Document:

EXHIBIT 10.3

Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked by [***], have been
separately filed with the Securities and Exchange Commission.

                   COMMON STOCK AND WARRANT PURCHASE AGREEMENT

      THIS COMMON STOCK AND WARRANT PURCHASE AGREEMENT (this "Agreement") is
dated and entered into as of December 10, 2001, by and between DISCOVERY
LABORATORIES, INC., a Delaware corporation (the "Company"), and PHARMABIO
DEVELOPMENT INC., a North Carolina corporation ("Purchaser").

      WHEREAS, the Company and Purchaser have entered into an Investment and
Commission Agreement and a Loan Agreement, both dated as of the date hereof, and
the Company and Quintiles Transnational Corp., an Affiliate of the Purchaser,
have entered into a Commercialization Agreement also dated as of the date hereof
(together with this Agreement, and the Warrants, collectively, the "Transaction
Agreements"); and

      WHEREAS, in connection with the foregoing, Purchaser desires to acquire
and the Company is willing to issue and sell to Purchaser: shares of common
stock, $.001 par value per share, of the Company (the "Common Stock"); and
warrants to purchase shares of Common Stock as described herein, subject to the
terms and conditions specified herein;

      NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by the parties, the parties agree
as follows:

                                    ARTICLE I
                                   DEFINITIONS

      1.01 Definitions. For purposes of this Agreement, in addition to the terms
defined elsewhere herein, the following terms shall have the meanings set forth
below:

      "Affiliate" shall mean, as to any person or entity, any corporation or
business entity controlled by, controlling, or under common control with such
party or entity. For this purpose, "control" shall mean direct or indirect
beneficial ownership of at least fifty percent (50%) of the voting stock or
income interest in such corporation or other business entity.

      "beneficial ownership" or "beneficially own" shall have the meaning given
under Rule 13d-3 promulgated under the Exchange Act.

      "Business Day" shall mean any day other than a Saturday, Sunday or legal
holiday on which banks in North Carolina and New York are open for the conduct
of their banking business.

<PAGE>

      "Closing" shall have the meaning specified in Section 2.02(a) herein.

      "Closing Date" shall have the meaning specified in Section 2.02(a) herein

      "Event of Default" shall have the meaning given such term in the Loan
Agreement.

      "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.

      "FFDCA" shall mean the United States Federal Food, Drug and Cosmetic Act,
as amended from time to time, and all regulations promulgated thereunder.

      "Five-Day Average Trading Price" of the Common Stock on any date shall
mean the average of the closing sales prices quoted on the Nasdaq SmallCap
Market for the five (5) trading days prior to such date.

      "knowledge" shall mean, when used with respect to the Company, the
knowledge of the executive officers and directors of the Company.

      "Loan Agreement" shall mean the Loan Agreement dated as of the date hereof
between the Company and Purchaser, as amended, modified or supplemented from
time to time.

      "Registrable Securities" shall mean (i) the Shares, (ii) the Warrant
Shares, and (iii) any Common Stock issued as a dividend or other distribution
with respect to, or in exchange for or in replacement of, such above-described
securities; provided however, that "Registrable Securities" shall not include
any securities sold by a person either pursuant to a registration statement or
Rule 144.

      "Rule 144" shall mean Rule 144 as promulgated by the SEC under the
Securities Act, as such Rule may be amended from time to time, or any similar
successor rule that may be promulgated by the SEC.

      "Securities Act" shall mean the Securities Act of 1933, as amended.

      "SEC" shall mean the Securities and Exchange Commission.

      "Shares" shall mean all shares of Common Stock of the Company issued at
the Closing.

      "Thirty-Day Average Trading Price" of the Common Stock on any date shall
mean the average of the closing sales prices quoted on the Nasdaq SmallCap
Market for the thirty (30) trading days prior to such date.

      "Warrants" shall mean the Class G and Class H Warrants described in
Section 2.01.

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<PAGE>

      "Warrant Shares" shall mean the shares issuable by the Company upon the
exercise of the Warrants.

                                   ARTICLE II
                         PURCHASE AND SALE OF THE SHARES

      2.01 Issuance of the Shares and Warrants.

            (a) Shares and Class G Warrant. Subject to the terms and conditions
of this Agreement, at the Closing, the Company agrees to issue and sell to
Purchaser, and Purchaser agrees to purchase from the Company for an aggregate
purchase price of $3,000,000:

                  (1) a number of shares of Common Stock equal to $3,000,000
divided by the higher of (x) 125% of the Thirty-Day Average Trading Price, and
(y) the Five-Day Average Trading Price, with any fractional share amount rounded
to the nearest whole share and with 0.5 shares or more rounded up; and

                  (2) a warrant to purchase 357,143 shares of Common Stock with
an initial exercise price equal to the higher of (x) 115% of the Thirty-Day
Average Trading Price, and (y) the Five-Day Average Trading Price, in form and
substance satisfactory to the parties (the "Class G Warrant").

            (b) Class H Warrant. Subject to the terms and conditions of this
Agreement, at the Closing, the Company agrees to issue to Purchaser a warrant to
purchase 320,000 shares of Common Stock with an initial exercise price equal to
the higher of (x) the Thirty-Day Average Trading Price, and (y) the Five-Day
Average Trading Price and a vesting schedule and otherwise in form and substance
satisfactory to the parties (the "Class H Warrant").

      2.02 Closing; Delivery of the Shares.

            (a) Closing.

                  (i) The purchase and sale of the Shares and Warrants shall
take place at a closing (the "Closing") to be held at the offices of Smith,
Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P., 2500 First Union Capitol
Center, Raleigh, NC 27601 at 10:00 a.m. Eastern Time on the date of this
Agreement, or at such other location, time and date as may be mutually agreed
upon by the parties (the "Closing Date"). The Closing shall take place
contemporaneously with the execution and delivery of this Agreement and the
other Transaction Agreements by the parties thereto.

                  (ii) At the Closing, subject to the terms and conditions
contained in this Agreement, in payment of the full purchase price for the
Shares and the Warrants, Purchaser shall provide a wire transfer of immediately
available funds to the Company in an amount equal to Three Million Dollars
($3,000,000) using the following wire transfer instructions:

                                      -3-
<PAGE>

                     Bank Name:        First Union National Bank
                                       Roanoke, Virginia (USA)
                     ABA No.:          051400549
                     Beneficiary:      First Clearing Corporation
                     Account No.:
                     To further credit Discovery Laboratories, Inc., Account No.

            (b) Delivery of Shares and Warrants. At the Closing, the Company
shall deliver the Class G Warrant and the Class H Warrant, and as soon as
reasonably practicable after the Closing the Company shall deliver a stock
certificate evidencing the Shares, all issued in the name of Purchaser and dated
as of the Closing Date.

                                   ARTICLE III
                              CONDITIONS TO CLOSING

      3.01 Conditions to Purchaser's Obligations at Closing. The obligation of
Purchaser to purchase and pay for the Shares and the Warrants at the Closing is
subject to each of the following conditions precedent:

            (a) Opinion of Counsel. Dickstein Shapiro Morin & Oshinsky, LLP,
counsel to the Company, shall have delivered its legal opinion to Purchaser, in
the form acceptable to the parties regarding this Agreement and the transactions
contemplated hereby;

            (b) Board Resolutions. Purchaser shall have received at the Closing
copies of the resolutions of the Board of Directors of the Company authorizing
the execution and delivery of this Agreement and the performance by the Company
of all transactions contemplated hereby, certified by an appropriate officer of
the Company;

            (c) Officer's Certificate. Purchaser shall have received at the
Closing, a certificate, executed by the appropriate officer of the Company and
dated as of the Closing Date, together with and certifying (i) the names of the
officers of the Company authorized to sign this Agreement together with the true
signatures of such officers; (ii) a copy of the certificate of incorporation of
the Company, as amended and in effect as of the Closing Date; (iii) a copy of
the bylaws of the Company, as amended and in effect as of the Closing Date; (iv)
that the representations and warranties contained in Article IV hereof are true
and correct as of the Closing Date; and (v) the Company has complied with all
the agreements and satisfied all the conditions herein on its part to be
performed or satisfied on or prior to the Closing Date;

            (d) Transaction Agreements. Purchaser shall have received at the
Closing the Transaction Agreements, duly executed by an authorized officer of
the Company; and

            (e) Instruction Letter. The Company shall have transmitted an
instruction letter to its stock transfer agent directing it to issue to
Purchaser the stock certificate for the Shares, and Purchaser shall have
received a copy of such letter.

                                      -4-
<PAGE>

      3.02 Conditions to Company's Obligations at Closing. The obligation of the
Company to issue and sell the Shares and Warrants at the Closing is subject to
each of the following additional conditions precedent:

            (a) Transaction Agreements. The Company shall have received at the
Closing the Transaction Agreements, duly executed by an authorized officer of
Purchaser or its Affiliates, as the case may be.

            (b) Payment. Purchaser shall have delivered Three Million Dollars
($3,000,000) in immediately available funds to Company's specified account in
accordance with Section 2.02(a)(ii).

                                   ARTICLE IV
                    REPRESENTATIONS AND WARRANTIES OF COMPANY

      The Company represents and warrants to Purchaser as follows:

      4.01 Corporate Status. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware,
and the Company is qualified to do business as a foreign corporation in each
jurisdiction in which qualification is required, except where failure to so
qualify would not have a Material Adverse Effect (as defined herein). Except for
Acute Therapeutics, Inc., a wholly owned subsidiary of the Company that is
presently inactive, the Company does not own or control, directly or indirectly,
any interest in any other corporation, partnership, limited liability company,
association, or other business entity. The Company is not a participant in any
joint venture, partnership, or similar arrangement. The Company has all
requisite corporate power and authority to carry on its business as now
conducted.

      4.02 Authorized Capital Stock.

            (a) As of the Closing Date, 24,753,138 shares of Common Stock and no
shares of the Company's preferred stock, par value $.001 per share ("Preferred
Stock"), were issued and outstanding. All of the outstanding shares of the
Company's capital stock are duly authorized, validly issued, fully paid and
nonassessable.

            (b) Except as set forth on Schedule 4.02(b), there are no
outstanding subscriptions, options, warrants, rights, calls, contracts, demands,
commitments, conversion rights or other agreements or arrangements of any
character or nature whatever under which the Company is or may be obligated (x)
to issue or sell shares of its Common Stock or Preferred Stock, or (y) to
register shares of its Common Stock or Preferred Stock. No holder of any
security of the Company is entitled to any preemptive or similar rights to
purchase any securities of the Company.

            (c) The Company has reserved a reasonably adequate number of
authorized but unissued shares of Common Stock for issuance upon exercise of the
Warrants and such

                                      -5-
<PAGE>

shares shall remain so reserved (subject to reduction from time to time for
Common Stock issued upon the exercise of the Warrants), as long as the Warrants
are exercisable.

      4.03 Issuance, Sale and Delivery of the Securities. The Shares, the
Warrants and the Warrant Shares, when issued and paid for pursuant to the terms
of this Agreement or the exercise provisions of the Warrants, as the case may
be, will be duly and validly authorized, issued and outstanding, fully paid,
nonassessable and free and clear of all pledges, liens, encumbrances and
restrictions (other than restrictions arising under federal or state securities
or "blue sky" laws). The issuance of the Shares, the Warrants and the Warrant
Shares by the Company pursuant to this Agreement (hereinafter such securities
are sometimes collectively referred to as the "Securities") are not subject to
any preemptive or other similar rights. No further approval or authority of the
stockholders or the Board of Directors of the Company will be required for the
issuance and sale of the Securities to be sold by the Company as contemplated
herein. Assuming the accuracy of the representations and warranties of Purchaser
contained in Article V, the issuance of the Shares, the Warrants and the Warrant
Shares as contemplated by this Agreement is exempt from the registration
provisions of the Securities Act.

      4.04 Due Execution, Delivery and Performance of the Agreements. The
Company has full legal right, corporate power and authority to enter into the
Transaction Agreements and to perform the transactions contemplated under the
Transaction Agreements. The Transaction Agreements have been duly authorized,
executed and delivered by the Company. The making and performance of the
Transaction Agreements by the Company and the consummation of the transactions
contemplated therein will not violate any provision of the organizational
documents of the Company, and will not result in the creation of any lien,
charge, security interest or encumbrance upon any assets of the Company pursuant
to the terms or provisions of, or will not conflict with, result in the breach
or violation of, or constitute, either by itself or upon notice or the passage
of time or both, a default under any agreement, mortgage, deed of trust, lease,
franchise, license, indenture, permit or other instrument to which the Company
is a party or by which the Company or its properties may be bound or affected
and in each case which would have a material adverse effect on the financial
condition, properties, business or results of operations of the Company (a
"Material Adverse Effect") or any statute or any authorization, judgment,
decree, order, rule or regulation of any court or any regulatory body,
administrative agency or other governmental body, applicable to the Company or
any of its properties. No consent, approval, authorization or other order of any
court, regulatory body, administrative agency or other governmental body, or any
other party, is required for the execution and delivery of this Agreement or the
consummation of the transactions contemplated by this Agreement. The Transaction
Agreements constitute valid and binding obligations of the Company, enforceable
in accordance with their respective terms except as such enforceability may be
limited by bankruptcy, insolvency, moratorium, reorganization or other similar
laws affecting the enforcement of creditors' rights generally and as to
limitations on the enforcement of the remedy of specific performance and other
equitable remedies.

      4.05 Financial Statements and Reports. Prior to the execution hereof, the
Company has made available to Purchaser true and complete copies of the
Company's most recently filed Form 10-KSB and the Proxy Statement filed in
connection with the Company's most recent annual meeting of stockholders and all
Forms 10-QSB and 8-K filed by the Company with the SEC after

                                      -6-
<PAGE>

January 1, 2001, in each case without exhibits thereto (the "SEC Reports"). As
of their respective filing dates, the SEC Reports were prepared in all material
respects in accordance with the requirements of the Securities Act or the
Exchange Act, as the case may be, and the rules and regulations of the SEC
promulgated thereunder applicable to such SEC Reports. The SEC Reports, when
read as a whole, do not contain any untrue statements of a material fact and do
not omit to state a material fact necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
audited consolidated financial statements and unaudited interim financial
statements of the Company included in the SEC Reports have been prepared in
accordance with United States generally accepted accounting principles applied
on a consistent basis (except as may be indicated therein or in the notes
thereto) and fairly present, in all material respects, the financial position of
the Company as at the dates thereof and the results of its operations and cash
flows for the periods then ended subject, in the case of the unaudited interim
financial statements, to normal year-end adjustments and any other adjustments
described in such financial statements. The Company has filed with the SEC on a
timely basis, or received a valid extension of such time of filing, all forms,
reports and documents required to be filed by it under the Exchange Act.

      4.06 No Defaults. Except as to defaults, violations and breaches which
individually or in the aggregate would not have a Material Adverse Effect on the
Company, the Company is not in violation or default of any provision of its
certificate of incorporation or bylaws, or other organizational documents, or in
breach of or default with respect to any provision of any agreement, judgment,
decree, order, mortgage, deed of trust, lease, franchise, license, indenture,
permit or other instrument to which it is a party or by which it or any of its
properties are bound; and there does not exist any state of fact which, with
notice or lapse of time or both, would constitute an event of default or default
on the part of the Company as defined in such documents, except such defaults
which individually or in the aggregate would not have a Material Adverse Effect
on the Company.

      4.07 Contracts. (a) The contracts and agreements of the Company described
in the SEC Reports, including without limitation the Company's licenses and
options for licenses, are in full force and effect on the date hereof; and the
Company is not, nor to the Company's knowledge is any other party, in breach of
or default under any of such contracts or agreements which would have a Material
Adverse Effect on the Company. All such contracts and agreements constitute
valid and binding obligations of the Company, enforceable in accordance with
their respective terms except as such enforceability may be limited by
bankruptcy, insolvency, moratorium, reorganization or other similar laws
affecting the enforcement of creditors' rights generally and as to limitations
on the enforcement of the remedy of specific performance and other equitable
remedies.

            (b) Without limiting the generality of Section 4.07(a), the Company
makes the representations and warranties in this Section 4.07(b) regarding the
Sublicense Agreement dated October 28, 1996 (the "Sublicense") among Johnson &
Johnson and Ortho Pharmaceutical Corporation, as licensors (collectively,
"Licensor"), and Acute Therapeutics, Inc., as licensee, as follows:

                                      -7-
<PAGE>

                  (i) Company is the successor to Acute Therapeutics, Inc. under
the Sublicense.

                  (ii) The Sublicense is in full force and effect, and the
Company is not, nor to the Company's knowledge is the Licensor, in breach or
default under the Sublicense in any material respect or in any manner that would
permit a party to terminate the Sublicense. To the Company's knowledge, no event
or condition exists or has occurred which would permit a party to terminate the
Sublicense. The Sublicense is a valid and binding agreement, enforceable in
accordance with its terms.

                  (iii) To the Company's knowledge, after reasonable
investigation and inquiry, (x) the representations and warranties of the
Licensor under Section 12 of the Sublicense are true and correct and (y) the
Scripps Agreement (as defined in the Sublicense) is in full force and effect.

                  (iv) The Company has received a valid and binding extension of
the deadline for the filing of the NDA referred to in Section 6 of the
Sublicense until October 28, 2002. The Company has achieved all milestones
required to be achieved under the Sublicense by the dates required thereunder,
taking into account any valid and binding extensions obtained by the Company.

      4.08 No Actions. There are no legal or governmental actions, suits,
proceedings or investigations pending or, to the Company's knowledge, threatened
to which the Company is or may be a party or of which property owned or leased
by the Company is or may be the subject, or related to environmental or
discrimination matters, which actions, suits, proceedings or investigations,
individually or in the aggregate, might prevent or might reasonably be expected
to have a material adverse affect the transactions contemplated by this
Agreement or result in a material adverse change in the financial condition,
properties, business, or results of operations of the Company (a "Material
Adverse Change"); and no labor disturbance by the employees of the Company
exists or is imminent, to the Company's knowledge, which might reasonably be
expected to have a Material Adverse Effect. The Company is not a party to or
subject to the provisions of any material injunction, judgment, decree or order
of any court, regulatory body administrative agency or other governmental body.

      4.09 Properties. The Company has good and marketable title to all the
properties and assets reflected as owned by it in the SEC Reports, subject to no
lien, mortgage, pledge, charge or encumbrance of any kind except (i) those, if
any, reflected in such SEC Reports, or (ii) those which are not material in
amount and do not adversely affect the use made and proposed to be made of such
property by the Company. The Company holds its leased properties under valid and
binding leases. The Company owns, leases or licenses all such properties
necessary for the conduct of its business (as described in the SEC Reports).

      4.10 No Material Change. Other than the private placement of shares of
Common Stock on October 1, 2001, since September 30, 2001, (i) the Company has
not incurred any material liabilities or obligations, indirect, or contingent,
or entered into any material verbal or written agreement or other transaction
which is not in the ordinary course of business or which

                                      -8-
<PAGE>

could reasonably be expected to result in a material reduction in the future
earnings of the Company; (ii) the Company has not sustained any material loss or
interference with its business or properties from fire, flood, windstorm,
accident or other calamity not covered by insurance; (iii) the Company has not
paid or declared any dividends or other distributions with respect to its
capital stock and the Company is not in default in the payment of principal or
interest on any outstanding debt obligations; (iv) there has not been any change
in the capital stock of the Company, other than options issued pursuant to
employee equity incentive plans or purchase plans approved by the Company's
Board of Directors, or indebtedness material to the Company; and (v) except for
the operating losses and negative cash flow the Company has continued to incur,
there has not been any Material Adverse Change.

      4.11 Intellectual Property. (a) The Company owns or has obtained valid
rights to use the inventions, patent applications, patents, trademarks (both
registered and unregistered), tradenames, copyrights and trade secrets necessary
for the conduct of the Company's business (as described in the SEC Reports)
(collectively, the "Intellectual Property"); and (b) to the Company's knowledge:
(i) there are no third parties who have any ownership rights to any Intellectual
Property that is owned by, or has been licensed to, the Company for the product
indications described in the SEC Reports that would preclude the Company from
conducting its business (as described in the SEC Reports), except for the
ownership rights of the owners of the Intellectual Property licensed or optioned
by the Company; (ii) there are currently no sales of any products that would
constitute an infringement by third parties of any Intellectual Property owned,
licensed or optioned by the Company; (iii) there is no pending or threatened
action, suit, proceeding or claim by others challenging the rights of the
Company in or to any Intellectual Property owned, licensed or optioned by the
Company; (iv) there is no pending or threatened action, suit, proceeding or
claim by others challenging the validity or scope of any Intellectual Property
owned, licensed or optioned by the Company; (v) there is no pending or
threatened action, suit, proceeding or claim by others that the Company
infringes or otherwise violates any patent, trademark, copyright, trade secret
or other proprietary right of others; and (vi) the Company is not subject to any
judgment, order, writ, injunction or decree of any court or any Federal, state,
local, foreign or other governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, or any arbitrator, and the
Company has not entered into or is a party to any contract which restricts or
impairs the use of any such Intellectual Property in a manner which would have a
Material Adverse Effect on the Company.

      4.12 Compliance. The Company has been and is in compliance in all material
respects with all applicable laws, rules, regulations and orders, in respect of
the conduct of its business and the ownership of its properties, including
without limitation with respect to the FFDCA, environmental issues, and taxes
and other governmental charges.

      4.13 Taxes. The Company has filed all federal, state, local and foreign
income and other tax returns required to be filed by it and has paid or accrued
all taxes shown as due thereon, and the Company has no knowledge of a tax
deficiency which has been or might be asserted or threatened against it.

      4.14 Transfer Taxes. On the Closing Date, all stock transfer or other
taxes (other than income taxes) which are required to be paid in connection with
the sale and transfer of the Shares

                                      -9-
<PAGE>

to be sold to the Purchaser hereunder will be, or will have been, fully paid or
provided for by the Company and all laws imposing such taxes will be or will
have been fully complied with.

      4.15 Registration and Listing of Stock. The Company's Common Stock is
registered pursuant to Section 12(g) of the Exchange Act and is listed on the
Nasdaq SmallCap Market, and the Company has taken no action designed to, or
likely to have the effect of, terminating the registration of the Common Stock
under the Exchange Act or de-listing the Common Stock from the Nasdaq SmallCap
Market, nor has the Company received any notification that the SEC or the
National Association of Securities Dealers, Inc. (the "NASD") is contemplating
terminating such registration or listing.

      4.16 No Manipulation of Stock. The Company has not taken any action
designed to or that might reasonably be expected to cause or result in
stabilization or manipulation of the price of the Common Stock to facilitate the
transactions contemplated hereby.

      4.17 Investment Company. The Company is not an "investment company" or an
"affiliated person" of, or "promoter" or "principal underwriter" for an
investment company, within the meaning of the Investment Company Act of 1940, as
amended.

      4.18 No Solicitation. The Company has not in the past nor will it
hereafter take any action to sell, offer for sale or solicit offers to buy any
securities of the Company which would bring the offer, issuance or sale of the
Shares, as contemplated by this Agreement, within the provisions of Section 5 of
the Securities Act, unless such offer, issuance or sale was or shall be within
the exemptions of Section 4 (or other appropriate exemption) of the Securities
Act.

      4.19 Insurance. The Company maintains insurance with sound and reputable
insurance companies of the types and in the amounts that the Company reasonably
believes is adequate for its business, including, but not limited to, insurance
covering all real and personal property owned or leased by the Company against
all risks customarily insured against by similarly situated companies, all of
which insurance is in full force and effect.

      4.20 No Integration. Neither the Company nor any of its Affiliates nor any
person acting on the Company's behalf has, directly or indirectly, at any time
within the past six (6) months made any offer or sale of any security or
solicitation of any offer to buy any security under circumstances, that in the
opinion of the Company's counsel, concurred by the Purchaser's counsel, would
eliminate the availability of the exemption from registration under Regulation D
under the Securities Act in connection with the offer and sale of the Securities
as contemplated hereby.

      4.21 No Implied Representations. All of the Company's representations and
warranties are contained in this Agreement, and no other representations or
warranties by the Company shall be implied.

                                      -10-
<PAGE>

                                    ARTICLE V
                   REPRESENTATIONS AND WARRANTIES OF PURCHASER

      Purchaser represents and warrants to Company as follows:

      5.01 Corporate Status. Purchaser is a corporation duly organized, validly
existing and in good standing under the laws of the State of North Carolina.
Purchaser has all requisite corporate power and authority to carry on its
business as now conducted.

      5.02 Due Execution, Delivery and Performance of Agreement. Purchaser and
its Affiliates have full legal right, corporate power and authority to enter
into the Transaction Agreements and to perform the transactions contemplated
thereunder. This Agreement has been duly authorized, executed and delivered by
Purchaser. This Agreement constitutes the valid and binding obligation of
Purchaser enforceable in accordance with its terms.

      5.03 Investment. Purchaser is acquiring the Securities for Purchaser's own
account, and not with a view to, or for resale in connection with, any
distribution or public offering thereof within the meaning of the Securities
Act. Purchaser acknowledges receiving and reviewing the SEC Reports. Purchaser
is aware of the Company's business affairs and financial condition has been
afforded (i) the opportunity to ask such questions as it has deemed necessary
of, and to receive answers from, representatives of the Company concerning the
business affairs and financial condition of the Company and (ii) the opportunity
to request such additional information which the Company possesses or can
acquire without unreasonable effort or expense and has had access to and has
acquired sufficient information about the Company to reach an informed and
knowledgeable decision to acquire the Securities to be purchased hereunder.
Purchaser, either by reason of its own business or financial experience or the
business or financial experience of its professional advisors (who are
unaffiliated with and who are not compensated by the Company or any affiliate,
finder or selling agent of the Company, directly or indirectly), has such
business and financial experience as is required to give it the capacity to
utilize the information received, to evaluate the risks involved in purchasing
such securities, to make an informed decision about purchasing the Securities
and to protect its own interests in connection with the purchase of the
Securities and is able to bear the risks of an investment in the Securities.
Purchaser is able to bear the economic risk of holding the Securities for an
indefinite period of time and can afford a complete loss of its investment.
Purchaser is not itself a "broker" or a "dealer" as defined in the Exchange Act
and is not an "affiliate" of the Company as defined in Rule 405 promulgated
under the Securities Act.

      5.04 Accredited Investor. Purchaser is an "accredited investor" within the
meaning of Rule 501 of Regulation D promulgated under the Securities Act.

      5.05 Shares and Warrants Not Registered. Purchaser understands that the
Securities are not registered under the Securities Act or registered or
qualified under any state securities or "blue sky" laws in reliance on specific
exemptions therefrom. Purchaser acknowledges and agrees that (i) it shall not
directly or indirectly, offer, sell, pledge, transfer or otherwise dispose of
(or solicit any offers to buy, purchase or otherwise acquire or take a pledge
of) any of the

                                      -11-
<PAGE>

Securities, except in compliance with the Securities Act and State securities or
"blue sky" laws and the rules and regulations promulgated thereunder and with
this Agreement, and (ii) neither the Shares, the Warrants nor the Warrant Shares
may be resold or otherwise transferred except in a transaction registered under
the Securities Act or unless an exemption from such registration is available.
Purchaser understands that until the Shares and the Warrant Shares have been
registered for resale by the Purchaser in compliance with applicable securities
laws, the certificates evidencing the Shares, the Warrants and the Warrant
Shares will be imprinted with a legend (in accordance with Section 5.06) that
prohibits the transfer of the Shares, the Warrants and the Warrant Shares unless
(a) such transaction is registered or such registration is not required or (b)
if the transfer is pursuant to an exemption from registration, upon the
reasonable request of the Company, an opinion of counsel reasonably satisfactory
to the Company is obtained to the effect that the transaction is not required to
be registered or is so exempt.

      5.06 Legend. To the extent applicable, each certificate evidencing the
Shares and the Warrant Shares, shall be endorsed with the legend substantially
in the form set forth below:

            "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
            THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE
            SECURITIES OR "BLUE-SKY" LAWS AND MAY NOT BE SOLD, TRANSFERRED,
            ASSIGNED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF UNLESS
            REGISTERED UNDER SUCH ACT OR UNDER SUCH LAWS, OR PURSUANT TO AN
            EXEMPTION FROM SUCH REGISTRATION, AND ARE SUBJECT TO THE TERMS AND
            CONDITIONS OF THE COMMON STOCK AND WARRANT PURCHASE AGREEMENT DATED
            DECEMBER 10, 2001, BETWEEN DISCOVERY LABORATORIES, INC. AND
            PHARMABIO DEVELOPMENT INC., A COPY OF WHICH IS AVAILABLE UPON
            WRITTEN REQUEST OF THE CORPORATE SECRETARY OF DISCOVERY
            LABORATORIES, INC."

                                   ARTICLE VI
                               SUBSCRIPTION RIGHT

      6.01 Subscription Right.

            (a) If at any time after the date hereof until the date on which
there shall no longer remain outstanding at least 25% of the Shares (computed on
an as converted to Common Stock basis) purchased by Purchaser under this
Agreement, the Company proposes to issue equity securities of the Company of any
kind, the primary purpose of which is to raise equity capital (the term "equity
securities" shall include for these purposes any warrants, options or other
rights to acquire equity securities and debt securities convertible into equity
securities), other than (x) to the public in an underwritten offering pursuant
to a registration statement filed under the Securities Act, (y) issued in
connection with bona fide acquisitions, mergers, joint ventures, collaborative
arrangements, strategic alliances or similar transactions, the terms of which
are approved by the Company's Board of Directors, or (z) pursuant to any stock
option,

                                      -12-
<PAGE>

stock purchase or similar plan or arrangement for the benefit of the employees
of the Company or its subsidiaries, adopted by the Board of Directors, then, the
Company shall:

                  (i) give written notice to Purchaser (no less than fifteen
      (15) Business Days prior to the closing of such issuance) setting forth in
      reasonable detail (A) the designation and all of the terms and provisions
      of the securities proposed to be issued (the "Proposed Securities"),
      including, where applicable, the voting powers, preferences and relative
      participating, optional or other special rights, and the qualification,
      limitations or restrictions thereof; (B) the price and other terms of the
      proposed sale of such securities; (C) the amount of such securities
      proposed to be issued; and (D) such other information as Purchaser may
      reasonably request in order to evaluate the proposed issuance; and

                  (ii) offer to issue and sell to Purchaser, on such terms as
      the Proposed Securities are issued, upon full payment by Purchaser, a
      portion of the Proposed Securities equal to a percentage determined by
      dividing (A) the number of shares of Common Stock then held by Purchaser
      (computed on an as converted to Common Stock basis but excluding any
      Warrant Shares attributable to the Class H Warrant that are unvested as of
      the date thereof), by (B) the total number of shares of Common Stock then
      outstanding, including for purposes of this calculation all shares of
      Common Stock issuable upon conversion or exercise in full of any
      convertible or exercisable securities (other than employee stock options)
      then outstanding (including shares of Common Stock issuable upon
      conversion of convertible securities or issuable upon exercise of
      outstanding warrants).

            (b) Purchaser must exercise its purchase rights hereunder within ten
      (10) Business Days after receipt of such notice from the Company. The
      closing of the exercise of such subscription right shall take place
      simultaneously with the closing of the sale of the Proposed Securities
      giving rise to such subscription right.

            (c) Upon the expiration of the ten (10) Business Day offering period
described above, the Company will be free to sell such Proposed Securities that
Purchaser has not elected to purchase during the ninety (90) days following such
expiration on financial and economic terms and conditions no more favorable to
the purchasers thereof than those offered to Purchaser. Any Proposed Securities
offered or sold by the Company after such ninety (90) day period must be
reoffered to Purchaser pursuant to this Section 6.01.

            (d) The election by Purchaser not to exercise its subscription
rights under this Section 6.01 in any one instance shall not affect its
subscription rights as to any subsequent proposed issuance.

            (e) Any sale of such securities by the Company without first giving
Purchaser the rights described in this Section 6.01 shall be void and of no
force and effect.

                                      -13-
<PAGE>

                                   ARTICLE VII
                               REGISTRATION RIGHTS

      7.01 Required Registration.

            (a) At any time following one hundred eighty (180) days after the
date of this Agreement, the holders of Registrable Securities who hold and
propose to sell Registrable Securities with an aggregate value of at least
$500,000 shall have the right to require the Company to register under the
Securities Act on Form S-3 or other comparable or successor form such shares by
delivering written notice thereof to the Company. All such registrations shall
be non-underwritten. For so long as the Company may be obligated to effect a
registration statement pursuant to this Section 7.01, the Company shall use its
reasonable best efforts to be and remain eligible to use Form S-3 or other
appropriate comparable or successor form under the Securities Act.

            (b) The Company shall be obligated to register Registrable
Securities pursuant to this Section 7.01 on not more than one occasion during
any twelve-month rolling period, or on more than two occasions in the aggregate;
provided, however, that such obligation shall be deemed satisfied only when a
registration statement covering all shares of Registrable Securities requested
to be included in such registration statement by the holders thereof, for sale
in accordance with the method of disposition specified by the requesting
holders, shall have become effective or if the holders participating in the
registration withdraw from the registration; provided, further, that if such
registration statement has become effective but the contemplated public offering
is withdrawn prior to the completion thereof, or if holders participating in the
registration withdraw, causing the requirements of this Section not to be met,
because of material adverse developments affecting the Company that were not
known to the participating holders prior to such effectiveness, then such
registration shall not count as one of the registrations hereunder.

            (c) The Company shall be entitled to include in any registration
statement referred to in this Section 7.01, for sale in accordance with the
method of disposition specified by requesting holders, shares of Common Stock to
be sold by the Company for its own account or for the account of other security
holders of the Company, but only to the extent that such inclusion will not
adversely affect the offering for the account of the holders of Registrable
Securities.

      7.02 Incidental Registration. If the Company at any time (other than
pursuant to Section 7.01) proposes to register any of its securities under the
Securities Act for sale to the public, whether for its own account or for the
account of other security holders or both (except with respect to registration
statements on Forms S-4, S-8 or another form not available for registering the
Registrable Securities for sale to the public, or which relate to employee
benefit plans or with respect to corporate reorganizations or other transactions
subject to Rule 145 of the Securities Act), each such time it will give written
notice to all holders of outstanding Registrable Securities of its intention so
to do. Upon the written request of any such holder, received by the Company
within thirty (30) days after the giving of any such notice by the Company, to
register

                                      -14-
<PAGE>

any of its Registrable Securities, the Company will use its best efforts to
cause such Registrable Securities to be included in the registration statement
proposed to be filed by the Company, all to the extent requisite to permit the
sale or other disposition of such Registrable Securities so registered. In the
event that any registration pursuant to this Section 7.02 shall be an
underwritten public offering of Common Stock, the number of shares of
Registrable Securities to be included in such an underwriting may be limited if
and to the extent that the managing underwriter shall be of the opinion that
such inclusion would adversely affect the marketing of the securities to be sold
by the Company therein, and, in such case, the number of shares of securities
that are entitled to be included in the registration and underwriting shall be
allocated in the following manner: The securities of the Company held by
officers, directors and other stockholders of the Company, other than securities
held by holders ("Demand Holders") who have contractual rights (existing prior
to the date of this Agreement) to participate in or demand such registration,
shall be excluded from such registration and underwriting to the extent required
by such limitation, and, if a limitation on the number of shares is still
required, the number of shares that may be included in the registration and
underwriting by each of the holders Registrable Securities and Demanding Holders
shall be reduced, on a pro rata basis (based on the number of shares held by
such holders of Registrable Securities and Demanding Holders), by such minimum
number of shares as is necessary to comply with such limitation.

      7.03 Registration Procedures. If and whenever the Company is required by
the provisions of Section 7.01 or 7.02 to effect the registration of any
Registrable Securities under the Securities Act, the Company will, as
expeditiously as reasonably possible:

            (a) prepare and file with the SEC a registration statement with
respect to such securities as soon as reasonably practicable after delivery of
the applicable notice, and in any event within thirty (30) days thereof, and use
its reasonable best efforts to cause such registration statement to become
effective within ninety (90) days after delivery of such notice and remain
effective for the period of the distribution contemplated thereby (determined as
hereinafter provided); provided, however, that that Company's obligation to file
a registration statement, or cause such registration statement to become and
remain effective, shall be suspended for a period not to exceed ninety (90) days
in any twelve-month period if in the reasonable judgment of the Company's Board
of Directors it would be detrimental to the Company to effect a registration at
such time;

            (b) prepare and file with the SEC such amendments and supplements to
such registration statement and the related prospectus as may be necessary to
keep such registration statement effective for the period specified in paragraph
(a) above and comply with the provisions of the Securities Act with respect to
the disposition of all Registrable Securities covered by such registration
statement in accordance with the sellers' intended method of disposition set
forth in such registration statement for such period; provided, however, the
holders hereby acknowledge that the Company may notify the holders of the
suspension of the use of the prospectus forming a part of the registration
statement until such time as an amendment to such registration statement has
been filed by the Company and declared effective by the SEC or until the Company
has otherwise amended or supplemented such prospectus, and upon receipt of such
notice the holders shall suspend the use of the prospectus and shall not offer

                                      -15-
<PAGE>

or sell any securities pursuant to said prospectus during the period commencing
at the time at which the Company gives the holders notice of the suspension of
the use of said prospectus and ending at the time the Company gives the holders
notice that holders may thereafter effect sales pursuant to said prospectus.
Notwithstanding anything herein to the contrary, the Company (i) shall not
suspend use of the registration statement by holders unless such suspension is
in the good faith opinion of the Company and its counsel advisable under the
federal securities laws and the rules and regulations promulgated thereunder;
and (ii) shall use its best efforts to amend to such registration statement or
amend or supplement such prospectus as soon as practicable to again permit sales
pursuant to said prospectus;

            (c) furnish to each seller of Registrable Securities and to each
underwriter, if applicable, such number of copies of the registration statement
and the prospectus included therein (including each preliminary prospectus) as
such persons reasonably may request in order to facilitate the public sale or
other disposition of the Registrable Securities covered by such registration
statement;

            (d) use its best efforts to register or qualify the Registrable
Securities covered by such registration statement under the securities or "blue
sky" laws of such jurisdictions as the sellers of Registrable Securities or, in
the case of an underwritten public offering, the managing underwriter reasonably
shall request, provided, however, that the Company shall not for any such
purpose be required to qualify generally to transact business as a foreign
corporation in any jurisdiction where it is not so qualified or to consent to
general service of process in any such jurisdiction;

            (e) immediately notify each seller of Registrable Securities and
each underwriter, if applicable, under such registration statement, at any time
when a prospectus relating thereto is required to be delivered under the
Securities Act, of the happening of any event of which the Company has knowledge
as a result of which the prospectus contained in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances then existing;
and

            (f) if the offering is underwritten and at the request of any seller
of Registrable Securities, use its best efforts to furnish on the date that
Registrable Securities are delivered to the underwriters for sale pursuant to
such registration: (i) an opinion dated such date of counsel representing the
Company for the purposes of such registration, addressed to the underwriters and
to such seller, in form and substance as is customarily given in an underwritten
public offering; and (ii) a letter dated such date from the independent public
accountants retained by the Company, addressed to the underwriters and to such
seller, in form and substance as is customarily given in an underwritten public
offering.

For purposes of Section 7.03(a) and (b), the period of distribution of
Registrable Securities in any registration shall be deemed to extend until the
earlier of the sale of all Registrable Securities covered thereby and one
hundred twenty (120) days after the effective date thereof.

                                      -16-
<PAGE>

      7.04 Expenses. All expenses incurred by the Company in complying with
Sections 7.01, 7.02 and 7.03, including, without limitation, all registration
and filing fees, printing expenses, fees and disbursements of counsel and
independent public accountants for the Company, fees and expenses (including
counsel fees) incurred in connection with complying with state securities or
"blue sky" laws, fees of the NASD, transfer taxes, fees of transfer agents and
registrars and the reasonable fees and disbursements of one counsel for the
sellers of Registrable Securities (not to exceed $25,000 in the aggregate), but
excluding any Selling Expenses, are called "Registration Expenses". All
underwriting discounts and selling commissions applicable to the sale of
Registrable Securities are called "Selling Expenses". The Company will pay all
Registration Expenses in connection with each registration statement under
Section 7.01 or 7.02. All Selling Expenses in connection with each such
registration statement shall be borne by the participating sellers on a pro rata
basis based on the number of Registrable Securities included in such
registration statement.

      7.05 Indemnification and Contribution.

            (a) In the event of a registration of any of the Registrable
Securities under the Securities Act pursuant to Section 7.01 or 7.02, to the
extent permitted by applicable law, the Company will indemnify and hold harmless
each seller of such Registrable Securities thereunder, each underwriter of such
Registrable Securities thereunder and each other person, if any, who controls
such seller or underwriter within the meaning of Section 5 of the Securities
Act, against any losses, claims, damages or liabilities, joint or several, to
which such seller, underwriter or controlling person may become subject under
the Securities Act or other applicable Federal or State securities or "blue sky"
laws, to the extent that such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in any registration
statement under which such Registrable Securities were registered under the
Securities Act, any preliminary prospectus or final prospectus contained
therein, or any amendment or supplement thereof, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
and will reimburse each such seller, each such underwriter and each such
controlling person for any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company will not be liable, to
any such indemnitee if and to the extent that any such loss, claim, damage or
liability arises out of or is based upon an (i) untrue statement or alleged
untrue statement or omission or alleged omission so made in conformity with
information furnished by or on behalf of such indemnitee in writing specifically
for use in such registration statement or prospectus or (ii) such untrue
statement or alleged untrue statement or omission or alleged omission was
contained in a preliminary or earlier effective prospectus and corrected in a
final or amended prospectus, and such holder of Registrable Securities failed to
deliver a copy of the final or amended prospectus at or prior to the
confirmation of the sale of the Registrable Securities to the buyer of such
Registrable Securities; provided, further, that the indemnity agreement
contained in this Section 7.05(a) shall not apply to amounts paid in settlement
of any such loss, claim, damage, liability or action if such settlement is
effected without the consent of the Company, which consent shall not be
unreasonably withheld, provided that such consent shall not be required if the
settlement shall

                                      -17-
<PAGE>

include as an unconditional term thereof the giving by the claimant or plaintiff
to such indemnified party of a release from all liability in respect of such
claim or litigation.

            (b) In the event of a registration of any of the Registrable
Securities under the Securities Act pursuant to Section 7.01 or 7.02, to the
extent permitted by applicable law, each seller of such Registrable Securities
thereunder, severally and not jointly, will indemnify and hold harmless the
Company, each person, if any, who controls the Company within the meaning of
Section 15 of the Securities Act, each officer of the Company who signs the
registration statement, each director of the Company, each underwriter and each
person who controls any underwriter within the meaning of the Securities Act,
against all losses, claims, damages or liabilities, joint or several, to which
the Company or such officer, director, underwriter or controlling person may
become subject under the Securities Act or other applicable Federal or State
securities or "blue sky" laws, to the extent that such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact contained
in the registration statement under which such Registrable Securities was
registered under the Securities Act, any preliminary prospectus or final
prospectus contained therein, or any amendment or supplement thereof, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse the Company and each such officer,
director, underwriter and controlling person for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however, that such
seller will be liable hereunder in any such case if and only to the extent that
any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in reliance upon and in conformity with information pertaining to such
seller, as such, furnished in writing to the Company by or on behalf of such
seller specifically for use in such registration statement or prospectus, and
provided, further, that the indemnity agreement contained in this Section
7.05(b) shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability or action if such settlement is effected without the consent
of such seller, which consent shall not be unreasonably withheld, provided that
such consent shall not be required if the settlement shall include as an
unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect of such claim or
litigation; provided, further, that the liability of each seller hereunder shall
be limited to the net proceeds received for the account of such seller from the
sale of Registrable Securities covered by such registration statement.

            (c) Promptly after receipt by an indemnified party hereunder of
notice of the commencement of any action, such indemnified party shall, if a
claim in respect thereof is to be made against the indemnifying party hereunder,
notify the indemnifying party in writing thereof, but the omission so to notify
the indemnifying party shall not relieve it from any liability which it may have
to such indemnified party other than under this Section 7.05 and shall only
relieve it from any liability which it may have to such indemnified party under
this Section 7.05 if and to the extent the indemnifying party is prejudiced by
such omission. In case any such action shall be brought against any indemnified
party and it shall notify the indemnifying party of the commencement thereof,
the indemnifying party shall be entitled to participate in and, to the

                                      -18-
<PAGE>

extent it shall wish, to assume and undertake the defense thereof with counsel
reasonably satisfactory to such indemnified party, and, after notice from the
indemnifying party to such indemnified party of its election so to assume and
undertake the defense thereof, the indemnifying party shall not be liable to
such indemnified party under this Section 7.05 for any legal expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation and of liaison with counsel
so selected, provided, however, that, if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be reasonable
defenses available to it which are different from or additional to those
available to the indemnifying party or if the interests of the indemnified party
reasonably may be deemed to conflict with the interests of the indemnifying
party, the indemnified party shall have the right to select a separate counsel
and to assume such legal defenses and otherwise to participate in the defense of
such action, with the reasonable expenses and fees of such separate counsel and
other expenses related to such participation to be reimbursed by the
indemnifying party as incurred; provided, further, that the Company shall not
have any reimbursement obligation for the expenses and fees of more than one
such separate counsel for all indemnitees.

            (d) In order to provide for just and equitable contribution to joint
liability under the Securities Act in any case in which either (i) any holder of
Registrable Securities exercising rights under this Agreement, or any
controlling person of any such holder, makes a claim for indemnification
pursuant to this Section 7.05 but it is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the expiration
of time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
this Section 7.05 provides for indemnification in such case, or (ii)
contribution under the Securities Act may be required on the part of any such
selling holder or any such controlling person in circumstances for which
indemnification is provided under this Section 6; then, and in each such case,
the Company and such holder will contribute to the aggregate losses, claims,
damages or liabilities to which they may be subject (after contribution from
others) in such proportion as is appropriate to reflect the relative fault of
the indemnifying party on the one hand and of the indemnified party on the
other, as well as any other relevant equitable considerations. The relative
fault of the parties shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission; provided, however, that, in any such case, (A) no such
holder will be required to contribute any amount in excess of the public
offering price of all such Registrable Securities offered by it pursuant to such
registration statement; and (B) no person or entity guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
will be entitled to contribution from any person or entity who was not guilty of
such fraudulent misrepresentation.

      7.06 Changes in Common Stock. If, and as often as, there is any change in
the Common Stock by way of a stock split, stock dividend, combination or
reclassification, or through a merger, consolidation, reorganization or
recapitalization, or by any other means,

                                      -19-
<PAGE>

appropriate adjustment shall be made in the provisions hereof so that the rights
and privileges granted hereby shall continue with respect to the Common Stock as
so changed.

      7.07 Rule 144 Reporting. With a view to making available the benefits of
certain rules and regulations of the SEC that may at any time permit the sale of
the Registrable Securities to the public without registration, the Company
agrees to:

            (a) make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act;

            (b) use commercially reasonable efforts to file with the SEC in a
timely manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act; and

            (c) furnish to each holder of Registrable Securities forthwith upon
request a written statement by the Company as to its compliance with the
reporting requirements of such Rule 144 and of the Securities Act and the
Exchange Act, a copy of the most recent annual or quarterly report of the
Company, and such other reports and documents so filed by the Company as such
holder may reasonably request in availing itself of any rule or regulation of
the SEC allowing such holder to sell any Registrable Securities without
registration.

      7.08 Future Registration Rights. The Company shall not, except with the
consent of the holders of a majority of the Registrable Securities, enter into
any agreement with any holder or prospective holder of any securities of the
Company that would allow such holder or prospective holder to include such
securities in any registration filed pursuant to Section 7.01 or 7.02 hereof,
unless under the terms of such agreement, such holder or prospective holder may
include such securities in any such registration only to the extent that the
inclusion thereof will not reduce the amount of Registrable Securities that is
included.

      7.09 Certain Holder Obligations. (a) As a condition to the inclusion of
its Registrable Securities in a registration effected pursuant to Section 7.01
or 7.02, the holders will promptly provide the Company with such information as
the Company shall reasonably request in order to prepare the applicable
registration statement for such registration, including, but not limited to,
information regarding the holders, the securities of the Company owned
beneficially or of record by the holders, the distribution proposed by the
holders, a customary selling securityholders questionnaire and, upon the
Company's request, the holders shall provide such information in writing and
signed by the holders and stated to be specifically for inclusion in the
applicable registrations. In the event that the distribution of the Common Stock
covered by the applicable registration statement shall be effected pursuant to
an underwritten offering as contemplated by Section 7.02, the inclusion of the
Registrable Securities shall be conditioned on the holders' execution and
delivery of a customary underwriting agreement with terms and conditions
reasonably satisfactory to the Company with respect thereto.

            (b) The holders shall not take any action with respect to any
distribution deemed to be made pursuant to any registration statement pursuant
to Section 7.01 or 7.02, which would constitute a violation of Regulation M
under the Exchange Act.

                                      -20-
<PAGE>

            (c) If, at the end of any period during which the Company is
obligated to keep a registration statement pursuant to Section 7.01 or 7.02
effective, the holders have Registrable Securities which were included in such
registration statement, the holders shall discontinue sales of such securities
pursuant to the registration statement and prospectus upon receipt of notice
from the Company of its intention to remove from registration the shares covered
by registration statement which remain unsold (as permitted under the provisions
of this Article VII, and the holders shall notify the Company of the number of
shares registered which remain unsold promptly upon receipt of such notice from
the Company.

            (d) The holders shall have no right to take any action to restrain,
enjoin or otherwise delay any registration as a result of any controversy that
may arise with respect to the interpretation or implementation of the terms of
this Article VII.

      7.10 Termination of Registration Rights.The obligations of the Company to
register shares of Registrable Securities under Section 7.01 or 7.02 for a
holder of Registrable Securities shall terminate on the earlier to occur of (i)
the date on which such holder can, in the reasonable opinion of counsel to the
Company, sell all shares of its Registrable Securities in a three-month period
without registration under the Securities Act pursuant to Rule 144 under the
Securities Act.

      7.11 Listing. The Company shall use its best efforts to list, and keep
authorized for listing, the Registrable Securities on the Nasdaq SmallCap
Market, the Nasdaq National Market or any national securities exchange on which
the Common Stock is traded.

                                  ARTICLE VIII
                              ADDITIONAL AGREEMENTS

      8.01 Short Sales, etc. Purchaser represents and agrees that, during the
period from October 3, 2001 through the date of this Agreement, Purchaser and
its Affiliates did not and, from the date hereof until the first anniversary of
the date of this Agreement, Purchaser will not, and shall cause its Affiliates
not to, execute or effect or cause to be executed or effected any "short sale"
(as defined in Rule 3b-3 of the Exchange Act) of Common Stock or any hedging
transaction in which the other party to such transaction is reasonably likely to
engage in such a short sale as a direct result of such transaction.

      8.02 Restriction on Purchase of Common Stock. Until the expiration or
termination of the Commercialization Agreement, Purchaser will not, and shall
cause its Affiliates not to, purchase or become the beneficial owner of any
shares of Common Stock which results in Purchaser and its Affiliates
beneficially owning more than nineteen percent (19%) of the issued and
outstanding shares of Common Stock; provided, however that (a) nothing in this
Section shall prevent Purchaser and its Affiliates from acquiring Common Stock
contemplated by the Transaction Agreements and (b) Purchaser shall not be deemed
to violate this Section as a result of any reorganization, recapitalization,
stock repurchase, stock combination or other similar transaction effected by the
Company with respect to the Common Stock if Purchaser and its

                                      -21-
<PAGE>

Affiliates beneficially owned less than 19% of the issued and outstanding shares
of Common Stock before giving effect to such transaction.

      8.03 Restrictions on Sale of Shares.

            (a) Until [***] after the date of this Agreement, Purchaser will not
sell or otherwise transfer the Shares.

            (b) If, at any time prior to the first anniversary of the date of
this Agreement, Purchaser proposes to sell Shares constituting [***] or more of
the outstanding shares of Common Stock, then Purchaser shall first offer to sell
such Shares of the Company, and the parties agree to negotiate in good faith to
reach an agreement on the purchase price and other terms of the sale of such
Shares to the Company. If the parties are not able to reach such an agreement
within ten (10) Business Days, then Purchaser shall be free to proceed with such
sale to a third party so long as it complies with any other applicable terms of
this Agreement.

            (c) Until the expiration or termination of the Commercialization
Agreement, Purchaser will not knowingly sell the Shares to a person or entity
which actively sells, distributes, markets, develops, or produces a
pharmaceutical product which directly competes with the Product (as defined in
the Investment and Commission Agreement) for any of the indications contemplated
by the Transaction Agreements on the date hereof. In any event, this subsection
(c) shall not prevent Purchaser from selling the Shares in open-market
transactions.

            (d) The restrictions under this Section shall not be applicable to
any transfers of the Shares to any Affiliate of Quintiles Transnational Corp.,
so long as such Affiliate agrees in an enforceable written instrument to be
bound by all the terms and conditions of this Agreement as if it were Purchaser
and a party hereto, which instrument shall be delivered a reasonably practicable
time prior to such sale or transfer.

      8.04 Voting Agreement. Until the earlier of (i) such time that Purchaser
beneficially owns less than [***] of the issued and outstanding shares of Common
Stock of the Company, and (ii) the completion of the Company's annual meeting of
shareholders for the calendar year [***], at each annual meeting of the
shareholders of the Company or in connection with any other meeting or action by
written consent in lieu of a meeting of the shareholders of the Company,
Purchaser shall vote or act with respect to all shares of Common Stock
beneficially owned by it (x) in favor of all persons nominated by the then
current Board of Directors of the Company for election to the Board of Directors
of the Company and (y) in accordance with the recommendations of the Board of
Directors with respect to any other issue; provided, that this clause (y) shall
not apply to any issue that is directly related to the matters which are subject
to the Transaction Agreements or to any Change of Control (as defined in the
Loan Agreement). The voting agreement contained in this Section 8.04 is
irrevocable to the extent permitted by applicable law and is coupled with an
interest. Until the earlier of (i) such time that Purchaser

Information marked by [***] has been omitted pursuant to a request for
confidential treatment. The omitted portion has been separately filed with the
Securities and Exchange Commission.

                                      -22-
<PAGE>

beneficially owns less than [***] of the issued and outstanding shares of Common
Stock of the Company, and (ii) [***] years after the date of this Agreement, at
and in relation to each annual meeting of the shareholders of the Company or in
connection with any other meeting or action by written consent in lieu of a
meeting of shareholders of the Company, Purchaser will not actively oppose any
items referred to in clauses (x) and (y) above.

      8.05 Continuation of Certain Restrictions. If at any time prior to the
[***] anniversary of the date of this Agreement, Purchaser transfers Shares in
accordance with the provisions of this Agreement, Purchaser shall not effect
such transfer unless the transferee agrees in an enforceable written instrument
to be bound by the terms and conditions of Sections 8.01, 8.03(c), and 8.04;
provided, however, that (i) such transferee shall not be bound to any greater
extent as to duration of time or otherwise than Purchaser is bound under such
Sections on the date of this Agreement and (ii) this Section 8.05 shall not
apply to any transfer by Purchaser to a transferee that will own one percent or
less of the Company's outstanding shares of Common Stock after giving effect to
such transfer.

      8.06 Termination of Restrictions. Upon the occurrence of an Event of
Default under the Loan Agreement or the termination of the Investment and
Commission Agreement by Purchaser in accordance with its terms, all of the
provisions of this Article VIII shall immediately terminate and have no further
force or effect.

                                   ARTICLE IX
                                  MISCELLANEOUS

      9.01 Amendments, Etc. No amendment or waiver of any provision of this
Agreement, nor consent to any departure by the Company therefrom, shall in any
event be effective unless the same shall be in writing and signed by Purchaser,
and then such waiver or consent shall be effective only in the specific instance
and for the specific purpose for which given.

      9.02 Notices. All notices and other communications provided for hereunder
shall be in writing, shall specifically refer to this Agreement, shall be
addressed to the receiving party's address set forth below or to such other
address as a party may designate by notice hereunder, and shall be deemed to
have been sufficiently given for all purposes if (a) mailed by first class
certified or registered mail, postage prepaid, (b) sent by nationally recognized
overnight courier for next Business Day delivery, (c) personally delivered, or
(d) made by telecopy or facsimile transmission with confirmed receipt.

Information marked by [***] has been omitted pursuant to a request for
confidential treatment. The omitted portion has been separately filed with the
Securities and Exchange Commission.

                                      -23-
<PAGE>

         If to Company:    Discovery Laboratories, Inc.
                           350 South Main Street, Suite 307
                           Doylestown, PA 18901-4874
                           Attn: President
                           Facsimile: (215) 340-3940

         with a copy to:   Roberts, Sheridan & Kotel
                           The New York Practice of
                           Dickstein Shapiro's Corporate & Finance Group
                           1177 Avenue of the Americas, 41st Floor
                           New York, NY 10036-2714
                           Attn: Ira L. Kotel
                           Facsimile: (212) 997-9880

         If to Purchaser:  PharmaBio Development Inc.
                           4709 Creekstone Drive
                           Suite 200 Riverbirch Bldg.
                           Durham, NC 27703
                           Attn: President
                           Facsimile:  (919) 998-2090

         with a copy to:   Smith, Anderson, Blount, Dorsett
                            Mitchell & Jernigan, L.L.P.
                           2500 First Union Capitol Center
                           Raleigh, NC 27601
                           Attn: Christopher B. Capel
                           Facsimile: (919) 821-6800

      9.03 No Waiver; Remedies. No failure on the part of Purchaser to exercise,
and no delay in exercising, any right hereunder shall operate as a waiver
thereof; nor shall any single or partial exercise of any such right preclude any
other or further exercise thereof or the exercise of any other right. The
remedies herein provided are cumulative and not exclusive of any remedies
provided by law.

      9.04 Attorneys' Fees. In the event that any dispute among the parties to
this Agreement should result in litigation, the prevailing party in such dispute
shall be entitled to recover from the losing party all fees, costs and expenses
enforcing any right of such prevailing party under or with respect to this
Agreement, including without limitation, such reasonable fees and expenses of
attorneys and accountants, which shall include, without limitation, all fees,
costs and expense of appeals.

      9.05 Binding Effect; Assignment. This Agreement shall be binding upon and
inure to the benefit of the Company and Purchaser and their respective
successors and assigns, provided that neither the Company nor Purchaser may
assign or transfer any or all of its rights or obligations under this Agreement
without the prior written consent of the other party and any

                                      -24-
<PAGE>

attempted assignment without such consent shall be null and void; provided,
however, that Purchaser may at any time assign or transfer any of its rights or
obligations under this Agreement to an Affiliate.

      9.06 Severability. To the extent any provision of this Agreement is
prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Agreement.

      9.07 Entire Agreement. This Agreement and the other Transaction Agreements
embody the entire agreement and understanding between the parties hereto with
respect to the subject matter thereof and supersede all prior oral or written
agreements and understandings relating to the subject matter thereof. No
statement, representation, warranty, covenant or agreement of any kind not
expressly set forth in the Transaction Agreements shall affect, or be used to
interpret, change or restrict, the express terms and provisions of the
Transaction Agreements.

      9.08 Further Action. Each party shall, without further consideration, take
such further action and execute and deliver such further documents as may be
reasonably requested by the other party in order to carry out the provisions and
purposes of this Agreement.

      9.09 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which, when
taken together, shall constitute one and the same instrument. This Agreement may
be executed and delivered by telecopy or facsimile transmission and any
execution by such means shall be deemed an original.

      9.10 Survival. The representations, warranties, covenants and agreements
made herein by the Company and Purchaser shall survive the Closing.

      9.11 Publicity. Except as otherwise required by applicable law or by
obligations pursuant to any listing agreement with or rules of any securities
exchange or automated quotation system, each party shall, and shall cause its
respective Affiliates to, not, issue any press release or make any other public
statement relating to, connected with or arising out of this Agreement or the
matters contained herein without the other parties' prior written approval of
the contents and the manner of presentation and publication thereof (which
approval shall not be unreasonably withheld or delayed).

      9.12 Governing Law. This Agreement, including, without limitation, the
interpretation, performance, enforcement, breach or termination thereof and any
remedies relating thereto, shall be governed by and construed in accordance with
the laws of the State of Delaware, United States of America, as applied to
agreements executed and performed entirely in the State of Delaware, without
regard to conflicts of law rules.

      9.13 Internal Review. In the event that a dispute, difference, claim,
action, demand, request, investigation, controversy, threat, discovery request
or request for testimony or

                                      -25-
<PAGE>

information or other question arises pertaining to any matters which arise
under, out of, in connection with, or in relation to this Agreement (a
"Dispute") and either party so requests in writing, prior to the initiation of
any formal legal action, the Dispute will be submitted to the JCC (as defined in
the Commercialization Agreement), which will use its good faith efforts to
resolve the Dispute within ten (10) days. If the JCC is unable to resolve the
Dispute in such period, the JCC will refer the Dispute to the Chief Executive
Officers of the Company and Purchaser. For all Disputes referred to the Chief
Executive Officers, the Chief Executive Officers shall use their good faith
efforts to meet at least two times in person and to resolve the Dispute within
ten (10) days after such referral.

      9.14 Arbitration. (a) If the parties are unable to resolve any Dispute
under Section 9.13, then either party may require the matter to be settled by
final and binding arbitration by sending written notice of such election to the
other party clearly marked "Arbitration Demand". Thereupon such Dispute shall be
arbitrated in accordance with the terms and conditions of this Section 9.14.
Notwithstanding the foregoing, either party may apply to a court of competent
jurisdiction for a temporary restraining order, a preliminary injunction, or
other equitable relief to preserve the status quo or prevent irreparable harm.

      (b) The arbitration panel will be composed of three arbitrators, one of
whom will be chosen by the Company, one by Purchaser, and the third by the two
so chosen. If both or either of the Company or Purchaser fails to choose an
arbitrator or arbitrators within 14 days after receiving notice of commencement
of arbitration, or if the two arbitrators fail to choose a third arbitrator
within 14 days after their appointment, the American Arbitration Association
shall, upon the request of both or either of the parties to the arbitration,
appoint the arbitrator or arbitrators required to complete the panel. The
arbitrators shall have reasonable experience in the matter under dispute. The
decision of the arbitrators shall be final and binding on the parties, and
specific performance giving effect to the decision of the arbitrators may be
ordered by any court of competent jurisdiction.

      (c) Nothing contained herein shall operate to prevent either party from
asserting counterclaim(s) in any arbitration commenced in accordance with this
agreement, and any such party need not comply with the procedural provisions of
this Section 9.14 in order to assert such counterclaim(s).

      (d) The arbitration shall be filed with the office of the American
Arbitration Association ("AAA") located in Wilmington, Delaware or such other
AAA office as the parties may agree upon (without any obligation to so agree).
The arbitration shall be conducted pursuant to the Commercial Arbitration Rules
of AAA as in effect at the time of the arbitration hearing, such arbitration to
be completed in a sixty (60) day period. In addition, the following rules and
procedures shall apply to the arbitration:

      (e) The arbitrators shall have the sole authority to decide whether or not
any Dispute between the parties is arbitrable and whether the party presenting
the issues to be arbitrated has satisfied the conditions precedent to such
party's right to commence arbitration as required by this Section 9.14.

                                      -26-
<PAGE>

      (f) The decision of the arbitrators, which shall be in writing and state
the findings the facts and conclusions of law upon which the decision is based,
shall be final and binding upon the parties, who shall forthwith comply after
receipt thereof. Judgment upon the award rendered by the arbitrator may be
entered by any competent court. Each party submits itself to the jurisdiction of
any such court, but only for the entry and enforcement to judgment with respect
to the decision of the arbitrators hereunder.

      (g) The arbitrators shall have the power to grant all legal and equitable
remedies (including, without limitation, specific performance) and award
compensatory damages provided by applicable law, but shall not have the power or
authority to award punitive damages. No party shall seek punitive damages in
relation to any matter under, arising out of, or in connection with or relating
to this Agreement in any other forum.

      (h) The parties shall bear their own costs in preparing for and
participating in the resolution of any Dispute pursuant to this Section 9.14,
and the costs of the arbitrator(s) shall be equally divided between the parties;
provided, however, that each party shall bear the costs incurred in connection
with any Dispute brought by such party that the arbitrators determine to have
been brought in bad faith.

      (i) Except as provided in the last sentence of Section 9.14(a), the
provisions of this Section 9.14 shall be a complete defense to any suit, action
or proceeding instituted in any federal, state or local court or before any
administrative tribunal with respect to any Dispute arising with regard to this
Agreement. Any party commencing a lawsuit in violation of this Section 9.14
shall pay the costs of the other party, including, without limitation,
reasonable attorney's fees and defense costs.

      9.15 HSR Filings. Purchaser acknowledges and agrees that if any of the
transactions contemplated by this Agreement or any other Transaction Agreement
shall require compliance with any applicable requirements of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules
and regulations promulgated thereunder (the "HSR Act"), and the antitrust,
competition, foreign investment or similar laws of any foreign countries or
supranational commissions or boards that require pre-merger notifications or
filings by either the Company or Purchaser, neither party shall have breached in
any material respect its obligations under this Agreement if the closing of any
such transaction is delayed to allow the parties to comply with any such laws,
rules and regulations, and any waiting periods required thereunder, including,
but not limited to compliance with any "Second Requests" as provided for, and
defined in, the HSR Act.

                            [signature page follows]

                                      -27-
<PAGE>

         [Signature Page to Common Stock and Warrant Purchase Agreement]

      IN WITNESS WHEREOF, Company and Purchaser have caused this Common Stock
and Warrant Purchase Agreement to be executed in their names by their duly
authorized officers or representatives effective as of the date first above
written.

                                      DISCOVERY LABORATORIES, INC.

                                      By: /s/ David L. Lopez
                                          --------------------------------------
                                              David L. Lopez
                                              Vice President and General Counsel

                                      PHARMABIO DEVELOPMENT INC.

                                      By: /s/ Thomas C. Perkins
                                          --------------------------------------
                                              Thomas C. Perkins
                                              Vice President and General Counsel

                                      -28-
<PAGE>

                                                                SCHEDULE 4.02(B)

                                      -29-EXHIBIT 10.4

Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked by [***], have been
separately filed with the Securities and Exchange Commission.

                                 LOAN AGREEMENT

      THIS LOAN AGREEMENT (this "Agreement") is dated and entered into as of
December 10, 2001 (the "Effective Date") by and between DISCOVERY LABORATORIES,
INC., a Delaware corporation ("Borrower"), and PHARMABIO DEVELOPMENT INC., a
North Carolina corporation ("Lender").

      WHEREAS, Borrower and Lender are parties to the Common Stock and Warrant
Purchase Agreement dated as of the date hereof (the "Purchase Agreement") and
the Investment and Commission Agreement dated as of the date hereof (the
"Investment and Commission Agreement");

      WHEREAS, Borrower and Quintiles Transnational Corp., an Affiliate of
Lender ("Quintiles"), are parties to a Commercialization Agreement (the
"Commercialization Agreement"), dated as of the date hereof;

      WHEREAS, in connection with the Purchase Agreement, Investment and
Royalty, and Commercialization Agreement, Lender is willing to extend certain
credit facilities to Borrower, subject to and upon the terms and conditions of
this Agreement; and

      NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by the parties, the parties hereby
agree as follows:

                                    ARTICLE I
                                   DEFINITIONS

      1.01 Definitions. Capitalized terms used but not defined in the text of
this Agreement shall have the meanings ascribed to them on Exhibit A attached
hereto and incorporated herein by reference.

                                   ARTICLE II
                            Amount and Terms of Loan

      2.01 Advances.

            (a) Subject to and upon the terms and conditions set forth herein,
Lender agrees, at any time and from time to time, from and after the occurrence
of Milestone One (as defined below) and prior to December 10, 2004 (the
"Maturity Date"), to make advances (each an

                                       1
<PAGE>

"Advance" and collectively the "Advances") to Borrower at such times and in such
amounts as Borrower shall request pursuant to this Agreement, up to an aggregate
principal amount of Eight Million, Five Hundred Thousand Dollars ($8,500,000)
(as adjusted and subject to the satisfaction of certain milestones in accordance
with this Section 2.01, the "Commitment") in lawful money of the United States
of America in immediately available funds. The Commitment shall become available
to Borrower as follows:

                  (i) Upon the occurrence of Milestone One (as defined below),
            one third (1/3) of the Commitment shall be available. "Milestone
            One" shall mean the later to occur of (i) the completion by The
            Lewin Group of a market opportunity assessment and report in
            customary form regarding the Product, which shall include without
            limitation an assessment and report as to pre-launch
            commercialization requirements and sales forecasts, and (ii)
            Borrower shall have obtained a valid and binding extension of the
            deadline for the filing of the NDA referred to in Section 6 of the
            License Agreement until at least October 28, 2003.

                  (ii) Upon the occurrence of Milestone One and Milestone Two
            (as defined below), two thirds (2/3) of the Commitment shall be
            available. "Milestone Two" shall mean the earlier to occur of (i)
            the sale after the date of this Agreement by Borrower of shares of
            its capital stock for cash proceeds with an aggregate purchase price
            of at least $10,000,000 in one or more capital financing
            transactions or pursuant to the exercise of options, warrants or
            rights to purchase its capital stock, and in each case the proceeds
            of which may be used for general corporate purposes or (ii) the
            public disclosure by Borrower of Phase III clinical trial data
            regarding the indication for the Product known as idiopathic
            respiratory distress syndrome ("IRDS"), and the completion by
            Quintiles or an appropriate Affiliate of a written assessment and
            report indicating that such data is favorable and that such data
            substantially enhances the Company's prospects with respect to its
            ability to repay the Commitment as increased by such Milestone Two.

                  (iii) Upon the occurrence of Milestone One, Milestone Two, and
            Milestone Three (as defined below), the full Commitment shall be
            available. "Milestone Three" shall mean the earlier to occur of (i)
            the completion by Quintiles or an appropriate Affiliate of a written
            assessment and report in customary form indicating the
            "approvability" by the FDA of Borrower's NDA for the Product for
            either the IRDS indication or the indication known as meconium
            aspiration syndrome ("MAS"), which shall include without limitation
            an assessment and report as to the quality of the documentation
            comprising such NDA and the clinical data included in such NDA, or
            (ii) the issuance by the FDA of a letter in customary form
            indicating that Borrower's NDA for the Product is "approvable" with
            respect to Borrower's NDA for either the IRDS indication or the MAS
            indication.

            (b) Notwithstanding anything to the contrary in this Agreement, upon
the occurrence of the "First Milestone" (as defined in the Investment and
Commission Agreement),

                                       2
<PAGE>

Borrower shall prepay Advances as described in Section 2.05(b), and the
Commitment shall be automatically reduced by the amount of such required
prepayment.

            (c) Notwithstanding anything to the contrary in this Agreement, upon
the occurrence of the "Second Milestone" (as defined in the Investment and
Commission Agreement), Borrower shall prepay the aggregate outstanding amount of
all Advances and the Commitment shall be automatically terminated.

            (d) As contemplated by the Commercialization Agreement, the JCC (as
defined therein) may authorize expenditures for pre-Launch Marketing Services in
excess of $8,500,000 up to $10,000,000 (without the consent of Lender). In the
event that the JCC authorizes such expenditures in excess of $8,500,000 (but not
in excess of $10,000,000), (i) the Commitment shall be deemed increased by a
commensurate amount, but in any event not in excess of a maximum Commitment of
$10,000,000 in the aggregate, and (ii) Borrower shall execute a new promissory
note as described in Section 3.02(e).

            (e) In the event that the parties mutually agree to authorize
expenditures for pre-Launch Marketing Services in excess of $10,000,000 (but not
in excess of $15,000,000), (i) the Commitment shall be deemed increased by a
commensurate amount, and (ii) Borrower shall execute a new promissory note as
described in Section 3.02 (e). Notwithstanding anything in this Agreement to the
contrary, any increase in the Commitment in excess of $10,000,000 shall require
the express written agreement of Lender in the sole discretion of Lender, and
this subsection (e) shall not imply that Lender is willing, or obligate Lender
in any manner, to agree to any such increase or to agree to any increase in
Lender's obligations under the Investment and Commission Agreement, with any
such increase in Lender's obligations being required to be set forth in an
express written agreement referring to the Investment and Commission Agreement.

            (f) Borrower may use the Commitment, as in effect from time to time,
on a revolving basis by borrowing, repaying the Advances in whole or in part,
and reborrowing, all in accordance with the terms and conditions of this
Agreement. The aggregate outstanding amount of the Advances at any time shall
not exceed the Commitment as in effect at such time. If at any time, the
aggregate outstanding principal amount of the Advances exceeds the Commitment,
Borrower shall immediately pay to Lender in cash the amount of such excess.

            (g) Each Advance shall be a principal amount of a loan, evidenced by
the Note referred to below.

      2.02 Use of Proceeds. At least [***] of the Advances shall be used for the
payment of pre-Launch Marketing Services (as defined in the Commercialization
Agreement) provided by Quintiles Transnational Corp. or its Affiliates and the
remainder of the Advances may be used for general corporate purposes.

Information marked by [***] has been omitted pursuant to a request for
confidential treatment. The omitted portion has been separately filed with the
Securities and Exchange Commission.

                                       3
<PAGE>

      2.03 Notices of Advances; Disbursement of Funds.

            (a) Whenever Borrower desires to obtain an Advance, Borrower shall
give to Lender a written notice of the requested Advance, signed by an
authorized officer of Borrower (each a "Notice of Advance"), and received no
later than 3:00 p.m. Eastern Time three (3) Business Days before the day on
which Borrower desires the Advance to be made. The Notice of Advance shall
specify: (i) the aggregate principal amount of the Advance to be made; (ii) the
date on which Borrower desires the Advance to be made, which date shall be a
Business Day; and (iii) an account of Borrower to which the Advance shall be
directed and wire transfer instructions. The giving of each Notice of Advance
shall constitute a representation and warranty by Borrower to Lender that the
conditions precedent set forth in Section 3.02 have been satisfied.

            (b) Whenever Borrower desires to obtain an Advance, Lender shall
make available to Borrower, at an account of Borrower specified to Lender, not
later than 2:00 p.m. Eastern Time on the date specified in the applicable Notice
of Advance the aggregate amount of such requested Advance. Each such payment
shall be an Advance under this Agreement and the Note. Each Notice of Advance
requesting an Advance shall be irrevocable when sent by Borrower, unless
otherwise agreed by Lender.

            (c) The amount of each Advance shall not be less than [***].

      2.04 Note. Borrower's obligation to pay the principal of, and interest on,
the Advances made by Lender shall be evidenced by a single promissory note (the
"Note") duly executed and delivered by Borrower in the form of Exhibit B
attached hereto. All Advances made by Lender to Borrower, and all payments in
respect thereof (and all reborrowings thereof, if any), shall be recorded by
Lender and shall be endorsed on the grid attached to the Note. Failure to make
any such notation shall not affect Borrower's obligations in respect of such
Advances.

      2.05 Repayment; Interest; Fees.

            (a) Borrower shall pay the aggregate outstanding principal amount
of, and all accrued interest on, all Advances on or before the Maturity Date,
unless due and payable sooner pursuant to the provisions of this Agreement.
Borrower may prepay any Advance or any accrued interest on Advances at any time
and from time to time without penalty, on the following terms and conditions:
(i) Borrower shall give Lender at least three (3) Business Days' prior notice of
its intent to prepay and the amount of the prepayment and (ii) each prepayment
shall not be less than [***].

            (b) Upon the occurrence of the "First Milestone" (as defined in the
Investment and Commission Agreement), Borrower shall prepay the Advances in an
aggregate principal amount equal to seventy percent (70%) of the aggregate
amount of the outstanding Advances.

Information marked by [***] has been omitted pursuant to a request for
confidential treatment. The omitted portion has been separately filed with the
Securities and Exchange Commission.

                                       4
<PAGE>

            (c) Upon the occurrence of the "Second Milestone" (as defined in the
Investment and Commission Agreement), Borrower shall prepay the aggregate
outstanding amount of all Advances.

            (d) Borrower agrees to pay interest in respect of the outstanding
principal amount of each Advance from the date the proceeds are made available
to Borrower until repaid. Interest on the outstanding principal amount of each
Advance shall accrue and be payable at a rate per annum (the "Base Rate") equal
to the greater of (i) [***] or (ii) [***] in excess of the Prime Rate in effect
from time to time, or, if less, the maximum rate permitted by law. Interest
shall be calculated on the basis of a 360-day year for the actual number of days
elapsed.

            (e) Accrued interest shall be due and payable (i) in respect of each
Advance, quarterly in arrears on the last Business Day of each calendar quarter,
and (ii) upon any payment of principal, on the amount paid.

            (f) Borrower agrees to pay to Lender commitment fees as follows:

                [***]

            (g) The outstanding principal amount of an Advance or any accrued
interest amounts thereon or any commitment fees that are not paid when due shall
accrue interest on a daily basis at the lesser of (i) [***] in excess of the
Base Rate, or (ii) the maximum rate permitted by law, such accrual beginning on
the date payment is due and continuing until the date payment is made in full.

            (h) All payments of principal, interest and fees described above
shall be made to Lender in lawful money of the United States of America in
immediately available funds.

                                   ARTICLE III
                              Conditions Precedent

      3.01 Initial Conditions Precedent to Lender's Obligations. The obligation
of Lender to perform its obligations under this Agreement is subject to the
conditions precedent that Lender shall have received from Borrower each of the
following documents on the date of this Agreement:

            (a) The Note duly executed by Borrower;

            (b) The Security Agreement in the form acceptable to the parties
(the "Security Agreement"), and the related financing statement in the form
acceptable to the parties, in each case duly executed by Borrower;

Information marked by [***] has been omitted pursuant to a request for
confidential treatment. The omitted portion has been separately filed with the
Securities and Exchange Commission.

                                       5
<PAGE>

            (c) Copies of (i) resolutions of the Board of Directors of Borrower
approving this Agreement, the Note, and the Security Agreement and any other
documents required or necessary to consummate the transactions contemplated in
this Loan Agreement (collectively, the "Loan Documents"), the Purchase
Agreement, the Investment and Royalty Agreement, and the Commercialization
Agreement (together with the Loan Documents, collectively, the "Transaction
Documents"), (ii) the Certificate of Incorporation of Borrower, and (iii) the
Bylaws of Borrower, in each case certified by an appropriate officer of
Borrower;

            (d) A certificate of the appropriate officers of Borrower certifying
(i) the names and true signatures of the officers of Borrower authorized to sign
the Transaction Documents, (ii) that the representations and warranties
contained in Article IV of the Purchase Agreement are true and correct as of the
date hereof, (iii) that Borrower has performed, satisfied and complied with all
covenants, agreements and conditions required by this Agreement to be performed,
satisfied or complied with on or prior to the date of this Agreement, and (iv)
that no event has occurred and is continuing, which constitutes an Event of
Default (as defined in Section 6.01 hereof) or would constitute an Event of
Default but for the requirement that notice be given or time elapse or both;

            (e) A certificate of good standing (or comparable document)
regarding Borrower from the State of Delaware; and

            (f) A legal opinion of Dickstein Shapiro Morin & Oshinsky, LLP,
counsel for Borrower, regarding the Transaction Documents and the transactions
contemplated thereby in the form acceptable to the parties.

      3.02 Conditions Precedent to All Advances. The obligation of Lender to
make each Advance shall be subject to the further conditions precedent that, on
the date of such Advance:

            (a) The representations and warranties contained in Article IV of
the Purchase Agreement (other than Sections 4.01 and 4.02) are true and correct
in all material respects on and as of the date of such Advance, before and after
giving effect to such Advance, as though made on and as of such date;

            (b) Borrower shall have performed, satisfied and complied with in
all material respects all covenants, agreements and conditions required under
the Transaction Documents to be performed, satisfied or complied with on or
prior to the date of such Advance;

            (c) No event has occurred and is continuing, or would result from
such Advance, which constitutes an Event of Default, or would constitute an
Event of Default but for the requirement that notice be given or time elapse or
both;

            (d) All principal amount of Advances, accrued interest or commitment
fees under this Agreement, which are due and payable at the time of such
Advance, shall have been paid in full; and

                                       6
<PAGE>

            (e) If the Commitment shall have been increased pursuant to Section
2.01(d), Lender shall have received a new promissory note duly executed by
Borrower in the form of the Note, except that the amount thereof shall be equal
to the amount of the Commitment as so increased, to replace the Note executed by
Borrower on the date hereof. Simultaneously with such replacement, the Note
executed by the Borrower on the date hereof shall be cancelled and returned to
Borrower and deemed null and void and of no further force and effect.

                                   ARTICLE IV
                         REPRESENTATIONS AND WARRANTIES

      4.01 Representations and Warranties. The representations and warranties of
Borrower set forth in Article IV of the Purchase Agreement (excluding Sections
4.02, 4.14 through 4.18, 4.20, and 4.21 and after modifying Section 4.04 so that
"Transaction Documents" shall mean this Agreement) are hereby incorporated by
reference into this Agreement, and Borrower hereby makes such representations
and warranties to Lender.

                                    ARTICLE V
                              Covenants of Borrower

      So long as any or all of the Advances or other obligations of Borrower
under this Agreement shall remain unpaid or Lender shall have any Commitment
hereunder, Borrower shall comply with the following covenants:

      5.01 Compliance with Laws. Borrower shall comply, and cause each of its
subsidiaries to comply, in all material respects with all applicable laws,
rules, regulations and orders, in respect of the conduct of its business and the
ownership of its properties, including without limitation with respect to the
FFDCA, environmental issues, and taxes and other governmental changes, where the
failure to so comply would have a material adverse effect on Borrower.

      5.02 Transfers of Assets. Borrower shall not sell, convey, transfer,
lease, license, assign or otherwise dispose of (whether in one transaction or in
a series of transactions) (a) all or substantially all of its assets or
properties (whether now owned or hereafter acquired) to any entity or person, or
(b) any of its assets or properties except in the ordinary course of business,
or in each case permit any of its subsidiaries to do so, if, in the case of this
subsection (b), such sale, conveyance, transfer, lease, license, assignment or
other disposition is likely to have a material adverse effect on Borrower or on
Lender's rights hereunder.

      5.03 Debt. Borrower shall not create or incur or allow to be created,
incurred or exist, or permit any of its subsidiaries to create or incur or allow
to be created, incurred or exist, any Debt, except (a) accounts payable incurred
or created in the ordinary course of Borrower's business, (b) Debt incurred or
created in the ordinary course of Borrower's business and which does not exceed
[***] in the aggregate, (c) Debt incurred or created solely for the purpose of

Information marked by [***] has been omitted pursuant to a request for
confidential treatment. The omitted portion has been separately filed with the
Securities and Exchange Commission.

                                       7
<PAGE>

financing the acquisition of property (other than real property) and equipment
for use in Borrower's business and which does not exceed [***] in the aggregate,
and (d) Debt which is junior and subordinate in right of payment to Borrower's
obligations to Lender under the Loan Documents ("Junior Debt") so long as, prior
to the creation of such Junior Debt, Lender has consented in writing to such
Junior Debt (such consent not to be unreasonably withheld), and Lender and the
holder of such Junior Debt have entered into a subordination agreement in form
and substance reasonably satisfactory to Lender providing for the subordination
of the Junior Debt to the obligations of Borrower under the Loan Documents.

      5.04 Liens, Etc. Borrower shall not create or incur or allow to be
created, incurred or exist, or permit any of its subsidiaries to create or incur
or allow to be created, incurred or exist, any Lien upon or with respect to any
of Borrower's or its subsidiaries' assets or properties, except (a) Permitted
Liens, as defined in the Security Agreement, (b) purchase money Liens upon
property and equipment of Borrower acquired for use in Borrower's business,
securing the purchase price thereof or securing Debt incurred solely for the
purpose of financing the acquisition thereof, and all of which Liens in the
aggregate do not secure Debt in excess of [***], (c) Liens securing capital
lease obligations under which the Lessor's recourse is limited to the leased
property, and (d) Liens securing indebtedness which is junior and subordinate in
right of payment to Borrower's obligations to Lender under the Loan Documents
("Junior Liens") so long as, prior to the creation of such Junior Liens, Lender
has consented in writing to such Junior Liens (such consent not to be
unreasonably withheld), and Lender and the holder of such Junior Liens have
entered into a subordination agreement in form and substance reasonably
satisfactory to Lender providing for the subordination of the indebtedness
secured by the Junior Liens to the obligations of Borrower under the Loan
Documents.

      5.05 Corporate Existence; Business. Borrower will (i) maintain and
preserve in full force and effect its corporate existence, and (ii) continue to
engage in the business in which it is engaged on the date hereof.

      5.06 Exchange Act Registration. Borrower will cause its Common Stock to
continue to be registered under Section 12(g) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), will comply in all material respects with
its reporting and filing obligations under the Exchange Act, and will not take
any action or file any documents to terminate or suspend such registration or
terminate or suspend its reporting or filing obligations under the Exchange Act.

      5.07 SEC Information. Upon request, Borrower will provide to Lender a copy
of any publicly available forms, reports or other documents filed with the
Securities and Exchange Commission.

Information marked by [***] has been omitted pursuant to a request for
confidential treatment. The omitted portion has been separately filed with the
Securities and Exchange Commission.

                                       8
<PAGE>

      5.08 Notice of Certain Events. Promptly, and in any event within five (5)
Business Days after an executive officer of the company obtains knowledge
thereof, Borrower will notify Lender of (a) the occurrence of an Event of
Default, (b) any litigation, governmental proceeding or investigation or other
event that is likely to materially and adversely affect the financial condition,
properties, business, or results of operations of Borrower, or (c) any Change of
Control.

      5.09 Compliance with Certain Agreements. Borrower shall perform and
fulfill all of its obligations under the License Agreement and the Research
Agreement as necessary to maintain Borrower's rights in such agreements in full
force and effect in all material respects. Borrower shall provide written notice
to Lender within five (5) Business Days of Borrower's receipt of any notice from
any other parties to the License Agreement or the Research Agreement proposing
or threatening to terminate any such agreement.

                                   ARTICLE VI
                                Events of Default

      6.01 Events of Default. The occurrence of each of the following events
shall be considered an event of default ("Event of Default"):

            (a) Borrower shall fail to pay any principal of, or interest on, the
Note when the same becomes due and payable and four (4) Business Days have
elapsed following receipt of notice of such non-payment from Lender to Borrower;

            (b) Any representation or warranty made by Borrower under this
Agreement shall prove to have been incorrect or untrue in any material respect
when made or deemed made and such incorrect or untrue representation or warranty
has a material adverse effect on Borrower or significantly impairs the prospect
that Lender will be repaid in accordance with the terms of this Agreement and is
not cured within thirty (30) days upon receipt of notice thereof by Borrower;

            (c) Borrower shall fail to perform or observe any term, covenant or
agreement contained in this Agreement required to be performed or observed by
Borrower (other than Section 5.02, 5.03 or 5.04) and such failure to perform or
observe such term, covenant or agreement has a material adverse effect on
Borrower or significantly impairs the prospect that Lender will be repaid in
accordance with the terms of this Agreement and is not cured within thirty (30)
days after receipt of notice thereof by Borrower;

            (d) Borrower shall fail to perform or observe the provisions of
Section 5.02, 5.03 or 5.04 above, except, in the case of Section 5.04, if such
Event of Default is based on a tax lien, judgment lien or materialman's lien,
such judgment shall continue without discharge or stay for a period of sixty
(60) days;

            (e) One or more judgments, decrees or orders for the payment of
money shall be entered against Borrower or any of its subsidiaries involving in
the aggregate a liability of

                                       9
<PAGE>

[***] or more, and any such judgment, decree or order shall continue without
discharge or stay for a period of sixty (60) days;

            (f) Borrower shall (i) commence a voluntary case under the federal
bankruptcy laws (as now or hereafter in effect), (ii) file a petition seeking to
take advantage of any other laws relating to bankruptcy, insolvency,
reorganization, winding up or composition for adjustment of debts, (iii) consent
to or fail to contest in a timely manner any petition filed against it in an
involuntary case under such bankruptcy laws or other laws, (iv) apply for or
consent to, or fail to contest in a timely and appropriate manner, the
appointment of, or the taking of possession by, a receiver, custodian, trustee,
or liquidator of itself or of a substantial part of its property, (v) admit in
writing its inability to pay its debts as they become due, (vi) make a general
assignment for the benefit of creditors, or (vii) take any corporate action for
the purpose of authorizing or effecting any of the foregoing;

            (g) A case or other proceeding shall be commenced against Borrower
or any of its subsidiaries in any court of competent jurisdiction seeking (i)
relief under the federal bankruptcy laws (as now or hereafter in effect) or
under any other laws relating to bankruptcy, insolvency, reorganization, winding
up or adjustment of debts, or (ii) the appointment of a trustee, receiver,
custodian, liquidator or the like for Borrower or any of its subsidiaries or for
all or any substantial part of their respective assets, and such case or
proceeding shall continue without dismissal or stay for a period of sixty (60)
consecutive days, or an order granting the relief requested in such case or
proceeding (including, but not limited to, an order for relief under such
federal bankruptcy laws) shall be entered;

            (h) A Change of Control shall occur; provided, however, that a
Change of Control, as defined in clauses (ii) and (iii) of the definition of
Change of Control, shall not be an Event of Default so long as the surviving,
acquiring or continuing entity has a net worth (after giving effect to the
consummation of the applicable transaction and determined in accordance with
generally accepted accounting principles) at least equal to the net worth of
Borrower immediately prior to the consummation of the applicable transaction and
such entity agrees in an enforceable written instrument to be bound by all the
terms and conditions of this Agreement as if it were Borrower and a party
hereto, which instrument shall be delivered a reasonably practicable time prior
to the consummation of such transaction;

            (i) Borrower or any of its subsidiaries shall default in the
performance or observance of any agreement or instrument relating to any Debt,
or any other event shall occur or condition exist, and the effect of such
default, event or condition is to cause or permit the holder of any such Debt to
cause any such Debt to become due prior to its stated maturity;

            (j) the Borrower shall fail to perform or observe any term, covenant
or agreement under the Security Agreement in any material respect;

Information marked by [***] has been omitted pursuant to a request for
confidential treatment. The omitted portion has been separately filed with the
Securities and Exchange Commission.

                                       10
<PAGE>

            (k) There shall have been a material adverse change (other than with
respect to matters relating to general economic conditions on Borrower's
industry as a whole) in the financial condition, properties, business or results
and operations of Borrower, taken as a whole, which materially adversely effects
Borrower's ability to satisfy its obligations under the Loan Documents;
provided, however, that in no event shall a material adverse change be deemed to
have occurred by virtue of the incurrence by the Company or its Affiliates of
any debt or other obligations permitted by this Agreement or the other
Transaction Documents;

            (l) Borrower shall fail to meet the continued listing criteria of
the Nasdaq SmallCap Market at any time if such failure shall continue for thirty
(30) consecutive days following receipt of notice thereof by Borrower of the
occurrence thereof from the Nasdaq SmallCap market or Lender;

            (m) The License Agreement or the Research Agreement shall have been
terminated;

            (n) The Commercialization Agreement shall have been terminated; or

            (o) The Investment and Commission Agreement shall have been
terminated.

      6.02 Effect of Event of Default. If any Event of Default shall occur and
be continuing, then Lender (i) may, by notice to Borrower, declare the
Commitment and its obligation to make Advances to be terminated, whereupon the
same shall forthwith terminate, (ii) may, by notice to Borrower, declare the
Note, all interest thereon and all other amounts payable under this Agreement to
be forthwith due and payable, whereupon the Note, all such interest and all such
amounts shall become and be forthwith due and payable, without presentment,
demand, protest or further notice of any kind, all of which are hereby expressly
waived by Borrower, and (iii) exercise any rights or remedies under the Security
Agreement; provided, however, that if an Event of Default specified in Section
6.01(f) or (g) shall occur, (A) the Commitment and the obligation of Lender to
make Advances shall automatically be terminated and (B) the Note, all such
interest and all such amounts shall automatically become and be due and payable,
without presentment, demand, protest or any notice of any kind, all of which are
hereby expressly waived by Borrower.

                                  ARTICLE VII
                                 MISCELLANEOUS

      7.01 Amendments. No amendment or waiver of any provision of this Agreement
or the Note, nor consent to any departure by Borrower therefrom, shall in any
event be effective unless the same shall be in writing and signed by Borrower
and Lender, and then such waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given.

      7.02 Notices. All notices and other communications provided for hereunder
shall be in writing, shall specifically refer to this Agreement, shall be
addressed to the receiving party's address set forth below or to such other
address as a party may designate by notice hereunder, and shall be deemed to
have been sufficiently given for all purposes if (i) mailed by first class

                                       11
<PAGE>

certified or registered mail, postage prepaid, (ii) sent by nationally
recognized overnight courier for next Business Day delivery, (iii) personally
delivered, or (iv) made by telecopy or facsimile transmission with confirmed
receipt.

      If to Borrower:  Discovery Laboratories, Inc.
                       350 South Main Street
                       Suite 307
                       Doyelstown, PA 18901-4874
                       Attn: President
                       Facsimile: (215) 340-3940

      with a copy to:  Roberts, Sheridan & Kotel
                       The New York Practice of
                       Dickstein Shapiro's Corporate & Finance Group
                       1177 Avenue of the Americas
                       New York, NY 10036-2714
                       Attn: Ira L. Kotel
                       Facsimile: (212) 997-9880

      If to Lender:    PharmaBio Development Inc.
                       4709 Creekstone Drive
                       Riverbirch Bldg., Suite 200
                       Durham, NC 27703
                       Attn:  President
                       Facsimile: (919) 998-2090

      with a copy to:  Smith, Anderson, Blount, Dorsett,
                       Mitchell & Jernigan, L.L.P.
                       2500 First Union Capitol Center
                       Raleigh, NC 27601
                       Attn: Christopher B. Capel
                       Facsimile: (919) 821-6800

      7.03 No Waiver; Remedies. No failure on the part of Lender to exercise,
and no delay in exercising, any right hereunder or under the Notes shall operate
as a waiver thereof; nor shall any single or partial exercise of any such right
preclude any other or further exercise thereof or the exercise of any other
right. The remedies herein provided are cumulative and not exclusive of any
remedies provided by law.

      7.04 Right of Set-off. If an Event of Default shall have occurred and be
continuing, Lender is hereby authorized at any time and from time to time, to
the fullest extent permitted by law, to set off and apply any payment obligation
by Lender to Borrower under the Transaction Documents against any and all of the
obligations of Borrower now or hereafter existing under this Agreement and the
Note, whether or not Lender shall have made any demand under this Agreement or
the Note and although such obligations may be unmatured. Lender agrees promptly
to notify Borrower after any such set-off and application, provided that the
failure to give such notice shall not affect the validity of such set-off and
application. The rights of Lender

                                       12
<PAGE>

under this Section 7.04 are in addition to other rights and remedies (including,
without limitation, other rights of set-off) which Lender may have.

      7.05 Attorneys' Fees. In the event that any dispute among the parties to
the Loan Documents should result in litigation, the prevailing party in such
dispute shall be entitled to recover from the losing party all fees, costs and
expenses enforcing any right of such prevailing party under or with respect to
the Loan Documents, including without limitation, such reasonable fees and
expenses of attorneys and accountants, which shall include, without limitation,
all fees, costs and expense of appeals.

      7.06 Binding Effect; Assignment. This Agreement shall be binding upon and
inure to the benefit of Borrower and Lender and their respective successors and
assigns, provided that neither Borrower nor Lender may assign or transfer any or
all of its rights or obligations under the Loan Documents without the prior
written consent of the other party and any attempted assignment without consent
shall be null and void; provided, however, that Lender may at any time assign or
transfer any of its rights or obligations under the Loan Documents to an
Affiliate of Lender so long as such Affiliate agrees in an enforceable written
instrument to be bound by all the terms and conditions of the Loan Documents as
if it were Lender and a party thereto, which instrument shall be delivered a
reasonably practicable time prior to such assignment.

      7.07 Severability. To the extent any provision of this Agreement is
prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Agreement.

      7.08 Entire Agreement. This Agreement and the other Transaction Agreements
embody the entire agreement and understanding between the parties hereto with
respect to the subject matter thereof and supersede all prior oral or written
agreements and understandings relating to the subject matter thereof. No
statement, representation, warranty, covenant or agreement of any kind not
expressly set forth in the Transaction Agreements shall affect, or be used to
interpret, change or restrict, the express terms and provisions of the
Agreements. If any provision contained in this Agreement shall be deemed to
conflict with any provision of any of the other Transaction Agreements, then the
provision contained in this Agreement shall be controlling.

      7.09 Further Action. Each party shall, without further consideration, take
such further action and execute and deliver such further documents as may be
reasonably requested by the other party in order to carry out the provisions and
purposes of this Agreement.

      7.10 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original and all of which,
when taken together, shall constitute one and the same instrument. This
Agreement may be executed and delivered by telecopy or facsimile transmission
and any execution by such means shall be deemed an original.

      7.11 Publicity. Except as otherwise required by applicable law or by
obligations pursuant to any listing agreement with or rules of any securities
exchange or automated quotation

                                       13
<PAGE>

system, each party shall, and shall cause its respective Affiliates to, not,
issue any press release or make any other public statement relating to,
connected with or arising out of this Agreement or the matters contained herein
without the other parties' prior written approval of the contents and the manner
of presentation and publication thereof (which approval shall not be
unreasonably withheld or delayed).

      7.12 Termination by Borrower. At such time that all Advances and accrued
interest have irrevocably been paid in full, the Commitment has expired or been
terminated and Borrower has satisfied all of its obligations under this
Agreement, Lender shall, at the request of Borrower, promptly, and in no event
later than ten (10) Business Days thereafter, make, execute, endorse,
acknowledge, file and/or deliver to Borrower any and all agreements,
certificates, instruments or other documents, and take all other action, as
reasonably requested by Borrower to terminate this Agreement.

      7.13 Disclaimer. Neither Lender nor Borrower, nor any of such party's
Affiliates, directors, officers, employees, subcontractors or agents shall have,
under any legal theory (including, but not limited to, contract, negligence and
tort liability), any liability to any other party hereto for any loss of
opportunity or goodwill, or any type of special, incidental, indirect or
consequential damage or loss, in connection with or arising out of this
Agreement.

      7.14 Governing Law. This Agreement, including, without limitation, the
interpretation, performance, enforcement, breach or termination thereof and any
remedies relating thereto, shall be governed by and construed in accordance with
the laws of the State of Delaware, United States of America, as applied to
agreements executed and performed entirely in the State of Delaware, without
regard to conflicts of law rules.

      7.15 Internal Review. In the event that a dispute, difference, claim,
action, demand, request, investigation, controversy, threat, discovery request
or request for testimony or information or other question arises pertaining to
any matters which arise under, out of, in connection with, or in relation to
this Agreement (a "Dispute") and either party so requests in writing, prior to
the initiation of any formal legal action, the Dispute will be submitted to the
JCC (as defined in the Commercialization Agreement), which will use its good
faith efforts to resolve the Dispute within ten (10) days. If the JCC is unable
to resolve the Dispute in such period, the JCC will refer the Dispute to the
Chief Executive Officers of Borrower and Lender. For all Disputes referred to
the Chief Executive Officers, the Chief Executive Officers shall use their good
faith efforts to meet at least two times in person and to resolve the Dispute
within ten (10) days after such referral.

      7.16 Arbitration. (a) If the parties are unable to resolve any Dispute
under Section 7.15, then either party may require the matter to be settled by
final and binding arbitration by sending written notice of such election to the
other party clearly marked "Arbitration Demand". Thereupon such Dispute shall be
arbitrated in accordance with the terms and conditions of this Section 7.15.
Notwithstanding the foregoing, either party may apply to a court of competent
jurisdiction for a temporary restraining order, a preliminary injunction, or
other equitable relief to preserve the status quo or prevent irreparable harm.

                                       14
<PAGE>

            (b) The arbitration panel will be composed of three arbitrators, one
of whom will be chosen by Borrower, one by Lender, and the third by the two so
chosen. If both or either of Borrower or Lender fails to choose an arbitrator or
arbitrators within 14 days after receiving notice of commencement of
arbitration, or if the two arbitrators fail to choose a third arbitrator within
14 days after their appointment, the American Arbitration Association shall,
upon the request of both or either of the parties to the arbitration, appoint
the arbitrator or arbitrators required to complete the panel. The arbitrators
shall have reasonable experience in the matter under dispute. The decision of
the arbitrators shall be final and binding on the parties, and specific
performance giving effect to the decision of the arbitrators may be ordered by
any court of competent jurisdiction.

            (c) Nothing contained herein shall operate to prevent either party
from asserting counterclaim(s) in any arbitration commenced in accordance with
this agreement, and any such party need not comply with the procedural
provisions of this Section 7.16 in order to assert such counterclaim(s).

            (d) The arbitration shall be filed with the office of the American
Arbitration Association ("AAA") located in Wilmington, Delaware or such other
AAA office as the parties may agree upon (without any obligation to so agree).
The arbitration shall be conducted pursuant to the Commercial Arbitration Rules
of AAA as in effect at the time of the arbitration hearing, such arbitration to
be completed in a sixty (60) day period. In addition, the following rules and
procedures shall apply to the arbitration:

                  (i) The arbitrators shall have the sole authority to decide
whether or not any Dispute between the parties is arbitrable and whether the
party presenting the issues to be arbitrated has satisfied the conditions
precedent to such party's right to commence arbitration as required by this
Section 7.16.

                  (ii) The decision of the arbitrators, which shall be in
writing and state the findings the facts and conclusions of law upon which the
decision is based, shall be final and binding upon the parties, who shall
forthwith comply after receipt thereof. Judgment upon the award rendered by the
arbitrator may be entered by any competent court. Each party submits itself to
the jurisdiction of any such court, but only for the entry and enforcement to
judgment with respect to the decision of the arbitrators hereunder.

                  (iii) The arbitrators shall have the power to grant all legal
and equitable remedies (including, without limitation, specific performance) and
award compensatory damages provided by applicable law, but shall not have the
power or authority to award punitive damages. No party shall seek punitive
damages in relation to any matter under, arising out of, or in connection with
or relating to this Agreement in any other forum.

                  (iv) The parties shall bear their own costs in preparing for
and participating in the resolution of any Dispute pursuant to this Section
7.16, and the costs of the arbitrator(s) shall be equally divided between the
parties; provided, however, that each party shall bear the costs incurred in
connection with any Dispute brought by such party that the arbitrators determine
to have been brought in bad faith.

                                       15
<PAGE>

            (e) Except as provided in the last sentence of Section 7.16(a), the
provisions of this Section 7.16 shall be a complete defense to any suit, action
or proceeding instituted in any federal, state or local court or before any
administrative tribunal with respect to any Dispute arising with regard to this
Agreement. Any party commencing a lawsuit in violation of this Section 7.16
shall pay the costs of the other party, including, without limitation,
reasonable attorney's fees and defense costs.

                     [REST OF PAGE INTENTIONALLY LEFT BLANK;
                          SIGNATURES ON FOLLOWING PAGE]

                                       16
<PAGE>

                       [Signature Page to Loan Agreement]

      IN WITNESS WHEREOF, the parties hereto have caused this Loan Agreement to
be executed by their respective officers thereunto duly authorized, as of the
date first above written.

                                       BORROWER:

                                       DISCOVERY LABORATORIES, INC.

                                       By: /s/ David L. Lopez
                                          --------------------------------------
                                       Name: David L. Lopez
                                       Title: Vice President and General Counsel

                                       LENDER:

                                       PHARMABIO DEVELOPMENT INC.

                                       By: /s/ Thomas C. Perkins
                                          --------------------------------------
                                       Name: Thomas C. Perkins
                                       Title: Vice President and General Counsel

                                       17
<PAGE>

                                    EXHIBIT A
                                   DEFINITIONS

      "Affiliate" shall mean, as to any person or entity, any corporation or
business entity controlled by, controlling or under common control with such
party or entity. For this purpose, "control" shall mean direct or indirect
beneficial ownership of at least fifty percent (50%) of the voting stock or
income interest in such corporation or other business entity.

      "Business Day" shall mean any day other than a Saturday, Sunday or legal
holiday on which banks in North Carolina and New York are open for the conduct
of their banking business.

      "Change of Control" shall mean the occurrence of any of the following
events: (i) the acquisition, whether directly or indirectly, by any person or
entity, including a "group" as defined in Section 13(d)(3) of the Exchange Act,
of fifty percent (50%) or more of the Common Stock of Borrower; (ii) Borrower
shall merge or consolidate (or engage in any other share exchange, acquisition
or business combination transaction) with or into another corporation or other
entity, with the effect that the persons who were the shareholders of Borrower
immediately prior to the effective time of such transaction hold less than
fifty-one percent (51%) of the combined voting power of the outstanding equity
securities of the surviving, continuing or acquiring entity in such transaction;
(iii) Borrower shall sell, convey, transfer, lease, license, assign or otherwise
transfer or dispose of (whether in one transaction or a series of transactions)
all or substantially all of its assets or properties (whether now owned or
hereafter acquired) to any person or entity, or permit any of its subsidiaries
to do so; or (iv) at any time during any calendar year, fifty percent (50%) or
more of the members of the full Board of Directors of Borrower shall have
resigned or been removed or replaced. The determination of "combined voting
power" shall be based on the aggregate number of votes that are attributable to
outstanding securities entitled to vote in the election of directors, general
partners, managers or persons performing analogous functions to directors of the
entity in question, without regard to contractual arrangements or rights
accruing in special circumstances.

      "Debt" shall mean (i) indebtedness for borrowed money, (ii) obligations
evidenced by bonds, debentures, notes or other similar instruments, (iii)
obligations to pay the deferred purchase price of property or services, (iv)
obligations as lessee under leases which shall have been or should be, in
accordance with generally accepted accounting principles, recorded as capital
leases, and (v) obligations under direct or indirect guaranties in respect of,
and obligations (contingent or otherwise) to purchase or otherwise acquire, or
otherwise to assure a creditor against loss in respect of, indebtedness or
obligations of others of the kinds referred to in clauses (i) through (iv)
above; provided, however, Debt shall not include any Debt of Borrower under this
Agreement.

      "FDA" shall mean the United States Food and Drug Administration.

      "FFDCA" shall mean the United States Federal Food, Drug and Cosmetic Act,
as amended from time to time, and all regulations promulgated thereunder.

<PAGE>

      "License Agreement" shall mean the Sublicense Agreement dated October 28,
1996 between Johnson & Johnson and Ortho Pharmaceutical Corporation, as
licensors, and the Company (formerly known as Acute Therapeutics, Inc.), as
licensee.

      "Liens" shall mean any lien, security interest, mortgage, pledge,
encumbrance, charge or claim.

      "NDA" shall mean a "new drug application" as such term is used under the
FFDCA.

      "Prime Rate" shall mean the rate which First Union National Bank (or its
successor) announces from time to time as its prime lending rate, the Prime Rate
to change when and as such prime lending rate changes.

      "Product" shall have the meaning given such term under the Investment and
Commission Agreement.

      "Research Agreement" shall mean the Research Funding and Option Agreement
dated March 1, 2000 between the Scripps Research Institute and the Company.

<PAGE>

                                    EXHIBIT B
                                  FORM OF NOTE

                                 PROMISSORY NOTE

$8,500,000                                                     December __, 2001

            FOR VALUE RECEIVED, DISCOVERY LABORATORIES, INC., a Delaware
corporation ("Borrower"), hereby promises to pay to the order of PHARMABIO
DEVELOPMENT INC., a North Carolina corporation ("Lender"), in lawful money of
the United States of America in immediately available funds, the lesser of (i)
the principal sum of Eight Million, Five Hundred Thousand Dollars ($8,500,000)
and (ii) the aggregate unpaid principal amount of all Advances (as defined in
the Loan Agreement referred to below) made by Lender to Borrower pursuant to the
Loan Agreement (as defined below), together with interest accrued thereon. The
interest shall accrue on the unpaid principal amount of each Advance at the
rates and in the manner provided in the Loan Agreement. Payment of the principal
amount of this Note and accrued interest on this Note shall be made at the times
and in the manner provided in the Loan Agreement. Capitalized terms used but not
defined herein shall have the meanings ascribed to them in the Loan Agreement.

            Each Advance made by Lender to Borrower, and all payments made on
account of the principal amount hereof, shall be recorded and endorsed by Lender
on the grid attached hereto which is a part of this Note. Failure to so record
and endorse such Advances and payments, however, shall not affect Borrower's
obligations in respect of such Advances.

            This Promissory Note is the Note referenced in the Loan Agreement
between Borrower and Lender dated as of the date of this Note (as same may be
amended from time to time, the "Loan Agreement"), and is entitled to the
benefits of the Loan Agreement. The Loan Agreement, among other things, (i)
provides for the making of certain Advances by Lender to Borrower from time to
time, the principal amount of each such Advance being a principal amount
evidenced by this Note, and (ii) provides that this Note is secured by, and
Borrower has granted a security interest in, certain of its assets as set forth
in that certain Security Agreement between Borrower and Lender dated as of the
same date as this Note.

            In case an Event of Default shall occur and be continuing and not
cured prior to the expiration of any applicable cure or grace periods set forth
in the Loan Agreement, the unpaid principal amount of, and accrued interest on,
this Note may be declared to be due and payable in the manner and with the
effect provided in the Loan Agreement.

            Borrower hereby waives presentment, demand, notice, protest and all
other demands and notices in connection with the delivery, acceptance,
performance and enforcement of this Note.

<PAGE>

            This Note is subject to early termination as set forth in the Loan
Agreement. This Note may be voluntarily prepaid, in whole or in part, on the
terms and conditions set forth in the Loan Agreement. Provided that no Advances
or accrued interest are outstanding and have irrevocably been paid in full and
the Commitment shall have expired or been terminated in accordance with the
terms of the Loan Agreement, the Lender shall, at the request of Borrower,
promptly, and in no event later than ten (10) Business Days after notice from
Borrower, cancel and return this Note to Borrower.

            This Note shall be governed by and construed in accordance with the
law of the State of Delaware without regard to the conflicts of law rules of
such state.

            This Note may not be assigned by Lender except to an Affiliate of
Lender which agrees in an enforceable written instrument to be bound by all the
terms and conditions of this Note as if it were Lender, which instrument shall
be delivered a reasonably practicable time prior to such assignment.

            Lender and Borrower agree that disputes relating to this Note shall
be subject to the provisions of the Loan Agreement entitled "Internal Review"
and "Arbitration" set forth in Sections 7.15 and 7.16 thereof, respectively.

                                                    BORROWER:

                                                    DISCOVERY LABORATORIES, INC.

                                                    By: ________________________
                                                    Name:
                                                    Title:

<PAGE>

                       ADVANCES AND PAYMENTS OF PRINCIPAL

              Amount     Amount of Principal Paid        Unpaid         Notation
  Date     of Advance           or Prepaid          Principal Balance    Made By
  ----     ----------           ----------          -----------------    -------

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