<PAGE>   1

                                                                    EXHIBIT 10.1



                                     RELAXIN

                         DEVELOPMENT, COMMERCIALIZATION

                                       AND

                                LICENSE AGREEMENT


                                 by and between


                                Paladin Labs Inc.


                                       and


                              Connetics Corporation





                                  July 7, 1999



* Confidential treatment has been requested for this portion of the Agreement.
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                                TABLE OF CONTENTS
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ARTICLE I - Definitions.........................................................   1
ARTICLE II - LICENSE............................................................   6
     2.1   License..............................................................   6
           2.1.1    Licensed IP.................................................   6
           2.1.2    Trademarks..................................................   6
           2.1.3    Connetics Improvements .....................................   7
           2.1.4    Sublicenses ................................................   7
     2.2    License to Paladin Improvements.....................................   7
     2.3   Third Party Technology...............................................   7
           2.3.1................................................................   7
           2.3.2................................................................   8
           2.3.3................................................................   8
     2.4   Reservation of Rights................................................   8
     2.5   Enforcement..........................................................   8
           2.5.1    Enforcement of Licensed IP .................................   8
           2.5.2    Encroachment ...............................................   9
     2.6   Other Countries......................................................   9

ARTICLE III - Product Development and Regulatory Approval ......................  10
     3.1   Product Development .................................................  10
           3.1.1    Development Committee.......................................  10
           3.1.2    Development Plan............................................  10
           3.1.3    Clinical Development........................................  10
           3.1.4    Regulatory Filings..........................................  10
           3.1.5    Patent Extensions...........................................  10
     3.2   Product Development Costs............................................  11
           3.2.1    General.....................................................  11
           3.2.2    Quarterly Reports...........................................  11
     3.3   Reproductive Indications.............................................  11
     3.4   Access to Information................................................  11
     3.5   Records..............................................................  12

ARTICLE IV - PAYMENTS AND EQUITY INVESTMENT ....................................  12
     4.1   Payments to Connetics................................................  12
           4.1.1    Development Fees............................................  12
           4.1.2    Milestone Payments..........................................  12
           4.1.3    Research and Development Payments...........................  13
     4.2   Payment Terms........................................................  14
     4.3   Equity Purchase......................................................  14
     4.4   Adjustments to Payment Obligations...................................  14
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ARTICLE V - MANUFACTURE AND COMMERCIALIZATION ..................................  14
     5.1   Manufacture .........................................................  14
           5.1.1    Clinical Supplies...........................................  14
           5.1.2    Product for Commercial Sale.................................  15
           5.1.3    Royalty.....................................................  15
           5.1.4    Contract Manufacturing......................................  16
           5.1.5    Inability to Supply.........................................  16
           5.1.6    Alternate Supply............................................  16
     5.2   Payment Terms........................................................  17
           5.2.1    Royalty Payments............................................  17
           5.2.2    Timing, Form of Payment.....................................  17
           5.2.3    Nonconforming Clinical Supplies.............................  17
           5.2.4    Payments for Commercial Supply..............................  18
     5.3   Product Markings.....................................................  18
     5.4   Commercialization....................................................  18
     5.5   Audit................................................................  18
           5.5.1    Books and Records...........................................  18
           5.5.2    Audit of Paladin's Records..................................  19
           5.5.3    Audit of Connetics' Records.................................  19
           5.5.4    Audit Results: Payments.....................................  19

ARTICLE VI - WARRANTIES AND INDEMNITIES.........................................  19
     6.1   Representations and Warranties of Connetics..........................  19
           6.1.1    Organization: Standing......................................  20
           6.1.2    No Conflicts................................................  20
           6.1.3    Rights to Licensed IP.......................................  20
           6.1.4    No Lawsuits, etc............................................  20
           6.1.5    Third Party Rights..........................................  20
           6.1.6    No Encumbrances.............................................  20
           6.1.7    No Other Agreements.........................................  20
           6.1.8    Information.................................................  21
6.1.9    Testing ...............................................................  21
6.1.10   Adverse Experiences ...................................................  21
     6.2   Representation and Warranties of Paladin.............................  21
           6.2.1    Organization; Standing......................................  21
           6.2.2    No Conflicts................................................  21
     6.3   Disclaimer of Warranties.............................................  21
     6.4   Indemnification of Paladin...........................................  22
     6.5   Indemnification of Connetics.........................................  22
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     6.6   Indemnification Procedure............................................  22
           6.6.1    Notice......................................................  22
           6.6.2    Copies .....................................................  23
           6.6.3    Participation ..............................................  23
     6.6.4 Control of Defense ..................................................  23
           6.6.5    Settlement .................................................  23
           6.6.6    Costs and Expenses..........................................  23
     6.7   Limitation of Liability..............................................  24

ARTICLE VII - COVENANTS ........................................................  24
     7.1   Connetics' Covenants to Paladin......................................  24
           7.1.1    Manufacture.................................................  24
           7.1.2    Compliance with Laws........................................  24
           7.1.3    Permits; Licenses...........................................  24
           7.1.4    Future Patents..............................................  24
           7.1.5    Insurance...................................................  25
           7.1.6    Non-Compete.................................................  25
           7.1.7    Commercialization...........................................  25
           7.1.8    Maintenance of Patents......................................  25
     7.2   Paladin's Covenants to Connetics.....................................  25
           7.2.1    Commercialization...........................................  25
           7.2.2    Permits; Licenses...........................................  25
           7.2.3    Future Patents..............................................  26

ARTICLE VIII - CONFIDENTIALITY AND PUBLICITY....................................  26
     8.1   Public Relations and Announcements...................................  26
     8.2   Confidentiality......................................................  26
           8.2.1    Confidential Information....................................  26
           8.2.2    Exceptions..................................................  26
     8.3   Remedy...............................................................  27
     8.4   Agreement Terms......................................................  27
ARTICLE IX - TERM AND TERMINATION ..............................................  27
     9.1   Term.................................................................  27
     9.2   Termination..........................................................  27
           9.2.1    For Breach by Connetics.....................................  27
           9.2.2    For Breach by Paladin.......................................  28
           9.2.3    Loss of Third Party Licenses................................  28
           9.2.4    Termination by Paladin......................................  28
           9.2.5    Termination for Insolvency..................................  28
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     9.3   Effect of Termination................................................  28
           9.3.1    Effect on License...........................................  28
           9.3.2    Ongoing Obligations.........................................  29
           9.3.3    Inventory...................................................  29

ARTICLE X - REGULATORY COMPLIANCE AND REPORTING ................................  29
     10.1  Government Inspection ...............................................  29
     10.2  Adverse Experience Reporting.........................................  30
     10.3  Notification and Recall..............................................  30
     10.4  Recall Expense.......................................................  31

ARTICLE XI- MISCELLANEOUS ......................................................  31
     11.1  Taxes, Tariffs, Fees ................................................  31
     11.2  Currency of Payments ................................................  31
     11.3  Compliance With Laws ................................................  32
     11.4  Dispute Resolution and Governing Law.................................  32
           11.4.1   Process.....................................................  32
           11.4.2   Governing Law...............................................  32
     11.5  Section Headings ....................................................  32
     11.6  Notices..............................................................  32
     11.7  Force Majeure........................................................  33
     11.8  Nonassignability and Binding Effect..................................  33
     11.9  Partial Invalidity ..................................................  33
     11.10 No Waiver ...........................................................  33
     11.11 Counterparts ........................................................  34
     11.12 Entire Agreement ....................................................  34
     11.13 Independent Contractors..............................................  34
</TABLE>

<PAGE>   6

                                     RELAXIN
              DEVELOPMENT, COMMERCIALIZATION AND LICENSE AGREEMENT

     This DEVELOPMENT, COMMERCIALIZATION AND LICENSE AGREEMENT, effective as of
July 7, 1999 ("EFFECTIVE DATE") is made by and between Paladin Labs Inc., having
its principal place of business at 6111 Royalmount, Suite 102, Montreal, Quebec,
Canada H4P 2T4 ("PALADIN") and Connetics Corporation, a Delaware corporation,
having its principal place of business at 3400 West Bayshore Road, Palo Alto,
California, 94303, U.S.A. ("CONNETICS") (each, respectively, a "PARTY" and
collectively, the "PARTIES").

                                   BACKGROUND

     A. Connetics possesses certain technology and intellectual property rights
pertaining to Relaxin as defined in this Agreement.

     B. Connetics and Paladin desire to collaborate to develop and commercialize
Product in the Territory (all as defined in this Agreement).

THEREFORE, the Parties agree as follows:


                                    ARTICLE I
                                   DEFINITIONS

The following terms shall be deemed to have the meanings stated below:

     "ADDITIONAL INDICATION(S)" means all human therapeutic indications except
DSS and Reproductive Indications.

     "ADVERSE EXPERIENCE" shall have the meaning set forth in SECTION 10.2 of
this Agreement.

     "AFFILIATE" means any individual, corporate or other entity that controls,
is controlled by or is under common control with a Party. For purposes of this
definition, "control" shall mean the possession directly or indirectly, of a
majority of the voting power of such entity (whether through ownership of
securities or partnership or other ownership interests, by contract or
otherwise); provided that such entity shall be deemed an Affiliate only so long
as such control continues.

     "AGREEMENT" means this agreement together with all exhibits, schedules, and
appendices attached to this agreement, all as respectively amended, modified or
supplemented by the Parties in accordance with the terms of this agreement.

     "BLA" means a Biologics License Application, or equivalent FDA application
relating to the manufacturing and marketing of biologically based pharmaceutical
products, filed with the FDA or any such comparable applications in the
Territory.



                                      -1-
<PAGE>   7

     "CLINICAL DEVELOPMENT" means all activities subsequent to the Effective
Date relating to human clinical trials including pre-clinical and additional
studies specifically required to support Regulatory Filings for the purpose of
obtaining Regulatory Approval to market and sell Product. Clinical Development
specifically excludes any activities which are part of CMC Development.

     "CMC DEVELOPMENT" means all development activities relating to Product
manufacturing, scale-up, quality assurance, quality control, Product
characterization, and stability.

     "COGS" means a Party's cost of producing the Product, computed in
accordance with GAAP applied on a consistent basis. Such costs shall include the
reasonable, out of pocket cost (whether incurred directly by such Party or
invoiced by any Third Party) of all raw materials, labor and overhead for
manufacturing, formulation, storage, filling, finishing, labeling, packaging,
quality assurance and quality control, shipping and distribution costs, and
technical support incurred directly and exclusively for, or proportionately
allocated to, the production of the Product, any value added taxes or
transportation charges, and any royalties (other than royalties payable pursuant
to Third Party Licenses) paid pursuant to licenses in connection with the
manufacturing process or materials used. Until such time, if ever, as Connetics
manufactures Relaxin Materials and/or Product, Connetics' COGS shall equal the
net amount invoiced by Contract Manufacturer(s) allocable to the Product for
Paladin plus ten percent (10%).

     "COMMERCIALLY REASONABLE EFFORTS" means the effort by Paladin or Connetics
to deploy, in light of prevailing circumstances and taking into account Third
Party obligations and commitments, sufficient resources, capital equipment,
material and labor as might reasonably be expected to achieve in an appropriate
time-scale, the benefits which are anticipated to accrue to Paladin and
Connetics from the commercial exploitation of the Product, and if the
Commercially Reasonable Efforts are to be directed to a specific goal, then that
goal.

     "CONFIDENTIAL INFORMATION" shall have the meaning set forth in SECTION
8.2.1 of this Agreement.

     "CONNETICS' IMPROVEMENTS" means any inventions, discoveries, improvements
or enhancements relating to Relaxin, whether patented, patentable or not,
conceived or first reduced to practice by Connetics during the Term and any and
all intellectual property rights therein and thereto. Connetics shall promptly
notify Paladin of the details of such Connetics Improvements as soon as possible

     "CONTRACT MANUFACTURER" means any Third Party contracted by Connetics to
provide manufacturing services which are material to Relaxin Materials or
Product, or any component or ingredient therein. Without limiting the foregoing,
the term "Contract Manufacturer" shall include any Third Party whose acts or
omissions in connection with its assumption of any obligation under this
Agreement or the Supply Agreement would be imputed to, and would therefore be
considered, the acts or omissions of Connetics pursuant to any applicable law or
by any Regulatory Authority.

                                      -2-
<PAGE>   8

     "CONTRACT MANUFACTURER AGREEMENT" means any contract entered into with a
Contract Manufacturer pursuant to SECTION 5.1.4 of this Agreement.

     "DEFENDING PARTY" shall have the meaning set forth in SECTION 2.5.2 of this
Agreement.

     "DEVELOPMENT PLAN" means the plan as amended from time to time which sets
forth, in one or more sections, (a) the Parties' strategies, plans, activities
and estimated time schedules with regard to Clinical Development and Regulatory
Filings for the United States and/or the Territory; and (b) the Parties'
respective responsibilities for such development activities. Paladin shall
develop a plan for the Territory as appropriate after the Effective Date, which
shall be subject to approval by Connetics prior to its implementation.

     "DSS" means diffuse systemic sclerosis, systemic sclerosis, progressive
systemic sclerosis, and/or systemic sclerosis with diffuse scleroderma.

     "ENFORCING PARTY" shall have the meaning set forth in SECTION 2.5.1 of this
Agreement.

     "FDA" means the U.S. Food and Drug Administration or successor agency.

     "FAIR MARKET VALUE" means the price of Connetics' Common Stock calculated
as the average closing price for the ten trading days prior to the Effective
Date, as reported by The Nasdaq National Market.

     "FIELD" means the treatment of DSS and all Additional Indications.

     "FORMULARY PRICE" means (solely for purposes of this Agreement) the higher
of [*] for the Product or [*] for the Product.

     "GAAP" (or Generally Accepted Accounting Principles) means generally
accepted accounting and reporting assumptions, standards, and practices as
applied in the United States and as prescribed by authoritative bodies such as
the Financial Accounting Standards Board.

     "INDEMNITEE" and "INDEMNITOR" shall have the meanings set forth in SECTION
6.6 of this Agreement.

     "LICENSED IP" means the Relaxin Patents, Relaxin Information and Third
Party Licenses.

     "LOSSES" shall have the meaning set forth in SECTION 6.4 of this Agreement.

     "MEDEVA AGREEMENT" means the Relaxin Development, Commercialization and
License Agreement effective as of January 11, 1999, by and between Medeva
Pharmaceuticals, Inc. ("MEDEVA") and Connetics.


* Certain information on this page has been omitted and filed
  separately with the Commission. Confidential treatment has
  been requested with respect to the omitted portions.


                                      -3-
<PAGE>   9

     "MEDEVA RELAXIN INFORMATION" means Relaxin Information (as that term is
defined in the Medeva Agreement) developed by Medeva and licensed to Connetics
pursuant to the Medeva Agreement.

     "NET SALES" means gross amounts invoiced by Paladin (and/or an Affiliate of
Paladin or a distributor appointed by Paladin) for sales of Product in the
Territory to a Third Party, less deductions for the following amounts directly
chargeable to such Product:

     (1)  customary trade, quantity or cash discounts and rebates (including
          non-cash rebates), actually allowed and taken;

     (2)  credits actually granted upon, or allowances for estimated amounts
          for, returns, claims, rejections, rebates and chargebacks;

     (3)  an allowance for uncollectible amounts or bad debts; and

     (4)  recalls.

Sales of Product between a Party and its Affiliates and sales solely for
research or testing purposes shall be excluded from the computation of Net
Sales.

     "NON-DEFENDING PARTY" shall have the meaning set forth in SECTION 2.5.2 of
this Agreement.

     "NON-ENFORCING PARTY" shall have the meaning set forth in SECTION 2.5.1 of
this Agreement.

     "PALADIN IMPROVEMENTS" means any inventions, discoveries, improvements or
enhancements relating to Relaxin, whether patentable or not, conceived or first
reduced to practice by Paladin during the Term and any and all intellectual
property rights therein and thereto. Paladin shall notify Connetics of the
details of such Paladin Improvements as soon as possible.

     "PRODUCT" means a commercial pharmaceutical product containing Relaxin for
use in the Field.

     "PRODUCT DEVELOPMENT" shall be comprised of: (1) CMC DEVELOPMENT, (2)
CLINICAL DEVELOPMENT, and (3) REGULATORY FILINGS.

     "REGULATORY APPROVAL" means all approvals, including pricing approvals for
reimbursement purposes, from the appropriate Regulatory Authorities (a) in the
United States or (b) in the Territory that are required to promote and market
the Product in the relevant country.

     "REGULATORY AUTHORITY" means the FDA or any equivalent or additional
governmental or regulatory agencies in the Territory.

                                      -4-
<PAGE>   10

     "REGULATORY FILINGS" means all activities relating to the filing for and
procurement of Regulatory Approval, including but not limited to price
reimbursement approval for the marketing and sale of Product from the relevant
Regulatory Authorities.

     "RELAXIN" means a polypeptide hormone which both (1) has an amino acid
sequence corresponding to all or a part of the sequence of the polypeptide
described in EXHIBIT A-1, and peptide derivatives thereof and (2) is an agonist
to any of the biological activities of the substances identified in EXHIBIT A-2.

     "RELAXIN INFORMATION" means trade secrets, know-how, information and
proprietary rights in any tangible or intangible form, other than Relaxin
Patents but including Connetics' trademarks and tradenames to the extent
licensed to Paladin pursuant to SECTION 2.1.2, and Connetics Improvements to the
extent licensed to Paladin pursuant to SECTION 2.1.3, relating to the
development and commercialization of Relaxin, Relaxin Materials and the Product,
including but not limited to any pre-clinical, clinical and regulatory
information that Paladin may need for the purposes of this Agreement that: (1)
is owned by Connetics and/or its Affiliates, or (2) is owned by a Third Party,
which Connetics and/or its Affiliates has a right to license or is not
prohibited from disclosing to Paladin and its Affiliates under this Agreement,
which Relaxin Information shall specifically include Medeva Relaxin Information.

     "RELAXIN MATERIALS" means bulk Relaxin or formulated Relaxin for use in
Product Development and/or procuring Regulatory Approval for the Product.

     "RELAXIN PATENTS" means the patents and patent applications including any
reissues, renewals, extensions, substitutions, divisionals, continuations and
continuations-in-part of such patents or patent applications, relating to
Relaxin or the Product, owned or controlled by Connetics and/or its Affiliates
or included in the Third Party Licenses which: (1) are in existence as of the
Effective Date or which come into existence during the Term of this Agreement;
or (2) are licensed to Connetics under the Third Party Licenses. The Relaxin
Patents include, without limitation, the patents and patent applications set
forth on EXHIBIT B to this Agreement.

     "REPRODUCTIVE INDICATION" shall have the meaning set forth in SECTION 3.3
of this Agreement.

     "SPECIFICATIONS" means the specifications for the Relaxin Materials and the
Product as set forth in EXHIBIT A-3 to this Agreement, and such changes to such
specifications as the Parties may subsequently agree to in writing.

     "SUPPLY AGREEMENT" means the agreement to be entered into at a future date
pursuant to SECTION 5.1.2.

         "TERM" shall have the meaning set forth in SECTION 9.1 of this
Agreement.

         "TERRITORY" means Canada.


                                      -5-
<PAGE>   11

     "THIRD PARTY LICENSES" means the licenses to Third Party intellectual
property rights including without limitation patents, patent applications, trade
secrets, and/or know-how covering, or related to, Relaxin, Relaxin Materials and
Product, under which Connetics and/or its Affiliates has a right to grant a
sublicense to Paladin and its Affiliates. A list of the Third Party Licenses as
of the Effective Date is attached to this Agreement as EXHIBIT C-1. In addition,
EXHIBIT C-2 lists all other agreements by which Connetics has licensed its
rights to Relaxin to Third Parties.

     "THIRD PARTY(IES)" means any person or entity other than Paladin,
Connetics, or an Affiliate of Paladin or Connetics.

     "THIRD PARTY WORK" shall have the meaning set forth in SECTION 7.1.6 of
this Agreement.


                                   ARTICLE II
                                     LICENSE

     2.1  LICENSE.

          2.1.1 LICENSED IP. Subject to the terms and conditions of this
Agreement, during the Term, Connetics grants to Paladin and its Affiliates an
exclusive license, solely within the Territory and in the Field, with the right
to sublicense as set forth in SECTION 2.1.4, to use the Licensed IP, and to
develop, use, sell, offer for sale and import the Product for DSS and Additional
Indications.

          2.1.2 TRADEMARKS. Subject to the terms and conditions of this
Agreement, during the Term, Connetics grants to Paladin an exclusive,
royalty-free license to use the trademarks CONXN(R) and ConXn(R) (and any
variation thereof) for the advertising, promotion, marketing, distribution and
sale of Product in the Territory. If Paladin chooses to use the trademarks, then
in addition to the requirements set forth in SECTION 5.3, Paladin shall display
the marks in a style or size of print distinguishing the mark from any
accompanying wording or text. Where feasible, Paladin shall display the
appropriate trademark symbol to the right of and slightly above or below the
last letter of the word, or to the right of the logo. Except as expressly
permitted in this Agreement, no right or license is granted to Paladin to use
Connetics' name or any trademarks or tradenames of Connetics in advertising,
publicity or other promotional activities without the express written approval
of Connetics. If at any time during the Term Connetics determines to use a
different trademark in connection with sales of Product outside the Territory,
Connetics agrees to make such trademarks available to Paladin on terms no less
favorable than Connetics makes the same marks available (if at all) to other
Third Party Licensees of Connetics.

          2.1.3 CONNETICS IMPROVEMENTS. Subject to the terms and conditions of
this Agreement, Connetics grants to Paladin and its Affiliates an exclusive,
royalty-free license in the Field, with the right to sublicense as provided in
this Agreement, to any Connetics Improvements



                                      -6-
<PAGE>   12

in the Territory for use in connection with the sale of Product. Notwithstanding
the foregoing sentence, to the extent any Connetics Improvement does not relate
exclusively to the Licensed IP or Product, Connetics shall have the right to use
or license such Connetics Improvement for any purpose outside the Field
throughout the Territory and for any purpose outside the Territory. Connetics
shall have no duty to notify Paladin of the details of any Connetics Improvement
to the extent that such disclosure would adversely affect the patentability of
the matters disclosed.

          2.1.4 SUBLICENSES. Paladin shall have the right to grant sublicenses
under the license set forth in SECTIONS 2.1.1, 2.1.2 and 2.1.3, and to employ
Affiliates and Third Parties in connection with the performance of its rights
and obligations under this Agreement, provided that (a) the execution of a
sublicense or a subcontract shall not in any way diminish, reduce or eliminate
any of Paladin's obligations under this Agreement, and Paladin shall remain
primarily liable for such obligations, (b) Paladin shall notify Connetics within
five (5) business days after entering into such a sublicense, and shall provide
a copy of the sublicense agreement (with non-relevant passages appropriately
redacted) to Connetics within five (5) business days after execution, and (c)
Paladin shall only grant a sublicense to any Affiliate or Third Party which
undertakes to perform those obligations of this Agreement relevant to such
sublicense in accordance with the terms of this Agreement, including
specifically the obligation under SECTION 7.2.1.

          2.2  LICENSE TO PALADIN IMPROVEMENTS. Subject to the terms and
conditions of this Agreement, Paladin grants to Connetics and its Affiliates an
exclusive, non-transferable, royalty-free license in the Field, without the
right to sublicense (except as provided in this Agreement), to any Paladin
Improvements in all territories of the world excluding the Territory for use in
connection with the development, manufacture and sale of Product.
Notwithstanding the foregoing sentence, to the extent any Paladin Improvement
does not relate exclusively to the Licensed IP or Product, Paladin shall have
the right to use or license such Paladin Improvement for any purpose in any
territory in the world. Paladin shall have no duty to notify Connetics of the
details of any Paladin Improvement to the extent that such disclosure would
adversely affect the patentability of the matters disclosed.

          2.3  THIRD PARTY TECHNOLOGY.

               2.3.1 The Parties acknowledge that the licenses granted to
Paladin in this Agreement include sublicenses under Third Party Licenses.
Connetics shall be solely responsible for all payments under the Third Party
Licenses entered into prior to the Effective Date and all amendments,
restatements or renewals thereof.

               2.3.2 Subject to SECTION 6.1.3, Connetics shall offer to Paladin
a sublicense under any new Third Party License that Connetics enters into after
the Effective Date related to the manufacture, sale or use of the Product in the
Territory. The fundamental requirement of such a sublicense shall be that
Paladin (a) pay [*] and (b) agree to abide by the terms and conditions of such
Third Party Licenses applicable to Paladin as Connetics' sublicensee. Paladin
shall have no obligation under this Agreement to agree to take a sublicense on
those or any terms.


* Certain information on this page has been omitted and filed
  separately with the Commission. Confidential treatment has
  been requested with respect to the omitted portions.


                                      -7-
<PAGE>   13


               2.3.3 Connetics shall abide by the terms and conditions of all
Third Party Licenses to maintain the Third Party Licenses to which Paladin has
taken a sublicense for Paladin as Connetics' sublicensee. Connetics agrees not
to terminate or assign, nor by act or omission permit the termination or
assignment of, any of the Third Party Licenses to which Paladin has taken a
sublicense, nor to amend or by act or omission permit the amendment of any such
Third Party Licenses to the extent such an amendment would adversely affect
Paladin's rights under this Agreement, without Paladin's prior written consent,
which consent may be granted or withheld in Paladin's sole discretion. Within
[*] entering into any amendment of a Third Party License, Connetics shall notify
Paladin and provide Paladin with a copy of the amendment.

          2.4  RESERVATION OF RIGHTS. No right, title, or interest is granted,
whether expressly or by implication, to any technology or intellectual property
rights owned by either Party, except for the rights and licenses expressly
granted under this Agreement, and each Party hereby reserves all rights not
expressly granted under this Agreement, nor shall anything in this Agreement be
deemed to restrict either Party from exploiting any of its rights not expressly
granted to the other Party under this Agreement.

          2.5  ENFORCEMENT.

               2.5.1 ENFORCEMENT OF LICENSED IP.

                    (a) A Party shall promptly notify the other Party if it
          becomes aware of any infringement or misappropriation of the Licensed
          IP. As between the Parties, Connetics shall have the primary right and
          discretion regarding enforcement of the Licensed IP against Third
          Parties who may be infringing or misappropriating such intellectual
          property rights. Connetics shall use Commercially Reasonable Efforts,
          at its sole expense, to protect the exclusive license granted to
          Paladin pursuant to this Agreement, taking into account the costs and
          benefits of such action, including, without limitation, the costs to
          be incurred in any such action and the amount and likelihood of the
          damages that may be awarded in any such action.

                    (b) If Connetics (i) decides not to enforce the Licensed IP,
          or having commenced an action fails to pursue it, or (ii) does not
          bring such action within ninety (90) days after notice of Paladin's
          request to enforce the Licensed IP, then Paladin may do so at its own
          expense.

                    (c) In either case, the Party enforcing the Licensed IP at
          the relevant time (the "ENFORCING PARTY") shall be entitled to recover
          all of its actual costs, expenses and fees incurred in such action
          from the damages awarded, and any remaining amount (subject to any
          amounts payable to any Third Party licensee as a result of the damages
          awarded) shall be payable [*] to the Enforcing Party and [*] to the
          Party not enforcing the Licensed IP (the "NON-ENFORCING PARTY"). The
          Enforcing Party shall, in its sole discretion, have the right to file
          and control such action as it deems warranted; provided, however, that
          the Enforcing Party shall provide to the Non-enforcing


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                                      -8-
<PAGE>   14


          Party and its attorneys the following: (i) reasonable notice of, and
          permission to attend, all meetings and proceedings related to such
          actions; (ii) copies of all documents (including without limitation
          correspondence, notices, filings, responses, requests, orders and
          rulings) related to such action in sufficient detail and with
          sufficient time to enable the Non-enforcing Party to review and
          provide comments on such documents; and (iii) timely information and
          updates regarding the status of such action.

                    (d) The Non-enforcing Party agrees to cooperate with the
          Enforcing Party to the extent reasonably requested by and at the
          expense of the Enforcing Party, including, without limitation, being
          named as a party in such proceeding. The Non-enforcing Party may
          choose to be represented by counsel of its choice and at its own
          expense at all meetings, and to participate in all discussions, but
          counsel for the Non-enforcing Party shall not be entitled to appear in
          any legal or judicial proceedings.

               2.5.2 ENCROACHMENT. The Royalties payable by Paladin pursuant to
SECTION 5.1.3 shall be reduced by [*] during any continuing period of
non-exclusivity in the Territory under the following circumstances: (a) Paladin
notifies Connetics that any pharmaceutical product containing Relaxin is being
marketed or sold in the Field in the Territory during the Term of this Agreement
by any Third Party, and (b) either (i) the Parties determine that the Licensed
IP is not enforceable or infringed or (ii) the Licensed IP is held invalid or
not infringed by a final decision of a court of competent jurisdiction from
which no further appeal is or can be taken, and (c) total market share of all
pharmaceutical products containing Relaxin sold in the Field in the Territory
(not including the Product marketed by Paladin) reach twenty percent (20%) or
more of the overall market for such pharmaceutical products, and (d) Connetics
is not an Enforcing Party pursuant to SECTION 2.5.1(B). Nothing in this Section
shall be construed as limiting any other remedies Paladin might have in law
(including, without limitation, pursuant to this Agreement) or equity under such
circumstances.

          2.6  OTHER COUNTRIES. Connetics retains the right to grant licenses
for the sale, marketing and distribution of the Product in all countries outside
the Territory; provided, however, that Connetics agrees that for each such
license entered into after the Effective Date, it will impose on each such
licensee, to the extent permitted by applicable law, a covenant prohibiting the
licensee from: (a) seeking approval, directly or indirectly, from the relevant
Regulatory Authorities, to qualify facilities for manufacturing or finishing the
Product inside the Territory or to label or re-label the Product in a manner
that would permit it to be marketed or sold inside the Territory, (b) selling or
exporting the Product to any Third Party for use or resale inside the Territory,
(c) or selling the Product to any Third Party that Connetics has reason to
believe intends to resell or export the Product inside the Territory.


                                   ARTICLE III
                   PRODUCT DEVELOPMENT AND REGULATORY APPROVAL

          3.1  PRODUCT DEVELOPMENT.


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                                      -9-
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               3.1.1 DEVELOPMENT COMMITTEE. The obligations and relationship
between the Parties pursuant to this Agreement shall be governed by a
development committee (the "DEVELOPMENT COMMITTEE"). Initially, and until such
time (if any) as Medeva objects, this provision shall be satisfied by the
inclusion of two representatives of Paladin on the development committee
established pursuant to the Medeva Agreement. If at any time Medeva asks that
Paladin cease to be represented on that committee, then Connetics and Paladin
shall, within thirty (30) days after receipt of notice from Medeva, establish a
separate Development Committee which will have the obligation to provide overall
direction, monitor progress, manage information exchange between the Parties,
decide key strategies and solve problems with respect to the Clinical
Development of and Regulatory Filings for the Product in the Territory. At the
first meeting of the Development Committee, the Parties shall establish a
regular meeting time and structure.

               3.1.2 DEVELOPMENT PLAN. Product Development shall be performed in
accordance with this SECTION 3.1, and the Development Plan. The Development Plan
may be amended from time to time during the Term to reflect the actual needs of
Product Development.

               3.1.3 CLINICAL DEVELOPMENT. Connetics shall conduct Clinical
Development in accordance with the Development Plan.

               3.1.4 REGULATORY FILINGS. Connetics shall be responsible for all
Regulatory Filings for the Product in the United States; provided that Paladin
may elect to attend meetings with the FDA for the purpose of obtaining
Regulatory Approval in the U.S., if the FDA does not object to Paladin's
attendance and if including Paladin is otherwise practicable. In any event,
Paladin shall be entitled to an update (including any written minutes) of any
meeting with the FDA that Paladin is not able or permitted to attend related to
Regulatory Filings for the Product in the United States. Paladin shall be
responsible for all Regulatory Filings for the Product in the Territory;
provided that Connetics may elect to participate in meetings with the applicable
Regulatory Authorities in the Territory for the purpose of obtaining relevant
Regulatory Approval(s). Each Party shall keep the other fully informed of all
communications with the regulatory authorities and will consult with the other
before submitting applications.

               3.1.5 PATENT EXTENSIONS. The Parties shall cooperate with each
other to the extent necessary to obtain any available extensions of the term of
the Patents in the Territory.



                                      -10-
<PAGE>   16

          3.2  PRODUCT DEVELOPMENT COSTS.

               3.2.1 GENERAL. Connetics will pay [*] of all CMC Development
costs for the Product worldwide, and Connetics will pay [*] of the expenses
associated with Clinical Development and Regulatory Approval for the Product in
the United States (including expenses associated with products or services that
are necessary in the United States but that can be used in the Territory);
provided that Paladin shall make the contributions as provided in SECTION 4.1.3.
In addition, Paladin will pay [*] of the expenses that are unique to the
Clinical Development and Regulatory Approval for the Product solely in the
Territory, and Connetics will not incur any such expenses without Paladin's
written authorization.

               3.2.2 QUARTERLY REPORTS. Within [*] days after the end of each
calendar quarter, commencing with the quarter ending June 30, 1999, each Party
shall provide to the other Party a quarterly written progress report which
shall:

                    (a)  summarize the Product Development activities and
          progress during the preceding calendar quarter; and

                    (b)  summarize the development activities and update the
          timetables of such activities expected to be conducted and development
          costs estimated to be incurred in the following calendar quarter.

          3.3  REPRODUCTIVE INDICATIONS. Connetics shall use Commercially
Reasonable Efforts to secure exclusive, worldwide rights to indications outside
the Field ("REPRODUCTIVE INDICATIONS"). Upon securing such exclusive rights,
Reproductive Indications shall be considered Additional Indications. If Paladin
elects to participate in the development and commercialization of Relaxin for
Reproductive Indications, Paladin shall pay [*]. Furthermore, the royalty to be
paid by Paladin to Connetics pursuant to SECTION 5.1.3 will be increased as to
Reproductive Indications in the Territory by the amount of any additional
royalty to be paid to Third Parties for Reproductive Indications in the
Territory. If Paladin elects not to participate in development and
commercialization, Connetics may request the right to commercialize Product for
Reproductive Indications within the Territory on an exclusive basis without the
right to sublicense, but Connetics shall not so commercialize within the
Territory without Paladin's consent, which consent shall not unreasonably be
withheld. If Connetics is unable to secure exclusive worldwide rights to
Reproductive Indications, Connetics shall not assign its co-exclusive rights in
the Territory to any Third Party without Paladin's consent. Furthermore,
Connetics shall use Commercially Reasonable Efforts to cause Genentech, Inc. to
agree that Connetics may assign its co-exclusive rights to Paladin in the
Territory.

          3.4  ACCESS TO INFORMATION. Paladin will consult with Connetics on the
CMC Development and Clinical Development that will be necessary to accumulate
data required for submitting a BLA for the Product in the Territory. It is the
intention of this provision that the Parties cooperate with one another to
support CMC Development, Clinical Development and Regulatory Filings to optimize
commercial success in the U.S. and in the Territory. Connetics

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                                      -11-
<PAGE>   17

will make available to Paladin, and Paladin under the license granted under this
Agreement shall be entitled to use in the Field in the Territory, all Relaxin
Information developed by or for Connetics with respect to the submission of the
BLA by Connetics, and all Medeva Relaxin Information. Paladin will make
available to Connetics, and Connetics under the license granted under this
Agreement shall be entitled to use, all Relaxin Information developed by or for
Paladin with respect to the submission of the BLA by Paladin in the Territory.

          3.5  RECORDS. Connetics shall maintain, and shall cause its
Affiliates, Contract Manufacturers, and other agents to maintain, all records
necessary to comply with applicable laws, rules and regulations relating to the
manufacture and storage of Relaxin, Relaxin Materials and the Product (in bulk
or finished form). All such records shall be maintained for such period as may
be required by law, rule or regulation; provided, however, that all records
relating to the manufacture, stability and quality control of each batch or
partial batch of the Product shall be retained at least until the first
anniversary of the end of the approved shelf life for all Product from such
batch or partial batch; and provided further that neither Party shall destroy
such records without first notifying the other Party and giving the other Party
an opportunity to take control of such records if the Party being notified
believes that applicable law or its own written corporate policy requires such
records to be maintained.


                                   ARTICLE IV
                         PAYMENTS AND EQUITY INVESTMENT

          4.1  PAYMENTS TO CONNETICS. The Parties agree that in consideration
for the rights granted by Connetics in this Agreement, Paladin will make the
following payments to Connetics in accordance with this ARTICLE IV.

               4.1.1 DEVELOPMENT FEES. For use in connection with, and for
purposes of the continued development of the Product, Paladin agrees to pay to
Connetics U.S. $400,000 cash upon execution of the Agreement.

               4.1.2 MILESTONE PAYMENTS. At the time each of the following
milestones is achieved, Paladin shall pay Connetics the amounts set forth
opposite them:

<TABLE>
<CAPTION>
              Milestone                                                    Amount

<S>                                                         <C>
[*]                                                         [*] if completed by
                                                            [*]

                                                            [*] if [*]

                                                            [*] if [*]

                                                            [*] if [*]
</TABLE>

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                                      -12-
<PAGE>   18
<TABLE>
<CAPTION>
              Milestone                                                    Amount

<S>                                                         <C>
                                                             [*]

                                                             [*] if [*]

                                                             [*] if [*]

                                                             Zero if [*]


[*]                                                          [*]

[*]                                                          [*]

[*]                                                          One-time payment of [*]
                                                             for [*]
</TABLE>


               4.1.3 RESEARCH AND DEVELOPMENT PAYMENTS. To provide ongoing
support for Product Development through the first full calendar quarter after
submission of the BLA in the United States (the "Final Quarter"), and subject to
the exceptions described in this section below, Paladin shall pay Connetics
according to the following schedule:

<TABLE>
<CAPTION>
         Amount Due                         Due Date
         <S>                            <C>
         [*]                            [*]
</TABLE>

Notwithstanding the foregoing payment schedule, Paladin shall not be required to
pay Connetics more than [*] of the amount that Medeva PLC pays to Connetics for
any given calendar quarter pursuant to Section 4.1.3 of the Medeva Agreement.
Should the Final Quarter conclude before a Due Date, then Paladin will make one
final payment to Connetics in support of Product Development in lieu of any
further "Amounts Due" listed above. The final payment shall be an amount equal
to the next "Amount Due" and shall be payable on the corresponding Due




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                                      -13-
<PAGE>   19

Date. Upon request, Connetics shall furnish Paladin with a statement of expenses
prepared on a cash basis of the costs incurred by Connetics in connection with
its Product Development.

          4.2  PAYMENT TERMS. Connetics or Paladin, as the case may be, shall
notify the other Party in writing within [*] after a milestone under SECTION
4.1.2 is achieved. The payments pursuant to SECTION 4.1.2 shall be made within
[*] after (a) the milestone is achieved, in the case of milestones in the
Territory, or (b) Paladin receives such written notice from Connetics that the
milestone has been achieved, supported by proper and verifiable backup
documentation, in the case of all other milestones.

          4.3  EQUITY PURCHASE. Upon execution of the Agreement, and promptly
following approval of the Vancouver Stock Exchange as contemplated in SECTION
9.1, below, Paladin (directly or through its Affiliates) shall purchase $400,000
of Connetics' common stock at a price equal to a [*] The purchase of Connetics
stock shall be pursuant to a Stock Purchase Agreement in the form attached to
this Agreement as EXHIBIT D.

          4.4  ADJUSTMENTS TO PAYMENT OBLIGATIONS. Connetics acknowledges that
Paladin reasonably anticipates being able to file for HPB approval without
having to do significant clinical testing of Relaxin on Canadian subjects, in
reliance on clinical trials in the U.S. Accordingly, Connetics agrees that it
will renegotiate this Agreement in good faith to adjust the royalty obligations
under this ARTICLE IV to compensate Paladin for unanticipated additional
expenses incurred or delays suffered (or expected to be incurred or suffered) by
Paladin as a result of a decision by the HPB within [*] after the
Effective Date that Paladin must reference clinical trials in Europe, or must
conduct additional animal or human trials in Canada prior to approval.
Specifically, [*]

                                    ARTICLE V
                        MANUFACTURE AND COMMERCIALIZATION

          5.1  MANUFACTURE.

               5.1.1 CLINICAL SUPPLIES. Connetics shall, and shall cause its
Contract Manufacturer(s) to, commencing from the Effective Date until Paladin
receives Regulatory Approval to market the Product in the Territory, use
Commercially Reasonable Efforts to manufacture for and supply to Paladin, and
Paladin shall (subject to the terms of this Agreement) purchase at [*] all
Paladin's required quantities of Relaxin Materials for use in Product
Development; provided that Paladin shall not transfer the Relaxin Materials to
any Third Party at any time except to the extent transfer is required for
Clinical Development, Regulatory Filings or Regulatory Approval related to the
Product in the Field and Territory. If Connetics




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                                      -14-
<PAGE>   20

decides that change or modification of the production procedure of the Relaxin
Materials is necessary during the Term for any reason, Connetics shall promptly
notify Paladin in writing of the need for such change or modification.

               5.1.2 PRODUCT FOR COMMERCIAL SALE. Commencing upon Paladin's
initial purchase order until the termination or expiration of this Agreement,
Connetics shall, and shall cause its Contract Manufacturer(s), to use
Commercially Reasonable Efforts to manufacture for and supply to Paladin all of
Paladin's requirements for Product on the terms set forth in a Supply Agreement
to be entered into as soon as practicable after Paladin's decision to proceed
with the first Regulatory Filing in the Territory, the outlined terms of which
are reflected in EXHIBIT E. The price to Paladin for commercial supply of
Product shall be [*] plus the royalty on Paladin's Net Sales of Product in the
Territory calculated pursuant to SECTION 5.1.3. Notwithstanding the foregoing,
if the price to Paladin of Product calculated in accordance with SECTIONS 5.1.2
and 5.1.3 exceeds [*], the Parties shall negotiate in good faith a new price for
the Product. Such negotiations can be requested by either Party after [*] and
thereafter no more frequently than every [*] Notwithstanding the foregoing,
either Party can request such negotiations earlier should an event outside the
Parties' control result in the price to Paladin of the Product exceeding [*] If
following any renegotiation requested by Paladin, the price to Paladin falls
below the [*] the price shall be reset to equal [*] Solely for purposes of this
Agreement, and by way of illustration, the Parties agree to negotiate in good
faith a new price for the Product if [(A / B) + (C / D)] > E([*])], where:

          A = the total of Connetics' COGS invoiced to Paladin over [*]

          B = the amount of Product sold to Paladin over [*]

          C = the applicable royalty payable by Paladin pursuant to SECTION
              5.1.3 over [*]

          D = the amount of Product sold by Paladin over [*] and

          E = Paladin's Net Selling Price averaged over [*]

Subject to SECTION 5.1.5 below, during the Term, Paladin shall purchase all its
requirements for Product from Connetics. Upon Paladin's request, during the one
(1) year period preceding the expiration of the Term, the Parties agree to
negotiate in good faith for an extension of supply by Connetics and purchase of
the Product by Paladin.

               5.1.3 ROYALTY. Paladin shall pay Connetics a royalty equal to [*]
of Paladin's annual Net Sales in the Territory up to [*] plus [*] of Paladin's
annual Net Sales in the Territory over [*]


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                                      -15-
<PAGE>   21
               5.1.4 CONTRACT MANUFACTURING.

                    (a) Connetics may contract with one or more Contract
          Manufacturers to perform any or all of its obligations under this
          Agreement and the Supply Agreement, provided that Connetics provides
          Paladin with a true and accurate copy of each such Contract
          Manufacturer Agreement.

                    (b) Connetics agrees to use Commercially Reasonable Efforts
          to include in each Contract Manufacturer Agreement the following
          provisions:

                         (i) a prohibition against sublicensing by such Contract
               Manufacturer of Licensed IP licensed to such Contract
               Manufacturer by Connetics;

                         (ii) a prohibition against the sale by such Contract
               Manufacturer to any Third Party of (A) Relaxin for use in any
               product to be sold or distributed in the Territory or (B) Product
               for resale (other than by Connetics to Paladin, or by Paladin) in
               the Territory, and

                         (iii) a right for Connetics to terminate such Contract
               Manufacturer Agreement in the event of a breach of the terms set
               forth in either of (b)(i) or (b)(ii) above.

                    (c) The fact that Connetics may have entered into one or
          more Contract Manufacturer Agreements shall not in any way diminish,
          reduce, or eliminate any of Connetics' obligations under this
          Agreement.

                    5.1.5 INABILITY TO SUPPLY. If Connetics fails for any
reason, including without limitation a force majeure event described in SECTION
11.7, to deliver Relaxin Materials and/or Product to Paladin, and such inability
to supply continues for more than [*] without a plan (acceptable to Paladin) by
which Connetics proposes to cure the inability to supply within [*] after the
inability first impacted Paladin, then Connetics hereby agrees to allocate to
Paladin a percentage of available Product equivalent to the percentage of sales
of Product in the Territory compared to sales of Product throughout the world in
the preceding [*] Alternatively, Paladin shall have the right under such
circumstances to contract with another supplier. At Paladin's request, Connetics
agrees to use Commercially Reasonable Efforts to secure the agreement of Medeva
to supply Product to Paladin in such circumstances.

                    5.1.6 ALTERNATE SUPPLY. Connetics agrees to use Commercially
Reasonable Efforts to cause at least two sources of supply of Relaxin to become
and remain pre-qualified as soon as practicable after the first Regulatory
Approval and during the remainder of the Term of this Agreement.

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                                      -16-

<PAGE>   22

               5.2  PAYMENT TERMS.

                    5.2.1 ROYALTY PAYMENTS. Paladin shall remit royalty payments
to Connetics quarterly, within [*] after the end of each calendar quarter with
respect to Paladin's Net Sales in the Territory during that quarter.

                    5.2.2 TIMING, FORM OF PAYMENT. All payments payable by
Paladin to Connetics pursuant to this ARTICLE 5 shall be made in accordance with
SECTION 11.2. Upon shipment of clinical supplies pursuant to SECTION 5.1.1,
Connetics shall invoice Paladin, and Paladin shall pay the invoice within thirty
(30) days after receipt of the invoice. All payments to Connetics by Paladin
under this Agreement shall be made in United States dollars by wire transfer (or
such other reasonable means as Connetics may direct) to such United States bank
account as Connetics may designate from time to time.

                    5.2.3 NONCONFORMING CLINICAL SUPPLIES.

                         (a) Within [*] after the delivery of Relaxin Materials
          and the accompanying Certificate of Analysis to Paladin, Paladin shall
          submit to Connetics in writing any claim that Relaxin Materials do not
          conform with the Specifications, accompanied by a report of Paladin's
          analysis (which analysis shall be conducted in good faith) and a
          sample of the Relaxin Materials at issue, explaining in reasonable
          detail the basis on which the allegedly nonconforming Relaxin
          Materials does not meet the Specifications. Paladin shall not be
          obligated to pay for such nonconforming shipment of Relaxin Materials.
          Only those tests listed in the Specifications may be used to
          demonstrate nonconformance of Relaxin Materials.

                         (b) Connetics shall conduct its own analysis of the
          sample in good faith within [*] after the receipt by Connetics of the
          report and sample from Paladin, and provide the results to Paladin. If
          after Connetics' own analysis of the sample Connetics agrees with the
          claim of nonconformity, Paladin shall promptly inform Connetics if
          Paladin wishes to have Connetics replace the nonconforming Relaxin
          Materials with conforming Relaxin Materials. If Paladin wishes to
          receive such replacement Relaxin Materials, Connetics shall provide
          such replacement as soon as reasonably practicable thereafter, in
          which case Paladin shall be obligated to pay only for such replacement
          Relaxin Materials. Paladin shall not be obligated to pay for the
          nonconforming Relaxin Materials, and Connetics shall: (i) credit
          Paladin for the amount paid by Paladin for the nonconforming Relaxin
          Materials if Paladin has already paid for such nonconforming Relaxin
          Materials or (ii) cancel its invoice to Paladin for such nonconforming
          Relaxin Materials if Paladin has not yet paid for such nonconforming
          Relaxin Materials, and Paladin shall not be obligated to pay such
          canceled invoiced amount. If, after its own analysis, Connetics does
          not agree with the claim of nonconformity or determines that Paladin
          is responsible for the nonconformity, the Parties shall in good faith
          discuss and agree upon a settlement of the issue, and Paladin shall
          not be obligated to pay for such alleged nonconforming Relaxin
          Materials until such settlement is reached.


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                                      -17-
<PAGE>   23

                         (c) After Connetics has agreed that the Relaxin
          Materials shipment is nonconforming, and if the nonconformity is not
          the fault of Paladin, then Paladin shall return or destroy it at
          Connetics' request and cost in the most cost effective and
          environmentally safe and appropriate manner available, consistent with
          federal, state and local laws and regulations.

                         (d) If conforming Relaxin Materials supplied under this
          Agreement become nonconforming or unsuitable at no fault of Connetics,
          Paladin will remain obligated to pay Connetics for such Relaxin
          Materials. At Connetics' request, Paladin shall return such unsuitable
          Relaxin Materials to Connetics. Otherwise, Paladin shall destroy it in
          the most environmentally safe and appropriate manner available,
          consistent with federal, state and local laws and regulations.

                    5.2.4 PAYMENTS FOR COMMERCIAL SUPPLY. All payments by
          Paladin for commercial supplies shall be made in accordance with the
          Supply Agreement.

               5.3  PRODUCT MARKINGS. Paladin shall market and sell Product in
the Territory as Paladin's products under trademarks selected and owned or
controlled by Paladin; provided, however, to the extent Paladin determines to
use any trademarks owned by Connetics each Product marketed and sold by Paladin
under this Agreement shall be marked: (a) in accordance with the provisions of
SECTION 2.1.2; (b) with a notice that such Product is sold under a license from
Connetics Corporation; and (c) with all patent and other intellectual property
notices relating to the Licensed IP as may be required by applicable law.

               5.4  COMMERCIALIZATION. After obtaining Regulatory Approval for
the Product in the Territory, Paladin shall use Commercially Reasonable Efforts
to develop and commercialize the Product in the Territory. Connetics and Paladin
shall jointly agree on the copy platform for promotional materials and, subject
to the restrictions on trademark usage set forth in SECTIONS 2.1.2 and 5.3,
Paladin may create and develop promotional materials related to the Product
using, and based on, materials created by or for Connetics; provided, however,
Paladin will not, publish or distribute any such promotional material (or other
material) with respect to the Product that Connetics has not approved. Except as
otherwise mutually agreed, Paladin shall bear all costs and expenses related to
commercializing the Product in the Territory. In addition, and subject to
availability (including the need to allocate such resources among multiple
licensees), Connetics agrees to sell to Paladin tradepacks, placebos and other
sales and marketing materials relating to the Product that Connetics develops at
a price equal to Connetics' cost of materials for same. Paladin may, at its
option, participate in any training sessions that Connetics holds for its own
salesforce regarding the Product, provided that Paladin shall bear its expenses
associated with training the Paladin salesforce.

               5.5  AUDIT.

                    5.5.1 BOOKS AND RECORDS. Each Party agrees to maintain and
cause its Affiliates and, to the extent possible, cause its Contract
Manufacturers, to maintain complete and accurate



                                      -18-
<PAGE>   24

books and records of account so as to enable the other Party to verify amounts
due and payable under this Agreement. In particular, each Party shall preserve
and maintain all such records and accounts required for audit for a period of
four (4) years after the calendar quarter for which the record applies.

                    5.5.2 AUDIT OF PALADIN'S RECORDS. Upon two (2) weeks notice
to Paladin, Connetics shall have the right to have an independent certified
public accountant, selected by Connetics and reasonably acceptable to Paladin,
audit Paladin's records during normal business hours to verify all records
pertaining to the calculation of Paladin's Net Sales in the Territory; provided,
however, that such audit shall not take place more frequently than once a year
and shall not cover records for more than the preceding four (4) years. Except
in the event that the audit reveals fraud, Connetics shall have no right under
this Section to audit records for periods which have already been audited under
this provision.

                    5.5.3 AUDIT OF CONNETICS' RECORDS. Upon two (2) weeks notice
to Connetics, Paladin shall have the right to have an independent certified
public accountant, selected by Paladin and reasonably acceptable to Connetics,
audit Connetics' records during normal business hours to verify all records
pertaining to the calculation of Connetics' COGS; provided, however, that such
audit shall not take place more frequently than once a year and shall not cover
records for more than the preceding four (4) years. Except in the event that the
audit reveals fraud, Paladin shall have no right under this Section to audit
records for periods which have already been audited under this provision.

                    5.5.4 AUDIT RESULTS: PAYMENTS. Each Party shall promptly pay
or refund to the other Party the amount of any overpayment or underpayment
determined in such audit. Any such audit shall be at the expense of the Party
requesting the audit unless such audit indicates greater than [*] error in
payment in favor of the audited Party based on the records and/or calculations
of the audited Party, in which case such audit shall be at the expense of the
audited Party and such payment or refund shall bear interest from the date the
payment was originally due at [*] plus the then current prime rate established
by the U.S. Federal Reserve Bank. Any dispute between the Parties with respect
to the results of any dispute shall be resolved in accordance with SECTION 11.4
of this Agreement. All information resulting from such audits conducted pursuant
to this SECTION 5.5 shall be kept confidential pursuant to SECTION 8.2. The
results of any such audit shall be disclosed to the auditing Party, provided
that the certified public accountants shall not disclose to the auditing Party
the business details of the audited Party's records, but shall report only as to
whether the amounts charged or royalties paid were correct, or if not, the
amount by which the certified public accountant's calculation varies from the
audited Party's calculation.


                                   ARTICLE VI
                           WARRANTIES AND INDEMNITIES

               6.1  REPRESENTATIONS AND WARRANTIES OF CONNETICS. Connetics
represents and warrants to Paladin as follows:


* Certain information on this page has been omitted and filed
  separately with the Commission. Confidential treatment has
  been requested with respect to the omitted portions.


                                      -19-
<PAGE>   25

                    6.1.1 ORGANIZATION; STANDING. Connetics is duly organized,
validly existing and in good standing and has the corporate power and authority
to execute and deliver this Agreement and the other agreements contemplated by
this Agreement, including the Stock Purchase Agreement.

                    6.1.2 NO CONFLICTS. The execution, delivery and performance
of this Agreement have been validly authorized by Connetics; neither the
execution and delivery of, or the performance of its obligations under this
Agreement (i) conflicts with, or contravenes or constitutes any default under,
any agreement, instrument or understanding, oral or written, to which it is a
party, including without limitation its certificate of incorporation or bylaws,
or (ii) violates applicable laws, rules or regulations, or any judgment,
injunction, order or decree of any governmental authority having jurisdiction
over it.

                    6.1.3 RIGHTS TO LICENSED IP. As of the Effective Date,
Connetics owns, controls, or otherwise has the right to use, all Relaxin
Information and Relaxin Patents required or necessary to develop, manufacture
and sell Product (in bulk or finished form); and Connetics further represents
that it has the right to grant to Paladin the rights and licenses under the
Licensed IP in this Agreement.

                    6.1.4 NO LAWSUITS, ETC. To the best of Connetics' knowledge,
as of the Effective Date and during the immediately preceding [*], there have
not been any claims, lawsuits, arbitrations, legal or administrative or
regulatory proceedings, charges, complaints or investigations by any government
authority or other Third Party threatened, commenced or pending against
Connetics or its licensors relating to, and Connetics has not received any
notice of infringement with respect to, the Relaxin Information, Relaxin
Patents, Relaxin or the Relaxin Materials, including Connetics' right to
manufacture, use or sell Product.

                    6.1.5 THIRD PARTY RIGHTS. The exercise by Paladin of the
rights and licenses granted to Paladin by Connetics under this Agreement will
not infringe any rights owned by any Third Party or violate any agreement
between Connetics and any Third Party (including without limitation the
licensors under the Third Party Licenses). Except as set forth in the Third
Party Licenses, as of the Effective Date, Connetics is not aware of any Third
Parties that own or control any patents or Relaxin Information required for the
production, manufacture or commercialization of Product.

                    6.1.6 NO ENCUMBRANCES. As of the Effective Date, Connetics
controls or otherwise is entitled to use throughout the Territory all rights in,
to and under the Relaxin Patents and Relaxin Information, free and clear of any
lien, claim, charge, encumbrance or right of any Third Party (other than as set
forth in the Third Party Licenses).

                    6.1.7 NO OTHER AGREEMENTS. No other agreement or
understanding, verbal or written, exists to which Connetics is legally bound
regarding the intellectual property rights granted to Connetics pursuant to the
Third Party Licenses. The Third Party Licenses represent



* Certain information on this page has been omitted and filed
  separately with the Commission. Confidential treatment has
  been requested with respect to the omitted portions.


                                      -20-
<PAGE>   26

the complete and entire understanding of Connetics and, to the knowledge of
Connetics, its respective Third Party License licensors as of the Effective Date
with respect to the intellectual property rights granted to Connetics pursuant
to the Third Party Licenses.

                    6.1.8 INFORMATION. All information relating to Relaxin or
the Product delivered to Paladin by Connetics, its officers, directors,
representatives or agents, was when delivered and is as of the date of this
Agreement in all material respects accurate and correct and Connetics is not
aware of any information which would be required to be disclosed to make any
such information not misleading.

                    6.1.9 TESTING. Connetics shall undertake all such Clinical
Development of the Product for the U.S. for DSS as is customary in the industry
for products of the nature of the Product and as required by all applicable U.S.
Regulatory Authorities for purposes of determining, among other things, what
adverse effects or reactions may be suffered by any person as a result of or in
connection with the use or consumption of the Product.

                    6.1.10 ADVERSE EXPERIENCES. Any BLA that Connetics submits
for the Product in the U.S. shall include all customary clinical information,
including information specific to Adverse Experiences seen during the course of
clinical trials. In addition, beginning on the Effective Date and until approval
for the Product in the U.S., Connetics shall provide copies to Paladin on an
ongoing basis of all correspondence with the FDA relating to safety information
in connection with the Product. After Connetics obtains FDA approval, Adverse
Experience reporting shall be governed by the provisions of ARTICLE X of this
Agreement.

               6.2  REPRESENTATION AND WARRANTIES OF PALADIN. Paladin represents
and warrants to Connetics as follows:

                    6.2.1 ORGANIZATION; STANDING. Paladin is duly organized,
validly existing and in good standing and has the corporate power and authority
to execute and deliver this Agreement and to perform its obligations under this
Agreement and the other agreements contemplated by this Agreement, including the
Stock Purchase Agreement.

                    6.2.2 NO CONFLICTS. The execution, delivery and performance
of the Agreement have been validly authorized by Paladin; neither the execution
and delivery of, or the performance of its obligations under this Agreement (i)
conflicts with, or contravenes or constitutes any default under, any agreement,
instrument or understanding, oral or written, to which it is a party, including
without limitation its articles of incorporation or bylaws, or (ii) violates
applicable laws, rules or regulations, or any judgment, injunction, order or
decree of any governmental authority having jurisdiction over it.

               6.3  DISCLAIMER OF WARRANTIES. EXCEPT AS OTHERWISE EXPRESSLY
PROVIDED IN THIS AGREEMENT OR BY APPLICABLE LAW, NEITHER PARTY MAKES ANY
WARRANTY WITH RESPECT TO ANY TECHNOLOGY, GOODS, SERVICES, RIGHTS, OR OTHER
SUBJECT MATTER OF THIS AGREEMENT AND HEREBY DISCLAIMS ALL WARRANTIES, CONDITIONS
OR REPRESENTATIONS OF



                                      -21-
<PAGE>   27

ANY KIND, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES
OF PERFORMANCE, MERCHANTABILITY, SATISFACTORY QUALITY, FITNESS FOR A PARTICULAR
PURPOSE OR NON-INFRINGEMENT OF THIRD PARTY INTELLECTUAL PROPERTY RIGHTS.

               6.4  INDEMNIFICATION OF PALADIN. Connetics shall indemnify
Paladin, its Affiliates and their respective directors, officers, employees and
agents, and defend and save each of them harmless, from and against any and all
suits, losses, actions, demands, investigations, claims, damages, liabilities,
costs and expenses (including, without limitation, reasonable attorneys' fees
and expenses) (collectively, "LOSSES") brought by Third Parties arising from or
occurring as a result of (a) any breach (or alleged breach) by Connetics of its
representations, warranties, or obligations under this Agreement; (b) any
Adverse Experiences that Connetics should have known about based on its clinical
trials, but which Adverse Experiences were not reported to the FDA or to
Paladin; (c) the manufacture or the storage of the Product prior to the date of
shipment of Product to Paladin by Connetics, its Affiliates, or Contract
Manufacturers, all except to the extent caused by the negligence or willful
misconduct of Paladin or its officers, agents, employees, Affiliates,
sublicensees or customers; (d) the negligence or willful misconduct of Connetics
or its officers, agents, employees or Affiliates; (e) the use or consumption of
the Product outside of the Territory; or (f) a claim that the Product infringes
any patents, except that (subject to SECTION 6.1.3) Connetics shall not
indemnify Paladin against any claim arising out of Paladin's decision to refuse
a sublicense to a Third Party License pursuant to SECTION 2.3 of this Agreement.

               6.5  INDEMNIFICATION OF CONNETICS. Paladin shall indemnify
Connetics, its Affiliates and their respective directors, officers, employees
and agents, and defend and save each of them harmless, from and against any and
all Losses brought by Third Parties arising from or occurring as a result of (a)
any breach (or alleged breach) by Paladin of its representations, warranties, or
obligations under this Agreement; (b) the storage of the Product after the date
of shipment of Product to Paladin by Paladin, its Affiliates, or Contract
Manufacturers, all except to the extent caused by the negligence or willful
misconduct of Connetics or its officers, agents, employees, Affiliates,
sublicensees or customers; (c) the negligence or willful misconduct of Paladin
or its officers, agents, employees or Affiliates; (d) the use or consumption of
the Product within the Territory; or (e) false or intentionally misleading
statements made by Paladin or its officers, agents or employees in connection
with the marketing and/or sale of the Product in the Territory.

               6.6  INDEMNIFICATION PROCEDURE.

                    6.6.1 NOTICE. Each indemnified party (the "INDEMNITEE")
agrees to give the indemnifying party (the "INDEMNITOR") prompt written notice
of any Losses or discovery of fact upon which such indemnified party intends to
base a request for indemnification under SECTION 6.4 or 6.5. Notwithstanding the
foregoing, the failure to give timely notice to the Indemnitor shall not release
the Indemnitor from any liability to the Indemnitee to the extent the Indemnitor
is not prejudiced thereby.

                    6.6.2 COPIES. The Indemnitee shall furnish promptly to the
Indemnitor copies of all papers and official documents in the Indemnitee's
possession or control which relate to any



                                      -22-
<PAGE>   28

Losses; provided, however, that if the Indemnitee defends or participates in the
defense of any Losses, then the Indemnitor shall also provide such papers and
documents to the Indemnitee. The Indemnitee shall cooperate with the Indemnitor
in providing witnesses and records necessary in the defense against any Losses.

                    6.6.3 PARTICIPATION. The Indemnitor shall have the right, by
prompt notice to the Indemnitee, to participate in the defense of any third
party claim forming the basis of such Losses with counsel reasonably
satisfactory to the Indemnitee, and at the sole cost of the Indemnitor so long
as (a) the Indemnitor promptly notifies the Indemnitee in writing (but in no
event more than 60 days after its receipt of notice of the claim) that it will
indemnify the Indemnitee from and against any Losses the Indemnitee may suffer
arising out of the claim, and (b) the Indemnitor diligently participates the
defense of the claim.

                    6.6.4 CONTROL OF DEFENSE. If the Indemnitor participates in
the defense of the claim as provided above, the Indemnitee may at its option
relinquish total control to the Indemnitor or participate in such joint defense
with its own counsel who shall be retained, at the Indemnitee's sole cost and
expense; provided, however, that neither the Indemnitee nor the Indemnitor shall
consent to the entry of any judgment or enter into any settlement with respect
to the claim without the prior written consent of the other party, which consent
shall not be reasonably withheld or delayed. If the Indemnitee withholds consent
in respect of a judgment or settlement involving only the payment of money and
which would not involve any stipulation or admission of liability or result in
the Indemnitee becoming subject to injunctive relief or other relief, the
Indemnitor shall have the right, upon notice to the Indemnitee within five (5)
days or receipt of the Indemnitee's written denial of consent, to pay to the
Indemnitee the full amount of such proposed judgment or settlement, including
all interest, costs or other charges relating thereto, and shall pay all
attorneys' fees incurred to such date for which the Indemnitor is obligated
under this Agreement, if any at which time the Indemnitor's rights and
obligations and duty to indemnify with respect to the claim shall cease.

                    6.6.5 SETTLEMENT. If the Indemnitor does not so participate
in the defense of such claim, the Indemnitee may conduct such defense with
counsel of its choice and at the sole cost of the Indemnitor and may settle such
case (for monetary damages only) as it shall determine in the exercise of its
reasonable discretion. Except as provided in this SECTION 6.6.5, the Indemnitor
shall not be liable for any settlement or other disposition of a Loss by the
Indemnitee which is reached without the written consent of the Indemnitor.

                    6.6.6 COSTS AND EXPENSES. Except as provided in this SECTION
6.6, the costs and expenses, including fees and disbursements of counsel,
incurred by any Indemnitee in connection with any claim shall be reimbursed on a
calendar quarter basis by the Indemnitor, without prejudice to the Indemnitor's
right to contest the Indemnitee's right to indemnification and subject to refund
in the event the Indemnitor is ultimately held not to be obliged to indemnify
the Indemnitee.

                    6.7  LIMITATION OF LIABILITY. EXCEPT FOR ANY LOSS,
LIABILITY, DAMAGE OR OBLIGATION ARISING OUT OF OR RELATING TO THE INABILITY TO
SUPPLY



                                      -23-
<PAGE>   29

THE PRODUCT, DISCLOSURE OF CONFIDENTIAL INFORMATION PURSUANT TO ARTICLE VIII OR
AS PROVIDED IN SECTION 6.4 OR 6.5, IN NO EVENT SHALL EITHER PARTY HAVE ANY
LIABILITY TO THE OTHER PARTY OR ANY OTHER THIRD PARTY FOR ANY LOST OPPORTUNITY
OR PROFITS, OR FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, PUNITIVE OR SPECIAL
DAMAGES ARISING OUT OF A BREACH OF THIS AGREEMENT, UNDER ANY CAUSE OF ACTION OR
THEORY OF LIABILITY (INCLUDING NEGLIGENCE), AND WHETHER OR NOT SUCH PARTY TO
THIS AGREEMENT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. THESE
LIMITATIONS SHALL APPLY NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY
LIMITED REMEDY.


                                   ARTICLE VII
                                    COVENANTS

               7.1  CONNETICS' COVENANTS TO PALADIN. Connetics covenants to
Paladin as follows:

                    7.1.1 MANUFACTURE. At the time of delivery of Relaxin
Materials to Paladin, the Relaxin Materials (a) will have been manufactured,
filled, packaged, stored and shipped in accordance with all applicable laws,
rules, regulations or requirements, (b) will have been manufactured, filled,
packaged and stored in accordance with the Specifications, and (c) will be free
from defects in material, manufacturing and workmanship for the shelf life of
such Relaxin Materials as set forth in the Specifications.

                    7.1.2 COMPLIANCE WITH LAWS. Connetics has conducted or has
caused Connetics' Contract Manufacturers to conduct, and will in the future
conduct Product Development and other relevant research and development
activities required to support clinical testing, Regulatory Approvals and
commercialization of the Product in the Field (and any Additional Indications)
in accordance with applicable laws, rules and regulations, including without
limitation, known or published standards of the FDA.

                    7.1.3 PERMITS; LICENSES. Connetics will maintain in effect
all governmental permits, licenses, orders, applications and Regulatory
Approvals, if applicable, necessary to manufacture, supply and sell Relaxin
Materials and/or Product and otherwise as necessary to perform its obligations
in accordance with the terms of this Agreement and the Supply Agreement.
Connetics will manufacture and supply such Relaxin Materials and/or Product in
accordance with such governmental permits, licenses, orders, applications, and
Regulatory Approvals.

                    7.1.4 FUTURE PATENTS. Connetics will promptly disclose to
Paladin any knowledge it acquires during the Term of this Agreement relating to
any patents or patent applications other than the Relaxin Patents, required for
the production, manufacture or commercialization of Product in the Field.

                                      -24-
<PAGE>   30

                    7.1.5 INSURANCE. Connetics shall obtain and maintain
sufficient liability insurance to cover its activities and obligations
(including without limitation indemnified obligations) contemplated under this
Agreement, in such amount normal and customary for companies engaged in industry
and activities similar to Connetics.

                    7.1.6 NON-COMPETE. Connetics covenants that, except as
expressly permitted under this Agreement, during the Term, it will not, nor will
it permit or cause its Affiliates or any Third Party to, enter into any
agreement or arrangement to manufacture, develop, use, offer for sale, lease,
market, sell, import, commercialize or otherwise exploit either directly or
indirectly in the Territory any product which contains human or animal relaxin
(whether recombinant or natural) or any product for the treatment of DSS except
in accordance with the terms of this Agreement (collectively, "THIRD PARTY
WORK"). Without limiting the foregoing, except for sublicenses and subcontracts
entered into in accordance with the terms of this Agreement, Connetics will not
grant to any Affiliate or Third Party any rights under the Licensed IP which
would permit such Affiliates or Third Party to engage in or otherwise exploit
Third Party Work in the Territory. If Connetics breaches the provisions of this
SECTION 7.1.6, then without limiting any other remedies available to Paladin,
Connetics shall at its sole expense contribute the Third Party Work to Paladin
for use and exploitation under the terms of this Agreement and secure for
Paladin the exclusive right in the Field to use and exploit the Third Party Work
in the Territory.

                    7.1.7 COMMERCIALIZATION. Connetics shall use Commercially
Reasonable Efforts to develop and commercialize the Product in the United
States.

                    7.1.8 MAINTENANCE OF PATENTS. Connetics shall prosecute and
maintain the Relaxin Patents, and shall not take any steps to abandon, or allow
to lapse, nor fail to take any steps which are required to avoid the abandonment
or lapsing of any Relaxin Patent (nor cause or permit any other person to do so)
unless, in each case, Paladin and Connetics specifically agree otherwise in
writing.

               7.2  PALADIN'S COVENANTS TO CONNETICS. Paladin covenants to
Connetics as follows:

                    7.2.1 COMMERCIALIZATION. Paladin shall use Commercially
Reasonable Efforts to develop and commercialize the Product in the Territory.

                    7.2.2 PERMITS; LICENSES. Paladin will maintain in effect in
the Territory all governmental permits, licenses, orders, applications and
Regulatory Approvals, if applicable, necessary to supply and sell Relaxin
Materials and/or Product in the Territory and otherwise as necessary to perform
its obligations in accordance with the terms of this Agreement and the Supply
Agreement (all to the extent not otherwise required to be held by Connetics
under applicable law or by the terms of this Agreement), and Paladin will supply
such Relaxin Materials and/or Product in accordance with such governmental
permits, licenses, orders, applications, and Regulatory Approvals.

                    7.2.3 FUTURE PATENTS. Paladin will promptly disclose to
Connetics any knowledge it acquires during the Term of this Agreement relating
to any patents or patent



                                      -25-
<PAGE>   31

applications other than the Relaxin Patents, required for the production,
manufacture or commercialization of Product in the Field.


                                  ARTICLE VIII
                          CONFIDENTIALITY AND PUBLICITY

               8.1  PUBLIC RELATIONS AND ANNOUNCEMENTS. The Parties shall
provide courtesy copies of any public announcements concerning the relationship
created by this Agreement. Neither Party shall make any representations
concerning the other without the prior consent from the other Party. Except for
such disclosure as is required by applicable law and/or stock exchange
regulation, neither Party shall make any announcement, news release, public
statement, publication or presentation relating to the existence of this
Agreement or the arrangements referred to in this Agreement without the other
Party's prior written consent, which consent will not be unreasonably withheld
or delayed.

               8.2  CONFIDENTIALITY.

                    8.2.1 CONFIDENTIAL INFORMATION. The Parties acknowledge that
by reason of their relationship to each other under this Agreement, each will
have access to certain information and materials concerning Relaxin Information,
the other's business, plans, trade secrets, customers (including, but not
limited to, customer lists of both Parties), technology, and/or products that is
confidential and of substantial value to that Party, which value would be
impaired if such information were disclosed to Third Parties ("CONFIDENTIAL
INFORMATION"). Each Party agrees that it will not use in any way other than
expressly authorized or contemplated under this Agreement, nor disclose to any
Third Party, any such Confidential Information revealed to it by the other Party
(except that Confidential Information may be disclosed, as required for the
purposes of this Agreement, to any Regulatory Authority, an Affiliate, assignee,
distributor, consultant or Third Party contractor or research and development
organization under similar written obligations of non-disclosure and non-use),
and will take every reasonable precaution to protect the confidentiality of such
information and with no less restrictive precautions than it takes to protect
its own confidential information. If Confidential Information is required to be
disclosed in response to a valid order by a court, regulatory authority or other
government body of competent jurisdiction, or if otherwise required to be
disclosed by law, or if necessary to establish the rights of either Party under
this Agreement, the receiving Party shall use commercially reasonable efforts to
provide the disclosing Party with advance notice of such required disclosure to
give the disclosing Party sufficient time to seek a protective order or other
protective measures, if any are available, for such Confidential Information.

                    8.2.2 EXCEPTIONS. For purposes of this Agreement,
information shall be deemed Confidential Information if such information, by its
nature or due to the context within which it is disclosed, is obviously intended
by the disclosing Party to be kept confidential even if not identified as such
in writing or with legends or other markings, provided that Relaxin Information
shall automatically be treated as Confidential Information. Upon request by
either Party, the other Party will advise whether or not it considers any
particular information or materials to be



                                      -26-
<PAGE>   32

Confidential Information. Confidential Information does not include information,
technical data or know-how which: (a) is rightfully in the possession of the
receiving Party at the time of disclosure as shown by the receiving Party's
files and records immediately prior to the time of disclosure; (b) becomes part
of the public knowledge or literature, not as a result of any inaction or action
of the receiving Party; (c) is independently developed by a Party without the
use of any Confidential Information of the other Party; (d) is obtained from any
Third Party who is authorized to disclose such data and information without
obligation of confidentiality to the disclosing party, or (e) is approved for
release in writing by the disclosing Party.

               8.3  REMEDY. If either Party breaches any of its obligations with
respect to this ARTICLE VIII, or if such a breach is likely to occur, the other
Party shall be entitled to seek equitable relief, including specific performance
or an injunction, in addition to any other rights or remedies, including money
damages, provided by law, without posting a bond.

               8.4  AGREEMENT TERMS. Subject to SECTION 8.1 and the exclusions
set forth in SECTION 8.2.2, the Parties shall treat the terms and conditions of
this Agreement as Confidential Information; provided, however, after written
notification to the other Party, each Party may disclose the existence of this
Agreement and the material terms and conditions of this Agreement under
circumstances that reasonably ensure the confidentiality thereof to: (a) any
government or regulatory authorities, including without limitation the United
States Security and Exchange Commission pursuant to applicable law (excluding,
to the extent legally permitted, disclosure of financial terms in any publicly
available versions of information so-disclosed), (b) its legal representatives,
advisors and prospective investors, and (c) to Connetics' licensors to the
extent required for compliance with Connetics' obligations under the Third Party
Licenses.


                                   ARTICLE IX
                              TERM AND TERMINATION

               9.1  TERM. The obligations of the Parties under this Agreement
are subject to the approval of the Vancouver Stock Exchange, which approval
Paladin undertakes to obtain forthwith. Subject to the preceding sentence, the
term of this Agreement shall commence on the Effective Date and continue in full
force and effect until the later of the last to expire of the Relaxin Patents,
or any regulatory extensions which provide exclusivity for the Product in the
Territory ("TERM").

               9.2  TERMINATION. In addition to and notwithstanding the
termination rights stated elsewhere in this ARTICLE IX and in SECTION 11.8 of
this Agreement, this Agreement may be terminated as follows:

                    9.2.1 FOR BREACH BY CONNETICS. Upon breach by Connetics of
any of its material obligations contained in this Agreement ("CONNETICS
BREACH"), Paladin shall be entitled to give Connetics notice specifying the
nature of the Connetics Breach and stating its intent to terminate this
Agreement if the Connetics Breach is not cured. This Agreement shall terminate
forty-five (45) days after Connetics receives such notice (a) if Connetics does
not cure the



                                      -27-
<PAGE>   33

Connetics Breach to the reasonable satisfaction of Paladin, or (b) if a plan,
reasonably acceptable to Paladin, is not implemented to cure as soon as
practicable after notice of the Connetics Breach.

                    9.2.2 FOR BREACH BY PALADIN. Upon breach by Paladin of any
of its material obligations contained in this Agreement ("PALADIN BREACH"),
Connetics shall be entitled to give Paladin notice specifying the nature of the
Paladin Breach and stating its intent to terminate this Agreement if the Paladin
Breach is not cured. This Agreement shall terminate forty-five (45) days after
Paladin receives such notice (a) if Paladin does not cure the Paladin Breach to
the reasonable satisfaction of Connetics, or (b) if a plan, reasonably
acceptable to Connetics, is not implemented to cure as soon as practicable after
notice of the Paladin Breach.

                    9.2.3 LOSS OF THIRD PARTY LICENSES. Notwithstanding the
provisions of SECTION 9.2.1, Paladin may terminate this Agreement on notice to
Connetics if either of the following agreements is terminated resulting in the
loss of Paladin's license under the Third Party Licenses: (a) the License
Agreement dated September 27, 1993 between Genentech and Connective
Therapeutics, Inc. (now known as Connetics) or (b) the License Agreement dated
December 31, 1982 and re-executed as amended and varied as of June 30, 1987
between the Howard Florey Institute of Experimental Physiology and Medicine and
Genentech, Inc. Connetics shall use Commercially Reasonable Efforts to obtain
from relevant Third Parties an acknowledgement that, should the relationship
contemplated by the Third Party Licenses terminate through no fault of
Paladin's, Paladin shall have the right to continue to commercialize the Product
as set forth in this Agreement.

                    9.2.4 TERMINATION BY PALADIN. Paladin shall have the right
to terminate this Agreement by giving one hundred eighty (180) days prior
written notice to Connetics for any reason or no reason; provided that Connetics
may elect at its sole discretion to continue development of the Product in the
Territory.

                    9.2.5 TERMINATION FOR INSOLVENCY. Either Party may terminate
this Agreement immediately upon delivery of written notice to the other Party
(a) upon the institution by or against the other Party of insolvency,
receivership or bankruptcy proceedings or any other proceedings for the
settlement of the other Party's debts, provided, however with respect to
involuntary proceedings, that such proceedings are not dismissed within one
hundred and twenty (120) days; (b) upon the other Party's making an assignment
for the benefit of creditors; or (c) upon the other Party's dissolution or
ceasing to do business.

               9.3  EFFECT OF TERMINATION.

                    9.3.1 EFFECT ON LICENSE. Upon the expiration or earlier
termination of this Agreement, the rights licensed under this Agreement shall be
treated as follows:

                         (a) Upon the expiration of the Term, Paladin shall have
          a fully paid-up, perpetual, irrevocable, royalty-free, transferable,
          worldwide, non-exclusive right and license under the Licensed IP
          existing as of the date of such expiration to make, have made, use,
          offer to sell, and sell Product in the Territory.

                                      -28-
<PAGE>   34

                         (b) Upon termination pursuant to SECTIONS 9.2.2, 9.2.4,
          or 11.8, or termination by Connetics pursuant to SECTION 9.2.5, all
          rights to the Product (except to Paladin's trademarks) in the
          Territory shall revert to Connetics.

                         (c) Upon termination by Paladin pursuant to SECTIONS
          9.2.1, 9.2.3, or 9.2.5, the license granted to Paladin pursuant to
          this Agreement shall become a perpetual, irrevocable, royalty-free (as
          to Connetics), transferable, exclusive as to the Territory, license
          under the Licensed IP existing as of the date of such termination, to
          make, have made, use, offer to sell, and sell Product in the
          Territory, with the right to sublicense; provided that Paladin assumes
          Connetics' obligations to Third Parties under existing Third Party
          Licenses with respect to the Territory.

                    9.3.2 ONGOING OBLIGATIONS. Except as expressly provided in
this Agreement, termination of this Agreement pursuant to the terms and
conditions set forth in this Agreement shall not relieve the Parties of any
right or obligation, including but not limited to any payment obligations,
accruing prior to or upon such expiration or termination. Upon expiration or
termination of this Agreement for any reason, each Party shall immediately
return to the other Party or destroy any Confidential Information disclosed by
the other Party, except that each Party may retain one copy of such Confidential
Information marked and used for legal archival purposes only. In the event of
termination pursuant to SECTION 9.2.2 by Connetics or SECTION 9.2.4 by Paladin,
then Paladin shall assign and deliver to Connetics all data and information
(including registration dossier) obtained in pursuing regulatory approvals, and
all regulatory approvals (e.g., to Connetics' designee in the Territory as
permitted under the applicable law) for the Product in the Territory received as
of such termination date. Except for the provisions of SECTIONS 2.2, 3.5, 5.3,
5.5 and 9.3, and ARTICLES I, VI, VIII, X and XI which shall survive such
expiration or termination (except as limited by the terms of such section or
Article), all other rights and obligations of the Parties shall cease upon
expiration or termination of this Agreement.

                    9.3.3 INVENTORY. Notwithstanding the foregoing, upon early
termination of this Agreement pursuant to SECTION 9.2.4, Paladin shall have the
right to sell all remaining Product in its inventory within six (6) months after
the date of termination, subject to the payment to Connetics of the amounts
specified in SECTION 4.1. Thereafter, Paladin agrees to destroy any remaining
supply of Product and Relaxin Materials at Connetics' request and direction.


                                    ARTICLE X
                       REGULATORY COMPLIANCE AND REPORTING

               10.1 GOVERNMENT INSPECTION. Connetics agrees to advise Paladin by
telephone and facsimile immediately of any proposed or announced visit or
inspection, and as soon as possible but in any case within twenty-four (24)
hours (or, in the case of a Contract Manufacturer, within twenty-four [24] hours
after receipt by Connetics of notice thereof), of any unannounced visit or
inspection, by any Regulatory Authority of any facilities used by Connetics or
its Contract Manufacturers in the performance of its obligations under this
Agreement, including the processes



                                      -29-
<PAGE>   35

or procedures used at such facilities in the manufacture of Relaxin Materials,
Relaxin or Product. Connetics shall provide Paladin with a reasonable
description of each such visit or inspection promptly (but in no event later
than five [5] calendar days) thereafter, and with copies of any letters, reports
or other documents (including Form 483's) issued by any such authorities that
relate to Relaxin, Relaxin Materials, or the Product, or such facilities,
processes or procedures. Paladin may review Connetics' responses to any such
reports and communications, and if practicable, and, insofar as timely received,
Paladin's reasonable views and requests shall be taken into account prior to
submission of such reports and communications to the relevant Regulatory
Authority. Connetics shall also provide Paladin with the notice, information,
documentation, and opportunity to comment provided for above with respect to
Contract Manufacturers.

               10.2 ADVERSE EXPERIENCE REPORTING. Each Party shall notify, and
shall cause its Affiliates and sublicensees and (with respect to Connetics) its
Contract Manufacturers, to notify, the other party promptly upon receipt of (a)
any information concerning any potentially serious or unexpected side effect,
injury, toxicity or sensitivity reaction or any unexpected incidence or other
adverse experience (an "ADVERSE EXPERIENCE") and the severity thereof associated
with the clinical uses, studies, investigations, tests and marketing of the
Relaxin Materials, Relaxin or the Product, whether or not determined to be
attributable to the same, (b) any information regarding any pending or
threatened action which may affect the safety or efficacy claims of the Product
or the continued marketing of the Product in any nation or jurisdiction, (c) any
material communications with or notice from a Regulatory Authority indicating
that it intends to visit or inspect a Party's facilities, or the facilities of
an Affiliate or sublicensee of such Party and (with respect to Connetics) a
Contract Manufacturer, for a purpose relevant to the development, manufacture or
marketing of the Product. Without limiting the foregoing, Connetics shall use
Commercially Reasonable Efforts to require each Affiliate, sublicensee and
Contract Manufacturer to notify Paladin's responsible drug safety department by
telephone and facsimile within twenty-four (24) hours after Connetics first
becomes aware of any Adverse Experience that gives cause for concern or is
unexpected or that is fatal, life-threatening (as it occurred), permanently
disabling, requires (or prolongs) inpatient hospitalization, represents a
significant hazard, or is a cancer or a congenital anomaly or represents an
overdose, or any other circumstance that might necessitate a recall, expedited
notification of any Regulatory Authorities or a significant change in the label
of the Product, including without limitation, any deviation from the specified
environmental conditions for shipping or storage of the Product. Each Party
shall make such reports as are necessary to comply with laws and regulations
applicable to it, at its sole expense. Further, in the event a Party (or its
Affiliates, sublicensees, or Contract Manufacturers) receives a communication or
directive from a Regulatory Authority commencing or threatening seizure of (or
other removal from the market of) Relaxin, Relaxin Materials, or Product, such
Party shall transmit such information to the other Party within twenty-four (24)
hours of receipt.

               10.3 NOTIFICATION AND RECALL. If any Regulatory Authority issues
or requests a recall or takes similar action in connection with Relaxin or the
Product, or if either Party determines that an event, incident or circumstance
has occurred which may result in the need for a recall or market withdrawal, the
Party notified of or wishing to call such recall or similar action shall, within
twenty-four (24) hours, advise the other Party of notification or its
determination by telephone or facsimile, after which the Parties shall promptly
discuss and work together to effect



                                      -30-
<PAGE>   36

an appropriate course of action; provided, however, that either Party may
initiate a recall or market withdrawal thereafter if it deems such action
necessary or appropriate. Connetics shall be responsible for notification to FDA
(or such other applicable Regulatory Authority with respect to countries other
than the United States and the Territory) and compliance with applicable laws
outside the Territory in conducting such recall. Paladin shall be responsible
for notification to the applicable Regulatory Authority with respect to
countries in the Territory and compliance with applicable laws in the Territory
in conducting such recall.

               10.4 RECALL EXPENSE. If a recall results from the breach of a
Party's warranties or obligations under this Agreement, the breaching Party
shall bear the full expense of both Parties incurred in any such recall. Such
expenses of recall shall include, without limitation, the expenses of
notification and destruction or return of the recalled Product and the sum paid
for the recalled Product. Without limitation of the foregoing, if the failure to
meet applicable legal requirements is caused by the act or omission of Connetics
in manufacture or sale of Product to Paladin, (a) Connetics shall have the
option of (i) replacing the recalled Product, or (ii) reimbursing Paladin for
any amounts paid to Connetics by Paladin under this Agreement for Product which
are recalled and/or cannot be shipped by Paladin due to the condition requiring
the recall, and (b) with respect to Product manufactured by Connetics, Connetics
shall reimburse Paladin for all liabilities incurred by Paladin by virtue of
being unable to meet its supply obligations to its customers because Product
could not be shipped by Connetics or Paladin due to the condition requiring
recall. In the event, however, that a recall is partially caused by Connetics'
actions or omissions and partially caused by Paladin's actions or omissions,
then each Party shall be responsible for its proportionate share of the recall
expenses based on its proportionate share of causation.


                                   ARTICLE XI
                                  MISCELLANEOUS

               11.1 TAXES, TARIFFS, FEES. Paladin shall have the right to deduct
from the payments set forth in SECTION 4.1 any withholding tax applicable to
Connetics' income which Paladin is obliged to pay by under applicable law;
provided however that Paladin shall provide Connetics with an appropriate tax
receipt for the deducted amount which Connetics can present to its tax authority
and sufficient for Connetics to receive the corresponding credit to which it is
entitled. The Parties agree to cooperate in all respects necessary to take
advantage of such double taxation agreements as may be available to optimize the
tax obligations of each Party.

               11.2 CURRENCY OF PAYMENTS. All amounts payable to Connetics by
Paladin pursuant to this Agreement shall be made to Connetics in U.S. dollars
and by wire transfer to the U.S. bank account(s) specified by Connetics from
time to time. Paladin shall apply a conversion rate from Canadian currency to
U.S. dollars for amounts payable under this Agreement equal to the average of
the conversion rates in effect on the last (30) days of the quarterly period for
which such payment is due. The conversion rates to be used in this Agreement
shall be the rates reported in the Wall Street Journal (West Coast Edition).



                                      -31-
<PAGE>   37

               11.3 COMPLIANCE WITH LAWS. In performing this Agreement, each
Party shall comply with all applicable laws and government regulations at all
times, including but not limited to any applicable laws and regulations in the
Territory and the U.S. with respect to the export or re-export or release of
technology and technical data.

               11.4 DISPUTE RESOLUTION AND GOVERNING LAW.

                    11.4.1 PROCESS. The Parties shall endeavor to resolve in
good faith any disputes or conflicts arising from or relating to the subject
matter of this Agreement, failing which either Party shall submit such conflict
for resolution to the Chief Executive Officers of Paladin and Connetics. If the
Chief Executive Officers of Paladin and Connetics are unable to resolve such
conflict within thirty (30) days after having such conflict submitted to them
for resolution, such conflict may be submitted to arbitration in accordance with
the rules of the American Arbitration Association then in effect. Judgment upon
the award rendered by the arbitrators may be entered in any court having
jurisdiction thereof. In any arbitration pursuant to this Section, the award
shall be rendered by a majority of the members of a board of arbitration
consisting of three members, one being appointed by each party and the third
being appointed by mutual agreement of the two arbitrators appointed by the
parties.

                    11.4.2 GOVERNING LAW. This Agreement shall be governed,
controlled, interpreted and defined by and under the laws of the State of New
York and the United States without regard to that body of law known as conflicts
of law; provided that issues relating to the validity and enforceability of
patents shall be governed by the laws of the jurisdiction by which such patent
was granted. The Parties specifically disclaim application to this Agreement of
the Convention on Contracts for the International Sale of Goods.

               11.5 SECTION HEADINGS. The section headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.

               11.6 NOTICES. Any notice required or permitted by this Agreement
shall be in writing and in English and shall be sent by prepaid registered or
certified mail, return receipt requested; by facsimile; by internationally
recognized courier; or by personal delivery, in each case addressed to the other
Party at the address below or at such other address for which such Party gives
notice under this Agreement.

               Connetics Corporation
               Attn: President and Chief Executive Officer
               3400 West Bayshore Road
               Palo Alto, California 94303
               U.S.A.

               Paladin Labs Inc.
               Attn: Chief Executive Officer
               6111 Royalmount, Suite 102



                                      -32-
<PAGE>   38

               Montreal, Quebec H4P 2T4
               CANADA

Such notice shall be deemed to have been given when delivered or, if delivery is
not accomplished by some fault of the addressee, when tendered.

               11.7 FORCE MAJEURE. Neither Party shall be considered in default
of performance of its obligations under this Agreement, except any obligation
under this Agreement to make payments when due, to the extent that performance
of such obligations is delayed by contingencies or causes beyond the reasonable
control and not caused by the negligence or willful misconduct of such Party,
including but not limited to strike, fire, flood, earthquake, windstorm,
governmental acts or orders or restrictions, or force majeure, to the extent
that the failure to perform is beyond the reasonable control of the
nonperforming Party.

               11.8 NONASSIGNABILITY AND BINDING EFFECT. Each Party agrees that
its rights and obligations under this Agreement may not be transferred or
assigned directly or indirectly, except as follows: (a) either Party may
transfer or assign this Agreement to an Affiliate of such Party which agrees in
writing to undertake the obligations under this Agreement provided the assigning
Party remains primarily liable, (b) either Party may transfer or assign this
Agreement in connection with the sale of all or substantially all of the
assigning Party's related business, and (c) either Party may transfer or assign
this Agreement to a non-Affiliate Third Party with the prior written consent of
the other Party, which consent shall not be unreasonably withheld. Subject to
the foregoing, this Agreement shall be binding upon and inure to, the benefit of
the Parties, their successors and assigns. Any attempted assignment contrary to
the provisions of this SECTION 11.8 shall be deemed ineffective, and either
Party shall have the right to terminate this Agreement, with the effect
described in SECTION 9.3.1.

               11.9 PARTIAL INVALIDITY. If any provision of this Agreement is
held to be invalid by a court of competent jurisdiction, then the remaining
provisions shall remain, nevertheless, in full force and effect. The Parties
agree to renegotiate in good faith any term held invalid and to be bound by the
mutually agreed substitute provision in order to give the most approximate
effect intended by the Parties.

               11.10 NO WAIVER. No waiver of any term or condition of this
Agreement shall be valid or binding on either Party unless agreed in writing by
the Party to be charged. The failure of either Party to enforce at any time any
of the provisions of this Agreement, or the failure to require at any time
performance by the other Party of any of the provisions of this Agreement, shall
in no way be construed to be a present or future waiver of such provisions, nor
in any way affect the validity of either Party to enforce each and every such
provision thereafter.

                                      -33-
<PAGE>   39
               11.11 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.

               11.12 ENTIRE AGREEMENT. This Agreement, including the attached
Exhibits which are incorporated in this Agreement by reference, constitutes the
entire agreement of the Parties with respect to the subject matter, and
supersedes all prior or contemporaneous understandings or agreements, whether
written or oral, between Connetics and Paladin with respect to such subject
matter. No amendment or modification of this Agreement shall be valid or binding
upon the Parties unless made in writing and signed by the duly authorized
representatives of both Parties.

               11.13 INDEPENDENT CONTRACTORS. The Parties to this Agreement are
independent contractors. This Agreement does not establish a relationship of
agency, partnership, joint venture, employment or franchise between the Parties
and neither Party shall have any authority to bind the other Party or incur any
obligation on the other Party's behalf.

          The undersigned have executed this Agreement on behalf of the Parties
as of the Effective Date.



CONNETICS CORPORATION                          PALADIN LABS INC.



By:  /s/ T. Wiggans                            By:  /s/ Jonathan Goodman
     -------------------------------------          --------------------------
     Thomas G. Wiggans                              Jonathan Goodman
     President and Chief Executive Officer          President




                                      -34-
<PAGE>   40

                                LIST OF EXHIBITS


<TABLE>

<S>                                        <C>
   EXHIBIT A-1                              Amino Acid Sequence

   EXHIBIT A-2                              Substances

   EXHIBIT A-3                              Specifications

   EXHIBIT B                                Relaxin Patents

   EXHIBIT C-1                              Third Party Licenses to Connetics

   EXHIBIT C-2                              Third Party Licenses Not Involving the
                                             Territory and Third Party Licenses from
                                             Connetics

   EXHIBIT D                                Stock Purchase Agreement

   EXHIBIT E                                Outline of Terms of Supply Agreement

</TABLE>
<PAGE>   41


                                  EXHIBIT A-1

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  separately with the Commission. Confidential treatment has
  been requested with respect to the omitted portions.
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                                  EXHIBIT A-2

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  separately with the Commission. Confidential treatment has
  been requested with respect to the omitted portions.
<PAGE>   43



                                  EXHIBIT A-3

                                      [*]














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  separately with the Commission. Confidential treatment has
  been requested with respect to the omitted portions.
<PAGE>   44



                                   EXHIBIT E

                                      [*]














* Certain information on this page has been omitted and filed
  separately with the Commission. Confidential treatment has
  been requested with respect to the omitted portions.