ENDO PHARMACEUTICALS HOLDINGS INC
EMPLOYEEMENT AGREEMENT - JOHN W. LYLE
<DOCUMENT>
<TYPE>EX-10.26
<SEQUENCE>16
<FILENAME>0016.txt
<DESCRIPTION>EMPLOYEEMENT AGREEMENT - JOHN W. LYLE
<TEXT>

<PAGE>

                                                                   Exhibit 10.26

                             EMPLOYMENT AGREEMENT

                                    Parties
                                    -------

          This Employment Agreement (the "Agreement") made as of July 17, 2000
is entered into by and between Endo Pharmaceuticals Holdings Inc., with its
principal business address at 223 Wilmington-West Chester Pike, Chadds Ford,
Pennsylvania 19317 (the "Company"), and John W. Lyle, residing at 28 Inlet
Terrace, Belmar, New Jersey 07719 ("Executive").

                                   Recitals
                                   --------

          A.   The Company has entered into an Agreement and Plan of Merger (the
"Merger Agreement"), dated as of November 26, 1999 and amended from time to
time, among the Company, Endo Inc., a Delaware corporation and a newly formed
wholly owned subsidiary of the Company ("Sub"), and [Target] Pharmaceutical
Corporation, a Delaware Corporation (the "Target"), pursuant to which, among
other things, the Target will merge with and into Sub.

          B.   The Company desires to retain Executive to provide the services
hereinafter set forth.

          C.   Executive is willing to continue to provide such services to the
     Company on the terms and conditions hereinafter set forth.

                              Terms of Agreement
                              ------------------

          The parties agree as follows:

          1.   Employment.
               ----------

               1.1  The Company hereby retains Executive's employment (subject
to the provisions of Section 6) in a senior executive capacity with the Company.
The Executive shall perform such duties and services, consistent with his
positions, as may be assigned to him from time to time by the Board of Directors
of the Company or its designee. In furtherance of the foregoing, the Executive
hereby agrees to perform well and faithfully the aforesaid duties and
responsibilities and the other reasonable senior executive duties and
responsibilities assigned to him from time to time by the Board of Directors of
the Company or its designee. During the Employment Period, the Company shall
provide the Executive with an office, secretarial and other support services
comparable to those provided to other senior executive officers of the Company
at its headquarters and at the Company's facility at 1333 Campus Parkway,
Neptune, New Jersey 07753 for so long as the Company maintains such facility and
afterward at another facility of the Company convenient to the Executive to be
chosen at Executive's discretion.

               1.2  Executive hereby accepts this employment on and subject to
the terms and conditions set forth in this Agreement, and shall use his
reasonable best efforts to promote the Company's interests.
<PAGE>

          2.   Compensations Benefits.
               ----------------------

               2.1  Salary. During the Employment Period, as compensation for
                    ------
Executive's performance of Executive's duties under this Agreement, the Company
shall pay Executive a Base Salary ("Base Salary") at the annual rate of $325,000
from the date of this Agreement through December 31, 2000. Thereafter, the Base
Salary shall be subject to increase at the option and in the sole discretion of
the Board of Directors of the Company annually. The Base Salary shall be payable
in installments pursuant to the Company's executive payroll policies in force at
the time of payment (but not less frequently than monthly) for the month or
shorter pay period then ended, subject to applicable withholding for FICA,
income taxes and other required payroll deductions.

                    2.1.1     The Executive's Base Salary will be supplemented
by payment of performance bonuses at the option and in the sole discretion of
the Board of Directors of the Company annually.

               2.2  Expenses. During the Employment Period, to the extent such
                    --------
expenditures meet the requirements and the policies of the Company for senior
executives, the Company shall reimburse Executive promptly for all reasonable
travel, entertainment, parking, business meeting and similar expenditures in
pursuance and furtherance of the Company's business, upon presentation of proper
vouchers or receipts therefor and in accordance with the Company's customary
procedures. During the Employment Period, the Company shall provide Executive
with a mobile phone, facsimile machine and photocopying machine for his home
office, and the Company shall reimburse Executive for expenses incurred in the
use thereof by Executive in pursuance and furtherance of the Company's business,
upon presentation of proper vouchers or receipts therefor and in accordance with
the Company's customary procedures.

               2.3  Other Benefits. Executive shall be entitled to participate,
                    --------------
at Executive's option and as eligible, in any Company plans for the benefit of
officers and key employees as from time to time established, including, without
limitation, profit sharing, pension plan, stock option plans, performance bonus
plans, disability, medical and group life insurance. If the Company shall not
provide coverage for comprehensive family major medical, family dental,
disability and life insurance to Executive, he shall be reimbursed for the cost
of such coverage acquired by him elsewhere.

          3.   Employment Period; Termination.
               ------------------------------

               3.1  Employment Period. Executive's employment term ("Employment
                    -----------------
Period") shall terminate on the fifth anniversary of the date of this Agreement
unless earlier terminated pursuant to Section 3.2.

               3.2  Termination.
                    -----------

                    3.2.1     Termination for Cause. The Company may, upon the
                              ---------------------
approval of a majority of the members of the Board of Directors of the Company,
discharge Executive and terminate the Employment Period for cause. Discharge for
cause shall be effective ten (10) days after Executive's receipt of written
notice of discharge or at such later date as may be specified in that notice,
provided such notice contains the specific reasons and the

                                       2
<PAGE>

specific events upon which discharge is predicated. If Executive is discharged
for cause, Executive shall only be entitled to Base Salary through the effective
date of the discharge or termination. As used in this paragraph, "cause" shall
mean any or all of the following:

                         (i)  Willful and grossly negligent action taken by
Executive which materially harms, or can reasonably be expected to harm, the
Company;

                         (ii) Commission of a fraud, misappropriation,
embezzlement, or criminal misconduct that would constitute a felony or adversely
affect the reputation of the Company or any of its affiliates (for purposes of
this Employment Agreement the term "affiliates" shall be deemed to include, but
not necessarily be limited to the corporation to which the Company assigns its
rights to the name, "Endo Pharmaceuticals" or any variation thereof); or

                        (iii) If Executive shall be in breach of, or in default
under, any material provision, term or covenant of Article 4 of this Agreement
(other than a breach or default described in clauses (i) and (ii)) and shall
fail to cure such breach or default within a reasonable time after written
notice describing such breach or default in particular by the Company; provided,
                                                                       --------
however, that the Company need not give such notice of, and Executive shall not
-------
have such opportunity to cure, any material breach or default of any provision,
term or covenant of Article 4 of this Agreement if Executive had previously
committed such material breach or default and received notice thereof pursuant
to this clause (iii). The Employment Agreement shall only be terminable by the
Company with cause; provided, however, that "cause" shall in no event include
                    --------  -------
failure by Executive to perform services under this Agreement because the
Company and Executive have failed to agree on the nature, amount, scope or
timing of his services.

               3.2.2     Termination for other than Cause. During the Employment
                         --------------------------------
Period, the Company may terminate Executive's employment at any time for other
than cause on 30 days' written notice to Executive. Such termination shall be
deemed effective 30 days after Executive's receipt of the written notice of
termination or at such later date as may be specified in such notice.

               3.2.3     Involuntary Termination. If, during the Employment
                         -----------------------
Period, Executive becomes ill, disabled or otherwise incapacitated so as to be
unable regularly to perform his usual duties for a period in excess of 120
consecutive days, or more than 150 days in any consecutive twelve-month period
(such condition being hereinafter referred to as "Disability"), the Company
shall have the right, with the approval of a majority of the members of the
Board of Directors, to terminate Executive's employment on 30 days' written
notice to Executive (such termination, or Executive's death, being herein
referred to as "Involuntary Termination"). If the Executive dies during the
Employment Period, his employment hereunder shall be deemed to have ceased as of
the date of his death.

               3.2.4     Voluntary Termination. Any termination of the
                         ---------------------
employment of the Executive hereunder effectuated by the Executive shall be
deemed to be a

                                       3
<PAGE>

"Voluntary Termination." A Voluntary Termination shall be deemed to be effective
immediately upon such termination.

               3.3  Effect of Termination of Employment.
                    -----------------------------------

                    3.3.1     Upon the termination of the Executive's employment
hereunder pursuant to a Voluntary Termination or a Termination for Cause,
neither the Executive nor his beneficiary or estate shall have any further
rights or claims against the Company under this Agreement except to receive:

                              (i)  the unpaid portion of the Base Salary
provided for in Section 2.1, computed on a pro rata basis to the date of
termination; and

                              (ii) reimbursement for any expenses for which the
Executive shall not have theretofore been reimbursed as provided in Section 2.2.

                    3.3.2     Upon the termination of the Executive's employment
hereunder pursuant to an Involuntary Termination or a Termination for other than
Cause, neither the Executive nor his beneficiary or estate shall have any
further rights or claims against the Company under this Agreement except to
receive:

                              (i)  the unpaid portion of the Base Salary
provided for in Section 2.1, to the fifth anniversary of the date of this
Agreement;

                              (ii) reimbursement for any expenses for which the
Executive shall not have theretofore been reimbursed as provided in Section 2.2;
and

                             (iii) the continuation of the benefits afforded
pursuant to Section 2.3(i) through the fifth anniversary of the date of this
Agreement.

          4.   Executive's Covenants.
               ---------------------

               4.1  Executive agrees that he will not from and after the date
hereof through the fifth anniversary of the termination of the Employment Period
(for whatever reason), directly or indirectly, through any other person, firm or
corporation, solicit, raid, entice, induce or encourage any employee, sales
representative, agent or consultant of or for the Company or its affiliates, to
(i) cease his or her association with or leave the employ of the Company or its
affiliates, (ii) solicit customers or suppliers of the Company or its affiliates
for Executive's or any other person's or entity's benefit or (iii) otherwise act
in violation of that person's obligations to the Company or its affiliates, and
Executive shall not authorize or knowingly approve the taking of such actions by
any other person.

               4.2  Executive acknowledges that, by reason of his employment
with the Company, he will obtain confidential or non-public proprietary
knowledge or information pertaining to the business and policies of the Company
and its affiliates. Executive agrees that during and after the term of this
Agreement, he shall not disclose, without the prior written consent of the Board
of Directors of the Company or the Chairman of the Board, any confidential or
non-public proprietary knowledge or information pertaining to the Company and

                                       4
<PAGE>

its affiliates ("Confidential Information"), including, but not limited to (1)
trade secrets concerning the business and affairs of the Company and its
affiliates, product specifications, data, know-how, formulae, compositions,
processes, designs, sketches, photographs, graphs, drawings, samples, inventions
and ideas, past, current and planned research and development, current and
planned manufacturing or distribution methods and processes, customer lists,
information regarding customers of the Company (including such customers'
requirements), price lists, market studies, business plans, computer software
and programs (including object code and source code), computer software and
database technologies, systems, structures, and architectures (and related
formulae, compositions, processes, improvements, devices, know-how, inventions,
discoveries, designs, methods and information); (2) information concerning the
business and affairs of the Company and its affiliates (which includes
historical financial statements, financial projections and budgets, historical
and projected sales, capital spending budgets and plans, the names and
backgrounds of key personnel, personnel training and techniques and material)
however documented; and (3) notes, analyses, compilations, studies, summaries
and other materials prepared by or for the Company and its affiliates containing
or based, in whole or in part, on any information included in the foregoing.
Confidential Information shall not include information that: (a) was known to
Executive prior to his first employment with the Company or its affiliates, or
(b) is public knowledge, or becomes public knowledge other than by action (or
omission) of (i) Executive or persons obtaining access to such information
directly or indirectly from Executive or (ii) other persons disclosing such
information in breach of obligations to the Company.

               4.3  Executive acknowledges and agrees that all memoranda, notes,
reports, records and other documents made or compiled by Executive, or made
available to Executive prior to or during the term of this Agreement concerning
the Company's and its affiliates, business, shall be the Company's or its
affiliates' property and shall be delivered to the Company on the termination of
this Agreement or at any other time on request by the Board of Directors or
Chairman of the Board of the Company.

               4.4  Executive agrees that he will not, from and after the date
hereof through the fifth anniversary of the termination of the Employment Period
(for whatever reason), (i) directly or indirectly engage in, represent in any
way, or be connected with, any business or activity (such business or activity
being hereinafter called a "Competing Business"), which engages in pain
management, generic pharmaceuticals or such other activities that (during
Executive's Employment Period) the Company engages in or intends to engage in
and is set forth in a detailed written business plan that has been submitted to
the Company's Board of Directors prior to the termination of the Executive's
Employment Period, within any state in which the Company or its affiliates
transact business, whether such engagement shall be as an officer, director,
owner, employee, partner, affiliate or other participant in any Competing
Business; or (ii) assist others in engaging in any Competing Business in the
manner described in the foregoing clause (i); provided, however, that it shall
                                              --------  -------
not be a violation of this Section 4.4 for Executive (a) to be the registered or
beneficial owner of up to twelve percent (12%) of any class of capital stock of
U.S. Dermatalogics, Inc., and the amount and percentage ownership of shares
beneficially owned by Executive, as of the date of this Agreement is set forth
on Schedule 4.4 hereto, (b) to be the registered or beneficial owner of shares
of any class of capital stock of a Competing Business that Executive owns as of
the date of this Agreement, the amounts and percentage ownership of which is set
forth on Schedule 4.4 hereto or (c) to become the registered

                                       5
<PAGE>

or beneficial owner of up to five percent (5%) of any class of the capital stock
of a Competing Business, provided that in the case of each of clauses (a), (b)
                         --------
and (c) Executive does not actively participate in the business of such
Competing Business until such time as this covenant expires. The Executive
acknowledges and understands that the foregoing restrictions may limit his
ability to earn a livelihood in a business similar to the business of the
Company, but he nevertheless believes that he has received and will receive
sufficient consideration and other benefits in connection with the Company's
issuance of certain stock to the Executive, as an employee of the Company and as
otherwise provided hereunder to clearly justify such restrictions which, in any
event (given his education, skills and ability), the Executive does not believe
would prevent him from earning a living; provided, however, that the Executive
                                         --------  -------
may actively engage in a Competing Business during the term of the covenant set
forth in this Section 4.4 if the Executive provides written notice to the
Company prior to engaging in any such Competing Business and the Executive
thereafter receives the written consent of the Board of Directors of the Company
to engage in such Competing Business. Notwithstanding the foregoing, during the
period from and after the date of this Agreement through the fifth anniversary
of the termination of the Employment Period, the Executive shall keep the Board
of Directors apprised of his business activities.

               4.5  The Executive shall promptly disclose, grant and assign to
the Company for its sole use and benefit any and all inventions, improvements,
technical information and suggestions relating in any way to the business of the
Company, which he may develop or acquire during the Employment Period (whether
or not during usual working hours), together with all patent applications,
letters patent, copyrights and reissues thereof that may at any time be granted
for or upon any such invention, improvement or technical information. In
connection therewith:

                    (i)  The Executive shall without charge, but at the expense
of the Company, promptly at all times hereafter execute and deliver such
applications, assignments, descriptions and other instruments as may be
reasonably necessary or proper in the reasonable opinion of the Company to vest
title to any such inventions, improvements, technical information, patent
applications, patents, copyrights or reissues thereof in the Company and to
enable it to obtain and maintain the entire right and title thereto throughout
the world; and

                    (ii) The Executive shall render to the Company at its
expense (including a reasonable payment for the time involved in case he is not
then in its employ) all such assistance as it may reasonably require in the
prosecution of applications for said patents, copyrights or reissues thereof, in
the prosecution or defense of interferences which may be declared involving any
said applications, patents or copyrights and in any litigation in which the
Company may be involved relating to any such patents, inventions, improvements
or technical information.

               4.6  The provisions of this paragraph 4 shall survive the
termination or expiration of this Agreement irrespective of the reason therefor.

               4.7  Executive acknowledges that the services to be rendered by
him are of a special, unique and extraordinary character and, in connection with
such services, he will have access to Confidential Information vital to the
Company's business. By reason of this,

                                       6
<PAGE>

Executive consents and agrees that if he violates any of the provisions of this
Agreement with respect to the diversion of the Company's or its affiliates'
employees or confidentiality, the Company or its affiliates would sustain
irreparable harm and, therefore, in addition to any other remedies which the
Company may have under this Agreement or otherwise, the Company shall be
entitled to apply to any court of competent jurisdiction for an injunction
restraining Executive from committing or continuing any such violation of this
Agreement, and Executive shall not object to any such application.

          5.   Indemnification. The Company agrees to indemnify and hold
               ---------------
harmless Executive on the terms set forth in the Company's Bylaws and
Certificate of Incorporation as they exist on the date of this Agreement and in
any event to the same extent that the Company provides indemnification for its
other executive employees.

          6.   Conflicting Duties. The Company acknowledges that during his
               ------------------
tenure pursuant to this Employment Agreement, Executive shall not be required to
work "full-time" for the Company and shall work on an as-needed basis, the dates
and times of which to be mutually agreed upon by the Company and Executive. In
addition, the Company acknowledges that during the Employment Period Executive
shall retain the right to pursue and/or fulfill other business opportunities,
commitments and obligations so long as such opportunities, commitments and
obligations would not constitute a breach by Executive of his obligations under
Section 4 of this Employment Agreement.

          7.   Miscellaneous.
               -------------

               7.1  Notices. Any notice or communication given by either party
                    -------
hereto to the other party shall be in writing and shall be deemed duly given (i)
when personally delivered, or (ii) when five days have elapsed after its
transmittal, by registered or certified mail, return receipt requested, postage
prepaid, or (iii) if transmitted by telecopy, when sent, or (iv) if transmitted
by telex (or equivalent service), when the sender's receiving apparatus has
printed the answerback of the addressee on a copy of the telex message. Notices
shall be addressed as follows:

          If to the Company:

               Endo Pharmaceutical Holdings Inc.
               223 Wilmington-West Chester Pike
               Chadds Ford, Pennsylvania  19317
               Telecopier No.:  610-558-9683
               Attention:  Chief Executive Officer

          If to Executive:

               Mr. John W. Lyle
               28 Inlet Terrace
               Belmar, New Jersey 07719

          With copies in each case to:

                                       7
<PAGE>

               Kleinberg, Kaplan, Wolff & Cohen, P.C.
               551 Fifth Avenue
               New York, New York 10176
               Telecopier No.:  212-986-8866
               Attention:  James R. Ledley, Esq.


               Skadden, Arps, Slate, Meagher & Flom LLP
               919 Third Avenue
               New York, New York 10022
               Telecopier No.:  212-735-2000
               Attention:  Eileen Nugent Simon, Esq.

Any person entitled to receive notice (or a copy thereof) may designate in
writing, by notice to the others, such other address to which notices to such
person shall thereafter be sent.

               7.2  Entire Agreement; Amendment; Waiver. This Agreement contains
                    -----------------------------------
the entire understanding of the parties covering its subject matter and
supersedes all prior agreements between the parties. This Agreement may be
amended or waived only by a writing signed by both parties. The waiver by either
party of a breach of any provision of this Agreement shall not operate or be
construed as a waiver of any other breach of that provision nor as a waiver of
any breach of another provision.

               7.3  Headings. The headings of the paragraphs of this Agreement
                    --------
are inserted for convenience only and shall not be considered a part of or be
referred to in interpreting this Agreement.

               7.4  Governing Law; Interpretation; Service of Process. This
                    -------------------------------------------------
Agreement shall be construed in accordance with and governed for all purposes by
the laws and public policies of the State of New Jersey applicable to contracts
executed and to be wholly performed in that State. Service of process in any
dispute shall be effective: (a) upon the Company, if service is made on any
officer of the Company; and (b) upon Executive, if service is made to
Executive's residence last known to the Company with an information copy to
Executive at any other residence, or care of a subsequent employer, of which the
Company may be aware.

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

               7.6  Assignment. Assignment of the rights and obligations of this
                    ----------
Agreement shall bind and enure to the benefit of any successor of the Company by
reorganization, merger or consolidation, or any assignee of all or substantially
all of the Company's business and properties, provided that the successor shall
assume the obligations of the Company under this Agreement. Executive's rights
or obligations under this Agreement may not be assigned by Executive.

               7.7  Further Assurances. Each of the parties agrees to execute,
                    ------------------
acknowledge, deliver and perform, and/or cause to be executed, acknowledged,
delivered and

                                       8
<PAGE>

performed, at any time and/or from time to time, as the case may be, all such
further acts, deeds, assignments, transfers, conveyances, powers-of-attorney
and/or assurances as may be necessary and/or proper to carry out the provisions
and/or intent of this Agreement.

               7.8  Severability. If any one or more of the terms, provisions,
                    ------------
covenants or restrictions of this Agreement shall be determined by a court of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions, covenants and restrictions of this Agreement shall remain
in full force and effect and shall in no way be affected, impaired or
invalidated, unless the parties hereto would not have entered into this
Agreement without said invalid, void or unenforceable term, provision, covenant
or restriction. If, moreover, any one or more of the provisions contained in
this Agreement shall for any reason be determined by a court of competent
jurisdiction to be excessively broad as to duration, geographical scope,
activity or subject, it shall be construed by limiting or reducing it, so as to
be enforceable to the extent compatible with then applicable law.

                                       9
<PAGE>

                                   Execution
                                   ---------

          The parties have duly executed this Agreement as of the date first
above written whereupon this Agreement enters into full force and effect in
accordance with its terms.

                                     ENDO PHARMACEUTICALS HOLDINGS
ATTEST:                              INC.
                                     a Delaware Corporation

By: /s/ Jeffrey R. Black                By: /s/ Carol A. Ammon
   Name:  Jeffrey R. Black              Name:  Carol A. Ammon
   Title: Chief Financial Officer       Title: President and Chief
                                               Executive Officer

                                     /s/ John W. Lyle
                                     -------------------------------
                                     John W. Lyle
<PAGE>

                                 Schedule 4.4

<TABLE>
<S>                          <C>                             <C>
---------------------------------------------------------------------------------------------------
Competing Business           Shares Beneficially Owned       Percentage Ownership
---------------------------------------------------------------------------------------------------
U.S. Dermatalogics, Inc.     970,250 shares of common        7.9%, fully diluted for the exercise
                             stock                           of the options and the issuance of
                                                             the 23,944 shares conversion of
                             23,944 shares of common         the note
                             stock issuable under a
                             convertible note

                             Options to purchase 25,000
                             shares of common stock

---------------------------------------------------------------------------------------------------
Warner Lambert               Less than 500 shares            Less than 1.0%

---------------------------------------------------------------------------------------------------
American Home Products       Less than 500 shares            Less than 1.0%

---------------------------------------------------------------------------------------------------
</TABLE>

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</TEXT>
</DOCUMENT>
