<PAGE>
 
                                                                    Exhibit 10.2


          DEVELOPMENT AGREEMENT, dated as of August 11, 1998, among
                                             ---------             
PHARMACEUTICAL RESOURCES, INC. ("PRI"), GENERICS  (UK) LIMITED ("G(UK)"), and
ISRAEL PHARMACEUTICAL RESOURCES L.P. (the "Partnership").

          WHEREAS, the Partnership is engaged in researching and developing
generic pharmaceutical products in Israel;

          WHEREAS, PRI and G(UK) and their respective Affiliates (as hereafter
defined) are engaged in manufacturing, marketing and distributing generic
pharmaceutical products, and they own and operate approved manufacturing
facilities and possess qualified marketing distribution systems and
organizations to enable them to manufacture and effectively promote, market and
distribute products worldwide;

          WHEREAS, PRI and G(UK) desire the Partnership to develop
pharmaceutical products for manufacture and distribution by PRI and G(UK) and
their respective Affiliates; and

          WHEREAS, the parties hereto desire to set forth their mutual
agreements with respect to certain matters relating to the parties hereto,
including the development, registration and distribution of products to be
developed by the Partnership.

          NOW, THEREFORE, the parties hereto agree as follows:

                                   ARTICLE 1
                                  DEFINITIONS

          1.1  Definitions:  Wherever used in this agreement the words and
terms, "Affiliate", "ANDA", "Bio-Availability Studies", "Budget", "business
day", "Competing Product", "Confidential Information", "FDA", "G(UK) Territory
", "Gross Sales", "License Fees", "Net Sales", "Partnership Products", "Person",
"Product Approval", "Product Information", "PRI Board", "PRI Territory" and
"Unit" shall have the respective meanings set out in Schedule "A" annexed
hereto.  In addition, words and expressions parenthetically defined elsewhere in
this agreement shall, throughout this agreement, have the meanings therein
provided.  Defined terms shall be used in the singular or in the plural, as
sense shall require.

                                   ARTICLE 2
                         FUNDING AND PRODUCT SELECTION

          2.1  Initial Fee:  In consideration of the grant of rights by the
Partnership to G(UK) hereunder, G(UK) has paid previously to the Partnership or
its designee the sum of $600,000 US.  Such fee shall be non-refundable.

          2.2  Product Selection Committee:

          (a) A committee (the "Committee") shall be established to select
generic pharmaceutical  products to be developed by the Partnership and
manufactured and distributed by PRI and G(UK) and their Affiliates pursuant to
this agreement (the "Products"); provided, that, none of the Partnership
                                 --------  ----                         
Products shall be eligible for selection as a Product.  The Committee shall
initially consist of two directors.  The number of members of the Committee
shall not be changed without the written consent of PRI and G(UK).  PRI and
G(UK) each shall have the right to designate one Committee member.  In the event
of the death disability, resignation or other withdrawal of any Committee
member, the party that appointed such Committee member shall have the right to
designate a replacement.  The PRI Board shall be entitled to cast the deciding
vote to resolve tie votes of the Committee.  Members of the Committee shall not
be paid any compensation for their services as members nor shall they be
entitled to reimbursement of any expenses incurred in connection therewith.  The
Committee shall meet and report to the PRI Board at least once each calendar
year.

          (b) The Committee will have the following additional responsibilities:
              (i)   modifying the list of Products from time to time, including
                    adding generic pharmaceutical products;
              (ii)  determining the priority of the development of the Products;
              (iii) approving the Budget each year not later than July 30; and



                                    --21--
<PAGE>
 
            (iv)  determining whether to discontinue development of one or more
                  Products.

          (c) Unless otherwise agreed by the Committee, the "Products" selected
shall be generic pharmaceutical products for which a US patent on the innovator
product or reference product is not due to expire for six years or more from the
date of selection.

          2.3  Funding Obligations:

          (a) Each year during the term of this agreement, each of PRI and G(UK)
shall pay to the Partnership an annual development fee equal to sum of the 50%
of the Budget approved by the Committee for the year, less the costs of active
and inactive raw materials and Bio-Availability Studies for the Products and the
Partnership Products and amortization and depreciation (the "Annual Fee").  It
is agreed that the Budget, less the costs of active and inactive raw materials
and Bio-Availability Studies for the Products and the Partnership Products and
amortization and depreciation, shall not exceed $2,000,000 US in any fiscal year
of the Partnership.  The Annual Fee shall be paid by each of PRI and G(UK) in
equal quarterly installments not later than on January 1, April 1, July 1 and
October 1 of each year.

          (b) The Annual Fee shall be paid in immediately available funds to an
account designated by the Partnership and shall be non-refundable.  The Annual
Fee obligations of PRI and G(UK) shall continue until the termination of this
Agreement.  The Annual Fee shall not be a loan unless PRI and G(UK) otherwise
agree in writing. No additional fees, other than the payment each year of the
Annual Fee and as set forth in Sections 2.1 and 2.3(c) and (d) hereof, will be
required to be made by PRI and G(UK) to the Partnership and any amounts paid in
any year in excess of the allocation of the Annual Fee will not reduce the
amount to be paid by such party in future years in respect of its Annual Fee.

          (c) PRI and G(UK) shall pay for or reimburse the Partnership for all
costs of all active and inactive raw materials used in connection with the
development of Products for the PRI Territory and G(UK) Territory, respectively.

          (d) PRI and G(UK) shall also be solely responsible for all out of
pocket costs and expenses relating to the registration, manufacture,
distribution, marketing and sale of Products (e.g., Bio-Availability Studies,
Product Approval expenses and lawsuits) in the PRI Territory and G(UK)
Territory, respectively.

                                   ARTICLE 3
                             EXCLUSIVE APPOINTMENT
                                        
          3.1  Exclusive Distributor: Subject to the provisions of this
agreement and to the receipt by PRI, G(UK) or their respective Affiliates, as
the case may be, of a Product Approval for such Product, the Partnership hereby
appoints (a) PRI as the sole and exclusive distributor of the Products for the
PRI Territory and PRI hereby accepts such appointment and agrees to act as such
sole distributor upon such terms and conditions and (b) G(UK) as the sole and
exclusive distributor of the Products for the G(UK) Territory and G(UK) hereby
accepts such appointment and agrees to act as such sole distributor upon such
terms and conditions.

          3.2  Nature of Relationship: This agreement does not constitute or
create (and the parties do not intend to create hereby) a joint venture, pooling
arrangement, partnership, or formal business organization of any kind between
and among any of the parties, and the rights and obligations of the parties
shall be only those expressly set forth herein. The relationship hereby
established between the Partnership, on the one hand, and PRI and G(UK), on the
other hand, is solely that of an independent contractor engaged in the operation
of its own respective business. None of the parties hereto shall be considered
to be an agent of any other (or any of its Affiliates) for any purpose
whatsoever.

          3.3  Territorial and Product Restrictions Applicable to PRI: During
the term of this agreement applicable to a Product, neither PRI nor any of its
Affiliates will directly or indirectly sell or license such Product outside of
the PRI Territory or to any Person in the PRI Territory where it knows or has
reason to believe that such Product will be resold by such Person outside of the
PRI Territory.  In the event the foregoing provision is or becomes unenforceable
or is unlawful in the PRI Territory, then it shall be deemed replaced by the
most restrictive provision on marketing or sale of the Product outside of the
PRI Territory as shall be lawful and enforceable in the PRI Territory. If G(UK)
establishes that one of PRI's customers or licensees or a customer or licensee
of any of its Affiliates is exporting such Product out of the PRI Territory, PRI
shall (and shall cause its Affiliates to) either cease to supply such customer
or obtain (and enforce, if necessary) an undertaking from such customer not to
sell the Product outside of the PRI Territory 


                                    --22--
<PAGE>
 
(unless PRI [or its Affiliate, as the case may be] is precluded from taking such
action under applicable law). Notwithstanding the foregoing, PRI shall not be in
violation of this Section 3.3 if G(UK) shall forfeit to PRI G(UK)'s exclusive
distribution and manufacturing rights pursuant to Section 5.1 below.

          3.4  Territorial and Product Restrictions Applicable to G(UK): During
the term of this agreement applicable to a Product, neither G(UK) nor any of its
Affiliates will directly or indirectly sell or license such Product outside of
the G(UK) Territory or to any Person in the G(UK) Territory where it knows or
has reason to believe that such Product will be resold by such Person outside of
the G(UK) Territory.  In the event the foregoing provision is or becomes
unenforceable or is unlawful in the G(UK) Territory, then it shall be deemed
replaced by the most restrictive provision on marketing or sale of the Product
outside of the G(UK) Territory as shall be lawful and enforceable in the G(UK)
Territory. If PRI establishes that one of G(UK)'s customers or licensees or a
customer or licensee of any of its Affiliates is exporting such Product out of
the G(UK) Territory, G(UK) shall (and shall cause its Affiliates to) either
cease to supply such customer or obtain (and enforce, if necessary) an
undertaking from such customer not to sell the Product outside of the G(UK)
Territory (unless G(UK) [or its Affiliate, as the case may be] is precluded from
taking such action under applicable law). In addition, G(UK) shall not (and it
shall not authorize, permit or suffer any of its Affiliates to), directly or
indirectly, manufacture, purchase, sell or distribute a Competing Product in the
G(UK) Territory at any time during the term of this agreement applicable to a
Product.

                                   ARTICLE 4
                      PRODUCT DEVELOPMENT AND REGISTRATION

          4.1  Obligations to Develop Products: Subject to the right of the
Committee to terminate the development of a Product, the Partnership shall use
commercially reasonable best efforts to develop the Products in accordance with
the requirements of applicable law in such order of priority as is determined by
the Committee. Nothing in this agreement shall constitute a guarantee or
warranty of the Partnership that development of any Product will be commenced or
continued or successfully completed within any specific time period or that a
Product Approval for any Product will be obtained.  All Products developed by
the Partnership and all applicable intellectual property rights shall be the
exclusive property of the Partnership and the Partnership shall be the exclusive
owner of all rights with respect to any Products developed by it, including,
without limitation, any manufacturing methods or intellectual property rights.
G(UK) and PRI agree and acknowledge that the Partnership has the right to
continue development of the Partnership Products concurrently with the
development of the Products; provided, that, the Committee will have the ability
                             --------  ----                                     
to determine the allocation of resources of the Partnership between the Products
and the Partnership Products. G(UK) shall have no rights with respect to the
Partnership Products.  THE PARTNERSHIP MAKES NO REPRESENTATION THAT ANY PRODUCT
WILL BE USEFUL FOR THE INTENDED PURPOSE OR THAT IT IS FREE FROM INHERENT SIDE
EFFECTS.

          4.2  Registration Responsibility: If a Product has been successfully
developed (as described below), it will be the sole responsibility of PRI or
G(UK) if PRI or G(UK), respectively, elects to distribute a product in the PRI
Territory or G(UK) Territory, respectively, (i) to file for Product Approvals in
the PRI Territory and G(UK) Territory, respectively, with the appropriate
authorities and (ii) where an application for Product Approval for such Product
has been submitted, to use commercially reasonable efforts to ensure that it
receives a Product Approval for such Product from the appropriate authorities on
the earliest possible schedule given the applicable process; provided, that, if
                                                             --------  ----    
G(UK) does not apply for Product Approval for a Product in any one or more
jurisdictions within the G(UK) Territory within 180 days of the successful
development of such Product or if G(UK) obtains a Product Approval with respect
to a Product and does not commercially market and sell any Products within 150
days of obtaining a Product Approval, PRI shall have all rights and obligations
of G(UK) as set forth in Articles 3, 4, 5, 7 and 8 hereof with respect to such
Product in the one or more jurisdictions within the G(UK) Territory in which
G(UK) failed to apply for Product Approvals or failed to commercially market and
sell the Product.  Product Approvals granted in respect of Products in a
jurisdiction within a territory will be registered in the name of the Party to
this agreement that has the right to distribute the Products within such
jurisdiction pursuant to Articles 3, 4 and 5 hereof.  For the purposes of this
agreement, a Product will deemed to be "successfully developed" if the Committee
determines in its sole and good faith judgment that the Product, in its current
state of development and without significant additional development or cost,
could obtain a Product Approval in one or more developed countries in the PRI
Territory or G(UK) Territory.  If the Committee cannot agree by a majority vote
of its members whether or not a Product has been "successfully developed," the
Committee shall hire an industry expert who has no business dealings with any of
the parties to this Agreement who will cast the deciding vote.  All expenses and
fees of such expert will be paid by the Partnership.  PRI and G(UK) shall be
responsible for and pay all expenses incurred by them in seeking Product
Approvals in their respective territories pursuant to Article 3 hereof and the
jurisdictions in which PRI and G(UK) shall have rights under Section 4.2 hereof
to distribute the Product.


                                    --23--
<PAGE>
 
          4.3  Status Reporting: The Partnership shall from time to time:

            (a) advise PRI and G(UK) of any unforeseen material problems or
                delays encountered or additional requirements imposed upon the
                Partnership since the date of its last report in connection with
                the development of a Product (and of which PRI and G(UK) have
                not been otherwise advised pursuant to (b) below); and

            (b) provide PRI and G(UK) with such information as PRI and G(UK) may
                reasonably request in writing from time to time with respect to
                the status of the development of a particular Product.

          4.5  License of Product Information to PRI and G(UK):  If PRI and/or
G(UK) desire to manufacture and distribute any successfully developed Product in
the PRI Territory or G(UK) Territory, respectively, PRI and/or G(UK) may require
the Partnership to grant to PRI and/G(UK) a fully paid-up license upon the terms
herein contemplated to use the Product Information to obtain a Product Approval
for such Product in the PRI Territory and G(UK) Territory, respectively, such
right to be exercised by notice in writing to the Partnership.  Pursuant to such
license:

            (a) all information, tests and studies not contained in the Product
                Information and which are required by PRI or G(UK) to obtain a
                Product Approval for such Product shall be developed and
                conducted by PRI and/or G(UK) and their respective Affiliates at
                their sole cost and expense;

            (b) the Partnership will answer PRI's and G(UK)'s reasonable
                inquiries concerning such Product Information so as to enable
                PRI and G(UK) to obtain a Product Approval for the Product in
                question but it shall not be required to compile or develop
                information which is not already available to or possessed by
                it; and

            (c) Neither PRI nor G(UK) will use the Product Information licensed
                to it pursuant hereto to obtain a regulatory license or approval
                to market the Product outside of the PRI Territory or G(UK)
                Territory, respectively, except as permitted expressly in this
                Agreement.

          4.6  Waiver of Right of First Refusal: G(UK) shall cause Genpharm Inc.
to execute and deliver an agreement pursuant to which Genpharm Inc. waives all
of its rights under Section 3.10 of the Distribution Agreement, dated March 25,
1998, between PRI and Genpharm Inc. with respect to all Products to be developed
by the Partnership.

                                   ARTICLE 5
                            MANUFACTURE OF PRODUCTS

          5.1  Rights to Manufacture and Distribute Products: PRI shall have the
exclusive right to manufacture and distribute all Products in the PRI Territory.
G(UK) shall have the exclusive right to manufacture and distribute all Products
in the G(UK) Territory; except, that, if (i) G(UK) shall fail to apply for
                        ------  ----                                      
Product Approval for a Product within 180 days of successful development of a
Product by the Partnership, (ii) G(UK) shall obtain a Product Approval with
respect to a Product and does not commercially market and sell any Products
within 150 days of obtaining a Product Approval or (iii) G(UK) shall cease sales
and marketing efforts with respect to a Product having a Product Approval, G(UK)
shall forfeit such exclusive manufacturing and distribution rights with respect
to such Product in the jurisdiction(s) in which G(UK) shall have failed to file
an application for Product Approval or failed to commercially market and sell
the Product or ceased sales and marketing efforts with respect to a Product
having a Product Approval, and PRI shall have the exclusive right to manufacture
and distribute such Product in such jurisdiction(s) within the G(UK) Territory.

          5.2  Manufacturing Responsibilities: Each Product supplied by PRI,
G(UK) or their Affiliates hereunder shall be manufactured (which shall include,
without limitation, all testing, packaging and labeling) in an approved facility
and in accordance with the appropriate practices, rules and regulations of the
appropriate regulatory authorities relative to the manufacture of such Product
where it shall be manufactured, marketed and sold.

                                   ARTICLE 6
                      ROYALTY PAYMENTS, REPORTS AND AUDIT


                                    --24--
<PAGE>
 
          6.1  Royalties:   G(UK) shall pay to the Partnership a perpetual
royalty equal to the sum of (i) 2.0% of Net Sales and arising out of sales in
the G(UK) Territory by G(UK) or its Affiliates of Products in each calendar
quarter (which for the purposes of clarity shall not include the portion of the
License Fees paid pursuant to Section 6(ii)) and (ii) 10.0% of Licensing Fees
paid to G(UK) or its Affiliates arising out of licenses granted by G(UK) or its
Affiliates of Products in the G(UK) Territory in each calendar quarter (which
for the purposes of clarity shall not include the portion of Net Sales paid
pursuant to Section 6(i)). The term "Royalties" shall refer collectively to Net
Sales and License Fees.  All Royalties shall be made in US dollars.

          6.2  Payment of Royalties: All Royalties shall be paid by G(UK) to the
Partnership quarterly, within 30 days following the end of each calendar quarter
in each year with respect to sales made by G(UK) or its Affiliates of Products
or payments made to G(UK) or its Affiliates by their licensees of Products,
during such calendar quarter. Each such payment shall be accompanied, in respect
of each Product, by a sales summary showing Gross Sales, Net Sales and License
Fees of each Product by Units and US dollars made by G(UK) and its Affiliates
and their licensees during the preceding quarter.

          For purposes of this agreement, a sale shall be considered to have
been made at the time the Product is shipped by G(UK)'s or its Affiliate's to
its customer, or by their licensees to their customers.  For purposes of
computing Gross Sales and Net Sales, all sales and other transactions between
G(UK) and its Affiliates shall be disregarded and sales and other transactions
between G(UK) and its Affiliates shall not constitute a license by G(UK) or its
Affiliates, but shall be deemed to be a sale generating Gross Sales and Net
Sales.

          6.3  Additional Information: G(UK) shall provide to the Partnership
and shall cause its Affiliates to provide to the Partnership, promptly following
a request therefor, such additional information concerning any sales of a
specific Product relevant to the calculation of Net Sales and Gross Sales and
License Fees in respect of a Product as the Partnership may reasonably request.

          6.4  Interest:  All payments to be made to the Partnership under this
agreement shall bear interest from and after the due date therefor until paid at
the annualized rate equal to the daily (as at the close of business on each such
day) prime rate as quoted from time to time by Citibank N.A., New York, New York
plus 3%, compounded daily.

          6.5  Maintenance of Records:  Each of the parties hereto agrees that
it shall keep (and shall cause its Affiliates to keep) complete and accurate
books and records of account containing all information required for the
computation and verification of all amounts on which payments hereunder are
based and shall, upon reasonable written notice from the other, make such
records available for examination by such other party or, at the requesting
party's expense, supply copies of such records to such other party.

          6.6  Examination of Records:  Each of the parties hereto shall have
the right, upon reasonable written notice to the other, to designate an
independent certified public or chartered accountant (except one to whom the
other has a reasonable objection) to have access during ordinary working hours
to such records as may be necessary to audit the correctness of any invoice,
report or payment made under this agreement.

                                   ARTICLE 7
                                  DISTRIBUTION

          7.1  Obligations of PRI and G(UK):  PRI and G(UK) shall be responsible
for packaging, labeling, marketing, pricing, storage, handling, quality control
and quality assurance in accordance with Product Approvals and all applicable
laws, and credit risks, collection of receivables, product returns, and product
recalls with respect to the Products manufactured and/or distributed by them or
their Affiliates in their respective territories.

          7.2  Pricing:  PRI and G(UK) shall have sole discretion in setting the
price for the sale of the Products in the PRI Territory and G(UK) Territory,
respectively.

          7.3  Conduct of Business: PRI and G(UK) shall have sole discretion in
the manufacturing, marketing, sale and distribution of Products, subject to
applicable laws and the express terms of this agreement, within the PRI
Territory and G(UK) Territory, respectively, and shall be solely responsible for
all costs, expenses and liabilities arising therefrom in their respective
territories.


                                    --25--
<PAGE>
 
                                   ARTICLE 8
                     DAMAGES, INDEMNIFICATION AND INSURANCE

          8.1  Limitation re Claims: Subject to the limitations set forth in
this Section 8.1, PRI, G(UK) and the Partnership covenant and agree to
indemnify, save harmless and compensate the other (and its Affiliates, for whose
benefit such other party shall hold the benefit of this provision in trust)
from, against or for, as the case may be, any and all claims, demands, actions,
causes of action, suits, proceedings, judgements, damages, expenses (including
reasonable attorney's fees and expenses), losses, fines, penalties and other
similar assessments, as the case may be, (the "Damages") relating to or arising
out of a breach by PRI, G(UK) or the Partnership, as the case may be, of any of
the representations, warranties, covenants or agreements herein; provided, that,
                                                                 --------  ---- 
except where the breach arises out of the representation or warranty being
intentionally false or inaccurate or constitutes a wilful material breach by
PRI, G(UK) or the Partnership of its duties or obligations hereunder or an act
or omission constituting gross negligence, the claim of the aggrieved party for
Damages arising out of the breach shall be limited to claiming the amounts owing
or payable to it in accordance with the provisions of this agreement and any out
of pocket costs and expenses (including amounts paid or payable by it to third
parties) which it has incurred and the aggrieved party shall not be entitled to
recover from the defaulting or breaching party any lost profits or consequential
or punitive damages, including loss or damage to its goodwill or reputation.

          8.2  Claims and Challenges:  In the event that the actual or proposed
sale, marketing or other release in the PRI Territory by PRI or its Affiliates,
or in the G(UK) Territory by G(UK) or its Affiliates or their licensees, or the
research, development or application for Product Approval, of any Product
results in a third-party claim or results in any challenge under applicable
legislation or regulation:

          (a) to the extent that the Damages awarded or incurred relate to or
              arise out of any act by or omission of G(UK) or any of its
              Affiliates or any other Persons for whose acts or omissions they
              are responsible at law, G(UK) shall be responsible therefor and
              shall defend, indemnify and hold harmless PRI and its Affiliates
              and the Partnership from and against all such Damages;

          (b) to the extent that the Damages awarded or incurred relate to or
              arise out of any or omission of PRI or any of its Affiliates or
              any other Persons for whose acts or omissions they or any one or
              more of them is responsible at law, PRI shall be responsible
              therefor and shall defend, indemnify and hold harmless G(UK) and
              its Affiliates from and against all such Damages;

          (c) to the extent that the Damages awarded or incurred relate to or
              arise out of an actual or threatened claim, demand, action, cause
              of action, suit or proceeding that any Product researched or
              developed by the Partnership or application for Product Approval
              or proposed marketing or sale of a Product infringes any patent or
              other proprietary right of another Person or violates any
              applicable law or regulation, the Party to this agreement which
              shall have the right to distribute the Product in the jurisdiction
              within the PRI Territory or G(UK) Territory in which the lawsuit
              shall be filed or other legal or non-legal charge asserted shall
              be responsible therefor and shall defend, indemnify and hold
              harmless the Partnership and the other Party to this agreement and
              their Affiliates from and against any and all Damages; and

          (d) to the extent that Damages in the PRI Territory are awarded in
              favor of any of the Parties to this agreement or their Affiliates,
              PRI shall be entitled to receive all of such Damages and to the
              extent that Damages in the G(UK) Territory are awarded in favor of
              G(UK) or any of its Affiliates, PRI shall be first reimbursed for
              its costs and expenses incurred in connection with the action and
              thereafter the Partnership shall be entitled to receive 10% of the
              Damages.

          Upon the assertion of any third-party claim or other challenge against
G(UK), PRI or the Partnership (or their respective Affiliates) that may give
rise to right of indemnification under this agreement, the Person claiming a
right to indemnification (the "Indemnified Party") shall give prompt notice to
the Person alleged to have the duty to indemnify (the "Indemnifying Party") of
the existence of such claim or other challenge (provided that the failure to
give such notice in timely fashion shall not release the Indemnifying Party of
its obligations of indemnification hereunder except to the extent that the
Indemnifying Party has been prejudiced thereby) and shall give the Indemnifying
Party reasonable opportunity to control, defend and/or settle such claim at its
own expense and with counsel of its own selection; provided, however, that, the
                                                   --------  -------  ----     
Indemnified Party shall, at all times, have the right to fully participate in
such defense at its own expense with separate counsel and, provided that both
                                                           -------- ----     
parties to the extent that they are not 


                                    --26--
<PAGE>
 
contractually or legally excluded therefrom, or otherwise prejudiced in a legal
position by so doing, shall co-operate with each other and with their respective
insurers in relation to the defense of such claim or other challenge. The
Indemnifying Party shall consult with the Indemnified Party with respect to
settlement of any claim or other challenge. The Indemnifying Party shall have
the right to settle any claim or other challenge without the consent of the
Indemnified Party, provided, that, the Indemnified Party is unconditionally
                   --------  ----
released from such claim or other challenge and it is not otherwise prejudiced
by the terms of settlement. In the event the Indemnifying Party elects to defend
such claim or other challenge, the Indemnified Party may not settle such claim
or other challenge without the prior written consent of the Indemnifying Party.
If the Indemnifying Party shall, within a reasonable time after such notice has
been given, fail to defend, compromise or settle such claim or other challenge,
(or thereafter fails to diligently defend such claim or other legal challenge)
then the Indemnified Party shall have the right to defend, compromise or settle
such claim or other legal challenge without prejudice to its rights of
indemnification hereunder. Notwithstanding the foregoing, in the event of any
dispute with respect to indemnity hereunder, each party shall be entitled to
participate in the defense of such claim or other legal challenge and to join
and implead the other in any such action.

          8.3  Insurance: Each of PRI and G(UK) shall (and shall cause their
respective Affiliates, as required, to) during the term of this agreement and
for a period of not less than 36 months following the termination or expiration
of this agreement, carry or be subject to coverage under (as a named insured)
product liability insurance (including blanket contractual liability) in an
amount of not less than $10,000,000 US combined single limit, which insurance
will be written on an occurrence policy form with an insurance carrier
reasonably acceptable to the other party. Each of G(UK) and PRI  shall, at the
request of the other, provide evidence to such requesting party of compliance
with its insurance obligations (and those of its Affiliate) under this Section
and evidence of renewals of any such policy, from time to time.

                                   ARTICLE 9
                              TERM AND TERMINATION

          9.1  Term:  The initial term of this agreement shall commence on the
date of this agreement and continue for a period of five years, and shall
automatically renew for additional periods of one year unless PRI or G(UK) gives
written notice of termination to the other and the Partnership at least 180 days
prior to the expiration of the initial term or any renewal terms, as the case
may be, subject to earlier termination as provided in this agreement; provided,
                                                                      -------- 
that, the rights and obligations set forth in Articles 3, 4, and 5 of this
----                                                                      
agreement shall survive any termination or expiration of this agreement with
respect to such Products as have been successfully developed or then under
development by the Partnership at the time of expiration of this agreement,
unless earlier terminated in accordance with the other provisions of this
agreement.

          9.2  Payment and Reporting Defaults:

          (a)  The Partnership or PRI may, by notice in writing to G(UK),
terminate this agreement if G(UK) fails to pay to the Partnership any amount
payable by G(UK) to the Partnership hereunder as and when the same shall have
become due and payable or shall have failed to deliver (or caused to be
delivered, as the case may be), in timely fashion, the reports or information
contemplated in Sections 6.2 or 6.3 hereof, and in either case, such breach
shall have continued unremedied for a period of 30 business days after written
notice of such breach has been given by the Partnership to G(UK); provided,
                                                                  -------- 
that, G(UK) shall not have the right to such 30 business day grace period within
----                                                                            
which to cure such default and the Partnership shall have the immediate right to
terminate the agreement for such breach if G(UK) shall have previously breached
Sections 6.2 or 6.3, or failed to remit any sums of at least $100,000 US to the
Partnership when due, in the aggregate, three times in the 12 month period
immediately preceding the default in question.

          (b) G(UK) may, by notice in writing to PRI and the Partnership,
terminate this agreement if PRI  fails to pay to the Partnership any amount
payable by PRI to the Partnership hereunder as and when the same shall have
become due and payable and such breach shall have continued unremedied for a
period of 30 business days after written notice of such breach has been given by
G(UK) to PRI and the Partnership; provided, that, PRI shall not have the right
                                  --------  ----                              
to such 30 business day grace period within which to cure such default and G(UK)
shall have the immediate right to terminate the agreement for such breach if PRI
shall have previously failed to remit any sums of at least $100,000 US to the
Partnership when due, in the aggregate, three times in the 12 month period
immediately preceding the default in question.

          9.3  Material Breach:  Subject to Section 9.2 above, PRI or G(UK) may,
by notice in writing to the 


                                    --27--
<PAGE>
 
other, terminate this agreement or, at its option, terminate this agreement in
respect to only those Products to which the default in question relates, if such
other party shall have breached any of its material duties or obligations under
this agreement and such default continues unremedied for a period of 60 days
following receipt of notice of such default or, if such default is capable of
being remedied but is not reasonably capable of being remedied within such 60
day period, such longer period of time as is reasonable in the circumstances,
not exceeding 90 days in the aggregate, provided, that, the defaulting party
                                        --------  ---- 
has, within such 60 day period, commenced and thereafter actively and diligently
pursues the remedying of such default.

          9.4  Events of Default: G(UK), PRI and the Partnership shall each have
the right to terminate this agreement upon written notice to the other party in
the event that any one or more of the following events shall become applicable
to the other parties to this agreement (G(UK), PRI and the Partnership each
being referred to as the "Party"):

            (a) an order is made or a resolution or other action of such Party
                is taken for the dissolution, liquidation, winding up or other
                termination of its corporate existence;

            (b) the Party commits a voluntary act of bankruptcy, becomes
                insolvent, makes an assignment for the benefit of its creditors
                or proposes to its creditors a reorganization, arrangement,
                composition or readjustment of its debts or obligations or
                otherwise proposes to take advantage of or shelter under any
                statute in force in the United States or in the governing
                jurisdiction of such Party for the protection of debtors;

            (c) if any proceeding is commenced with respect to a compromise or
                arrangement, or to have such Party declared bankrupt or to have
                a receiver appointed in respect of such Party or a substantial
                portion of its property and such proceeding is not fully stayed
                or dismissed within 30 days after such commencement;

            (d) a receiver or a receiver and manager of any of the assets of
                such Party is appointed and such receiver or receiver and
                manager is not removed within 30 days of such appointment; or

            (e) such Party ceases or takes steps to cease to carry on its
                business.

          9.5  Force Majeure: Either Party may terminate this agreement with
respect to a particular Product materially affected by an event of Force Majeure
in accordance with the provisions of Section 12.2 below (but this agreement
shall continue in respect of the other Products which remain subject to this
agreement and which are not effected by such Force Majeure event).
 
          9.6  Survival: Any cause of action for breach of contract shall
survive the termination or expiration of this agreement.  The termination or
expiration of this agreement shall not affect any right or obligation of G(UK),
PRI or the Partnership existing prior to the effective date of termination or
expiration and which is by expressed hereunder to survive termination.
Termination or expiration of this agreement shall not affect any right, duty or
obligation arising pursuant to Articles 6, 7, 8, 10, 11 and 12 hereof and
Section 9.1 hereof (which shall survive termination or expiration).

                                   ARTICLE 10
                                CONFIDENTIALITY

          10.1 Confidential Nature of Agreement:  Each Party agrees that,
without the prior written consent of the other, or except as may be required by
law or court order, the existence and terms of this agreement shall remain
confidential and shall not be disclosed to any Person other than employees and
professional advisers of such Party or its Affiliates who reasonably require
knowledge of  the existence or terms of this agreement and who are bound to such
Party or its Affiliates by a like obligation of confidentiality. Such employees
and advisors will be advised of the nature and existence of the confidentiality
undertakings of this agreement and of the applicability of such undertakings to
them and will agree to be bound hereby.

          10.2 Duty of Confidentiality:  Each Party agrees to hold in trust and
confidence (and to cause its Affiliates to hold in trust and confidence) for the
benefit of the other Parties (and their Affiliates) all Confidential Information
of such other Parties and their Affiliates and each further agrees to safeguard,
and to cause its Affiliates to safeguard, the Confidential Information of the
other (or its Affiliates) to the same extent that it does with its own


                                    --28--
<PAGE>
 
confidential information and to limit and control copies, extracts and
reproductions made of such Confidential Information. No Party will, without the
express written consent of the others, directly or indirectly, use (or
authorize, permit or suffer any of its Affiliates to use) any Confidential
Information of the other Parties or of their Affiliates for any purpose other
than to implement the provisions of this agreement or in regulatory proceedings
or in litigation. No Party will disclose Confidential Information to any Person,
other than its employees or other representatives or those of its Affiliates who
have a need to know to fulfill the provisions and intent of this agreement
(where such provisions and intent cannot properly be fulfilled without such
disclosure) and who have been informed of the confidential nature of the
information and have agreed to be bound by the terms hereof.  Each Party shall
use its best efforts to prevent unauthorized use or disclosure of the
Confidential Information of the other Parties or their Affiliates and shall use
protective measures no less stringent than those used by it in its own business
to protect its own confidential information, including segregating such
information at all times from the confidential material of others so as to
prevent any commingling.

          10.3 Compulsory Disclosures:  In the event that any Party (or any of
their respective Affiliates) shall be legally compelled or required by a court
of competent jurisdiction to disclose all or any part of the Confidential
Information of another Party (or its Affiliates), it shall provide prompt notice
to the other so that such other Party (or its Affiliates) may determine whether
or not to seek a  protective order or any other appropriate remedy. If a
protective order or other appropriate remedy is not obtained before such
disclosure is required, the Party required to make disclosure will disclose only
those portions of the Confidential Information in question which it is advised
by written opinion of counsel (which opinion shall be addressed to such Party
and to the other Party), it is legally required to disclose and will exercise
its best efforts to obtain reliable assurances that confidential treatment will
be accorded such Confidential Information.

          10.4 Return of Confidential Information:  Upon termination of this
agreement, each Party shall immediately return to the other Parties all material
containing or reflecting or referring to any Confidential Information of the
other Parties or their Affiliates (including all notes, summaries, analysis or
other documents prepared or derived therefrom) and all copies thereof in any
form whatsoever under the power or control of such Party or its Affiliates,
except that one copy may be retained for legal archival purposes, and such Party
shall delete such Confidential Information from all retrieval systems and data
bases or destroy same as directed by the other Parties and furnish to the other
Parties, if requested, a certificate of a senior officer of such Party
certifying such return, deletion and/or destruction. Where this agreement is
terminated in respect of a particular Product or Products only then the
foregoing obligations shall thereupon apply to Confidential Information relating
to such Product or Products.

                                   ARTICLE 11
                                  ARBITRATION

          11.1 Arbitration: Any controversy or claim arising out of, or relating
to, this Agreement or the breach thereof shall be referred for decision
forthwith to a senior executive of each Party not involved in the dispute. If no
agreement is reached  within 30 days of the request by one Party to the other to
refer the same to such senior executive, then such controversy or claim shall be
settled by arbitration in accordance with the Commercial Arbitration Rules of
the American Arbitration Association, such arbitration to be held in New York,
New York on an expedited basis. Judgement upon the award rendered by the
arbitrator(s) may be entered in any court having jurisdiction thereof.

                                   ARTICLE 12
                     GENERAL CONTRACT TERMS AND CONDITIONS

          12.1 Notice: Subject to the express provisions of this agreement, any
notice required or permitted to be given under this agreement shall be
sufficiently given if in writing and delivered by facsimile (with confirmation
of transmittal) or overnight courier (with confirmation of delivery), as well as
by prepaid registered mail (with return receipt requested) or hand delivery to
the appropriate Party at the address set forth below, or at such other address
or to the attention of such other individual as such Party may from time to time
specify for that purpose in a notice similarly given:

            To G(UK) at:

            4 Harley Street
            London



                                    --29--
<PAGE>
 
            W1N 1AA
            United Kingdom

            Attention: Chief Executive Officer
            Fax Number: 011-44-171-436-4903

            To PRI or the Partnership at:
 
            One Ram Ridge Road,
            Spring Valley, New York  10977
            U.S.A.
 
            Attention:  Chief Financial Officer
            Fax Number: (914) 425-7922

          Any such notice shall be effective (i) if sent by mail, as aforesaid,
5 business days after mailing, (ii) if sent by facsimile, as aforesaid, when
sent (with confirmation of receipt), and (iii) if sent by courier or hand
delivered, as aforesaid, when received, provided that if any such notice shall
have been sent by mail and if on the date of mailing thereof or during the
period prior to the expiry of the 5th business day following the date of mailing
there shall be a general postal disruption (whether as a result of rotating
strikes or otherwise) in the country or territory where the sender or the
intended recipient is situated then such notice shall not become effective until
the 5th business day following the date of resumption of normal mail service.

          12.2 Force Majeure:  No Party shall be considered to be in default in
respect of any obligation hereunder if failure of performance shall be due to
Force Majeure (as hereinafter defined).  If any Party is affected by a Force
Majeure event such Party shall, within 20 days of its occurrence, give notice to
the other Parties stating the nature of the event, its anticipated duration and
any action being taken to avoid or minimize its effect.  The suspension of
performance shall be of no greater scope and no longer duration than is required
by such Force Majeure and the non-performing Party shall use commercially
reasonable efforts to remedy its inability to perform.  The obligation to pay
money in a timely manner is absolute and shall not be subject to the Force
Majeure provisions, except to the extent payment is prohibited by governmental
rule or regulations other than rules or regulations incident to bankruptcy or
insolvency proceedings of a Party.  Force Majeure shall mean an unforeseeable or
unavoidable cause beyond the control and without the fault or negligence of a
Party or its Affiliate including, but not limited to, explosion, flood, war
(whether declared or otherwise), accident, labor strike or other labor
disturbance, inability to obtain materials or services, sabotage, acts of God,
newly enacted legislation, newly issued orders or decrees of any Court and any
binding act or order of any governmental agency. Notwithstanding anything in
this Section, the Party to whom performance is owned but to whom it is not
rendered because of an event of  Force Majeure as contemplated in this Section
shall, after the passage of 120 days, have the option to terminate this
agreement in respect of the Product affected by such event on 30 days prior
written notice to the other Parties hereto.

          12.3 Governing Law and Consent to Jurisdiction:

          (a) This agreement shall be deemed to have been made under, and shall
              be governed by, the laws of the State of New York without giving
              effect to New York's choice of law provisions.
 
          (b) Subject to Article 11 above, in connection with any action
              commenced hereunder, each of the undersigned consents to the
              jurisdiction of the state and federal courts located in New York
              City. G(UK) hereby appoints Lipha Americas, Inc., 9 W. 57/th/
              Street, New York, New York (or any successor firm or to such other
              address as they or G(UK) may designate in writing) and PRI and the
              Partnership hereby appoint Hertzog, Calamari & Gleason, 100 Park
              Avenue, New York, New York, l0017, (or any successor firm or to
              such other address as they or PRI or the Partnership may designate
              in writing), as their respective agents upon whom service of
              process may be made with the same force and effect as if service
              shall have been made personally upon them.

          12.4 Entire Agreement:  This agreement contains the entire agreement
and understanding of the Parties with respect to its subject matter and
supersedes all negotiations, prior discussions and any agreements relating to
the subject matter hereof.   This agreement may not be amended or modified
except by a written instrument signed by the Parties.



                                    --30--
<PAGE>
 
          12.5 Waiver: Any waiver of, or consent to depart from, the
requirements of any provision of this agreement shall be effective only if it is
in writing and signed by the Party giving it, and only in the specific instance
and for the specific purpose for which it has been given. No failure on the part
of any Party to exercise, and no delay in exercising, any right under this
agreement shall operate as a waiver of such right. No single or partial exercise
of any such right shall preclude any other or further exercise of such right or
the exercise of any other right.

          12.6 Counterparts:  This  agreement may be executed in identical
duplicate copies exchanged by facsimile transmission.  The Parties agree to
execute three identical original copies of the agreement after exchanging signed
facsimile versions.  Each identical counterpart shall be deemed an original, but
all of which together shall constitute one and the same instrument.

          12.7 Severability of Provisions: If, for any reason whatsoever, any
term, covenant or provision of this agreement or the application thereof to any
Party or circumstance or in any jurisdiction  is to any extent held or rendered
invalid, unenforceable or illegal, then such term, covenant or condition (a) is
deemed to be independent of the remainder of this agreement and to be severable
and divisible therefrom and its validity, unenforceability or illegality shall
not affect, impair or invalidate the remaining provisions hereof; and (b)
continue to be applicable and enforceable to the fullest extent permitted by law
in every other jurisdiction and against any Party and circumstances other than
those as to which or in respect of which it has been held or rendered
unenforceable or illegal. To the extent permitted by applicable law, each Party
hereby waives any provision of law which renders any provision of this agreement
prohibited or unenforceable in any respect.   Should any provision of this
agreement be so held to be unenforceable, such provision, if permitted by law,
shall be considered to have been superseded by a legally permissible and
enforceable clause which corresponds most closely to the intent of the parties
as evidenced by the provision held to be unenforceable.

          12.8 Assignment: Neither this agreement nor rights of a Party
hereunder may be assigned nor may the performance of any duties hereunder be
delegated without the prior written consent of the other Party. Notwithstanding
the foregoing, G(UK) and PRI may delegate from time to time some of their
respective duties hereunder to any of their respective Affiliates and, in
addition, G(UK) and PRI may license the distribution and/or subcontract the
manufacturing of a Product, in whole or in part, to any other Person which is
not an Affiliate after the prior written notice to the other Parties; provided,
                                                                      -------- 
that, the Person to whom the license and/or subcontract shall have been granted
----                                                                           
shall agree in writing to be bound by the terms and conditions of this agreement
as a condition to and prior to the license and/or subcontract and that the
license and/or subcontract shall not be detrimental to the interest of the
Partnership or any other Party to this agreement in the reasonable judgment of
the Partnership or such other Party.  No such delegation, licensing or
subcontracting will relieve G(UK) or PRI, as the case may be, of any of its
obligations hereunder.  Subject to the foregoing this agreement shall be binding
upon and enure to the benefit of the parties and their respective successors and
permitted assigns.

          12.9 Non-Contravention:  Each Party represents and warrants that the
execution, delivery and performance of this agreement by it will not contravene
any other contract or agreement to which it is a Party or by which it is bound.

          12.10  Headings:  The headings of all Articles and Sections hereof are
inserted for convenience of reference only, are not intended to be full or
accurate descriptions of the contents hereof and shall not be considered part of
this agreement or affect the construction or interpretation of this agreement.

          12.11  Compliance: Where, in accordance with the provisions of this
agreement, the Affiliate of a Party is required to do or omit to do or use
reasonable commercial (or other) efforts to do or refrain from doing any act or
thing such Party shall use reasonable best commercial efforts to cause its
Affiliates to comply.



                                    --31--
<PAGE>
 
          IN WITNESS WHEREOF, each of the parties hereto has caused this
agreement to be executed by its duly authorized officer as of the date first
above written.


GENERICS (UK) LIMITED                     PHARMACEUTICAL
                                          RESOURCES, INC.   
                                        
By: /s/ Anthony S. Tabatznik              By: /s/ Kenneth I. Sawyer 
    -----------------------------             -----------------------------
                                                                           
Name: Anthony S. Tabatznik                Name: Kenneth I. Sawyer          
      ---------------------------               ---------------------------     
                                                                           
Title: Chairman                           Title: President                 
       --------------------------                -------------------------- 
                                                                                
                                                                         
ISRAEL PHARMACEUTICAL RESOURCES L.P.                        
By: Israel Pharmaceutical Resources (1995) Ltd.,
General Partner

By: /s/ Kenneth I. Sawyer
    --------------------------          

Name: Kenneth I. Sawyer
      -------------------------  

Title:
       ------------------------



                                    --32--
<PAGE>
 
                                  SCHEDULE "A"
                                  DEFINITIONS

          "Affiliate" means, subject to the limitations set forth in (A) and (B)
below, any Person which, directly or indirectly, controls, is controlled by or
is under common control with such Person. For purposes of this definition, the
term "control" (as used in the terms "controls", "controlled by" and "under
common control") means either (i) holding 50% or more of the voting securities
of such Person or (ii) in the case of  a Person that has no outstanding voting
securities, having the right to 50% or more of the profits of such Person or
having the right in the event of dissolution to  50% or more of the net assets
of such Person or (iii) the power to direct or cause the direction of the
management and policies of such Person, whether pursuant to the ownership of
voting securities, by contract or otherwise; provided, that (A) any Person who
                                             --------  ----                   
(but for the exceptions contemplated herein in (A)) is or was an Affiliate of
G(UK) and, but for the completion of the transactions contemplated by the Stock
Purchase Agreement, dated March 25, 1998, between PRI and Lipha Americas Inc. or
the exercise of any rights granted pursuant thereto or in connection with the
completion of such transactions would not be an Affiliate of PRI or the
Partnership, such Person shall be deemed not to be an Affiliate of PRI or the
Partnership so that, for greater certainty, but without limitation, G(UK) and
any of its Affiliates shall not be Affiliates of PRI or the Partnership or any
of their Affiliates and vice versa and (B) the Partnership shall not be deemed
an Affiliate of PRI or any of its Affiliates and vice versa;

          "ANDA" means the abbreviated new drug application heretofore or
hereafter filed by PRI or any of its Affiliates with the FDA for or in respect
of a Product;

          "Bio-Availability Studies " mean necessary studies performed to
determine the availability of a drug in the bloodstream over time, comparing
that availability to that of another drug;

          "Budget" means the annual operating and capital budget of the
Partnership and shall include all funding reasonably necessary to fund
development of the Products and to continue to fund development of the
Partnership Products;

          "business day" means a day other than a Saturday, a Sunday or a day
which is a statutory holiday in London, England or the State of New York, United
States of America;

          "Competing Product" means, with respect to a particular Product, a
generic pharmaceutical product which is in the same dosage form,  has the same
active ingredient and the same strength as such Product but which is
manufactured and supplied by or purchased or acquired from any Person other than
the Parties or any of their Affiliates;

          "Confidential Information" shall mean information disclosed to or
obtained by one party from another party (including information obtained by one
party as a result of access to the facilities of the other party) either prior
to or during the term of this agreement which is non-public, confidential or
proprietary in nature (including, without limitation, trade secrets, financial
data, product information, manufacturing methods, market research data,
marketing plans, identity of customers, or product information [including the
nature and source of raw materials, product formulation and methods of
producing, testing and packaging]) and which relates to the disclosing party's
past, present or future research, development or business activities
Confidential Information shall not, however, include information that a party
can demonstrate by written evidence:

          (i)    is in the public domain (provided that information in the
                 public domain has not and does not come into the public domain
                 as a result of a breach by a party hereto (or any of its
                 Affiliates) of its obligations of confidentiality contained
                 herein;

          (ii)   is known by the receiving party prior to disclosure by the
                 other party;

          (iii)  which has been developed by the receiving party independent of
                 any disclosure by the other party; or

          (iv)   is subsequently, lawfully and in good faith obtained by the
                 receiving party on a non-confidential basis from a third party
                 as shown by documentation sufficient to establish the third
                 party as the source of the information, provided that such
                 third party was not under an obligation to treat such
                 information in a confidential manner and had a lawful right to
                 make such disclosure;


                                    --33--
<PAGE>
 
          "FDA" shall mean the United States Food and Drug Administration (or
whatever such agency might be called from time to time), or any successor agency
having regulatory jurisdiction over the manufacture, distribution and sale of
drugs in the United States;

          "G(UK) Territory" means all jurisdictions other than the PRI
Territory; provided, that, with respect to a Product, the G(UK) Territory shall
           --------  ----                                                      
not include such jurisdictions in the G(UK) Territory in which G(UK) shall have
forfeited to PRI exclusive manufacturing and distribution rights pursuant to
Section 4.2 of the agreement with respect to such Product;

          "Gross Sales" means, in respect of a Product for a period, the gross
amount invoiced by G(UK) and its Affiliates in such period to unrelated third
party customers on account of the sale of such Product (excluding amounts for
freight, postage, insurance, sales tax and other governmental charges imposed
upon such sale which are included in the gross amount invoiced and shown
separately on such invoice) plus any other form of revenue (other than interest
accruing from or paid by such customers on account of outstanding overdue
invoices) or expense reimbursement or recovery recognized by G(UK) or its
Affiliates in such period in accordance with generally accepted accounting
principles as a result of commercial arrangements relating to such Product;

          "License Fees" means, in respect of a Product for a period, the gross
amount owed to G(UK) and its Affiliates in such period by unrelated third-
parties on account of the sale of such Product pursuant to bona fide licenses to
such unrelated third-parties plus any other form of revenue (other than interest
accruing from or paid by such licensees on account of outstanding overdue
license fees) or expense reimbursement or recovery recognized by G(UK) or its
Affiliates in such period in accordance with generally accepted accounting
principles as a result of licensing or other commercial arrangements relating to
such Product;

          "Net Sales" means Gross Sales less without duplication:

               (i)   credits issued or payments made by G(UK) and its Affiliates
                     to unrelated third party customers for or on account of,
                     without duplication, bona fide rebates granted and
                     customary trade discounts (other than prompt payment
                     discounts) actually allowed by G(UK) or its Affiliates to
                     such customers in the ordinary course of business (except
                     rebates or discounts granted wholly or partially in
                     consideration of such customer's agreement to purchase any
                     service or any product other than the Product unless such
                     rebates or discounts are across-the-board rebates or
                     discounts applied uniformly to the Product and other
                     products or services as part of an overall program of
                     rebates or discounts established by G(UK) covering
                     substantially all of its products), shelf stock
                     adjustments, chargebacks, returned Product, rejection of
                     damaged Product and billing and shipping errors related to
                     the Product;

               (ii)  out-of-pocket costs for freight, postage and insurance
                     incurred by G(UK) or its Affiliates in the period to
                     deliver the Product to unrelated third party customers to
                     the extent that such amount is not charged to such
                     customer; and

               (iii) payments made by G(UK) and its Affiliates for
                     administrative fees, reimbursements or similar payments to
                     or for Medicaid or any other government programs,
                     hospitals, health maintenance organizations, insurance
                     carriers, or other similar arm's length entity or entities
                     in connection with the purchase or utilization of the
                     Product;

          It is understood and agreed that:

          (a)  deductions under (i), (ii) and (iii) above from the gross amount
               invoiced or other revenue recognized shall not include any
               amounts which would be categorized as packaging, relabelling,
               selling, promotion, marketing or general or administrative
               expenses in accordance with generally accepted accounting
               principles;

          (b)  deductions under (i) and (iii) above from the gross amount
               invoiced or other revenue recognized are for actual credits
               issued or payments made by G(UK) and its Affiliates and do not
               include amounts accrued, provided or reserved for estimated or
               potential deductions;



                                    --34--
<PAGE>
 
          (c)  the deduction under (i) above from the gross amount invoiced or
               other revenue recognized shall not include any recall expenses or
               excess reprocurement costs credited or paid to such customer;

          (d)  no amount shall be deducted under (i), (ii), or (iii) above or
               otherwise from the gross amount invoiced or other revenue
               recognized on account of or as an allowance for a bad debt or
               doubtful account in relation to Product sold by G(UK) or its
               Affiliates; and

          (e)  no credit or payment to an unrelated third party customer shall
               be deducted under (i) from the gross amount invoiced or other
               revenue recognized where such credit or payment is an attempt to
               directly or indirectly circumvent the restrictions or limitations
               contained herein as to the nature or quantum of the items which
               may be deducted hereunder in calculating Net Sales nor shall
               G(UK) or its Affiliates reduce the selling price at which the
               Product is sold to an unrelated third party customer with a view
               to circumventing such restrictions or limitations;

          "Partnership Products" means the products currently being developed by
the Partnership on the date of this agreement;

          "Person" shall be broadly interpreted and shall include an individual,
partnership, joint venture, association, corporation, company and any other form
of business organization, government, regulatory or governmental agency,
commission, department and instrumentality;

          "Product Approval" means, with respect to a Product, the final and
unconditional approval of  an application for the product by the appropriate
regulatory authorities enabling G(UK) or PRI or their Affiliates  to sell such
Product in the G(UK) Territory or PRI Territory, as the call may be;

          "Product Information" means, in respect of any Product, all technical
information and data relating to such Product, including the chemistry,
manufacture, use, formulation and regulatory approval thereof, heretofore or
hereafter during the term of this agreement produced or received by, or known to
the Partnership or its applicable Affiliate  including, without limiting the
generality of the foregoing:

          (a) where an approval letter has been issued, a copy of the approval
              as approved and all communication, documents and information
              relevant to the application submission received from or forwarded
              to the regulatory authorities in connection therewith, including
              without limitation, any responses to deficiency letters issued by
              the regulatory authorities;

          (b) if an new drug application submission has been made but no
              approval letter has been received, the submission to the
              appropriate regulatory authority and all communication,
              documentation and information received from or forwarded to the
              regulatory authority in connection therewith including any
              responses to deficiency letters issued by the regulatory
              authority; and

          (c) if no new drug application submission has been made, all data
              compiled heretofore or hereafter compiled for submission
              including, all studies and all communications, documents and
              information received from or forwarded to the regulatory
              authority.

          "PRI Board" means the Board of Directors of PRI;

          "PRI Territory" means the 50 states of the United States of America,
plus the District of Columbia, the Commonwealth of Puerto Rico, the U.S. Virgin
Islands, Guam, Samoa and any other territory which, on the Effective Date is a
United States government protectorate wherein an ANDA approved by the FDA is
required to sell the Product in such territory; provided, that, with respect to
                                                --------  ----                 
a Product, the PRI Territory shall include such jurisdictions in the G(UK)
Territory in which G(UK) shall have forfeited to PRI exclusive manufacturing and
distribution rights pursuant to Section 5.1 of the agreement with respect to
such Product; and

             "Unit" means an individual packaged finished Product.


                                    --36--