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                                                                   EXHIBIT 10.60

                            WATSON SECURITY AGREEMENT

         THIS WATSON SECURITY AGREEMENT ("Security Agreement") is made and
entered into as of March 29, 2000, by and between HALSEY DRUG CO., INC., a New
York corporation ("Borrower"), and WATSON PHARMACEUTICALS, INC., a Nevada
corporation ("Lender").

                               W I T N E S S E T H

         WHEREAS, Borrower and Lender have entered into that certain Loan
Agreement dated as of the date hereof (as the same may be amended, modified,
supplemented or restated from time to time, the "Loan Agreement"; terms which
are capitalized herein and not otherwise defined shall have the meanings
ascribed to them in the Loan Agreement); and

         WHEREAS, Lender requires, as a condition precedent to the effectiveness
of the Loan Agreement, that Borrower (i) grant to Lender a first priority lien
on all the real and personal property and assets of Borrower, now existing or
hereinafter acquired (as defined in Section II below, the "Collateral") and (ii)
execute and deliver the Security Agreement in order to secure the payment and
performance by Borrower of the Obligations.

         NOW, THEREFORE, in order to induce Lender to enter into and perform the
Loan Agreement and as consideration for Lender entering into and performing
such, Borrower hereby agrees as follows:

                                    SECTION I

                          CREATION OF SECURITY INTEREST

         Borrower hereby pledges, assigns and grants to Lender a continuing
perfected first priority lien on and security interest in all of Borrower's
right, title and interest in and to the Collateral (as defined in Section II
below) in order to secure the payment and performance of all Obligations owing
by Borrower to Lender.

                                   SECTION II

                                   COLLATERAL

         For purposes of this Security Agreement, the term "Collateral" shall
mean, with respect to Borrower, all of the kinds and types of real and personnel
property described in subsections A through F hereof, whether now owned or
hereafter at any time arising, acquired or created by Borrower and wherever
located, including all replacements, additions, accessions, substitutions,
repairs, proceeds and products relating thereto or therefrom, and all documents,
ledger sheets and files of Borrower relating thereto. "Proceeds" hereunder
include (i) whatever is now or hereafter received by Borrower upon the sale,
exchange, collection or other disposition of any item of Collateral, whether
such proceeds constitute inventory, accounts, accounts receivable, general
intangibles, instruments, securities (including, without limitation, United
States of America Treasury Bills), credits, claims, demands, documents, letters
of credit and letter of credit proceeds, chattel paper, documents of title,
certificates of title, certificates of deposit, warehouse receipts, bills of
lading, leases, deposit accounts, money, tax refund claims, contract rights,
goods or equipment and

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(ii) any such items which are now or hereafter acquired by Borrower with any
proceeds of Collateral hereunder:

       A.   Accounts. All of Borrower's accounts, whether now existing or
existing in the future, including without limitation (i) all accounts receivable
(whether or not specifically listed on schedules furnished to Lender),
including, without limitation, all accounts created by or arising from all of
Borrower's sales of goods or rendition of services made under any of Borrower's
trade names, or through any of its divisions, (ii) all the unpaid sellers'
rights (including rescission, repletion, reclamation and stoppage in transit)
relating to the foregoing or arising therefrom, (iii) all rights to any goods
represented by any of the foregoing, including returned or repossessed goods,
(iv) all reserves and credit balances held by Borrower with respect to any such
accounts receivable or account debtors and (v) all guarantees or collateral for
any of the foregoing (all of the foregoing property and similar property being
hereinafter referred to as "Accounts");

       B.   Inventory. All of Borrower's inventory, including without limitation
(i) all raw materials, work in progress, parts, components, assemblies, supplies
and materials used or consumed in Borrower's businesses, wherever located and
whether in the possession of Borrower or any other Person (for the purposes of
the Security Agreement, the term "Person" means any individual, sole
proprietorship, partnership, joint venture, trust, unincorporated organization,
association, corporation, institution, entity, party or government, including
any division, agency or department thereof); (ii) all goods, wares and
merchandise, finished or unfinished, held for sale or lease or leased or
furnished or to be furnished under contracts of service, wherever located and
whether in the possession of Borrower or any other Person or entity; and (iii)
all goods returned to or repossessed by Borrower (all of the foregoing property
being hereinafter referred to as "Inventory");

       C.   Equipment. All of the equipment owned or leased by Borrower,
including, without limitation, machinery, equipment, office equipment and
supplies, computers and related equipment, furniture, furnishings, tools,
tooling, jigs, dies, fixtures, manufacturing implements, fork lifts, trucks,
trailers, motor vehicles, and other equipment (all of the foregoing property
being hereinafter referred to as "Equipment");

       D.   Intangibles. All of Borrower's general intangibles, instruments,
securities (including without limitation United States of America Treasury
Bills), credits, claims, demands, documents, letters of credit and letter of
credit proceeds, chattel paper, documents of title, certificates of title,
certificates of deposit, warehouse receipts, bills of lading, leases which are
permitted to be assigned or pledged, deposit accounts, money, tax refund claims,
contract rights which are permitted to be assigned or pledged (all of the
foregoing property being hereinafter referred to as "Intangibles"); and

       E.   Intellectual Property. All of Borrower's intellectual property,
including, without limitation, New Drug Applications, Investigatory New Drug
Applications, Abbreviated New Drug Applications, Alternative New Drug
Applications, registrations and quotas as issued by the Drug Enforcement
Administration and/or the Attorney General of the United States pursuant to the
Controlled Substances Act, certifications, permits and approvals of federal and
state governmental agencies, patents, patent applications, trademarks, trademark
applications, service marks, service mark applications, trade names, technical
knowledge and processes, formal or informal licensing arrangements which are
permitted to be assigned or pledged, blueprints, technical specifications,
computer software, copyrights, copyright applications and other trade secrets,
and all embodiments thereof, and rights thereto, including, without limitation,
all of Borrower rights to use the patents, trademarks, copyrights, service
marks, or other property of the aforesaid nature of other Persons now

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or hereafter licensed to Borrower, together with the goodwill of the business
symbolized by or connected with Borrower's trademarks, copyrights, service
marks, licenses and the other rights included in this section II (E).

       F.   Real Property. All of Borrower's right, title and interest to real
property, including, without limitation, Borrower's right, title and interest to
the Brooklyn Facility Lease and the Congers Facility Lease.

                                   SECTION III

                    BORROWER'S REPRESENTATIONS AND WARRANTIES

       Borrower represents and warrants as follows:

       A.   Places of Business. Borrower has no places of business, or
warehouses in which it leases space, other than those set forth on Section III
A. of Schedule A, a copy of which is attached hereto and made a part hereof
("Schedule A").

       B.   Location of Collateral. Except for the movement of Collateral from
time to time from one place of business or warehouse listed on Section III A. of
Schedule A to another place of business or warehouse listed on Section III A. of
such Schedule A, the Collateral is located at Borrower's chief executive offices
or other places of business or warehouses listed on such Section III A. of
Schedule A, and not at any other location.

       C.   Restrictions on Collateral Disposition. Except as otherwise provided
in the Loan Agreement, none of the Collateral is subject to contractual
obligations that may restrict or inhibit Lender's rights or ability to sell or
dispose of the Collateral or any part thereof after the occurrence of an Event
of Default.

       D.   Status of Accounts. Each Account is based on an actual and bona fide
rendition of services to customers, made by Borrower in the ordinary course of
its business; the Accounts created are its exclusive property and are not and
shall not be subject to any lien, consignment arrangement, encumbrance, security
interest or financing statement whatsoever, except as otherwise provided in
Section III D. of Schedule A, and to the best knowledge of Borrower, Borrower's
customers have accepted the services, and owe and are obligated to pay the full
amounts stated in the invoices according to their terms, without any dispute,
offset, defense or counterclaim.

                                   SECTION IV

                              COVENANTS OF BORROWER

       Borrower agrees as follows:

       A.   Defend Against Claims. Borrower will defend the Collateral against
all claims and demands of all persons at any time claiming the same or any
interest therein unless both Lender and Borrower determine that the claim or
demand is not material and that, consequently, such defense would not be
consistent with good business judgment. Borrower will permit any lien notices
with respect to the Collateral or any portion thereof to exist or be on file in
any public office except for those in favor of Lender and those permitted under
the terms of the Loan Agreement.

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       B.   Change in Collateral Location. Borrower will not (i) change its
corporate name, (ii) change the location of its chief executive office or
establish any place of business other than those specified in Section III A. of
Schedule A, or (iii) move or permit movement of the Collateral from the
locations specified therein except from one such location to another such
location, unless in each case Borrower shall have given Lender at least thirty
(30) days prior written notice thereof, and shall have, in advance, executed and
caused to be filed and/or delivered to Lender any financing statements or other
documents required by Lender to perfect the security interest of in the
Collateral in accordance with Section IV C. hereof, all in form and substance
satisfactory to Lender.

       C.   Additional Financing Statements. Promptly upon the reasonable
request of Lender, Borrower will execute and deliver or use its reasonable
efforts to procure any document, give any notices, execute and file any
financing statements, mortgages or other documents, all in form and substance
satisfactory to Lender, mark any chattel paper, deliver any chattel paper or
instruments to Lender and take any other actions that are necessary or, in the
opinion of Lender, desirable to perfect or continue the perfection and the first
priority of Lender's security interest in the Collateral, to protect the
Collateral against the rights, claims, or interests of third persons, or to
effect the purposes of this Security Agreement. Borrower will pay the costs
incurred in connection with any of the foregoing.

       D.   Additional Liens; Transfers. Without the prior written consent of
Lender, Borrower will not, in any way, hypothecate or create or permit to exist
any lien, security interest, charge or encumbrance on or other interest in the
Collateral, other than Permitted Liens, and Borrower will not sell, transfer,
assign, pledge, collaterally assign, exchange or otherwise dispose of the
Collateral, other than the sale of Inventory in the ordinary course of business
and the sale of obsolete or worn out Equipment. Notwithstanding the foregoing,
if the proceeds of any such sale consist of notes, instruments, documents of
title, letters of credit or chattel paper, such proceeds shall be promptly
delivered to Lender to be held as Collateral hereunder. If the Collateral, or
any part thereof, is sold, transferred, assigned, exchanged, or otherwise
disposed of in violation of these provisions, the security interest of Lender
shall continue in such Collateral or part thereof notwithstanding such sale,
transfer, assignment, exchange or other disposition, and Borrower will hold the
proceeds thereof for the benefit of Lender, and promptly transfer such proceeds
to Lender in kind.

       E.   Contractual Obligations. Borrower will not enter into any
contractual obligations which may restrict or inhibit Lender's rights or ability
to sell or otherwise dispose of the Collateral or any part thereof after the
occurrence or during the continuance of an Event of Default.

       F.   Lender's Right to Protect Collateral. Upon the occurrence or
continuance of an Event of Default, Lender shall have the right at any time to
make any payments and do any other acts may deem necessary to protect the
security interests of Lender in the Collateral, including, without limitation,
the rights to pay, purchase, contest or compromise any encumbrance, charge or
lien which, in the reasonable judgment of Lender, appears to be prior to or
superior to the security interests granted hereunder, and appear in and defend
any action or proceeding purporting to affect its security interests in, and/or
the value of, the Collateral. Borrower hereby agrees to reimburse Lender for all
payments made and expenses incurred under this Security Agreement including
reasonable fees, expenses and disbursements of attorneys and paralegals acting
for Lender, including any of the foregoing payments under, or acts taken to
protect its security interests in, the Collateral, which amounts shall be
secured under this Security Agreement, and agree they shall be bound by any
payment made or act taken by Lender hereunder absent Lender's gross negligence
or willful

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misconduct. Lender shall have no obligation to make any of the foregoing
payments or perform any of the foregoing acts.

       G.   Further Obligations With Respect to Accounts. In furtherance of the
continuing assignment and security interest in the Accounts of Borrower granted
pursuant to this Security Agreement, upon the creation of Accounts, upon
Lender's request, Borrower will execute and deliver to Lender in such form and
manner as Lender may require, solely for its convenience in maintaining records
of Collateral, such confirmatory schedules of Accounts, and other appropriate
reports designating, identifying and describing the Accounts as Lender may
reasonably require. In addition, upon Lender's request, Borrower shall provide
Lender with copies of agreements with, or purchase orders from, the customers of
Borrower and copies of invoices to customers, proof of shipment or delivery and
such other documentation and information relating to said Accounts and other
Collateral as Lender may reasonably require. Furthermore, upon Lender's request,
Borrower shall deliver to Lender any documents or certificates of title issued
with respect to any property included in the Collateral, and any promissory
notes, letters of credit or instruments related to or otherwise in connection
with any property included in the Collateral, which in any such case came into
the possession of Borrower, or shall cause the issuer thereof to deliver any of
the same directly to Lender, in each case with any necessary endorsements in
favor of Lender. Failure to provide Lender with any of the foregoing shall in no
way affect, diminish, modify or otherwise limit the security interests granted
herein. Borrower hereby authorizes Lender to regard Borrower's printed name or
rubber stamp signature on assignment schedules or invoices as the equivalent of
a manual signature by Borrower's authorized officers or agents.

       H.   Insurance. Borrower agrees to maintain public liability insurance,
third party property damage insurance and replacement value insurance on the
Collateral under such policies of insurance, with such insurance companies, in
such amounts and covering such risks as are at all times satisfactory to Lender
in its commercially reasonable judgment. All policies covering the Collateral
are to name Lender as an additional insured and the loss payee in case of loss,
and are to contain such other provisions as Lender may reasonably require to
fully protect Lender's interest in the Collateral and to any payments to be made
under such policies.

       I.   Taxes. Borrower agrees to pay, when due, all taxes lawfully levied
or assessed against Borrower or any of the Collateral before any penalty or
interest accrues thereon; provided, however, that, unless such taxes have become
a Federal tax or Employment Retirement Security Income Act lien on any of the
assets of Borrower, no such tax need be paid if the same is being contested, in
good faith, by appropriate proceedings promptly instituted and diligently
conducted and if an adequate reserve or other appropriate provision shall have
been made therefor as required in order to be in conformity with generally
accepted accounting principles and procedures in effect in the United States of
America.

       J.   Compliance with Laws. Borrower agrees to comply in all material
respects with all requirements of law applicable to the Collateral or any part
thereof, or to the operation of its business or its assets generally, unless
Borrower contests any such requirements of law in a reasonable manner and in
good faith. Borrower agrees to maintain in full force and effect, its respective
licenses and permits granted by any governmental authority as may be necessary
or advisable for Borrower to conduct its business in all material respects.

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       K.   Maintenance of Property. Borrower agrees to keep all property useful
and necessary to its business in good working order and condition (ordinary wear
and tear excepted) and not to commit or suffer any waste with respect to any of
their properties.

       L.   Environmental and Other Matters. Borrower will conduct its business
so as to comply in all material respects with all environmental, land use,
occupational, safety or health laws, regulations, directions, ordinances,
criteria and guidelines in all jurisdictions in which it is or may at any time
be doing business, except to the extent that Borrower is contesting, in good
faith by appropriate legal, administrative or other proceedings, any such law,
regulation, direction, ordinance, criteria, guideline, or interpretation thereof
or application thereof; provided, further, that Borrower shall comply with the
order of any court or other governmental authority relating to such laws unless
Borrower shall currently be prosecuting an appeal, proceedings for review or
administrative proceedings and shall have secured a stay of enforcement or
execution or other arrangement postponing enforcement or execution pending such
appeal, proceedings for review or administrative proceedings.

       M.   Further Assurances. Borrower shall take all such further actions and
execute all such further documents and instruments (including, but not limited
to, collateral assignments of Intellectual Property and Intangibles or any
portion thereof) as Lender may at any time reasonably determine in its sole
discretion to be necessary or desirable to further carry out and consummate the
transactions contemplated by the Loan Agreement and the documentation relating
thereto, including the Security Agreement, and to perfect or protect the liens
(and the priority status thereof) of Lender in the Collateral.

                                    SECTION V

                                    REMEDIES

       A.   Obtaining the Collateral Upon Default. If any Event of Default shall
have occurred and be continuing, then and in every such case, subject to any
mandatory requirements of applicable law then in effect, Lender, in addition to
any rights now or hereafter existing under applicable law, shall have all rights
as a secured creditor under the Uniform Commercial Code in all relevant
jurisdictions and may:

            (a)     personally, or by agents or attorneys, immediately retake
       possession of the Collateral or any part thereof, from Borrower or any
       other Person who then has possession of any part thereof, with or
       without notice or process of law, and for that purpose may enter upon
       Borrower's premises where any of the Collateral is located and remove
       the same and use in connection with such removal any and all services,
       supplies, aids and other facilities of Borrower;

            (b)     instruct the obligor or obligors on any agreement,
       instrument or other obligation (including, without limitation, the
       Accounts) constituting the Collateral to make any payment required by
       the terms of such instrument or agreement directly to Lender;

            (c)     withdraw all monies, securities and instruments held
       pursuant to any pledge arrangement for application to the Obligations;

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            (d)     sell, assign or otherwise liquidate, or direct Borrower to
       sell, assign or otherwise liquidate, any or all of the Collateral or
       any part thereof, and take possession of the proceeds of any such sale
       or liquidation;

            (e)     take possession of the Collateral or any part thereof, by
       directing Borrower in writing to deliver the same to Lender at any
       place or places designated by Lender, in which event Borrower shall at
       its own expense:

                     (i)   forthwith cause the same to be moved to the place
            or places so designated by Lender and there delivered to Lender,

                     (ii)  store and keep any Collateral so delivered to Lender
            at such place or places pending further action by Lender as
            provided in Section V B., and

                     (iii) while the Collateral shall be so stored and kept,
            provide such guards and maintenance services as shall be necessary
            to protect the same and to preserve and maintain the Collateral in
            good condition; it being understood that Borrower's obligation to
            so deliver the Collateral is of the essence of this Security
            Agreement and that, accordingly, upon application to a court of
            equity having jurisdiction, Lender shall be entitled to a decree
            requiring specific performance by Borrower of said obligation.

       B.   Disposition of the Collateral. Any collateral repossessed by Lender
under or pursuant to Section V A. and any other Collateral whether or not so
repossessed by Lender, may be sold, assigned, leased or otherwise disposed of
under one or more contracts or as an entirety, and without the necessity of
gathering at the place of sale the property to be sold, and in general in such
manner, at such time or times, at such place or places and on such terms as
Lender may, in compliance with any mandatory requirements of applicable law,
determine to be commercially reasonable. Any of the Collateral may be sold,
leased or otherwise disposed of, in the condition in which the same existed when
taken by Lender or after any overhaul or repair which Lender shall determine to
be commercially reasonable. Any such disposition which shall be a private sale
or other private proceedings permitted by such requirements shall be made upon
not less than ten (10) days' written notice to Borrower specifying the time at
which such disposition is to be made and the intended sale price or other
consideration therefor, and shall be subject, for the ten (10) days after the
giving of such notice, to the right of Borrower or any nominee of Borrower to
acquire the Collateral involved at a price or for such other consideration at
least equal to the intended sale price or other consideration so specified. Any
such disposition which shall be a public sale permitted by such requirements
shall be made upon not less than ten (10) days' written notice to Borrower
specifying the time and place of such sale and, in the absence of applicable
requirements of law, shall be by public auction (which may, at the option of
Lender, be subject to reserve), after publication of notice of such auction not
less than ten (10) days prior thereto in two (2) newspapers in general
circulation in the City of New York as Lender may determine. To the extent
permitted by any such requirement of law, Lender may bid for and become the
purchaser of the Collateral or any item thereof, offered for sale in accordance
with this Section without accountability to Borrower (except to the extent of
surplus money received). If, under mandatory requirements of applicable law,
Lender shall be required to make disposition of the Collateral within a period
of time which does not permit the giving of notice to Borrower as herein above
specified, Lender need give Borrower only such notice of disposition as shall be
reasonably practicable in view of such mandatory requirements of applicable law.

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       C.   Power of Attorney. Borrower hereby irrevocably authorizes and
appoints Lender, or any Person that Lender may designate, as Borrower's
attorney-in-fact, at Borrower's cost and expense, to exercise all of the
following powers upon and at any time after the occurrence and during the
continuance of an Event of Default, which powers, being coupled with an
interest, shall be irrevocable until all of the Obligations owing by Borrower
shall have been paid and satisfied in full:

            (a)     accelerate or extend the time of payment, compromise,
issue credits, bring suit or administer and otherwise collect Accounts or
proceeds of any Collateral;

            (b)     receive, open and dispose of all mail addressed to
Borrower and notify postal authorities to change the address for delivery
thereof to such address as Lender may designate;

            (c)     give customers indebted on Accounts notice of Lender's
interest therein, and/or to instruct such customers to make payment directly to
Lender for Borrower's account;

            (d)     convey any item of Collateral to any purchaser thereof;

            (e)     give any notices or record any liens under Section IV C.
hereof; and

            (f)     make any payments or take any acts under Section IV F.
hereof.

Lender's authority under this Section V C. shall include, without limitation,
the authority to execute and give receipt for any certificate of ownership or
any document, transfer title to any item of Collateral, sign Borrower's name on
all financing statements or any other documents deemed necessary or appropriate
to preserve, protect or perfect the security interest in the Collateral and to
file the same, prepare, file and sign Borrower's name on any notice of lien,
assignment or satisfaction of lien or similar document in connection with any
Account and prepare, file and sign Borrower's name on a proof of claim in
bankruptcy or similar document against any customer of Borrower, and to take any
other actions arising from or incident to the rights, powers and remedies
granted to Lender in this Security Agreement. This power of attorney is coupled
with an interest and is irrevocable by Borrower.

       D.   Waiver of Claims. Except as otherwise provided in this Security
Agreement, BORROWER HEREBY WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW,
NOTICE AND JUDICIAL HEARING IN CONNECTION WITH LENDER'S TAKING POSSESSION OF OR
DISPOSING OF ANY OF THE COLLATERAL, INCLUDING, WITHOUT LIMITATION, ANY AND ALL
PRIOR NOTICE AND HEARING FOR ANY PREJUDGMENT REMEDY OR REMEDIES AND ANY SUCH
RIGHT WHICH BORROWER WOULD OTHERWISE HAVE UNDER THE CONSTITUTION OR ANY STATUTE
OF THE UNITED STATES OR OF ANY STATE, and Borrower hereby further waives, to the
extent permitted by law:

            (a)     all damages occasioned by such taking of possession except
any damages which are the direct result of Lender's gross negligence or willful
misconduct;

            (b)     all other requirements as to the time, place and terms of
sale or other requirements with respect to the enforcement of Lender's rights
hereunder, except as expressly provided herein; and

            (c)     all rights of redemption, appraisement, valuation, stay,
extension or moratorium now or hereafter in force under any applicable law in
order to prevent or delay the

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enforcement of this Security Agreement or the absolute sale of the Collateral or
any portion thereof, and Borrower, for itself and all who may claim under it,
insofar as it or they now or hereafter lawfully may, hereby waives the benefit
of all such laws.

Any sale of, or the grant of options to purchase, or any other realization upon
any Collateral shall operate to divest all right, title, interest, claim and
demand, either at law or in equity, of Borrower therein and thereto, and shall
be a perpetual bar both at law and in equity against Borrower and against any
and all persons claiming or attempting to claim the Collateral so sold, optioned
or realized upon, or any part thereof, from, through and under Borrower.

       E.   Remedies Cumulative. Each and every right, power and remedy hereby
specifically given to Lender shall be in addition to every other right, power
and remedy specifically given under this Security Agreement, under the Loan
Agreement or under other documentation relating thereto or now or hereafter
existing at law or in equity, or by statute, and each and every right, power and
remedy whether specifically herein given or otherwise existing may be exercised
from time to time or simultaneously and as often and in such order as may be
deemed expedient by Lender. All such rights, powers and remedies shall be
cumulative and the exercise or the beginning of exercise of one shall not be
deemed a waiver of the right to exercise of any other or others. No delay or
omission of Lender in the exercise of any such right, power or remedy and no
renewal or extension of any of the Obligations shall impair any such right,
power or remedy or shall be construed to be a waiver of any Default or Event of
Default or any acquiescence therein.

                                   SECTION VI

                            MISCELLANEOUS PROVISIONS

       A.   Notices. All notices, approvals, consents or other communications
required or desired to be given hereunder shall be delivered in person, by
facsimile transmission followed promptly by first class mail or by overnight
mail, and delivered if to Borrower, then to the attention of Mr. Michael
Reicher, c/o Halsey Drug. Co., Inc., 695 No. Perryville Road, Rockford,
Illinois, 61107, fax no. (815) 399-9710, with a copy to John P. Reilly, Esq.,
c/o St. John & Wayne, L.L.C., 2 Penn Plaza East, Newark, New Jersey 07105, fax
no. (973) 491-3407, and if to Lender, then to the attention of the Chief
Financial Officer, c/o Watson Pharmaceuticals, Inc., 311 Bonnie Circle, Corona,
California, 92880, fax no. (909) 279-8094 (courtesy copy to Robert Funsten,
Esq., General Counsel), with a copy to Lawrence B. Cohn, c/o Stradling Yocca
Carlson & Rauth, 660 Newport Center Drive, Newport Beach, CA 92660, fax no.
(949) 725-4100.

       B.   Headings. The headings in this Security Agreement are for purposes
of reference only and shall not affect the meaning or construction of any
provision of this Security Agreement.

       C.   Severability. The provisions of this Security Agreement are
severable, and if any clause or provision shall be held invalid or unenforceable
in whole or in part in any jurisdiction, then such invalidity or
unenforceability shall affect, in that jurisdiction only, such clause or
provision, or part thereof, and shall not in any manner affect such clause or
provision in any other jurisdiction or any other clause or provision of the
Security Agreement in any jurisdiction.

       D.   Amendments, Waivers and Consents. Any amendment or waiver of any
provision of the Security Agreement and any consent to any departure by Borrower
from any provision of the Security Agreement shall be effective only if made or
given in writing signed by Lender.

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       E.   Interpretation of Agreement. Time is of the essence in each
provision of this Security Agreement of which time is an element. All terms not
defined herein shall have the meaning set forth in the applicable Uniform
Commercial Code. Acceptance of or acquiescence in a course of performance
rendered under the Security Agreement shall not be relevant in determining the
meaning of the Security Agreement even though the accepting or acquiescing party
had knowledge of the nature of the performance and opportunity for objection.

       F.   Continuing Security Interest. The Security Agreement shall create a
continuing security interest in the Collateral and shall (i) remain in full
force and effect until indefeasible payment in full of the Obligations owing by
Borrower, (ii) be binding upon Borrower, and its successors and assigns and
(iii) inure to the benefit of Lender and its successors and assigns.

       G.   Reinstatement. To the extent permitted by law, the Security
Agreement shall continue to be effective or be reinstated if at any time any
amount received by Lender in respect of the Obligations owing by Borrower is
rescinded or must otherwise be restored or returned by Lender upon the
occurrence or during the pendency of any Event of Default, all as though such
payments had not been made.

       H.   Survival of Provisions. All representations, warranties and
covenants of Borrower contained herein shall survive the execution and delivery
of this Security Agreement, and shall terminate only upon the full and final
indefeasible payment and performance by Borrower of the Obligations secured
hereby.

       I.   Setoff.  Lender shall have all rights of setoff available at law or
in equity.

       J.   Power of Attorney. In addition to the powers granted to Lender under
Section V C., Borrower hereby irrevocably authorizes and appoints Lender, or any
Person that Lender may designate, as Borrower's attorney-in-fact, at Borrower's
cost and expense, to exercise all of the following powers, which being coupled
with an interest, shall be irrevocable until all of the Obligations shall have
been indefeasibly paid and satisfied in full:

            (a) after the occurrence of an Event of Default, to receive,
take, endorse, sign, assign and deliver, all in the name of Lender or Borrower,
any and all checks, notes, drafts, and other documents or instruments relating
to the Collateral; and

            (b) to request, at any time from customers indebted on
Accounts, verification of information concerning the Accounts and the amounts
owing thereon.

       K.   Indemnification; Authority of Lender. Neither Lender nor any
director, officer, employee, attorney or agent of Lender shall be liable to
Borrower for any action taken or omitted to be taken by it or them hereunder,
except for its or their own gross negligence or willful misconduct, nor shall
Lender be responsible for the validity, effectiveness or sufficiency of the
Security Agreement or of any document or security furnished pursuant hereto.
Lender and its directors, officers, employees, attorneys and agents shall be
entitled to rely on any communication, instrument or document reasonably
believed by it or them to be genuine and correct and to have been signed or sent
by the proper person or persons. Borrower agrees to indemnify and hold harmless
Lender and any other person from and against any and all costs, expenses
(including reasonable fees, expenses and disbursements of attorneys and
paralegals (including, without duplication, reasonable charges of inside
counsel)), claims or liability incurred by Lender or such person hereunder,
unless such claim

                                       10
<PAGE>   11

or liability shall be due to willful misconduct or gross negligence on the part
of Lender or such person.

       L.   Release; Termination of Agreement. Subject to the provisions of
Section VI G. hereof, this Security Agreement shall terminate upon full and
final indefeasible payment and performance of all the Obligations owing by
Borrower. At such time, Lender shall, at the request of Borrower, reassign and
redeliver to Borrower all of the Collateral hereunder which has not been sold,
disposed of, retained or applied by Lender in accordance with the terms hereof.
Such reassignment and redelivery shall be without warranty by or recourse to
Lender, except as to the absence of any prior assignments by Lender of its
interest in the Collateral, and shall be at the expense of Borrower.

       M.   Counterparts. The Security Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which shall
together constitute one and the same agreement.

       N.   GOVERNING LAW. THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THE
SECURITY AGREEMENT AND ANY DISPUTE ARISING OUT OF OR IN CONNECTION WITH THIS
SECURITY AGREEMENT, WHETHER SOUNDING IN CONTRACT, TORT, EQUITY OR OTHERWISE,
SHALL BE GOVERNED BY THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICTS OF LAWS
PROVISIONS) AND DECISIONS OF THE STATE OF CALIFORNIA.

       O.   SUBMISSION TO JURISDICTION. ALL DISPUTES BETWEEN BORROWER AND
LENDER, WHETHER SOUNDING IN CONTRACT, TORT, EQUITY OR OTHERWISE, SHALL BE
RESOLVED ONLY BY STATE AND FEDERAL COURTS LOCATED IN ORANGE COUNTY, CALIFORNIA,
AND THE COURTS TO WHICH AN APPEAL THEREFROM MAY BE TAKEN; PROVIDED, HOWEVER,
THAT LENDER SHALL HAVE THE RIGHT, TO THE EXTENT PERMITTED BY APPLICABLE LAW, TO
PROCEED AGAINST BORROWER OR ITS PROPERTY IN ANY LOCATION REASONABLY SELECTED BY
LENDER IN GOOD FAITH TO ENABLE LENDER TO REALIZE ON SUCH PROPERTY, OR TO ENFORCE
A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF LENDER. BORROWER AGREES THAT IT WILL
NOT ASSERT ANY PERMISSIVE COUNTERCLAIMS, SETOFFS OR CROSS-CLAIMS IN ANY
PROCEEDING BROUGHT BY LENDER. BORROWER WAIVES ANY OBJECTION THAT IT MAY HAVE TO
THE LOCATION OF THE COURT IN WHICH LENDER HAS COMMENCED A PROCEEDING, INCLUDING,
WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON FORUM NON
CONVENIENS.

       P.   SERVICE OF PROCESS. BORROWER HEREBY IRREVOCABLY AGREES THAT SERVICE
OF PROCESS IN ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS SECURITY
AGREEMENT MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED
MAIL, POSTAGE PREPAID, TO BORROWER AT ITS ADDRESS SET FORTH IN SECTION VI A.
HEREOF.

       Q.   JURY TRIAL.  BORROWER AND LENDER EACH HEREBY WAIVE ANY RIGHT TO A
TRIAL BY JURY.

       R.   LIMITATION OF LIABILITY. LENDER SHALL NOT HAVE ANY LIABILITY TO
BORROWER (WHETHER SOUNDING IN TORT, CONTRACT, OR OTHERWISE) FOR LOSSES SUFFERED
BY BORROWER IN CONNECTION WITH, ARISING OUT OF, OR IN

                                       11
<PAGE>   12

ANY WAY RELATED TO THE TRANSACTIONS OR RELATIONSHIPS CONTEMPLATED BY THIS
SECURITY AGREEMENT, OR ANY ACT, OMISSION OR EVENT OCCURRING IN CONNECTION
THEREWITH, UNLESS IT IS DETERMINED BY A FINAL AND NONAPPEALABLE JUDGMENT OR
COURT ORDER BINDING ON LENDER, THAT THE LOSSES WERE THE RESULT OF ACTS OR
OMISSIONS CONSTITUTING GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.

       S.   Delays; Partial Exercise of Remedies. No delay or omission of Lender
to exercise any right or remedy hereunder, whether before or after the happening
of any Event of Default, shall impair any such right or shall operate as a
waiver thereof or as a waiver of any such Event of Default. No single or partial
exercise by Lender of any right or remedy shall preclude any other or further
exercise thereof, or preclude any other right or remedy.

       IN WITNESS WHEREOF, Borrower has caused this Security Agreement to be
duly executed and delivered as of the day and year first above written.

                             HALSEY DRUG CO, INC.,
                             a New York corporation

                             By: /s/ Michael Reicher
                                  Name:
                                  Title: Chief Executive Officer

By its acceptance hereof, as of the day and year first above written, Lender
agrees to be bound by the provisions hereof applicable to it.

                             WATSON PHARMACEUTICALS, INC.,
                             a Nevada corporation

                             By: /s/ Robert C. Funsten
                                  Name:
                                  Title: Senior Vice President

                                       12<PAGE>   1

                                                                  EXHIBIT 10.61

                          WATSON STOCK PLEDGE AGREEMENT

         THIS WATSON STOCK PLEDGE AGREEMENT (this "Agreement") dated as of March
29, 2000, is executed by HALSEY DRUG CO., INC., a New York corporation (the
"Pledgor"), in favor of WATSON PHARMACEUTICALS, INC., a Nevada corporation (the
"Pledgee").

         WHEREAS, Pledgor and Pledgee have entered into that certain Loan
Agreement dated as of the date hereof (as the same may be amended, modified,
supplemented or restated from time to time, the "Loan Agreement"; terms which
are capitalized herein and not otherwise defined shall have the meanings
ascribed to them in the Loan Agreement); and

         WHEREAS, it is a condition precedent to the effectiveness of the Loan
Agreement that Pledgor shall have executed this Agreement and made the pledges
referred to herein in favor of Pledgee.

         NOW, THEREFORE, to induce Pledgee to enter into and perform the Loan
Agreement and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Pledgor hereby agrees with Pledgee
as follows:

         1.   Definitions. Unless the context otherwise requires, all terms used
but not expressly defined herein shall have the meanings given to them in the
Loan Agreement, or, if they are not defined in the Loan Agreement, but are
defined in the California Uniform Commercial Code (the "Code"), they shall have
the same meaning herein as in the Code.

         2.   Pledge of the Pledged Stock; Power of Attorney.

              (a) As security for the prompt payment and performance when
due of the Obligations, Pledgor hereby pledges and grants to Pledgee a lien on
and security interest in the following (collectively the "Pledged Collateral"):
(i) all of the issued and outstanding shares of common stock of each of Halsey
Pharmaceuticals, Inc. ("HP, Inc." or a "Subsidiary"), Houba, Inc. ("Houba" or a
"Subsidiary," and together with HP, Inc., the "Subsidiaries") which shares are
more particularly described on Schedule A hereto (the "Pledged Stock"), (ii) all
additional shares of common stock at any time issued to Pledgee by any of HP,
Inc., and Houba, (iii) the certificates evidencing all such shares and
securities, (iv) subject to Section 6 hereof, all dividends, cash, instruments
and other property from time to time received, receivable or otherwise
distributed in respect of or in exchange for any or all of the Pledged Stock and
such shares and securities and (v) all proceeds of any of the foregoing
(including, without limitation, proceeds constituting any property of the types
described above). Pledgor shall deliver to Pledgee original stock certificates
for all of the Pledged Stock, each accompanied by an undated stock power
executed in blank by Pledgor.

              (b) Pledgee shall have no obligation with respect to the Pledged
Collateral or any other property held or received by it hereunder except
to use reasonable care in the custody thereof to the extent required by law.
Pledgee may hold the Pledged Collateral in the form in which it is received by
it.

              (c) Pledgor, to the full extent permitted by law, hereby
constitutes and irrevocably appoints Pledgee (and any officer or agent of
Pledgee, with full power of substitution and revocation) as Pledgor's true and
lawful attorney-in-fact, in Pledgor's stead and in the name of Pledgor or in
the name of Pledgee, to transfer, upon the occurrence and during the
continuance of an

<PAGE>   2

Event of Default (as hereinafter defined) or at any time Pledgee, based on all
the facts and circumstances then existing, and in the exercise of its
commercially reasonable credit judgment, reasonably believes in good faith, and
has so notified Pledgor in writing, that, in connection with the Loan Agreement
and the agreements, documents and instruments delivered by Pledgor pursuant
thereto or in connection therewith, fraud has occurred with respect to Pledgor
or any other Person (for the purposes of this Agreement, the term "Person" means
any individual, sole proprietorship, partnership, joint venture, trust,
unincorporated organization, association, corporation, institution, entity,
party or government, including any division, agency or department thereof),
controlling, controlled by, or under common control with Pledgor which has a
material adverse effect on the operations or condition (financial or otherwise)
of Pledgor and its subsidiaries, taken as a whole (a "Fraud"), the Pledged
Collateral on the books of HP, Inc. and Houba, as applicable, in whole or in
part, to the name of Pledgee or such other Person or Persons as Pledgee may
designate and, upon the occurrence and during the continuance of an Event of
Default or at any time Pledgee, based on all the facts and circumstances then
existing, and in the exercise of its commercially reasonable credit judgment,
reasonably believes in good faith, and has so notified Pledgor in writing, that
Fraud has occurred, to take all such other and further actions as Pledgor could
have taken with respect to the Pledged Collateral which Pledgee in its
reasonable judgment determines to be necessary or appropriate to accomplish the
purposes of this Agreement.

            (d)     The powers of attorney granted pursuant to this Agreement
and all authority hereby conferred are granted and conferred solely to protect
Pledgee's interests in the Pledged Collateral and shall not impose any duty upon
the attorney-in-fact to exercise such powers. Such powers of attorney shall be
irrevocable prior to the payment in full of the Obligations, and, shall not be
terminated prior thereto or affected by any act of Pledgor or other Persons or
by operation of law.

            (e)     Except to the extent that Pledgee releases its pledge of
any of the Pledged Collateral, each Person who shall be a transferee of the
beneficial ownership of any of Pledged Collateral shall be deemed to have
irrevocably appointed Pledgee, with full power of substitution and revocation,
as such Person's true and lawful attorney-in-fact in such Person's name and
otherwise to do any and all acts herein permitted and to exercise any and all
powers herein conferred; provided, however, no Person shall exercise any such
power of attorney unless an Event of Default shall have occurred and be
continuing.

       3.   Rights of Pledgor; Voting.

            (a)     During the term of this Agreement, and so long as no Voting
Notice (as defined below) is received from Pledgee following the occurrence and
during the continuance of an Event of Default as hereinafter provided in this
Section 3, Pledgor shall have the right to vote any of the Pledged Collateral in
all corporate matters except those which would contravene this Agreement, the
Loan Agreement or the agreements, documents and instruments delivered by Pledgor
and each Subsidiary pursuant thereto unless Pledgee consents thereto.

            (b)     Upon the occurrence and during the continuance of an Event
of Default or from and after such time as Pledgee has notified Pledgor in
writing that based on all the facts and circumstances than existing, and in the
exercise of its commercially reasonable judgment, Pledgee reasonably believes in
good faith that Fraud has occurred, Pledgor shall give Pledgee at least five (5)
days' prior notice of (i) any meeting of stockholders of any of the Subsidiaries
or any meeting of directors convened for any purpose and (ii) any written
consent which Pledgor proposes to execute as the stockholder of any of the
Subsidiaries or which any of the representatives of Pledgor proposes to

                                       2
<PAGE>   3

execute as a director of any of the Subsidiaries. During the continuance of an
Event of Default, Pledgor hereby authorizes Pledgee to send its agents and
representatives to any such meeting of shareholders or directors of any of one
of the Subsidiaries that Pledgee wishes to attend, and agrees to take such
steps as may be necessary to confirm and effectuate such authority, including,
without limitation, causing such Subsidiary to give reasonable prior written
notice to Pledgee of the time and place of any such meeting and the principal
actions to be taken thereat.

            (c)     Notwithstanding the occurrence of an Event of Default,
Pledgor may continue to exercise the voting rights of Pledgor as herein
described (and subject to the limitations herein) except to the extent that
Pledgee may elect to exercise voting power (as determined by it in its sole
discretion) by a written notice given to Pledgor at any time during the
continuance of an Event of Default (a "Voting Notice"), whereupon Pledgee shall
have the exclusive right during the continuance of an Event of Default to
exercise such rights to the extent specified in such Voting Notice, and Pledgor
shall take all such steps as may be necessary to effectuate such rights until
Pledgee notifies Pledgor of the release of such rights. Once any such Event of
Default has been cured or waived, any relevant Voting Notice shall be deemed to
be rescinded.

       4.   No Restrictions on Transfer. Pledgor warrants and represents that
there are no restrictions on the transfer of the Pledged Stock except for such
restrictions imposed by operation of law, that there are no options, warrants or
rights pertaining thereto, and that Pledgor has the right to transfer Pledged
Stock free of any encumbrances and without the consent of the creditors of
Pledgor or the consent of any of the Subsidiaries or any other Person or any
governmental agency whatsoever.

       5.   No Transfer or Liens; Additional Securities. Pledgor agrees that it
will not sell, transfer or convey any interest in, or suffer or permit any lien
or encumbrance to be created upon or with respect to, any of the Pledged
Collateral during the term of this Agreement, except to or in favor of Pledgee,
or as agreed to in advance by Pledgee in accordance with the terms of the Loan
Agreement. Pledgor shall not cause, suffer or permit any Subsidiary to issue any
common or preferred stock, or any other equity security, to any Person, unless
Pledgee otherwise consents in writing (which consent may be withheld in
Pledgee's reasonable credit judgment).

       6.   Adjustments of Capital Stock; Payment and Application of Dividends.
In the event that during the term of this Agreement any stock dividend,
reclassification, readjustment or other change is declared or made in the
capital structure of any Subsidiary or if any other or additional shares of
stock of any Subsidiary are issued to Pledgor, all new, substituted and
additional shares or other securities issued by reason of any such change or
acquisition shall immediately be delivered by Pledgor to Pledgee and shall be
deemed to be part of the "Pledged Collateral" under the terms of this Agreement
in the same manner as the shares of stock originally pledged hereunder. Upon the
occurrence and during the continuance of an Event of Default, all cash dividends
received by or payable to Pledgor in respect of the Pledged Collateral,
including any additional shares of stock received by Pledgor as a result of
Pledgor's record ownership of the Pledged Stock, shall immediately be delivered
by Pledgor to Pledgee, to be held by Pledgee as Pledged Collateral hereunder or
to be applied by Pledgee against the Obligations. Upon the occurrence and during
the continuance of an Event of Default, Pledgor will not demand and will not be
entitled to receive, any cash dividends or other income, interest or property in
or with respect to the Pledged Collateral, and if Pledgor receives any of the
same, Pledgor shall immediately deliver it to Pledgee to be held by it and
applied as provided in the preceding sentence.

                                       3
<PAGE>   4

       7.   Warrants and Options. In the event that during the term of this
Agreement subscription warrants or other rights or options shall be issued to
Pledgor in connection with the Pledged Collateral, all such stock warrants,
rights and options shall forthwith be assigned to Pledgee by Pledgor, and said
stock warrants, rights and options shall be, and, if exercised by Pledgor, all
new stock issued pursuant thereto shall be, pledged by Pledgor to Pledgee to be
held as, and shall be deemed to be part of, the Pledged Collateral under the
terms of this Agreement in the same manner as the shares of capital stock
originally pledged hereunder.

       8.   Return of Pledged Collateral Upon Termination. Upon the release,
satisfaction, discharge or termination of all of the Obligations and the
termination of the Loan Agreement, Pledgee shall cause to be transferred or
returned to Pledgor all of the stock pledged by Pledgor herein and any money,
property and rights received by Pledgee pursuant hereto, to the extent Pledgee
has not taken, sold or otherwise realized upon the same as permitted hereunder,
together with all other documents reasonably required by Pledgor to evidence
termination of the pledge contemplated hereby.

       9.   Events of Default; Remedies.

            (a)     Upon the occurrence and during the continuance of any Event
of Default (as defined below), Pledgee shall have and at any time may exercise
with respect to the Pledged Collateral, the proceeds thereof, and any other
property or money held by Pledgee hereunder, all rights and remedies available
to it under law, including, without limitation, those given, allowed or
permitted to a secured party by or under the Code, and all rights and remedies
provided for herein. "Event of Default" shall mean the occurrence of an Event of
Default as defined in the Loan Agreement.

            (b)     Without limiting the foregoing, in the event that Pledgee
elects to sell the Pledged Stock (such term including, for purposes of this
Section 9, the Pledged Stock and all other shares of stock or securities at any
time forming part of the Pledged Collateral), Pledgee shall have the power and
right in connection with any such sale, exercisable at its option and in its
absolute discretion, to sell, assign, and deliver the whole or any part of the
Pledged Stock or any additions thereto at a private or public sale for cash, on
credit or for future delivery and at such price as Pledgee deems to be
satisfactory. Notice of any public sale shall be sufficient if it describes the
Pledged Collateral to be sold in general terms, and is published at least once
in the New York Times not less than ten (10) days prior to the date of sale. If
the New York Times is not then being published, publication may be made in lieu
thereof in any newspaper then being circulated in the City of New York, New
York, as Pledgee may elect. All requirements of reasonable notice under this
Section 9 shall be met if such notice is mailed, postage prepaid at least ten
(10) days before the time of such sale or disposition, to Pledgor at its address
set forth in Section 16 hereto or such other address as Pledgor may have, in
writing, provided to Pledgee. Pledgee may, if it deems it reasonable, postpone
or adjourn any sale of any collateral from time to time by an announcement at
the time and place of the sale to be so postponed or adjourned without being
required to give a new notice of sale.

            (c)     Because federal and state securities laws may restrict the
methods of disposition of the Pledged Stock which are readily available to
Pledgee, and specifically because a public sale thereof may be impossible or
impracticable by reason of certain restrictions under the Securities Act of
1933, as amended, or under applicable Blue Sky or other state securities laws as
now or hereafter in effect, Pledgor agrees that Pledgee may from time to time
attempt to sell the Pledged Stock by means of a private placement restricting
the offering or sale to a limited number of

                                       4
<PAGE>   5

prospective purchasers who meet suitability standards Pledgee deems appropriate
and who agree that they are purchasing for their own accounts for investment and
not with a view to distribution, and Pledgee's acceptance of the highest offer
obtained therefrom shall be deemed to be a commercially reasonable disposition
of the Pledged Stock. To the extent permitted by law, Pledgee or its assigns may
purchase all or any part of the Pledged Stock and any purchaser thereof shall
thereafter hold the same absolutely free from any right or claim of any kind. To
the fullest extent permitted by law, Pledgee shall not be obligated to make any
such sale pursuant to notice and may, without notice or publication, adjourn any
public or private sale by announcement at the time and place fixed for the sale,
and such sale may be held at any time or place to which the same may be
adjourned. If any of the Pledged Stock is sold by Pledgee upon credit or for
future delivery, Pledgee shall not be liable for the failure of the purchaser to
pay for same and, in such event, Pledgee may resell such Pledged Stock and
Pledgor shall continue to be liable to Pledgee for the full amount of the
Obligations to the extent Pledgee does not receive full and final payment in
cash therefor.

            (d)     Except as otherwise provided in the Loan Agreement or by
applicable law, Pledgee shall have the sole right to determine the order in
which Obligations shall be deemed discharged by the application of the proceeds
of Pledged Stock or any other property or money held hereunder or any amount
realized thereon.

       10.   Certain Representations and Warranties. Pledgor represents and
warrants to Pledgee that: (a) All shares of Pledged Stock are fully paid, duly
and properly issued, nonassessable and owned by Pledgor free and clear of any
lien or encumbrance of any kind whatsoever, excepting those herein granted to
Pledgee and to the Existing Holders (as described in the Loan Agreement), and
Pledged Stock constitutes all of the outstanding securities of any class or kind
of all of the Subsidiaries.

            (a)     No effective financing statement or other instrument similar
in effect covering all or any part of the Pledged Collateral is on file in any
recording office.

            (b)     The pledge of the Pledged Collateral pursuant to this
Agreement creates a valid and perfected security interest in the Pledged
Collateral, securing the payment of the Obligations, and all filing and other
actions necessary or desirable to perfect and protect such security interest
having been duly made or taken.

            (c)     Except as contemplated by the Loan Agreement or the
Subordination Agreement, no authorization, approval or other action by, and no
notice to or filing with, any governmental authority or regulatory body is
required for (i) the pledge by Pledgor of the Pledged Collateral pursuant to
this Agreement, the grant by Pledgor of the assignment or security interest
granted hereby or the execution, delivery or performance of this Agreement by
Pledgor, (ii) the perfection of or exercise by Pledgee of its rights and
remedies provided for in this Agreement, or (iii) the exercise by Pledgee of the
voting or other rights provided for in this Agreement or the remedies in respect
of the Pledged Collateral pursuant to this Agreement (except as may be required
in connection with a judicial foreclosure, if applicable, or the disposition of
the Pledged Stock by laws affecting the offering and sale of securities
generally).

            (d)     Pledgor has full right, power and authority to enter into
this Agreement and to grant the security interest in the Pledged Collateral made
hereby, and this Agreement constitutes the legal, valid and binding obligation
of Pledgor enforceable against Pledgor in accordance with its terms, except as
the enforceability thereof may be (i) limited by bankruptcy, insolvency,

                                       5
<PAGE>   6

reorganization, moratorium or similar laws affecting the enforceability of
creditors' rights generally, and (ii) subject to general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law).

       11.  Indemnity and Expenses.

            (a)     Pledgor agrees to and hereby indemnifies Pledgee from and
against any and all claims, damages, losses, liabilities and expenses arising
out of, or in connection with, or resulting from this Agreement (including,
without limitation, enforcement of this Agreement) unless resulting from or
arising out of the negligence, willful misconduct or bad faith of Pledgee.

            (b)     Pledgor agrees promptly upon Pledgee's demand to pay or
reimburse Pledgee for all reasonable expenses (including, without limitation,
reasonable fees and disbursements of counsel) incurred by Pledgee in connection
with (i) any modification or amendment to or waiver of any provision of this
Agreement requested by Pledgor, (ii) the custody or preservation of the Pledged
Collateral, (iii) any actual or attempted sale or exchange of, or any
enforcement, collection, compromise or settlement respecting, the Pledged
Collateral or any other property or money held hereunder or any other action
taken by Pledgee hereunder reasonably necessary to enforce its rights, whether
directly or as attorney-in-fact pursuant to the power of attorney herein
conferred, or (iv) the failure by Pledgor to perform or observe any of the
provisions hereof. All such expenses shall be deemed a part of the Obligations
for all purposes of this Agreement and Pledgee may apply the Pledged Collateral
or any other property or money held hereunder to payment of or reimbursement for
such expenses after notice and demand to Pledgor.

       12.  Pledgee May Perform. If Pledgor fails to perform any agreement
contained herein, Pledgee may, but shall not be obligated to, perform, or cause
performance of, such agreement, and the reasonable, out-of-pocket expenses of
Pledgee incurred in connection therewith shall be payable by Pledgor.

       13.  Waivers and Amendment. The rights and remedies given hereby are in
addition to all others however arising, but it is not intended that any right or
remedy be exercised in any jurisdiction in which such exercise would be
prohibited by law. No action, failure to act or knowledge of Pledgee shall be
deemed to constitute a waiver of any power, right or remedy hereunder, nor shall
any single or partial exercise thereof preclude any further exercise thereof or
the exercise of any other power, right or remedy. Any right or power of Pledgee
hereunder in respect of the Pledged Collateral and any other property or money
held hereunder may at the option of Pledgee be exercised as to all or any part
of the same and the term the "Pledged Collateral" wherever used herein, unless
the context clearly requires otherwise, shall be deemed to mean (and shall be
read as) "the Pledged Collateral and any other property or money held hereunder
or any part thereof." This Agreement shall not be amended nor shall any right
hereunder be deemed waived except by a written agreement expressly setting forth
the amendment or waiver and signed by Pledgor.

       14.  Continuing Security Interest; Assignments of Secured Debt. This
Agreement shall create a continuing security interest in the Pledged Collateral
and shall (i) remain in full force and effect until released in accordance
herewith, (ii) be binding upon Pledgor, and Pledgor's successors and assigns,
and upon each of the Subsidiaries, and its successors and assigns, and (iii)
inure, together with the rights and remedies of Pledgee hereunder, to the
benefit of Pledgee, its successors and permitted assigns. Without limiting the
generality of the foregoing clause (iii), Pledgee may assign or otherwise
transfer all or any portion of its rights and obligations under this Agreement
to

                                       6
<PAGE>   7

any other person or entity, to the extent and in the manner provided in the
Loan Agreement and such other person or entity shall thereupon become vested
with all the benefits in respect hereof granted to Pledgee herein; Pledgee
shall, however, retain all of its rights and powers with respect to any part of
the Pledged Collateral not transferred. Any agent or nominee of Pledgee shall
have the benefit of this Agreement as if named herein and may exercise all the
rights and powers given to Pledgee hereunder.

       15.  GOVERNING LAW; SUITS. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS
OF PLEDGOR AND PLEDGEE HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, NOTWITHSTANDING ITS
CONFLICTS OF LAW PRINCIPLES. THE PLEDGOR HEREBY IRREVOCABLY (I) CONSENTS THAT
ANY SUIT, ACTION OR LEGAL PROCEEDING ARISING OUT OF OR RELATED IN ANY WAY TO
THIS AGREEMENT SHALL, IF PLEDGEE SO ELECTS, BE BROUGHT AND ENFORCED IN STATE OR
FEDERAL COURTS HAVING SITUS WITHIN THE COUNTY OF ORANGE, STATE OF CALIFORNIA AND
(II) WAIVES ANY OBJECTION TO JURISDICTION OR VENUE IN ANY SUCH SUIT, ACTION OR
PROCEEDING COMMENCED IN ANY SUCH COURT AND ANY CLAIM THAT SUCH SUIT, ACTION OR
PROCEEDING HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. PLEDGOR AGREES THAT
SERVICE OF PROCESS IN ANY ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT
MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR
ANY SUBSTANTIALLY SIMILAR FORM OF MAIL) POSTAGE PREPAID, TO PLEDGOR AT ITS
ADDRESS SET FORTH IN SECTION 16 HEREOF.

       16.  Notices. All notices hereunder shall be in writing (except only as
otherwise provided in Section 13) and shall be conclusively deemed to have been
received and shall be effective (a) on the day on which delivered if delivered
personally (including delivery by courier providing evidence of delivery), or
transmitted by telex or telegram or telecopier with transmission confirmed, or
(b) five (5) days after the date on which the same is deposited in the United
States mail (certified or registered if required under Section 15), with postage
prepaid and properly addressed, and any notice mailed shall be addressed:

            (a)      in the case of Pledgor, to:

                     Halsey Drug Co., Inc.
                     695 No. Perryville Road
                     Rockford, Illinois  61107

                     with copies to:

                     St. John & Wayne, L.L.C.
                     2 Penn Plaza East
                     Newark, New Jersey 07105
                     Attention:  John P. Reilly, Esq.
                     Telecopier No. (973) 491-3555

                                       7
<PAGE>   8

            (b)      in the case of Pledgee, to:

                     Chief Financial Officer
                     Watson Pharmaceuticals, Inc.
                     311 Bonnie Circle
                     Corona, California  92880
                     Fax no. (909) 279-8094
                     cc:      Robert Funsten, Esq.
                              General Counsel

                     with a copy to:

                     Stradling, Yocca, Carlson & Rauth
                     660 Newport Center Drive, Suite 1600
                     Newport Beach, CA  92660
                     Attention:  Lawrence B. Cohn
                     Telecopier No. (949) 725-4100

or at such other address as the party giving such notice shall have been advised
of in writing for such purpose by the party to whom or to which the same is
directed.

       17.  WAIVERS OF JURY TRIAL AND CONSEQUENTIAL DAMAGES. THE PLEDGOR AND,
BY ITS ACCEPTANCE HEREOF, PLEDGEE HEREBY WAIVE TRIAL BY JURY IN ANY LITIGATION
IN ANY COURT WITH RESPECT TO, IN CONNECTION WITH, OR ARISING OUT OF THIS
AGREEMENT, THE PLEDGED COLLATERAL, OR ANY INSTRUMENT OR DOCUMENT DELIVERED
PURSUANT HERETO. NEITHER PLEDGOR OR PLEDGEE, NOR ANY EMPLOYEE, AGENT OR ATTORNEY
OF EITHER OF THEM, SHALL BE LIABLE TO THE OTHER FOR CONSEQUENTIAL DAMAGES
ARISING FROM ANY BREACH OF CONTRACT, TORT OR OTHER WRONG RELATING TO THIS
AGREEMENT OR THE ESTABLISHMENT, ADMINISTRATION OR COLLECTION OF THE OBLIGATIONS,
EXCEPT FOR BAD FAITH.

       18.  Severability: Entire Agreement.

            (a)     If any provision of this Agreement shall be invalid,
illegal, or unenforceable in any jurisdiction, the validity, legality or
enforceability of any such provision in any other jurisdiction shall not be
affected or impaired, and to the extent any provision is held invalid, illegal
or unenforceable, then such provision shall be deemed severable from, and shall
in no way affect the validity or enforceability of the remaining provisions of
this Agreement.

            (b)     This Agreement constitutes the entire agreement of Pledgor
and replaces any other or prior agreements or undertakings, with respect to the
subject matter hereof, and there are no other agreements or undertakings, oral
or written, respecting such subject matter which are intended to have any force
or effect after the execution hereof.

       19.   Miscellaneous. This Agreement shall be binding upon and shall inure
to the benefit of Pledgor and Pledgee and their respective successors and
permitted assigns. Section headings used herein are for convenience only and
shall not affect the meaning or construction of any of the provisions hereof.

                                       8
<PAGE>   9

         IN WITNESS WHEREOF, Pledgor has caused this Agreement to be executed by
its duly authorized officer as of the day and year first above written.

                             HALSEY DRUG CO., INC.

                             By: /s/ Michael Reicher
                                  Name:
                                  Title: Chief Executive Officer

ACCEPTED AND AGREED TO
AS OF MARCH 29, 2000

WATSON PHARMACEUTICALS, INC.,
a Nevada corporation

By:  /s/ Robert C. Funsten
      Name:
      Title:  Senior Vice President

                                       9
<PAGE>   10

Each of the undersigned hereby agrees to recognize all of the rights granted to
Pledgee under the foregoing Agreement and to take all actions necessary to
effectuate said rights and the purposes of the Agreement including, without
limitation, performance of any acts requested by Pledgee pursuant to the terms
thereof.

Date:  as of March 29, 2000

                             HALSEY PHARMACEUTICAL, INC.

                             By: /s/ Michael Reicher
                                  Name:
                                  Title: Chief Executive Officer

                             HOUBA, INC.

                             By: /s/ Michael Reicher
                                  Name:
                                  Title: Chief Executive Officer

                                       10
<PAGE>   11

                                   SCHEDULE A

                            Designation and Number of
                    shares of capital stock owned by Pledgor

<TABLE>
<CAPTION>

       Name of Issuer Shares          Certificate No.                Designation
<S>                                  <C>                <C>
Halsey Pharmaceutical, Inc.                  _           Common Stock, $.01 par value
Houba, Inc.                                  _           Common Stock, $.01 par value
</TABLE>

                                      1

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