<PAGE>

                                                                   Exhibit 10.17
================================================================================

                       MANUFACTURE AND SUPPLY AGREEMENT



                                     Among

                    The Dupont Merck Pharmaceutical Company

                              DuPont Merck Pharma



                                      And



                           Endo Pharmaceuticals Inc.



                                August 26, 1997

================================================================================

 The confidential portions of this exhibit have been filed separately with the
Securities and Exchange Commission pursuant to a confidential treatment request
in accordance with Rule 406 of the Securities Act of 1933.

            REDACTED PORTIONS OF THIS EXHIBIT ARE MARKED BY AN ***.


<PAGE>

                               TABLE OF CONTENTS
                               -----------------

<TABLE>
<CAPTION>
                                                                         Page
                                                                         ----
<S>                                                                      <C>
ARTICLE 1 DEFINITIONS
     1.1  Terms Defined in Purchase Agreement...........................    1
     1.2  Additional Definitions........................................    2
     1.3  References to DMPC............................................    4

ARTICLE 2 OWNERSHIP AND SUPPLY OF PRODUCTS
     2.1  Ownership.....................................................    4
     2.2  Supply........................................................    5
     2.3  Exclusivity...................................................    5
     2.4  New Products..................................................    5
          (a)  Addition of New Products.................................    5
          (b)  Split Manufacturing for New Products.....................    5
          (c)  API for New Products.....................................    6
          (d)  Transfer to Commercial Manufacture.......................    6
     2.5  Adequate Supply...............................................    6
          (a)  API Inventory Levels.....................................    6
          (b)  Validation of Alternate Facility.........................    6
          (c)  Agreed Manufacturing Level...............................    7
     2.6  Failure to Supply.............................................    7
     2.7  Contact Persons/Teams.........................................    7
          (a)  Representatives..........................................    7
          (b)  Joint Manufacturing Team.................................    8
          (c)  S&OP Procedures..........................................    8
          (d)  Resolution of Issues.....................................    8
     2.8  Standard of Supply............................................    8
     2.9  Chemical Processing Facility..................................    8

ARTICLE 3 TERM AND TERMINATION
     3.1  Term..........................................................    9
     3.2  Special Termination Provisions................................    9
          (a)  Put Agreement............................................    9
          (b)  Manati Production........................................    9
          (c)  Change of Control........................................   10
     3.3  Survival......................................................   10
     3.4  Effect of Termination.........................................   10
          (a)  Transfer of EPI Property.................................   10
          (b)  Inventory................................................   11

ARTICLE 4 PRICING
     4.1  General Compensation - Puerto Rico............................   11
</TABLE>

                                      -i-
<PAGE>

<TABLE>
<S>                                                                        <C>
          (a)  Fixed Costs................................................ 11
          (b)  Variable Costs............................................. 11
          (c)  Additional Compensation.................................... 11
     4.2  General Compensation - DMPC..................................... 11
          (a)  Fixed Costs................................................ 11
          (b)  Variable Costs............................................. 11
          (c)  Additional Compensation.................................... 12
     4.3  Additional General Compensation Matters......................... 12
          (a)  Payment Form............................................... 12
          (b)  Note Terms................................................. 12
          (c)  Adjustment of Variable Costs............................... 12
          (d)  Additional Services........................................ 13
          (e)  Additional Manufacturing................................... 13
     4.4  FPDE Charge..................................................... 13
     4.5  Reimbursement for API........................................... 13
     4.6  Reimbursement for Equipment..................................... 14
          (a)  EPI Equipment.............................................. 14
          (b)  DMPC Equipment............................................. 14
          (c)  Adjustment of Variable Costs............................... 14
     4.7  Trade Dress..................................................... 14
     4.8  Transition from DMPC to EPI..................................... 14
          (a)  Identification of Transferred Inventory.................... 14
          (b)  Continued Use of Prior Trade Dress......................... 14

ARTICLE 5 ESTIMATES AND ORDERS
     5.1  Forecasts and Orders............................................ 15
          (a)  Products................................................... 15
          (b)  API........................................................ 15
          (c)  Inventory of Finished Goods................................ 15
          (d)  Anticipated Forecast Supply Problems....................... 16
     5.2  Five-Year Forecast.............................................. 16
     5.3  Contract Products............................................... 17
     5.4  Addresses....................................................... 17

ARTICLE 6 TERMS OF SHIPMENT AND PAYMENT
     6.1  Terms of Shipment............................................... 17
     6.2  Payment Provisions.............................................. 18
          (a)  Variable Costs............................................. 18
          (b)  Fixed Costs; FPDE Charge Installments...................... 18
          (c)  Additional Compensation Factor............................. 18
          (d)  Other Billings............................................. 18
          (e)  Payment Terms.............................................. 18
          (f)  Late Fee................................................... 18
</TABLE>

                                     -ii-
<PAGE>

<TABLE>
<S>                                                                        <C>
ARTICLE 7  INSPECTION AND ANALYSIS
     7.1   By DMPC........................................................ 18
     7.2   By EPI......................................................... 19
     7.3   Independent Testing............................................ 19

ARTICLE 8  COMPONENT SUPPLY
     8.1   Ingredient Components.......................................... 19
     8.2   Packaging Components........................................... 19
     8.3   API Supply Agreements.......................................... 19
     8.4   DEA Quotas..................................................... 19

ARTICLE 9  WARRANTIES
     9.1   Manufacturing.................................................. 20
     9.2   Products....................................................... 20
     9.3   Personnel...................................................... 20
     9.4   Compliance with Law in Conduct of Facility Business............ 20
     9.5   General and Continuing Warranty................................ 20
     9.6   Limitation of Warranties....................................... 21

ARTICLE 10 MANUFACTURING STANDARDS/PROCESSES
     10.1  Change Control................................................. 21
     10.2  Work Requests.................................................. 21
     10.3  Batch Records.................................................. 21
     10.4  Retention Samples.............................................. 22
     10.5  Stability Studies.............................................. 22
     10.6  Process Validation............................................. 22
     10.7  Records Retention.............................................. 22
     10.8  Annual Product Review.......................................... 22

ARTICLE 11 CONFIDENTIAL INFORMATION
     11.1  Confidential Information....................................... 22

ARTICLE 12 INSPECTIONS/AUDITS
     12.1  Regulatory Inspections......................................... 23
     12.2  EPI Inspections................................................ 24
     12.3  Audit Rights................................................... 24
     12.4  EPI Information................................................ 24

ARTICLE 13 COMPLAINTS, ADER'S, RECALLS
     13.1  Product Complaints and ADE's................................... 24
     13.2  ADER's and Field Alert Reports................................. 25
     13.3  Recall Action.................................................. 25
     13.4  Recall Expenses................................................ 25
     13.5  Recall Records................................................. 25
</TABLE>

                                     -iii-
<PAGE>

<TABLE>
<S>                                                                   <C>
     13.6  Recalls of Contract Products.............................. 25
     13.7  DEA Actions or Proceedings................................ 25
     13.8  Product Notices........................................... 26

ARTICLE 14 INDEMNITY
     14.1  By DMPC................................................... 26
     14.2  By EPI.................................................... 26
     14.3  Limitation of Liability................................... 27
     14.4  Scope/Indemnification Procedures.......................... 27

ARTICLE 15 FORCE MAJEURE
     15.1  Performance Excused....................................... 27
     15.2  Additional Consequences of Force Majeure.................. 27

ARTICLE 16 MEDIATION / ARBITRATION
     16.1  Mediation................................................. 28
     16.2  Arbitration............................................... 28
     16.3  Arbitration Request....................................... 28
     16.4  Selection of Arbitrator................................... 29
           (a)  Number of Arbitrators................................ 29
           (b)  One Arbitrator....................................... 29
           (c)  Three Arbitrators.................................... 29
           (d)  Absence of Material Interest or Relationship......... 29
     16.5  Powers, Proceedings of Arbitrator......................... 30
           (a)  General.............................................. 30
           (b)  Costs and Fees....................................... 30
           (c)  Confidentiality...................................... 30
     16.6  Interim or Other Relief................................... 30
     16.7  Agreement in Force........................................ 30

ARTICLE 17 MISCELLANEOUS
     17.1  Notices................................................... 31
     17.2  Security Interest......................................... 31
     17.3  Modifications............................................. 32
     17.4  Assignability/Subcontracting.............................. 32
           (a)  Assignment by EPI.................................... 32
           (b)  Assignment by DMPC................................... 32
           (c)  Subcontracting....................................... 33
     17.5  Enforcement............................................... 33
     17.6  Entire Agreement.......................................... 33
     17.7  GOVERNING LAW............................................. 33
     17.8  Headings.................................................. 34
     17.9  Relationship of the Parties............................... 34
     17.10 Severability.............................................. 34
</TABLE>

                                     -iv-
<PAGE>

<TABLE>
     <S>                                                              <C>
     17.11 Waiver...................................................  34
</TABLE>

                                      -v-
<PAGE>

                               LIST OF SCHEDULES
                               -----------------


SCHEDULE A  PRODUCTS TO BE SUPPLIED
SCHEDULE B  CONTRACT PRODUCTS
SCHEDULE C  VARIABLE COSTS
SCHEDULE D  FIXED COSTS
SCHEDULE E  FORMS TO REQUEST  CHANGES AND ADDITIONAL ACTIVITIES
SCHEDULE F  PROCEDURES FOR TRANSFERRING NEW PRODUCTS TO COMMERCIAL MANUFACTURE
SCHEDULE G  API INVENTORY LEVELS
SCHEDULE H  FINISHED PRODUCT INVENTORY LEVELS
SCHEDULE I  IDENTIFICATION OF CONTRACTS
                    Part 1 Contract Product Agreements
                    Part 2 API Supply Agreements

EXHIBIT 1   Promissory Note Form - (S) 4.3(a)

                                     -vi-
<PAGE>

                       MANUFACTURE AND SUPPLY AGREEMENT


          This Agreement is effective as of August 26, 1997 and is among The
DuPont Merck Pharmaceutical Company ("DMPC"), a Delaware general partnership
with offices in Wilmington, Delaware, DuPont Merck Pharma ("DuPont Pharma"), a
Delaware general partnership with offices in Manati, Puerto Rico, and Endo
Pharmaceuticals Inc. ("EPI"), a Delaware corporation with offices in Wilmington,
Delaware.

                                  BACKGROUND

          A.   EPI, DMPC, DuPont Pharma and Endo Laboratories, L.L.C., a
Delaware limited liability company ("Endo"), have entered into an Asset Purchase
Agreement dated as of June 27, 1997 (the "Purchase Agreement") pursuant to which
DMPC, DuPont Pharma and Endo will sell to EPI their combined worldwide generic
and multi-source branded pharmaceuticals businesses (excluding the Excluded
Business and other Excluded Assets).

          B.   DMPC owns a manufacturing facility in Garden City, New York and
DuPont Pharma owns a manufacturing facility in Manati, Puerto Rico.  DMPC and
DuPont Pharma currently manufacture certain of the Products in such facilities,
and, in addition, DMPC provides certain related services for certain Contract
Products manufactured by third parties from its Wilmington site.  EPI desires
that such manufacturing and other services be continued for the Products and
Contract Products, and DMPC and DuPont Pharma are willing to supply the same on
the terms and conditions set forth in this Agreement.

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

                                   ARTICLE 1
                                  DEFINITIONS

     1.1  Terms Defined in Purchase Agreement.  The following terms that are
          -----------------------------------
defined in the Purchase Agreement are used herein as therein defined:

          "Affiliate"
          "Ancillary Agreements"
          "Bank Financing"
          "Building"
          "Closing"
          "Closing Date"
          "DEA"
          "Environmental Laws"
          "Excluded Assets"
          "Excluded Business"

                                      -1-
<PAGE>

          "Exempted Products"
          "Exempt Territory" or "Exempt Territories"
          "FDA"
          "Generic Products"
          "Intellectual Property"
          "Inventory"
          "Legal Requirements"
          "Loss"
          "Put Agreement"
          "Transferred Inventory"
          "U.S." or "United States"

     1.2  Additional Definitions.  The following terms, as used herein, shall
          ----------------------
have the following respective meanings:

          "Additional Compensation Factor" shall mean, with respect to any
Contract Year and as applicable to DMPC or DuPont Pharma, an amount equal to the
sum of the Fixed Costs payable to DMPC or DuPont Pharma, as applicable for such
Contract Year, plus the amount of all Variable Costs for Products invoiced by
DMPC or DuPont Pharma, as applicable, to EPI for such Contract Year; provided,
however, that the Additional Compensation Factor for DuPont Pharma for any
Contract Year shall not exceed $17,000,000 and provided, further, that the
Additional Compensation Factor for DMPC for any Contract Year shall not exceed
$17,000,000 less the amount of Additional Compensation Factor paid to DuPont
Pharma for such Contract Year.

          "Agreed Manufacturing Level" shall mean the volume of production of
Products at the Facilities in any Contract Year that in the aggregate does not
exceed (i) in the case of batches, * * * batches, and (ii) in the case of lots,
* * * lots; provided that such number of lots or batches, as applicable, shall
be increased for purposes of determining Agreed Manufacturing Level with respect
to either Facility (x) to the extent that lot or batch capacity is increased at
either Facility by equipment that is purchased for EPI's exclusive use and at
EPI's expense pursuant to Section 4.6(a) or purchased or otherwise provided
pursuant to Section 3.2(b) or (y) to the proportionate extent that lot or batch
capacity is increased at either Facility by shared new equipment purchased
pursuant to Section 4.6(b), such proportion to be based on the percentage use of
new equipment allocated to production of EPI Products; provided, further, that
if the Garden City Facility is sold or the operations at the Garden City
Facility are terminated pursuant to the Put Agreement, then from and after the
fifth anniversary of the date hereof, the Agreed Manufacturing Level shall
relate only to the volume of production of Products at the Manati Facility and
shall mean (i) in the case of batches, * * * batches, and (ii) in the case of
lots, * * * lots (subject to adjustment as referenced in the foregoing proviso
with respect to equipment purchased for the Manati Facility).

                                      -2-
<PAGE>

          "API" shall mean active pharmaceutical ingredient for Products and New
Products as set forth in the applicable NDA or ANDA, or as otherwise specified
by EPI in its equivalent internal filing in the absence of an applicable NDA or
ANDA.

          "Batch" shall mean a quantity produced according to a single
manufacturing order during a specified cycle of manufacturing.

          "Cash Cap Amount" shall mean, with respect to any Contract Year, an
amount equal to the portion of the Fixed Costs payable under Section 4.1(a) with
respect to such Contract Year, plus the amount of the Variable Costs of Products
payable with respect to such Contract Year pursuant to Section 4.1(b) and
4.2(b).

          "Contract Products" shall mean the pharmaceutical products
manufactured by third parties set forth on Schedule B.

          "Contract Year" shall mean the twelve (12) month period beginning on
the Closing Date and each twelve (12) month period thereafter during the term of
this Agreement.

          "Core Team Services" shall have the meaning set forth in Section
4.3(d).

          "CPI-U" shall mean the U.S. national Consumer Price Index -- All Urban
Consumers, which index is published monthly by the U.S. Department of Labor,
Bureau of Labor Statistics (or any successor agency), using 1982-1984 dollars at
one hundred percent (100%) as a base, or if such index ceases to be published,
such substitute index of like nature as shall be agreed upon by the parties.

          "DMF" shall mean, with respect to any Product, the drug master file
for such Product and any updates thereto.

          "Event of Force Majeure" shall have the meaning set forth in Section
15.1.

          "Excipient" shall mean an inactive pharmaceutical ingredient for a
Product as set forth in the applicable NDA or ANDA, or as otherwise specified by
EPI in its equivalent internal filing in the absence of an applicable NDA or
ANDA.

          "Facilities" shall mean the Garden City Facility and the Manati
Facility.

          "Fixed Costs" means the compensation payable to DMPC and DuPont Pharma
in respect of fixed manufacturing and overhead costs associated with the
Facilities, as provided in Sections 4.1(a) and 4.2(a).

          "Garden City Facility" shall mean the manufacturing facility owned by
DMPC, located in Garden City, New York.

                                      -3-
<PAGE>

          "Lot" shall mean a uniquely defined output of Product from the
packaging process.

          "Manati Facility" shall mean the manufacturing facility owned by
DuPont Pharma, located in Manati, Puerto Rico.

          "NDA" or "ANDA" shall mean a new drug application or an abbreviated
new drug application, as applicable, submitted to and approved by the FDA to
manufacture and market the Products and supplements, amendments and additions
thereto.

          "New Product" shall mean a new pharmaceutical product not initially
included on Schedule A on the Closing Date but which is added to Schedule A in
accordance with the provisions of Section 2.4.  A New Product shall also be
deemed to constitute a Product (as defined herein) from and after the date
Schedule A is amended pursuant to Section 2.4(d) to include such New Product;
provided, however, that all references in this Agreement to New Products shall
continue to include New Products that have become Products and have been added
to Schedule A after the Closing Date.

          "Notes" shall have the meaning set forth in Section 4.3(b).

          "Products" shall mean the pharmaceutical products set forth on
Schedule A, as amended from time to time, including any products that are line
extensions of, or product improvements to, the products set forth on Schedule A
to the extent that such line extensions or product improvements do not require
the filing of an NDA, ANDA or 505(2)(b) submission.

          "Product Support" shall have the meaning set forth in Section 4.3(d).

          "Purchase Agreement" shall have the meaning set forth in the
Background section.

          "Trade Dress" shall mean the color, appearance and printing on the
dosage form, the type, color and appearance of all packaging materials, and the
size and content of all printing on the package and on any written materials
supplied with the Products, and on promotional and educational literature.

          "Variable Costs" shall mean the direct labor and direct material costs
for producing units of Products, as more fully described in Schedule C hereto.

          "Warehouse" shall mean DMPC's warehouse and distribution center
located in Duluth, Gwinnett County, Georgia.

     1.3  References to DMPC.  Recognizing that the services provided in this
          ------------------
Agreement may be provided by DMPC or DuPont Pharma, references to DMPC in this
Agreement shall be deemed references to DMPC and/or DuPont Pharma, as
applicable.

                                      -4-
<PAGE>

                                   ARTICLE 2
                       OWNERSHIP AND SUPPLY OF PRODUCTS

     2.1  Ownership.  EPI has acquired all rights, title and interests in and
          ---------
to the Products (as identified on Schedule A on the effective date of this
Agreement) and the related NDAs, ANDAs, DMFs and Intellectual Property pursuant
to the Purchase Agreement, subject to certain licensing arrangements described
in the following sentence and except for certain non-U.S. filings and
registrations and associated rights relating to such licensing arrangements.
EPI has licensed rights under the NDAs and ANDAs and the Intellectual Property
to DMPC and DuPont Pharma pursuant to the Purchase Agreement to permit DMPC and
DuPont Pharma (i) to fulfill their obligations under certain contracts specified
in the Purchase Agreement, (ii) to manufacture, market, sell and distribute
Exempted Products in the applicable Exempt Territories, and (iii) to perform
their manufacture and supply obligations pursuant to this Agreement.  Neither
DMPC nor DuPont Pharma is retaining or acquiring pursuant to this Agreement any
ownership interests in the Products manufactured hereunder or any related NDAs,
ANDAs, DMFs or Intellectual Property (other than DMPC's or DuPont Pharma's
ownership of Inventory in the course of manufacture hereunder, until title
passes as referenced in Section 6.1).

     2.2  Supply.  The Products shall be manufactured and supplied by DMPC in
          ------
finished, final packaged form in EPI's Trade Dress.  DMPC will determine in
which Facility Products will be manufactured; provided that all New Products
will initially be manufactured in the Garden City Facility; provided, however,
that DMPC may determine to manufacture such New Products in the Manati Facility.
If DMPC determines to cause any such New Product to be manufactured at the
Manati Facility, then DMPC will bear the expenses of having the New Product
validated and approved by all necessary governmental authorities for manufacture
at the Manati Facility.

     2.3  Exclusivity.  DMPC agrees to sell to EPI, and EPI agrees to buy from
          -----------
DMPC, all of EPI's requirements for Products (including all New Products) for
resale anywhere in the world, except as otherwise set forth in this Agreement;
provided that EPI shall have no obligation to subject to the New Product
procedure referenced in Section 2.4, and EPI may cause to be manufactured by
others (and DMPC shall have no right to manufacture), any pharmaceutical product
(i) as to which rights to manufacture or sell are hereafter acquired from a
third party or (ii) separately developed by EPI without the involvement of DMPC.

     2.4  New Products.
          ------------

          (a) Addition of New Products.  Based on the time line developed by the
              ------------------------
DMPC/EPI core team for a New Product with respect to the transfer of such New
Product to commercial manufacture, EPI shall request, and DMPC shall submit, a
proposal to EPI to manufacture and supply such New Product, which proposal will
include the Variable Cost of manufacturing and supplying such New Product.  The
Variable Cost for such New Product will be determined in a manner consistent
with the calculation of Variable Costs for all other Products as set forth on
Schedule C.  DMPC shall be obligated to manufacture New Products for EPI to the
extent that the Agreed Manufacturing Level will not be exceeded as a result of
the manufacture

                                      -5-
<PAGE>

and supply of such New Product; provided that DMPC shall not be
required to manufacture any New Product for which DMPC lacks the necessary
equipment unless EPI agrees to purchase such equipment pursuant to Section
4.6(a) or otherwise provide such equipment at its cost.  Notwithstanding the
provisions of Section 2.3, EPI shall have the right to have a New Product
manufactured by a third party if EPI ultimately decides not to accept DMPC's
final proposal (in which case such New Product will not become a "Product" for
purposes of this Agreement). If EPI does accept DMPC's proposal, DMPC agrees to
manufacture and supply the New Product without any increase in the Fixed Charge
if the Agreed Manufacturing Level will not be exceeded as a result of the
manufacture and supply of such New Product. If the Agreed Manufacturing Level
will be exceeded, Section 4.3(e) shall apply.

          (b) Split Manufacturing for New Products.  Notwithstanding the
              ------------------------------------
provisions of Section 2.3, EPI shall have the right to purchase up to 50% of its
requirements for any New Product from an alternate source.  If EPI intends to
exercise such right with respect to a New Product it shall so advise DMPC as
early as practicable in the core team development process so that DMPC may amend
its proposal made or to be made pursuant to Section 2.4(a) to properly reflect
the consequences of such split manufacturing.

          (c) API for New Products.  EPI shall be responsible for sourcing and
              --------------------
paying for API for New Products, with the exception of (i) APIs that constitute
narcotics, and (ii) any API that DMPC is already then sourcing for any other
Product.  Any supplier of API sourced by EPI must meet DMPC's quality standards,
as determined by DMPC in its reasonable discretion.  DMPC shall be responsible
for procuring, qualifying, testing and releasing API sourced by EPI.  EPI shall
provide DMPC with a copy of the proposed supply contract pursuant to which any
API will be sourced by EPI and DMPC shall have the right to approve the terms of
such contracts (which approval shall not unreasonably be withheld) which would
have an impact on the manufacturing process at either Facility or on DMPC's
obligations for procuring, qualifying, testing, inspecting and releasing API.
Following the Initial Term (as defined in Section 3.1), EPI shall be responsible
for paying for API for all Products, whether sourced by EPI or sourced by DMPC.
In the event this Agreement is renewed beyond the Initial Term, the parties will
mutually agree upon and institute procedures for all API charges to be invoiced
directly to and paid by EPI.

          (d) Transfer to Commercial Manufacture.  The parties agree to transfer
              ----------------------------------
New Products to commercial manufacture in accordance with the procedures
attached hereto as Schedule F.  DMPC shall not change such procedures without
the prior written consent of EPI (which consent shall not unreasonably be
withheld).  After a New Product has been transferred to commercial manufacture,
EPI agrees to provide R&D support to resolve issues which may arise for six (6)
batches of commercial production.  Once a New Product has been transferred it
shall be added to Schedule A and the Variable Costs to be paid by EPI for such
Product shall be added to Schedule C.

                                      -6-
<PAGE>

     2.5  Adequate Supply.
          ---------------

          (a)  API Inventory Levels.  DMPC shall maintain inventory of API for
               --------------------
each Product at the level set forth in Schedule G, as such level may be modified
(without necessity for any amendment of Schedule G) from time to time through
the S&OP process (as referenced in Section 2.7(c)), or at such higher levels as
may be specified by EPI pursuant to Section 5.1(b).  DMPC shall not change the
levels of API inventory established from time to time in accordance with the
foregoing sentence without EPI's prior written consent (which consent shall not
unreasonably be withheld).

          (b)  Validation of Alternate Facility.  DMPC agrees to cause an
               --------------------------------
alternate Facility to be validated for the manufacture of Products as follows:

               (i)  Upon EPI's request, DMPC will use all commercially
reasonable efforts to have (x) the Garden City Facility validated and approved
by all necessary governmental authorities to manufacture *** and *** and (y) the
Manati Facility validated and approved by all necessary governmental authorities
to manufacture ***. DMPC will submit a plan for any such validation, which shall
include the estimated costs and timing therefor, to EPI for EPI's signed
agreement before implementing such validation plan. EPI shall bear all of the
expenses of such validation and approval process.

               (ii) If EPI determines that a Product is critical to its
business, upon EPI's request, DMPC will use all commercially reasonable efforts
to have the Facility which is not manufacturing the Product validated and
approved by all necessary governmental authorities to manufacture such Product;
provided that DMPC shall have no obligations regarding such validation and
approval if the Facility not manufacturing the Product lacks the necessary
equipment to manufacture the Product. DMPC will submit a plan for such
validation, which shall include the estimated costs and timing therefor, to EPI
for EPI's signed agreement before implementing such validation plan. EPI shall
bear all of the expenses of such validation and approval process. In the event
DMPC fails to have such Facility validated and approved by all necessary
governmental authorities within the time frame set forth in the validation plan,
EPI may seek to have a third party validated and approved to manufacture such
Product and EPI may purchase up to 50% of its requirements for such Product from
such third party.

          (c)  Agreed Manufacturing Level.  DMPC agrees that it will not
               --------------------------
knowingly take on additional manufacturing responsibilities or commitments at
the Facilities or otherwise knowingly take any actions that would prevent it
from manufacturing Products up to the Agreed Manufacturing Level.  If, at any
time, the annual manufacturing volume exceeds the Agreed Manufacturing Level,
Section 4.3(e) will apply.

     2.6  Failure to Supply.  If DMPC fails to supply any Product to meet
          -----------------
EPI's requirements that has been ordered in accordance with Article 5 of this
Agreement other than due to EPI's failure to supply API sourced by EPI, for a
period in excess of thirty (30) days from the due date of delivery, then EPI
will have the right to discontinue the purchase of that singular Product by

                                      -7-
<PAGE>

giving written notice to DMPC and may purchase the Product from an alternate
source until DMPC can resume supply of such Product.  After DMPC resumes supply
of such Product, EPI may continue to purchase up to 50% of its requirements for
such Product from such alternate source.

     2.7  Contact Persons/Teams.
          ---------------------

          (a) Representatives.  Each party will (i) designate a primary contact
              ---------------
person with respect to the transactions contemplated by this Agreement
(collectively, the "Representatives")  and (ii) advise the others in writing of
its appointment of a Representative and of any substitution.  The initial
Representatives are:

     For DMPC:
     --------

          Robert C. Fromuth (Wilmington Site)
          Richard Serafin (Garden City Facility)
          William Hernandez (Manati Facility)

     For EPI:
     -------

          Mariann T. MacDonald

          (b)  Joint Manufacturing Team.  The parties also agree to form a joint
               ------------------------
manufacturing team with equal membership from each of DMPC and EPI.  The joint
manufacturing team shall meet not less often than quarterly and from time to
time as reasonably requested by either party.

          (c)  S&OP Procedures.  The parties also agree that EPI will
               ---------------
participate in DMPC's Business Resource Planning process pursuant to its
representation at Sales and Operations Planning ("S&OP") meetings and pre-S&OP
meetings for the portions of such meetings dealing with the Products.  As a part
of the S&OP process, the parties shall develop and update plans for the
manufacture and supply of Products based on (i) projected sales, (ii)
manufacturing and packaging availabilities at the Facilities and (iii) other
relevant considerations (the "S&OP Plans").

          (d)  Resolution of Issues.  The Representatives and, in turn, the
               --------------------
joint manufacturing team shall attempt in good faith to promptly resolve all
matters which may arise during the term of this Agreement. If they are unable to
do so, however, the provisions of Section 16.1 shall apply.

     2.8  Standard of Supply.  In manufacturing and supplying Products to EPI
          ------------------
under this Agreement, DMPC agrees to act fairly and impartially and not to favor
any business (EPI's, DMPC's or a third party's) over another and to instruct its
employees accordingly.  DMPC agrees that the employees it appoints as
Representatives, the DMPC members of the joint manufacturing team

                                      -8-
<PAGE>

team and the providers of the services identified on Schedule D will have the
appropriate skill sets to perform such functions and services and will not have
conflicts of interest of which DMPC has knowledge or responsibilities that
conflict with performing those functions and services.

     2.9  Chemical Processing Facility.  DMPC shall allow EPI access to the
          ----------------------------
chemical processing area within the Garden City Facility (the "CP Area") for the
purpose of conducting developmental activities for narcotic compounds or for
Products or potential New Products utilizing narcotic compounds.  Such access
shall be provided only to qualified personnel and shall be limited in accordance
with DMPC's security procedures.  A DMPC chemical engineer shall be on duty at
all times when EPI personnel are working in the CP Area.  Such chemical engineer
shall perform such functions and services as requested by EPI in accordance with
Schedule D.  EPI shall reimburse DMPC for the fully allocated cost of such
engineer to the extent EPI's usage exceeds the level of service identified on
Schedule D.  Any manufacturing activities to be carried on in the CP Area shall
be conducted by DMPC as a normal manufacturing activity under this Agreement.
DMPC and EPI shall jointly plan utilization of the CP Area consistent with the
planning procedures referenced in Section 2.7.  In allocating access to the CP
Area, DMPC agrees to act fairly and impartially and not to favor any business
(EPI's, DMPC's or a third party's) over another and to instruct its employees
accordingly.

                                   ARTICLE 3
                             TERM AND TERMINATION

     3.1  Term.  The term of this Agreement shall commence on the Closing Date
          ----
and shall terminate at the conclusion of the fifth Contract Year (the "Initial
Term").  At EPI's option, subject to Section 3.2, upon twenty-four (24) months
prior written notice, EPI may renew this Agreement for an additional five (5)
year term, or for successive one (1) year terms not to exceed five (5) years in
the aggregate; provided, however, that DMPC continues to receive a reasonable
manufacturing profit during any such renewal term.  Notice of each one-year
renewal shall be given not less than twenty-four (24) months prior to the
commencement of such one-year renewal.  In the event any one-year renewal is not
exercised, no subsequent one-year renewal may be exercised.  Promptly following
the giving of notice by EPI that it is exercising an option to renew this
Agreement, the parties shall negotiate the pricing terms, on a basis consistent
with the foregoing provisions of this Section 3.1, for the applicable renewal
term.

     3.2  Special Termination Provisions.
          ------------------------------

          (a)  Put Agreement.  In the event that DMPC exercises its option to
               -------------
sell or terminate the operations at the Garden City Facility pursuant to the Put
Agreement, (i) this Agreement will terminate as of the end of the Initial Term,
without any right of renewal, with respect to the Products manufactured at the
Garden City Facility; (ii) this Agreement will terminate as of the end of the
Initial Term, with respect to the Products manufactured at the Manati Facility
and services performed at the Wilmington site with respect to Contract Products,
provided, however, that EPI may elect to renew this Agreement for two additional
one-year terms beyond the end of the Initial Term with respect to Products
manufactured, or validated for

                                      -9-
<PAGE>

manufacture, at the Manati Facility as of the end of the Initial Term and for
Contract Product services; (iii) any provisions of the Put Agreement relating to
the management and operation of the Garden City Facility that become operative
by reason of the exercise by DMPC of its put rights shall control over any
inconsistent provisions of this Agreement; and (iv) in the event of a sale of
the Garden City Facility, EPI, in accordance with the terms of the Put
Agreement, shall receive any proceeds of such sale after DMPC's recovery of
expenses relating to the termination of the operations of the Garden City
Facility and the sale thereof. In the event that the Put Agreement is terminated
pursuant to Section 10.1(c) thereof, this Agreement shall be automatically
extended for such period of time as EPI reasonably requires to transition the
Products to alternative manufacturing sites on an orderly basis; provided,
however, that such period of time shall not exceed 30 months from the date of
termination of the Put Agreement and after such period of time, this Agreement
shall terminate. Notice of renewal for the first renewal year under clause (ii)
of this Section 3.2(a) shall be given by EPI at the time it gives notice to DMPC
as to whether it will purchase the Garden City Facility (pursuant to Section 2.3
of the Put Agreement), and, if the first renewal is exercised, notice of renewal
for the second year shall be given not less than twenty-four (24) months prior
to the commencement of such second one-year renewal.

          (b)  Manati Production.  In the event that (i) DMPC exercises its
               -----------------
option to sell or terminate the operations of the Garden City Facility pursuant
to the Put Agreement and (ii) EPI has not elected to purchase the Garden City
Facility, then EPI shall have the right, notwithstanding the terms of Sections
2.2 and 3.2(a), to direct that particular Products be manufactured for EPI at
the Manati Facility, provided that (x) the Manati Facility has the necessary
equipment to manufacture the Product (or EPI causes such equipment to be
purchased under Section 4.6(a) or otherwise provides such equipment at its cost,
in which case, the parties shall review the Variable Costs and consider in good
faith adjustments that should be implemented therein as a consequence of the
addition of such equipment), and (y) if the Product is not validated for
manufacture at the Manati Facility, EPI agrees to pay the expenses of having the
Product validated and approved by all necessary governmental authorities for
manufacture at the Manati Facility.

          (c)  Change of Control.  In the event there is a direct or indirect
               -----------------
change in the majority ownership or control of EPI such that Kelso & Company, or
its Affiliates, is no longer in control of EPI, other than as a consequence of a
public offering of the equity of EPI or a transaction which results in the
majority of EPI's equity being owned directly or indirectly by the public, or if
EPI sells or otherwise disposes of all or substantially all of its assets, DMPC
at its option, and notwithstanding the renewal rights set forth in Sections 3.1
and 3.2, may terminate this Agreement upon five (5) years prior notice to EPI or
its successor (such that, for example, if DMPC gave such notice in connection
with a change in control occurring at the end of the third year of the term
hereof, this Agreement would terminate without further right of renewal, if not
earlier terminated, at the end of the eighth year), provided, however, that such
notice must be given within six (6) months following such change in control.  In
addition, if any person or entity acquiring a direct or indirect majority
ownership or controlling interest in EPI, or acquiring all or substantially all
of the assets of EPI, is a competitor of DMPC in any material line of business
conducted by DMPC, then DMPC shall be entitled to place such limits on EPI's or
such competitor's access to the Facilities and access to books and records
relating to business and

                                     -10-
<PAGE>

operations at the Facilities as is reasonable under the circumstances to protect
DMPC's confidential business information.

     3.3  Survival.  The rights and obligations contained in Sections 10.4,
          --------
10.7, 12.2 and 12.3 and Articles 11, 13 and 14 will survive termination of this
Agreement, as will any rights to payment or other rights or obligations that
have accrued under this Agreement prior to termination.  Termination will not
affect a party's liability by reason of any act, omission, default or occurrence
prior to termination.

     3.4  Effect of Termination.  Upon termination of this Agreement:
          ---------------------

          (a)  Transfer of EPI Property.  To the extent not previously
               ------------------------
transferred at Closing, DMPC will transfer all NDA's, ANDA's and DMF's, all
documents required to be transferred pursuant to 21 CFR 314.81 and all of EPI's
Intellectual Property, technical information and other documentation with
respect to the Products to EPI or a third party designated by EPI.  DMPC will
also deliver all other property of EPI in its possession (including, but not
limited to, equipment purchased by EPI), to EPI or a third party designated by
EPI.  DMPC will provide such assistance with respect to such transfer or
delivery as EPI reasonably requests.  The costs of disassembling, packing and
shipping (inclusive of insurance charges) any equipment shall be borne by EPI.

          (b)  Inventory.  DMPC shall deliver all inventory of finished and
               ---------
semi-finished Products on hand and, to the extent used exclusively for the
Products, all components (API, Excipient and packaging) for Products on hand to
EPI or a third party designated by EPI. DMPC shall invoice EPI, and EPI shall
make payment pursuant to the payment terms set forth in Section 6.2, for such
inventory of finished Products at Variable Cost in accordance with Sections
4.1(b) and 4.2(b), and semi-finished Products and components at cost.

                                   ARTICLE 4
                                    PRICING

     4.1  General Compensation - Puerto Rico.  During the Initial Term, EPI
          ----------------------------------
shall pay DuPont Pharma the following compensation in connection with its
manufacturing activities under this Agreement:

          (a)  Fixed Costs.  For the first Contract Year, EPI shall pay DuPont
               -----------
Pharma the amount of $7,000,000 in respect of Fixed Costs at the Manati
Facility, which amount shall be invoiced as provided in Section 6.2. The Fixed
Costs amount described in this Section 4.1(a) shall be subject to adjustment
annually beginning as of the first day of the second Contract Year to reflect
any changes in the CPI-U. Such adjustment shall be accomplished by multiplying
the annual Fixed Costs amount in effect immediately prior to the annual
adjustment date by a fraction, the numerator of which shall be the CPI-U as of
the subject adjustment date and the denominator of which shall be the CPI-U as
of the immediately prior annual adjustment date or, in the case of the first
adjustment, as in effect on the effective date of this Agreement.

                                     -11-
<PAGE>

          (b)  Variable Costs.  EPI shall pay to DuPont Pharma the Variable
               --------------
Costs of Products manufactured at the Manati Facility, which amounts shall be
invoiced as provided in Section 6.2. Variable Costs shall be subject to
adjustment as provided in Section 4.3(c).

          (c)  Additional Compensation.  In addition to the Fixed Costs and
               -----------------------
Variable Costs, EPI shall pay to DuPont Pharma the Additional Compensation
Factor for DuPont Pharma, which amount shall be invoiced as provided in Section
6.2.

     4.2  General Compensation - DMPC.  During the Initial Term, EPI shall pay
          ---------------------------
DMPC the following compensation in connection with its manufacturing activities
under this Agreement:

          (a)  Fixed Costs.  EPI shall pay DMPC the amount of $6,000,000 per
               -----------
annum in respect of Fixed Costs at the Garden City Facility, which amount shall
be payable annually in arrears by delivery of a zero coupon promissory note due
and payable on the fifth anniversary of the Closing Date.

          (b)  Variable Costs.  EPI shall pay to DMPC the Variable Costs of
               --------------
Products manufactured at the Garden City Facility, which amounts shall be
invoiced as provided in Section 6.2.  Variable Costs shall be subject to
adjustment as provided in Section 4.3(c).

          (c)  Additional Compensation.  In addition to the Fixed Costs and
               -----------------------
Variable Costs, EPI shall pay DMPC the Additional Compensation Factor for DMPC,
which amount shall be invoiced as provided in Section 6.2.

     4.3  Additional General Compensation Matters.
          ---------------------------------------

          (a)  Payment Form.  Payments due to Dupont Pharma pursuant to Section
               ------------
4.1 and payments due to DMPC pursuant to Section 4.2(b) and (c) shall, with
respect to each Contract Year, be payable in cash up to the Cash Cap Amount.
Amounts due in excess of the Cash Cap Amount for any applicable Contract Year
shall be payable in the form of promissory notes delivered as of the end of each
of the first five Contract Years.  Such Promissory notes shall be zero coupon
and shall be due and payable on the fifth anniversary of the Closing Date.  The
allocation of cash amounts and amounts payable in the form of promissory notes
as between EPI's payment obligations under Sections 4.1 and 4.2 shall be as
agreed between DMPC and DuPont Pharma on a monthly basis or on an annual basis,
if applicable.  Except as referenced in Section 4.2(a) and the foregoing
provisions of this Section 4.3(a), all amounts payable by EPI under this
Agreement (including, without limitations, payments due under Sections 2.5(b)
(validation), 2.9 (CP Area engineer), 3.4(a) (equipment termination costs), 4.7
(change in Trade Dress), 4.8 (transition costs), 5.1(b) (API in excess of normal
inventory), 5.1(e) (Inventory in excess of S&OP Plan), 6.1 (shipping costs),
6.2(f) (late fees), 7.2 and 7.3 (testing costs), 10.1 (change over costs), 10.2
(work requests), 10.6 (process validation), 13.4 (recall expenses), 14.2
(indemnification) and 16.5(b) (arbitration costs) shall be payable in cash (via
ACH transfer to the extent EPI has the capacity to make ACH transfers).

                                     -12-
<PAGE>

          (b)  Note Terms. The promissory notes referenced in Sections 4.2(a)
               ----------
and 4.3(a) (the "Notes") shall be in the form attached hereto as Exhibit 1. The
maturity dates of the Notes may be extended beyond their originally scheduled
maturity dates (but no later than seven and one-half years following the Closing
Date) under the circumstances and to the extent provided in the Note forms, and
the Notes are subject to mandatory repayment as provided therein. In the event
the maturity date of a Note is extended, the Note shall bear interest following
the end of the fifth Contract Year at the rate specified in the Note form.
Interest during such deferred maturity period shall be payable annually and, at
the election of EPI, may be paid in kind by adding the amount thereof to the
principal balance due on the applicable Note on and as of each annual interest
date.

          (c)  Adjustment of Variable Costs.  The Variable Costs of Products
               ----------------------------
shall initially be the amounts set forth on Schedule C.  The Variable Costs
shall be subject to adjustment as of the beginning of each calendar year during
the term hereof; provided that during the first two years of commercial
manufacture of New Products, the parties agree to review and adjust Variable
Costs on a calendar quarterly basis.  Variable Costs shall also be subject to
adjustment in connection with the addition of new equipment as referred in
Section 4.6(c).  With respect to each annual adjustment, DMPC shall provide
proposed cost adjustments to EPI by September 30 of the prior year.  DMPC shall
endeavor to deliver quarterly price adjustments for New Products at least thirty
days prior to the quarterly dates on which the price adjustments are proposed to
be implemented.  Proposed annual and quarterly price adjustments shall be
accompanied by reasonable supporting documentation.  In the event the parties
are unable to agree on an adjustment to Variable Costs prior to the effective
date of the adjustment, then Variable Costs in effect shall be increased by the
percentage change in the CPI-U from its level at the beginning of the prior year
or quarter, as applicable.

          (d)  Additional Services.  The levels of manufacturing activity,
               -------------------
marketed product support ("Product Support") and core team services for New
Products ("Core Team Services") that are included within the Fixed Costs payment
amounts referenced in Section 4.1(a) and 4.2(a) are specified on Schedule D
hereto.  Activities beyond the Product Support and Core Team Services specified
on Schedule D may be requested by EPI by completing the forms set forth in
Schedule E and forwarding them to the DMPC Representative.  DMPC shall respond
to any such request within thirty (30) business days, which response shall
include the amount that DMPC would charge EPI for such additional activities.
The parties agree to negotiate in good faith to resolve any differences over any
such additional activities requested by EPI and the associated charges.  DMPC
shall use all commercially reasonable efforts to provide the requested
additional activities, provided that DMPC shall have no obligation to provide
any such additional activities if the parties are unable to resolve their
differences regarding them (in which circumstance, EPI may obtain the additional
services from a third party).

          (e)  Additional Manufacturing.  If in any Contract Year the forecast
               ------------------------
volume in number of lots or number of batches of Products increases above the
Agreed Manufacturing Level, DMPC shall use all commercially reasonable efforts
(taking into consideration DMPC's manufacturing requirements with respect to the
Facilities and the manufacturing capacity of the Facilities) to manufacture to
satisfy all of EPI's requirements for Products above the Agreed

                                     -13-
<PAGE>

Manufacturing Level. In such case, the parties agree to negotiate in good faith
an appropriate increase in the Fixed Costs payable by EPI hereunder. In the
event that DMPC and EPI cannot agree to an appropriate increase in Fixed Costs
payable for the forecast volume over the Agreed Manufacturing Level, the
increase in Fixed Costs shall be determined by an independent, nationally
recognized accounting firm, reasonably acceptable to DMPC and EPI, based on the
actual increase in fixed manufacturing and overhead costs caused by the forecast
volume over the Agreed Manufacturing Level. The expenses of such accounting firm
shall be shared equally by DMPC and EPI.

     4.4  FPDE Charge.  For the first Contract Year, EPI shall pay to DMPC an
          -----------
annual charge in the amount of *** for packing and preparing Product for
shipment (the "FPDE Charge"), payable as set forth in Section 6.2.  The FPDE
charge shall be subject to adjustment annually beginning as of the second
Contract Year to reflect any changes in the CPI-U (such adjustments shall be
accomplished in the same manner as annual adjustments to Fixed Costs as
referenced in Section 4.1(a)).

     4.5  Reimbursement for API.  EPI shall reimburse DMPC at cost for any API
          ---------------------
for the Products which DMPC has purchased pursuant to Section 5.1(b) and which
is not consumed in the normal course of business within twelve (12) months of
the date of delivery of such API to DMPC.  If such API is subsequently used in
manufacturing Product for EPI, DMPC will deduct the cost of such API (as
previously paid by EPI) from the Variable Cost for such Product.  Payment terms
for such reimbursement shall be as set forth in Section 6.2.

     4.6  Reimbursement for Equipment.
          ---------------------------

          (a)  EPI Equipment.  EPI shall have the right to purchase new
               -------------
equipment that is uniquely or exclusively required to support Products for
either Facility, subject to DMPC's prior approval which will not unreasonably be
withheld, and DMPC shall acquire, install and validate such equipment. EPI shall
reimburse DMPC for the acquisition, installation and validation of such
equipment. Such equipment shall be the property of EPI and shall be used
exclusively for producing the Products, unless EPI agrees otherwise in writing.
DMPC agrees to maintain such equipment (and spare parts therefor), at EPI's
expense (to be included in Fixed Costs), in accordance with DMPC's internal
practices for maintaining its own equipment. The parties will negotiate in good
faith regarding the adjustment, if any, to the Fixed Costs required as a result
of such equipment.

          (b)  DMPC Equipment.  If the volume increases above the Agreed
               --------------
Manufacturing Level and additional equipment is required to meet such demand
which can be utilized for both EPI's Products and DMPC's own pharmaceutical
products, then, after discussion by the parties regarding such equipment,  (i)
DMPC shall purchase and own such equipment; (ii) the parties shall agree upon an
equitable sharing of such equipment with an appropriate adjustment to Fixed
Costs based on EPI's use of such equipment; and (iii) upon termination of this
Agreement, if the equipment has been used primarily to produce Product for EPI,
EPI shall have the option to purchase such equipment from DMPC at book value.

                                     -14-
<PAGE>

          (c)  Adjustment of Variable Costs.  In connection with the addition of
               ----------------------------
equipment to the manufacturing process as referenced in this Section 4.6, the
parties shall review the Variable Costs and consider in good faith adjustments
that should be implemented therein as a consequence of the addition of the new
equipment.

     4.7  Trade Dress.  EPI shall be responsible for all costs associated with
          -----------
the change from DMPC's and Endo's Trade Dress to EPI's Trade Dress and
subsequent changes to EPI's Trade Dress.

     4.8  Transition from DMPC to EPI.
          ---------------------------

          (a)  Identification of Transferred Inventory.  Commencing upon
               ---------------------------------------
Closing, the Transferred Inventory shall be uniquely identified (either through
discrete lot numbers or sub-codes), to the reasonable satisfaction of EPI, in a
manner which distinguishes the Transferred Inventory from Product sold prior to
Closing. DMPC and EPI shall share equally in the incremental out-of-pocket
expenses of uniquely identifying the Transferred Inventory.

          (b)  Continued Use of Prior Trade Dress.  With respect to the Product
               ----------------------------------
manufactured and delivered within six (6) months after the Closing Date, EPI may
use DMPC's and Endo's Trade Dress for the Products.  Upon EPI's request, DMPC
shall cause stickers/labels to be applied to DMPC's and Endo's Trade Dress,
indicating EPI's acquired ownership of such Product.  EPI will supply masters
for such stickers/labels and DMPC will procure, inspect and apply such
stickers/labels in accordance with the component supply procedures set forth in
Section 8.2 hereof.  The cost of such stickers/labels and the cost of
application of stickers/labels on Products manufactured and delivered after the
Closing Date will be added to the Variable Costs calculated in accordance with
Schedule C.

                                   ARTICLE 5
                             ESTIMATES AND ORDERS

     5.1  Forecasts and Orders.
          --------------------

          (a)  Products.  Within fifteen (15) days following the effective date
               --------
of this Agreement, EPI shall provide DMPC with a 24-month forecast of EPI's
sales of Products by SKU, broken down by 3-month periods.  The forecast shall be
updated monthly on the fifth day of the month on a rolling basis.  The forecast
for the most current 3-month period shall always constitute a firm order which
shall state in detail the quantities of Products ordered and shall be binding on
both parties regarding Products to be purchased.  The forecast for the second
3-month period shall be deemed a firm order for sixty-five percent (65%) of the
amount of Products forecast; and the forecast for the remaining 18-month period
of each rolling forecast is for planning purposes only and shall not constitute
a commitment to purchase or supply except as set forth in Section 5.1(b) below.
With each monthly update, EPI shall add one new month to its most recent firm
order and to its most recent planning forecast. EPI may not decrease its firm
order quantities in any monthly update, but may increase such firm order with
DMPC's written

                                     -15-
<PAGE>

agreement. DMPC will use all commercially reasonable efforts to meet any firm
order increase submitted by EPI. New Products shall be included in forecasts and
firm orders in the same manner as existing Products; provided, however, that
DMPC will use all commercially reasonable efforts to cooperate with EPI during
any New Product launch period to accommodate fluctuations in firm order
quantities created by the inherent uncertainties of New Product launches.

          (b)  API.  Based on EPI's forecast and with EPI's co-signature on the
               ---
initial purchase order with any new API supplier, DMPC shall purchase API to
maintain the levels of inventory of API for each Product as set forth in
Schedule G, as such inventory levels may be modified (without necessity for any
amendment of Schedule G) from time to time through the S&OP process. If EPI
desires to maintain higher levels of inventory of API, DMPC will procure such
additional quantities of API at EPI's expense.  EPI shall reimburse DMPC for API
purchased by DMPC at its expense in accordance with EPI's forecasts if obligated
to do so under Section 4.5.

          (c)  Inventory of Finished Goods.  So long as DMPC is providing
               ---------------------------
warehousing services on behalf of EPI:

               (i)  DMPC shall manufacture and ship Product to the Warehouse in
order to maintain inventory levels at the Warehouse sufficient to fulfill firm
orders for each Product for the time periods set forth on Schedule H, as such
inventory levels may be modified (without necessity for any amendment of
Schedule H) from time to time through the S&OP process. DMPC shall invoice EPI
for such Product in accordance with Section 6.2. Notwithstanding the foregoing,
EPI may request that DMPC increase its inventory levels of Product at any date,
with sufficient lead time; provided, however, that DMPC will invoice EPI for
such increases in inventory levels in accordance with Section 6.2.

               (ii) With respect to New Products, DMPC shall use all
commercially reasonable efforts to maintain inventory levels at the Warehouse
sufficient to fulfill the next ten (10) weeks of firm orders for such New
Product. DMPC shall invoice EPI for such Product in accordance with Section 6.2.
DMPC and EPI shall cooperate to establish reasonable inventory levels for New
Products.

          (d)  Anticipated Forecast Supply Problems.
               ------------------------------------

               (i)  DMPC agrees to use all commercially reasonable efforts to
fulfill the firm orders set forth in the 6-month forecast and to maintain levels
of finished inventory of Product as set forth on Schedule H, as modified from
time to time through the S&OP process (provided that DMPC is providing
warehousing services), including the expenditure of premium time and air or
other expedited shipping methods, at DMPC's expense.

               (ii) DMPC shall notify EPI within two (2) business days if it
believes it will have difficulty supplying the quantities of Products forecast
by EPI. Upon any such notification, or if through the S&OP planning process EPI
determines that DMPC will have

                                     -16-
<PAGE>

difficulty supplying the quantities of Products forecast by EPI, the parties
agree to use all commercially reasonable efforts and to cooperate to resolve the
problem. If within the ninety (90) days following the giving of notice by DMPC
or EPI as referenced in the foregoing sentence, DMPC and EPI are unable to
resolve the subject problem and if, following the conclusion of such period, EPI
reasonably determines that DMPC will not be able to supply EPI's firm orders,
EPI shall be free to enter into an agreement with an alternative supplier for
such quantities of Products that EPI has determined that DMPC will be unable to
supply (or any amount in excess thereof that constitutes the minimum batch size
production from EPI's alternate supplier). DMPC shall be obligated to reimburse
EPI for the increased expense incurred by EPI in obtaining its requirements for
such Product from an alternate supplier over the costs for such Product
hereunder; provided that (i) the cause of its inability to supply did not
constitute an Event of Force Majeure and (ii) such inability to supply was not
caused by the Agreed Manufacturing Level being exceeded for the applicable
Contract Year. In the event that DMPC disputes EPI's determination that DMPC
would be unable to supply such Product, such dispute shall be resolved pursuant
to the arbitration provisions set forth in Article 16; provided, however, that
such dispute will not affect the ongoing supply of such Product from such
alternative supplier. If the arbitrator determines that EPI did not have
reasonable grounds for its determination that DMPC would be unable to supply
such Product, any increased expense for such Product paid by DMPC shall be
reimbursed to DMPC by EPI, and EPI shall cease to purchase such Product from
such alternative supplier.

     5.2  Five-Year Forecast.  By the end of the first quarter of each Contract
          ------------------
Year (other than the first Contract Year), EPI shall supply DMPC with a five-
year volume forecast in sufficient detail to allow DMPC to do capacity planning
for the Facilities, which forecast shall only be for purposes of DMPC's capacity
planning.

     5.3  Contract Products.  During the term hereof, EPI's requirements for
          -----------------
Contract Products shall be subject to administration and forecasting as part of
the S&OP and pre-S&OP planning process.  Further, the parties shall develop S&OP
Plans for Contract Products and DMPC shall (i) acquire such Contract Products on
behalf of EPI pursuant to the Contract Product related contracts identified on
Part 1 of Schedule I, and (ii) so long as DMPC is providing warehousing
services, DMPC shall maintain inventory levels of Contract Products at the
Warehouse in accordance with the then current S&OP Plan.  EPI shall pay the
purchase price for Contract Products directly to the third party manufacturer.

     5.4  Addresses.  Orders and estimates by the parties should be addressed
          ---------
as follows or as otherwise instructed by a party from time to time:

     If to EPI:
     ---------

          Endo Pharmaceuticals Inc.
          P.O. Box 4144
          Wilmington, DE 19807
          Attention: Mariann T. MacDonald

                                     -17-
<PAGE>

     If to DMPC, as applicable:
     -------------------------

          The DuPont Merck Pharmaceutical Co.     (Wilmington Site)
          DuPont Merck Plaza
          974 Centre Road
          Wilmington, Delaware 19807-2802
          Attention: Wayne Lerner

          The DuPont Merck Pharmaceutical Co.     (Garden City Facility)
          1000 Stewart Avenue
          Garden City, New York 11530
          Attention: John Steininger

          DuPont Merck Pharma                     (Manati Facility)
          P.O. Box 30100
          Highway 686, Km. 2.3
          Manati, Puerto Rico 00674-3000
          Attention: Ilsa M. Esteves

                                   ARTICLE 6
                         TERMS OF SHIPMENT AND PAYMENT

     6.1  Terms of Shipment.  Terms of shipment for Products will be FOB the
          -----------------
Facilities.  Freight and insurance from the Facilities to the destination shall
be at EPI's expense.  Title and risk of loss or damage shall pass to EPI upon
delivery by DMPC to a common carrier at its Facilities.  Unless otherwise
instructed by EPI at least thirty (30) days prior to any shipment, DMPC shall
select and make transport arrangements with common carriers.

     6.2  Payment Provisions.
          ------------------

          (a)  Variable Costs.  DMPC will invoice EPI for the Variable Costs of
               --------------
Products in accordance with Schedule C upon delivery of Product by DMPC to a
common carrier at its Facilities.  DMPC shall not invoice EPI for Product in
excess of the inventory levels as set forth on Schedule H (or the inventory
levels established pursuant to 5.1(c)(ii) with respect to New Products), as such
inventory levels may be modified (without necessity for any amendment of
Schedule H) from time to time through the S&OP process; provided, however, that
DMPC shall invoice EPI for Product in excess of such inventory levels where such
excess inventory is requested by EPI pursuant to Section 5.1(c)(i).

          (b)  Fixed Costs; FPDE Charge Installments.  Subject to Sections
               -------------------------------------
4.2(a) and 4.3(a), annual amounts due for Fixed Costs and the annual amount of
the FPDE Charge shall be payable in 12 equal monthly installments. For the first
six (6) months of the Initial Term, DMPC will invoice EPI quarterly in arrears
for monthly installments of Fixed Costs and FPDE Charge.

                                     -18-
<PAGE>

Thereafter, DMPC will invoice EPI monthly in advance on the first day of each
month for installments of Fixed Costs and FPDE Charge.

          (c)  Additional Compensation Factor.  During the Initial Term, DMPC
               ------------------------------
and DuPont Pharma will invoice EPI annually in arrears for the Additional
Compensation Factor at the end of each Contract Year due to DMPC and DuPont
Pharma under the terms of this Agreement.

          (d)  Other Billings.  Subject to Section 4.3(a), DMPC will invoice EPI
               --------------
monthly in arrears for all other amounts due to DMPC under the terms of this
Agreement that have accrued.

          (e)  Payment Terms.  Unless otherwise provided herein, payment terms
               -------------
for all invoices issued pursuant to this Section 6.2 shall be via ACH, to the
extent EPI has the capacity to make ACH transfers, net thirty (30) days after
date of invoice.

          (f)  Late Fee.  Any late payments (thirty (30) days after date of
               --------
invoice) will be assessed a late payment charge of one percent (1%) per month or
part thereof.

                                   ARTICLE 7
                            INSPECTION AND ANALYSIS

     7.1  By DMPC.  DMPC will analyze a representative sample from each lot of
          -------
Product for compliance with specifications, prior to DMPC's release of each lot
of Product.  After DMPC's release of each lot of Product, DMPC will send a
certificate of analysis of each lot of Product to EPI, addressed to the
attention of EPI's quality control officer.  If any other documentation is
reasonably necessary for EPI to perform a quality assurance analysis of the
Product, EPI will request that documentation in writing and DMPC will provide
it, if reasonably available.

     7.2  By EPI.  Upon EPI's request and at its cost, DMPC shall provide
          ------
samples of Product to EPI at its facilities for analysis.  If EPI determines
that there is a defect in Product, DMPC shall hold such Product under its
control until (i) the defect is removed, (ii) the parties mutually agree that
the Product does meet specifications or (iii) the matter is resolved pursuant to
Section 7.3.

     7.3  Independent Testing.  If EPI notifies DMPC that Product does not
          -------------------
meet specifications, and DMPC does not agree, the parties will attempt to reach
a mutually acceptable resolution.  If they are unable to do so, the matter will
be submitted to an independent testing laboratory acceptable to both parties.
Both parties will accept the results of the independent laboratory.  The cost of
the independent testing will be borne by the party whose test results were in
error.

                                     -19-
<PAGE>

                                   ARTICLE 8
                               COMPONENT SUPPLY

     8.1  Ingredient Components.  Based on EPI's forecasts, and in accordance
          ---------------------
with the further provisions of Section 5.1(b) as regards API, DMPC shall
procure, qualify, test, inspect and approve all API and Excipients used in the
manufacture of Product in accordance, as applicable, with the terms of the API
supply agreements set forth in Part 2 of Schedule I and DMPC's test monographs
for incoming material.  DMPC shall notify EPI in writing of changes to such
monographs that affect the Products.  Such materials will be supplied from
approved suppliers as set forth in the approved Product NDA's or ANDA's.  The
sourcing of API for New Products shall be governed by Section 2.4(c).

     8.2  Packaging Components.  Products will be labeled and packaged in
          --------------------
accordance with written instructions provided by EPI.  Except as set forth in
Section 4.8(b) hereof, EPI will supply approved masters for labels, package
inserts and packaging.  DMPC will procure, test, inspect and approve all labels,
package inserts and packaging used for Products which shall conform to EPI's
written instructions and the masters supplied by EPI.

     8.3  API Supply Agreements.  All of the API supply agreements relating to
          ---------------------
the Products to which DMPC is a party as of the Closing Date are identified in
Part 2 of Schedule I.  Part 2 of Schedule I shall be updated to reflect any new
API supply agreements or amendments to existing API supply agreements entered
into by DMPC during the term of this Agreement.  Any new API supply agreements
shall be subject to EPI's prior written consent, which shall not be unreasonably
withheld.  DMPC shall not amend the API supply agreements set forth in Part 2 of
Schedule I in a manner which is detrimental to EPI without EPI's prior written
consent.

     8.4  DEA Quotas.  DMPC and EPI will cooperate in petitioning the DEA with
          ----------
respect to annual quotas for narcotic API.

                                   ARTICLE 9
                                  WARRANTIES

     9.1  Manufacturing.  DMPC warrants that each lot of Product sold to EPI
          -------------
will be manufactured, processed, packed and held in accordance with the higher
of the standards established by (i) then current Good Manufacturing Practices as
set forth in 21 C.F.R. 210-211 (as amended from time to time, "GMP") or (ii)
DMPC's internal standards.

     9.2  Products.  DMPC warrants that Product delivered to EPI (i) will be
          --------
free from defects in materials and manufacture, (ii)  will contain API that has
passed DMPC's internal testing pursuant to Section 8.1, (iii)  will conform to
the specifications set forth in the applicable NDA's or ANDA's or otherwise as
specified by EPI in its equivalent internal filing in the absence of an
applicable NDA or ANDA and (iv) will not be adulterated or misbranded within the
meaning of the Federal Food, Drug and Cosmetic Act due to any act or omission of
DMPC; provided that

                                     -20-
<PAGE>

this warranty does not apply to any misbranding which arises out of DMPC's use
of labeling and packaging components whose use is instructed by EPI.

     9.3  Personnel.  DMPC warrants that it will not use, in its performance
          ---------
of this Agreement, the services of any individual or firm who or that has (i)
been debarred by the FDA or (ii) been convicted of a felony related to
controlled substances or had a registration with the DEA revoked or an
application for registration with the DEA denied.

     9.4  Compliance with Law in Conduct of Facility Business.  DMPC agrees
          ---------------------------------------------------
that it will comply in all material respects with all laws, regulations and
ordinances that govern the conduct of the Facilities and its performance under
this Agreement, including but not limited to those regulations established by
the Federal Food, Drug and Cosmetic Act and the Controlled Substance Act.

     9.5  General and Continuing Warranty.  Upon Closing, DMPC shall execute
          -------------------------------
and deliver to EPI a general and continuing warranty in the following form:

     [The DuPont Merck Pharmaceutical Company ("DMPC")] [DuPont Merck
     Pharma ("DuPont Pharma")] hereby warrants to Endo Pharmaceuticals
     Inc. ("Endo Pharmaceuticals") that the pharmaceutical products
     comprising each shipment of Products hereafter made by [DMPC]
     [DuPont Pharma] from the point of manufacture to or on behalf of
     Endo Pharmaceuticals pursuant to the Manufacture and Supply
     Agreement among DMPC, DuPont Merck and Endo Pharmaceuticals dated
     ______ __, 1997 (the "Manufacture and Supply Agreement"), as of
     the time and date of such shipment, will not be adultered or
     misbranded within the meaning of the Federal Food, Drug and
     Cosmetic Act; provided, however, that this warranty shall not
     apply to misbranding that arises by reason of [DMPC's] [DuPont
     Pharma's] use of labels, packaging inserts and packages that
     comply with Endo Pharmaceuticals' instructions provided pursuant
     to Section 8.2 of the Manufacture and Supply Agreement, entitled
     "Packaging Components."

                                   Signature
                                   Title
                                   Post Office Address

     9.6  Limitation of Warranties.  THE WARRANTIES IN THIS ARTICLE 9 ARE MADE
          ------------------------
IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, OTHER THAN THE IMPLIED
WARRANTY OF MERCHANTABILITY UNDER THE UNIFORM COMMERCIAL CODE.  ANY IMPLIED
WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE APPLICABLE TO THE PRODUCTS ARE
HEREBY EXCLUDED.  DMPC shall not be liable for punitive or consequential damages
(including loss of sales, loss of profits, and loss of goodwill) arising out of
any cause whatsoever.

                                     -21-
<PAGE>

                                  ARTICLE 10
                       MANUFACTURING STANDARDS/PROCESSES

     10.1  Change Control.  Except with the prior written consent of EPI
           --------------
(which shall not unreasonably be withheld), DMPC will not make any change to
Product ingredients (both API and Excipient), analytical procedures, components,
process, specifications, controls, storage and/or stability protocols.  Costs
incurred by EPI for any such changes requested by DMPC will be borne by DMPC.
Costs incurred by DMPC for any such changes requested by EPI will be borne by
EPI.  Costs incurred by DMPC for any such changes requested by the FDA shall be
borne by EPI, if EPI desires to comply with such changes for reasons relating to
marketing the Products, and by DMPC if DMPC desires to comply with such changes
for reasons relating to the Facilities.  Changes in text of prescribing
information (package insert) and labeling shall be the responsibility and under
the control of EPI.  DMPC shall be notified of all changes specific to package
inserts or other labeling sufficiently in advance of implementation to allow
time for process documentation changes and stock control.  Certain agreements of
EPI with respect to the maintenance of NDA's or ANDA's in current forms, as
relevant to DMPC's sales of Exempted Products in Exempt Territories, are set
forth in Section 6.11 of the Purchase Agreement.

     10.2  Work Requests.  Any request by EPI for Trade Dress changes,
           -------------
packaging changes or changes in Product Support shall be made by filling out the
forms set forth in Schedule E and forwarding them to the applicable DMPC
Representative.  In the event that EPI requests a Trade Dress change, all costs
associated with implementation of such change, including the cost of all
obsolete labeling components, will be borne by EPI.  In the event EPI requests a
packaging change, the costs associated with implementation of such change, above
the level set forth in Schedule D for Product Support, will be borne by EPI; EPI
shall also bear the cost of all obsolete packaging components.  The costs
associated with Product Support in excess of the levels set forth in Schedule D
shall be borne by EPI and shall be determined pursuant to Section 4.3(d).

     10.3  Batch Records.  All records required under applicable law and
           -------------
regulations which include the information relating to the manufacturing,
packaging and quality operation for each batch of Product will be prepared by
DMPC at the time such operations occur.  The records will include, but not be
limited to: mixing and filling records; container and component traceability
records; equipment usage records; in-process and final laboratory testing
results; in-process and final Product physical inspection results; yield
reconciliation for bulk and finished Product; labeling and packaging records;
and records relating to deviations from approved procedure, as well as DMPC's
investigation and corrective actions.  Copies of the manufacturing batch records
will be made available for inspection by EPI upon reasonable request pursuant to
Section 12.2.

     10.4  Retention Samples.  DMPC will store and maintain retention samples
           -----------------
of raw material and Product from each lot to meet regulatory requirements.

     10.5  Stability Studies.  DMPC will conduct stability testing pursuant to
           -----------------
the written testing program established for each Product pursuant to 21 CFR
211.166, as amended from time

                                     -22-
<PAGE>

to time. DMPC shall promptly notify EPI of any samples that are out of
specification. DMPC will provide EPI with the results of such testing at least
quarterly or upon specific request.

     10.6  Process Validation.  DMPC will revalidate, as necessary, all
           ------------------
processes, methods, equipment, utilities, facilities and computers used in the
manufacture, packaging, storage, testing and release of Product in conformance
with all current FDA requirements and as reasonably requested by EPI, provided
that EPI shall bear all expenses of such revalidation if requested by EPI.  EPI
will have the right to review the results of validation upon request as provided
in Section 12.2.

     10.7  Records Retention.  DMPC will retain records and documents as
           -----------------
required by all applicable regulations of the FDA and the DEA.

     10.8  Annual Product Review.  DMPC will supply EPI all information which
           ---------------------
EPI may reasonably request for EPI's annual report submissions to the FDA.

                                  ARTICLE 11
                           CONFIDENTIAL INFORMATION

     11.1  Confidential Information.
           ------------------------

           (a)   Except as expressly set forth in this Section 11.1, each party
shall, and shall cause its Affiliates and its and their officers, directors,
employees, agents and subcontractors (collectively, "Recipients") to, keep
secret and retain in confidence any and all data, reports, technical,
commercial, scientific and other information that is or has been disclosed to it
in any form and designated as confidential by the other party hereto or any of
such other party's Affiliates or Recipients prior to or after the date of this
Agreement and that relate to any such other party or any such other party's
Affiliates or their respective businesses ("Confidential Information") and shall
not disclose directly or indirectly any Confidential Information, and shall
cause its Affiliates and its and their Recipients not to disclose directly or
indirectly any Confidential Information, to anyone outside such party, such
Affiliates and their respective agents; provided, however, (i) if either party
is legally required to disclose any of the Confidential Information, such party
shall provide the other with prompt notice thereof so that the other party may
seek an appropriate protective order, and in the absence of such an order, the
party being required to make disclosure of the Confidential Information shall
furnish only that portion of the Confidential Information that such party has
been advised by its attorneys in writing it is legally required to disclose and
shall use its best efforts to obtain confidential treatment thereof; (ii) the
restriction on disclosure of Confidential Information set forth in this Section
11.1 shall not apply to Confidential Information that (x) is already in the
public domain, or released to the public through no fault of the Recipient, (y)
information disclosed to the Recipient by a third party having the right to
disclose such information, or (z) information that is developed by or for the
Recipient or its Affiliates independently of either the information provided
under this Agreement or any information provided under the Purchase Agreement or
any other Ancillary Agreement; and (iii) each party agrees to treat all non-
public information disclosed to it in any form and not designated as

                                     -23-
<PAGE>

confidential by the other party hereto with the same standard of care with which
it treats its own non-public information.

           (b)   EPI shall, and shall request each of its employees who has
access to, or dealings with, DMPC's products in any capacity to enter into such
confidentiality agreements as DMPC shall reasonably request in connection with
DMPC's safeguarding of its Confidential Information that is known to such
employees, and DMPC shall cause each of its employees who has access to, or
dealings with, the Products in any capacity to enter into such confidentiality
agreements as EPI shall reasonably request in connection with EPI's safeguarding
of its Confidential Information that is known to such employees.

           (c)   DMPC, on the one hand, and EPI, on the other, acknowledge and
agree that a breach by the other, or any of the other's officers or employees,
of the confidentiality agreements referred to in this Section could cause
irreparable harm to the non-breaching party, that such non-breaching party's
remedies at law in the event of such a breach would be inadequate, and that,
accordingly, in the event of such a breach, a restraining order, preliminary
injunction or injunction or all of said remedies may be issued against the
breaching party and/or any of its officers or employees, as applicable, in
addition to any other rights and remedies that are available to the non-
breaching party.

           (d)   The confidentiality obligations of the parties under this
Section 11.1 shall survive termination of this Agreement for a period of ten
(10) years.

                                  ARTICLE 12
                              INSPECTIONS/AUDITS

     12.1  Regulatory Inspections.  DMPC will promptly, or in any event within
           ----------------------
twenty-four (24) hours, inform EPI of any inspection or audit by any
governmental agency, including the FDA and the DEA, related to or affecting any
Product or Facility.  DMPC will promptly, or in any event within twenty-four
(24) hours, provide EPI with copies of any government-issued inspection
observation reports concerning any Product or Facility.  DMPC and EPI will
cooperate in resolving any concerns with the FDA, DEA or other governmental
agency.  DMPC will also inform EPI of any action taken by FDA, DEA or other
governmental agency against DMPC or any of its officers and employees that
affects any Product or Facility as soon as possible and in any event within
twenty-four (24) hours after the action is taken.  Notwithstanding the
foregoing, DMPC shall not be required to provide any of the above-referenced
information as regards an inspection, audit, report or governmental action
relating to a "Facility" if the subject inspection, audit, report or
governmental action does not relate to or affect EPI or the Products.

     12.2  EPI Inspections.  EPI will have the right on reasonable prior
           ---------------
notice, at annual intervals or upon specific request, to inspect the Facilities
to audit GMP compliance or for any other reasonable purpose.  In addition,
representatives of EPI will have access, during regular business hours and upon
reasonable prior notice, to inspect, review and copy documents, records,

                                     -24-
<PAGE>

reports, data, procedures, regulatory submissions and other information
maintained by DMPC that specifically relate to the Products.

     12.3  Audit Rights.  Upon the written request of EPI, DMPC shall permit
           ------------
an independent certified public accounting firm of nationally recognized
standing selected by EPI to have access during normal business hours to such of
the records of DMPC as may be reasonably necessary to verify the accuracy of the
costs reported hereunder in respect of any Contract Year ending not more than
twelve (12) months prior to the date of such request.  All such verifications
shall be conducted at EPI's expense and not more than once in each Contract
Year.  These rights with respect to any Contract Year shall terminate one (1)
year after the end of any such Contract Year.

     12.4  EPI Information.  Within sixty (60) days after the end of each
           ---------------
fiscal year, EPI shall provide to DMPC a copy of EPI's consolidated balance
sheet and consolidated statements of income, retained earnings, stockholders'
equity and liabilities and changes in financial position of EPI and any
consolidated subsidiaries for such year, reported on by an independent certified
public accounting firm of nationally recognized standing.  Within thirty (30)
days after the end of each fiscal quarter, EPI will provide DMPC with copies of
EPI's internally generated management financial reports for such quarter and for
the portion of EPI's fiscal year ended at the end of such quarter.

                                  ARTICLE 13
                          COMPLAINTS, ADER'S, RECALLS

     13.1  Product Complaints and ADE's.  EPI and DMPC will notify each other
           ----------------------------
by fax of all Product complaints and adverse drug experiences ("ADE's") within
two (2) business days of receipt of notice thereof.  A follow-up copy of the fax
transmission is to be mailed and postmarked within two (2) business days of the
date of the fax transmission.  DMPC will investigate all Product complaints and
ADE's associated with Exempted Products sold by it in Exempt Territories and, in
each case, will provide a written summary to EPI and a written response to the
complainant, with a copy to EPI.  EPI will investigate all other Product
complaints and ADE's and, in each case, will provide a written summary to DMPC
and a written response to the complainant, with a copy to DMPC.  DMPC will
assist EPI in the investigation of any complaints or ADE's when such adverse
events are believed to be attributable to the quality of the Product.  If EPI
determines that any reasonable physical, chemical, biological or other
evaluation should be conducted in relation to an ADE or Product complaint, DMPC
will, at EPI's cost, conduct the evaluation and provide EPI a written report of
such evaluation.  DMPC will notify EPI within twenty-four (24) hours if any
Product evaluated fails to meet specifications.  Evaluations not required by
regulation and not carried out by DMPC in the usual course of its investigation
will be at the expense of EPI.  In the event that any Product complaint or ADE
results from the supply by DMPC of Product that does not conform to the
applicable specifications and warranties set forth in this Agreement, DMPC shall
bear all reasonable costs and expenses related thereto, including reimbursement
of any costs already incurred by EPI.

                                     -25-
<PAGE>

     13.2  ADER's and Field Alert Reports.  EPI will file any averse drug
           ------------------------------
experience reports ("ADER's") required under 21 CFR 314.80, as amended from time
to time, for the Products as well as any reports required under foreign laws or
regulations elsewhere in the world where it sells Products.  DMPC will file all
ADER's (or the equivalent foreign report) required under foreign laws or
regulations with respect to Exempted Products sold by it in Exempt Territories.
Complaints associated with Product sold in the United States which may require
an FDA field alert report as specified under 21 CFR 314.81, as amended from time
to time, or foreign equivalents elsewhere in the world with respect to Products
sold by EPI will be handled by EPI.  The parties will supply each other with
copies of any ADER's and field alert reports or foreign equivalents before or at
the time of submission to the regulatory authorities.

     13.3  Recall Action.  All Product recalls and FDA contacts relating to
           -------------
recall of Products in the United States or elsewhere in the world with respect
to Products sold by EPI will be the responsibility and under the control of EPI;
all Product recalls and regulatory authority contacts relating to recall of
Exempted Products sold by DMPC in Exempt Territories will be the responsibility
and under the control of DMPC.  Each party agrees to contact the other as soon
as practicable after deliberations have begun regarding the potential recall of
a Product manufactured at either of the Facilities.  Either party has the right
to initiate a Product recall, withdrawal or field correction.  If either party
should decide or be required to initiate a Product recall, withdrawal or field
correction, that party will provide the other a copy of its recall letter for
prior approval which shall not unreasonably be withheld.

     13.4  Recall Expenses.  If any Product is recalled as a result of the
           ---------------
supply by DMPC of Product that does not conform to the applicable specifications
or warranties set forth in this Agreement, then DMPC will bear all reasonable
costs and expenses of such recall.  Recalls of Exempted Products sold by DMPC in
Exempt Territories will also be at DMPC's expense.  All other recalls of Product
in the United States or elsewhere will be at EPI's expense.  If each party
contributes to the cause for a recall, the cost will be shared in proportion to
each party's responsibility.

     13.5  Recall Records.  DMPC and EPI will maintain complete and accurate
           --------------
records for such periods as may be required by applicable law, but not less than
three (3) years, of all Product supplied under this Agreement.

     13.6  Recalls of Contract Products.  Recalls or withdrawals of Contract
           ----------------------------
Products shall be governed by the terms of the contracts between EPI and the
manufacturer of such Contract Products.

     13.7  DEA Actions or Proceedings.  EPI and DMPC will notify each other by
           --------------------------
fax of all notices or communications with the DEA with respect to any pending or
threatened action or proceeding or any potential violation within two (2)
business days of receipt.  A follow-up copy of the fax transmission is to be
mailed and postmarked within two (2) business days of the date of the fax
transmission.  DMPC will investigate all such notices or communications in
connection with the Facilities, its employees, or in connection with the
procurement of components or the

                                     -26-
<PAGE>

manufacturing, processing, packing or holding of Product and will provide a
written summary to EPI and a written response to the DEA, with a copy to EPI.
EPI will investigate all such notices or communications in connection with the
Building, its employees, the supplier of API sourced by it, and all other such
notices or communications and will provide a written summary to DMPC and a
written response to the DEA, with a copy to DMPC. In the event that any action
is required by a party in response to the DEA, such party shall use all
commercially reasonable efforts to cooperate with, and satisfy the requirements
of, the DEA. The party required to investigate or to take action with respect to
the DEA shall bear the costs of such investigation or action.

     13.8  Product Notices.  Notices required under this Article 13 shall be
           ---------------
addressed as follows or as otherwise instructed by a party from time to time:

     If to EPI:
     ---------

           Endo Pharmaceuticals Inc.
           P.O. Box 4144
           Wilmington, DE 19807
           Attention: Mariann T. MacDonald

     If to DMPC:
     ----------

           The DuPont Merck Pharmaceutical Company
           DuPont Merck Plaza
           974 Centre Road
           Wilmington, Delaware 19807-2802
           Attention: Medical Data Coordinator
           Fax: (302) 892-7771

                                  ARTICLE 14
                                   INDEMNITY

     14.1  By DMPC.  DMPC agrees to indemnify, defend and hold harmless EPI
           -------
and its Affiliates, and their respective stockholders, directors, officers,
employees, agents and representatives, from and against any and all Losses that
are caused by, based on or arise out of (i) any breach or nonperformance by DMPC
of any of its obligations under this Agreement, (ii) the sale, labeling or use
of Exempted Products sold by DMPC in Exempt Territories, (iii) DMPC's violation
or alleged violation of any Legal Requirement in connection with the performance
of this Agreement, including, without limitation, any violation of any
Environmental Laws, (iv) the presence, discharge, deposit, disposal, release,
storage, or transport of hazardous or regulated substances, or the arrangement
for such activities by third parties, in connection with any activities
undertaken by DMPC pursuant to this Agreement, provided, however, that DMPC will
not be obligated to indemnify EPI or its Affiliates (or other indemnitees) for
Losses for which EPI is required to indemnify DMPC under Section 14.2(iii)
hereof or under Section 23.1 of the Lease Agreement or (v) the gross negligence,
recklessness or wilful misconduct of DMPC.

                                     -27-
<PAGE>

     14.2  By EPI.  EPI agrees to indemnify, defend and hold harmless DMPC and
           ------
its Affiliates, and their respective stockholders, directors, officers,
employees, agents and representatives, from and against any and all Losses that
are caused by, based on or arise out of (i) any breach or nonperformance by EPI
of any of its obligations under this Agreement, (ii) the sale, labeling or use
of Products or Contract Products sold by EPI in the United States or elsewhere,
(iii) EPI's violation or alleged violation of any Legal Requirement in
connection with the performance of this Agreement, including without limitation,
any violation of any Environmental Laws or (iv) the gross negligence,
recklessness or wilful misconduct of EPI.

     14.3  Limitation of Liability.  Notwithstanding any other provisions of
           -----------------------
this Article 14, neither DMPC nor EPI shall be liable for, and neither shall
have any obligation to indemnify the other or its Affiliates (or other
indemnitees) in respect of, punitive or consequential damages (including loss of
sales, loss of profits and loss of goodwill) arising out of any cause
whatsoever.

     14.4  Scope/Indemnification Procedures.  The foregoing indemnities are
           --------------------------------
intended to be the exclusive remedies in respect of any breach of this Agreement
and in lieu of the indemnification standards otherwise existing under the
Purchase Agreement, provided that the provisions of Section 8.3 of the Purchase
Agreement shall be equally applicable to this Agreement and such provisions are
hereby incorporated herein by reference.

                                  ARTICLE 15
                                 FORCE MAJEURE

     15.1  Performance Excused.  DMPC shall be excused from performance however
           -------------------
if its failure to perform arises from events beyond its reasonable control and
which occurred without its negligence (each, an "Event of Force Majeure").
Without limiting the foregoing, possible examples of such Events of Force
Majeure are war, fire, flood, strike, accident, riot, third-party non-
performance, pollution or debasement of raw material sources (unless DMPC is
responsible therefor), or acts of God. DMPC shall provide prompt notice to EPI
of any such Event of Force Majeure and shall indicate the estimated duration of
such Event of Force Majeure, and shall use all commercially reasonable efforts
to mitigate the effects of such Event of Force Majeure, including, without
limitation, manufacturing Product in another Facility or identifying another
party to manufacture Product (including Affiliates), in either case, the
increased expense of which over the costs for Product hereunder would be shared
equally by DMPC and EPI.

     15.2  Additional Consequences of Force Majeure.  If, by reason of any
           ----------------------------------------
such Event of Force Majeure, DMPC is excused from performance then, to the
extent Products are not delivered to EPI in the quantities or at the times
required hereunder, EPI may purchase the Products from other sources without
liability or obligation to DMPC.  In the event EPI purchases from another
source, then EPI may, to the full extent of such purchases, reduce its
commitment for Products, if any, hereunder.  DMPC and EPI shall share equally
the increased expense of such alternative source over the costs for Product
hereunder.  If during the Event of Force Majeure DMPC failed to deliver Product
to EPI and no other source was obtained, EPI may, at its option, extend the term
of this Agreement with respect to such Product to permit partial or total
delivery of Products

                                     -28-
<PAGE>

not delivered, and not secured elsewhere, because of any such Event of Force
Majeure. If such Event of Force Majeure continues for more than sixty (60) days,
EPI has the option, at any time thereafter during which the Event of Force
Majeure is continuing, to terminate this Agreement with respect to the Products
affected without liability to DMPC, except to pay for Products already accepted.

                                  ARTICLE 16
                            MEDIATION / ARBITRATION

     16.1  Mediation.  In the event of any dispute, controversy or claim
           ---------
arising out of or relating to this Agreement (including any provision of any
Schedule or Exhibit hereto) which does not constitute a Dispute (as defined
below) and the Representatives and/or the joint manufacturing team are unable to
resolve such matter, the parties shall endeavor to settle the dispute by
mediation under the Center for Public Resources (or any successor organization,
the "CPR") Model Mediation Procedure for Business Disputes then in effect.

     16.2  Arbitration.  In the event of any dispute, controversy or claim
           -----------
arising out of or relating to the breach or alleged breach of this Agreement by
any party hereto ("Dispute"), upon the written request of any party to this
Agreement, the matter shall immediately be referred to Representatives of DMPC
and EPI for resolution.  The Representatives of DMPC and EPI shall meet as soon
as possible and attempt in good faith to negotiate a resolution of the Dispute.
In the event that the Representatives are unable to resolve the Dispute, the
Dispute shall be immediately referred to the chief executive officers of DMPC
and EPI, and the chief executive officers shall meet as soon as possible and
attempt in good faith to negotiate a resolution of the Dispute.  If the parties
are unable to resolve the Dispute within 10 days after receipt by a party of
such written request, then either party may submit the Dispute to arbitration as
the exclusive means of resolving it in accordance with the procedures set forth
in this Article 16. So long as the parties are timely complying with the dispute
resolution procedures set forth in this Article 16, EPI shall continue to timely
pay all undisputed invoices (or undisputed portion of invoices) and DMPC shall
continue the performance of its manufacturing and other obligations under this
Agreement.  Except as provided in Section 16.6, recourse to any court with
respect to any matter subject to arbitration hereunder shall be limited to
proceedings to confirm any award rendered and other appropriate proceedings
under the Federal Arbitration Act of the United States, 9 U.S.C. (S)(S) 1 et
seq. (the "Federal Arbitration Act").

     16.3  Arbitration Request.  If the parties fail to resolve any Dispute
           -------------------
within the time period referenced in Section 16.2, any party may notify the
other parties to the Agreement that it wishes to commence an arbitration
proceeding under this Article 16 (an "Arbitration Request").  Any Dispute not
resolved by the Representatives or the chief executive officers, as the case may
be, as set forth in Section 16.2 shall be finally settled by arbitration in
accordance with the CPR Non-Administered Arbitration Rules then in effect (the
"Rules"), except as modified herein.   Any arbitration proceedings, decision or
award rendered hereunder and the validity, effect and interpretation of this
arbitration agreement in this Section shall be governed by the Federal
Arbitration Act.

                                     -29-
<PAGE>

     16.4  Selection of Arbitrator.
           -----------------------

           (a)   Number of Arbitrators.  In any arbitration proceeding, there
                 ---------------------
shall be either one or three arbitrators, appointed in accordance with this
Section 16.4.  As used herein, the term "arbitrator" shall mean the sole
arbitrator or, if there are three arbitrators, such term shall mean the three
arbitrators collectively.

           (b)   One Arbitrator.  In any arbitration proceeding, the party or
                 --------------
parties commencing the arbitration (the "Petitioner") shall state in the
Arbitration Request a number of arbitrators (either one or three) for the
arbitration.  If such number is three, there shall be three arbitrators and the
appointment procedures set forth in paragraph (c) shall apply.  If such number
is one, the party or parties with whom the Petitioner has its dispute (the
"Respondent") shall have the right to elect that there be three arbitrators by
notifying the Petitioner of such election within seven (7) business days after
receipt of the Arbitration Request, in which event the appointment procedures
set forth in paragraph (c) shall apply.  In the event that neither the
Petitioner nor the Respondent makes such election, the sole arbitrator shall be
a person, mutually agreeable to the Petitioner and the Respondent, who is a
member of the Panels of the Center for Public Resources (the "CPR Panels").  If,
however, the Petitioner and the Respondent are unable to agree upon the sole
arbitrator within ten (10) business days after receipt of the Arbitration
Request, then either party may request the CPR to appoint the sole arbitrator
from among the members of the CPR Panels.

           (c)   Three Arbitrators.  If either the Petitioner or the Respondent
                 -----------------
elects that there be three arbitrators, the one making that election shall
appoint a member of the CPR Panels to serve as one of the arbitrators and shall
notify the other party of such appointment.  Such notice shall be given in the
Arbitration Request (if the Petitioner makes such election) or response thereto
(if the Respondent makes such election).  Within ten (10) business days after
receipt of such notice, the other party shall appoint another member of the CPR
Panels to serve as the second arbitrator and shall notify the Respondent or the
Petitioner (as the case may be) of such appointment, but if the other party
shall fail to do so within such period, the arbitrator appointed by the
Petitioner or Respondent (as the case may be) shall act as the sole arbitrator.
The two arbitrators shall, within ten (10) business days after the appointment
of the second arbitrator, appoint the third arbitrator from the members of the
CPR Panels.  If, however, the two arbitrators are unable to agree upon the third
arbitrator within such period, then either arbitrator may request the CPR to
appoint the third arbitrator from among the members of the CPR Panels.

           (d)   Absence of Material Interest or Relationship.  Notwithstanding
                 --------------------------------------------
the foregoing, no person may serve as an arbitrator pursuant to this Article 16
if such person has a material interest or relationship (through employment,
stock ownership, business dealings or otherwise) in or with any party to the
arbitration or any of their respective Affiliates, directors, officers or
employees.

                                     -30-
<PAGE>

     16.5  Powers, Proceedings of Arbitrator.
           ---------------------------------

           (a)   General.  The arbitrator selected in accordance with Section
                 -------
16.4 hereof shall have full power to decide any Dispute. The arbitration
proceedings shall be held in Philadelphia, Pennsylvania. The arbitrator shall
hold one or more hearings and render the award expeditiously (it being the
intent of the parties that Disputes be settled within ninety (90) days following
the delivery of an Arbitration Request). The arbitrator shall determine all
matters of admissibility, weight and relevance of evidence, and in connection
therewith, may look to the Federal Rules of Evidence to the extent found helpful
to do so. The arbitration shall maintain the attorney-client privilege and work
product immunity. The award shall be final and binding upon the parties, and
shall be the sole and exclusive remedy between the parties regarding any claims,
counter-claims, issues, or accounting presented to the arbitrator. The
arbitrator is empowered to award any remedy, other than punitive and
consequential damages, permitted under this Agreement or by law, including
equitable relief such as specific performance of this Agreement. Judgment upon
an award of the arbitrator may be entered in any court of competent
jurisdiction.

           (b)   Costs and Fees.  The arbitrator shall apportion the costs of
                 --------------
the arbitration as provided in the CPR Rules, except that each party shall bear
the costs of its own legal representation and experts.

           (c)   Confidentiality.  The arbitration proceeding shall be
                 ---------------
confidential and the arbitrator may issue appropriate protective orders to
safeguard both parties' Confidential Information.  Except as required by law,
neither the Petitioner nor the Respondent shall make (or instruct the arbitrator
to make) any public announcement with respect to the proceedings or decision of
the arbitrator without the prior written consent of the other.  The existence of
any dispute submitted to arbitration, and the award of the arbitrator, shall be
kept in confidence by the parties and the arbitrator, except as required in
connection with the enforcement of such award or as otherwise required by
applicable law.

     16.6  Interim or Other Relief.  This Article 16 shall not limit the right
           -----------------------
of any party to seek in any court of competent jurisdiction such interim relief,
and only such interim relief, as may be needed in aid of arbitration or to
maintain the status quo or otherwise protect the subject matter of the
             ------ ---
arbitration until the arbitrator shall have had an opportunity to act.

     16.7  Agreement in Force.  So long as (i) in the case of DMPC, EPI is
           ------------------
timely complying with the arbitration procedures set forth in Sections 16.2-
16.6, or (ii) in the case of EPI, DMPC is timely complying with the arbitration
procedures set forth in Sections 16.2-16.6, the rights and obligations of the
parties shall remain in full force and effect in accordance with the terms of
this Agreement during any arbitration proceeding hereunder.

                                     -31-
<PAGE>

                                  ARTICLE 17
                                 MISCELLANEOUS

     17.1  Notices.  Except as otherwise stated herein, all notices or other
           -------
communications given pursuant hereto by one party to the other party shall be in
writing and deemed given (a) when delivered by messenger (with receipt
confirmed), (b) when sent by telecopier (with receipt confirmed), provided that
a copy is mailed by first class postage prepaid mail within two (2) business
days, (c) when received by the addressee, if sent by overnight courier, or (d)
seven days after being mailed in the U.S. first-class postage prepaid,
registered or certified, in each case to the appropriate addresses and
telecopier numbers set forth below (or to such other addresses and telecopier
numbers as a party may designate as to itself by notice to the other parties):

     If to EPI, addressed to:
     -----------------------

           Endo Pharmaceuticals Inc.
           P.O. Box 4144
           Wilmington, DE
           Attention: Carol A. Ammon

           with a copy to:

           Kelso & Company
           320 Park Avenue, 24th Floor
           New York, New York 10022
           Attention: General Counsel
           Fax: 212-223-2379


     If to DMPC, addressed to:
     ------------------------

           The DuPont Merck Pharmaceutical Company
           DuPont Merck Plaza
           974 Centre Road
           Wilmington, Delaware 19807-2802
           Attention: President, Manufacturing Division, and General Counsel
           Fax: (302) 892-8899

     17.2  Security Interest.  As security for the prompt payment of all
           -----------------
amounts from time to time due under the Notes and the promissory note referenced
in Section 3.1 of the Purchase Agreement (the "Transferred Inventory Note"), and
the performance of all of EPI's obligations thereunder, EPI agrees to execute
and deliver at Closing a security agreement in form and substance acceptable to
DMPC and the lenders providing the Bank Financing, granting a security interest
in, and lien on, all property and assets of EPI as security for the payment of
amounts due under the Notes and the Transferred Inventory Note, subject to any
conditions that such lenders may require in oder for EPI to execute and deliver
such Agreement. Such security agreement shall terminate in the event that EPI
pays $60 million of its obligations under the Notes and/or the Transferred
Inventory Note, and at such time DMPC determines that it has a reasonable
expectation of payment of the remaining balance of the Notes and the Transferred
Inventory Note.


                                     -32-
<PAGE>

     17.3  Modifications.  This Agreement will not be modified or amended
           -------------
except in writing, signed by all parties.  Any terms and conditions of the
parties' purchase orders, invoices, or other sales documents which conflict with
this Agreement will have no effect.

     17.4  Assignability/Subcontracting.
           ----------------------------

           (a)   Assignment by EPI.  EPI may not assign this Agreement, or its
                 -----------------
rights or obligations hereunder, without the prior written consent of DMPC
(which consent shall not unreasonably be withheld), except that, subject to
Section 3.2(c), EPI may assign this Agreement and its rights and obligations
hereunder (i) to an Affiliate or to a successor to all or substantially all of
the business and assets of EPI relating to the Products and (ii) to or for the
account of the lenders providing the Bank Financing solely and specifically for
the purpose of securing such Bank Financing.

           (b)   Assignment by DMPC.  DMPC may not assign this Agreement, or its
                 ------------------
rights or obligations hereunder, without the prior written consent of EPI.
Solely for purposes of this Section 17.4(b), a transfer by Merck and/or DuPont
of all or any part of their partnership interests in DMPC shall be deemed to
cause an assignment of this Agreement if, as a consequence of such transfer,
neither DuPont nor Merck (or their respective Affiliates) owns at least a 50%
partnership interest in DMPC (a "DMPC Change of Control").  Notwithstanding the
foregoing:

                 (i)  In the event of the sale or other disposition of all or
     substantially all of the business or assets of DMPC, DMPC may assign this
     Agreement, and its rights and obligations hereunder, to the successor to
     the business or assets of DMPC, provided that EPI consents to such
     assignment, which consent shall not unreasonably be withheld (and in
     determining whether to consent, EPI shall consider the pre-acquisition
     financial strength of the successor and if such successor has at least $250
     million of tangible net worth, such amount of tangible net worth shall be
     prima facie evidence of the satisfactory financial strength of the
     successor);

                 (ii) In the event of a DMPC Change of Control, the assignment
     of this Agreement (and DMPC's rights and obligations) that is deemed to
     occur hereunder shall be permitted if EPI consents, which consent shall not
     unreasonably be withheld (and in determining whether to consent EPI shall
     consider the pre-acquisition financial strength of the acquiror of the
     partnership interest or interests and if such acquiror has at least $250
     million of tangible net worth, such amount of tangible net worth shall be
     prima facie evidence of the satisfactory financial strength of the
     acquiror), and if EPI does not so consent then in connection with the DMPC
     Change of Control DuPont and Merck shall cause this Agreement to be
     assigned to and assumed by DuPont and/or Merck; and/or

                                     -33-
<PAGE>

                 (iii)  If DMPC determines to sell or otherwise transfer either
     or both Facilities it may do so and in connection therewith it may assign
     this Agreement (insofar as applicable to the subject Facility or
     Facilities) to the acquiring entity; provided, however, that in the event
     that EPI determines, in its sole discretion, that the acquiror of the
     Facility or Facilities would not be an acceptable manufacturer of the
     Products, then DMPC shall not assign this Agreement (or applicable rights
     and/or obligations hereunder) to the acquiror but shall instead be
     responsible at DMPC's cost to implement appropriate arrangements for the
     manufacture and supply of Products that otherwise would have been
     manufactured at the subject Facility or Facilities in accordance with the
     terms hereof at and from the other Facility (if still owned) and/or at and
     from one or more alternate manufacturers located within the continental
     United States or Puerto Rico, satisfactory to EPI in its sole discretion.
     DMPC will reimburse EPI for incremental distribution costs if transfer of
     production from the Facility being transferred results in increased
     distribution costs. In addition, if DMPC transfers its Garden City
     Facility, DMPC will pay or reimburse EPI for reasonable costs incurred to
     relocate EPI's research and development employees from the Garden City
     Facility to a location reasonably proximate to the alternate site where the
     Products are transferred for manufacture; provided, that such relocation
     costs to be incurred or reimbursed by DMPC shall not exceed $2,000,000 in
     the aggregate. Once the foregoing arrangements are implemented in all
     material respects to the reasonable satisfaction of EPI, DMPC may complete
     the transfer of the subject Facility or Facilities.

           (c)   Subcontracting.  DMPC may not procure any Products from a third
                 --------------
party in a completed or substantially completed form without EPI's prior written
consent, which consent shall not unreasonably be withheld.

     17.5  Enforcement.  DMPC recognizes that its failure to timely comply with
           -----------
the dispute resolution procedures set forth in Article 16, including its
obligation to continue performance hereunder pending resolution of Disputes,
could result in irreparable harm to EPI for which money damages would not be a
sufficient remedy and that EPI (without limiting any other right or remedy it
may have at law or equity) shall be entitled to seek specific performance or
other injunctive relief as a remedy to enforce compliance with the dispute
resolution procedures set forth herein.

     17.6  Entire Agreement.  This Agreement, the Purchase Agreement, the
           ----------------
Discount Letter Agreement, dated as of June 27, 1997, between EPI and DMPC, and
the other Ancillary Agreements constitute the entire agreement between the
parties pertaining to their subject matter.  This Agreement fully and completely
expresses the agreement of the parties with respect to the manufacture and
supply of the Products, and supersedes all other agreements or understandings
between the parties, written or oral.  This Agreement was entered into after
adequate investigation by each party, no party relying upon any statement or
representation made by any of the others not embodied herein.

     17.7  GOVERNING LAW.  THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED
           -------------
ACCORDING TO THE LAWS OF THE STATE OF DELAWARE.

                                     -34-
<PAGE>

     17.8   Headings.  The various headings used in this Agreement are for
            --------
convenience only and are not to be used in interpreting the text of the article
in which they appear or to which they relate.

     17.9   Relationship of the Parties.  The relationship of the parties to
            ---------------------------
this Agreement is that of independent contractors.  No party will purport to
make any representation on behalf of any other party or purport to bind or
commit any other party in any way.

     17.10  Severability.  If any provision of this Agreement is judicially
            ------------
declared to be invalid, unenforceable or void, such decision will not invalidate
or void the remainder of this Agreement.

     17.11  Waiver.  The waiver of a breach of this Agreement will not be a
            ------
waiver of subsequent or continuing breach.

                                     -35-
<PAGE>

          IN WITNESS WHEREOF, the undersigned have duly executed this Agreement
in multiple counterparts, effective as of the day and year first above written.

                         THE DUPONT MERCK PHARMACEUTICAL
                          COMPANY


                         By:  /s/ PAUL G. HOWES
                            --------------------------------------------
                         Title:  President and Chief Executive Officer
                                 ---------------------------------------


                         DUPONT MERCK PHARMA


                         By: /s/ MICHAEL R. MILLER
                             -------------------------------------------
                         Title: Chief Financial Officer
                                ----------------------------------------


                         ENDO PHARMACEUTICALS INC.


                         By: /s/ CAROL A. AMMON
                            --------------------------------------------
                         Title: President, Secretary and Chief Executive
                                ----------------------------------------
                                Officer
                                ----------------------------------------

                                     -36-
<PAGE>

                                  Schedule A
                            PRODUCTS TO BE SUPPLIED
                                      ***

                                      37
<PAGE>

                                  Schedule B
                               Contract Products
                                      ***

                                      38

<PAGE>


                                  SCHEDULE C
                                VARIABLE COSTS
                                      ***

                                      39


<PAGE>


                                  SCHEDULE D
                                  FIXED COSTS
                                      ***

                                      40


<PAGE>


                                  SCHEDULE E
               FORMS TO REQUEST CHANGES AND ADDITIONAL ACTIVITIES



                                      41




<PAGE>



   Request by Newco for Additional Marketed Product Support and New Products

                           Request # ______________

                                            To:
                                            --
                                            R. Fromuth/Wilm Contract Site
                                            R. Serafin/Garden City
                                            W. Hernandez/Manati

                                For Newco's Use
                                ---------------

Requested Work:

_______________________________________________________________________________

_______________________________________________________________________________

_______________________________________________________________________________

_______________________________________________________________________________

Reason for Request:

_______________________________________________________________________________

_______________________________________________________________________________

_______________________________________________________________________________

_______________________________________________________________________________

Product Details:

Product: ______________________________________________________________________

Dosage Form/Formulation/Strength: _____________________________________________

Put-Up: _______________________________________________________________________

Other: ________________________________________________________________________

Forecast Units (3 years): _____________________________________________________

Submitted: ________________________________________ Date: _____________________

Approved for Assessment: __________________________ Date: _____________________


                                      42


<PAGE>



                                For DMPC's Use
                                --------------

                        Request # _________________

  .     General project plan completed                  Yes             No
        (If yes, note and attach)

  .     Addition to the line required                   Yes             No
        (If yes, note and attach)

  .     Quality/Compliance Assessment completed         Yes             No
        (If yes, note and attach)

  .     Cost Assessment completed                       Yes             No
        (If yes, note and attach)

  .     Any special legal considerations                Yes             No
        (If yes, note and attach)

  .     General Regulatory plan completed               Yes             No
        (If yes, note and attach)



Approved: ___________________________________________________  ________________
             Vice President, Manufacturing Site                 Date

                                      43





<PAGE>



                                For Newco's Use
                                ---------------

                       Request # ________________

DMPC's proposed plan to accomplish the requested work is:

     1)     Accepted __________________

     2)     Rejected __________________

Approved: _________________________________________________  _____________
            Executive Vice President, Operations - Newco         Date

                                      44





<PAGE>



                                  SCHEDULE F
                    PROCEDURES FOR TRANSFERRING NEW PRODUCTS
                           TO COMMERCIAL MANUFACTURE





The attached procedures for transferring New Products to commercial manufacture
were originally adopted to transfer new products to commercial manufacture by
DMPC from Endo Laboratories, L.L.C. and are hereby adopted by DMPC with respect
to EPI.  References to Endo Laboratories, L.L.C., in the attached procedures
should be read as references to EPI.  Specific references to individuals or
groups of individuals, within Endo Laboratories, L.L.C should be read as
references to individuals or groups of individuals, yet to be named, within EPI;
provided, how ever, EPI is not bound to name or create any positions, groups,
committees or boards referred to in this Schedule F and EPI may assign such
responsibilities to any individual or group of individuals within EPI.

                                      45
<PAGE>

                    THE DUPONT MERCK PHARMACEUTICAL COMPANY
                           ENDO LABORATORIES, L.L.C.

                          TECHNOLOGY TRANSFER PROCESS
                           ENDO LABORATORIES, L.L.C.
                             Doc. No. ENDO-0683-01


Prepared By:        /s/ Illegible Signature                  Date:     7/31/96
                  --------------------------------------            ------------


                               DOCUMENT APPROVAL
                               -----------------
<TABLE>
<CAPTION>


<S>                                                         <C>
           /s/ P. Van Nostrand                              7/31/96
------------------------------------------------            -------
Initiator - Endo Product Development                          Date

          /s/  James E. Smith                                8/1/96
------------------------------------------------            -------
Initiator - Technical Services - Garden City                  Date

           /s/ Illegible Signature                          7/31/96
------------------------------------------------            -------
          Endo Product Development                            Date

           /s/ Illegible Signature                           8/5/96
------------------------------------------------            -------
Technical Services/Manufacturing - Garden City                Date

          /s/ Illegible Signature                            8/8/96
------------------------------------------------            -------
            Regulatory Affairs                                Date

         /s/ Illegible Signature                            8/12/96
------------------------------------------------            -------
              Site Quality                                    Date

         /s/ Illegible Signature                            8/14/96
------------------------------------------------            -------
              Endo Quality                                    Date
</TABLE>

                                      ***

                                      46

<PAGE>


1.0  PURPOSE
     -------

     This SOP defines the process, responsibilities, and the necessary require
     ments for the orderly technical transfer of a product from Endo
     Laboratories Development to the DMPC Garden City (DMPC GC) manufacturing
     site (or to an approved contract laboratory).  This SOP is based on DuPont
     Merck Corporate Best Practices for Technology Transfer and is modified to
     confirm with the requirements stated in the Endo New Product Process
     Document.  A flow chart outlining the various Technology Transfer
     activities is provided in Attachment I.

2.0  SCOPE
     -----

     This guideline covers the transfer of technology associated with the
     manufac ture and testing of drug product from Endo Product Development
     (EPD) to a manufacturing site not currently qualified for manufacture of
     the product. This procedure does not apply to the Transfer of Technology
     for the synthesis of active drug substances or excipients.

3.0  DEFINITIONS
     -----------

     ADS:  Active Drug Substance

     ANDA: Abbreviated New Drug Application

     BPCS: Business Planning Control System

     BRP:  Business Resource Planning

     CAST: Core Advisory Science Team

     COA:  Certificate of Analysis

     DEA:  Drug Enforcement Agency

     DMF:  Drug Master File

     DMPC: DuPont Merck Pharmaceutical Company

3.0  DEFINITIONS (Continued)
     -----------

                                      47

<PAGE>


     EDCB: Endo Development and Commercialization Board

     EN#: Endo Product/Project Number

     FDA: Food and Drug Administration

     GMP: Good Manufacturing Practices

     ILQ: Interlaboratory Qualification (Analytical Method Transfer)

     IR: Investigation Report

     IQ: Installation Qualification

     MSDS: Material Safety Data Sheet

     NPV: Net Present Value

     OQ: Operational Qualification

     PAI: Preapproval Inspection

     PQ: Performance Qualification

     PSC: Product Selection Committee

     QE: Quality Engineer

     QS: Quality Scientist

     SOP: Standard Operating Procedure

     SUPAC: Scale-up and Postapproval Changes

     WFP: Working Formula Procedure

                                      ***


                                      48
<PAGE>



                                  SCHEDULE G
                             API INVENTORY LEVELS
                                      ***

                                      49



<PAGE>




                                  SCHEDULE H
                        FINISHED GOOD INVENTORY LEVELS
                                      ***

                                      50



<PAGE>



                                  Schedule I
                          IDENTIFICATION OF CONTRACTS
                                      ***

                                      51



<PAGE>

                                   Exhibit 1
                            Form of Promissory Note

                                                                       Exhibit 1

THIS PROMISSORY NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR REGISTERED OR QUALIFIED UNDER ANY STATE SECURITIES LAWS.  THIS
PROMISSORY NOTE MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS
THE PROPOSED TRANSACTION DOES NOT REQUIRE REGISTRATION OR QUALIFICATION UNDER
APPLICABLE FEDERAL OR STATE SECURITIES LAWS.  THIS PROMISSORY NOTE IS SUBJECT TO
SET-OFF UNDER CERTAIN CIRCUMSTANCES.  THIS PROMISSORY NOTE IS SUBJECT TO THE
[INTERCREDITOR AND SUBORDINATION AGREEMENT ENTERED INTO BY ___________]
FOR PURPOSES OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED, THE AMOUNT OF
ORIGINAL ISSUE DISCOUNT WITH RESPECT TO EACH $1,000 OF PRINCIPAL AMOUNT AT
MATURITY OF  THIS NOTE IS $___________, THE ISSUE DATE IS _____, ____ AND THE
YIELD TO MATURITY IS ___/1/% (COMPOUNDED ANNUALLY).


                           ENDO PHARMACEUTICALS INC.

                                PROMISSORY NOTE


                                                    New York, New York
                                                    ________ ___, ____


          FOR VALUE RECEIVED, the undersigned, Endo Pharmaceuticals Inc. (herein
called the "Company"), a corporation organized and existing under the laws of
the State of Delaware, hereby unconditionally promises to pay to the order of
the person designated as payee on the signature page hereof ("Payee") in the
manner and at the place hereinafter provided, the principal sum of
$[_________]/2/ (the "Principal Amount") on or prior to [____], 2002 (the
"Original Maturity Date") (subject to Section 1.1 below) which amount shall be
payable in accordance with the terms set forth below (together with accrued and
unpaid interest thereon from the Original Maturity Date through the date of
repayment as provided
---------------
/1/The Applicable Federal Rate at date of issuance.

/2/  The Principal Amount will equal $17,000,000 or $6,000,000, as appropriate.


<PAGE>

below). Capitalized terms not otherwise defined herein are defined in Section 7.

          From and after the Original Maturity Date, this Promissory Note shall
bear, and the Company promises to pay, interest on the Principal Amount,
annually on December 31st of each year and on the maturity date of this
Promissory Note as such date may be determined pursuant to Section 1.1, at a
rate equal to 16% per annum and the Company may, at its option, elect to satisfy
its obligation to pay interest (other than on the maturity date of this
Promissory Note as such date may be determined pursuant to Section 1.1) by
adding such interest to the Principal Amount on the applicable interest payment
date.  The applicable rate of interest on all overdue obligations (including
interest not paid when due) shall be 18% per annum and such interest on overdue
obligations shall be payable upon demand by the holder hereof.

1.   Timing and Method of Payment.
     ----------------------------

     1.1  Term.
          ----

          The Principal Amount shall be due and payable on the fifth anniversary
of the Closing Date; provided, however, that this Promissory Note may be
                     --------  -------
extended for successive one year periods, at the option of the Company, with 5
days prior written notice to the Payee; provided, however, that in no event
                                        ---------  -------
shall such payment be due and payable later than seven and one-half years after
the Closing Date.

     1.2  Prepayments.  The Company, by action of the Board of Directors, shall
          -----------
have the right at any time and from time to time, subject to the receipt of the
prior written consent of the majority of the Banks that have loans and
commitments outstanding under the Credit Agreement, prior to the Original
Maturity Date to prepay, in whole or in part, upon 5 days notice the prepayment
amount on this Promissory Note which shall be the Principal Amount discounted
from the Original Maturity Date to the date of prepayment at a rate equal to 12%
per annum.  After the Original Maturity Date, the Company, by action of the
Board of Directors, shall have the right at any time and from time to time,
subject to the receipt of the prior written consent of the majority of the Banks
that have loans and commitments outstanding under the

                                       2
<PAGE>

Credit Agreement, to prepay, without premium, the Principal Amount then due on
this Promissory Note in whole or in part plus accrued interest upon 5 days
notice.

     1.3  Method of Payment.  All payments of principal and interest in respect
          -----------------
of this Promissory Note shall be made in lawful money of the United States of
America in next day funds at the office or address of Payee set forth in Section
8.1(ii) or at such other place as shall be designated in a written notice
delivered to the Company at least 5 days prior to the due date of such payment.
Whenever any payment on this Promissory Note shall be stated to be due on a day
that is not a Business Day, such payment shall instead be made on the next
succeeding Business Day, and such extension of time shall be included in the
computation of interest payable on this Promissory Note.  Each payment made
hereunder shall be credited first to accrued and unpaid interest and then to
principal.  Each of Payee and any subsequent holder of this Promissory Note
agrees, by its acceptance hereof, that before disposing of this Promissory Note
it will make a notation hereon of all principal and interest payments previously
made hereunder.

     1.4  Set-Off.  The Company may, at its option, set-off and apply any and
          -------
all amounts owed to the Company from the Payee arising under the indemnification
provided for in Article 14 of the Manufacture and Supply Agreement (to the
extent that such amounts have been finally determined to be owed to the Company
pursuant to the provisions of Article 16 of the Manufacture and Supply Agree-
ment) against any and all of the obligations of the Company now or hereafter
existing under this Promissory Note, whether or not the Payee is otherwise in
any way liable for such amounts.  In such event, the Company shall so notify the
holder in writing at least three (3) Business Days before such set-off.

2.   Reference Agreements.  This Promissory Note is issued pursuant to a
     --------------------
Manufacture and Supply Agreement (the "Manufacture and Supply Agreement"), dated
as of ,       1997, among the Company, The DuPont Merck Pharmaceutical Company,
and DuPont Merck Pharma. Under this Promissory Note, The Dupont Merck
Pharmaceutical Company is the lender, and the Company is the borrower. This
Promissory Note is also subject to the security interest granted in accordance
with the terms of the
                                       3
<PAGE>

Manufacture and Supply Agreement and is entitled to all of the benefits
thereunder and under any security documents executed in connection therewith.

  3. Rank.  This Promissory Note is subordinate to all Senior Debt to the extent
     ----
set forth in section 4 below.

  4. Subordination.
     -------------

     4.1  Agreement To Subordinate.  The Company agrees, and Payee by accepting
          ------------------------
this Promissory Note agrees, that the indebtedness and other payment obligations
evidenced by this Promissory Note is subordinated in right of payment, to the
extent and in the manner provided in this Section 4, to the prior payment in
full in cash of all Senior Debt, and that the subordination is for the benefit
of the holders of Senior Debt, and only indebtedness of the Company which is
Senior Debt shall rank senior to this Promissory Note (and in such case only to
the extent and on the terms and conditions set forth herein).

     4.2  Liquidation, Dissolution, Bankruptcy.  Upon any distribution to
          ------------------------------------
creditors of the Company in a liquidation or a total or partial dissolution of
the Company or in a bankruptcy, reorganization, insolvency, receivership or
similar proceeding relating to the Company or its property:

          (a)  holders of Senior Debt shall be entitled to receive payment in
full in cash of the Senior Debt or provisions satisfactory to the holders of
Senior Debt shall be made for such payment before Payee shall be entitled to
receive any payment of principal of or interest on this Promissory Note; and

          (b)  until the Senior Debt is paid in full, in cash, any distribution
to which Payee would be entitled but for this Section 4 shall be made to holders
of Senior Debt as their interests may appear, except that Payee may  receive (i)
interest which may continue to accrue and be added to the Principal Amount and
(ii) Permitted Junior Securities.

     4.3  Default on Senior Debt.  If any amount to be paid in respect of any
          ----------------------
Senior Debt is not paid when due and such default is not cured or waived in
writing and the holder of such Senior Debt has not waived in writing

                                       4
<PAGE>

the benefits of this sentence, the Company may not pay principal of or interest
on this Promissory Note or acquire or redeem this Promissory Note for cash,
property or securities (other than (i) interest that is added to the Principal
Amount and (ii) Permitted Junior Securities) unless and until such default
shall have been cured or waived in writing or shall have ceased to exist or such
Senior Debt shall have been discharged in accordance with its terms or holders
of such Senior Debt shall have waived in writing the benefit of this sentence,
after which the Company shall resume making any and all required payments in
respect of this Promissory Note including any missed payments (such period
during which such payments and acquisitions and redemptions are prohibited
being hereinafter referred to as a "Payment Default Blockage Period"). In
addition, during the continuance of any other event of default with respect to
any Senior Debt pursuant to which the maturity thereof may be accelerated
immediately without further notice (except such notice as may be required to
effect such acceleration) or the expiration of any applicable grace periods,
upon the receipt by the Company of written notice thereof from or on behalf of
the holders of at least a majority of the principal amount of such Senior Debt
(taken together as one class), the Company may not pay principal of or interest
on this Promissory Note or acquire or redeem this Promissory Note for cash,
property or securities (other than Permitted Junior Securities) for a period
(the "Non-Monetary Default Blockage Period") commencing on the date of receipt
of such notice until the earlie[st] of (x) [180 days thereafter, (y)] the date,
if any, on which the Senior Debt to which such event of default relates is
discharged in accordance with its terms or such event of default is waived in
writing by the holders of such Senior Debt or otherwise cured and (z) the date,
if any, on which such Non-Monetary Default Blockage Period shall have been
terminated by written notice to the Company from or on behalf of such holders of
Senior Debt. Any number of notices of a Non-Monetary Default Blockage Period
may be given[; provided, however, (i) not more than one notice of a Non-Monetary
               --------  -------
Default Blockage Period shall be given within a period of any 360 consecutive
days, and (ii) no event of default that existed or was continuing (it being
acknowledged that any subsequent action that would give rise to an event of
default pursuant to any provision under which an event of default previously
existed or was continuing shall constitute a new event of default for this
purpose) on the date of commencement of any Non-Monetary Default

                                       5
<PAGE>

Blockage Period with respect to the Senior Debt initiating such Non-Monetary
Default Blockage Period shall be, or shall be made, the basis for the
commencement of a second Non-Monetary Default Blockage Period by the
representative for, or the holders of, such Senior Debt whether or not within a
period of 360 consecutive days, unless such event of default shall have been
cured or waived for a period of not less than ninety (90) consecutive days;
provided, further, that, until the payment in full in cash of the Senior Debt
--------  -------
outstanding under or in respect of the Credit Agreement, only the Agent (to the
extent that there is an Agent) may deliver the written notice of a Non-Monetary
Default Blockage Period]. The Company agrees to give the Payee prompt written
notice of the occurrence of a Payment Blockage Period, provided that the failure
to furnish such notice shall not in any way limit or adversely affect the rights
of the holders of Senior Debt with respect to such Payment Blockage Period or
otherwise.

     4.4  When Distribution Must Be Paid Over.  If any payment or distribution
          -----------------------------------
is made to Payee that pursuant to this Section 4 should not have been made to
it, Payee shall hold it in trust for holders of Senior Debt and pay it over to
them as their interests may appear.

     4.5  Subrogation.  Subject to the prior payment in full in cash of all
          -----------
Senior Debt and until this Promissory Note is paid in full, Payee shall be
subrogated to the rights of holders of Senior Debt to receive the payments or
distributions applicable to the Senior Debt.  Any payment or distribution made
under this Section 4 to holders of Senior Debt which otherwise would have been
made to Payee except for the provisions of this Section 4 shall, as between the
Company, its creditors (other than the holders of the Senior Debt) and Payee, be
deemed to be a payment by the Company to or on account of the Senior Debt, and
no payments or distributions to Payee of cash, property or securities by virtue
of the subrogation herein provided shall, as between the Company, its credi tors
(other than the holders of the Senior Debt) and Payee, be deemed to be a payment
to or on account of this Promissory Note, it being understood that the
provisions of this Section 4 are and are intended solely for the purpose of
defining the relative rights of Payee on the one hand and the holders of Senior
Debt on the other.

                                       6
<PAGE>

     4.6  Relative Rights.  This Section 4 defines the relative rights of Payee
          ---------------
and holders of Senior Debt.  Nothing herein shall:

          (a)  impair, as between the Company and Payee, the obligations of the
Company, which are absolute and unconditional, to pay principal of and interest
on this Promissory Note in accordance with its terms (provided, however,
                                                      --------  -------
that this provision is not intended to limit the restrictions on payments on
this Promissory Note set forth in Section 4.3); or

          (b)  prevent Payee from exercising its avail able remedies upon an
Event of Default, subject to the rights of holders of Senior Debt to receive
distributions otherwise payable to Payee (provided, however, that this provision
                                          --------  -------
is not intended to limit the provisions of Section 6).

          If the Company fails because of this Section 4 to pay principal of or
interest on this Promissory Note on the due date, the failure is still an Event
of Default (subject to expiration of the fifteen (15) day grace period referred
to in Section 5(d)).

     4.7  Subordination May Not Be Impaired by the Company.  No right of a
          -------------------------------------------------
holder of Senior Debt to enforce the subordination of the indebtedness evidenced
by this Promissory Note shall be impaired by any act or failure to act by the
Company or by its failure to comply with this Promissory Note.

     4.8  Reinstatement.  If, at any time, all or part of any payment with
          -------------
respect to Senior Debt previously made by the Company or any other Person is
rescinded for any reason whatsoever (including, without limitation, the
insolvency, bankruptcy or reorganization of the Company or such other Person),
the subordination provisions set forth herein shall continue to be effective or
be rein stated, as the case may be, all as though such payment had not been
made.

     4.9  Non-Impairment.  Payee agrees (and consents) that, without notice to
          --------------
or assent by it, and without affecting the liabilities and obligations of the
Company and the rights and benefits of the holders of the Senior Debt set forth
in this Section 4:

                                       7
<PAGE>

          (a)  the obligations and liabilities of the Company and any other
party or parties for or upon the Senior Debt may, from time to time, be
increased (but not above $250,000,000 in aggregate principal amount), renewed,
refinanced, extended, modified, amended, restated, compromised, supplemented,
terminated, waived or released;

          (b)  the holders of Senior Debt, and any representative or
representatives acting on behalf thereof, may exercise or refrain from
exercising any right, remedy or power granted by or in connection with any
agreements relating to the Senior Debt; and

          (c)  any balance or balances of funds with any holder of Senior Debt
at any time outstanding to the credit of the Company may, from time to time, in
whole or in part, be surrendered or released, all as the holders of any Senior
Debt, or any representative or representatives acting on behalf thereof, may
deem advisable, and all without impairing, abridging, diminishing, releasing or
affecting the subordination of this Promissory Note to the Senior Debt.

     4.10  No Modification.  The provisions of this Section 4 and the
           ---------------
definitions used herein are for the bene fit of the holders from time to time of
Senior Debt and, so long as any Senior Debt or any commitments with respect
thereto remain outstanding, such provisions and definitions may not be modified,
rescinded or canceled in whole or in part; provided, that the provisions of this
                                           --------
Section 4 and such definitions may be modified, amended or supplemented by the
Company and Payee upon obtaining the prior written consent of (i) the holders of
at least a majority of the principal amount of the Senior Debt (taken together
as one class), (ii) the majority of the Banks that have loans and commitments
outstanding under the Credit Agreement and (iii) the Agent.

     4.11  Waivers; Reliance by Holders of Senior Debt.
           -------------------------------------------

To the extent permitted by applicable law, Payee and the Company hereby waive
(A) notice of acceptance hereof by the holders of the Senior Debt and (B) all
diligence in the collection or protection of or realization upon the Senior
Debt. The Payee by accepting this Promissory Note acknowledges and agrees that
the subordination provisions in this Section 4 are, and are intended to be, an
inducement and a consideration to each holder of any

                                       8
<PAGE>

Senior Debt, whether such Senior Debt was created or acquired before or after
the issuance of this Promissory Note, to acquire and continue to hold, or to
continue to hold, such Senior Debt and such holder of Senior Debt shall be
deemed conclusively to have relied on such subordination provisions in acquiring
and continuing to hold, or in continuing to hold, such Senior Debt.

     4.12  Enforcement of Rights.  The Company and Payee hereby expressly agree
           ---------------------
that the holders of Senior Debt may enforce any and all rights derived herein by
suit, either in equity or at law, for specific performance of any agreement
contained in this Section 4 or for judgment at law and any other relief
whatsoever appropriate to such action or procedure.

     4.13  Proofs of Claim.  If, while any Senior Debt is outstanding, any Event
           ---------------
of Default under Section 5 (a), (b), or (c) of this Agreement occurs, the Payee
shall, to the extent permitted by applicable law, duly and promptly take such
action as the Agent may reasonably request to collect any payment hereunder to
which the holders of Senior Debt may be entitled hereunder and to file appro
priate claims or proofs of claim in respect thereof.  Upon the failure of any
Payee to take any such action, the Agent is hereby irrevocably authorized and
empowered (in its own name or otherwise and to the extent permitted by
applicable law), but shall have no obligation, to file claims and proofs of
claim with respect thereof and the Payee hereby appoints the Agent as attorney-
in-fact for Payee to take any and all such actions; provided, how ever, that the
                                                    --------  --------
Agent shall only be permitted to file such proofs of claim upon notice to Payee
and to the extent that Payee has failed to make such filings by the date which
is ten (10) days prior to the last date on which Payee is permitted to make such
filings as a matter of law under the Bankruptcy Code (as defined below).

5.   Events of Default.  The occurrence of any of the following events shall
     -----------------
constitute an "Event of Default":

          (a) a court having jurisdiction in the premises shall enter a decree
or order for relief in respect of the Company in an involuntary case under Title
11 of the United States Code entitled "Bankruptcy" (as now or hereafter in
effect, or any successor thereto, the "Bank ruptcy Code") or any applicable
bankruptcy, insolvency or other similar law now or hereafter in

                                       9
<PAGE>

effect, which decree or order is not stayed; or any other similar relief shall
be granted under any applicable federal or state law; or

          (b) an involuntary case shall be commenced against the Company under
any applicable bankruptcy, insolvency or other similar law now or hereafter in
effect; or a decree or order of a court having jurisdiction in the premises
shall be entered for the appointment of a receiver, liquidator, sequestrator,
trustee, custodian or other officer having similar powers over the Company or
over all or substantially all of its property; or the involuntary appointment
shall occur of an interim receiver, trustee or other custodian of the Company
for all or substantially all of its property; and, in the case of any event
described in this clause (b), such event shall continue for 60 days unless
dismissed, bonded or discharged; or

          (c) an order for relief shall be entered with respect to the Company
in, or the Company shall commence, a voluntary case under the Bankruptcy Code or
any applicable bankruptcy, insolvency or other similar law now or hereafter in
effect; or the Company shall consent to the entry of an order for relief in an
involuntary case, or to the conversion of an involuntary case to a voluntary
case, under any such law, or shall consent to the appointment of or taking
possession by a receiver, trustee or other custodian for all or substantially
all of its property; or the Company shall make a general assignment for the
benefit of creditors; or

          (d)  the Company defaults in (i) payment of principal at the stated
maturity thereof (as extended as provided in Section 1.1 above), upon redemption
or upon acceleration or (ii) payment of any interest on this Promissory Note
when the same becomes due and payable in accordance with the terms hereof; and
in any such case such default shall continue unremedied for fifteen days beyond
such due date; or

          (e) the Company defaults in the performance or observance of any
obligation or condition with respect to the Credit Agreement and as a result of
such default the Indebtedness under the Credit Agreement shall become or be
declared to be due and payable prior to its stated maturity; or

                                      10
<PAGE>

          (f) one or more judgments in an aggregate amount of $25,000,000 or
more shall be entered by a court or courts of competent jurisdiction against the
Company (other than any judgment as to which, and only to the extent, a
reputable insurance company has acknowledged coverage of such claim) and any
such judgments or decrees shall not be stayed, discharged, paid, bonded or
vacated within 45 days.

6.   Remedies.  Upon the occurrence of any Event of Default under Sections 5(a),
     --------
(b), or (c), all Principal Amounts under this Promissory Note together with
accrued interest thereon shall become immediately due and payable, without
presentment, demand, notice, protest or other requirements of any kind (all of
which are hereby expressly waived by the Company).  Upon the occurrence of any
other Event of Default and during the continuance of such Event of Default, the
Payee may declare by notice to the Company and the Agent, all or any portion of
the unpaid principal amount of this Promissory Note to be immediately due and
payable, provided that until the Senior Debt shall have been paid in full in
         --------
cash, such declarations shall not be effective until the earliest of (i) the
date on which an Event of Default with respect to the Company under Sections
5(a), (b) or (c) has occurred, or (ii) the date on which the maturity of any
Senior Debt under the Credit Agreement is accelerated, or (iii) forty-five (45)
days after the date of such declaration.

7.   Definitions.  The following terms used in this Promissory Note shall have
     -----------
the following meanings (and any of such terms may, unless the context otherwise
requires, be used in the singular or the plural depending on the reference).
Any capitalized terms not otherwise defined in this Promissory Note shall have
the meaning ascribed to them in the Manufacture and Supply Agreement.

     "Action" means any action, claim, complaint, investigation, petition,
suit, or other proceeding, whether civil or criminal, in law or in equity, or
before any arbitrator or Governmental Entity.

     "Agent" means The Chase Manhattan Bank and its subsidiaries and affiliates
(or any person serving in the capacity of administrative agent under the Credit
Agreement from time to time) as administrative agent for the Banks under the
Credit Agreement and, if there is no Person serving in such capacity under the
Credit

                                      11
<PAGE>

Agreement, any agent or trustee under any refinancing or replacement thereof, in
whole or in part. The designation in writing by the Company to the Payee from
time to time of the identity of the Agent for purposes of this Promissory Note
shall be conclusive for all purposes hereof.

     "Banks" means each financial institution which is a party to the Credit
Agreement.

     "Business Day" means any day other than a Saturday, Sunday or legal holiday
under the laws of the State of New York or any other day on which banking
institutions located in such state are authorized or required by law or other
governmental action to close.

     "Credit Agreement" means the Credit Agreement dated as of __________ ___,
1997 among the Company, each financial institution which is a party thereto,
and The Chase Manhattan Bank, as administrative agent, as in effect at the
Closing (as defined in the Manufacture and Supply Agreement), and as the same
may be amended, supplemented, modified or extended, renewed, refinanced or
replaced from time to time, in whole or in part.

     "Governmental Entity" means any government or any agency, bureau, board,
commission, court, department, political subdivision, tribunal, or other
instrumentality of any government (including any regulatory or administrative
agency), whether federal, state, or local, domestic or foreign.

     "Indebtedness" means, without duplication:

     (i)  the principal of, premium (if any) and interest and related fees and
expenses (if any) in respect of (A) indebtedness of such Person for money
borrowed and (B) indebtedness evidenced by notes, debentures, bonds or other
similar instruments for the payment of which such Person is responsible or
liable;

     (ii)  all capital lease obligations of such Person;

     (iii)  all obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations of such Person and
all obligations of such Person under any title retention agreement;

                                      12
<PAGE>

     (iv)  all obligations of such Person for the reimbursement of any obligor
on any letter of credit, banker's acceptance or similar credit transaction;

     (v)  all obligations of the type referred to in clauses (i) through (iv) of
other Persons and all dividends of other Persons for the payment of which, in
either case, such Person is responsible or liable, directly or indirectly, as
obligor, guarantor or otherwise, including any guarantees of such obligations
and dividends, but, in each case, only to the extent such Person is responsible
or liable for such obligations or dividends;

     (vi)  all obligations of the type referred to in clauses (i) through (v) of
other Persons secured by any lien on any property or asset of such Person
(whether or not such obligation is assumed by such Person), the amount of such
obligation being deemed to be the lesser of the value of such property or assets
or the amount of the obligation so secured; and

     (vii)  to the extent not otherwise included in this definition, any
interest rate or currency swap agreement, any interest rate cap agreement, any
interest rate collar agreement or other similar agreement or arrangement de
signed to protect such Person or any subsidiary against fluctuations in interest
rates or currency.

     Notwithstanding any of the foregoing provisions of this definition of
"Indebtedness", (1) the amount out standing at any time of any Indebtedness
issued with original issue discount is the face amount of such Indebtedness
less the remaining unamortized portion of the original issue discount of such
Indebtedness at such time as determined in conformity with generally accepted
accounting principles, and (2) Indebtedness shall not include (A) any liability
for federal, state, local or other taxes, (B) trade accounts payable and other
accrued expenses arising in the ordinary course of business, or (C) with respect
to the deferred purchase price of property, obligations which are due within
six months after the date of placing such property in service or taking delivery
and title thereto.  The amount of Indebtedness of any Person at any date shall
be (x) the outstanding balance at such date of all unconditional obligations as
described above, and (y) the maximum liability determined by such Person's Board
of Directors, in good faith, as reasonably likely to occur, upon the

                                      13
<PAGE>

occurrence of the contingency giving rise to the obligation, of any contingent
obligations at such date.

     "Manufacture and Supply Agreement" means the Manufacture and Supply
referenced in Section 2 of this Promissory Note.

     "Permitted Junior Securities" means (a) debt securities of the Company as
reorganized or readjusted, or debt securities of the Company (or any other
company, trust or organization provided for by a plan of reorganization or
readjustment succeeding to the assets and liabilities of the Company), that, in
each case, are subordinated, to at least the same extent as this Promissory
Note, to the payment of all Senior Debt that will be outstanding after giving
effect to such plan of reorganization or readjustment, so long as (i) the rate
of interest on such debt securities (to the extent paid or payable in cash, or
property or securities other than Permitted Junior Securities) shall not exceed
the effective rate of interest on this Promissory Note on the date hereof, (ii)
such debt securities shall not be entitled to the benefits of covenants or
defaults materially more beneficial to the holders of such debt securities than
those in effect with respect to this Promissory Note on the date hereof (or the
Senior Debt, after giving effect to such plan of reorganization or
readjustment), (iii) such debt securities shall not mature prior to the date
one year following the final scheduled maturity of the Senior Debt (as modified
by such plan of reorganization or readjustment) and (iv) such debt securities
shall not provide for amortization (including sinking fund and mandatory
prepayment provisions) commencing prior to the date one year following the
final scheduled maturity date of the Senior Debt (as modified by such plan of
reorganization or readjustment) of (b) shares of stock of the Company as
reorganized or readjusted pursuant to a plan of reorganization or readjustment;
provided that, in each case with respect to clauses (a) and (b) above, (x) if a
--------
new corporation results from any such reorganization or readjustment, such
corporation assumes all Senior Debt that will be outstanding after giving effect
thereto and (y) the rights of the holders of the Senior Debt are not, without
the consent of such holders, altered by any such reorganization or
readjustment, including, without limitation, such rights being impaired within
the meaning of Section 1124 of Title 11 of the United States Code, or

                                      14
<PAGE>

any impairment of the right to receive interest accruing during the pendency of
a bankruptcy or insolvency proceeding, including proceedings under Title 11 of
the United States Code.

     "Person" means any individual, partnership, limited liability company,
joint venture, firm, corporation, association, bank, trust or other enterprise,
whether or not a legal entity, or any government or political subdivision or any
agency, department or instrumentality thereof.

     "Promissory Note" means this Promissory Note.

     "Senior Debt" means the principal of and premium, if any, and interest
(whether accrued prior to or after the commencement of any proceeding under any
law under the Bankruptcy Code or any other bankruptcy or reorganization law and
whether or not such interest is allowed as a claim in such proceeding) on, and
all fees, expenses, indemnities and other amounts owing with respect to, (a) the
Credit Agreement and (b) any other Indebtedness of the Company, whether
outstanding on the date hereof or thereafter created, incurred, assumed or
guaranteed, and, in each such case all renewals, extensions and refundings
thereof, and any Indebtedness of a successor corporation issued in exchange for
or in replacement thereof, which, in each case, (other than the case of the
Credit Agreement), by the terms of the instrument creating or evidencing the
Indebtedness it is expressly provided that such Indebtedness is superior in
right of payment to this Promissory Note; provided that the aggregate
outstanding principal amount of Indebtedness that constitutes Senior Debt,
including Indebtedness outstanding under the Credit Agreement, shall not at any
time exceed $250,000,000.

8.   Miscellaneous.
     -------------

     8.1  Notices.  All notices and other communications required or permitted
          -------
hereunder shall be in writing, shall be deemed duly given upon actual receipt,
and shall be delivered (a) in person, (b) by registered or certified mail
(air mail if addressed to an address outside of the country in which mailed),
postage prepaid, return receipt requested, (c) by a generally recognized over
night courier service which provides written acknowledgement by the addressee of
receipt, or (d) by facsimile or other generally accepted means of electronic

                                      15
<PAGE>

transmission (provided that a copy of any notice delivered pursuant to this
clause (d) shall also be sent pursuant to clause (b)), addressed as follows:

          (i)  If to the Company:

               Endo Pharmaceuticals Inc.
               P.O. Box 4144
               Wilmington, DE 19807
               Attention:  Carol A. Ammon

               with copy to:

               Kelso & Company
               320 Park Avenue
               24th Floor
               New York, NY 10022
               Attention:  General Counsel
               Fax:  (212) 223-2379

          (ii) If to Payee, at the address or fax number specified under its
          signature below;

          or to such other addresses as may be specified by like notice to the
          other party.

     8.2  Delay by Payee.  No failure or delay on the part of Payee or any other
          --------------
holder of this Promissory Note to exercise any right, power or privilege under
this Promissory Note and no course of dealing between the Company and Payee
shall impair such right, power or privilege or operate as a waiver of any
default or an acquiescence therein, nor shall any single or partial exercise of
any such right, power or privilege preclude any other or further exercise
thereof or the exercise of any other right, power or privilege.  The rights and
remedies expressly provided in this Promissory Note are cumulative to, and not
exclusive of, any rights or remedies that Payee would otherwise have.  No
notice to or demand on the Company in any case shall entitle the Company to any
other or further notice or demand in similar or other circumstances or
constitute a waiver of the right of Payee to any other or further action in any
circumstances without notice or demand.

     8.3  Headings.  Captions contained in this Promissory Note are inserted
          --------
only as a matter of convenience and in no way define, limit or extend the

                                      16
<PAGE>

scope or intent of this Promissory Note or any provision hereof.

     8.4  Governing Law.  THIS PROMISSORY NOTE SHALL BE GOVERNED BY AND
          -------------
INTERPRETED AND ENFORCED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE STATE OF
NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAWS PRINCIPLES THEREOF.


     8.5  Consent to Jurisdiction; Service of Process; Venue; Arbitration.  Each
          ---------------------------------------------------------------
party hereto hereby irrevocably and unconditionally (i) consents to the
submission to the exclusive jurisdiction of the courts of the State of New York
and of the United States of America located in the State of New York, Southern
District, for any Actions arising out of or relating to this Promissory Note or
the breach, termination or validity thereof and the transactions contemplated
by this Promissory Note, (ii) agrees not to commence any Action relating thereto
except in such courts and in accordance with the provisions of this Promissory
Note, (iii) agrees that service of any process, summons, notice, or document by
U.S. registered mail or as otherwise provided in this Promissory Note shall be
effective service of process for any Action brought in any such court, (iv)
waives any objection to the laying of venue of any Action arising out of this
Promissory Note or the transactions contemplated by this Agreement in the courts
of the State of New York or the United States of America located in the State of
New York, and (v) agrees not to plead or claim in any such court that any such
Action brought in any such court has been brought in an inconvenient forum.

     8.6  Amendments; Waivers.  Subject to Section 4 hereof, this Promissory
          -------------------
Note and any schedule or exhibit attached hereto may be amended only by
agreement in writing of all the parties.  No waiver of any provision or consent
to any exception to the terms of this Promissory Note or any agreement
contemplated hereby shall be effective unless in writing and signed by the party
to be bound and then only to the specific purpose, extent, and instance so
provided.

     8.7  Transferability.  Prior to the fifth anniversary of the Closing Date,
          ---------------
as defined in the Manufacture and Supply Agreement, this Promissory Note shall
not be transferable by Payee without the prior

                                      17
<PAGE>

written consent of the Board of Directors of the Company. Thereafter, this
Promissory Note shall be freely transferable, provided that Payee or any
subsequent holder, as applicable, shall give the Company written notice of any
such transfer (which notice shall include the name and address of the
transferee).

                                      18
<PAGE>

          IN WITNESS WHEREOF, the Company has caused this Promissory Note to be
executed and delivered by its duly authorized officer as of the day and year and
at the place first written above.


                    ENDO PHARMACEUTICALS INC.



                    By:________________________________
                    Name:
                    Title:



Accepted and agreed:
Payee

THE DUPONT MERCK PHARMACEUTICAL COMPANY



By:__________________________
Name:
Title:

Address:

                                      19