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                                                                   Exhibit 10.58

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                              CONNETICS CORPORATION

                           LOAN AND SECURITY AGREEMENT

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        This LOAN AND SECURITY AGREEMENT is entered into as of September 24,
1998, by and between SILICON VALLEY BANK ("Bank") and CONNETICS CORPORATION
("Borrower").

                                    RECITALS

        Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower will repay the amounts
owing to Bank.

                                    AGREEMENT

        The parties agree as follows:

        1. DEFINITIONS AND CONSTRUCTION

                1.1. Definitions. As used in this Agreement, the following terms
shall have the following definitions:

                      "Accounts" means all presently existing and hereafter 
arising accounts, contract rights, and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods (including, without
limitation, the licensing of software and other technology) or the rendering of
services by Borrower, whether or not earned by performance, and any and all
credit insurance, guaranties, and other security therefor, as well as all
merchandise returned to or reclaimed by Borrower and Borrower's Books relating
to any of the foregoing.

                      "Account Audit" means an audit of the Collateral, 
Borrower's Accounts and/or Borrower's Books prepared by Bank in accordance with
generally accepted business and accounting practices in form and substance
acceptable to Bank.

                      "Advance" or "Advances" means a Term Advance.

                      "Affiliate" means, with respect to any Person, any Person 
that owns or controls directly or indirectly such Person, any Person that
controls or is controlled by or is under common control with such Person, and
each of such Person's senior executive officers, directors, and partners.

                      "Bank Expenses" means all: reasonable costs or expenses 
(including reasonable attorneys' fees and expenses) incurred in connection with
the preparation, negotiation, administration, and enforcement of the Loan
Documents; and Bank's reasonable attorneys' fees and expenses incurred in
amending, enforcing or defending the Loan Documents (including fees and expenses
of appeal), whether or not suit is brought.

                      "Borrower's Books" means all of Borrower's books and
records including: ledgers; records concerning Borrower's assets or liabilities,
the Collateral, business operations or financial condition; and all computer
programs, or tape files, and the equipment, containing such information.

                      "Business Day" means any day that is not a Saturday,
Sunday, or other day on which banks in the State of California are authorized or
required to close.

                      "Closing Date" means the date of this Agreement.

                      "Code" means the California Uniform Commercial Code.

                      "Collateral" means the property described on Exhibit A 
attached hereto.

                      "Committed Line" means One Million Five Hundred Thousand 
Dollars ($1,500,000).


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                      "Contingent Obligation" means, as applied to any Person, 
any direct or indirect liability, contingent or otherwise, of that Person with
respect to (i) any indebtedness, lease, dividend, letter of credit or other
obligation of another, including, without limitation, any such obligation
directly or indirectly guaranteed, endorsed, co-made or discounted or sold with
recourse by that Person, or in respect of which that Person is otherwise
directly or indirectly liable; (ii) any obligations with respect to undrawn
letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; provided, however,
that the term "Contingent Obligation" shall not include endorsements for
collection or deposit in the ordinary course of business. The amount of any
Contingent Obligation shall be deemed to be an amount equal to the stated or
determined amount of the primary obligation in respect of which such Contingent
Obligation is made or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof as determined by such Person in good
faith; provided, however, that such amount shall not in any event exceed the
maximum amount of the obligations under the guarantee or other support
arrangement.

                      "Daily Balance" means the amount of the Obligations owed 
at the end of a given day.

                      "Equipment" means all present and future machinery, 
equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and
attachments in which Borrower has any interest.

                      "ERISA" means the Employment Retirement Income Security 
Act of 1974, as amended, and the regulations thereunder.

                      "GAAP" means generally accepted accounting principles as 
in effect from time to time.

                      "Indebtedness" means (a) all indebtedness for borrowed 
money or the deferred purchase price of property or services, including without
limitation reimbursement and other obligations with respect to surety bonds and
letters of credit, (b) all obligations evidenced by notes, bonds, debentures or
similar instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.

                      "Insolvency Proceeding" means any proceeding commenced by 
or against any person or entity under any provision of the United States
Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, formal or informal
moratoria, compositions, extension generally with its creditors, or proceedings
seeking reorganization, arrangement, or other relief.

                      "Inventory" means all present and future inventory in 
which Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished products
intended for sale or lease or to be furnished under a contract of service, of
every kind and description now or at any time hereafter owned by or in the
custody or possession, actual or constructive, of Borrower, including such
inventory as is temporarily out of its custody or possession or in transit and
including any returns upon any accounts or other proceeds, including insurance
proceeds, resulting from the sale or disposition of any of the foregoing and any
documents of title representing any of the above, and Borrower's Books relating
to any of the foregoing.

                      "Investment" means any beneficial ownership of (including 
stock, partnership interest or other securities) any Person, or any loan,
advance or capital contribution to any Person.

                      "IRC" means the Internal Revenue Code of 1986, as amended,
and the regulations thereunder.

                      "Lien" means any mortgage, lien, deed of trust, charge, 
pledge, security interest or other encumbrance.

                      "Liquidity" means, at any date of determination, the sum 
of Borrower's cash, cash equivalents and short term investments, less any cash
and cash equivalent balances that are held in a sinking fund for 

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the retirement of debt or capital stock or that are held in pledge for another
creditor plus one half of Borrower's net, billed, accounts receivable.

                      "Loan Documents" means, collectively, this Agreement, 
any note or notes executed by Borrower, and any other agreement entered into
between Borrower and Bank in connection with this Agreement, all as amended or
extended from time to time.

                      "Material Adverse Effect" means a material adverse effect 
on (i) the business operations or condition (financial or otherwise) of Borrower
and its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay
the Obligations or otherwise perform its obligations under the Loan Documents.

                      "Negotiable Collateral" means all of Borrower's present 
and future letters of credit of which it is a beneficiary, notes, drafts,
instruments, securities, documents of title, and chattel paper, and Borrower's
Books relating to any of the foregoing.

                      "Net Cash Losses" means, with respect to any period of 
determination, determined on a consolidated basis in accordance with GAAP for
Borrower and its consolidated Subsidiaries, the reduction in cash from
operations (excluding non-recurring charges) during the three months prior to
such date of determination is the last day of a fiscal quarter, during the
fiscal quarter then ending (or, if monthly reporting is required pursuant to
Section 6.3, during the three fiscal months ending prior to such date of
determination).

                      "Obligations" means all debt, principal, interest, Bank 
Expenses and other amounts owed to Bank by Borrower pursuant to this Agreement
or any other agreement, whether absolute or contingent, due or to become due,
now existing or hereafter arising, including any interest that accrues after the
commencement of an Insolvency Proceeding and including any debt, liability, or
obligation owing from Borrower to others that Bank may have obtained by
assignment or otherwise.

                      "Periodic Payments" means all installments or similar 
recurring payments that Borrower may now or hereafter become obligated to pay to
Bank pursuant to the terms and provisions of any instrument, or agreement now or
hereafter in existence between Borrower and Bank.

                      "Permitted Indebtedness" means:

                      (a) Indebtedness of Borrower in favor of Bank arising
under this Agreement or any other Loan Document;

                      (b) Indebtedness secured by a Lien described in Subsection
(c) of the definition of "Permitted Liens" below provided the principal amount
of such Indebtedness does not exceed the lesser of the cost or fair market value
of the Equipment financed;

                      (c) Subordinated Debt;

                      (d) Indebtedness to trade creditors incurred in the
ordinary course of business;

                      (e) other Indebtedness of Borrower, not exceeding $100,000
in the aggregate outstanding at any time;

                      (f) extensions, renewals, refundings, refinancings,
modifications, amendments and restatements of any of the items of Permitted
Indebtedness (a) through (e) above, provided that the principal amount thereof
is not increased or the terms thereof are not modified to impose more burdensome
terms upon Borrower.

                      "Permitted Investment" means:


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                      (a) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency or any
State thereof maturing within two (2) years from the date of acquisition
thereof;

                      (b) Corporate commercial paper, corporate notes and bonds,
master notes, medium term notes, bankers acceptances, certificates of deposit
and repurchase agreements which, if short-term, have a minimum credit rating of
A-1 or P-1 or, if long-term, have a minimum credit rating of A by Standard
Poor's or Moody's Investor Services; and non-diversified short duration mutual
funds with an average credit rating of at least A- and a duration not to exceed
1.5 years. Investments shall mature no more than two years from the date of
purchase by Borrower, individual investments shall not be greater than $3.0
million unless said investment is issued by the U.S. Government or its agencies
or is a repurchase agreement collateralized by same or unless said investment is
an approved money market fund;

                      (c) certificates of deposit maturing no more than one (1)
year from the date of investment therein issued by Bank;

                      (d) Extensions of credit in the nature of accounts
receivable or note receivable arising from the sale or lease of goods or
services in the ordinary course of business;

                      (e) Investments consisting of the endorsement of
negotiable instruments for deposit or collection or similar transactions in the
ordinary course of business;

                      (f) Investments (including debt obligations) received in
connection with the bankruptcy or reorganization of customers or suppliers and
in settlement of delinquent obligations of, and other disputes with, customers
or suppliers arising in the ordinary course of business;

                      (g) Investments consisting of (i) compensation of
employees, officers and directors of Borrower so long as the Board of Directors
of Borrower determines that such compensation is in the best interests of
Borrower, (ii) travel advances, employee relocation loans and other employee
loans and advances in the ordinary course of business, (iii) loans to employees,
officers or directors relating to the purchase of equity securities of Borrower,
and (iv) other loans to officers and employees approved by the Board of
Directors;

                      (h) other Investments not described above aggregating not
in excess of $100,000 at any time.

                      "Permitted Liens" means:

                      (a) any Liens existing on the Closing Date and disclosed
in Schedule 2 or arising under the terms of this Agreement;

                      (b) Liens for taxes, fees, assessments or other
governmental charges or levies, either not delinquent or being contested in good
faith by appropriate proceedings, provided the same have no priority over any of
Bank's security interests;

                      (c) Liens (i) upon or in any equipment acquired or held by
Borrower or any of its Subsidiaries to secure the purchase price of such
equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such equipment, or (ii) existing on such equipment at the time of
its acquisition, provided that the Lien is confined solely to the property so
acquired and improvements thereon, and the proceeds of such equipment;

                      (d) Liens on Equipment leased by Borrower or any
Subsidiary pursuant to an operating or capital lease in the ordinary course of
business (including proceeds thereof and accessions thereto) incurred solely for
the purpose of financing the lease of such Equipment (including Liens pursuant
to leases 


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permitted pursuant to Section 7.1 and Liens arising from UCC financing
statements regarding leases permitted by this Agreement);

                      (e) Leases or subleases and licenses and sublicenses
granted to others in the ordinary course of Borrower's business not interfering
in any material respect with the business of Borrower and its Subsidiaries taken
as a whole, and any interest or title of a lessor, licensor or under any lease
or license;

                      (f) Liens on assets (including the proceeds thereof and
accessions thereto) that existed at the time such assets were acquired by
Borrower or any Subsidiary (including Liens on assets of any corporation that
existed at the time it became or becomes a Subsidiary); provided such Liens are
not granted in contemplation of or in connection with the acquisition of such
asset by Borrower or a Subsidiary;

                      (g) Liens arising from judgments, decrees or attachments
in circumstances not constituting an Event of Default under Section 8.8;

                      (h) easements, reservations, rights-of-way, restrictions,
minor defects or irregularities in title and other similar charges or
encumbrances affecting real property not constituting a Material Adverse Effect;

                      (i) Liens in favor of customs and revenue authorities
arising as a matter of law to secure payments of customs duties in connection
with the importation of goods;

                      (j) Liens that are not prior to the Lien of Bank which
constitute rights of set-off of a customary nature or banker's Liens with
respect to amounts on deposit, whether arising by operation of law or by
contract, in connection with arrangement entered in to with banks in the
ordinary course of business; and

                      (k) earn-out and royalty obligations existing on the date
hereof or entered into in connection with an acquisition permitted by Section
7.3 that are not prior to the Lien of the Bank.

                      "Person" means any individual, sole proprietorship,
partnership, limited liability company, joint venture, trust, unincorporated
organization, association, corporation, institution, public benefit corporation,
firm, joint stock company, estate, entity or governmental agency.

                      "Prime Rate" means the variable rate of interest, per
annum, most recently announced by Bank, as its "prime rate," whether or not such
announced rate is the lowest rate available from Bank.

                      "Quick Assets" means, at any date as of which the amount
thereof shall be determined, the sum of : (i) unrestricted cash, (ii)
cash-equivalents, (iii) net, billed accounts receivable, and (iv) investments
with maturities not to exceed twelve (12) months, of Borrower determined in
accordance with GAAP.

                      "Remaining Months Liquidity" means, at the end of each
fiscal quarter, or if monthly reporting is required pursuant to Section 6.3, as
at the end of each fiscal month, the ratio of (i) Liquidity at such time to (ii)
the monthly average of Net Cash Losses.

                      "Responsible Officer" means each of the Chief Executive
Officer, the Chief Financial Officer and the Controller of Borrower.

                      "Schedule" means the schedule of exceptions attached
hereto, if any.

                      "Subordinated Debt" means any debt incurred by Borrower
that is subordinated to the debt owing by Borrower to Bank on terms acceptable
to Bank (and identified as being such by Borrower and Bank).

                      "Subsidiary" means any corporation or partnership in which
(i) any general partnership interest or (ii) more than 50% of the stock of which
by the terms thereof ordinary voting power to elect the Board of


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Directors, managers or trustees of the entity shall, at the time as of which any
determination is being made, be owned by Borrower, either directly or through an
Affiliate.

                      "Tangible Net Worth" means at any date as of which the
amount thereof shall be determined, the consolidated total assets of Borrower
and its Subsidiaries minus, without duplication, (i) the sum of any amounts
attributable to (a) goodwill, (b) intangible items such as unamortized debt
discount and expense, patents, trade and service marks and names, copyrights and
research and development expenses except prepaid expenses, and (c) all reserves
not already deducted from assets, and (ii) Total Liabilities.

                      "Term Advances" means cash advances made pursuant to
Section 2.1.

                      "Term Loan Facility" means the facility under which
Borrower may request Bank to issue cash advances, as specified in Section 2.1
hereof.

                      "Term Maturity Date" means the fifth anniversary of the
Closing Date.

                      "Total Liabilities" means, at any date as of which the
amount thereof shall be determined, all obligations that should, in accordance
with GAAP be classified as liabilities on the consolidated balance sheet of
Borrower, including in any event all Indebtedness.

                      "Unrestricted Cash Reserves" means, at any time of
determination, the sum of Borrower's (i) cash balance of deposit accounts and
investment accounts, plus (ii) market value of all readily marketable securities
beneficially owned by Borrower, minus (iii) cash value of any certificates of
deposit or securities encumbered and/or restricted by any Bank or any other
Persons.

                1.2. Accounting Terms. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP and all calculations
made hereunder shall be made in accordance with GAAP. When used herein, the
terms "financial statements" shall include the notes and schedules thereto.

        2. LOAN AND TERMS OF PAYMENT

                2.1. Term Loan.

                        (a) Subject to and upon the terms and conditions of this
Agreement, Bank will make one (1) Term Advance to Borrower in an aggregate
amount not to exceed One Million Five Hundred Thousand Dollars ($1,500,000). The
Term Advance shall be used for general corporate purposes (including the
purchase of Equipment). Bank will credit the amount of the Term Advance to
Borrower's deposit account with Bank.

                        (b) Interest shall accrue on the Term Advance from the
date of such Advance at the rate specified in Section 2.3(a), and shall be
payable monthly on the twenty-third calendar day of each month through September
23, 1999. The aggregate Term Advances outstanding on September 23, 1999 shall be
repaid in forty eight (48) equal monthly installments of principal, plus accrued
interest, beginning October 23, 1999, and continuing on the twenty-third
calendar day of each month thereafter through the Term Maturity Date. All
outstanding obligations under this Agreement, including, but not limited to, any
accrued and unpaid interest and other unpaid charges or principal balances,
shall be payable on the Term Maturity Date.

                2.2. Interest Rate Protection. Subject to the terms and
condition of this Agreement, Borrower may prepay the Term Advances, in whole or
in part, only upon payment in full of (i) all accrued but unpaid interest and
all outstanding obligations hereunder (or, if partial prepayment, an applicable
or proportionate amount of such obligations), and (ii), if Borrower has elected
the fixed rate option set forth in Section 2.3(a), a fee as shall be determined
by Bank in its reasonable discretion to provide for interest rate protection in
the event the then current Treasury Bill rate is different from the fixed
interest rate set forth in Section 2.3(a).



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                2.3. Interest Rates, Payments, and Calculations.

                        (a) Interest Rate. Except as set forth in Section
2.3(b), prior to the first anniversary of the Closing Date the Term Advances
shall bear interest, on the average daily balance thereof, at a rate equal to
one and one-quarter (1.25) percentage points above the Prime Rate. Term Advances
outstanding after such date shall bear interest, at Borrower's option, either
(i) at a floating rate equal to the Prime Rate plus one and one-quarter percent
(1.25%) or (ii) at a fixed rate equal to four and one half (4.5) percentage
points above the yield of the 48 month Treasury Bill as reported in the Western
edition of The Wall Street Journal, which rate shall be fixed at the time of
Borrower's election. Borrower shall give written notice to Bank of its interest
rate election two (2) Business Days prior to such first anniversary. If Borrower
fails to give such notice, then the applicable rate shall be based on the 48
month Treasury Bill fixed rate described herein.

                        (b) Default Rate. All Obligations shall bear interest,
from and after the occurrence and during the continuance of an Event of Default,
at a rate equal to five (5) percentage points above the interest rate applicable
immediately prior to the occurrence of the Event of Default. If the Event of
Default is cured, the interest rate shall revert to the previously applicable
interest rate.

                        (c) Payments. Bank shall, at its option, charge such
interest and all Periodic Payments against any of Borrower's deposit accounts,
including Account Number 501733570 or against the Committed Line, in which case
those amounts shall thereafter accrue interest at the rate then applicable
hereunder. Any interest not paid when due shall be compounded by becoming a part
of the Obligations, and such interest shall thereafter accrue interest at the
rate then applicable hereunder. Bank Expenses will be billed to Borrower on an
invoice due within thirty (30) days.

                        (d) Computation. In the event the Prime Rate is changed
from time to time hereafter, the applicable rate of interest hereunder shall be
increased or decreased effective on the day the Prime Rate is changed, by an
amount equal to such change in the Prime Rate. All interest chargeable under the
Loan Documents shall be computed on the basis of a three hundred sixty (360) day
year for the actual number of days elapsed.

                2.4. Crediting Payments. Prior to the occurrence of an Event of
Default, Bank shall credit a wire transfer of funds, check or other item of
payment to such deposit account or Obligation as Borrower specifies. After the
occurrence of an Event of Default, the receipt by Bank of any wire transfer of
funds, check, or other item of payment shall be immediately applied to
conditionally reduce Obligations, but shall not be considered a payment on
account unless such payment is of immediately available federal funds or unless
and until such check or other item of payment is honored when presented for
payment. Notwithstanding anything to the contrary contained herein, any wire
transfer or payment received by Bank after 12:00 noon California time shall be
deemed to have been received by Bank as of the opening of business on the
immediately following Business Day. Whenever any payment to Bank under the Loan
Documents would otherwise be due (except by reason of acceleration) on a date
that is not a Business Day, such payment shall instead be due on the next
Business Day, and additional fees or interest, as the case may be, shall accrue
and be payable for the period of such extension.

                2.5. Fees. Borrower shall pay to Bank the following:

                        (a) Facility Fee. A Facility Fee equal to Fifteen
Thousand Dollars ($15,000), which fee shall be due on the Closing Date and shall
be fully earned and nonrefundable;

                        (b) Financial Examination and Appraisal Fees. Bank's
customary fees and out-of-pocket expenses for Bank's audits of Borrower's
Accounts, and for each appraisal of Collateral and financial analysis and
examination of Borrower performed from time to time by Bank or its agents, which
shall be performed not more than two times per year, except upon the occurrence
and continuance of an Event of Default;

                        (c) Bank Expenses. Upon the date hereof, all Bank
Expenses incurred through the Closing Date, including reasonable attorneys' fees
and expenses, and, after the date hereof, all Bank Expenses, including
reasonable attorneys' fees and expenses, as and when they become due.


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                2.6. Additional Costs. In case any change in any law,
regulation, treaty or official directive or the interpretation or application
thereof by any court or any governmental authority charged with the
administration thereof or the compliance with any guideline or request of any
central bank or other governmental authority (whether or not having the force of
law), in each case after the date of this Agreement:

                        (a) subjects Bank to any tax with respect to payments of
principal or interest or any other amounts payable hereunder by Borrower or
otherwise with respect to the transactions contemplated hereby (except for taxes
on the overall net income of Bank imposed by the United States of America or any
political subdivision thereof);

                        (b) imposes, modifies or deems applicable any deposit
insurance, reserve, special deposit or similar requirement against assets held
by, or deposits in or for the account of, or loans by, Bank; or

                        (c) imposes upon Bank any other condition with respect
to its performance under this Agreement,

and the result of any of the foregoing is to increase the cost to Bank, reduce
the income receivable by Bank or impose any expense upon Bank with respect to
any loans, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank
the amount of such increase in cost, reduction in income or additional expense
as and when such cost, reduction or expense is incurred or determined, upon
presentation by Bank of a statement of the amount and setting forth Bank's
calculation thereof, all in reasonable detail, which statement shall be deemed
true and correct absent manifest error; provided, however, that Borrower shall
not be liable for any such amount attributable to any period prior to the date
of hundred eight (180) days prior to the date of such certificate.

                2.7. Term. This Agreement shall become effective on the Closing
Date and, subject to Section 12.7, shall continue in full force and effect for a
term ending on the Term Maturity Date. Notwithstanding the foregoing, Bank shall
have the right to terminate its obligation to make Advances under this Agreement
immediately and without notice upon the occurrence and during the continuance of
an Event of Default. Notwithstanding termination, Bank's Lien on the Collateral
shall remain in effect for so long as any Obligations are outstanding.

        3. CONDITIONS OF LOANS

                3.1. Conditions Precedent to Initial Advance. The obligation of
Bank to make the initial Advance is subject to the condition precedent that Bank
shall have received, in form and substance satisfactory to Bank, the following:

                        (a) this Agreement;

                        (b) a certificate of the Secretary of Borrower with
respect to incumbency and resolutions authorizing the execution and delivery of
this Agreement;

                        (c) financing statement (Form UCC-1);

                        (d) insurance certificate;

                        (e) payment of the fees and Bank Expenses then due
specified in Section 2.5 hereof; and

                        (f) such other documents, and completion of such other
matters, as Bank may reasonably deem necessary or appropriate.

                3.2. Conditions Precedent to all Advances. The obligation of
Bank to make each Advance, including the initial Advance, is further subject to
the following conditions:


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                        (a) timely receipt by Bank of the Payment/Advance Form
as provided in Section 2.1; and

                        (b) the representations and warranties contained in
Section 5 shall be true and correct in all material respects on and as of the
date of such Payment/Advance Form and on the effective date of each Advance as
though made at and as of each such date, and no Event of Default shall have
occurred and be continuing, or would result from such Advance. Except as
otherwise disclosed to Bank in writing, and approved by Bank, the making of each
Advance shall be deemed to be a representation and warranty by Borrower on the
date of such Advance as to the accuracy of the facts referred to in this Section
3.2(b).

        4. CREATION OF SECURITY INTEREST

                4.1. Grant of Security Interest. Borrower grants and pledges to
Bank a continuing security interest in all presently existing and hereafter
acquired or arising Collateral in order to secure prompt repayment of any and
all Obligations and in order to secure prompt performance by Borrower of each of
its covenants and duties under the Loan Documents. Except as set forth in the
Schedule of Exceptions and for Permitted Liens, such security interest
constitutes a valid, first priority security interest in the presently existing
Collateral, and will constitute a valid, first priority security interest in
Collateral acquired after the date hereof, subject to Permitted Liens.

                4.2. Delivery of Additional Documentation Required. Borrower
shall from time to time execute and deliver to Bank, at the request of Bank, all
Negotiable Collateral, all financing statements and other documents that Bank
may reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.

                4.3. Right to Inspect. Bank (through any of its officers,
employees, or agents) shall have the right, at its own expense (except during
the continuance of an Event of Default), upon reasonable prior notice, from time
to time during Borrower's usual business hours, to inspect Borrower's Books and
to make copies thereof and to check, test, and appraise the Collateral in order
to verify Borrower's financial condition or the amount, condition of, or any
other matter relating to, the Collateral.

                4.4. Requirement for Cash Collateral. Upon Borrower's failure to
comply with the financial covenants in Sections 6.8, 6.9 and 6.10 Borrower shall
pledge cash in the form of a certificate of deposit at Bank, on terms reasonably
acceptable to Bank, in an amount equal to one hundred percent (100%) of the
outstanding loan balances, at which time Borrower shall be deemed to have cured
the default under Sections 6.8, 6.9 or 6.10. Notwithstanding the foregoing, Bank
shall have no obligation to release the cash pledged pursuant to this Section
4.4 unless and until Borrower achieves compliance with all the terms of the Loan
Documents, cures any Events of Default and complies with the financial covenants
set forth in Sections 6.8, 6.9 and 6.10.

        5. REPRESENTATIONS AND WARRANTIES

           Borrower represents and warrants as follows:

                5.1. Due Organization and Qualification. Borrower and each
Subsidiary is a corporation duly existing and in good standing under the laws of
its state of incorporation and qualified and licensed to do business in, and is
in good standing in, any state in which the conduct of its business or its
ownership of property requires that it be so qualified.

                5.2. Due Authorization; No Conflict. The execution, delivery,
and performance of the Loan Documents are within Borrower's powers, have been
duly authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Articles of Incorporation or Bylaws, nor will
they constitute an event of default under any material agreement to which
Borrower is a party or by which Borrower is bound. Borrower is not in default
under any agreement to which it is a party or by which it is bound, which
default could have a Material Adverse Effect.


                                       9

<PAGE>   11

                5.3. No Prior Encumbrances. Borrower has good and indefeasible
title to the Collateral, free and clear of Liens, except for Permitted Liens.

                5.4. Merchantable Inventory. All Inventory is in all material
respects of good and marketable quality, free from all material defects.

                5.5. Name; Location of Chief Executive Office. Except as
disclosed in the Schedule, Borrower has not done business under any name other
than that specified on the signature page hereof. The chief executive office of
Borrower is located at the address indicated in Section 10 hereof.

                5.6. Litigation. Except as set forth in the Schedule, there are
no actions or proceedings pending by or against Borrower or any Subsidiary
before any court or administrative agency in which an adverse decision is
reasonably likely to have a Material Adverse Effect or a material adverse effect
on Borrower's interest or Bank's security interest in the Collateral. Borrower
does not have knowledge of any such pending or threatened actions or
proceedings.

                5.7. No Material Adverse Change in Financial Statements. All
consolidated financial statements related to Borrower and any Subsidiary that
have been delivered by Borrower to Bank fairly present in all material respects
Borrower's consolidated financial condition as of the date thereof and
Borrower's consolidated results of operations for the period then ended. There
has not been a material adverse change in the consolidated financial condition
of Borrower since the date of the most recent of such financial statements
submitted to Bank.

                5.8. Solvency. The fair saleable value of Borrower's assets
(including goodwill minus disposition costs) exceeds the fair value of its
liabilities; Borrower is not left with unreasonably small capital after the
transactions contemplated by this Agreement; and Borrower is solvent and able to
pay its debts (including trade debts) as they mature.

                5.9. Regulatory Compliance. Borrower and each Subsidiary has met
the minimum funding requirements of ERISA with respect to any employee benefit
plans subject to ERISA. No event has occurred resulting from Borrower's failure
to comply with ERISA that is reasonably likely to result in Borrower's incurring
any liability that could have a Material Adverse Effect. Borrower is not an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940. Borrower is not engaged
principally, or as one of the important activities, in the business of extending
credit for the purpose of purchasing or carrying margin stock (within the
meaning of Regulations G, T and U of the Board of Governors of the Federal
Reserve System). Borrower has complied with all the provisions of the Federal
Fair Labor Standards Act. Borrower has not violated any statutes, laws,
ordinances or rules applicable to it, violation of which could have a Material
Adverse Effect.

                5.10. Environmental Condition. None of Borrower's or any
Subsidiary's properties or assets has ever been used by Borrower or any
Subsidiary or, to the best of Borrower's knowledge, by previous owners or
operators, in the disposal of, or to produce, store, handle, treat, release, or
transport, any hazardous waste or hazardous substance other than in accordance
with applicable law; to the best of Borrower's knowledge, none of Borrower's
properties or assets has ever been designated or identified in any manner
pursuant to any environmental protection statute as a hazardous waste or
hazardous substance disposal site, or a candidate for closure pursuant to any
environmental protection statute; no lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned by Borrower or any Subsidiary; and neither Borrower nor any
Subsidiary has received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal, state or other
governmental agency concerning any action or omission by Borrower or any
Subsidiary resulting in the releasing, or otherwise disposing of hazardous waste
or hazardous substances into the environment.

                5.11. Taxes. Borrower and each Subsidiary has filed or caused to
be filed all tax returns required to be filed, and has paid, or has made
adequate provision for the payment of, all taxes reflected therein.


                                       10

<PAGE>   12

                5.12. Subsidiaries. Borrower does not own any stock, partnership
interest or other equity securities of any Person, except for Permitted
Investments, and except for those equity interests disclosed in any schedule
attached to this Agreement.

                5.13. Government Consents. Borrower and each Subsidiary has
obtained all consents, approvals and authorizations of, made all declarations or
filings with, and given all notices to, all governmental authorities that are
necessary for the continued operation of Borrower's business as currently
conducted.

                5.14. Full Disclosure. No representation, warranty or other
statement made by Borrower in any certificate or written statement furnished to
Bank contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained in such
certificates or statements not misleading.

        6. AFFIRMATIVE COVENANTS

                Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to make
an Advance hereunder, Borrower shall do all of the following:

                6.1. Good Standing. Borrower shall maintain its and each of its
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could have a Material Adverse Effect. Borrower shall
maintain, and shall cause each of its Subsidiaries to maintain, to the extent
consistent with prudent management of Borrower's business, in force all
licenses, approvals and agreements, the loss of which is reasonably likely to
have a Material Adverse Effect.

                6.2. Government Compliance.

                        (a) ERISA. Borrower shall meet, and shall cause each
Subsidiary to meet, the minimum funding requirements of ERISA with respect to
any employee benefit plans subject to ERISA.

                        (b) FDA. To the extent required by law, Borrower shall
cause its, and each of its Subsidiaries', manufacturing and quality control to
conform in all material respects to FDA Good Manufacturing Practices ("GMP")
regulations and such other regulations applicable to Borrower and its
Subsidiaries with respect to advertising, labeling and reporting, product
testing, design, safety and labeling of products except where the failure to so
conform is not reasonably likely to have a Material Adverse Effect. To the
extent necessary to the conduct of its and its Subsidiaries' business, Borrower
shall register, and shall cause each of its Subsidiaries to register, with the
Food and Drug Branch of the California Department of Health Services and the
FDA, and Borrower shall register its, and shall cause each of its Subsidiaries
to register their, manufacturing facilities in accordance with GMP regulations.

                        (c) Statutory Compliance. Borrower shall comply, and
shall cause each Subsidiary to comply, with all statutes, laws, ordinances and
government rules and regulations to which it is subject, noncompliance with
which is reasonably likely to have a Material Adverse Effect, including without
limitation, compliance in all material respects with the Federal Food, Drug, and
Cosmetics Act, the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, and all other applicable
federal, state and local laws, orders and regulations.

                        (d) Adverse Information. Borrower shall immediately
notify Bank upon receipt of any information that indicates that (a) the FDA has
denied, or has stated that it is likely to deny, any of Borrower's, or its
Subsidiaries', Investigational New Drug Applications or New Product Application,
(b) Borrower or a Subsidiary has elected not to proceed with clinical trials for
any of Borrower's or Subsidiary's products for which Borrower or any Subsidiary
has filed an Investigational New Drug Application with the FDA, or (c) the FDA
or other governmental agency has advised Borrower that it found material
deficiencies in Borrower's or a Subsidiary's compliance with applicable
regulations.



                                       11

<PAGE>   13

                6.3. Financial Statements, Reports, Certificates. Borrower shall
deliver to Bank: (a) as soon as available, but in any event within thirty (30)
days after the end of each month (or after the end of each fiscal quarter when
Borrower is in compliance with Section 6.11), a company prepared consolidated
balance sheet and income statement covering Borrower's consolidated operations
during such period, certified by a Responsible Officer; (b) as soon as
available, but in any event within ninety (90) days after the end of Borrower's
fiscal year, audited consolidated financial statements of Borrower prepared in
accordance with GAAP, consistently applied, together with an unqualified opinion
on such financial statements of an independent certified public accounting firm
reasonably acceptable to Bank; (c) within five (5) days upon becoming available,
copies of all statements, reports and notices sent or made available generally
by Borrower to its security holders or to any holders of Subordinated Debt and
all reports on Form 10-K and 10-Q filed with the Securities and Exchange
Commission; (d) promptly upon receipt of notice thereof, a report of any legal
actions pending or threatened against Borrower or any Subsidiary that could
result in damages or costs to Borrower or any Subsidiary of One Hundred Thousand
Dollars ($100,000) or more; and (e) such budgets, sales projections, operating
plans or other financial information as Bank may reasonably request from time to
time.

        Borrower shall deliver to Bank with the monthly financial statements (
or with the Form 10-Q and 10-K, when monthly financial statements are not
required) a Compliance Certificate signed by a Responsible Officer in
substantially the form of Exhibit C hereto.

        Bank shall have a right from time to time hereafter to audit Borrower's
Accounts at Borrower's expense, provided that such audits will be conducted no
more often than every six (6) months unless an Event of Default has occurred and
is continuing.

                6.4. Inventory; Returns. Borrower shall keep all Inventory in
good and marketable condition, free from all material defects. Returns and
allowances, if any, as between Borrower and its account debtors shall be on the
same basis and in accordance with the usual customary practices of Borrower, as
they exist at the time of the execution and delivery of this Agreement. Borrower
shall promptly notify Bank of all returns and recoveries and of all disputes and
claims, where the return, recovery, dispute or claim involves more than Fifty
Thousand Dollars ($50,000).

                6.5. Taxes. Borrower shall make, and shall cause each Subsidiary
to make, due and timely payment or deposit of all material federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Bank, on demand, appropriate certificates attesting to
the payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not limited
to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state, and federal income taxes, and will, upon request, furnish Bank with proof
satisfactory to Bank indicating that Borrower or a Subsidiary has made such
payments or deposits; provided that Borrower or a Subsidiary need not make any
payment if the amount or validity of such payment is contested in good faith by
appropriate proceedings and is reserved against (to the extent required by GAAP)
by Borrower.

                6.6. Insurance.

                        (a) Borrower, at its expense, shall keep the Collateral
insured against loss or damage by fire, theft, explosion, sprinklers, and all
other hazards and risks, and in such amounts, as ordinarily insured against by
other owners in similar businesses conducted in the locations where Borrower's
business is conducted on the date hereof. Borrower shall also maintain insurance
relating to Borrower's ownership and use of the Collateral in amounts and of a
type that are customary to businesses similar to Borrower's.

                        (b) All such policies of insurance shall be in such
form, with such companies, and in such amounts as reasonably satisfactory to
Bank. All such policies of property insurance shall contain a lender's loss
payable endorsement, in a form satisfactory to Bank, showing Bank as an
additional loss payee thereof and all liability insurance policies shall show
the Bank as an additional insured, and shall specify that the insurer must give
at least twenty (20) days notice to Bank before canceling its policy for any
reason. Upon Bank's request, Borrower 


                                       12

<PAGE>   14

shall deliver to Bank certified copies of such policies of insurance and
evidence of the payments of all premiums therefor. All proceeds payable under
any such policy shall, at the option of Bank, be payable to Bank to be applied
on account of the Obligations.

                6.7. Principal Depository. Borrower shall maintain its principal
depository and operating accounts with Bank.

                6.8. Debt-Tangible/Net Worth Ratio. Borrower shall maintain, as
of the last day of each calendar month, a ratio of Total Liabilities less
Subordinated Debt to Tangible Net Worth plus Subordinated Debt of not more than
1.45 to 1.00.

                6.9. Tangible Net Worth. Borrower shall maintain, as of the last
day of each calendar month, a Tangible Net Worth plus Subordinated Debt of not
less than Three Million Dollars ($3,000,000).

                6.10. Minimum Liquidity. Borrower shall maintain, as of the last
day of each calendar month, a minimum Liquidity of (a) two (2) times the amount
of the outstanding Term Advance and (b) six months Remaining Months Liquidity.

                6.11. Quarterly Compliance. If at any time and during such time
as Borrower's Liquidity is greater than nine (9) months Remaining Months
Liquidity and Borrower's Liquidity is greater than two and one half (2.5) times
the amount of the outstanding Term Advance for two (2) consecutive quarters,
Borrower shall comply with Sections 6.8, 6.9, and 6.10 as of the last day of
each fiscal quarter, rather than the last day of each calendar month.

                6.12. Further Assurances. At any time and from time to time
Borrower shall execute and deliver such further instruments and take such
further action as may reasonably be requested by Bank to effect the purposes of
this Agreement.

        7. NEGATIVE COVENANTS

               Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until payment in full of the outstanding
Obligations or for so long as Bank may have any commitment to make any Advances,
Borrower will not do any of the following without consent of the Bank, which is
not to be unreasonably withheld:

                7.1. Dispositions. Convey, sell, lease, transfer or otherwise
dispose of (collectively, a "Transfer"), or permit any of its Subsidiaries to
Transfer, all or any part of its business or property, other than: (i) Transfers
of Inventory in the ordinary course of business; (ii) Transfers of non-exclusive
licenses and exclusive licenses with geographic or other limitations granted in
the ordinary course of business and similar arrangements for the use of the
property of Borrower or its Subsidiaries; (iii) Transfers of worn-out or
obsolete Equipment, provided that in each such case an Event of Default does not
exist before or after giving effect to such Transfer.

                7.2. Change in Business. Engage in any business, or permit any
of its Subsidiaries to engage in any business, other than the businesses
currently engaged in by Borrower and any business substantially similar or
related thereto (or incidental thereto). Borrower will not, without thirty (30)
days prior written notification to Bank, relocate its chief executive office.

                7.3. Mergers or Acquisitions. Merge or consolidate, or permit
any of its Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person.

                7.4. Indebtedness. Create, incur, assume or be or remain liable
with respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.



                                       13

<PAGE>   15

                7.5. Encumbrances. Create, incur, assume or suffer to exist any
Lien with respect to any of its property, or assign or otherwise convey any
right to receive income, including the sale of any Accounts, or permit any of
its Subsidiaries so to do, except for Permitted Liens.

                7.6. Distributions. Pay any dividends or make any other
distribution or payment on account of or in redemption, retirement or purchase
of any capital stock, other than payments made for the repurchase of stock
effected in connection with the termination of an employee, officer or director,
provided an Event of Default does not exist prior to the making of such
payments, and would not exist after giving effect to such payments.

                7.7. Investments. Directly or indirectly acquire, or make any
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments.

                7.8. Transactions with Affiliates. Directly or indirectly enter
into or permit to exist any material transaction with any Affiliate of Borrower
except for transactions that are in the ordinary course of Borrower's business,
upon fair and reasonable terms that are no less favorable to Borrower than would
be obtained in an arm's length transaction with a non-affiliated Person.

                7.9. Subordinated Debt. Make any payment in respect of any
Subordinated Debt, or permit any of its Subsidiaries to make any such payment,
except in compliance with the terms of such Subordinated Debt, or amend any
provision contained in any documentation relating to the Subordinated Debt
without Bank's prior written consent.

                7.10. Inventory. Store the Inventory with a bailee,
warehouseman, or similar party unless Bank has received a pledge of the
warehouse receipt covering such Inventory. Except for Inventory sold in the
ordinary course of business and except for such other locations as Bank may
approve in writing and described on Schedule 3, as amended from time to time,
Borrower shall keep the Inventory only at the location set forth in Section 10
hereof and such other locations of which Borrower gives Bank prior written
notice and as to which Borrower signs and files a financing statement where
needed to perfect Bank's security interest.

                7.11. Compliance. Become an "investment company" or become
"controlled" by an "investment company," within the meaning of the Investment
Company Act of 1940, or become principally engaged in, or undertake as one of
its important activities, the business of extending credit for the purpose of
purchasing or carrying margin stock, or use the proceeds of any Advance for such
purpose. Fail to meet the minimum funding requirements of ERISA, permit a
Reportable Event or Prohibited Transaction, as defined in ERISA, to occur, fail
to comply with the Federal Fair Labor Standards Act or violate any law or
regulation, which violation could have a Material Adverse Effect or a material
adverse effect on the Collateral or the priority of Bank's Lien on the
Collateral, or permit any of its Subsidiaries to do any of the foregoing.

        8. EVENTS OF DEFAULT

                Any one or more of the following events shall constitute an
Event of Default by Borrower under this Agreement:

                8.1. Payment Default. If Borrower fails to pay the principal of,
or any interest on, any Advances when due and payable; or fails to pay any
portion of any other Obligations not constituting such principal or interest;

                8.2. Covenant Default. If Borrower fails to perform any
obligation under Sections 6.7, 6.8, 6.9, 6.10 or 6.11 or violates any of the
covenants contained in Article 7 of this Agreement, or fails or neglects to
perform, keep, or observe any other material term, provision, condition,
covenant, or agreement contained in this Agreement, in any of the Loan
Documents, or in any other present or future agreement between Borrower and Bank
and as to any default under such other term, provision, condition, covenant or
agreement that can be cured, has failed to cure such default within ten (10)
days after Borrower receives notice thereof or any officer of Borrower becomes
aware thereof; provided, however, that if the default cannot by its nature be
cured within the ten (10) day period or 

                                       14


<PAGE>   16

cannot after diligent attempts by Borrower be cured within such ten (10) day
period, and such default is likely to be cured within a reasonable time, then
Borrower shall have an additional reasonable period (which shall not in any case
exceed thirty (30) days) to attempt to cure such default, and within such
reasonable time period the failure to have cured such default shall not be
deemed an Event of Default;

                8.3. Material Adverse Change. If there occurs a material adverse
change in Borrower's business or financial condition, or if there is a material
impairment of the prospect of repayment of any portion of the Obligations or a
material impairment of the value or priority of Bank's security interests in the
Collateral;

                8.4. Attachment. If any material portion of Borrower's assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within twenty (20) days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within twenty (20)
days after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower;

                8.5. Insolvency. If Borrower becomes insolvent, or if an
Insolvency Proceeding is commenced by Borrower, or if an Insolvency Proceeding
is commenced against Borrower and is not dismissed or stayed within forty-five
(45) days (provided that no Advances will be made prior to the dismissal of such
Insolvency Proceeding);

                8.6. Other Agreements. If there is a default in any agreement to
which Borrower is a party with a third party or parties resulting in the
exercise by such third party or parties, of a right to accelerate the maturity
of any Indebtedness in an amount in excess of One Hundred Thousand Dollars
($100,000) or that is reasonably likely to have a Material Adverse Effect;

                8.7. Subordinated Debt. If Borrower makes any payment on account
of Subordinated Debt, except to the extent such payment is allowed under any
subordination agreement entered into with Bank;

                8.8. Judgments. If a judgment or judgments for the payment of
money in an amount, individually or in the aggregate, of at least One Hundred
Thousand Dollars ($100,000) shall be rendered against Borrower and shall remain
unsatisfied and unstayed for a period of thirty (30) days;

                8.9. FDA Determinations. If the FDA takes one or more of the
following actions with respect to all or substantially all of Borrower's or a
Subsidiary's products: (a) withdraws Investigational New Drug status for any
such product that is undergoing clinical trials as the result of a determination
by the FDA that such product exposes subjects or patients to an unacceptable
health risk; (b) suspends clinical trials of any such product as the result of a
determination that such product is not reasonably likely to be demonstrated to
be safe and efficacious; (c) withdraws product approval of any such product as
the result of any failure to comply with regulatory standards; or (d) determines
that such products are not safe or efficacious; or

                8.10. Change of Control. If any "person" or "group" (within the
meaning of Section 13(d) and 14(d)(2) of the Securities Exchange Act of 1934)
becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934), directly or indirectly, of a sufficient number of shares
of all classes of stock then outstanding of Borrower ordinarily entitled to vote
in the election of directors, empowering such "person" or "group" to elect a
majority of the Board of Directors of Borrower.

                8.11. Misrepresentations. If, as of the date such representation
or warranty was made or such certificate delivered, any material
misrepresentation or material misstatement exists now or hereafter in any
warranty 

                                       15


<PAGE>   17

or representation set forth herein or in any certificate delivered to Bank by
any Responsible Officer pursuant to this Agreement or to induce Bank to enter
into this Agreement or any other Loan Document.

        9. BANK'S RIGHTS AND REMEDIES

                9.1. Rights and Remedies. Upon the occurrence and during the
continuance of an Event of Default, Bank may, at its election, without notice of
its election and without demand, do any one or more of the following, all of
which are authorized by Borrower:

                        (a) Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise, immediately due and
payable (provided that upon the occurrence of an Event of Default described in
Section 8.5 all Obligations shall become immediately due and payable without any
action by Bank);

                        (b) Cease advancing money or extending credit to or for
the benefit of Borrower under this Agreement or under any other agreement
between Borrower and Bank;

                        (c) Settle or adjust disputes and claims directly with
account debtors for amounts, upon terms and in whatever order that Bank
reasonably considers advisable;

                        (d) Make such payments and do such acts as Bank
considers necessary or reasonable to protect its security interest in the
Collateral. Borrower agrees to assemble the Collateral if Bank so requires, and
to make the Collateral available to Bank as Bank may designate. Borrower
authorizes Bank to enter the premises where the Collateral is located, to take
and maintain possession of the Collateral, or any part of it, and to pay,
purchase, contest, or compromise any encumbrance, charge, or lien which in
Bank's determination appears to be prior or superior to its security interest
and to pay all expenses incurred in connection therewith. With respect to any of
Borrower's owned premises, Borrower hereby grants Bank a license to enter into
possession of such premises and to occupy the same, without charge, in order to
exercise any of Bank's rights or remedies provided herein, at law, in equity, or
otherwise;

                        (e) Apply to the Obligations any and all (i) balances
and deposits of Borrower held by Bank, or (ii) indebtedness at any time owing to
or for the credit or the account of Borrower held by Bank;

                        (f) Ship, reclaim, recover, store, finish, maintain,
repair, prepare for sale, advertise for sale, and sell (in the manner provided
for herein) the Collateral. Bank is hereby granted a license or other right,
solely pursuant to the provisions of this Section 9.1, to use, without charge,
Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and, in
connection with Bank's exercise of its rights under this Section 9.1, Borrower's
rights under all licenses and all franchise agreements shall inure to Bank's
benefit, except to the extent that such license would result in a breach of such
agreement;

                        (g) Sell the Collateral at either a public or private
sale, or both, by way of one or more contracts or transactions, for cash or on
terms, in such manner and at such places (including Borrower's premises) as Bank
determines is commercially reasonable, and apply any proceeds to the Obligations
in whatever manner or order Bank deems appropriate;

                        (h) Bank may credit bid and purchase at any public sale;
and

                        (i) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower.

                9.2. Power of Attorney. Effective only upon the occurrence and
during the continuance of an Event of Default, Borrower hereby irrevocably
appoints Bank (and any of Bank's designated officers, or employees) 

                                       16


<PAGE>   18

as Borrower's true and lawful attorney to: (a) send requests for verification of
Accounts or notify account debtors of Bank's security interest in the Accounts;
(b) endorse Borrower's name on any checks or other forms of payment or security
that may come into Bank's possession; (c) sign Borrower's name on any invoice or
bill of lading relating to any Account, drafts against account debtors,
schedules and assignments of Accounts, verifications of Accounts, and notices to
account debtors; (d) make, settle, and adjust all claims under and decisions
with respect to Borrower's policies of insurance; (e) settle and adjust disputes
and claims respecting the accounts directly with account debtors, for amounts
and upon terms which Bank determines to be reasonable; and (f) dispose of the
Collateral; provided Bank may exercise such power of attorney to sign the name
of Borrower on any of the documents described in Section 4.2 regardless of
whether an Event of Default has occurred. The appointment of Bank as Borrower's
attorney in fact, and each and every one of Bank's rights and powers, being
coupled with an interest, is irrevocable until all of the Obligations have been
fully repaid and performed and Bank's obligation to provide advances hereunder
is terminated. 

                9.3. Accounts Collection. At any time when an Event of Default
has occurred and is continuing, Bank may notify any Person owing funds to
Borrower of Bank's security interest in such funds and verify the amount of such
Account. Borrower shall collect all amounts owing to Borrower for Bank, receive
in trust all payments as Bank's trustee, and immediately deliver such payments
to Bank in their original form as received from the account debtor, with proper
endorsements for deposit.

                9.4. Bank Expenses. If Borrower fails to pay any amounts or
furnish any required proof of payment due to third persons or entities, as
required under the terms of this Agreement, then Bank may do any or all of the
following: (a) make payment of the same or any part thereof; (b) set up such
reserves under the Revolving Facility as Bank deems necessary to protect Bank
from the exposure created by such failure; or (c) obtain and maintain insurance
policies of the type discussed in Section 6.6 of this Agreement, and take any
action with respect to such policies as Bank deems prudent. Any amounts so paid
or deposited by Bank shall constitute Bank Expenses, shall be immediately due
and payable, and shall bear interest at the then applicable rate hereinabove
provided, and shall be secured by the Collateral. Any payments made by Bank
shall not constitute an agreement by Bank to make similar payments in the future
or a waiver by Bank of any Event of Default under this Agreement.

                9.5. Bank's Liability for Collateral. So long as Bank complies
with reasonable banking practices, Bank shall not in any way or manner be liable
or responsible for: (a) the safekeeping of the Collateral; (b) any loss or
damage thereto occurring or arising in any manner or fashion from any cause; (c)
any diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of
loss, damage or destruction of the Collateral shall be borne by Borrower.

                9.6. Remedies Cumulative. Bank's rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Bank shall have all other rights and remedies not inconsistent herewith as
provided under the Code, by law, or in equity. No exercise by Bank of one right
or remedy shall be deemed an election, and no waiver by Bank of any Event of
Default on Borrower's part shall be deemed a continuing waiver. No delay by Bank
shall constitute a waiver, election, or acquiescence by it. No waiver by Bank
shall be effective unless made in a written document signed on behalf of Bank
and then shall be effective only in the specific instance and for the specific
purpose for which it was given.

                9.7. Demand; Protest. Borrower waives demand, protest, notice of
protest, notice of default or dishonor, notice of payment and nonpayment, notice
of any default, nonpayment at maturity, release, compromise, settlement,
extension, or renewal of accounts, documents, instruments, chattel paper, and
guarantees at any time held by Bank on which Borrower may in any way be liable.

        10. NOTICES

               Unless otherwise provided in this Agreement, all notices or
demands by any party relating to this Agreement or any other agreement entered
into in connection herewith shall be in writing and (except for financial
statements and other informational documents which may be sent by first-class
mail, postage prepaid) shall be 

                                       17

<PAGE>   19

personally delivered or sent by a recognized overnight delivery service,
certified mail, postage prepaid, return receipt requested, or by telefacsimile
to Borrower or to Bank, as the case may be, at its addresses set forth below:

        If to Borrower:      Connetics Corporation
                             3400 West Bayshore Road
                             Palo Alto, CA  94303
                             Attn:  Chief Financial Officer
                             FAX:  (650) 843-2899

        If to Bank:          Silicon Valley Bank
                             1731 Embarcadero Road, Suite 220
                             Palo Alto, CA  94303
                             Attn:  Mr. Cliff White
                             FAX:  (650) 812-0640

        The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.

        11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER

               This Agreement shall be governed by, and construed in accordance
with, the internal laws of the State of California, without regard to principles
of conflicts of law. Each of Borrower and Bank hereby submits to the exclusive
jurisdiction of the state and Federal courts located in the County of Santa
Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE
RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT
OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN,
INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER
COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE
FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER
WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.

        12. GENERAL PROVISIONS

                12.1. Successors and Assigns. This Agreement shall bind and
inure to the benefit of the respective successors and permitted assigns of each
of the parties; provided, however, that except as provided in Section 7.3,
neither this Agreement nor any rights hereunder may be assigned by Borrower
without Bank's prior written consent, which consent may be granted or withheld
in Bank's sole discretion. Bank shall have the right without the consent of or
notice to Borrower to sell, transfer, negotiate, or grant participation in all
or any part of, or any interest in, Bank's obligations, rights and benefits
hereunder.

                12.2. Indemnification. Borrower shall defend, indemnify and hold
harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by this Agreement; and
(b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank
as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under this Agreement, or
otherwise (including without limitation reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.

                12.3. Time of Essence. Time is of the essence for the
performance of all obligations set forth in this Agreement.


                                       18


<PAGE>   20

                12.4. Severability of Provisions. Each provision of this
Agreement shall be severable from every other provision of this Agreement for
the purpose of determining the legal enforceability of any specific provision.

                12.5. Amendments in Writing, Integration. This Agreement cannot
be amended or terminated orally. All prior agreements, understandings,
representations, warranties, and negotiations between the parties hereto with
respect to the subject matter of this Agreement, if any, are merged into this
Agreement and the Loan Documents.

                12.6. Counterparts. This Agreement may be executed in any number
of counterparts and by different parties on separate counterparts, each of
which, when executed and delivered, shall be deemed to be an original, and all
of which, when taken together, shall constitute but one and the same Agreement.

                12.7. Survival. All covenants, representations and warranties
made in this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify Bank
with respect to the expenses, damages, losses, costs and liabilities described
in Section 12.2 shall survive until all applicable statute of limitations
periods with respect to actions that may be brought against Bank have run.

                12.8. Confidentiality. In handling any confidential information
Bank, shall exercise the same degree of care that it exercises with respect to
its own proprietary information of the same types to maintain the
confidentiality of any non-public information thereby received or received
pursuant to this Agreement, except that disclosure of such information may be
made (i) to the subsidiaries or affiliates of Bank in connection with their
present or prospective business relations with Borrower, (ii) to prospective
transferees or purchasers of any interest in the Loans, provided that they have
entered into a comparable confidentiality agreement in favor of Borrower and
have delivered a copy to Borrower, (ii) as required by law, regulations, rule or
order, subpoena, judicial order or similar order, (iv) as may be required in
connection with the examination, audit or similar investigation of Bank and (v)
as Bank may deem appropriate in connection with the exercise of any remedies
hereunder. Confidential information hereunder shall not include information that
either: (a) is in the public domain, or becomes part of the public domain, after
disclosure to Bank through no fault of Bank; or (b) is disclosed to Bank by a
third party, provided Bank does not have actual knowledge that such third party
is prohibited from disclosing such information.

        IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.

                               CONNETICS CORPORATION


                               By: /s/ JOHN L. HIGGINS
                                   ---------------------------------------

                               Title: VP Finance & Administration, CFO
                                      ------------------------------------

                               SILICON VALLEY BANK

                               By: /s/ CLIFF WHITE
                                   ---------------------------------------
                               Title: SVP                                 
                                      ------------------------------------



                                       19
<PAGE>   21



                           LOAN MODIFICATION AGREEMENT

        This Loan Modification Agreement is entered into as of December 22,
1998, by and between Connetics Corporation ("Borrower") and Silicon Valley Bank
("Bank").

1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may be
owing by Borrower to Bank, Borrower is indebted to Bank pursuant to, among other
documents, a Loan and Security Agreement, dated September 24, 1998, as may be
amended from time to time (the "Loan Agreement"). The Loan Agreement provided
for, among other things, a Committed Line in the original principal amount of
One Million Five Hundred Thousand Dollars ($1,500,000) (the "Term Loan
Facility"). Defined terms used but not otherwise defined herein shall have the
same meanings as in the Loan Agreement.

Hereinafter, all indebtedness owing by Borrower to Bank shall be referred to as
the "Indebtedness."

2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the Indebtedness is
secured by the Collateral as described in the Loan Agreement and the
Intellectual Property Security Agreement.

Hereinafter, the above-described security documents and guaranties, together
with all other documents securing repayment of the Indebtedness shall be
referred to as the "Security Documents". Hereinafter, the Security Documents,
together with all other documents evidencing or securing the Indebtedness shall
be referred to as the "Existing Loan Documents".

3. DESCRIPTION OF CHANGE IN TERMS.

        A. Modification(s) to Loan Agreement

                1.      The following term defined in Section 1.1 of the Loan
                        Agreement entitled "Definitions" is hereby amended to
                        read:

                        "Committed Line" means Four Million Dollars
                        ($4,000,000).

                2.      Section 2.1 of the Loan Agreement entitled "Term Loan"
                        is hereby amended in part to provide that Bank will make
                        Term Advances to Borrower in an aggregate amount not to
                        exceed the Committed Line.

                3.      Section 6.9 of the Loan Agreement entitled "Tangible Net
                        Worth" is hereby amended to read:

                        Borrower shall maintain, as of the last day of each
                        calendar month, a Tangible Net Worth plus Subordinated
                        Debt of not less than Five Million Dollars ($5,000,000).

                4.      Notwithstanding anything to the contrary contained in
                        Section 7 of the Loan Agreement entitled "Negative
                        Covenants", Bank agrees to allow Borrower to continue to
                        make its regularly scheduled payments to SmithKline
                        Beecham Corporation ("SB"), provided, that an Event of
                        Default, as defined in the Loan Agreement, has not
                        occurred and is not continuing and would not exist
                        immediately after making such payment and, provided,
                        further, that Borrower notify Bank, in writing, promptly
                        after SB exercises any of its remedies under any
                        agreements between Borrower and SB.

4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever
necessary to reflect the changes described above.

5. PAYMENT OF LOAN FEE. Borrower shall pay to Bank a fee in the amount of Twelve
Thousand Five Hundred Dollars ($12,500) (the "Loan Fee") plus all out-of-pocket
expenses.


<PAGE>   22

6. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor signing
below) agrees that, as of the date hereof, it has no defenses against the
obligations to pay any amounts under the Indebtedness.

7. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing below)
understands and agrees that in modifying the existing Indebtedness, Bank is
relying upon Borrower's representations, warranties, and agreements, as set
forth in the Existing Loan Documents. Except as expressly modified pursuant to
this Loan Modification Agreement, the terms of the Existing Loan Documents
remain unchanged and in full force and effect. Bank's agreement to modifications
to the existing Indebtedness pursuant to this Loan Modification Agreement in no
way shall obligate Bank to make any future modifications to the Indebtedness.
Nothing in this Loan Modification Agreement shall constitute a satisfaction of
the Indebtedness. It is the intention of Bank and Borrower to retain as liable
parties all makers and endorsers of Existing Loan Documents, unless the party is
expressly released by Bank in writing. No maker, endorser, or guarantor will be
released by virtue of this Loan Modification Agreement. The terms of this
paragraph apply not only to this Loan Modification Agreement, but also to all
subsequent loan modification agreements.

8. CONDITIONS. The effectiveness of this Loan Modification Agreement is
conditioned upon Borrower's payment of the Loan Fee.

        This Loan Modification Agreement is executed as of the date first
written above.

BORROWER:                             BANK:

CONNETICS CORPORATION                 SILICON VALLEY BANK


By: /s/ THOMAS G. WIGGANS             By: /s/ SAM THOMPSON FOR CLIFF WHITE
   ----------------------------          -------------------------------------
Name: Thomas G. Wiggans               Name: Sam Thompson
    ---------------------------            -----------------------------------
Title: President & CEO                Title: Credit Analyst
     --------------------------             ----------------------------------




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