<PAGE>
 
                                                                   EXHIBIT 10.31


                                                                                



                               LICENSE AGREEMENT

                                    between

                          Bristol-Myers Squibb Company

                                      and

                            PathoGenesis Corporation


                               September 30, 1998
<PAGE>
 
                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                     Page
                                                                     ----
<C>           <S>                                                    <C>
Article 1.    Definitions............................................  1
        1.1   Affiliate..............................................  2
        1.2   Compound...............................................  2
        1.3   Field of Use...........................................  2
        1.4   FDA....................................................  2
        1.5   IND....................................................  2
        1.6   Inhalation Device......................................  2
        1.7   Intermediate...........................................  2
        1.8   Licensed Patent(s).....................................  2
        1.9   Licensed Product.......................................  3
        1.10  NDA....................................................  3
        1.11  Net Sales..............................................  3
        1.12  Sale(s)................................................  3
        1.13  Sublicensee............................................  3
        1.14  Technical Information..................................  4
        1.15  Territory..............................................  4
        1.16  Valid Claim............................................  4

Article 2.    License................................................  4
        2.1   Grant of Nonexclusive License for Research.............  4
        2.2   Grant of Licenses for the Licensed Product.............  4
        2.3   Systemic Administration of Compound....................  5

Article 3.    Disclosure and Confidentiality.........................  5
        3.1   Disclosure of the Technical Information................  5
</TABLE>

                                       i
<PAGE>
 
<TABLE>
<C>           <S>                                                    <C>
        3.2   Meetings Regarding Technical Information.............   5
        3.3   Confidentiality of the Technical Information.........   5
        3.4   Confidentiality of Development and Commercialization 
              Activities...........................................   6
        3.5   Injunctive Relief....................................   7

Article 4.    Development, Commercialization and Regulatory
              Activities...........................................   7
        4.1   NDA Filing and Development of the Licensed Product...   7
        4.2   Regulatory Cooperation from BMS......................   8
        4.3   Adverse Information and Event Reporting..............   8
        4.4   Generic Names and Trademarks.........................   8
        4.5   Expenses.............................................   9
        4.6   Publications.........................................   9

Article 5.    Payments.............................................   9
        5.1   Consideration and Method of Payment..................   9
        5.2   Progress Payments by PathoGenesis....................   9
        5.3   Royalty Payments by PathoGenesis.....................   9
        5.4   Royalty Reports......................................  10
        5.5   Reduction of Royalties...............................  10
        5.6   Books and Records....................................  11
        5.7   Inspection...........................................  11
        5.8   Withholding Tax......................................  11

Article 6.    Marking..............................................  12
        6.1   Marking the Licensed Product.........................  12

Article 7.    Maintenance of the Licensed Patents and Prosecution
              of Infringements of the Licensed Patents.............  12
        7.1   Maintenance of the Licensed Patents..................  12
        7.2   Extension of Licensed Patent Term....................  12
</TABLE>

                                      ii
<PAGE>
 
<TABLE>
<C>           <S>                                                    <C>
        7.3   Notice of Infringement................................  12
        7.4   PathoGenesis' Right to Prosecute Infringements........  12
        7.5   BMS's Option to Prosecute Infringements...............  13

Article 8.    Manufacture and Supply of the Intermediate............  14
        8.1   Manufacture, Supply and Specifications................  14
        8.2   Pricing and Payment...................................  14
        8.3   Orders................................................  15
        8.4   Delivery, Testing and Acceptance......................  15
        8.5   Use...................................................  15
        8.6   Other Terms...........................................  15

Article 9.    Representations and Warranties........................  15
        9.1   BMS's Representations and Warranties..................  15
        9.2   PathoGenesis' Representations and Warranties..........  18

Article 10.   Indemnification.......................................  18
        10.1  Indemnification of PathoGenesis.......................  18
        10.2  Indemnification of BMS................................  19

Article 11.   Term and Termination..................................  19
        11.1  Term..................................................  19
        11.2  Termination for Abandonment...........................  19
        11.3  Termination in a Specific Country.....................  19
        11.4  Termination for Breach................................  20
        11.5  Sales after Termination...............................  20
        11.6  Survival..............................................  20
        11.7  Rights in Bankruptcy..................................  20

Article 12.   Dispute Resolution....................................  21
</TABLE>

                                      iii
<PAGE>
 
<TABLE>
<C>           <S>                                                    <C>
        12.1  Negotiation...........................................  21
        12.2  Mediation.............................................  21
        11.3  Arbitration...........................................  21
        11.4  Injunctive Relief.....................................  22

Article 13.   Miscellaneous.........................................  22
        13.1  Entire Agreement......................................  22
        13.2  Notices...............................................  22
        13.3  Governing Law.........................................  23
        13.4  Assignability.........................................  23
        13.5  Waivers and Amendments................................  23
        13.6  Severability..........................................  23
        13.7  Section Headings......................................  23
        13.8  Counterparts..........................................  24
        13.9  Further Assurances....................................  24
        13.10 Force Majeure.........................................  24
        13.11 Compliance of Law.....................................  24
        13.12 Confidentiality of Terms of Agreement.................  24
</TABLE>
 
 
Exhibit A  --  Description of BMS-180680

Exhibit B  --  Licensed Patents

Exhibit C  --  Schedule for Disclosure of the Technical Information

Exhibit D  --  Schedule for Disclosure of Technical Information for Preclinical
               and Clinical Study Data

Exhibit E  --  Schedule for Regulatory Cooperation from BMS

Exhibit F  --  Press Release

                                      iv
<PAGE>
 
                               LICENSE AGREEMENT

     THIS LICENSE AGREEMENT ("Agreement") is dated and entered into as of
September 30, 1998 (the "Effective Date"), between Bristol-Myers Squibb Company,
a Delaware corporation having a principal place of business at Route 206 &
Province Line Road, Princeton, New Jersey  08540 ("BMS"), and PathoGenesis
Corporation, a Delaware corporation having its principal place of business at
201 Elliott Avenue West, Suite 150, Seattle, Washington 98119 ("PathoGenesis").

                                    RECITALS

     A.  BMS (i) has developed a certain Compound, (ii) has filed an IND
application relating to the Compound, (iii) has abandoned the IND application,
and (iv) possesses certain Licensed Patents and Technical Information relating
to the Compound, the manufacture of the Compound, the use of the Compound and
the testing of the Compound;

     B.  BMS desires to grant to PathoGenesis, and PathoGenesis desires to
acquire from BMS, a worldwide license, with the right to grant sub-licenses,
under the Licensed Patents and the Technical Information to develop, make, have
made, use, import, export, offer for sale and sell the Licensed Product in the
Field of Use; and

     C.  PathoGenesis is interested in conducting additional studies to obtain
regulatory approval for marketing the Licensed Product and is interested in
marketing the Licensed Product in the Field of Use.

                                   AGREEMENT

     In consideration of the recitals set forth above, the mutual covenants,
terms and conditions set forth below, and other good and valuable consideration,
the receipt and sufficiency of which is hereby acknowledged, BMS and
PathoGenesis agree as follows:

 
ARTICLE 1.  DEFINITIONS.

     As used in this Agreement, the following terms shall have the following
meanings:
<PAGE>
 
     1.1  An "Affiliate" of a party shall mean any person or entity that
directly or indirectly owns or controls, is owned or controlled by or is under
common ownership or control with such party. "Control" of a party shall mean
beneficial ownership, directly or indirectly, of 50% or more of the outstanding
voting shares or securities or the ability otherwise to elect a majority of the
board of directors or other managing authority of the party.

     1.2  "Compound" shall mean: (i) BMS-180680, which is described in Exhibit A
of this Agreement, and any of its salts, esters, crystalline and amorphous
forms; and (ii) any other compounds claimed in the GC280 Licensed Patents.

     1.3  "Field of Use" shall mean inhalation, non-systemic administration of
the Compound or the Licensed Product for the treatment or prophylaxis of
respiratory tract infectious diseases. Incidental systemic absorption of the
Compound administered by inhalation shall not be considered outside the Field of
Use.

     1.4  "FDA" shall mean the United States Food and Drug Administration or any
successor to that agency.

     1.5  "IND" shall mean Investigational New Drug Application designation by
the FDA.

     1.6  "Inhalation Device" shall mean any nebulizer or other inhalation
mechanism, device or apparatus used to deliver the Compound or Licensed Product
to the respiratory tract of a patient, person or end user, including the
packaging therefor and any reconstitution system therefor.

     1.7  "Intermediate" shall mean the intermediate compound known as SQ-27,710
which BMS currently manufactures for the production of aztreonam pursuant to a
license granted by Fujisawa Pharmaceutical Co., Ltd. under U.S. Patent No.
4,560,765 and related foreign patents.

     1.8  "Licensed Patent(s)" shall mean (i) all patents, patent applications,
provisional patent applications, divisional applications, continuation
applications, continuation-in-part applications, continued prosecution
applications, renewals, reissues, reexaminations, extensions and substitutions
identified by docket numbers GC155 (including GC155B and GC155C) and GC280
(including GC280A, GC280B and GC280C) in Exhibit B of this Agreement, (ii) all
related divisional applications, continuation applications, continuation-in-part
applications, continued prosecution applications, renewals, reissues,
reexaminations, extensions, substitutions, and counterparts thereof in the
Territory, and (iii) all patents issuing therefrom. "GC155 Licensed Patent(s)"
shall mean the Licensed Patents identified by the docket number GC155 (including
GC155B and GC155C) in Exhibit B and all related divisional applications,
continuation applications, continuation-in-part applications, continued
prosecution applications, renewals, reissues, reexaminations, extensions,
substitutions, and counterparts thereof in the Territory, and all patents
issuing therefrom. "GC280 Licensed Patent(s)" shall mean the Licensed Patents
identified by docket number GC280 (including GC280A, GC280B and GC280C) in
Exhibit B and all related divisional applications, continuation applications,
continuation-in-part applications, continued prosecution applications, renewals,
reissues, 

                                       2
<PAGE>
 
reexaminations, extensions, substitutions, and counterparts thereof in the
Territory, and all patents issuing therefrom.

     1.9  "Licensed Product" shall mean any product containing the Compound.

     1.10  "NDA" shall mean a New Drug Application filed with the FDA pursuant
to 21 U.S.C. Section 355 et. seq. or any regulations thereunder.

     1.11  "Net Sales" shall mean the amount invoiced by PathoGenesis, its
Affiliates or Sublicensees for Sales of the Licensed Product less the following
deductions, but only to the extent that the amounts sought to be deducted are
part of the total invoiced amount: (a) discounts, returns, allowances,
commissions and wholesaler chargebacks allowed and taken; (b) import, export,
excise, sales or use taxes, value added taxes, and other taxes, tariffs and
duties imposed on such Sales; (c) freight, freight insurance, packaging,
handling, transportation and other insurance relating to such Sales; and (d)
amounts allowed or credited on such Sales for retroactive price reductions or
rebates including, but not limited to, Medicaid rebates. PathoGenesis, may, at
its option, allocate the above deductions from Sales of the Licensed Product
based upon accruals estimated reasonably and consistent with PathoGenesis'
standard business practices, and in any event in accordance with generally
accepted accounting principles applied on a consistent basis, provided, further,
that such deductions are of a type (such as Medicaid rebates) the actual amounts
of which cannot reasonably be determined at the time royalties on the related
Net Sales are due under this Agreement. If PathoGenesis elects to utilize such
accruals, actual deductions will be calculated and, if applicable, a "true-up"
made, on an annual basis. If the Licensed Product contains, in addition to the
Compound, one other therapeutically active ingredient, Net Sales shall be deemed
to be [********]% of the Net Sales of such Licensed Product. If the Licensed
Product contains, in addition to the Compound, two or more other therapeutically
active ingredients, Net Sales shall be deemed to be [********]% of the Net Sales
of such Licensed Product. If the Licensed Product is sold in combination with
any Inhalation Device, Net Sales shall be deemed to be the Net Sales of the
combination of the Licensed Product and such Inhalation Device multiplied by the
fraction [********]. If either the Licensed Product or the Inhalation Device is
not sold separately, or if the fraction is less than [********], Net Sales shall
be deemed to be [********]% of the Net Sales of the combination of the Licensed
Product and such Inhalation Device.

     1.12  "Sale(s)" shall mean the sale or sales, whether by PathoGenesis, an
Affiliate of PathoGenesis or a Sublicensee of PathoGenesis, of the Licensed
Product to a third party that is not an Affiliate or Sublicensee of the seller.

     1.13  "Sublicensee" shall mean any person or entity which sublicenses any
or all of the rights under the license provided in Article 2.2 of this Agreement
directly or indirectly from PathoGenesis.

* Confidential treatment is requested; filed separately with the Securities and
  Exchange Commission.

                                       3
<PAGE>
 
     1.14  "Technical Information" shall mean any and all know-how, technical
facts, data, regulatory data and other information relating to the Compound or
the Licensed Product which are reasonably useful in the Field of Use, whether
written or oral, tangible or intangible, which is as of the date hereof known,
controlled or possessed by BMS or an Affiliate of BMS including, but not limited
to: (a) information relating to the manufacture or use of the Compound; (b)
information relating to intermediates for manufacturing the Compound; (c)
information, if any, relating to the manufacture or use of the Licensed Product;
(d) information, if any, relating to formulation of the Compound into the
Licensed Product; (e) all pre-IND applications, IND applications and clinical
data available on or for the Compound; and (f) all information regarding the
Compound or the Licensed Product required to comply with applicable laws or
regulations in the Territory. Technical Information specifically includes all
official and unofficial correspondence and regulatory filings and updates, study
reports, investigator brochures, formulation information, bioavailability
information, bioanalytical assays, metabolism data, mechanisms of action,
antibiotic resistance information, specifications and analytical methods for the
Compound and the Licensed Product, manufacturing processes, intermediate source
and supply information, stability data, side effect information and data,
adverse reaction information and data, toxicity information and data, and all
analytical, pharmaceutical, biological, and chemical information and data.
Technical Information also specifically includes all official and unofficial
patent office or agency correspondence relating to issued, unissued, published
or unpublished patent applications or patents relating to the Compound, use of
the Compound or manufacture of the Compound.

     1.15  "Territory" shall mean the entire world.

     1.16  "Valid Claim" shall mean a claim in an issued patent included within
the GC280 Licensed Patents which has not expired, lapsed, been canceled or
become abandoned and has not been finally found to be invalid (or not valid) or
unenforceable by an unreversed or unappealable final decision or judgment of a
court or other authority or agency of competent jurisdiction.

ARTICLE 2.  LICENSE.

     2.1  Grant of License for Research.  BMS hereby grants to PathoGenesis a
non-transferable non-exclusive license under the Licensed Patents and the
Technical Information to make, have made, import, export and use (but not to
sell) the Compound solely for research purposes in the Territory. PathoGenesis
may contract with one or more third parties to conduct such contract research on
behalf of PathoGenesis. Such license for research purposes shall not include the
right to sub-license the Compound or the right to administer any amount or form
of the Compound systemically to humans.

     2.2  Grant of Licenses for the Licensed Product.

     A.  BMS hereby grants to PathoGenesis an exclusive license, including the
right to grant sub-licenses, under the GC280 Licensed Patents and the Technical
Information, together 

                                       4
<PAGE>
 
with a non-exclusive license, including the right to grant sub-licenses, under
the GC155 Licensed Patents, to develop, make, have made, use, import, export,
offer for sale and sell the Licensed Product in the Field of Use in the
Territory.

     B.  BMS hereby grants to PathoGenesis a non-exclusive license, including
the right to grant sub-licenses, under the Licensed Patents to make, have made,
import, export and use any compound or process claimed therein for manufacturing
the Compound or the Licensed Product.

     C.  The licenses under this Article 2.2 shall not include the right to
administer any amount or form of the Compound systemically to humans, other than
(i) any incidental systemic absorption of the Compound administered by
inhalation, or (ii) as may be required by a regulatory agency or authority in
the United States, the European Union or Japan to obtain approval for
commercializing the Licensed Product.

     2.3  Systemic Administration of Compound.  Except as provided in Article
2.2C of this Agreement, PathoGenesis (whether or not pursuant to any of the
licenses granted under this Article 2) shall not, and shall not authorize any
other person or entity to, administer any amount or form of the Compound
systemically to humans.

ARTICLE 3.  DISCLOSURE AND CONFIDENTIALITY.

     3.1  Disclosure of the Technical Information.  Pursuant to the schedule
provided in Exhibit C of this Agreement, BMS shall disclose and provide the
Technical Information to PathoGenesis.

     3.2  Meetings Regarding Technical Information.  Pursuant to the schedule
provided in Exhibit D of this Agreement, representatives of BMS shall meet with
representatives of PathoGenesis to discuss and review the Technical Information.
Each party shall bear its own expenses in connection with such meetings.

     3.3  Confidentiality of the Technical Information.

     A.  Except as expressly permitted under this Agreement, PathoGenesis shall
not disclose or permit to be disclosed any part of the Technical Information to
any third party and shall use its commercially reasonable efforts to maintain
the confidentiality of the Technical Information. PathoGenesis shall take such
steps and implement such procedures with respect to the Technical Information no
less stringent than what it takes with respect to its own confidential and
secret information.

     B.  PathoGenesis (or any Affiliate of PathoGenesis or Sublicensee to whom
disclosure has been made in accordance with clause (vi) of this paragraph) may
disclose the Technical Information to third parties to the extent necessary for
research relating to and the development and commercialization of the Licensed
Product including, without limitation: (i) 

                                       5
<PAGE>
 
pursuant to Article 4 of this Agreement; (ii) publication or presentation at
professional conferences, scientific congresses or other meetings to obtain
scientific review, discussion, comment and analysis relating to the Compound or
the Licensed Product; (iii) when required by appropriate regulatory agencies
(for filings, communication or other purposes) or pursuant to court order; (iv)
to actual or potential distributors, wholesalers, retailers, purchasers,
patients or end users of the Licensed Product; (v) to enable the scientific
community to evaluate PathoGenesis' research, development, experimentation,
studies, testing or programs; (vi) to PathoGenesis' Affiliates, Sublicensees or
potential Sublicensees under this Agreement, but only after such Affiliates,
Sublicensees or potential Sublicensees have entered into agreements obligating
such Affiliates, Sublicensees or potential Sublicensees to the same terms of
confidentiality as are set forth in this Agreement; (vii) to third parties
engaged by PathoGenesis to conduct the research, development and
commercialization activities; or (viii) under the circumstances set forth in
Article 3.3C of this Agreement, in each case (other than clause (viii)) only to
the extent necessary for the furtherance of the research, development or
commercialization of the Licensed Product.

     C.  The provisions of this Article 3.3 of this Agreement regarding
confidentiality shall not apply to any Technical Information which: (i) was
known or used by PathoGenesis or an Affiliate of PathoGenesis prior to its date
of disclosure to them; (ii) either before or after the date of disclosure by BMS
or its Affiliates, is lawfully disclosed to PathoGenesis or an Affiliate of
PathoGenesis by an independent, unaffiliated third party rightfully in
possession of such Technical Information without an obligation of
confidentiality to BMS with respect to such information and who did not obtain
the same, directly or indirectly, from BMS; (iii) either before or after the
date of the disclosure by BMS or its Affiliates, becomes published or generally
known to the trade or the public through no fault or omission on the part of
PathoGenesis or its Affiliates; or (iv) is independently developed by
PathoGenesis or an Affiliate of PathoGenesis without use of the Technical
Information.

     3.4  Confidentiality of Research, Development and Commercialization
Activities.

     A.  BMS shall not disclose or permit to be disclosed to any third party
any part of the information regarding the research, development and
commercialization activities undertaken by PathoGenesis, Affiliates of
PathoGenesis or Sublicensees which PathoGenesis discloses to BMS and designates
as confidential. BMS shall not use such information in furtherance of its own
commercial activities and shall use its commercially reasonable efforts to
maintain the confidentiality of all such information. BMS shall take such steps
and implement such procedures with respect to such information no less stringent
than what it takes with respect to its own confidential and secret information.
In the event PathoGenesis orally discloses such information to BMS, PathoGenesis
shall provide BMS with a written description of such information and identify
such information marked as confidential within thirty days of such disclosure.

     B.  The provisions of this Article 3.4 of this Agreement regarding
confidentiality shall not apply to any information relating to the research,
development or commercialization 

                                       6
<PAGE>
 
activities which: (i) was known or used by BMS or an Affiliate of BMS prior to
its date of disclosure by PathoGenesis; (ii) either before or after the date of
disclosure by PathoGenesis or its Affiliates, is lawfully disclosed to BMS or an
Affiliate of BMS by an independent, unaffiliated third party rightfully in
possession of information relating to such research, development and
commercialization activities without an obligation of confidentiality to
PathoGenesis or an Affiliate of PathoGenesis with respect to such information
and who did not obtain the same, directly or indirectly, from PathoGenesis;
(iii) either before or after the date of the disclosure to BMS or its
Affiliates, becomes published or generally known to the public through no fault
or omission on the part of BMS or its Affiliates; or (iv) is independently
developed by BMS or an Affiliate of BMS without use of information relating to
such research, development or commercialization activities.

     3.5  Injunctive Relief.  Each party acknowledges that the restrictions
placed on it under Article 3 of this Agreement are reasonable and necessary, and
that the other party may not have an adequate remedy at law for breach of any of
the confidentiality requirements in Article 3 of this Agreement and hereby
consents to the enforcement of the same by means of temporary or permanent
injunction issued by any court having jurisdiction thereof. The disclosing party
shall be entitled to assert any claim it may have for damages resulting from the
breach of such covenants in addition to seeking injunctive or other relief.

ARTICLE 4.  DEVELOPMENT, COMMERCIALIZATION
            AND REGULATORY ACTIVITIES.

     4.1  NDA Filing and Development of the Licensed Product.

     A.  PathoGenesis shall use its commercially reasonable efforts to develop
and commercialize the Licensed Product. PathoGenesis shall own all resulting
data, reports and information and all rights arising from its research,
development and commercialization activities and efforts including, but not
limited to, all data, reports, information and rights arising out of any NDA for
the Licensed Product, any FDA approval thereof or any corresponding application
or approval in any country in the Territory.

     B.  PathoGenesis, Affiliates of PathoGenesis and Sublicensees may prepare,
file, prosecute and maintain, during the term of this Agreement, all necessary
and appropriate applications, submissions and filings with the appropriate
regulatory authorities, to obtain approval in each country within the Territory
in which PathoGenesis, any Affiliate of PathoGenesis or any Sublicensee intends
to market the Licensed Product. Without prejudice to PathoGenesis' obligation to
use its commercially reasonable efforts to develop and commercialize the
Licensed Product (and any liability arising from its failure to do so),
PathoGenesis makes no representation or warranty that PathoGenesis, any
Affiliate of PathoGenesis or any Sublicensee will obtain approvals for the
Licensed Product in any country in the Territory and PathoGenesis, Affiliates of
PathoGenesis and Sublicensees shall not be liable to BMS for any damages or
other compensation if PathoGenesis, Affiliates of PathoGenesis or 

                                       7
<PAGE>
 
Sublicensees use their commercially reasonable efforts, but do not obtain
approvals for the Licensed Product.

     C.  BMS shall promptly provide PathoGenesis with a full and complete copy
of BMS's IND application relating to BMS-180680.

     4.2  Regulatory Cooperation from BMS.  Pursuant to the schedule provided in
Exhibit E of this Agreement, BMS shall provide reasonable assistance to
PathoGenesis in connection with PathoGenesis making the necessary submissions
and filings for obtaining regulatory approvals for the Licensed Product.

     4.3  Adverse Information and Event Reporting.  In the event that BMS or any
of its Affiliates conducts further research, development, experiments, programs,
studies or tests which include the administration of the Compound to humans, or
develops or commercializes any product containing the Compound for human use,
BMS shall immediately provide PathoGenesis written notice thereof and each party
shall promptly notify the other party of any information or data which comes to
its attention that could indicate or reveal the safety or efficacy of the
Compound or the Licensed Product in humans where such information or data is
obtained as a result of such party's, Affiliate's or licensee's research,
development or commercialization activities. Each party shall report to the
other in as much detail as possible, within 48 hours from receipt of the
information, any experience coincident with the use of the Compound or the
Licensed Product at any dose, whether or not considered drug related, that
suggests a significant hazard, contraindication, side effect or precaution. This
includes, but is not limited to, any serious adverse experience coincident with
the use of the Compound or the Licensed Product. A serious adverse experience
includes, at minimum, any event coincident with the use of the Compound or the
Licensed Product that results in any of the following outcomes: death, a life-
threatening experience, inpatient hospitalization, prolongation of an existing
hospitalization, a persistent or significant disability or incapacity, or a
congenital anomaly or birth defect. In the event that BMS or any of its
Affiliates grants any license to a third party to conduct further research,
development, experiments, programs, studies or tests which include the
administration of the Compound to humans, or to develop or commercialize any
product containing the Compound for human use, BMS shall immediately provide
PathoGenesis written notice thereof.

     4.4  Generic Names and Trademarks.  PathoGenesis may apply to the
appropriate regulatory agencies including USAN for a generic name for the
Compound. PathoGenesis, its Affiliates and Sublicensees may select and use one
or more trademarks in conjunction with the research, development and
commercialization of the Licensed Product and may apply for and obtain
registration of such trademarks in the United States Patent and Trademark Office
and other corresponding agencies in each country in the Territory in which
PathoGenesis, any Affiliate of PathoGenesis or any Sublicensee markets or
intends to market the Licensed Product. PathoGenesis, its Affiliates or
Sublicensees shall own all such trademark rights, trademark registrations and
all goodwill associated therewith. No express or implied right or license is
granted by this Agreement to either party to use in any manner the name or other
trade name or trademark of the other party.

                                       8
<PAGE>
 
     4.5  Expenses.  Each party shall bear all of its expenses incurred in
exercising it rights and performing its duties under Article 4 of this
Agreement.

     4.6  Publications.  Subject to Article 3 of this Agreement, PathoGenesis
may publish the results or present at professional conferences, scientific
congresses or other meetings the results of any of the research, development or
commercialization activities or regulatory applications.

ARTICLE 5.  PAYMENTS                     .

     5.1  Consideration and Method of Payment.  In consideration for the
licenses granted by BMS under this Agreement, as the fee for furnishing all
Technical Information to PathoGenesis and for all BMS representatives and
cooperation to be provided by BMS, PathoGenesis shall pay to BMS in United
States Dollars by wire transfer to the bank account designated by BMS the
amounts set forth in Article 5.2 and Article 5.3 of this Agreement, subject to
any deduction permitted under Articles 5.5 or 5.8 of this Agreement.

     5.2   Progress Payments by Pathogenesis.  Subject to the terms and
conditions of this Agreement, PathoGenesis shall pay to BMS the following one-
time payments of:

          A.   $2,000,000 within five business days after the Effective Date of
               this Agreement;

          B.   $2,000,000 on or prior to January 11, 1999;

          C.   [********] within five business days after [********]; and

          D.   [********] within five business days after [********].

The payments under this Article 5.2 are not refundable or creditable towards any
Royalty or Step-Down Royalty.

     5.3  Royalty Payments by PathoGenesis.  Subject to the terms and conditions
of this Agreement, PathoGenesis shall pay to BMS the following royalty payments:

          A.   a royalty of [********] percent of the Net Sales from Sales of
               the Licensed Product if [********] ("Royalty" or "Royalties"); or

* Confidential treatment is requested; filed separately with the Securities and
  Exchange Commission.

                                       9
<PAGE>
 
          B.   a step-down royalty of [********] percent of the Net Sales from
               Sales of the Licensed Product [********] ("Step-Down Royalty" or
               "Step-Down Royalties").

Notwithstanding anything in this Agreement to the contrary, PathoGenesis shall
not owe any Step-Down Royalty to BMS on any Sales of the Licensed Product made
in the Territory after the [********] anniversary of the Effective Date of this
Agreement.  PathoGenesis shall pay to BMS the Royalty or the Step-Down Royalty
owed by PathoGenesis to BMS on Sales of the Licensed Product on a calendar-
quarterly basis, within 60 days following the end of the calendar quarter during
which the Sales in question were made.  Upon payment of a Royalty or Step-Down
Royalty, as applicable, for any Sale of a Licensed Product, the royalty
obligation under this Agreement with respect to that Licensed Product shall be
deemed exhausted, without, however, prejudice to BMS's right to claim that a
Royalty, instead of a Step-Down Royalty, should apply to such Sale.
PathoGenesis' obligation to pay Royalties or Step-Down Royalties to BMS under
this Agreement is imposed only once with respect to any Sale of the Licensed
Product, regardless of the number of Valid Claims or other claims within the
Licensed Patents that may cover the Compound or the Licensed Product, use of the
Compound or the Licensed Product or manufacture of the Compound or the Licensed
Product.  There shall be no minimum or other unearned Royalties or Step-Down
Royalties due to BMS under this Agreement.

     5.4  Royalty Reports.  After the first Sale of the Licensed Product in
the Territory, PathoGenesis shall provide BMS with calendar-quarterly written
royalty reports, within 60 days from the last day of each calendar quarter
during the term of the Agreement.  Each report shall include a country-by-
country summary of the Net Sales of the Licensed Product for Sales made during
the calendar quarter in question on which a Royalty or Step-Down Royalty is
payable and the Royalties or Step-Down Royalties which are payable on such
Sales.  Sales made in currencies other than United States Dollars shall be
converted to United States Dollars on the basis of the average exchange rate for
the calendar quarter in which such Sales were made as listed in the Wall Street
Journal.  Any objection by BMS to the accuracy or completeness of any such
reports must be made in writing to PathoGenesis within two years after the
report is provided to BMS, or such report shall be deemed to be true and
correct.

     5.5  Reduction of Royalties.

     A.  If [********], PathoGenesis' obligations to pay Royalties or Step-Down
Royalties to BMS on Net Sales [********] shall be reduced by [********] of the
amount of the royalties paid or payable [********], but PathoGenesis' obligation
to pay the Royalty or Step-Down Royalty shall in no event, after giving effect
to any deduction permitted under Article 5.5B of this Agreement, be reduced to
below [********]% of the otherwise applicable Royalty or Step-Down Royalty.  It
shall be considered [********].

* Confidential treatment is requested; filed separately with the Securities and
  Exchange Commission.

                                       10
<PAGE>
 
     B.  If [********], BMS shall give prompt written notice to PathoGenesis.
For so long as [********], PathoGenesis' obligations to pay Royalties and not
Step-Down Royalties with respect to Sales of the Licensed Product [********]
under this Agreement shall be reduced by [********]%, provided that such
Royalties shall in no event, after giving effect to any deduction permitted
under Article 5.5A of this Agreement, be reduced to below [********]% of
otherwise applicable Royalties.

     5.6  Books and Records.  PathoGenesis shall, and shall cause its Affiliates
and Sublicensees to, keep full, true and accurate books and records which
disclose the Net Sales of the Licensed Product, the number of Licensed Products
sold in each country of the Territory and all matters relating to those Sales
which are relevant for the purposes of determining the Royalty or Step-Down
Royalty to be paid by PathoGenesis to BMS. Such books and records shall be
retained for three years following the occurrence of such Sales.

     5.7  Inspection.  BMS, at its own expense, shall have the right during
normal business hours on 30 days' prior written notice to PathoGenesis and not
more than once in any calendar year to have a nationally recognized independent
public accounting firm selected by BMS and reasonably acceptable to PathoGenesis
examine the relevant books and records of PathoGenesis, its Affiliates and
Sublicensees for the purpose of verifying the Royalty and Step-Down Royalty due
under Article 5.3 of this Agreement.  Such accounting firm shall not work on a
contingency fee basis, shall execute and deliver to PathoGenesis a standard
reasonable confidentiality agreement and shall not disclose to BMS any
information relating to PathoGenesis' business, except whether PathoGenesis
Royalty and Step-Down Royalty reports are correct or incorrect, and if
incorrect, the specific details concerning any discrepancies and the amounts of
the Royalty or Step-Down Royalty due under Article 5.3 of this Agreement.  If
such examination reveals a discrepancy, PathoGenesis shall pay to BMS any
additional Royalty or Step-Down Royalty owed to BMS, or BMS shall refund to
PathoGenesis any excess Royalty or Step-Down Royalty payments made by
PathoGenesis, as appropriate.  In the event that the discrepancy amounts to an
underpayment by PathoGenesis of [********]% or more of the Royalty or Step-Down
Royalty due under Article 5.3 of this Agreement, PathoGenesis shall promptly
reimburse BMS for its out-of-pocket expenses reasonably incurred in connection
with such examination.

     5.8  Withholding Tax.  Any and all withholding taxes or similar charges
imposed by any government on amounts due from PathoGenesis under this Agreement
will be deducted from the amounts due and paid to BMS, will be paid by
PathoGenesis to the proper taxing authority, and proof of payment of said taxes
or other charges will  be promptly secured and sent to BMS as evidence of such
payment.

* Confidential treatment is requested; filed separately with the Securities and
  Exchange Commission.

                                       11
<PAGE>
 
ARTICLE 6.  MARKING.

     6.1  Marking the Licensed Product.  BMS shall provide PathoGenesis the
patent number and country of each of the Licensed Patents when issued by
providing suitable written notice to PathoGenesis.  PathoGenesis, its Affiliates
and Sublicensees shall use their commercially reasonable efforts to place in a
conspicuous location on the Licensed Product, a patent notice in accordance with
and when required by applicable laws of the country within the Territory in
which the Licensed Product is sold and in which there is a Valid Claim of a
Licensed Patent covering the Licensed Product.  With respect to Licensed Patents
owned by the BMS, PathoGenesis will respond to any request for disclosure under
35 U.S.C. (S)287(b)(4)(B) only by notifying BMS of the request for disclosure.

ARTICLE 7.  MAINTENANCE OF THE LICENSED PATENTS AND PROSECUTION
            OF INFRINGEMENTS OF THE LICENSED PATENTS.

     7.1  Maintenance of the Licensed Patents.  BMS shall take all reasonable
steps and pay all fees necessary to prosecute, obtain and maintain the GC280
Licensed Patents in the Territory, including all prosecution costs, issue fees,
maintenance fees and annuities.  BMS shall promptly notify PathoGenesis in
writing of the filing or issuance of any of the GC280 Licensed Patents.  Upon
the reasonable written request of PathoGenesis, BMS shall provide to
PathoGenesis copies of all actions, amendments and correspondence relating to
such Licensed Patents, and shall otherwise keep PathoGenesis up to date on the
status of all such Licensed Patents.

     7.2  Extension of Licensed Patent Term.  Upon the reasonable, written
request of PathoGenesis, BMS shall execute and file any appropriate application
and related documents to extend the term of any GC280 Licensed Patent.

     7.3  Notice of Infringement.  If, during the term of this Agreement,
either party (i) becomes aware of any third party infringement, threatened
infringement or suspected infringement of any GC280 Licensed Patent in the Field
of Use in the Territory, or (ii) becomes a party to any infringement action
relating to any of the GC280 Licensed Patents, the party having such knowledge
shall promptly give written notice to the other party thereof, with all
available details.  The party involved in any such action or controlling any
action under Article 7.4 or 7.5 of this agreement shall keep the other party
reasonably informed of the status of the action including but not limited to the
filing of the action, the settlement or resolution of the action, and all
significant developments during the pendency of such action.  The controlling
party shall endeavor to solicit the participation and views of the other party
during each stage of the action and shall reasonably consider such other party's
views, although the controlling party's judgment shall control.

     7.4  PathoGenesis' Right to Prosecute Infringements. PathoGenesis, at
PathoGenesis' expense, shall have the first right, but not the obligation, to
take action in its own name, in the name of its Affiliates and its Sublicensees,
and in the name of BMS, as PathoGenesis reasonably 

                                       12
<PAGE>
 
deems necessary, to restrain any infringement, threatened infringement or
suspected infringement of any GC280 Licensed Patent in the Field of Use and to
recover profits and damages. BMS shall cooperate with PathoGenesis in all
respects in such action and shall cause any of BMS's employees and agents to
give depositions and testify when reasonably requested by PathoGenesis and make
available to PathoGenesis copies of any and all relevant records, papers,
documents, information and specimens, if necessary under an appropriate
protective order. PathoGenesis shall reimburse BMS for its out of pocket
expenses incurred in providing such cooperation to PathoGenesis. BMS, at BMS's
option and expense, may actively participate as a party in such action.
PathoGenesis shall have the sole and exclusive right to control prosecution of
such action, and the right to settle and compromise such action or dispute. In
the event any monetary recovery in connection with such action or settlement is
obtained, such recovery shall be applied in the following priority: first, to
reimburse PathoGenesis for its total expenses incurred in prosecuting such
action, including filing fees, reasonable attorneys' fees, reasonable local
counsel fees, expert and other witness fees and all other reasonable costs;
second, if BMS actively participates as a party in such action, to reimburse BMS
for its total expenses incurred in prosecuting such action, including filing
fees, reasonable attorneys' fees, reasonable local counsel fees, expert and
other witness fees and all other reasonable costs not previously reimbursed by
PathoGenesis; third, to be shared by the proportion and up to the extent of any
damages established including, but not limited to, PathoGenesis' lost profits
and BMS's lost Royalties or Step-Down Royalties; and fourth, the balance, if
any, to be retained by PathoGenesis. If PathoGenesis brings such action and does
not prevail, PathoGenesis shall only owe to BMS a Step-Down Royalty for Sales of
the Licensed Product made in such country retroactive from the date on which
PathoGenesis brought such action. In such event, PathoGenesis shall deduct any
excess payments from future royalty payments otherwise owed to BMS, but no
refund of royalty paid shall be required of BMS.

     7.5  BMS's Option to Prosecute Infringements.  If PathoGenesis does not
file an action to restrain such infringement, threatened infringement or
suspected infringement of any GC280 Licensed Patents in the Field of Use within
nine months after PathoGenesis becomes aware of such infringement, threatened
infringement or suspected infringement, or after BMS's written request to
PathoGenesis to do so, then BMS, at BMS's expense, shall have the right, but not
the obligation, to take action in its name, to restrain such infringement,
threatened infringement or suspected infringement and to recover profits and
damages.  PathoGenesis shall cooperate with BMS in all respects in such action
and shall cause any of PathoGenesis' and its Affiliates' employees and agents to
give depositions or testify when requested by BMS and make available to BMS
copies of any and all relevant records, papers, documents, information and
specimens, if necessary under an appropriate protective order.  BMS shall
reimburse PathoGenesis for its out-of-pocket expenses incurred in providing such
cooperation to BMS.  PathoGenesis, at PathoGenesis' option and expense, may
actively participate as a party in such action.  BMS shall have the sole and
exclusive right to control prosecution of such action, and the right to settle
and compromise such action or dispute.  In the event any monetary recovery in
connection with such infringement action is obtained, such recovery shall be
applied in the following priority:  first, to reimburse BMS for its total
expenses incurred in prosecuting such action, including filing fees, reasonable
attorneys' fees, reasonable local counsel fees, expert and 

                                       13
<PAGE>
 
other witness fees and all other reasonable costs; second, if PathoGenesis
actively participates as a party in such action, to reimburse PathoGenesis for
its total expenses incurred in prosecution such action, including filing fees,
reasonable attorneys' fees, reasonable local counsel fees, expert and other
witness fees and all other reasonable costs not previously reimbursed by BMS;
third, to be shared by the proportion and up to the extent of any damages
established including, but not limited to, PathoGenesis' lost profits and BMS's
lost Royalties or Step-Down Royalties; and fourth, the balance, if any, to be
retained by BMS.

ARTICLE 8.  MANUFACTURE AND SUPPLY OF THE INTERMEDIATE.

     8.1  Manufacture, Supply and Specifications.

     A  Until U.S. Patent No. 4,560,765 and its foreign counterpart patents
claiming the Intermediate expire, lapse, are canceled or become abandoned or are
finally found to be invalid (or not valid) or unenforceable by an unreversed or
unappealable final decision or judgment of a court or other authority or agency
of competent jurisdiction, and subject to the provisions in this Article 8, BMS
shall manufacture for and supply to PathoGenesis, and PathoGenesis shall
purchase from BMS, any or all of the requirements of PathoGenesis, its
Affiliates and Sub-licensees of the Intermediate in connection with the
production of the Compound or Licensed Product to the extent PathoGenesis orders
any or all of such requirements from BMS.  The quantities and delivery schedules
shall be as specified in purchase orders submitted to BMS by PathoGenesis.

     B.  BMS shall manufacture the Intermediate (i) in compliance with current
good manufacturing practices of the FDA ("cGMP"), (ii) in accordance with the
BMS internal quality control specifications or as otherwise agreed upon by BMS
and PathoGenesis ("QC Specifications"), and (iii) in accordance with the BMS
internal product specifications for the Intermediate or as otherwise agreed upon
by BMS and PathoGenesis ("Product Specifications").  All of the Intermediate
supplied by BMS to PathoGenesis shall be at least of the same quality as the
Intermediate that BMS produces for itself or its Affiliates to manufacture
aztreonam.  BMS shall grant PathoGenesis representatives reasonable access to
BMS documents and manufacturing facilities at reasonable times for the purpose
of verifying BMS's compliance with this Article 8.1(B).

     8.2  Pricing and Payment.  The purchase price to be paid by PathoGenesis to
BMS for the Intermediate shall be $[********] per kilogram of the Intermediate,
FOB BMS manufacturing facilities. BMS shall invoice PathoGenesis at the time of
shipment of the Intermediate. PathoGenesis shall pay all invoices for the
Intermediate delivered by BMS in accordance with normal commercial terms.

* Confidential treatment is requested; filed separately with the Securities and
  Exchange Commission.

                                       14
<PAGE>
 
     8.3  Orders.  Each order of the Intermediate by PathoGenesis shall be for
at least [********] kilograms of the Intermediate. To the extent that
PathoGenesis requires more than [********] kilograms of the Intermediate in any
[********] month period, the excess amount will be subject to a [********].
There shall be no minimum required purchases of the Intermediate by PathoGenesis
under this Agreement.

     8.4  Delivery, Testing and Acceptance.  Subject to Article 8.3 of this
Agreement, as soon as practicable after receipt of an order for the Intermediate
from PathoGenesis, BMS shall manufacture and ship the specified quantity of the
Intermediate ordered by PathoGenesis to the destination specified in the order.
Each shipment shall be accompanied by the appropriate certificates of analysis
with respect to the Intermediate.  BMS shall arrange for shipment of all orders
for the Intermediate hereunder Free on Board (FOB) BMS manufacturing facility
(Incoterms 1990).  PathoGenesis shall have a maximum of 45 days from the date of
receipt of any shipment of the Intermediate to test for quality and quantity of
the shipment and to accept or reject such shipment.  If PathoGenesis determines
that any shipment or portion thereof of the Intermediate does not meet the
specifications warranted by BMS hereunder, PathoGenesis shall notify BMS in
writing within 45 days of receipt of the shipment, indicating the particular
lot, date of delivery and the defective nature of Intermediate.

     8.5  Use.  PathoGenesis may use the Intermediate to manufacture the
Compound or the Licensed Product or may transfer the Intermediate to a third
party solely to have such third party manufacture the Compound or the Licensed
Product.

     8.6  Other Terms.  Other terms and conditions of the sale of the
Intermediate to PathoGenesis pursuant to this Agreement that are not expressly
provided for herein shall be in accordance with commercially reasonable
standards and substantially similar in all material respects to the terms and
conditions offered to any other customer of BMS for substances similar to the
Intermediate.

ARTICLE 9.  REPRESENTATIONS AND WARRANTIES.

     9.1  BMS's Representations and Warranties.  BMS represents, warrants and
covenants that:

          A.  BMS is a corporation duly organized, existing and in good standing
              under the laws of the State of Delaware, with full right, power
              and authority to enter into and perform this Agreement and to
              grant the licenses and rights herein granted;

* Confidential treatment is requested; filed separately with the Securities and
  Exchange Commission.

                                       15
<PAGE>
 
          B.  the execution, delivery and performance of this Agreement does not
              conflict with, violate or breach any agreement to which BMS is a
              party, or BMS's certificate of incorporation or bylaws;

          C.  this Agreement has been duly executed and delivered by BMS and is
              a legal, valid and binding obligation enforceable against BMS in
              accordance with its terms subject to applicable bankruptcy,
              insolvency, reorganization, arrangement, moratorium and other laws
              relating to or affecting creditors' rights generally and equitable
              principles;

          D.  as of the Effective Date of this Agreement, BMS is the sole and
              exclusive owner of the Licensed Patents and Technical Information;

          E.  BMS has not received any notice from any third party claiming any
              ownership interest in the Licensed Patents, Technical Information
              or the Compound; 

          F.  BMS has the right to grant the licenses and rights set forth in
              this Agreement;

          G.  to the best knowledge of BMS (but without having conducted any
              specific investigation), the issued GC280 Licensed Patents are
              valid and enforceable, and are not known to be infringed by any
              third party in the Territory, and BMS is unaware of any
              information that would adversely affect the validity or
              enforceability of any GC280 Licensed Patent;

          H.  no GC280 Licensed Patent has been involved in any reissue,
              reexamination, interference, opposition or equivalent or similar
              proceeding or in any litigation;

          I.  except in regard to U.S. Patent No. 4,560,765, and its foreign
              counterpart patents without having conducted any specific
              investigation, BMS has no knowledge that the development,
              manufacture, use, importation, exportation or sale of the Compound
              in the Territory will infringe any patent or other intellectual
              property rights of any third party;

          J.  except in regard to U.S. Patent No. 4,560,765, and its foreign
              counterpart patents to the best knowledge of BMS (but without
              having conducted any specific investigation), no other patent
              license from any third party is required to develop, make, have
              made, use, import, export, offer for sale or sell the Compound in
              the Territory; and no other license for currently existing patents
              or patent applications of BMS or Affiliates of BMS is required to
              develop, make, have made, use, import, export, offer for sale or
              sell the Compound;

                                       16
<PAGE>
 
          K.  BMS has not withheld from PathoGenesis any material information in
              BMS's possession relating to the manufacture, safety or efficacy
              of the Compound, and to the best knowledge of BMS, the information
              relating to the manufacture, safety or efficacy of the Compound
              provided to PathoGenesis does not contain any misstatement of a
              material fact nor omit to state any material fact required to make
              such information not misleading;

          L.  BMS has the right to sell the Intermediate to PathoGenesis, its
              Affiliates and Sub-licensees, and BMS's sale of the Intermediate
              and PathoGenesis', its Affiliates' and Sub-licensees' use of the
              Intermediate to manufacture or have others manufacture the
              Compound or the Licensed Product, in and of itself, will not
              infringe the rights of any third party and will not be in breach
              of any agreement between BMS and any third party;

          M.  all Intermediate supplied hereunder will be (i) manufactured under
              cGMP, (ii) manufactured in accordance with the QC Specifications
              and Product Specifications, and (iii) of the same quality as the
              Intermediate BMS manufactures for itself;

          N.  all Intermediate supplied hereunder shall be free and clear of all
              security interests, liens and other encumbrances of any kind or
              character whatsoever;

          O.  the execution and delivery by BMS of this Agreement and the
              performance by BMS of the obligations under this Agreement require
              no regulatory approvals to be obtained on the part of BMS, or, if
              required, BMS has obtained such approvals;

          P.  neither this Agreement nor the rights or licenses granted
              hereunder are in breach or violate any agreement or court order to
              which BMS is a party or is subject, and BMS has not granted and
              that it will not grant any license or other right in any of the
              Licensed Patents that interferes with or conflicts with any of the
              licenses or rights granted to PathoGenesis under this Agreement;
              and

          Q.  subject to BMS's representations, warranties and covenants as
              expressly provided in this Agreement, BMS EXTENDS NO EXPRESS OR
              IMPLIED REPRESENTATION OR WARRANTY WITH RESPECT TO THE LICENSED
              PATENTS, THE TECHNICAL INFORMATION, THE COMPOUND, ANY LICENSED
              PRODUCT OR ANY OTHER DOCUMENT, MATERIAL, INFORMATION OR DATA,
              TANGIBLE OR INTANGIBLE, BEING TRANSFERRED OR DELIVERED TO
              PATHOGENESIS HEREUNDER. Without limitation of the generality of
              the preceding sentence, BMS makes no representation or warranty as
              to 

                                       17
<PAGE>
 
              the use of the Compound for PathoGenesis' purposes, the likelihood
              of success of PathoGenesis' development or commercialization of
              the Licensed Product, the use of BMS's manufacturing process for
              making the Compound or the adequacy and suitability of BMS's
              preclinical and clinical data for PathoGenesis' purposes, it being
              understood that EXCEPT FOR BMS's REPRESENTATIONS, WARRANTIES AND
              COVENANTS AS EXPRESSLY PROVIDED IN THIS AGREEMENT, THE COMPOUND,
              THE LICENSED PATENTS AND THE TECHNICAL INFORMATION, TANGIBLE OR
              INTANGIBLE, ARE BEING LICENSED TO PATHOGENESIS HEREUNDER ON AN "AS
              IS" BASIS.

     9.2  PathoGenesis' Representations and Warranties.  PathoGenesis
represents, warrants and covenants that:

          A.  PathoGenesis is a corporation duly organized, existing and in good
              standing under the laws of the State of Delaware, with full right,
              power and authority to enter into and perform this Agreement;

          B.  the execution, delivery and performance of this Agreement does not
              conflict with, violate, or breach any agreement to which
              PathoGenesis is a party, or PathoGenesis' certificate of
              incorporation or bylaws;

          C.  this Agreement has been duly executed and delivered by
              PathoGenesis and is a legal, valid and binding obligation
              enforceable against PathoGenesis in accordance with its terms
              subject to applicable bankruptcy, insolvency, reorganization,
              arrangement, moratorium and other laws relating to or affecting
              creditors' rights generally and equitable principles; and

          D.  the execution and delivery by PathoGenesis of this Agreement
              requires no regulatory approvals be obtained on the part of
              PathoGenesis, or, if required, PathoGenesis has obtained such
              approvals.

ARTICLE 10.  INDEMNIFICATION.

     10.1  Indemnification of PathoGenesis.  BMS shall at all times during and
after the term of this Agreement be responsible for, and shall defend, indemnify
and hold PathoGenesis, its directors, officers, employees, agents and
representatives harmless from and against any and all losses, claims, lawsuits,
proceedings, expenses, recoveries and damages, including reasonable legal
expenses, costs and attorneys' fees, arising out of any breach of any
representation or warranty given herein by BMS; provided, however, that: (i)
PathoGenesis gives BMS prompt notice of any such claim or lawsuit; (ii) BMS has
the right to compromise, settle or defend such claim or lawsuit; and (iii)
PathoGenesis, at BMS's expense, cooperates with BMS in the defense 

                                       18
<PAGE>
 
of such claim or lawsuit. PathoGenesis, at its expense, may participate in the
defense of any such claim or lawsuit.

     10.2  Indemnification of BMS.  PathoGenesis shall at all times during and
after the term of this Agreement be responsible for, and shall defend, indemnify
and hold BMS, its directors, officers, employees, agents and representatives
harmless from and against any and all losses, claims, lawsuits, proceedings,
expenses, recoveries and damages, including reasonable legal expenses, costs and
attorneys fees, arising out of: (i) any products liability claim or lawsuit by a
third party relating to the Licensed Product made, used, sold or distributed by
PathoGenesis, Affiliates of PathoGenesis or Sublicensees, except to the extent
attributable to BMS's breach of its representations and warranties provided in
Article 9.1M; or (ii) any breach of any representation or warranty given herein
by PathoGenesis; provided, however, that (a) BMS gives PathoGenesis prompt
notice of any such claim or lawsuit; (b) PathoGenesis, its Affiliates or
Sublicensees have the right to compromise, settle or defend such claim or
lawsuit; and (c) BMS, at the expense of PathoGenesis, cooperates with
PathoGenesis, its Affiliates or Sublicensees in the defense of such claim or
lawsuit. BMS, at its expense, may participate in the defense of any such claim
or lawsuit.

ARTICLE 11.  TERM AND TERMINATION.

     11.1   Term.  This Agreement is effective as of the Effective Date as first
written above, and except as otherwise provided in this Article 11 of this
Agreement, shall expire on the later of: (a) the expiration, lapse, cancellation
or abandonment of all of the GC280 Licensed Patents, or an unreversed or
unappealable final decision or judgment of a court or other authority of
competent jurisdiction that all GC280 Licensed Patents which have not previously
expired, lapsed, been canceled or been abandoned are invalid (or not valid) or
unenforceable; or (b) the 15th anniversary of the Effective Date of this
Agreement. Following any such expiration, this Agreement shall be fully paid-up
and any license and rights to the Technical Information granted hereunder shall
remain in effect as a fully paid-up non-exclusive irrevocable right and license
in perpetuity.

     11.2  Termination for Abandonment.  Notwithstanding anything in this
Agreement to the contrary, PathoGenesis, in its sole discretion, may terminate
this Agreement at any time if PathoGenesis decides to expressly abandon the
development and commercialization of the Licensed Product throughout the
Territory. Such termination must be evidenced by a certified written notice to
BMS signed by the chief executive officer and one other officer of PathoGenesis.
Such termination in and of itself shall not entail any liability on
PathoGenesis' part, without, however, prejudice to PathoGenesis' obligation to
use its commercially reasonable efforts to develop and commercialize the
Licensed Product (and any liability arising from its failure to do so).

     11.3  Termination in a Specific Country.  Notwithstanding anything in this
Agreement to the contrary, PathoGenesis, in its sole discretion, may terminate
this Agreement at any time or 

                                       19
<PAGE>
 
from time to time as to a specific country or countries in the Territory. Such
termination must be evidenced by a certified written notice to BMS signed by the
chief executive officer and one other officer of PathoGenesis. Such termination
shall not affect the rights of PathoGenesis under this Agreement in any other
country in the Territory. Such termination in and of itself shall not entail any
liability on PathoGenesis' part, without, however, prejudice to PathoGenesis'
obligation to use its commercially reasonable efforts to develop and
commercialize the Licensed Product (and any liability arising from its failure
to do so).

     11.4  Termination for Breach.  If either party shall be in default of, or
fail to comply with any material obligation or condition of this Agreement, the
non-defaulting party may terminate this Agreement by giving 60 days' notice to
the defaulting party, specifying in reasonable detail the basis for termination.
If within 60 days after the receipt of such notice, the party who received such
notice remedies the condition forming the basis for termination, such notice
shall cease to be operative, and this Agreement shall continue in full force and
effect.

     11.5  Sales after Termination.  Upon termination of this Agreement, other
than pursuant to Article 11.1 of this Agreement, PathoGenesis, its Affiliates
and Sublicensees shall have the right for six months to sell the Licensed
Product in inventory, on order, or being manufactured at the time of
notification of termination, whether or not in the form of raw materials,
products in process or finished products on hand, provided the Royalties or 
Step-Down Royalties owed to BMS on such Sales are paid to BMS when due in
accordance with this Agreement.

     11.6  Survival.  The rights and obligations described in Articles 3.3, 3.4,
3.5, 4.3, 4.4, 4.6, 5.7, 9.1, 9.2, 10.1, 10.2, 11.1, 11.5, 11.7, 12 and 13 of
this Agreement shall survive expiration or termination of this Agreement.

     11.7  Rights in Bankruptcy.  All rights and licenses granted under or
pursuant to this Agreement by BMS are, and shall otherwise be deemed to be, for
purposes of Section 365(n) of the United States Bankruptcy Code, licenses of a
right to "intellectual property" as defined under Section 101 of the United
States Bankruptcy Code. PathoGenesis, as licensee of such rights under this
Agreement, shall retain and may fully exercise all of its rights and elections
under the United States Bankruptcy Code in the event of the commencement of a
bankruptcy proceeding by or against BMS under the United States Bankruptcy Code
including, but not limited to, the right to treat this Agreement or any
agreement supplementary to this Agreement as terminated or to retain its rights
under this Agreement or any Agreement supplementary to this Agreement. In the
event that PathoGenesis elects to retain its rights under this Agreement or any
agreement supplementary to this Agreement, BMS shall provide to PathoGenesis,
within seven calendar days of written notice by PathoGenesis to BMS in
accordance with Article 13.2 of this Agreement, all intellectual property and
all embodiments of such intellectual property within the possession or control
of BMS.

                                       20
<PAGE>
 
ARTICLE 12.  DISPUTE RESOLUTION.

     12.1  Negotiation.  BMS and PathoGenesis shall endeavor to resolve any
claim or controversy arising out of or relating to this Agreement or the
threatened breach, breach, termination or validity of this Agreement informally
by negotiation between the senior executives, officers or management of BMS and
PathoGenesis.  Any party may give the other party written notice of any claim or
controversy not resolved in the normal course of business (the "Disputing Party
Notice").  Within 30 days after the delivery of the Disputing Party Notice, the
receiving party shall submit to the other party a written response (the
"Response").  The Disputing Party Notice and Response shall include a statement
of each party's position and a summary of the arguments supporting that
position.  Within 60 days after the Disputing Party Notice, such designated
senior executives, officers or management of BMS and PathoGenesis shall meet at
a mutually acceptable time and place and thereafter as often as they reasonably
deem necessary to attempt to resolve the claim or controversy.  All negotiations
pursuant to this clause are confidential and without prejudice and shall be
treated as compromise and settlement negotiations for purposes of applicable
rules of evidence.

     12.2  Mediation.  If the claim or controversy has not been resolved by
negotiation pursuant to Article 12.1 of this Agreement within 90 days of the
Disputing Party Notice, or if the parties fail to meet within the time periods
specified in Article 12.1 of this Agreement, the parties shall endeavor to
settle the dispute by mediation under the then current Model Mediation Procedure
for Business Disputes of the Center for Public Resources ("CPR").  Unless
otherwise agreed, the parties shall select a mediator from the CPR panel of
neutrals and shall notify CPR to initiate the selection process.  Either party
may initiate this procedure 90 days after the Disputing Party Notice whether or
not the parties have met.

     12.3  Arbitration.  Any controversy or claim arising out of or relating
to this Agreement, or the threatened breach, breach, termination or validity
thereof, which remains unresolved for 45 days after the appointment of a
mediator pursuant to Article 12.2 of this Agreement shall be finally settled by
arbitration in accordance with the CPR Rules for Non-Administered Arbitration of
Licensed Patent and Trade Secret Disputes. The tribunal shall consist of a sole
arbitrator unless in the initial notice of arbitration or notice of defense,
either party requests a panel of three arbitrators in which event the panel will
consist of three arbitrators, none of whom shall be appointed by a party.  In
selecting the arbitrator(s), either party may, but need not, strike any
candidate who does not have a background in the field of pharmaceuticals with
related scientific, legal or business experience.  The arbitration shall be
governed by the United States Arbitration Act, 9 U.S.C. (S) 1 et seq., and
judgment upon the award rendered by the arbitrator(s) may be entered by any
court or authority having jurisdiction thereof.  Insofar as the proceeding
relates to patents, it shall also be governed by 35 U.S.C. (S) 294, to the
extent applicable.  The arbitrators are not empowered to award treble, punitive
or any other damages in excess of compensatory damages and each party
irrevocably waives any claim to recover any such damages.  The place of the
arbitration shall be in Chicago, Illinois if the 

                                       21
<PAGE>
 
arbitration is initiated by BMS, or in New York, New York if the arbitration is
initiated by PathoGenesis.

     12.4  Injunctive Relief.  Notwithstanding the foregoing, each party shall
have the right to immediately apply to a court of competent jurisdiction to seek
temporary, or permanent injunctive relief to restrain any conduct or any
threatened conduct in violation of or otherwise with respect to Articles 2, 3, 7
or 10 of this Agreement, or that could threaten the parties rights in or to, or
protect or enforce, any of the GC280 Licensed Patents or the Technical
Information.

Article 13.  MISCELLANEOUS.

     13.1  Entire Agreement.  This Agreement, which includes the Exhibits
hereto, contains the entire agreement between BMS and PathoGenesis with respect
to the transactions contemplated by this Agreement and supersedes all prior
arrangements or understandings with respect thereto including the April 16,
1998, letter of intent, the Biological Materials and Information Transfer
Agreement between BMS and PathoGenesis dated July 11, 1997, and the Confidential
Disclosure Agreement between BMS and PathoGenesis dated June 2, 1997.

     13.2  Notices.  All notices or other communications that are required or
permitted under this Agreement shall be in writing and shall be sent by Federal
Express or other reliable overnight courier, or hand delivered or mailed by
registered or certified mail, postage prepaid and return receipt requested, to
the appropriate party addressed as follows:

          If to BMS:          Bristol-Myers Squibb Company
                              Route 206 & Province Line Road
                              Princeton, New Jersey  08540

                              Attention:  Vice President, Licensing


          If to PathoGenesis: PathoGenesis Corporation
                              5215 Old Orchard Rd., #900
                              Skokie, Illinois  60077

                              Attention: Wilbur H. Gantz
                              Chairman and Chief Executive Officer

                                       22
<PAGE>
 
          with a copy to:     Cameron S. Avery, General Counsel
                              PathoGenesis Corporation
                              5215 Old Orchard Rd., #900
                              Skokie, Illinois 60077

Any party may by such notice change the address to which notice or other
communications to it are to be delivered or mailed.

     13.3  Governing Law.  This Agreement shall be governed by and construed in
accordance with the laws of Delaware excluding its conflict-of-law rules. This
provision shall not preclude application of the United States Arbitration Act.

     13.4  Assignability.  This Agreement shall not be assignable other than by
operation of law by either party without the prior written consent of the other
party, and any purported assignment by either party without the prior written
consent of the other party shall be void, except that either party may assign
its rights under this Agreement to any other corporation that succeeds to all or
substantially all of that portion of its business to which this Agreement
relates pursuant to any reorganization or sale or disposition of substantially
all of its assets related to that portion of its business, provided that the
assignee agrees to assume the assignor's obligations hereunder, in which case
the assignor shall have no further rights or obligations under this Agreement.
PathoGenesis will not sell such portion of its business to which this Agreement
relates, without obtaining the written consent of BMS, which consent shall not
be unreasonably withheld. Nothing in this Agreement or such assignment shall
eliminate such assignor's obligations under this Agreement which arise prior to
the time of such assignment. This Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective successors and permitted
assigns.

     13.5  Waivers and Amendments.  Any waiver of any term or condition of this
Agreement, or any amendment or supplementation of this Agreement, shall be
effective only if in writing signed by the parties. A waiver of any breach or
failure to enforce any of the terms or conditions of this Agreement shall not in
any way affect, limit or waive a party's rights hereunder at any time to enforce
strict compliance thereafter with every term or condition of this Agreement.

     13.6  Severability.  In the event that any provision contained in this
Agreement shall be determined to be invalid, illegal or unenforceable in any
respect for any reason, the validity, legality and enforceability of any such
provision in every other respect and the remaining provisions of this Agreement
shall not, at the election of the party for whose benefit the provision exists,
be in any way impaired.

     13.7  Section Headings.  The section headings contained in this Agreement
are for the purpose of convenience and are not intended to define or limit the
contents of such sections.

                                       23
<PAGE>
 
     13.8  Counterparts.  This Agreement may be signed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

     13.9  Further Assurances.  Upon the reasonable request of either party, the
other party shall execute any additional certificates or other documents that
may be reasonably necessary to fully implement this Agreement.

     13.10  Force Majeure.  No failure or omission by either party in the
performance of any obligation of this Agreement shall be deemed a breach of this
Agreement or create any liability if the same shall arise from any cause or
causes beyond the control of the parties, including, but not limited to, the
following, which, for the purposes of this Agreement, shall be regarded as
beyond the control of the party in question: Act of God; act or omission of any
government; any rule, regulation or order issued by any governmental authority
or by any officer, department, agency, or instrumentality thereof; fire; storm;
flood; earthquake; accident; war; rebellion; insurrection; riot; invasion;
strike; and lockout.

     13.11  Compliance of Law.  In conducting any activities under this
Agreement or in connection with the manufacture, use or sale of the Licensed
Product, PathoGenesis shall comply with all applicable laws and regulations
including, but not limited to, all Export Administration Regulations of the
United States Department of Commerce.

     13.12  Confidentiality of Terms of Agreement.  Without the prior written
consent of the other party, neither of the parties shall disclose to anyone any
of the material terms of this Agreement, except upon the recommendation of
counsel in view of any governmental or regulatory law, rule or guideline (in
which event, the disclosing party shall make reasonable efforts to obtain
whatever protection against further disclosure may be available in the
circumstances). Notwithstanding the above, either party may issue a press
release in the form set forth in Exhibit F of this Agreement.

                                       24
<PAGE>
 
     IN WITNESS WHEREOF, the parties hereby have executed this Agreement, as of
the date first above written.

BMS:

BRISTOL-MYERS SQUIBB COMPANY

By: /s/ K. Alice Leung
    ------------------
    K. Alice Leung
    Vice-President, Licensing


PathoGenesis:

PATHOGENESIS CORPORATION

By: /s/ Wilbur H. Gantz
    -------------------
    Wilbur H. Gantz
    Chairman and Chief Executive Officer


Attachments:

     Exhibit A -- Description of BMS-180680

     Exhibit B -- Licensed Patents

     Exhibit C -- Schedule for Disclosure of the Technical Information

     Exhibit D -- Schedule for Disclosure of Technical Information for
                  Preclinical and Clinical Study Data

     Exhibit E -- Schedule for Regulatory Cooperation from BMS

     Exhibit F -- Press Release

                                       25
<PAGE>
 
                                   EXHIBIT A


DESCRIPTION OF BMS-180680



Chemical name for BMS-180680:

[2R-[2(alpha),3(alpha)(Z)]]-3-[[[[1-(2-amino-4-thiazolyl)-2-[(2-methyl-4-oxo-1-
sulfo-3-azetidinyl)amino]-2-oxoethylidene]amino]oxy]methyl]-6,7-dihydroxy-2-
quinoxalinecarboxylic acid, and it has the molecular formula
C19H17N7O10S2.

<PAGE>
 
                                   EXHIBIT B


LICENSED PATENTS

                             GC155 Licensed Patents

[********]

                             GC280 LICENSED PATENTS

[********]


* Confidential treatment is requested; filed separately with the Securities and
  Exchange Commission.

<PAGE>
 
                                   EXHIBIT C


SCHEDULE FOR DISCLOSURE OF TECHNICAL INFORMATION

[********]

* Confidential treatment is requested; filed separately with the Securities and
  Exchange Commission.

<PAGE>
 
                                   EXHIBIT D


SCHEDULE FOR DISCLOSURE OF TECHNICAL INFORMATION FOR PRECLINICAL AND CLINICAL
STUDY DATA

[********]

STUDY REPORTS REQUESTED FOR PRECLINICAL AND CLINICAL DATA

[********]

DATA REQUESTED:
---------------

[********]

POST IND SUBMISSIONS REQUESTED:
-------------------------------

[********]

* Confidential treatment is requested; filed separately with the Securities and
  Exchange Commission.

<PAGE>
 
                                   EXHIBIT E


SCHEDULE FOR REGULATORY COOPERATION FROM BMS

[********]

* Confidential treatment is requested; filed separately with the Securities and
  Exchange Commission.

<PAGE>
 
[PATHOGENESIS LOGO]                EXHIBIT F                        NEWS RELEASE

                                                                    
    . 201 ELLIOTT AVENUE WEST, SEATTLE, WASHINGTON  98119 . (206) 467-8100

--------------------------------------------------------------------------------

DRAFT FOR APPROVAL ONLY  September 29, 1998
 
Contacts:  Alan Meyer           Maryellen Thielen    Barbara Lindheim
           PathoGenesis Corp.   PathoGenesis Corp.   Noonan/Russo
           (206) 467-8100       (847) 583-5424       (212) 696-4455, X237
 

                          PATHOGENESIS CORP. ANNOUNCES
                       AEROSOLIZED DRUG CANDIDATE LICENSE

     SEATTLE, Sept. 30, 1998 -PathoGenesis Corp. (Nasdaq: PGNS) has obtained an
exclusive worldwide license from Bristol-Myers Squibb (NYSE: BMY) to develop and
market an antibiotic for inhalation. The drug candidate has been named PA-1806.

"PA-1806 demonstrates high levels of activity against a wide spectrum of
  bacteria that affect people with chronic lung infections," said Wilbur H.
  Gantz, chairman and chief executive officer.  "Our goal is to develop
  complementary aerosolized antibiotics with different mechanisms of action to
  give physicians more tools to treat these chronic lung infections."

     PA-1806 is a patented new chemical entity in the monobactam class of
antibiotics.  A patent on the drug candidate (originally BMS-180680) was issued
in 1994 and will expire in 2011.  PA-1806 demonstrates potent activity against
Pseudomonas aeruginosa, Burkholderia cepacia, Stenotrophomonas maltophilia and
other gram-negative bacteria.  PA-1806 has high potency against P. aeruginosa,
in part because it is transported into the bacterial cells via the same pathway
that is used to import iron.  This potency may allow a relatively small dose to
have a therapeutic effect.

     PathoGenesis obtained an exclusive worldwide license for the aerosol use of
PA-1806 from Bristol-Myers Squibb for an initial payment of $4 million, to be
expensed in the third quarter of 1998.  Half is payable now and the other half
in early 1999.  The agreement also calls for payments to be made upon achieving
agreed-upon milestones and for a royalty to be paid on product sales.

     PathoGenesis plans to reformulate PA-1806 for nonsystemic aerosolized
delivery.  The company's strategy is to develop a portfolio of aerosolized
antibiotics to treat chronic lung infections, including those in cystic
fibrosis, bronchiectasis, ventilator-dependent and immunocompromised patients.
PathoGenesis markets TOBIR (tobramycin solution for inhalation) in the U.S. and
has a second aerosolized drug candidate, PA-1420, in preclinical development.
TOBI, PA-1420 and PA-1806 have different mechanisms of action against gram-
negative bacteria.

<PAGE>
 
     "We have a head start in developing PA-1806 and our second aerosolized drug
candidate, PA-1420, because of our knowledge of their use in humans--just as
our knowledge of tobramycin accelerated our development of TOBI," said A. Bruce
Montgomery, M.D., executive vice president of research and development for
PathoGenesis.

     Seattle-based PathoGenesis Corp. is a pharmaceutical company that develops
and markets drugs to treat chronic infectious diseases--lung infections, in
particular--where there is a significant need for improved therapy. The company
markets an inhaled antibiotic in the U.S. and is developing drug candidates to
treat serious chronic lung infections, including those common in cystic
fibrosis, bronchiectasis and tuberculosis patients. PathoGenesis' stock is
traded on the Nasdaq National Market System under the symbol PGNS. The company's
Web site is located at www.pathogenesis.com.

     Note:  This news release contains "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995.  Such forward-
looking statements are subject to known and unknown risks, uncertainties or
other factors that may cause the company's actual results to be materially
different from historical results or any results expressed or implied by such
forward-looking statements.  Factors that might cause such a difference include,
but are not limited to, uncertainties related to the fact that PathoGenesis
began commercial operations only recently, its dependence on TOBI, third party
reimbursement and product pricing, government regulation, drug development and
clinical trials, competition and alternative therapies, and other factors
described in PathoGenesis' filings with the Securities and Exchange Commission.

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