<PAGE>
 
* The confidential material contained herein has been omitted and filed 
separately with the Comission.

                               SUPPLY AGREEMENT
                               ----------------
                                    BETWEEN
                                    -------
                           ABBOTT LABORATORIES INC.
                           ------------------------
                                      AND
                                      ---
                         MAGAININ PHARMACEUTICALS INC.
                         -----------------------------


         THIS AGREEMENT is made, effective as of January 1, 1999, (the
"Effective Date") by and between Abbott Laboratories Inc., an Illinois
corporation, having a principal place of business at 100 Abbott Park Road,
Abbott Park, Illinois 60064-3500 ("Abbott"), and Magainin Pharmaceuticals Inc.,
a Delaware corporation, having a principal place of business at 5110 Campus
Drive, Plymouth Meeting, Pennsylvania 19462 ("Magainin").

         WHEREAS, Magainin is the owner of certain technology and patent rights
to pexiganan acetate;

         WHEREAS, Magainin and Abbott have entered into a series of purchase
order agreements, including addendums thereto, and a stock issuance agreement,
pursuant to which Abbott has performed development activities leading to the
creation and maintenance of a Drug Master File (the "DMF") for Bulk Drug
Substance (the "Purchase Orders");

         WHEREAS, Abbott possesses large scale facilities for the production of
commercial quantities of Bulk Drug Substance; and

         WHEREAS, Magainin desires Abbott to produce for Magainin commercial
quantities of Bulk Drug Substance.

<PAGE>
 
         NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements contained herein, Magainin and Abbott agree as follows:

1.       Definitions
         -----------

         As used in this Agreement, the following words and phrases shall have
the following meanings:

         1.1      "Affiliate" of a party hereto means any entity which controls,
is controlled by, or is under common control with such party. For purposes of
this definition, a party shall be deemed to control another entity if it owns or
controls, directly or indirectly, at least fifty percent (50%) of the voting
equity of the other entity (or other comparable ownership interest for an entity
other than a corporation).

         1.2      "Bulk Drug Substance" means the bulk form of pexiganan acetate
manufactured for Magainin by Abbott in accordance with the Bulk Drug
Specifications.

         1.3      "Bulk Drug Specifications" means the written specifications 
for Bulk Drug Substance set forth in Exhibit A as amended from time to time
pursuant to Subparagraph 6.1.

         1.4      "Confidential Information" means all information disclosed 
pursuant to this Agreement and the Purchase Orders in writing (or all
information disclosed orally, visually and/or in another tangible form that is
summarized in writing as to its general content within thirty (30) days after
original disclosure and identified as being confidential), except any portion
thereof that:

         (i)      is known to the recipient, as evidenced by its written records
                  before receipt thereof under this Agreement and the Purchase
                  Orders;

                                       2
<PAGE>
 
         (ii)     is disclosed to the recipient without restriction after
                  acceptance of this Agreement by a third person who has the
                  right to make such disclosure;

         (iii)    is or becomes part of the public domain through no fault of
                  the recipient; or

         (iv)     is independently developed by or for the recipient by
                  individuals or entities who have not had access to
                  Confidential Information as evidenced by its written records.

         1.5      "Contract Quarter" means each three (3)-month calendar period
beginning each January 1, April 1, July 1, and October 1, as the case may be, of
each Contract Year, However, the first Contract Quarter means the period
commencing on the first day of the first Contract Year and ending on the first
to occur of March 31, June 30, September 30, or December 31 of the first
Contract Year.

         1.6      "Contract Year means the twelve month period commencing on the
Effective Date and each anniversary thereof.

         1.7      "Effective Date" shall mean January 1, 1999.

         1.8      "Requirements" means one hundred percent (100%) of the 
commercial requirements for Bulk Drug Substance of Magainin, its Affiliates,
subsidiaries, assignees, licensees and sublicensees in the Territory.






                                        3
<PAGE>
 
          1.9     "Segments" means the series of assembly steps forming the
pexiganan molecule as referenced in the DMF and as described as follows:

--------------------------------------------------------------------------------
Step ( ):                         (                                             

                                                                             )**
--------------------------------------------------------------------------------
Step ( ):                         (                                             

                                                                             )**
--------------------------------------------------------------------------------
Step ( ):                         (                                             

                                                                             )**
--------------------------------------------------------------------------------

          1.10    "Territory" means the entire world, except Europe.

2.        Obligations of the Parties
          --------------------------

          2.1     Magainin shall purchase, and Abbott shall supply, (      )   *
kilograms of Bulk Drug Substance to be delivered during the first Contract Year.

          2.2     On or before April 1, 1999, Magainin shall make an election
regarding its purchase obligations for the remainder of the term of this
Agreement, in accordance with Paragraph 2.2(a) or 2.2(b) as set forth below:

                  (a) Magainin shall purchase, and Abbott shall supply, a      *
minimum of (    ) kilograms of Bulk Drug Substance to be delivered during the
second, third and fourth Contract Years, on delivery dates to be agreed upon by
the parties; or, alternatively

                  (b) Magainin shall elect to purchase its Requirements for the
remainder of Term.



                                       *   THE CONFIDENTIAL MATERIAL CONTAINED
                                           HEREIN HAS BEEN OMITTED AND HAS BEEN
                                           FILED SEPARATELY WITH THE COMMISSION
                                                  
                                       4
<PAGE>
 
         2.3      Magainin hereby agrees to offer Abbott the opportunity to 
provide a proposal for the development, manufacture and supply of pexiganan
acetate using recombinant technology based on capacity and ability, as mutually
agreed upon by both parties. If Abbott's proposal is equivalent in cost,
manufacturing and technical capability, facilities, delivery timing and scale to
any bona fide proposal received by Magainin Magainin and Abbott shall enter into
an agreement for the development, manufacture and supply of that pexiganan
acetate.

3.       Price
         -----

         3.1      (a) The purchase price per gram for Bulk Drug Substance for
the first Contract Year shall be (                                          )  *
for the first (          )                                                     *
kilograms, and (                                                            )  *
for the next (          ),                                                     *
kilograms.

                  (b) The purchase price per gram for Bulk Drug Substance
purchased pursuant to Paragraph 2.2(a) hereof shall be (                    )  *
for the next (          )                                                      *
kilograms, as adjusted annually in accordance with C.P.l.-U.

                  (c) The purchase price per gram for Bulk Drug Substance
purchased pursuant to Paragraph 2.2(b), or for any additional kilograms of Bulk
Drug Substance beyond that purchased pursuant to Paragraph 2.2(a), shall be the
purchase price set forth in Exhibit B.

                  (d) Abbott shall not be obligated to store Bulk Drug Substance
beyond thirty (30) days from its manufacture. Notwithstanding the preceding
sentence should

                                       
                                                   *  THE CONFIDENTIAL MATERIAL
                                                      CONTAINED HEREIN HAS BEEN
                                                      OMITTED AND HAS BEEN
                                                      FILED SEPARATELY WITH THE
                                                      COMMISSION

                                      5
<PAGE>
 
Abbott consent to such storage, Magainin shall pay Abbott at a rate to be
negotiated between the parties, for any Bulk Drug Substance storage costs and/or
inventory carrying charges incurred by Abbott in excess of thirty (30) days
after the manufacture of the Bulk Drug Substance that is the subject of purchase
order.

          3.2     Any federal, state, county or municipal sales or use tax, 
excise or similar charge, or other tax assessment (other than that assessed
against income), governmental license fee or other charge lawfully assessed or
charged by governmental authorities on the manufacture, sale or transportation
of Bulk Drug Substance sold pursuant to this Agreement shall be paid by
Magainin.

          3.3     If the Bulk Drug Specifications are modified hereunder or the 
Bulk Drug Specifications must be modified by requirement of the FDA or other
regulatory agency (or its foreign equivalent), and such modification increases
Abbott's cost to manufacture Bulk Drug Substance, Abbott shall submit to
Magainin a revised price for Bulk Drug Substance which reflects such cost
increase and the adjusted price for Bulk Drug Substance shall be effective
immediately thereafter. If such modification results in the requirement to
reprocess and/or retest otherwise acceptable Bulk Drug, fifty percent (50%) of
any additional costs incurred by Abbott in such reprocessing, retesting and/or
regulatory filing shall be paid by Magainin upon submission by Abbott of
documentation of such costs. In the event that Magainin has previously accepted
Bulk Drug






                                       6
<PAGE>
 
Substance pursuant to Article 7, Magainin shall pay one hundred percent (100%)
of any such additional costs.

          3.4     If Magainin requests that Abbott perform (or the FDA or its
foreign equivalent requires) additional development work relating to Bulk Drug
Substance, including but not limited to work relating to modified dosage forms
of Bulk Drug Substance and validation of segments, the costs of such additional
work shall be paid for by Magainin.

          3.5     Magainin shall pay Abbott for its direct costs pre-approved by
Magainin, unrelated to the costs associated with filing, maintaining and
updating the DMF as necessary, associated with (i) the FDA (and/or its foreign
equivalent) filing by Abbott requested by Magainin, in support of Magainin's
regulatory filings with respect to Bulk Drug Substance, and (ii) any work
requested by Magainin to produce and assemble documentation for Bulk Drug
Substance registrations both inside and outside the United States.

4.        Term and Termination
          --------------------

          4.1     Except as provided in Subparagraph 4.2, this Agreement shall
commence on the Effective Date and shall terminate on the later of December 31,
2001 or the third anniversary of the commercial launch of finished product
containing Bulk Drug Substance (the "Termination Date"). Thereafter, except as
provided in Subparagraph 4.2, this Agreement shall continue automatically for
one-year periods until terminated upon not less than ninety (90) days' written
notice from either party to the other party. Notwithstanding the foregoing, in
the event that Magainin has not received FDA

                                       7
<PAGE>
 
approval of finished product containing Bulk Drug Substance on or before January
1, 2000, Abbott shall have the option to terminate this Agreement upon thirty
(30) days' written notice. In the event that Magainin has not received FDA
approval of finished product containing Bulk Drug Substance on or before January
1, 2001, Magainin shall have the option to terminate this Agreement upon thirty
(30) days' written notice.

          4.2     Upon the occurrence of the following events, either party may
terminate this Agreement by giving the other party sixty (60) days prior written
notice:

          (i)     Upon the bankruptcy or insolvency of the other party; or

          (ii)    Upon the material breach of any provision of this Agreement by
                  the other party if the breach is not remedied prior to the
                  expiration of such sixty (60) day notice period.

          4.3     Termination, expiration, cancellation or abandonment of this
Agreement through any means and for any reason shall not relieve the parties of
any obligation accruing prior thereto, including, but not limited to, the
obligation to pay money or the requirement to supply or accept previously
ordered Bulk Drug Substance, and shall be without prejudice to the rights and
remedies of either party with respect to the antecedent breach of any of the
provisions of this Agreement. Further, Paragraphs 10, 11, 12, 13, 15, 18 and 25
shall survive the termination of this Agreement. 

5.       Forecasts and Orders
         -------------------- 

         5.1      Forecasting In the event that Magainin elects to purchase its
                  -----------
Requirements pursuant to Paragraph 2.2(b), Magainin shall give Abbott a forecast
of





                                       8
<PAGE>
 
Magainin's estimated Requirements for the second Contract Year no later than
April 1, 1999, broken down by Contract Quarter. Such forecast shall be updated
by Magainin every six (6) months.

          5.2     Firm Orders In the event that Magainin elects to purchase its
                  -----------
Requirements pursuant to Paragraph 2.2(b), the following provisions shall apply:

          (a)     On or before April 1, 1999, Magainin shall give Abbott a firm
purchase order of its Requirements for Bulk Drug Substance for the fourth
quarter of the second Contract Year.

          (b)     On or before the third Contract Quarter of the first Contract
Year, and each subsequent Contract Quarter thereafter, Magainin shall provide to
Abbott a firm purchase order for Bulk Drug Substance to be purchased by Magainin
during the next Contract Quarter not already covered by a firm purchase order.

          (c)     Each firm purchase order shall specify the quantity of Bulk 
Drug Substance ordered and the required delivery date. Subject to the provisions
of this Subparagraph 5.2, Abbott shall use its reasonable best efforts to
deliver Bulk Drug Substance on or prior to the delivery date specified on the
order as received. Magainin shall use its reasonable best efforts to smooth the
quarterly requirements during each Contract Year.

          (d)     A firm purchase order shall not be cancellable once it is
issued to Abbott by Magainin.





                                       9
<PAGE>
 
6.        Manufacture of Bulk Drug Substance
          ---------------------------------- 

          6.1     Abbott shall manufacture, or cause to be manufactured, Bulk 
Drug Substance in compliance with cGMP's in accordance with all applicable
governmental regulations and in conformance with the Bulk Drug Specifications.
Bulk Drug Specifications may be modified from time to time by written agreement
of the parties without the necessity of amending this Agreement. Abbott shall
maintain all records as necessary and appropriate to demonstrate compliance with
cGMP's.

          6.2     Abbott shall permit Magainin and SmithKline Beecham Inc., and,
if agreed and consented to by Abbott, Magainin licensees or sublicensees, or any
agent or consultant designated by Magainin in writing and who is under a binder
of confidentiality, access during reasonable business hours and after reasonable
notice to those areas of Abbott's manufacturing facilities where Bulk Drug
Substance is manufactured, stored and handled and to manufacturing records of
Bulk Drug Substance manufactured by Abbott solely for the purpose of Magainin
performing a quality assurance audit of such facilities and activities; provided
however that SmithKline Beecham, Inc., is under a binder of confidentiality.
Following such inspections, Magainin will submit a report to Abbott with
findings. If any items are identified as requiring follow-up action, then Abbott
shall respond to Magainin in writing within thirty (30) days of the receipt of
the report. Such response shall state actions Abbott plans to take to correct
any such items and the proposed timing(s) therefor, and shall set forth those
items that Abbott will not correct.


                                      10
<PAGE>
 
          6.3     Abbott shall maintain all regulatory and governmental permits,
licenses and approvals that may be necessary to manufacture and ship Bulk Drug
Substance to Magainin and, upon written request, will forward copies to Magainin
of any such permit, license or approval.

          6.4     Abbott shall use its reasonable best efforts to report matters
regarding the manufacture of Bulk Drug Substance to the FDA or other appropriate
governmental authorities in accordance with pertinent laws and regulations.
Abbott shall notify Magainin as soon as reasonably possible of any such matter
and promptly furnish copies of such reports to Magainin.

          6.5     Abbott shall be responsible for handling and responding to any
appropriate governmental agency inspections with respect to Bulk Drug Substance.
Abbott shall provide to Magainin copies of all material correspondence between
Abbott and any governmental agency in connection with any governmental
inspection related to Bulk Drug Substance. Abbott shall advise Magainin as soon
as reasonably possible of any requests by any governmental agency for such
inspections with respect to Bulk Drug Substance.

          6.6     Abbott will not make material changes relating to the
manufacturing process of Bulk Drug Substance (as set forth in the DMF) or
relating to any of the raw materials, or controls used in the manufacture of
Bulk Drug Substance without prior written consent of Magainin. In the event that
Abbott believes that such change is necessary, Abbott will provide Magainin with
written notice detailing such proposed change. In no event shall any change be
implemented until Abbott has received written

                                      11
<PAGE>
 
approval from Magainin. Such proposal shall not be unreasonably withheld. For
the purposes of this Subparagraph, a material change shall be considered a
change requiring prior approval by the FDA before it may be implemented, or a
change that adversely affects the delivery or quality of Bulk Drug Substance.

          6.7     Abbott certifies it did not and will not knowingly use in any
capacity the services of any person, including any firm or individual, debarred
or subject to debarment under the Generic Drug Enforcement Act of 1992, amending
the Food, Drug and Cosmetic Act at 21 USC 335a. Abbott agrees to notify Magainin
immediately in the event any person providing services to Abbott under the scope
of this work of this Agreement is debarred or becomes subject to debarment.

          6.8     Each shipment of Bulk Drug Substance delivered under this
Agreement shall be accompanied by a certificate of analysis ("COA") in the form
set forth in Exhibit C which shall specify that the delivered Bulk Drug
Substance conforms to the Bulk Drug Specifications. Such form shall be mutually
agreed upon by Abbott and Magainin. Magainin shall be under no obligation to
accept any shipment of Bulk Drug Substance without an accompanying COA.

          6.9     Each party shall advise the other of any safety or toxicity
problem of which either party becomes aware regarding the Bulk Drug Substance
and any formulation containing Bulk Drug Substance within two (2) business days
of becoming aware of such problem.




                                      12
<PAGE>
 
     6.10  Abbott agrees to make reasonable efforts to improve the productivity,
efficiency, and quality of the process under which Bulk Drug Substance is
manufactured. Abbott and Magainin shall meet from time to time to review and
share ideas for these improvements.

     6.11  Abbott shall use its reasonable best efforts to ensure that all Bulk
Drug Substance sold and shipped pursuant to this Agreement is manufactured in
accordance with all applicable Federal, state and local environmental, health
and safety laws and regulations in effect at the time and place of manufacture
of Bulk Drug Substance. Further, Abbott shall use its reasonable best efforts to
ensure that all waste, including but not limited to all hazardous waste,
generated in the manufacture of Bulk Drug Substance is disposed of in accordance
with all applicable Federal, state and local laws and regulations.

 7.  Acceptance of Bulk Drug Substance
     ---------------------------------

     (a) Magainin shall have a period of forty-five (45) days from the date
of receipt of Bulk Drug Substance to inspect and reject any shipment of Bulk
Drug Substance. Magainin shall notify Abbott in writing of any claim relating to
damaged, defective or nonconforming Bulk Drug Substance or any shortage in
quantity of any shipment of Bulk Drug Substance within such forty-five (45) day
period. Failure to notify Abbott in writing of rejections within the forty-five
(45) day period shall constitute a waiver of all claims with respect to Bulk
Drug Substance delivered hereunder and, in any event, any use of the Bulk Drug
Substance by Magainin shall be deemed to mean satisfactory performance on the
part of Abbott. In the event of such rejection or


                                       13
<PAGE>
 
shortage, Abbott shall replace the rejected Bulk Drug Substance or make up the
shortage within fifteen (15) days if replacement Bulk Drug Substance is 
available, at no extra cost to Magainin, and shall make arrangements with 
Magainin for the return of any rejected Bulk Drug Substance, such return 
shipping charges to be paid by Abbott. No claims under this Paragraph 7 with 
respect to delivered Bulk Drug Substance shall be greater in amount than the 
purchase price of such Bulk Drug Substance. Nothing in this Paragraph 7 shall be
construed to limit the ability of Magainin to recover third party damages from
Abbott under Paragraph 11.

     (b)  In the event of a discrepancy between Magainin's and Abbott's test
results such that one party's results fall within the Bulk Drug Substance 
Specifications and the other party's results fall outside the Bulk Drug 
Substance Specification's, the parties shall cause an independent tester to 
perform tests on samples of the allegedly defective Bulk Drug Substance using 
the validated methods that were implemented by Abbott during the development of 
Bulk Drug Substance. The independent tester's results shall be final and 
binding, and all related costs and expenses incurred as a result of such 
independent testing shall be borne by the erroneous party.

8.   Shipment and Delivery
     ---------------------    

     8.1  Abbott shall prepare the Bulk Drug Substance for shipment and deliver
the Bulk Drug Substance to the carrier F.O.B. Abbott's manufacturing facility in
North Chicago, Illinois for delivery to (                                   )  *

                                       
                                                  * THE CONFIDENTIAL MATERIAL 
                                       14           CONTAINED HEREIN HAS BEEN 
                                                    OMITTED AND HAS BEEN FILED 
                                                    SEPARATELY WITH THE 
                                                    COMMISSION
<PAGE>
 
(                                     ), or a designate. Title and risk of     *
loss for Bulk Drug Substance shall pass to Magainin at the time Abbott delivers
Bulk Drug Substance to the carrier designated by Magainin to transport Bulk Drug
Substance. All shipping costs shall be borne by Magainin.

     8.2  Each delivery of Bulk Drug Substance shall be governed by the terms of
this Agreement, and none of the conflicting terms or conditions of Magainin's
purchase order form, Abbott's acknowledgment or invoice form shall be
applicable, except those specifying special shipping instructions.

     8.3  All Bulk Drug Substance sold by Abbott to Magainin shall be free and
clear of all liens, claims and encumbrances.

9.   Invoice
     -------

     (a)  In regard to the first (              )                              *
kilograms of Bulk Drug Substance shipped by Abbott to Magainin during the first
Contract Year, Abbott shall invoice Magainin upon shipment. Magainin shall pay
Abbott net seventy-five (75) days from the date of invoice.

     (b)  In regard to the remaining (                )                        *
kilograms of Bulk Drug Substance shipped by Abbott to Magainin during the first
Contract Year, Abbott shall invoice Magainin as follows: (i) upon the completion
of Step (  ), a one time payment                                               *
of (                                                                            
                                                ); and, (ii) upon the shipment *
of each of the (         ) kilogram                                            *
deliverables, (         )                                                     **


                                                  * THE CONFIDENTIAL MATERIAL 
                                       15           CONTAINED HEREIN HAS BEEN 
                                                    OMITTED AND HAS BEEN FILED 
                                                    SEPARATELY WITH THE 
                                                    COMMISSION
<PAGE>
 
(                                                       ) per shipment (for a  *
total of (           )                                                         *
shipments). Magainin shall pay Abbott net seventy-five (75) days from the date 
of invoice.

     (c)  In regard to the purchases of Bulk Drug Substance made by Magainin
under Paragraph 2.2(a), Abbott shall bill Magainin according to the following
schedule:

Step in Manufacturing Process           Percentage of Purchase Price Billed to
-----------------------------           --------------------------------------
                                            Magainin at Step Completion
                                            ---------------------------
          
          Step(   )                                     (   )%                **
          Step(   )                                     (   )%                **
          Step(   )                                     (   )%                **

Abbott shall invoice Magainin for the remaining purchase price upon shipment of
Bulk Drug Substance. Magainin shall pay Abbott net forty-five (45) days from the
date of invoice.

     (d)  In regard to purchases of Bulk Drug Substance made by Magainin
pursuant to Section 2.2(b), Abbott shall invoice Magainin upon shipment.
Magainin shall pay Abbott net forty-five (45) days from the date of invoice.

     (e)  Magainin shall pay a late payment service charge of one and one-half
percent (1.5%) per month (or the highest amount allowed by law, if lower than
one and one-half percent (1.5%)) on all past-due amounts.

10.  Warranties
     ----------

     10.1  Abbott warrants that (i) Bulk Drug Substance delivered to Magainin
pursuant to this Agreement shall conform with the Bulk Drug Specifications and
shall be in compliance with applicable laws and regulations, (ii) Bulk Drug
Substance is and


                                                    * THE CONFIDENTIAL MATERIAL 
                                       16             CONTAINED HEREIN HAS BEEN 
                                                      OMITTED AND HAS BEEN FILED
                                                      SEPARATELY WITH THE
                                                      COMMISSION
<PAGE>
 
shall be manufactured in accordance with cGMP and all applicable federal rules
and regulations, (iii) Bulk Drug Substance shall be free from defects in
materials and workmanship and shall not be adulterated or misbranded within the
meaning of the U.S. Federal Food, Drug and Cosmetic Act, and is not an article
which may not, under the Act, be introduced into interstate commerce, (iv) to
the best of Abbott's knowledge, any Confidential Information provided by Abbott
does not, and will not for the term hereof, infringe any patent or other
proprietary right of any third party, and (v) it owns or controls all of the
rights, title and interest in and to all Confidential Information provided by
Abbott to Magainin under this Agreement and the Purchase Orders. ABBOTT MAKES NO
OTHER WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO BULK DRUG SUBSTANCE. ALL
OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION, THE IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE ARE HEREBY
DISCLAIMED BY ABBOTT.

     10.2  Magainin warrants to Abbott that (i) to the best of Magainin's
knowledge, any Confidential Information provided by Magainin to Abbott does not,
and will not for the term hereof, infringe any patent or other proprietary right
of any third party, (ii) that any Bulk Drug Substance shipped to Magainin shall
be stored in a manner that conforms to cGMP, and (iii) it owns or controls all
of the rights, title and interest in and to all Confidential Information
provided by Magainin to Abbott under this Agreement and the Purchase Orders.


                                       17
<PAGE>
 
     10.3  In no event shall either party be liable to the other party for
indirect, incidental or consequential damages, including without limitation,
lost revenues or profits. Nothing in this Subparagraph 10.3 shall abdicate the
rights of Abbott or Magainin to recover third party damages under Paragraph 11.

11.  Indemnification
     ---------------

     11.1  Magainin shall defend, indemnify and hold Abbott and its
Affiliates and their respective employees, directors, officers and agents
harmless against any liability, judgment, demand, action, suit, loss, damage,
cost and other expense (including reasonable attorney's fees) ("Liability")
resulting from any third party claims made or proceedings brought against Abbott
to the extent such Liability arises from (i) Magainin's negligence or willful
act or omission in the testing, use, manufacture, promotion, marketing, sale,
distribution, packaging, labeling, handling, or storage of Bulk Drug Substance
and/or formulations containing Bulk Drug Substance; (ii) Magainin's material
breach of this Agreement; (iii) any infringement set forth in Subparagraph 10.2;
(iv) the alleged release or threat of release of a hazardous substance at
either: (A) the place of manufacture of any finished product containing Bulk
Drug Substance, or (B) the place that any waste, including but not limited to
any hazardous waste, generated in the manufacture of any finished product
containing Bulk Drug Substance has been treated, stored or disposed; or (v)
Magainin's breach of any warranty set forth in Subparagraph 10.2.

     11.2  Abbott shall defend, indemnify and hold Magainin and its
Affiliates and their respective employees, directors, officers and agents
harmless against any Liability


                                       18
<PAGE>
 
resulting from any third party claims made or proceedings brought against
Magainin to the extent that such Liability arises from (i) Abbott's negligence
or willful act or omission in the manufacture, handling or storage of Bulk Drug
Substance; (ii) Abbott's material breach of this Agreement; (iii) any
infringement set forth in Subparagraph 10.1; (iv) the alleged release or threat
of release of a hazardous substance at either: (A) the place of manufacture of
Bulk Drug Substance, or (B) the place that any waste, including but not limited
to any hazardous waste, generated in the manufacture of Bulk Drug Substance has
been treated, stored or disposed; or (v) Abbott's breach of any warranty set
forth in Subparagraph 10.1.

     11.3  Each party shall notify the other promptly of any threatened or
pending claim or proceeding covered by any of the above Subparagraphs in this
Paragraph 11 and shall include sufficient information to enable the other party
to assess the facts. Each party shall cooperate fully with the other party in
the defense of all such claims. No settlement or compromise shall be binding on
a party hereto without its prior written consent.

12.  Proprietary Ownership of Technology and License Grants
     ------------------------------------------------------

     12.1  Abbott shall own any discovery or invention, whether or not
patentable (an "Invention"), consisting of a solution phase process or any other
process of manufacturing Bulk Drug Substance and all plans, procedures,
specifications, technology, know-how, and other information reasonably necessary
for the practice of the Invention that is conceived and reduced to practice by
Abbott personnel in the conduct of the work hereunder, and under all prior
Purchase Orders. Abbott and


                                       19
<PAGE>
 
Magainin shall jointly own any Invention consisting of a solution phase process
or any other process of manufacturing Bulk Drug Substance that is conceived or
reduced to practice hereunder and under all prior Purchase Orders as to which at
least one Abbott employee and at least one Magainin employee are co-inventors.
Magainin shall exclusively own (a) any Invention consisting of improvements,
modifications, enhancements, refinements or new uses of Bulk Drug Substance, and
(b) subject to the first two sentences of this Paragraph 12, any Magainin
Confidential Information, that is conceived or reduced to practice in the
conduct of the work hereunder, regardless of which party conceived or reduced
such Invention to practice.

     12.2  In the event that Magainin seeks a license to Abbott's Inventions
prior to the second anniversary of the Termination Date, then Magainin shall
make payments in accordance with the following schedule:

     Termination Date/License Grant            Payment      Due Date
     ------------------------------            -------
     On or before the Termination Date          (   )       (   ) at time of  **
                                                            license grant, 
                                                            (   ) every three  *
                                                            (3) months 
                                                            thereafter

     After the Termination Date but             (   )       (   ) at time of  **
     on or before the Second                                license grant,
     Anniversary of the Termination Date                    (   ) every three  *
                                                            months thereafter

     Anytime after the Second                   (   )       (   ) at time of  **
     Anniversary of the Termination                         license grant
     Date


                                                   * THE CONFIDENTIAL MATERIAL 
                                       20            CONTAINED HEREIN HAS BEEN 
                                                     OMITTED AND HAS BEEN FILED
                                                     SEPARATELY WITH THE 
                                                     COMMISSION
<PAGE>
 
Subject to the payment terms set forth above, as applicable, Magainin shall need
no further license from Abbott for the use of Abbott Inventions.

     12.3  If the parties terminate the Supply Agreement, Abbott will assist
Magainin with regard to Magainin's transition to another supplier or to internal
production of Bulk Drug Substance, as the case may be, at Abbott's sole cost,
for a period not to exceed six (6) man months. Any additional assistance
requested by Magainin shall be paid for by Magainin.

13.  Confidential Information
     ------------------------

     Neither party shall use or disclose any Confidential Information received
by it pursuant to this Agreement without the prior written consent of the other
party. Except as provided in the following sentence, nothing contained in this
Paragraph shall be construed to restrict the parties from disclosing
Confidential Information as is reasonably necessary to perform acts permitted by
this Agreement. However, if either party is required or feels it necessary to
disclose any Confidential Information received by it pursuant to this Agreement
(whether by audit or otherwise) to any third party or governmental agency in
compliance with any federal, state and/or local laws and/or regulations, or
pursuant to an order of a court of competent jurisdiction, the disclosing party
shall notify the party owning such Confidential Information immediately, prior
to any such disclosure, in order to enable the owning party to protect its
Confidential Information. In any event, the disclosing party shall make any
disclosures of Confidential Information received by it pursuant to this
Agreement only to the extent required, and only to such persons who have a need
to know. The obligations of the


                                       21
<PAGE>
 
parties relating to Confidential Information shall expire five (5) years after
termination of this Agreement.

14.      Force Majeure
         -------------

         Any delay in the performance of any of the duties or obligations of any
party (except the payment of money due hereunder) caused by an event outside the
affected party's reasonable control shall not be considered a breach of this
Agreement, and unless provided to the contrary herein, the time required for
performance shall be extended for a period equal to the period of such delay.
Such events shall include without limitation, acts of God; acts of the public
enemy; insurrections; riots; injunctions; embargoes; labor disputes, including
strikes, lockouts, job actions, or boycotts; fires; explosions; floods;
earthquakes; shortages of material or energy; delays in the delivery of raw
materials; or other unforeseeable causes beyond the reasonable control and
without the fault or negligence of the party so affected. The party so affected
shall give prompt notice to the other party of such cause, and shall take
whatever reasonable steps are necessary to relieve the effect of such cause as
rapidly as reasonably possible.

15.      Recalls
         -------

         In the event (i) any government authority issues a request, directive
or order that the Bulk Drug Substance or Product be recalled, or (ii) a court of
competent jurisdiction orders such a recall, or (iii) Magainin reasonably
determines after consultation with Abbott that the Bulk Drug Substance or
Product should be recalled, the parties shall take all appropriate corrective
actions. In the event that such recall results from the

                                       22
<PAGE>
 
failure of the Bulk Drug Substance to meet the Bulk Drug Specifications, and
such failure could not reasonably be detected by Magainin within the forty-five
(45) day acceptance period set forth in Paragraph 7, Abbott shall be responsible
for all expenses of the recall. In all other cases, Magainin shall be
responsible for the expense of recall, including the expense or service fee
associated with the representatives' time. For the purposes of this Agreement,
the expenses of recall shall include, without limitation, the expense of
notification and destruction or return of the recalled Bulk Drug Substance or
Product, but not the expense or service fee associated with the representatives'
time which shall in all cases be borne by Magainin. The remedy set forth above
shall constitute the sole remedy under this Paragraph 15.

16.      Notices
         -------

         All notices hereunder shall be in writing and shall be delivered
personally, mailed by overnight delivery, registered or certified mail, postage
prepaid, mailed by express mail service or given by facsimile, to the following
addresses of the respective parties:

              If to Abbott:     Abbott Laboratories
                                President
                                Chemical and Agricultural Products Division
                                Department 390, Building Al
                                1401 Sheridan Road
                                North Chicago, IL 60064-4000

                                Fax Number: 847/938-2315




                                       23
<PAGE>
 
              with copy to:     Abbott Laboratories
                                Senior Vice President and General Counsel
                                Department 364, Building AP6D
                                100 Abbott Park Road
                                Abbott Park, IL 60064-3500

                                Fax Number: 847/938-6277

              If to Magainin:   Magainin Pharmaceuticals, Inc.
                                5110 Campus Drive
                                Plymouth Meeting, Pennsylvania 19462

                                Attn:  Chief Executive Officer 

                                Fax Number: 610/941-5399

Notices shall be effective upon receipt if personally delivered, on the third
business day following the date of mailing if sent by certified or registered
mail, and on the second business day following the date of delivery to the
express mail service if sent by express mail, or the date of transmission if
sent by facsimile. A party may change its address listed above by notice to the
other party.

17.      Binding Effect
         --------------

         This Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective assigns and successors in interest.

18.      Applicable Law
         --------------

         This Agreement shall be construed, interpreted and governed by the laws
of the State of Illinois, except for choice of law rules. Any controversy or
claim arising out of relating to this Agreement, or the breach thereof, shall be
resolved by the alternative


                                       24
<PAGE>
 
dispute resolution process described in Exhibit D; provided, however, that each
party may seek injunctive relief to prevent the breach of the other party's
obligations under this Agreement.

19.      Assignment
         ----------

         Neither party shall assign this Agreement or any part thereof without
the prior written consent of the other party; provided, however, that this
Agreement may be assigned by either party to a third party purchaser in the
event of an acquisition of at least fifty (50%) percent of Magainin. Any
permitted assignee shall assume all obligations of its assignor under this
Agreement. No assignment shall relieve any party of responsibility for the
performance of any accrued obligation that such party then has hereunder.

20.      Entire Agreement
         ----------------

         20.1    Except as provided in Subparagraph 20.2 below this Supply
Agreement constitutes the entire agreement between the parties concerning the
subject matter hereof and supersedes all written or oral prior agreements or
understandings with respect thereto. No party shall claim any amendment,
acknowledgment or acceptance of purchase order forms or otherwise, unless in
writing signed by an authorized representative of each party.

         20.2    This Agreement shall not supersede or replace any of the
Purchase Orders, all of which shall be interpreted consistently with this
Agreement.


                                       25
<PAGE>
 
21.      Severability
         ------------

         This Agreement is subject to the restrictions, limitations, terms and
conditions of all applicable governmental regulations, approvals and clearances.
If any term or provision of this Agreement shall for any reason be held invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other term or provision hereof, and this
Agreement shall be interpreted and construed as if such term or provision, to
the extent the same shall have been held to be invalid, illegal or
unenforceable, had never been contained herein.

22.      Waiver
         ------

         No waiver or modification of any of the terms of this Agreement shall
be valid unless in writing and signed by an authorized representative of each
party hereto. Failure by either party to enforce any rights under this Agreement
shall not be construed as a waiver of such rights nor shall a waiver by either
party in one or more instances be construed as constituting a continuing waiver
or as a waiver in other instances.

23.      Exhibits
         --------

         All Exhibits referenced herein are hereby made a part of this
Agreement.

24.      Counterparts
         ------------

         This Agreement may be executed in any number of separate counterparts,
each of which shall be deemed to be an original, but that together shall
constitute one and the same instrument.


                                       26
<PAGE>
 
25.      No Disclosure of Agreement
         --------------------------

         Neither party shall disclose the provisions of this Agreement without
the prior written approval of the other party. Neither party shall use the name
of the other party in any publicity or advertising without the other party's
prior written consent, except as may be required by law.

         IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized representatives on the later date written
below.


ABBOTT LABORATORIES INC.                          MAGAININ PHARMACEUTICALS INC.


By: [SIGNATURE APPEARS HERE]                      By: /s/ M. Dougherty
   ---------------------------                       ---------------------------
Title: DIV. VP.                                   Title: PRES., CEO
      ------------------------                          ------------------------
Date: 12/22/98                                    Date: 12/18/98
     -------------------------                         -------------------------
<PAGE>
 
                                   Exhibit A
                                   ---------
                                Specifications

***




                                       *  THE CONFIDENTIAL MATERIAL CONTAINED 
                                          HEREIN HAS BEEN OMITTED AND HAS BEEN
                                          FILED SEPARATELY WITH THE COMMISSION
<PAGE>
 
                                   Exhibit B
                                   ---------
                                    Pricing


 Annual Volume Commitment (Kilograms)                   *Price per Gram
 ------------------------------------                   ---------------

                (   )                                        (   )            **
                (   )                                        (   )            **
                (   )                                        (   )            **
                (   )                                        (   )            **
                (   )                                        (   )            **
                (   )                                        (   )            **


*Annual price increases based on CPI-U





                                            * THE CONFIDENTIAL MATERIAL
                                              CONTAINED HEREIN HAS BEEN OMITTED
                                              AND HAS BEEN FILED SEPARATELY WITH
                                              THE COMMISSION
<PAGE>
 
ABBOTT LABORATORIES
Chemical and Agricultural Products Division             Exhibit C
North Chicago Illinois 60064-4000                       ---------
TEL:  1-800-323-9597 FAX: 1-847-938-6035
================================================================================
                                                   Quality Health Care Worldwide

                            CERTIFICATE OF ANALYSIS
      22--Oct--1996

      ***














     The undersigned certifies this to be a true copy of the results of tests
     and assays conducted by ABBOTT LABORATORIES.


     /s/ Susan Kendzior 

     Susan Kendzior 
     Quality Assurance
                                                   *  THE CONFIDENTIAL MATERIAL
                                                      CONTAINED HEREIN HAS BEEN
                                                      OMITTED AND HAS BEEN FILED
                                                      SEPARATELY WITH THE 
                                                      COMMISSION
<PAGE>
 
                                   Exhibit D
                                   ---------

                         Alternative Dispute Resolution

The parties recognize that a bona fide dispute as to certain matters may arise
from time to time during the term of this Agreement that relates to either
party's rights and/or obligations. To have such a dispute resolved by this
Alternative Dispute Resolution ("ADR") provision, a party first must send
written notice of the dispute to the other party for attempted resolution by
good faith negotiations between their respective presidents (or their
equivalents) of the affected subsidiaries, divisions, or business units within
twenty-eight (28) days after such notice is received (all references to "days"
in this ADR provision are to calendar days).

If the matter has not been resolved within twenty-eight (28) days of the notice
of dispute, or if the parties fail to meet within such twenty-eight (28) days,
either party may initiate an ADR proceeding as provided herein. The parties
shall have the right to be represented by counsel in such a proceeding.


1.   To begin an ADR proceeding, a party shall provide written notice to the
     other party of the issues to be resolved by ADR. Within fourteen (14) days
     after its receipt of such notice, the other party may, by written notice to
     the party initiating the ADR, add additional issues to be resolved within
     the same ADR.

2.   Within twenty-one (21) days following receipt of the original ADR notice,
     the parties shall select a mutually acceptable neutral to preside in the
     resolution of any disputes in this ADR proceeding. If the parties are
     unable to agree on a mutually acceptable neutral within such period, either
     party may request the President of the CPR Institute for Dispute Resolution
     ("CPR") 366 Madison Avenue, 14th Floor, New York, New York 10017, to select
     a neutral pursuant to the following procedures:

     (a)  The CPR shall submit to the parties a list of not less than five (5)
          candidates within fourteen (14) days after receipt of the request,
          along with a Curriculum Vitae for each candidate. No candidate shall
          be an employee, director, or shareholder of either party or any of
          their subsidiaries or affiliates.

     (b)  Such list shall include a statement of disclosure by each candidate of
          any circumstances likely to affect his or her impartiality.
<PAGE>
 
     (c)  Each party shall number the candidates in order of preference (with
          the number one (1) signifying the greatest preference) and shall
          deliver the list to the CPR within seven (7) days following receipt of
          the list of candidates. If a party believes a conflict of interest
          exists regarding any of the candidates, that party shall provide a
          written explanation of the conflict to the CPR along with its list
          showing its order of preference for the candidates. Any party failing
          to return a list of preferences on time shall be deemed to have no
          order of preference.

     (d)  If the parties collectively have identified fewer than three (3)
          candidates deemed to have conflicts, the CPR immediately shall
          designate as the neutral the candidate for whom the parties
          collectively have indicated the greatest preference. If a tie should
          result between two candidates, the CPR may designate either candidate.
          If the parties collectively have identified three (3) or more
          candidates deemed to have conflicts, the CPR shall review the
          explanations regarding conflicts and, in its sole discretion, may
          either (i) immediately designate as the neutral the candidate for whom
          the parties collectively have indicated the greatest preference, or
          (ii) issue a new list of not less than five (5) candidates, in which
          case the procedures set forth in Sections 2(a) - 2(d) shall be
          repeated.

3.   No earlier than twenty-eight (28) days or later than fifty-six (56) days
     after selection, the neutral shall hold a hearing to resolve each of the
     issues identified by the parties. The ADR proceeding shall take place at a
     location agreed upon by the parties. If the parties cannot agree, the
     neutral shall designate a location other than the principal place of
     business of either party or any of their subsidiaries or affiliates.

4.   At least seven (7) days prior to the hearing, each party shall submit the
     following to the other party and the neutral:

     (a)  a copy of all exhibits on which such party intends to rely in any oral
          or written presentation to the neutral;

     (b)  a list of any witnesses such party intends to call at the hearing, and
          a short summary of the anticipated testimony of each witness;

     (c)  a proposed ruling on each issue to be resolved, together with a
          request for a specific damage award or other remedy for each issue.
          The proposed rulings and remedies shall not contain any recitation of
          the facts or any legal arguments and shall not exceed one (1) page per
          issue.
<PAGE>
 
     (d)  a brief in support of such party's proposed rulings and remedies,
          provided that the brief shall not exceed twenty (20) pages. This page
          limitation shall apply regardless of the number of issues raised in
          the ADR proceeding. Except as expressly set forth in Sections 4(a) -
          4(d), no discovery shall be required or permitted by any means,
          including depositions, interrogatories, requests for admissions, or
          production of documents.

5.   The hearing shall be conducted on two (2) consecutive days and shall be
     governed by the following rules:

     (a)  Each party shall be entitled to five (5) hours of hearing time to
          present its case. The neutral shall determine whether each party has
          had the five (5) hours to which it is entitled.

     (b)  Each party shall be entitled, but not required, to make an opening
          statement, to present regular and rebuttal testimony, documents or
          other evidence, to cross-examine witnesses, and to make a closing
          argument. Cross-examination of witnesses shall occur immediately after
          their direct testimony, and cross-examination time shall be charged
          against the party conducting the cross-examination.

     (c)  The party initiating the ADR shall begin the hearing and, if it
          chooses to make an opening statement, shall address not only issues it
          raised but also any issues raised by the responding party. The
          responding party, if it chooses to make an opening statement, also
          shall address all issues raised in the ADR. Thereafter, the
          presentation of regular and rebuttal testimony and documents, other
          evidence, and closing arguments shall proceed in the same sequence.

     (d)  Except when testifying, witnesses shall be excluded from the hearing
          until closing arguments.

     (e)  Settlement negotiations, including any statements made therein, shall
          not be admissible under any circumstances. Affidavits prepared for
          purposes of the ADR hearing also shall not be admissible. As to all
          other matters, the neutral shall have sole discretion regarding the
          admissibility of any evidence.

6.   Within seven (7) days following completion of the hearing, each party may
     submit to the other party and the neutral a post-hearing brief in support
     of its proposed rulings and remedies, provided that such brief shall not
     contain or discuss any new evidence and shall not exceed ten (10) pages.
     This page limitation shall apply regardless of the number of issues raised
     in the ADR proceeding.
<PAGE>
 
7.   The neutral shall rule on each disputed issue within fourteen (14) days
     following completion of the hearing. Such ruling shall adopt in its
     entirety the proposed ruling and remedy of one of the parties on each
     disputed issue but may adopt one party's proposed rulings and remedies on
     some issues and the other party's proposed rulings and remedies on other
     issues. The neutral shall not issue any written opinion or otherwise
     explain the basis of the ruling.

8.   The neutral shall be paid a reasonable fee plus expenses. These fees and
     expenses, along with the reasonable legal fees and expenses of the
     prevailing party (including all expert witness fees and expenses), the fees
     and expenses of a court reporter, and any expenses for a hearing room,
     shall be paid as follows:

     (a)  If the neutral rules in favor of one party on all disputed issues in
          the ADR, the losing party shall pay 100% of such fees and expenses.

     (b)  If the neutral rules in favor of one party on some issues and the
          other party on other issues, the neutral shall issue with the rulings
          a written determination as to how such fees and expenses shall be
          allocated between the parties. The neutral shall allocate fees and
          expenses in a way that bears a reasonable relationship to the outcome
          of the ADR, with the party prevailing on more issues, or on issues of
          greater value or gravity, recovering a relatively larger share of its
          legal fees and expenses.

9.   The rulings of the neutral and the allocation of fees and expenses shall be
     binding, non-reviewable, and non-appealable, and may be entered as a final
     judgment in any court having jurisdiction.

10.  Except as provided in Section 9 or as required by law, the existence of the
     dispute, any settlement negotiations, the ADR hearing, any submissions
     (including exhibits, testimony, proposed rulings, and briefs), and the
     rulings shall be deemed Confidential Information. The neutral shall have
     the authority to impose sanctions for unauthorized disclosure of
     Confidential Information.