* Afexa board has recommended Valeant deal
* Afexa directors and officers agree to lock-up shares
* Rival bidder Paladin holds 14.95 percent of shares
* Afexa still has right to shop for other buyers (Adds comment from Paladin; updates shares to close)
TORONTO, Aug 30 (Reuters) - Acquisition-hungry Valeant Pharmaceuticals International (VRX.TO) stepped into the battle for Canadian cold and flu medicine maker Afexa Life Sciences FXA.TO on Tuesday with a friendly C$76 million ($77.6 million) takeover offer that tops a rival bid by 34 percent.
The deal would give Valeant control of Canada's No. 1 selling cold and flu medicine, Cold-FX, and let the Mississauga, Ontario-based company pursue its strategy of making Canada a key growth area.
The all-cash bid of 71 Canadian cents a share has the support of the Afexa board, and Valeant said it had lock-up agreements with Afexa directors and officers holding 8.8 percent of the stock.
Shares of Afexa, which has been fighting off a C$56.7 million hostile cash-and-stock bid from Paladin Labs PLB.TO since early August, jumped 21 percent to close at 71 Canadian cents, in line with Valeant's offer price.
"It's right in line with what Valeant has been consistently doing - building franchises through small acquisitions," said Canaccord Genuity analyst Neil Maruoka.
Afexa and Valeant agreed to a 30-day "go shop" period during which Afexa may solicit rival bids, and Valeant has the right to match superior offers.
"The purpose of the go-shop provision is for us to continue to test whether or not this offer is the highest value that we can bring to the shareholders," Afexa Chairman Bill White told Reuters. He said Valeant was one of several solicited and unsolicited parties that looked at Afexa's books.
Analysts do not expect a rival bid due to Valeant's current premium and because the company typically does not get into bidding wars.
Montreal-based Paladin, which already owns 14.95 percent of Afexa, has offered 55 Canadian cents a share, or 0.013 of a Paladin share, for each Afexa share it does not already own.
Paladin said it was weighing its options and would make an announcement after a review of the terms of Valeant's bid.
WAVE OF PHARMA MERGERS
Valeant, the name taken on when Canada's Biovail Corp bought U.S. listed Valeant last year, has been a leading player in pharmaceutical sector acquisitions as competition grows for access to approved and marketable drugs.
For the Valeant bid to succeed, holders of at least 66-2/3 of Afexa's outstanding shares must tender to the offer.
Paladin interim Chief Executive Mark Beaudet told Reuters on Monday that the firm had about C$200 million in cash, giving it "a lot more flexibility to pursue deals of greater size and scope."
Paladin specializes in acquiring distribution rights to specialty over-the-counter and prescription pharmaceutical products. It is in the process of acquiring Labopharm Inc DDS.TO, a Canadian biotech company specializing in controlled-release drugs, in a C$20 million friendly deal.
Valeant, which focuses on dermatology and neurology products, failed earlier this year to buy Cephalon Inc CEPH.O for $5.7 billion. Sources have said it is also pursuing a $4 billion tie-up with Swedish drugmaker Meda AB (MEDAa.ST).
Afexa has agreed to a pay Valeant a $3.75 million break fee if it opts for a superior offer.
Valeant shares fell 0.4 percent to close at C$43.35 on the Toronto Stock Exchange on Tuesday, while Paladin stock closed down 1.3 percent at C$36.26. ($1=$0.98 Canadian) (Reporting by Pav Jordan and S. John Tilak; editing by Janet Guttsman and Peter Galloway)