finely powdered 4-nitrobenzoyl chloride. The reaction mixture was stirred at 5deg.C. for 20 hours, acidified and the precipitate isolated, washed with water and suction dried. Repeated fractional crystallisation from acetone- diethyl ether (2:1 v/v) gave 4-nitrobenzoylalanine: m.p. 199 200deg.C.

(Distribution Schedule 1 cont...)

-14-

ethanol-diethyl ether (1:2 v/v) to give 4-aminobenzoyl alanine; m.p, 198 - 199deg.C.

c) A solution of 0.8 g. 4-aminobenzoyl alanine in 15 ml. 1N hydrochloric acid was cooled to -5deg.C. and diazotised with 5 ml. of 10% aqueous sodium nitrite solution for 30 minutes. The reaction mixture was then added to a solution of 0.7 g, salicylic acid in 15 ml. of water containing 0.8 g. sodium hydroxide and 0.5 g. sodium carbonate. After 2 hours, the reaction mixture was acidified and the precipitate obtained was isolated, dissolved in ethyl acetate and the solution was washed, dried and charcoaled. The solution was then concentrated and cooled to give 0.9 g. 5-[4-(a- methylcarboxymethylcarbamoyl)-phenylazo]-salicylic acid: m.p. 252 - 254deg.C.

Example 8

a) 20 g. Acetylsulphanilyl chloride were added portionwise at 5deg.C., with stirring, to a solution of 15 g. 4-aminophenylacetic acid in 10% aqueous sodium hydroxide solution. The reaction mixture was further stirred for 4 hours and then added to a mixture of dilute hydrochloric acid and ice. The precipitate obtained was isolated, taken up in ethyl acetate, washed with water, dried and evaporated to give 22 g. acetylsulphanilyl-4- (carboxymethyl)-anilide.

b) 3.5 g. Acetylsulphanilyl-4-(carboxymethyl)anilide in 7 ml. 5N hydrochloric acid were heated under

(Distribution Schedule 1 cont...)

-15-

reflux for 2 hours, cooled, diluted with 20 ml. ice and water and cooled to -5deg.C. 8 ml. of 10% aqueous sodium nitrite solution were added thereto and after 30 minutes the diazotised solution was added to 1.4 g. salicylic acid in 20 ml. of an aqueous solution of 2 g. sodium hydroxide and 2 g. sodium carbonate cooled to below 0deg.C. The reaction mixture was stirred for 2 hours and then added to a mixture of hydrochloric acid and ice. The precipitate obtained was isolated and dissolved in ethyl acetate and the solution washed with water, dried and charcoaled. Upon concentrating the filtered solution and adding an equal volume of diethyl either to the filtrate, the desired product slowly crystallised out. There were obtained is 3 g. 5-[4-(4-carboxymethylphenyl)- sulphamoylphenylazo)salicylic acid; m.p. 252 - 254deg.C.

Example 9.

a) A solution of 12 g. 6-aminohexanoic acid in 60 ml. of 10% aqueous sodium hydroxide solution was treated portionwise with 9 g. finely powdered 4-nitrobenzoyl chloride. After 4 hours, the reaction mixture was added to a mixture of dilute hydrochloric acid and ice. The precipitate obtained was isolated, washed with water and crystallised from acetone to give 12.6 g. 6-(4-nitrobenzoylamino)-hexanoic acid; m.p. 148 - 150deg.C.

(Distribution Schedule 1 cont...)

-16-

b) A solution of 6 g. 6-(4-nitrobenzoylamino)hexanoic acid in 150 ml. ethanol was hydrogenated in the presence of 0.5 g. palladium-charcoal (5%) until the reaction was complete. The catalyst and solvent were removed and the residue was crystallised from ethanol-diethyl ether (1:1 v/v) to give 4.7 g. 6-(4-aminobenzoylamino)-hexanoic acid; m.p. 132 - 134deg.C.

c) A solution of 2.5 g. 6-(4-aminobenzoylamino). hexanoic acid in 15 ml. 2N hydrochloric acid was cooled to -5deg.C. and treated dropwise, while stirring, with 8 ml. of a 10% aqueous solution of sodium nitrite. The reaction mixture was stirred for 30 minutes and then added at -5deg.C. to salicylic acid in 20 ml. of water containing 2 g. sodium hydroxide and 1 g. sodium carbonate. After 3 hours, the reaction mixture was acidified and the precipitate obtained was isolated by centrifuging, dissolved in ethyl acetate, washed, dried and concentrated to a small volume. Upon cooling, there were obtained 2.7 g. 5-(4-carboxypentylcarbamoylphenylazo)-salicylic acid: m.p. 238 -239deg.C.

Example 10.

a) A solution of 13 g. copper sulphate in 60 ml. water and a solution of 2 g. sodium hydroxide in 30 ml. water were added simultaneously to a solution of 7.5 g. lysine in 50 ml. water, followed by the addition of 50
ml. of 10% aqueous sodium bicarbonate solution.

(Distribution Schedule 1 cont...)

-17-

The precipitated salt was filtered off and the blue filtrate was added, with vigorous stirring, to a solution of 7 g. 4-nitrobenzoyl chloride in 50
ml. acetone. The reaction mixture was stirred for 20 hours and the precipitate obtained was filtered off, washed with water, methanol and diethyl ether and dried in a vacuum at 50deg.C. to give the copper salt of E-(4-nitrobenzoyl)-lysine.

b) A suspension of 7 g. of the copper salt of E-(4-nitrobenzoyl)-lysine in 30 ml. water was stirred with 6 ml. hydrochloric acid until dissolution was complete. Hydrogen sulphide was passed in for 1 hour and precipitated copper sulphide then filtered off. The filtrate was evaporated to dryness and the residue was taken up in 20 ml, methanolic hydrogen chloride and heated under reflux for 3 hours. The cooled reaction mixture was diluted with water, rendered alkaline with sodium carbonate and extracted with ethyl acetate to give 4.8 g. E-(4-nitrobenzoyl)-lysine methyl ester in the form of a yellow oil.

c) A solution of 1 g. E -(4-nitrobenzoyl)-lysine methyl ester in 2 ml. methyl iodide and 0.2 ml. acetone was left to stand for 20 hours at ambient temperature, whereafter the NMR showed the reaction to be complete. The volatile materials were evaporated off to leave E:-(4-nitrobenzoyl)-a,a- dimethyllysine methyl ester in the form of an oil.

(Distribution Schedule 1 cont...)

-18-

d) 1 g. E -(4-nitrobenzoyl)-a,a-dimethyllysine methyl ester in 20 ml. ethanol was hydrogenated in the presence of 0.1 g. palladium-charcoal (5%) until the absorption of hydrogen had ceased. The catalyst was filtered off and the filtrate evaporated to dry-ness. The residue was taken up in 5 ml. 2N hydrochloric acid, cooled to -5deg.C. and treated with 2.5 ml. of 10% aqueous sodium nitrite solution. After standing for 30 minutes, the clear solution was added at -5deg.C. to a solution of 0.5 g. salicylic acid in 20
ml. of a 1N aqueous sodium hydroxide solution. After subsequently standing for 3 hours at 20deg.C., the reaction mixture was acidified and extracted with diethyl ether to remove unreacted salicylic acid. The aqueous phase was adjusted to pH 7 by adding IN aqueous sodium hydroxide solution and the resulting solution was evaporated to dryness. The residue was further dried by adding toluene and subsequently evaporating it and the residue then extracted with methanol. The methanolic solution was concentrated to a small volume. After adding diethyl ether and cooling, the disodium salt of 5-[4-(a-dimethylaminocarboxypentylcarbamoyl)-phenylazo]-salicylic acid separated out; m.p. (greater than) 210deg.C. (decomp.).

Example 11.

a) A solution of 30 ml. N,N-diethylethylenediamine in 100 ml. water was treated portionwise. while

(Distribution Schedule 1 cont...)

-19-

stirring, with 15 g. finely powdered 4-nitrobenzoyl chloride. The reaction mixture was stirred for 20 hours and the precipitate obtained was filtered off, washed with water and aqueous sodium carbonate solution and crystallised from petroleum ether-diethyl ether (1:1 v/v) to give 6 g. N,N- diethyl-N'-(4-nitrobenzoyl)-ethylenediamine; m.p. 49 - 51deg.C.

b) A solution of 5 g. N,N-diethyl-N'-(4-nitrobenzoyl)-ethylenediamine in 40 ml. ethanol was hydrogenated in the presence of 0.3 g. palladium- charcoal (5%) until the reaction was complete. The catalyst and solvent were removed to give 5 g. N,N-diethyl-N-(4-aminobenzoyl)-ethylenediamine in the form of an oil.

c) A solution of 2.35 g, N,N-diethyl-N'-(4-aminobenzoyl)-ethylenediamine in 20 ml, 2N hydrochloric acid was cooled to -5deg.C. and treated with 8
ml. of a 10% aqueous solution of sodium nitrite. The reaction mixture was stirred for 30 minutes and added to 1.4 g. salicylic acid in a solution of 1.6 g. sodium hydroxide and 2 g. sodium carbonate in 20 ml. water. After 3 hours at 0 to 20deg.C., sodium chloride was added to the reaction mixture to salt out the desired diazo compound. This was filtered off, washed with water and hot methanol and dried to give 2.3 g. 5-(4- diethylaminoethylcarbamoylphenylazo)-salicylic acid; m.p. 252 - 254deg.C. (decomp.).

The pharmaceutical compositions according to the present invention contain at least one of the compounds

(Distribution Schedule 1 cont...)

-20-

(I) in admixture with a solid or liquid pharmaceutical carrier.

The percentage of active material in tire compositions of the present invention may be varied, it being necessary that it should constitute a proportion such that a suitable dosage for the desired therapeutic

(Distribution Schedule 1 cont...)

-21-

The following Examples illustrate pharmaceutical compositions according to the present invention:

Example 12.
-----------

     600 mg, tablets are prepared containing:

     disodium salt of 5-(4-carboxyethyl-
     carbamoylphenylazo)-salicylic acid                       500 mg.

     starch                                                    50 mg.

     lactose                                                   45 mg.

     magnesium stearate                                         5 mg.

Example 13.
-----------

     450 mg. tablets are prepared containing:

     disodium salt of 5-(4-carboxymethyl-
     carbamoylphenylazo)-salicylic acid                       250 mg.

     starch                                                   100 mg.

     lactose                                                   95 mg.

     magnesium stearate                                         5 mg.

The tablets according to Examples 12 and 13 are intended for administration to humans for the treatment of ulcerative Colitis.

An attempt was made to establish an acute oral toxicity profile for the disodium salts of 5-(4-carboxymethylcarbamoylphenylazo)-salicylic acid and of 5-(4-carboxyethylcarbamoylphenylazo)-salicylic

(Distribution Schedule 1 cont...)

-22-

acid, using rats and mice as experimental animals but this was not possible due to their low toxicity. No deaths were observed with the carboxymethyi compound when administered to mice at a dosage of 3 g./kg. and to rats at a dosage of 2 g./kg. and no deaths were observed with the carboxy--ethyl compound when administered to mice at a dosage of 4 g. /kg. and to rats at a dosage of 2 g./kg.

Experiments have also been carried out on groups of 6 male Wistar rats in order to ascertain whether the new compounds according to the present invention split in the same manner as sulphasalazine to liberate 5- aminosalicylic acid (5-ASA). The test compounds were administered in an amount of 45 to 50 mg./kg. The results obtained are set out in the following Table:-

test compound                                    % of dose measured as 5-ASA
                                          -------------------------------------------------------------
                                          faeces                      urine                total
-------------------------------------------------------------------------------------------------------
sulphasalazine                             26 (plus/minus) 4    17 (plus/minus) 2    43 (plus/minus) 4
=======================================================================================================
   Example 1                               24 (plus/minus) 3    19 (plus/minus) 3    43 (plus/minus) 3
   Example 2                               17 (plus/minus) 3    17 (plus/minus) 6    34 (plus/minus) 5
   Example 4                               22 (plus/minus) 2    14 (plus/minus) 2    36 (plus/minus) 3
   Example 5                               26 (plus/minus) 3    15 (plus/minus) 2    41 (plus/minus) 5
   Example 6                               22 (plus/minus) 2    19 (plus/minus) 3    41 (plus/minus) 4

(Distribution Schedule 1 cont...)

-23-

(Distribution Schedule 1 cont...)

-24-

Patent Claims

1. 2-Hydroxy-5-phenylazobenzoic acid derivatives of the general formula:-

[FORMULA OMITTED]

5 wherein X is an -SO2- or -Co- group and R is either a non-heterocyclic aromatic ring system optionally substituted by a radical of the general formula -(CH\\2\\)\\n\\-Y or is a radical of the general formula - (CH\\2\\)\\n\\-Y, in which Y is a hydroxyl group, an unsubstituted or 10 substituted amino group or a carboxylic or sulphonic acid group and n is a

whole number of from 1 to 6 and in which one or more of the hydrogen atoms in the alkylene radical can be replaced by unsubstituted or substituted 15 amino groups or alkyl radicals, with the proviso that R-NH-X- is other than a -CO-NH-CH\\2\\-COOH radical; and the esters and non-toxic, pharmacologically acceptable salts thereof.

2. 5-(4-Phenylsulphamoylphenylazo)-salicylic acid and the sodium salt thereof.

20 3. Disodium salt of 5-(4-carboxymethylcarbamoylphenylazo)-salicylic acid.

4. 5-(4-Carboxyethylcarbamoylphenylazo)-salicylic acid and the disodium salt thereof.

(Distribution Schedule 1 cont...)

-25-

5. 5-(4-Sulphoethylcarbamoylphenylazo)-salicylic acid.

6. 5-(4-Hydroxyethylcarbamoylphenylazo)-salicylic acid and the sodium salt thereof.

5    7.   5-[(a-Methylcarboxymethylcarbamoyl)-phenylazo]-alicylic acid.

     8.   5-[ 4- (4-Carboxymethylphenyl)-sulphamoylphenylazo]-salicylic acid.

10   9.   5-(4-Carboxypentylcarbamoylphenylazo)-salicylic acid.

10. 5-[-(a-Dimethylaminocarboxypentylcarbamoyl)-phenylazo]-salicylic acid and the disodium salt thereof.

l1. 5-(4-Diethylaminoethylcarbamoylphenylazo)-salicylic acid.

15 12. A pharmaceutical composition containing at least one compound of the general formula:

[GRAPHICS APPEARS HERE]

wherein X is an -SO2- or -CO- group and R is either a non-heterocylic ring system optionally substituted by a radical of the general formula -
20 (CH\\2\\)\\n\\-Y-in or is a radical of the general formula -(CH\\2\\)\\n\\- Y, in which Y is a hydroxyl group, an unsubstituted or substituted amino group or a carboxylic or sulphonic acid group and n is a whole number of

from 1 to 6 and

(Distribution Schedule 1 cont...)

-26-

in which one or more hydrogen atoms in the alkylene radical can be replaced by unsubstituted or substituted amino groups or alkyl radicals, and/or containing at least one ester thereof and/or at least one non-toxic, 5 pharmaceutically acceptable salt thereof, in admixture with a solid or liquid pharmaceutical diluent or carrier.

13. Pharmaceutical compositions according to claim 12, substantially as 10 hereinbefore described and exemplified.

14. Process for the preparation of compounds of the general formula given in claim 12, wherein an amine of the general formula:-

[FORMULA OMITTED]

15 in which R and X have the same meanings as above, is diazotised and coupled with salicylic acid, whereafter, if desired, the compound obtained is salified with a non-toxic inorganic or organic base.

15. Process for the preparation of compounds of the general formula given 20 in claim 12 and of the salts thereof, substantially as hereinbefore described and exemplified.

16. Compounds of the general formula given in claim 12, whenever prepared 25 by the process according to claim 14 or 15.

-29-

SCHEDULE 2

TERMS AND CONDITIONS APPLICABLE TO THE
MANUFACTURING LICENCE UNDER CLAUSE 13.2

1. With effect from the effective date of notice served by Astra under and in accordance with Clause 13.2 of the Agreement (and Clause 6.6.3 of the Research Agreement) Glycyx shall grant Astra a licence to manufacture the Product in the Territory for sale in the Territory only under the terms of the Agreement and this Schedule 2.

2. For the avoidance of doubt Glycyx shall not be prevented from manufacturing or continuing to manufacture the Product or appointing sub-contractors to manufacture the Product for sale by Glycyx or its customers both inside and outside the Territory subject to the exclusivity granted to Astra in respect of the Territory under the terms of the Agreement.

3. Glycyx shall supply Astra with such technical information and assistance as Astra may reasonably require (and which has not previously been supplied to Astra pursuant to Clause 13.4) to enable Astra to produce the Product in commercial quantities Provided Always That Glycyx shall be reimbursed all costs and expenses incurred by it in supplying such information and assistance to Astra.

4. Astra undertakes to Glycyx that it will manufacture the Product fully in accordance with the Bulk Product Specification and the Finished Product Specification (annexed to the Agreement in the approved form) and with the Drug Master File for the Product and in accordance with European Community Good Manufacturing Practice.

5. Astra shall be entitled to market, distribute and sell the Product manufactured by it only in accordance with the terms and provisions of the Agreement.

6. In consideration of the licence to manufacture Astra shall pay to Glycyx a fee calculated as a percentage of the Factory Sales Price of all Product manufactured by or on behalf of Astra pursuant to this licence and sold by Astra or any Astra Associate such percentage to be:

6.1 [*]

6.2 [*]

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN

REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

-30-

6.3  [*]

6.3.1  [*] Provided Always that

6.3.2  in the event that the [*]

6.3.3  the actual cost of manufacture of the Product incurred by Astra
       shall be calculated upon the expiry of 12 months from the date of
       service of notice under Clause 13.2 (and fees shall be payable
       during such 12 month period on an estimate and shall be adjusted
       retrospectively upon such calculation) by Astra which shall produce
       to Glycyx full details of all actual direct costs of manufacture
       (being materials labour and direct manufacturing overhead and
       interest) and its calculation of the average actual cost per
       kilogram of Product incurred in such 12 month period and upon
       agreement by Glycyx of such actual cost, it shall remain fixed
       thereafter for the period in which fees under this Clause 6 shall
       remain payable.

6.4  [*]

6.5  [*]

7. Astra shall be solely liable for all losses, damages, costs and expenses arising out of any claim by any third party in connection with any Product manufactured by Astra and Astra hereby agrees fully and effectively to indemnify Glycyx against any claims, damages, costs, expenses, or other losses incurred by Glycyx arising out of or in connection with any Product manufactured by Astra,

8. The licence to manufacture granted hereunder shall continue

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

-31-

for such period in which Astra may wish to manufacture the Product provided always that such licence shall terminate in the event of termination of the Agreement by Glycyx under the provisions of Clause 20.2.

9. In the event that Astra decides to have the Product manufactured by a sub- contractor Astra may appoint such sub-contractor provided that Astra shall ensure that the sub-contractor shall perform in accordance with this Agreement and Astra shall remain liable for the acts of its sub-contractor so appointed.

-32-

SCHEDULE 3

"Bulk Product Specifications"

and

"Finished Product Specifications"

BALSALAZIDE SODIUM

Specification - "IN-HOUSE"

[*]

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

-33-

BALSALAZIDE SODIUM

Specification - "PL Submission"

[*]

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

-34-

COLAZIDETM CAPSULES

1. GENERAL CHARACTERISTICS

Red/maroon, hard gelatin lock-fit capsule shells, size 00, containing a dry orange/yellow powder.

2. FINISHED PRODUCT SPECIFICATION

[*]

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

-35-

SCHEDULE 4
MANUFACTURING AGREEMENT

TECHNICAL ARRANGEMENTS

between

ASTRA PHARMACEUTICAL PRODUCTION AB a Company incorporated under the laws of Sweden whose principal place of business is at S-151 85 Sodertalje, Sweden hereinafter called ASTRA

and

GLYCYX PHARMACEUTICALS LTD a Company incorporated under the laws of Bermuda whose registered office is at 41 Cedar Avenue Hamilton HM12 Bermuda hereinafter called GLYCYX

WHEREBY it is agreed as follows:-

Supply of Product

1. GLYCYX will supply the Product specified in the Schedule to this agreement ("the Product") to ASTRA upon the terms and conditions of this agreement and otherwise as agreed between the parties.

2. GLYCYX will use its site(s) at [ ] for manufacturing and control activities of the Product.

Quality of manufacturing materials used by GLYCYX

3. GLYCYX shall obtain the manufacturing materials specified in Schedule 2.

4. GLYCYX is solely responsible for ensuring that each batch of manufacturing material used by GLYCYX has been examined and complies with the specifications in Schedule 2.

GMP standard

5. All manufacture and quality control operations of GLYCYX shall be carried out according to the current Basic Standard of Good Manufacturing Practice for Pharmaceutical Products - including supplementary recommendations - adopted by the Pharmaceutical Inspection Convention (PIC) and issued by the EFTA Secretariat, Geneva.

Changes in quality standards, formula, manufacturing and quality control
procedures

6. The procedures of manufacture and quality control shall be as agreed by the parties and any change in such procedures shall be agreed upon by both parties in writing.

-36-

7. GLYCYX may not sub-contract any manufacturing or quality control operations to any Glycyx site other than that specified in Clause 2 or sub-contractor without prior notice in writing to ASTRA and providing such period of notice is reasonably required by ASTRA for ASTRA to meet Drug Regulatory requirements.

Responsibility for release of product manufactured by GLYCYX

8. GLYCYX shall only release batches of Product for shipment to ASTRA which have been examined and comply with the specifications in Schedule 5

Provided Always that ASTRA shall be solely responsible for the final approval of batches of Product manufactured by GLYCYX.

Storage

9. GLYCYX shall store all manufacturing materials and Products in accordance with GMP recommendations and the storage conditions prescribed therein [and agreed between the parties].

Documentation

10. GLYCYX shall keep:-

10.1 reference samples (solvents excluded) and quality control records for each batch of manufacturing material used by GLYCYX; and

10.2 manufacturing and quality control records for each batch of the Product manufactured for ASTRA by GLYCYX

for a period of six years from the date of manufacture or such longer period as may be agreed upon in writing between ASTRA and GLYCYX.

11. Each shipment of the Products from GLYCYX to ASTRA shall be accompanied by a certificate of analysis with the following information:-

11.1 the results of such tests as may by agreement of the parties be carried out by GLYCYX; and

11.2 a statement by GLYCYX that the batch of Products has been released for shipment to ASTRA in accordance with the following criteria:-

11.2.1  all manufacturing materials used in the manufacture of the
        Products have complied with the specification in Schedule 2;
        and

11.2.2  all manufacture and quality control operations by GLYCYX have
        been carried out according to current GMP, manufacturing, in
        process control and testing procedures, as

-37-

well as Standard Operating Procedures in the form agreed between the parties.

11.3 the manufacturing date.

12. GLYCYX agrees to submit to ASTRA upon receipt of any request therefor from Astra:-

12.1 copies of all manufacturing and quality control records of any batch of the Products manufactured by GLYCYX; and

12.2 copies of the quality control records of any batch of manufacturing materials used by GLYCYX.

Quality Audit

13. During normal working hours and upon reasonable notice ASTRA shall be entitled to inspect the manufacturing and quality control areas at GLYCYX's site.

14. During quality audits by ASTRA and upon request, GLYCYX shall inform ASTRA of the outcome of inspections by the National Drug Inspectorate of GLYCYX's site.

15. GLYCYX shall supply ASTRA with all relevant information reasonably required for the investigation of any complaints concerning the quality of the Products.

Post production product inspection

16. ASTRA is solely responsible for all post production inspection of the Product.

Contact persons

17. Contact persons in matters relating to manufacture and quality control under the terms of this Agreement are:-

- on behalf of ASTRA Folke Ljungner Senior Manager, Quality Assurance Tablets Astra Pharmaceutical Production AB S-151 85 Sodertalje, Sweden phone: +46-8-553 27072 fax: +46-8-553 28857

- on behalf of GLYCYX

Date: Date:

ASTRA PHARMACEUTICAL PRODUCTION AB GLYCYX

-38-

APPENDIX 1

Products to be Manufactured by GLYCYX and supplied to ASTRA

PRODUCT SPECIFICATION NO.

Date: Date:

ASTRA PHARMACEUTICAL PRODUCTION AB GLYCYX

-39-

APPENDIX 2

Manufacturing materials to be supplied by GLYCYX

NAME SPECIFICATION NO.

Date: Date:

ASTRA PHARMACEUTICAL PRODUCTION AB GLYCYX

-40-

SIGNED by                          )
for and on behalf of GLYCYX        )  /s/ Randy Hamilton
PHARMACEUTICALS LTD in the presence)
of:-
      /s/ Lorin K. Johnson



SIGNED by                          )  /s/ Hakan Mogren
for and on behalf of AB ASTRA in   )
the presence of:-                  )
/s/ Olof Ljungstrand                  Hakan Mogren
    Olof Ljungstrand                  President and

 Legal Counsel                        Group Chief Executive Officer

EXHIBIT 10.8

AMENDED AND RESTATED LICENSE AGREEMENT

BY AND BETWEEN

SALIX PHARMACEUTICALS, INC.

AND

BIOREX LABORATORIES LIMITED

APRIL 16, 1993

TABLE OF CONTENTS

                                                                                       Page
                                                                                       ----
Article 1. DEFINITIONS................................................................    1

         1.1   Affiliate..............................................................    1
         1.2   Astra..................................................................    1
         1.3   Balsalazide............................................................    1
         1.4   Biorex/Astra Agreement1................................................    1
         1.5   Commercial Introduction................................................    1
         1.6   Launch.................................................................    2
         1.7   Manufacturing Technology...............................................    2
         1.8   Net Sales..............................................................    2
         1.9   Patent Rights..........................................................    2
         1.10  Products...............................................................    2
         1.11  Royalty Term...........................................................    2
         1.12  Salix/Astra Agreement..................................................    2
         1.13  Technical Information..................................................    3
         1.14  Territory..............................................................    3
         1.15  Third Party............................................................    3
         1.16  Trademarks.............................................................    3
         1.17  Valid Claim............................................................    3

Article 2. REPRESENTATIVES WARRANTIES.................................................    3

         2.1   Authorization..........................................................    3
         2.2   No other Representations...............................................    3

Article 3. GRANT......................................................................    4

         3.1   Grant..................................................................    4
         3.2   Sublicenses............................................................    4
         3.3   Subcontracts...........................................................    4
         3.4   Milestone Payments.....................................................    4

Article 4. DEVELOPMENT................................................................    5

         4.1   Technical Information..................................................    5
         4.2   Exchange of Data.......................................................    5
         4.3   Visit of Facilities....................................................    6
         4.4   Conferences............................................................    6
         4.5   Technical Assistance...................................................    6
         4.6   Progress Report........................................................    6

Article 5. DUE DILIGENCE; NONCOMPETITION..............................................    6

         5.1   Regulatory Approvals...................................................    6
         5.2   Commencement of Marketing..............................................    6
         5.3   Biorex's Remedies .....................................................    7
         5.4   Excused Performance....................................................    7
         5.5   Noncompetition.........................................................    7
         5.6   Scientific Advisory Board..............................................    7

Article 6. MANUFACTURING  TRADEMARKS..................................................    8

         6.1   Clinical Materials.....................................................    8

TABLE OF CONTENTS

                                                                                       Page
                                                                                       ----

         6.2   Manufacturing Technology...............................................    8
         6.3   Trademarks.............................................................    8

Article 7.  ROYALITIES................................................................    8

         7.l   Base Royalty Rate......................................................    8
         7.2   Sales to Resellers.....................................................    9
         7.3   Minimum Royalties......................................................    9
         7.4   Combination Produc.....................................................    9
         7.5   No Patent Protection...................................................   10
         7.6   Third Party Royaltie...................................................   10
         7.7   Nonexclusivity.........................................................   10

Article 8.  ROYALTY REPORTS AND ACCOUNTING............................................   10

         8.1   Reports, Exchange Rates................................................   10
         8.2   Audits.................................................................   11
         8.3   Confidential Financial Information.....................................   11

Article 9.  ROYALTY PAYMENTS..........................................................   11

         9.1   Payment Terms..........................................................   11
         9.2   Exchange Control.......................................................   12
         9.3   Late Payments..........................................................   12

Article 10. INFRINGEMENT..............................................................   12

         10.1  Infringement Rights....................................................   12
         10.2  Enforcement of Patent Rights...........................................   12
         10.3  Third Party Claims.....................................................   12

Article 11. CONFIDENTIALITY...........................................................   12

         11.1  General................................................................   12
         11.2  Exceptions.............................................................   13
         11.3  Licensed Information...................................................   13
         11.4  Terms of this Agreement................................................   13

Article 12. PATENT PROSECUTION AND MAINTENANCE........................................   13

         12.1  Control................................................................   13
         12.2  Exceptions.............................................................   14
         12.3  Cooperation............................................................   14

Article 13. TERM; TERMINATION.........................................................   14

         13.1  Expiration.............................................................   14
         13.2  Termination for Cause..................................................   14
         13.3  Termination by Salix...................................................   15
         13.4  Effect of Termination..................................................   15

TABLE OF CONTENTS

                                                                                       Page
                                                                                       ----
Article 14. INDEMNITY.................................................................   15

         14.1  Salix..................................................................   15
         14.2  Biorex.................................................................   16
         14.3  Procedure..............................................................   16

Article 15. FORCE MAJEURE.............................................................   17

Article 16. ASSIGNMENT................................................................   17

Article 17. MISCELLANEOUS.............................................................   17

         17.1  Notices................................................................   17
         17.2  Applicable Law; Arbitration............................................   17
         17.3  Export Laws............................................................   18
         17.4  No Consequential Damages...............................................   18
         17.5  Entire Agreement.......................................................   18
         17.6  Headings...............................................................   18
         17.7  Independent Contractors................................................   18
         17.8  Waiver.................................................................   19
         17.9  Severability...........................................................   19

iii

AMENDED AND RESTATED LICENSE AGREEMENT

THIS AMENDED AND RESTATED LICENSE AGREEMENT (the "Agreement") is entered into effective as of April 16, 1993 between SALIX PHARMACEUTICALS, INC., a California corporation having its principal place of business at 3600 W. Bayshore, Suite 205, Palo Alto, California 94303 ("Salix"), and BIOREX LABORATORIES LIMITED, a United Kingdom corporation having its principal place of business at 2 Crossfield Chambers, Gladbeck Way, Enfield, Middlesex EN2 7HT ("Biorex"),

RECITALS:

Biorex and Salix have entered into a License Agreement dated as of January 17, 1991, as amended by an Amendment Agreement dated as of September 17, 1992 (collectively, the "Original Agreement"). Salix and Biorex desire to amend and restate the Original Agreement to make certain modifications thereto as set forth below.

NOW, THEREFORE, for good and valuable consideration, the sufficiency and receipt of which is hereby acknowledged, the parties hereto mutually agree to amend, restate and supersede the Original Agreement in its entirety to read as set forth below:

Article 1. DEFINITIONS

For the purposes of this Agreement, the terms defined in this Article shall have the meanings specified below:

1.1 "AFFILIATE" means any corporation or other entity which controls, is controlled by, or is under common control with, a party to this Agreement. A corporation or other entity shall be regarded as in control of another corporation or entity if it owns or directly or indirectly controls more than fifty percent (50%) of the voting stock or other ownership interest of the other corporation or entity, or if it possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of the corporation or other entity.

1.2 "ASTRA" means AB Astra, a company incorporated under the laws of Sweden, whose principal place of business is at Kvarnbengagatan 16, S-151 Sodertalje, Sweden.

1.3 "BALSALAZIDE" means 5-[4(2-Carboxyethylcarbamoyl)-phenylazo]- salicylic acid disodium salt dihydrate, and prodrugs, analogs and isomers thereof, and improvements to any of the foregoing, owned by or licensed to Biorex during the term of this Agreement.

1.4 "BIOREX/ASTRA AGREEMENT" means the Agreement of even date herewith by and between Astra and Biorex.

1.5 "COMMERCIAL INTRODUCTION" of any Product shall mean the first sale for use or consumption by the general public of such Product in a country after required marketing arid, if required, pricing approval has been granted by the governing health authority of such country.

1.6 "LAUNCH" means a commercial launch by Salix, its Affiliates and/or sublicensees of the Product throughout the Territory supported by such marketing expense and supported and launched in such quantities as may be reasonably be appropriate for the Product to have a significant effect on total sales of any similar or competitive product.

1.7 "MANUFACTURING TECHNOLOGY" shall mean all methods, processes. designs, data. procedures and other information owned by or licensed to Biorex or its Affiliates during the term of this Agreement that are reasonably required for pilot production or commercial manufacturing of Products, including, without limitation, final quality assurance-quality control procedures, manufacturing procedures (including conditions, times, temperatures, pressures and rates), product and raw material specifications, and other technology related thereto, including all patent and other intellectual property rights thereto.

1.8 "NET SALES" with respect to any Product means the invoiced sales price of such Product received from independent customers (including distributors) who are not an Affiliate or sublicensee, less, to the extent such amounts are included in the invoiced sales price: (a) actual credited allowances to such independent customers for spoiled, damaged, out-dated and returned Product; (b) freight and insurance costs incurred in transporting such Products to such customer; (c) quantity and other trade discounts actually allowed and taken; (d) sales, value-added and other direct taxes; and (e) customs duties and surcharges and other governmental charges.

1.9 "PATENT RIGHTS" means all rights of Biorex in the Territory to any subject matter described by, claimed in or covered by any of the following:

1.9.1 United States Patent Number 4,412,992 entitled "2-Hydroxy- 5 Phenylazobenzoic Acid Derivatives and Methods of Treating Ulcerative Colitis Therewith," issued November 1, 1983, and any substitutions, renewals, reissues, and extensions of the foregoing.

1.9.2 Any and all other patent rights, now existing or hereafter acquired (including applications therefor), pertaining to the subject matter described in Section 1.9.1 above, or that are otherwise related to Balsalazide, obtained in any country within the Territory.

1.10 "PRODUCTS" means products incorporating Balsalazide, or any other material whose manufacture, use or sale by an unlicensed third party would constitute an infringement of any Valid Claim (as defined below) included within the Patent Rights.

1.11 "ROYALTY TERM" means, with respect to each Product in the Territory, the period of time equal to the longer of: (a) nine (9) years from the date of Launch of such Product in the Territory; or (b) if the manufacture, use or sale of such Product in the Territory is covered by a Valid Claim, the term of such valid claim.

1.12 "SALIX/ASTRA AGREEMENT" means the Co-Participation Agreement of even date herewith by and between Salix and Astra.

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

1.13 "TECHNICAL INFORMATION" means all formulae, raw material and product specifications, designs and procedures, formulation data, processes and methods, pharmacology, toxicology and other preclinical tests results, clinical trials data and results, know-how, trade secrets, inventions and other scientific, medical, technical and marketing data and information, including all patent and other intellectual property rights thereto, which: (a) are owned or controlled by, or licensed to, Biorex or its Affiliates during the term of this Agreement, and (b) that are reasonably necessary for the development, manufacture, sale or use of Products. Technical Information shall include information and methods relating to the characterization, synthesis, formulation, stability, manufacture or assay of Balsalazide.

1.14 "TERRITORY" means the United States (including its territories, possessions and the Commonwealth of Puerto Rico).

1.15 "THIRD PARTY" means any entity other than Salix or Biorex and their respective Affiliates.

1.16 "TRADEMARKS" means the trade name "Colazide" registered as a trademark for use on pharmaceutical preparations in the Territory and any other trade name designated by Biorex for use in the Territory in connection with the Products.

1.17 "VALID CLAIM" means a claim of an issued and unexpired patent included within the Patent Rights, which has not been held permanently revoked, unenforceable or invalid by a decision of a court or other governmental agency of competent jurisdiction, unappealable or unappealed within the time allowed for appeal, and which has not been admitted to be invalid or unenforceable through reissue or disclaimer or otherwise.

Article 2. REPRESENTATIONS AND WARRANTIES

2.1 AUTHORIZATION. Biorex represents and warrants that (i) it has the full right and authority to grant the licenses provided in the Agreement and perform its obligations hereunder; (ii) to the best of Biorex's knowledge, Salix may exercise the licenses granted to it under the Agreement without conflict with or infringement of any rights or alleged rights of any person or entity;
(iii) Biorex has not, and will not during the term of this Agreement, make any commitment or incur any obligation in conflict with the licenses granted in the Agreement; (iv) Biorex is the sole legal owner of the Patent Rights; and (v) Biorex has obtained any and all governmental approvals, other than of the United States, that are required for Biorox: to enter into and perform this Agreement.

2.2 NO OTHER REPRESENTATIONS. Except to the extent provided in this Article 2 Biorex makes no representations and extends no warranties of any kind, either expressed or implied, with respect to use, sale, or other disposition by Salix or its sublicensees or its vendees or other transferees of Products incorporating or made by use of subject matter licensed under this Agreement.
THE WARRANTIES EXPRESSLY SET FORTH IN THIS ARTICLE 2 BY EITHER PARTY ARE EXCLUSIVE AND NO OTHER WARRANTY, WRITTEN OR ORAL, INCLUDING WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, IS EXPRESSED OR IMPLIED.

Article 3. GRANT

3.1 Grant. Biorex hereby grants to Salix and its Affiliates (a) an exclusive license under the Patent Rights, the Technical Information and Manufacturing Technology to develop, use, and sell and have sold Products within the Territory; and (b) a nonexclusive license under the Patent Rights (including foreign counterparts thereof), the Technical Information and the Manufacturing Technology to make and have made Products anywhere in the world, but solely for sale or use within the Territory. Notwithstanding the foregoing, Salix shall not manufacture the Product outside the Territory without first obtaining Biorex's consent, which shall not be unreasonably withheld.

3.2 Sublicenses. The license granted to Salix under Section 3.1 above shall include the right to grant sublicenses, subject to this Section 3.2. To the extent applicable, such sublicenses shall include all of the rights and obligations due Biorex that are contained in this Agreement. Salix shall provide Biorex with a copy of any sublicense issued hereunder, which copy shall be maintained in confidence pursuant to Section 11 hereof. Notwithstanding the foregoing, Salix shall not grant a sublicense for the manufacture, sale and use of a Product in the Territory without first obtaining Biorex's consent, which shall not be withheld unreasonably. For the purposes of this Agreement, the Salix/Astra Agreement shall be deemed to be a sublicense and not a subcontract.

3.3 Subcontracts. The following types of arrangements shall not be deemed to be sublicenses hereunder:

3.3.1 appointment of third parties to market, sell, use or otherwise dispose of Products;

3.3.2 subcontracting of third parties to develop new Products; or

3.3.3 subcontracting of third parties to manufacture the Products.

3.4 Milestone Payments.

3.4.1 Salix has paid to Biorex the amounts set forth below:

Milestone                                      Amount
---------                                      ------

  [*]                                            [*]

3.4.2 Salix shall pay to Biorex, within thirty (30) days after the events described below, the amounts set forth opposite such event:

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

[*]

Article 4. DEVELOPMENT

4.1 Technical Information. Insofar as it has not already done so, Biorex shall promptly provide to Salix all Technical Information, including all regulatory filings made by or for Biorex with respect to Balsalazide and any other products that would be covered by the Patent Rights if made, used or sold within the Territory ("Biorex Products"), and a description of Biorex's development program for such products, including without limitation descriptions of all tests, trials, development steps, protocols, clinical investigators and the like. Biorex shall promptly provide to Salix, and in any event at least quarterly, all Technical Information (including such regulatory filings) and information that it develops or acquires after the date hereof. In addition, Biorex shall use all reasonable efforts to so provide to Salix all similar items and information generated or developed by or for other licensees of Biorex and to permit Salix to use such items and information to the same extent it may use Technical Information hereunder. Salix shall have a right to use all such Technical Information and information of such licensees for purposes of this Agreement, and to cross-reference all such regulatory filings. In the event that Biorex does not obtain from any other licensee of Biorex the right to permit Salix to use such items or information, Biorex shall not provide to such licensee any information of Salix provided to Biorex under Section 4.2 below.

4.2 Exchange of Data. Each party shall keep the other informed as to its progress in the development and testing of all Products and Biorex Products and the preparing, filing and obtaining of the approvals necessary for marketing such products. Each party shall notify the other at least thirty (30) days in advance of, and make available to the other party for review prior to submittal of, all filings and correspondence to be submitted to regulatory authorities with respect to marketing approval of such a product, and all proposed publications of test data or results related to such products. Such items shall be made available at such party's principal place of business, or if reasonable to do so, they shall be sent to the other party. In addition, each party shall provide the other with copies of such other documents as it reasonably requests promptly after such request. Until the date of the Commercial Introduction of each such product each party shall provide to the other quarterly reports summarizing in reasonable detail its activities related to the development and securing of the requisite marketing and other regulatory approvals for such products. After the Commercial Introduction of any such product, each party shall keep the other informed of any further communications or activities concerning such products by, with or involving governmental health agencies. Throughout the term of this Agreement, each party shall promptly supply the other with all information regarding adverse drug experiences.

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

4.3 Visit of Facilities. Representatives of Salix and Biorex may, upon reasonable notice and at times reasonably acceptable to the other party (a) visit the facilities where the preclinical tests or clinical trials are being conducted with respect to Products or Biorex Products, and the facilities where the other party manufactures any Product, Biorex Product or active compound contained therein (or has such a product or compound manufactured, but subject always to the consent of the relevant subcontractor) to the extent relating to such product or compound; and (b) consult informally, during such visits and by telephone, with personnel of the other party performing work on such tests, trials or manufacturing.

4.4 Conferences. Until the filing of an NDA with respect to a Product, the parties shall meet periodically, at times and locations to be agreed, to discuss their respective development programs with respect to such Product and related Biorex Products.

4.5 Technical Assistance. Biorex shall provide to Salix such reasonable technical assistance as is in Biorex's control, if appropriate at Salix's facilities, with respect to the development, preclinical and clinical testing and manufacturing of Products.

4.6 Progress Reports. Salix shall provide to Biorex semiannual reports describing in reasonable detail its progress in developing Products hereunder. Such obligation shall continue until the Commercial Introduction of the first Product.

ARTICLE 5. DUE DILIGENCE: NONCOMPETITION

5.1 Regulatory Approvals. Salix shall use its best efforts to conduct such additional preclinical studies and clinical trials as are necessary to obtain regulatory approval to market at least one Product in the Territory. In this connection, and subject to Section 5.4 below, Salix shall use its best efforts to achieve the following objectives:

5.1.1 Commencing human clinical trials with respect to a Product on or before June 1, 1993;

5.1.2 Substantially completing human clinical trials necessary to file with the FDA an NDA with respect to a Product on or before March 31, 1994; and

5.1.3 Filing with the FDA an NDA with respect to a Product on or before June 30, 1994.

5.2 Commencement of Marketing. Subject to the provisions of Section 5.4 below, with respect to each Product for which Salix has received necessary regulatory approvals to market such Product in the United States, Salix shall use commercially reasonable efforts to:

5.2.1 Commence marketing such Product in such country within four (4) months of receiving approval (including, if required, pricing and reimbursement approval) to market such Product in that country;

5.2.2 After commencing marketing of such Product in such country, to meet the market demand for such Product in such country; and

5.3 Biorex's Remedies.

5.3.1 Failures Relating to Clinical Development. In the event that Salix fails to meet its obligations under Section 5.1 above, and does not remedy such failure within 60 days of notice by Biorex, Salix shall pay to Biorex [*] until such failure is cured provided, however, that failure to meet the time schedules set forth in Section 5.1 above shall not alone constitute a failure to meet Salix's obligations under Section 5.1, so long as Salix is using its best efforts to meet the objectives set forth therein as soon as is reasonably practicable. Any amounts paid by Salix hereunder may be carried forward and offset against royalties or minimum royalties that accrue under Article 7 below.

5.3.2 Failure to Market. If Salix fails to fulfill its obligations under Section 5.2 with respect to any country, and does not remedy such failure within one hundred eighty (180) days after receiving a written request to do so, Salix's rights to sell that Product in such country shall thereafter be nonexclusive, and Biorex shall have the right to grant one additional license to sell such Product in such country (which license shall not include the right to grant further sublicenses), unless Salix promptly commences to pay the minimum royalties required under Section 7.3.

5.3.3 Sole Remedy. This Section 5.3 sets forth Biorex's sole remedies for a failure by Salix to meet its obligations under Sections 5.1 and 5.2 above.

5.4 Excused Performance. In addition to the provisions of Article 15, Salix's obligations with respect to any Product under this Article 5 are expressly conditioned upon the continuing absence of any adverse condition relating to the safety, quality or efficacy of that Product or any other restrictions or delays imposed or caused by governmental authorities, or other condition or event beyond Salix's control that would reasonably justify Salix, after consulting with Biorex, in exercising prudent and justifiable business judgment, to conclude that development or marketing of such Product should be delayed, suspended or stopped altogether, and Salix's obligation to develop or market any such Product shall be delayed or suspended so long as any such condition or event exists. In addition, Salix shall not be responsible for any delays caused by failure of the FDA to accept data provided by Biorex or by inability of Salix to obtain or delays in obtaining, sufficient quantities of clinical materials on reasonable terms.

5.5 Noncompetition. During the term of this Agreement, Biorex shall not market in the Territory, itself or through licensees, distributors, agents or Affiliates, any product that competes or would compete with a Product.

5.6 Scientific Advisory Board. Until the Commercial Introduction of a Product, Salix may appoint to its Scientific Advisory Board one representative selected by Biorex; provided, however, that such scientific advisor nominated by Biorex shall enter into Salix's standard form of Scientific Advisor Agreement on the same terms and conditions generally proposed by Salix for its scientific advisors.

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

ARTICLE 6. MANUFACTURING: TRADEMARKS

6.1 Clinical Materials. Biorex shall use its best efforts to supply, or to arrange for others to supply, Salix's requirements of Products for preclinical tests and human clinical trials on reasonable terms and conditions. In the event that Biorex arranges for Third Parties to develop formulations of, or supply, Products to Biorex under this Section 6.1, Biorex shall use all reasonable efforts to acquire the right to include the manufacturing processes and technology used by such Third Party for such Product in the Technical Information, Manufacturing Technology or the Patent Rights, so that Salix. may use such process to manufacture such Product.

6.2 Manufacturing Technology. As soon as practicable following a request by Salix, Biorex shall disclose to Salix all Manufacturing Technology in existence at such time, and shall thereafter promptly (and in any event at least quarterly) provide Salix with updates or additions to such Manufacturing Technology that are subsequently developed or acquired by Biorex or its Affiliates. In addition, Biorex shall use all reasonable efforts to so provide to Salix all similar items and information generated or developed by or for other licensees of Biorex and to permit Salix to use such items and information to the same extent it may use Manufacturing Technology hereunder.

6.3 Trademarks. Biorex hereby grants to Salix an exclusive license, including the right to grant sublicenses, to use the Trademarks within the Territory in connection with sales of Products. Such license shall be royalty free and fully paid for the first six (6) years following Launch; thereafter Salix shall pay Biorex a royalty fee of [*] of all Products bearing the Trademarks sold or supplied by Salix, its Affiliates and/or sublicensees in the Territory. Except as provided below, Salix shall have the exclusive right to institute and pursue actions to prevent any use of the Trademarks within the Territory.

ARTICLE 7. ROYALTIES

7.1 Base Royalty Rate. In consideration of licenses granted to Salix herein, Salix shall pay to Biorex the following royalties with respect to Net Sales by Salix, its Affiliates and sublicensees of Products in the Territory during the Royalty Term for such Product (except as otherwise set forth in this
Section 7);

Annual Net Sales For All Products        Royalty Rate
---------------------------------        ------------

[*]                                       [*]

[*]

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

[*]

7.2 Sales to Resellers. With respect to sales of Products to a wholesaler or distributor who are not Affiliates ("Distributors"), Net Sales shall be calculated based upon the price paid by such Distributor, and no royalty shall be payable upon the Distributor's sales of such Products by the Distributor. With respect to sales of Products in bulk form to sublicensees other than Distributors, royalties shall be payable only upon the sublicensee's resale of such Products and not upon Salix's sale to the sublicensee. For the purposes of this Agreement, Astra and any Astra Associates (as defined the Salix/Astra Agreement) shall be deemed to be sublicensees and not Distributors.

7.3 Minimum Royalties. Beginning with Salix's first full fiscal year after the Commercial Introduction of the first Product incorporating Balsalazide, and continuing for [*] Salix shall pay to Biorex the following minimum royalties:

      Year After
Commercial Introduction              Minimum Royalty
-----------------------              ---------------

         [*]                               [*]

[*] In the event that earned royalties in any Salix fiscal year in the Territory do not exceed the minimum royalties for such year, the royalty report provided under Article 8 below for the final quarter of such year shall include a payment so that the total royalties paid for such year equals the minimum royalties for such year. In the event that Salix fails to pay the minimum royalties for any year within ninety (90) days of the date such payment is due, Biorex shall have the right to convert Salix's licenses hereunder into nonexclusive licenses. To exercise such right, Biorex must give Salix at least thirty (30) days prior written notice within such 90-day period of its intention to do so. Salix may cure any such failure by paying the minimum royalty within such ninety (90) day period (or if longer, within the 30-day notice period), in which case Biorex's right to convert Salix's licenses as a result of such nonpayment shall cease. Converting such licenses to be nonexclusive shall be Biorex's sole remedy upon a failure by Salix to pay such minimum royalties.

7.4 Combination Product. In the event a Product is sold in a combination product with other biologically active components, Net Sales, for purposes of royalty payments on the combination product, shall be calculated by multiplying the Net Sales of that combination by the fraction A/B, where A is the gross selling price of the Product sold separately and B is the gross selling price of the combination product. In the event that no such separate sales are made by Salix or a permitted sublicensee, Net Sales for royalty determination shall be reasonably allocated between such Product and such other compensation, based upon their relative importance and proprietary protection.

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

7.5 No Patent Protection. Notwithstanding anything to the contrary contained in Section 7.1:

7.5.1 In the event that Product is sold in a country in which the sale would not infringe a Valid Claim within the Patent Rights in the Territory, and significant sales of a substantially equivalent product are made by third parties in the Territory, the royalty otherwise applicable to such Product in the Territory shall be [*](even though the Product is made in a country in which such manufacture infringes a Valid Claim) for so long as significant sales of the substantially equivalent product continue.

7.5.2 In the event that any patent or any claim thereof included within the Patent Rights shall be held invalid in a decision by a court of competent jurisdiction, Salix shall have the right to withhold [*] of the royalties payable with respect to such claim accruing after the date of such decision. In the event that such decision is reversed on appeal, Salix shall promptly remit to Biorex all such royalties so withheld.

7.5.3 In the event Astra is granted a license to manufacture as set forth in Schedule 5 of the Salix/Astra Agreement with the royalty rates specified in Sections 6.1, 6.2 or 6.3 of said Schedule 5, the royalties otherwise payable by Salix under Article 7 shall be limited the lesser amount of:

[*]

7.6 Third Party Royalties. In the event that Salix is required to pay to a Third Party any royalties or amounts determined by Net Sales of a Product with respect to technology incorporated in such Product other than the technology licensed hereunder, Salix may deduct from the royalty accruing to Biorex under Section 7.1 or 7.2 above with respect to such Product [*] of the amount paid to such Third Party, up to [*] of the royalties that would otherwise accrue to Biorex with respect to such Product under Section 7.1 or
Section 7.2.

7.7 Nonexclusivity. In the event that Salix's licenses under this Agreement become nonexclusive under Section 5.3 or Section 7.3 above, and Biorex grants another license with respect to a Product within the Territory on royalty terms more favorable than those set forth herein, Salix shall have the right and option to substitute such royalty terms for the royalty terms provided herein. In the event Salix's licenses herein become nonexclusive, its obligations to pay minimum royalties shall thereupon terminate.

ARTICLE 8. ROYALTY REPORTS AND ACCOUNTING

8.1 Reports, Exchange Rates. During the term of this Agreement, after the Commercial Introduction of a Product, Salix shall furnish to Biorex on a quarterly basis a written report covering Salix's fiscal quarters showing(i)the gross sales of all Products sold by Salix its Affiliates.

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

and its sublicensees in the Territory during the reporting period and the calculation of Net Sales from such gross sales, (ii) the gross sales of all Products bearing the Trademark sold by Salix, its Affiliates and its sublicensees in the Territory during the reporting period and the calculation of Net Sales from such gross sales;; (iii) the sublicense royalties received by Salix during the reporting period; (iv) the royalties payable in U.S. dollars, which shall have accrued hereunder in respect of such sales and sublicense royalties; (v) withholding taxes, if any, required by law to be deducted in respect of such royalties, sales and sublicense royalties; and (vi) the dates of the Commercial Introductions of any Products in the Territory during the reporting period. Reports shall be due sixty (60) days following the close of each respective quarter. In case no royalty is due for any royalty period hereunder, Salix shall so report. Salix shall keep accurate records in sufficient detail to enable the royalties payable hereunder to be determined.

8.2 Audits.

8.2.1 Upon the written request of Biorex, at Biorex's expense and not more than once each Salix fiscal year, Salix shall permit an independent public accountant selected by Biorex and reasonably acceptable to Salix to have access during normal business hours to such of the records of Salix as may be reasonably necessary to verify the accuracy of the royalty reports hereunder made not more than thirty-six (36) months prior to the date of such request

8.2.2 In the event such accountant concludes that additional royalties were owed during such period, the additional royalty shall be paid promptly. The fees charged by such accountant shall be paid by Biorex unless the audit establishes that the royalties payable by Salix for the audited period are more than one hundred five percent (105%) of the royalties actually paid for such period, in which case Salix shall pay the reasonable fees and expenses charged by the accountant.

8.2.3 Upon the expiration of thirty-six (36) months following the date of any royalty report hereunder, the calculation of royalties payable with respect to the quarter covered by such report shall be binding and conclusive upon Biorex; and Salix shall be released from any liability or accountability with respect to royalties for such year.

8.3 Confidential Financial Information. Biorex agrees that all information subject to review under this Article 8 is confidential and shall cause its accountant to retain all such information in confidence.

ARTICLE 9. ROYALTY PAYMENTS

9.1 Payment Terms. Royalties shown to have accrued by each royalty report provided for under Article 8 of this Agreement shall be due and payable on the date such royalty report is due. Payment of royalties in whole or in part may be made in advance of such due date. Royalties determined to be owing, and any overpayments to be credited, with respect to any prior quarter shall be added, together with interest thereon under Section 9.3 below from the date of the report for the quarter for which such amounts are: owing, or credited, as the case may be, to the next quarterly payment hereunder.

9.2 Exchange Control. Except as hereinafter provided in this Section 9.2, all royalties due shall be paid in U.S. currency. If at any time legal restrictions prevent the prompt remittance of part or all royalties with respect to any country of the Territory where the Product is sold, payment shall be made through such lawful means or methods as Biorex may designate.

9.3 Late Payments. Any payments that are not paid on or before the date such payments are due under this Agreement shall bear interest to the extent permitted by applicable law at the prime rate of interest as reported by Bank of America NT&SA in San Francisco, California from time to time, calculated on the number of days such payment is delinquent. This Section 9.3 shall in no way limit any other remedy available to either party.

ARTICLE 10. INFRINGEMENT

10.1 Infringement Rights. The provisions of this Article l0 shall govern the parties' rights and obligations, as between themselves, with respect to actions against and by Third Parties for infringement of patents licensed under this Agreement or owned by such Third Parties. In the event that either party learns of a significant infringement of the Patent Rights, or corresponding patent rights outside of the Territory ("Foreign Patent Rights"), it shall promptly notify the other party.

10.2 Enforcement of Patent Rights.

10.2.1 Salix shall have the exclusive right to bring, direct and control any action to enforce the Patent Rights against infringers within the Territory.

10.2.2 Salix may deduct from royalties owing under Article 7 above all of its costs and expenses incurred in enforcing the Patent Rights, up to [*] of the royalties accruing hereunder. After reimbursement to Salix for its unreimbursed expenses, all damages and other payments recovered from such infringing parties shall be retained by Salix and included in Net Sales for the quarter in which they are received. Biorex shall cooperate with Salix, at Salix's expense, in connection with any such litigation, including without limitation by joining as a party if necessary or appropriate and executing such documents as Salix may reasonably request.

10.3 Third Party Claims. In the event that Salix is sued by an unaffiliated third party alleging that the manufacture, sale or use of a Product infringes patent rights of such third party, then Salix may withhold up to [*] of the royalties payable hereunder and apply such royalties to any damages, costs, liabilities or expenses (including the reasonable fees of attorneys and other professionals) incurred as a result of such claim, up to [*] of such damages, costs, liabilities and expenses.

ARTICLE 11. CONFIDENTIALITY

11.1 General. Except as expressly otherwise provided in this Agreement each party shall hold in confidence and not use or disclose to any Third Party (other than employees, consultants, advisors, permitted sublicensees and third parties with whom such party is considering entering into a business relationship who are similarly bound in writing) any

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

product. technical, manufacturing, process, marketing, financial, business or other information. ideas, cell lines or know-how identified in writing as confidential ("Proprietary Information") of or used by the other; provided, however, that Proprietary Information of a party shall not include:

11.1.1 Items which at the time of disclosure are published or otherwise generally available to the public;

11.1.2 Items which, after disclosure by the other party, are published or become generally available to the public through no breach of this Agreement by the other or the other's employees or agents; or

11.1.3 Items which the other can document were or are (i) in its possession at the time of disclosure and was not acquired directly or indirectly from such party, or (ii) independently developed.

11.2 Exceptions. A party may disclose Proprietary Information of the other:

11.2.1 In connection with the order of a court of law or in compliance with laws or regulations relating to registrations or sale of securities or product approval, or

11.2.2 If such information is also rightfully acquired from a third party who, to the best of such party's knowledge and belief, is entitled to rightfully make such disclosure, but only to the extent such party complies with any restrictions imposed by the third party.

11.2.3 After five(5)years from the date such information is disclosed to it hereunder.

11.3 Licensed Information. Any Proprietary Information of or used by Biorex which are or may be subject to an exclusive license to Salix hereunder shall not be disclosed by Biorex to any third party for use in the Territory except for purposes not inconsistent with such exclusive license and only pursuant to confidentiality and non-use restrictions at least as restrictive as those provided herein.

11.4 Terms of this Agreement. Salix and Biorex agree not to disclose the financial terms or conditions of this Agreement to any Third Party without the prior written consent of the other party hereto, except as required by applicable law or to persons with whom Biorex or Salix has entered into or proposes to enter into a business relationship.

Article 12. PATENT PROSECUTION AND MAINTENANCE

12.1 Control. Salix shall have the right to take such actions as are necessary or appropriate, with counsel of its choosing, to effect the patent applications within the Patent Rights and to obtain patent protection with respect to the subject matter therein in any country within the Territory. In the event that Salix elects not to prosecute or maintain a patent application or patent within the Patent Rights, Biorex shall have the right to do so at its own expense.

12.2 Expenses. The cost of Salix's preparing, filing, prosecuting and maintaining all patent applications and patents contemplated by this Agreement shall be borne by Salix.

12.3 Cooperation. Salix shall provide Biorex with copies of all material documentation after receipt from or prior to submission to any governmental agency with jurisdiction to issue such patents, as appropriate, so that Biorex may be informed and apprised of the continuing prosecution. Salix shall consult with Biorex and its counsel concerning prosecution of any patent application and adopt reasonable suggestions made with respect thereto, and shall use its best efforts to amend any patent application to include claims reasonably requested by Biorex and required to protect the product contemplated to be sold under this Agreement. Biorex shall make available to Salix or its authorized attorneys, agents or representatives, Biorex's employees, agents or consultants necessary or appropriate to enable Salix to file, prosecute -and maintain patent applications and resulting patents within the Patent Rights. Biorex shall sign or cause to have signed all documents relating to said patent applications or patents at no charge to Salix.

ARTICLE 13. TERM: TERMINATION

13.l Expiration. Unless terminated earlier pursuant to Section l3.2 or l3.3 below, the provisions of this Agreement with respect to a Product shall expire on the expiration of the last Royalty Term applicable under this Agreement with respect to such Product. Upon expiration of each Royalty Term with respect to each Product in the Territory, Salix shall have the following irrevocable, royalty-free licenses (with right to sublicense): (a) a nonexclusive license (with right to grant sublicenses) under the Patent Rights, Technical Information and Manufacturing Technology to make, have made, use, sell and have sold such Products in the Territory; and (b) the exclusive license to use the Trademarks in connection with the marketing and sale of such Products in the Territory, subject to Salix's payment to Biorex of the royalty stated in
Section 6.3 for so long as Salix, its Affiliates and sublicensees shall continue to use the Trademarks.

13.2 Termination for Cause. Either party may terminate this Agreement following the material breach of any material provision of this Agreement by the other party if the breaching party has not commenced to cure such breach within ninety (90) days after written notice thereof by the other party and thereafter proceeded diligently to cure such breach within a reasonable time; provided, that in no event shall such reasonable time to cure such breach exceed 180 days from the date of such notice. In determining whether there has been a material breach of a material provision of this Agreement for purposes of this Section 13.2, all of the circumstances of the breach shall be considered, including the breaching party's conduct, the hardship of termination. the extent to which the breaching party has performed its obligations, the extent to which the nonbreaching party will obtain the benefits it reasonably anticipated, and similar factors.

13.3 Termination by Salix. Salix shall have the right to terminate this Agreement or the licenses granted herein, in whole or as to any specified Product, at any time, and from time to time, by giving notice in writing to Biorex. Such termination shall be effective ninety (90) days from the date Biorex receives such notice and all Salix's rights associated therewith shall cease as of that date; provided, however, that if Salix revokes in writing its notice of termination before the end of such 90-day period, such notice of termination shall have no effect and the rights specified in such notice of termination shall not terminate.

13.4 Effect of Termination.

13.4.1 Upon a termination of this Agreement by Salix under
Section 13.3 above, or by reason of a material breach by Salix, all licenses granted to Salix hereunder (or, in the event of a partial termination under
Section 13.3, the licenses to the Products to which such termination pertains) shall terminate, and Salix shall promptly return to Biorex all tangible materials provided by Biorex incorporating Technical Information and Manufacturing Technology pertaining to the terminated Product. In the event of such a termination, Salix shall assign to Biorex its filings with the FDA and all other regulatory authorities within the Territory that pertain to the terminated Products.

13.4.2 Expiration or termination of this Agreement shall not relieve the parties of any obligation accruing prior to such expiration or termination.

13.4.3 Upon termination of this Agreement by either party, Salix shall provide Biorex with a written inventory of all Products in process of manufacture or in stock, and Salix (and its Affiliates and sublicensees) shall have the privilege of disposing of such Products within a period of one hundred eighty (180) days; provided, however, that Salix shall pay royalties on any Net Sales of such Products at the rate and at the time herein provided and shall render reports thereon in the manner herein provided.

13.4.4 Upon the expiration or termination of this Agreement for any reason the parties rights and obligations under the following provisions shall survive: Sections 8.2, 8.3, and 10.3 and Articles 9, 11, 13, 14 and 17; provided, that the indemnification provision of Article 14 shall survive only with respect to claims that are made prior to three (3) years after expiration or termination of this Agreement. In addition, upon expiration of this Agreement under Section 13.1 above, the parties rights and obligations under Article 4 and Sections 6.2 and 6.3 shall survive.

13.4.5 If the Biorex /Astra Agreement comes into force in accordance with Clause 2.1 thereof, then this Agreement shall terminate automatically forthwith and the provisions of Clause 13.4.1-13.4.4, inclusive, of this Agreement shall apply upon such termination.

ARTICLE 14. INDEMNITY

14.1 Salix. Subject to Biorex's compliance with its obligations set forth in Section 14.3 below, Salix agrees to indemnify and hold Biorex, its Affiliates and their employees and agents harmless from and against any losses, claims, damages, liabilities or actions

(including reasonable attorneys' fees and court and other expenses of litigation) (collectively, the "Liabilities") suffered or incurred in connection with Third Party claims for personal injuries or any product recall to the extent caused by: (a) any failure to test for or provide adequate warnings of adverse side effects to the extent such failure arises out of acts or omissions in connection with the performance of Salix's preclinical or clinical testing obligations hereunder, (b) any manufacturing defect in any Product or other material manufactured by Salix or its sublicensee, or subcontractors, or (c) any other act or omission (without regard to culpable conduct) of Salix or its sublicensee, or subcontractors in connection with the activities contemplated under this Agreement, except to the extent such Liabilities resulted from negligence, recklessness or intentional misconduct of Biorex.

14.2 Biorex. Subject to Salix's compliance with its; obligations set forth in Section 14.3, Biorex agrees to indemnify and hold Salix, its Affiliates, and licensees and their employees and agents harmless from and against any Liabilities suffered or incurred in connection with third party claims for personal injuries or any product recall to the extent caused by: (a) any failure to test for or provide adequate warnings of adverse side effects to the extent such failure arises out of acts or omissions in connection with Biorex's preclinical or clinical testing obligations hereunder, (b) any manufacturing defect in any Product or other material manufactured by Biorex or its sublicensees or subcontractors, or (c) any other act or omission (without regard to culpable conduct) of Biorex. or its sublicensees or subcontractors in connection with the activities contemplated under this Agreement, except to the extent such Liabilities resulted from negligence, recklessness or intentional misconduct of Salix. Notwithstanding the foregoing, Biorex shall not be obligated to indemnify Salix with respect to Liabilities incurred in the course of human clinical trials conducted by Salix (itself or through subcontractors), or with respect to Liabilities resulting from the use of Products supplied by Biorex as clinical trials materials for use in such clinical trials.

14.3 Procedure. A party (the "Indemnitee) that intends to claim indemnification under this Article 14 shall promptly notify the other party (the "Indemnitor") in writing of any loss, claim, damage, liability or action in respect of which the Indemnitee or any of its Affiliates, employees or agents intend to claim such indemnification, and the Indemnitor shall have the right to participate in, and, to the extent the Indemnitor so desires, jointly with any other Indemnitor similarly noticed, to assume the defense thereof with counsel mutually satisfactory to die parties; provided, however, that an Indemnitee shall have the right to retain its own counsel, with the fees and expenses to be paid by the Indemnitee, if representation of such indemnitee by the counsel retained by the Indemnitor would be inappropriate due to actual or potential differing interests between such Indemnitee and any other party represented by such counsel in such proceeding. The indemnity agreement in this Article 14 shall not apply to amounts paid in settlement of any loss, claim, damage, liability or action if such settlement is effected without the consent of the Indemnitor, which consent shall not be withheld unreasonably. The failure to deliver written notice to the Indemnitor within a reasonable time after the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such Indemnitor of any liability to the indemnitee under this Article 16, but the omission so to deliver written notice to the Indemnitor shall not relieve it of any liability that it may have to any Indemnitee otherwise than under this Article 14. The Indemnitee under this Article 14, its employees and agents, shall cooperate fully with the Indemnitor and its legal representatives in the investigation of any action, claim or liability covered by this indemnification.

ARTICLE 15. FORCE MAJEURE

Neither party shall be held liable or responsible to the other party nor be deemed to have defaulted under or breached this Agreement for failure or delay in fulfilling or performing any term of this Agreement when such failure or delay is caused by or results from causes beyond the reasonable control of the affected party or from fire, floods, embargoes, war, acts of war (whether war be declared or not), insurrections, rights, civil commotions, strikes, lockouts or other labor disturbances, acts of God or acts, omissions or delays in acting by any governmental authority or the other party.

ARTICLE 16. ASSIGNMENT

This Agreement may not be assigned or otherwise transferred, nor, except as expressly provided hereunder, may any right or obligations hereunder be assigned or transferred, by either party without the written consent of the other party; provided, however, that either Biorex or Salix may, without such consent, assign this Agreement and its rights and obligations hereunder in connection with the transfer or sale of all or substantially all of its business, if such assets include substantially all of the assets relating to its performance of its respective obligations hereunder, or in the event of its merger or consolidation with another company at any time during the term of this Agreement. Any purported assignment in violation of the preceding sentence shall be void. Any permitted assignee shall assume all obligations of its assignor under this Agreement. No assignment shall relieve either party of responsibility for the performance of any accrued obligation which such party then has hereunder.

ARTICLE 17. MISCELLANEOUS

17.1 Notices. Any notice or report required or permitted to be given or made under this Agreement by one of the parties hereto to the other shall be in writing, delivered personally or by facsimile (and promptly confirmed by personal delivery or courier) or courier, postage prepaid, addressed to such other party at its address indicated below, or to such other address as the addressee shall have last furnished in writing to the addressor and shall be effective upon receipt by the addressee.

Salix Pharmaceuticals, Inc.                   Biorex Laboratories Limited
3600 W. Bayshore Road                         2 Crossfield Chambers
Palo Alto, CA 94303                           Gladbeck Way
Attention:  Randy W. Hamilton                 Enfield, Middlesex EN2 7HT
                                              Attention: Miss L. Baxendale

          17.2  Applicable Laws' Arbitration.
                ---------------------------

17.2.1 Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California, without regard to conflicts of laws provisions.

17.2.2 Arbitration. Any dispute arising between the parties relating to, arising out of or in any way connected with this Agreement or any term or condition hereof, the performance by either party of its obligations hereunder, whether before or after termination of this Agreement, shall be finally resolved by binding arbitration. Whenever a party shall decide to institute arbitration proceedings, it shall give written notice to that effect to the other party. The party giving such notice shall refrain from instituting the arbitration proceeding for a period of sixty (60) days following such notice. Any arbitration hereunder shall be conducted under the UNCITRAL Arbitration Rules. Each such arbitration shall be conducted in the English language by a panel of three arbitrators appointed in accordance with such rules. Any such arbitration initiated by Biorex shall be held in Santa Clara County California, in which case the appointing authority shall be the American Arbitration Association, and any such arbitration initiated by Salix shall be in London, in which case the appointing authority shall be the London Court of International Arbitration. The arbitrators shall have the authority to grant specific performance, and to allocate between the parties the costs of arbitration in such equitable manner as they determine. Any monetary award shall bear interest at a rate fixed by the arbitrators from the date an arbitration proceeding is commenced to the date on which the award is paid in full. Judgment upon the award so rendered may be entered in any court having jurisdiction or application may be made to such court for judicial acceptance of any award and an order of enforcement, as the case may be. Neither Salix nor Biorex shall be entitled to exercise its respective remedies hereunder until the conclusion of any arbitration proceeding seeking such remedy; provided that the party against whom the breach is asserted notifies the other party that it disputes the breach within the time provided to cure the asserted breach under the applicable Section.

17.3 Export Laws. Biorex shall procure and maintain all export licenses required for it to transfer to Salix and its sublicensees all Technical Information, Patent Rights, Manufacturing Technology and other technical data, and shall comply with all other laws, regulations and governmental directives relating to the export of technical data, goods and services including, without limitation, those enforced by the United States Departments of Commerce and Defense.

17.4 No Consequential Damages. EXCEPT AS PROVIDED IN SECTION 14, IN NO EVENT SHALL EITHER SALIX OR BIOREX OR THEIR AFFILIATES BE LIABLE FOR SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES BASED ON CONTRACT, TORT OR ANY OTHER LEGAL THEORY.

17.5 Entire Agreement. This Agreement contains the entire understanding of the parties with respect to the subject matter hereof. All express or implied agreements and understandings, either oral or written, heretofore made are expressly merged in and made a part of this Agreement. This Agreement may be amended, or any term hereof modified, only by a written instrument duly executed by both parties hereto.

17.6 Headings. The captions to the several Articles hereof are not a part of this Agreement, but are merely guides or labels to assist in locating and reading the several Articles hereof.

17.7 Independent Contractors. It is expressly agreed that Salix and Biorex shall be independent contractors and that the relationship between the two parties shall not constitute a

partnership, joint venture or agency. Neither Salix nor Biorex 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 authorization of the party to do so.

17.8 Waiver. The waiver by either party hereto of any right hereunder or the failure to perform or of a breach by the other party shall not be deemed a waiver or any other right hereunder or of any other breach or failure by said other party whether of a similar nature or otherwise.

17.9 Severability. In case any one or more of the provisions contained in this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect an y other provisions hereof, but this Agreement shall be construed as if such invalid or illegal or unenforceable provisions had never been contained herein.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

SALIX PHARMACEUTICALS, INC. BIOREX LABORATORIES LIMITED

By: /s/   Randy Hamilton                 By: /s/   Lily Baxendale
   ----------------------------             ----------------------------
          Randy Hamilton                           Lily Baxendale

Title: PRESIDENT                         Title: Managing Director
      -------------------------                 ------------------------

EXHIBIT 10.9

Dated April 30, 1993

SALIX PHARMACEUTICALS, INC (1)

and

AB ASTRA (2)

CO-PARTICIPATION

AGREEMENT

TABLE OF CONTENTS


     1.       DEFINITIONS......................................   2

PART A - RESEARCH AND DEVELOPMENT..............................   5

     2.       SALIX' OBLIGATIONS AND THE PRODUCT...............   5

     3.       COMPLETION OF THE PROJECT........................   8

     4.       ASTRA'S OBLIGATIONS..............................   8

     5.       CLINICAL TRIALS..................................   8

     6        COSTS AND FUNDING................................  10

PART B - DISTRIBUTION..........................................  14

     7.       APPOINTMENT OF ASTRA.............................  14

     8.       REGULATORY APPROVALS.............................  15

     9.       PROMOTION, MARKETING AND SALE....................  17

     10.      PRODUCT DATABASE AND ADVERSE REACTIONS REPORTING.  20

     l1.      CONSIDERATION....................................  22

PART C - SUPPLY AND MANUFACTURE................................  23

     12.      SUPPLY OF PRODUCT................................  23

     13.      PRICE............................................  26

     14.      TERMS OF PAYMENT.................................  29

     l5.      DELIVERY.........................................  30

     16.      LICENSE TO MANUFACTURE...........................  30

PART D - TRADEMARK LICENSE.....................................  34

     17.      TRADEMARK LICENSE................................  34

     18.      LICENSE PAYMENT..................................  35

PART E - MISCELLANEOUS.........................................  36

     19.      INDEMNIFICATION..................................  36

     20.      CONFIDENTIAL INFORMATION.........................  37

     21.      INTELLECTUAL PROPERTY............................  39

     22.      SUB-DISTRIBUTORS AND SUB-LICENSEES...............  43

     23.      ASSIGNMENT.......................................  43

     24.      FORCE MAJEURE....................................  43

     25.      COSTS............................................  44

     26.      CONFIDENTIALITY OF THIS AGREEMENT................  44

     27.       NATURE OF THE AGREEMENT.........................  44

     28.       NOTICES.........................................  47

PART F - TERMINATION AND EFFECTS THEREOF.......................  48

     29.       TERMINATION.....................................  48

     30.       CONSEQUENCES OF TERMINATION.....................  51

PART G - ASTRA OPTION..........................................  53

     31.       ASTRA OPTION....................................  53

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THIS CO-PARTICIPATION AGREEMENT is made the 30th day of April, 1993

BETWEEN:

(1) SALIX PHARMACEUTICALS, INC a company incorporated under the laws of California and whose registered office is at 3600 W. Bayshore Road, Suite 205, Palo Alto, CA 94303, USA ("Salix"); and

(2) AB ASTRA a company incorporated under the laws of Sweden whose principal place of business is at Kvarnbergagatan 16, S-151 85 Sodertalje, Sweden ("Astra").

WHEREAS:

A. By an agreement dated 17th January, 1991 and made between Salix of the one part and Biorex Laboratories Limited ("Biorex") of the other part, Biorex granted Salix an exclusive license to develop, manufacture, use and sell pharmaceutical products incorporating Balsalazide in the U.S. (as hereinafter defined) under patents granted to Biorex upon the terms of such license.

B. Salix and Astra have agreed to collaborate in the programme of development of such pharmaceutical products for the creation of a Dossier to be registered in the U.S. and for the commercial exploitation of such products in the U.S.

NOW IT IS HEREBY AGREED as follows:

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1. DEFINITIONS

1.1 In this Agreement the following words shall have the following meanings:

"Advisory Committee" means the committee consisting of representatives of Astra and Salix to be formed and function as described in Article 9.1.1.

"Applications" means the treatment of Diseases of the Digestive System according to WHO classification of diseases Class 52.

"Primary Applications" means the treatment of acute relapse in ulcerative colitis.

"Astra Associate" means any company which is a holding company of Astra or a subsidiary of Astra and any other subsidiary of any such holding company or subsidiary. For this purpose a company shall be deemed to be a "subsidiary" of another if that other is a member of it and controls the composition of its Board of Directors.

"Astra Coordinator" means one individual employee of Astra or an Astra Associate nominated and appointed from time to time by Astra as a member of the Project Team.

"Balsalazide" means 5- [4(2- Carboxyethylcarbamoyl) - phenylazo]-salicylic acid disodium salt dihydrate.

"Biorex" means Biorex Laboratories Limited, a company incorporated in England under Company Registration Number 390233 whose registered office is at 2 Crossfield Chambers, Gladbeck Way, Enfield, Middlesex EN2 7HT.

"Biorex Agreement" means an agreement dated 17th January, 1991 between Salix and Biorex, as amended.

"Biorex/Astra Agreement" means the agreement of even date herewith entered into between Biorex and Astra and attached hereto as Exhibit A.

"Developmental Product" means a pharmaceutical preparation for the Primary Applications containing

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Balsalazide, as previously developed by Biorex and licensed to Salix pursuant to the Biorex Agreement.

"Dossier" means the master regulatory dossier relating to the Developmental Product which shall be prepared during the Project and which shall in the reasonable opinion of Salix and the Project Team be:

(1) in accordance with the published standard required for master regulatory dossiers by the FDA as at the date of completion of the Dossier; and

(2) in a form suitable for submission to and suitable for approval by the FDA in connection with obtaining health registration for the Developmental Product in the U.S.

"FDA" means the Food and Drug Administration of the U.S.

"Force Majeure" means in relation to either party any circumstances beyond the reasonable control of that party (including but not limited to strike, lock out or other form of industrial action, act of God, war, riot, accident, breakdown in plant or machinery, fire, flood, explosion or government action).

"Launch" means a commercial launch by Astra (or any Astra Associate) of the Product throughout the U.S. supported by such marketing expense and supported and launched in such quantities as may reasonably be appropriate for the Product to have a significant effect on total sales of any similar or competitive product.

"NDA" means a New Drug Application.

"Net Sales" means the ex factory sales price of each individual Product actually charged by Astra (or any Astra Associate) for each shipment of Product on an arms length open market basis to any third party (being a person, firm or company which is not an Astra Associate), net only of sales and purchase taxes, customs or import duties, delivery charges, returns and allowances, discounts and chargebacks actually charged on each such shipment.

"Patents" means the patents and applications therefore for Balsalazide listed in Schedule 1 and any substitutes, renewals, reissues and extensions thereof, plus any patent rights, now existing or

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hereafter acquired by Salix (including patent applications therefor) in the U.S. pertaining to Product and securing the exclusive use and sale in the U.S. of Product for treatment of ulcerative colitis and Crohn's disease.

"Product" means a pharmaceutical preparation in capsule form containing Balsalazide for the Applications and such other pharmaceutical preparations containing Balsalazide for the Applications as may be developed by or on behalf of Astra or Salix during the term of this Agreement.

"Product Information" means the chemical, pharmaceutical, preclinical, clinical and other information relating to the Developmental Product and Balsalazide delivered to Astra by Salix in full or in summary form or as expert opinion of the data prior to the date hereof as identified and listed in Schedule 3.

"Project" means the development program in connection with the development of the Developmental Product, and the preparation and completion of the Dossier and obtaining the grant of approval to market the Developmental Product in the U.S. conducted in accordance with the terms of this Agreement and as summarized in Schedule 2.

"Project Team" means the team of experts appointed by Salix from time to time in connection with the Project, plus the Astra Coordinator.

"RoW" means the whole world except the U.S., Japan, Korea and Taiwan.

"Trademark" means the trade name "Colazide" registered as a trademark for use on pharmaceutical preparations in the U.S. and any other tradename designated by Salix for use in the U.S. in connection with the Product.

"U.S." means the United States of America, its territories and possessions.

1.2 The headings in this Agreement are for convenience only and shall not affect its interpretation.

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1.3 Reference to any document in the approved form shall be reference to the document agreed between the parties and initialled for the purposes of identification by each party.

PART A - RESEARCH AND DEVELOPMENT

2. SALIX' OBLIGATIONS AND THE PRODUCT

2.1 Salix shall manage the Project Team and conduct or procure the conduct of the Project in a competent manner and shall use all reasonable endeavors to prepare and/or procure the preparation of the Dossier.

2.2 The Project shall be conducted in respect of and relate only to the Developmental Product as defined herein and notwithstanding the wider definition of the Product.

2.3 Salix shall conduct and manage the Project in close liaison with the Project Team and Salix shall keep Astra fully informed of the progress, costs and conduct of the Project and shall take account of comments and proposals made by the Project Team with regard to the scientific content and methods involved in the Project. Astra may be represented by additional individuals at Project Team meetings save that only the Astra Coordinator is a member of the Project Team. The actions of the Project Team will be governed by the principles of good faith. For the avoidance of doubt, Salix remains responsible for the conduct of the Project and the completion of the Dossier and, consequently, Salix will always have the final say for all matters discussed by the Project Team.

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2.4 Without prejudice to the generality of the foregoing, Salix hereby agrees:

2.4.1  that Salix shall use all reasonable endeavors to complete the
       Project without undue delay; and

2.4.2  that the nature and procedures of any clinical trials conducted or
       required to be conducted as part of the Project by Salix (or by any
       third party duly authorized by Salix) will be agreed in advance with
       Astra (subject to the rights of Salix as provided in Section 2.3
       regarding final say in all matters) and Salix shall ensure that the
       results of any such trials or other clinical data relating to such
       trials shall be made freely available to Astra as soon as is
       reasonably practicable; and

2.4.3  to manage the Project team and to ensure that the Project Team shall
       meet at least once in every twelve (12) week period during the
       Project to review and coordinate the Project and to share and
       exchange all information relating to the Project; and

2.4.4  to prepare a quarterly written report on the progress of the Project
       and to submit such report to Astra each calendar quarter. (The first
       report shall be submitted to Astra within one calendar quarter from
       the date of this Agreement); and

2.4.5  to use reasonable endeavors to ensure that all the contractors
       working on the Project [including without limitation the members of
       the Project Team (excluding the Astra Coordinator)] at the date of
       this Agreement

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       are either recruited as employees of Salix or enter into contracts
       for the supply of their services to Salix; and

2.4.6  to coordinate all documentation in connection with the Project.

2.5 Astra hereby confirms and acknowledges that any information, assistance, representation or warranty given or made by Astra, any Astra Associate or any of its representatives or the Astra coordinator shall be supplied in good faith to, and may be accepted by and used by Salix in the performance of the Project Provided Always that Salix shall remain solely responsible for the performance of the Project and shall not be entitled to rely upon any such representation, warranty or information supplied by any such Astra representative or the Astra Coordinator.

2.6 Upon completion of the Dossier, Salix shall file the NDA for the Developmental Product with the FDA and shall apply for and pursue obtaining approval for the marketing and sale of the Developmental Product in the U.S., which includes the responsibility to fund, perform and complete any Phase IV studies upon which such approval is conditioned.

2.7 The conduct of the Project and the preparation of the Dossier in accordance with the terms hereof shall include the undertaking by Salix to perform all pre-clinical trials and human pharmacokinetics trials and such clinical trials for the Developmental Product as are necessary to obtain approval in the U.S. pursuant to Article 2.6.

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3. COMPLETION OF THE PROJECT

Upon any application for approval in the U.S. made by Salix under Article 2.6 or in addition thereto, Salix shall be named as applicant and shall name Astra in such application as the distributor for the Product in the U.S.

4. ASTRA'S OBLIGATIONS

4.1 Astra shall be solely responsible for all costs and expenses incurred by or payable to the Astra Coordinator or any other Astra representative in connection with the Project.

4.2 Astra acknowledges that the Project meetings under Article 2.4.3 shall take place in the U.S. at such places as shall be reasonably nominated by Salix. Astra hereby agrees to bear the entire cost and expense in connection with the attendance at such meetings of any Astra representative and the Astra Coordinator.

5. CLINICAL TRIALS

5.1 Astra may undertake clinical trials for the Product (beyond the clinical trials conducted as part of the Project as specified in Article 2.6) at Astra's sole cost and expense Provided always that:

5.1.1  the trials are planned, organized and carried out solely by Astra
       and shall not interfere with trials conducted or to be conducted by
       or on behalf of Salix in connection with the Project; and

5.1.2  prior to the conduct of the trials, the clinical trial objectives
       and the clinical trial protocols are agreed in writing between Astra
       and Salix (such agreement not

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       to be unreasonably withheld or delayed and Provided Always that such
       agreement shall be deemed to have been given by Salix in the event
       that no response is received by Astra from Salix within 20 working
       days of receipt by Salix of any request from Astra for approval);
       and

5.l.3  Astra shall provide all medical resources and clinical trials
       monitors at its own cost and expense; and

5.l.4  Astra shall bear all the costs and expenses associated with such
       clinical trials including but without limitation the costs of
       documentation and administrative payments to trialists; and

5.l.5  Salix shall provide such supplies of finished capsules of Product to
       Astra as Astra may reasonably require for the conduct of such trials
       in accordance with Articles 12.4, 12.6, 12.7, 12.8, 12.9 and 13.5;
       and

5.1.6  Unless otherwise agreed by Salix, Astra shall use and promote the
       Trademark in connection with such trials,

5.2 In the event that any clinical trials are conducted by Astra pursuant to Article 5.1, Astra undertakes:

5.2.1  to keep Salix fully informed as to the conduct of such clinical
       trials and to provide to Salix full unrestricted access to such
       results; and

5.2.2  to permit Salix to use such results and to disclose the same to
       third parties in

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       connection with the use and sale of the Product in RoW.

Provided Always that Salix shall provide full unrestricted access to Astra to the results of any clinical trials and other studies conducted by Salix and/or any third party authorized by Salix or Glycyx (as defined in Article 23.1) in connection with the use and sale of the Product in the RoW.

6. COSTS AND FUNDING

6.1 Astra shall fund the total development cost for the Project with an amount of [*] Astra agrees to remit monies into Salix' bank account (details of which are set out below) in respect of such costs and expenses in accordance with Schedule 2 to this Agreement.

[*]

Provided Always that any payments, costs and expenses expressly stated in this Agreement to be the sole responsibility of Astra shall be paid over and above such [*] and such costs shall not be taken into account in calculating such maximum. It is understood that any monies [*] hereunder not paid by Astra on the date an approved NDA for the Developmental Product is granted by the FDA shall be remitted to Salix within 60 days after the date of such approval.

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

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6.2 Salix shall be solely responsible for funding or obtaining funding for any excess of the actual costs for completion of the Project above Astra's contributions as provided in this Agreement.

6.3 Salix shall be solely responsible for making all payments to all third parties working in the Project and Salix shall maintain detailed and accurate accounts and records in connection with all such payments.

6.4 Salix shall submit to Astra a summary of the accounts and records maintained by it in connection with the conduct of the Project on a calendar quarterly basis. The first summary of accounts and records shall be submitted to Astra three calendar months from the date of this Agreement. Salix shall allow Astra or its auditors or representative reasonable access during normal business hours to inspect the books of accounts of Salix in order to verify incurred costs in the Project. If such examination reflects an overpayment of five percent (5%) or more of the amount that should have been paid for during the period audited, then Salix will bear the expenses of the audit; otherwise Astra shall bear the expenses of the audit.

6.5 In the event that the actual costs incurred by Salix in the performance of the Project exceed the total amount under Article 6.1, Salix shall be solely liable for any excess costs incurred; Provided Always that in the event that Salix shall thereafter at any time (in its sole discretion) decide that it is unable or unwilling to incur expenses in excess of such amount and to complete the Project in accordance with the terms of this Agreement, it shall forthwith notify Astra in writing and Astra may at its sole option (exercised by 30 days notice in writing to Salix served within 90 days of receipt

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of any such notice from Salix) determine whether the Project shall be continued or discontinued, In Such event:

6.5.l  If Astra decides that the Project will be discontinued, this
       Agreement will be terminated automatically upon receipt of such
       notice by Salix. If Astra determines that the Project shall be
       continued and the NDA for the Developmental Product has been filed
       and the payment under Article 11.1.2 consequently has been made,
       Salix will continue to perform under this Agreement in accordance
       with a revised and agreed Schedule 2. Astra will make available
       additional funds in accordance with the agreed payment schemes under
       such revised Schedule 2 up to a maximum of the total amount not yet
       paid under Article 11.1.3. Any amount so used to complete the
       Project to an approved NDA for the Developmental Product shall be
       subtracted from what is to be paid by Astra under said Article
       11.1.3. Any remaining amount not so used will be payable in
       accordance with Article 11.1.3.

6.6 In the event that the actual cost incurred by Salix in the performance of the Project either exceeds the [*] funded by Astra as referred to in Article 6.1 and the total funds referred to under Article 6.5.1 or exceeds

the total amount under Article 6.1 and Article 6.5.1 is not applicable, and, in either case, Salix decides that it is unable or unwilling to incure expenses in excess of such amounts and to complete the Project, Salix shall forthwith notify Astra in writing. Astra may at its sole option (exercised by 30 days notice in writing to Salix served within 90 days of receipt of any such notice from Salix) either decide to discontinue or continue

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

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the Project. If Astra decides to discontinue the Project, this Agreement will be terminated automatically upon receipt of such notice by Salix. If Astra decides to continue the Project, Astra will assume all obligations in connection with the conduct and completion of the Project, the filing of the Dossier in accordance with Article 3 hereof and obtaining regulatory approval under Article 2.6; provided however, that Astra will do the NDA filing and will be the applicant and the following will apply:

6.6.1  The rights of Astra to distribute the Product under this Agreement
       will remain and for the avoidance of doubt payments under Article
       11.1 shall remain due and payable in accordance with the terms of
       such Article 11.1; and

6.6.2  The right of Astra to manufacture Product pursuant to Article 16
       shall be deemed to be granted pursuant to Article 16.2.2 thereof;
       and


6.6.3  Astra shall have no claims against Salix and Salix shall not be
       liable for any breach by it of its obligations to complete the
       Project in accordance with the terms of this Agreement; and

6.6.4  Astra may in its sole discretion supply information relating to or
       arising in the Project to third parties who are licensed to use the
       Patents to exploit the Product in the RoW but shall not be under any
       obligation to do so and such supply may be upon such terms as may be
       agreed between Astra and such third party.

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PART B - DISTRIBUTION

7 APPOINTMENT OF ASTRA

7.1 With effect from the date of this Agreement and in accordance with the terms and conditions contained in this Agreement, Salix hereby appoints Astra as its exclusive distributor for the Product within and throughout the U.S.

7.2 The rights granted hereunder to Astra shall be in respect of the Product only. In the event that either party shall become aware of any indications or applications for Balsalazide other than the Applications, it shall forthwith notify the other party and shall supply the other party with such details of the other indications and applications as may be available to it Provided Always That:

7.2.1 Astra shall have a first option to enter into good faith negotiations with Salix during the period six months from the supply of such details in respect of an agreement concerning the development of such other indications and applications and the grant to Astra of the right to exploit the same in the U.S.; and

7.2.2 Astra shall have no right whatsoever to use and exploit Balsalazide in any such other indications and/or applications unless and until completion of such good faith negotiations and the execution of a written agreement in respect thereof; and

7.2.3 During such period in which Astra shall continue to negotiate in good faith Salix shall not disclose details of such other

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indications and/or applications to any third party or grant any third party any rights therein in the U.S. provided that Salix shall not be prevented or precluded from disclosing the same to any third party which shall have entered good faith negotiations for the acquisition of the right to exploit such other indications and/or applications outside the U.S.; and

7.2.4 In respect of any such other applications and indications disclosed by Astra to Salix, Salix shall not use or exploit the same (either itself or through any third party) whether in the U.S. or elsewhere without the prior consent of Astra (such consent not to be unreasonably withheld or delayed); and

7.2.5 In respect of any such other applications and indications disclosed by Salix to Astra, Salix shall not use or exploit the same (either itself or through any third party) in the U.S. without the prior consent of Astra (such consent not to be unreasonably withheld or delayed).

8. REGULATORY APPROVALS

8.1 As stated in Articles 2.6 and 2.7 Salix undertakes to use all reasonable endeavors to file the Dossier and to apply for and obtain all relevant regulatory health approvals for the marketing and use of the Developmental Product in the U.S. as soon as reasonably practicable.

8.2 Astra undertakes to use all reasonable endeavors to effect Launch of the Product in the U.S. within

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90 days of the receipt of all necessary approvals for such Launch.

8.3 In the event that Astra shall fail to effect Launch in the U.S. within a period of 180 days after the grant of necessary registrations and approvals for such Launch, then Salix may in its absolute discretion serve written notice on Astra (within 30 days of the expiry of such period of 180 days) amending the rights of Astra granted hereunder to those of a non-exclusive distributor for the Product in the U.S. Thereafter Salix for the avoidance of doubt shall also be entitled to exploit such rights and to market and exploit the Product in the U.S. (whether directly or indirectly through any agent, contractor or licensee) in such manner as it may in its sole discretion think fit Provided Always that Astra will retain exclusive rights to use the Trademark in the U.S.

8.4 In the event that Astra's failure to effect Launch as stated in Article 8.3 exceeds a period of twelve months from the grant of all necessary registrations and approvals for such Launch, Salix may at its sole discretion serve written notice on Astra (within 90 days of the expiry of such period of twelve months) terminating this Agreement in full in accordance with Article 29.2. Thereafter Salix for the avoidance of doubt shall be entitled to exploit such rights and to market and exploit the Product in the U.S. (whether directly or indirectly through any agent, contractor or licensee) in such manner as it may in its sole discretion think fit free of any obligation to Astra and Astra shall have no rights with respect to Product or the Trademark in the U.S.

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9. PROMOTION, MARKETING AND SALE

9.1 Astra shall use reasonable endeavors to promote, market and sell the Product throughout the U.S. and undertakes to allocate such promotional and sales resources and such technical support for the promotion, marketing and sales of the Product as may reasonably be required to sell the Product. Astra agrees generally to use the same channels and methods, exercising the same diligence and adhering to the same standards which it employs with respect to its other products.

9.1.1 For the purposes of utilizing the support and competence of Salix in the most efficient way the parties have agreed to form the Advisory Committee, which will be comprised of two members from Salix and Astra respectively as determined by the parties separately. The Advisory Committee will primarily be responsible for the development of the strategy and promotional plans for the Product. It is envisaged that Salix will at its own expense agree to perform certain promotional activities such as symposias and medical, scientific and technical programs as specified by the Advisory Committee and accepted by Salix. The actions of the Advisory Committee will be governed by the principles of good faith. For the avoidance of doubt, Astra remains responsible for the promotion, marketing and sale of the Product and consequently Astra will always have the final say in all matters discussed by the Advisory Committee.

9.2 Astra shall promote, market and sell the Product in the U.S. entirely in accordance with the terms of

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any product license, price approval (if applicable), and other restrictions and regulations for the Product as may be relevant and applicable in the U.S.

9.3 Astra undertakes:

9.3.1  To promote, market and sell the Product solely in the U.S. under the
       Trademark only and not to use any other trade name, trademark or
       logo for or on the Product (Provided That the name "Balsalazide" may
       be used but only as a generic name for the Product in accordance
       with and as required by applicable laws and regulations); and

9.3.2  To enter into Trademark user agreements and such other agreements
       (whether relating to the Trademark, technical standards or
       otherwise) as may reasonably be required by Salix or as required by
       applicable regulations in connection with the promotion, marketing
       and sale by Astra of the Product and/or the use by Astra of the
       Trademark; and

9.3.3  To notify Salix immediately of any improper or wrongful use of the
       Trademark, the Patents or otherwise any proprietary or confidential
       information of Salix or Biorex relating to the Product coming to
       Astra's knowledge; and

9.3.4  Forthwith to refer to Salix all inquiries received for the supply of
       the Product outside the U.S.; and

9.3.5  Not to seek or sell to customers for the Product outside the U.S.;
       and

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9.3.6  To develop and design packaging for the Product in each part of the
       U.S. at its sole cost and expense and further that Astra agrees to
       state on packages containing the Product that such Product was
       manufactured by Salix Pharmaceuticals, Inc., Palo Alto, California
       and distributed by Astra USA, Inc. (provided that such wording is in
       compliance with U.S. laws and regulations); and

9.3.7  Not to use any misleading statements or misrepresentations on the
       Product packaging or use any defective packaging materials and to
       comply in all respects with all regulations and laws in connection
       with the Product packaging and the information provided thereon; and

9.3.8  In the sale, use and promotion of the Product in each part of the
       U.S. to comply with all relevant regulatory health and pricing
       regulations and approvals in the U.S. For the avoidance of doubt,
       Salix shall not be responsible or liable in any manner whatsoever
       for compliance with any such regulations and approvals (whether or
       not it shall have assisted Astra in or approved the sale or use of
       the Product in the U.S.); and

9.3.9  Not to use any packaging which may adversely affect the Product in
       any way whatsoever including but without limitation the Product's
       approved shelf-life; and

9.3.10 Not to incur any liability on behalf of Salix or in any manner pledge or purport to pledge Salix' credit or accept any order or

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make any contract binding on Salix or give or make any representation, warranties or conditions with reference to the Product on behalf of Salix. Astra is not and shall not be deemed to be the agent of Salix and in all correspondence and dealings with third parties shall not indicate that it is acting as an agent of Salix; and

9.3.11 To be solely responsible for the acts and omissions of its employees and representatives in connection with the performance of its rights and obligations hereunder; and

9.3.12 To purchase Product for sale in the U.S. solely from Salix during the term hereof (except as specifically provided in this Agreement).

9.4 Astra shall be entirely responsible for the collection of debts due to it and shall bear all losses owing to its failure so to do.

9.5 To the extent legal, practical and feasible, Astra and Salix shall agree on appropriate mentioning in promotional material that the Product has been developed in collaboration between Salix and Astra.

10. PRODUCT DATABASE AND ADVERSE REACTIONS REPORTING

10.1 Salix shall maintain a database of all adverse and other reactions or events occurring in connection with the Product in any part of the world except Japan, Taiwan and Korea and shall use reasonable endeavors to assure that any such adverse and other reactions are notified to it in a timely manner by any third party authorized by Salix or Glycyx (as defined in Article 23.1) who are licensed to use and

21 (53) exploit the Product in such countries.

10.2 Astra undertakes to notify Salix:

10.2.1 forthwith (or in any event in sufficient time to allow Salix to report such information in compliance with applicable regulations) in the event that it becomes aware of any serious adverse reactions (as defined by the FDA regulations) or contra indications to the Product; and

10.2.2 within three months (or in any event in sufficient time to allow Salix to report such information in compliance with applicable regulations) after it becomes aware of other adverse reactions, or contra indications to the Product other than stated under 10.2.1.

10.3 Salix undertakes to notify Astra:

10.3.1 forthwith (or in any event in sufficient time to allow Salix to report such information in compliance with applicable regulations) in the event that it becomes aware of any serious adverse reactions (as defined by the FDA regulations) or contra indications to the Product in any part of the world; and

10.3.2 within three months (or in any event in sufficient time to allow Salix to report such information in compliance with applicable regulations) after it becomes

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aware of other adverse reactions or contra indications to the Product other than stated under 10.3.1.

10.4 In the event that Salix or any third party authorized by Salix or Glycyx (as defined in Article 23.1) shall conduct clinical studies of the Product outside the U.S. in support of any promotional or marketing activities of Salix or such third party, Salix shall use reasonable endeavors to grant or procure the grant to Astra of full unrestricted access to the results of such trials so that Astra shall be entitled to use such results in connection with the marketing, sale and use of the Product in the U.S.

11. CONSIDERATION

11.1 In consideration of the rights hereby granted by Salix to Astra, Astra hereby agrees to pay to Salix a sum of [*] such sum to be nonrefundable and payable to Salix as follows:

11.1.1 [*]

11.1.2 [*]

11.1.3 [*]

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[*]

PART C - SUPPLY AND MANUFACTURE

12. SUPPLY OF PRODUCT

12.1 Astra shall notify Salix in writing of its forecast requirements for quantities of the Product (in the form of bulk filled capsules and including Product to be used as samples) and details of its proposals for Launch twelve months prior to its expected Launch. With such forecast Astra shall deliver a detailed forecast of its requirements for the Product for the twelve month period from the date of such notice. Thereafter, Astra shall, on a quarterly basis, deliver to Salix revised forecasts for the subsequent 12 month period commencing on the subsequent April 1st, July 1st, October 1st and January 1st respectively. Astra's ambition is to provide Salix with forecasts indicating Astra's expected requirements per month.

12.2 Salix shall fulfill all written orders placed on it by Astra for the Product in the form of bulk filled capsules, subject to the provisions of Article 12.3.

12.3 Whilst the forecasts delivered by Astra to Salix under Article 12.1 shall be non-binding and will not place any obligation on either Astra to order such quantities or Salix to deliver such quantities:

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12.3.1 Astra shall use all reasonable endeavors to estimate accurately in such forecasts its requirements for the Product; and

12.3.2 Astra shall ensure that all written orders are placed permitting a lead time for manufacturing of the Product of not less than 16 weeks; and

12.3.3 Astra acknowledges that Salix shall not be obliged to fulfil any firm written orders placed on it that may be in excess [*] of the last forecast quantities (in accordance with Article 12.1) for such period; and

12.3.4 Astra shall place written orders and accept delivery of quantities of the Product that are not less [*] of the last forecast quantities (in accordance with Article 12.1) for such period.

12.4 Salix shall supply Astra with such quantities of the Product as Astra may reasonably require (in bulk filled capsule form) for clinical trials undertaken by Astra hereunder. Astra shall endeavor to provide Salix with the maximum period of notice of such requirements and in any event shall place firm written orders on Salix therefore not less than 60 days before any requested delivery date, provided that failure of Salix to deliver sooner than within 90 days shall not constitute breach under this Agreement.

12.5 Salix shall supply Astra with such quantities of the Product in bulk filled capsule form as Astra shall reasonably require for use as product samples and as shall have been forecasted and ordered by Astra in accordance with Articles 12.1 and 12.3.

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12.6 Salix hereby warrants and undertakes that all quantities of the Product (in bulk filled capsule form) supplied by it to Astra under the terms of this Agreement shall as at the date of delivery be supplied fully in accordance with the Bulk Product Specifications and the Finished Product Specifications contained in Schedule 3 and shall have been manufactured in accordance with all applicable laws and regulations including FDA Good Manufacturing Practices, and in compliance with the Drug Master File for the Product.

12.7 Upon the receipt of any delivery of the Product from Salix, Astra shall test such Product (in accordance with the Quality Test Procedures to be agreed and incorporated into Schedule 4 to this Agreement after execution of this Agreement) and in the event that such Quality Test Procedures reveal any breach of the warranty given in Article 12.6, Astra shall be entitled to reject the full shipment of the Product within 45 days of receipt of such shipment by notice in writing to Salix. Failure of Astra to reject Product after such 45 day period shall constitute acceptance thereof by Astra.

12.8 In the event of any dispute between the parties concerning any allegation of breach of the warranty contained in Article 12.6 or concerning any rejection or purported rejection of any shipment of the Product, a sample quantity of the Product in question shall be delivered to an independent laboratory (nominated by the mutual agreement of the parties) which shall be supplied with copies of the Bulk Product Specifications, the Finished Product Specifications and the Drug Master File and shall carry out testing in accordance with the Quality Test Procedures and whose decision as to the quality of such Product and as to any breach of warranty by such Product shall, in the absence of manifest

26 (53)

error, be final and binding an the parties. The fees and expenses of such laboratory testing shall be borne entirely by the party against whom such findings are made.

12.9 The terms and conditions relating to the supply of the Product by Salix to Astra shall be as set out in this Agreement and each written order placed on Salix by Astra shall form a separate contract for the supply of the Product. In the event of any conflicting term between this Agreement and any order placed by Astra, this Agreement will apply.

13. PRICE

13.1 The price charged for the Product by Salix to Astra shall (save as provided in Article 12.4, 13.5 and 13.6) be established in US Dollars as follows:

13.1.1 The price for the Product shall be finally determined by the end of February of each calendar year for the preceding calendar year and shall equal [*]

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[*]

13.1.2 Until the price can be finally determined in accordance with Article 13.1.1 the Product will be supplied at provisional prices per unit as determined in good faith by Salix and Astra (at Launch and thereafter on January 1 of each year) based on historical figures, forecasts (including forecasted Net Sales for Product) and best estimates;

13.1.3 Any balance resulting from differences between the provisional and the final prices shall be settled by March 15 of the calendar year in which the final prices are established;

13.1.4 The parties confirm their understanding that they will at the latest three (3) months prior to Launch in good faith establish a "floor price" for the supply by Salix to Astra of the Product. It is understood that Salix will be under no obligation to supply the Product for commercial use hereunder at a price which is lower than such established floor price unless otherwise agreed.

13.2 In order to calculate the price charged by Salix to Astra pursuant to Article 13.1, Astra shall keep Salix informed of its best available estimate of the annual Net Sales which it reasonably considers will be obtained for the Product by Astra in the U.S.

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

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13.3 Astra shall keep full, proper and up-to-date books of account and records showing clearly all transactions relating to the calculation of the Net Sales. During the term of this Agreement, after Launch, Astra shall furnish to Salix on a quarterly basis a written report covering Astra's fiscal quarters showing the gross sales of all Product sold by Astra and/or any Astra Associates during the reporting period and the calculation of Net Sales from such gross sales. Reports shall be due forty-five (45) days following the close of each respective quarter.

13.4 Astra shall allow Salix or its auditors or representative reasonable access during normal business hours to inspect the books of account of Astra (or any Astra Associate) in order to verify the annual Net Sales of Product under this Article 13 Provided That such verification shall be at the sole cost and expense of Salix. If such examination however reflects an underpayment of five percent (5%) or more of the amount that should have been paid for the period audited, then Astra will bear the expense of the audit.

13.5 Salix shall provide such supplies of the Product to Astra as Astra may reasonably require for the conduct of clinical trials at cost to Salix (as specified in Article 13.6).

13.6 The Product supplied by Salix to Astra for the purpose of Product samples shall be supplied to Astra [*] for a period of [*] from the date of Launch Provided That:

13.6.1 The quantities so delivered in any one year shall not exceed [*] of the total aggregate units of Product sold by Astra in such year; and

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13.6.2 For the purpose of determining [*] it is understood that this shall include direct costs of material, labor and interest direct manufacturing overhead, and insurance and shipping costs, but shall not in any circumstances exceed [*] of such Product in the U.S. for such year (determined as if such Product had been sold by Astra at the average Net Sales price per unit of Product during such period); and

13.6.3 Articles 13.3 and 13.4 shall apply mutatis mutandis with respect to Salix for the purpose of verifying [*] prices charged;

Provided Further That for the avoidance of doubt Salix shall be entitled to charge and receive the price for Product calculated in accordance with Article 13.1 (as if such Product had been sold by Astra at the average Net Sales price per unit of Product during such period) in respect of any supplies of Product samples made after such [*] period or made during such
[*] period which are in excess of such [*] figure.

14. TERMS OF PAYMENT

14.1 Payment is strictly net cash to be paid to Salix within thirty (30) days from the date of invoice in US Dollars. Such payment shall be made in USD by express payment through the banking system into such bank account as Salix shall designate for such purpose.

14.2 If payment is not made as set out in Article 14.1 for any bulk delivery of the Product to Astra Salix

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reserves the right:

14.2.1 To charge interest to Astra at the lower of the rate of 2% (two per cent) per annum above the prime rate set by the Bank of America on all past due amounts (such interest to accrue on a day-to-day basis to the date of payment or the maximum interest allowable by law; and

14.2.2 To require payment in advance for any delivery of the Product made prior to receipt of such payment in full.

15. DELIVERY

15.1 Delivery of the Product to Astra by Salix shall be F.O.B. any continental U.S. manufacturing plant of Product (including Puerto Rico) or any port of entry into the continental U.S. (the "FOB Location").

15.2 Risk in the Product shall pass to Astra on delivery to the FOB Location and Astra shall be responsible for insuring the Product from the date of delivery to the FOB Location at its own cost and expense.

16. LICENSE TO MANUFACTURE

16.1 Save only in the circumstances set out below, Salix shall manufacture the Product and shall supply Astra with such quantities of the Product as it shall require (subject to the provisions of Article 12) and (save as expressly provided in this Article 16) Astra shall have no right, title or interest in any of the Patents or proprietary rights relating to the Product and is entitled to use the same only under the terms of this Agreement;

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16.2 In the event that Salix shall:

16.2.1 Be in breach of its obligations to supply the Product as specified in Article 12 and shall fail to remedy such breach within 90 days of written notice from Astra requiring remedy; or

16.2.2 Give Astra 180 days notice in writing of its intention to cease to supply Astra with the Product; or

16.2.3 By reason of Force Majeure be prevented from supplying the Product to Astra for a period exceeding 180 days;

Astra shall be entitled, by service of notice in writing to Salix forthwith upon receipt of such notice from Salix, to acquire a non-exclusive license to manufacture the Product. So manufactured Product may only be sold in the U.S. on an exclusive basis in accordance with the terms of this Agreement. Such license shall commence upon the effective date of such notice and shall be granted and continue upon the terms and conditions contained in Schedule 5.

16.3 In the event that during any period in which Salix shall fail to supply the Product to Astra by reason of;

16.3.1 any breach by Salix in respect of which notice shall have been served under Article 16.2.1; or

16.3.2 any Force Majeure notified by Salix to Astra under Article 16.2.3

Astra wishes to manufacture quantities of the

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Product to satisfy requirements for the Product in the U.S. Astra shall (by notice in writing to Salix) forthwith be entitled to a temporary license to manufacture the Product during such period only and Provided That:

16.3.3 Such license shall be upon the terms specified in Schedule 5; and

16.3.4 Such license shall permit manufacture by Astra of only such quantities of the Product as may reasonably be required to fulfill actual and reasonably anticipated orders on Astra for the Product during such period and a reasonable period thereafter.

16.4 In order to satisfy itself of its ability to manufacture the Product, Astra (or an Astra Associate) shall be entitled at any time during the term of this Agreement to effect one trial manufacture of bulk quantity of the Product Provided Always That:

16.4.1 Salix shall provide such assistance and technical information as Astra may reasonably require for such trial; and

16.4.2 Salix shall be entitled to attend and observe such trial; and

16.4.3 Such trial shall be conducted at the sole cost and expense of Astra and if such trial quantity is used by Astra for commercial purposes in the U.S., be entitled to charge Astra for the Product produced as if it were Product sold by Salix to Astra under this Agreement at a price calculated [*]

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILLED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

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obtained by Salix on the supply of Product under the terms of this Agreement, [*] in the U.S. (determined as if such Product had been sold by Astra at the average Net Sales price per unit of Product during such period) or such higher figure as Salix may show by documentary evidence [*].

16.4.4 Astra shall be solely responsible and liable for the quality of the Product produced in the trial and for all expenses necessary to register Astra as a supplier of Product in the U.S.; and

16.4.5 Astra shall be licensed to use the Patents and any intellectual property rights existing in the Product for such trial only and solely for purposes of sales in the U.S.; and

16.4.6 Astra shall not use all or any information received for the purpose of the trial for any other purpose whatsoever and shall not use the same after the trial unless and until a license to manufacture Product shall became effective under the terms of Articles 16.2 and 16.3; and

16.4.7 Upon the successful completion of Astra's trial manufacture under Article 16.4, Salix shall apply, at Astra's expense, for registration of Astra as a supplier of Product in the U.S. under the Drug Master File for the Product Provided Always That Astra shall not exercise any right as such a registered supplier unless and until a

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

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manufacturing license shall become effective under Articles 16.2 and 16.3.

PART D - TRADEMARK LICENSE

17. TRADEMARK LICENSE

17.1 Salix hereby grants to Astra a sole and exclusive license to use the Trademark on the Product and in connection with the marketing and commercialization of the Product in the U.S. only. Astra agrees to utilize the Trademark on all Product sold in the U.S. during the term of the trademark license granted hereunder.

17.2 Salix undertakes to procure the grant of such rights and license as may reasonably be required to give effect to Article 17.1 from the Trademark owner and shall use reasonable endeavors to obtain such owner's execution of such agreements as are referred to in Article 9.3.2.

17.3 Astra hereby confirms and acknowledges that it is licensed to use the Trademark only as set out in this Agreement and Astra further:

17.3.1 Acknowledges that all goodwill in the Trademark in the U.S. (whether or not generated by the activities of Astra under this Agreement) shall vest in such trademark owner as Salix shall identify; and

17.3.2 Acknowledges that any application for registration of the Trademark shall only be made in the name of such trademark owner as Salix shall identify; and

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17.3.3 Undertakes to transfer and assign to Salix (or as it may direct) any right, title or interest required by Salix for registration of the Trademark in any part of the U.S. in the name of such owner of the Trademark as Salix shall direct and for all goodwill in the U.S. to such owner.

17.4 In consideration of the rights and license granted to Astra by Salix in respect of the Trademark, Astra shall pay to Salix a license fee at the rate of [*] of all Product bearing the Trademark supplied by Astra (or any Astra Associate) to any third party. Such license fee shall commence on the date of this Agreement and shall continue to be payable for such period of time in which Astra shall continue to use the Trademark under the license hereby granted.

18. LICENSE PAYMENT

18.1 Astra shall keep true and accurate records of the sales of all Product manufactured by it pursuant to any license granted under Articles 16.2 and 16.3 and of all Product sold by it at any time bearing the Trademark and Astra shall within ninety (90) days of the end of each period of three months (such periods to end on March 31, June 30, September 30 and December 31) send Salix a full statement showing the calculation of all sums due and owing to Salix:

18.1.1 In respect of the manufacturing license under the provisions of Article 6 of Schedule 5; and

18.1.2 In respect of the Trademark License under the provisions of Article

and with such statement shall make payment in US Dollars by express payment through the banking

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

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system into such bank account as Salix shall designate for such purpose, of such sum as is shown as due on the statement.

18.2 Astra shall allow Salix or its auditors or representative reasonable access during normal business hours to inspect the books of account of Astra or any Astra Associate in order to verify the accuracy and calculation of any statements delivered under Article 18.1 Provided That such verification shall be at the sole cost and expense of Salix. If such examination however reflects an underpayment of five percent (5%) or more of the amount that should have been paid for the period audited, then Astra will bear the expense of the audit.

18.3 Interest shall be payable to Salix by Astra at the lower of the rate of two percent (2%) above the prime lending rate set by the Bank of America from time to time or the maximum interest allowable by law on all on all past due amounts payable by Astra to Salix under the provisions of this Article 18, both before and after judgement.

PART E - MISCELLANEOUS

19. INDEMNIFICATION

19.1 Salix hereby agrees to indemnify Astra against any action, claim, loss and damage suffered by or awarded against Astra (as well as attorney's fees and defense costs) in connection with any claim against Astra from a third party arising from any statement or presentation with respect to the Product or Balsalazide made by Salix or its authorized agents or employees (excluding Astra or any Astra Associate) which is inconsistent,

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contradictory or misleading to the information of or for the Product included in the package insert for Product, or from any breach by Salix (or its subcontractors or nominees) of the warranty and undertaking contained in Article 12.6 Provided Always That such indemnity shall not extend to any liability, cost, expense or damage suffered or incurred by reason of any defect in any Product which was detected or should have been detected by Astra by means of the Quality Test Procedures applied (or which should have been applied) by Astra within 45 days of the date of delivery of the Product under the provisions of Article 12.7.

19.2 Astra undertakes to indemnify and hold Salix harmless against all and any action, loss, damage, claim or liability (including Attorney's fees and defense costs) suffered or incurred by Salix in any circumstances whatsoever save only where Salix is liable under Article 19.1.

20. CONFIDENTIAL INFORMATION

20.1 Astra hereby agrees and undertakes that during the application of this Article 20 and for a period of ten years thereafter (howsoever termination may be caused or arise) Astra and any Astra Associate shall keep confidential and shall not without the prior written consent of Salix disclose to any third party or use (except as specifically provided in this Agreement) any information of a confidential nature belonging to Salix or Biorex (including without limitation trade secrets and information of commercial value) which may become known to Astra from Salix in connection with this Agreement Provided Always That such obligation of confidentiality shall not extend to any part of such confidential information which:

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20.1.1 Shall otherwise than by reason of any default by Astra or any Astra Associate become freely available to the general public; or

20.1.2 Astra can show by documentary evidence was in its possession or control prior to disclosure free of any obligation of confidentiality; or

20.1.3 Astra can show by documentary evidence shall have come into the possession or control of Astra from a third party free of any obligation of confidentiality subsequent to disclosure hereunder; or

20.1.4 Astra is obliged by law or regulation to disclose to a third party provided that such disclosure shall only be to the extent required by such law or regulation.

20.1.5 Astra or any Astra Associate is authorized to use under separate agreements with Biorex or its licensees, provided however that any such use shall be governed by and limited to what is stated in such agreements.

and Provided Further that in the event that this Agreement is terminated by Salix, Astra shall forthwith cease any use of such information for any purpose whatsoever.

20.2 Astra shall ensure that any employee of, or consultant to, Astra or any Astra Associate who shall obtain any confidential information in connection with the performance of this Agreement shall be bound by obligations of confidentiality substantially similar to the provisions of Article

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20.1.

20.3 Salix acknowledges the importance of keeping all material information relating to the Product confidential and Salix will use all reasonable endeavors to make sure that no such information is made public or otherwise made available to third parties in any manner which would jeopardize the exclusivity in the U.S. granted to Astra hereunder.

21. INTELLECTUAL PROPERTY

21.l Salix hereby represents and warrants to Astra as at the date of this Agreement (with the intent that Astra has relied upon such representations and warranties in entering into this Agreement) that:

21.1.1 The Biorex Agreement (which has been disclosed to Astra) contains all the terms concerning the arrangements between Biorex and Salix affecting the U.S. and that there is no other fact or circumstance relating to the Biorex Agreement that is material to the Project and/or this Agreement and which might reasonably be expected to affect the decision of Astra to enter into this Agreement which has not been disclosed to Astra by Salix; and

21.1.2 Biorex is the sole legal owner of the Patents listed in Schedule 1; and

21.1.3 So far as Salix is aware the issued Patents are valid and subsisting; and

21.1.4 So far as Salix is aware and save as indicated therein the Product Information is accurate and complete in all material

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respects and there is nothing contained therein which might render the Product Information misleading in any material respect; and

21.1.5 Except as disclosed in writing to Astra, so far as Salix is aware the Trademark is available for use in connection with the Product in the U.S. and does not infringe the rights of any third party;

Provided Always That Salix shall not be liable in any respect for any breach of the warranties contained in Articles 21.1.1 and 21.1.5 unless notice in writing specifying details of such breach shall have been served on Salix by Astra prior to the twelfth anniversary of the date of this Agreement.

21.2 Astra acknowledges that save as expressly provided herein or as may be required in connection with the performance by Astra of any obligations hereunder, Astra shall have no right, title, interest or license in or to the Patents or otherwise any intellectual property rights of Biorex or Salix in Balsalazide, the Trademark or the Product, including without limitation the results of the Project.

21.3 In the event that either party becomes aware of any infringement by any third party within the U.S. of any intellectual property rights of Salix and/or Biorex in the Patents, Balsalazide, the Product or the Trademark it shall forthwith notify the other party. Salix shall be entitled to take such action (or procure such action by Biorex) as it may in its sole discretion consider appropriate against any such third party infringer Provided Always That:

21.3.1 Astra shall give such assistance as Salix

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may reasonably require in connection with any such action (subject to reimbursement by Salix of all costs reasonably incurred by Astra); and

21.3.2 Salix shall keep Astra informed of the conduct and progress of such action but shall be entitled to conduct, pursue and settle such action in such manner as it shall reasonably consider appropriate and to retain any damages awarded against any such infringer;

In the event that such infringement shall continue for a period of sixty
(60) days after Salix has knowledge of the infringement and Salix shall fail to take or procure any action to prevent any continued infringement Astra may (in its sole discretion) at its sole expense initiate and pursue such action as it considers appropriate to prevent any continued infringement Provided Further That:

21.3.3 Salix shall give (and shall use reasonable endeavors to procure from Biorex) such assistance as Astra may reasonably require in connection with any such action (subject to reimbursement by Astra or all costs reasonably incurred by Salix and/or Biorex); and

21.3.4 Astra shall keep Salix informed of the conduct and progress of such action but shall be entitled to conduct, pursue and settle such action in such manner as it shall reasonably consider appropriate (having regard to the continuing value of any such intellectual property rights to Salix and/or Biorex and the effect which any such infringement shall have had or will have on the sale in the U.S. by

Astra

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of the Product) and to retain any damages awarded against any such infringer.

21.4 In the event that any claim is made against Astra by any third party alleging infringement of any rights of any third party by the use and exploitation of the Product by Astra, Astra shall be entitled at its sole cost and expense to defend any such claim in such manner as it may in its sole discretion consider appropriate Provided Always That:

21.4.1 Salix shall give (and shall use reasonable endeavors to procure from Biorex) such assistance as Astra may reasonably require in such action (subject to reimbursement by Astra of all costs reasonably incurred by Salix and/or Biorex); and

21.4.2 Astra shall keep Salix informed of the conduct and progress of such action but shall be entitled to conduct, pursue and settle such action in such manner as it shall reasonably consider appropriate (having regard to the continuing value of any such intellectual property rights to Salix and/or Biorex and the effect which any such infringement shall have had or will have on the sale in the U.S. by Astra of the Product) and to retain any damages awarded against such infringer; and

21.4.3 Save only for any liability arising by reason of any breach by Salix of the warranties contained in Article 21.1, Salix shall not be liable in any manner whatsoever to Astra for any loss or damages suffered incurred or awarded against Astra in connection with any such claim.

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22. SUB-DISTRIBUTORS AND SUB-LICENSEES

22.1 Astra is hereby granted the right to appoint subdistributors for the Product Provided Always That

22.1.1 Astra shall remain solely liable for the performance of its obligations hereunder; and

22.1.2 Any sub-distributor appointed shall only be an Astra Associate.

23. ASSIGNMENT

23.1 The benefit of this Agreement is personal to Astra and Salix and shall not be capable of assignment by either of them without the prior consent in writing of the other party (such consent not to be unreasonably withheld or delayed). Salix may however assign this Agreement to its associated company, Glycyx Pharmaceuticals Ltd. a company incorporated under the laws of Bermuda with its registered office at 41 Ceder Avenue, Hamilton, HM 12, Bermuda ("Glycyx").

24. FORCE MAJEURE

24.1 If the performance of any obligations under this Agreement by either party is affected by Force Majeure, it shall forthwith notify the other party of the nature and extent thereof.

24.2 Neither party shall be deemed to be in breach of this Agreement or otherwise be liable to the other by reason of any delay in performance or nonperformance of any of its obligations hereunder to the extent that such delay or nonperformance is due to any Force Majeure which has been notified to the other party in writing.

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25. COSTS

25.1 Each party hereto shall bear its own costs in relation to the negotiation, drafting, preparation and execution of this Agreement.

25.2 All payments made by Astra to Salix under this Agreement shall be made free and clear of, and shall shall not be reduced or offset by any non-U.S. withholding taxes, which shall be the sole responsibility of Astra. Astra shall make all such required payments and shall provide Salix with a certificate evidencing payment of any such withholding tax.

26. CONFIDENTIALITY OF THIS AGREEMENT

26.1 The content of this Agreement shall remain confidential as between the parties. Neither party shall, without the prior written consent of the other (such consent not to be unreasonably withheld without justification), disclose any of the financial terms of this Agreement to any other person, firm or company save for:

26.1.1 disclosure by Salix to Biorex, Glycyx or proposed investors in circumstances where such third party shall have accepted obligations of confidentiality in respect of the information disclosed; and

26.1.2 such disclosure as may be required by any relevant law or regulatory authority.

27. NATURE OF THE AGREEMENT

27.1 Nothing in this Agreement shall create or be deemed to create any partnership, joint venture or the relationship of principal and agent between the

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27.2 EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT, SALIX MAKES NO REPRESENTATION OR WARRANTY AS TO THE PRODUCTS, EXPRESS OR IMPLIED, EITHER IN FACT OR BY OPERATION OF LAW, BY STATUTE OR OTHERWISE, AND SALIX SPECIFICALLY DISCLAIMS ANY AND ALL IMPLIED OR STATUTORY WARRANTIES, INCLUDING WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY OR WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE.

27.3 EXCEPT AS PROVIDED IN THIS AGREEMENT, IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR COSTS OF PROCUREMENT OF SUBSTITUTE PRODUCTS OR SERVICES, OR FOR ANY LOST PROFITS OR OTHER CONSEQUENTIAL, INCIDENTAL, SPECIAL, OR INDIRECT DAMAGES OF THE OTHER PARTY, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY, ARISING OUT OF THIS AGREEMENT. THESE LIMITATIONS SHALL APPLY NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY.

27.4 This Agreement (including all the Schedules) and any agreements entered into pursuant to this Agreement constitutes the entire understanding and agreement between the parties with respect to the subject matter of this Agreement and supersedes all prior agreements, negotiations and discussions between the parties relating to this Agreement.

27.5 This Agreement may not be released, discharged, abandoned, charged or modified, in any manner, except by an instrument in writing signed by a duly authorized officer of representative from each of the parties hereto.

27.6 Dispute Resolution; Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the state of New York, excluding any choice of law rules which may direct the

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application of the law of any other jurisdiction. In the event of the occurrence of a dispute relating to a party's rights or obligations hereunder, either party may, by notice to the other party, have such dispute referred to their respective President or other designee, for attempted resolution by good faith negotiations within thirty (30) days after such notice is received. All such disputes shall be addressed in English. In the event such officers are not able to resolve such dispute within such thirty (30) day period, the parties agree that the dispute will be submitted to binding arbitration which shall be in accordance with the Commercial Arbitration Rules of the American Arbitration Association. Any arbitration or litigation initiated hereunder shall be (i) held in Santa Clara County, California if the demand for arbitration or litigation is initiated by Astra and (ii) held in Boston, Massachusetts if the demand for arbitration or litigation is initiated by Salix. In the event of arbitration, there shall be three (3) arbitrators, one (1) chosen by Astra, one chosen by Salix and a third to be selected by the two arbitrators so chosen. The costs of arbitration including reasonable attorney's fees, shall be borne by the party designated by the arbitrators. For the purpose of accepting service of process in connection with any action commenced hereunder, the parties hereto hereby absolutely, unconditionally and irrevocably appoint the following agents to accept process on their behalf; it being unconditionally agreed that for this purpose such process will be properly and effectively served if the same is left at the addresses set out below:

Astra:    Astra USA, Inc.
          50 Otis Street
          Westboro, MA 01581 USA
          F.A.O. President

                                                                    47 (53)


Salix:    Salix Pharmaceuticals, Inc.
          3600 W. Bayshore Road, Suite 205
          Palo Alto, CA 94303 USA
          F.A.O. President

28. NOTICES

28.l All Notices to be served by the parties to this Agreement shall be served only in the English language.

28.2 Notices shall be sufficiently served if dispatched by first class or express post (meaning the fastest normal method of mail transmit in the country of dispatch) to the address of the receiving party set out below

Astra:    AB Astra
          S-151 85 Sodertalje
          Sweden
          F.A.O. Vice President Legal Affairs

copy to:  Astra USA, Inc.
          50 Otis Street
          Westboro, MA 01581 USA
          F.A.O. President

Salix:    Salix Pharmaceuticals, Inc.
          3600 W. Bayshore Road, Suite 205
          Palo Alto, CA 94303 USA
          F.A.O. President

Any modification to these address must in itself be notified in writing to the other party in accordance with the terms of this sub-clause.

28.3 In the absence of proof to the contrary and subject to Article 28.4, notices properly sent hereunder shall be deemed to have been duly served 10 days after the date of dispatch.

28.4 It shall be permitted for notices to be served hereunder by facsimile transmission and for this purpose the following fax numbers below shall apply:

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28.4.1 In the case of Salix at 3600 Bayshore Road, Suite 205, Palo Alto, CA 94303, USA facsimile transmission number (415) 856-1555 and marked for the attention of the President; and

28.4.2 In the case of Astra at S-151 85 Sodertalje, Sweden facsimile transmission number (8) 55 32 90 00 and marked for the attention of Vice President Legal Affairs with copy to 50 Otis Street, Westboro, MA 01581, USA facsimile transmission number (508) 366-7406 and marked for the attention of the President;

provided that such notice is confirmed by return facsimile and shall be deemed served 24 hours after the time of receipt of such return facsimile.

PART F - TERMINATION AND EFFECTS THEREOF

29. TERMINATION

29.1 Unless terminated earlier as set forth in this Agreement, the rights and obligations of the parties contained in Articles 2-16 and 21-31 shall cease forthwith upon the later of (i) the date of expiry of the validity of the last to expire of the Patents (including any exclusivity extension for the Product in the U.S. granted by or through the FDA or applicable governmental body), or (ii) nine (9) years from the Launch of Product Provided Always That:

29.1.1 The Trademark License granted under Article 17 shall continue thereafter in accordance with its terms and Article 18 will remain valid with respect to Article 17; and

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29.1.2 Any license granted to Astra to manufacture under Article 16.2 shall continue indefinitely thereafter in accordance with Article 6.4 of Schedule 5; and

29.1.3 Astra is entitled to continue to sell the Product indefinitely thereafter.

29.1.4 Salix is free to manufacture and sell the Product in the U.S. indefinitely thereafter to any party.

29.2 Either party to this Agreement shall be entitled to terminate this Agreement forthwith by notice in writing to the other in the event that:

29.2.1 The other party shall fail to pay any sum due hereunder on the due date and shall fail to remedy such breach within thirty (30) days of being required in writing by the other party so to do; or

29.2.2 The other party shall commit a material breach of any of the terms and conditions of this Agreement and shall fail to remedy the same (if capable of remedy) within ninety (90) days of being required in writing by the other party so to do; provided that such right of termination shall not arise in the event of any breach by Salix of its obligations under Article 12 which circumstance is governed by the provisions of Article 16 only; or

29.2.3 The other party goes into liquidation (either voluntary or compulsory or shall be the subject of any petition for winding up;

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29.2.4 The other party shall make any assignment or arrangement for the benefit of its creditors or cease to carry on its business in the ordinary course; or

29.2.5 A receiver, administrative receiver, or receiver and manager, or judicial manager or administrator is appointed over the whole or any part of the assets of either party or if any court proceedings are commenced for the appointment of an administrator or receiver to either party; or

29.2.6 The other party shall become unable to pay its debts as they become due in the ordinary course of business or shall otherwise become subject or seek relief under any law relating to insolvency in any jurisdiction relevant to such other party; or

29.2.7 The party serving such notice shall have served notice of termination on such other party under the provisions of Article 29.2 provided that in the event that Astra assumes all obligations in connection with the conduct and completion of the Project in accordance with Article 6.5 or 6.6, no event referred to in such Article 6.5 or 6.6 shall constitute grounds for breach under this Agreement.

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29.3 Any waiver by either party of a breach of any provision of this Agreement shall not be considered as a waiver of any subsequent breach of the same or any other provisions of this Agreement.

29.4 Any termination of this Agreement shall be without prejudice to the right of either party to recover any monies due to it under this Agreement or the rights or remedies of either party in respect of any breach prior to the effective date of termination of this Agreement.

29.5 Salix undertakes that during the term of this Agreement it shall not exercise any right which it may have (or may acquire) to terminate the Biorex Agreement without prior consultation with Astra and without taking such action as may be appropriate to ensure that the rights granted to such other hereunder are not prejudiced to any material extent.

30. CONSEQUENCES OF TERMINATION

30.1 In the event of termination of this Agreement under Article 29.2 by Salix or as provided in Articles 6.5.1 or 6.6, prior to its expiry under Article
29.1 Astra shall:

30.1.1 Forthwith, cease all marketing, sale and promotion of the Product; and

30.1.2 Immediately telegraphically transfer all monies due and payable to Salix as at the date of termination into Salix's bank account designated under Article 14.1; and

30.1.3 Immediately return to Salix all information and data of whatsoever nature relating to the Product together with all copies thereof (other than correspondence between

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Salix and Astra) which Astra may have in its possession or under its control including but without limitation all scientific, medical and safety data relating to the Product; and

30.1.4 Immediately cease use of (i) all or any confidential information of Salix delivered in connection with this Agreement and (ii) the Trademark; and

30.1.5 Take all such steps as may reasonably be required to transfer or procure the transfer to Salix (or its nominee) of all such product licenses and approvals as may have been obtained for the marketing and sale of the Product in any part of the U.S.; and

30.1.6 Salix shall purchase such stocks of the Product (inclusive of packaging) as Astra shall still have in its possession (once Astra has fulfilled all orders outstanding as at the date of termination) at a price calculated as cost price to Astra Provided That Salix shall not be obliged to purchase any of the stocks of the Product which do not have at least two thirds of its approved shelf-life unexpired or are otherwise not of merchantable quality.

30.2 In the event of termination of this Agreement under Article 29.2 by Astra prior to its expiry under Article 29.1, the rights and obligations of Astra shall be as provided by the terms of the Biorex/Astra Agreement.

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PART G - ASTRA OPTION

31. ASTRA OPTION

Astra will have a first right of refusal to obtain U.S. marketing rights to gastrointestinal products for which Salix has obtained such rights from a third party and where Salix chooses not to assume the sole and exclusive responsibility for marketing.

Salix will submit to Astra a proposal including commercial terms and technical information sufficient for Astra to make an informed decision. Astra will have exclusive rights to evaluate and negotiate with Salix for the following 6 months and during which time Salix will negotiate in good faith. Upon expiration of 6 months, Salix can contract with third parties but at terms no less favorable than those last offered by Astra.

For gastrointestinal products which Salix obtains as a result of its own internal research and development efforts, Salix agrees to discuss these products first with Astra with the intention of initiating a business discussion.

This Agreement has been duly executed by the duly authorized representatives of the parties hereto effective as of the day and year first above written.

SALIX PHARMACEUTICALS INC           AB ASTRA

By:  /s/ Randy Hamilton             By: /s/ signature unreadable

Title: President                    Title: President & CEO

EXHIBIT A

DATED April 30 1993

BIOREX LABORATORIES LIMITED (1)

- and -

AB ASTRA (2)

AGREEMENT

TABLE OF CONTENTS

                                                            Page
                                                            ----

 1. Definitions............................................   1

 2. Commencement...........................................   3

 3. Appointment of Astra...................................   4

 4. Regulatory Approvals...................................   5

 5. Astra's Undertakings...................................   6

 6. Product Database and Adverse Reactions Reporting.......   7

 7. Clinical Trials and Developments.......................   8

 8. Licence to Manufacture.................................   9

 9. Trademark Licence......................................  10

10. Licence Payment........................................  11

11. Product Liability......................................  12

12. Confidential Information...............................  12

13. Intellectual Property..................................  13

14. Sub-Distributors.......................................  14

15. Termination............................................  14

16. Consequences of Termination............................  15

17. Assignment.............................................  16

18. Force Majeure..........................................  16

19. Costs..................................................  17

20. Confidentiality of This Agreement......................  17

TABLE OF CONTENTS - (Cont.)

                                                            Page
                                                            ----


21. Nature of the Agreement...............................   17

22. Notices...............................................   18

THIS AGREEMENT is made the 30th day of April, 1993

BETWEEN:

(1) BIOREX LABORATORIES LIMITED, a company incorporated under the laws of England and Wales having its registered office at 2 Crossfield Chambers Gladbeck Way Enfield Middlesex EN2 7HT ("Biorex"); and

(2) AB ASTRA, a company incorporated under the laws of Sweden whose principal place of business is at Kvarnbergagatan 16 S-151 85 Sodertalje Sweden ("Astra").

WHEREAS: (A) Salix Pharmaceuticals, Inc., a company incorporated under the laws of California and whose registered office is at 3600 W. Bayshore Road, Palo Alto, CA 94303 ("Salix") and Biorex have entered into a License Agreement dated as of January 17, 1991, as amended and restated by an agreement of even date herewith. The January 17, 1991 Agreement, as amended, is referred to in this Agreement as the "Biorex/Salix Agreement."

(B) By a Co-Participation Agreement of even date herewith between Salix and Astra (the "Salix/Astra Agreement"), Salix has entered into arrangements with Astra concerning further research and development of the pharmaceutical product licensed to Salix by Biorex, and Salix has sub- licensed certain of the rights granted to it by Biorex under the terms of the Biorex/Salix Agreement to Astra for a defined territory.

(C) Astra wishes to ensure that its rights to manufacture and distribute such pharmaceutical product will not be prejudiced by any action by Salix or circumstances which might give Biorex rights to terminate the Biorex/Salix Agreement or by any termination by Astra of the Salix/Astra Agreement and Biorex and Astra have agreed to enter into this Agreement upon the terms and conditions hereof.

NOW IT IS HEREBY AGREED as follows:

1. DEFINITIONS

1.1 In this Agreement the following words shall have the following meanings:

"Applications"      means the treatment of Diseases of Digestive System
                    according to WHO classification of diseases Class 52.

"Astra Associate"   means any company which is a holding company of Astra
                    or a subsidiary of Astra and any other subsidiary of
                    any such holding company or subsidiary and for this
                    purpose a company

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                     shall be deemed to be a "subsidiary" of another if that
                     other is a member of it and controls the composition of
                     its board of directors.

 "Balsalazide"       means 5-[4(2-carboxyethylcarbamoyl)-phenylazo]-
                     salicylic acid disodium salt dihydrate.


 "Biorex/Salix
 Agreement"          means the agreement dated January 17, 1991 between
                     Salix and Biorex, as amended and restated by an
                     agreement of even date to this Agreement.

 "Salix/Astra
 Agreement"          means the Co-Participation Agreement of even date to
                     this Agreement between Salix and Astra.

 "Dossier"           shall mean the master regulatory dossier relating to
                     the Product prepared under and in accordance with the
                     terms of the Salix/Astra Agreement.

 "Excluded
 Territory"          the entire world excluding the Territory, Japan, Korea
                     and Taiwan.

"Factory Sale Price" means the ex factory sales price of each Product
                     actually charged by Astra (or any Astra Associate) for
                     each shipment of Product on an arms length open market
                     basis to any third party (being a person firm or
                     company which is not an Astra Associate) net only of
                     sales and purchase taxes, customs or import duties,
                     delivery charges, and returns and allowances. discounts
                     and chargebacks actually charged on each such shipment.

 "Filing Date"       means the date upon which the Dossier (completed in
                     accordance with the terms of die Salix/Astra Agreement)
                     shall be submitted by Salix for registration within the
                     U.S. under Clause 2.6 of the Salix/Astra Agreement.

 "Force Majeure"     means in relation to either party any circumstances
                     beyond the reasonable control of that party (including
                     but not limited to strike, lock out or other form of
                     industrial action, act of God, war, riot, accident,
                     breakdown in plant or machinery, fire, flood, explosion
                     or government action).

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 "Salix"            means Salix Pharmaceuticals, Inc.. a company
                    incorporated under the laws of California and whose
                    registered office is at 3600 W. Bayshore Road, Palo
                    Alto, California 94303.

"Launch"            means a commercial launch by Astra (or any Astra
                    Associate) of the Product throughout the Territory
                    supported by such marketing expense and support and
                    launched in such quantities as may reasonably be
                    appropriate for the Product to have a significant
                    effect on total sales of any similar or competitive
                    product.

"the Patents"       means the patents and applications therefor relating to
                    Balsalazide listed in Schedule 1 to the Salix/Astra
                    Agreement.

"Product"           means a pharmaceutical preparation in capsule form
                    containing Balsalazide for the Applications and such
                    other pharmaceutical preparations containing
                    Balsalazide for the Applications as may be developed by
                    Salix during the term of the Salix/Astra Agreement or
                    by Biorex during the term of this Agreement.

the "Territory"     means the United States of America, its territories and
                    possessions.

the "Trade Mark"    means the trade name "Colazide" registered as a
                    trademark for use on pharmaceutical preparations in the
                    Territory and any other tradename designated by Biorex
                    for use in connection with the Product in any part of
                    the Territory.

1.2 The headings in this Agreement are for convenience only and shall not affect its interpretation.

1.3 References to documents in the approved form shall be references to documents in the form agreed between the parties and initialled by both parties for the purposes of identification.

2. COMMENCEMENT

2.1 The rights and obligations of the parties under this Agreement shall only come into force if either:

2.1.1 Biorex terminates the Biorex/Salix Agreement in accordance with its terms; or

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2.1.2 Astra terminates the Salix/Astra Agreement pursuant to Clause 29.2 thereof and consequently Biorex terminates the Biorex/Salix Agreement in accordance with its terms.

2.2 For the avoidance of doubt Biorex shall not be liable to Astra or incur any obligation to Astra for any act or omission of Salix in respect of the Salix/Astra Agreement.

2.3 Any payments which would otherwise have become payable to Salix pursuant to Clause 11.1.3 of the Salix/Astra Agreement but which have not at the date of termination of the Biorex/Salix Agreement or at the date of termination of the Salix/Astra Agreement (as the case may be) in accordance with Clause 2.1 above become due and payable to Salix shall be paid directly to Biorex by Astra.

3. APPOINTMENT OF ASTRA

3.1 With effect from the date this Agreement comes into force pursuant to Clause 2.1 and in accordance with the terms and conditions contained in this Agreement, Biorex hereby grants Astra an exclusive licence to sell within and throughout the Territory Product manufactured in the Territory by Astra pursuant to the licence granted in Clause 8.1. Astra shall not have the right to grant sublicenses under this license or pursuant to the Salix/Astra Agreement, except to an Astra Associate.

3.2 The rights granted hereunder to Astra shall be in respect of the Product only. In the event that either party shall become aware of any indications or applications for Balsalazide other than the Applications, it shall forthwith notify the other party and shall supply the other party with such details of the other indications and applications as may be available to it Provided Always That:

3.2.1  Astra shall have a lint option to enter into good faith negotiations
       with Biorex during the period six months from the supply of such
       details in respect of an agreement concerning the development of
       such other indications and applications and the grant to Astra of
       the right to exploit the same in the Territory; and

3.2.2  Astra shall have no right whatsoever to use and exploit Balsalazide
       in any such other indications and/or applications unless and until
       completion of such good faith negotiations and the execution of a
       written agreement in respect thereof; and

3.2.3  during such period in which Astra shall continue to negotiate in
       good faith, Biorex shall not disclose details of such other
       indications and/or applications to any third party or grant any
       third party any rights therein in the Territory; provided that
       Biorex shall not be prevented or precluded from disclosing the same
       to any third party which shall have entered good faith negotiations
       for the

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       acquisition of the right to exploit such other indications and/or
       applications outside the Territory; and

3.2.4  in respect of any such other applications and indications disclosed
       by Astra to Biorex of which Biorex was not already aware at the time
       of such disclosure (as evidenced by its written records), Biorex
       shall not use or exploit the same (either itself or through any
       third party) in the Territory without the prior consent of Astra
       (such consent not to be unreasonably withheld or delayed).

4. REGULATORY APPROVALS

4.1 Astra shall not be able to exercise its rights hereunder unless and until the Dossier shall have been completed and is available for filing with the relevant regulatory authority in the Territory.

4.2 Astra undertakes to use all reasonable endeavours to file the Dossier and to apply for and obtain all relevant regulatory health and price approvals for the marketing and use of the Product in the Territory as soon as reasonably practicable after the Filing Date.

4.3 Astra undertakes to use its best endeavours to apply for and obtain all relevant regulatory health and price approvals for the marketing and use of the Product in the Territory and to effect Launch of the Product in the Territory within 90 days of the receipt of all necessary approvals for such Launch.

4.4 Astra shall be solely responsible for effecting (at its sole cost and expense) such amendments and translations to the Dossier as may be required to procure that the Dossier complies with and satisfies the requirements of any regulatory or approval authority within any particular part of the Territory and Biorex shall not be obliged to incur any cost or conduct any further test or development work or otherwise amend or translate the Dossier whether before or after the Filing Date.

4.5 In the event that Astra shall fail to effect Launch in the Territory within a period of 180 days after the grant of all necessary registrations, approvals, price approvals, and reimbursements, then Biorex may in its absolute discretion serve written notice on Astra (within 30 days of the expiry of such period of 180 days) amending the rights of Astra to be granted hereunder in respect of the Territory to those of a non-exclusive distributor for the Product for the Territory only. Thereafter Biorex for the avoidance of doubt shall also be entitled to exploit such rights and to market and exploit the Product in the Territory (whether directly or indirectly through any agent, contractor or licensee) in such manner as it may in its sole discretion think fit; Provided Always that Astra will retain exclusive rights to use the Trade Mark in the Territory.

4.6 In the event that Astra's failure to effect Launch as stated in Clause 4.5 exceeds a period of twelve months from the grant of all necessary registrations, approvals, price

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approvals and reimbursements in the Territory, Biorex may at its sole discretion serve written notice on Astra (within 90 days of the expiry of such period of twelve months) terminating all rights granted hereunder to Astra in respect of the Territory only and thereafter Biorex for the avoidance of doubt shall be entitled to exploit such rights and to market and exploit the Product in the Territory (whether directly or indirectly through any agent, contractor or licensee) in such manner as it may in its sole discretion think fit, free of any obligation to Astra; and Astra shall have no rights with respect to the Product or the Trade Mark in the Territory.

5. ASTRA'S UNDERTAKINGS

5.1 Astra shall use reasonable endeavours to promote, market and sell the Product throughout the Territory and undertakes to allocate such promotional and sales resources and such technical support for the promotion, marketing and sales of the Product as may reasonably be required to sell the Product. Astra agrees generally to use the same channels and methods, exercising the same due diligence and adhering to the same standards which it employs with respect to its other products.

5.2 Astra shall promote market and sell the Product in the Territory entirely in accordance with the terms of any product licence, price approval (where applicable) and other restrictions and regulations for the Product as may be relevant and applicable within the Territory.

5.3 Astra further undertakes:

5.3.1  to promote, market and sell the Product in the Territory under the
       Trade Mark only and not to use any other trade name, trademark or
       logo for or on the Product (Provided That the name "Balsalazide" may
       be used but only as a generic name for the Product in accordance
       with and as required by applicable laws and regulations); and

5.3.2  to enter into trade mark user agreements and such other agreements
       (whether relating to the Trade Mark, Technical Standards or
       otherwise) as may reasonably be required by Biorex or is required by
       applicable regulations in any part of the Territory in connection
       with the exploitation by Astra of the Product and/or the use by
       Astra of the Trade Mark; and

5.3.3  to notify Biorex immediately of any improper or wrongful use of the
       Trade Mark, the Patents or otherwise any proprietary or confidential
       information of Biorex relating to the Product coming to Astra's
       knowledge; and

5.3.4 forthwith to refer to Biorex all enquiries received for the supply of the Product outside the Territory; and

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5.3.5  not actively to seek customers for the Product outside the
       Territory; and

5.3.6  to develop and design packaging for the Product in each part of the
       Territory at its sole cost and expense Provided Always That the
       general quality design and content of such packaging and any
       information supplied with the Product by Astra shall be subject to
       prior approval by Biorex: and

5.3.7  not to use any misleading statements or misrepresentations on the
       Product packaging or use any defective packaging materials and to
       comply in all respects with all local regulations and laws in
       connection with the Product packaging and the information provided
       thereon; and

5.3.8  in the sale and use of the Product in each part of the Territory to
       comply with all relevant regulatory, health and pricing regulations
       and approvals in such part of the Territory.  For the avoidance of
       doubt, Biorex shall not be responsible or liable in any manner
       whatsoever for compliance with any such regulations and approvals
       (whether or not it shall have assisted Astra in or approved the sale
       or use of the Product in such part of the Territory); and

5.3.9  not to use any packaging which may adversely affect the Product in
       any way whatsoever including but without limitation the Product's
       approved shelf-life; and

5.3.10 not to incur any liability on behalf of Biorex or in any manner pledge or purport to pledge Biorex's credit or accept any order or make any contract binding on Biorex or give or make any representation, warranties or conditions or quantities with reference to the Product on behalf of Biorex. Astra is not and shall not be deemed to be the agent of Biorex and in all correspondence and dealings with third parties shall clearly indicate that it is acting as a principal; and

5.3.11 To be solely responsible for the acts and omissions of its employees and representatives in connection with the performance of its rights and obligations hereunder.

5.4 Astra shall be entirely responsible for the collection of debts due to it and shall bear all losses owing to its failure so to do.

6. PRODUCT DATABASE AND ADVERSE REACTIONS REPORTING

6.1 Biorex shall maintain a database of all adverse and other reactions or events occurring in connection with the Product in any part of the Territory or the Excluded Territory and shall use reasonable endeavours to procure that any such adverse and other reactions are notified to it in a timely manner by any sub-licensee and/or distributor of the Product in the Territory and the Excluded Territory.

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6.2 Astra undertakes to notify Biorex:

6.2.1  forthwith in the event that it becomes aware of any serious or
       previously unknown adverse reaction or contra indications to the
       Product; and

6.2.2  within three months, on a quarterly basis of other adverse reactions
       or contra indications to the Product other than stated under 6.2.1

6.3 Biorex undertakes to notify Astra:

6.3.1  forthwith in the event that it becomes aware of any serious or
       previously unknown adverse reaction or contra indications to the
       Product in any part of the Territory and the Excluded Territory; and

6.3.2  within three months, on a quarterly basis of other adverse reactions
       or contra indications to the Product other than stated under 6.2.1.

6.4 In the event that Biorex or any third party shall conduct clinical studies in support of any promotional or marketing activities of Biorex or such third party within the Territory or the Excluded Territory, Biorex shall use reasonable endeavours to grant or procure the grant to Astra of full unrestricted access to the results of such trials so that Astra shall be entitled to use such results in connection with the marketing, sale and use of the Product in the Territory.

7. CLINICAL TRIALS AND DEVELOPMENTS

7.1 Astra is authorised by Biorex to undertake clinical studies after the Filing Date in support of Astra's regulatory, promotional and marketing activities and to enhance the Product's approval and/or use within the Applications Provided Always That:

7.1.1  such trials are conducted solely for such purposes and not for any
       other purpose whatsoever; and

7.1.2  prior to the conduct of such trials, the trial objectives and
       protocols are approved by Biorex (such approval not to be
       unreasonably withheld or delayed and Provided Always That such
       approval shall be deemed given by Biorex in the event that no
       response is received by Astra from Biorex within 20 working days of
       receipt by Biorex of any request for approval); and

7.1.3  Astra shall keep Biorex fully informed as to the conduct, progress
       and results of such trials; and

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7.1.4  Biorex shall have full unrestricted access to the results of such
       trials and shall be entitled to disclose the same to third parties
       for use in connection with the registration. marketing, sale and use
       of the Product in the Excluded Territory only; and

7.1.5  Astra shall bear all the costs and expenses associated with such
       trials (including but without limitation the costs of documentation
       and administrative payments to trialists); and

7.1.6  such trials shall be conducted only in accordance with any
       regulatory permissions and/or approvals granted for the Product in
       such part of the Territory in which the trials are conducted.

7.2 It is anticipated that Astra shall support any symposia organised, arranged or sponsored by Biorex involving areas of medicine relating to diseases of the gastro-intestinal tract and similar conditions and shall nominate and sponsor key physicians in the said field of medicine to attend at those symposia (and in particular shall sponsor those physicians presenting the results of clinical research studies relating to the Product).

8. LICENCE TO MANUFACTURE

8.1 In consideration of the royalties payable under Clause 8.6 and subject to the terms of this Agreement, Biorex hereby grants to Astra a licence to manufacture the Product in the Territory for sale in the Territory pursuant to the licence granted in Clause 3.1.

8.2 For the avoidance of doubt Biorex shall not be prevented from manufacturing or continuing to manufacture the Product or appointing sub-contractors to manufacture the Product for sale by Biorex or its customers both inside and outside the Territory subject to the exclusivity granted to Astra in respect of the Territory under Clause 3.1 above.

8.3 Biorex shall supply Astra with such technical information as it has in its possession and is free to disclose as Astra may reasonably require (and which has not previously been supplied to Astra by Salix) to assist Astra to produce the Product in commercial quantities Provided Always that Biorex shall be reimbursed all costs and expenses incurred by it in supplying such information and assistance to Astra.

8.4 Astra undertakes to Biorex that it will manufacture the Product fully in accordance with the Bulk Product Specification and the Finished Product Specification set out in the Salix/Astra Agreement and with the Drug Master File for the Product and in accordance with United States current Good Manufacturing Practices.

8.5 Astra shall be entitled to market, distribute and sell the Product manufactured by it only in accordance with the terms and provisions of this Agreement.

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8.6 In consideration of the licences granted in Clauses 3.1 and 8.1, Astra shall pay to Biorex a royalty [*]

8.7 Astra shall be solely liable in all losses, damages, costs and expenses arising out of any claim by any third party in connection with any Product manufactured by Astra and Astra hereby agrees fully and effectively to indemnify Biorex against any claims, damages, costs, expenses, or other losses incurred by Biorex arising out of or in connection with any Product manufactured by Astra.

8.8 In the event that Astra decides to have the Product manufactured by a sub- contractor, Astra may appoint such sub-contractor provided that Astra shall ensure that the sub-contractor shall perform in accordance with this Agreement and Astra shall remain liable for the acts of its sub-contractor so appointed.

9. TRADE MARK LICENCE

9.1 Biorex hereby grants to Astra an exclusive licence to use the Trade Mark on the Product and in connection with the marketing and exploitation of the Product in the Territory only.

9.2 Astra hereby confirms and acknowledges that it is licensed to use the Trade Mark only as set out in this Agreement and Astra further:

9.2.1  acknowledges that all goodwill in the Trade Mark in any part of the
       Territory (whether or not generated by the activities of Astra under
       this Agreement) shall vest in Biorex; and

9.2.2  acknowledges that any application for registration of the Trade Mark
       shall be made in the name of Biorex only; and

9.2.3  undertakes to transfer and assign to Biorex (or as it may direct)
       any right, title or interest required by Biorex for registration of
       the Trade Mark in any part of the Territory in the name of Biorex
       and for all goodwill in the Territory to vest in Biorex.

9.3 In consideration of the rights and licence granted to Astra by Biorex in respect of the Trade Mark, Astra shall pay to Biorex a licence fee at the rate of [*] of the Factory Sales Price of all Product bearing the Trade Mark supplied by Astra (or any Astra Associate) to any third party. Such licence fee shall commence on the date this Agreement comes into force pursuant to Clause 2.1 and shall continue to be payable for such period of time in which Astra shall continue to use the Trade Mark under the licence hereby granted.

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[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

10. LICENCE PAYMENT

10.1 Astra shall keep true and accurate records of the sales of all Product manufactured by or on behalf of it or any Astra. Associate pursuant to any licence granted under Clause 8 and of all Product sold by it or any Astra Associate at any time and Astra shall within ninety (90) days of the end of each period of three months (such periods to end on 31 March, 30 June, 30 September and 31 December) send Biorex a full statement showing the calculation of all sums due and owing to Biorex

10.1.1  in respect of the licence to sell under the provisions of Clause
        3.1 and the manufacturing licence under the provisions of Clause
        8.1; and

10.1.2  in respect of the Trade Mark Licence under the provisions of Clause
        9;

and with such statement shall make payment in pounds sterling by express payment through the banking system into such bank account as Biorex shall designate for such purpose, of such sum as is shown due on the statement.

10.2 For the conversion of the relevant currencies into Sterling Pounds under Clause 10.1, the official average exchange rates for the sale and purchase of foreign currency at the SE-Banken, Stockholm on the last banking day of the calendar half-year in question shall be applied. With respect to currencies not quoted by the SE-Banken, the average rate for purchasing Sterling Pounds in the respective country as published by any leading London Bank shall apply.

10.3 Astra shall allow Biorex or its auditors or representative reasonable access during normal business hours to inspect the books of account of Astra or any Astra Associate in order to verify the accuracy and calculation of any statements delivered under Clause 10.1 Provided That such verification shall be at the sole cost and expense of Biorex.

10.4 In the event of any dispute between the parties concerning the calculation and/or payment of any fee due under this Clause 10, an independent auditor shall be appointed by the agreement of the parties or in the absence of agreement at the request of either party by the President for the time being of the Institute of Chartered Accountants in England and Wales who acting as an expert and not as an arbitrator shall have full an free access to all relevant information and data and shall be asked to determine and settle any such dispute and in the absence of manifest error his decision shall be final and binding on the parties. The independent auditor's fees shall be paid by the parties in such proportions as he shall direct.

10.5 Interest shall be payable to Biorex by Astra at a rate of two per cent (2%) above the base lending rate from time to time of Barclays Bank plc on all outstanding fees due and payable by Astra to Biorex under the provisions of this Clause 10 both before and after judgment.

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11. PRODUCT LIABILITY

11.1 Astra undertakes to indemnify and hold Biorex harmless against all and any loss, damage, claim or liability suffered or incurred by Biorex in connection with the sale and use of the Products hereunder.

12. CONFIDENTIAL INFORMATION

12.1 Astra hereby agrees and undertakes that during the application of this Clause 12 and for a period of ten years thereafter (howsoever termination may be caused or arise) it shall keep confidential and shall not without the prior written consent of Biorex disclose to any third party or use except for the purposes of this Agreement any information of a confidential nature belonging to Biorex (including trade secrets and information of commercial value) which may become known to Astra from Biorex in connection with this Agreement and/or the Salix/Astra Agreement Provided Always that such obligation of confidentiality shall not extend to any part of such confidential information which:

12.1.1  shall otherwise than by reason of any default by Astra, become
        freely available to the general public; or

12.1.2  Astra can show by documentary evidence was in its possession or
        control prior to disclosure free of any obligation of
        confidentiality; or

12.1.3  Astra can show by documentary evidence shall have come into the
        possession or control of Astra from a third party free of any
        obligation of confidentiality subsequent to disclosure hereunder;
        or

12.1.4  Astra is obliged by law or regulation to disclose to a third party
        provided that such disclosure shall only be to the extent required
        by such law or regulation.

12.2 Astra shall ensure that any employee of, or consultant to, or sub- contractor of, Astra who shall obtain any confidential information in connection with the performance of this Agreement shall be bound by obligations of confidentiality substantially similar to the provisions of Clause 12.1.

12.3 Biorex acknowledges the importance of keeping all material information relating to the Product confidential and Biorex will use all reasonable endeavours to make sure that no such information is made public or otherwise made available to third parties in any manner which would jeopardize the exclusivity in the Territory granted to Astra hereunder.

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13. INTELLECTUAL PROPERTY
13.1 Astra acknowledges that save as expressly provided herein Astra shall have no right, title, interest or licence in or to the Patents. the Trade Mark or otherwise any intellectual property rights of Biorex in Balsalazide or the Product.

13.2 In the event that either party becomes aware of any infringement by any third party within the Territory of any intellectual property Tights of Biorex in the Patents. Balsalazide, the Product or the Trade Mark it shall forthwith notify the other party. Biorex shall be entitled to take such action as it may in its sole discretion consider appropriate against any such third party infringer Provided Always That:

13.2.1  Astra shall give such assistance as Biorex may reasonably require
        in connection with any such action (subject to reimbursement by
        Biorex of all costs reasonably incurred by Astra); and

13.2.2  Biorex shall keep Astra informed of the conduct and progress of
        such action but shall be entitled to conduct, pursue and settle
        such action in such manner as it shall reasonably consider
        appropriate and to retain any damages awarded against any such
        infringer;

In the event that such infringement shall continue and Biorex shall fail to take or procure any action to prevent any continued infringement (for the avoidance of doubt, any such failure on the part of Biorex shall not constitute a breach of this Agreement) Astra may (in its sole discretion) at its sole expense initiate and pursue such action as it considers appropriate to prevent any continued infringement Provided Further That:

13.2.3  Biorex shall give such assistance as Astra may reasonably require
        in connection with any such action (subject to reimbursement by
        Astra of all costs reasonably incurred by Biorex); and

13.2.4  Astra shall keep Biorex informed of the conduct and progress of
        such action but shall be entitled to conduct, pursue and settle
        such action in such manner as it shall reasonably consider
        appropriate (having regard to the continuing value of any such
        intellectual property rights to Biorex and the effect which any
        such infringement shall have had or will have on the exploitation
        in the Territory by Astra of the Product) and to retain any damages
        awarded against any such infringer.

13.3 In the event that any claim is made against Astra by any third party alleging infringement of any rights of any third party by the use and exploitation of the Product by Astra, Astra shall be entitled at its sole cost and expense to defend any such claim in such manner as it may in its sole discretion consider appropriate Provided Always That

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13.3.1  Biorex shall give such assistance as Astra may reasonably require
        in such action (subject reimbursement by Astra of all costs
        reasonably incurred by Biorex); and

13.3.2  Astra shall keep Biorex informed of the conduct and progress of
        such action but shall be entitled to conduct, pursue and settle
        such action in such manner as it shall reasonably consider
        appropriate (having regard to the continuing value of any such
        intellectual property rights to Biorex and the effect which any
        such infringement shall have had or will have on the exploitation
        in the Territory by Astra of the Product) and to retain any damages
        awarded against any such infringer; and

13.3.3  Biorex shall not be liable in any manner whatsoever to Astra for
        any loss or damage suffered incurred or awarded against Astra in
        connection with any such claim.

14. SUB-DISTRIBUTORS

14.1 Astra is hereby granted the right to appoint sub-distributors for the Product in the Territory Provided Always That:

14.1.1  Astra shall remain solely liable for the performance of its
        obligations hereunder in each part of the Territory; and

14.1.2  in any part of the Territory where there is resident an Astra
        Associate any sub-distributor appointed shall only be such Astra
        Associate

15. TERMINATION

15.1 The rights and obligation of the parties contained in Clauses 2, 3, 4, 5, 6, 7, 8.3, 8.6, 13, 14 and 17 shall cease forthwith upon the later of (i) the expiry of the last to expire of the Patents or (ii) the expiry of a period of 9 years from the date of first Launch Provided Always That

15.1.1  the Trade Mark licence granted under Clause 9 shall continue
        thereafter in accordance with its terms and Clause 10 will remain
        valid with respect to Clause 9; and

15.1.2  the licence granted to Astra to manufacture under Clause 8 shall
        continue indefinitely thereafter subject to no additional
        compensation or royalty to Biorex; and

15.1.3  any licence or interest in all or any part of the Patents,
        Balsalazide and/or the Product shall continue indefinitely
        thereafter.

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15.2 Either party to this Agreement shall be entitled to terminate this Agreement forthwith by notice in writing to the other in the event that:

15.2.1  the other party shall fail to pay any sum due hereunder on the due
        date and shall fail to remedy such breach within (30) thirty days
        of being required in writing by the other party so to do; or

15.2.2  the other party shall commit a material breach of any of the terms
        and conditions of this Agreement and shall fail to remedy the same
        (if capable of remedy) within ninety (90) days of being required in
        writing by the other party so to do; or

15.2.3  The other party goes into liquidation (either voluntary or
        compulsory) or shall be the subject of any petition for winding up;
        or

15.2.4  the other party shall make any assignment or arrangement for the
        benefit of its creditors or cease or threaten to cease to carry on
        its business in the ordinary course; or

15.2.5  a receiver, administrative receiver, or receiver and manager, or
        judicial manager or administrator is appointed over the whole or
        any part of the assets of either party or if any court proceedings
        are commenced for the appointment of an administrator or receiver
        to either party; or

15.2.6  the other party shall become unable to pay its debts as they become
        due in the ordinary course of business or shall otherwise become
        subject or seek relief under any law relating to insolvency in any
        jurisdiction relevant to such other party.

15.3 Any waiver by either party of a breach of any provision of this Agreement shall not be considered as a waiver of any subsequent breach of the same or any provisions of this Agreement.

15.4 Any termination of this Agreement shall be without prejudice to the right of either party to recover any monies due to it under this Agreement or the rights or remedies of either party in respect of any breach prior to the effective date of termination of this Agreement.

16. CONSEQUENCES OF TERMINATION

16.1 In the event of termination of this Agreement under Clause 15.2 by Biorex or Astra prior to the later of (i) the expiry of the last to expire of the Patents or (ii) expiry of a period of 9 years from date of Launch, Astra shall:

-15-

16.1.1  forthwith, cease all marketing, sale and promotion of the Product;
        and

16.1.2  immediately telegraphically transfer all monies due and payable to
        Biorex as at the date of termination into Biorex's bank account
        designated under Clause 10; and

16.1.3  immediately return to Biorex all information and data of whatsoever
        nature relating to the Product together with all copies thereof
        which Astra may have in its possession or under its control
        including but without limitation all scientific, medical and safety
        data relating to the Product; and

16.1.4  immediately cease use of all or any confidential information of
        Biorex delivered in connection with this Agreement and the Trade
        Mark; and

16.1.5  take all such steps as may reasonably be required to transfer or
        procure the transfer to Biorex (or its nominee) of all such product
        licences and approvals as may have been obtained for the marketing
        and sale of the Product in any part of the Territory; and

16.1.6  Biorex shall purchase such stocks of the Product (inclusive of
        packaging) as Astra shall still have in its possession once it has
        fulfilled all orders outstanding as at the date of termination at a
        price calculated as cost price to Astra Provided That Biorex shall
        not be obliged to purchase any of the stocks of the Product which
        do not have at least two thirds of its approved shelf life
        unexpired or are otherwise not of merchantable quality.

17. ASSIGNMENT

17.1 The benefit of this Agreement is personal to Astra and to Biorex and shall not be capable of assignment by either of them without the prior consent in writing of the other party (such consent not to be unreasonably withheld or delayed).

18. FORCE MAJEURE

18.1 If the performance of any obligations under this Agreement by either party is affected by Force Majeure it shall forthwith notify the other party of the nature and extent thereof.

18.2 Neither party shall be deemed to be in breach of this Agreement or otherwise be liable to the other by reason of any delay in performance or non-performance of any of its obligations hereunder to the extent that such delay or non-performance is due to any Force Majeure which has been notified to the other party in writing.

-16-

19. COSTS

19.1 Each party hereto shall bear its own costs in relation to the negotiation, drafting, preparation and execution of this Agreement.

20. CONFIDENTIALITY OF THIS AGREEMENT

20.1 The contents of this Agreement shall remain confidential as between the parties. Neither party shall, without the prior written consent of the other (such consent not to be unreasonably withheld without justification), disclose any of the financial terms of this Agreement to any other person, firm or company save for

20.1.1 such disclosure as may be required by any relevant law or regulatory authority.

21. NATURE OF THE AGREEMENT

21.1 Nothing in this Agreement shall create or be deemed to create any partnership, joint venture or the relationship of principal and agent between the parties.

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

21.3 This Agreement (including all the Schedules and other documents referred to) and any agreements entered into pursuant to this Agreement constitutes the entire understanding and agreement between the parties with respect to the subject matter of this Agreement and supersedes all prior agreements, negotiations and discussions between the parties relating to this Agreement.

21.4 This Agreement may not be released, discharged, abandoned, charged or modified, in any manner, except by an instrument in writing signed by a duly authorised officer or representative from each of the parties hereto.

21.5 This Agreement shall be governed by and construed in all respects in accordance with the laws of England and each party hereby submits to the exclusive jurisdiction of the English courts. For the purpose of accepting service of process in connection with any action commenced before the High Court in England the parties hereto hereby absolutely, unconditionally and irrevocably appoint the following agents to accept process on their behalf, it being unconditionally agreed that for this purpose such process will be properly and effectively served if the same is left at the addresses set out below:

-17-

Astra:    F.A.O. The Managing Director
          Astra Pharmaceuticals Limited
          Home Park Estate
          Kings Langley
          Herts
          WD4 8DH

Biorex:   F.A.O. The Managing Director
          Biorex Laboratories Limited
          2 Crossfield Chambers
          Gladbeck Way
          Enfield
          Middlesex
          EN2 7HT

22. NOTICES

22.1 All notices to be served by the parties to this Agreement shall be served only in the English language.

22.2 Notices shall be sufficiently served if dispatched by First class or express post (meaning the fastest normal method of mail transmit in the country of dispatch) to the address of the receiving party set out below:

Biorex:   2 Crossfield Chambers
          Gladbeck Way
          Enfield
          Middlesex
          EN2 7HT
          F.A.O. L Baxendale

Astra:    Kvarnbergagatan 16
          S-151 85 Sodertalje
          Sweden
          F.A.O. Vice President Legal Affairs

Any modification to this address must in itself be notified in writing to the other party in accordance with the terms of this sub-clause.

22.3 In the absence of proof to the contrary notices properly sent hereunder shall be deemed to have been duly served 10 days after the date of dispatch.

22.4 It shall be permitted for notices to be served hereunder by facsimile transmission and for this purpose the following fax number below shall apply:

-18-

22.4.1  in the case of Biorex facsimile transmission number 081 367 4627
        and marked for the attention of Miss L Baxendale; and

22.4.2  in the case of Astra at Kvarnbergagatan 16.S-151 85 Sodertalje,
        Sweden facsimile transmission number +46 855 32 90 00 and marked
        for the attention of Vice President Legal Affairs;

provided that such notice is confirmed by first class or express post in accordance with Clause 22.2 and shall be deemed served on the next business day following transmission of such facsimile.

-19-

AS WITNESS the hands of the duly authorised representatives of the parties hereto the day and year first above written.

SIGNED by                             )           /s/ signature unreadable
for and on behalf of BIOREX           )
LABORATORIES LIMITED in the presence  )
of:-                                  )
     /s/ signature unreadable
       Director


SIGNED by                             )           /s/ signature unreadable
for and on behalf of AB ASTRA         )
in the presence of:-                  )

     /s/ signature unreadable
     /s/title unreadable

-20-

SCHEDULE 1

BALSALAZIDE PATENTS AND APPLICATIONS

United States Patent Number 4,412,992

Title: "2-Hydroxy-5-Phenylazobenzoic Acid Derivatives and Methods of Treating Ulcerative Colitis Therewith"

Issued: November 1, 1983

SCHEDULE 2

SUMMARY OF PROJECT AND ASTRA FUNDING

The major elements of the Project relate to the preparation and submission of an NDA for the treatment of acute relapse of ulcerative colitis. A large-scale clinical program will be undertaken in the U.S. in support of the NDA, though the studies have been designed to be of use outside the U.S. as well. Non-clinical data will be obtained from past and in-progress work in the U.K. under the management of Glycyx Pharmaceuticals, Ltd. Salix will contribute toward the cost of these studies. The major elements of the Project are as follows:

Pre-clinical Safety and Pharmacology

Relevant pre-clinical studies conducted by Biorex will be re-formatted, summarized and included in the NDA as appropriate. Additional data and reports will be acquired from Glycyx's U. K. studies over an 18 month period. Summary reports will be prepared, as necessary.

Human Clinical and Metabolic Studies

Two pivotal studies of efficacy are planned. A double-blind controlled, multi-center, dose ranging trial is scheduled to begin in May 1993. The trial has a target enrollment of 230 patients, in 3 treatment groups:
placebo, Balsalazide (BSZ) 4.50g/d, and BSZ 6.75g/d. Completion is forecast for 4Q 1993. A second double-blind controlled trial, comparing Balsalazide to Asacol is planned to begin 4Q 1993. Target enrollment is 230 patients in 3 arms: BSZ 2.25g/d, BSZ 6.75g/d, and Asacol. Completion is forecast for 2Q 1994. Both trials will be multi-center, encompassing 15-20 clinics throughout the U.S. Salix has previously received IND approval for a Phase III study and an amendment for the above two protocols will be filed in April 1993. BRI, a Contract Research Organization, has been retained by Salix

-1-

for trial administration, data collection and analysis. The clinical plan and protocols have been developed through consultation with representatives of Astra Draco.

A short-duration pharmacokinetic study in healthy volunteers will be conducted to measure dose proportionality and other parameters. The plan and protocol are currently under preparation. Completion is expected prior to that of the pivotal studies. Data from the U.K. pharmacokinetic studies will be acquired from Glycyx.

Manufacturing and Controls

Active ingredient and pharmaceutical process will be transferred to Salix from Glycyx. Supplementary process development and documentation for the drug product will be developed by Salix. An outside company is under contract to produce "Colazide" capsules in the U.S. Balsalazide chemical will be procured from the current European manufacturers.

Dossier Preparation and Regulatory Affairs

The NDA will be assembled and submitted by Salix staff, with assistance from BRI. To the extent possible, all sections of the NDA will be prepared and submitted in advance of the completion of the final pivotal clinical study. Post-submission follow up and requests from FDA will be managed by Salix staff. A review period of two years is forecast.

It is planned that approximately 70% of Salix's current administrative resources will be dedicated to the Project.

Expenses

Estimated costs for the Project are shown on the following page. Payments from Astra to Salix shall be made no later than the first day of each calendar quarter.

-2-

SCHEDULE 2

SUMMARY OF PROJECT AND ASTRA FUNDING

               PROJECT SUMMARY
[*]

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

LISTING OF COMPLETED AND PLANNED PHARMACOKINETIC STUDIES WITH BASALAZIDE
Requested by R.A. Onyett, CAMAS Partners, 31 August 1992. Prepared by J. G. Allen, Pharmac Consultants, 1 September 1992.

1. A list of the non-clinical studies "completed by Biorex" has been prepared by Glycyx Pharmaceuticals Ltd., in their COLAZIDE - INVENTORY OF STUDIES (annotated copy attached). None of these have, in fact, been written up as formal reports; therefore, they all need to be "reconstructed". The possible use Of a standard format for the preclinical reports has been discussed with T. Hardy Consultancy, who are exploring this. When they are complete, however, the kinetic reports will only provide limited support the NDA. All of the studies listed as "pharmacokinetics and distribution " under PART IIIG (categories 1-3) only involve the measurement of radioactivity, and in many cases this is complicated by the simultaneous use of two different 3H-forms of BSZ and/or failure to separate out the tritiated water. Reports of all the studies are however required to provide some data for the ferret, mouse and rabbit, and supportive information for the new rat data.

3. If it is confirmed that the clearance of balsalazide and/or metabolites is higher in laboratory animals than humans, reasoned arguments to justify the validity of the toxicology will need to be included in the NDA [e.g. exposure of the colon (the primary target organ) is related to total dose and the expected secondary effect is the salicylate-like action of 5-ASA on the kidney, which will be determined by species sensitivity and/or total renal clearance of active metabolite rather than plasma concentrations.] Comparative protein binding data ("free drug fractions") may also need to be determined in this context.

Listing of Completed and Planned Pharmacokinetic Studies with Balsalazide
cont.

4. The dog was selected as the "non-rodent" for toxicology on the basis that it is one of the species recommended by various regulatory authorities, and because it was used for the recently submitted applications for olsalazine and mesalazine (FDA Summary Basis or Approval). However the metabolism of both 5-ASA and 4-ABA in this species is unlikely to reflect that in man, where N-acetylation is expected to be the major route. This can probably be justified for 5-ASA, because the dog's lack of secondary metabolism will maximise exposure to the active and potentially (salicylate) toxic moiety. Exposure to the N-acetyl metabolite of 4-ABA is likely, however, to only be covered in the rat. If this proves to be very low relative to that in humans, additional (short-term) toxicology, either with this metabolite or in a further species, may need to be considered.

/S/ J.G. Allen

Summary of Preclinical ADME Studies planned for Balsalazide

Balsalazide and 4-ABA, randomly labelled with Carbon-14 in the aromatic ring are being prepared by Amersham International, for ADMI studies at Hazleton U.K. These materials will be used for.

1. A quantitative whole body autoradiographic study with 14C-balsalazide in pregnant pigmented rats, to determine (i) general distribution after oral administration, (ii) placental transfer and foetal penetration and (ii) melanin binding after a single oral administration by gavage.

2. Absorption, distribution, metabolism and excretion of single doses of 14C- balsalazide administered to male rats intravenously (one dose level) and orally by gavage (two dose levels, corresponding to the high and low doses used for 26 week toxicology).

3. Absorption, distribution, metabolism and excretion of single doses of 14C- ABA administered to male rats intravenously (one dose level) and orally by gavage (one dose level, equivalent to the low dose used for 26 week toxicology).

4. Absorption, distribution, metabolism and excretion of single doses of 14C- balsalazide administered to beagles intravenously (one dose level) and orally by gavage (two dose levels, corresponding to the high and low doses used for 26 week toxicology).

In addition, monitoring of the rat and dog MTD, 26 week toxicology and rat carcinogenicity will be used to assess dose-proportionality of absorption and elimination during repeated oral administration. Notification has also been received recently from Biorex that 30 mCI of tritiated balsalazide were held at University of Surrey; arrangements to transfer this material to HUK have been made, as a contingency measure.

T.L HARDY CONSULTANCY

Tel  (0929) 48 1197                                         "Badgers".
Fax: (0929) 48 1197                                         South Street,
                                                            Kingston,
                                                            Corfe Castle,
                                                            Wareham,
                                                            Dorset BH20 5LL
                                                            England


                                re:  Balsalazide

Non-Clinical Safety Evaluation Studies - Toxicology

To date the initial findings in preliminary studies using high doses of balslazide at large multiples of the proposed dose for man, are substantiating the balsalazide has a low order of toxicity.

/s/ Terry L. Hardy
------------------
    Terry L. Hardy.

                     Dated: 31st, August, 1992.

Adviser on Toxicology and Safety Evaluation

COLAZIDE(R) DEVELOPMENT - Completed Studies and Additional Work

--------------------------------------------------------------------------------

EC Registration Dossier Headings      Completed           Glycyx
                                      by Biorex   Repeat/New   Reconstruct
--------------------------------------------------------------------------------

PART IIIA Single dose toxicity

     - Mouse, oral                        o
     - Mouse, ip                          o
     - Rat oral                           o           *
     - Rat, ip (iv)                       o           *
     - Mouse, oral: 4-ABA                 o
     - Rat, oral: 4-ABA                   o
     - Mouse, oral: 5-ASA                 o
     - Rat, oral: 5-ASA                   o
     - Mouse, oral: 5-ASA/4-ABA           o
     - Rat, oral: 5-ASA/4-ABA             o
     - Mouse, oral: BSZ impurity          o
     - Mouse, ip: BSZ impurity            o
     - Mouse, ip: Colazide                o

Part IIIB - Repeated dose toxicity

 Max. Tolerated Dose
 -------------------

     - Dog                                            o

 !unreadable!
     - Rat, 14 days, oral                 o           o              *
     - Mouse, 7 days, oral: BSZ           o                          *
     - Mouse, 28 day, oral BSZ            o                          *
     - Rat, 7 days, oral: BSZ             o                          *
     - Rat, 28 day, oral: BSZ             o                          *
     - Dog, 28 days, oral                             o

 Chronic
 -------
     - Rat, 96 week, oral                 o                          o
     - Ferret, 26 week, oral              o                          o
     - Dog, 26 week, gavage                           o
     - Rat 26 week, gavage                            o

PART IIIC Reproduction Studies

1. Fertility and general reproductive
   performance
   ----------------------------------

     - Rat fertility, oral                o           o

     - Rat, comparative fertility with
       sulphasalazine, oral               o

     - Mouse, comparative fertility
       with sulphasalazine, oral          o
--------------------------------------------------------------------------------
Page 1                                                     *under consideration

COLAZIDE(R) DEVELOPMENT - Completed Studies and Additional Work

--------------------------------------------------------------------------------

EC Registration Dossier Headings      Completed           Glycyx
                                      by Biorex   Repeat/New   Reconstruct
--------------------------------------------------------------------------------
2. Embryotoxicity

   -  Mouse teratology oral              o
   -  Rat teratology                                  o
   -  Rabbit teratology, oral            o            o

3. Peri-/postnatal potential

   -  Mouse perinatal                    o
   -  Rat peri-/post natal                            o

PART IIID Mutagenic Potential

   In vitro
   --------
   -  Ames test                          o
   -  Cultured human lymphocytes         o
   -  HGPRT locus Chinese hamster
      V79 cells                          o

   In vivo
   -------
   -  Micronucleus test                  o

PART IIIE - Oncogenic/carcinogenic
            potential

   -  Mouse carcinogenicity, oral        o                           o
   -  Rat carcinogenicity, oral          o            o              o
      (new study is 104 week)

PART IIIF General Pharmacology

1. Pharmacodynamic effects relating
   to proposed indications
   --------------------------------

   - Carrageenin-induced ulcerative
     colitis                             o                           *

   - Gastrointestinal studies
     - Ulcerogenic potential             o                           *
     - GI motility and smooth muscle
       activity                          o                           *
     - Ethanol-induced gastric
       necrosis in rats                  o                           *
     - Effect of BSZ on GSH levels
       in rectocolonic mucosa            o                           *
     - Effect on BSZ on ethanol-induced
       rectocolonic damage               o                           *
     - Effect on BSZ and metabolites
       on ethanol-induced gastric
       necrosis                          o                           *
     - Effect on BSZ on eicosanoid
       release                           o                           *
     - Effect on BSZ and SASP on
       rectocolonic lesions              o                           *

   - Anti-inflammatory activity          o                           *

   - Analgesic activity
     - Acetic acid-induced writhing
       test                              o                           *
     - Hyperalgesia test in rats         o                           *

   - Yeast-induced pyrexia               o                           *

Page 2 * under consideration

                             7
COLAZIDE(R) DEVELOPMENT-Completed Studies and Additional Work
-------------------------------------------------------------

--------------------------------------------------------------------------------

EC Registration Dossier Headings      Completed           Glycyx
                                      by Biorex   Repeat/New   Reconstruct
--------------------------------------------------------------------------------

2. General Pharmacodynamics
---------------------------

   - Central nervous system
     - Barbiturate-induced sleeping
       time                              o                          *
     - Spontaneous locomotor activity    o                          *

   - Endocrine system
     - Vaginal comification test         o                          *
     - Uterine weight response           o                          *

   - Cardiovascular system
     - Effect of BSZ on CV system and
       respiration in ferrets            o                          *
     - Effect of BSZ on cat BP and
       respiration                       o                          *
     - Effect of BSZ (I.V.) on BP,
       HR and respiration in
       anesthetized male cat             o                          *
     - Effect of BSZ on BP, HR and
       respiration in anesthetized rats  o                          *
     - Effect of BSZ on BP, HR and
       respiration of ferrets            o                          *
     - Effect of impurity (BX769A) on
       rat BP, HR and respiration        o                          *
     - Effect of impurity (BX769A)
       (I.V.) on BP, HR and respiration
       of anesthetized rats              o                          *
     - Effect of BSZ metabolites on BP,
       HR and respiration of
       anesthetized cats                 o                          *

   - Electrolyte Excretion
     - Diuretic test                     o                          *
     - Effect of BSZ and related
       compounds on water induced
       diuresis in the rat               o                          *
   - Other Systems
     - Effects of BSZ on rat peritoneal
       mast cell degranulation           o                          *
     - Effects of BSZ in vitro on
       erythrocyte membrane
       stabilization                     o                          *
     - Effect of BSZ and its impurity
       (BX769A) on erythrocyte membrane
       stabilization                     o                          *
     - Effect of SASP and BSZ on cell
       membrane stability and histamine
       release                           o                          *
     - Possible anti-microbial activity
       of BSZ and related compounds on
       organisms of gut microflora       o                          *
     - Comparative suppression of
       lymphocyte transformation by
       SASP analogues                    o                          *


2. Drug Interactions
--------------------

   - No studies

Page 3 * Under Consrtuction

COLAZIDE(R) DEVELOPMENT-Completed Studies and Additional Work

--------------------------------------------------------------------------------

EC Registration Dossier Headings      Completed           Glycyx
                                      by Biorex   Repeat/New   Reconstruct
--------------------------------------------------------------------------------

PART IIIG-Pharmacokinetics

  1. Pharmacokinetics after a
     single dose

      - Drug excretion in rat
        and ferret                      o                            o
      - Rat blood concentrations,
        oral and iv                     o                            o
      - Rat bioavailability, oral
        liquid vs solid dose            o                            o
      - Ferret blood concentrations,
        oral and iv                     o                            o
      - Ferret blood concentrations,
        dietary dosing                  o                            o


  2. Pharmacokinetics after repeated
     administration

      - Rat blood concentrations,
        oral, 28 days dosing            o                            o
      - Ferret blood concentrations,
        oral 28 days dosing             o                            o

  3. Distribution in normal and
     pregnant animals

      - Rat tissue concentrations,
        oral                            o                            o
      - Ferret tissue concentrations,
        oral                            o                            o
      - Rat QWBA                                       o

  4. Biotransformation
      - Mouse excretion, oral           o                            o
      - Rat excretion, oral             o                            o
      - Rat biliary excretion, oral     o                            o
      - Ferret excretion, oral          o                            o
      - Ferret biliary excretion, oral  o                            o
      - Rat ADME, iv and gavage                        o
      - Rat ADME (4-ABA), iv and gavage                o
      - Dog ADME, iv and gavage                        o

Comparison pharmacokinetics rat &
 ferret                                 o

PART IIIH-Local Tolerance

      - No studies

PART IIIQ-Other Information

      - No studies

Page 4 *under consideration

COLAZIDE(R) DEVELOPMENT-Completed Studies and Additional Work

--------------------------------------------------------------------------------

EC Registration Dossier Headings      Completed           Glycyx
                                      by Biorex   Repeat/New   Reconstruct
--------------------------------------------------------------------------------

PART IV A Clinical Pharmacology

  1. Pharmacodynamics
  -------------------

  2. Pharmacokinetics
  -------------------
     - Serum concentrations of
       BX661A, sulphasalazine
       and metabolites in man              o

     - Comparative tolerability
       and pharmacokinetic
       study of balsalazide,
       sulphasalazine and
       mesalazine following a
       single oral dose                                 o

     - Single dose bioequivalence           o                        o

     - Tolerability and pharmacokinetic
       study of balsalazide following
       repeated oral doses                              o

     - High dose patient monitoring         o                        o

PART IV B - Clinical Experience

     1. Clinical trials

        Double Blind, Controlled Studies
        in Acute Active Ulcerative Colitis

        - Balsalazide 6.75g/d vs SASP
          3g/d in the treatment of mild
          first episode ulcerative
          colitis (Protocol 028/011)        o

        - Balsalazide 6.75g/d vs SASP
          3g/d in the treatment of acute
          relapse or first episode
          ulcerative colitis(Protocol
          028/017)                          o

        Double-Blind, Controlled Studies
        in Maintenance of Remission of
        Ulcerative Colitis

        Low dose pilot (6 month) study:
        - Balsalazide 2g/d vs SASP 2g/d
          in the maintenance of remission
          of patients with ulcerative
          colitis (Protocol: 028/001)       o

        Medium dose subchronic (12 month)
        study:
        - Balsalazide 2g/d vs 4g/d in the
          maintenance of remission of
          patients with ulcerative colitis
          (Protocol: 028/005)               o

Page 5 *under consideration

SCHEDULE 3

"Bulk Product Specifications"

and

"Finished Product Specifications"

BALSALAZIDE SODIUM

Specification - "IN-HOUSE"

[*]

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

BALSALAZIDE SODIUM

Specification - "PL Submission"

[*]

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

SCHEDULE 4

QUALITY TEST PROCEDURES

To be mutually agreed upon prior to Launch.

COLAZIDE (TM) CAPSULES

1. GENERAL CHARACTERISTICS

Red/maroon, hard gelatin lock-fit capsule shells, size 00, containing a dry orange/yellow powder.

2. FINISHED PRODUCT SPECIFICATION

[*]

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

1 (4)

SCHEDULE 5

TERMS AND CONDITIONS APPLICABLE TO THE
MANUFACTURING LICENCE UNDER ARTICLE 16.2

l. With effect from the effective date of notice served by Astra under and in accordance with Article 16.2 of the Agreement (and consequently also Article 6.6) Salix shall grant Astra a licence to manufacture the Product both inside and outside the U.S. for sale in the U.S. only under the terms of the Agreement and this Schedule 5.

2. For the avoidance of doubt Salix shall not be prevented from manufacturing or continuing to manufacture the Product or appointing sub-contractors to manufacture the Product for sale by Salix or its customers both inside and outside the U.S. subject to the exclusivity granted to Astra in respect of the U.S. under the terms of the Agreement.

3. Salix shall supply Astra with such technical information and assistance as Astra may reasonably require (and which has not previously been supplied to Astra pursuant to Article 16.4) to enable Astra to produce the Product in commercial quantities Provided Always That Salix shall be reimbursed all costs and expenses incurred by it in supplying such

2 (4) information and assistance to Astra.

4. Astra undertakes to Salix that it will manufacture the Product fully in accordance with the Bulk Product Specification and the Finished Product Specification (annexed to the Agreement in the approved form) and with the Drug Master File for the Product and in accordance with FDA Good Manufacturing Practice.

5. Astra shall be entitled to market, distribute and sell the Product manufactured by it only in accordance with the terms and provisions of the Agreement,

6. In consideration of the licence to manufacture Astra shall pay to Salix a fee calculated as a percentage of the Net Sales of all Product manufactured by or on behalf of Astra pursuant to this license and sold by Astra or any Astra Associate such percentage to be:

6.1 [*]

6.2 [*]

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN

REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                                                           3 (4)

6.3  [*]

     6.3.1  [*]

     6.3.2  the actual cost of manufacture of the Product incurred by Astra
            shall be calculated upon the expiry of 12 months from the date of
            service of notice under Article 16 (and fees shall be payable during
            such 12 month period on an estimate and shall be adjusted
            retrospectively upon such calculation) by Astra which shall produce
            to Salix full details of all actual direct costs of manufacture
            (being materials labour and direct manufacturing overhead and
            interest) and its calculation of the average actual cost per
            kilogram of Product incurred in such 12 month period and upon
            agreement by Salix of such actual cost, it shall remain fixed
            thereafter for the period in which fees under this Article 6

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

4 (4) shall remain payable.

6.4 [*]

6.5 [*]

7. Astra shall be solely liable for all losses, damages, costs and expenses arising out of any claim by any third party in connection with any Product manufactured by Astra and Astra hereby agrees fully and effectively to indemnify Salix against any claims, damages, costs, expenses, or other losses incurred by Salix arising out of or in connection with any Product manufactured by Astra.

8. The licence to manufacture granted hereunder shall continue for such period in which Astra may wish to manufacture the Product provided always that such licence shall terminate in the event of termination of the Agreement by Salix under the provisions of Article 29.2

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

AMENDMENT NO. 1 TO CO-PARTICIPATION AGREEMENT

This Amendment No. 1 to Co-Participation Agreement (the "Amendment") is entered into effective as of September 30, 1993 between Salix Pharmaceuticals, Inc., a company incorporated under the laws of California whose registered office is at 3600 W. Bayshore Road, Suite 205, Palo Alto, California 94303 USA ("Salix"), and AB Astra, a company incorporated under the laws of Sweden whose principal place of business is at Kvarnbergagatan 16, S-151 85 Sodertalje, Sweden ("Astra")

Recitals

Salix and Astra entered into a Co-Participation Agreement dated as of April 30, 1993 (the "Co-Participation Agreement") with respect to a collaboration in a programme of development and commercial sale in the United States of pharmaceutical products incorporating Balsalazide. The parties now desire to amend the Co-Participation Agreement on the following terms and conditions. Unless otherwise defined herein, capitalized terms shall have the meanings provided in the Co-Participation Agreement.

Agreement

Now, therefore, in consideration of the premises and the mutual covenants set forth herein, the parties hereto mutually agree as follows:

1. Amendment to Schedule 2. In order to better reflect the estimated expenses to be incurred by Salix and funded by Astra pursuant to Section 6.1 of the Co-Participation Agreement, Schedule 2 to the Co-Participation Agreement is hereby amended as follows:

[*]

2. Miscellaneous. Except as specifically amended as set forth above, the Co-Participation Agreement shall remain in full force and effect.

IN WITNESS WHEREOF, the parties, by their respective authorized officers, have executed this Amendment effective as of the date first above written.

AB ASTRA                                         SALIX PHARMACEUTICALS, INC.


By: /s/ Claes Wilhelmsson   /s/ Goran Lerenius   By: /s/ Randy W. Hamilton
        Claes Wilhelmsson       Goran Lerenius           Randy W. Hamilton,
  Executive Vice President      General Counsel          President

Title: ___________________________

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

EXHIBIT 10.10

THIS AGREEMENT is made 15th September 1993

BETWEEN

COURTAULDS CHEMICALS (HOLDINGS) LIMITED whose registered office is at 50 George Street, London. WIA 2BB ("COURTAULDS"): and

GLYCYX PHARMACEUTICALS LIMITED whose registered office is at Cedar House. 41 Cedar Avenue. Hamilton HH 1 2. Bermuda ("GLYCYX").

WHEREAS., the parties have reached agreement on the following terms for the supply of the product described in Schedule 1 (the "PRODUCT") by Courtaulds to Glycyx.

NOW IT IS AGREED as follows:

1. Definitions

In this Agreement:

(1) "COMMENCEMENT DATE" means 1st January 1994.

(2) "CALENDAR YEAR" means calendar years beginning on 1st January, and ending on 31st December each year.

(3) "SPECIFICATION" means the specification for the Product set out in Schedule 1. as amended from time to time in writing by mutual agreement of the parties.

(4) "TONNE" means a tonne of 1.000 kilogramms.

(5) "MONTH" means a calendar month.

(6) "AFFILIATE" means any corporation or other entity which controls, is controlled by, or is under common control with, a party to this Agreement. A corporation or other entity shall be regarded as in control of another corporation or entity if it owns or directly or indirectly controls more than fifty percent (50%) of the voting stock or other ownership interest of the other corporation or entity, or if it possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of the corporation or other entity.

(7) "CERTIFICATE OF ANALYSIS" means the certificate of analysis to be provided by Courtaulds with each shipment of Product, setting forth:

(a) the results of the quality test procedures with respect to such shipment;

(b) the manufacturing date: and

(c) a statement that the batch of Products has been released for shipment in accordance with the following criteria:
(1) all manufacturing materials used in the manufacture of such Products have complied with the Specification and (2) all manufacture and quality control operations by Courtaulds with respect to such Product have been carried out according to current Good Manufacturing Practices. in-process control. manufacturing and testing procedures. and standard operating procedures in the form agreed upon by the parties.

2. Sale and Purchase

(1) With effect from the Commencement Date Courtaulds shall sell and deliver the Product to Glycyx and Glycyx shall purchase the Product from Courtaulds on the terms and conditions of this Agreement.

(2) Courtaulds undertakes to supply such quantities of the Product meeting the Specification as Glycyx may order from Courtaulds from time to time, subject always to minimum quantities as follows:

(a) Within one month after Glycyx receives the first order from their marketing partner. following the first country being approved for the sale of distribution of the Product as a drug, Glycyx will place an order on Courtaulds (the "INITIAL ORDER") for [*] of the Product, and delivery of [*] of the Product shall be made by Courtaulds within 20 weeks of receipt of the Initial Order and the balance of [*] of Product will be delivered by Courtaulds within 14 weeks after the [*] has been delivered to Glycyx;

(b) Between 6 and 14 months after the Initial Order, Glycyx will place a further order for [*] of the Product and delivery shall be made by Courtaulds within 20 weeks of the further order (the "SECOND ORDER"); and

(c) Between 20 and 28 months after the Initial Order. Glycyx will place an order for [*] of the Product, and Courtaulds shall deliver [*] of the Product within 12 weeks of receiving the order and the balance 10 weeks later (the "THIRD ORDER").

(3) Subject to Clause 2(2), Courtaulds shall supply to Glycyx the quantities of the Product specified in Glycyx' order confirmations as aforesaid, and shall make deliveries to Glycyx in the installments and at such times and places as Glycyx shall require from time to time.

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(4) Courtaulds hereby agrees that, during the term of this Agreement. Courtaulds and its Affiliates will only supply Product to Glycyx or its bona fide designees which designees will be notified to Courtaulds in writing by Glycyx.

3. Delivery

(1) The Product shall be supplied on an ex-works basis to Glycyx or on a delivered basis to Glycyx or Glycyx's designee in accordance with Glycyx's instructions.

(2) Title to and risk in the Product shall pass to Glycyx either upon collection by Glycyx of the Product from Courtaulds' Buckhaven plant or upon delivery to (Glycyx or their designee at destinations to be nominated by Glycyx.

(3) Deliveries of the Product will initially be in 50 kg net weight Mauser drums (which will be double polythene lined and non-returnable). Courtaulds shall test each lot of Product before delivery to Glycyx and provide a Certificate of Analysis for each lot of Product delivered.

4. Price and Payment

(1) The price to be paid by Glycyx for the minimum orders of Product supplied pursuant to Clause 2(2) hereunder shall be as follows:

(a) for Product supplied pursuant to the Initial Order [*] the price shall be [*]:

(b) for Product supplied pursuant to the Second Order of [*] the price shall be [*]; and

Provided that Courtaulds is able to buy the required quantities of raw materials (namely beta alanine and p Nitro benzoylchloride) at the appropriate time such raw materials are required to make the Product and at a price for such raw materials respectively of [*] delivered to Courtaulds' plant at Buckhaven, [*]. If both Glycyx and Courtaulds are unable to purchase the raw materials at the prices referred to above. Courtaulds will forthwith notify Glycyx and the parties will meet and negotiate in good faith within 30 days a revised price per kilogramme for the

-3-

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

Product. If the parties fail to agree on a revised price within 30 days or if Glycyx is unable to End an acceptable supplier of such raw materials at a mutually acceptable price. this Agreement shall terminate forthwith. If requested by Glycyx, Courtaulds shall deliver the Product to a consignment address and charge Glycyx at cost for Carriage and insurance.

(2) At the beginning of October each Calendar year Glycyx and Courtaulds will negotiate in good faith and agree on prices for any quantities ordered over the quantities referred to in Clause 2(2) above.

(3) Glycyx shall make payment to Courtaulds in British Pounds Sterling within 30 days after the later of (i) the date of dispatch of Product to Glycyx or (ii) Glycyx's receipt of the invoice with respect to shipment of such Product.

5. Terms of Supply.

(1) Courtaulds warrants to Glycyx that all Product supplied hereunder will at the time of dispatch to Glycyx or its designees (i) comply with the Specification. (ii) be Manufactured, packaged, stored and supplied in accordance with Good Manufacturing Practices and the Drug Master File with respect to Product and
(iii) not be adulterated or misbranded within the meaning of the United States Federal Food, Drug and Cosmetic Act or any other similar law or regulation within the United Kingdom. Courtaulds shall comply with the requirements of all laws regulations and codes of practice relating to the manufacture of the Product that are in force in the United Kingdom (including UK DHSS and ISO 9002 standards) and the United States of America (being the standards of the FDA).

(2) Should Glycyx have requirements for compliance with other laws or regulations they shall notify Courtaulds of these and the direct cost of complying with such further laws or regulations shall be reimbursed to Courtaulds by Glycyx.

(3) Courtaulds shall maintain for a least 6 years for each batch of Product made and produce for inspection by Glycyx all documentation regarding the manufacture of the Product, reference samples (solvents excluded) and quality control records, as Glycyx may from time to time require and shall provide Glycyx upon request with copies of the same.

(4) Glycyx or their authorized representatives may carry out quality assurance inspections of Courtaulds' production facilities for the Product at reasonable times during the course of this Agreement and may take reasonable samples for quality assurance purposes only. Courtaulds shall promptly provide Glycyx with all relevant information reasonably

-4-

required for the investigation of any complaints regarding the quality of Produce. Courtaulds shall promptly inform Glycyx of the outcome of any inspections by regulatory authorities
(including, without limitation. the National Drug Inspectorate)
of Courtaulds' manufacturing site for Product.

(5) Courtaulds shall not make any change to the manufacturing process for Product which would necessitate an amendment to the Drug Master File for Product, without the prior written consent of Glycyx.

(6) The Product to be supplied to Glycyx by Courtaulds shall be manufactured at Courtaulds' premises at Buckhaven or such other place as Glycyx and Courtaulds may agree.

6. Liability and Indemnity

(1) Neither party shall be liable (in contract, tort or otherwise) and irrespective of any negligence of such party for any indirect or consequential losses (including but not limited to loss of goodwill, business or anticipated savings), loss of profits or use or third party claims, suffered by the other party in connection with this Agreement or the Product save to the extent that such claims relate to death or personal injury resulting from the negligence of the first party in which case there shall be no limit to such party's liability.

(2) Notwithstanding Clause 6(l) above Glycyx shall have the responsibility to make any claim that any supply of the Product does not meet the Specification within 45 days from the date of delivery of such Product or within 25 days after Glycyx becomes aware that the Product does not meet the Specification; provided that in the latter event such claims must be brought within six months from the date of delivery of such Product. Glycyx will, in the event it receives Product which does not meet the Specification, require Courtaulds to redeliver a Product which does comply at Courtaulds' risk and expense. Where Glcyx claims that a Product does not comply with the Specification, it shall give full details of such claim and give Courtaulds reasonable access to investigate the matter before the remainder of the Product of the same consignment is used or returned to Courtaulds. If Glycyx does not so notify Courtaulds within the time limits set out above Glycyx shall be treated as having waived all claims connected with the matter which should have been so notified and, other than as provided in Clauses 6(l) and 6(3), Courtaulds shall have no further liability in respect of Product which does not comply with the Specification.

(3) In the event that Glycyx recalls any of its products due to the failure of Courtaulds or any of its employees to supply the Product in accordance with the Specification in any material respect, Courtaulds shall

-5-

compensate Glycyx for the reasonable costs of physical recovery and destruction of the Product and any products incorporating the Product directly incurred by Glycyx as a result of such recall.
[*]

(4) For the avoidance of doubt Glycyx hereby acknowledges that Courtaulds has neither been a party to nor is competent to judge the result of any clinical trials of the Product.

7. Duration and Termination

(1) Either party may terminate this Agreement by at least 12 months' prior written notice given at any time but not to expire prior to the fifth anniversary of the Commencement Date.

(2) Either party may terminate this Agreement forthwith by written notice to the other upon any material breach by the other which is not remedied within 30 days of notification in writing to the offending party, or if the other goes into liquidation or if a receiver or administrator is appointed over or an encumbrancer takes possession of any part of its assets, or it makes any composition with its creditors or is deemed unable to pay its debts, or suffers any analogous act under foreign law.

(3) Courtaulds may in addition terminate this Agreement forthwith by written notice to Glycyx if the Product license is withdrawn by a competent health authority in either the United Kingdom or the United States of America and may require Glycyx to pay Courtaulds' cost for any reasonable quantities of raw materials, work in progress (including the payment of waste) or finished goods in connection with the Product. Within 30 days of such termination, Courtaulds shall furnish Glycyx with a statement of all such materials. Glycyx shall pay such amount within 30 days of such statement date.

(4) Termination shall be without prejudice to Clause 6 and to any liabilities accrued at the date of termination.

8. Force Majeure

(1) If any party is delayed in or prevented from carrying out any of its obligations under this Agreement for any reason beyond such party's reasonable control, that party shall be excused performance of such obligation for as long as and to the extent that the prevention or delay lasts; provided that the party affected gives the other as much advance notice of such circumstances as is practicable, and in any event shall have notified the other in writing within seven days of discovery of such

-6-

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circumstances, identifying the same and indicating the anticipated period and quantities of the Product affected.

(2) A party affected by such circumstances shall use all reasonable endeavours to minimize the extent and duration of their effect on this Agreement.

(3) Notwithstanding Clause 8(l), if either party invokes force majeure for a continuous period of 90 days or more, or 90 days or more in any period of 180 days, the other party may forthwith terminate this Agreement by notice to the other.

9. Confidentiality

(1) Glycyx shall keep secret and shall not divulge to any third party any information given by Courtaulds in connection with this Agreement and/or the Product or which otherwise becomes known to Glycyx concerning Courtaulds' Drug Master File for the Product, the manufacturing process for the Product, or Courtaulds and its products through its performance of this Agreement or use the same other than for the purpose of executing this Agreement. Courtaulds shall keep secret and shall not divulge to any third party any information given by or on behalf of Glycyx in connection with this Agreement and/or the Product or use the same other than for the purpose of executing this Agreement. The foregoing obligations shall not apply to information which is:

(i) in the public domain or subsequently enters the public domain other than by breach of this Agreement;

(ii) can be shown by the receiving party by documentary evidence to have been in its possession or control prior to disclosure by the disclosing party;

(iii) received from a third party lawfully entitled to disclose the same; or

(iv) is required by law, regulation or court order to be disclosed; provided that the receiving party has taken such steps as are reasonably available under the law (but not the institution of legal action) to protect such information and notifies the disclosing party prior to disclosure and provided further that such disclosure shall only be made to the extent actually required by such law, regulation or court order.

-7-

10. Assignment

Courtaulds may assign any of its rights or duties hereunder with the prior consent of Glycyx which may not be unreasonably withheld save that such consent may be reasonably withheld by Glycyx if Courtaulds wishes to assign its rights and duties hereunder to a company which at the time of the proposed assignment (i) is selling Balsalazide Sodium in a finished form; or (ii) is manufacturing, formulating, or marketing a product which competes or will compete with Balsalazide Sodium. Glycyx may assign its rights and duties hereunder with the prior written consent of Courtaulds which consent shall not be unreasonably withheld.

11. Miscellaneous

(1) Save as otherwise provided herein, any order, notice, claim or demand hereunder shall be given in writing and shall be deemed duly served seven days after it has been sent property addressed by registered air mail to the address of the party set out below, and if sent by facsimile deemed sufficiently served on the date and at the time when it is sent to the following fax number or such other number(s) as may be notified by the party in question from time to time):

(a) in the case of notices to Glycyx to:

Glycyx Pharmaceuticals Ltd.

3600 W. Bayshore Road, Suite 205
Palo Alto, California 94303 USA
Fax No.: 0101 415 856 1555
FAO: President

(b) in the case of notices to Courtaulds to:

50 George Street
London W1A 2BB
Fax No.: 071-612-1500 FAO: The Company Secretary

(2) The parties acknowledge that for reasons of administrative convenience. supplies of the Product may be requested and orders confirmed on forms which embody the parties' respective standard conditions of trade, but such conditions shall not apply to the supply of the Products hereunder.

(3) This Agreement supersedes and cancels all previous agreements or arrangements between Glycyx and Courtaulds relating to the supply of Products by Glycyx. and any such previous agreement or arrangement is hereby terminated without compensation, but without prejudice to any

-8-

right resulting from any prior breach of such agreement or any rights or indemnity which may have accrued to either party under any such previous agreement or arrangement.

(4) No amendment to this Agreement shall be effective unless it is made in writing and signed by a duly authorized representative on behalf of each party.

(5) No failure by either party to enforce any provision of this Agreement shall constitute a waiver of that party's rights or thereafter prevent it from insisting on strict compliance therewith.

(6) This Agreement shall be governed by the law of England and the parties submit to the non-exclusive jurisdiction of the English courts.

(7) It is expressly agreed that Glycyx and Courtaulds shall be independent contractors and that the relationship between the two parties shall not constitute a partnership, joint venture or agency. Neither Glycyx or Courtaulds 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 authorization of the other party to do so.

(8) In case any one or more of the provisions of this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions hereof, but this Agreement shall be construed as if such provisions had never been contained herein.

-9-

IN WITNESS whereof the parties hereto have executed this Agreement the day and year first before written.

SIGNED by                )
------
for and on behalf of     )
COURTAULDS CHEMICALS     )     /s/ William J. McPherson
--------------------
(HOLDINGS) LIMITED       )
------------------


SIGNED by                )
------
for and on behalf of     )
GLYCYX PHARMACEUTICALS   )     /s/ Randy Hamilton
----------------------
LIMITED                  )
------

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(Page 1 of 4)

SCHEDULE I

BALSALAZIDE SODIUM

Written by:                                        Date:

Approved by:                                       Date:

Ref.No.                  07.JUL.93                 supersedes: 27 MAY 1993

Page 1 of 4

[*]

(Page 2 of 4)

SPECIFICATIONS

[*]

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(Page 3 of 4)

TEST METHODS

[*]

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

(Page 4 of 4)

[*]

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN

REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

EXHIBIT 10.11

Dated 23rd September, 1994

GLYCYX PHARMACEUTICALS, LTD (1)

- and -

MENARINI INTERNATIONAL OPERATIONS LUXEMBOURG SA (2)

DISTRIBUTION AGREEMENT

Hewitson Becke + Shaw 4/5 Church Street Peterborough
PE1 1XB

-1-

THIS AGREEMENT is made 23rd day of September 1994

BETWEEN:
(1) GLYCYX PHARMACEUTICALS, LTD a company incorporated under the laws of Bermuda and whose registered office is at 41 Cedar Avenue, Hamilton, HM12, Bermuda ("Glycyx"); and

(2) MENARINI INTERNATIONAL OPERATIONS LUXEMBOURG SA a company incorporated under the Law of Luxembourg whose principal place of business is at 15 Boulevard Roosevelt, Luxembourg ("Menarini")

WHEREAS:

A. Biorex Laboratories Limited ("Biorex") has developed and owns patent and other intellectual property rights in' a therapeutic pharmaceutical product for treatment and maintenance of colitis based upon the compound Balsalazide and Biorex has granted to Glycyx the exclusive right and licence to manufacture, or have manufactured, use, sell or have sold products incorporating Balsalazide.

B. Glycyx wishes to grant to Menarini (who in turn wishes to accept) the exclusive right to promote market distribute and sell the Product in the Territory and to effect or have effected on its behalf final manufacture of a finished Product within the Territory on the terms and subject to the conditions of this Agreement.

NOW IT IS HEREBY AGREED as follows:-

1. DEFINITIONS

1.1       In this Agreement the following words shall have the following
          meanings:

          "the Applications"       means the treatment of Diseases of Digestive
                                   System according to the international
                                   Classification of Diseases (Edition 9) under
                                   categories 555 and 556 "Ulcerative Colitis
                                   and Crohn's disease"

          "Balsalazide"            means (E)-5- [[4[[ (2-carboxyethyl) amino]
                                   carbonyl] phenyl] azo] -2 hydroxybenzoic acid
                                   disodium salt dihydrate (USAN)

          "Biorex"                 means Biorex Laboratories Limited a company
                                   incorporated in England under Company
                                   Registration Number 390233 whose registered
                                   office in at 2 Crossfield Chambers, Gladbeck
                                   Way, Enfield,

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                                   Middlesex EN2 7HT

"Clinical Trials"                  shall mean clinical trials effected by or on
                                   behalf of Glycyx and/or Menarini to effect a
                                   comparative study between the Product and the
                                   Asacol brand of 5.ASA currently marketed in
                                   the Territory and elsewhere whether conducted
                                   in the United States, United Kingdom, the
                                   Territory or elsewhere and to be conducted
                                   substantially in accordance with the protocol
                                   previously agreed between Menarini and Glycyx
                                   and contained in a document dated October 5th
                                   1992

"Dossier"                          means the master regulatory dossier relating
                                   to the Product prepared by Glycyx in
                                   accordance with the terms of this Agreement

"Dossier Date"                     means the date upon which the Dossier shall
                                   be delivered by Glycyx to Menarini in
                                   accordance with the terms of this Agreement

"Excluded Territory"               means all countries in the World except the
                                   Territory and Japan Taiwan and Korea

"Force Majeure"                    means in relation to either party any
                                   circumstances beyond the reasonable control
                                   of that party (including but not limited to
                                   strike, look out or other form of industrial
                                   action, act of God, war, riot, accident,
                                   breakdown in plant or machinery, fire, flood,
                                   explosion or government action)

"Launch"                           means a commercial launch by Menarini (or any
                                   Menarini Associate) of the Product in a
                                   country Of the Territory supported by such
                                   marketing expense and support and launched in
                                   such quantities as may reasonably be
                                   appropriate for the Product to have a
                                   significant effect on total

-3-

                                   sales of any similar or competitive product
                                   in such country of the Territory

"the Manufacturing                 means the agreement relating to the
Agreement"                         manufacture and supply of the Menarini.
                                   Product referred to in clause 9.10.



"Menarini Associate"               means Menarini and such other companies owned
                                   by or associated with Menarini as are
                                   notified in writing to Glycyx by Menarini
                                   from time to time

"the Menarini Product"             means Bulk Balsalazide or the Bulk Active
                                   Ingredient (4ABA) and in the event of the
                                   development of any other pharmaceutical
                                   preparations, Bulk Balsalazide or the Bulk
                                   Active Ingredient in the form required for
                                   such other pharmaceutical preparation for the
                                   Applications.

"the Patents"                      means the patents and applications therefor
                                   relating to Balsalazide listed in Schedule 1
                                   to this Agreement and Any continuations,
                                   continuations in part, divisions,
                                   substitutions, reissues and extensions
                                   thereof and any applications for patents and
                                   patents granted in any part of the World
                                   derived from any such patents and
                                   applications and any and all other patent
                                   rights now existing or hereafter acquired
                                   (including applications therefor) pertaining
                                   to the subject matter of any of such patents
                                   and applications listed in Schedule 1 or that
                                   are otherwise related to Balsalazide or to
                                   pro drugs analogs or isomers thereof or
                                   improvements of any of the foregoing obtained
                                   in any country within the Territory.

"Product"                          means a pharmaceutical preparation in capsule
                                   form containing Balsalazide for the

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                                   Applications and such other pharmaceutical
                                   preparations containing Balsalazide for the
                                   Applications as may be developed by Glycyx
                                   during the term of this Agreement

"the Territory"                    means Italy, Spain, Portugal and Greece

"the Trade Name"                   means such trade name (other than the Trade
                                   Mark) as may be agreed between Glycyx and
                                   Menarini and designated for use in connection
                                   with the Product in any part of the Territory

"the Trade mark"                   means the trade name "Colazide" registered as
                                   a trademark for use on pharmaceutical
                                   preparations in the United Kingdom and
                                   elsewhere

1.2 The headings in this Agreement are for convenience only and shall not affect its Interpretation.

1.3 References to documents in the approved form shall be references to documents in the form agreed between the parties and initialled by both parties for the purposes of identification.

2. APPOINTMENT OF MENARINI

2.l In accordance with the terms and conditions contained in this Agreement Glycyx hereby grants to Menarini the exclusive right to promote market and sell the Product within and throughout the Territory and pursuant to the terms of Clause 9.2 only to effect (or have affected on its behalf) final manufacture of a finished Product.

2.2 The rights granted hereunder to Menarini shall be in respect of the Product only but for the avoidance of doubt shall include such dosages and forms thereof as may be appropriate within the Applications. In the event that either party shall become aware of any indications or applications for Balsalazide other than the Applications it shall forthwith notify the other party and shall supply the other party with such details of the other indications and applications as may be available to it Provided Always That:-

2.2.1     Menarini shall have the right of first refusal (exercisable
          within 30 days of receipt by Menarini of such details from
          Glycyx or supply by Menarini of such details to Glycyx (as
          the case may be)) to enter into good faith negotiations with
          Glycyx in respect of an agreement concerning the development

-5-

          of such other Indications and applications and the grant to
          Menarini of the right to exploit the same in the Territory;
          and

2.2.2     Menarini shall have no right whatsoever to use and exploit
          Balsalazide in any such other indications and/or
          applications unless and until completion of such good faith
          negotiations and the execution of a written agreement in
          respect thereof; and

2.2.3     during the period in which Menarini shall continue to
          negotiate in good faith (which shall not (unless expressly
          agreed in writing by Glycyx and Menarini) exceed six
          calendar months) Glycyx shall not disclose details of such
          other indications and/or applications to any third party or
          grant any third party any rights therein provided that
          Glycyx shall not be prevented or precluded from disclosing
          the same to any third party which shall have entered good
          faith negotiations for the acquisition of the right to
          exploit such other indications and/or applications outside
          the Territory; and

2.2.4     In the event that Menarini shall not exercise its right of
          first refusal under Clause 2.2.1 or (after exercise of such
          right of first refusal) shall not enter into an agreement
          for the grant of rights to Menarini in respect of the
          Territory in respect of such other indications and
          applications within such period of six calendar months (or
          such extended period as may be agreed between the parties)
          Glycyx shall be entitled to offer such rights in respect of
          the Territory to a third party provided that (unless
          otherwise agreed by Menarini) such rights shall be offered
          to such third party upon terms and conditions no more
          favourable than those offered to Menarini. For the avoidance
          of doubt no such proviso shall apply to the offer or grant
          of rights in respect of such other indications and
          applications for areas outside the Territory; and

2.2.5     in respect of any such other applications and Indications
          disclosed by Menarini to Glycyx, Glycyx shall not use or
          exploit the same (either itself or through any third party)
          whether in the Territory or elsewhere without the prior
          consent of Menarini (such consent not to be unreasonably
          withheld or delayed).

3. EARLY TERMINATION BY MENARINI

3.l This agreement shall become effective in all respects as at the date of execution and shall continue thereafter in accordance with its terms, subject to termination under the provisions of Clause 18 Provided Always that this agreement may at the sole option of Menarini be terminated by notice

-6-

in writing served by Menarini on Glycyx in the event that the results of the Clinical Trials shall not have established the clinical superiority of the Product in comparison with the Asacol brand of 5- ASA (as currently marketed within the Territory and elsewhere) upon the criteria and basis set out in Appendix 1 to this agreement: such notice to be served by Menarini within 30 days of receipt by Menarini of the results of the Clinical Trials.

3.2 Forthwith upon service of any notice of termination under Clause 3.1 Menarini shall:-

3.2.1     return to Glycyx and deliver up all tangible copies of all
          confidential information belonging to Glycyx or Biorex and
          supplied to or obtained by Menarini in connection with this
          Agreement; and

3.3.2     forthwith cease all and any actions concerning or in respect
          of the exercise by it of any rights granted under this
          Agreement; and

3.2.3     deliver to Glycyx all information and data of whatsoever
          nature relating to the Product together with all copies
          thereof (other than correspondence between Glycyx and
          Menarini) which Menarini may have in its possession or under
          its control including (but without limitation) all
          scientific, medical and safety data relating to the Product;
          and

3.2.4     at its sole cost take all such actions as may be necessary
          and appropriate fully and effectively to transfer absolutely
          to Glycyx (or as it may direct) all applications made or
          pending and all approvals and rights granted to or by all
          regulatory and approval authorities (including without
          limitation all technical and pricing approvals) within each
          part of the Territory and all information, documentation and
          rights within the possession or control of Menarini or any
          Menarini Associate or any agent or representative thereof in
          respect of all or any of such applications, approvals and
          rights.

3.3 Menarini undertakes after the date of service of any notice under Clause 3.1:-

3.3.1     and for a period of two years thereafter to execute such
          further documents and/or provide to Glycyx such further
          Information and assurance as Glycyx may reasonably require
          fully to give effect to the provisions of Clause 3.2;

3.3.2     and for a period of tan years thereafter (without prejudice
          to the provisions of Clause 3.4) to keep and maintain as
          confidential the existence of and the contents of this
          Agreement and all matters relating to the negotiation and/or
          termination of

-7-

this Agreement and not to disclose any information
concerning any of the same to any third party.

3.4 Menarini hereby confirms and acknowledges that notwithstanding the termination of this Agreement under Clause 3.l the provisions of Clauses 14, 15.1 and 23 shall continue thereafter in accordance with their terms.

3.5 In the event of termination under Clause 3.1 forthwith upon the proper and full performance in all material respects by Menarini of its obligations under Clause 3.2 Glycyx shall reimburse to Menarini:-

3.5.1     [*]

3.5.2     [*]

3.5.3     [*]

3.6 Menarini hereby undertakes that it shall not effect any Launch of the Product in any part of the Territory unless and until either:-

3.6.l     30 days after the date of receipt by Menarini of the results
          of the Clinical Trials, in the event that no notice shall
          have been served under Clause 3.1; or

3.6.2     Menarini shall have expressly and irrevocably by notice in
          writing to Glycyx waived its right to terminate under Clause
          3.1

3.7 In the event that either no notice under Clause 3.1 shall have been servedby Menarini within 30 days of receipt by Menarini of the results of the Clinical Trials or that Glycyx shall receive from Menarini

notice in writing expressly and irrevocably waiving in all respects its right to terminate under Clause 3.1 Menarini shall forthwith upon the expiry of such 30 day period or upon service of such notice of waiver (as the case may be) pay to Glycyx the sum of [*] due under Clause 7.1.1.

4. REGULATORY APPROVALS

4.1 Glycyx shall use all reasonable endeavours to prepare (or procure the preparation of) the Dossier in accordance with published standards required for master regulatory dossiers by the European Commission as at the date of completion of the Dossier and in a form suitable for submission to and suitable for approval by the relevant regulatory authorities in connection with obtaining health registration in each

Part of the Territory.

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

-8-

4.2 Menarini undertakes to use its best endeavours to file the Dossier in each part of the Territory as soon as reasonably practicable after the Dossier Date and in any event within 26 weeks of the Dossier Date.

4.3 Menarini undertakes to use its best endeavours to apply for and obtain all relevant regulatory health and price approvals for the marketing and use of the Product in each part of the Territory as soon as reasonably practicable after the Dossier Date and in any event shall apply for such approvals within two years from the Dossier Date Provided Always that Menarini shall not be liable in respect of any delay experienced in obtaining any such approvals where such delay is caused by circumstances outside its reasonable control or influence. Menarini shall supply to Glycyx quarterly reports setting out in reasonable detail its activities and progress in developing and securing such approvals for the Products in each part of the Territory.

4.4 Subject to proper performance by Glycyx of its obligations under Clause 4.1 Menarini shall be solely responsible for effecting (at its sole cost and expense) such amendments and translations to the Dossier as may be required to procure that the Dossier complies with and satisfies the requirements of any regulatory or approval authority within any particular part of the Territory and Glycyx shall not be obliged to incur any cost or conduct any further test or development work or otherwise amend or translate the Dossier whether before or after the Dossier Date Provided always that in the event that Menarini reasonably requires any additional work to be carried out by Glycyx in such connection, Glycyx shall use its reasonable endeavours to assist Menarini subject to reimbursement by Menarini of reasonable costs incurred by Glycyx in providing such assistance.

4.5 In the event that Menarini shall fail to effect Launch in any country of the Territory within a period of 180 days after the grant of all necessary registrations, approvals, price approvals, and reimbursements, then Glycyx may in its absolute discretion serve written notice on Menarini (within 30 days of the expiry of such period of 180 days) amending the rights of Menarini granted hereunder to be non-exclusive in respect of any such country of the Territory only. Thereafter Glycyx for the avoidance of doubt shall also be entitled to exploit such rights and to market and exploit the Product in such part of the Territory (whether directly or indirectly through any agent, contractor or licenses) in such manner as it may In its sole discretion think fit.

4.6 In the event that Menarini's failure to effect Launch in any country in the Territory as stated in Clause 4.5 exceeds a period of twelve months from the grant of all necessary registrations, approvals, final price approvals and reimbursements for such country Glycyx may at its sole discretion serve written notice on Menarini (within 30 days of the expiry of such period of twelve months) terminating all rights granted to Menarini under the terms of this

-9-

Agreement in respect of such part of the Territory only and thereafter Glycyx for the avoidance of doubt shall be entitled to exploit such rights and to market and exploit the Product in such part of the Territory (whether directly or indirectly through any agent, contractor or licensee) in such manner as it may in its sole discretion think fit free of any obligation to Menarini.

5. MENARINI'S UNDERTAKINGS

5.l Menarini shall use its best endeavours to promote, market and sell the Product and to achieve such penetration of the relevant market as may be commensurate with the qualities of the Product throughout the Territory. Menarini undertakes to use at least such procedures and standards to seek to obtain such penetration as it may use for other products of Menarini.

5.2 Without prejudice to the generality of Clause 5.1 Menarini undertakes to allocate such promotional and sales resources and such technical support for the promotion, marketing and sales of the Product as may reasonably be required to achieve such penetration of the relevant market an may be commensurate with the qualities of the Product in all parts of the Territory. Menarini undertakes to use at least such procedures and standards to seek to obtain such penetration as it may use for other products of Menarini.

5.3 Menarini shall promote market and sell the Product in the Territory entirely in accordance with the terms of any product licence, price approval (where applicable), and other restrictions and regulations for the Product as may be relevant and applicable in each country within the Territory.

5.4       Menarini further undertakes:-

          5.4.1     to promote, market and sell the Product in the Territory
                    under the Trade Mark or Trade Name only and not to use any
                    other trade name, trademark or logo for or on the Product
                    Provided Always That the name "Balsalazide" may be used but
                    only as a generic name for the Product in accordance with
                    and as required by applicable laws and regulations; and

          5.4.2     to enter into such trademark user agreements as may
                    reasonably be required by Glycyx in connection with the
                    exploitation by Menarini of the Trade Mark or the Trade
                    Name; and

          5.4.3     to enter into such other agreements (whether relating to
                    technical standards or otherwise) as may reasonably be
                    required by Glycyx in connection with the exploitation by
                    Menarini of the Product provided always that such other
                    agreements shall evidence and clarify the obligations of
                    Menarini as agreed between the parties as at the date

-10-

          hereof and shall not seek to amend any such obligations; and

5.4.4     to notify Glycyx immediately of any improper or wrongful use
          of the Trade Mark or the Trade Name, Patents or otherwise
          any proprietary or confidential information of Glycyx or
          Biorex relating to the Product coming to Menarini's
          knowledge; and

5.4.5     forthwith to refer to Glycyx all enquiries received for the
          supply of the Product outside the Territory; and

5.4.6     not actively to seek customers for the Product outside the
          Territory and not to establish any branch or sales force
          outside the Territory for the marketing and sale of the
          Product; and

5.4.7     to develop and design packaging labelling instructions and
          promotional materials for the Product in each part of the
          Territory at its sole cost and expense Provided Always That
          the general quality design and content of such packaging and
          other materials supplied with the Product by Menarini shall
          be subject to prior approval by Glycyx (such approval not to
          be unreasonably withheld or delayed); and

5.4.8     not to use any misleading statements or misrepresentations
          on the Product packaging labelling instructions and
          promotional materials or use any defective packaging or
          other materials and to comply in all respects with all
          regulations and laws applicable in each part of the
          Territory in connection with the Product packaging and other
          materials provided in connection therewith; and

5.4.9     in the promotion marketing and/or sale of the Product in
          each part of the Territory to comply with all relevant
          regulatory health and pricing regulations and approvals in
          such part of the Territory. For the avoidance of doubt
          Glycyx shall not be responsible or liable In any manner
          whatsoever for compliance with any such regulations and
          approvals (whether or not it shall have assisted Menarini in
          or approved the promotion marketing and/or sale of the
          Product in such part of the Territory); and

5.4.10    not to use any packaging which may adversely affect the
          Product in any way whatsoever including but without
          limitation the Product's approved shelf-life; and

5.4.11    not to incur any liability on behalf of Glycyx or in any
          manner pledge or purport to pledge Glycyx's credit or accept
          any order or make any contract

-11-

          binding on Glycyx or give or make any representation,
          warranties or conditions or quantities with reference to the
          Product on behalf of Glycyx. Menarini is not and shall not
          be deemed to be the agent of Glycyx and in all
          correspondence and dealings with third parties shall clearly
          indicate that it is acting as principal or otherwise as
          Licenses under the terms of this Agreement; and

5.4.12    to be solely responsible for the acts and omissions of its
          employees and representatives in connection with the
          performance of its rights and obligations hereunder; and

5.4.13    not to obtain or seek to obtain the Menarini Product from
          any third party or otherwise (save as expressly permitted by
          this Agreement) itself to manufacture or attempt to
          manufacture all or any part of the Menarini Product.

5.4.14    During the period from the date of this Agreement to the
          date of expiry of a period of three years after Launch in
          each country of the Territory not to market (and to procure
          that no Menarini Associate involved in the distribution or
          marketing of the Product within any country of the Territory
          shall market) whether directly or indirectly or through any
          licenses or distributor within each such country of the
          Territory any product for the treatment of inflammatory
          bowel disease in which the anti inflammatory component may
          compete in any material respect with Balsalazide.

6. PRODUCT DATABASE AND ADVERSE REACTIONS REPORTING

6.2       Menarini undertakes to notify Glycyx:-

          6.2.1     by telephone or telefax within 24 hours of becoming aware of
                    any serious or unexpected adverse reaction or
                    contraindication to the Product; written documentation of
                    such events must be received by Glycyx within five working
                    days of verbal notification using the CIOMS form;

          6.2.2     within 3 months, on a quarterly basis, of other adverse
                    reactions or contraindications to the Product other than
                    stated under 6.2.1, in accordance with the definitions
                    listed in Schedule

-12-

          4; and

6.2.3     regarding sales volumes, by providing in writing quarterly
          unit sales figures by reference to each part of the
          Territory. This information will be used by Glycyx to
          generate "increased frequency" data for periodic safety
          reporting to FDA.

6.3 Glycyx undertakes to notify Menarini:-

6.3.1     forthwith in the event that it becomes aware of any serious
          or previously unknown adverse reaction or contra indications
          to the Product in any part of the Territory and the Excluded
          Territory; and

6.3.2     within three months, on a quarterly basis of other adverse
          reactions or contraindications to the Product other than
          stated under 6.3.1 in any part of the Territory and the
          Excluded Territory.

6.4 In the event that Glycyx or any third party shall conduct clinical studies in support of any promotional or marketing activities of Glycyx or such third party within the Territory or the Excluded Territory, Glycyx shall grant or procure the grant to Menarini of full unrestricted access to the results of such trials and Menarini shall be entitled to use such results in connection with the marketing, sale and use of the Product in the Territory.

6.5 Glycyx undertakes to organise regular meetings between Menarini and any other licenses and/or distributor of the Product within Europe at which information concerning the marketing usage and performance of the Product may be exchanged in order to co-ordinate the marketing image of the Product as sold by licensees and/or distributors throughout Europe and Menarini undertakes to procure attendance at such meetings by a suitably qualified and experienced employee of Menarini.

7. DEVELOPMENT PAYMENT

7.1 In consideration of the obligations of Glycyx contained in this Agreement Menarini shall pay to Glycyx as a contribution to the costs incurred in the research and development of the Product (both before and after the date hereof):-

7.1.1 [*]

7.1.2 [*]

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN

REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

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          [*]

7.1.3     [*]

7.2.1     Glycyx acknowledges receipt prior to the date hereof to the
          sum of [*] from Menarini as partial reimbursement of the
          costs of conduct of the Clinical Trials.

7.2.2     In the event that the Clinical Trials are conducted at the
          cost of Glycyx within the United Kingdom and/or the United
          States of America Menarini shall pay to Glycyx (within seven
          days of receipt of a request therefore from Glycyx such
          request to be made upon agreement of the parties as to the
          conduct of the Clinical Trials) a

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN

REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

-14-

          further sum of [*] as partial reimbursement of the costs of
          the conduct of the Clinical Trials.

7.2.3     In the event that the clinical trials are not conducted at
          the cost Of Glycyx within the United Kingdom and/or the
          United States of America and at Menarini's option the
          Clinical Trials will be conducted at the cost of Menarini
          within the Territory Menarini shall be under no obligation
          to pay any further sum under clause 7.2.2 above and Glycyx
          shall repay to Menarini (within seven days of receipt of the
          request therefore from Menarini such request to be made upon
          agreement between the parties as to the conduct of the
          Clinical Trials) the sum previously paid under clause 7.2.1.

8. CLINICAL TRIALS AND DEVELOPMENTS

8.1 Menarini is authorised by Glycyx to undertake clinical studies after the date hereof in support of Menarini's regulatory, promotional and marketing activities and to enhance the Product's approval and/or use within the Applications Provided Always That:-

8.1.l     such trials are conducted solely for such purposes and not
          for any other purpose whatsoever;. and

8.1.2     prior to the conduct of such trials the trial objectives and
          protocols are approved by Glycyx (such approval not to be
          unreasonably withheld or delayed); and

8.1.3     Menarini shall keep Glycyx fully informed as to the conduct
          progress and results of such trials; and

8.1.4     Glycyx shall have full unrestricted access to the results of
          such trials and shall be entitled to disclose the same to
          third parties for use in connection with the registration
          marketing sale and use of the Product in the Excluded
          Territory only; and

8.l.5     Menarini shall bear all the costs and expenses associated
          with such trials (including but without limitation the costs
          of documentation and administrative payments to trialists);
          and

8.1.6     such trials shall be conducted only in accordance with any
          regulatory permissions and/or approvals granted for the
          Product in such part of the Territory in which the trials
          are conducted; and

8.1.7     Menarini, agrees that, prior to submission of a manuscript
          describing the results for publication, Menarini, shall
          forward to Glycyx a copy of the manuscript to be submitted
          and shall allow Glycyx 30 days to determine whether a patent
          application

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN

REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

-15-

          or other Intellectual property protection should be sought
          prior to publication in order to protect Glycyx's
          proprietary interest in any product or invention developed
          in connection with this project. Upon request by Glycyx and
          with reasonable justification, Menarini agrees to withhold
          such publication for an additional 90 days, if required to
          obtain subject protection. Glycyx will have the right to
          request deletion from a manuscript of any trade secret,
          proprietary, or confidential information supplied by Glycyx
          to Menarini, but shall not otherwise have the right to
          interfere with publication; and

8.1.8     all Information relating to and all results of such trials
          shall be supplied to Glycyx forthwith in the event of
          termination of this agreement by Menarini under Clause 3.1.

8.2 Menarini undertakes to use reasonable endeavours to support those scientific International symposia organised, arranged or sponsored by Glycyx and/or Biorex involving areas of medicine relating to diseases of the gastro-intestinal tract and similar conditions.

9. SUPPLY OF PRODUCT

9.1 The Menarini Product shall be supplied by Glycyx to Menarini (or any specified sub-licensee or designated third party) upon such terms as may be agreed in writing between Glycyx and Menarini.

9.2 Menarini shall be granted a limited licence for the term of this Agreement only to undertake such further manufacturing as may reasonably be required to produce from the Menarini Product the Product in and for use in the Territory only Provided Always that;

9.2.1     Menarini shall carry out such manufacturing fully in
          accordance with the Drug Master File and the specification
          for the Product and otherwise in accordance with good
          manufacturing practice and shall comply with such
          instructions of Glycyx as may reasonably be required to
          ensure conformity with other Product on the market within
          Europe; and

9.2.2     Glycyx shall notify Menarini forthwith of any changes in the
          Drug Master File and/or the specification for the Product;

9.2.3     Representatives of Glycyx and/or its licensor may upon
          reasonable notice and at times reasonably acceptable to
          Menarini visit and inspect the premises and facilities at
          which such further manufacturing takes place from time to
          time and consult informally (during such visits and by
          telephone) with personnel of Menarini carrying out work on
          such manufacture.

-16-

9.3 Without prejudice to the generality of Clause 9.1 Menarini shall notify Glycyx in writing of its forecast requirements for quantities of Menarini Product and details of its proposals for Launch in each country of the Territory:-

9.3.l     In respect of initial quantities of Menarini Product
          required for Launch of Product In the Territory and details
          of its proposals for Launch In each country of the Territory
          Menarini shall deliver to Glycyx in writing on or before the
          date of filing within any country (under clause 4.2) a
          forecast of its requirements for each of the twelve months
          immediately following the anticipated date for Launch. Such
          forecast shall be updated in writing quarterly thereafter
          but shall not be binding upon Menarini unless and until
          delivered in connection with Launch under the provisions of
          Clause 9.3.2.

9.3.2     Menarini shall deliver to Glycyx firm written orders for
          quantities of Menarini Product required for Launch and
          thereafter not less than sixteen weeks before the required
          date of delivery. Firm written orders for the first two
          months after Launch shall be delivered (permitting not less
          than 16 weeks lead time) no later than fifteen days
          following the grant of all relevant approvals for marketing
          and sale of the Product within such Territory together with
          forecasts for the seven months subsequent to the first two
          months after Launch. Upon delivering such firm written
          orders in connection with Launch, and thereafter on or
          before the first day of each calendar month throughout the
          term of this agreement, Menarini shall deliver to Glycyx
          revised forecasts in writing of its requirements for
          Menarini Product for the subsequent nine month period
          (commencing on the first day of the month being sixteen
          weeks after the month in which the forecast is delivered)
          and with such forecasts shall deliver firm written orders
          for the first two calendar months of such nine month
          forecast period, In accordance with clause 9.5. Provided
          Always that during the first year of supply under the terms
          of this Agreement the parties will work closely together and
          agree on such terms as to enable Glycyx to have such firm
          orders and lead times as may reasonably be appropriate to
          enable it to use all reasonable endeavours to meet in full
          Menarini's requirements for Menarini Produt under the terms
          of this Agreement.

9.4 Glycyx shall use reasonable endeavours to fulfil all written orders placed on it by Menarini for the Menarini Product.

9.5 Whilst the forecasts delivered by Menarini to Glycyx under Clause 9.3 shall be non-binding and will not place any obligation on either Menarini to order such quantities or

-17-

Glycyx to deliver such quantities:-

9.5.1     Menarini shall use all reasonable endeavours to estimate
          accurately in such forecasts its requirements for the
          Menarini Product; and

9.5.2     Menarini shall ensure that all written orders are placed
          providing a period of 16 weeks between the date of order and
          the required date of delivery.

9.6 Glycyx hereby warrants and undertakes that all quantities of the Menarini Product supplied by it to Menarini under the terms of this Agreement shall as at the date of delivery be supplied fully in accordance with the Bulk Product Specification and the Finished Product Specification contained in Schedule 2 and shall have been manufactured in accordance with European Community Current Good Manufacturing Practice and the Drug Master File for the Product.

9.7 Upon the receipt of any delivery of the Menarini Product from Glycyx Menarini shall test such Menarini Product (in accordance with the Quality Test Procedures agreed in the Manufacturing Agreement) and in the event that the proper performance of such Quality Test Procedures reveals any breach of the warranty given in Clause 9.6 Menarini shall be entitled to reject the full shipment of the Menarini Product within 45 days of receipt of such shipment by notice in writing to Glycyx. In the event that such shipment is not rejected within 45 days of receipt Menarini shall be deemed to have accepted the same as fully in compliance with the warranty given in Clause 9.6.

9.8 In the event of any dispute between the parties concerning any allegation of breach of the warranty contained in clause 9.6 or concerning any rejection or purported rejection of any shipment of the Menarini. Product a sample quantity of the Menarini Product in question shall be delivered to an independent laboratory (nominated by the agreement of the parties or in the absence of agreement on the application of either party by the President for the time being of the Swiss Pharmaceutical Society) which shall be supplied with copies of the Bulk Product Specification, the Finished Product Specification or otherwise, the relevant agreed specification and the Drug Master File and shall carry out testing in accordance with the Quality Test Procedures and whose decision as to the quality of such Menarini Product and as to any breach of warranty by such Menarini Product and as to the apportionment between the parties of the costs of arbitration shall in the absence of manifest error be final and binding on the parties.

9.9 The terms and conditions relating to the supply of the Menarini Product by Glycyx to Menarini as set out in this Agreement or as otherwise agreed in writing from time to time by the parties shall prevail over any terms and conditions of sale or purchase specified by either party from time to time.

-18-

9.10      The parties undertake to execute an agreement relating to the
          manufacture and supply of Menarini Product for the purpose of
          disclosure to the relevant regulatory authorities in the Territory
          substantially in the form contained in Schedule 3. In the event that
          such agreement is entered into by any Menarini Associate in place of
          Menarini, Menarini undertakes to guarantee and procure the proper
          performance by such Menarini Associate of all its obligations under
          such agreement.

10.       PRICE
          -----

10.1      The price charged for the Menarini Product by Glycyx to Menarini shall
          be such prices as may be agreed in writing between Glycyx and
          Menarini (or any Menarini Associate, on behalf of Menarini).

11.       DELIVERY
          --------

11.1      Delivery of the Menarini Product shall be made to such address
          designated by Menarini and Glycyx shall be responsible for effecting
          delivery to such designated address Provided Always that all such
          costs incurred by Glycyx in effecting such delivery shall be
          reimbursed in full by Menarini.

11.2      Risk in the Menarini Product shall pass to Menarini upon delivery and
          Glycyx shall be responsible for insuring the Menarini Product in
          transit to the designated Menarini destination Provided Always that
          all such costs of insurance shall be reimbursed in full by Menarini.

12.       TRADEMARK LICENCE
          -----------------

12.l      Glycyx hereby grants to Menarini (at Merarini's sole option) a sole
          and exclusive licence to use either the Trade Mark or the Trade Name
                                       ------                --
          on the Product and in connection with the marketing and exploitation
          of the Product in the Territory only.

12.2      In the event that Menarini wishes to use the Trade Mark Glycyx
          undertakes to procure the grant of such rights and licence as may
          reasonably be required to give effect to Clause 12.1 from the Trade
          Mark owner, Biorex.

12.3      In the event that Menarini wishes to use the Trade Name Menarini
          hereby confirms and undertakes that all right title and interest
          therein shall vest in and remain in Glycyx and that Menarini shall
          have the right to use the same only as set out in this Clause 12.

12.4      Menarini hereby confirms and acknowledges that it is licensed to use
          either the Trade Mark or the Trade Name only as set out in this
          Agreement and Menarini further acknowledges:-

-19-

          l2.4.1    that all goodwill in the Trade Mark and the Trade Name in
                    any part of the Territory (whether or not generated by the
                    activities of Menarini under this Agreement) shall vest in
                    Biorex or Glycyx as the case may be; and

          l2.4.2    that any application for registration of the Trade Mark
                    shall be made in the name of Biorex only; and

          12.4.3    that any application for registration of the Trade Name
                    shall be made in the name of Glycyx only; and

          12.4.4    undertakes to transfer and assign to Glycyx (or as it may
                    direct) any right, title or interest required by Glycyx or
                    Biorex for registration of the Trade Name or the Trade Mark
                    in any part of the Territory in the name of Biorex or Glycyx
                    and for all goodwill relating to the Trade Mark or the Trade
                    Name in the Territory to vest in Biorex or Glycyx as the
                    case may be.

l2.5      In consideration of the rights and licence granted to Menarini in
          respect of the Trade Mark or Trade Name Menarini shall pay to Glycyx a
          licence fee at the rate of [*] [*] of all Product bearing the Trade
          Mark or Trade Name (as the case may be) supplied by Menarini to any
          third party Provided Always that:-

          12.5.l    such licence fee shall not become payable upon any Product
                    until after the date of expiry of this Agreement pursuant to
                    Clause 18.1; and

          12.5.2    thereafter shall continue to be payable for the period only
                    in which the Trade Mark or Trade Name (as the case may be)
                    is used by Menarini

          and for the purposes of this Clause 12.5:

          "Net Sales Price" shall mean the invoiced ex-works sales price of a
          Product as sold by Menarini or any Menarini Associate in an arms
          length transaction after deduction of normal trade discounts actually
          granted and any credits actually given by Menarini or any Menarini
          Associate for returned or defective goods and after deducting any
          costs included in the invoice for packing, insurance, carriage and
          freight and Value Added Tax or other sales tax and in the case of
          export orders any import duties or similar applicable government
          levies. In any sale or other disposal of any Product otherwise than in
          any arms length transaction the Net Sales Price shall be whichever is
          the higher of the price actually charged to the customer for the
          Product or the fair market value of the Product in the relevant part
          of the Territory.

[*]  CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
     THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
     REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

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13. LIABILITY

13.1 Glycyx hereby agrees to indemnify Menarini against any action, claim, loss and damage suffered by or awarded against Menarini in connection with any claim against Menarini from a third party arising from any breach by Glycyx (or its subcontractors or nominees) of the warranty and undertaking contained in clause 9.6 Provided Always That such indemnity shall not extend to any liability, cost, expense or damage suffered or incurred by reason of any defect in any Menarini Product which was detected or should have been detected by Menarini by means of the Quality Test Procedures applied (or which should have been applied) by Menarini within 45 days of the date of delivery of the Menarini Product under the provisions of Clause 9.7.

13.2 Menarini undertakes to indemnify and hold Glycyx harmless against all and any loss, damage, claim or liability suffered or incurred by Glycyx in any circumstances whatsoever save only where Glycyx is liable under Clause 13.l.

13.3 Save as expressly provided in this Agreement in no circumstances whatsoever shall either Glycyx or Menarini be liable for any special indirect incidental or consequential damages (including without limitation damages for lose of profits production, use or sales) whether arising in contract, tort or any other legal basis whatsoever.

14. CONFIDENTIAL INFORMATION

14.1 Menarini hereby agrees and undertakes that during the term of the Agreement and for a period of ten years thereafter (howsoever termination may be caused or arise and including termination by reason of expiry under Clause 18.l) it shall keep confidential and shall not without the prior written consent of Glycyx disclose to any third party or (save as expressly provided in this Agreement) use any information of a confidential nature belonging to Glycyx or Biorex (including trade secrets and information of commercial value) which may become known to Menarini from Glycyx or its representatives in connection with this Agreement Provided Always That such obligation of confidentiality shall not extend to any part of such confidential information which:

14.1.1    shall otherwise than by reason of any default by Menarini become
          freely available to the general public; or

14.l.2    Menarini can show by documentary evidence was in its possession
          or control prior to disclosure free of any obligation of
          confidentiality; or

14.l.3    Menarini can show by documentary evidence shall have come into
          the possession or control of Menarini from a third party free of
          any obligation of confidentiality subsequent to disclosure
          hereunder; or

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14.l.4    Menarini is obliged by law or regulation to disclose to a third
          party provided that such disclosure shall only be to the extent
          required by such law or regulation.

14.2 Menarini shall ensure that any employee of, or consultant to Menarini who shall obtain any confidential information in connection with the performance of this Agreement shall be bound by obligations of confidentiality substantially similar to the provisions of Clause 14.1.

14.3 Glycyx acknowledges the importance of keeping all material information relating to the Product confidential and Glycyx will use all reasonable endeavours to ensure that no such information is made public or otherwise made available to third parties in any manner which would jeopardize the exclusivity in the Territory granted to Menarini hereunder.

15. INTELLECTUAL PROPERTY

15.1 Menarini acknowledges that save as expressly provided herein Menarini shall have no right, title, interest or licence in or to the Patents or otherwise any intellectual property rights of Biorex or Glycyx in Balsalazide or the Product or any Menarini Product.

15.2 In the event that either party becomes aware of any infringement by any third party within the Territory of any intellectual property rights of Glycyx and/or Biorex in the Patents, Balsalazide, the Product or any Menarini Product or the Trade Mark it shall forthwith notify the other party. Glycyx shall be entitled to take such action (or procure such action by Biorex) as it may in its sole discretion consider appropriate against any such third party infringer Provided Always That:-

15.2.1    Menarini shall give such assistance as Glycyx may reasonably
          require in connection with any such action (subject to
          reimbursement by Glycyx of all costs reasonably incurred by
          Menarini); and

15.2.2    Glycyx shall keep Menarini informed of the conduct and progress
          of such action but shall be entitled to conduct, pursue and
          settle such action in such manner as it shall reasonably consider
          appropriate and to retain any damages awarded against any such
          infringer;

and in the event that such infringement shall continue and Glycyx shall fail to take or procure any action to prevent any continued infringement within the period of ninety days from the date upon which Glycyx shall become aware of any such infringement Menarini may (in its sole discretion) at its sole expense initiate and pursue such action as it considers appropriate to prevent any continued infringement Provided Further That:-

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15.2.3    Glycyx shall give (and shall use reasonable endeavours to procure from
          Biorex) such assistance as Menarini may reasonably require in
          connection with any such action (subject to reimbursement by Menarini
          of all costs reasonably incurred by Glycyx and/or Biorex); and

15.2.4    Menarini shall keep Glycyx informed of the conduct and progress of
          such action but shall be entitled to conduct, pursue and settle such
          action in such manner as it shall reasonably consider appropriate
          (having regard to the continuing value of any such intellectual
          property rights to Glycyx and/or Biorex and the effect which any such
          infringement shall have had or will have on the exploitation in the
          Territory by Menarini of the Product) and to retain any damages
          awarded against any such infringer.

15.3 In the event that any claim is made against Menarini by any third party alleging infringement of any rights of any third party by the use and exploitation of the Product by Menarini Menarini shall forthwith notify Glycyx and Glycyx may at its sole option take such action (or procure such action by Biorex) as it may in its sole discretion consider appropriate to defend any such claim and in such circumstances;

15.3.l    Menarini shall give such assistance as Glycyx may reasonably
          require in connection with any such defence (subject to
          reimbursement by Glycyx of all costs reasonably incurred by
          Menarini); and

15.3.2    Glycyx shall keep Menarini informed of the conduct and progress
          of any such claim but shall be entitled to conduct pursue and
          settle such action in such manner as it reasonably considers
          appropriate;

In the event that Glycyx (and/or Biorex) shall notify Menarini that it does not intend taking any action to defend any such claim or shall otherwise not take any action to defend any such claim Menarini shall be entitled at its sole cost and expense to defend any such claim in such manner as it may in its sole discretion consider appropriate Provided Always That

15.3.3    Glycyx shall give (and shall use, reasonable endeavours to
          procure from Biorex) such assistance as Menarini may reasonably
          require in such action (subject to reimbursement by Menarini of
          all costs reasonably incurred by Glycyx and/or Biorex); and

15.3.4    Menarini shall keep Glycyx informed of the conduct and progress
          of such action but shall be entitled to conduct, pursue and
          settle such action in such manner as it shall reasonably consider
          appropriate (having regard to the continuing value of any such
          intellectual property rights to Glycyx and/or

-23-

          Biorex and the effect which any such infringement shall have had
          or will have on the exploitation in the Territory by Menarini of
          the Product) and to retain any damages awarded against any such
          infringer; and

15.3.5    In the event of any such claim as aforesaid (subject always to
          any breach of the warranty contained in Clause 15.4) Glycyx shall
          not be liable in any manner whatsoever to Menarini for any loss
          or damages suffered incurred or awarded against Menarini in
          connection with any such claim.

15.4 Glycyx hereby represents and warrants to Menarini as at the date of this Agreement that so far as it is aware such of the Patents as are listed in Schedule 1 are valid and subsisting.

15.5 In the event that in the exercise of its rights and obligations under this Agreement Menarini shall develop any improvements to the Product or its use in the Applications or otherwise any invention of direct application to the Product and/or its use in the Applications Menarini shall:-

15.5.1    notify Glycyx in writing of any such improvements or inventions;
          and

15.5.2    forthwith upon such notification grant to Glycyx an exclusive
          royalty free licence (without limit in time) to use and exploit
          any such inventions or improvements in connection with the use
          and exploitation of the Products by Glycyx or any sub-licensee in
          all parts of the world outside the Territory; and

15.5.3    (for the avoidance of doubt) have the right to use and exploit
          the same within the Territory in such manner as it considers
          appropriate and to use and exploit the same in connection with
          the Product in the exercise of its rights and obligations under
          the terms of this Agreement.

16. SUB-DISTRIBUTION AND SUB-LICENSEES

16.1 Menarini is hereby granted the right to appoint sub-distributors and/or sub-licensees for the exercise of its rights hereunder in connection with the Product In countries within the Territory Provided Always That:-

16.1.1    Menarini shall remain solely liable to Glycyx for the performance
          of its obligations hereunder in each part of the Territory; and

16.1.2    Menarini shall prior to granting any such rights notify Glycyx in
          writing of the identity of any such sub-distributor and/or sub
          licensee and of the terms upon which it proposes to appoint such

-24-

          sub-distributor/sub-licensee; and

16.1.3    No such sub-distributor and/or sub-licensee shall be appointed
          without the prior approval in writing of Glycyx such approval not
          to be unreasonably withheld or delayed; and

16.1.4    Menarini shall supply Glycyx with a copy of each such sub-licence
          and/or sub-contract entered into by it within fourteen days of
          the effective date thereof.

17. BREACH BY GLYCYX

17.1 In the event of any breach of the terms of this Agreement by Glycyx, Menarini shall be entitled to refer any such breach to arbitration (pursuant to the provisions of Clauses 24.5 and 24.6) and to request from the arbitrator such remedies as Menarini may reasonably require:-

17.1.1    to compensate Menarini for any lose or damage suffered or
          incurred by reason of any such breach; and

17.1.2    to ensure the continued supply to Menarini of the Menarini
          Product under the terms of this Agreement; and

17.1.3    to enable Menarini to exploit the Product fully in accordance
          with the rights granted to Menarini under the terms of this
          Agreement

and Glycyx and Menarini each confirm and acknowledge that such arbitrator shall have the power, upon hearing all the evidence and representations of both parties in a full arbitration hearing, to make such order as he considers reasonable and appropriate in the light of all the circumstances concerning and surrounding such breach including (but without limitation):

17.1.4    the award of damages; and/or

17.1.5    the grant of a licence to manufacture the Menarini Product to a
          third party upon the basis that such third party shall fulfil the
          obligations of Glycyx under the terms of this Agreement for such
          period as the arbitrator may consider reasonable and appropriate
          as Glycyx's agent and/or licensee; and/or

17.1.6    the grant of a licence to manufacture the Menarini Product to
          Menarini to enable Menarini to manufacture the Menarini Product
          for such period as the arbitrator may consider reasonable and
          appropriate, such licence to be granted upon such terms as the
          arbitrator may consider reasonable and appropriate including,
          (without limitation) terms relating to the payment of such
          royalty (if

-25-

any) as the arbitrator may consider appropriate to compensate Glycyx and/or any licensor of Glycyx for the use by Menarini of the Patents and otherwise any confidential information supplied or required in connection with the Product under the terms of this Agreement.

18. TERMINATION

18.1 Subject always to earlier termination under Clauses 3.1 or 18.2 the rights and obligations of the parties contained in this agreement shall cease forthwith upon the expiry of whichever shall be the earlier of:-

18.1.1    that date upon which such of the Patents as are listed as patents
          in Schedule 1 (together with any extensions (deriving from a
          supplementary protection certificate or similar instrument or
          provision of such Patents) reasonably available to the Patent
          owner in any part of the Territory) shall expire or otherwise
          cease to be subsisting; or

18.l.2    a period of fifteen years from the date hereof

Provided Always that

18.l.3    notwithstanding the provisions of Clause 18.1.1 no such cessation
          shall occur and this agreement shall continue fully in accordance
          with its terms for a period of 10 years from the first date of
          Launch; and

18.1.4    for the avoidance of doubt any licence or interest granted under
          this agreement in all or any part of the Patents Balsalazide
          and/or the Product and any confidential information shall
          continue indefinitely after such cessation.

18.2 Either party to this Agreement shall be entitled to terminate this Agreement forthwith by notice in writing to the other in the event that:-

18.2.1    the other party shall fail to pay any sum due hereunder on the
          due date and shall fail to remedy such breach within (30) thirty
          days of being required in writing by the other party so to do; or

18.2.2    the other party shall commit a material breach of any of the
          terms and conditions of this Agreement and shall fail to remedy
          the same (if capable of remedy) within ninety (90) days of being
          required in writing by the other party so to do; or

18.2.3    the other party shall enter into liquidation (either voluntary or
          compulsory) or shall be the subject of any petition for winding
          up; or

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18.2.4    the other party shall make any assignment or arrangement for the
          benefit of its creditors or cease or threaten to cease to carry
          on its business in the ordinary course; or

18.2.5    a receiver, administrative receiver, or receiver and manager, or
          judicial manager or administrator is appointed over the whole or
          any part of the assets of either party or if any court
          proceedings are commenced for the appointment of an administrator
          or receiver to either party; or

18.2.6    the other party shall become unable to pay its debts as they
          become due in the ordinary course of business or shall otherwise
          become subject or seek relief under any law relating to
          insolvency in any jurisdiction relevant to such other party

18.3 Any waiver by either party of a breach of any provision of this Agreement shall not be considered as a waiver of any subsequent breach of the same or any provisions of this Agreement.

18.4 Any termination of this Agreement shall be without prejudice to the right of either party to recover any monies due to it under this Agreement or the rights or remedies of either party in respect of any breach prior to the effective date of termination of this Agreement.

19. CONSEQUENCES OF TERMINATION

19.1 In the event of termination of this Agreement under Clause 18.2 by Glycyx or by Menarini (prior to the expiry of this Agreement in respect of any part of the Territory pursuant to Clause 18.1) Menarini shall:

19.1.1    forthwith, cease all manufacturing, marketing, sale and promotion
          of the Product; and

19.1.2    immediately pay all monies due and payable to Glycyx as at the
          date of termination; and

19.1.3    immediately return to Glycyx all information and data of
          whatsoever nature relating to the Product together with all
          copies thereof (other than correspondence between Glycyx and
          Menarini) which Menarini may have in its possession or under its
          control including but without limitation all scientific, medical
          and safety data relating to the Product; and

19.l.4    immediately cease use of all or any confidential information of
          Glycyx delivered in connection with this Agreement; and

19.1.5    immediately cease use of the Trade Mark; and

-27-

19.1.6    take all such steps as may reasonably be required by Glycyx to
          transfer or procure the transfer to Glycyx (or its nominee) of
          all such product licences and approvals as may have been obtained
          for the manufacturing marketing and sale of the Product in any
          part of the Territory subject always (save only in the event of
          termination by Glycyx under the provisions of Clauses 18.2.1 or
          18.2.2) to payment by Glycyx of a sum representing the
          reimbursement to Menarini of the unamortised amount of its
          reasonable costs directly incurred in obtaining and successfully
          exploiting such product licences and approvals, amortised over a
          ten year period from the date of approval, such costs to be
          agreed and determined in good faith negotiations between the
          parties or, in the event of any failure to be agreed by an
          arbitrator appointed and operating in accordance with the
          provisions of Clause 24.6; and

19.1.7    immediately deliver to Glycyx a full and detailed inventory of
          all Products and Menarini Products in the course of manufacture
          and/or in stock as at the date of termination; and

19.1.8    Glycyx may at its sole discretion purchase such stocks of the
          Product (inclusive of packaging) as Menarini shall still have in
          its possession once it has fulfilled all orders outstanding as at
          the date of termination at a price calculated as cost price to
          Menarini Provided Always that such stocks:-

(i) are of merchantable quality; and

(ii) have remaining (as at the date of any such purchase) not less than two thirds of their approved shelf life.

20. ASSIGNMENT AND SUB-CONTRACTING

20.1 The benefit of this Agreement is personal to Menarini and to Glycyx and shall not be capable of assignment (whether in whole or in part) by either of them without the prior consent in writing of the other party (such consent not to be unreasonably withheld or delayed) Provided Always that:-

20.1.1    Glycyx shall be entitled to assign the whole (but not part) of
          this Agreement without the prior consent of Menarini to any
          company to which the entire trade and business of Glycyx may be
          transferred as part of any internal corporate restructuring of
          Glycyx;

20.1.2    Menarini shall be entitled to assign the whole (but not part) of
          this Agreement to any Menarini Associate without the prior
          consent of Glycyx

Provided  further that in the event of any assignment by Menarini to any

Menarini Associate or third party Menarini

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undertakes to remain liable as guarantor of the obligations of such Menarini Associate or third party under this Agreement.

20.2 Menarini hereby confirms and undertakes that in the event that any obligation of Menarini contained herein is sub-contracted or sub-licensed or otherwise performed by any Menarini Associate Menarini shall remain solely liable for the proper performance of such obligation.

21. FORCE MAJEURE

21.1 If the performance of any obligations under this Agreement by either party Is affected by Force Majeure it shall forthwith notify the other party of the nature and extent thereof.

21.2 Neither party shall be deemed to be in breach of this Agreement or otherwise be liable to the other by reason of any delay in performance or non-performance of any of its obligations hereunder to the extent that such delay or non-performance is due to any Force Majeure which has been notified to the other party in writing.

22. COSTS Each party hereto shall bear its own costs in relation to the negotiation, drafting, preparation, and execution of this Agreement.

23. CONFIDENTIALITY OF THIS AGREEMENT

23.1 The contents of this Agreement shall remain confidential as between the parties. Neither party shall, without the prior written consent of the other (such consent not to be unreasonably withheld without justification), disclose any of the financial terms of this Agreement to any other person, firm or company save for

23.1.1    disclosure by Glycyx to Biorex (or otherwise the owner for the
          time being of the Patents) and/or Salix Pharmaceuticals Inc. (for
          as long as it shall remain a company in common ownership with
          Glycyx) in circumstances where such third party shall have
          accepted obligations of confidentiality in respect of the
          information disclosed; and

23.1.2    such disclosure as may be required by any relevant law or
          regulatory authority; and

23.1.3    such disclosure as may reasonably be required to its professional
          advisers and/or any potential or actual investor in such party
          (subject always to such party obtaining appropriate obligations
          of confidentiality from any such person(s)).

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24. NATURE OF THE AGREEMENT

24.1 Nothing in this Agreement shall create or be deemed to create any partnership, joint venture or the relationship of principal and agent between the parties.

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

24.3 This Agreement (including all the Schedules) and any agreements entered into pursuant to this Agreement constitutes the entire understanding and agreement between the parties with respect to the subject matter of this Agreement and supersedes all prior agreements, negotiations and discussions between the parties relating to this Agreement.

24.4 This Agreement may not be released, discharged, abandoned, charged or modified, in any manner, except by an instrument in writing signed by a duly authorised officer or representative from each of the parties hereto.

24.5 This Agreement shall be governed by and construed in all respects in accordance with the laws of England.

24.6 Any dispute arising out of or in connection with this Agreement shall be referred to arbitration in Geneva, Switzerland before an arbitrator (with suitable technical knowledge) appointed by the agreement of the parties or in the absence of agreement by the President for the time being of the Swiss Pharmaceutical Society and such arbitration shall be conducted in the English language under the arbitration rules of the International Chamber of Commerce.

25. NOTICES

25.l All notices to be served by the parties to this Agreement shall be served only in the English language.

25.2 Notices shall be sufficiently served if dispatched by international courier to the address of the receiving party set out below

Glycyx    3600 W Bayshore Road
          Suite 205
          Palo Alto
          CA 94303 U.S.A.
          F.A.O. The President

Menarini       15 Boulevard Roosevelt
               Luxembourg
               F.A.0. for the President of the Board

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with a copy to:

A. Menarini Industrie Farmaccutiche
Riunite s.r.l.
Via Sette Santi 1
50131 Firenze
Italy
F.A.O. The Legal Department

Any modification to this address must in itself be notified in writing to the other party in accordance with the terms of this sub-clause.

25.3 In the absence of proof to the contrary notices properly sent hereunder shall be deemed to have been duly served 10 days after the date of dispatch.

AS WITNESS the hands of the duly authorised representatives of the parties hereto the day and year first above written.

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SCHEDULE 1

THE PATENTS

PATENT     NUMBER     FILING DATE   GRANT DATE  DUE TO EXPIRE

UK        2,080,796  Complete                      07.07.2001
                     Specification
                        07.07.1981

France    1,493,313     21.07.1981                 21.07.2001

Italy     1,138,450     10.07.1981                 10.07.2001

Japan     1,433,303     16.07.1981                 07.04.2001

U.S.A.    4,4l2,992     08.07.1981                 01.11.2000

F.R.G.    3,120,0l9     21.07.1981    15.02.90     21.07.2001

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SCHEDULE 2

"Bulk Product Specifications"

and

"Finished Product Specifications"

-33-

PENN PHARMACEUTICALS LTD

DEVELOPMENT DEPARTMENT

INTERIM
ANALYTICAL PROCEDURES AND SPECIFICATIONS

BALSALAZIDE SODIUM

Written by:                                Date:

Approved by:                               Date:

Ref.No.        20.DEC.93                   Supersedes: 19 AUG 1993

Page 1 of 4

--------------------------------------------------------------------------------

Chemical Name
-------------

[*]

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

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SPECIFICATIONS

[*]

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

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PENN PHARMACEUTICALS LTD

DEVELOPMENT DEPARTMENT

ANALYTICAL PROCEDURES AND SPECIFICATIONS

COLAZIDE CAPSULES

Written by:                                Date:

Approved by:                               Date:

Ref. No.        18.FEB.93                  Supersedes: First

Page 1 of 3

--------------------------------------------------------------------------------

Appearance:
----------

[*]

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

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[*]

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

-37-

[*]

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

-38-

SCHEDULE 3

MANUFACTURING AGREEMENT

TECHNICAL ARRANGEMENTS

between

A. MENARINI INDUSTRIE FARMACEUTICHE RIUNITE SRL a company incorporated under the laws of Italy whose principal Place of business is at Sette Santi, 1 50131 Firenze Italy hereinafter called MENARINI

and

GLYCYX PHARMACEUTICALS LTD a Company incorporated under the laws of Bermuda whose registered office is at 41 Cedar Avenue Hamilton HM12 Bermuda hereinafter called GLYCYX

WHEREBY it is agreed as follows:-

Supply of Product

1. GLYCYX will supply the Product specified in the Schedule to this agreement ("the Product") to MENARINI upon the terms and conditions of this agreement and otherwise as agreed between the parties.

2. GLYCYX will use its site(s) at [

] for manufacturing and control activities of the Product.

Quality of manufacturing materials used by GLYCYX

3. GLYCYX shall obtain the manufacturing materials specified in Schedule A.

4. GLYCYX is solely responsible for ensuring that each batch of manufacturing material used by GLYCYX has been examined and complies with the specifications In Schedule A.

GMP standard

-39-

Changes in quality standards, formula, manufacturing and quality control
procedures

6. The procedures of manufacture and quality control shall be as agreed by the parties and any change in such procedures shall be agreed upon by both parties in writing.

7. GLYCYX may not sub-contract any manufacturing or quality control operations to any Glycyx site other than that specified in Clause 2 or sub-contractor without prior notice in writing to MENARINI and providing such period of notice is reasonably required by MENARINI for MENARINI to meet Drug Regulatory requirements.

Responsibility for release of product manufactured by GLYCYX

8. GLYCYX shall only release batches of Product for shipment to MENARINI which have been examined and comply with the specifications in Schedule A

Provided Always that MENARINI shall be solely responsible for the final approval of batches of Product manufactured by GLYCYX.

Storage

9. GLYCYX shall store all manufacturing materials and Products in accordance with GMP recommendations and the storage conditions prescribed therein [and agreed between the parties].

Documentation

10. GLYCYX shall keep:-

10.1 reference samples (solvents excluded) and quality control records for each batch of manufacturing material used by GLYCYX; and

10.2 manufacturing and quality control records for each batch of the Product manufactured for MENARINI by GLYCYX

for a period of six years from the date of manufacture or such longer period as may be agreed upon in writing between MENARINI and GLYCYX.

l1. Each shipment of the Products from GLYCYX to MENARINI shall be accompanied by a certificate of analysis with the following information:-

11.1 the results of such tests as may by agreement of the parties be carried out by GLYCYX; and

11.2 a statement by GLYCYX that the batch of Products has been released for shipment to MENARINI in accordance

- 40 -

with the following criteria:-

11.2.1    all manufacturing materials used in the manufacture of the
          Products have complied with the specification in Schedule 2;
          and

11.2.2    all manufacture and quality control operations by GLYCYX
          have been carried out according to current GMP,
          manufacturing, in process control and testing procedures, as
          well as Standard Operating Procedures in the form agreed
          between the parties.

11.3 the manufacturing date.

12. GLYCYX agrees to submit to MENARINI upon receipt of any request therefor from Menarini:-

12.1 copies of all manufacturing and quality control records of any batch of the Products manufactured by GLYCYX; and

12.2 copies of the quality control records of any batch of manufacturing materials used by GLYCYX.

13. Menarini shall keep reference samples and quality control records for each batch of Product delivered to Menarini by Glycyx for a period of six years from the date of delivery or such longer period as may be agreed upon in writing between Menarini and Glycyx.

14. Menarini agrees to submit to Glycyx upon receipt of any request therefor copies of all quality control records for each batch of Product delivered to it by Glycyx.

Quality test procedures

15. Upon receipt of each batch of Products from Glycyx, Menarini shall test each such batch fully in accordance with Quality Test Procedures agreed from time to time by Glycyx and Menarini.

Quality Audit

16. During normal working hours and upon reasonable notice MENARINI shall be entitled to inspect the manufacturing and quality control areas at GLYCYX's site.

17. During quality audits by MENARINI and upon request, GLYCYX shall inform MENARINI of the outcome of inspections by the National Drug Inspectorate of GLYCYX's site.

18. GLYCYX shall supply MENARINI with all relevant information reasonably required for the investigation of any complaints concerning the quality of the Products.

- 41 -

Post production product inspection

19. MENARINI is solely responsible for all post production Inspection of the Product.

Contact persons

20. Contact persons in matters relating to manufacture and quality control under the terms of this Agreement are:-

- on behalf of MENARINI

- on behalf of GLYCYX

- 42 -

SCHEDULE A

Manufacturing materials to be supplied by GLYCYX

NAME                                     SPECIFICATION NO.
----                                     -----------------


                            Detailed specifications
                            -----------------------

Date:

A. MENARINI INDUSTRIE FARMACEUTICHE RIUNITE SRL

Date:

GLYCYX

- 43 -

SCHEDULE 4

ADVERSE EVENT REPORTING

1. Serious Event: In the US, a serious event includes death, a life- threatening event, hospitalisation (initial or prolonged), disability, congenital anomaly, and any event requiring intervention to prevent permanent impairment or damage.

2. Unexpected: Event is not listed in the current FDA-approved labelling for the drug. This includes events that may differ from a labelled reaction because of greater severity or specificity.

3. Quarter: Non-serious and expected events occurring prior to NDA approval will be reported to Glycyx on a quarterly basis, where the first quarter of each year begins an 22 June.

Non-serious and expected events occurring post-NDA approval will be reported to Glycyx every quarter, where the first quarter begins on the date of approval of the NDA.

- 44 -

SIGNED by                           )        Randy W. Hamilton
for and on behalf of GLYCYX         )        PRESIDENT
PHARMACEUTICALS, LTD in the presence)        Lorin K. Johnson
of:-                                )        VICE PRESIDENT




SIGNED by Dr. Lucia Aleotti         )        Lucia Aleotti
for and on behalf of MENARINI       )

INTERNATIONAL OPERATIONS LUXEMBOURG ) Stephano Marano
S.A. in the presence of:- )
Dr. Stefano Marano

GENERAL COUNSEL

APPENDIX 1

RAO:eae/1.3/24

ADDRESS FOR CORRESPONDENCE:

Beech House,
Melbourn Science Park,
Cambridge Road,
Melbourn, Cambridge SG8 6TB.

TEL: 0763-262940                              [IMAGE OMITTED]
FAX: 0763-263460
                                              CAMAS PARTNERS
________________________________
                                              CAMAS HOUSE
21st April 1992                               23 PARK LANE, BLUNHAM
                                              BEDFORDSHIRE MK44 3NH
FAX:  010 39 55  5680446                      E N G L A N D
                                              TEL(0767)40373
                                              FAX(0767)40941
Dr Capone

Direttore Della Ricerca Clinica
A. MENARINI Industrie Farmaceutiche Riunite srl

Via Sette Santi 1
50131 Firenze
Italy                                    cc:  Mr R Hamilton
                                              Mr J Chappell
Dear Dr Capone

Since our meeting on March 10th, we have been diligently analysing data in order to arrive at a fair and accurate measure of the superiority of 'Colazide' when compared to 'Asacol'. I must apologise for the delay in responding to these matters, but we have felt it important to give due consideration to the parameters that are used to adjudge these comparative factors.

In regard to clinical superiority, our hypothesis is that the reproducible and site-specific delivery aspects of 'Colazide' will result in superior rates of symptomatic improvement vs. 'Asacol'. This hypothesis has largely been based on the improvement we have seen in our relapse-treatment trials at the two week interval.

To date, there have been no direct comparative studies of the two drugs, so we must rely on analogy to establish a foundation of understanding. Nevertheless, two published studies can shed light on the anticipated performance of 'Colazide' and 'Asacol' in the treatment of relapse in mild to moderate ulcerative colitis:

* Sninsky CA, et al, Oral Mesalamine ('Asacol') for mildly to moderately active ulcerative colitis. Annals of Int Med 1991; 115(5): 350-355

* Mansfield JC et al. Is high dose balsalazide better than sulphasalazine in initial management of ulcerative colitis? Gut (1991) In Press.

/Contd...

- 2 -

Dr Capone
A. MENARINI Industrie Farmaceutiche Riunite srl

The 'Asacol' study compared 1.6g/d and 2.4g/d to placebo, measuring improvement and remission at 3 and 6 weeks. The balsalazide study compared 6.75g/d balsalazide to 3g/d of sulphasalazine, and measured improvement and remission at 2, 4 and 8 weeks. End-point measures were similar and the patient populations were not dramatically different. The daily balsalazide dose of 6.75g equates to 2.36g of 5-ASA, almost exactly the 2.4g/d dose of 'Asacol'.

Though it is not scientifically valid to directly compare these two studies, we believe the 2/3 week scores reveal a trend in the favour of balsalazide. The Sninsky trial defined improvement as a reduction of physician's global assessment score and in at least one other component score, with no score increase in severity. At 3 weeks, 32% of patients on 2.4g/d 'Asacol' were scored as improved. Using a similar scoring of improvement in the balsalazide study, at 2 weeks of treatment, 68% of patients were scored as improved. Had this been a direct comparative study, these results would represent a 112% superiority of balsalazide over 'Asacol', measured as early (2 week) patient improvement.

We therefore propose to conduct a direct, comparative clinical trial of 'Colazide' and 'Asacol' in the treatment of acute relapse in mild to moderate ulcerative colitis. The trial would compare the most widely accepted acute dosage of 'Asacol', 2.4g per day, to 6.75 g of 'Colazide' per day. The trial would run for 8 weeks, with symtomatic scores being taken at 1, 2 and 4 weeks, and assessment of remission at the 8 week treatment point. The scoring system is shown on the attached sheet. Patient improvement would be defined as per the Sninsky study, noted above.

Clinical superiority of 'Colazide' will be determined by the following formulae:

Proportion of 'Colazide' patients Improved

------------------------------------------ = 1.20

Proportion of 'Asacol' patients Improved

This represents the 20% "superiority" target set out for us by Dott. Aleotti.

We think that the superiority of 'Colazide' at any of the time points is a significant finding, consistent with our postulate that 'Colazide' treatment will result in faster improvement, even if at later time points the two drugs are closer to equivalent (c.f. omeprazole vs ranitidine vs cimetidine).

/Contd ...

- 3 -

Dr Capone
A. MENARINI Industrie Farmaceutiche Riunite srl

Of course, more rapid clinical improvement is only a part of 'Colazide's advantage. In regard to safety, our hypothesis is that the unpredictable release of 5-ASA from Asacol can result in greater systemic exposure and possible nephrotoxicity. This concern gave rise to a CSM warning regarding 'Asacol' in the UK.

To put 'Colazide into perspective, we refer to: Laursen et al. Disposition of 5-aminosalicylic acid by olsalazine and three mesalazine preparations (including 'Asacol') in patients with ulcerative colitis: comparison of intraluminal colonic concentrations, serum values and urinary excretion. Gut (1990) 31:1271- 1276. This study showed a significantly higher urinary output of 5-ASA from 'Asacol' as compared to olsalazine. The authors note:

"The potential toxicity of 5-ASA should be considered, in particular during long-term treatment with 5-ASA delivering compounds in doses above 1g/day. Most interest has been focused on the potential renal abnormalities due to 5-ASA. The drug has structural similarities to phenacetin, and has caused papillary necrosis when given intravenously in high doses to rats. A putative nephrotic syndrome and an interstitial nephritis after treatment with 'Asacol' and 'Salofalk' respectively, have been reported. Finally, a two year follow up of patients on 'Asacol' has shown an incidence of pyuria of more than 50%. Hence; the lowest possible systemic load of 5-ASA should be sought in the choice of a system for effective delivery of 5-ASA to the inflamed colon."

We also know from direct clinical input from UK gastroenterologists that patients transferred onto 'Asacol' are in practice exposed to a higher level of side effects than is widely perceived. Our intent is to monitor systemic 5-ASA levels and other marker enzymes predictive of renal tubule damage in volunteers and patients. We consider that such evaluation is a critical adjunct to the assessment of this type of product, where the site and mechanism of delivery of 5-ASA is such a key adjunct to efficacy.

/Contd ...

- 4 -

Dr Capone
A. MENARINI Industrie Farmaceutiche Riunite srl

Since 'Colazide' uses the same azo-reductase delivery mechanism as olsalazine, we postulate that urinary excretion of 5-ASA from 'colazide' will be significantly less than that from 'Asacol'. Furthermore, we believe this contrast will be even greater when comparing unmetabolized urinary 5-ASA output (N-acetyl-5-ASA is considered therapeutically inert).

Clearly, superiority in efficacy is a much stronger argument from reimbursement and marketing perspectives. However, it might be appropriate to factor urinary 5-ASA output as an additional score in the definition. For any drug, superiority should be measured by both efficacy and safety parameters. Each must be considered together in a benefit/risk assessment.

SYMPTOM SCORING SYSTEM

Stool frequency
0 = Normal number of stools for this patient
1 = 1 to 2 stools more than normal
2 = 3 to 4 stools more than normal
3 = 5 or more stools more than normal

Rectal bleeding
0 = No blood seen
1 = Streaks of blood with stool less than half the time
2 = Obvious blood with stool most of the time
3 = Blood alone passed

Abdominal pain
0 = None
1 = Mild, with bowel action
2.= Moderate, with bowel action
3 = Severe, with bowel action or continuous abdominal pain

PATIENT'S FUNCTIONAL ASSESSMENT

0 = Generally well 1 = Fair
2.= Poor
3 = Terrible

HAEMATOLOGICAL SCORING SYSTEM

0 = ESR within Normal Range
1 = ESR more than 20 less than 50 mm/hr
2.= ESR more than 50 less than 100 mm/hr
3 = ESR more than 100 mm/hr /Contd...

- 5 -

Dr Capone
A. MENARINI Industrie Farmaceutiche Riunite srl

SIGMOIDOSCOPIC AND HISTOLOGICAL GRADING SYSTEMS

--------------------------------------------------------------------------------
Sigmoidoscopic grading                  Histological grading
--------------------------------------------------------------------------------
Grade macroscopic appearance            Grade Microscopic appearance
--------------------------------------------------------------------------------
     0    Normal, vascular pattern      0  Normal
          clearly visible
--------------------------------------------------------------------------------
     1    Erythema with loss of         1  Mild increase in chronic
          vascular pattern                 inflammatory cell infiltrate
                                           no tissue destruction
--------------------------------------------------------------------------------
     2    As above plus contact         2  Moderate increase in chronic
          bleeding                         inflammatory cell infiltrate
                                           no tissue destruction
--------------------------------------------------------------------------------
     3    As above plus                 3  Marked increase in
          spontaneous bleeding             inflammatory cell infiltrate
                                           mild tissue destruction
--------------------------------------------------------------------------------
     4    As above plus                 3  Marked increase in chronic,
          obvious ulceration               inflammatory cell infiltrate
                                           obvious tissue destruction
--------------------------------------------------------------------------------

We are in the process of developing a complete clinical trial protocol, but in the meantime we should come to a basic understanding as to the means of determining and definition of superiority. I look forward to your comments and a chance to discuss the definition proposed herein.

This letter has been forwarded to you by Fax as the preliminary communication. The references quoted in the letter are being sent with a hard copy of the letter by Express Post.

Best regards

Yours sincerely

/s/ R.A. Onyett

R A ONYETT
----------

Glycyx Pharmaceuticals, Ltd Cedar House 41 Cedar Avenue Hamilton
EM12

Bermuda

Menarini International
Operations Luxembourg S.A.
15 Boulevard Roosevelt
Luxembourg 23rd September 1994

Dear Sirs

I write in connection with an Agreement entered into between Glycyx Pharmaceuticals, Ltd ("Glycyx") and Menarini International Operations Luxembourg SA ("Menarini") in the form of the agreement attached hereto dated 23rd September ("the Agreement").

In this letter words and phrases defined in the Agreement shall bear the same meaning.

I write to confirm the agreement between Menarini and Glycyx of the prices to be paid for the Menarini Product in accordance with clause 10.1. I confirm our agreement as follows:.

1. It is intended that the prices charged by Glycyx will be calculated by reference to Glycyx's [*] Provided Always that Glycyx's costs shall not be materially different to the costs that might be incurred by Menarini if it was itself to manufacture the Menarini Product.

2. For this purpose, the [*] of Glycyx shall be volume related and shall be calculated as a percentage of the [*] achieved by Menarini (or any Menarini Associate, marketing and selling the Product under the terms of the Agreement) on any sale within each part of the Territory in any year ("Menarini's Price") and:-

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN

REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

Continued/...                                                             Page 2



     for that portion of Menarini       Glycyx's reasonable profit
     aggregate sales in any             will be calculated as
     calendar year between

[*]

3. Annual quantities of Product (ie finished capsules) shall be calculated as the number sold during each twelve month period starting from the date of first commercial launch of the Product in the first market. Once the Product has been launched in all parts of the Territory a definitive adjustment to the anniversary date will be made substituting 31st December in each year as the expiry date of each twelve month period and such calendar year shall apply to all quantities of products sold In the Territory.

4. "Menarini's Price" shall be calculated as the price obtained by Menarini (or any Menarini Associate, exercising rights granted to Menarini under the terms of the Agreement) on the sale and supply of each unit of Product to third parties in each calendar year. In any six month period from the date of first commercial launch of the Product in the Territory account shall be taken of actual volumes of sales and prices in such period. The overall accounting periods will be adjusted to conform with a calendar year basis through one definitive adjustment (as specified above) once the Product has been launched in all parts of the Territory.

5. Not later than one month prior to the commencement of any six month period Glycyx and Menarini will determine the "Interim Price" to apply during such six month period and to be based on historical figures, forecasts and estimates. Menarini's Price shall be determined finally for each six month period at the end of the third month after the expiry of each six month period and any difference arising from the calculation of the Menarini Price as due and the Interim Price previously paid shall be settled between Glycyx and this Company within fourteen days of such date of determination.

6. To assist in the calculation of the Menarini Price (and the Interim Price) Menarini shall

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN

REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

Continued/...                                                             Page 3


     (i)    keep Glycyx fully informed of its best available estimates of total
            sales and prices for the Product in each part of the Territory and
            of any material deviation from such estimates; and

     (ii)   keep full records of all such prices actually achieved; and

     (iii)  grant Glycyx access to all such records in order to verify such
            prices for the purposes of calculating the "reasonable profit" and
            the prices to be charged by Glycyx to Menarini for the Product under
            the terms of this letter agreement.

7. Menarini's Price shall be determined and settled in United Kingdom pounds sterling at the exchange rate applicable as at the date of determination.

8. The price payable to Glycyx for all quantities of Menarini Product delivered pursuant to the Agreement shall be payable in Pounds Sterling and shall be payable by means of interbank telegraphic transfer.

9. All matters information and discussions relating to the calculation of the Interim Price and Menarini's Price shall be treated as strictly confidential and this shall be maintained as confidential.

It is confirmed that this letter is intended to reflect a binding agreement between Glycyx and Menarini in respect of all the matters covered by this letter as if these terms were expressly incorporated into the Agreement.

It is the intention of Menarini that all detailed matters concerning the trading relationship between Menarini and Glycyx (including, in particular, the supply of Menarini Product and details concerning the forecasting, ordering, delivery and payment of and for the Menarini Products) shall be effected by a Menarini Associate appointed by Menarini as its agent with authority to act in all such matters under the terms of the Agreement and to bind Menarini in all such matters as if it was a signatory to any such arrangements. Menarini would intend appointing any such agent by a letter of authority forwarded to Glycyx and Menarini confirms that notwithstanding any such appointment or the exercise of any such rights by any Menarini Associate, Menarini shall remain solely liable for the proper performance of all obligations under the Agreement.

Continued/... Page 4

Kindly countersign and return the enclosed copy letter to evidence your agreement to these terms.

Yours faithfully

Randy W. Hamilton

FOR AND ON BEHALF OF
GLYCYX PHARMACEUTICALS, LTD

Confirmed, acknowledge and agreed for and on behalf of Menarini International Operations Luxembourg SA.

[SIGNATURE ILLEGIBLE]
.................................
Duly authorised signatory

DATED 23rd September 1994

A. MENARINI INDUSTRIE FARMACCUTICHE RIUNITE s.r.l.

-and-

GLYCYX PHARMACEUTICALS, LTD

AGREEMENT

Hewitson Becke + Shaw 4/5 Church Street Peterborough
PE1 1XB

THIS AGREEMENT is made the 23rd day of September 1994

BETWEEN

(1) A. Menarini Industrie Farmaccutiche Riunite s.r.l of Via Sette Santi 1, 50131 Firenze Italy ("Menarini"); and

(2) Glycyx Pharmaceuticals, Ltd of Cedar House 41 Cedar Avenue Hamilton EM12 Bermuda ("Glycyx")

WHEREAS

(A) At the request of Menarini Glycyx has today entered into an Agreement between Glycyx and Menarini International Operations Luxembourg SA ("Menarini Luxembourg"); and

(B) Menarini has agreed to guarantee to Glycyx the performance of all the obligations and liabilities of Menarini Luxembourg under the terms of the said Agreement in accordance with the terms of this Agreement.

NOW IT IS HEREBY AGREED as follows:-

1. In consideration of Glycyx at the request of Menarini entering into an agreement with Menarini Luxembourg dated 23rd September 1994 ("the Agreement");

1.1 Menarini hereby guarantees to Glycyx the due and punctual performance by Menarini Luxembourg (notwithstanding any legal limitation and/or incapacity or other circumstances (including without limitation, insolvency) relating to Menarini Luxembourg or any irregularity unenforceability or invalidity of any obligation of Menarini under this agreement) of all obligations which Menarini Luxembourg may incur or assume under the Agreement and the due compliance by Menarini Luxembourg of all provisions under the Agreement ("Menarini Luxembourg's Obligations"); and

1.2 Menarini hereby covenants with Glycyx that if and whenever Menarini Luxembourg shall make any default in any of Menarini Luxembourg's Obligations Menarini will indemnify Glycyx against all losses, damages costs and expenses which may be incurred by Glycyx by reason of any such default.

2. The liability of Menarini hereunder shall be as primary obligor and not merely as a surety and Menarini waives any rights which it may have to require Glycyx to proceed first against or claim payment first from Menarini Luxembourg and furthermore, the liability of Menarini shall not be affected impaired or discharged by reason of any act omission matter or thing which but for this provision might operate to release or otherwise exonerate Menarini Luxembourg from the Menarini Luxembourg Obligations including but without limitation;

2.1 any granting of time or other indulgence or (without limitation) any extension renewals acceptance forbearance or release in respect of any of Menarini Luxembourg's Obligations; or

2.2 Any waiver or release of any right under the terms of the Agreement; or

2.3 Any modification of or variation to the terms of the Agreement; or

2.4 Any transfer or assignment of rights or obligations under the Agreement; or

2.5 Any corporate reorganisation reconstruction amalgamation dissolution merger acquisition of or by other alteration in the corporate existence or structure of Menarini Luxembourg; or

2.6 Any composition or arrangement made by Glycyx with Menarini Luxembourg or any other person; or

2.7 Any dealing with exchange modification or abstention from perfecting or enforcing any right; or

2.8 The invalidity or enforceability of any provision of the Agreement.

It being the intention of Menarini that the guarantee and indemnity set out herein shall be irrevocable and unconditional and that the same may be enforced as often as the need may arise.

3. This Agreement shall be construed in accordance with the laws of England and Wales and Menarini hereby undertakes to submit to the jurisdiction of the English Courts.

IN WITNESS whereof the parties hereto have executed this Agreement as a Deed on the date set out above.

Signed sealed and         )
delivered by A. Menarini  )
Industrie Farmaceutiche   )
Riunite s.r.l             )

[SIGNATURE ILLEGIBLE]

Signed sealed and     )                       Randy W. Hamilton
delivered by Glycyx   )                       PRESIDENT
Pharmaceuticals, Ltd  )                       Lorin K. Johnson
                                              VICE PRESIDENT

-2-

Menarini International Operations
Luxembourg SA
15 Boulevard Roosevelt
Luxembourg 23rd September 1994

Dear Sirs:

Re: AGREEMENT BETWEEN MENARINI INTERNATIONAL OPERATIONS LUXEMBOURG SA and
GLYCYX PHARMACEUTICALS, LIMITED DATED 23rd Sept. 1994 ("the Agreement")

I write for and on behalf of Glycyx Pharmaceuticals, Limited ("Glycyx") in connection with the Agreement and in particular, in connection with agreements and arrangements entered into between Glycyx and third parties for the exploitation of the Product (as defined in the Agreement) within Europe and Scandinavia.

I confirm that such agreements contain a clear obligation on Glycyx's licensee for such Territory to, within each country of its Territory, "use all reasonable endeavours to obtain the most favourable Factory Sales Price, which is consistent with competitive market characteristics and the demonstrated advantages of the Product and presenting the Product as a new chemical entity within such country."

In such agreements "Factory Sales Price" is defined as the ex-factory sales price of each Product actually charged by the licensee (or any associate) for each shipment of Product on an arms length open market basis to any third party net only of sales and purchase taxes, customs or import duties, delivery charges and returns and allowances actually charged on each shipment.

I hope this confirms the position for your purposes.

Yours faithfully,

/s/ Randy Hamilton

Randy W. Hamilton
President

SIGNED FOR AND ON BEHALF OF
GLYCYX PHARMACEUTICALS, LIMITED

[A. MENARINI LETTERHEAD]

Legal Department

FIONA CRAWLEY
Hewitson Becke and Shaw
4/5 Church Street
Peterborough PEI IXB
UNITED KINGDOM Florence, September 9, 1994

Dear Fiona

Re: Glycyx Pharmaceuticals Limited - Distribution Agreement

Further to your letter dated 26th August 1994 and to our recent phone conversation, I would like to confirm that under Italian law the "guarantee agreement" signed by Menarini Florence in connection with the captioned Distribution Agreement is valid and enforceable even though there is no seal of the company and one signatory only appears. As a matter of fact, the Italian Civil code allows a limited liability company to be validly represented by one person ("Amministratore Unico") whose signature on any document creates a legal obligation on the conpany itself.

For certain acts or documents the law prescribes the written form as a condition of their validity (for example, sale of a piece of land) and legalization by a Notary Public is required to give publicity to the act and gain protection against third parties. However, a unilateral warranty or a guarantee agreement does not need to be executed before a Notary Public or by another director. In other words, we are not bound to execute a document of that kind as a deed.

I can also confirm that Dr. Alberto Aleotti is "Amministratore Unico" of "A.MENARINI INDUSTRIE FARMACEUTICHE RIUNITE s.r.l." and his signature on any document released by the company (including, inter alia, the "guarantee agreement" pertaining to Balsalazide Distribution Agreement) creates a legal obligation on the company to abide by the terms of the signed document.

I hope that the above clarifies the situation. Please do not hesitate to call me if you have any further question on the content of this letter.

Kindest regards.

/s/ Stefano Marino
Stefano Marino

TRIBUNALE CIVILE E PENALE DI FIRENZE

CANCELLERIA COMMERCIALE

Il Cancelliere sottoscritto

c e r t i f i c a

risulatre dagli atti depositati in questa Cancelleria, omologati, iscritti e pubblicati nelle forme di legge: - che la societa "A.MENARINI - Industrie Farmaceutiche Riunite s.r.l."e regolarmente iscritta al n 2206 del Registro Societa con il capitale di 1 3,000,000,000 - interamente versato durata fino al 31 dicembre 2050 avente sede legale in Firenze Via Sette Santi n.3, avente per oggetto la ricerca scientifica, l'industria e la fabbricazione di specialita medicinali, Prodotti farmaceutici, prodotti ottenuti attraverso la biologia molecare, parafarmaceutici, diagnostici (e relative apparecchiature), elettromedicali, cosmetici, dietetici, sanitari e similari in genere, nonche il commercio degli stessi in Italia e all'estero - Cod. Fisc. e Partita IVA 00395270481; - che detta societa e stata trasformata da "societa in accomandita semplice" a "societa a responsabilita limitata" con atto a rogito Notaio Alessandro Ruggiero di Firenze del 22 dicembre 1988 reg. to a Firenze - Atti Civili - il 10 gennaio 1989 al n. 252, omologato dal Tribunale di Firenze con decreto 16 gennaio 1989, trascritto nel Registro Societa in data 1 febbraio 1989 al n. 2210 reg. Gen. d'Ord.- La predetta so-

cieta e stata costituita con Atto Costitutivo in data 24 febbraio 1915 atto Notaio F. Parronchi registrato a Firenze il 4 marzo 1915 da ultimo modificato con Patti Sociali sottoscritti in data 22 dicembre 1988;

- che detta societa e amministrata da un Amministratore Unico nominato per tutta la durata della societa nella persona del Cav. del. Lav. Dr. Alberto Aleotti nato a Quattro Castella (RE) il 4 marzo 1923 il quale ha accettato la carica;

- che il predetto Amministratore Unico fino ad oggi non risulta sostituito e quindi tutt'ora in carica;

- che in base all'art. 14 del vigente statuto sociale all'Amministratore Unico sono attribuiti tutti i piu ampi poteri per la gestione della societa e per il compimento di tutti gli atti di ordinaria e straordinaria amministrazione rientranti nell'oggetto sociale essendo di sua competenza tutto cio che per legge o per statuto non sia espressamente riservato alla competenza dell'assemblea dei soci;

- che la rappresentanza legale della societa di fronte a terzi ed in giudizio e devoluta al predetto Amministratore Unico Cav. del Lavoro Dr. Alberto Aleotti;

- che nell'ultimo quinquennio la predetta societa non e stata dichiarata fallita ne ammessa a procedura di concordato preventivo, di amministrazione controllata,
o di liquidazione e quindi si trova nel pieno e libero esercizio dei

suoi diritti. -
Si rilascia per gli usi consenti dalla legge - Firenze.

TERMS OF AMENDMENT

In light of new developments affecting the Distribution Agreement between Glycyx Pharmaceuticals ("Glycyx"); and Menarini International Operations Luxembourg SA ("Menarini") dated 23rd September 1994 ("the Agreement"), Glycyx and Menarini, with intent to be legally bound, agree to the following amendment to the Agreement.

I. Menarini will provisionally accept the interim results of the U.S. comparative trial versus Asacol delivered on 6 December 1994 as very promising with regard to the requirements of Clause 3.1 of the Agreement. Payment of [*] per Clause 7.1.1 is due and payable immediately following acceptance by both parties of this Letter of Amendment, but it will be refundable pursuant to section III herebelow and clause 3.1 of the Agreement.

II. The parties having agreed that Glycyx will file the dossier in Europe under the E.U. Decentralized Procedure, the term "Dossier Date" for purposes of the Agreement is now understood as "the date upon which the master regulatory dossier relating to the Product shall be delivered by Glycyx to Menarini following filing of Glycyx's Product licence application for the Product in the UK" it being understood that UK has been selected as the rapporteur country for the EU Decentralized Procedure. Payment of [*] to Glycyx will be due no later than three months from the Dossier Date per Clause 7.1.2.2 of the Agreement.

III. The above payments shall not be refunded by Glycyx, Provided Always That:

A. Glycyx shall complete the scheduled Clinical Trials as convened at due time and shall submit to Menarini the final results; and
B. the results of the Clinical Trials are satisfactory pursuant to Clause 3.1 of the Agreement.

IV. Except as specifically provided herein, the terms of the Distribution Agreement shall remain in full force and effect.

Accepted and agreed this 13th day of February, 1995

Company:    GLYCYX PHARMACEUTICALS, LTD
By:         Randy Hamilton
Title:      President
Signature:  /s/ Randy Hamilton


Company:    MENARINI INTERNATIONAL OPERATIONS LUXEMBOURG SA
By:         Dr. asa Lucia Aleotti
Title:      President of the Board of Directors
Signature:  /s/ Dr. Lucia Aleotti

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN

REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

Exhibit 10.12

Dated JUNE 24, 1996

ALFA WASSERMANN S.p.A

-and-

SALIX PHARMACEUTICALS. INC.

LICENCE AGREEMENT

Hewitson Becke Shaw
First Floor
Stuart House
City Road
Peterborough
PEI IQF

Hewitson Becke+Shaw
SOLICITORS

Article 1  - RECITALS.................................................... 1
Article 2  - DEFINITIONS................................................. 1
Article 3  - LICENSE TO MANUFACTURE AND SELL THE PRODUCTS................ 4
Article 4  - SUPPLY OF INFORMATION AND ASSISTANCE........................ 7
Article 5  - SUPPLY OF COMPOUND.......................................... 8
Article 6  - CONSIDERATION............................................... 8
Article 7  - DEVELOPMENT. REGULATORY APPROVALS AND MARKETING.............10
Article 8  - MARKETING...................................................13
Article 9  - COMMENCEMENT AND DURATION...................................14
Article 10 - TRADEMARK...................................................15
Article 11 - INDUSTRIAL PROPERTY RIGHTS..................................15
Article 12 - DEVELOPMENTS................................................15
Article 13 - CONFIDENTIALITY UNDERTAKING.................................17
Article 14 - PRODUCT LIABILITY - INDEMNIFICATION.........................18
Article 15 - NON COMPETITION.............................................19
Article 16 - FORCE MAJEURE...............................................19
Article 17 - TERMINATION OF THE AGREEMENT................................20
Article 18 - PERIOD SUBSEQUENT TO THE TERMINATION OF THE AGREEMENT.......21
Article 19 - ASSIGNABILITY...............................................21
Article 20 - ENTIRE AGREEMENT AND MODIFICATION...........................22
Article 21 - LANGUAGE AND GOVERNING LAW..................................22
Article 22 - WAIVER......................................................22
Article 23 - NOTICES.....................................................23
Article 24 - LITIGATION..................................................23

LICENCE AGREEMENT

BETWEEN:

ALFA WASSERMANN S.p.A., a corporation organized and existing under the laws of Italy, with registered office at Contrada S. Emidio, 65020 Alanno (Pescara), Italy, represented herein by Mr. Andrea Golinelli, in his capacity as Int'l Gen. Manager (hereinafter "ALFA"); and SALIX PHARMACEUTICALS, INC. corporation organized and existing under the laws of California, United States of America, with registered office is at 3600 W. Bayshore Road, Suite 205, Palo Alto, California 94303, represented herein by Mr. Randy W. Hamilton in his capacity as President (hereinafter "SALIX")

WHEREAS

(A) ALFA has developed a Compound known as "rifaximin", and Products (hereinafter defined) which exhibit antibacterial activity and therefore can be used in the treatment of bacterial diseases;

(B) The Compound and/or the Products are the subject of patents and/or patent applications owned by ALFA ( the "Patents", as hereinafter defined);

(C) SALIX wishes to obtain from ALFA an exclusive licence to exploit the Patents and the Technology Rights (hereinafter defined) and to use the Compound in order to develop, make, have made, use, sell and have sold therapeutic products for the treatment of gastrointestinal and respiratory tract diseases and conditions (the "Products", as hereinafter defined) under the Trademark in the Territory (both hereinafter defined);

(D) ALFA is willing to grant SALIX such licence on the terms and conditions contained in this Agreement.

NOW THEREFORE, for and in consideration of the premises and the understandings herein contained, it is hereby agreed as follows;

Article I - RECITALS

It is acknowledged and agreed that the recitals to this Agreement and the schedules and annexures to this Agreement form an integral part hereof and are expressly incorporated herein..

Article 2 - DEFINITIONS

The following words and expressions used in this Agreement shall have the following meanings:

"Affiliate(s)"                shall mean any corporation, joint-venture or
                              other entity which directly or indirectly
                              controls, is controlled by or is under common
                              control with a party to this Agreement.  "Control"
                              shall mean the possession of the power to direct
                              or cause the direction of the management and
                              policies of a person or business entity, whether
                              through ownership of voting securities, by
                              contract or otherwise;


"Compound"                    shall mean the raw material known as "rifaximin",
                              which is 2,7-(Epoxypentadeca [1,11,13]trienimino)
                              benzofuro [4,5-e]-pyrido[1,2-a]benzimidazole-
                              1,15(2H)-dione, 25-(acetyloxy)-5,6,21,23-
                              tetrahydroxy-27-methoxy-2,4,11,16,20,22,24,26-
                              octamethyl-,[2S-(2R*, 16Z,     18E,20R*,21R*,
                              22S*,23S*,24S*,25R*,26S*,27R*,28E)]-(Chemical
                              Abstract No. 80-621-81-4-together with all
                              products analogs and isomers thereof and any
                              improvements or developments to any of the
                              foregoing owned by or controlled by or licensed to
                              ALFA in respect thereof during the term of this
                              Agreement.

"FDA"                         shall mean the United States Food and Drug
                              Administration or any successor agency performing
                              a similar function or an equivalent foreign
                              regulatory agency (including without limitation,
                              the Health Protection Branch in Canada);

"NDA"                         shall mean applications filed with the FDA
                              requesting approval to market a new drug,
                              including but not limited to New Drug Applications
                              and Product License Applications (PLA), as
                              applicable. As used herein, the term "NDA" is
                              inter-changeable with the term "PLA" depending on
                              the regulatory approval process applicable to the
                              product under the provisions of the United States
                              Code 21 CFR or any equivalent foreign regulatory
                              provisions;

"Net Sales"                   shall mean the gross invoiced amount received by
                              SALIX (or any of its sub-licensees or
                              distributors) for

                                       2

                              commercial sales to third parties (who shall not
                              be Affiliates or distributors of SALIX or its
                              Affiliates) of the Products in the Territory, net
                              of all normal trade and cash discounts and net of
                              all refunds, rebates, returns, transportation and
                              insurance charges, sales, value added or other
                              direct taxes charged on any invoice, customs
                              duties and surcharges allowed to the purchasers as
                              deductions from the purchase price of the Products
                              or otherwise as specified on the invoice;

"Patents"                     shall mean the patents and/or patent applications
                              listed in Part I of the Schedule and any other
                              patent rights in the Territory now existing or
                              hereafter acquired by or licensed to ALFA
                              pertaining to the subject matter of such patents
                              and patent applications or otherwise to the
                              Compound and/or the Product and any divisions,
                              continuations and continuations-in-part of any
                              such patents or patent rights and any patent
                              granted in respect thereof for the full terms
                              thereof including any reexaminations, renewals,
                              extensions and reissues thereof and including any
                              supplementary protection certificates;

"Products"                    shall mean those pharmaceutical products for human
                              use in the treatment and/or prevention of
                              gastrointestinal and respiratory tract diseases
                              and conditions containing the Compound as an
                              active ingredient;

"Putting into Commerce"       shall mean the date of the first commercial
                              sale of Products to third parties (who shall not
                              be Affiliates or Sublicensees or distributors of
                              SALIX or its Affiliates) by or on behalf of SALIX
                              or any sublicensees or distributors of SALIX or
                              its Affiliates under the terms of this Agreement
                              made in any part of the Territory after all
                              relevant marketing and pricing approvals shall
                              have been granted by the relevant regulatory
                              authorities in respect of the Product in such part
                              of the Territory;

"Schedule"                    shall mean the Schedule hereto, comprising Parts 1
                              to 4 thereof;

"Supply Agreement"            shall mean an agreement between the parties of
                              even date herewith relating to the supply of the
                              Compound by ALFA to SALIX;

                                       3

"Technology Rights"           shall mean all intellectual property and other
                              proprietary rights and all confidential
                              information and know-how pertaining to the
                              Compound and/or the Products or otherwise to the
                              Patents in any respect (including without
                              limitation all improvements, inventions,
                              derivatives, formulation data, specifications,
                              manufacturing procedures and technology, technical
                              information, know-how, trade secrets,
                              pharmacology, toxicology and other preclinical
                              data, clinical data, regulatory information and
                              marketing data) within the possession or control
                              of ALFA (whether developed by or licensed to ALFA)
                              (and all such rights and information within the
                              possession or control of any other licensee of
                              ALFA having rights in respect of the Compound or
                              the Products) in existence as at the date hereof
                              or arising during the term of this Agreement which
                              are available to ALFA for the Territory.

"Territory"                   shall mean the United States (its territorial
                              possessions, territories and the Commonwealth of
                              Puerto Rico) and Canada;

"Trademark"                   shall mean the trademark to be chosen and agreed
                              by the parties to be used by SALIX for the
                              marketing of the Products in the Territory , such
                              trademark to be registered and maintained by ALFA
                              in its name under the terms of this Agreement;

"Valid Claim"                 shall mean a claim of an issued and unexpired
                              patent included within the Patents, which has not
                              been held permanently revoked, unenforceable or
                              invalid by a decision of a court or other
                              governmental agency of competent jurisdiction
                              unappealable or unappealed within the time allowed
                              Or appeal and which has not been admitted to be
                              invalid or unenforceable through reissue or
                              disclaimer or otherwise.

Article 3 - LICENCE TO MANUFACTURE AND SELL THE PRODUCTS

3.1 For good and valuable consideration set forth herein, ALFA hereby grants to SALIX and SALIX hereby accepts;

3.1.1  an exclusive licence under the Patents and all Technology Rights to
       develop, make, have made, use, market, promote, sell and have sold
       Products within the Territory;

                                  4

3.1.2  a non exclusive Licence under the Patents and all Technology Rights
       (and under any similar rights existing outside the Territory) to
       manufacture and have manufactured on its behalf Products in any part
       of the world solely for use and sale within the Territory;

3.1.3  an exclusive Licence to use and exploit the Trademark within the
       Territory in connection with the sale of the Products only;

3.1.4  the right to sublicence to third parties and Affiliates all or any
       part of the rights granted under Articles 3.1.1, 3.1.2 and 3.1.3
       above, under the provisions of Article 3.2.

Such Licences to be continuing and irrevocable, save only as expressly provided under the terms of this Agreement.

3.2 The right to sublicence granted under Article 3.1.4 shall be subject to the following terms:

3.2.1  the terms of any such sublicence shall be in accordance with the
       terms of the Licence granted to SALIX hereunder and shall be subject
       to the prior approval of ALFA, such approval not to be unreasonably
       withheld or delayed;

3.2.2  SALIX will be entitled to grant sublicences in each of the three
       indications selected under Article 7.1 only after the Products have
       been adequately developed and the relevant NDA has been filed with
       the FDA for each such indication.

3.2.3  notwithstanding the appointment of any such sublicensee SALIX shall
       remain solely responsible to ALFA for the performance of its
       obligations under the terms hereof and for any breach of such
       obligations, whether such breach shall be caused by SALIX or any
       sublicensee.

For be avoidance of doubt it is hereby acknowledged that the appointment by SALIX of any distributor for the Products within the Territory, of any manufacturer to manufacture the Products for and on behalf of SALIX or of any third party to assist in the development and approval of the Products shall not be deemed to constitute the appointment of any sublicensee or the sublicense by SALIX of any rights hereunder.

3.3 ALFA shall procure and maintain all export and other licences and permits required for the grant to SALIX of the rights and Licences granted under Article 3.1 and for the supply to SALIX of all documentation under Article 4 and shall comply with all other laws regulations and government directives relating to the grant of rights under the terms of this Agreement to ensure that SALIX shall be entitled to exercise the rights granted to it free of any restriction.

3.4 ALFA hereby represents, warrants and undertakes to SALIX;

3.4.1  that it has full right and authority to grant the Licences contained
       in this Agreement and to perform its obligations hereunder;

3.4.2  that the exercise by SALIX of the rights granted to it hereunder
       within the Territory shall not infringe the rights of any third
       party;

3.4.3  that ALFA has not (and will not during the term of this Agreement)
       make any commitment or incur any obligation in conflict with the
       rights and Licences granted to SALIX hereunder;

3.4.4  that ALFA is the sole legal and beneficial owner of the patents and
       patent applications set out in Part I of the Schedule and that Part
       I of the Schedule contains accurate details of all patents and
       patent applications existing in the Territory in respect of the
       Compound and/or the Products.

3.4.5 that during the term of the Trademark Licence granted under Article
3.1.3 ALFA shall not use or permit the use of the Trademark within the Territory on or in connection with any pharmaceutical product.

3.5 SALIX undertakes, during the term of this Agreement, not to sell or otherwise supply the Compound and/or the Products to any third party outside the Territory (save only for the supply of Compound to manufacturers of Products for sale within the Territory) and shall not knowingly, sell or otherwise supply the Compound and/or the Products to any third party within the Territory for the purpose of sale or supply to any third party outside the Territory. ALFA confirms and acknowledges that restrictions in substantially the form of this Article 3.5 have been and will be imposed upon third party licensees of Compound, Patent and/or Technology Rights in respect of territories outside the Territory when and where legally enforceable. For the proper protection of the rights granted to SALIX hereunder ALFA undertakes to use all reasonable endeavours to prevent any breach or continuation of any breach by any such licensee of such terms and ALFA confirms and acknowledges that it shall also be bound by such restrictions in respect of the exploitation of the Compound and/or the Products outside the Territory.

3.6 SALIX acknowledges that ALFA has represented to it that the Patents, the Compound, the Products, the Technology Rights, the Trademark and the relevant exploitation rights in the Territory are all the exclusive property of ALFA. SALIX acknowledges that save as expressly provided herein it shall acquire no right title or interest in any such proprietary rights of ALFA and that nothing contained herein shall be construed as granting SALIX any rights whatsoever in the Patents, the Compound, the Products, the Technology Rights, the Trademark and the relevant exploitation rights in connection with products other than the Products.

3.7 In order to protect the rights granted by ALFA to SALIX under the terms of this Agreement:-

3.7.1  ALFA undertakes that it shall not without the prior consent of SALIX
       either

                                  6

       directly or indirectly (through any third party or sublicensee)
       develop, manufacture or market within the Territory any
       pharmaceutical product containing the Compound as an active
       ingredient, such consent not to be unreasonably witheld or delayed
       where ALFA can show to SALIX that such development, marketing or
       manufacture would not adversely affect the exploitation by SALIX of
       its rights hereunder, and

3.7.2  in the event of any development of any pharmaceutical product
       containing the Compound as an active ingredient, within the
       Territory (whether by ALFA or any licensee) the development thereof
       shall be effected in close consultation with SALIX and SALIX shall
       be kept fully informed and shall have the right to rescind any
       consent given under Article 3.7.1 in the event that in the course of
       such development it is shown that such development and/or subsequent
       marking is adversely affecting the exploitation by SALIX of its
       rights hereunder; and

3.7.3  ALFA undertakes and warrants that any exploitation of any
       rights in the Compound within the Territory (whether by ALFA or any
       third party) will not adversely affect the exploitation by SALIX of
       its rights hereunder, in any material manner.

3.8 SALIX is aware that ALFA has developed formulations of the Compound which may find a use for the treatment of topical and vaginal infections and also in the veterinary area. SALIX accepts the fact that the activities which ALFA or its Licensees may undertake in such areas (save for activities in the case of veterinary formulations which fall within the definition of Product) are to be considered in connection with the provisions of Article 3.7, not in contrast with SALIX's interests and not adversely affecting the exploitation by SALIX of its rights in the Compound under the terms of this Agreement.

Article 4 - SUPPLY OF INFORMATION AND ASSISTANCE

4.1 ALFA undertakes to supply to SALIX forthwith upon execution of this Agreement copies of all documentation constituting the Patents and the Technology Rights existing as at the date hereof and thereafter during the term of this Agreement to supply to SALIX all documentation in respect of any further or additional Patents or Technology Rights promptly upon the same becoming available to ALFA.

4.2 ALFA undertakes promptly to supply to SALIX during the twin of this Agreement such information and documentation in connection with and relating to the completion of the clinical development and applications for regulatory approvals for the Compound and/or Products in respect of other territories (whether prepared by ALFA or any licensee of ALFA and which are available to ALFA) as Salix may reasonably require in connection, with the clinical development and regulatory approvals required for the Products within the Territory or otherwise in connection with the performance by SALIX of its obligations under Article 7.

4.3 Each party undertakes throughout the term of this Agreement to supply free of charge to the other all such pharmaceutical pre-clinical and clinical data and information as may be developed or obtained by it or any sublicensee with respect to the Compound and/or Products and to permit the other party to use all such information in connection ,with the continued exploitation of the Products.

4.4 Representatives of either party may upon reasonable notice and at times reasonably acceptable to the other party visit any facilities where any pre clinical or clinical tests or trials are being carried out in respect of the Products and any facilities where the Compound or Products are being manufactured and shall be entitled to consult informally during any such visit or by telephone or facsimile communication with personnel at any such facilities Provided That SALIX shall inform ALFA of the substance and content of all such consultations and communications.

4.5 All documentation supplied to SALIX under the terms of this agreement necessary. to enable SALIX to fulfill its regulatory obligations hereunder or necessary to enable SALIX to exercise its right to manufacture under Article 9 of the Supply Agreement shall be supplied in the English Language and ALFA shall at its sole cost obtain translations of any such documentation for such purpose, save where SALIX shall notify ALFA in writing that a summary of the same in the English language will suffice..

Article 5 - SUPPLY OF COMPOUND

5. In order to safeguard the quality standards of the Compound and of the Products, it is understood that subject to the terms of me Supply Agreement ALFA will be the sole and exclusive supplier of the Compound to SALIX and SALIX undertakes to purchase the Compound exclusively from ALFA subject to the provisions contained in the Supply Agreement.

Article 6 - CONSIDERATION

6.1 In consideration of all the rights and licences granted hereunder SALIX agrees to pay ALFA the following amounts:

6.1.1 [*]

6.1.2 [*]

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN

REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

       [*]

6.1.3  [*]

6.1.4  [*]

QUANTITY Of COMPOUND SOLD IN EACH CALENDAR YEAR        ROYALTY RATE, AS A %
                                                            OF NET SALES
[*]

6.2 In the event that SALIX is required to pay to any third party royalties calculated by reference to Products sold in respect of any technology of such third party incorporated in the Products there shall be deducted from the calculation of Net Sales (in connection with the calculation of royalties due hereunder) a sum equal to [*] in respect of the Products.

6.3 Within 60 days of the end of each calendar quarter after the date of Putting into Commerce (such quarters to end on the last days of March, June, September and December in each calendar year) SALIX shall submit to ALFA a written report setting out details of all Net Sales in such calendar quarter together with its calculation of such Net Sales) and with such statement SALIX shall pay to ALFA the sum due in respect of royalty on such Net Sales.

6.4 In the event that any payment due hereunder shall not be paid by the due date such payment shall from the due date until the date of payment bear interest at the rate of 4 % (four per-cent) above the official prime rate published by the Bank of America in the Territory.

6.5 Each of SALIX and ALFA shall use all reasonable endeavours to minimise any sum required to be deducted by way of withholding tax from any sums payable under this agreement to ALFA and shall use all reasonable endeavours to procure for ALFA the

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

benefit of any present or future treaty against double taxation in force between Italy ,and the Territory in respect of such sums payable and any tax so withheld. Provided That for the avoidance of doubt SALIX shall deduct any such withholding tax required to be deducted by it under any applicable law.

6.6 All payments to be made by SALIX to ALFA hereunder shall be made in US Dollars by SWIFT (international communications) wire transfer to such bank as ALFA shall designate in writing.

6.7 SALIX shall maintain during the term of this Agreement normal accounting books (in accordance with normal US accounting practice) containing accurate details of all sales of Products and of the calculation of Net Sales (in accordance with the definition thereof contained in Article 2) and the royalty due to ALFA hereunder. ALFA will have the right upon reasonable notice during normal working hours to cause qualified professional accountants of its choice to inspect the books and records and any other documentation and records maintained by SALIX relevant to the calculation of any royalty hereunder. The cost of the above accountants' inspections shall be borne by ALFA save only where any such inspection reveals a discrepancy in excess of 5% of royalties due and payable, in which event the costs shall be borne by SALIX Provided Always;

6.7.1  that such inspection shall not take place more than once in each
       calendar year;

6.7.2  that such inspection shall only be in respect of records and
       accounts for the period of three years preceding the date of such
       inspection and SALIX shall not be required to retain records for any
       period exceeding three years

6.8 For the avoidance of doubt, sales of Products made by SALIX to an Affiliate or any sub-licensee or distributor for the purpose of resale to non- Affiliated parties shall be specifically excluded from Net Sales calculations for royalty determinations.

6.9 Save as expressly stated in this Agreement, SALIX shall not be entitled in any circumstances to withhold any money due to ALFA under the terms of this Agreement in respect of any possible (justified or unjustified) claims against ALFA, related to this Agreement or to the Supply Agreement.

Article 7 - DEVELOPMENT, REGULATORY APPROVALS AND MARKETING

7.1 SALIX shall use all reasonable endeavours to develop at least [*] indications for the Products. It is acknowledged that it is the present intention of SALIX to first develop a Product as a treatment for antibiotic associated colitis as per the Development Plan contained in Part 3 of the Schedule. The [*] indications will be identified within the first [*] the date hereof. The development of these latter indications shall not start later than [*] from the date hereof.

7.2 SALIX shall perform and complete (or procure the performance or completion on its behalf) diligently and expeditiously at its sole expense and direction (except as

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

hereinafter set forth) all work studies and formalities necessary to complete all Phase II and III clinical requirements for the initial indication and pre-clinical and clinical requirements, as appropriate, for additional indications for the Products within the Territory, shall file the NDA and shall obtain (in its own name or that of its nominee(s)) the permits, approvals, (including NDA approval(s)) and any other authorizations necessary to market the Products in the Territory.

7.3 SALIX shall provide ALFA with semiannual reports describing in reasonable detail its progress in all the above activities, until the Putting into Commerce.

7.4 ALFA undertakes to perform and complete diligently and expeditiously the studies listed in Part 4 of the Schedule at its sole responsibility for covering all cost and expense. All such studies shall be conducted and completed in such manner and to such standard (including without limitation, US Good Laboratory Practice and Good Clinical Practice) as may be required for the use of such study results and documentation in connection with any regulatory approvals required for the Products within the Territory and to supply SALIX with full details and information concerning the same under the provisions of Article 4.

7.5 Each of ALFA and SALIX undertakes to cooperate and liaise with the other party in such manner as may reasonably be required in connection with the timing and conduct of trials in order to prevent any avoidable delays and to ensure the commitment of each party as may be appropriate under the terms of this Agreement.

7.6 ALFA shall use its best efforts to supply, or arrange for others to supply, all such quantities of the Compound and/or Products as may reasonably be required by SALIX for all required preclinical tests, stability and human clinical trials and for samples or placebos for clinical trials such quantities to be supplied at ALFA's expense free of charge to SALIX (Provided Always that in this Article 7.6 "Products" shall mean bulk (tablets) for the active drug and for the placebo).

7.7 ALFA undertakes to supply to SALIX copies of all preclinical or clinical reports and protocols relating to the Compound and/or the Products obtained or prepared by ALFA or any licensee of ALFA of the Compound in any territory. The parties shall use their best efforts in order that all preclinical and clinical studies are obtained and produced in accordance with US Good Laboratory Practice and Good Clinical Practice standards and comply in all material respects with the requirements of the FDA in respect of reports and protocols filed in support of or otherwise in connection with any NDA.

7.8 Immediately after the signature hereof, ALFA and SALIX will establish a "Product Development Committee" consisting of three representatives from each of the parties. It is acknowledged that the Product Development Committee as at the date hereof will be constituted by;

ALFA; Dr Ernesto Palazzini
Dr MS. Miriam Barbanti

          and one other to be appointed

SALIX;    Alexander McMahon
          Margie Nemcik-Cruz
          Dr Lorin Johnson

The primary aim of the Product Development Committee will be the discussion and the recommendation of indications which SALIX shall develop; it shall also discuss and suggest to the parties any additional form of cooperation, under Article 7.8 below. The Product Development Committee shall endeavour to meet at least two times in each year, at locations alternating between California and Italy. Each party shall bear the costs and expenses incurred by its own representatives in connection with the Product Development Committee and attending any meetings. Notwithstanding the foregoing it is acknowledged and confirmed that in its role of developer and marketer SALIX will retain the final decision to determine all aspects of the development and commercialization of the Products in the Territory, in its sole discretion, acting in the best interest of the Products in the Territory.

7.9 SALIX will be responsible in its sole discretion for determining which indication(s) of the Products, within the treatment of gastrointestinal and respiratory tract diseases and conditions, to develop, taking into consideration the recommendations of the Product Development Committee (subject always to the final decision of SALIX under Article 7.8), and for designing all related clinical protocols, conducting clinical studies, preparing, filing for and obtaining regulatory approvals required to market, and commence commercial sales for such indication(s) in the Territory. SALIX undertakes to market the Products in compliance with all such regulatory approvals obtained.

7.10 In addition to the exchange of information and obligations in respect thereof contained in this Agreement and without limiting and or affecting in any way the generality of such provisions, the parties agree that they are prepared to negotiate specific forms of cooperation for carrying out additional studies and/or tests, and for exchanging respective proprietary information in addition to what is already subject to the provisions hereof, for the most efficient preparation of pre-clinical and clinical regulatory packages; the parties shall then agree on law and in what portion they will share the related costs; the parties shall furthermore from time to time exchange marketing information for the purpose of homogenizing worldwide strategies and marketing policies.

7.11 SALIX shall notify ALFA of any material step which has been undertaken with the purpose to have the Products approved and shall promptly send to ALFA by courier or by similar means copies of the following documentation;

IND annual reports
Final reports of all clinical studies undertaken the NDA

ALFA shall be allowed to use and to make available such documentation to its

Licensees free of charge.

SALIX acknowledges that it shall not in the Territory or elsewhere publish any data or information concerning the Products or any clinical trials of the Products without the prior consent in writing of ALFA such consent to be provided within a maximum period of 60 days and not to be unreasonably withheld or delayed.

7.12 In the event that SALIX abandons development of the Compound and/or Products for any indication (after commencing development in respect of such indication) in a defined part of the Territory and does not recommence such development within 90 days of any notice in writing served on it by ALFA Licence granted hereunder in connection with the Patents and the Technology Rights relating solely to such indication shall be deemed (upon the expiry of such 90 day period) to have terminated in respect of such specified indication only and all rights in such indication shall revert to ALFA and SALIX shall deliver to ALFA all information within its possession relating to such indication Provided Always that ALFA undertakes that it shall not either directly or indirectly (through any third party or sub licensee) market within the Territory any Product for any such indication without the prior consent of SALIX such consent not to be unreasonably withheld where ALFA can show that such marketing would not adversely affect the exploitation by SALIX of its rights hereunder. For the avoidance of doubt the provisions of this Article 7.12 shall not affect in any manner the obligations of SALIX under Article 6.

7.13 The parties further undertake to maintain throughout the terms of this Agreement a system (and obligations as required) concerning the prompt reporting of all and any adverse events relating to the Compound and/or the Products and the prompt supply to the other party of any information concerning any such adverse event, in such manner as may required by the FDA and European Union authorities..

Article 8 - MARKETING

8.1 SALIX shall use all reasonable endeavours to introduce, promote and maximize the sales of the Products throughout the Territory; SALIX shall carry out such activities under the Trademark and in accordance with the usual practice in the pharmaceutical field of the Territory .

8.2 SALIX and ALFA shall consult and exchange information concerning marketing strategies and market information within the Territory and elsewhere in respect of any territory in which the Products may be marketed to endeavour to produce homogeneity in the marketing of the Products worldwide. The parties will exchange marketing information; for this purpose each party shall provide to the other samples of all promotional literature, pamphlets, booklets, and advertising material for the Products and all data which support promotional claims for them. ALFA and/or ALFA'S licensees, at their own cost, may translate and reproduce such promotional materials or publications and distribute them, at their sole discretion, in the course of its promotional and marketing activities Provided Always that SALIX shall not be liable in any manner whatsoever in respect of any such translations or reproductions

and shall be indemnified and held harmless against any loss or claim arising in connection with the same. SALIX may at its own cost translate and reproduce any such promotional materials or publications and distribute them in the course of its promotional and marketing activities Provided Always that ALFA shall not be liable in any manner whatsoever in respect of any such translations or reproductions and shall be indemnified and held harmless against any loss or claim arising in connection with the same.

8.3 SALIX undertakes to print on the packaging of and on all promotional and advertising material relating to the Products the words "Licensed by Wassermann S.p.A" or similar language to the extent permitted under any applicable law and ALFA licenses SALIX to use is corporate name in such form for such purpose.

8.4 Putting into Commerce of the Products shall be effected by SALIX in any country in the Territory within and not later than six (6) months from the date of the obtaining of the NDA and/or of the regulatory approvals to market the Products in such country within the Territory (including if applicable all pricing and reimbursement approvals), unless postponements of said deadline be agreed upon in writing by the parties Provided Always that SALIX shall not be in breach of its obligations under this Article in the event that any failure to meet such deadlines shall be caused by any failure by ALFA to Supply Compound in accordance with the provisions of the Supply Agreement. SALIX shall promptly notify ALFA in writing of the date of the Putting into Commerce in the Territory.

Article 9 - COMMENCEMENT AND DURATION

9.1 This Agreement shall come into force and effect from the last date of execution of these presents and shall continue thereafter unless and until terminated in accordance with the provisions set out below.

9.2 The obligations of SALIX to pay royalties in respect of Products under the provisions of Article 6 shall commence upon Putting into Commerce of such Products and shall continue until whichever shall be the later

of.-

9.2.1    the expiry of the period in which the manufacture, use or
         sale of the Products by any unlicensed third party would
         constitute an infringement of any Valid Claim within the
         Patents; and

9.2.2    the expiry of a period of ten years from the date of Putting
         into Commerce of the first Product

For the avoidance of doubt this Agreement shall continue thereafter in accordance with its terms and the licences granted under Article 3.1 shall continue thereafter as irrevocable royalty free paid up licences (with the right to sublicence), and save only as expressly provided under Article 10.3 in respect of the Trademark thereafter.

ARTICLE 10 - TRADEMARK

10.1      As soon as possible after execution of this Agreement the parties will
          select and agree the most suitable trademark for the Products (the
          Trademark) to be used by SALIX hereunder in the Territory. Forthwith
          upon agreement of the Trademark ALFA undertakes to take all such steps
          as may be required at its own expense to obtain registration of the
          Trademark throughout the Territory for use of the Trademark on the
          Products and thereafter to maintain and renew such registration(s) as
          required throughout the period in which SALIX shall be exploiting the
          Products.

10.2      ALFA hereby grants SALIX to exclusive licence to use the Trademark to
          identify the Products to be manufactured, promoted and sold in the
          Territory hereunder. The parties agree and undertake to execute such
          Trademark User Agreements as may be required to note and register the
          Licence granted under this Agreement in respect of the Trademark
          within the Territory.

10.3      It is understood that the Trademark Licence granted to SALIX hereunder
          does not involve the acquiring of ownership of the Trademark on the
          part of SALIX; upon expiry of the obligation to pay royalties under
          the terms of Article 9.2 SALIX shall thereafter retain an exclusive
          licence of the Trademark in respect of the continued sale and
          exploitation of the Products. If so required by SALIX ALFA shall
          execute a separate Trademark Licence in respect of the Trademark in
          favour of SALIX permitting the continued use of the Trademark on the
          Products, such licence to be irrevocable provided that SALIX shall pay
          royalties on the continued use of the Trademark thereafter at the rate
          of [*] of Net Sales. In the event that SALIX notifies ALFA in writing
          at any time thereafter that it wishes to terminate such Trademark
          Licence SALIX acknowledges that it shall have no continuing right to
          use the Trademark Provided Always that ALFA under takes not thereafter
          (either directly or indirectly) to use the Trademark within the
          Territory upon any products competitive in any material respect with
          the Products.

1O.4      In the event the parties shall agree and select as the Trademark any
          trademark already in the possession of SALIX as at the date hereof,
          SALIX shall transfer said trademark to ALFA within and not later than
          three (3) months after the date of agreement of the Trademark and such
          trademark shall fall within the definition of "Trademark" for all
          purposes hereunder. In such circumstances SALIX shall take all such
          steps as may reasonably be required to vest ownership of such
          trademark in ALFA

Article 11 - INDUSTRIAL PROPERTY RIGHTS

11.1      In the event that SALIX shall become aware of any infringement or
          violation of the rights of ALFA in the Patents or the Technology
          Rights by any third party within the Territory it shall forthwith
          notify ALFA. SALIX undertakes to use all reasonable endeavours to
          prevent any such infringement or violation.

11.2      ALFA, undertakes promptly and at its sole expense, either directly or
          indirectly through a duly authorized agent, to take all such steps as
          may reasonably be required

                                       15

[*]  CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
     THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
     REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

          to prevent any violation or infringement of any of the Patents or the
          Technology Rights or the Trademark within the Territory and to procure
          that any such infringement or violation is discontinued . SALIX shall
          provide to ALFA such assistance as it may reasonably requite in
          connection therewith provided always that ALFA shall reimburse to
          Salix all reasonable costs incurred by SALIX in providing such
          assistance or otherwise in the performance of its obligations under
          Article II 1.1. In the event that ALFA shall fail to take such steps
          SALIX shall be entitled to take such steps in its own name or in be
          name of ALFA as it considers appropriate to prevent any such
          Infringement or violation or otherwise as it may consider appropriate
          to protect the market for the Products within the Territory provided
          always that SALIX shall be entitled to deduct from royalties due to
          ALFA hereunder all costs, charges, expenses and damages suffered or
          incurred by it.

11.3      In the event that the exercise by SALIX of the rights granted under
          Article 3.1 shall infringe the rights of any third party or in the
          event that any allegation is made in respect of any such infringement
          ALFA shall take all such steps and action at its sole cost and expense
          to defend or otherwise settle any such claim and to procure for SALIX
          the right to continue to exercise the exclusive and other rights
          granted hereunder and shall indemnify and hold harmless SALIX against
          all costs expenses claims losses or damages suffered or incurred in
          connection with any such claim or allegation.

Article 12 - DEVELOPMENTS

12.1      In the event that SALIX shall discover or identify any new uses or
          applications outside the field of gastrointestinal and respiratory
          tract diseases and conditions for the Compound or any pharmaceutical
          product which may use the Compound or otherwise any new indications
          for the Products or the Compound outside the field of gastro
          intestinal and respiratory tract diseases and conditions (an
          "Invention") it shall notify ALFA in writing of be same and shall use
          all reasonable endeavours to procure that the same shall remain
          strictly confidential and shall not be disclosed to any third party
          during a period of 180 days from the date of notification or if
          earlier until ALFA and SALIX shall have agreed the manner in which the
          same may be exploited. Thereafter it shall only be disclosed either
          upon terms agreed between the parties or by SALIX in such manner as it
          considers appropriate. The parties shall negotiate in good faith terms
          relating to the protection and exploitation of any such Invention
          Provided Always that

          12.1.1   SALIX shall have the right to exploit any Invention
                   throughout the Territory free of any further or additional
                   payment to ALFA.

          12.1.2   ALFA shall have the right to exploit any such invention in
                   all other parts of the world and to sublicense any such
                   rights, subject to the negotiation in good of faith such
                   payments (including royalties) as may be reasonable and
                   appropriate to compensate SALIX for its rights in any such
                   Invention

          12.1.3   Any patent rights applied for in respect of any such
                   Invention shall be applied

                                       16

                   for in the sole name of SALIX

12.2      In the event that ALFA (or any licensee of ALFA) shall discover or
          identify any new uses or applications for the Compound or any
          pharmaceutical product which may use the Compound or otherwise any new
          indications for the Products or the Compound (an "ALFA invention")
          within or relating to the field of gastro intestinal or respiratory
          tract diseases or conditions ALFA shall notify SALIX in writing of the
          same and SALIX is hereby granted an option to obtain an exclusive
          licence in respect of all rights existing in any ALFA Invention to
          exploit the same within the Territory the terms of such licence to be
          negotiated in good faith between the parties.

12.3      ALFA hereby grants SALIX a first option to enter into good faith
          negotiations concerning the grant to SALIX of a licence to exploit
          within the Territory any future compounds and/or pharmaceutical
          products developed or identified by ALFA of potential application
          within the field of gastro intestinal and respiratory tract diseases
          and conditions.

Article 13 - CONFIDENTIALITY UNDERTAKING

13.1      During the term of this Agreement and for a period of ten (10) years
          after the expiry of the obligation to pay royalties, SALIX shall keep
          secret and confidential and shall use all reasonable endeavours, to
          procure that the same is kept confidential all technical and
          scientific data, information and know-how and documentation disclosed
          to it by ALFA under the terms of this Agreement and shall not disclose
          the same to any third party save only as may be required in connection
          with the performance of its obligations hereunder or in connection
          with any sublicence granted or to any potential investor in SALIX.

13.2      During the term of this Agreement and for a period of ten (10) years
          after the expiry of the obligation to pay royalties. ALFA shall keep
          secret and confidential and shall use all reasonable endeavours to
          procure that the same is kept confidential all technical and
          scientific data, information and know-how and documentation disclosed
          by it to SALIX under the terms of this Agreement together with all
          information developed by it from any such information or documentation
          and all information data and documentation supplied to it by SALIX in
          connection with this Agreement and shall not disclose the same to any
          third party save only as may be required in connection with the
          performance of its obligations or otherwise to any other licensee of
          the rights hereunder in respect of any territory outside the Territory
          Provided such Licensees agree to be bound by the same obligations of
          confidentiality accepted by ALFA in this Article 13.

13.3      The obligations contained in Articles 13.1 and 13.2 shall not apply to
          any part of such data information or documentation which

          13.3.1   shall otherwise than by reason of the default of the
                   recipient after the date hereof enter the public domain;

13.3.2   the recipient can show was in its possession free of any
         obligation of confidentiality prior to the date of receipt in
         connection with this Agreement

13.3.3   the recipient is obliged by or statutory or regulatory
         authority to disclose

Article 14 - PRODUCT LIABILITY - INDEMNIFICATION

14.1      ALFA shall be solely liable for all costs claims damages and expenses
          arising out of the use of the Compound in the Product and the
          exploitation of the Product Within the Territory where any such costs
          claims damages and expenses are suffered or incurred by any third
          party or by SALIX by reason of;

          14.1.1   any default by ALFA of its obligations under this Agreement
                   or under the Supply Agreement;

          14.1.2   any negligent act or omission of ALFA in connection with the
                   performance of its obligations under this Agreement or the
                   Supply Agreement

          14.1.3   any inherent defect in the Compound as determined by the
                   Specifications (as defined in the Supply Agreement);

          and ALFA shall idemnify, and hold SALIX harmless against all and any
          such costs claims damages and expenses and shall effect and maintain
          adequate and appropriate insurance cover in respect of all such risks
          and shall if and when required by SALIX produce to SALIX evidence of
          such insurance cover .

14.2      Save as expressly provided in Article 14.1 SALIX shall be solely
          liable to third parties and shall hold ALFA harmless from all actions
          for compensation by third parties for any damages whatsoever, either
          direct or indirect or consequential, deriving from the Products
          manufactured and sold by SALIX or from the studies made by SALIX under
          the terms of this Agreement and undertakes to effect and maintain
          appropriate and adequate insurance cover against any such liability
          and shall if and when required by ALFA produce to ALFA evidence of
          such insurance cover.

14.3      In the event of any claim, action or proceeding for which a person is
          entitled to indemnity hereunder, the person seeking indemnity
          ("Claimant") shall promptly notify the relevant party ("Indemnitor")
          of such matter in writing. Indemnitor shall then promptly assume
          responsibility for and shall have full control of such matter,
          including settlement negotiations and any legal proceedings and
          Claimant shall fully cooperate in Indemnitor' s handling and defence
          thereof. Provided Always that Indemnitor shall keep Claimant fully
          informed of the progress and conduct of any such negotiations or legal
          proceedings and shall not in any settlement defence of the same make
          any admission or otherwise act in such manner as may prejudice the
          continuing business or reputation of Claimant without the prior
          consent in writing of Claimant (such consent not to be unreasonably
          withheld or delayed).

14.4      Notwithstanding any provision of this Agreement which might otherwise
          be to the

                                       18

          contrary, neither party shall under any circumstances be liable to the
          other for any indirect loss, lost profits, economic loss or other
          consequential damages and in the event of any breach by either party
          of the teens of this Agreement or otherwise in the event of the
          negligence of either party the damages recoverable shall be limited to
          such damages as may be suffered as a direct consequence of any such
          breach of negligence Provided Always that such limitation shall not
          apply to the indemnity provisions contained in Articles 14.1 and 14.2
          and any such indemnity shall extend to the full amount of any sums
          paid by the Claimant to any third party in connection with such
          matters (whether or not such sums paid to the third party include
          consequential or indirect loss).

14.5      Each party undertakes to notify the other: -

          14.5.1   forthwith in the event that it becomes aware of any serious
                   or previously unknown adverse reaction or contra indications
                   to the Compound and/or the Products in any part of the
                   Territory or elsewhere; and

          14.5.2   within three months, on a quarterly basis, of other adverse
                   reactions or contra indications to the Compound and/or the
                   Product (other than those specified in Article 14.5. 1) in
                   any part of the Territory or elsewhere.

Article 15 - NON COMPETITION

15.1      SALIX undertakes that it shall not for a period of 5 (five) years from
          the first date of Putting into Commerce of any Product promote,
          distribute or otherwise sell, directly or indirectly, any antibiotic
          products in the Territory competitive in any material respect with the
          Products developed and sold by SALIX hereunder.

15.2      ALFA undertakes that it shall not for a period of 10 (ten) years from
          the date hereof be involved directly or indirectly in the promotion,
          distribution or sale of any antibiotic products within the Territory
          competitive in any material respect with the Products to be developed
          and sold by SALIX hereunder.

15.3      ALFA undertakes that during the period in which royalties may be due
          hereunder it shall use all reasonable endeavours to procure that any
          product incorporating the Compound sold and exploited in the Territory
          shall be sold and exploited in such manner as shall not prejudice or
          otherwise affect in any material manner the ability of SALIX to
          exploit the rights granted hereunder in the best commercial interests
          of SALIX.

Article 16 - FORCE MAJEURE

Neither party shall be liable in any manner in respect of any breach by such party of its bligations hereunder (other than any breach of any obligation to make payment on the due date) where such breach raises from any circumstance outside such party's reasonable control. Amongst said circumstances are included, by way of example only and not implying any limitation, fires, floods, earthquakes, accidents, explosions, quarantine restrictions, strikes,

labour shortages, shortages of raw materials for the manufacturing of Products and acts of any public authority, including foreign ones.

Article 17 - TERMINATION OF THE AGREEMENT

17.1      Either party may terminate this Agreement following the material
          breach of any material provision hereof if the party in breach shall
          have failed to remedy such breach within sixty days of receipt of
          written notice from the other party specifying such breach and
          requesting remedy.

17.2      ALFA shall have the right to terminate this Agreement, by sending
          SALIX by registered airmail return (receipt requested) a three (3)
          months advance notice in writing

          17.2.1   should SALIX fail to use its best efforts to develop the
                   Products for the [*] indications selected under Article 7.1
                   in particular SALIX shall use its best efforts to file the
                   IND for the first indication in the US within six (6)
                   months from the date of execution of this Agreement and the
                   NDA within twenty-four (24) months from the filing of the
                   IND.

          17.2.2   should SALIX fail to effect the Putting into Commerce
                   within the six (6) months term provided for in Article 8.4
                   above subject to the proviso in Article 8.4; or

          17.2.3   should SALIX fail to sell the Products for a period of at
                   least six (6) consecutive months after the Putting into
                   Commerce of the Products, save where such failure is due:

                   (a)  in whole or in part to any failure of ALFA to perform
                        its obligations under this Agreement or the Supply
                        Agreement; or

                   (b)  the discontinuance or suspension of sales by reason of
                        any government regulations relating to the Products or
                        otherwise by any delays or restrictions caused or
                        imposed by government or by reason of any concern
                        relating to safety, efficacy or quality of the Products.

                   (c)  SALIX being affected by force majeure circumstances
                        (that is, circumstances outside its reasonable control).

          17.2.4   should SALIX become the subject of proceedings involving
                   bankruptcy, receivership, administration, insolvency,
                   moratorium of payment, reorganization or liquidation, or make
                   any assignation for the benefit of the creditors or any
                   equivalent measures in any relevant jurisdiction;

          Provided Always that such notice shall not be effective in the event
          that SALIX shall during such three month period remedy any breach or
          failure specified above such that the circumstances giving rise to any
          such notice shall no longer apply. In the event of

                                       20

[*]  CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
     THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
     REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

          termination by ALFA under the provisions of this Article such
          termination shall be ALFA's sole remedy in respect of any such failure
          or otherwise any alleged breach by SALIX.

17.3      SALIX shall have the right to terminate this Agreement in whole or in
          part, in respect of any indication or any part of the Territory by
          giving ninety (90) days' notice in writing to ALFA whereupon the
          rights of SALIX under this Agreement to exploit such indication or
          exploit Product in such part of the Territory shall cease.

Article 18 - PERIOD SUBSEQUENT TO THE TERMINATION OF THE AGREEMENT

18.1      Upon the termination or expiration of this Agreement by reason of
          service of notice under Article 17.1 or 17.2 (and not otherwise);

          18.1.1   SALIX shall cease any activity and any use of material
                   consequent to or connected with this Agreement and shall
                   return to ALFA, at its own expense and within one (1) month
                   from the effective date of termination, all the Technology
                   Rights supplied to it by ALFA hereunder, as well as any and
                   all documents and materials referring to it, and shall (save
                   only as specified below) cease any and all use of be
                   Technology Rights and of the Trademark for any purpose
                   whatsoever; and

          18.1.2   ALFA may at its sole discretion require SALIX to:

                   (a)  transfer to ALFA or to a company named by ALFA the IND,
                        the NDA, the PLA and/or other regulatory approvals for
                        the Product Provided That upon any such transfer SALIX
                        shall be entitled to reimbursement of all provable
                        government fees incurred by SALIX in connection with the
                        NDA and/or other regulatory approvals or the
                        applications therefor;

                   (b)  transfer to ALFA or a company named by ALFA, at cost,
                        all unsold quantities of the Products Provided Always
                        that SALIX shall have the right to continue its selling
                        activities in order to dispose of said Products (and in
                        such a case SALIX shall continue to pay the royalties
                        due in respect thereof);

                   (c)  accept delivery of any quantities of Compound ordered
                        from ALFA prior to the date of termination under the
                        terms of the Supply Agreement.

Article 19 - ASSIGNATION

19.1      ALFA shall have the right to assign this Agreement, in whole but not
          in part, to any Affiliate of its choice to whom the Patents and
          Technology Rights may have been transferred and SALIX hereby
          acknowledges and accepts any such assignation but

                                       21

          ALFA shall not otherwise assign or purport to assign this Agreement
          (in whole or in part) without the prior consent in writing of SALIX
          such consent not to be unreasonably withheld or delayed.

19.2      SALIX shall have the right to assign this Agreement, in whole but not
          in part, to any Affiliate of its choice and ALFA hereby acknowledges
          and accepts any such assignation but SALIX shall not otherwise assign
          or purport to assign this Agreement (in whole or in part) without the
          prior consent in writing of ALFA such consent not to be unreasonably
          withheld or delayed.

19.3      This Agreement shall be binding upon the successors and assignees,
          (and any subsequent assignee) of each of the parties.

Article 20 - ENTIRE AGREEMENT AND MODIFICATION

20.1      This Agreement together with the Supply Agreement constitutes the
          final and complete understanding existing between ALFA and SALIX
          relating to the subject matter hereof The terms of this Agreement
          cannot be substituted, superseded, waived or modified in any manner
          except by written agreement executed for and on behalf of each of ALFA
          and SALIX.

20.2      This Agreement supersedes the letter of intent dated February 2, 1995.
          This Agreement supersedes the Nondisclosure Agreement dated Number 11,
          1991 between SALIX and ALFA provided that such agreement shall
          continue in accordance with its terms in respect of any breach by
          either party of the terms thereof occurring prior to the date hereof.

Article 21 - LANGUAGE AND GOVERNING LAW

21.1      This Agreement is written and executed in two originals in the English
          language.

21.2      This Agreement shall be governed by and construed in accordance with
          the laws of Scotland, without giving effect to any conflict of laws
          principles or rules. All communications notices and proceedings
          required to be given hereunder shall be in the English Language.

Article 22-WAIVER

No waiver of any default by either party shall be deemed to constitute a waiver of any subsequent default with respect to the same or any other provision hereof. No waiver shall be effective unless made in writing with specific reference to the relevant provision(s) of this Agreement and signed by a duly authorized representative of the party granting the waiver.

Article 23 - NOTICES

Except as otherwise herein provided, all notices to be served or notified to the parties hereunder shall be mailed by registered airmail return receipt requested to their respective addresses listed below or to any other address subsequently communicated in writing, and shall be deemed to have been given seven working days after the date of mailing.

Party                          By Mail
-----                          -------

to SALIX                       SALIX HOLDINGS Ltd
                               3600 W. Bayshore Road,
                               Suite 205, Palo Alto,
                               California 94303

to ALFA:                       ALFA WASSERMAN S.p.A
                               Attn. Mr. Andrea Golinelli
                               --------------------------
                               Via Ragazzi del '99 no 5
                               40133 Bologna, Italy

Article 24 - LITIGATION

The parties hereby agree that any legal action or proceeding arising out of or in connection with this Agreement shall be brought in the Scottish Courts and the parties hereby prorogate the non-exclusive jurisdiction of the Court of Session, Edinburgh. IN WITNESS WHEREOF, these presents consisting of this and the twenty one preceding pages together with the Schedule hereto, are executed as follows:-.

For and on behalf of
ALFA WASSERMANN S.p.A
at MILANO
on the 24 day of June 1996

By /s/ signature unreadable
   ---------------------------
                        Director
in the presence of
/s/ Alberto Sacconi
-------------------------------
ALBERTO SACCONI           Name of Witness
-------------------------
c/o ALFA WASSERMANN      Address of Witness
-------------------------
MILANO
-------------------------

For and on behalf of
SALIX PHARMACEUTICALS, INC.
at Palo Alto
on the 24 day of June 1996

By /s/ Randy Hamilton
   ------------------------
                      Director

in the presence of

/s/ ALEXANDER T. McMAHON
------------------------

ALEXANDER T. McMAHON      Name of Witness
------------------------

c/o SALIX PHARMACEUTICALS Address of Witness Palo Alto, CA

This is the Schedule referred to in the foregoing Licence Agreement between Alfa Wassermann S.p.A and Salix Pharmaceuticals, Inc., dated June 24, 1996

SCHEDULE
PART 1

PATENTS

Case    Filing date  Filing no.  Granting date No. of       the Expiry date
                                               granted patent

S34     05/11/1981   262,123     07/27/1982    4,341,785    05/11/2001
S50     04/26/1985   727,521     12/10/1985    4,557,866    04/26/2005
S73     06/28/1993   083,453     10/04/1994    5,352,679    06/28/2013

Case S 34 (product patent): Imidazo-rifamycin derivatives with antibacterial utility

Case S 50 (processing patent): Process for the synthesis of pyrido-imidazo rifamycins

Case S 73 (patent for therapeutical use) : Use of rifaximin and pharmaceutical formulations containing it in the treatment of gastric dyspepsia caused by helicobacter pylori.

All as filed for the Territory.

PART 2

COMPOUND SPECIFICATION

[*]

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

PART 3
SALIX DEVELOPMENT PLAN

ACTIVITIES

A. ANIMAL PHARMACOLOGY

Al        Treatment of clindamycin-induced colitis with rifaximin in hamsters

B         HUMAN PHARMACOKINETICS

B1        Absorption/excretion in patients with C difficile colitis (assay of
          samples taken from phase III efficacy studies)

C         CLINICAL EFFICACY

C1        Two phase III pivotal efficacy studies in patients with
          antibioticassociated colitis (to include evaluation of dose-response)

PART 4

ALFA DEVELOPMENT PLAN

ACTIVITIES

A. TOXICOLOGY

A.1       Validation chemistry pre-study stability and homogeneity of
          suspension.
A.2       Analytical method development LC-MS/N4S (rat/dog/rabbit/human)
          (including validation)
A.3       4 week preliminary toxicity rat
A.4       26 week toxicity rat
A.5       4 week preliminary toxicity dog (including supporting toxicokinetics)
A.6       52 week toxicity dog (including supporting toxicokinetics)
A.7       Formulation chemistry rabbit (repro)
A.8       Pregnant preliminary rabbit
A.9       Teratology rabbit (ICH 413) (including supporting toxicokinetics)
A.10      Formulation chemistry rat (repro)
A.11      Fertility rat (ICH 411)
A.12      pre- and post natal rat (ICH 412)
A.13      Teratology rat (ICH 413) (including supporting toxicokinetics)
A.14      Acute studies in two rodent species (mouse, rat)

B         ADME (dog-rat)

B.1       Preparation of 14C-Rifaxmin
B.2       Absorption excretion (AE) 14C-R, in dog after single administration
B.3       Absorption distribution excretion (ADE) 14C-R in rat after single
          administration
B.4       ADME alter multiple doses in rat or dog (if required)
B.5       Identification of metabolites (if required)

C         SAFETY (general) PHARMACOLOGY STUDIES

C.1       General signs and behavior
C.2       Central nervous system
C.3       Respiration and cardiovascular system
C.4       Autonomic nervous system and smooth muscle
C.5       Skeletal muscle
C.6       Gastrointestinal system
C.7       Water and electrolyte excretion
C.8       Drug interaction studies.

                                       28

D         MICROBIOLOGY

D.1       R on C Difficile vs Vancomicin and Metronidazole
D.2       R induction of resistance in NH4 pr.b.vs Neomycin

E         CLINICAL DEVELOPMENT

E.1       Single ascending dose in healthy volunteers
E.2       Single dose radiolabelled study in healthy volunteers (including
          determination of metabolites, as necessary)
E.3       Multiple dose in healthy volunteers (if required)
E.4       Absorption study in patients with ulcerative colitis.

EXHIBIT 10.13

Dated June 24, 1996

ALFA WASSERMANN S.p.A

and

SALIX PHARMACEUTICALS. Inc.

SUPPLY AGREEMENT

Hewitson Becke + Shaw
First Floor
Stuart House
City Road
Peterborough PE1 1QF

Hewitson Becke + Shaw
S O L I C I T O R S

ARTICLE 1  - DEFINITIONS.................................................  1
ARTICLE 2  - SUPPLY......................................................  5
ARTICLE 3  - TERMS AND CONDITIONS OF SUPPLY..............................  5
ARTICLE 4  - SPECIFICATIONS..............................................  6
ARTICLE 5  - ORDERS AND QUALITY ASSURANCE................................  6
ARTICLE 6  - WARRANTIES AID  INSPECTION..................................  7
ARTICLE 7  - INDEMNIFICATION.............................................  8
ARTICLE 8  - CONFIDENTIALITY UNDERTAKING................................. 10
ARTICLE 9  - LICENCE TO MANUFACTURE...................................... 10
ARTICLE 10 - TERMINATION................................................. 11
ARTICLE 11 - NOTICES..................................................... 12
ARTICLE 12 - ENTIRE AGREEMENT AND MODIFICATION........................... 13
ARTICLE 13 - ASSIGNABILITY............................................... 13
ARTICLE 14 - WAIVER OF DEFAULT........................................... 13
ARTICLE 15 - GOVERNING LAW............................................... 13
ARTICLE 16 - FORCE MAJEURE............................................... 13
ARTICLE 17 - LITIGATION.................................................. 14
ARTICLE 18 - HEADINGS.................................................... 14

SUPPLY AGREEMENT

BETWEEN

ALFA WASSERMANN S.p.A., a corporation organized and existing under the laws of Italy, with registered of at Contrada S. Emidio 65020 Alanno (Pescara) Italy, (hereinafter "ALFA"); and SALIX PHARMACEUTICALS, INC., a corporation organized and existing under the laws of the State of California, United States of America, with registered office at 3600 W Bayshore Road, Suite 205, Palo Alto, California, USA 94303 (hereinafter "SALIX").

WHEREAS

(A) ALFA and SALIX have envied into a Licence Agreement (the "Licence Agreement") of even date herewith with respect to the Products (as defined below); and

(B) ALFA desires to supply SALIX with Compound (as defined below), subject to the terms and conditions hereof, and SALIX desires to purchase such Compound from ALFA.

NOW THEREFORE, for and in consideration of the premises and the understandings herein contained it is hereby agreed as following;

Article 1 - DEFINITIONS

The following words and expressions used in this Agreement shall have tile following meanings:

"ACT"                         means the United States Food, Drug, and Cosmetic
                              Act and rules and regulations thereunder and the
                              equivalent legislation, rules and regulations in
                              any other country in the Territory, as amended
                              from time to time, as the context requires.

"AFFILIATE(S)"                shall mean any corporation, joint-venture other
                              entity which directly or indirectly controls, is
                              controlled by or is under common control with a
                              party to this Agreement. "Control" shall mean the
                              possession of the power to direct or cause the
                              direction of the management and policies of a
                              person or business entity, whether through
                              ownership of voting securities, by contract or
                              otherwise;

"APPLICATION(S)               means the new drug application ("NDA") for the

                              Products to be filed with the U.S. Food and
                              Drug Administration ("FDA") or any other
                              applicable

                              regulatory authority by SALIX.

"COMPOUND"                    shall mean the raw material known as "rifaximin",
                              which is 2,7-(Epoxypentadeca [1,11,13]trienimino)
                              benzofuro [4,5-e-]-pyrido[1,2-a]benzimidazole-
                              1,15(2H)-doine, 25-(acetyloxy)-5,6,21,23-
                              tetrahydroxy-27-methoxy-2,4,11,16,20,22,24,26-
                              octamethyl-, [2S-(2R*, 16 Z, 18E, 20R*,21R*,22S*
                              ,23S*, 24S*,25R*,26S*,27R*,28E)]-(Chemical
                              Abstract No. 80-621-814) together with all
                              products analogs and isomers thereof and any
                              improvements or developments to any of the
                              foregoing owned or controlled by or licenced to
                              ALFA in inspect thereof during the term of this
                              Agreement;

"FACILITY                     means the plant where the Compound will be
                              manufactured for the purposes of supplying SALIX
                              hereunder. Such plant unless notified to SALIX
                              under Article 2.3 shall be the plant of Alfa
                              Chemicals Italiana S.r.l. located at Strada
                              Briantea Km 36, no.83, 22060 Bulciago (Como).

"FDA"                         shall mean the United States Food and Drug
                              Administration or any successor agency performing
                              a similar function or an equivalent foreign
                              regulatory agency (including without limitation,
                              the Health Protection Branch in Canada);

"GOVERNMENT"                  means the FDA other regulatory authority, or
                              successor agencies thereto.

"LICENCE"                     shall mean an agreement between the parties of
                              even date herewith granting a licence in respect
                              of the Patents and the Technology Rights for the
                              exploitation of the Product by SALIX within the
                              Territory;

"MANUFACTURER"                shall mean the manufacturer appointed by ALFA to
                              manufacture the Compound on behalf of ALFA which
                              manufacturer is at the date hereof Alfa Chemicals
                              Italiana S.r.l. and which Manufacturer shall be
                              changed only as provided in Article 2.3

                                       2

"MANUFACTURING LICENCE"       shall mean the license granted by ALFA to SALIX to
                              manufacture the Compound in accordance with the
                              terms of Article 9.

"NDA"                         shall mean applications filed with the FDA
                              requesting approval to market a new drug,
                              including but not limited to New Drug Applications
                              and Product License Approvals (PLA), as
                              applicable.

"NDA APPROVAL"                means the date upon which the FDA approves SALIX'S
                              NDA for the applicable Product.

"NET SALES"                   shall mean the gross invoiced amount received by
                              SALIX (or any of its sub-licensees or distributor)
                              for commercial sales to third parties (who shall
                              not be Affiliates, sublicensees or distributors of
                              SALIX or its Affiliates) of the Products in the
                              Territory, net of all normal trade and cash
                              discounts and net of all rebates, returns,
                              transportation and insurance charges, sales, value
                              added or other direct taxes charged on any
                              invoice, customs duties and surcharges allowed to
                              the purchasers as deductions from the purchase
                              price of the Products or otherwise as specified on
                              the invoice;

"PATENTS"                     shall mean the patents and/or patent applications
                              listed in Part 1 of the Schedule and any other
                              patent rights in the Territory now existing or
                              hereafter acquired by or licenced to ALFA
                              pertaining to the subject matter of such patents
                              and patent applications or otherwise to the
                              Compound and/or the Product and any divisions,
                              continuations and continuations-in-part of any
                              such patents or patent rights and any patent
                              granted in respect thereof for the full terms
                              thereof including any reexaminations, renewals,
                              extensions and reissues thereof and including any
                              supplementary protection certificates;

"PRODUCTS"                    shall mean those pharmaceutical products for human
                              use in the treatment and/or prevention of
                              gastrointestinal and respiratory tract diseases
                              and conditions containing the Compound as an
                              active ingredient;

"PUTTING INTO COMMERCE"       shall mean the date of the first commercial sale
                              of Products to third parties (who shall not be
                              Affiliates or sublicensees or distributors of
                              SALIX or its

                                       3

                              Affiliates) by or on behalf of SALIX or any
                              sublicensees or distributors of SALIX or its
                              Affiliates under the terms of this Agreement made
                              in any part of the Territory after all relevant
                              marketing and pricing approvals shall have been
                              granted by the relevant regulatory authorities in
                              respect of the Product in such part of the
                              Territory;

"SCHEDULE"                    shall mean the Schedule hereto comprising Parts 1
                              to 3 thereof;

"SPECIFICATIONS"              means the requirements, standards and other items
                              for Compound attached as Part 2 of the Schedule,
                              as amended from time to time in accordance with
                              the provisions hereof to comply with the
                              Applications.

"TECHNOLOGY RIGHTS"           shall mean all intellectual property and other
                              proprietary rights and all confidential
                              information and knowhow pertaining to the Compound
                              and/or the Product or otherwise to the Patents in
                              any respect (including without limitation all
                              improvements, inventions, derivatives, formulation
                              data, specifications, manufacturing procedures and
                              technology, technical information, know-how, trade
                              secrets, pharmacology, toxicology and other pre-
                              clinical data, clinical data, regulatory
                              information and marketing data) within the
                              possession or control of ALFA (whether developed
                              by or licensed to ALFA) (and all such rights and
                              information within the possession or control of
                              any other licensee of ALFA having right in respect
                              of the Compound or the Product) in existence as at
                              the date hereof or arising during the term of this
                              Agreement which are available to ALFA for the
                              Territory.

"TERRITORY"                   shall mean the United States (its territorial
                              possessions, territories and the Commonwealth of
                              Puerto Rico) and Canada;

"VALID CLAIM"                 shall mean a claim of an issued and unexpired
                              patent included within the Patents, which has not
                              been held permanently revoked, unenforceable or
                              invalid by a decision of a court or other
                              governmental agency of competent jurisdiction
                              unappealable or unappealed within the time allowed
                              for appeal and which has not been admitted to be
                              invalid or unenforceable through reissue or

                                       4

                              disclaimer or otherwise;

ARTICLE 2 - SUPPLY

2.1 Subject to the terms hereof, ALFA agrees to sell to SALIX, and SALIX agrees (subject only to the provisions of Article 9) to purchase from ALFA, all such quantities of Compound required by SALIX for use in the manufacture of Product for sale in the Territory in exercise of the rights granted to SALIX by ALFA under the Licence.

2.2 ALFA, at its sole expense, will provide all labour, utilities, equipment, raw materials and components necessary for manufacturing, shipping and storage of the Compound in compliance with the Specifications and the warranties contained in Article 6.1.

2.3 Subject to the prior written approval of SALIX (which approval shall not be unreasonably withheld or delayed but may be conditional upon receipt of necessary Government approvals), ALFA may change the Manufacturer and/or the Facility. In such event, the obligations of ALFA under this Agreement shall continue and ALFA shall remain solely responsible for the performance of its obligations under this Agreement notwithstanding the appointment of a Manufacturer. ALFA shall use its best endeavours to procure that the Manufacturer shall comply in full with all obligations of ALFA hereunder.

ARTICLE 3 - TERMS AND CONDITIONS OF SUPPLY

3.1 The price to be paid by SALIX to ALFA for Compound shall be as set forth in Part 3 of the Schedule and shall be inclusive of the cost of carriage insurance and freight of the Compound to SALIX as specified in Article 3.2.

3.2 The Compound will be delivered by ALFA to a plant in close proximity to a major airport, as designated by SALIX from time to time by notice to ALFA. Title and risk shall be deemed to have passed to SALIX when the Compound is delivered by the carrier to the plant designated by SALIX.

3.3 SALIX will pay for each shipment within forty-five (45) days after whichever shall be the later of the date the relevant invoice is received by SALIX or the date of receipt of the Compound, by SWIFT (international communications) wire transfer in US dollars to such bank and account in Italy as is designated by ALFA in writing for such purpose. ALFA shall be responsible for securing any governmental permits or making any filings with the Italian government required in connection with such payment.

3.4 For a period of [*] following the Putting into Commerce of Product for each indication, ALFA shall provide [*] to SALIX quantities of Compound not exceeding [*] of Compound required in connection with the actual total sales of Product by SALIX during such period, [*] in

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

connection with the launch and promotion and marketing of the Products.

ARTICLE 4 - SPECIFICATIONS

4.1 Specifications

The Compound shall be manufactured, packaged, stored and shipped by ALFA fully in accordance with the Specifications as described in Part 2 of the Schedule. The Specifications may be changed by mutual agreement which will be reached in good faith by the parties.

4.2 Filings.

At SALIX's request following the execution of this Agreement; ALFA shall promptly (but not later than sixty (60) days after receipt of such request provide all technical data knowhow and other information relating to the Patents or the Technology Rights required and necessary to enable SALIX to file the Applications with respect to the Products in compliance with all relevant Government regulations.

ARTICLE 5 - ORDERS AND QUALITY ASSURANCE

5.1 Delivery Date.

SALIX shall place firm orders for Compound in economical batches with a delivery date of not less than ninety (90) days after ALFA's receipt thereof. SALIX shall submit its initial purchase order not later than 30 days following NDA Approval. Compound shall be shipped to SALIX within the time frame requested in the applicable purchase order, provided that ALFA has at least a ninety day lead time.

5.2 Forecasts.

Commencing from the date of filing of the Applications SALIX shall provide to ALFA a 12 month forecast of its requirements for Products and Compound which forecast will be updated quarterly until the first Putting into Commerce. Thereafter, SALIX shall provide a rolling 12 month forecast, updated monthly.

5.3 SALIX agrees to purchase [*] of SALIX;s last forecasts for any forecast period, and ALFA agrees to fulfill SALIX's purchase orders to the extent such orders exceed its revised forecasts for any forecast period by [*] ALFA shall use its best efforts to fulfill SALIX purchase orders to the extent such orders exceed its revised forecasts for any forecast period by more than [*]

5.4 Quality Assurance.

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ALFA, at its sole expense, will perform all testing for the release of raw materials and components listed in the Specifications. ALFA will supply a chemical Certificate of Analysis with each batch of Compound and any other documentation required by law. Complete copies of all test results and/or assays will be submitted to SALIX promptly following any request therefor during the term hereof.

ARTICLE 6 - WARRANTIES AND INSPECTION

6.1 ALFA Warranties.

ALFA warrants and undertakes that in respect of all Compound delivered:-

6.1.1  as at the date of delivery to SALIX, such Compound will comply fully
       with the Specifications;

6.1.2  as at the date of delivery to SALIX such Compound shall have been
       manufactured, packaged, labelled, stored and shipped fully in
       accordance with all relevant GMP's, all applicable laws and
       regulations and requirements and all commitments and undertakings
       made in any applicable regulatory filings;

6.1.3  it will prepare and maintain all such batch records and samples as
       may be required for the manufacture of chemical compounds for
       pharmaceutical use of this type by any relevant regulatory
       authority, for the full period required under any applicable
       regulations.

6.2 ALFA confirms that it shall grant to SALIX and its authorised representatives full access to all such records, documentation and data of ALFA or its manufacturer(s), as may reasonably be required by SALIX for the purpose of inspecting the compliance by ALFA with the warranties set out above Provided Always that such inspection will take place not more than twice in each calendar year and shall take place upon reasonable notice upon normal working hours. ALFA will procure access for SALIX to any Facility at which the Compound is manufactured whether such Facility is within the control of ALFA or any third party Manufacturer.

6.3 Reporting.

Both parties shall promptly

6.3.1  notify the other party of any governmental inspection of the
       Facility by the FDA or any other governmental agency department
       which relates to or could adversely affect the manufacture and/or
       supply of Compound hereunder; and

6.3.2  supply the other parry with all written communications to or from
       Government relating to the above.

6.4 Quality Control Evaluation.

Within forty-five (45) days of receipt of each shipment of Compound, SALIX may make a visual or other quality control evaluation of such shipment. If any shipment fails to conform to the Specifications or shall have been manufactured, packaged or shipped under conditions which do not comply with this Agreement, SALIX may reject the same by giving prompt written notice to ALFA within such forty-five (45) day period, specifying the manner in which it fails to meet the requirements hereof. If SALIX fails to give such notice within such period, SALIX shall be deemed to have waived its right to reject such shipment due to failure to meet Specifications Provided Always that such waiver shall without prejudice to the rights of SALIX against ALFA in connection with any latent defect contained in the Compound or otherwise any breach by ALFA of the warranties contained in Article 6.1.

6.5 Disposal.

SALIX shall not dispose of any non-conforming shipment without written authorization and instructions from ALFA. ALFA shall promptly notify SALIX as to the disposal thereof (at ALFA's sole cost and expense) at the conclusion of any investigation by ALFA. In no event shall this investigation exceed sixty (60) days from receipt by ALFA of SALIX's written notice provided for in Section 6.4.

6.6 Disputes.

Any dispute as to whether any shipment of Compound fails in whole or part to meet the requirements hereof shall be resolved by an independent testing organization of recognized repute within the U.S. pharmaceutical industry agreed upon by the parties, the appointment of which shall not be unreasonably withheld or delayed by either party. The cost of such independent testing organization shall be paid by the party in error with respect to such shipment.

6.7 Product

ALFA shall have the right to inspect or cause to be inspected (at its sole cost) at any time samples of the Products in order to ascertain whether they are manufactured using the Compound, and in compliance with the manufacturing and quality standards established by FDA and for such purpose shall have the right to visit such facilities at which the Product is manufactured and to inspect records and samples held at such Facilities Provided Always that such inspection shall not take place more than once in each year and shall be upon reasonable notice during normal business hours.

ARTICLE 7 - INDEMNIFICATION AND DAMAGES

7.1 In Favour of SALIX.

ALFA shall defend, indemnify and hold SALIX and its Affiliates and the respective

officers, directors and employees of each harmless from and against any and all claims, demands, losses, damages, liabilities (including without limitation Product liability), settlement amounts, cost or expenses whatsoever (including reasonable legal fees and costs and court costs) arising from or relating to any claim, action or proceeding made or brought against such person by a third party as a result of ALFA's negligence, willful misconduct or breach of this Agreement (including, without limitation, ALFA's failure to comply with the Specifications, any breach by ALFA of the warranties contained in Article 6.1 or otherwise any breach of the provisions of this Agreement by ALFA).

7.2 In Favour of ALFA.

Except as otherwise provided in Section 7. 1, SALIX shall defend, indemnify and hold ALFA and its Affiliates and the respective officers, directors and employees of each harmless from and against any and all claims, demands, losses, damages, liabilities (including without limitation Product liability), settlement amounts, cost or expenses whatsoever (including reasonable legal fees and costs and court costs) arising from or relating to any claim, action or proceeding made or brought against such person by a third party as a result of SALIX's manufacture, use, sale and/or distribution of the Products.

7.3 Notice: Defence

In the event of any claim, action or proceeding for which a person is entitled to indemnity hereunder, the person seeking indemnity ("Claimant") shall promptly notify the relevant party ("Indemnitor") of such matter in writing. Indemnitor shall then promptly assume responsibility for and shall have full control of such matter, including settlement negotiations and any legal proceedings, and Claimant shall fully cooperate in Indemnitor's handling and defence thereof Provided Always that Indemnitor shall keep Claimant fully informed of the progress and conduct of any such negotiations or legal proceedings and shall not in any settlement or defence of the same make any admission or otherwise act in such manner as may prejudice the continuing business or reputation of Claimant without the prior consent in writing of Claimant (such consent not to be unreasonably withheld or delayed).

7.4 Consequential Damages.

Notwithstanding any provision of this Agreement which might otherwise be to the contrary, neither party shall under any circumstances be liable to the other for any indirect loss, lost profits, economic loss or other consequential damages and in the event of any breach by either party of the terms of this Agreement or otherwise in the event of the negligence of either party the damages recoverable shall be limited to such damages as may be suffered as a direct consequence of any such breach or negligence, Provided Always that such limitation shall not apply to the indemnity provisions contained in Articles 7.1 and 7.2 and any such indemnity shall extend to the full amount of any sums paid by the Claimant to any third party in connection with such matters (whether or not such sums paid to the third party include

consequential or indirect loss).

ARTICLE 8 - CONFIDENTIALITY UNDERTAKING

8.1 During the term of this Agreement and for a period of ten (10) years thereafter, SALIX shall keep secret and confidential and shall use all reasonable endeavours to procure that the same is kept confidential all technical and scientific data, information and know-how and documentation disclosed to it by ALFA under the terms of this Agreement and shall not disclose the same to any third party save only as may be required in connection with the performance of its obligations hereunder or in connection with any sublicence granted or any potential Investor in SALIX.

8.2 During the term of this Agreement and for a period of ten (10) years thereafter, ALFA shall keep secret and confidential and shall use all reasonable endeavours to procure that the same is kept confidential all technical and scientific data, information and know-how and documentation disclosed by it to SALIX under the terms of this Agreement together with all information developed by it from any such information or documentation and all information data and documentation supplied to it by SALIX in connection with this Agreement and shall not disclose the same to any third party save only as may be required in connection with the performance of its obligations or otherwise to any potential investor in ALFA or any other licensee of the Patent and/or Technology Rights in respect of any territory outside the Territory Provided such licensees or potential investor agree to be bound by the same conditions of confidentiality agreed to by ALFA herein.

8.3 The obligations contained in Articles 8.1 and 8.2 shall not apply to any part of such data information or documentation which

8.3.1  shall otherwise than by reason of the default of the recipient after
       the date hereof enter the public domain;

8.3.2  the recipient can show was in its possession free of any obligation
       of confidentiality prior to the date of receipt in connection with
       this Agreement

8.3.3  the recipient is obliged by law or statutory or regulatory authority
       to disclose

ARTICLE 9 - LICENCE TO MANUFACTURE

9.1 In the event that for any reason whatsoever ALFA shall fail to supply SALIX in accordance with written orders placed by SALIX on ALFA for the Compound under the terms of this Agreement for a period of ninety (90) days SALIX shall be granted a license (under all relevant Patents and Technology Rights) to manufacture the Compound within the Territory or elsewhere. Such license shall be upon terms whereby:-

9.1.1  such licence shall be continuing, sublicensable and irrevocable in
       the event that any such failure to supply continues for a further
       period of ninety (90)

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REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

       days;

9.1.2  SALIX shall be permitted to manufacture the Compound for the purpose
       only of the use of the Compound for use and sale of Products within
       the Territory;

9.1.3  [*] shall be due in connection with such manufacturing licence
       Provided That, for the avoidance of doubt, SALIX shall continue to
       pay all sums due under the provisions of the Licence;

For the purpose of establishing any such manufacturing facility, ALFA will deliver to SALIX at the request of SALIX after the date hereof all such information, data and technology relating to the Patents and the Technology Rights or otherwise relating to processes for the manufacture of the Compound as SALIX( may reasonably require to enable it to establish a manufacturing facility and to permit such manufacturing facility to produce three test batches of the Compound and to enable such manufacturing facility to qualify as a supplier under the Applications and all regulatory provisions. In this respect, SALIX shall be entitled to procure that the NDA shall permit the substitution of SALIX and/or its subcontractor manufacturer at any time in the event that the Manufacturing License becomes operative, at the request of SALIX.

9.2 In consideration of the loss of ALFA's appointment to supply all quantities of Compound required by SALIX (as contemplated under Article 2.1) SALIX agrees to pay ALFA [*] in respect of the manufacture by SALIX of the Compound under this Article 9 which is dependent upon the delivery of the items referred to in Article 9.1. The [*] for such manufacture under the respective Patents while such Patents are in force or which utilises to a significant extent confidential know-how of ALFA for such time as it remains confidential Provided however that no royalties will be due to ALFA if SALIX does not use such Patents or confidential know-how or if the items delivered pursuant to Article 9.1 are not sufficient to enable such manufacture by SALIX.

9.3 To ensure the provision by ALFA of continuity of supply of the Compound ALFA will procure that at all times after Putting into Commerce of the Compound it will have at least two facilities fully qualified by FDA and capable of manufacturing such Compound in compliance with Article 6 for and on behalf of SALIX.

ARTICLE 10 - TERMINATION

10.1 Termination.

This agreement shall come into force and effect as at the last date of execution of these presents and shall continue thereafter until whichever shall be the earlier of:

10.1.1 the expiry of a period of ten years from the date of Putting into Commerce of the first Product for a non-orphan indication;

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10.1.2 the date of the first commercial sale of a generic of any Product by a third party in any part of the Territory

and shall continue thereafter torn year to year unless and until either party shall give not less than six months notice in writing to the other party of termination.

10.2 In addition to any other rights or remedies a party may have, either party may terminate this Agreement upon the occurrence of any of the following events of default which is not cured within thirty (30) days after written notice thereof is received by the other party:

10.2.1    breach by the other party of any of its material obligations
          hereunder; or

10.2.2    should the other party become subject of proceedings  involving
          bankruptcy, receivership, administration, insolvency, moratorium
          of payment reorganization or liquidation, or make any assignation
          for the benefit of the creditors or any equivalent measures in
          any relevant jurisdiction.

10.3 In the event of termination of the Agreement under the provisions of Article 10.1 or in the event of termination of this Agreement by SALIX under Article 10.2, the Manufacturing Licence shall immediately become effective and thereafter SALIX shall be permitted to manufacture the Compound under the terms of the Manufacturing Licence.

10.4 The obligations under Articles 6, 7, 8 and 9 shall survive any expiration or other termination of this Agreement in accordance with their terms.

ARTICLE 11 - NOTICES

Party               By Mail
-----               -------

to SALIX:           SALIX HOLDINGS Ltd
                    3600 W. Bayshore Road,
                    Suite 205, Palo Alto,
                    California 94303

to ALFA:            ALFA WASSERMAN S.p.A
                    Attn. Mr. Andrea Golinelli
                    --------------------------
                    Via Ragazzi del '99 no 5
                    40133 Bologna, Italy

ARTICLE 12 - ENTIRE AGREEMENT AND MODIFICATION

This Agreement (including the Schedule and the Licence) constitutes the entire agreement between the parties relating to the subject matter hereof. Save as expressly provided in the licence all prior agreements or arrangements, written or oral, between the parties relating to the subject matter hereof are hereby cancelled and superseded. This Agreement may not be modified except in writing signed by both parties.

ARTICLE 13 - ASSIGNATION

13.1 ALFA shall have the right to assign this Agreement, in whole but not in part, to any Affiliate of its choice to whom the Patents and Technology Rights may have been transferred and SALIX hereby acknowledges and accepts any such assignation but shall not otherwise assign or purport to assign this Agreement (in whole or in part) without the prior consent in writing of SALIX.

13.2 SALIX shall have the right to assign this Agreement, in whole but not in part, to any Affiliate of its choice and ALFA hereby acknowledges and accepts any such assignation but shall not otherwise assign or purport to assign this Agreement (in whole or in part) without the prior consent in writing of ALFA.

13.3 This Agreement shall be binding upon the successors and assignees (and any subsequent assignee) of each of the parties.

ARTICLE 14 - WAIVER OF DEFAULT

ARTICLE 15 - GOVERNING LAW

This Agreement is written and executed in two originals in the English language. All notices, communications and proceedings to be in English. It shall be governed by and construed in accordance with the laws of Scotland, without giving any effect to any conflict of laws principles or rules.

ARTICLE 16 - FORCE MAJEURE

Save as expressly provided in Clause 7 neither party shall be liable in any manner in respect of any breach by such party of its obligations hereunder (other than any breach of any obligation to make payment on the due date) where such breach arises from any circumstance outside such party's reasonable control. Amongst said circumstances are included, by way of example only and not implying any limitation, fires, floods, earthquakes, accidents, explosions, quarantine restrictions, strikes labour shortages shortages of raw materials for the manufacturing of the Products, or acts of any public authority, including

foreign ones.

ARTICLE 17 - LITIGATION

ARTICLE 18 - HEADINGS

Headings are inserted for convenience and shall not affect the meaning or interpretation of this Agreement IN WITNESS WHEREOF, these present consisting of this and the twelve preceding pages together with the Schedule hereto are executed as follows:-

For and on behalf of
SALIX PHARMACEUTICALS, INC
at
on the 24 day of June 1996

By[SIGNATURE ILLEGIBLE] Director
in the presence of

/s/ Alberto Sacconi

ALBERTO SACCONI
................................Name of Witness

c/o ALFA WASSERMANN
................................Address of Witness

MILANO

................................

For and on behalf of
ALFA WASSERMANN S.p.A.
at
on the 24 day of June 1996

By /s/ Randy Hamilton Director
in the presence of

/s/ Alexander McMahon

Alexander T. McMahon
................................Name of Witness

c/o SALIX PHARMACEUTICALS
................................Address of Witness

PALO ALTO, CA
................................

This is the Schedule referred to in the foregoing Supply Agreement between Alfa Wassermann S.p.A and Salix Pharmaceuticals, Inc., dated June 24, 1996.

SCHEDULE

PART 1

THE PATENTS

PATENTS

CASE    FILING DATE  FILING NO.  G R A N T I N G NO.        OF        THE  EXPIRY DATE
                                        DATE          GRANTED PATENT
S 34     05/11/1981     262,123           07/27/1982       4,341,785        05/11/2001
S 50     04/26/1985     727,521           12/10/1985       4,557,866        04/26/2005
S 73     06/28/1993     083,453           10/04/1994       5,352,679        06/28/2013

Case S 34 (product patent): IMIDAZO-RIFAMYCIN DERIVATIVES WITH ANTIBACTERIAL UTILITY

Case S 50 (processing patent) : PROCESS FOR THE SYNTHESIS OF PYRIDO-IMIDAZO
RIFAMYCINS

Case S 73 (patent for therapeutical use) : USE OF RIFAXIMIN AND PHARMACEUTICAL
FORMULATIONS CONTAINING IT IN THE TREATMENT OF GASTRIC DYSPEPSIA CAUSED BY HELICOBACTER PYLORI.

ALL AS FILED FOR THE TERRITORY.

PART 2

COMPOUND SPECIFICATION

[*]

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PART 3

PRICES

[*]

[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

EXHIBIT 10.14

THE KONTRABECKI GROUP
OFFICE LEASE

1. Parties. THIS LEASE, dated for reference purposes only, January 1, 1992, is made by and between KONTRABECKI-MASON DEVELOPERS, a California general partnership (herein "Landlord") and SALIX PHARMACEUTICALS, INC., a California Corporation (herein "Tenant").

2. Premises.

(a) Landlord leases to Tenant and Tenant hires from Landlord the office space indicated on Exhibit "A" attached hereto (the "Premises"). The Premises are more particularly identified as Suite 102, with an agreed area of 762 square feet, situated on the first floor of that certain two-story building commonly known as 3600 West Bayshore Road, Palo Alto, California 94303 (the "Building"), together with the interior improvements thereto, if any, specified on the "Tenant Improvement Plan" attached hereto as Exhibit "B". The square footage of the Premises comprise two and 15/100's percent (2.15%) of the total leasable space within the Building, which percentage shall hereinafter be referred to as "Tenant's Share." Tenant's Share shall be equitably adjusted upon any future expansion or reduction of the leasable space within either the Premises or the Building. Tenant shall also have a nonexclusive right to use, during the term of this Lease, in common with other Tenants of the Building and their guests and customers, the areas described on Exhibit "C" attached hereto and incorporated herein by this reference the ("Common Areas"), subject to rules and regulations promulgated or modified hereunder from time to time by Landlord.

(b) The Premises shall be deemed to exclude exterior faces of exterior walls and exterior window glass, anything beyond the interior face of demising walls, and pipes, ducts, conduits, wires and appurtenant fixtures serving exclusively or in common, other parts of the Building.

3. Tenant and Landlord Covenant. The Lease is subject to the following terms, covenants and conditions. Tenant and Landlord covenant, as a material part of the consideration for this Lease, to keep and perform each of said terms, covenants and conditions.

4. Term.

(a) The term of this Lease is month to month, commencing on January 20, 1992 (the "Commencement Date") and ending, upon thirty (30) days written notice by either party to the other (the "Expiration Date").

(b) Notwithstanding Paragraph 4(a) above, if at the date of execution of this Lease, Landlord and Tenant have agreed that Landlord shall construct, modify, or install any interior improvements to the Premises, as set forth in Exhibit "B", then the Commencement Date shall be the later of:

(i) The scheduled Commencement Date set forth in Paragraph 4(a) above, or

(ii) The date on which Landlord delivers possession of the Premises to Tenant after approval of occupancy by the appropriate governmental authority, and after substantial completion of such interior improvements as certified by Landlord's architect.

Upon completion of such improvements, Landlord will determine the Commencement Date for purposes of this Lease and deliver notice thereof to Tenant.

5. Possession,

(a) If Landlord, for any reason, cannot deliver possession of the Premises to Tenant at the commencement of the term hereof, this Lease shall not be void or voidable, nor shall Landlord be liable to Tenant for any loss or damage resulting therefrom, nor shall the expiration date of the term be extended, but in such event, all rent shall be abated during the period between the commencement of said term and the time when Landlord delivers possession.

(b) If Landlord permits Tenant to occupy the Premises prior to the Commencement Date of the term of this Lease, for the purpose of installing fixtures or for any other purpose permitted by Landlord such occupancy shall be subject to all of the provisions of this Lease except for the obligation to pay rent which shall commence on the Commencement Date. Said early possession shall not advance the expiration date hereinabove provided. In the event Landlord permits any such early entry, Tenant agrees not to interfere with or cause any delay with any work conducted on or about the Premises by Landlord or its employees and contractors, and further agrees to indemnify Landlord from and against any and all claims of damage whatsoever arising out of any activity by Tenant, or its agents, employees or contractors on or about the Premises during such early entry.

6. Security Deposit.

(a) Tenant has deposited with Landlord the sum of ONE THOUSAND FOUR HUNDRED FORTY AND 18/100'S DOLLARS ($1,440.18) to be held by Landlord as security for the faithful performance by Tenant of all terms covenants and conditions of this Lease. If Tenant defaults with respect to any provision of this Lease, including but not limited to the provisions relating to the payment of rent, Landlord may (but shall not be required to) use, apply or retain all or any part of this security deposit for the payment of any rent or any other sum in default, or for the payment of any amount which Landlord may spend or become obligated to spend by reason of Tenant's default, or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. If any portion of said deposit is so used or applied, Tenant shall, within five (5) days after written demand therefor, deposit cash with Landlord in an amount sufficient to restore the security deposit to its original amount and Tenant's failure to do so shall be a material breach of this Lease. Landlord shall not be required to keep this security deposit separate from its general funds, and Tenant shall not be entitled to interest on such deposit.

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(b) If Tenant is not in default at the expiration or termination of this Lease, Landlord shall return to Tenant (or at Landlord's option, to the last assignee of Tenant's interest hereunder) the balance of the security deposit; provided that, a reasonable portion of said deposit may be retained to secure payment of Tenant's share of operating Expenses (as defined in Paragraph
7) prior to determination of the actual amount thereof.

7. Rent.

(a) Tenant shall pay to Landlord as monthly rental for the Premises (the "Base Rent"), on or before the first day of each and every calendar month of the term hereof, the sum of ONE THOUSAND ONE HUNDRED FOUR AND 90/100'S DOLLARS ($1,104.90). The first month's rent shall be paid in advance upon the execution of this Lease. Rent for any period which is for less than one (1) month shall be a prorated portion of the monthly installment stated herein, based upon a thirty (30) day month. Said rental shall be paid, without prior notice or demand and without deduction or offset, in lawful money of the United States of America to KONTRABECKI-MASON DEVELOPERS at 3600 West Bayshore Road, Suite 101 Cupertino, California 94303 or to such other person or at such other place as Landlord may from time to time designate in writing. If rent is received after the third (3rd) day of the month in which it is due, Tenant agrees to pay an additional ten percent (10%) of the monthly payment then due as a late payment charge in accordance with Paragraph 30 (i) below.

(b) In addition to the Base Rent payable to Landlord pursuant to Paragraph 7(a) above, Tenant shall pay to Landlord as part of the monthly rent Tenant's Share of all expenses incurred by Landlord in the operation, maintenance and repair of the Building (herein "Operating Expenses"). Operating Expenses shall include, without limitation, real property taxes and assessments (general and special), rent taxes, gross receipt taxes (whether assessed against Landlord or assessed against the Tenant and collected by Landlord, or both), water and sewer charges, insurance premiums, utilities charges, central station monitoring charges, janitorial services, pest control, trash removal, labor costs incurred in the management of the Building including salaries and employer taxes thereon, and Building maintenance supplies, material, equipment and tools, the cost of maintenance, repair and upkeep of all parking and common areas and the landscaping therein, the cost of maintaining, repairing or replacing the HVAC system servicing the Building and the roof membrane and structure of the Building, including the cost of any maintenance contracts entered into by Landlord, the cost of cleaning, repainting and resurfacing the exterior surface of Common Area Walls and the exterior walls of the Building. In addition, Landlord will change Building management fees equal to five percent (5%) of the current monthly rental for the Premises. Operating Expenses shall not include depreciation on the Building, loan payments or real estate broker's commissions.

(i) Landlord estimates that Operating Expenses during the first calendar year of the Lease term hereunder (or the balance thereof, as the case may be) will be equivalent to $.44 per month per square foot of leasable square feet in the Building. Accordingly, during the first calendar year of the Lease term (or remaining portion thereof, as the case may be), Tenant shall pay

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to Landlord each month as additional rent attributable to estimated Operating Expenses the sum of THREE HUNDRED THIRTY-FIVE AND 28/100'S DOLLARS ($335.28).

(ii) On or before December 1 of each year Landlord shall estimate the projected Operating Expenses (per square foot of leasable space per month) for the following calendar year and notify the Tenant thereof. Commencing January 1 of the following calendar year and continuing on the first day of each calendar month thereafter for the remainder of said year, Tenant shall pay to Landlord Tenant's Share of the projected Operating Expenses. Annually, on March 1 of each calendar year (or soon thereafter as Landlord can reasonably make the determination), Landlord shall determine and deliver to Tenant a statement of the actual amount of Operating Expenses incurred by Landlord during the twelve month period ending December 31 of the previous year. If Tenant's cumulative total of monthly payments of estimated Operating Expenses for said previous year is less than Tenant's Share of the actual Operating Expenses during said period, Tenant shall pay the difference to Landlord within thirty (30) days after the date of Landlord's statement. If Tenant's Share of actual Operating Expenses is less than the cumulative total of Tenant's monthly payments of Operating Expenses during said period, the difference shall be credited against amounts thereafter becoming due from Tenant for subsequent payments of Operating Expenses, or refunded to Tenant if the lease is terminated.

(iii) In the event the Lease term commences on a date other than January 1 or expires on a date other than December 31, the amount of Operating Expenses payable by Tenant to Landlord hereunder shall be equitably prorated to reflect only such period of time during said year as this Lease is in effect.

8. First Year Operating Expenses. Notwithstanding Paragraph 7 above, during the first twelve (12) months of the Lease term, Tenant shall pay a fixed amount of $.44 per month per square foot of leasable square feet in the Building for Operating Expenses. This amount equals the sum of THREE HUNDRED THIRTY-FIVE AND 28/100's DOLLARS ($335.28) per month. After the first twelve (12) months, the Operating Expenses shall be charged and accounted for as provided in Paragraph 7.

9. Use of Premises.

(a) Tenant shall use the Premises for general office purposes and shall not use or permit the Premises to be used for any other purpose without the prior written consent of Landlord.

(b) Tenant shall not do or permit anything to be done in or about the Premises nor bring or keep anything therein which will:

(i) increase the existing rate of or affect any fire or other insurance covering the Building or any of its contents, or

(ii) cause cancellation of any insurance policy covering the Building or any part thereof or any of its contents, or

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(iii) in any way obstruct or interfere with the rights of other Tenants or occupants of the Building or injure or annoy them.

(c) Tenant shall not cause, maintain or permit any nuisance in, on or about the Premises. Tenant shall not commit or suffer to be committed any waste in or upon the Premises. Tenant shall not use any apparatus, machinery or other equipment in or about the Premises that may cause substantial noise or vibration or overload existing electrical systems, and shall not place any loads upon the floors, walls or ceilings of the Premises which may jeopardize the structural integrity of the Building or any part thereof.

10. Compliance with Law. Tenant shall not use or permit the Premises to be used in any way which will conflict with any law, statute, ordinance or governmental rule or regulation now in force or which may hereafter be enacted or promulgated. Tenant shall, at its sole cost and expense, promptly comply with all laws, statutes, ordinances, and governmental rules, regulations or requirements now in force or which may hereafter be in force, relating to Tenant's use of the Premises. Tenant shall also comply with the requirements of any board of fire insurance underwriters or other similar bodies now or hereafter constituted relating to or affecting the condition, use or occupancy of the Premises. The judgment of any court of competent jurisdiction or the admission of Tenant in any action against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any law, statute, ordinance or governmental rule, regulation or requirement, shall be conclusive of that fact as between Landlord and Tenant.

11. Alterations and Additions. Tenant shall not make or allow any alterations, additions, or improvements of or to the Premises without Landlord's prior written consent. Any such alterations, additions or improvements, including but not limited to wall coverings, paneling and built-in cabinet work, but excepting movable furniture and trade fixtures, shall immediately upon installation or construction thereof become a part of the realty, shall belong to Landlord and shall, unless Landlord requests the removal thereof in the manner set forth below, be surrendered with the Premises at the expiration or termination of the Lease. Any alterations, additions or improvements that Tenant desires to make in the Premises shall be presented to Landlord in written form, with proposed working drawings and plans and specifications therefor prepared at Tenant's sole expense. If Landlord consents to any such alterations, additions or improvements by Tenant, they shall be made by Tenant at Tenant's sole cost and expense, and in compliance with all codes, rules and regulations, and any contractor or person selected by Tenant to perform the work shall first be approved of, in writing, by Landlord. All work performed hereunder shall be done at such times and in such manner as Landlord from time to time may designate. Tenant shall not proceed to make such alterations or additions, after having obtained consent from Landlord to do so, until ten (10) days from receipt of such consent, in order that Landlord may post appropriate notices to avoid any liability to contractors or material suppliers for payment for Tenant's improvements. Tenant will at all times permit such notices to be posted and to remain posted until the completion of work. In performing any work hereunder, Tenant shall not interfere with the proper functioning of any mechanical, electrical, sanitary and other service systems of the Building ("Service Facilities"), and no construction, improvement, alteration or addition permitted by Landlord hereunder shall interfere with Landlord's free access to the Service Facilities. Upon completion of any work hereunder,

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Tenant, at Tenant's sole cost, shall promptly deliver to Landlord "as-built" plans in mylar form and specifications therefor.

12. Liens. Tenant shall keep the Premises and the Building free from any liens arising out of any work performed, materials furnished or obligations incurred by Tenant. If any claim of lien is recorded, Tenant shall bond against or discharge the same within ten (10) days after the same has been recorded. Landlord may require Tenant to provide Landlord, at Tenant's sole cost and expense, a payment and performance bond in an amount equal to one and one-half (1/2) times the estimated cost of any improvements, additions, or alterations by Tenant, to insure Landlord against liability for mechanics' and materialmen's liens and to insure completion of the work.

13. Maintenance.

(a) By entry hereunder, Tenant accepts the Premises as being in good and sanitary order condition and repair and accepts the Building and the other improvements in their present condition. Any exceptions to the foregoing must be by written agreement executed by Landlord and Tenant. During the term of the Lease, Tenant shall keep the Premises and every part thereof in good condition and repair, at Tenant's sole cost and expense. The Tenant agrees on the last day of the term hereof, or on the sooner termination of this Lease, to surrender the Premises to Landlord in good condition and repair with all interior walls cleaned, all interior painted surfaces repainted in original color, all holes in walls repaired, all stained or damaged suspended ceiling tiles replaced, all carpets shampooed and cleaned, and all floors cleaned and waxed. Tenant also agrees to surrender to Landlord all alterations, additions, and improvements which may have been made in, to, or on the Premises by Tenant, except that Tenant shall ascertain from Landlord within thirty (30) days before the end of the term of this Lease whether Landlord desires to have the Premises or any part or parts thereof restored to their condition as of the commencement of this Lease. If Landlord shall so desire, then Tenant shall restore the Premises or such part or parts thereof before the termination of this Lease at Tenant's sole cost and expense. Tenant on or before the end of the term or sooner termination of this Lease, shall remove all its personal property and trade fixtures from the Premises, and all property not so removed shall be deemed to be abandoned by Tenant. If the Premises is not surrendered at the end of the term or sooner termination of this Lease, Tenant shall indemnify Landlord against loss or liability resulting from delay by Tenant in so surrendering the Premises including, without limitation, any claims made by any succeeding Tenant founded on such delay.

(b) Notwithstanding the provisions of Paragraph 13(a), Landlord shall repair and maintain the roof, exterior walls, and foundation of the Building, and plumbing, air conditioning, heating and electrical systems installed or furnished by Landlord, and parking and landscaped areas and all other common areas appurtenant to the Building, as provided in Paragraph 7(b), unless such maintenance and repairs are necessitated in part or in whole by the act, neglect, fault or omission of any duty by Tenant, or its agents, servants, employees or invitees, in which case Tenant shall pay to Landlord the entire cost of such maintenance and repairs.

(c) Tenant hereby waives Section 1932.1 of the Civil Code of California, as well as all rights to make repairs at Landlord's expense under Sections 1941.1, 1942 and 1942.1 of the

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said Code, or any similar or successor laws. Except as provided in Paragraph 23 hereof, there shall be no abatement of rent and no liability of Landlord by reason of any injury or interference with Tenant's business arising from the making of any repairs, alterations or improvements to any portion of the Building or the Premises or to fixtures, appurtenances and equipment therein.

14. Assignment and Subletting.

(a) Tenant shall not, voluntarily or by operation of law, assign, transfer or encumber Tenant's interest under this Lease or in the Premises nor sublease all or any part of the Premises or allow any other person or entity (except Tenant's employees, agents and invitees) to occupy or use all or any part of the Premises without the prior written consent of Landlord, which consent shall not be unreasonably withheld. Any such consent shall not release Tenant from liability hereunder, and a consent to one assignment, subletting, occupation or use shall not be deemed a consent to any subsequent assignment, subletting, occupation or use. Any such purported assignment, subletting, or permission to occupy or use without such consent from Landlord shall be void and shall, at the option of Landlord, constitute a default under this Lease. If the Premises are assigned for a consideration or sublet for a rental value in excess of that which is due to Landlord under the terms of this Lease, such excess rental value shall be paid to Landlord at such times and in such amounts as said rent would otherwise be payable to Tenant by said assignee or sublessee, as the case may be. In lieu of consenting to a proposed assignment or sublease, Landlord shall be entitled to terminate this Lease with respect to all or such portion of the Premises which Tenant proposes to assign or sublease.

(b) If Tenant is a partnership, a transfer, voluntary or involuntary, of all or any part of an interest in the partnership, or the dissolution of the partnership, shall be deemed an assignment requiring Landlord's prior written consent. If Tenant is a corporation, any dissolution, merger, consolidation of other reorganization of Tenant, or the transfer, either all at once or in a series of transfers, of a controlling percentage of the capital stock of Tenant, or the sale, or series of sales within any one (1) year period, of all or substantially all of Tenant's assets located in, on, or about the Premises, shall be deemed an assignment. The phrase "controlling percentage" means the ownership of, and the right to vote, stock possessing at least fifty-one percent (51%) of the total combined voting power of all classes of Tenant's capital stock issued, outstanding, and entitled to vote for the election of directors. The provisions of this Paragraph shall not apply to Tenant if Tenant is a corporation the stock of which is listed on a national securities exchange (as this term is used in the Securities Exchange Act of 1934, as amended) or is publicly traded on the over-the-counter market and prices therefor are published daily on business days in a recognized financial journal.

(c) If Tenant shall purport to assign this Lease, or sublease all or any portion of the Premises or permit any person or persons other than Tenant to occupy the Premises, without Landlord's prior written consent, Landlord may collect rent from the person or persons then or thereafter occupying the Premises and apply the net amount collected to the rent reserved herein, but no such collection shall be deemed a waiver of Landlord's rights and remedies under this Paragraph 14, or the acceptance of any such purported assignee, sublessee or occupant, or a release of Tenant from the further performance by Tenant of covenants on the part of Tenant herein contained.

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15. Hold Harmless and Waiver of Claims.

(a) Tenant shall indemnify Landlord against and hold Landlord harmless from:

(i) any claims arising from Tenant's use of the Premises or from any activity, work, or other thing done or permitted by Tenant in or about the Premises; and

(ii) any claims arising from any breach or default in Tenant's performance of any obligation under the terms of this Lease, or arising from any act or negligence of Tenant, or any officer, agent, employee, guest, or invitee of Tenant; and

(iii) all costs, attorneys' fees, expenses and liabilities incurred in or attributable to any such claim and any action or proceeding brought thereon.

(b) If any action or proceeding is brought by reason of any such claim in which Landlord is named as a party, Tenant shall defend Landlord therein at Tenant's expense by counsel reasonably satisfactory to Landlord. Tenant hereby assumes all risk of damage to property or injury to persons, in, upon or about the Premises, from any cause except to the extent caused by Landlord's negligence or willful misconduct and Tenant hereby waives all claims in respect thereof against Landlord.

(c) Landlord and its agents shall not be liable for any damage to property entrusted to employees of the Building, nor for loss or damage to any property by theft or otherwise, nor from injury to or damage to persons or property resulting from any cause whatsoever, unless caused by the wilful misconduct of Landlord, its agents, or employees.

Landlord and its agents and employees shall not be liable for interference with light or other incorporeal hereditaments, or loss of business by Tenant, nor shall Landlord be liable for any latent defect in the Premises or in the Building. Tenant shall give prompt notice to Landlord in case of fire or accidents in the Premises or in the Building or of alleged defects in the Building, fixtures or equipment.

16. Subrogation. Landlord and Tenant hereby mutually waive their respective rights of recovery against each other for any loss insured by fire, extended coverage, and other property insurance policies existing for the benefit of the respective parties. Tenant and Landlord shall, upon obtaining the policies of insurance required hereunder, obtain from their respective insurance carriers an endorsement to said policies whereby the insurance carriers waive their respective rights of subrogation in accordance with this Paragraph.

17. Liability Insurance. Tenant shall, at Tenant's expense, obtain and keep in force during the term of this Lease a policy of comprehensive public liability insurance with an insurance company satisfactory to Landlord insuring Landlord and Tenant against claims occurring in, on or about the Premises and all areas appurtenant thereto. The limit of said insurance shall not, however, limit the liability of Tenant hereunder. Tenant may carry said insurance under a blanket policy,

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providing however, said insurance by Tenant shall name Landlord as an additional insured. If Tenant fails to procure and maintain said insurance, Landlord may, but shall not be required to, procure and maintain the same, but at the expense of Tenant. Tenant shall deliver to Landlord prior to occupancy of the Premises copies of policies of liability insurance required herein or certificates evidencing the existence and amount of such insurance with loss payable clauses satisfactory to Landlord. No policy shall be cancellable or subject to reduction of coverage except after thirty (30) days prior written notice to Landlord. Such insurance policy shall have a single combined liability limit of at least Two Million Dollars ($2,000,000) insuring against damage to or loss of Property and injury or death to persons, and shall contain a cross-liability endorsement. Landlord shall have the right to require Tenant from time to time to increase its insurance coverage hereunder to levels consistent with insurance amounts generally considered prudent in the area at the time for similar businesses.

18. Services and Utilities.

(a) Landlord shall furnish to the Premises during reasonable hours of generally recognized business days to be determined by Landlord in its sole discretion and subject to the rules and regulations of the Building, electricity for normal lighting and fractional horsepower office machines, heat and air conditioning required in Landlord's judgment for the comfortable use and occupation of the Premises, subject to restrictions or guidelines for temperature limitations provided by lawful governmental authority, and janitorial service. Landlord shall maintain and light the common stairs, common entries, and toilet rooms in the Building. Landlord shall not be liable for and Tenant shall not be entitled to, any reduction of rental by reason of Landlord's failure to furnish any of the foregoing when such failure is caused by accident, breakage, repairs, strikes, lockout or other labor disturbances or labor disputes of any character, or by any other cause, similar or dissimilar, beyond the reasonable control of Landlord. Landlord shall not be liable for a loss of or injury to property, however occurring, through or in connection with or incidental to furnishing or its failure to furnish any of the foregoing. Wherever heat generating machines or equipment are used in the Premises which affect the temperature otherwise maintained by the air conditioning system, Landlord reserves the right to install supplementary air conditioning units in the Premises and the cost thereof, including the cost of installation, and the cost of operation and maintenance thereof, shall be paid by Tenant to Landlord as additional rent upon demand by Landlord.

(b) Tenant shall not, without the written consent of Landlord, use any apparatus or device in the Premises, including but not limited to electronic data processing machines, punch card machines, and machines using in excess of 120 volts, which will increase the amount of electricity consumed by Tenant beyond that amount which is reasonably required for the use of the Premises as general office space. Tenant shall not connect with electric current, except through existing electrical outlets in the Premises, any apparatus or device, for the purpose of using electric current. If Tenant requires water, gas or electric current in excess of the amount which Landlord deems reasonable for the use of the Premises as general office space, Tenant shall first procure the written consent of Landlord (which Landlord may refuse) to the use thereof and Landlord may cause a separate water, gas or electrical current meter to be installed in the Premises to measure the amount of water, gas and electric current consumed for any such use. The cost of installation, maintenance and repair of any

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such meters shall be paid by Tenant. Tenant agrees to pay to Landlord as additional rent promptly upon demand, the cost of all such water, gas and electric current consumed as shown by said meters, at the rates charged for such services by the local public utility furnishing the same, plus any additional expense incurred in keeping account of the water and electric current so consumed. If a separate meter is not installed, such excess cost for such water, gas and electric current will be established and adjusted from time to time by an estimate made by a utility company or electrical engineer designated by Landlord.

19. Personal Property Taxes. Tenant shall pay before delinquency all taxes levied or assessed and which become payable during the term hereof upon all Tenant's leasehold improvements, equipment, furniture, fixtures and personal property located in the Premises, except that which has been paid for by Landlord and is standard for the Building. If any of Tenant's leasehold improvements, equipment, furniture, fixtures and personal property are assessed and taxed with the Building, Tenant shall pay to Landlord its share of such taxes within ten (10) days after delivery to Tenant by Landlord of a statement in writing setting forth the amount of such taxes applicable to Tenant's property.

20. Rules and Regulations. Tenant shall faithfully observe and comply with the rules and regulations attached as Exhibit "D" to this Lease, as well as such rules and regulations that Landlord shall from time to time promulgate relating to Tenant's use of the Premises or the Building. Landlord reserves the right from time to time to make all reasonable modifications to said rules. The additions and modifications to those rules shall be binding upon Tenant upon delivery of a copy of them to Tenant. Landlord shall not be responsible to Tenant for the nonperformance of any of said rules or regulations by any other Tenants or occupants of the Building.

21. Holding Over

(a) If Tenant remains in possession of the Premises or any part thereof after the expiration of the term hereof, with the express written consent of Landlord, such occupancy shall be a tenancy from month to month at a rental in the amount of one hundred fifty percent (150%) of the then prevailing rental, plus all other charges payable hereunder, and upon all the terms hereof. Tenant shall continue in possession until such tenancy is terminated by either Landlord or Tenant by thirty (30) days prior notice to the other.

(b) If Tenant remains in possession without Landlord's consent, after expiration or sooner termination of the Lease, by lapse of time or otherwise, Tenant shall pay Landlord for each day of such retention one-fifteenth (1/15th) of the amount of the monthly rental for the last month prior to such termination and Tenant shall also pay all costs, expenses and damages, direct or consequential, sustained by Landlord by reason of such retention, including, without limitation, claims made by a succeeding Tenant resulting from Tenant's failure to surrender the Premises.

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22. Entry by Landlord.

(a) Landlord reserves the right to enter the Premises at any time to inspect the Premises, to provide any service for which Landlord is obligated hereunder, to show the Premises to prospective purchasers or Tenants, to post notices of non-responsibility, and to alter, improve, maintain or repair the Premises and any portion of the Building that Landlord deems necessary or desirable, all without abatement of rent. Landlord may erect scaffolding and other necessary structures where reasonably required by the character of the work to be performed, but shall not block any entrance to the Premises nor interfere with Tenant's business, except as reasonably required for the particular activity by Landlord. Landlord shall not be liable in any manner for any inconvenience, disturbance, loss of business, nuisance, interference with quiet enjoyment, or other damage arising out of Landlord's entry on the Premises as provided in this Paragraph, except damage, if any, resulting from the sole negligence or willful misconduct of Landlord or its authorized representatives.

(b) Landlord shall retain, or Tenant shall provide to Landlord, as the case may be, a key with which to unlock all doors into, within and about the Premises, excluding Tenant's vaults, safes and files. In an emergency, Landlord shall have the right to use any means which Landlord deems reasonably necessary to obtain entry to the Premises, without liability to Tenant, except for any failure to exercise due care for Tenant's property. Any such entry to the Premises by Landlord shall not be construed or deemed to be forcible or unlawful entry into the Premises or an eviction of Tenant from the Premises or any portion thereof.

23. Damage and Destruction.

(a) Subject to Paragraph 23(d) below, if the Premises or the Building are damaged by fire or other peril covered by extended coverage insurance, Landlord agrees to make repairs and restorations to the extent and in the manner possible at a cost not exceeding the proceeds of the insurance received by Landlord. If the cost of repair and restoration exceeds the amount of proceeds received from insurance, Landlord may elect to terminate this Lease by giving notice to Tenant within twenty (20) days after determining that the cost will exceed such proceeds. If Landlord proceeds with repair and restoration, this Lease shall remain in full force and effect, except that Tenant shall be entitled to a proportionate abatement of rent while such repairs are being made. The rent abatement shall be based upon the extent to which repair and restoration activity materially interferes with Tenant's business at the Premises, provided, however, that if the damage was occasioned by the fault or neglect of Tenant, its agents or employees, there shall be no such abatement of rent.

(b) If the Premises or the Building, as the case may be, are damaged as a result of any cause other than the perils covered by fire and extended coverage insurance on the Building, then Landlord shall repair the same, if the destruction is less than five percent (5%) of the then full replacement cost thereof. If the destruction is to an extent greater that five percent (5%) of the full replacement cost, then Landlord shall have the option:

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(i) to repair or restore such damage, this Lease continuing in full force and effect, but the rent to be proportionately abated as provided in Paragraph 23(a); or

(ii) to give notice to Tenant at any time within sixty (60) days after such damage terminating this Lease as of the date specified in such notice, which date shall be no less than thirty (30) and no more than sixty (60) days after the giving of such notice. In the event of giving such notice, this Lease shall expire, the entire interest of Tenant in the Premises shall terminate on the date so specified in such notice, and the rent, as abated to reflect the extent, if any, to which such damage materially interferes with the business carried on by Tenant in the Premise, shall be paid up to the date of such termination.

(c) Notwithstanding anything to the contrary contained in this Paragraph, Landlord shall not have any obligation whatsoever to repair, reconstruct or restore the Premises or the Building when the damage thereto occurs during the last twelve (12) months of the term of this Lease or any extended term but shall instead be entitled to terminate this Lease by delivery of written notice to Tenant thereof within thirty (30) days after the occurrence of such damage.

(d) Notwithstanding anything to the contrary contained in this Paragraph, Landlord shall not be required to repair or replace any damage to any panels, decorations, office fixtures, railings, floor coverings, partitions, or any other property installed or maintained in or about the Premises by Tenant.

(e) Tenant shall not be entitled to any compensation or damages from Landlord for loss of the use of the whole or any part of Premises, and/or Tenant's personal property, or any inconvenience or annoyance occasioned by any damage, repair, reconstruction or restoration of the Premises or the Building.

24. Default. Occurrence of any of the following events shall constitute a default and breach of this Lease by Tenant.

(a) The vacating or abandonment of the Premises by Tenant for a continuous period of at least three (3) days.

(b) The failure by Tenant to make any payment of rent or any other payment required of Tenant hereunder, as and when due, if such failure continues for three (3) days after written notice thereof by Landlord to Tenant.

(c) The failure by Tenant to observe or perform any of the covenants, conditions or provisions of this Lease other than described in Paragraph 24(b) above, where such failure continues for ten (10) days after written notice thereof by Landlord to Tenant; provided however, that if Tenant's default is such that more than ten (10) days are reasonably required for its cure, then Tenant shall not be deemed to be in default if Tenant commences such cure within said ten (10) day period and thereafter diligently prosecutes such cure to completion.

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(d) The making by Tenant of any general assignment or general arrangement for the benefit of creditors or the filing by or against Tenant of a petition to have Tenant adjudged bankrupt, or a petition, or reorganization or arrangement under any law relating to bankruptcy (unless in the case of a petition filed against Tenant, the same is dismissed within sixty (60) days); or the appointment of a trustee or a receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where possession is not restored to Tenant within thirty (30) days; or the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where such seizure is not discharged in thirty (30) days.

25. Remedies.

(a) Landlord shall have the following remedies if Tenant commits a default. These remedies are not exclusive, but are cumulative and in addition to any remedies herein provided or now or later allowed by law.

(b) Landlord may continue this Lease in full force and effect, as long as Landlord does not terminate Tenant's right to possession, and Landlord shall have the right to collect rent when due. During the period Tenant is in default, Landlord may enter the Premises and relet them, or any part of them, to third parties for Tenant's account. Tenant shall be liable to Landlord for all costs Landlord incurs in reletting the Premises, including, without limitation, brokers' commissions and expenses of remodeling the Premises required by the reletting. Reletting may be for a period shorter or longer than the remaining term of the Lease. Tenant shall pay to Landlord the rent due under this Lease as and when due, less the rent Landlord receives from any reletting. No act by Landlord allowed by this Paragraph shall terminate this Lease unless Landlord notifies Tenant in writing that Landlord elects to terminate Tenant's right to possession of the Premises.

(c) Provided Tenant is in default, Landlord may terminate Tenant's right to possession of the Premises at any time. No act by Landlord other than giving written notice to Tenant shall terminate this Lease. Acts of maintenance, efforts to relet the Premises, or the appointment of a receiver on Landlord's initiative to protect Landlord's interest under this Lease shall not constitute a termination of Tenant's right to possession. On termination, Landlord shall have the right to recover from Tenant:

(i) The worth, at the time of the award, of the unpaid rent that had been earned as of the time of termination of this Lease;

(ii) The worth, at the time of the award, of the amount by which the unpaid rent that would have been earned after the date of termination of this Lease until the time of award exceeds the amount of the loss of rent that Tenant proves could have been reasonably avoided;

(iii) The worth, at the time of the award, of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of the loss of rent that Tenant proves could have been reasonably avoided;

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(iv) Any other amount, and court costs, necessary to compensate Landlord for all detriment proximately caused by Tenant's default.

"The worth, at the time of the award," as used (i) and (ii) of this Paragraph, is to be computed by allowing interest at the rate of ten percent
(10%) per annum. "The worth, at the time of the award," as referred to in (iii)
of this Paragraph, is to be computed by discounting the amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of the award, plus one percent (1%).

26. Eminent Domain. If more than twenty-five percent (25%) of the Premises is taken or appropriated by any public or quasi-public authority under powers of eminent domain, either party hereto shall have the right, at its option, to terminate this Lease by delivery of notice to the other party thereof on or before five (5) days after such taking, in which event this Lease shall terminate as of the later of the date of such taking or the date on which Tenant vacates the Premises. If less than twenty-five percent (25%) of the Premises is taken (or neither party elects to terminate as above provided if more than twenty-five percent (25%) is taken), the Lease shall continue, and the rental thereafter to be paid shall continue, but the rental thereafter to be paid shall be reduced in proportion to the portion of the Premises so taken. If any part of the Building or areas appurtenant thereto are so taken or appropriated, whether or not any part of the Premises is involved, Landlord shall have the right, at its option, to terminate this Lease in accordance with the foregoing provision. Whether or not the Lease is terminated by reason of any such taking or appropriation, Landlord shall be entitled to the entire award and compensation for the taking which is paid or made by the public or quasi-public agency, and Tenant shall have no claim against said award. Tenant hereby waives the provisions of California Civil Code Procedure Section 1205.730 allowing it to petition the superior court to terminate this Lease in the event of a partial taking of the Premises except as otherwise allowed by this Paragraph.

27. Offset Statement. Tenant shall at any time and from time to time, upon not less than ten (10) days prior written notice from Landlord, execute, acknowledge, and deliver to Landlord a statement in writing, (a) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modifications and certifying that this Lease so modified, is in full force and effect), and the date to which the rental and other charges are paid in advance, if any, and (b) acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder, or specifying such defaults if any are claimed. Any such statement may be relied upon by any prospective purchaser or encumbrancer of all or any portion of the real property of which the Premises are a part.

28. Parking. Tenant shall have the right to use in common with other Tenants or occupants of the Building parking facilities, if any, provided by Landlord for Tenants of the Building. Tenant shall have the right to use on a reserved basis one (1) parking space to be designated by Landlord and located in the parking garage beneath the Building. Landlord shall not be responsible for any person parking in Tenant's reserved parking spaces.

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29. Notices. All notices, demands, consents, and approvals (collectively "notices") which may or are required to be given by either party to the other hereunder shall be in writing. All notices by Landlord to Tenant shall be sufficient if delivered in person, or by overnight courier, or sent by United States mail, registered or certified with return receipt requested, postage prepaid, and addressed to Tenant at the Premises or to such other place as Tenant may from time to time designate in a written notice to Landlord. All notices by Tenant to Landlord, shall be sufficient if delivered in person, or by overnight courier, or sent by United States mail, registered or certified with return receipt requested, postage prepaid, addressed to Landlord at 10055 Miller Avenue, Suite 202, Cupertino, California 95014, or to such other person or place as Landlord may from time to time designate in a notice to Tenant. Any such notice shall be effective at the time of personal delivery, or one (1) business day after deposit with an overnight courier service, or three (3) days after depositing if such notice is deposited in the United States mail, return receipt requested.

30. Toxic Materials.

(a) Tenant shall not cause or permit to be discharged into the plumbing or sewage system of the Building or onto the land underlying or adjacent to the Building any hazardous, toxic or radioactive materials, including, but not limited to, those materials identified in Section 66680 of Title 22 of the California Administrative Code, Division 4, Chapter 30, as amended from time to time (collectively, "Toxic Materials"). Tenant shall neutralize, by filtering or otherwise, all Toxic Materials generated by Tenant's activities on the Premises. Tenant shall at its sole expense comply with any and all rules, regulations, codes, ordinances, statutes, and other requirements of lawful governmental authority respecting Toxic Materials, pollution, harmful chemicals and other materials in connection with Tenant's activities on or about the Premises. Tenant specifically agrees to comply with any such requirements relating to the handling, use, storage and disposal of Toxic Materials and other materials which are considered by any such governmental authorities as harmful, dangerous, toxic, flammable, or otherwise deserving of special care. Tenant shall pay the full cost of any clean-up work performed on or about the Premises as required by any such governmental authority in order to remove, neutralize or otherwise treat toxic Materials of any type whatsoever directly or indirectly placed by Tenant or its agents, employees, invitees or contractors on or about the Premises or the land under or about the Premises.

(b) Tenant shall be solely responsible for and shall indemnify, defend, and hold Landlord harmless from any and all claims, judgments, losses, demands, causes of action, proceedings, or hearings relating to the storage, placement, or use of Toxic Materials (hereinafter collectively referred to as "Claims") by Tenant, its agents, employees, invitees or contractors on or about the Premises, including, but not limited to, Claims resulting from the contamination of subterranean water beneath, adjoining, or in the vicinity of the Premises. Tenant shall reimburse Landlord for (i) losses in or reductions to rental income resulting from Tenant's use, storage, and disposal of Toxic Materials; (ii) all costs of refitting or other alterations to the Premises necessitated by Tenant's use, storage, or disposal of Toxic Materials including, but not limited to, alterations required to accommodate an alternate use of the Premises; and (iii) any diminution in the fair market value of the Premises caused by Tenant's use, storage, or disposal of Toxic Materials. Tenant agrees to defend all such claims on behalf of Landlord with counsel acceptable to Landlord, and to pay all

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fees, costs, damages, or expenses relating to or arising out of any such Claims including attorneys' fees and costs. Tenant shall further be solely responsible for and shall indemnify, defend and hold Landlord harmless from and against all claims, including reasonable attorneys' fees and costs, arising out of or in connection with any removal, clean-up, or restoration work which is required by any government agency having jurisdiction and which arises from Tenant's storage, use, or disposal of Toxic Materials on the Premises during the term of this Lease.

31. General Provisions.

(a) The waiver by Landlord of any term, covenant or condition herein contained shall not be deemed to be a waiver of such term, covenant or condition for any subsequent breach of the same or any other terms, covenant or condition herein contained. The subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular rental so. Accepted, regardless of Landlord's knowledge of such preceding breach at the time of the acceptance of such rent. The acceptance of partial rent by Landlord shall not be deemed a waiver of the right to full payment of all rent owed hereunder.

(b) If Tenant is a corporation, each individual executing this Lease on behalf of said corporation represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said corporation, in accordance with a duly adopted resolution of the Board of Directors of said corporation or in accordance with the by-laws of said corporation, and that this Lease is binding upon said corporation in accordance with its terms.

(c) If there be more than one individual or other entity comprising Tenant, the obligations hereunder imposed upon Tenant shall be joint and several with respect to said individuals and/or other entities.

(d) The marginal headings and Paragraph titles to the Paragraphs of this Lease are not a part of this Lease and shall have no affect upon the construction or interpretation of any part hereof.

(e) Time of the essence of this Lease and each of its provisions in which performance is a factor.

(f) The covenants and conditions herein contained, subject to the provisions as to assignment, apply to and bind the heirs, successors, executors, administrators, and assigns of the parties hereto.

(g) Neither Landlord nor Tenant shall record this Lease or a short form memorandum hereof without the prior written consent of the other party.

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(h) Upon Tenant paying the rent reserved hereunder and observing and performing all of the covenants, conditions and provisions on Tenant's part to be observed and performed hereunder, Tenant shall have quiet possession of the Premises for the entire term hereof, subject to all the provisions of this Lease.

(i) Tenant hereby acknowledges that late payment by Tenant to Landlord of rent or other sums due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Landlord by terms of any mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or of a sum due from Tenant shall not be received by Landlord or Landlord's designee within three (3) days after said amount is past due, then Tenant shall pay to Landlord a late charge equal to ten percent (10%) of such overdue amount. The parties hereby agree that such late charges represent a fair and reasonable estimate of the additional costs that Landlord will incur by reason of the late payment by Tenant. Acceptance of such late charges by Landlord shall in no event constitute a waiver of Tenant's default with respect to such overdue amount, nor prevent Landlord from exercising any of the other rights and remedies granted hereunder.

(j) This Lease contains all of the agreements of the parties hereto with respect to any matter covered or mentioned in this Lease. No prior agreements or understandings pertaining to any such matters shall be effective for any purpose. No provision of this Lease may be amended or added except by an agreement in writing signed by the parties hereto or their respective successors in interest. This Lease shall not be effective or binding on any party until fully executed by both parties hereto.

(k) This Lease and the obligations of Tenant hereunder shall not be affected or impaired because Landlord is unable to fulfill any of its obligations hereunder or is delayed in doing so, if such inability or delay is caused by reason of strike, labor troubles, acts of God, or any other cause beyond the reasonable control of Landlord.

(l) In the event of any action or proceeding brought by either party against the other under this Lease, the prevailing party shall be entitled to recover all costs and expenses, including the fees of its attorneys, whether or not such action shall proceed to final judgment by a court of law.

(m) In the event of any sale of the Building, Landlord shall be and is hereby entirely freed and relieved of all liability under any and all of its covenants and obligations contained in or derived from this Lease arising out of any act, occurrence, or omission occurring after the consummation of such sale, and the purchaser at such sale or any subsequent sale of the Building shall be deemed, without any further agreement between the parties or their successors in interest or between the parties and any such purchaser, to have assumed and agreed to carry out all of the covenants and obligations of Landlord under this Lease.

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(n) Upon request of Landlord, Tenant will, in writing, subordinate its rights hereunder to the lien of any mortgage, or deed of trust to any bank, insurance company or other lending institution, now or hereafter in force against the Building and/or the land on which the Building is situated, and to all advances made or hereafter to be made upon the security thereof. If any proceedings are brought for foreclosure, or in the event of the exercise of the power of sale under any mortgage or deed of trust made by Landlord covering the Premises, Tenant shall attorn to the purchaser upon any such foreclosure or sale and recognize such purchaser as Landlord under this Lease. The provisions of this Paragraph 30 to the contrary notwithstanding and so long as Tenant is not in default hereunder, this Lease shall remain in full force and effect for the full term hereof. Tenant shall execute and return to Landlord any documents required by the lender to accomplish any subordination requested by Landlord hereunder within seven (7) days after delivery thereof to Tenant, and the failure of Tenant to execute and return such documents as and when required shall constitute a default hereunder.

(o) Tenant shall not use the name of the Building for any purpose other than as an address of the business to be conducted by Tenant in the Premises.

(p) Any provision of this Lease which shall prove to be invalid, void, or illegal shall in no way affect, impair, or invalidate any other provisions hereof and such other provisions shall remain in full force and effect.

(q) No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies herein provided or permitted at law or in equity.

(r) This lease shall be governed by the laws of The State of California.

(s) Tenant shall not conduct any auction, on or at the Premises or Building, without Landlord's prior written consent.

(t) The covenants and conditions contained herein, subject to the provisions as to assignment, shall apply to and be binding upon the parties' respective heirs, executors, administrators, assigns and other successors in interest.

(u) The voluntary or other surrender of this Lease, or a mutual cancellation thereof, shall not work an automatic merger, but shall, at the sole option of Landlord, either terminate all or any existing subleases or subtenancies, or operate as an assignment to Landlord of any or all of such subleases or subtenancies.

(v) Any prevention of or delay in the performance by a party hereto of its obligations under this Lease caused by inclement weather, labor disputes (including strikes and lockouts), inability to obtain materials or reasonable substitutes therefor, governmental restrictions, regulations, controls, action or inaction, civil commotion, fire or other causes beyond the reasonable control of the party obligated to perform (except financial inability), shall excuse the performance by

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such party of its obligations hereunder (except the obligation of Tenant to pay rent and other sums hereunder) for a period of one day for each such day of delay.

32. Brokers. Tenant warrants that it has had no dealings with any real estate broker or agent in connection with the negotiation of this Lease, excepting only Jack Troedson and Brad Van Ling of Cornish & Carey, whose fee Landlord shall pay. Landlord and Tenant agree to hold the other harmless from and indemnify the other against any claim or demand for commission, finder's fee, or other compensation by any broker, other than the brokers named herein based upon their respective acts.

33. List of Exhibits. The following is a complete list of documents attached hereto and made a part of this Lease:

Exhibit  "A" - Premises
Exhibit  "B" - Tenant Improvement Plan
Exhibit  "C" - Common Areas
Exhibit  "D" - Rules and Regulations

IN WITNESS WHEREOF, the parties hereto have executed this Lease on the dates set forth opposite their respective signatures.

Landlord:

KONTRABECKI-MASON DEVELOPERS, a California General Partnership

By:/S/J.T. KONTRABECKI
   -------------------

Title:  GENERAL PARTNER               Dated:       1/21/92
      -----------------                            -------

Tenant:

SALIX PHARMACEUTICALS, INC., a California Corporation

By:/S/LORIN K. JOHNSON
   -------------------

Title:    VICE PRESIDENT                   Dated:       1/20/92
          --------------                                -------

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EXHIBIT "A"

FLOOR PLAN OF LEASED SPACE

[Floor plan graphic omitted]

EXHIBIT "B"

SUBJECT PROPERTY IS LEASED IN IMPROVED "AS IS" CONDITION

EXHIBIT "C"

COMMON AREAS

The following are the "Common Areas" for that certain two-story building commonly known as 3600 West Bayshore Road, Palo Alto, California 94303:

1. Parking lot and parking garage

2. Outdoor patios

3. Men's and Women's restrooms

4. Lobbies and corridors

5. Landscaped areas

EXHIBIT "D"

RULES AND REGULATIONS OF BUILDING

1. Tenant, and its employees and patrons, shall not loiter in the entrances or corridors, nor in any way obstruct the sidewalks, entry passages, halls and stairways and shall use the same only as passageways and means of passage to and from their respective offices.

2. The sash doors, sashes, windows, glass doors, lights, and skylights that reflect or admit light into the halls or other places of the Building shall not be covered or obstructed. The toilets and urinals shall not be used for any purpose other than those for which they were constructed, and no rubbish, newspapers or other substances of any kind shall be thrown into them. Waste and excessive or unusual use of water shall not be allowed. Tenant shall not mark, drive nails, screw or drill into, paint, nor in any way deface the walls, ceilings, partitions, floors, wood, stone or iron work. The expense of any breakage, stoppage or damage resulting from a violation of this rule shall be borne by Tenant.

3. Tenant shall not paint, display, inscribe, maintain or affix any sign, placard, picture, advertisement, name, notice, lettering, or direction (collectively "signs") on any part of the outside or inside of the Building, or on any part of the inside of the Premises which can be seen from the outside of the Premises, without the written consent of Landlord, and then only such name or names or matter and in such color, size, style, character and material as may be first approved by Landlord in writing. Landlord reserves the right to remove at Tenant's expense all signs other than those permitted pursuant to the foregoing without notice to Tenant.

4. Electric wiring of every kind shall be introduced and connected as directed by Landlord and no boring nor cutting for wires will be allowed except with the consent of Landlord. The location of telephones, call boxes, etc. shall be prescribed by Landlord.

5. Landlord shall prescribe the weight, size and position of all safes and other property brought into the Building, and also the times of moving the same in and out of the Building, and all such moving must be done under the supervision of Landlord. Landlord will not be responsible for any loss of or damage to any such safe or property from any cause; but all damage done to the building by moving or maintaining any such safe or property shall be repaired at the expense of Tenant. All safes shall stand on timbers of such size as shall be designated by Landlord.

6. No additional lock or locks shall be placed by Tenant on any door in the Building unless written consent of Landlord shall have first been obtained. All keys shall be surrendered to Landlord upon termination of the tenancy.

7. Tenant shall not employ any person or persons other than the janitor of Landlord for the purpose of cleaning the Premises without the consent of Landlord. Landlord shall not be responsible to Tenant for any loss of property from the Premises, however occurring, or for any damage done to the effects of Tenant by the janitor or any other of Landlord's employees, or by any other person.

8. Tenant, and/or its guests and employees, shall not make or permit any unduly loud or otherwise unduly disturbing noises in the Building, nor smoke tobacco in the public areas, nor play musical instruments in the Building, nor disturb or interfere in any way with other Tenants of the Building or those having business with them. Tenant, and its guests and employees, shall not throw substances of any kind out of the windows or doors, nor down the passages or skylights of the Building, nor set, or place anything upon the window sills, or bring in or keep within the Building any animal or motorcycle or other vehicle.

9. All freight must be moved into, within and out of the Building according to such regulations as may be posted in the Building, but Landlord will not be responsible for loss of or damage to such freight from any cause.

10. No awnings are allowed. Any window covering desired by Tenant shall be installed at its expense and must be of such uniform shape, color, material and make as may be prescribed by Landlord.

11. No physician, surgeon or dentist shall advertise his business in any manner prohibited by the Code of Ethics of the American Medical Association.

12. At any time while the Building is in charge of a watchman, any person entering or leaving the Building may be questioned by him as to his business in the Building, and anyone not satisfying the watchman of his right to enter the Building nay be excluded by him.

13. Landlord reserves the right to make such other and further rules and regulations as in his judgment may from time to time be necessary for the safety and cleanliness of, and for the preservation of good order in the Building.

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ADDENDUM "I"

This Addendum I is executed by and between KONTRABECKI-MASON DEVELOPERS, a California General Partnership as Landlord, and SALIX PHARMACEUTICALS, INC., a California Corporation as Tenant with respect to those certain Premises commonly known as 3600 West Bayshore Road, Suite 102, Palo Alto, California 94303. This Addendum I is an integral part of the Lease to which it is attached; provided, the provisions of this Addendum I supersede the provisions of the Lease to the extent inconsistent therewith.

1. Paragraph 2(a) of the Lease is amended so that the Premises shall be Suite 202, situated on the second floor of the Building.

3. This addendum shall become effective on April 1, 1992. Except as provided herein, all other terms and conditions of the Lease shall be as previously set forth and are hereby ratified, affirmed, and in full force and effect.

LANDLORD

KONTRABECKI-MASON DEVELOPERS,
a California General Partnership

By:/S/J.T. KONTRABECKI
   -------------------

Title:  GENERAL PARTNER               Dated:       2/5/92
      -----------------                            ------

TENANT

SALIX PHARMACEUTICALS, INC.,
a California Corporation

By:/S/LORIN K. JOHNSON
   -------------------

Title:    VICE PRESIDENT              Dated:       2/10/92
          --------------                           -------

ADDENDUM "II"

This Addendum II is executed by and between KONTRABECKI-MASON DEVELOPERS, a California General Partnership as Landlord, and SALIX PHARMACEUTICALS, INC., a California Corporation as Tenant with respect to those certain Premises commonly known as 3600 West Bayshore Road, Suite 202, Palo Alto, California 94303. This Addendum II is an integral part of the Lease and Addendum I to which it is attached; provided, the provisions of this Addendum II supersede the provisions of the Lease and Addendum I to the extent inconsistent therewith.

1. Paragraph 2(a) of the Lease is amended to reflect the expansion of the Premises. The agreed area of the Premises of 762 square feet is increased by 2,188 square feet to 2,950 square feet. Tenant's share of the total leasable space within the Building is increased from two and 15/100's percent (2.15%) by six and 17/100's percent (6.17%) to eight and 32/100's percent (8.32%).

2. Paragraph 4(a) of the Lease is amended so that the expiration date of the Lease shall be October 31, 1995.

3. Paragraph 6(a) of the Lease is amended so that the security deposit is increased from $1,440.18 by $4,135.32 to $5,575.50.

4. Paragraph 7(a) of the Lease is amended so that the monthly rent for the Lease term shall increase from $1,104.90 by $3,172.60 to $4,277.50.

5. Paragraph 7(b)(i) of the Lease is amended so that the monthly estimated operating expenses shall increase from $335.28 by $962.72 to $1,298.00.

6. Paragraph 28 of the Lease is amended so that the number of reserved spaces in the parking garage shall increase from one (1)space by two (2) spaces to three (3) spaces.

7. This addendum shall become effective on November 1, 1992. Except as provided herein, all other terms and conditions of the Lease and Addendum I shall be as previously set forth and are hereby ratified, affirmed, and in full force and effect.

LANDLORD

KONTRABECKI-MASON DEVELOPERS,
a California General Partnership

By:/S/J.T. KONTRABECKI
   -------------------

Title:  GENERAL PARTNER               Dated:       9/15/92
      -----------------                            -------

TENANT

SALIX PHARMACEUTICALS, INC.,
a California Corporation

By:/S/LORIN K. JOHNSON
   -------------------

Title:    VICE PRESIDENT               Date:       9/15/92
          --------------                           -------

ADDENDUM "III"

This Addendum III is executed by and between KONTRABECKI-MASON DEVELOPERS, a California General Partnership as Landlord, and SALIX PHARMACEUTICALS, INC., a California Corporation as Tenant with respect to those certain Premises commonly known as 3600 West Bayshore Road, Suite 205, Palo Alto, California 94303. This Addendum III is an integral part of the Lease and Addendum I and II to which it is attached; provided, the provisions of this Addendum III supersede the provisions of the Lease and Addendum I and II to the extent inconsistent therewith.

1. Paragraph 4(a) of the Lease is amended so that the expiration date of the Lease shall be November 30, 1998.

2. Paragraph 6(a) of the Lease is amended so that the security deposit is increased from $6,666.00 by $255.75 to $6,921.75.

3. Paragraph 7(a) of the Lease is amended so that the monthly rent for the Lease term shall increase from as follows:

December 1, 1995 - $5,369.86
December 1, 1996 - $5,638.35
December 1, 1997 - $5,920.27

4. Except as provided herein, all other terms and conditions of the Lease and Addendum I and II shall be as previously set forth and are hereby ratified, affirmed, and in full force and effect.

LANDLORD

KONTRABECKI-MASON DEVELOPERS,
a California General Partnership

By:/S/STEVE S. MASON
   -----------------

Title:  GENERAL PARTNER               Dated:       4/14/95
      -----------------                            -------

TENANT

SALIX PHARMACEUTICALS, INC.,
a California Corporation

By:/S/LORIN K. JOHNSON
   -------------------

Title:    VICE PRESIDENT              Dated:       4/14/95
          --------------                           -------

ADDENDUM "IV"

This Addendum IV is executed by and between KONTRABECKI-MASON, a California General Partnership as Landlord, and SALIX PHARMACEUTICALS, Inc., a California Corporation as Tenant with respect to those certain Premises commonly known as 3600 West Bayshore Road, Suite 205, Palo Alto, California 94303. This Addendum IV is an integral part of the Lease and Addendum I, II, and III to which it is attached; provided, the provisions of this Addendum IV supersede the provisions of the Lease and Addendum I, II, and III to the extent inconsistent therewith.

1. Paragraph 2(a) of the Lease is amended to reflect the expansion of the Premises. The agreed area of the Premises of 3,527 square feet is increased by 2,001 square feet to 5,528 square feet. Tenant's share of the total leasable space within the building is increased from ten percent (10%) by five and 71/100's percent (5.71%) to fifteen and 71/100's percent (15.71%).

2. Paragraph 4(a) of the Lease is amended so that the expiration date of the Lease shall be July 31, 2000.

3. Paragraph 6(a) of the Lease is amended so that the security deposit is increased from $6,921.75 to $10,462.75.

4. Paragraph 7(a) of the Lease is amended so that the monthly rent for the Lease term shall be as follows:

08/01/96  -  11/31/96    $ 8,911.63
12/01/96  -  11/31/97    $ 9,180.12
12/01/97  -  11/30/98    $ 9,462.04
12/01/98  -  07/31/00    $10,779.60

5. Paragraph 7(b)(i) of the Lease is amended so that the monthly estimated operating expenses shall increase from $1,551.88 by $900.45 to $2,452.33.

6. Paragraph 28 of the Lease is amended so that the number of reserved spaces in the parking garage shall increase from four (4) spaces by two (2) spaces to six (6) spaces.

7. Tenant shall pay up to $2,500 for the creation of a suitable passageway between the current space and the expansion space, and Landlord agrees to pay any additional cost above this amount.

8. This addendum is contingent upon the termination of the Karen Butera Inc. lease in Suite 204 of the Premises by October 1, 1996.

9. This addendum shall be effective on the later of August 1, 1996, or the termination date of the Karen Butera Inc. lease. Except as provided herein, all other terms and conditions of the Lease and Addendum I, II, and III shall be as previously set forth and are hereby ratified, affirmed, and in full force and effect.

LANDLORD

KONTRABECKI-MASON DEVELOPERS,
a California Partnership

By:/S/J.T. KONTRABECKI
   -------------------

Title:  GENERAL PARTNER               Dated:       6/5/96
      -----------------                            ------

TENANT

SALIX PHARMACEUTICALS, INC.,
a California Corporation

By:/S/LORIN K. JOHNSON
   -------------------

Title:    VICE PRESIDENT              Dated:       6/5/96
          --------------                           ------

ADDENDUM "V"

This ADDENDUM "V" is dated for reference purposes as of July 27, 1997 and is made between Kontrabecki-Mason Developers, a California general partnership ("Landlord"), and Salix Pharmaceuticals, Inc., a California Corporation ("Tenant"), with respect to those certain Premises commonly known as 3600 West Bayshore Road, Suite 101 and Suite 205, Palo Alto, California 94303. This Addendum V is an integral part of the Lease and Addendum I, II, III, and IV to which it is attached; provided, the provisions of this Addendum V supersede the provisions of the Lease and Addendum I, II, III, and IV to the extent inconsistent therewith.

1. Paragraph 2 (a) of the Lease is amended to reflect the expansion of the premises. The agreed area of the Premises of 5,528 square feet is increased by 2,056 square feet to 7,584 square feet. Tenant's share of the total leasable space within the building is increased from fifteen and 71/100's percent (15.71%) by five and 84/100s percent (5.84%) to twenty one and 55/100's percent (21.55%). Along with the new premises, Tenant shall have the right to five (5) additional assigned parking spaces in the underground parking garage.

2. Paragraph 6(a) of the Lease is amended so that the security (deposit is increased from $10,462.75 by $7,915.60 to $18,378.35.

3. Paragraph 7(a) of the Lease is amended to add the following rent schedule for Suite 101 (the "Expansion Space").

09/01/97 - 08/31/98      $6,168.00   $3.00 per sq ft
09/01/98 - 08/31/99      $6,373.60   $3.10 per sq ft
09/01/99 - 08/31/00      $6,579.20   $3.20 per sq ft
09/01/00 - 08/31/01      $6,784.80   $3.30 per sq ft

Upon the expiration of the original lease term for Suite 205, the new rental rate shall correspond with the rent schedule, per square foot, as outlined above.

4. Paragraph 7 (b) of the Lease is amended to add the monthly estimated operating expenses for Suite 101 of $925.20.

5. Renewal Option: Tenant shall have one (1) option to extend the Lease for five (5) years at Fair Market Value by providing written notice not less than one hundred and eighty days (180) prior to the expiration of the lease.

6. Except as provided herein, all other terms and conditions of the Lease and Addendum I, II, III, and IV shall be as previously set forth and are hereby ratified, affirmed, and in full force and effect.

7. Paragraph 4(a) of the Lease is amended so that the expiration date of the Lease shall be August 31, 2001.

LANDLORD

KONTRABECKI-MASON DEVELOPERS, a California general partnership

By:___________________________ Date:__________________

Its:__________________________

TENANT

SALIX PHARMACEUTICALS, INC., a California corporation

     /s/ Randy Hamilton                     7/31/97
By:___________________________    Date:__________________

         President

Its:__________________________

Exhibit 21.1

Subsidiaries of the Registrant

Name                                    Place of Incorporation
----                                    ----------------------
Glycyx Pharmaceuticals, Ltd.            Bermuda



Salix Pharmaceuticals, Inc.              California

EXHIBIT 23.1

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the references to our firm under the captions "Selected Consolidated Financial Data" and "Experts" and to the use of our report dated March 18, 1997, in the Registration Statement (Form S-1) and related Prospectus of Salix Holdings, Ltd. for the registration of 3,450,000 shares of its common stock.

                                          /S/ ERNST & YOUNG, LLP

Palo Alto, California


August 14, 1997

ARTICLE 5

MULTIPLIER: 1,000


PERIOD TYPE	YEAR	6 MOS
FISCAL YEAR END	DEC 31 1996	DEC 31 1997
PERIOD START	JAN 01 1996	JAN 01 1997
PERIOD END	DEC 31 1996	JUN 30 1997
CASH	5,624	3,657
SECURITIES	0	0
RECEIVABLES	0	0
ALLOWANCES	0	0
INVENTORY	0	200
CURRENT ASSETS	5,703	4,055
PP&E	333	373
DEPRECIATION	188	221
TOTAL ASSETS	5,858	4,250
CURRENT LIABILITIES	1,265	1,069
BONDS	0	0
PREFERRED MANDATORY	0	0
PREFERRED	0	0
COMMON	13,194	14,257
OTHER SE	(8,601)	(11,076)
TOTAL LIABILITY AND EQUITY	5,858	4,250
SALES	0	0
TOTAL REVENUES	1,820	21
CGS	0	0
TOTAL COSTS	4,389	2,596
OTHER EXPENSES	0	0
LOSS PROVISION	0	0
INTEREST EXPENSE	172	22
INCOME PRETAX	(2,451)	(2,475)
INCOME TAX	0	0
INCOME CONTINUING	(2,451)	(2,475)
DISCONTINUED	0	0
EXTRAORDINARY	0	0
CHANGES	0	0
NET INCOME	(2,451)	(2,475)
EPS PRIMARY	(0.46)	(0.35)
EPS DILUTED	(0.46)	(0.35)