Document:

<PAGE>

                                                                   Exhibit 10.12

                              PURCHASE AGREEMENT

          THIS PURCHASE AGREEMENT (this "Agreement") is made and entered into as
                                         ---------
of January 13, 2000, by and among INSMED PHARMACEUTICALS, INC., a Virginia
corporation (the "Company"), INSMED, INC., a Virginia corporation ("Parent") and
                  -------                                           ------
each of the several purchasers identified on Exhibit A attached hereto
                                             ---------
(individually an "Investor" and collectively the "Investors").
                  --------                        ---------

                                   RECITALS
                                   --------

          WHEREAS, the Company desires to sell to the Investors, and the
Investors desire to purchase from the Company that number of shares set forth
shares set forth on Exhibit A attached hereto (collectively, the "Shares") of
                    ---------                                     ------
the Company's common stock, $.01 par value per share (the "Common Stock") and
                                                           ------------
Parent desires to sell to the Investors, and the Investors desire to purchase
from Parent, warrants (each warrant, a "Warrant" and collectively the
                                        -------
"Warrants"), in the form of Exhibit B attached hereto, to purchase that number
 --------                   ---------
of shares of Parent Common Stock set forth on Exhibit A attached hereto (the
                                              ---------
"Warrant Shares") on the terms and conditions set forth in this Agreement;
---------------

          WHEREAS, the Company has entered into an Agreement and Plan of
Reorganization, dated November 30, 1999 (the "Reorganization Agreement"), among
                                              ------------------------
the Company, Celtrix Pharmaceuticals, Inc., a Delaware corporation ("Celtrix"),
                                                                     -------
Parent and Celtrix Mergersub, Inc., a Delaware corporation and a wholly-owned
subsidiary of Parent ("Merger Subsidiary"); and
                       -----------------

          WHEREAS, pursuant to the Reorganization Agreement (i) Celtrix will
merge with and into Merger Subsidiary, with Celtrix to be the surviving
corporation, (ii) the outstanding capital stock of the Company will be exchanged
for shares of capital stock of Parent in accordance with the Plan of Exchange
(as defined in the Reorganization Agreement) and (iii) each Celtrix Stock
Option, Celtrix Warrant, Insmed Stock Option and Insmed Warrant which are
outstanding at the Effective Time, shall be assumed by Parent and replaced with
stock options and warrants to purchase capital stock of Parent as adjusted
pursuant to the terms of the Reorganization Agreement.

                                   AGREEMENT
                                   ---------

          NOW, THEREFORE, in consideration of the foregoing, and for other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto hereby agree as follows:
<PAGE>

                                   ARTICLE I
                                  DEFINITIONS

          The following defined terms used herein and not otherwise defined
shall have the meaning set forth below:

          "1933 Act" shall have the meaning set forth in Section 4.10 hereof.
           --------                                      ------------

          "Action" shall have the meaning set forth in Section 4.6 hereof.
           ------                                      -----------

          "Affiliate" shall mean any Person who is an "affiliate" (as defined in
           ---------
Rule 12b-2 of the General Rules and Regulations under the Exchange Act) of, and
any Person controlling, controlled by, or under common control with, any Person.
For the purposes of this Agreement, "control" includes the ability to have
investment discretion through contractual means or by operation of law.

          "Agreement" shall have the meaning set forth in the Preamble hereof.
           ---------

          "Articles" shall have the meaning set forth in Section 4.2((a))(i)
           --------                                      -------------------
hereof.

          "Capital Stock" means, with respect to any Person, any and all shares,
           -------------
interests, participation, rights in, or other equivalents (however designated
and whether voting or non-voting) of, such Person's capital stock.

          "Celtrix" shall have the meaning set forth in the Recitals hereof.
           -------

          "Celtrix Common Stock" shall have the meaning set forth in the
           --------------------
Reorganization Agreement.

          "Celtrix Disclosure Letter" shall have the meaning set forth in the
           -------------------------
Reorganization Agreement.

          "Celtrix Series A Preferred Stock" shall have the meaning set forth in
           --------------------------------
the Reorganization Agreement.

          "Celtrix Series B Preferred Stock" shall have the meaning set forth in
           --------------------------------
the Reorganization Agreement.

          "Celtrix Stock Options" shall have the meaning set forth in Section
           ---------------------                                      -------
4.2((c)) hereof.
--------

          "Celtrix Warrant" shall have the meaning set forth in Section 4.2((c))
           ---------------                                      ----------------
hereof.

          "Closing" shall have the meaning set forth in Article III hereof.
           -------                                      -----------

          "Closing Date" shall mean the date on which the Closing occurs.
           ------------

                                       2
<PAGE>

          "Code" means the Internal Revenue Code of 1986, as amended, or any
           ----
successor statute thereto.

          "Common Stock" shall have the meaning set forth in the Recitals
           ------------
hereof.

          "Company" shall have the meaning set forth in the Preamble hereof.
           -------

          "Confidential Material" shall have the meaning set forth in Section
           ---------------------                                      -------
11.2((a)) hereof.
---------

          "Contractual Obligations" means as to any Person, any provision of any
           -----------------------
security issued by such Person or of any agreement, undertaking, contract,
indenture, mortgage, deed of trust or other instrument to which such Person is a
party or by which it or any of its property is bound.

          "Delivering Company" shall have the meaning set forth in Section
           ------------------                                      -------
11.2((a)) hereof.
---------

          "Effective Time" shall have the meaning set forth in the
           --------------
Reorganization Agreement.

          "Exchange" shall have the meaning set forth in the Reorganization
           --------
Agreement.

          "FDA" means the United States Food and Drug Administration.
           ---

          "Financial Statements" shall have the meaning set forth in Section 4.8
           --------------------                                      -----------
hereof.

          "GAAP" shall have the meaning set forth in Section 4.8 hereof.
           ----                                      -----------

          "Governmental Authority" shall mean any federal, state, provincial,
           ----------------------
municipal or other government department, commission, bureau, agency or
instrumentality, or any court, in each case whether of the United States, any of
its possessions or territories, or of any foreign nation.

          "IND" shall have the meaning set forth in Section 4.15 hereof.
           ---                                      ------------

          "Indemnified Party" shall have the meaning set forth in Section 10.1
           -----------------                                      ------------
hereof.

          "Insmed Companies" shall have the meaning set forth in the
           ----------------
Reorganization Agreement.

          "Insmed Contracts" shall have the meaning set forth in Section 4.13
           ----------------                                      ------------
hereof.

          "Insmed Disclosure Letter" shall have the meaning set forth in the
           ------------------------
Reorganization Agreement.

                                       3
<PAGE>

          "Insmed Stock Options" shall have the meaning set forth in Section
           --------------------                                      -------
4.2((b)) hereof.
--------

          "Insmed Warrant" shall have the meaning set forth in Section 4.2((b))
           --------------                                      ----------------
hereof.

          "Investor" shall have the meaning set forth in the Preamble hereof.
           --------

          "Investor Rights Agreement" shall have the meaning set forth in
           -------------------------
Section 6.7 hereof.
-----------

          "Laws" means all applicable statutes, laws, ordinances, regulations,
           ----
rules, orders, judgments, writs, injunctions or decrees of any state,
commonwealth, nation, territory, possession, province, county, parish, township,
village or municipality.

          "Liens" shall mean any mortgages, liens, pledges, charges, security
           -----
interests or encumbrances of any kind.

          "Losses" shall have the meaning set forth in Section 10.1 hereof.
           ------                                      ------------

          "Material Adverse Effect" means, with respect to any Person, a
           -----------------------
material adverse effect (or any development which, insofar as reasonably can be
foreseen, is reasonably likely to have a material adverse effect) on (i) the
business, assets, financial or other condition, or results of operations of such
Person or (ii) the ability of such Person to consummate the transactions
contemplated by this Agreement or any of the Transaction Documents.

          "Merger Subsidiary" shall have the meaning set forth in the Recitals
           -----------------
hereof.

          "Nasdaq" shall mean The Nasdaq SmallCap Market.
           ------

          "Parent" shall have the meaning set forth in the Preamble hereof.
           ------

          "Parent Common Stock" shall have the meaning set forth in the
           -------------------
Reorganization Agreement.

          "Permits" shall have the meaning set forth in Section 4.7((b)) hereof.
           -------                                      ----------------

          "Person" means any individual, firm, corporation, partnership, limited
           ------
liability company, trust, incorporated or unincorporated association, joint
venture, joint stock company, Governmental Authority or other entity of any
kind, and shall include any successor (by merger or otherwise) of such entity.

          "Plan of Exchange" shall have the meaning set forth in the
           ----------------
Reorganization Agreement.

          "Preferred Stock" shall have the meaning set forth in Section
           ---------------                                      -------
4.2((a))(i) hereof.
-----------

          "QIB" shall have the meaning set forth in Section 5.4 hereof.
           ---                                      -----------

                                       4
<PAGE>

          "Receiving Company" shall have the meaning set forth in Section
           -----------------                                      -------
11.2((a)) hereof.
---------

          "Registration Rights Agreement" shall have the meaning set forth in
           -----------------------------
Section 6.3 hereof.
-----------

          "Registration Statement" shall have the meaning set forth in the
           ----------------------
Reorganization Agreement.

          "Reorganization Agreement" shall have the meaning set forth in the
           ------------------------
Recitals hereof.

          "Representatives" shall have the meaning set forth in Section
           ---------------                                      -------
11.2((a)) hereof.
---------

          "Shares" shall have the meaning set forth in the Recitals hereof.
           ------

          "Subsidiary" shall have the meaning set forth in the Reorganization
           ----------
Agreement.

          "Taxes" shall have the meaning set forth in the Reorganization
           -----
Agreement.

          "Tax Return" shall have the meaning set forth in the Reorganization
           ----------
Agreement.

          "Transaction Documents" means collectively, this Agreement, the
           ---------------------
Warrants, the Registration Rights Agreement and the Reorganization Agreement.

          "Warrant" shall have the meaning set forth in the Recitals hereof.
           -------

          "Warrant Shares" shall have the meaning set forth in the Recitals
           --------------
hereof.

                                  ARTICLE II
               AGREEMENT TO PURCHASE AND SELL STOCK AND WARRANTS

     Section 2.1.  Agreement to Purchase and Sell.
                   ------------------------------

          Subject to the terms and conditions set forth herein, the Company
agrees to sell to each Investor at the Closing, and each Investor agrees to
purchase from the Company at the Closing, the number of shares of Common Stock
set forth opposite the name of such Investor under the heading "Number of Shares
to be Issued" on Exhibit A attached hereto, and Parent agrees to sell to each
                 ---------
Investor at the Closing, and each Investor agrees to purchase from Parent,
Warrants for the number of Warrant Shares set forth opposite the name of such
Investor under the heading "Number of Warrant Shares to be Issued" on Exhibit A
                                                                      ---------
attached hereto.  The purchaser price per Share shall equal $6.00.  The
aggregate purchase price for the Shares to be purchased by each Investor shall
be equal to the amount opposite the name of such Investor under the heading
"Purchase Price for Shares" on Exhibit A attached hereto.  The purchase price
                               ---------
for each Warrant shall be an amount equal to the number of Warrant Shares
covered by such Warrant multiplied by $.102.  The aggregate purchase price for
the Warrants to be purchased by

                                       5
<PAGE>

each Investor shall be equal to the amount opposite the name of such Investor
under the heading "Purchase Price for Warrants" on Exhibit A attached hereto.
                                                   ---------
The aggregate purchase price for the Shares and Warrants to be sold to all
Investors shall not exceed $40,000,000.

     Section 2.2.  Authorization.
                   -------------

          As of the Closing, (as defined below) the Company and Parent will have
authorized the sale and issuance, pursuant to the terms and conditions of this
Agreement, of the Shares and the Warrants, respectively, and Parent will have
authorized the Exchange, including the exchange of the Shares, and the other
transactions contemplated by the Reorganization Agreement.

                                  ARTICLE III
                                    CLOSING

          The purchase and sale of the Shares and the Warrants will take place
at the offices of Hunton & Williams, counsel to the Company and Parent, at
Riverfront Plaza, East Tower, 951 East Byrd Street, Richmond, Virginia 23219 on
the same day, but prior to, the closing of the transactions contemplated by the
Reorganization Agreement, as hereinafter defined, or such time and on such date
that the Company, Parent and the Investors may agree in writing (which time and
place are referred to in this Agreement as the "Closing").
                                                -------

          At the Closing, (a) the Company will deliver to each Investor a stock
certificate or certificates in definitive form, registered in the name of such
Investor, representing the number of Shares set forth opposite the name of such
Investor under the heading  "Number of Shares to be Issued" on Exhibit A
                                                               ---------
attached hereto, and (b) Parent will deliver to each Investor a Warrant
registered in the name of such Investor, representing the number of Warrant
Shares set forth opposite the name of such Investor under the heading "Number of
Warrant Shares to be Issued" on Exhibit A attached hereto.  As payment in full
                                ---------
for the Shares and Warrants, respectively, being purchased by it at the Closing,
and against delivery of the stock certificate or certificates and Warrant or
Warrants, at the Closing, subject to the terms and conditions set forth herein,
each Investor shall deliver to the Company by wire transfer of immediately
available funds the amount shown opposite such Investor's name under the heading
"Purchase Price for Shares" on Exhibit A attached hereto and shall deliver to
                               ---------
Parent by wire transfer of immediately available funds the amount shown opposite
such Investor's name under the heading "Purchase Price for Warrants."

                                  ARTICLE IV
                 REPRESENTATIONS AND WARRANTIES OF THE COMPANY

          The Parent and the Company each hereby represents and warrants to each
Investor as of the date hereof as follows:

                                       6
<PAGE>

     Section 4.1.  Organization, Good Standing and Qualification.
                   ---------------------------------------------

          (a)  Each of the Parent and the Company is a corporation duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Virginia and has all requisite corporate power and authority to
own, operate and hold under lease its properties and assets and to carry on its
business as now conducted and as presently proposed to be conducted. Each of the
Parent and the Company is duly qualified and in good standing to do business as
a foreign corporation in each jurisdiction where failure to be so qualified
would not have a Material Adverse Effect on the Company or Parent, as the case
may be.

          (b)  The copies of the articles of incorporation and bylaws of each of
the Company and Parent provided to the Investors are complete and true and in
full force and effect on the date hereof.

          (c)  Except as set forth on Schedule 4.1((c)) attached hereto, neither
                                      -----------------
the Company nor Parent directly or indirectly owns any interest in any other
Person. None of the Persons listed on Schedule 4.1((c)) is engaged in any active
                                      -----------------
trade or business nor owns any material assets.

     Section 4.2.  Capitalization.
                   --------------

          (a)  As of November 30, 1999, the capitalization of the Company
consists of the following:

               (i)  Preferred Stock.  A total of 17,000,000 authorized shares of
Preferred Stock, $.01 par value per share (the "Preferred Stock"), consisting of
7,000,000 shares designated as Series A Convertible Participating Preferred
Stock, 6,144,599 of which are issued and outstanding, and 5,000,000 shares
designated as Series B Convertible Preferred Stock, 3,581,761 of which are
issued and outstanding. The rights, preferences and privileges of the Preferred
Stock are as stated in the Amended and Restated Articles of Incorporation
attached hereto as Exhibit C (the "Articles"), and as provided by law .
                   ---------       --------

               (ii) Common Stock.  A total of 20,000,000 authorized shares of
                    ------------
Common Stock, of which 3,648,346 shares of Common Stock are issued and
outstanding.

          (b)  Schedule 4.2((b)) sets forth all outstanding options ("Insmed
               -----------------
Options"), warrants ("Insmed Warrants"), subscriptions or other rights to
purchase or acquire any Capital Stock of Insmed. Except for the Shares and as
set forth in Schedule 4.2((b)), there are no options, warrants or other rights
             -----------------
to purchase shares of Capital Stock or other securities of the Company or
Parent, or securities convertible into or exchangeable for shares of Capital
Stock or other securities of the Company or Parent, nor, except as required by
this Agreement and the Reorganization Agreement, is the Company or Parent
obligated in any manner to issue shares of its Capital Stock or other
securities, pursuant to any preemptive rights or otherwise. Except as
contemplated hereby and for relevant state and federal securities laws, there
are no restrictions on any Investor's ability to transfer shares of Capital
Stock of the Company or Parent upon consummation of the transactions
contemplated by the Reorganization Agreement.

                                       7
<PAGE>

          (c)  Celtrix's authorized equity capitalization consists of 60,000,000
shares of common stock, $.01 par value, and 10,000,000 shares of preferred
stock, $.01 par value, 10,000 shares of which have been designated Series A
Preferred Stock and 9,000 shares of which have been designated Series B
Preferred Stock. As of the close of business on October 31, 1999, 26,569,804
shares of Celtrix Common Stock, 8,010 shares of Celtrix Series A Preferred Stock
and 0 shares of Celtrix Series B Preferred Stock were issued and outstanding.
Schedule 4.2((c)) sets forth all outstanding options ("Celtrix Options"),
-----------------
warrants ("Celtrix Warrants"), subscriptions or other rights to purchase or
acquire any Capital Stock of Celtrix.

          (d)  There has been no change in the authorized, issued and
outstanding capital stock of the Company, Parent or, to the knowledge of the
Company, Celtrix in the interval between (i) November 30, 1999 (with respect to
the Company) and October 31, 1999 (with respect to Celtrix) and (ii) the date
hereof and the Closing Date, except for shares of common stock of the Company or
Celtrix, as the case may be, issued upon exercise of the Celtrix Stock Options,
Insmed Stock Options, Celtrix Warrants or Insmed Warrants, shares of Celtrix
Series B Preferred Stock that may be issued between the date hereof and the
Closing Date, or up to 750,000 shares of Insmed's Capital Stock that may be
issued to a licensee of Insmed's products.

          (e)  Parent is the owner of all of the issued and outstanding shares
of Capital Stock of Merger Subsidiary and the Company is the owner of all of the
issued and outstanding shares of Capital Stock of Insmed Diagnostics, Inc.

          (f)  As of the date hereof, the Company is the owner of all of the
issued and outstanding shares of Capital Stock of Parent.

          (g)  Assuming the transactions contemplated by the Reorganization
Agreement were consummated on November 30, 1999, but without giving effect to
the transactions contemplated hereby, Parent's capitalization on a fully-diluted
basis would consist of 77,496,822 shares of issued and outstanding Parent Common
Stock, options exercisable into 7,973,609 shares of Parent Common Stock and
warrants exercisable into 9,172,891 shares of Parent Common Stock.

     Section 4.3.  Due Authorization.
                   -----------------

          All corporate action on the part of the Company and Parent, and their
respective officers, directors and shareholders necessary for the authorization,
execution, delivery of, and the performance of all obligations of the Company
and Parent under the Transaction Documents, and the authorization, issuance,
reservation for issuance and delivery of all of the Shares and Warrants being
sold under this Agreement or the Warrant Shares to be issued upon exercise of
the Warrants has been taken or will be taken prior to the Closing, and this
Agreement constitutes, a valid and legally binding obligation of the Company and
the Parent, and the Registration Rights Agreement and Warrants, when executed,
will constitute a valid and legally binding obligation of the Company and Parent
enforceable in accordance with their respective terms, except as may be limited
by (i) applicable bankruptcy, insolvency, reorganization, fraudulent conveyance
or transfer, moratorium or similar laws of general application relating to or
affecting the enforcement of creditors' rights generally and (ii) the effect of
rules of law governing the

                                       8
<PAGE>

availability of equitable remedies. The Company and the Parent have the
requisite corporate power and authority to execute, deliver and perform their
respective obligations under this Agreement and each of the other Transaction
Documents.

     Section 4.4.  Valid Issuance of Shares and Warrant Shares.
                   -------------------------------------------

          The Shares, when issued, sold and delivered in accordance with the
terms of this Agreement for the consideration provided for herein, will be duly
and validly issued, fully paid and nonassessable shares of Common Stock and will
be delivered free and clear of all claims, liens, encumbrances and security
interests of any nature whatsoever and not subject to any preemptive rights.
Upon issuance of the Warrants, the Warrant Shares will have been duly and
validly reserved for issuance and, upon exercise of the Warrants (in the case of
the Warrant Shares), will be duly and validly issued, fully paid and
nonassessable and will be delivered free and clear of all claims, liens,
encumbrances and security interests of any nature whatsoever and not subject to
any preemptive rights that have not been waived.  At the Closing, the Company
and Parent will have each reserved out of its authorized Capital Stock the
number of shares of Common Stock or Parent Common Stock, as the case may be,
solely for the purpose of issue and delivery upon the Exchange, as provided in
the Reorganization Agreement, and the exercise of the Warrants.  The issued and
outstanding shares of Common Stock are all, and the Parent Common Stock when
issued will be, duly authorized, validly issued, fully paid and nonassessable by
the Company, and were or will be with respect to the Parent Common Stock, issued
in compliance with the registration and qualification requirements of all
applicable federal securities laws.

     Section 4.5.  Governmental Consents.
                   ---------------------

          No consents, approvals, orders or authorizations of, or registrations,
qualifications, designations, declarations, filings with, or other action by, or
notice to, any Governmental Authority (including under the "blue sky laws" of
any such state governmental authority) or any other Person, including without
limitation, any party to a contract to which the Company or Parent is bound or
any other third party, on the part of the Company or Parent, is required in
connection with the consummation of the transactions contemplated by this
Agreement or any other Transaction Document and no lapse of a waiting period
under any Law, is necessary or required in connection with the execution,
delivery or performance (including, without limitation, the sale, issuance and
delivery of the Shares or the Warrants) by the Company or Parent of this
Agreement, each of the other Transaction Documents and the transactions
contemplated hereby or thereby.

     Section 4.6.  Litigation.
                   ----------

          There is no action, suit, proceeding, claim, arbitration, complaint or
dispute or investigation ("Action") pending (or, to the best of the Company's
                           ------
knowledge, currently threatened) against the Company or Parent, its activities,
properties or assets or, to the best of the Company's knowledge, against any
officer, director or employee of the Company or Parent in connection with such
officer's, director's or employee's relationship with, or actions taken on

                                       9
<PAGE>

behalf of, the Company or Parent which would have a Material Adverse Effect on
the Company or Parent.

     Section 4.7.  Compliance with Law and Charter Documents.
                   -----------------------------------------

          (a)  Except for any violations that would not have a Material Adverse
Effect on the Company or Parent, the Company and the Parent are each in
compliance with all applicable Laws. The Company has not received any notice of
any such violation of such Laws, which has not been remedied prior to the date
hereof. The execution, delivery and performance by the Company and the Parent of
each of the Transaction Documents and the consummation of the transactions
contemplated hereby or thereby will not result in any such violation or default,
or be in conflict with or constitute, with or without the passage of time or the
giving of notice or both, either a default under the Company's or Parent's
articles or bylaws, or any such default of any agreement or contract of the
Company or Parent, or, to the best of the Company's knowledge, any such
violation of any Laws, against or binding upon the Company or Parent or an event
which results in the creation of any lien, charge or encumbrance upon any asset
of the Company or Parent. Neither the Company nor Parent has previously entered
into any agreement which is currently in effect or by which the Company or
Parent is currently bound, granting any rights to any Person which are
inconsistent with the rights to be granted by the Company or Parent in this
Agreement and each of the other Transaction Documents, other than preemptive
rights granted to the holders of the Company's Series A Participating
Convertible Preferred Stock.

          (b)  (i) Each of the Company, Parent and their respective Subsidiaries
has all permits, licenses, variances, exemptions, orders, registrations and
approvals and governmental authorizations of any Governmental Authority
(collectively, "Permits") that are material to or necessary for the conduct of
                -------
the business of the Company, Parent and their respective Subsidiaries in the
manner presently conducted, and as proposed to be conducted, except to the
extent that the failure to have such Permits would not have a Material Adverse
Effect on the Company or Parent; (ii) such Permits are in full force and effect;
and (iii) no violations are or have been recorded in respect of any Permit,
other than any such violations as would not have a Material Adverse Effect on
the Company or Parent.

     Section 4.8.  Financial Statements.
                   --------------------

          The unaudited balance sheet of the Company as of September 30, 1999,
and the related unaudited income statement and cash flow statement for the nine
months then ended, and the audited balance sheet of the Company as of December
31, 1998, and the related audited income statement and cash flow statement for
the year then ended, each of which is attached to this Agreement as Schedule 4.8
                                                                    ------------
(the "Financial Statements"), present fairly in all material respects the
      --------------------
financial condition of the Company at that date, the results of operations and
cash flows of Company at that date and for the periods therein indicated and
have been prepared in accordance with generally accepted accounting principles
("GAAP") applied on a consistent basis, subject to normal year-end adjustments
  ----
and the absence of footnotes in the case of the unaudited financial statements.

                                       10
<PAGE>

     Section 4.9.  Investment Company.
                   ------------------

          The Company is not an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.

     Section 4.10.  Private Offering.
                    ----------------

          No form of general solicitation or general advertising was used by the
Company or Parent or either of its representatives in connection with the offer
or sale of the Shares or the Warrants.  No registration of the Shares or the
Warrants, pursuant to the provisions of the Securities Act of 1933, as amended
(the "1933 Act") or any state securities or "blue sky" laws, is required on the
      --------
date hereof or on the Closing Date by the offer, sale or issuance of the Shares
and the Warrants.  The Company and Parent hereby agree that neither it nor
anyone acting on its behalf, will offer to sell the Shares or the Warrants or
any other security so as to require the registration of the Shares or the
Warrants, pursuant to the provisions of the 1933 Act or any state securities or
"blue sky" laws, unless such securities are so registered.

     Section 4.11.  Title to Assets.
                    ---------------

          Except as set forth in Schedule 4.11, each of Company and Parent has
                                 -------------
good title to all of its properties and assets used in the business as currently
conducted and reflected as owned on the Financial Statements, in each case free
and clear of any Lien, except for (a) Liens specifically described on the notes
to the Financial Statements and (b) Liens that would not have a Material Adverse
Effect on the Company or Parent, as the case may be.

     Section 4.12.  Liabilities.
                    -----------

          As at December 31, 1998, the Company did not have any direct or
indirect obligation or liability required by GAAP to be set forth in the
Financial Statements or the footnotes thereto that were not fully and adequately
reflected or reserved against in the Financial Statements.

     Section 4.13.  Contracts and Other Agreements.
                    ------------------------------

          Schedule 6.26 of the Insmed Disclosure Letter contains a true, correct
          -------------
and complete list of all contracts, agreements, leases, licenses, arrangements,
relationships and commitments, whether written or oral (and all amendments, side
letters, modifications and supplements thereto) to which the Company is a party
or by which any of its properties or assets are bound that are material to the
business, properties or assets of the Company and its Subsidiaries, taken as a
whole (the "Insmed Contracts").  All Insmed Contracts are valid, subsisting, in
full force and effect and binding upon the Company, as the case may be, and, to
the knowledge of the Company, the other parties thereto, in accordance with
their terms.  Except as set forth on Schedule 4.13, the Company has paid in full
                                     -------------
or accrued all material amounts currently due thereunder and has satisfied in
full or provided for all of its currently matured liabilities and obligations
thereunder, and is not in default under any of them.  Except as set forth on
Schedule 4.13, to the knowledge of the Company, no other party to any such
-------------
Insmed Contract

                                       11
<PAGE>

is in breach thereof or in default thereunder nor does any condition exist that
with notice or lapse of time or both will constitute a breach thereof or default
thereunder by such other party, except for such breaches or defaults that would
not have a Material Adverse Effect on the Company or Parent.

     Section 4.14.  No Default or Breach.
                    --------------------

          Except as set forth in Schedule 4.14, neither the Company nor Parent
                                 -------------
has received notice of, and is not in, default under or with respect to any,
Contractual Obligation in any respect, which, individually or together with all
such defaults, would be likely to have a Material Adverse Effect on the Company
or Parent.

     Section 4.15.  FDA Requirements.
                    ----------------

          Except as set forth on Schedule 4.15, the Company and to the knowledge
                                 -------------
of the Company, Celtrix are in compliance in all material respects with all
applicable FDA requirements.  With respect to any Investigational New Drug
Application ("IND") filed by the Company, or to the knowledge of the Company, by
              ---
Celtrix with respect to all drugs currently under development neither the
Company nor Celtrix has been advised by the FDA that such IND was or may in the
future be (i) terminated, or (ii) subject to indefinite clinical hold, nor is
the Company aware of the occurrence of any event that would result in such
termination or indefinite clinical hold.

     Section 4.16.  Disclosure; Agreement and Other Documents.
                    -----------------------------------------

          This Agreement, each of the other Transaction Documents and each of
the certificates furnished to the Investors by the Company and Parent in
connection with the purchase and sale of the Shares and the Warrants at or prior
to the Closing, taken as a whole, do not contain any untrue statement of a
material fact.

     Section 4.17.  Reorganization Agreement.
                    ------------------------

          (a) The Company has delivered to the Investors a true, complete and
correct copy of the Reorganization Agreement, together with all amendments and
modifications thereto.  Except as set forth on Schedule 4.17, such agreement
                                               -------------
(including the schedules and exhibits thereto) comprises a full and complete
copy of all agreements between the parties thereto with respect to the subject
matter thereof or among the Company, Parent and Celtrix and any other party with
respect to the merger of Celtrix into Parent, the Exchange and all transactions
related thereto, and there are no agreements or understandings, written or oral,
or side arrangements not contained therein that relate to or modify the
substance thereof.  The Reorganization Agreement is in full force and effect and
has not been amended or modified, except for any amendments between the date
hereof and the Closing Date that would not have an adverse effect on the
Investors with respect to the purchase of or ownership of the Shares and the
Warrants.  The Company shall give each Investor three (3) business days' notice
prior to effecting any amendments to the Reorganization Agreement and shall
consult with the Investors prior to amending the Reorganization Agreement.  For
purposes of this Agreement, any cross references

                                       12
<PAGE>

to the Reorganization Agreement, including any schedules or exhibits thereto,
shall refer to the Reorganization Agreement as in effect on the date hereof, but
with respect to the Closing Certificate contemplated by Section 6.6((e)) hereof,
shall refer to the Reorganization Agreement, together with any amendments
effected between the date hereof and Closing as contemplated by this Section
                                                                     -------
4.17((a)).
---------

          (b)  The Company and Parent hereby represent and warrant to the
Investors that the representations and warranties contained in Section 6.9,
Section 6.18, Section 6.19, Section 6.20, the last sentence of Section 6.26(a),
Section 6.27 and Section 6.28 of the Reorganization Agreement as in effect on
the date of this Agreement are hereby confirmed and restated, each such
representation and warranty, together with all related definitions (other than
those terms otherwise defined herein) and ancillary provisions, being hereby
incorporated into this Agreement by reference as though specifically set forth
in this section.

          (c)  To the best knowledge of the Company, each of the representations
and warranties of Celtrix set forth in the Reorganization Agreement is as of the
date hereof, and shall as of the Closing Date be, true and correct in all
material respects.

Section 4.18.  Tax Matters.
               -----------

          (a)  Except as set forth on Schedule 4.18 hereof:
                                      -------------

               (i)    Insmed and each of its Subsidiaries that is incorporated
under the laws of the United States or of any of the United States are members
of the affiliated group, within the meaning of Section 1504(a) of the Code, of
which Insmed is the common parent, such affiliated group does not file a
consolidated federal income tax return and neither Insmed nor any of its
Subsidiaries has ever filed a consolidated federal income tax return with (or
been included in a consolidated return of) a different affiliated group;

               (ii)   each of the Insmed Companies has timely filed or caused to
be filed all material Tax Returns required to have been filed by or for it, and
all information set forth in such Tax Returns is accurate and complete in all
material respects;

               (iii)  each of the Insmed Companies has paid or made adequate
provision on its books and records in accordance with GAAP for all material
Taxes covered by such Tax Returns;

               (iv)   each of the Insmed Companies has collected or withheld all
material Taxes required to be collected or withheld by it, and all such Taxes
have been paid to the appropriate Governmental Authority or set aside in
appropriate accounts for future payment when due;

               (v)    there are no unpaid Taxes due and payable by any of the
Insmed Companies or by any other person that are or may become a lien on any
asset of, or otherwise may reasonably be expected to have a Material Adverse
Effect on, Insmed;

                                       13
<PAGE>

               (vi)   none of the Insmed Companies has granted (or is subject
to) any waiver, which is currently in effect, of the period of limitations for
the assessment of any Tax; no unpaid Tax deficiency has been assessed or
asserted against or with respect to any of the Insmed Companies by any
Governmental Authority; there are no currently pending administrative or
judicial proceedings, or any deficiency or refund litigation, with respect to
Taxes of any of the Insmed Companies, the adverse outcome of which may
reasonably be expected to have a Material Adverse Effect on Insmed; and any such
assertion, assessment, proceeding or litigation disclosed in Schedule 4.18 is
                                                             -------------
being contested in good faith through appropriate measures, and its status is
described in Schedule 4.18; and
             -------------

               (vii)  the most recent audited consolidated balance sheet
included in the Financial Statements fully and properly reflects, as of the date
thereof, the liabilities of Insmed and its Subsidiaries for all accrued Taxes
and deferred liability for Taxes and, for periods ending after such date, the
books and records of each such corporation fully and properly reflect its
liability for all accrued Taxes.

               (viii) neither Parent nor Company is a "United States real
property holding company" as that term is defined in Section 897(c)(2) of the
Code and the treasury regulations promulgated thereunder.

     Section 4.19.  No Material Adverse Change, Ordinary Course of Business.
                    -------------------------------------------------------

          Since September 30, 1999, there has not been any material adverse
change in the business, properties, or operations of the Company or Parent.

     Section 4.20.  Absence of Undisclosed Liabilities.
                    ----------------------------------

          Neither the Company nor Parent has any liabilities or obligations of
any kind, whether absolute, accrued, asserted or unasserted, contingent or
otherwise, except liabilities, obligations or contingencies that are accrued or
reserved against in the consolidated balance sheet of the Company as of December
31, 1998 or reflected in the notes thereto, or that were incurred after the date
of such balance sheet in the ordinary course of business and consistent with
past practices, and except for any such liabilities or obligations which,
individually or in the aggregate, would not have a Material Adverse Effect on
the Company or Parent.

                                   ARTICLE V
                        REPRESENTATIONS, WARRANTIES AND
                      CERTAIN AGREEMENTS OF THE INVESTORS

          Each Investor hereby represents and warrants to the Company and Parent
as of the date hereof as follows:

     Section 5.1.  Authorization.
                   -------------

          This Agreement and the Registration Rights Agreement each constitute
the Investor's valid and legally binding obligation, enforceable in accordance
with its terms except

                                       14
<PAGE>

as may be limited by (i) applicable bankruptcy, insolvency, reorganization,
fraudulent conveyance or transfer, moratorium or similar laws of general
application relating to or affecting the enforcement of creditors' rights
generally and (ii) the effect of rules of law governing the availability of
equitable remedies. The Investor represents that it has full power and authority
to enter into this Agreement and the Registration Rights Agreement.

     Section 5.2.  Purchase for Own Account.
                   ------------------------

          The Shares and Warrants to be purchased by the Investor hereunder will
be acquired for investment for the Investor's own account, not as a nominee or
agent, and not with a view to the public resale or distribution thereof within
the meaning of the 1933 Act, and the Investor has no present intention of
selling, granting any participation in, or otherwise distributing the same.  The
Investor also represents that it has not been formed for the specific purpose of
acquiring the Shares or the Warrants.

     Section 5.3.  Investment Experience.
                   ---------------------

          The Investor understands that the purchase of the Shares and the
Warrants involves substantial risk.  The Investor:  (i) has experience as an
investor in securities of companies in the development stage and acknowledges
that the Investor is able to fend for itself, can bear the economic risk of the
Investor's investment in the Shares and the Warrants and has such knowledge and
experience in financial or business matters that the Investor is capable of
evaluating the merits and risks of this investment in the Shares and the
Warrants and protecting its own interests in connection with this investment
and/or (ii) has had an opportunity to discuss the Company's and Parent's
business, management and financial affairs with the Company's and Parent's
management.

     Section 5.4.  QIB Status.
                   ----------

          The Investor is an "accredited investor" as defined under Regulation D
of the 1933 Act or is a "qualified institutional buyer" ("QIB") within the
                                                          ---
meaning of Rule 144A promulgated under the 1933 Act and such status is indicated
on Exhibit A attached hereto, and the Investor has received a copy of all such
   ---------
documents and agreements that it has requested and has read and understands the
respective contents thereof.  The Investor has had the opportunity to ask
questions of the Company and Parent and has received answers to such questions
from the Company and Parent.  The Investor has carefully reviewed and evaluated
these documents and understands the risks and other considerations relating to
the investment.

     Section 5.5.  Restricted Securities.
                   ---------------------

          The Investor understands that the Shares and the Warrants are
characterized as "restricted securities" under the 1933 Act inasmuch as they are
being acquired from the Company or Parent, as the case may be, in a transaction
not involving a public offering and that under the 1933 Act and applicable rules
and regulations thereunder such securities may be resold without registration
under the 1933 Act only in certain limited circumstances.  In this connection,
the Investor represents that the Investor is familiar with Rule 144 and Rule
144A of the U.S. Securities

                                       15
<PAGE>

and Exchange Commission, as presently in effect, and understands the resale
limitations imposed thereby and by the 1933 Act. The Investor understands that
neither the Company nor Parent is under any obligation to register any of the
securities sold hereunder other than as contemplated by the Reorganization
Agreement. The Investor understands that no public market now exists for any of
the Shares or the Warrants and that it is uncertain whether a public market will
ever exist for the Shares or the Warrants unless the transactions contemplated
by the Reorganization Agreement are consummated.

     Section 5.6.  Further Limitations on Disposition.
                   ----------------------------------

          Without in any way limiting the representations set forth above, the
Investor further agrees not to make any disposition of all or any portion of the
Shares, the Warrants or the Warrant Shares unless and until:

          (a)  there is then in effect a registration statement under the 1933
Act and all applicable state securities laws covering such proposed disposition
and such disposition is made in accordance with such registration statement; or

          (b)  (i) the Investor shall have notified the Company or Parent, as
the case may be, of the proposed disposition and shall have furnished the
Company or Parent, as the case may be, with a statement of the circumstances
surrounding the proposed disposition, and (ii) the Investor shall have furnished
the Company or Parent, as the case may be, at the expense of the Investor or its
transferee, with an opinion of counsel, reasonably satisfactory to the Company
or Parent, as the case may be, that such disposition will not require
registration of such securities under the 1933 Act or under any applicable state
securities laws.

Notwithstanding the provisions of paragraphs (a) and (b) above, no such
registration statement or opinion of counsel shall be required:  (i) for any
transfer in compliance with Rule 144 or Rule 144A of the 1933 Act, (ii) to an
affiliate of the Investor, or (iii) as to any exchange of the Shares pursuant to
the Reorganization Agreement; provided, however, the provisions of Article V
                                                                   ---------
hereof shall continue to apply to the shares of common stock and warrants of
Parent to be exchanged for the Shares and the Warrants to the extent such newly
issued securities are not registered by the Parent pursuant to the Registration
Statement.

     Section 5.7.  Legends.
                   -------

          It is understood that the certificates evidencing the Shares, the
Warrants and the Warrant Shares will bear the legends set forth below:

          THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF
                                         ---
ANY STATE.  THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND
RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT
AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION
THEREFROM.  INVESTORS SHOULD BE AWARE THAT THEY MAY BE

                                       16
<PAGE>

REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD
OF TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN
FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED
TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE
SECURITIES LAWS.

The legend set forth above shall be removed by the Company or Parent, as the
case may be, from any certificate evidencing the Shares, the Warrants and the
Warrant Shares upon delivery to the Company or Parent, as the case may be, of an
opinion by counsel, reasonably satisfactory to the Company or Parent, as the
case may be, that a registration statement under the 1933 Act is at that time in
effect with respect to the legended security or that such security can be freely
transferred in a public sale without such a registration statement being in
effect and that such transfer will not jeopardize the exemption or exemptions
from registration pursuant to which the Company or Parent, as the case may be,
issued the Shares, the Warrants and the Warrant Shares.

                                  ARTICLE VI
              CONDITIONS TO INVESTORS' OBLIGATIONS AT THE CLOSING

          The obligation of each Investor under Article III of this Agreement is
                                                -----------
subject to the fulfillment or waiver, on or before the Closing of each of the
following conditions, the waiver of which shall not be effective against such
Investor if it does not consent to such waiver, which consent may be given by
written, oral or telephone communication to the Company, its counsel or to
counsel to such Investor:

     Section 6.1.  Representations and Warranties True.
                   -----------------------------------

          Each of the representations and warranties of the Company and Parent
contained and incorporated in Article IV shall be true and correct on and as of
                              ----------
the Closing with the same effect as though such representations and warranties
had been made on and as of the date of the Closing (except to the extent that
any representation and warranty expressly speaks as of an earlier date, in which
case such representation is true and correct as of such date and except that the
representations and warranties set forth in Section 4.2 shall be modified to
                                            -----------
reflect changes in capitalization permitted by Section 8.3).
                                               -----------

     Section 6.2.  Satisfaction of Conditions to Closing of Reorganization.
                   -------------------------------------------------------

          The Company shall have delivered to the Investors a certificate,
signed by a duly authorized officer of each of the Company, Parent and Celtrix,
certifying that the conditions to closing contained in Article VIII of the
Reorganization Agreement have been satisfied (and not waived, except for any
waiver which would not have a material effect on the assets, business or
operations of the Parent, the Company and Celtrix, taken as a whole), except for
the delivery of certain closing certificates or opinions required pursuant
thereto, the forms of which have been agreed to by the party receiving such
certificates and opinions.

                                       17
<PAGE>

     Section 6.3.  Registration Rights Agreement.
                   -----------------------------

          The Company, Parent and the Investors shall have entered into the
Registration Rights Agreement in the form of Exhibit D attached hereto (the
                                             ---------
"Registration Rights Agreement").
 -----------------------------

     Section 6.4.  Performance.
                   -----------

          The Company and Parent shall have performed and complied in all
material respects with all agreements, obligations and conditions contained in
this Agreement that are required to be performed or complied with by it on or
before the Closing and shall have obtained all approvals, consents and
qualifications necessary to complete the purchase and sale described herein.

     Section 6.5.  Securities Exemptions.
                   ---------------------

          The offer and sale of the Shares and the Warrants to the Investors
pursuant to this Agreement shall be exempt from the registration requirements of
the 1933 Act and the registration and/or qualification requirements of all
applicable state securities laws.

     Section 6.6.  Proceedings and Documents.
                   -------------------------

          All corporate and other proceedings in connection with the
transactions contemplated at the Closing, and all documents incident thereto
shall be reasonably satisfactory in form and substance to each Investor and to
each Investor's counsel, and each Investor shall have received all such
counterpart originals and certified or other true, complete and correct copies
of such documents as they may reasonably request.  Such documents shall include
(but not be limited to) the following:

          (a) Certified Charter Documents.  A copy of the articles of
              ---------------------------
incorporation and the bylaws of the Company and Parent (as amended through the
date of the Closing), certified by the Secretary of the Company and Parent as
true, complete and correct copies thereof, as of the Closing.

          (b) Secretary's Incumbency Certificate.  A certificate of the
              ----------------------------------
Secretary or an Assistant Secretary or other officer of each of the Company and
Parent in form and substance satisfactory to the Investors dated the Closing
Date certifying the names of the officers of each of the Company and Parent
authorized to sign this Agreement, the certificates for the Shares and the
Warrants and the other documents, instruments or certificates to be delivered
pursuant to this Agreement by each of the Company and Parent or any of its
officers, together with the true signatures of such officers.

          (c) Corporate Actions.  A copy of the resolutions of the Board of
              -----------------
Directors of each of Parent and the Company evidencing the approval of this
Agreement and each of the Transaction Documents, the issuance of the Shares, the
Warrants, the Warrant Shares and the other matters contemplated hereby and by
the Reorganization Agreement, certified by the Secretary of each of the Company
and Parent to be true, complete and correct, which remain unamended and in full
force and effect.

                                       18
<PAGE>

          (d) Good Standing Certificate.  Good standing certificate for the
              -------------------------
Company, Parent and Celtrix issued by the Virginia State Corporation Commission
or the Secretary of State of the State of Delaware, as the case may be, dated
within ten (10) days of the Closing.

          (e) Officers' Certificate.  The Investors shall have received a
              ---------------------
certificate from each of the Company and Parent, in form and substance
satisfactory to the Investors, dated the Closing Date, and signed by an officer
of each of Parent and the Company, certifying as to the matters contained in
Sections 6.1 and 6.4.
------------     ---

     Section 6.7.  Miscellaneous.
                   -------------

          (a) Preemptive Rights. Other than the Amended and Restated Investor
              -----------------
Rights Agreement, dated September 1, 1999, as amended by a First Amendment dated
June 16, 1998, and a Second Amendment dated January 15, 1999 (the "Investor
                                                                   --------
Rights Agreement"), neither Parent nor the Company has granted any preemptive,
----------------
first refusal or other rights with respect to the issuance of the Shares, the
Warrants or the Warrant Shares.  The Investor Rights Agreement shall be amended
prior to the Closing to eliminate any preemptive rights granted to the parties
to such agreement.  In addition, the Company shall amend its License Agreement
with the University of Virginia Patent Foundation and its Option Agreement with
Dr. Joseph Larner to clarify that the University of Virginia Patent Foundation's
right to receive Common Stock to enable it to maintain a 3% interest in the
Company and Dr. Larner's right to receive options to enable him to maintain a 3%
ownership interest in the Company will each terminate on the day immediately
prior to the Effective Time.

          (b) Opinion of Counsel.  The Investors shall have received an opinion
              ------------------
or opinions of counsel to the Company and Parent in form and substance
reasonably acceptable to the Company and the Investors.  In addition, the
Investors shall be named as addressees on the tax opinion to be delivered by
Hunton & Williams pursuant to Section 8.3(d) of the Reorganization Agreement.

                                  ARTICLE VII
             CONDITIONS TO THE COMPANY'S AND PARENT'S OBLIGATIONS
                                AT THE CLOSINGS

          The obligations of the Company and Parent to the Investors under this
Agreement are subject to the fulfillment or waiver on or before the Closing:

Section 7.1.  Representations and Warranties.
              ------------------------------

          The representations and warranties of each Investor contained in

Article V shall be true and correct in all material respect on the date of the
---------
Closing with the same effect as though such representations and warranties had
been made on and as of the Closing (except to the extent that any representation
and warranty expressly speaks as of an earlier date, in which case such
representation is true and correct as of such date).

                                       19
<PAGE>

     Section 7.2.  Payment of Purchase Price.
                   -------------------------

          The Investors shall have delivered to the Company and Parent their
respective portion of the purchase price as set forth on Exhibit A hereto and in
                                                         ---------
accordance with the provisions of Article III.
                                  -----------

     Section 7.3.  Securities Exemptions.
                   ---------------------

          The offer and sale of the Shares and the Warrants to the Investors
pursuant to this Agreement shall be exempt from the registration requirements of
the 1933 Act and the registration and/or qualification requirements of all other
applicable state securities laws.

     Section 7.4.  Proceedings and Documents.
                   -------------------------

          All corporate and other proceedings in connection with the
transactions contemplated at the Closing and all documents incident thereto
shall be reasonably satisfactory in form and substance to the Company and to the
Company's legal counsel, and the Company shall have received all such
counterpart originals and certified or other copies of such documents as it may
reasonably request.

                                 ARTICLE VIII
                                   COVENANTS

     Section 8.1.  Conduct of Business.
                   -------------------

          (a) Except as contemplated by this Agreement and the Reorganization
Agreement, during the period from the date hereof to the Closing Date, each of
the Company and Parent will conduct its operations in the ordinary and usual
course of business consistent with past practice.  The Company and Parent shall
not amend their respective articles of incorporation or bylaws in any manner
that would result in a material adverse effect to the Investors, with respect to
the ownership of the Shares and the Warrants.  The Company and Parent shall give
each Investor three (3) business days' notice prior to effecting any amendments
to their respective articles of incorporation or bylaws.

     Section 8.2.  Registration of Shares.
                   ----------------------

          Parent:

                   (i)    shall cause the Parent Common Stock to be issued upon
conversion of the Shares to be included in the Registration Statement and shall
comply with its obligations under Section 7.6 and Section 7.8 of the
Reorganization Agreement;

                   (ii)   shall promptly advise each of the Investors (A) when
the Registration Statement becomes effective, (B) when, prior to the Closing
Date, any amendment to the Registration Statement shall be filed or become
effective, (C) of the issuance by the Securities and Exchange Commission of any
stop order suspending the effectiveness of the

                                       20
<PAGE>

Registration Statement or the institution or threatening of any proceeding for
that purpose and (D) of the receipt by Parent of any notification with respect
to the suspension of the registration or qualification of Parent Common Stock
for sale in any jurisdiction or the institution or threatening of any proceeding
for that purpose; and

                   (iii)  shall cause the registration or qualification of the
Parent Common Stock to be issued upon conversion of the Shares in accordance
with the Plan of Exchange under state securities or "Blue Sky" laws of each
state of residence of a record holder of the Company's Capital Stock as
reflected in its stock transfer ledgers between the date hereof and the Closing
Date;

     Section 8.3.  No Issuance.
                   -----------

          Except as permitted by Section 4.2((d)) hereof prior to the Closing,
                                 ----------------
the Company and Parent shall not issue any Capital Stock without the prior
consent of the Investors.

     Section 8.4.  Rule 145.
                   --------

          Each Investor agrees to comply, and will cause any Affiliate to
comply, with the 1933 Act and the Securities and Exchange Commission's rules and
regulations thereunder, and will not offer to sell, sell or otherwise dispose of
any shares of Parent Common Stock that such Investor or any Affiliate will
receive pursuant to the transactions contemplated by the Reorganization
Agreement except, in each case, in compliance with Rule 145 under the 1933 Act,
or following receipt of an opinion of counsel satisfactory to Parent that the
provisions of such rule need not be observed.  Each Investor acknowledges that
the certificates for shares of Parent Common Stock such Investor or any
Affiliate will receive pursuant to the transactions contemplated by the
Reorganization Agreement may bear the following legend:

     "Shares represented by this certificate are subject to restrictions
     as to transfer by virtue of provisions of the Securities Act of 1933
     and the General Rules and Regulations of the Securities and Exchange
     Commission thereunder. Such shares may not be transferred except upon
     compliance with 17 CFR 230.145(d) or the favorable opinion of counsel
     for Insmed, Inc. that such transfer will not constitute or result in
     a violation of the Securities Act of 1933."

     Section 8.5.  Board Observation Rights.
                   ------------------------

          Between the date of Closing and for so long as the Investors or their
Affiliates collectively hold at least 50% of their aggregate initial investment
in the Shares, or upon conversion, the Parent Common Stock and the Warrants, the
Investors may designate one person who shall be entitled to attend all meetings
of the board of directors of the Company and, upon consummation of the
transactions contemplated by the Reorganization Agreement, of the Parent.
Investors holding not less than fifty-one percent (51%) of the outstanding
Shares and Warrants (held by the Investors on the date of determination) shall
provide the Company and Parent with written notice of their designee.  Such
designee shall not be entitled to voting rights as a member of the board of
directors.  Such designee shall not be entitled to voting rights as a member of
the

                                       21
<PAGE>

board of directors and may be excluded from meetings, or portions thereof if the
Company's Board of Directors makes a good faith determination that such
designee's presence would create a conflict of interest or in the opinion of
counsel to the Company or Parent may violate an attorney-client privilege. The
Company or Parent, as the case may be, shall reimburse the Investors or their
designee for all reasonable travel and accommodation expenses incurred by the
designee.

                                  ARTICLE IX
                                  TERMINATION

     Section 9.1.  Termination.
                   -----------

          This Agreement may be terminated prior to the Closing as follows:

          (a) at any time on or prior to the Closing Date, by mutual written
consent of the Company, Parent and the Investors; or

          (b) at the election of the Company, Parent or the Investors by written
notice to the other parties hereto after 5:00 p.m., New York City time on May
31, 2000, if the transactions contemplated by this Agreement shall not have been
consummated pursuant hereto, unless such date is extended by the mutual written
consent of the Company, Parent and the Investors; or

          (c) at the election of the Investors, if the Reorganization Agreement
shall have been terminated by any of the parties to such agreement or shall have
terminated in accordance with its terms.

          If this Agreement so terminates, it shall become null and void and
have no further force or effect, except as provided in Section 9.2.
                                                       -----------

     Section 9.2.  Survival.
                   --------

          If this Agreement is terminated and the transactions contemplated
hereby are not consummated as described above, this Agreement shall become void
and of no further force and effect with no liability on the part of any party
hereto or its respective directors, officers, stockholders, partners or members,
except that nothing herein shall relieve any party from liability for any breach
of this Agreement.

                                   ARTICLE X
                                INDEMNIFICATION

     Section 10.1.  Indemnification.
                    ---------------

          Except as otherwise provided in this Article X, the Company and Parent
                                               ---------
jointly and severally agree to indemnify, defend and hold harmless each of the
Investors and their Affiliates and their respective officers, directors, agents,
employees, advisors, subsidiaries, members, partners and controlling persons
(each, an "Indemnified Party") to the fullest extent
           -----------------

                                       22
<PAGE>

permitted by law from and against any and all Losses (as hereinafter defined)
resulting from, arising out of or relating to any inaccuracy or breach of any
representation, warranty, covenant or agreement by the Company or Parent, as the
case may be, in this Agreement, the Registration Rights Agreement or Warrant,
provided, however, that if and to the extent that such indemnification is
--------  -------
unenforceable for any reason, then the Company or Parent shall make the maximum
contribution to the payment and satisfaction of such Losses which shall be
permissible under applicable laws. "Losses" means all losses, claims (including
any claim by a third party), damages, deficiencies, judgments, assessments,
fines, settlements, expenses (including reasonable fees, disbursements and other
charges of counsel incurred by the Indemnified Party in any action between the
Company and/or Parent and the Indemnified Party or between the Indemnified Party
and any third party or otherwise) or other liabilities.

     Section 10.2.  Notification.
                    ------------

          Each Indemnified Party under this Article X will, promptly after the
                                            ---------
receipt of notice of the commencement of any action, investigation, claim or
other proceeding against such Indemnified Party in respect of which indemnity
may be sought from the Company or Parent under this Article X, notify the
                                                    ---------
Company and Parent in writing of the commencement thereof.  The failure of any
Indemnified Party to so notify the Company or Parent of any such action shall
not relieve the Company or Parent from any liability which either the Company or
Parent may have to such Indemnified Party, except to the extent the Company or
Parent is materially prejudiced by such failure and then only to the extent of
such prejudice.  In case any such action, claim or other proceeding shall be
brought against any Indemnified Party and it shall notify the Company and Parent
of the commencement thereof, the Company or Parent shall be entitled to assume
the defense thereof at its own expense, with counsel satisfactory to such
Indemnified Party in its reasonable judgment; provided, however, that any
                                              --------  -------
Indemnified Party may, at its own expense, retain separate counsel to
participate in such defense at its own expense.  Notwithstanding the foregoing,
in any action, claim or proceeding in which the Company and Parent, on the one
hand, and an Indemnified Party, on the other hand, are, or are reasonably likely
to become, a party, such Indemnified Party shall have the right to employ
separate counsel at the expense of the Company and Parent and to control its own
defense of such action, claim or proceeding if, in the reasonable opinion of
counsel to such Indemnified Party, a conflict or potential conflict exists
between the Company and/or Parent, on the one hand, and such Indemnified Party,
on the other hand, that would make such separate representation advisable.  Each
of the Company and Parent agrees that it will not, without the prior written
consent of the Investors, settle, compromise or consent to the entry of any
judgment in any pending or threatened claim, action or proceeding relating to
the matters contemplated hereby (if any Indemnified Party is a party thereto or
has been actually threatened to be made a party thereto) unless such settlement,
compromise or consent includes an unconditional release of the Investors and
each other Indemnified Party from all liability arising or that may arise out of
such claim, action or proceeding and imposes no obligations upon such
Indemnified Party.  Neither the Company nor Parent shall be liable for any
settlement of any claim, action or proceeding effected against an Indemnified
Party without its written consent, which consent shall not be unreasonably
withheld.  Notwithstanding the foregoing or anything to the contrary contained
in

                                       23
<PAGE>

this Agreement, nothing in this Article X shall restrict or limit any rights
                                ---------
that any Indemnified Party may have to seek equitable relief.

     Section 10.3.  Registration Rights Agreement.
                    -----------------------------

          Notwithstanding anything to the contrary contained in this Article X,
                                                                     ---------
the indemnification and contribution provisions of the Registration Rights
Agreement shall govern any claim made with respect to registration statements
filed pursuant thereto or sales made thereunder.

                                  ARTICLE XI
                                 MISCELLANEOUS

     Section 11.1.  Public Announcements.
                    --------------------

          The parties hereto will consult with each other before issuing any
press release or otherwise making any public statement with respect to this
Agreement, the Investors or any of their respective Affiliates and shall not
issue any such press release or make any such public statement prior to such
consultation or as to which the other party promptly and reasonably objects,
except as may be required by law in the written opinion of such party's counsel
or by obligations pursuant to any listing agreement with any national securities
exchange or inter-dealer quotation system, in which case the party proposing to
issue such press release or make such public announcement shall use its best
efforts to provide in good faith the other parties the reasonable opportunity to
comment on such press release or announcement before issuing any such press
release or making any such public announcements.

     Section 11.2.  Confidentiality.
                    ---------------

          (a) Each party hereto will hold, and will use its best efforts to
cause its officers, members, partners, directors, employees, accountants,
counsel, consultants, advisors, affiliates (as such term is defined herein or is
used in Rule 12b-2 under the Exchange Act) and representatives (collectively,
the "Representatives"), to hold, in confidence all confidential documents and
     ---------------
information concerning the other parties hereto furnished to such party in
connection with the transactions contemplated by this Agreement, including,
without limitation, all analyses, compilations, studies or records prepared by
the party receiving the information or by such party's Representatives, that
contain or otherwise reflect or are generated from such information
(collectively, the "Confidential Material").  The party furnishing any
                    ---------------------
Confidential Material is herein referred to as the "Delivering Company" and the
party receiving any Confidential Material is herein referred to as the
"Receiving Company."

          (b) The Receiving Company agrees that the Confidential Material will
not be used other than for the purpose of the transaction contemplated by this
Agreement, and that such information will be kept confidential by the Receiving
Company and its Representatives; provided, however, that (i) any of such
information may be disclosed to the Representatives who need to know such
information for the purpose described above (it being understood that (a) each

                                       24
<PAGE>

such Representative shall be informed by the Receiving Company of the
confidential nature of such information, shall be directed by the Receiving
Company to treat such information confidentially and not to use it other than
for the purpose described above and shall agree to be bound by the terms of this
Section 11.2 and (b) in any event, the Receiving Company shall be responsible
------------
for any breach of this Agreement by any of its Representatives), and (ii) any
other disclosure of such information may be made if the Delivering Company has,
in advance, consented to such disclosure in writing.  The Receiving Company will
make all reasonable, necessary and appropriate efforts to safeguard the
Confidential Material from disclosure to anyone other than as permitted hereby.

          (c) Notwithstanding the foregoing, if the Receiving Company or any of
its Representatives is requested or required (by oral question or request for
information or documents in legal proceedings, interrogatories, subpoena, civil
investigative demand or similar process) to disclose any Confidential Material,
the Receiving Company will promptly notify the Delivering Company of such
request or requirement so that the Delivering Company may seek an appropriate
protective order and/or waive the Receiving Company's compliance with the
provisions of this Agreement.  If, in the absence of a protective order or the
receipt of a waiver hereunder, the Receiving Company or any of its
Representatives is nonetheless, in the reasonable written opinion of the
Receiving Company's counsel, compelled to disclose Confidential Material to any
tribunal, the Receiving Company or such Representative, after notice to the
Delivering Company, may disclose such information to such tribunal.  The
Receiving Party shall exercise reasonable efforts to obtain reliable assurance
that confidential treatment will be accorded the Confidential Material so
disclosed.  The Receiving Company or such Representative shall not be liable for
the disclosure of Confidential Material hereunder to a tribunal compelling such
disclosure unless such disclosure to such tribunal was caused by or resulted
from a previous disclosure by the Receiving Company or any of its
Representatives not permitted by this Agreement.

          (d) This Section 11.2 shall be inoperative as to particular portions
                   ------------
of the Confidential Material if such information (i) is or becomes generally
available to the public other than as a result of a disclosure by the Receiving
Company or its Representatives, (ii) was available to the Receiving Company on a
non-confidential basis prior to its disclosure to the Receiving Company by the
Delivering Company or the Delivering Company's Representatives as demonstrated
by documents of the Receiving Company, or (iii) becomes available to the
Receiving Company on a non-confidential basis from a source other than the
Delivering Company or the Delivering Company's Representatives, provided that
such source is not known by the Receiving Company, after reasonable inquiry, to
be bound by a confidentiality agreement with the Delivering Company or the
Delivering Company's Representatives and is not otherwise prohibited from
transmitting the information to the Receiving Company by a contractual, legal or
fiduciary obligation.  The fact that information included in the Confidential
Material is or becomes otherwise available to the Receiving Company or its
Representatives under clauses (i) through (iii) above shall not relieve the
Receiving Company or its Representatives of the prohibitions of the
confidentiality provisions of this Section 11.2 with respect to the balance of
                                   ------------
the Confidential Material.

                                       25
<PAGE>

          (e) If this Agreement is terminated, each party hereto will, and will
use its best efforts to cause its officers, directors, members, partners,
employees, accountants, counsel, consultants, advisors and agents to destroy or
deliver to the party from whom such Confidential Material was obtained, upon
request, all documents and other materials, and all copies thereof, obtained by
such party or on its behalf from any such other parties in connection with this
Agreement that are subject to such confidence.

     Section 11.3.  Survival of Representations, Warranties and Covenants.
                    -----------------------------------------------------

          The representations and warranties, covenants and agreements contained
herein shall survive until the date that is 30 days after the receipt by the
Investors of audited consolidated financial statements of Parent for the fiscal
year ending December 31, 2000 (or, if such fiscal year changes and no such
audited consolidated financial statements are available, then the first fiscal
year ending after December 31, 2000), except for Section 4.4, which
representations and warranties shall survive without any expiration, and Section
4.18, which representations and warranties shall survive until two years
following the date hereof.  The agreements set forth in Article XI shall survive
                                                        ----------
termination of this Agreement.

     Section 11.4.  Successors and Assigns.
                    ----------------------

          The terms and conditions of this Agreement shall inure to the benefit
of and be binding upon the respective successors and assigns of the parties.
None of the parties hereto may assign any of its rights under this Agreement to
any of its Affiliates without the written consent of the other parties hereto,
which consent shall not be unreasonably withheld; provided, however, that an
Investor may assign its entire rights hereunder to a single assignee who is both
an Affiliate of such Investor and a QIB.  No Person other than the parties
hereto and their successors and permitted assigns is intended to be a
beneficiary of this Agreement.

     Section 11.5.  Governing Law.
                    -------------

          This Agreement shall be governed by and construed under the internal
laws of the Commonwealth of Virginia as applied to agreements among Virginia
residents entered into and to be performed entirely within Virginia, without
reference to principles of conflict of laws or choice of laws.

     Section 11.6.  Counterparts.
                    ------------

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

     Section 11.7.  Headings.
                    --------

          The headings and captions used in this Agreement are used for
convenience only and are not to be considered in construing or interpreting this
Agreement.  All references in this Agreement to sections, paragraphs, exhibits
and schedules shall, unless otherwise provided, refer to

                                       26
<PAGE>

sections and paragraphs hereof and exhibits and schedules attached hereto, all
of which exhibits and schedules are incorporated herein by this reference.

     Section 11.8.  Notices.
                    -------

          Unless otherwise provided, any notice required or permitted under this
Agreement shall be given in writing or by facsimile and shall be deemed
effectively given upon personal delivery to the party to be notified or one day
after deposit with a national overnight delivery service or three days after
deposit with the United States Post Office, by registered or certified mail,
postage prepaid in the case of the Investors to the address or facsimile number
set forth under such Investor's name on Exhibit A attached hereto or, in the
                                        ---------
case of the Company or Parent, to 800 East Leigh Street, Richmond, Virginia
23219, facsimile number (804) 828-6894, or at such other address as such party
may designate by giving ten (10) days advance written notice to the other
parties.

     Section 11.9.  No Finder's Fees.
                    ----------------

          Each Investor agrees to indemnify and to hold harmless the Company
from any liability for any commission or compensation in the nature of a
finders' or broker's fee (and any asserted liability) for which such Investor or
any of its officers, partners, employees, or representatives is responsible.
The Company agrees to indemnify and hold harmless each Investor from any
liability for any commission or compensation in the nature of a finder's or
broker's fee (and any asserted liability) for which the Company or any of its
officers, employees or representatives is responsible.

     Section 11.10. Costs, Expenses.
                    ---------------

          Each party shall pay its own expenses and legal fees incurred on its
behalf with respect to this Agreement and the transactions contemplated hereby;
provided, however, in the event the transactions contemplated herein are
consummated the Company shall reimburse the Investors for the legal fees and
expenses of one law firm representing all such Investors subject to a maximum
liability to the Company of $50,000.

     Section 11.11. Amendments and Waivers.
                    ----------------------

          (a) Any term of this Agreement may be amended and the observance of
any term of this Agreement may be waived (either generally or in a particular
instance and either retroactively or prospectively), only with the written
consent of the Company and Investors holding or who have agreed to purchase not
less than fifty percent (50%) of the Shares and Warrants.  Any amendment or
waiver effected in accordance with this Section shall be binding upon the
Investors, each future holder of such securities, and the Company.

          (b) No failure or delay on the part of the Company, Parent or the
Investors in exercising any right, power or remedy hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any such right,
power or remedy preclude any other or further exercise thereof or the exercise
of any other right, power or remedy.

                                       27
<PAGE>

     Section 11.12. Severability.
                    ------------

          If one or more provisions of this Agreement are held to be
unenforceable under applicable law, such provision(s) shall be excluded from
this Agreement and the balance of the Agreement shall be interpreted as if such
provision(s) were so excluded and shall be enforceable in accordance with its
terms unless the provisions held unenforceable shall substantially impair the
benefits of the remaining provisions hereof.

     Section 11.13. Entire Agreement.
                    ----------------

          This Agreement, together with all exhibits and schedules hereto,
constitutes the entire agreement and understanding of the parties with respect
to the subject matter hereof and supersedes any and all prior negotiations,
correspondence, agreements, understandings, duties or obligations between the
parties with respect to the subject matter hereof.

     Section 11.14. Further Assurances.
                    ------------------

          From and after the date of this Agreement, upon the request of any
Investor, the Company or Parent, the Company, Parent and such Investor shall
execute and deliver such instruments, documents or other writings as may be
reasonably necessary or desirable to confirm and carry out and to effectuate
fully the intent and purposes of this Agreement.

                           [SIGNATURE PAGE FOLLOWS]

                                       28
<PAGE>

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

THE PARENT:                         INSMED, INC.,
----------                          a Virginia corporation

                                    By:  ______________________________________
                                         Geoffrey Allan, Ph.D.
                                         President and Chief Executive Officer

THE COMPANY:                        INSMED PHARMACEUTICALS, INC.,
-----------                         a Virginia corporation

                                    By:  ______________________________________
                                         Geoffrey Allan, Ph.D.
                                         President and Chief Executive Officer

                                    VERON INTERNATIONAL LTD.

                                    By:  ______________________________________
                                         Name:
                                         Title:

                                    VECTOR LATER-STAGE EQUITY FUND II (QP), L.P.

                                    By:  VECTOR FUND MANAGEMENT II, L.L.C.
                                    Its: General Partner

                                    By:  ______________________________________
                                         Name: Barclay A. Phillips
                                         Its:  Managing Director

                                    VECTOR LATER-STAGE EQUITY FUND II, L.P.

                                    By:  ______________________________________
                                         Name: Barclay A. Phillips
                                         Its:  Managing Director

                                    CADUCEUS CAPITAL TRUST

                                    By:  ______________________________________
                                         Name:
                                         Title:

                                    CADUCEUS CAPITAL II, L.P.

                                    By:  ______________________________________
                                         Name:
                                         Title:

                                    PAINE WEBBER EUCALYPTUS FUND

                                    By:  ______________________________________
                                         Name:
                                         Title:

                                    T. ROWE PRICE HEALTH SCIENCES FUND, INC.

                                    By:  ______________________________________
                                         Name:
                                         Title:

                                    GREENLINE HEALTH SCIENCES FUND

                                    By:  ______________________________________
                                         Name:
                                         Title:

                                    CLSP, L.P.

                                    By:  ______________________________________
                                         Name:
                                         Title:

                                    CLSP-SBS I, L.P.

                                    By:  ______________________________________
                                         Name:
                                         Title:

                                    CLSP-SBS II, L.P.

                                    By:  ______________________________________
                                         Name:
                                         Title:

                                    QUANTUM PARTNERS, LDC

                                    By:  ______________________________________
                                         Name:
                                         Title:

                                    PEQUOT PARTNERS FUND, L.P.

                                    By:  PEQUOT CAPITAL MANAGEMENT, INC.
                                    Its: Investment Manager

                                    By:  ______________________________________
                                         Name
                                         Title:

                                    PEQUOT INTERNATIONAL FUND, INC.

                                    By:  PEQUOT CAPITAL MANAGEMENT, INC.
                                    Its: Investment Advisor

                                    By:  ______________________________________
                                         Name
                                         Title:

                                       29<PAGE>

                                                                   EXHIBIT 10.13

          THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY
          BE SOLD, OFFERED FOR SALE OR TRANSFERRED ONLY IN ACCORDANCE
          WITH THE PROVISIONS OF THIS WARRANT AND PURSUANT TO A
          REGISTRATION STATEMENT OR AN OPINION OF COUNSEL SATISFACTORY
          TO THE CORPORATION AS TO THE AVAILABILITY OF AN EXEMPTION
          FROM REGISTRATION.

No._____                                              ________Shares

                          WARRANT TO PURCHASE SHARES
                              OF COMMON STOCK OF

                                 INSMED, INC.

     1.   Common Stock and Warrant Purchase Agreement.  This Warrant is issued
          -------------------------------------------
to  [          ] ("Purchaser") pursuant to that certain Purchase Agreement dated
                   ---------
as of January ___, 2000 between Insmed Pharmaceuticals, Inc., a Virginia
corporation (the "Company"), Insmed, Inc., a Virginia Corporation ("Insmed"),
                  -------                                           ------
Purchaser and the other purchasers identified therein (the "Agreement").
                                                            ---------

     2.   Number and Price of Shares Subject to Warrant; Automatic Exercise.
          -----------------------------------------------------------------
Subject to the terms and conditions herein set forth Purchaser is entitled to
purchase from Insmed, at any time in whole or from time to time in part
commencing upon the Effective Time (as defined in the Agreement and Plan of
Reorganization by and among Insmed, the Company, Celtrix Pharmaceuticals, Inc.,
a Delaware corporation and Celtrix MergerSub, Inc., a Delaware corporation,
dated November 30, 1999 (the "Reorganization Agreement")) and continuing until
                              ------------------------
termination of this Warrant in accordance with Section 13 hereof, [      ]
(______) shares (which number of shares is subject to adjustment as described
below) of fully paid and nonassessable Common Stock, $.01 par value, of Insmed
("Warrant Shares"), upon surrender of this Warrant at the principal office of
  --------------
Insmed and upon payment of the purchase price by wire transfer to Insmed or
cashiers check drawn on a United States bank made to the order of Insmed.
Subject to adjustment as hereinafter provided, the purchase price of one Warrant
Share (or such securities as may be substituted for one Warrant Share pursuant
to the provisions hereinafter set forth) shall be $2.25.  The purchase price of
one Warrant Share (or such securities as may be substituted for one Warrant
Share pursuant to the provisions hereinafter set forth) payable from time to
time upon the exercise of this Warrant (whether such price be the price
specified above or an adjusted price determined as hereinafter provided) is
referred to herein as the "Warrant Price."
                           -------------

     3.   Adjustment of Warrant Price and Number of Shares.  The number and kind
          ------------------------------------------------
of securities issuable upon the exercise of this Warrant shall be subject to
adjustment from time to time upon the happening of certain events as follows:

          (a) Adjustment for Dividends in Stock or Other Securities or Property.
              -----------------------------------------------------------------
In case at any time or from time to time on or after the date hereof the holders
of the Common Stock of Insmed (or any shares of other stock or other securities
of Insmed at the time issued and
<PAGE>

outstanding) shall have received, or, on or after the record date fixed for the
determination of eligible stockholders, shall have become entitled to receive,
without payment therefor, (i) other or additional stock or other securities or
property (other than cash in connection with regular or ordinary dividends) of
Insmed by way of dividend, or (ii) other or additional stock or other securities
or property (including cash) by way of spin-off, split-up, reclassification,
recapitalization, combination of shares, or similar corporate rearrangement,
then and in each case, the holder of this Warrant shall, upon the exercise
hereof, be entitled to receive, in addition to the number of shares of Common
Stock receivable thereupon, and without payment of any additional consideration
therefor, the amount of such other or additional stock or other securities or
property (including cash in the case referred to in clause (ii) above) of Insmed
which such holder would hold on the date of such exercise had it been the holder
of record of such Common Stock on the date hereof and had thereafter, during the
period from the date hereof to and including the date of such exercise, retained
such shares and/or all other additional stock available by it as aforesaid
during such period, giving effect to all adjustments called for during such
period by paragraphs (b), (c) and (d) of this Section 3.

          (b) Adjustment for Reclassification, Reorganization or Merger.  In
              ---------------------------------------------------------
case of any reclassification or change of the outstanding securities of Insmed
or of any reorganization of Insmed (or any other corporation the stock or
securities of which are at the time receivable upon the exercise of this
Warrant) or any similar corporate reorganization on or after the date hereof, or
any merger or consolidation of Insmed, or any transfer of all or substantially
all of Insmed's properties or assets to any other person or entity then and in
each such case, subject to Section 13 below, Insmed, or such successor
corporation, as the case may be, shall, without payment of any additional
consideration therefor, execute new Warrants providing that the holders of the
Warrants shall have the right to exercise such new Warrants (upon terms not less
favorable to the holders than those then applicable to the Warrants) and to
receive upon such exercise, in lieu of each share of Common Stock or other
security theretofore issuable upon exercise of the Warrants, the kind and amount
of shares of stock, other securities, money or property receivable upon such
reclassification, change, reorganization, merger or conveyance by the holder of
one share of Common Stock or other security issuable upon exercise of the
Warrants had the Warrants been exercised immediately prior to such
reclassification, change, reorganization, merger or conveyance and such new
Warrants shall provide for adjustments which shall be as nearly equivalent as
may be practicable to the adjustments provided for in this Section 3, all
subject to further adjustment as provided in this Section 3; and in each such
case, the terms of this Section 3 shall be applicable to the shares of stock or
other securities properly receivable upon the exercise of this Warrant after
such consummation.

          (c) Stock Splits and Reverse Stock Splits.  If at any time on or after
              -------------------------------------
the date hereof Insmed shall subdivide its outstanding shares of Common Stock
into a greater number of shares, the Warrant Price in effect immediately prior
to such subdivision shall thereby be proportionately reduced and the number of
shares receivable upon exercise of the Warrant shall thereby be proportionately
increased as of the effective date of such subdivision, or, if Insmed shall take
a record of holders of its Common Stock for the purpose of so subdividing, as of
such record date whichever is earlier; and, conversely, if at any time on or
after the date hereof the outstanding number of shares of Common Stock shall be
combined into a smaller number of

                                      -2-
<PAGE>

shares, the Warrant Price in effect immediately prior to such combination shall
thereby be proportionately increased and the number of shares receivable upon
exercise of Warrant shall thereby be proportionately decreased as of the
effective date of such combination, or, if Insmed shall take a record of holders
of its Common Stock for the purpose of so combining, as of such record date,
whichever is earlier.

     4.   No Fractional Shares.  No fractional shares of Warrant Shares will be
          --------------------
issued in connection with any exercise of this Warrant.  In lieu of any
fractional shares which would otherwise be issuable, Insmed shall pay cash equal
to the product of such fraction multiplied by the closing price (or average of
the bid and ask price if a closing price is not available) of one Warrant Share
as reported on the Nasdaq National Market, the Nasdaq SmallCap Market or such
other securities exchange as the Insmed Common Stock may be listed on the date
of exercise.

     5.   No Stockholder Rights.  This Warrant shall not entitle its holder to
          ---------------------
any of the rights of a stockholder of Insmed nor shall it impose any liabilities
on the holder to purchase any securities whether such liabilities are asserted
by the Company or by creditors or stockholders of the Company or otherwise.

     6.   Reservation of Stock.  Insmed covenants and agrees that all shares
          --------------------
which may be issued upon the exercise of this Warrant will, upon issuance, be
duly authorized and validly issued, fully paid and nonassessable and free and
clear of any liens or encumbrances whatsoever.  Insmed covenants and agrees that
none of the shares which may be issued upon the exercise of this Warrant will,
upon issuance, be in violation of or subject to any preemptive rights of any
person.  Insmed covenants that during the period this Warrant is exercisable,
Insmed will reserve at all times from its authorized and unissued Common Stock a
sufficient number of shares of Common Stock (or other securities, if applicable)
to provide for the issuance of Warrant Shares (or other securities) upon the
exercise of this Warrant.  Insmed agrees that its issuance of this Warrant shall
constitute full authority to its officers who are charged with the duty of
executing stock certificates to execute and issue the necessary certificates for
the Warrant Shares upon the exercise of this Warrant.

     7.   Exercise of Warrant.  This Warrant may be exercised by the holder
          -------------------
hereof, in whole or in part, by the surrender of this Warrant and the Notice of
Exercise attached hereto as Exhibit A duly completed and executed on behalf of
                            ---------
the holder hereof, manually or by facsimile transmission at the principal office
of Insmed at 800 East Leigh Street, Richmond, Virginia 23219, facsimile number
(804) 828-6894, or such other location which shall at that time be the principal
office of the Company together with payment in full of the Warrant Price then in
effect with respect to the number of Warrant Shares as to which the Warrant is
being exercised.  The Warrant Price shall be paid by wire transfer to Insmed or
cashiers check drawn on a United States bank made to the order of Insmed.  This
Warrant shall be deemed to have been exercised immediately prior to the close of
business on the date of its surrender for exercise as provided above, and the
person entitled to receive the Warrant Shares issuable upon such exercise shall
be treated for all purposes as the holder of such shares of record as of the
close of business on such date.  As promptly as practicable on or after such
date and in any event within ten (10) days thereafter, Insmed at its expense
shall cause to be issued and delivered to the person or persons

                                      -3-
<PAGE>

entitled to receive the same a certificate or certificates for the number of
full Warrant Shares issuable upon such exercise, together with cash in lieu of
any fraction of a share as provided above. The Warrant Shares issuable upon
exercise hereof shall, upon their issuance, be fully paid and nonassessable. In
the event that this Warrant is exercised in part, Insmed at its expense will
execute and deliver a new Warrant of like tenor exercisable for the number of
shares for which this Warrant may then be exercised.

     8.   Certificate of Adjustment.  Whenever the Warrant Price or number or
          -------------------------
type of securities issuable upon exercise of this Warrant is adjusted, as herein
provided, Insmed shall, at its expense, promptly deliver to the record holder of
this Warrant a certificate of an officer of Insmed setting forth the nature of
such adjustment and showing in detail the facts upon which such adjustment is
based, the method by which such adjustment was calculated (including a
description of the basis on which the Insmed's Board of Directors made any
determination hereunder), and the Warrant Price and number of shares of Common
Stock purchasable at that Warrant Price after giving effect to such adjustment,
and shall promptly cause copies of such certificate to be mailed (by first class
and postage prepaid) to the registered holder of this Warrant.

     9.   Transferability.
          ---------------

          (a) Unregistered Security.  Each holder of this Warrant acknowledges
              ---------------------
that this Warrant and the Warrant Shares have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), and agrees not to
                                         --------------
sell, pledge, distribute, offer for sale, transfer or otherwise dispose of this
Warrant or any Warrant Shares issued upon its exercise in the absence of (i) an
effective registration statement under the Securities Act as to this Warrant or
such Warrant Shares and registration or qualification of this Warrant or such
Warrant Shares under any applicable U.S. federal or state securities law then in
effect or (ii) an opinion of counsel, satisfactory to Insmed, that such
registration and qualification are not required.  Each certificate or other
instrument for Warrant Shares issued upon the exercise of this Warrant shall
bear a legend substantially to the foregoing effect.

          (b) Transferability.  Subject to the provisions of Section 9((a))
              ---------------
hereof, this Warrant and all rights hereunder are transferable, in whole or in
part, upon surrender of the Warrant with a properly executed assignment (in the
form of Exhibit B hereto) at the principal office of Insmed.
        ---------

          (c) Warrant Register.  Insmed will maintain a register containing the
              ----------------
name and address of Purchaser or its registered assign (the "Registered Holder")
                                                             -----------------
of this Warrant.  Until any transfer of this Warrant is made in the warrant
register, Insmed may treat the Registered Holder of this Warrant as the absolute
owner hereof for all purposes; provided, however, that if this Warrant is
                               --------  -------
properly assigned in blank, Insmed may (but shall not be required to) treat the
bearer hereof as the absolute owner hereof for all purposes, notwithstanding any
notice to the contrary.  Any Registered Holder may change such Registered
Holder's address as shown on the warrant register by written notice to Insmed
requesting such change.

                                      -4-
<PAGE>

          (d) Exchange.  This Warrant is exchangeable, upon the surrender hereof
              --------
by the holder hereof at the principal office of Insmed, for new Warrants of like
tenor registered in such holder's name and representing in the aggregate the
right to purchase the same number of shares purchasable under the Warrant being
exchanged, each of such new Warrants to represent the right to subscribe for and
purchase such number of shares as shall be designated by said holder at the time
of such surrender.

     10.  Notices of Record Date.  In the event of:
          ----------------------

          (a) any taking by Insmed of a record of the holders of any class of
securities for the purpose of determining the holders thereof who are entitled
to receive any dividend (other than a cash dividend payable out of earned
surplus of Insmed) or other distribution, or any right or warrants to subscribe
for, purchase or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right; or

          (b) any capital reorganization of Insmed, any reclassification or
recapitalization of the capital stock of Insmed or any transfer of all or
substantially all the assets of Insmed to or consolidation or merger of Insmed
with or into any other person; or

          (c) any voluntary or involuntary dissolution, liquidation or winding-
up of Insmed, then and in each such event Insmed will mail or cause to be mailed
to each holder of a Warrant a notice specifying (i) the date on which any such
record is to be taken for the purpose of such dividend, distribution or right,
and stating the amount and character of such dividend, distribution, right or
warrant or, if a record is not to be taken, the date as of which the holders of
Common Stock of record to be entitled to such dividend, distribution, right or
warrant are to be determined, and (ii) the date on which any such
reorganization, reclassification, recapitalization, transfer, consolidation,
merger, dissolution, liquidation or winding-up is to take place, and the time,
if any, as of which the holders of record of Common Stock (or other securities)
shall be entitled to exchange their shares of Common Stock (or other securities)
for securities or other property deliverable upon such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding-up.  Such notice shall be mailed as promptly
as practicable, but in any event at least 20 days prior to the date therein
specified.

     11.  Replacement of Warrants.  On receipt of evidence reasonably
          -----------------------
satisfactory to Insmed of the loss, theft, destruction or mutilation of any
Warrant and, in the case of any such loss, theft, destruction or mutilation of
any Warrant, on delivery of an indemnity agreement or security reasonably
satisfactory in form and amount to Insmed or, in the case of any such
mutilation, on surrender and cancellation of such Warrant, Insmed at its expense
will execute and deliver, in lieu thereof, a new Warrant of like tenor.

     12.  Miscellaneous.  This Warrant shall be governed by the laws of the
          -------------
Commonwealth of Virginia.  The headings in this Warrant are for purposes of
convenience and reference only, and shall not be deemed to constitute a part
hereof.  Neither this Warrant nor any term hereof may be changed, waived,
discharged or terminated orally but only by an instrument in writing signed by
Insmed and the registered holder of this Warrant.  All notices and other
communications from Insmed to the holder of this Warrant shall be sufficient if
in writing and

                                      -5-
<PAGE>

sent by registered or certified mail, domestic or international courier, or
facsimile, return receipt requested, postage or courier charges prepaid, to the
address furnished to Insmed in writing by Purchaser. All such notices and
communications shall be effective one (1) trading day after being sent by
courier or by facsimile with confirmation of receipt or five (5) trading days
after being sent by the other approved methods. Any party may by notice given in
accordance with this Section 12 designate another address or person for receipt
of notices hereunder. The invalidity or unenforceability of any provision hereof
shall in no way affect the validity or enforceability of any other provisions.
This Warrant shall inure to the benefit of and shall be binding upon Insmed and
the holder and their respective successors and assigns. Nothing in this Warrant,
expressed or implied, is intended to or shall confer on any person other than
Insmed and the holder, or their respective successors or assigns, any rights,
remedies, obligations or liabilities under or by reason of this Warrant.

     13.  Termination.  This Warrant (and the right to purchase securities upon
          -----------
exercise hereof) shall terminate on the earlier of (i) ________, 2005, or (ii)
the sale, conveyance, disposal, or encumbrance of all or substantially all of
Insmed's property or business or Insmed's merger into or consolidation with any
other corporation (other than a wholly-owned subsidiary corporation) or any
other transaction or series of related transactions in which more than fifty
percent (50%) of the voting power of Insmed is disposed of; provided that this
                                                            --------
Section 13(ii) shall not apply to (x) a merger effected exclusively for the
purpose of changing the domicile of Insmed, (y) with respect to the transactions
contemplated by the Reorganization Agreement, or (z) with respect to any
transaction described above if after giving effect to such transaction the
shareholders of Insmed immediately prior to such transaction will own, as a
result of their ownership in Insmed prior to the transaction, more than 20% of
the surviving entity in such transaction immediately after the closing thereof.

     14.  Remedies.  Insmed stipulates that the remedies at law of the holder of
          --------
this Warrant in the event of any default or threatened default by Insmed in the
performance of or compliance with any of the terms of this Warrant are not and
will not be adequate, and that such terms may be specifically enforced by a
decree for the specific performance of any agreement contained herein or by an
injunction against a violation of any of the terms hereof or otherwise.

     15.  Payment of Taxes.  The issuance of certificates for Warrant Shares
          ----------------
shall be made without charge to the holder for any stock transfer or other
issuance tax in respect thereto; provided, however, that the holder shall be
                                 --------  -------
required to pay any and all taxes that may be payable in respect of any transfer
involved in the issuance and delivery of any certificate in a name other than
that of the then holder of this Warrant as reflected on the books of Insmed.

     16.  Negotiability.  This Warrant is issued upon the following terms, to
          -------------
all of which each holder or owner hereof by the taking hereof consents and
agrees:

          (a) title to this Warrant may be transferred only in accordance with
the provisions of Section 9 hereunder; and

          (b) subject to the terms of Section 9, any person in possession of
this Warrant properly endorsed is authorized to represent himself as absolute
owner hereof and is empowered

                                      -6-
<PAGE>

to transfer absolute title hereto by endorsement and delivery hereof to a bona
fide purchaser hereof for value; each prior taker or owner waives and renounces
all of his right, title and interest in this Warrant in favor of each such bona
fide purchaser and each such bona fide purchaser shall acquire absolute title
hereto and to all rights represented hereby.

     17.  Assignability.  This Warrant may be assigned only in accordance with
          -------------
the provisions set forth in Section 9.

     ISSUED this __ day of ________, 2000.

                                      INSMED, INC.

                                      By:  ______________________________
                                           Geoffrey Allan, Ph.D.
                                           President and Chief Executive Officer

                                      -7-
<PAGE>

                                   EXHIBIT A
                                   ---------

                         NOTICE OF INTENT TO EXERCISE
                 (To be signed only upon exercise of Warrant)

To:  INSMED, INC.

The undersigned, the Holder of the within Warrant, hereby irrevocably elects to
exercise the purchase right represented by such Warrant for, and to purchase
thereunder, ________________ (____) shares of Common Stock of Insmed, Inc. and
herewith makes payment of ________ Dollars ($_________) thereof and requests
that the certificates for such shares be issued in the name of, and delivered to
___________________________, whose address is __________________________________
________________________________________________________________________________
________________________________________.

     DATED: _____________________

                                        _______________________________________
                                        (Signature must conform in all respects
                                        to name of Holder as specified on the
                                        face of the Warrant)

                                        _______________________________________

                                        _______________________________________
                                        (Address)
<PAGE>

                                   EXHIBIT B
                                   ---------

                                ASSIGNMENT FORM
                                ---------------

     FOR VALUE RECEIVED, ______________ hereby sells, assigns and transfers all
of the rights of the undersigned under the attached Warrant with respect to the
number of shares of Common Stock covered thereby set forth below, unto:

      Name of Assignee      Address/Fax Number       No. of Shares
      ----------------      ------------------       -------------

Dated:                             Signature: _______________________

                                              _______________________

                                   Witness:   _______________________

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