<PAGE>
                                                                  EXHIBIT 10.113

 Confidential Treatment Requested. Confidential portions of this document have
      been redacted and have been filed separately with the Commission.


                               LICENSE AGREEMENT

                                by and between

                                   Madaus AG

                                     and

                       INTERNEURON PHARMACEUTICALS, INC.



<PAGE>

                               LICENSE AGREEMENT



     THIS AGREEMENT effective as of November 26, 1999 ("Effective Date"),
between Madaus AG, a corporation organized and existing under the laws of
Germany and having its principal office at Ostmerheimer Stra/Beta/e 198, D-51109
Koln, Germany ("Madaus") and Interneuron Pharmaceuticals, Inc., a corporation
organized and existing under the laws of the state of Delaware, United States,
and having its principal office at 99 Hayden Avenue, Suite 200, Lexington, MA
02421 ("Interneuron").



                              W I T N E S S E T H:



     WHEREAS, Madaus is the owner of the Madaus Know-How, as defined herein;

     WHEREAS, Interneuron desires to obtain an exclusive license under the
Madaus Know-How, upon the terms and conditions set forth herein;

     NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants herein contained, the Parties hereby agree as follows:



                                   ARTICLE I

                                  DEFINITIONS
                                  -----------

     Unless specifically set forth to the contrary herein, the following terms,
where used in the singular or plural, shall have the respective meanings set
forth below:

1.1  "Affiliate" shall mean (i) any corporation or business entity of which more
     -----------
     than fifty percent (50%) of the securities or other ownership interests
     representing the equity, the voting stock or general partnership interest
     are owned, controlled or held, directly or indirectly, by a Party; (ii) any
     corporation or business entity which, directly or indirectly, owns,
     controls or holds more than fifty percent (50%) (or the maximum ownership
     interest permitted by law) of the securities or other ownership interests
     representing the equity, the voting stock or, if applicable, the general
     partnership interest, of a Party or (iii) any corporation or business
     entity of which a Party has the right to acquire, directly or indirectly,
     at least fifty percent

                                       1
<PAGE>

     (50%) of the securities or other ownership interests representing the
     equity, voting stock or general partnership interests.

1.2  "Business Day" means any day that is not a Saturday or a Sunday or a day on
      ------------
     which the New York Stock Exchange is closed.

1.3  "Calendar Quarter" shall mean the respective periods of three (3)
      ----------------
     consecutive calendar months ending on March 31, June 30, September 30 and
     December 31.

1.4  "Calendar Year" shall mean each successive period of twelve (12) months
      -------------
     commencing on January 1 and ending on December 31.

1.5  "Compound" shall mean trospium chloride, the active ingredient in Spasmo-
      --------
     lyt(R).

1.6  "Distribution Period" shall mean the ten (10) year period commencing on the
      -------------------
     date of First Commercial Sale.

1.7  "Effective Date" shall mean the date first above written.
      --------------

1.8  "FDA" shall mean the United States Food and Drug Administration and any
     -----
     successor agency having substantially the same functions.

1.9  "First Commercial Sale" shall mean, with respect to any Licensed Product,
     -----------------------
     the first sale for end use or consumption of such Licensed Product in the
     Territory after all required approvals, including marketing and pricing
     approvals, if any, have been granted by the FDA and any other applicable
     regulatory authority, by Interneuron, its Affiliates or sublicensees.

1.10 "GAAP" means generally accepted accounting principles in the United States.
      ----

1.11 "Generic Drug(s)" shall mean any drug in which Compound is at least one
     -----------------
     active ingredient, except Licensed Product and any generic drugs identical
     to Licensed Product originating from Interneuron or its Affiliates.

1.12 "GLP" shall mean current applicable good laboratory practices regulations
      ---
      of the FDA.

1.13 "cGMP" shall mean current applicable good manufacturing practices
      ----
     regulations of the FDA.

1.14 "Improvement" shall mean any enhancement in the manufacture, formulation,
     -------------
     ingredients, preparation, presentation, means of delivery, dosage or
     packaging of Compound or Licensed Product.

1.15 "IND" shall mean an investigational new drug application and any
     -----
     supplements and additions thereto relating to the use of Compound or
     Licensed Product.

                                       2
<PAGE>

1.16 "Interneuron Know-How" shall mean anything, tangible or intangible, which
      --------------------
     relates to Compound or Licensed Product, that is generated, developed,
     discovered, invented or made during the Term of this Agreement, which are
     in Interneuron's possession or control and as to which Interneuron has the
     right to license or sublicense.

1.17 "Licensed Product" shall mean any product in final form for commercial sale
      -----------------
     by prescription, over-the-counter, or by any other method, which contains
     Compound as at least one active ingredient, which product, Compound, its
     manufacture, use or sale uses Madaus Know How.

1.18 "Madaus Know-How" shall mean any information and materials, including but
      ---------------
     not limited to, discoveries, information, Improvements, processes,
     formulas, data, inventions, patents and patent applications (listed in
     Schedule 1.18), know-how and trade secrets, patentable or otherwise, which
     relates to Compound or Licensed Product, which are in Madaus's possession
     or control as of the Effective Date or at any time during the Term of this
     Agreement, and as to which Madaus has the right to license or sublicense,
     or are necessary or useful in connection with the rights granted and
     activities contemplated under this Agreement.  Such know-how shall include,
     without limitation, all chemical, pharmaceutical, toxicological,
     preclinical, clinical, assay control, manufacturing, regulatory, and any
     other information used or useful for the development and/or regulatory
     approval of Compound and Licensed Product, including any regulatory filing
     or any data included in or generated as a result of or under any regulatory
     filing.

1.19 "NDA" shall mean a new drug application filed with the FDA for marketing
      ---
     authorization of a Licensed Product in the United States.

1.20 "Net Sales" shall mean the actual gross amount invoiced for the sale of
      ---------
     Licensed Product commencing upon the date of First Commercial Sale by
     Interneuron or its Affiliates to the first Third Party after deducting, if
     not previously deducted from the amount invoiced using GAAP:

     (a)  trade, cash, promotional and quantity discounts;

     (b)  recalls, credits and allowances on account of returned or rejected
          products including, but not limited to, allowance for breakage and
          spoilage;

     (c)  rebates, chargebacks and amounts paid on sale or dispensing of
          Licensed Product;

     (d)  retroactive price reductions;

     (e)  sales or excise taxes, VAT or other taxes, transportation and
          insurance charges and

                                       3
<PAGE>

          additional special transportation, custom duties, and other
          governmental charges;

     (f)  reserves for bad debts or allowances, credits or rebates not covered
          by (a) through (e) above;

     provided that the deductions shall total no more than four percent (4%) of
     gross sales, subject to the Net Sales definition in a potential future
     sublicensing agreement.

1.21 "Party" shall mean Madaus or Interneuron.
      -----

1.22 "Proprietary Information" shall mean any and all scientific, clinical,
      -----------------------
     regulatory, marketing, financial and commercial information or data,
     whether communicated in writing, orally or by any other means, which is
     provided by one Party to the other Party in connection with this Agreement.

1.23 "Royalty Year" shall mean each successive twelve (12) month period during
      ------------
     the Distribution Period commencing with the first day of the first month in
     which occurs the First Commercial Sale.

1.24 "SEC" means the United States Securities and Exchange Commission.
      ---

1.25 "Territory" shall mean the United States of America, including the
      ---------
     District of Columbia, and  its territories and possessions.

1.26 "Third Party(ies)" shall mean a person or entity who or which is neither a
      ----------------
     Party nor an Affiliate of a Party.



                                  ARTICLE II

                             LICENSE; SUBLICENSES
                             --------------------

2.1  License Granted by Madaus.  Madaus hereby grants to Interneuron an
     -------------------------
     exclusive, even as to Madaus during the Distribution Period, license under
     the Madaus Know-How, including the right to grant sublicenses, to make,
     have made, use, develop, import, offer for sale, sell, or have sold the
     Licensed Product in the Territory.

2.2  Right to Use Granted by Interneuron.  It is understood that title to
     -----------------------------------
     Interneuron Know-How or any general technology or Improvement developed or
     discovered by Interneuron while engaged in activities embraced by or
     pursuant to the license granted under SECTION 2.1 above shall vest solely
     in Interneuron.  Interneuron hereby grants to Madaus the right to use
     Interneuron's clinical and preclinical data relating to Compound or
     Licensed Product for

                                       4
<PAGE>

     Madaus' own regulatory filings relating to the development and marketing of
     Compound, Licensed Product or both outside the Territory. In addition, it
     is agreed and understood that after the Distribution Period, Madaus shall
     have the right to make, have made, use, and sell the Compound and/or
     Licensed Product in the Territory, by itself or through an Affiliate, using
     Interneuron's clinical and preclinical data relating to the Compound or
     Licensed Product in regard to Interneuron's regulatory filing.

2.3  Sublicenses.
     ------------

     (a)  Interneuron shall have the right to issue sublicenses to Third Parties
          to make, have made, use, develop, import, offer for sale, sell or have
          sold the Licensed Product in the Territory as long as Interneuron has
          rights thereto under this Agreement, provided, however that Madaus
          shall have the right to consent to the sublicensee, which consent
          shall not be unreasonably withheld or delayed.

     (b)  Upon termination of this Agreement by Interneuron, Madaus shall accept
          assignment of sublicenses, provided that:

          (i)  the sublicensee is not in breach of its sublicense agreement at
               the time of termination of this Agreement; and

          (ii) the sublicensee acquires no rights from or obligations on the
               part of Madaus, other than those that are specifically granted in
               this Agreement, and the sublicensee assumes all obligations to
               Madaus required of Interneuron by this Agreement, including past
               due obligations existing at the time of assumption of the
               sublicense, as well as any additional payments required of the
               sublicensee.



                                  ARTICLE III

                       DEVELOPMENT AND COMMERCIALIZATION
                       ---------------------------------

3.1  Exchange of Information. Upon execution of this Agreement, Madaus shall
     -----------------------
     promptly disclose to Interneuron in writing all Madaus Know-How not
     previously disclosed.  During the term of this Agreement, Madaus shall also
     promptly disclose to Interneuron in writing on an ongoing basis all Madaus
     Know-How.

3.2  Diligence; Development and Commercialization.  Interneuron will be
      --------------------------------------------
     responsible for all preclinical development, toxicology and clinical
     development, including regulatory filings, which are required for
     commercialization of Licensed Product in the Territory.  The progress and
     results of such development, as well as such other information reasonably
     requested by

                                       5
<PAGE>

     Madaus relating to the progress, goals or performance of such development,
     will be reported to Madaus at meetings of the Committee (as defined below).
     Interneuron shall also notify Madaus upon the receipt of regulatory
     approvals and of the date of First Commercial Sale.

3.3  Steering Committee.  The Parties agree to establish a steering committee
     ------------------
     (the "Committee") to facilitate the development of Licensed Product as
     follows:

     (a)  Composition of the Committee.  The Committee shall be comprised of
          ----------------------------
          three (3) named representatives of Interneuron and three (3) named
          representatives of Madaus and shall be chaired by a representative of
          Interneuron.  The initial representatives for each Party hereto shall
          be set forth on SCHEDULE 3.3.  Each Party shall appoint its respective
          representatives to the Committee from time to time, and may substitute
          one or more of its representatives, in its sole discretion, effective
          upon notice to the other Party of such change. Additional
          representatives or consultants may from time to time, by mutual
          consent of the Parties, be invited to attend Committee meetings,
          subject to compliance with SECTION 4.1.  The Committee shall use its
          reasonable efforts in good faith to resolve by consensus any issue
          relevant to the development of the Licensed Product.

     (b)  Committee Resolution.  If a majority of the Committee is unable to
          --------------------
          reach an agreement on any issue relating to the development of
          Licensed Product in the Territory, notwithstanding the exercise of its
          reasonable efforts as provided in SECTION 3.3, then such issue shall
          be referred to the chief executive officer of Interneuron  (the
          "CEO").  Any final decision of the CEO shall be conclusive and binding
          on the Parties hereto.  All other issues, including interpretation of
          this Agreement shall be determined in accordance with the provisions
          of SECTION 8.6 hereunder.

     (c)  Meetings and Costs.  The Committee shall meet if necessary once each
          ------------------
          Calendar Quarter, starting in the Calendar Quarter in which this
          Agreement is executed, with the location for such meetings alternating
          between Madaus and Interneuron facilities (or such other locations as
          is determined by the Committee).  Alternatively, the Committee may
          meet by means of conference call or other similar communications
          equipment.  Any costs incurred by either Party in connection with
          meetings of the Committee shall be borne by the respective Party
          incurring such cost.

     (d)  Committee Responsibilities.  Except as specifically set forth in this
          --------------------------
          Agreement, the Committee shall be responsible for overseeing the
          development of Licensed Product, including but not limited to
          generation, review and approval of all clinical protocols, budgets and
          timetables for the development of the Licensed Product.  The Committee
          shall establish appropriate estimates of timeframes for development of
          Licensed Product in the Territory prior to filing of the NDA.

                                       6
<PAGE>

3.4  Regulatory Matters.  Interneuron shall own, control and retain primary
     ------------------
     legal responsibility for the preparation, filing and prosecution of all
     filings and regulatory applications required to obtain marketing
     authorization to commercially sell and use Licensed Product in the
     Territory.  Interneuron shall have the right to cross reference any
     regulatory filing owned by Madaus or to which Madaus has access and the
     legal right to disclose, including but not limited to any drug master file
     relating to the drug substance or drug product manufacturing or
     manufacturing facilities.

3.5  Trademark.  Interneuron shall select, own and maintain any trademarks for
     ----------
     Licensed Product in the Territory.

3.6  Excused Performance.  Interneuron's obligations under this Agreement are
     -------------------
     expressly conditioned on the absence, in Interneuron's reasonable judgment,
     of any adverse condition or event relating to the safety or efficacy of
     Compound and/or Licensed Product.

3.7  Manufacturing.
     -------------

(a)  Interneuron accepts Madaus as exclusive manufacturer of the Licensed
     Product during the Distribution Period, provided that Madaus'
     manufacturing facility is in compliance with GMP and all other regulatory
     requirements in the Territory including successful regulatory inspection
     of any such facility.

(b)  Interneuron reserves the right to appoint a second source supplier if
     Madaus fails to meet the regulatory requirements or is unable to deliver
     the Licensed Product at quantities which satisfy Interneuron's commercial
     requirements.  If such a situation arises, Madaus has the right to
     receive an adequate royalty, not to exceed 1% of net sales for giving
     such a manufacturing license relying on Madaus Know-How.  And
     Interneuron agrees that it will rely in such an eventual situation only
     on the supply of the Compound by Madaus in order to ensure consistent
     Compound identity, provided that regulatory requirements are satisfied,
     and commercial quantities are provided at a mutually agreeable price.

(c)  The supply price, calculated on today's costing and pricing, is [*] German
     Deutschmarks per 1,000 marked tablets of Bulk, FOB German sea-/airport,
     (as defined in Incoterms 1990).

(d)  The supply price is based upon Madaus current active ingredient purchase
     price and manufacturing structure, Madaus will perform best reasonable
     efforts in order to keep both elements as stable as possible for the
     whole term of this agreement.

     Nevertheless, if proven increase occurs Interneuron is prepared to accept
     a fair

-----------------------------------
* Confidential treatment requested.

                                       7
<PAGE>

     modification of the supply prices with prior notice of not less that 6
     (six) months time, provided that the Parties shall agree on a maximum
     annual price increase. In exchange Madaus is prepared to lower the supply
     prices in case the purchase price of the active ingredient moves downwards.

(e)  Prior to the first commercial sale, the Parties agree to negotiate in good
     faith the terms of the delivery which are not yet covered by Art. 3.7.,
     e.g. ordering procedure, shipment, schedule, inventories, Interneuron
     inspection rights standard representation and warranties and appropriate
     insurance coverage.

3.8  Adverse Events.  Madaus shall promptly (within 48 hours if the event is
     --------------
     serious, as defined by regulatory agencies, and otherwise within 30 days)
     furnish to Interneuron all information concerning safety or utility of
     Compound or Licensed Product, such as adverse or unexpected side effects,
     injury or other events associated with uses, studies, investigations or
     tests of Compound or Licensed Product, whether or not Madaus is required to
     report such information to any regulatory authority and whether or not such
     event is determined to be attributable to Compound or Licensed Product.



                                   ARTICLE IV

                        CONFIDENTIALITY AND PUBLICATION
                        -------------------------------

4.1  Non-Disclosure and Non-Use Obligations.  All Proprietary Information
     --------------------------------------
     disclosed by one Party to the other Party hereunder shall be maintained in
     confidence and shall not be disclosed to any Third Party or used for any
     purpose except as expressly permitted herein without the prior written
     consent of the Party that disclosed the Proprietary Information to the
     other Party.  The foregoing non-disclosure and non-use obligations shall
     not apply to the extent that such Proprietary Information:

     (a)  is known by the receiving Party at the time of its receipt, and not
          through a prior disclosure by the disclosing Party, as documented by
          business records;

     (b)  is properly in the public domain;

     (c)  is subsequently disclosed to a receiving Party by a Third Party who
          may lawfully do so and is not under an obligation of confidentiality
          to the disclosing Party; or

     (d)  is developed by the receiving Party independently of Proprietary
          Information received

                                       8
<PAGE>

          from the other Party, as documented by research and development
          records.

4.2  Permitted Disclosure of Proprietary Information.  Notwithstanding SECTION
     -----------------------------------------------
     4.1, a Party receiving Proprietary Information of another Party may
     disclose such Proprietary Information:

     (a)  to governmental or other regulatory agencies in order to obtain
          patents subject to this Agreement, or to gain approval to conduct
          clinical trials or to market Licensed Product, but such disclosure may
          be only to the extent reasonably necessary to obtain such patents or
          authorizations;

     (b)  by each of Interneuron or Madaus to its respective permitted
          sublicensees, agents, consultants, Affiliates and/or Third Parties for
          the research and development, manufacturing and/or marketing of the
          Compounds and/or Licensed Products (or for such parties to determine
          their interests in performing such activities) on the condition that
          such Third Parties agree to be bound by the confidentiality
          obligations contained in this Agreement; or

     (c)  if required to be disclosed by law or court order, provided that
          notice is promptly delivered to the non-disclosing Party in order to
          provide an opportunity to challenge or limit the disclosure
          obligations; provided, however, without limiting any of the foregoing,
                       --------  -------
          it is understood that Interneuron, including any Affiliate, may make
          disclosure of this Agreement, and the terms hereof in a press release
          and in any filings required by the SEC, may file this Agreement as an
          exhibit to any filing with the SEC and may distribute any such filing
          in the ordinary course of its business.

     Upon execution of this Agreement, the Parties may issue a press release in
     the form attached as Appendix 4.2.
                          -------------

4.3  Publication.  If either Party, its employees or consultants wish to make a
     -----------
     publication or to make an oral disclosure, it shall deliver to the other
     Party a copy of the proposed written publication or an outline of an oral
     disclosure at least seven (7) days prior to submission for publication or
     presentation. If the other Party requests modifications to the publication
     or oral disclosure, the disclosing Party shall edit such publication to
     prevent disclosure of proprietary business information prior to submission
     of the publication or prior to oral disclosure.



                                   ARTICLE V

                        PAYMENTS;  ROYALTIES AND REPORTS
                        --------------------------------

5.1  Milestone Payments. Subject to the terms and conditions contained in this
     ------------------
     Agreement, Interneuron shall pay Madaus the following milestone payments
     within ninety (90) days after

                                       9
<PAGE>

     the achievement of each of the following milestones, provided that each
     milestone payment will be made no more than once with respect to the
     achievement of each such milestone for the Licensed Product:

     (a)  US$2,000,000 upon the receipt of written approval by the FDA of an NDA
          with respect to Licensed Product, 50% of which shall be creditable
          against royalties payable under SECTION 5.2 hereof; and

     (b)  US$[*] after the first Calendar Quarter in which cumulative Net Sales
          of Licensed Product in the Territory exceed US$[*].

5.2  Royalties.
     ----------

     5.2.1  Royalties Payable By Interneuron.
            ---------------------------------

          (a)  Subject to the terms and conditions of this Agreement, during the
               first five (5) years of the Distribution Period, Interneuron
               shall pay to Madaus royalties  equal to the following percentages
               of Net Sales in the Territory each Royalty Year of Licensed
               Product:

                    Amount of Net Sales              Royalty Rate
                   ---------------------             ------------
                   Up to US$75 million                    [*]%
                   Over US$75 million to US$150 million   [*]%
                   Over US$150 million                    [*]%

          (b)  Subject to the terms and conditions of this Agreement, during the
               second five (5) years of the Distribution Period, Interneuron
               shall pay to Madaus royalties equal to 2.5% of Net Sales in the
               Territory each Royalty Year of Licensed Product.

          (c)  Notwithstanding the provisions of Subsection (a) and (b) above,
               no royalties shall be payable commencing on the first date in
               which any or all Generic Drugs achieve a market share in one
               Calendar Quarter of thirty three percent (33%) or greater of the
               total prescriptions for Compound or Licensed Product in the
               Territory (as so shown by the average of the monthly IMS (or IMS-
               equivalent) data for such prescriptions in those two consecutive
               Calendar Quarters of that Calendar Year).

          (d)  The payment of royalties set forth above shall be subject to the
               following conditions:

-----------------------------------
* Confidential treatment requested.

                                       10
<PAGE>

               (i)    that only one royalty shall be due with respect to the
                      same unit of Licensed Product;

               (ii)   that in the event that Interneuron enters into a
                      sublicense in the Territory to a Third Party or Third
                      Parties, in lieu of royalty payments set forth in SECTION
                      5.2.1, Interneuron shall pay Madaus twenty-five percent
                      (25%) of sublicensing royalty on net sales of Licensed
                      Product(s) that Interneuron receives in respect of such
                      sublicense(s), provided, however, that during the first
                      five years of the Distribution Period, in no event shall
                      such sublicense royalty payments to Madaus be less than
                      four percent (4%) of the net sales of Licensed Product(s)
                      by a sublicensee or sublicensees in the sublicensed
                      territory; and

               (iii)  no royalties shall accrue on the disposition of Licensed
                      Product by Interneuron, Affiliates or sublicensees as
                      samples (promotion or otherwise) or as donations (for
                      example, to non-profit institutions or government agencies
                      for a non-commercial purpose).

          (e)  Royalties on Licensed Product at the rate set forth above shall
               be effective as of the date of First Commercial Sale of Licensed
               Product in the Territory and shall continue until expiration of
               the applicable portion of the Distribution Period.

     5.2.2  Third Party Licenses.  If one or more patent licenses from a Third
            ---------------------
            Party or Parties are required by Interneuron, its Affiliates or
            sublicensees in order to develop, make, have made, use, sell or
            import the Licensed Product in the Territory, any royalties or other
            payments paid under such Third Party patent licenses by Interneuron
            for manufacture, use, or sale of such Licensed Product for such
            Calendar Quarter shall be creditable in full against the royalty
            payments to be paid to Madaus by Interneuron with respect to the
            manufacture, use, or sale of such Licensed Product.

5.3  Reports; Payment of Royalty.  Following the First Commercial Sale of a
     ----------------------------
     Licensed Product and during the term of the Agreement for so long as
     royalty payments are due, Interneuron shall furnish to Madaus a quarterly
     written report for the Calendar Quarter showing the sales of all Licensed
     Products subject to royalty payments sold by Interneuron, its Affiliates
     and its sublicensees in the Territory during the reporting period (and a
     reconciliation of gross sales to Net Sales) and the royalties payable under
     this Agreement.  Reports shall be due on the forty-fifth (45th) day
     following the close of each Calendar Quarter, subject to an extension in
     accordance with the terms of a potential future sublicensing agreement.
     Royalties shown to have accrued by each royalty report, if any, shall be
     due and payable on the date such royalty report is due.  Interneuron shall
     keep complete and accurate records in sufficient detail to enable the
     royalties payable hereunder to be determined.

                                       11
<PAGE>

5.4  Audits.
     -------

     (a)  Upon the written request of Madaus and not more than once in each
          Calendar Year, Interneuron shall permit an independent certified
          public accounting firm of nationally recognized standing selected by
          Madaus and reasonably acceptable to Interneuron, to have access during
          normal business hours at times mutually convenient to the Parties and
          upon reasonable notice to Interneuron to such of the records of
          Interneuron as may be reasonably necessary to verify the accuracy of
          the royalty reports hereunder for any year ending not more than
          twenty-four (24) months prior to the date of such request.  The
          accounting firm shall disclose to Madaus only whether the royalty
          reports are correct or incorrect and the specific details concerning
          any discrepancies.

     (b)  If such accounting firm concludes, and Interneuron agrees, that
          additional royalties were owed during such period, Interneuron shall
          pay the additional royalties within sixty (60) days of the date Madaus
          delivers to Interneuron such accounting firm's written report so
          concluding; provided that, in the event that Interneuron shall not be
          in agreement with the conclusion of such report (a) Interneuron shall
          not be required to pay such additional royalties and (b) such matter
          shall be resolved pursuant to the provisions of SECTION 8.6 herein.
          In the event such accounting firm concludes that amounts were overpaid
          by Interneuron during such period, Madaus shall reimburse Interneuron
          the amount of such overpayment within thirty (30) days of receipt of
          such accounting firm's written report.  The fees charged by such
          accounting firm shall be paid by Madaus; provided, however, that if an
                                                   --------  -------
          error in favor of Madaus in the payment of royalties of more than the
          greater of (i) US$100,000 or (ii) ten percent (10%) of the royalties
          due hereunder for the period being reviewed is discovered, then the
          fees and expenses of the accounting firm shall be reimbursed by
          Interneuron.

     (c)  Upon the expiration of twenty-four (24) months following the end of
          any Royalty Year the calculation of royalties payable with respect to
          such year shall be binding and conclusive upon Madaus, and Interneuron
          and its sublicensees shall be released from any liability or
          accountability with respect to royalties for such year.

     (d)  Madaus shall treat all financial information subject to review under
          this SECTION 5.4 or under any sublicense agreement in accordance with
          the confidentiality provisions of this Agreement.

5.5  Payment.  All royalty payments to Madaus under this Agreement shall be made
     --------
     in United States dollars.

                                       12
<PAGE>

5.6  Tax Withholding.  If laws, rules or regulations require withholding of
     ---------------
     income taxes or other taxes imposed upon payments set forth in this Article
     V, Madaus shall provide Interneuron, prior to any such payment, annually or
     more frequently if required, with all forms or documentation required by
     any applicable taxation laws, treaties or agreements to such withholding or
     as necessary (including, but not limited to, Form 1001 and any successor
     form) and Interneuron shall make such withholding payments as required and
     subtract such withholding payments from the payments set forth in this
     Article V. Interneuron shall submit appropriate proof to Madaus of payment
     of the withholding taxes within a reasonable period of time. Interneuron
     will use efforts consistent with its usual business practices to ensure
     that any withholding taxes imposed are reduced as far as possible under the
     provisions of the current or any future taxation treaties or agreements
     between foreign countries, and Madaus shall cooperate with such efforts.



                                   ARTICLE VI

                         REPRESENTATIONS AND WARRANTIES
                         ------------------------------

6.1  Madaus Representations and Warranties.  Madaus represents and warrants to
     --------------------------------------
     Interneuron that as of the Effective Date:

     (a)  this Agreement has been duly executed and delivered by it and
          constitutes legal, valid, and binding obligations of it enforceable
          against it in accordance with its terms;

     (b)  no approval, authorization, consent, or other order or action of or
          filing with any court, administrative agency or other governmental
          authority is required for the execution and delivery by it of this
          Agreement or the consummation by it of the transactions contemplated
          hereby;

     (c)  it has the full right, power and authority to enter into and deliver
          this Agreement, to perform and to grant the licenses granted under
          Article II hereof and to consummate the transactions contemplated
          hereby.  All corporate acts and other proceedings required to be taken
          to authorize such execution, delivery, and consummation have been duly
          and properly taken and obtained;

     (d)  it has not previously assigned, transferred, conveyed or otherwise
          encumbered its right, title and interest in the Madaus Know-How or
          entered into any agreement with any Third Party which is in conflict
          with the rights granted to Interneuron pursuant to this Agreement;

     (e)  it is the sole and exclusive owner under the Madaus Know-How, all of
          which are free and clear of any liens, charges and encumbrances, and
          to the best of Madaus' knowledge, no other person, corporate or other
          private entity, or governmental entity or subdivision thereof, has
          any valid claim of ownership with respect to the Madaus Know-How,
          whatsoever;

                                       13
<PAGE>

     (f)  patents contained in the Madaus Know-How are valid or enforceable;

     (g)  the Madaus Know-How practiced as contemplated herein and the
          development, manufacture, use and sale of Compound and Licensed
          Products do not and will not infringe any patent rights owned or
          possessed by any Third Party;

     (h)  there are no claims, judgments or settlements against or owed by
          Madaus or pending or, threatened claims or litigation relating to the
          Madaus Know-How; and

     (i)  it has disclosed to Interneuron all relevant information known by it
          regarding the Madaus Know-How reasonably related to the activities
          contemplated under this Agreement.

6.2  Interneuron Representations and Warranties.  Interneuron represents and
     -------------------------------------------
     warrants to Madaus that as of the Effective Date:

     (a)  it has full corporate power and authority to execute and deliver this
          Agreement and the other agreements and instruments to be executed and
          delivered by it pursuant hereto and to consummate the transactions
          contemplated hereby and thereby; and

     (b)  no approval, authorization, consent, or other order or action of or
          filing with any court, administrative agency or other governmental
          authority is required for the execution and delivery by it of this
          Agreement or the consummation by it of the transactions contemplated
          hereby.



                                  ARTICLE VII

                              TERM AND TERMINATION
                              --------------------

7.1  Term and Expiration.  This Agreement shall be effective as of the Effective
     --------------------
     Date and unless terminated earlier pursuant to SECTION 7.2 or 7.3 below,
     the term of this Agreement shall continue in effect until the end of the
     Distribution Period.  Upon expiration of the royalty obligations with
     respect to a Licensed Product hereunder, Interneuron's license to such
     Licensed Product pursuant to SECTION 2.1 shall become a fully paid-up,
     perpetual license.

7.2  Termination by Notice.  Notwithstanding anything contained herein to the
     ----------------------
     contrary, Interneuron shall have the right to terminate this Agreement at
     any time by giving thirty (30) days advance written notice to Madaus in the
     event of any event, condition, or regulatory

                                       14
<PAGE>

     action that affects the safety or efficacy of the Compound or Licensed
     Product in the Territory. In the event of such termination, (i) the rights
     and obligations hereunder, including any payment obligations not due and
     owing as of the termination date, shall terminate and (ii) Interneuron
     shall have no further rights with respect to the Madaus Know-How.

7.3  Termination for Cause
     ---------------------

     Either Party may terminate this Agreement by notice to the other Party at
     any time during the term of this Agreement:

          (a)  if the other Party is in breach of its material obligations
               hereunder by causes and reasons within its control and has not
               cured such breach within ninety (90) days after notice requesting
               cure of the breach provided, however, that if the breach is not
               capable of being cured within ninety (90) days of such written
               notice, the Agreement may not be terminated so long as the
               breaching Party commences and is taking commercially reasonable
               actions to cure such breach as promptly as practicable; or

          (b)  upon the filing or institution of bankruptcy, reorganization,
               liquidation or receivership proceedings, or upon an assignment of
               a substantial portion of the assets for the benefit of creditors
               by the other Party; provided,  however, in the case of any
               involuntary bankruptcy, reorganization, liquidation, receivership
               or assignment proceeding such right to terminate shall only
               become effective if the Party consents to the involuntary
               proceeding or such proceeding is not dismissed within ninety (90)
               days after the filing thereof.

7.4  Effect of Expiration or Termination.  Expiration or termination of this
     ------------------------------------
     Agreement shall not relieve the Parties of any obligation accruing prior to
     such expiration or termination.  In addition to any other provisions of
     this Agreement which by their terms continue after the expiration of this
     Agreement, the provisions of Article IV shall survive the expiration or
     termination of this Agreement and shall continue in effect for five (5)
     years from the date of expiration or termination.  Any expiration or early
     termination of this Agreement shall be without prejudice to the rights of
     any Party against the other accrued or accruing under this Agreement prior
     to termination, including the obligation to pay royalties for Licensed
     Product(s) or Compound sold prior to such termination.  Except as otherwise
     provided in this SECTION 7, in the event of termination by Madaus pursuant
     to SECTION 7.3, Interneuron shall promptly return any and all Madaus Know-
     How in its possession at the time of termination.

                                       15
<PAGE>

                                  ARTICLE VIII

                                 MISCELLANEOUS
                                 -------------

8.1  Force Majeure.  Neither Party shall be held liable or responsible to the
     --------------
     other Party nor be deemed to have defaulted under or breached the Agreement
     for failure or delay in fulfilling or performing any term of the Agreement
     during the period of time when such failure or delay is caused by or
     results from causes beyond the reasonable control of the affected Party
     including, but not limited to, fire, flood, embargo, war, acts of war
     (whether war be declared or not), insurrection, riot, civil commotion,
     strike, lockout or other labor disturbance, act of God or act, omission or
     delay in acting by any governmental authority or the other Party. The
     affected Party shall notify the other Party of such force majeure
     circumstances as soon as reasonably practicable.

8.2  Assignment.  The Agreement may not be assigned or otherwise transferred,
     -----------
     nor, except as expressly provided hereunder, may any right or obligations
     hereunder be assigned or transferred by a Party; provided, however, that
                                                      --------  -------
     either Party may assign the Agreement and its rights and obligations
     hereunder to an Affiliate or in connection with the transfer or sale of all
     or substantially all of its assets related to Compound or Licensed Products
     or its business or in the event of its merger or consolidation or change in
     control or similar transaction.  Except as otherwise set forth herein, any
     permitted assignee shall assume all obligations of its assignor under this
     Agreement.

8.3  Severability.  In the event that any of the provisions contained in this
     -------------
     Agreement are held invalid, illegal or unenforceable in any respect, the
     validity, legality and enforceability of the remaining provisions contained
     herein shall not in any way be affected or impaired thereby, unless the
     absence of the invalidated provision(s) adversely affect the substantive
     rights of the Parties.  In such event, the Parties shall replace the
     invalid, illegal or unenforceable provision(s) with valid, legal and
     enforceable provision(s) which, insofar as practical, implement the
     purposes of this Agreement.

8.4  Notices.  All notices or other communications which are required or
     --------
     permitted hereunder shall be in writing and sufficient if delivered
     personally, sent by facsimile (and promptly confirmed by personal delivery,
     registered or certified mail or overnight courier), sent by nationally-
     recognized overnight courier or sent by registered or certified mail,
     postage prepaid, return receipt requested, addressed as follows:

          if to Interneuron to:  Interneuron Pharmaceuticals, Inc.
                                 99 Hayden Avenue, Suite 200
                                 Lexington, MA 02421
                                 USA
                                 Attention:  President
                                 Fax No.:  781-862-3859

                                       16
<PAGE>

          if to Madaus to:  Madaus AG
                            Ostmerheimer Stra/Beta/e 198
                            D-51109 Koln
                            Germany
                            Attention: Dr. Carl Schneider
                            Fax No.:  011-49-221-8998-731

     or to such other address as the Party to whom notice is to be given may
     have furnished to the other Parties in writing in accordance herewith.  Any
     such communication shall be deemed to have been given when delivered if
     personally delivered or sent by facsimile on a business day, upon confirmed
     delivery by nationally-recognized overnight courier if so delivered and on
     the third business day following the date of mailing if sent by registered
     or certified mail.

8.5  Applicable Law.  The Agreement shall be governed by and construed in
     ---------------
     accordance with the laws of the United States of America and State of
     Delaware without reference to any rules of conflict of laws.

8.6  Dispute Resolution.  The Parties agree to attempt initially to solve all
     -------------------
     claims, disputes, or controversies arising under, out of, or in connection
     with this Agreement by conducting good faith negotiations.  If the Parties
     are unable to settle the matter between themselves, the matter shall
     thereafter be resolved by alternative dispute resolution, starting with
     mediation and including, if necessary, a final and binding arbitration.
     Whenever a Party shall decide to institute arbitration proceedings, it
     shall give written notice to that effect to the other Party. The Party
     giving such notice shall refrain from instituting the arbitration
     proceedings for a period of sixty (60) days following such notice.  During
     such period, the Parties shall continue to make good faith efforts to
     amicably resolve the dispute without arbitration.  Any arbitration
     hereunder shall be conducted under the rules of arbitration of the
     International Chamber of Commerce  ("ICC").  Each such arbitration shall be
     conducted by a panel of three arbitrators: one arbitrator shall be
     appointed by each of Interneuron and Madaus and the third shall be
     appointed by the ICC.  Any such arbitration shall be held in London,
     England.  The arbitrators shall have the authority to grant specific
     performance.  Judgment upon the award so rendered may be entered in any
     court having jurisdiction or application may be made to such court for
     judicial acceptance of any award and an order of enforcement, as the case
     may be.  In no event shall a demand for arbitration be made after the date
     when institution of a legal or equitable proceeding based on such claim,
     dispute or other matter in question would be barred by the applicable
     statute of limitations.  Each Party shall bear its own costs and expenses
     incurred in connection with any arbitration proceeding and the Parties
     shall equally share the cost of the arbitration levied by the ICC.

8.7  Entire Agreement.  This Agreement contains the entire understanding of the
     -----------------
     Parties with respect to the subject matter hereof.  All express or implied
     agreements and understandings,

                                       17
<PAGE>

     either oral or written, heretofore made are expressly merged in and made a
     part of this Agreement. This Agreement may be amended, or any term hereof
     modified, only by a written instrument duly executed by all Parties hereto.

8.8  Headings.  The captions to the several Articles and Sections hereof are not
     ---------
     a part of the Agreement, but are merely guides or labels to assist in
     locating and reading the several Articles and Sections hereof.

8.9  Independent Contractors.  It is expressly agreed that the Parties shall be
     ------------------------
     independent contractors and that the relationship between the Parties shall
     not constitute a partnership, joint venture or agency.  Neither Party shall
     have the authority to make any statements, representations or commitments
     of any kind, or to take any action, which shall be binding on the other
     Party, without the prior consent of such other Party.

8.10 Waiver.  The waiver by a Party hereto of any right hereunder or the failure
     -------
     to perform or of a breach by another Party shall not be deemed a waiver of
     any other right hereunder or of any other breach or failure by said other
     Party whether of a similar nature or otherwise.

8.11 Counterparts.  The Agreement may be executed in two or more counterparts,
     -------------
     each of which shall be deemed an original, but all of which together shall
     constitute one and the same instrument.

8.12 Euro Conversion.  If the Euro becomes the only legal tender in Germany at
     ----------------
     any time during the term of this Agreement, in the event that financial
     payments are required to be made in German Deutschemarks pursuant to this
     Agreement, these payments shall be made in Euros, converted from
     Deutschemarks based upon the officially defined rate of exchange as of the
     date upon which the Euro becomes the only legal tender in Germany.  The
     fact that the Euro becomes the only legal tender in Germany, or the
     conversion from Deutschemarks to Euros as provided herein, shall not affect
     the validity or effectiveness of this Agreement, and shall not form the
     basis for termination of this Agreement by either Party.

     IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date
first set forth above.

MADAUS AG

By:     s/s Gunther Niederheide                   s/s Carl C. Schneider, Ph.D.
        ----------------------------------------------------------------------
Name:   Gunther Niederheide                       Carl C. Schneider, Ph.D.
Title:  Board Member                              Corporate Projects


INTERNEURON PHARMACEUTICALS, INC.

                                       18
<PAGE>

By:    /s/ Glenn L. Cooper, M.D.
       -------------------------
Name:  Glenn L. Cooper, M.D.
Title: President and Chief Executive Officer

                                       19
<PAGE>

                                 SCHEDULE 1.18
                                 -------------

                    Madaus Patents and Patent Applications*

U.S. Patent Number 4,780,476 entitled, "Azoniaspironortropanol Esters as Asthma
Therapeutics and Broncholytics"

U.S. Patent Number 4,855,422 entitled, "Processes for the Preparation of
Azoniaspironortropanol Esters"

*Madaus has advised Interneuron that the bulk to be supplied by Madaus to
Interneuron is not protected by the patents listed herein.

                                       20
<PAGE>

                                  SCHEDULE 3.3
                                  ------------

                               Steering Committee


Interneuron:
-----------

Bobby W. Sandage, Jr.,  Ph.D., Executive Vice President, Research & Development
and CSO
Richard E. Gammans, Ph.D., Senior Vice President, Clinical Research
Sonja Barton Loar, Pharm.D., Vice President, Regulatory and Scientific Affairs


Madaus:
------

Elke Leng-Peschlow, Ph.D., International Project Director
Uwe Pechar, Ph.D., Director of Regulatory Affairs
Michael Schaefer, M.D., Medical Director

                                       21