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Salix Pharmaceuticals, Inc: Succeeding on the road less traveled by Leonidas Kyriazis and Linda E. Swayne. Reproduced with permission of Linda E. Swayne in the format post in a course management system.

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Salix Pharn1aceuticals,

Inc: Succeeding

on the Road

Less Traveled

"I started having problems with stomach pain and severe diarrhea," explained Rex Young, a 37-year-old public high school teacher from Riverside, California. "Each day I was making between 25 and 35 trips to the bathroom. This just was not conducive to teaching in high school and because I didn't know what it was, I got dehydrated and ended up in the hospital. I was diagnosed with ulcerative colitis. Dr. Vinod Mishra, my gastroenterologist, first prescribed a treatment of prednisone (steroid) to fight the inflammation, along with a drug called ASACOL. The prednisone didn't work very well at all. I had a bad reaction to it and had to quit after four days. The ASACOL seemed to work OK for the first year. However, at the end of the year, I had another very severe exacerbation. I was facing radical surgery - a colostomy - that would remove my lower intestine.

This case was written by Leonidas Kyriazis, MBA, and Linda E. Swayne, PhD, both from The University of North Carolina at Charlotte. It is intended as a basis for

classroom discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Used with permission from Leo Kyriazis.

SAliX PHARMACEUTICAlS, INC.

"My doctor asked me if I wanted to try a new drug he had just heard about called COLAZAL from Salix Pharmaceuticals. I was willing to try anything to avoid the surgery and all the unpleasantness of a colostomy for the rest of my life. COLAZAL was amazing! I saw results within the first two weeks and at the end of the first month I was pretty much back to normal. I have been taking COLAZAL now for about two and a half years, in a regimen of 6 pills per day and I am in com­ plete remission. I had a sigmoidoscopy/ colonoscopy about three months ago and Dr. Mishra says that my intestine virtually looks like it has never been afflicted. He could not be more pleased with the result. Since I started taking COLAZAL, I gained back weight to where I was before I got sick- my wife says maybe a little bit more - and I was able to return to a normal life. I can say without hesitation - that COLAZAL saved my career and gave me my life back. I bought stock in Salix."

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"Rex's story, and many other stories like his, make all the challenges of found­ ing Salix worth while," stated co-founder Randy Hamilton. He continued, "Salix is a pharmaceutical company with a mission to provide products to gastroen­ terologists and their patients. The strategy to achieve this goal, e

PHARMACEUTICALS, INc. ADVANCING TREATMENT IN GASTROENTEROlOGY

as we've defined it, is through 'search and development' rather than the traditional ' research and development.' We've searched the world for chemical com­ pounds that could be developed into therapeutic drugs to treat intestinal disorders."

Lorin Johnson, co-founder, continued the story: "In the fifth century BC, Hippocrates suggested that his patients chew the bark of the willow tree to relieve pain and fever. Native Americans used willow tree bark to alleviate toothaches and other pains. The French pharmacist, H. Leroux, identified the chemical with the therapeutic properties and named it salicin after the scientific name for the willow tree (Salix alba).

"In the twentieth century, salicylic acid derivatives (aspirin) were used globally to regulate blood vessel elasticity, reduce fevers and aches, prevent cardiovascular ailments, affect blood clotting, or ease inflammation. Salix Pharmaceuticals was named after our first compound that was derived from the willow tree."

Randy commented, "Our focus on gastroenterology has been a successful niche strategy. We've really helped a lot of patients to have normal lives and we've become a successful public company." He continued, "Now we have to keep growing. Can we do that by sticking with gastroenterology? We'd like to in-license additional drugs to be used in gastroenterology- but can we find them? And, if we can find them, can we afford them? Or maybe we should look for new customers here in the US with other specialists - our XIF AXAN could be marketed to general practitioners. Or maybe we should investigate other inflammatory diseases since that's Loren's expertise. We are definitely feeling some pressure to grow the company . . . "

CASE 2: SALIX PHARMACEUTICALS INC.

Salix was created in 1989 by Randy W. Hamilton and Lorin K. Johnson- friends who had both worked for California Biotechnology, Inc. (CalBio), an organization that focused on biotechnology research. Before joining CalBio, Randy was Director of Strategic Planning and Business Development for SmithKline Diagnostics. At 35, he was Manager of Business Development for CalBio, responsible for the commercial aspects of several of the company's development projects, including human lung surfactant, drug delivery systems, genetic marker diagnosis, and growth factors. In addition, he was responsible for establishing strategic relation­ ships within the Japanese pharmaceutical industry and developing other global relationships.

Lorin earned a PhD degree from the University of Southern California and was a post-doctoral fellow at the University of California, San Francisco, before becoming Assistant Professor of Pathology at Stanford University Medical Center. He co-authored more than 70 journal articles and book chapters and co-invented 16 issued patents. Then, he joined CalBio as Director of Scientific Operations and Chief Scientist at the age of 37. His research focused on anti-inflammatory therapeutics.

After being caught in management changes at CalBio, Randy and Lorin began talking about starting their own business. A wave of biotechnology research startups had begun targeting basic research. However, Randy and Lorin chose a different path. Lorin stated, "These new biotechnology companies didn't have any products when starting out and they had to raise a lot of money. We thought maybe we could short-circuit the need to raise a lot of money - and the timeline it took to bring the products to market." He continued, "At one point, we thought that we might produce our own research products but we soon realized that it was better to market products that were more advanced in the life cycle."

Because Lorin was experienced in researching inflammation at the cellular and molecular level, Randy and Lorin decided to start the company around that research. Inflammation and inflammatory diseases had many manifesta­ tions such as arthritis, asthma, and psoriasis. The intestinal tract had two pri­ mary inflammatory diseases - ulcerative colitis and Crohn' s disease (both a form of inflammatory bowel disease). Randy summarized, "We looked at these various segments and early on we became interested in inflammatory bowel disease. We began a worldwide search for products that were in an advanced stage of devel­ opment and we might be able to obtain the marketing rights."

The First Drug

With their worldwide knowledge of the pharmaceutical industry, Lorin and Randy identified a compound called balsalazide disodium developed by Biorex, a small research company in London. Lorin realized very quickly that it could become a promising product, and they decided to try to acquire the rights to develop this

THE BEGINNING

drug in the United States. Randy remembered, "We thought if we were going to be at all successful in convincing this company to license a product to an unknown, early startup company, we needed to visit them face to face. We used frequent flyer miles to fly to London. We met with Biorex and really got to know them. We weren't trying to sell our company- we didn't really have a company at the time - but we believed that they needed to be comfortable with us. Right after meeting with them, we put together a proposal." He continued, "Biorex was a startup company in 1950. They looked at us and we reminded them of themselves. They understood what it was like to start a company when all you have to offer is desire and a willingness to work hard. They were willing to take a risk with us because they saw themselves in us."

When Randy and Lorin returned to California from London in 1989, they car­ ried an agreement that gave them the right to the in-license of their first product. They immediately incorporated their company and started looking for money to pay the financial commitment to Biorex. Randy said, "Our total capital at that point was $9,500. We were working out of a spare bedroom in my home, which became the Salix world headquarters."

They tried to acquire the necessary capital from venture capitalists (VCs). "We thought that when we went out to VCs with a real product, they would be fall­ ing all over us to invest in Salix. We couldn't have been more wrong! Venture capitalists were more interested in technology than a product," explained Randy. "We met with over 120 firms and half of them showed some interest, but in all cases the VCs demanded ownership of 50 percent of the company with the first investment of funds, regardless of what the amount was! We had a pretty good idea what balsalazide disodium was going to be worth and they weren't investing enough! So, we tried a different way."

Lorin picked up, "We decided to contact some industry people we knew to invest capital. We had two takers - John Chappell, a former chairman of SmithKline, and Mark Schlesinger MD, a noted gastroenterologist. John and Mark not only invested $150,000 that we could use to make the necessary mile­ stone payments to Biorex, but also gave us confidence that the product we had acquired was solid."

Flourishing

John Chappell suggested that they try to procure the license for the global rights to balsalazide disodium. Biorex was convinced and in 1991 Salix obtained global rights for this product. In 1993, the fact that Salix had a worldwide product in its portfolio opened doors. Astra, a Swedish company, and Menarini, an Italian pharmaceutical company, purchased licenses from Salix to exclusively distribute balsalazide disodium in specifically defined, non-competing, areas. The cash received for the licenses enabled Salix to begin the costly process of having the product approved for human use in Europe and the United States.

Because Salix needed additional money in 1996 to continue its testing activi­ ties, the company listed on the Toronto Stock exchange raising $10 million. That

CASE 2: SALIX PHARMACEUTICALS INC.

same year, Salix identified a second product, rifaximin, and licensed its rights from an Italian company, Alfa Wassermann. approved in Europe; and Astra began promoting

In 1997, balsalazide disodium was it there under the brand name

COLAZIDE.

A Bit of Good Luck

In 1999, Astra merged with Zeneca, the pharmaceutical division of the British giant Imperial Chemical Industries, becoming the seventh largest pharmaceuti­ cal company in the world. Balsalazide disodium was a fairly minor product for AstraZeneca. AstraZeneca contacted Salix and tried to sell back the license. Randy remembered, "We said, 'Wait a minute, you're walking away from the deal. There are payments that you really should be making. You can give it back to us but you should pay us the money you owe us for the development and loan us the money to find another partner.' AstraZeneca gave it back and we owned the license to an approved drug! In the furor of the merger, we were a minor issue. To avoid any legal implications, the management of AstraZeneca just decided to throw us into the big bucket of merger expenses."

Lorin added, "They [AstraZeneca] actually paid us to fulfill the contract we had and loaned us some money that allowed us to find another partner in Europe."

Moving Ahead

In the spring of 2000, Shire Pharmaceuticals, a UK company, paid Salix $24 million to acquire the rights to balsalazide disodium for Europe (except southern Europe where Minarini maintained its license to be the distributor). In July 2000, the FDA approved balsalazide disodium for use in the US market under the brand name COLAZAL. Salix decided to distribute COLAZAL itself and listed on the NASDAQ exchange to raise additional funds to hire a sales force. In 2001 COLAZAL was launched in the US market.

In 2002 the company acquired from Dr. Falk Pharma the license for the granu­ lated version of mesalamine and started the clinical tests for it to be approved for the treatment of ulcerative colitis. In 2003, Salix acquired from aaiPharma the exclusive rights to sell ASAZAN tablets and launched that product in 2004. Also in 2004, Salix acquired from King Pharmaceuticals two corticosteroids- ANUSOL-HC and PROCTOCORT- and launched them in the American market along with the FDA approved rifaximin under the brand name XIF AXAN. All the Salix drugs were marketed to gastroenterologists. The timeline is summarized in Appendix I.

Additionally in 2004, Salix signed a license agreement for Pharmatel of Sydney to market COLAZAL in Australia and New Zealand. To market its products outside the United States, Salix formed strategic alliances to avoid the significant costs, risks, and infrastructure inherent in assembling an international sales force. (See Appendix II for Salix strategic alliances.)

THE PHARMACEUTICAL IN DUSTRY

Salix dedicated its efforts toward identifying and acquiring (in-licensing) late­ stage or early marketed proprietary pharmaceutical products that had an existing base of safety and efficacy data for the treatment of gastrointestinal disease. Salix focused on late-stage products attempting to reduce the risk, time, and expense that it invested in products compared to traditional pharmaceutical companies. Salix focused its time and energy on maximizing the commercial potential of its licensed products. Operations that were not core for the business, such as manu­ facturing, were outsourced. Resources were not tied up in "bricks and mortar" but rather invested in activities directed toward increasing product sales.

Salix was a marketing-focused organization and employed a direct sales force to promote its products to the fastest-adopting, highest-prescribing gastroenter­ ologists in the United States. Salix CEO Carolyn Logan believed, "Our specialty sales force - and the high level of service they are able to provide - allows us to capitalize on the opportunity to build a franchise with the gastroenterology community. And, our sales force allows us to attain higher profit margins and better control over distribution because we sell our own products."

The pharmaceutical industry actually consisted of all enterprises that were involved in the invention of drugs, production of the active substances in drugs, formu­ lation of drugs, and promotion of drugs to the public, as well as the specialists who prescribed the drugs.

The Products

A drug was considered to be any article (other than food) intended to be used in diagnosis, treatment, prevention, mitigation, or cure for humans or other ani­ mals. Drugs were classified as prescription, generic, or over-the-counter (OTC). Prescription drugs were sold only in pharmacies and required a written authori­ zation (a prescription) from a physician. Physicians prescribed a drug that they believed would improve the health of their patients, although a drug that had not been approved by the FDA was sometimes prescribed for a disease or illness. Termed "off-label," it was a prescription drug approved for the treatment of a specific illness or disease, but prescribed for a patient with a different illness or disease because some medical testing published in a medical journal had sug­ gested it as a drug to try when other recognized treatments failed.

Generic (or generic equivalent) drugs contained the same active ingredient as a spe­ cific brand name prescription drug and required a prescription, but were only allowed to be produced after the brand name drug's patent had expired. OTC drugs were freely available to the public and were sold in drug, grocery, and discount stores.

CASE 2: SALIX PHARMACEUTICALS INC.

Exhibit 2/1: Average Retail Prescription Prices of Drugs

Year Brand Name Generic

2002 $75.82 $27.16 2003 $84.21 $30.56

Source: National Association of Chain Drug Stores, Facts & Resources, Industry Statistics

(see: http://www.nacds.org/wmspage.cfm?parm1=507).

BRANDED PRESCRIPTION VERSUS GENERIC DRUGS

New products that were the result of research and development (R&D) by phar­ maceutical companies were usually covered by patents. Patented products enjoyed exclusivity (monopoly) in the market to sell the active ingredient for a specific indication (condition or disease) As long as the drug was protected by a patent, monopoly pricing was in effect and the price was usually well above the price of the same product after the patent expired. Exhibit 2/1 compares the average price of patented, brand name drugs versus generic drugs.

PRESCRIPTION VERSUS OTC

The Food and Drug Administration (FDA) through its OTC Drug Monographs defined 80 therapeutic categories and 800 significant active ingredients that could be used by consumers in self-diagnosis and self-treatment without prescriptions. More than 100,000 products were manufactured (mainly by pharmaceutical com­ panies) for the OTC market. The pharmaceutical companies had some, but not complete, freedom to decide whether a product would be sold as an OTC drug. When the preparation contained an active ingredient that was one of those con­ tained in the list of 800, it could be sold over the counter. If a product contained an active ingredient that was not on the OTC list, it had to be registered with the FDA and usually became a prescription drug. Pharmaceutical companies were able to request that any prescription product be transferred to the OTC list, but FDA approval for the change depended on the nature of the product and its safety for public use.

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FDA Approval Process

To introduce a new drug to the US market, FDA approval was required - a complicated, time-consuming, expensive process with no guarantees. Exhibit 2/2 outlines the process. The organization seeking approval (the "sponsor") went through two different evaluation stages:

Exhibit 2/2: New Drug F DA Approval Process

Pre-Clinical

Research Clinical Studies

Synthesis and Purification

Animal Testing

Institutional

IND Submitted

<:!l Sponsor/FDA Meetings Encouraged

A Advisory Committees

Early Access:

4)subpart E

NDA Review

A t NDA Submitted

Review Decision

Sponsor Answers any Questions From Review

REGULATION

1. The Investigational New Drug (IND) Review Process to determine whether the product was suitable for use in clinical trials, and

2. The New Drug Application (NDA) Review Process to determine the benefit/ risk profile of a drug prior to its approval for marketing to physicians.

One of the most important parts of the drug approval process was the clini­ cal studies that were designed to distinguish the drug's effect from other influ­ ences on humans - for example, a spontaneous change in disease progression or the effect of placebo (an inactive ingredient that looked like a test drug). In the United States these studies were typically conducted under informed consent of participants. There were three different phases of trials in the pre-approval stage and one in the post-marketing stage:

• Phase I: The first trials in humans to test a compound for safety tolerance and 1 pharmacokinetics. These trials usually employed normal, healthy volunteers.

CASE 2: SALIX PHARMACEUTICALS INC.

• Phase II: Pilot studies to define efficacy2 and safety in selected populations of patients with the disease or condition to be treated, diagnosed, or prevented. Dose and dosing regimens were assigned for magnitude and duration of effect.

• Phase III: Expanded clinical trials intended to gather additional evidence of effectiveness for specific indications and to better understand safety and drug­ related adverse effects.

• Phase IV: Post-marketing studies were conducted to determine the incidence of adverse reactions under normal prescribing conditions to a broad population over time. These studies could result in serious consequences for the company if they proved that serious adverse effects existed that were not identified in Phases I through III.

Patents

New drugs were usually protected by patents. Once a patented drug exceeded its protected time period, market exclusivity could be sought (the patent would expire; however, competitors would still not be allowed to offer the product as long as the exclusivity period lasted). When the patent protection and market exclusivity were exhausted, other manufacturers could begin offering a generic version­ provided that the generic product was evaluated (tested) to be certain that it was equally safe and offered the same efficacy as the branded product. Typically, the manufacturers of generic drugs did not need to repeat all the studies originally done for a drug's approval. This kept the cost for the introduction of a generic drug down, encouraged competition, and kept drug costs lower for patients.

Exhibit 2/3 lists the control stages that both brand name and generic drugs were required to go through to be approved. A generic drug supplier was required to go through the abbreviated new drug application (ANDA) review process for the active ingredient(s). The possible generic was rigorously reviewed - its labeling, chemistry, manufacturing, and controls and had to be identical (excluding the parts indicating the patent protection) and the testing procedure had to be repeated

Exhibit 2/3: N DA vs. AN DA Review Process

Brand Name Drug Generic Drug NDA Requirements ANDA Requirements

Chemistry Chemistry

Manufacturing Manufacturing Controls Controls Labeling Labeling

Testing Testing

Animal Studies

Clinical Studies

Bio-availability } Bio-equivalence

Source: Food and Dug Administration (www.fda.gov)

REGUlATION

similarly to the new drug application process. The difference for generics was that the animal studies, the clinical studies, and the bio-availability were replaced by bio-equivalence studies. Two products are considered bio-equivalent if, when they were given to the same individual patient, the patient absorbed the same amount of drug into the blood stream and at the same rate.

The procedure used to verify the bio-equivalence was to measure the concentra­ tion of the drug in the blood of the patient at different times after administering it. If the measures were the same, the brand name and the generic drug were considered therapeutically equivalent. Only when the drug was not absorbed into the bloodstream - a rather rare case - would clinical studies have to be redone.

Market Exclusivity

Because the FDA approval process was lengthy (and totally out of the control of the organization submitting a drug for review and approval), US lawmakers decided to incorporate a provision into the Hatch-Waxman Act that allowed the innovator to apply for an extension of the patent coverage based on the length of the FDA approval process. According to the statute, no ANDA filings (request to begin the generic drug approval process) could be submitted during a period of exclusivity. A 5-year period of exclusivity (past the patent expiration) could be granted for an ingredient that had never previously been approved by the FDA.

A 3-year period of exclusivity could be granted for a drug that contained an active moiety3 that had been previously approved, when the application contained reports of new clinical investigations conducted by the sponsor that were essential to approval of the application. For example, the changes in the approved drug product that affected its active ingredient(s), strength, dosage form, route of admin­ istration or conditions of use might be granted exclusivity if clinical investigations were essential to the approval of the application containing those changes.

For the drugs whose NDA was submitted before January 1, 2002, six additional months of exclusivity could be obtained under the Food and Drug Administration Modernization Act of 1997, if the sponsor submitted requested information relat­ ing to the use of the active moiety in the pediatric (children) population.

Finally, a reason for a sponsor to be granted exclusivity beyond the patent pro­ tection period was if the drug was developed to cure diseases affecting less than 200,000 people. Such a drug could be designated an "orphan drug" by the FDA. Sponsors of orphan drugs were granted 7 years of market exclusivity (beyond the patent) as well as tax incentives for clinical research.

Generic

A drug could become generic after the expiration of the patent. Competitive firms could produce the drug and sell at lower prices effectively competing with the innovator. When a drug came "off patent" and became generic, it was usually referred to by the name designating the active chemical ingredient. Thus, when the patent for PRILOSEC (manufactured by AstraZeneca) expired, the generic

Exhibit 2/4: $16 billion Prescribing Specialists Market for Gastrointestinal Tract

General Practitioners 77%

astroenterologists 23%

Source: IMS Health, IMS National Sales Perspectives,™ 2/2005 (see: http://www.imshealth.com).

CASE 2: SALIX PHARMACEUTICAlS INC.

appeared in the market as omeprazole. A patent could expire but a brand name, once registered and protected, belonged to the company that registered it.

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Gastroenterology was the study of the diseases of the stomach and intestines. Gastrointestinal disease afflicted more than 70 million Americans every year, producing over 50 million physician visits. Nearly 80 percent of these visits were conducted by general practitioners (GPs) prescribing drugs such as NEXIUM (AstraZeneca), PRILOSEC (AstraZeneca), PREVACID (TAP Pharmaceuticals), ACIPHEX (Eisai/Janssen), and PROTONIX (Wyeth). In addition, general practi­ tioners treated diseases such as traveler's diarrhea. More severe diseases such as ulcerative colitis and Crohn' s disease (that are described as inflammatory bowel disease), were treated by gastroenterologists (frequently shortened to GI doctors). The total gastrointestinal therapeutic market was estimated to be $16 billion every year. Exhibit 2/4 illustrates the prescription value breakdown of GPs versus spe­ cialists prescribing for gastrointestinal disease.

The Prescribing Specialists

Various physicians prescribed drugs to improve the health and well-being of their patients. Board certified physicians (those MDs who successfully passed the exams in a specific specialty area) as well as any other licensed medical doctor (one who passed the state exam to practice medicine in that state) could prescribe pharmaceuticals for their patients (see Exhibit 2/ 5). General practitioners and internal medicine were the largest physician groups; gastroenterology was one of the smallest specialty groups.

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Inflammatory Bowel Disease (IBD)4

For many patients, receiving a diagnosis of inflammatory bowel disease was a relief because it meant that the blood in their stool was not a sign of cancer. The

GASTROENTEROLOGY DISEASES

Exhibit 2/5: US Prescribing Physicians, 2004

Specialty #of Writers Patient Visits Rx Counts Rx Sales (ira thousands) (ira millions) {ira millions) {ira billions)

General Practitioners 147 457 1,000 $65.4 Internal Medicine 115 319 786 $55.8 Cardiologists {heart, circulatory system) 24 85 133 $9.3 Neurologists (brain, nervous system) 13 25 44 $6.4 Gastroenterologist (GI tract) 12 31 38 $4.8 Dermatologists (skin) 12 36 48 $4.4 Oncologists (cancer) 12 14 23 $3.7 All Others 848 1,033 1,228 $86.9

All Specialists 1,183 2,000 3,300 $236.7

Rx � medical shorthand for a ''prescription" Source: Company Document

initial feeling was short lived however as the patients realized that they had a disease that would require life-long medication and management. Approximately one million people in America had IBD (ulcerative colitis or Crohn's disease).

ULCERATIVE Couns (UC)

Ulcerative colitis is a chronic form of IBD characterized by inflammation of the lining of the colon, specifically the large intestine. The disease affected roughly 500,000 people in the United States, typically with onset under the age of 40. Ulcerative colitis could be cured with surgery to remove the colon. Because this surgery had other consequences, it was generally reserved for people whose disease could not be adequately treated with medications or for those people with signs of pre-cancer in the colon. Rex Young's UC was successfully treated with COLAZAL.

CROHN' s DISEASE (CD)

Crohn' s disease differed from ulcerative colitis because it could affect the entire intes- tinal tract and could not be cured with surgery. Some people had long periods of remission, sometimes years, when they were free of symptoms, although they had to continue medications or their symptoms returned.

CASE 2: SALIX PHARMACEUTICALS INC.

Other IBD Diseases

TRAVELER'S DIARRHEA

According to National Ambulatory Medical Care and National Hospital Ambulatory Medical Care surveys, between 1992 and 1996 (the most recent publicly available information) patients visited physicians over 15 million times on average each year in the United States with complaints of diarrhea, vomiting, or gastrointestinal infections. According to the Centers for Disease Control and Prevention, each year between 20 to 50 percent of international travelers (an estimated 10 million people), developed diarrhea, with approximately 80 percent of the cases caused by bacteria. In 2003, approximately 6.2 million people sought treatment in the United States for infectious diarrhea and approximately 4.1 million of those patients were prescribed a drug.

HEPATIC ENCEPHALOPATHY

Hepatic encephalopathy was caused by disorders affecting the liver and was characterized by intellectual deterioration and neurological abnormalities.5 It occurred as an acute, potentially reversible disorder or as a chronic, progres­ sive disorder associated with chronic liver disease. It was estimated that 60,000 cases of hepatic encephalopathy were diagnosed each year in the United States. Hepatic encephalopathy was treated primarily by hepatologists, a subspecialty of gastroenterology.

Colazal® (balsalazide disodium) COLAZAL was chemically similar in structure to salicin (found in the bark of the willow tree). It was the first new molecular entity approved by the FDA in over 10 years for the treatment of mildly to moderately active ulcerative colitis and the first new oral therapy approved by the FDA for this indication in seven years. In clinical trials, it demonstrated at least comparable efficacy and had an improved safety profile as compared to other oral products (see Exhibit 2/6 for competitive products). Specifically, clinical trials indicated that other drugs caused strong side effects for 40 percent of the patients whereas COLAZAL showed side effects in a very small percentage (less than 8 percent) of patients.

COLAZAL' s chemistry allowed more than 99 percent of the drug to reach the colon, so it worked faster and more effectively than comparable doses of other available products. Because the systematic absorption was less than 1 percent, its active ingredient was not active in the blood nor detected in the blood of the patients taking the medicine. Responding to a FDA request, Salix was additionally conducting pediatric studies to verify the utility of COLAZAL in the pediatric population.

Exhibit 2/6: COLAZAL ® and its Competition

Product• Marketer Active Notes Ingredient

COLAZAL Salix Balsa/azide Mild side effects such as: headache, abdominal disodium pain, diarrhea, nausea, vomiting, respiratory

infection, and arthralgia occur in no more than

8% of the patients. Withdrawal from therapy

due to adverse events was comparable among

patients on COLAZAL or a placebo.

AZULFIDINE Pfizer Sulfasalazine Strong side effects due to sulfapyridine release.

(Pharmacia) ( Bio-converted Allergic reactions, anorexia, headache, nausea,

to 5-ASA) vomiting, gastric distress, and reversible

oligospermia occur in about one-third of the

patients.

DIPENT U M Pfizer 0/sa/azine Strong side effects (abdominal or stomach pain

Calltech (Bio-converted or upset, diarrhea, loss of appetite).

to 5-ASA)

AZACOL P&G 5-ASA Not very effective colon-specific delivery. Covered by a pH sensitive coating.

PENTASA Shire 5-ASA Coated microgranules for longer time delivery.

Not very effective colon-specific delivery.

ROWASA Solvay 5-ASA Not very effective colon-specific delivery.

Covered by a pH sensitive coating.

'All prescription drugs, none sold OTC

Company documents

SALIX PRO DUCTS

Source:

As more patients, similar to Rex Young, had dramatic results using COLAZAL, sales grew (see Exhibit 2/7). The patent covering COLAZAL was to have ended in 2001; however, market exclusivity was sought and granted by the FDA.

Exhibit 2/7: COLAZAL Sales and Prescription History

Year 2001 2002 2003 2004

Sales (in millions) $14.1 $33.5 $55.8 $85.4 Prescriptions 62,500 208,000 313,000 374,000

Salix Pharmaceuticals Source:

AZASAN (azathioprine) In November 2003, Salix acquired from aaiPharma LLC the exclusive right to sell 25-, 75-, and 100-milligram AZASAN tablets in North America. AZASAN was an FDA-approved drug used to prevent rejection of kidney transplants and for treat­ ment of severe arthritis. It was sometimes off-label prescribed by gastroenterolo­ gists for the treatment of Crohn' s disease and ulcerative colitis. Salix launched this

CASE 2: SALIX PHARMACEUTICALS INC.

Exhibit 2/8: AZASAN and its Co

Product Marketer

mpetitors (all pre

Active Ingredient

scription-only drugs)

Notes

AZASAN Salix Azathioprine Active ingredient the same as I MURAN, 25, 75, and 100 mg tablets.

I MURAN Prometheus Azathioprine Active ingredient the same as AZASAN. Laboratories

PURENITHOL Gate Mercaptopurine Very toxic. Indicated for remission induc­ Pharmaceuticals tion and maintenance therapy of acute

lymphatic leukemia.

Source: Salix Pharmaceuticals

product in the United States in February 2004 ($211 million market). The competitive products for AZASAN were IMURAN and PURENITHOL (see Exhibit 2/8).

Ms. Carolyn Logan, President and Chief Executive Officer, Salix Pharmaceuticals, said, "We are extremely proud that Salix is the exclusive source for AZASAN 75-mg and 100-mg dosage strengths. We believe our product will differentiate itself from the competition by offering more convenient dosing at a lower cost. AZASAN offers the dosing precision and flexibility that are essential to successful therapy. The most common dosage used by physicians is 100-mg and AZASAN is the only azathioprine formulation available at this dose. We believe that the convenience of AZASAN 100-mg should improve patient compliance."

XIFAXA� (rifaximin)

XIFAXIN was a gastrointestinal-specific oral antibiotic that was being marketed in 17 countries but was not approved for use in the United States. XIF AXIN potentially had a number of other uses as outlined in Exhibit 2/9. Salix in-licensed the chemical compound from Alfa Wassermann and submitted a new drug application (NDA) for the treatment of traveler's diarrhea to the FDA in December 2001. In May 2004, the FDA granted marketing approval for XIF AXAN 200-mg tablets to treat traveler's diarrhea and Salix launched the drug for that purpose in the US market.

The advantages of XIFAXAN to treat the indications described in Exhibit 2/9 were two-fold. First, it offered site-targeted antibiotic delivery and, second, its improved tolerability compared to other treatments. Because of its site-specific delivery, less than 0.5 percent of XIFAXAN was absorbed into the bloodstream when taken orally. In addition, the drug appeared to cause fewer side effects such as nausea, headache, or dizziness than observed with currently available, more highly-absorbed antibiotics. In addition, XIF AXAN was less likely to cause harmful interaction with other drugs a patient was taking.

XIF AXAN was unique because there was no other US-approved oral antibiotic with its potential lack of systemic absorption and safety profiles. Salix was con­ ducting an ongoing series of studies to establish the drug in the American market for a broad range of gastrointestinal bacterial infections beyond the treatment of traveler's diarrhea (see Exhibit 2/10). Off-label prescriptions for XIFAXAN were being written by gastroenterologists for their patients with more severe IBD.

SALIX PRO DUCTS

Exhibit 2/9: XIFAXAN Estimated US Uses/Indications and Patient Visits with a Drug Prescribed

Potential Uses/Indications Type Visits Writers w/ Drug

Traveler's I infectious diarrhea Acute 4,000,000 General Practitioners Hepatic encephalopathy and Chronic 224,000 Hepatologists (a subspecialty

nonalcoholic steatohepatitis (NASH) of gastroenterology) Uncomplicated diverticular disease Small bowel overgrowth and irritable

Chronic

Chronic 2,400,000 3,500,000

Gastroenterologists

Gastroenterologists bowel syndrome

Crohn's disease

Clostridium difficile-associated diarrhea

Chronic

Acute

1,100,000 450,000

Gastroenterologists

General Practitioners Surgical prophylaxis Acute 1,500,000 Surgeons Traveler's diarrhea prophylaxis Acute 4,000,000 General Practitioners

Verispan PDDA and literature MAT Nov. 2004 Source:

Exhibit 2/10: XIFAXAN Development Plan

Indication Study F DA Status

Traveler's diarrhea and Shigellosis prophylaxis Completed Accepted

Hepatic encephalopathy (orphan drug) In progress

Crohn's disease In progress

Small bowel overgrowth In progress

Pediatric In progress

Salix Pharmaceuticals Source:

XIF AXAN competed in a $2 billion antibiotic market comprising over 12 million patients. The most common drugs used in the treatment of traveler's diarrhea are listed in Exhibit 2/11; two of them - XIFAXAN and CIPRO - were by prescrip­ tion and the rest were sold over-the-counter.

Commented CEO Carolyn Logan, "XIF AXAN has the potential to be even more successful than COLAZAL in terms of revenue. This belief is based on the uniqueness of XIF AXAN as a gastrointestinal-specific antibiotic, combined with ··

results of our market research and discussions with leading medical authorities highlighting the large number of diseases in which it could be used."

The patent covering XIF AXAN expired in May 2001. However, market exclu­ sivity was sought and granted.

ANUSOL-HC® and PROCTOCORT® (hydrocortisone creams and suppositories)

In July 2004, Salix acquired the exclusive US rights from King Pharmaceuticals to sell ANUSOL and PROCTOCORT (cream and suppository) and launched them in the US market through Salix's own sales force. Both ANUSOL-HC and

CASE 2: SALIX PHARMACEUTICAlS INC.

Exhibit 2/11: Commonly Used Drugs for the Treatment of Traveler's Diarrhea

Product Marketer Active Ingredient Notes

XIFAXAN• Salix Rifaximin Prescription antibiotic. CIPRO• Bayer Ciprofloxazine T he most commonly used

prescription antibiotic for

the treatment of traveler's diarrhea. Less tolerable than

rifaximin. KAOPECTAT E Pfizer Bismuth subsalicylate Over the counter MAALOX Novartis Magnesium hydroxide, Over the counter

aluminum hydroxidee

simethicone

LOMOTI L Pfizer Diphenoxylate and Over the counter Atropine

IMODIUM Teva Phar USA Mylan Loperamide Over the counter Geneva Novopharm

•Prescription only.

Salix Pharmaceuticals Source:

PROCTOCORT were steroids offered either as a cream (for the relief of inflam­ mation and itching at the anus) or suppositories (for hemorrhoids and other inflammatory conditions).

Said Ellen Marth McKim, Salix Vice President of Marketing, "We believe ANUSOL-HC and PROCTOCORT can serve an important role in helping gas­ troenterologists and other physicians to provide effective treatment. Salix has the opportunity to grow the sales of these products based on several key attributes, including the flexibility provided by the multiple dosage forms and the strengths of the four products. These products represent the only branded product line available in a suppository formulation for internal use supplemented by a cream formulation for external use."

Granulated Mesalamine In July 2002, Salix acquired the exclusive development rights for the granulated product in the United States from Dr. Falk Pharma GmbH. As part of the trans­ action, Salix received a right of first negotiation with respect to additional Falk products in the United States. When the rights were acquired, Fall<' s granulated product was already approved in most of the principal markets of Europe. Salix acquired the product with the hope that, if approved by the FDA in the United States, the granulated product's unique prolonged release mechanism providing consistent delivery of the drug to the distal ileum and the entire colon would allow the company to expand the range of treatment options for ulcerative colitis.

In December 2003, the FDA permitted the initiation of clinical trials for the product under an investigational new drug (IND) application. In December 2004, Phase III studies were initiated to investigate the product as a treatment for ulcerative

Financials

Beginning in 1989 with $9,500 in working capital, Salix grew significantly by the end of 2004 but would still be considered small in the pharmaceutical industry. See Exhibit 2/12 for summary financial statements.

PROMOTIONAL STRATEGY

colitis utilizing a dosing regimen that represented significant improvements over current therapies. Salix expected that the patent for the treatment of the intestinal tract with granulated mesalamine would be active till 2018.

Because Salix products were prescription drugs for the intestinal tract, its primary effort was to focus on marketing and sales efforts to prescribing gastroenterologists. The company believed that the gastroenterologist universe could be covered by its sales force of 68 sales representatives. The highest prescribing decile of gas­ troenterologists (the top 10 percent) were visited weekly by a Salix representative and the lower decile once or twice a month.

To maintain contact with the physicians, Salix organized various activities such as:

• Regular visits by the sales representatives to the prescribing gastroenterologists to keep them updated about the properties of its products.

• Participation in lectures and seminars to physicians about its products (see Appendix III).

• Participation in congresses and professional activities where Salix presented the advantages of its products (see Appendix IV).

• Grants to support symposia on subjects related to gastroenterology. • Distribution of prescription pads and post-it notes printed with various Salix

brand names. • Maintaining contact with the opinion leaders in the small community of

gastroenterologists. • Sponsoring publications where its products were mentioned. • Purchasing advertisements in gastroenterology-focused scientific magazines. • Sponsoring studies about off-label usage of its products (see Appendix V).

Salix did not engage in any direct-to-consumer advertising (DTCA) other than through its own Internet website that was open to the public. Salix offered patient coupons to prompt new customers to try its products. The coupon was found to be a more efficient incentive compared to the distribution of free samples (the norm in the industry) as it reduced the material that was stocked and stayed unused in the market and gave patients the opportunity to have direct contact with the company through its Internet site.

CASE 2: SAliX PHARMACEUTICAlS INC.

Exhibit 2/12: Salix Financial Statements (in thousands)

Balance Sheet

Assets

Cash & Cash Equivalents

Accounts Receivable, Net

Inventories

Investments

Prepaid & other Assets

Total Current Assets

Other Assets (Property, Intangible and other)

Total Assets

liabilities & Stockholders' Equity Accounts Payable & Accrued liabilities

Differed Revenue

Total Current liabilities

Common Stock

Additional Paid in Capital

Other Comprehensive loss

Accumulated Other losses

Total Stockholders' Equity

Total Liabilities & Stockholder's Equity

2001

$27,868 2,378 6,274

784 37,304

1,286 38,950

8,094 2,902

10,996 17

73,461

(45,884) 27,594 38,590

2002

$48,696 5,980

10,210 7,052

71,938 3,364

75,302

11,705 3,208

14,913 21

131,300 (306)

(70,626) 60,389 75,302

2003

$64,807 3,598

16,094

84,499 6,353

90,852

13,360 3,557

16,917 36

165,281 (655)

(90,727) 73,935 90,852

2004

$48,108 10,457 26,655

4,000 1,871

91,091 16,773

107,864

21,177

21,177 37

171,214 (676)

(83,888) 86,687

107,864

Income Statement

Product Revenue

Revenue from collaborative agreements

Total Revenues

Cost of Sales

Gross Profit

Selling, general and administrative expenses

R&D Expenses

Amortization of intangible assets

License fees and costs related to collaborative agreements

Interest Expense

Operating Expenses

Income Before Income Tax

Income Tax Expense

Net Income

2001

$14,129 8,221

22,350 3,495

18,855 24,688

6,629

5,583

(547) 36,353

(17,498)

(17,498)

2002

$33,456

33,456 8,192

25,264 33,004 17,967

125

(1,090) 50,006

(24,742)

(24,742)

2003

$55,807

55,807 13,226 42,581 38,635 23,654

125

268 62,682

(20,101)

(20, 101)

2004

$101,697 3,799

105,496 21,754 83,742 54,128 20,366

762 1,837

(598) 76,495

7,247 408

6,839

A PPEN DIX I

In 2005 Salix was a growing company with four FDA-approved products and another in the approval process, $100 million in sales, and 130 employees (68 sales representatives, 32 marketers, and 30 executive and administrative staff). The two founders were still active members of the company. Said Randy, "This company has been our life for 15 years. I'm not sure that's where we were heading when we started out. It's been more than a job, it's been an adventure!" Both laughed as they thought about how many times they had said that to each other when they worked into the night.

Lorin picked up, "We still think it's our baby to a large extent. I think our child has been off to college and maybe now is starting its first job!"

Randy concluded, "We've been successful with our 'search and develop' strategy specializing in gastroenterology products in the US market. Can we continue to be successful? Is it time to change our mission or our way of doing business?"

Salix Timeline

1989 Biorex licensed Randy Hamilton and Lorin Johnson the rights to sell balsalazide disodium in the US and Salix was incorporated.

1991 Salix acquired the worldwide rights to sell balsalazide disodium. 1993 Astra and Menarini purchased licenses from Salix to exclusively distribute

balsalazide disodium in non-competing areas in Europe. 1996 Salix was listed on the Toronto Stock Exchange raising $10 million to

continue its testing activities. 1996 Salix acquired another in-licensed product, rifaximin from Alfa Wasse . 1997 Balsalazide disodium was approved in Europe; Astra began promoting

rmann it

there under the brand name COLAZIDE. 1999 Astra merged with Zeneca (AstraZeneca) returning the license to sell

balsalazide disodium to Salix. 2000 Shire Pharmaceuticals purchased the right to sell balsalazide disodium in

Europe (except southern Europe where Menarini maintained its license to be a distributor).

2000 FDA approved balsalazide disodium for use in the US, marketed as COLZAL.

2000 Salix was listed on NASDAQ (September). 2001 Salix submitted a new drug application for rifaximin as a treatment for

traveler's diarrhea. 2002 Salix acquired from Dr. Falk Pharma the license for the granulated ver­

sion of mesalamine and started the clinical tests for it to be approved for the treatment of ulcerative colitis.

2003 Salix acquired from aaiPharma the exclusive rights to sell ASAZAN tablets.

CASE 2: SAliX PHARMACEUTICALS INC.

2004 Salix launched ASAZAN in the US market. 2004 Salix acquired from King Pharmaceuticals ANUSOL-HC and PROCTOCORT

and launched them in the US market. 2004 FDA granted the marketing approval to Salix for rifaximin using the brand

name XIF AXAN in 200-mg tablets. 2004 Salix launched XIF AXAN in the US market to treat traveler's diarrhea. 2004 Salix licensed COLAZAL to Pharmatel to market in Australia and New

Zealand.

Salix Pharmaceuticals, Inc. Alliances

AAIPHARMA LLC

aaiPharma Inc. was a company focused on pain management. Its corporate head­ quarters was in Wilmington, North Carolina, although it had research and devel­ opment as well as manufacturing sites in the United States, Europe, and Asia.

In November 2003, Salix acquired from aaiPharma LLC the exclusive right to sell 25-, 75-, and 100-mg azathioprine tablets in North America using the brand name AZASAN. Under the terms of the agreement, Salix made aaiPharma an initial payment and paid royalties on net sales in exchange for aaiPharma supplying the drug.

ALFA WASSERMANN S.P.A.

Salix inlicensed rifaximin from Alfa Wassermann, a privately held pharmaceutical company headquartered in Italy. Alfa Wassermann's therapeutic focus included antithrombotics, antibiotics, gastrointestinal products, NSAIDs, immunomodula­ tors, antihypertensives, and bronchopulmonary products.

Alfa Wassermann granted Salix 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 and agreed to supply Salix with bulk active ingredient rifaximin at a fixed price. Salix agreed to pay Alfa Wassermann a net sales-based royalty, as well as certain milestone payments. Salix was obligated to pay royalties on the commercial launch of the product and to continue until the later of the expiration of the period in which the manufacture, use, or sale of the products by an unlicensed third party would constitute an infringement on the patent covering the product, or 10 years from commercial launch. Salix launched the sale of rifaximin under the brand name XIF AXAN in May 2004.

Either party could terminate the license agreement within 60 days following a material breach. In addition, Alfa Wassermann had the right to terminate the agree­ ment on three months' written notice in the event that Salix failed to develop the product in a timely manner. Salix could terminate the agreement on three months' written notice in respect to any indication or any part of the territory covered.

A P PEN DIX II

BIOREX LABORATORIES LIMITED

Biorex, a private, independent drug research company headquartered in London, developed the chemical entity balsalazide disodium and completed limited Phase III clinical trials in England. Biorex granted Salix the exclusive right to develop, manufacture, and sell balsalazide disodium 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 was longer. Salix paid Biorex initial fees at agreement and was obligated to make additional milestone and royalty payments for the drug. Salix undertook completion of preclinical testing, clinical trials, and securing regulatory approvals for balsalazide disodium in the United States and registered it under the brand name COLAZAL.

Under a separate agreement, Biorex granted Salix the exclusive worldwide right (other than Japan, Taiwan, Korea, and the United States) to develop, manufacture, and sell balsalazide disodium for all disease indications for a period of 15 years from the date of commercial launch (subject to early termination in certain circumstances). Under the agreement governing territories other than the United States, Salix was obligated to pay to Biorex a portion of any gross profit on sales of balsalazide diso­ dium outside the United States. During 2001, Salix acquired the exclusive right and license to develop, manufacture, and sell balsalazide disodium in Japan, Korea, and Taiwan. Salix paid no fees to Biorex on entering into this agreement, but was obli­ gated to pay Biorex a portion of any upfront payments, milestone payments, and gross profit on sales of balsalazide disodium in Japan, Korea, and Taiwan as well.

DR. FALK PHARMA GMBH

Dr. Falk Pharma, a privately owned company headquartered in Germany, was one of the most widely recognized gastroenterology companies in the world.

In July 2002, Salix in-licensed rights to a granulated formulation of mesalamine under an agreement with Dr. Falk Pharma. The agreement gave Salix the exclusive rights to develop and market the product in the United States. In return Salix would make upfront, milestone, and royalty payments to Falk. addition, the agreement provided Salix first negotiation rights to develop and

In market certain

additional Falk products in the United States.

MENARINI PHARMACEUTICAL INDUSTRIES S.R. L.

Menarini, headquartered in Italy, was the largest manufacturer and distributor of pharmaceuticals in Southern Europe. Menarini had extensive experience in developing and marketing therapies for gastrointestinal disease in its markets. Salix granted Menarini certain manufacturing rights and exclusive distribution rights with respect to balsalazide disodium in Italy, Spain, Portugal, and Greece.

Salix sold the bulk active ingredient balsalazide disodium to Menarini for mar­ keting and distribution in its territories at cost plus a sales-based royalty. The agreement with Menarini would continue until the earlier of the expiration of the patents relating to the product or 15 years from the date of the agreement. Either

CASE 2 : SALIX PHARMACEUTICA lS INC.

party could terminate the agreement within 30 days (in the case of a payment breach) or 90 days (in the case of any other material breach).

SHIRE PHARMACEUTICALS GROUP PLC

Founded in 1986, Shire Pharmaceuticals Group was a global specialty pharmaceuti­ cal company with revenues of $1.2 billion in 2003. Shire was marketing products to defined customer groups (physician specialists) and supported its growth by acquiring or in-licensing additional R&D projects and marketed products.

In May 2000, Salix signed an agreement with Shire Pharmaceuticals Group whereby Shire purchased the exclusive rights to balsalazide disodium for use as a treatment for ulcerative colitis for Austria, Belgium, Denmark, Finland, France, Germany, Iceland, Republic of Ireland, Luxembourg, Norway, The Netherlands, Switzerland, Sweden, and the United Kingdom. Shire agreed to pay Salix $12.1 million in upfront fees and $12.0 million on achievement of certain milestones (a portion of these payments was shared with Biorex). In May 2000, Shire paid Salix $9.6 million in cash and $2.5 million by way of the issue of 160,546 new Shire ordinary shares. In August 2000, Shire paid $4.4 million in connection with the product license for balsalazide disodium in the United Kingdom.

KINe PHARMACEUTICALS

King Pharmaceuticals, headquartered in Tennessee, was a publicly traded company on the NYSE. King produced and marketed branded prescription products that fell in a broad range of therapeutic categories including cardiovascular, orthopedic, endo­ crinology, neurology, women's health, critical care, respiratory, and anti-infectives.

In June 2004, Salix paid $13 million cash for exclusive US rights for four products: ANUSOL-HC (2.5% hydrocortisone cream USP), ANUSOL-HC (hydrocortisone acetate 25-mg suppository), PROCTOCORT Cream (1 percent hydrocortisone cream USP), and PROCTOCORT Suppositories (hydrocortisone acetate rectal suppositories, 30-mg).

PHARMATEL PTY

Pharmatel, headquartered in Sydney, Australia, was a leading pharmaceutical company in the area focused on gastroenterology and oncology.

In June 2004, Salix signed an agreement for Pharmatel to market COLAZAL in Australia and New Zealand. As part of the agreement, Pharmatel was to fund and conduct a study of COLAZAL in the treatment of irritable bowel syndrome. Salix had the first right of negotiation for all Pharmatel gastrointestinal products to be sold in the United States. Pharmatel made a one-time milestone payment and paid royalties based on product sales.

RIMA CO

In June 2004, Salix signed an agreement with Rimaco to serve as a distributor of Salix products in Puerto Rico. Rimaco' s sales force would market and sell all Salix products to physicians throughout Puerto Rico.

A P PEN DIX I l l

Salix Phannaceuticals Reports On Digestive Disease Week Activities

RALEIGH, NC- May 19, 2004- Salix Pharmaceuticals, Ltd. (Nasdaq: SLXP) today reported on several Company-related events that took place at Digestive Disease Week (DDW) earlier this week. DDW 2004 provided a venue for over 18,000 gastroenterologists and related healthcare providers to gain information on the latest advances in gastrointestinal research, medicine, and technology.

RIFAXIMIN AS A PROPHYLAXIS FOR TRAVELERS' DIARRHEA

Dr. Herbert L. DuPont, Chief of Internal Medicine Service, St. Luke's Episcopal Hospital, Houston; Director, Center for Infectious Diseases, University of Texas, Houston School of Public Health; and Vice-Chairman, Department of Medicine, Baylor College of Medicine reported findings of a study investigating the use of rifaximin as a prophylaxis for travelers' diarrhea. The efficacy and tolerability of rifaximin as a prophylaxis for travelers' diarrhea was assessed in 220 US adults in a randomized, double-blind placebo-controlled study. Subjects received rifaximin 200 mg either once, twice or three times daily or placebo three times daily for two weeks. Subjects were followed daily for three weeks for the occurrence of diarrhea, mild diarrhea or severe diarrhea. Subjects also were followed for five weeks for drug-related side effects. Over the two-week treatment period 85 percent of the rifaximin-treated subjects compared with 49 percent of the placebo-treated subjects remained free of diarrhea. Additionally, rifaximin also prevented the occurrence of milder forms of diarrhea and prevented the occurrence of moderate and severe abdominal pain and cramps and excessive gas-related symptoms. The incid�nce of adverse events was comparable between each rifaximin group and placebo.

CHEMOPREVENTION OF COLONIC POLYPS BY BALSALAZIDE DISODIUM

Mesalamine previously has been reported in retrospective studies to reduce the risk of colitis-related neoplasia, and balsalazide disodium (COLAZAL ®), a prodrug of mesalamine, has been shown to prevent the growth of intestinal tumors in ani­ mals. Jonathan Terdiman of the San Francisco Veterans' Administration Medical Center and University of California San Francisco reported results of a prospec­ tive, randomized, double-blind placebo-controlled study conducted to examine the effect of balsalazide disodium on the size and number of colorectal polyps in situ in humans. In this study, 86 patients with colonic polyps were treated with balsalazide disodium (3 gm daily) or placebo for six months. Though the change in size and number of adenomas did not significantly differ between treatment groups, a trend was seen toward reduced total adenoma volume in those receiv­ ing balsalazide disodium, suggesting that the rate of tubular adenoma growth may be slowed by balsalazide disodium treatment. In addition, the slowing of adenoma growth was enhanced by concomitant aspirin use. Additional studies of different

CASE 2: SALIX PHARMACEUTICAlS INC.

design and larger size are required to further investigate the chemopreventive effects of this agent.

MEDICAL CROSSFIRE: DIAGNOSIS AND MANAGEMENT OF GASTROINTESTINAL DISORDERS

Approximately 500 gastroenterologists and other health care professionals attended a continuing medical education initiative- "Medical Crossfire: Diagnosis and Management of Gastrointestinal Disorders"- supported by an umestricted educational grant from Salix. A panel of nationally recognized key opinion leaders comprising Asher Kornbluth, MD, Gary R. Lichtenstein, MD, Mark Pimentel, MD, Daniel H. Present, MD, Ellen J. Scherl, MD and Steven R. Peiken, MD addressed current issues and challenges associated with the diagnosis and management of gastrointestinal disorders.

Source: Salix website (http:/ jwww.salix.com/newsroom/20040519b.asp)

Salix Pharmaceuticals Reports on American Academy of Family Physicians Activities

RALEIGH, NC - October 14, 2004 - Salix Pharmaceuticals, Ltd. (Nasdaq:SLXP) today reported on Company-related activities that will take place over the next several days at the 2004 Annual Scientific Assembly of the American Academy of Family Physicians (AAFP) in Orlando, FL. AAFP 2004 will provide a venue for Salix to introduce XIFAXAN™ (rifaximin) tablets 200 mg to more than 94,000 primary health care providers.

Salix is supporting, by means of an umestricted educational grant, a continuing educational symposium for general practitioners entitled: "New Perspectives in Managing Infectious Diarrhea in the Traveler: A Focus on Prevention and Post­ Infectious Complications." A faculty of nationally recognized key opinion leaders comprising Robert E. Rakel, MD, Herbert L. DuPont, MD and Henry Lin, MD will address issues related to the epidemiology, diagnosis and current and new management strategies for travelers' diarrhea.

Commenting on the Company's presence and activities at AAFP, Ms. Carolyn Logan, President and CEO, stated, "Salix looks forward to this first opportunity to meet face-to-face with and introduce XIF AXAN to family physicians. We anticipate that these primary care providers will be very receptive to XIF AXAN, a nonab­ sorbed, gut-selective antibiotic, as a significant new addition to currently available systemic antibiotic therapy for the treatment of travelers' diarrhea."

Source: Salix website (http:/ jwww.salix.comjnewsroom/20041014.asp)

NOTES

Salix Pharmaceuticals Announces Positive Results of Balsalazide Disodium Study

STUDY RECEIVES AsTRa RESIDENT CLINICAL RESEARCH AwARD

RALEIGH, NC - October 13, 2004 - Salix Pharmaceuticals, Ltd. (Nasdaq:SLXP) today announced results of a study entitled "Randomized, Double-Blind, Placebo­ Controlled Trial of Balsalazide disodium in the Prevention of Acute Radiation Enteritis as a Consequence of Pelvic Radiotherapy." Christopher Jahraus, MD, a radiation oncologist with the Department of Radiation Medicine, University of Kentucky College of Medicine, presented the abstract and oral proceedings of the study results on Wednesday, October 6 at the 46th Annual Meeting of the American Society for Therapeutic Radiology and Oncology.

Source: Salix website (http:/ jwww.salix.com/newsroom/20041013.asp)

NOTES

1 . Pharmacokmetics: how the drugs move through the body after they are swallowed or injected.

2. Efficacy: ability to control or cure a condition or disease.

3. Moiety: ingredient or part. According to the FDA "an active moiety means the molecule or ion, exclud­ ing those appended portions of the molecule that cause the drug to be an ester, salt (including a salt with hydrogen or coordination bonds) or other noncovalent derivative (such as a complex, chelate,

or clahrate) of the molecule, responsible for the physiological or pharmacological action of the drug substance."

4. Maria T. Abreu, MD, "The Clinical Course of IBD." (See Salix Newsletters at http:/ jwww.salix.com/ newsletter j newsl121504_pg2.asp#)

5. Medline Plus (full copy) US National Library of Medi­ cine. (See http:/ jwww.nlm.nih.gov jmedlineplus/

ency j article/ 000302.htm# Altemative%20Names)