2008 Annual Report Included in the 2008 Annual Report: Form 10-K filed with the U.S. Securities and Exchange Commission on March 11, 2009 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year ended December 31, 2008 or ‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from to Commission File Number: 000-23265 Salix Pharmaceuticals, Ltd. (Exact name of Registrant as specified in its charter) Delaware 94-3267443 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 1700 Perimeter Park Drive Morrisville, North Carolina 27560 (Address of principal executive offices, including zip code) (919) 862-1000 (Registrant’s telephone number, including area code) Securities Registered Pursuant to Section 12(b) of the Act: Title of Each Class Name of Exchange on which Registered Common Stock, $0.001 Par Value Nasdaq Global Market Preferred Share Purchase Rights Nasdaq Global Market Securities Registered Pursuant to Section 12(g) of the Act: None Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ‘ NO È Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ‘ NO È Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES È NO ‘ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. È Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Act (Check one): Large accelerated filer ‘ Accelerated filer È Non-accelerated filer ‘ Smaller reporting company ‘ Indicate by check mark whether registrant is a shell company (as defined) in Rule 12b-2 of the Exchange Act. YES ‘ NO È The aggregate market value of the Registrant’s common stock held by non-affiliates of the Registrant on June 30, 2008 (based on the closing sale price of U.S. $7.03 of the Registrant’s common stock, as reported on The Nasdaq Global Market on such date) was approximately U.S. $141,251,133. Common stock held by each officer and director and by each person known to the Company who owned 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of shares of the Registrant’s common stock outstanding at March 10, 2009 was 48,119,013. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant’s definitive Proxy Statement to be filed for its 2009 Annual Meeting of Stockholders currently scheduled to be held June 18, 2009 are incorporated by reference into Part III of this report. SALIX PHARMACEUTICALS, LTD. ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS Page PART I Item 1. Business ......................................................................... 1 Item 1A. Risk Factors ...................................................................... 18 Item 1B. Unresolved Staff Comments ......................................................... 24 Item 2. Properties ........................................................................ 24 Item 3. Legal Proceedings ................................................................. 25 Item 4. Submission of Matters to a Vote of Security Holders ...................................... 25 Executive Officers of the Registrant ................................................... 25 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ................................................................ 27 Item 6. Selected Financial Data ............................................................. 29 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ........ 30 Item 7A. Quantitative and Qualitative Disclosures about Market Risk ................................ 45 Item 8. Financial Statements and Supplementary Data ........................................... 45 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........ 45 Item 9A. Controls and Procedures ............................................................. 45 Item 9B. Other Information .................................................................. 46 PART III Item 10. Directors, Executive Officers and Corporate Governance ................................... 47 Item 11. Executive Compensation ............................................................ 47 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ........................................................................ 47 Item 13. Certain Relationships and Related Transactions, and Director Independence ................... 48 Item 14. Principal Accountant Fees and Services ................................................ 48 PART IV Item 15. Exhibits and Financial Statement Schedule ............................................. 49 SIGNATURES ............................................................................. 54 i This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are subject to risks and uncertainties, including those set forth under “Item 1A. Risk Factors” and “Cautionary Statement” included in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report, that could cause actual results to differ materially from historical results or anticipated results. Unless otherwise indicated or required by the context, the terms “we,” “our,” “us” and the “Company” refer to Salix Pharmaceuticals, Ltd. and all of its subsidiaries. PART I Item 1. Business Salix Pharmaceuticals, Ltd., a Delaware corporation, is a specialty pharmaceutical company dedicated to acquiring, developing and commercializing prescription drugs used in the treatment of a variety of gastrointestinal diseases, which are those affecting the digestive tract. Our website address is www.salix.com. Information on our website is not incorporated herein by reference. We make available free of charge through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. OVERVIEW We are a specialty pharmaceutical company dedicated to acquiring, developing and commercializing prescription drugs used in the treatment of a variety of gastrointestinal disorders, which are those affecting the digestive tract. Our strategy is to: • identify and acquire rights to products that we believe have potential for near-term regulatory approval or are already approved; • apply our regulatory, product development, and sales and marketing expertise to commercialize these products; and • use our approximately 150-member specialty sales and marketing team focused on high-prescribing U.S. gastroenterologists, who are doctors who specialize in gastrointestinal disorders, to sell our products. Our current products demonstrate our ability to execute this strategy. As of December 31, 2008, our products were: • XIFAXAN® (rifaximin) Tablets 200 mg; • MOVIPREP® (PEG 3350, Sodium Sulfate, Sodium Chloride, Potassium Chloride, Sodium Ascorbate and Ascorbic Acid for Oral Solution); • OSMOPREP™ (sodium phosphate monobasic monohydrate, USP and sodium phosphate dibasic anhydrous, USP) Tablets; • VISICOL® (sodium phosphate monobasic monohydrate, USP, and sodium phosphate dibasic anhydrous, USP) Tablets; • AZASAN® Azathioprine Tablets, USP, 75/100 mg; • ANUSOL-HC® 2.5% (Hydrocortisone Cream, USP), ANUSOL-HC® 25 mg Suppository (Hydrocortisone Acetate); • PROCTOCORT® Cream (Hydrocortisone Cream, USP) 1% and PROCTOCORT® Suppository (Hydrocortisone Acetate Rectal Suppositories) 30 mg; • PEPCID® (famotidine) for Oral Suspension; • Oral Suspension DIURIL® (Chlorothiazide); • APRISO™ (mesalamine) extended-release capsules 0.375g; and • COLAZAL® (balsalazide disodium) Capsules 750 mg. 1 We generate revenue primarily by selling our products, namely prescription drugs, to pharmaceutical wholesalers. These direct customers resell and distribute our products to and through pharmacies to patients who have had our products prescribed by doctors. We currently market our products, and intend to market future products, if approved by the U.S. Food and Drug Administration,