Document:

Exhibit 10.53

Certain portions have been omitted pursuant to a request for confidentiality and
     such omitted portions have been separately filed with the Commission.

                                SUPPLY AGREEMENT

                  Supply Agreement dated as of October 26th, 1999 by and between
DISCOVERY LABORATORIES, INC. ("Seller") and LABORATORIOS DEL DR. ESTEVE, S.A., a
company organized and existing under the laws of Spain ("Buyer").

                  WHEREAS, Seller is engaged in clinical studies of surfactant
pharmaceutical preparations for the treatment of acute respiratory distress
syndrome ("ARDS"), acute lung injury ("ALI"), infant respiratory distress
syndrome ("IRDS") and meconium aspiration syndrome ("MAS"); and

                  WHEREAS, Seller and Buyer are parties to a Sublicense
Agreement dated as of October 26th, 1999 (the "Sublicense Agreement") pursuant
to which Buyer has agreed to purchase from Seller, and Seller has agreed to
supply to Buyer, Licensed Products (such term and other capitalized terms used
and not otherwise defined herein having the meanings assigned to them in the
Sublicense Agreement) from Seller.

                  NOW, THEREFORE, in consideration of the foregoing premises and
the mutual promises and covenants set forth below, Seller and Buyer mutually
agree as follows:

                                    ARTICLE I
                                    ---------

                                   DEFINITIONS
                                   -----------

                  As used in this Agreement, the following terms shall have the
following meanings:

                  "Affiliate/s" of a Person shall mean any Person which directly
or indirectly Controls, is Controlled by or is under common Control with such
Person.

                  "Business Day" shall mean any day on which banking
institutions are open or authorized to be open in the Commonwealth of
Pennsylvania.

                  "Current Good Manufacturing Practices" or "cGMP" shall mean
(i) with respect to the United States, the good manufacturing practices required
by the FDA and set forth in the Federal Food, Drugs and Cosmetics Act or FDA
regulations,

935303.1

<PAGE>

policies or guidelines in effect at a particular time for the manufacture,
testing and quality control of pharmaceutical materials and (ii) with respect to
any other country, the standards for the manufacture and testing of
pharmaceutical materials that are imposed by any regulatory authority having
jurisdiction.

                  "Control" shall mean direct or indirect beneficial ownership
of at least fifty percent (50%) of the voting stock of a Person having
outstanding voting securities, or a fifty percent (50%) or greater interest in
the income of a Person not having outstanding securities, or, in either case,
the power to direct or cause the direction of the management or policies of such
Person.

                  "EMEA" shall mean the European Medicines Evaluation Agency.

                  "Ex Factory Price" shall mean Licensee or its Affiliate's
selling price for each Licensed Product in Spain (officially called "PVL" or
"Precio Venta Laboratorio") as such price is authorized from time to time by the
Spanish regulatory authorities and set forth in the Spanish Pricing Approval.

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

                  "Facility" means an Owned Facility or a Contract Facility (in
each case as defined in Section 3.1).

                  "First Commercial Sale" shall mean the first commercial sale
by Buyer, its Affiliates or sublicensees of any Licensed Product following final
EMEA or other regulatory approval required to market such Licensed Product
commercially in the Licensed Territory for use in humans.

                  "Person" shall mean any natural person, corporation, limited
liability company, unincorporated association, partnership, joint venture or
other entity.

                  "Specifications" shall mean the Licensed Product
specifications approved by the EMEA and the other regulatory authorities having
jurisdiction in the Licensed Territory, as the same may be amended from time to
time in accordance with applicable regulatory procedures.

                  "Transfer Price" shall mean the price for each Licensed
Product established in accordance with Section 2.2.

                                   ARTICLE II
                                   ----------

                          PURCHASE AND SALE OF PRODUCTS
                          -----------------------------

935303.1

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                  Section 2.1.  Purchase and Sale; Delivery; Acceptance or
                                Rejection.

                                   (a) Seller agrees to sell to Buyer such
         quantities of Licensed Products, manufactured in conformity with cGMP
         and meeting the Specifications, as Buyer may order in accordance with
         the terms and conditions of this Agreement. Subject to the provisions
         of Sections 3.4 and 7.2 hereof, so long as this Agreement shall remain
         in effect, Buyer agrees, for itself and its Affiliates and
         sublicensees, to satisfy solely through the purchase of Licensed
         Products from Seller under this Agreement 100% of Buyer's and its
         Affiliates' and sublicensees' requirements for Licensed Products.

                                   (b) Purchase orders issued by Buyer to Seller
         with respect to purchases of Licensed Products shall be subject to, and
         governed exclusively by, the terms of this Agreement. Buyer agrees not
         to issue to Seller any purchase order containing terms different from
         those set forth herein and further agrees that no shipment of Licensed
         Product by Seller in accordance with a nonconforming purchase order
         shall be deemed to be acceptance of any terms of such purchase order
         conflicting with the terms of this Agreement except to the extent such
         conflicting terms are initialed by Seller with the words "change
         accepted" written thereon by Seller. Except as aforesaid, this
         Agreement shall override all other conflicting terms of purchase and/or
         sale contained in any purchase and/or sale document generated by Seller
         or Buyer.

                                   (c) All Licensed Products sold to Buyer
         hereunder shall be delivered [***] , subject to paragraph (d) below.
         [***] shall assist [***] in arranging transportation in the manner
         specified by[***], in accordance with applicable regulatory
         requirements, to any destinations specified in writing from time to
         time by Buyer; provided that all costs and expenses relating to such
         transportation and delivery (including without limitation customs,
         duties, taxes, insurance premiums and all expenses relating to
         validation of temperature-controlled shipment conditions) shall be at
         [***]expense.

                                   (d) Seller will include with each shipment
         copies of all applicable quality and testing records, which shall be in
         a form acceptable for any applicable EMEA or other regulatory
         submission in the Licensed Territory. Product shipments for sale by
         Buyer in the European countries of the Licensed Territory shall
         originate from a [***] and shall be accompanied by a certificate of
         analysis made in such [***]. Seller shall certify in writing, to
         Buyer's reasonable satisfaction, that each delivery of Licensed Product
         was produced and tested in compliance with (i) the Specifications, (ii)
         cGMP requirements and (iii) all applicable regulatory documents.

         [***] Confidential treatment requested.

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                                   (e) Buyer may reject any portion of any
         shipment of Licensed Product which does not conform with the
         Specifications. In order to reject a shipment, Buyer must (i) give
         notice to Seller of Buyer's intent to reject the shipment within 30
         days of receipt together with a detailed written indication of the
         reasons for such possible rejection, and (ii) as promptly as reasonably
         possible thereafter, but in any event within an additional thirty (30)
         days, provide Seller with notice of final rejection and the full basis
         therefor. After notice of intent to reject is given, Buyer shall
         cooperate with Seller in determining whether rejection is necessary or
         justified. If such notices of intent to reject and final rejection are
         not timely received, Buyer shall be deemed to have accepted such
         delivery of Licensed Product and to have waived all claims for
         non-conformity with the Specifications, damage, defect or shortage,
         other than claims for latent defects not capable of discovery by Buyer
         upon physical examination. In the event of latent defects not capable
         of discovery by Buyer upon physical examination, Buyer shall inform
         Seller within fifteen (15) days of discovering any such defect. Buyer
         shall be entitled to a refund of the purchase price (together with
         insurance, freight charges and, where applicable, custom duties) of
         properly rejected Licensed Products at the time they are ultimately
         rejected, provided that if Seller disputes the rejection, refund shall
         be made, if at all, at the time the dispute is finally resolved. Seller
         shall notify Buyer as promptly as reasonably possible (but in any event
         no later than thirty (30) days after receipt of Buyer's final rejection
         notice) whether it accepts Buyer's basis for any rejection. In the
         event Seller disputes Buyer's rejection, the parties will select a
         mutually agreeable independent third party laboratory which shall
         determine whether the rejected Licensed Products meet the applicable
         Specifications and shall confirm or dissent from Buyer's rejection of
         Licensed Products. If the parties are unable to agree on a laboratory
         firm within thirty (30) days after receipt of Buyer's final rejection
         notice, the laboratory shall be appointed by computer generation of a
         random number, with an even number signifying Seller's right to
         designate the laboratory and an odd number designating Buyer's right to
         designate the laboratory. If the independent tester confirms Buyer's
         rejection, Seller will pay the fees of the tester, and if the tester
         dissents from Buyer's rejection, Buyer will pay the fees.

                                   (f) Whether or not Seller accepts Buyer's
         basis for rejection, promptly on receipt of a notice of rejection,
         Seller shall use its commercially reasonable efforts, at Buyer's
         request, to provide replacement Licensed Product, which shall be
         purchased by Buyer as provided in this Agreement as soon as reasonably
         practicable.

                                   (g) Unless Seller requests the return to it
         of a rejected batch within 60 days of receipt of Buyer's notice of
         rejection, Buyer shall, at Seller's cost, destroy such batch promptly
         and provide Seller with certification

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         of such destruction. Buyer shall, upon receipt of Seller's request for
         return, promptly dispatch said batch to Seller, at Seller's cost.

                                   (h) No change to the Specifications shall be
         effective unless the same shall be required or permitted by any
         regulatory agency having jurisdiction over any country in the Licensed
         Territory, Buyer or the Licensed Products (and if not required, shall
         be agreed to in writing by Buyer and Seller). Seller shall give Buyer
         advance notice of any change to the Specifications required by a
         regulatory agency.

                  2.2 Price; Method of Payment.

                           (a) Buyer shall purchase Licensed Products from
         Seller hereunder at the applicable Transfer Price. The Transfer Price
         for each unit of Licensed Product shall equal [***], subject to
         paragraph (d) below.

                           (b) Seller shall invoice Buyer for each shipment of
         Licensed Products delivered by Seller to Buyer, its Affiliates or
         sublicensees at the Transfer Price converted into U.S. dollar at the
         exchange rate of the last Business Day of the calendar month
         immediately preceding the month when the Licensed Product is shipped to
         Licensee, as quoted by the Wall Street Journal.

                           (c) Buyer shall pay Seller's invoices in U.S. Dollar
         not later than ninety (90) days following the date of the applicable
         invoice by wire transfer to the bank account designated by Seller.

                           (d) In the event that the Transfer Price of any
         Licensed Product represents more than [***], Licensor and Licensee
         shall, at Licensee's request, hold good faith discussions in order to
         adjust the Transfer Price with respect to Licensed Product sales in
         such country.

                           (e) All payments under this Section 2.2 shall be free
         of all withholdings of any nature whatsoever (including, without
         limitation, withholding taxes, monetary transfer fees, or similar taxes
         and charges), and in the event any withholding is required, Buyer shall
         pay the same together with such additional amount as is required so
         that each such payment shall be, under any circumstances and in any
         event, in the amount as set forth or referred to herein.

[***] Confidential treatment requested.

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<PAGE>

                                   ARTICLE III
                                   -----------

                             PRODUCTION OF PRODUCTS
                             ----------------------

                  Section 3.1. Manufacturing of Licensed Products.

                           (a) Until such time, if any, as a Seller-owned
         manufacturing facility (an "Owned Facility") is qualified for the
         manufacture of Licensed Products sold to Buyer hereunder, Seller shall
         manufacture or have manufactured the Licensed Products sold to Buyer
         hereunder at a contract manufacturing facility (a "Contract Facility")
         [***]. Commencing sixty (60) days prior to the First Commercial Sale of
         any Licensed Product in a country of the Licensed Territory (provided
         that such date of First Commercial Sale has been communicated to Seller
         [***] Seller shall maintain at least one alternate production site for
         Licensed Products sold to Buyer hereunder, which alternate production
         site, if a Contract Facility, shall [***]. Seller's obligation to
         maintain an alternate manufacturing facility may also be satisfied
         through a sublicensing arrangement complying with Section 3.2.

                           (b) Seller shall be responsible for obtaining and
         maintaining all necessary licenses, registrations, authorizations and
         approvals (other than such licenses, registrations, authorizations and
         approvals that are required to be obtained or made by an owner or
         operator of a Contract Facility) which are necessary to manufacture,
         handle, store, label, package, transport and ship Licensed Products
         under cGMP conditions and in accordance with other regulatory
         requirements.

                           (c) Seller shall provide Buyer with copies of any
         correspondence sent from Seller to governmental entities relating to
         the manufacturing, handling, storage, labeling, packaging,
         transportation or shipment of Licensed Products at the time such
         correspondence is sent by Seller, purged of Seller proprietary and/or
         confidential information and trade secrets. Seller shall provide Buyer
         with copies of any comments, responses, notices or other correspondence
         received by Seller from any governmental entity relating to the
         foregoing matters within fifteen (15) days of receipt of such
         correspondence by Seller, purged of any Seller proprietary information
         and/or trade secrets.

                           (d) Seller shall furnish to Buyer (i) promptly, but
         in any event within fifteen (15) days after receipt, a summary of any
         report or correspondence issued by a governmental entity (or a third
         party authorized by

[***] Confidential treatment requested.

935303.1

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<PAGE>

         a governmental entity) in connection with a visit or inquiry relating
         to any Owned Facility or, to the extent Seller is provided with such
         information, any Contract Facility, including but not limited to, any
         FDA Form 483 or warning letter and (ii) not later than fifteen (15)
         days after the time Seller provides such to a governmental entity,
         summaries of any and all proposed responses or explanations relating
         thereto (each, a "Proposed Response"), in each case purged of trade
         secrets or other confidential or proprietary information of Seller.
         After the filing of a response with the appropriate governmental
         entity, Seller will notify Buyer of any further oral and/or written
         contacts with a governmental entity (or a third party authorized by a
         governmental entity) relating to the manufacturing, handling, storage,
         labeling, packaging, transportation or shipment of Licensed Products.

                           (e) If requested in writing by Buyer, Seller shall
         permit Buyer to inspect, once per year, during normal business hours
         and hours during which Seller is manufacturing Licensed Products,
         Seller's Facilities and manufacturing records to the extent Buyer deems
         it reasonably necessary to enable Buyer to verify compliance with any
         statutory or regulatory requirements to which Buyer is subject and
         which are applicable to the manufacture and/or packaging of Licensed
         Products. Notwithstanding the foregoing, Buyer shall have the right to
         inspect Seller's Facilities and manufacturing records at any time, in
         the event that there is a quality or regulatory problem with any
         Licensed Product. If, as a result of any such inspection, Buyer
         concludes that Seller is not in compliance with any regulatory
         obligations or requirements applicable to Buyer, Buyer shall so notify
         Seller in writing, specifying such areas of noncompliance in reasonable
         detail and Seller shall remedy the problems identified.

                           (f) Seller agrees to use all reasonable efforts to
         promptly rectify or resolve any deficiencies noted by a governmental
         entity (or third party authorized by a governmental entity) in a report
         or correspondence issued to Seller with respect to an Owned Facility or
         a Contract Facility.

                  Section 3.2.  Subcontracting.

                  It is understood and agreed that Seller shall have the right
in connection with its performance hereunder to contract with such third parties
as Seller deems advisable to manufacture Licensed Products, provided that (i)
manufacture and/or quality control by any such third party has been authorised
by the competent regulatory authorities in the Licensed Territory, (ii) Seller
shall provide Buyer with not less than fifteen (15) days' advance notice of its
intent to contract with any third party and shall identify such third party to
Buyer, (iii) Buyer may audit Seller's contractor's qualifications and (iv)
Seller shall remain fully liable for its performance hereunder to the same
extent as if such contractor had not been engaged.

935303.1

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<PAGE>

                  Section 3.3.  Exclusivity.

                  For so long as the Sublicense Agreement remains in effect with
respect to any country in the Licensed Territory, until such time as Buyer has a
fully paid-up license in such country in accordance with the terms of the
Sublicense Agreement, Seller shall supply Licensed Products only to Buyer for
distribution within such country.

                  Section 3.4.  Alternate Sources of Supply.

                  In the event Seller is unable to supply conforming Licensed
Products sufficient to meet Buyer's firm orders made consistent with Section
4.1, Buyer shall have the immediate right to manufacture and package Licensed
Product with a supplier other than Seller (a "Back-Up Supplier"). Such right
shall continue until Seller notifies Buyer that Seller is able to supply all
Licensed Products required by Buyer as provided herein, in which case Buyer
shall recommence sourcing Licensed Products from Seller once any outstanding
orders from a Back-Up Supplier have been satisfied (provided that Buyer shall
not at any time enter into binding commitments for the purchase of quantities of
Licensed Products from any Back-Up Supplier exceeding Buyer's requirements for
Licensed Products during the three-month period commencing with the date of the
latest such commitment). Seller shall be entitled to receive a royalty in an
amount equal to the sum of [***] and (ii) [***] of such Licensed Product sales;
but only to the extent that Buyer's cost of the Licensed Product in finished,
packaged, labelled and quality controlled form ready for resale to the ultimate
customer plus the royalties hereinabove established shall not exceed the [***].
Buyer may elect to act as Back-Up Supplier or, at its election, have a third
party supplier of Buyer's choice (and reasonably acceptable to Seller) act as
Back-Up Supplier. Seller shall cooperate fully with Buyer and any separate
Back-Up Supplier, and shall use commercially reasonable best efforts to enable
the Back-Up Supplier to qualify and validate the Back-Up Supplier's facilities
and to manufacture and package Licensed Products. Seller shall give the Back-Up
Supplier prompt and unrestricted access to, or, if requested, Seller shall
immediately provide to the Back-Up Supplier, all technical information necessary
for the Back-Up Supplier to manufacture Licensed Products during the period
permitted hereby. Any disclosure or use of technical information will be subject
to the confidentiality restrictions set forth in Article 6 of the Sublicense
Agreement. The Back-Up Supplier shall have the right to observe the operation of
any laboratory and manufacturing and/or packaging facility of Seller (subject to
Buyer obligations of confidentiality to third parties), and to have a reasonable
number of employees or other representatives of Seller visit the Back-Up
Suppliers' facilities, at Buyer's option and in accordance with a mutually
agreed timetable, to demonstrate and explain any of the technical information
and the manufacturing and packaging processes for the

[***] Confidential treatment requested.

935303.1

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<PAGE>

Licensed Products. Seller shall reasonably cooperate with Buyer and Back-Up
Supplier to obtain any regulatory approval in the Licensed Territory as may be
required for the manufacture of Licensed Products by the Back-Up Supplier.

                  Section 3.5.  Allocation in the Event of Shortage.

                  If for any reason Seller experiences a shortage of materials
required to manufacture Licensed Products and Seller is therefore unable to
supply Buyer with the full quantity of Licensed Products ordered by it and
accepted by Seller, Buyer shall be entitled to receive that quantity of Licensed
Products which bears the same proportion to the total quantity of available
Licensed Products as the quantity of Licensed Products purchased by Buyer from
Seller in the 12 months preceding the supply shortage (or a shorter period if
Buyer has started purchasing Licensed Products less than 12 months before the
shortage occurs) bears to all purchases of orders from Seller from all customers
(including Buyer) for Licensed Products during such period.

                                   ARTICLE IV
                                   ----------

                           QUANTITY FORECASTS; ORDERS
                           --------------------------

                  Section 4.1.  Forecasts.

                                   (a) In order to assist Seller in planning its
         production, commencing sixty (60) days prior to the calendar month in
         which the First Commercial Sale of Licensed Products takes place in any
         country in the Licensed Territory, Buyer shall provide Seller with
         [***] rolling forecast of the quantities of such Licensed Product
         required by Buyer, by month, for the following [***]. The first [***]
         of such projections shall constitute a binding commitment to order the
         quantity of such Licensed Product forecast for such period, provided
         that with respect to the first [***] provided that the portion of such
         forecast relating to such country is separately stated and is so
         indicated. Projections for months [***] shall be made in good faith and
         shall constitute Buyer's best estimates of future orders, but shall not
         be binding on Buyer. Updated [***] forecasts will be provided at the
         beginning of each succeeding calendar month for the [***] . Buyer's
         forecast shall also describe anticipated regulatory modifications to
         any English language version of Licensed Product labeling proposed by
         Seller. Seller shall, no later than fifteen (15) Business Days after
         receipt of each such forecast, notify Buyer in writing of any
         prospective problems of which Seller is aware of that might prevent
         Seller from meeting Buyer's forecast order quantities or estimated
         delivery dates.

[***] Confidential treatment requested.

935303.1

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<PAGE>

                                   (b) Buyer shall provide Seller with its firm
         purchase orders for Licensed Product in accordance with the lead-times
         and batch size increments to be specified by Seller in writing as soon
         as reasonably practicable but in any event before Buyer places its
         first order for Licensed Products, such lead-times and batch sizes to
         be applicable during the term of this Agreement unless otherwise agreed
         in writing by the parties. Notwithstanding the foregoing, Buyer shall
         have the right, up to the date of manufacture, to issue binding change
         orders to increase or decrease such purchase orders with the consent of
         Seller, which shall not be unreasonably withheld so long as Buyer
         agrees to compensate Seller for any damages suffered by Seller as a
         consequence of such change order (including damages attributable to
         loss of allocable overhead recoupment, but excluding loss of profit),
         provided that Seller shall advise Buyer before carrying out any change
         order of Seller's estimated increased cost of doing so. Buyer agrees to
         accept partial shipments of Licensed Products should, for any reason,
         it become necessary to ship in advance of order completion, provided
         that Seller shall (i) give advance written notice to Buyer of such
         shipment and (ii) bear any additional cost to Buyer of receiving
         Licensed Products in partial shipments. Seller shall make all
         commercially reasonable efforts to comply with any revisions to
         purchase order requirements consistent with the provisions of Section
         4.1(a) and this Section 4.1(b). Seller, within ten (10) Business Days
         after the date that a purchase order is issued to it, shall acknowledge
         receipt of Buyer's order and confirm in writing that the order can be
         supplied. For purposes hereof, a purchase order will be deemed issued
         on the earlier of (i) the date that Seller receives the purchase order
         via mail and (ii) the date of receipt of the telecopied purchase order.

                  Section 4.2.  Purchase Order Contents.

                                   (a) Each purchase order shall specify the
         quantity, concentration and container size of Licensed Product ordered
         and the required delivery date. Seller shall use reasonable commercial
         efforts to deliver each shipment of Licensed Product within five (5)
         days of the delivery date specified in Buyer's purchase order relating
         thereto (provided that in no event shall such date be less than 30 days
         after the date the purchase order is issued, unless otherwise consented
         to by Buyer) using carriers mutually agreeable to Buyer and Seller.
         Seller shall use commercially reasonable efforts to accommodate "Rush"
         orders from Buyer.

                                   (b) When all appropriate validation and
         quality control release criteria for a particular shipment of Licensed
         Product have been met (the "Release Date"), Seller shall notify Buyer
         in writing of the expected delivery dates (including details of
         destination, date and time) to enable delivery and receipt to be
         coordinated. Title and risk of loss to Licensed Products shall

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<PAGE>

         pass to Buyer upon delivery of Licensed Products by Seller to the
         carrier.

                  Section 4.3.  Packaging.

                                   (a) Licensed Products shall be delivered to
         Buyer as finished goods in final packaged and labelled form, quality
         controlled in accordance with Section 2.1 (d) and ready for resale to
         the ultimate customer and in accordance with the packaging requirements
         set forth in the Marketing Regulatory Approvals.

                                   (b) Buyer shall distribute all Licensed
         Products as packaged by Seller in accordance with Section 4.3(a). In no
         event shall any Licensed Products be repackaged or reconfigured by
         Buyer without Seller's prior written consent.

                  Section 4.4.  Labelling.

                  With respect to each country in the Licensed Territory, prior
to distribution of a Licensed Product, Buyer shall provide Seller with evidence
of the regulatory approval of labelling specifications for such Licensed Product
in such country and any variations required by the applicable regulatory agency.
All such materials shall be provided to Seller together with an English
translation by a translator reasonably acceptable to Seller. Seller shall
distribute Licensed Products bearing only labelling supplied or approved by
Buyer and in accordance with such regulatory requirements.

                                    ARTICLE V
                                    ---------

                          CERTAIN OBLIGATIONS OF BUYER
                          ----------------------------

                  Buyer agrees to ascertain and comply with all applicable laws
and regulations and standards of industry or professional conduct in connection
with the use, distribution or promotion of the Licensed Products, including
without limitation, those applicable to product claims, labelling, approvals,
registrations and notifications, and also to obtain Seller's prior written
consent to all claims, labels, instructions, packaging or the like, which
consent shall not be unreasonably withheld.

                  Buyer agrees to use commercially reasonable efforts, at its
sole expense, to obtain and maintain any applicable approvals, registrations,
notifications or the like (other than any NDA or its equivalent for which Seller
shall be responsible to the extent provided in the Sublicense Agreement) with
regard to marketing, using, selling, labeling or otherwise promoting or making
claims regarding the Licensed Products or

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<PAGE>

their uses or reimbursement therefor in the Licensed Territory other than those
for which Seller is responsible pursuant to the Sublicense Agreement. Seller
will reasonably cooperate with Buyer in such efforts. Buyer shall not file any
such application or document without Seller's prior written consent, which shall
not be unreasonably withheld. To the extent permitted by law, all approvals,
registrations, notifications and the like (and all documents, applications and
information related thereto) and all rights thereunder or thereto shall be for
the sole benefit of and shall be solely owned by and in the name of Seller.
Buyer will provide Seller with any information regarding the foregoing that
Seller may request (with English translations).

                                   ARTICLE VI
                                   ----------

                               REGULATORY MATTERS
                               ------------------

                  Section 6.1. Information Regarding Regulatory Approvals.
Seller shall promptly advise Buyer, at Buyer's request, in matters pertaining to
U.S. regulatory requirements relating to Seller's activities hereunder. Seller
shall also provide to Buyer reasonable advance notice of any regulatory
submission containing information or data provided by Buyer to Seller which
Seller intends to disclose to regulatory agencies under this Agreement.

                  Section 6.2. Quality Control Program; Additional Testing
Programs. Seller shall maintain a quality control program consistent with cGMP,
as required by the FDA and/or any other governmental entity in the Licensed
Territory, with respect to Seller's manufacture of Licensed Products hereunder.
In addition, Seller will perform such additional testing programs, and provide
Buyer with documentation arising from such testing programs, as may be agreed to
by Buyer and Seller or required by any applicable regulatory authority.

                  Section 6.3. Retention of Samples. Seller shall retain as
samples such quantities of Licensed Products from each batch of Licensed Product
as Buyer shall reasonably request. Retained samples shall be maintained in a
suitable storage facility for one year past the product's expiration date. All
such samples shall be available for inspection and testing by Buyer at
reasonable times and upon reasonable notice.

                  Section 6.4. Recalls. Buyer shall notify Seller promptly if
any Licensed Product is the subject of a recall, market withdrawal or correction
within the Licensed Territory (a "Recall"), and Buyer and/or its designee shall
have sole responsibility for the handling and disposition of such Recall. Buyer
and/or its designee shall bear the costs of all Recalls of Licensed Products
except to the extent that such Recall shall have been the result of Seller's
breach of any of the warranties set

935303.1

                                       12
<PAGE>

forth in this Agreement or the Sublicense Agreement, in which case Seller will
promptly reimburse Buyer to such extent for actual, direct costs sustained as a
result of the Recall. In the event that Seller disputes Buyer's determination
that the fault is due to Seller and/or to its agent, the Parties will select a
mutually agreeable outside consulting firm which will be instructed to review
the applicable information and data and to confirm or dissent from Buyer's
determination. If the consulting firm confirms Buyer's determination, Seller
will pay the fees of such consulting firm. If the consulting firm dissents from
Buyer's determination, Buyer will pay the fees of such consulting firm. Buyer
and/or its designee shall maintain records of all sales of Licensed Products and
customers sufficient to adequately administer a Recall, market withdrawal or
correction for a period of three years after termination or expiration of this
Agreement. Except as required by law, Buyer and/or its designee shall serve as
the sole point of contact with the applicable governmental entity concerning any
Recall within the Licensed Territory with respect to Licensed Products and
Seller shall serve as the sole point of contact with the FDA with respect to any
Recall. In the event that Seller is required to communicate with the FDA with
respect to Recall of Licensed Products, Seller shall within one Business Day
notify Buyer of such communication.

                                   ARTICLE VII
                                   -----------

                    TERMINATION; RIGHTS AND OBLIGATIONS UPON
                    ----------------------------------------
                                   TERMINATION
                                   -----------

                  Section 7.1. Term. This Agreement shall commence on the date
hereof and shall continue in effect with respect to each Licensed Product in
each country in the Licensed Territory for so long as the Sublicense Agreement
remains in effect with respect to such Licensed Product in such country and
Buyer does not have a paid-up license thereunder with respect to such Licensed
Product in such country.

                  Section 7.2. Termination for Default. If either party
materially defaults in the performance of any material agreement, condition or
covenant of this Agreement or the Sublicense Agreement [***] after receipt by
the defaulting party of a notice thereof from the other party, the party not in
default may terminate this Agreement.

                  Section 7.3. Rights and Obligations on Expiration or
Termination. Except to the extent expressly provided to the contrary, the
following provisions shall survive the termination of this Agreement: Sections
6.3 and 6.4 and Articles VIII through X. Any rights of Seller to payments
accrued through termination as well as obligations of the parties under firm
orders for purchase and delivery of Licensed Products at the time of such
termination shall remain in effect, except that in the case

[***] Confidential treatment requested.

935303.1

                                       13
<PAGE>

of termination under Section 7.2, the terminating party may elect whether
obligations under firm orders will remain in effect and except that Seller will
have no obligation with respect to delivery dates more than three months after
termination.

                                  ARTICLE VIII
                                  ------------

                 WARRANTIES; REPLACEMENT OF PRODUCTS; INSURANCE
                 ----------------------------------------------

                  Section 8.1. Warranties. Seller warrants to Buyer for itself
and on behalf of its subcontractors and agents who assume any of Seller's
obligations hereunder that (i) when shipped to Buyer by Seller, the Licensed
Products will conform to the Specifications, as then in effect, and will not be
(A) adulterated or misbranded within the meaning of the Food, Drugs & Cosmetic
Act or (B) be an article which may not, under the provisions of the Food, Drugs
& Cosmetic Act, be introduced into interstate commerce, (ii) any Facility used
by Seller will remain in compliance with cGMP at all times during the term of
this Agreement and (iii) Seller shall obtain and maintain all necessary permits,
registrations and licenses necessary to carry out its obligations pursuant to
this Agreement. The foregoing warranties are the only warranties made by Seller
with respect to the Licensed Products delivered hereunder, and may only be
modified or amended by a written instrument signed by a duly authorized officer
of Seller and duly authorized officer of Buyer. THE EXPRESS WARRANTIES CONTAINED
IN THIS ARTICLE 8 ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED,
INCLUDING WITHOUT LIMITATION ANY WARRANTY OF MERCHANTIBILITY OR FITNESS FOR A
PARTICULAR USE.

                  Section 8.2. Replacement of Licensed Products. Any Licensed
Products delivered to Buyer by Seller which do not conform to the Specifications
and are properly rejected as set forth in Article 2, or which are otherwise not
in compliance with the warranties made in Section 8.1 or in the Sublicense
Agreement, shall be replaced, or Buyer's account may be credited, at Buyer's
election. The remedy of replacement or credit shall not be available if and to
the extent that such nonconformance was caused by Buyer's misuse, unauthorized
modification, neglect, improper testing or improper storage, including without
limitation storage at inappropriate temperatures, transportation, use beyond any
dating provided, by accident, fire or other hazard. THE EXPRESS OBLIGATIONS
STATED IN THIS SECTION 8.2 AND IN SECTIONS 2.1 AND 8.3 ARE IN LIEU OF ALL OTHER
LIABILITIES OR OBLIGATIONS OF SELLER FOR DAMAGES, INCLUDING BUT NOT LIMITED TO
DIRECT OR CONSEQUENTIAL DAMAGES, ARISING OUT OF OR IN CONNECTION WITH THE
DELIVERY, USE OR PERFORMANCE OF THE PRODUCTS.

935303.1

                                       14
<PAGE>

                  Section 8.3.  Insurance.

                  Buyer and Seller shall maintain during the term of this
Agreement products liability insurance policies, covering their respective
obligations under this Agreement, issued by reputable insurance companies under
ordinary terms and conditions in the pharmaceutical industry and will prove the
existence thereof to the other party if so requested.

                                   ARTICLE IX
                                   ----------

                                  MISCELLANEOUS
                                  -------------

                  Section 9.1. Entire Agreement This Agreement, including the
Schedules and Exhibits hereto, constitutes the entire agreement and
understanding between the parties as to the subject matter hereof. All prior
negotiations, representations, agreements, contracts, offers and earlier
understandings of whatsoever kind, whether written or oral between Seller and
Buyer in respect of the subject matter of this Agreement, are superseded by,
merged into, extinguished by and completely expressed by this Agreement. No
aspect, part or wording of this Agreement may be modified except by mutual
agreement between the Seller and Buyer taking the form of an instrument in
writing signed and dated by duly authorized representatives of both Seller and
Buyer. The representations and warranties made by Seller in the Sublicense
Agreement are incorporated herein by reference, provided that no breach of such
representations and warranties shall be the basis for a termination of this
Agreement unless the Sublicense Agreement is terminated simultaneously.

                  Section 9.2. Notices Any notice or communication or permitted
to be given by this Agreement shall be given by post-paid, first class,
registered or certified mail or reputable courier service addressed to:

                  In the case of Seller:   Discovery Laboratories, Inc.
                                           350 South Main Street, Suite 307
                                           Doylestown, Pennsylvania 18901
                                           Attention:  Robert J. Capetola, Ph.D.
                                                       Chief Executive Officer

                                           With a copy to:

                                           Yi Tuan & Brunstein
                                           The Empire State Building
                                           350 Fifth Avenue, Suite 5411
                                           New York, New York 10118
                                           Attention:  Han-Hsien Tuan

935303.1

                                       15
<PAGE>

                  In the case of Buyer:    Laboratorios del Dr. Esteve, S.A.
                                           Av. Mare de Deu de Montserrat, 221
                                           08041 Barcelona (Spain)
                                           Attention:  Director, International

                  Such addresses may be altered by notice so given. If no time
limit is specified for a notice required or permitted to be given by this
Agreement, the time limit therefor shall be 10 full Business Days, not including
the day of mailing. Notice shall be considered made as of the date of deposit
with the appropriate Post Office or courier service.

                  Section 9.3.      Governing Laws and Dispute Resolution.

                                   (a) This Agreement and its effect are subject
         and shall be construed and enforced in accordance with the laws of the
         State of New York, United States, except as to any issue which depends
         upon the validity, scope or enforceability of any patent within the
         Patent Rights, which issue shall be determined in accordance with the
         applicable patent laws of the country of such patent.

                                   (b) Any controversy or claim arising out of
         or relating to this Agreement, or the breach, termination or validity
         thereof which cannot be settled within three (3) months of it having
         arisen shall be submitted to the respective President or General
         Manager of each Party and if, within thirty (30) days or such other
         period as may be agreed upon between the Parties following such
         reference, the dispute remains unresolved, it shall be settled on
         application by either Party by arbitration conducted in the English
         language, in Stockholm (Sweden) in accordance with the Rules of
         Arbitration of the International Chamber of Commerce by one or more
         arbitrators appointed in accordance with the said rules. The parties
         expressly agree to abide the award rendered. This provision shall not
         prevent either party from addressing any competent court or tribunal in
         order to seek for interim measures.

                  Section 9.4. Conflicts. Nothing in this Agreement shall be
construed so as require the commission of any act contrary to law, and whenever
there is any between any provision of this Agreement or concerning the legal
right the parties to contract and any statute, law, ordinance or treaty, the
latter prevail, but in such event the affected provisions of this Agreement
shall curtailed and limited only to the extent necessary to bring it within the
applicable legal requirements.

                  Section 9.5. Registration. Buyer shall take all reasonable and
necessary steps to register this Agreement in any country where such is required
to

935303.1

                                       16
<PAGE>

permit the transfer of funds and/or payment of royalties to Seller hereunder
or is otherwise required by the government or law of such country to effectuate
or carry out this Agreement. Notwithstanding anything contained herein but
subject to Section 9.4 hereof, Buyer shall not be relieved of any of its
obligations under this Agreement by any failure to register this Agreement in
any country, and, specifically, Buyer shall not be relieved of its obligation to
make any payment due to Seller hereunder at Seller's address specified in
Section 9.2 hereof, where such payment is blocked due to any failure to register
this Agreement.

                  Section 9.6. Headings. As used in this Agreement, singular
includes the plural and plural includes the singular, wherever so required by
the context. The headings appearing at the beginning of the numbered Articles
and Sections hereof have been inserted for convenience only and do not
constitute a part of this Agreement.

                  Section 9.7. Agency. Nothing herein shall be deemed to create
an agency, joint venture or partnership between the parties hereto.

                  Section 9.8. Force Majeure. Notwithstanding any other
provisions of this Agreement, neither of the parties hereto shall be liable in
damages for any delay or default in performing hereunder if such delay or
default is caused by conditions beyond its control including but not limited to
acts of God, governmental restrictions, wars, or insurrections, strikes, floods,
work stoppages and/or lack of materials; provided, however, that the party
suffering such delay or default shall notify the other party in writing of the
reasons for the delay or default. If such reasons for delay or default
continuous exist for six (6) months, this Agreement may be terminated by either
party.

                  Section 9.9. Assignment. Neither party shall assign this
Agreement without the prior written consent of the other party, provided,
however, that Buyer may assign some or all of its rights and obligations
hereunder to the following Affiliates: Laboratorios P.E.N., S.A. (Spain), Esteve
Farma, Lda. (Portugal), Provesan S.A. (Switzerland) and to any other Affiliate
which Buyer may establish in the Licensed Territory. Buyer hereby warrants and
represents that such Affiliates will comply with all applicable terms of this
Agreement, and guarantees such Affiliates' performance hereunder.

                  Section 9.10. Successors and Assigns. Subject to Section 9.9,
this Agreement shall be binding upon and inure to the benefit of the permitted
successors or permitted assigns of Seller and Buyer respectively.

                  Section 9.11. Counterparts. This Agreement may be executed in
any number of counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument.

935303.1

                                       17
<PAGE>

                                    ARTICLE X
                                    ---------

                                BASIS OF BARGAIN
                                ----------------

                  EACH PARTY RECOGNIZES AND AGREES THAT THE WARRANTY DISCLAIMERS
AND LIABILITY AND REMEDY LIMITATIONS IN THIS AGREEMENT ARE MATERIAL, BARGAINED
FOR BASES OF THIS AGREEMENT AND THAT THEY HAVE BEEN TAKEN INTO ACCOUNT AND
REFLECTED IN DETERMINING THE CONSIDERATION TO BE GIVEN BY EACH PARTY UNDER THIS
AGREEMENT AND IN THE DECISION BY EACH PARTY TO ENTER INTO THIS AGREEMENT.

933503.1

                                       18
<PAGE>

                  IN WITNESS WHEREOF, the parties have executed this Agreement
to be effective as of the date first written above.

                                DISCOVERY LABORATORIES, INC.

                                By:      /s/ Robert J. Capetola,
                                         -----------------------
                                Name:    Robert J.Capetola, Ph.D.
                                Title:   President & CEO

                                LABORATORIOS DEL DR. ESTEVE, S.A.

                                By:      /s/ Dr. J. Esteve
                                         -----------------
                                Name:    Dr. J. Esteve
                                Title:   President

935303.1

                                       19EXHIBIT 10.54

                          SECURITIES PURCHASE AGREEMENT

         SECURITIES PURCHASE AGREEMENT dated as of October 26th , 1999, between
LABORATORIOS P.E.N., S.A., a corporation organized under the laws of Spain (the
"Purchaser"), and DISCOVERY LABORATORIES, INC., a Delaware corporation (the
"Seller").

         WHEREAS, Seller wishes to sell to Purchaser and Purchaser wishes to
purchase from Seller, upon the terms and subject to the conditions of this
Agreement, certain shares of common stock of Seller, par value $0.001 per share
("Common Stock"), upon the terms and subject to the conditions set forth in this
Agreement;

         WHEREAS, Seller and Purchaser are entering into this Agreement in
contemplation of Seller and Purchaser's affiliate Laboratorios del Dr. Esteve,
S.A. entering into that certain Sublicense Agreement dated as of October 26th ,
1999 (the "Sublicense Agreement") relating to Seller's Surfaxin(R) product; and

         WHEREAS, Seller and Purchaser are executing and delivering this
Agreement in accordance with and in reliance upon the exemption from securities
registration afforded, inter alia, by Regulation D as promulgated by the United
States Securities and Exchange Commission (the "SEC") under the Securities Act
of 1933, as amended (the "1933 Act"), and/or Section 4(2) of the 1933 Act.

         NOW, THEREFORE, in consideration of the premises and the respective
agreements hereinafter set forth, the parties hereto agree as follows:

                                    ARTICLE I

                                PURCHASE AND SALE

         Section 1.01. Purchase and Sale. Upon the terms and subject to the
conditions set forth in this Agreement, Seller agrees to sell to Purchaser, and
Purchaser agrees to purchase from Seller, on the Closing Date (as defined below)
[this amount will be fixed at closing by the following equation: the quotient of
(a) the Purchase Price and (b) a fifty percent (50%) premium to the average
closing price of the Seller's stock for the ten (10) days preceding the Closing]
shares of Common Stock (the "Shares"). In consideration of the sale and transfer
to Purchaser of the Shares, Purchaser shall pay to Seller on the Closing Date,
by wire transfer of immediately available funds, an aggregate purchase price of
approximately Eight Hundred Fifty Thousand Dollars ($850,000) (the "Purchase
Price").

935343.2

<PAGE>

         Section 1.02. The Closing. The acquisition by Purchaser of the Shares
(the "Closing") shall occur within 5 (five) business days of the date of
execution of this Agreement, subject to satisfaction or waiver of the conditions
set forth in Articles V and VI, at the offices of Yi Tuan & Brunstein, The
Empire State Building, 350 Fifth Avenue, Suite 5411, New York, New York or at
such other time and place as the Seller and the Purchaser may agree.

         Section 1.03. Further Assurances. From and after the Closing, upon
written request from and at the expense of Purchaser, Seller shall execute,
acknowledge and deliver all such further acts, assurances, deeds, assignments,
transfers, conveyances and other instruments and papers as may be reasonably
required to sell, assign, transfer, convey and deliver the Shares to Purchaser.

                                   ARTICLE II

                    REPRESENTATIONS AND WARRANTIES OF SELLER

         Seller represents and warrants to Purchaser, acknowledging that such
representations and warranties are made by Seller with the intent that they be
relied upon by Purchaser in determining whether to invest in the Shares as
follows:

         Section 2.01. Organization and Qualification of Seller. The Seller is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has the requisite corporate power to own its
properties and to carry on its business as now being conducted. The Seller is
duly qualified as a foreign corporation to do business and is in good standing
in each jurisdiction where the nature of the business conducted or property
owned by it makes such qualification necessary, other than those jurisdictions
in which the failure to so qualify would not have a material adverse effect on
the business, operations or condition (financial or otherwise) of Seller. The
Seller has registered certain of its Common Stock pursuant to Section 12 of the
1934 Act, and such Common Stock is listed and traded on The NASDAQ SmallCap
Market.

         Section 2.02. Authority. Seller has the requisite power and authority
to execute and deliver this Agreement and the other agreements and instruments
to be executed and delivered by Seller pursuant hereto and to consummate the
transactions contemplated hereby and thereby. All corporate acts and other
proceedings required to be taken by or on the part of Seller to authorize such
execution, delivery and consummation have been duly and properly taken .

         Section 2.03. Enforceability. This Agreement has been duly executed and
delivered by Seller and constitutes, and such other agreements and instruments
when duly executed and delivered by Seller will constitute, legal, valid and
binding obligations of Seller enforceable against Seller in accordance with
their respective terms, subject as to enforceability to general principles of

                                      -2-
935343.2

<PAGE>

equity and to bankruptcy, insolvency, moratorium, and other similar laws
affecting the enforcement of creditors' rights generally. No approval,
authorization, consent or other order or action of or filing with any court,
administrative agency or other governmental body in the United States of America
or any foreign government is required for the execution and delivery by Seller
of this Agreement and the execution and delivery by Seller of such other
agreements and instruments or the consummation by Seller of the transactions
contemplated hereby or thereby.

         Section 2.04. Capitalization; Status of the Shares. (a) As of the date
hereof, the authorized capital stock of Seller consists of 35,000,000 shares of
Common Stock, par value $0.001 per share, and 5,000,000 shares of Preferred
Stock, par value $0.001 per share, of which 2,420,282 are designated Series B
Convertible Preferred Stock of Seller (the "Series B Preferred Stock") and 2,039
are designated Series C Convertible Preferred Stock of Seller (the "Series C
Preferred Stock"). As of the date hereof, (i) 9,064,889 shares of Common Stock
were issued and outstanding, (ii) 1,617,505 shares of Series B Preferred Stock
were issued and outstanding and are convertible into 5,035,706 shares of Common
Stock, (iii) 2,039 shares of Series C Preferred Stock were issued and
outstanding and are convertible into shares of Common Stock having an aggregate
market value of $2,467,190, (iv) 2,000 shares of Common Stock are held in the
treasury of Seller, (v) 2,154,428 shares of Common Stock are reserved for
issuance upon exercise of outstanding options issued under (A) Seller's 1998
Stock Incentive Plan, Seller's 1995 Stock Option Plan and Seller's 1993 Stock
Option Plan (the "Option Plans") and (B) stock option plans of certain corporate
predecessors of Seller, (vi) an aggregate of 2,297 shares of Common Stock are
reserved for issuance under stock options granted by Seller outside the Option
Plans, (vii) an aggregate of 2,593,818 shares of Common Stock are reserved for
issuance under outstanding investor warrants, (viii) 684,997 shares of Common
Stock are reserved for issuance upon conversion of the 220,026 shares of Series
B Preferred Stock upon the exercise of outstanding warrants, and (ix) 173,333
shares of Common Stock are reserved for issuance upon exercise of Seller's
outstanding unit purchase option (including warrants issuable upon the exercise
of such unit purchase option). All of the outstanding shares of Common Stock
have been duly authorized and validly issued and are fully paid and
nonassessable and free of preemptive rights.

                           (b) The Shares, upon such issuance, will be validly
                  issued, fully paid and nonassessable shares of Common Stock.
                  Except as described in the Reports (as hereinafter defined) or
                  as set forth in this Agreement, there are no preemptive rights
                  or other rights to subscribe for or to purchase, or any
                  restrictions upon the voting or transfer of, any shares of
                  Common Stock, pursuant to Seller's Certificate of
                  Incorporation or Bylaws or any agreement or other instrument
                  to which Seller is a party. The sale of the Shares as
                  contemplated in this Agreement does not give rise to any
                  rights, other than those which have been waived for or
                  relating to the registration of any shares of Common Stock
                  (other than as provided in Article 4 of this Agreement). The
                  Shares are not subject to any voting trust agreement or other
                  contract, agreement, arrangement, commitment or understanding,
                  including any such

                                      -3-

935343.2

<PAGE>

                  agreement, arrangement, commitment or understanding
                  restricting or otherwise relating to the voting, dividend
                  rights or disposition of the Shares other than this Agreement.

         Section 2.05. SEC Filings. Seller has duly and timely filed with the
SEC all reports (the "Reports") required by the Securities Exchange Act of 1934
(the "1934 Act"). None of the Reports contained, at the time they were filed,
any untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements made therein
in light of the circumstances under which they were made, not misleading. The
financial statements (including the related notes) of Seller included in the
Reports present fairly the financial position of Seller as of the dates
indicated and its results of operations for the period specified therein. All
such financial statements have been prepared in accordance with United States
generally accepted accounting principles on a basis consistently applied. Seller
will timely make in the future all required filings with the SEC.

         Section 2.06. Absence of Certain Changes. Since December 31, 1998,
there has been no material adverse change in the business, properties,
operations, condition (financial or otherwise), or results of operations of
Seller, except as disclosed in Seller's SEC filings and except for uses of cash
in the course of Seller's business and corresponding decreases in stockholders'
equity.

         Section 2.07. No Conflicts. Seller is not in violation of its
Certificate of Incorporation or Bylaws or in default in the performance of any
material obligation contained in any material agreement, indenture or other
instrument. The performance by Seller of its obligations under this Agreement
and the consummation of the transactions herein contemplated will not conflict
with or result in a breach of the Certificate of Incorporation or Bylaws of
Seller, or any material agreement, indenture or other instrument to which Seller
is a party or by which it is bound, or any law, rule, administrative regulation
or decree of any court or governmental authority having jurisdiction over Seller
or its properties, or result in the creation or imposition of any material lien,
charge, claim or encumbrance upon any property or asset of Seller under any such
agreement, indenture or other instrument. Except as required by the Act and
applicable state securities or blue sky laws, no consent, approval,
authorization or order of any court or governmental authority is required in
connection with the consummation of the transactions contemplated by this
Agreement. The rights granted to the Purchaser hereunder do not in any way
conflict with and do not violate any rights granted to the other holders of
Seller's securities or debt instruments.

         Section 2.08. Properties. Except as otherwise stated in the Reports,
(A) Seller has good marketable title (in fee simple, in the case of real
property), free and clear of all liens and encumbrances, to all of the material
real and personal property described in the Report as being owned by it, except
for any liens and encumbrances which are not material in the aggregate and do
not materially interfere with the conduct of the business of Seller, and (B) has
valid leases to the material real property described in the Report as under
lease to it with such exceptions as do not materially interfere with the conduct
of the business of Seller.

                                      -4-

935343.2

<PAGE>

         Section 2.09. Disputes. Except as set forth in the Reports, there are
no actions, suits or proceedings pending before or by any court or governmental
agency or authority, or any arbitrator, which seek to restrain or prohibit the
consummation of the transactions contemplated hereby or which might reasonably
be expected to result in any material adverse change in the condition (financial
or other), business or results of operations of Seller and, to Seller's
knowledge, no such action, suit or proceeding is being threatened.

         Section 2.10. Compliance with Laws. Seller is not in violation of any
law, ordinance, governmental rule or regulation or court degree to which it may
be subject and Seller has not failed to obtain any license, permit, franchise or
other governmental authorization necessary to the ownership of its property or
to the conduct of its business as conducted on the date hereof, which violation
or failure to obtain is likely to have a material adverse effect on the
condition (financial or other), business or results of operations of Seller.

                                   ARTICLE III

                   REPRESENTATIONS AND WARRANTIES OF PURCHASER

         Purchaser represents and warrants to Seller, acknowledging that such
representations and warranties are made by Purchaser with the intent that they
be relied upon by Seller in determining whether to sell the Shares, as follows:

         Section 3.01. Organization. Purchaser is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization.

         Section 3.02. Authority. Purchaser has the full corporate power and
authority to execute and deliver this Agreement and the other agreements and
instruments to be executed and delivered by Purchaser pursuant hereto and to
consummate the transactions contemplated hereby and thereby. All corporate acts
and other proceedings required to be taken by or on the part of Purchaser to
authorize such execution, delivery and consummation have been duly and properly
taken.

         Section 3.03. Enforceability. This Agreement has been duly executed and
delivered by Purchaser and constitutes, and such other agreements and
instruments when duly executed and delivered by Purchaser will constitute,
legal, valid and binding obligations of Purchaser enforceable against Purchaser
in accordance with their respective terms, subject as to enforceability to
general principles of equity and to bankruptcy, insolvency, moratorium, and
other similar laws affecting the enforcement of creditors' rights generally. No
approval, authorization, consent or other order or action of or filing with any
court, administrative agency or other governmental body in the United States of
America or any foreign government is required for the execution and delivery by
Purchaser of this Agreement and the execution and delivery by Purchaser of such
other agreements and instruments or the

                                      -5-

935343.2

<PAGE>

consummation by Purchaser of the transactions contemplated hereby or thereby.

         Section 3.04. Securities Act of 1933. (a) The Shares are being acquired
by Purchaser for its own account, for investment purposes only and not with a
view to any public distribution thereof, and Purchaser will not offer to sell or
otherwise dispose of the Shares in violation of the registration requirements of
the 1933 Act.

                           (b) The Purchaser has received and carefully reviewed
                  copies of (i) Seller's Annual Report on Form 10-KSB for the
                  year ended December 31, 1998 (including without limitation the
                  section thereof entitled "Important Considerations Regarding
                  Forward-Looking Statements"), (ii) Seller's Quarterly Report
                  on Form 10-QSB for the quarter ended June 30, 1999 and (iii)
                  all current reports on Form 8-K filed since the date of the
                  Seller's Form 10-QSB for the quarter ended June 30, 1999.
                  Purchaser has also been afforded the opportunity to ask
                  questions of and receive answers from duly authorized officers
                  or other representatives of Seller and has received any
                  additional information regarding Seller which Purchaser has
                  requested.

                           (c) The Purchaser's consent to this Agreement was not
                  obtained by means of any form of general solicitation or
                  general advertising, and in connection therewith Purchaser did
                  not: (A) receive or review any advertisement, article, notice
                  or other communication published in a newspaper or magazine or
                  similar media or broadcast over television or radio whether
                  closed circuit, or generally available; or (B) attend any
                  seminar meeting or industry investor conference whose
                  attendees were invited by any general solicitation or general
                  advertising.

                           (d) The Purchaser is an accredited investor within
                  the meaning of Rule 501 under the 1933 Act, and Purchaser was
                  not formed for the purpose of receiving the Shares. The
                  Purchaser, either by reason of Purchaser's business or
                  financial experience or the business or financial experience
                  of Purchaser's purchaser representative (within the meaning of
                  Rule 501 under the 1933 Act), which Purchaser representative,
                  if any, is unaffiliated with and is not compensated by Seller
                  or any affiliate of Seller, directly or indirectly, has the
                  capacity to protect Purchaser's interests in connection with
                  the transactions contemplated by this Agreement.

                           (e) The Purchaser recognizes that its purchase of the
                  securities contemplated herein involves a high degree of risk
                  in that (i) an investment in Seller is highly speculative and
                  (ii) Purchaser could sustain the loss of Purchaser's entire
                  investment.

                                      -6-

935343.2

<PAGE>

                                   ARTICLE IV

                        FURTHER COVENANTS AND AGREEMENTS

         Section 4.01. Certificates; Restrictive Legend; Stop Transfer
Instructions. Upon the Closing Date, Seller shall deliver to Purchaser one
certificate representing the Shares, duly executed by or on behalf of Seller.
Purchaser acknowledges and agrees that the Shares shall bear a restrictive
legend in substantially the following form:

                  THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
                  REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
                  ANY STATE SECURITIES LAWS, AND MAY NOT BE SOLD, PLEDGED,
                  HYPOTHECATED OR OTHERWISE TRANSFERRED ABSENT SUCH REGISTRATION
                  UNLESS EVIDENCE SATISFACTORY TO COUNSEL FOR THE COMPANY THAT
                  AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE HAS BEEN
                  DELIVERED TO THE COMPANY.

The share certificate may also have such additional legends, if any, as may be
required in order to comply with the applicable "blue sky" laws of any
jurisdiction. The Purchaser further agrees to the issuance by Seller to its
transfer agent of stop transfer instructions with respect to any sale or other
transfer of the Shares by Purchaser absent registration under the Securities Act
or the establishment by Purchaser of an exemption therefrom in accordance with
this Agreement.

         Section 4.02. Transfer Restrictions. Purchaser acknowledges that:

                      (a) the Shares have not been and are not being
             registered under the provisions of the 1933 Act and are not
             intended to be registered under the Securities Act and are
             intended to be exempt from the registration requirements of
             Section 5 of the Securities Act pursuant to Sections 4(2) of
             the 1933 Act and Regulation D promulgated thereunder;

                      (b) the Shares may not be transferred, and Purchaser
             agrees not to transfer such Shares, unless (A) such sale or
             transfer is registered under the 1933 Act or (B) Purchaser
             shall have delivered to Seller an opinion of counsel,
             reasonably satisfactory in form, scope and substance to
             Seller, to the effect that the Shares to be sold or
             transferred may be sold or transferred pursuant to an
             exemption from such registration;

                      (c) any sale of the Shares made in reliance on Rule
             144 promulgated

                                      -7-

935343.2

<PAGE>

             under the 1933 Act may be made only in accordance with the terms of
             said Rule and further, if said Rule is not applicable, any resale
             of such Shares under circumstances in which the seller, or the
             person through whom the sale is made, may be deemed to be an
             underwriter, as that term is used in the 1933 Act, may require
             compliance with some other exemption under the 1933 Act or the
             rules and regulations of the SEC thereunder; and

                      (d) neither Seller nor any other person is under any
             obligation to register the Shares under the 1933 Act or,
             except as provided in Section 4.04, to comply with the terms
             and conditions of any exemption thereunder.

         Section 4.03. Rule 144 Undertaking. For so long as and to the extent
necessary to permit Purchaser to sell the Shares pursuant to Rule 144 under the
1933 Act, Seller shall use reasonable efforts to file, on a timely basis, all
reports and data required to be filed with the SEC by Seller pursuant to Section
13 of the 1934 Act. Seller has filed all reports required to be so filed by it
during the preceding twelve (12) months. Notwithstanding anything contained in
this Section 4.03, Seller may deregister under Section 12 of the 1934 Act if it
then is permitted to do so pursuant to the 1934 Act and the rules and
regulations thereunder.

         Section 4.04. Transfer Taxes. Purchaser and Seller shall each be
responsible for all transfer and similar taxes assessed or payable in connection
with the transfer of the Shares pursuant to this Agreement in their respective
jurisdictions; provided that this Section 4.04 shall not apply to (i) taxes
which are net income, capital, net worth, franchise, or similar conduct of
business taxes which are imposed on either party by any national, provincial,
state or local taxing authority; (ii) taxes imposed as a direct and primary
result of any party's gross negligence or willful misconduct; and (iii) taxes
imposed as a result of either party's failure to file any applicable tax report
or return in a timely or proper manner.

         Section 4.05. Additional Covenants of Seller. (a) For so long as
Purchaser is the holder of any Shares, Seller will use commercially reasonable
efforts to pay all taxes (other than those taxes that are being contested in
good faith by Seller through appropriate proceedings) and to comply with all
applicable laws noncompliance with which would be expected to have a material
adverse effect on Seller.

                      (b) Seller undertakes to notify Purchaser as soon as
            reasonably practical of any material change in any representation,
            warranty or other information relating Seller set forth herein which
            occurs prior to the Closing.

                      (c) Neither the Company nor any of its employees or other
            persons directly or indirectly affiliated with it will engage in any
            activity that would jeopardize the status of the Offering as an
            exempt transaction under the Act or under the laws of any state in
            which the Offering is made.

                                      -8-

935343.2

<PAGE>

                                    ARTICLE V

                CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER

         All obligations of Purchaser to effect the Closing hereunder are, at
the option of Purchaser, subject to the conditions precedent that, at the
Closing:

         Section 5.01. Performance by Seller. All the terms, covenants,
agreements and conditions of this Agreement to be complied with and performed by
Seller on or before the Closing shall have been complied with and performed in
all material respects.

         Section 5.02. Representations and Warranties. The representations and
warranties made by Seller in this Agreement shall have been true and correct in
all material respects at the date hereof and as of the Closing with the same
force and effect as though all such representations and warranties had been made
as of the Closing.

         Section 5.03. No Injunctions. No provision of any applicable law or
regulation and no judgment, injunction, order or decree shall prohibit the
consummation of the Closing.

         Section 5.04. Sublicense Agreement. Seller shall have executed and
delivered to Purchaser's affiliate Laboratorios del Dr. Esteve, S.A. the
Sublicense Agreement.

         Section 5.05. Consents. All consents, approvals, authorizations and
orders required to be obtained from, and all registrations, filings and notices
required to be made with or given to, any relevant governmental or regulatory
authority or any other person or entity shall have been duly obtained, made or
given, as the case may be, and shall be in full force and effect, and any
waiting period required by any statute, ordinance, law, rule, regulation, code,
injunction, judgment, order, decree, ruling or other requirement, standard or
procedure enacted, adopted or applied by any Governmental Authority, including
judicial decisions applying common law or interpreting any other law or any
governmental or regulatory authority in connection with such transactions shall
have expired or have been earlier terminated, except such consents as would not,
individually or in the aggregate, have a material adverse effect if not received
by the Closing Date.

         Section 5.06. Approvals. The Seller shall have taken all action
necessary to authorize the execution of this Agreement and the consummation of
the transactions contemplated hereby, including any actions required to be taken
by the Board of Directors of the Seller and/or its shareholders pursuant to
State law.

         Section 5.07. Seller's Certificate. Purchaser shall have received from
Seller, in form and substance reasonably satisfactory to Purchaser and its
counsel, a certificate of Seller, dated the Closing Date, of Seller, confirming
the satisfaction of the conditions set forth in

                                      -9-

935343.2

<PAGE>

Sections 5.01 and 5.02.

         Section 5.08. Secretary's Certificate. Purchaser shall have received
from Seller, in form and substance reasonably satisfactory to Purchaser and its
counsel, a certificate, dated the Closing Date, of the Secretary or an Assistant
Secretary of Seller, (i) certifying all documents evidencing the actions of
Seller authorizing the transactions contemplated hereby and the execution,
delivery and performance by Seller of this Agreement and the documents
contemplated hereby, (ii) certifying the Certificate of Incorporation and Bylaws
of Seller, (iii) containing a certificate of good standing from the Secretary of
State of the State of Delaware, and (iv) containing an incumbency certificate
regarding the officers authorized to sign this Agreement and the other documents
contemplated hereby.

         Section 5.09. Opinion of Counsel. Purchaser shall have received from
Seller's counsel an opinion reasonably acceptable to Purchaser.

                                   ARTICLE VI

                  CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER

         All obligations of Seller to effect the Closing hereunder are, at the
option of Seller, subject to the conditions precedent that, at the Closing:

         Section 6.01. Performance by Purchaser. All the terms, covenants,
agreements and conditions of this Agreement to be complied with and performed by
Purchaser on or before the Closing shall have been complied with and performed
in all material respects.

         Section 6.02. Representations and Warranties. The representations and
warranties made by Purchaser in this Agreement shall have been true and correct
in all material respects at the date hereof and as of the Closing with the same
force and effect as though all such representations and warranties had been made
as of the Closing.

         Section 6.03. No Injunctions. No provision of any applicable law or
regulation and no judgment, injunction, order or decree shall prohibit the
consummation of the Closing.

         Section 6.04. Sublicense Agreement. Purchaser's affiliate Laboratorios
del Dr. Esteve, S.A. shall have executed and delivered to Seller the Sublicense
Agreement.

         Section 6.05. Consents. All consents, approvals, authorizations and
orders required to be obtained from, and all registrations, filings and notices
required to be made with or given to, any relevant governmental or regulatory
authority or any other person or entity shall have been duly obtained, made or
given, as the case may be, and shall be in full force and effect, and any
waiting period required by any statute, ordinance, law, rule, regulation, code,

                                      -10-

935343.2

<PAGE>

injunction, judgment, order, decree, ruling or other requirement, standard or
procedure enacted, adopted or applied by any governmental authority, including
judicial decisions applying common law or interpreting any other law or any
governmental or regulatory authority in connection with such transactions shall
have expired or have been earlier terminated, except such consents as would not,
individually or in the aggregate, have a material adverse effect if not received
by the Closing Date.

         Section 6.06. Approvals. The Purchaser shall have taken all action
necessary to authorize the execution of this Agreement and the consummation of
the transactions contemplated hereby, including any actions required to be taken
by the Board of Directors of the Purchaser and/or its shareholders pursuant to
the law of the jurisdiction of its organization.

         Section 6.07. Purchaser's Certificate. Seller shall have received from
Purchaser, in form and substance reasonably satisfactory to Seller and its
counsel, a certificate of Purchaser, dated the Closing Date, of Purchaser,
confirming the satisfaction of the conditions set forth in Sections 6.01 and
6.02.

         Section 6.08. Secretary's Certificate. Seller shall have received from
Purchaser, in form and substance reasonably satisfactory to Seller and its
counsel, a certificate, dated the Closing Date, of the Secretary or an Assistant
Secretary of Purchaser, (i) certifying all documents evidencing the actions of
Purchaser authorizing the transactions contemplated hereby and the execution,
delivery and performance by Purchaser of this Agreement and the documents
contemplated hereby, (ii) certifying the organizational documents of Purchaser,
(iii) containing a certificate of good standing in the jurisdiction of its
organization, and (iv) containing an incumbency certificate regarding the
officers authorized to sign this Agreement and the other documents contemplated
hereby.

         Section 6.09. Opinion of Counsel. Seller shall have received from
Purchaser's counsel an opinion reasonably acceptable to Seller.

                                   ARTICLE VII

                                    SURVIVAL

         The representations, warranties, covenants and agreements contained in
this Agreement, and in any agreements, certificates or other instruments
delivered pursuant to this Agreement, shall survive the Closing and shall remain
in full force and effect, but subject to all limitations and other provisions
contained in this Agreement. The representations and warranties contained in
this Agreement and such other agreements, certificates and instruments are
exclusive and the parties hereto confirm that they have not relied upon any
other representation or warranty as an inducement to enter into this Agreement
and the transactions contemplated hereby (even though information not
represented and warranted to may have been, or may hereafter be, given to or
obtained or developed by one or both of the

                                      -11-

935343.2

<PAGE>

parties hereto pertaining to Seller, the transactions contemplated hereby or
otherwise). All such representations, warranties, covenants and agreements are
made or given by the parties in connection with, and are intended to be relied
upon only in entering into, this Agreement and shall not be construed to have
been made or given by the parties in connection with, and are not intended to be
relied upon only in entering into, the Sublicense Agreement or the Supply
Agreement.

                                  ARTICLE VIII

                                  MISCELLANEOUS

         Section 8.01. Brokers. Seller represents and warrants to Purchaser, and
Purchaser represents and warrants to Seller, that neither it nor any party
acting on its behalf has incurred any liability, either express or implied, to
any "broker", "finder", financial adviser or similar person in respect of any of
the transactions contemplated hereby. Purchaser agrees to indemnify Seller
against, and hold it harmless from, and Seller agrees to indemnify Purchaser
against, and hold it harmless from, any liability, cost or expense (including,
but not limited to, fees and disbursements of counsel) resulting from any
agreement, arrangement or understanding made by such party with any third party
for brokerage, finders' or financial advisory fees or other commissions in
connection with this Agreement or the transactions contemplated hereby.

         Section 8.02. Expenses. Except as otherwise specifically provided in
this Agreement, each party will pay its own expenses incident to this Agreement
and the transactions contemplated hereby, including legal and accounting fees
and disbursements.

         Section 8.03. Amendments and Waivers. The parties hereto may, by
written agreement signed by the parties, modify any of the covenants or
agreements or extend the time for the performance of any of the obligations
contained in this Agreement or in any document delivered pursuant to this
Agreement. Any party hereto may waive, by written instrument signed by such
party, any inaccuracies in the representations and warranties of another party
or compliance by another party with any of its obligations contained in this
Agreement or in any document delivered pursuant to this Agreement. This
Agreement may be amended only by written instrument signed by the parties
hereto.

         Section 8.04. Transferability. The respective rights and obligations of
each party hereto shall not be assignable by either such party without the
written consent of the other party hereto (and any purported assignment without
such written consent shall be void and of no effect). This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assignees.

         Section 8.05. Notices. Any notice, request or other document to be
given hereunder to a party hereto shall be effective when received and shall be
given in writing and

                                      -12-

935343.2

<PAGE>

delivered in person or sent by hand delivery or overnight courier, as follows:

         If to Purchaser, addressed to
         it at:                              Laboratorios P.E.N., S.A.
                                             Av. Mare de Deu de Montserrat, 215
                                             08041 Barcelona (Spain)
                                             Attn: Managing Director

         If to Seller, addressed to
         it at:                              Discovery Laboratories, Inc.
                                             350 South Main Street, Suite 307
                                             Doylestown, Pennsylvania 18901
                                             Attn: Robert J. Capetola, Ph.D.
                                                   Chief Executive Officer

                                             With a copy to:

                                             Yi Tuan & Brunstein
                                             The Empire State Building
                                             350 Fifth Avenue, Suite 5411
                                             New York, New York 10118

         Any party hereto may change its address for receiving notices, requests
and other documents by giving written notice of such change to the other parties
hereto.

         Section 8.07. Governing Law; Choice of Forum. This Agreement shall be
governed by and construed in accordance with the laws of the State of New York
(without regard to conflict of laws doctrines).

         Section 8.08. Jurisdiction. The Seller and the Purchaser each hereby
irrevocably consents that any legal action or proceeding against it or any of
its assets with respect to this Agreement may be brought in any jurisdiction
where such party or any of its assets may be found, or in any court of the State
of New York or any Federal court of the United States of America located in New
York, New York, United States of America, or both, as the other parties may
elect, and by execution and delivery of this Agreement, the Seller and Purchaser
each hereby irrevocably submits to and accepts with regard to any such action or
proceeding, for itself and in respect of its assets, generally and
unconditionally, the jurisdiction of the aforesaid courts. Each Seller and
Purchaser may serve process in any manner permitted by applicable law or to
bring any legal action or proceeding or to obtain execution of judgment in any
jurisdiction. Each Seller and Purchaser further agrees that final judgment
against such party in any action or proceeding in connection with this Agreement
shall be conclusive and may be enforced in any other jurisdiction within or
outside the United States of America by suit on the judgment, a certified or
exemplified copy of which shall be conclusive evidence of the fact and the
amount of such party's indebtedness. Each Seller and Purchaser hereby
irrevocably waives, to the fullest extent permitted by applicable law, any
objection which such party may now or hereafter have to the laying of venue of
any suit, action or proceeding arising out of or relating to this Agreement
brought in the State of New York, and hereby further irrevocably waives any
claim that any such suit, action or proceeding brought in the State of New York
has been brought in an inconvenient forum.

         Section 8.09. Partial Invalidity. In the event that any provision of
this Agreement shall be held invalid or unenforceable by any court of competent
jurisdiction, such holding shall not invalidate or render unenforceable any
other provision hereof.

         Section 8.10. Section Headings. The section headings and table of
contents contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement.

         Section 8.11. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed to be an original, but all of
which together shall constitute one and the same instrument.

         Section 8.12. Entire Agreement. This Agreement, together with the
schedules and exhibits and the agreements, certificates and instruments
delivered pursuant hereto, contain the entire agreement among the parties
hereto, and supersede all prior agreements and undertakings (written and oral)
between the parties hereto, relating to the subject matter hereof.

         Section 8.13. Parties in Interest. Nothing in this Agreement, express
or implied, is intended to confer on any person other than the parties and their
respective successors and permitted assigns any rights or remedies under or by
virtue of this Agreement, and no person shall assert any rights as a third party
beneficiary hereunder.

         IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.

                          DISCOVERY LABORATORIES, INC.

                          By: /s/Robert Capetola, Ph.D.
                              -----------------------------------
                              Name:  Robert J. Capetola, Ph.D.
                              Title: President & CEO

                            LABORATORIOS P.E.N., S.A.

                            By: /s/J. Andreu
                                ---------------------------------
                                Name:   J. Andreu
                                Title:  Managing Director

                                      -13-

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