<PAGE>
 
                             EMPLOYMENT AGREEMENT
                             
          Agreement dated as of March 15, 1999 effective as of March 15, 1999
(the "Effective Date"), by and between Interneuron Pharmaceuticals, Inc., a
Delaware corporation having a place of business at One Ledgemont Center, 99
Hayden Avenue, Suite 200, Lexington, Massachusetts 02421 (the "Corporation"),
and Mark S. Butler, an individual residing at 40 Singleton Road, Chestnut Hill,
Massachusetts, (the "Officer").

                                  WITNESSETH:

          WHEREAS, the Corporation desires to continue to employ the Officer as
Executive Vice President , General Counsel and Chief Administrative Officer, and
the Officer desires to be employed by the Corporation as Executive Vice
President, Chief Administrative Officer and General Counsel and all pursuant to
the terms and conditions hereinafter set forth:

          NOW, THEREFORE, in consideration of the foregoing and the mutual
promises and covenants herein contained, it is agreed as follows:

     1.   EMPLOYMENT: DUTIES
          ------------------

          (a)  The Corporation engages and employs the Officer, and the Officer
hereby accepts engagement and employment, as Executive Vice President Chief
Administrative Officer and General Counsel, to direct, supervise and have
responsibility for the legal, business development, sales and marketing and
management information systems operations of the Corporation, including, but not
limited to (i) directing and supervising the legal, business development, sales
and marketing and management information systems departments of the Corporation,
(ii) managing the other legal, business development, sales and marketing and
management information systems and resources of the Corporation; and (iii)
performing such other services and duties as the Board of Directors of the
Corporation shall determine.  In his capacity as Executive Vice President, Chief
Administrative Officer and General Counsel of the Corporation, and as an officer
of the Corporation, the Officer shall report directly to the Chief Executive
Officer of the Corporation.

          (b)  The Officer shall perform his duties hereunder from the
Corporation's executive offices in Massachusetts, provided, however, that the
Officer acknowledges and agrees that the performance by the Officer of his
duties hereunder may require domestic and international travel by the Officer.

          (c)  The Officer shall devote his best efforts and entire working time
and attention to the proper discharge of his duties and responsibilities under
this Agreement.
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     2.   TERM
          ----

          (a)  Subject to the completion of the matters set forth in subsections
(b)and (c) hereof and to the provisions of Section 6 hereof, the Officer's
employment hereunder shall be for a term of one (1) year commencing on the
Effective Date and continuing through the first anniversary of such date and
shall automatically renew for periods of one (1) year commencing at the second
anniversary of the Effective Date unless either the Officer or the Corporation
gives written notice to the other not less than sixty (60) days prior to the
date of any such anniversary of such party's election not to extend the term of
this Agreement.

     3.   COMPENSATION
          ------------

          (a)  As compensation for the performance of his duties under this
Agreement, the Officer shall be compensated as follows:

               (i)  The Corporation shall pay the Officer an annual base salary
                    ("Base Salary") of Two Hundred Sixty-Five Dollars
                    ($265,000), payable in accordance with the usual payroll
                    period of the Corporation;

              (ii)  The Officer shall be entitled to participate in the annual
                    Senior Executive Bonus Plan.

          (b)  The Corporation shall reimburse the Officer for all normal, usual
and necessary expenses incurred by the Officer in furtherance of the business
and affairs of the Corporation, including reasonable travel and entertainment,
against receipt by the Corporation of appropriate vouchers or other proof of the
Officer's expenditures and otherwise in accordance with such Expense
Reimbursement Policy as may from time to time be adopted by the Board of
Directors of the Corporation.

          (c)  The Officer shall be, during the term of this Agreement, entitled
to vacations of not less than four (4) weeks per annum.

          (d)  The Corporation shall make available to the Officer and his
dependents, such medical, disability, life insurance and such other health
benefits as the Corporation makes available to its senior officers and
directors. The Company shall reimburse the Officer for premiums for $1,000,000
additional term life insurance during the period of the Officer's employment.

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     4.   NON-SOLICITATION
          ----------------

          (a)  During the term of this Agreement and for one (1) year
thereafter, the Officer shall not, directly or indirectly, without the prior
written consent of the Corporation, solicit or induce any employee of the
Corporation or any affiliate to leave the employ of the Corporation or any
affiliate or hire for any purpose any employee of the Corporation or any
affiliate or any employee who has left the employment of the Corporation or any
affiliate within six months of the termination of said employee's employment
with the Corporation.

          (b)  During the term of this Agreement and for one (1) year
thereafter, the Officer shall not, directly or indirectly, without the prior
written consent of the Corporation:

               (i)  solicit or accept employment or be retained by any party
                    who, at any time during the term of this Agreement, was a
                    customer or supplier of the Corporation or any affiliate
                    where his position will be related to the business of the
                    Corporation; or
             
              (ii)  solicit or accept the business of any customer or supplier
                    of the Corporation or any affiliate with respect to products
                    similar to those supplied by the Corporation.

          (c)  In the event that the Officer breaches any provisions of this
Section 4 or there is a threatened breach, then, in addition to any other rights
which the Corporation may have, the Corporation shall be entitled, without the
posting of an bond or other security, to injunctive relief to enforce the
restrictions contained herein. In the event that an actual proceeding is brought
in equity to enforce the provisions of this Section 4, the Officer shall not
urge as a defense that there is an adequate remedy at law nor shall the
Corporation be prevented from seeking any other remedies which may be available.

     5.   CONFIDENTIAL INFORMATION
          ------------------------

          (a)  The Officer agrees that during the course of his employment or at
any time after termination, he will not disclose or make accessible to any other
person, the Corporation's products, services and technology, both current and
under development, promotion and marketing programs, lists, trade secrets,
litigation information and other confidential and proprietary business
information of the Corporation or any of its clients. The Officer agrees: (i)
not to use any such information for himself or others; and (ii) not to take any
such material or reproductions thereof from the Corporation's facilities at any
time during his employment by the Corporation, except as required in the
Officer's duties to the Corporation. The Officer agrees immediately to return
all such material and reproductions thereof in his possession to the Corporation
upon request and in any event 

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upon termination of employment.

          (b)  Except with prior written authorization by the Corporation, the
Officer agrees not to disclose or publish any of the confidential, technical or
business information or material of the Corporation, its clients or any other
party to whom the Corporation owes an obligation of confidence, at any time
during or after his employment with the Corporation.

          (c)  The Officer hereby assigns to the Corporation all right, title
and interest he may have or may acquire in all inventions (including patent
rights) developed by the Officer during the term of this Agreement
("Inventions") and agrees that all Inventions shall be the sole property of the
Corporation and its assigns, and the Corporation and its assigns shall be the
sole owner of all patents, copyrights and other rights in connection therewith.
The Officer further agrees to assist the Corporation in every proper way (but at
the Corporation's expense) to obtain and from time to time enforce patents,
copyrights or other rights on said Inventions in any and all countries.

     6.   TERMINATION
          -----------

          (a)  The term of this Agreement shall continue for the period set
forth in Section 2 hereof unless sooner terminated upon the first to occur of
the following events:

               (i)  The death of the Officer;

               (ii) Termination for just cause.  Any of the following actions by
                    the Officer shall constitute just cause:
 
                    (A)  Material breach by the Officer of Section 4 or Section
                         5 of this Agreement;

                    (B)  Material breach by the Officer of any provision of this
                         Agreement other than Section 4 or Section 5 or the
                         willful or reckless failure by the Officer to perform
                         his duties hereunder which breach or failure is not
                         cured by the Officer within fifteen (15) days of notice
                         thereof from the Corporation; or

                    (C)  The commission by the Officer of any act of fraud or
                         theft against the Corporation or any of its
                         subsidiaries, or the conviction of the Officer of any
                         criminal act.

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<PAGE>
 
               (iii) Termination by the Officer for just cause. Any of the
                     following actions or omissions by the Corporation shall
                     constitute just cause:

                     (A) Material breach by the Corporation of any provision of
                         this Agreement which is not cured by the Corporation
                         within fifteen (15) days of notice thereof from the
                         Officer;

                     (B) Any action by the Corporation to intentionally harm
                         the Officer; or

                     (C) A Change in Control of the Corporation (as defined
                         below), unless the Officer is offered and, in his sole
                         discretion, accepts either (1) a comparable executive
                         position of the acquiror or of the division of the
                         acquiror which assumes the business of the corporation
                         after the Change in Control or (2) compensation
                         comparable to that provided to the Officer under this
                         Agreement.

               (iv)  Termination without just cause.

               (v)   Upon the election of the Officer made within thirty (30)
                     days after a Change in Control.

          (b)  Upon termination pursuant to subparagraph (ii) of paragraph (a)
above, the Officer (or his estate in the event of termination pursuant to
subparagraph (i), shall be entitled to receive the Base Salary accrued but
unpaid as of the date of termination.

          (c)  Upon termination pursuant to subparagraph (iii) of paragraph (a)
above, the Officer shall be entitled to receive the Base Salary plus average
bonuses paid to Officer since the Effective Date. At the discretion of the
Corporation, such Base Salary and bonus amount may be paid either in one lump
sum or in monthly installments. In addition, the Corporation shall provide
continuation of health benefits for twelve (12) months to the extent authorized
by and consistent with 29 U.S.C. (S) 1161 et seq. (Commonly known as "COBRA"),
with the cost of the regular premium for such benefit shared in the same
relative proportion by the Corporation and the Officer as in effect on the date
of the termination. Notwithstanding the foregoing, nothing in this Section 6(c)
shall be construed to affect the Officer's right to receive COBRA continuation
entirely at the Officer's own cost to the extent that the Officer may continue
to be entitled to COBRA continuation after the Officer's right to cost sharing
under this Section 6(c) ceases.

          (d)  Upon termination pursuant to subparagraphs (iii), (iv) or (v) of
paragraph (a) above, or if the Corporation does not renew this Agreement, the
Corporation will pay to the Officer twelve (12) months of Base Salary plus an
amount equal to the average of the executive bonuses received by the Officer in
                                                  ==                           
the immediately preceding three (3) year period.  At the 

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<PAGE>
 
discretion of the Corporation, such base salary and bonus amount may be paid
either in one lump sum or in monthly installments. This payment, however, shall
be reduced by the salary and bonus compensation from other employment received
by the Officer during the twelve (12) months following termination of this
Agreement. In addition, the Corporation shall provide continuation of health
benefits for twelve (12) months to the extent authorized by and consistent with
29 U.S.C. (S) 1161 et seq. (Commonly known as "COBRA"), with the cost of the
regular premium for such benefit shared in the same relative proportion by the
Corporation and the Officer as in effect on the date of the termination.

          (e)  For purposes of this Agreement, a "Change in Control of the
Corporation" shall be deemed to have occurred upon any one of the following
events:

               (i)   The date on which shares of Common Stock are first
                     purchased pursuant to a tender offer or exchange offer
                     (other than such an offer by the Corporation, any
                     Subsidiary, any employee benefit plan of the Corporation or
                     of any Subsidiary or any entity holding shares or other
                     securities of the Corporation for or pursuant to the terms
                     of such plan), whether or not such offer is approved or
                     opposed by the Corporation and regardless of the number of
                     shares purchased pursuant to such offer;

               (ii)  The date the Corporation acquires knowledge that any person
                     or group deemed a person under Section 13(d)-3 of the
                     Securities Exchange Act of 1934 ("Exchange Act") (other
                     than the Corporation, any Subsidiary, any employee benefit
                     plan of the Corporation or of any Subsidiary or any entity
                     holding shares of Common Stock or other securities of the
                     Corporation for or pursuant to the terms of any such plan
                     or any individual or entity or group or affiliate thereof
                     which acquired its beneficial ownership interest prior to
                     the date the Plan was adopted by the Board), in a
                     transaction or series of transactions, has become the
                     beneficial owner, directly or indirectly (with beneficial
                     ownership determined as provided in Rule 13d-3, or any
                     successor rule, under the Exchange Act), of securities of
                     the Corporation entitling the person or group to 30% or
                     more of all votes (without consideration of the rights of
                     any class or stock to elect directors by a separate class
                     vote) to which all stockholders of the Corporation would be
                     entitled in the election of the Board of Directors were an
                     election held on such date;

               (iii) The date, during any period of two consecutive years, when

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<PAGE>
 
                    individuals who at the beginning of such period constitute
                    the Board of Directors of the Corporation cease for any
                    reason to constitute at least a majority thereof, unless the
                    election, or the nomination for election by the stockholders
                    of the Corporation, of each new director was approved by a
                    vote of at least two-thirds of the directors then still in
                    office who were directors at the beginning of such period;
                    and

               (iv) the date of approval by the stockholders of the Corporation
                    of an agreement (a "reorganization agreement") providing
                    for:

                    (A)  The merger or consolidation of the Corporation with
                         another corporation where the stockholders of the
                         Corporation, immediately prior to the merger or
                         consolidation, do not beneficially own, immediately
                         after the merger or consolidation, shares of the
                         corporation issuing cash or securities in the merger or
                         consolidation entitling such stockholders to 65% or
                         more of all votes (without consideration of the rights
                         of any class of stock to elect directors by a separate
                         class vote) to which all stockholders of such
                         corporation would be entitled in the election of
                         directors or where the members of the Board of
                         Directors of the Corporation, immediately prior to the
                         merger or consolidation, do not, immediately after the
                         merger or consolidation, constitute a majority of the
                         Board of Directors of the corporation issuing cash or
                         securities in the merger or consolidation; or

                    (B)  The sale or other disposition of all or substantially
                         all the assets of the Corporation.

          (f)  Anything in this Agreement to the contrary notwithstanding, in
the event it shall be determined that as a result of any payment or distribution
by the Corporation to or for the benefit of the Officer whether paid or payable
or distributed or distributable pursuant to the terms of this Agreement or
otherwise (a "Payment"), the Officer would be subject to the excise tax imposed
by Section 49999 of the Internal Revenue Code (the "Code") or any interest or
penalties are incurred by the Officer with respect to such excise tax (such
excise tax, together with any such interest and penalties, are hereinafter
collectively referred to as the "Excise Tax"), the Officer shall be entitled to
promptly receive an additional payment (a "Gross-Up Payment") in an amount such
that, after payment by the Officer of all taxes (including any interest or
penalties imposed with respect to such taxes), including, without limitation,
any income taxes and Excise Tax

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<PAGE>
 
imposed upon the Gross-Up Payment, the Officer is in the same after-tax position
as if no Excise Tax had been imposed upon the Officer with respect to the
Payments. Notwithstanding the foregoing provisions of this Section, if it shall
be determined that the Officer is entitled to a Gross-Up Payment, but that the
Officer, after taking into account the Payments and the Gross-Up Payment, would
not receive a net after-tax benefit of at least $50,000 (taking into account
both income taxes and Excise Tas) as compared to the net after-tax proceeds to
the Officer resulting from the elimination of the Gross-Up Payment and a
reduction of the Payments, in the aggregate, to an amount (the "Reduced Amount")
such that the receipt of Payments would not give rise to any Excise Tax, then no
Gross-Up Payment shall be made to the Officer and the Payments, in the
aggregate, shall be reduced to the Reduced Amount.

          (g)  Cooperation: Pending Litigation
           -                                  

               (A)  Upon the request of the Company, in connection with any
                    suit, action, proceeding, arbitration or litigation
                    involving the Company (a "Litigation"), which Litigation is
                    directly or indirectly the result of an event, fact or
                    occurrence existing, in whole or in part, prior to the
                    Termination Date, Officer agrees to, at the expense of the
                    Company, in connection with any such Litigation:

                    (i)   attend depositions, meetings, conferences or other
                          scheduled proceedings related to the Litigation with a
                          designated officer of the Company;

                    (ii)  provide a written outline of any actions taken by
                          Officer on behalf of the Company, or any information
                          known to Officer; and

                    (iii) otherwise cooperate with the Company, counsel to the
                          Company and with other parties or entities whom the
                          Company shall reasonably request.

               (B)  Unless Officer and the Company agree otherwise, Officer
                    shall not be required to engage or participate in any of the
                    activities described in Section 6(g) of this Agreement for
                    more than three (3) consecutive business days at a time, or
                    more than six (6) business days per ninety (90) day period.

          (h)  It is understood and agreed that the payments by the Corporation
to the Officer set forth in paragraphs (b), (c) and (d) of this Section 6 shall
be all of the payments required to be paid by the Corporation to the Officer
upon termination of this Agreement.  Specifically, the Corporation shall not be
obligated to make payments to the Officer with respect to the unexpired term of
this Agreement (ie. salary or bonus payments 

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<PAGE>
 
for all or a portion of such period).

     7.   NOTICES
          -------

          Any notice or other communication under this Agreement shall be in
writing and shall be deemed to have been given: when delivered personally
against receipt therefor; one (1) day after being sent by Federal Express or
similar overnight delivery; or there (3) days  after being mailed registered or
certified mail, postage prepaid, return receipt requested, to either party at
the address set forth above, or to such other address as such party shall give
by notice hereunder to the other party.

     8.   INDEMNIFICATION
          ---------------

          The Company will enter into an indemnification agreement with Officer
substantially identical to that entered into with its other executive officers,
in the form attached as Exhibit A hereto.

     9.   SEVERABILITY OF PROVISIONS
          --------------------------

          If any provision of this Agreement shall be declared by a court of
competent jurisdiction to be invalid, illegal or incapable of being enforced in
whole or in part, such provision shall be interpreted so as to remain
enforceable to the maximum extent permissible consistent with applicable law and
the remaining conditions and provisions or portions thereof shall nevertheless
remain in full force and effect and enforceable to the extent they are valid,
legal and enforceable, and no provision shall be deemed dependent upon any other
covenant or provision unless so expressed herein.

     10.  ENTIRE AGREEMENT: MODIFICATION
          ------------------------------

          This Agreement contains the entire agreement of the parties relating
to the subject matter hereof, and the parties hereto have made no agreements,
representations or warranties relating to the subject matter of this Agreement
which are not set forth herein. No modification of this Agreement shall be valid
unless made in writing and signed by the parties hereto.

     11.  BINDING EFFECT
          --------------

          The rights, benefits, duties and obligations under this Agreement
shall inure to, and be binding upon, the Corporation, its successors and
assigns, and upon the Officer and his legal representatives.  This Agreement
constitutes a personal service agreement, and the performance of the Officer's
obligations hereunder may not be transferred or assigned by the Officer.

     12.  NON-WAIVER
          ----------

          The failure of either party to insist upon the strict performance of
the terms,

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conditions and provisions of this Agreement shall not be construed as a waiver
or relinquishment of future compliance therewith, and said terms, conditions and
provisions shall remain in full force and effect.  No waiver of any term or
condition of this Agreement on the part of either party shall be effective for
any purpose whatsoever unless such waiver is in writing and signed by such
party.

     13.  GOVERNING LAW

          This Agreement shall be governed by, and construed and interpreted in
accordance with, the laws of the Commonwealth of Massachusetts without regard to
principles of conflict of laws.

     14.  HEADINGS
          --------

          The headings of paragraphs are inserted for convenience and shall not
affect the interpretation of this Agreement on the day and year first above
written.



                                               INTERNEURON PHARMACEUTICALS, INC.



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


                                           /s/ Mark S. Butler
                                          --------------------------------------
                                                    MARK S. BUTLER

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