HALSEY DRUG CO INC/NEW
NOTEHOLDERS AGREEMENT
<DOCUMENT>
<TYPE>EX-10.16
<SEQUENCE>19
<FILENAME>y93872exv10w16.txt
<DESCRIPTION>NOTEHOLDERS AGREEMENT
<TEXT>
<PAGE>

                                                                   EXHIBIT 10.16

                              NOTEHOLDERS AGREEMENT

         This Noteholders Agreement ("Agreement") is dated as of February 6,
2004 by and among Essex Woodlands Health Ventures V, L.P., a Delaware limited
partnership ("Essex"), Galen Partners III, L.P., a Delaware limited partnership
("Galen"), acting in its capacity as a Holder (as defined herein) and as agent
for the Holders ("Agent") and Care Capital Investments, L.P., a Delaware limited
partnership ("Care Capital" and, together with Essex, Galen and the other
participants in the Senior Note (as defined herein), the "Holders").

                             PRELIMINARY STATEMENTS

         Pursuant to Section 2.3 of that certain Umbrella Agreement (the
"Umbrella Agreement") as of the date hereof by and among the Holders, Watson
Pharmaceuticals, Inc. ("Watson") and Halsey Drug Co., Inc. ("Company"), Watson
agreed to sell, transfer and assign to the Holders the Assigned Rights,
including Watson's right, title and interest in that certain Amended and
Restated Note in the principal amount of $5,000,000 issued as of the date hereof
by the Company pursuant to the Loan Agreement, and any other promissory notes
issued by the Company pursuant to the Loan Agreement from time to time (the
"Senior Note"). The Holders hereby agree to (1) appoint Agent to act as agent
for the Holders with respect to the Assigned Rights and (2) acquire a
participation in the Senior Note, all on the terms and subject to the conditions
set forth in this Agreement.

                                    AGREEMENT

         In consideration of the mutual covenants contained in this Agreement
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereby agree as follows:

                                    ARTICLE 1

                              CERTAIN DEFINED TERMS

         Capitalized terms appearing in this Agreement without definition will
have the meanings ascribed to such terms in the Umbrella Agreement. For the
purposes of this Agreement, the following terms have the meanings indicated:

         "Participation Percentage" shall mean the percentage interest of each
Holder in the principal amount of the Senior Note at any time outstanding, which
on the date of this Agreement is equal to percentage set forth opposite such
Holder's name on Schedule I.

         "Requisite Holders" means the holders of sixty percent (60%) of the
aggregate Participation Percentage.

<PAGE>

                                   ARTICLE 2

                      APPOINTMENT OF AGENT; DUTIES OF AGENT

2.1 APPOINTMENT OF AGENT

         (a)      Each Holder hereby designates Galen as its agent and
authorizes the Agent to take action on its behalf under the Assigned Agreements,
to exercise the powers and perform the duties described therein, and to exercise
such other powers reasonably incidental thereto. The Agent may perform any of
its duties through its agents or employees. Each Holder acknowledges that Galen
has undertaken the agency herein set forth as an accommodation to the Holders
and at no charge. Without limiting the generality of the foregoing, the Agent is
hereby expressly authorized to (i) waive breaches or events of default, (ii)
release security interests or other liens, in each case arising under or in
connection with the Assigned Agreements, with the written consent of the
Requisite Holders, and (iii) make claims against Watson with respect to Watson's
obligations to the Holders under the Umbrella Agreement, in each case without
written consent of the Holders.

         (b)      The Requisite Holders may from time to time instruct the Agent
in writing to take any action on behalf of the Holders under the Assigned
Agreements, or refrain from taking any such action, as applicable (in each case
to the extent the Agent would be authorized to do so pursuant to Section 2.1(a)
above), and in each such case the Agent shall promptly comply with such
instructions. Each Holder agrees to hold Agent harmless and covenants not to sue
Agent with respect to any action taken by Agent pursuant to this Section 2.1(b).

         (c)      This Section 2.1 is for the benefit of the Agent and the
Holders only. The Agent acts only for the Holders and assumes no obligation to
or agency or trust relationship with the Company or any of its affiliates or
subsidiaries, except for the ratable disbursement to the Holders of any payments
received by the Agent for the account of the Holders, if any.

         (d)      SUBJECT TO THE TERMS OF SECTION 2.1(b) AND 2.1(e), THE AGENT'S
AUTHORITY WITH RESPECT TO THE ASSIGNED AGREEMENTS SHALL BE EXCLUSIVE, AND NO
HOLDER SHALL TAKE ANY ACTION OR EXERCISE ANY RIGHT UNDER ANY ASSIGNED AGREEMENT
WITHOUT THE CONSENT OF THE AGENT.

         (e)      The holders of a majority of the aggregate Participation
Percentage held by Holders other than Galen and its Affiliates may revoke the
authority of the Agent to act on the Holders' behalf at any time, by written
notice to the Agent (which revocation shall be effective upon receipt by the
Agent unless the revocation states a later effective date). Upon such
effectiveness, Galen shall be deemed to have resigned and the Holders may
appoint a successor Agent pursuant to Section 2.7.

<PAGE>

2.2 NATURE AND DUTIES OF AGENT

         The Agent has no duties or responsibilities, except those expressly set
forth in this Agreement and the Assigned Agreements. Neither the Agent nor any
of its officers, directors, employees or agents shall be liable for any action
taken or omitted in compliance with this Agreement. The duties of the Agent
shall be mechanical and administrative in nature. The Agent shall not have a
fiduciary relationship to the Holders or any participant of the Holders.

2.3 LACK OF RELIANCE ON AGENT

         Independently and without reliance upon the Agent, each Holder has made
and shall continue to make its own independent investigation and analysis of the
content and validity of this Agreement and the Assigned Agreements or of the
performance and creditworthiness of the Company thereunder. The Agent assumes no
responsibility and undertakes no obligation to make inquiry with respect to such
matters.

2.4 RELIANCE BY AGENT

         The Agent may rely upon written or telephonic communication it believes
to be genuine and to have been signed, sent or made by the proper person. The
Agent may obtain the advice of legal counsel (including, for matters concerning
the Company, counsel for the Company), independent public accountants and other
experts selected by it and shall have no liability for action or inaction taken
or not taken, in good faith, based upon such advice.

2.5 INDEMNIFICATION OF AGENT

         Each Holder agrees to hold the Agent harmless against, and reimburse
and indemnify the Agent for any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses (including
reasonable attorneys fees and disbursements) or disbursements of any kind or
nature whatsoever which may be imposed on, incurred by or asserted against the
Agent in performing its duties hereunder, unless resulting from the Agent's
fraud, gross negligence or willful misconduct. The liability of the Holders
hereunder shall be several and not joint and each Holder shall be liable only
for the percentage of such amounts equal to its Participation Percentage.

2.6 AGENT IN ITS INDIVIDUAL CAPACITY

         In its capacity as a Holder, Galen shall have the same rights and
powers hereunder as the other Holders and may exercise them to the same extent
as the other Holders (as if it was not acting as the Agent herein). To the
extent permitted by the Assigned Agreements, Galen shall have the right to lend
money to, make investments in and generally engage in any kind of business with,
the Company to the same extent as if it were not the Agent (and shall have no
duty hereunder to account for the same to the other Holders).

<PAGE>

2.7 SUCCESSOR AGENT

         (a)      The Agent may, upon 30 days' notice to each Holder and the
Company, resign by giving written notice thereof to each Holder and the Company.
The Agent's resignation shall be effective upon the expiration of such 30-day
period or the earlier appointment of a successor agent.

         (b)      Upon receipt of the Agent's resignation, the Requisite Holders
may appoint a successor Agent. If a successor Agent has not been selected and
accepted its appointment within 15 business days, then the retiring Agent may,
on behalf of the Holders, appoint a successor Agent.

         (c)      Upon its acceptance of the agency hereunder, a successor agent
shall succeed to and become vested with all the rights, powers, privileges and
duties of the retiring agent, and the retiring agent shall be discharged from
its duties and obligations under this Agreement and deemed released by the
Holders from all claims of any description or sort. The retiring agent shall
continue to have the benefit of this Agreement for any action or inaction while
it was Agent.

         (d)      Notwithstanding anything contained herein to the contrary,
Agent shall retain any and all rights as a Holder under the Assigned Agreements.

2.8 COLLATERAL MATTERS

         The Agent shall have no obligation to assure that the Collateral exists
or is owned by the Company or any of its affiliates or subsidiaries, or that
such Collateral is cared for, protected or insured, or that the liens on the
Collateral have been created, perfected, or have any particular priority.
Subject to Section 2.1, with respect to the Collateral the Agent may act in any
manner it may deem appropriate, in its sole discretion, given Agent's own
interest in the Collateral as a Holder, and it shall have no duty or liability
whatsoever to any of the Holders, except for its fraud, willful misconduct or
gross negligence.

2.9 ACTIONS WITH RESPECT TO DEFAULTS

         Without limiting the generality of Section 2.1 above, (a) the Agent
shall only take action with respect to a "default" or "event of default" under
the Assigned Agreements as shall be directed by the Requisite Holders, and (b)
no Holder shall take any action with respect to a "default" or "event of
default" under the Assigned Agreements without the consent of the Agent.

<PAGE>

                                   ARTICLE 3

                          PARTICIPATION IN SENIOR NOTE

3.1 PARTICIPATION

         Each Holder hereby acquires an undivided interest in the Senior Note in
a percentage equal to its Participation Percentage. The interest of each Holder
under this Agreement shall include participation in the principal of and
interest on the Senior Note and in all amounts payable by the Company under the
Senior Note and participation in any security therefore, all for the pro rata
account and risk of each Holder in accordance with its Participation Percentage.

3.2 RECORD HOLDER OF SENIOR NOTE

         The Agent and each Holder hereby acknowledges that Watson is assigning
the Senior Note to Agent for the benefit of the Holders, and that Agent holds
the Senior Note solely as a nominee of the Holders. The Agent shall have no
beneficial interest in the Senior Note (other than in its Participation
Percentage thereof owned in its role as a Holder).

3.3 APPLICATION OF PAYMENTS

         (a)      Promptly upon receipt by the Agent of any payment of principal
of or interest on the Senior Note (including the net cash proceeds received from
any realization upon security therefore) or of any fees or costs payable by the
Company under the Senior Note or other Assigned Agreement, the Agent shall remit
to each Holder its pro rata share thereof in accordance with its Participation
Percentage.

         (b)      All amounts payable by Agent to the Holders hereunder shall be
paid in lawful currency of the United States and in immediately available funds
at the address set forth opposite the name of each of the Holders on the
signature page of this Agreement. Any Holder may change the address to which
payments are to be sent by notice of such change to the Agent given as provided
herein.

                                   ARTICLE 4

                       VARIOUS UMBRELLA AGREEMENT MATTERS

4.1 UMBRELLA AGREEMENT

         Essex, Care Capital, Galen, Galen Partners International III, L.P. and
Galen Employee Fund III, L.P. (each a "Claimant" and collectively, the
"Claimants") are parties to the Umbrella Agreement and have undertaken certain
obligations as "Claimants" under such agreement. Each Claimant agrees to the
provisions of this Article 4 as a material inducement to the other Claimants to
enter into the Umbrella Agreement and to be a "Claimant" thereunder.

<PAGE>

4.2 CONTRIBUTION

         In order to provide for just and equitable contribution as between the
Claimants with respect to certain specific liabilities of the Claimants under
the Umbrella Agreement, the Claimants agree as follows:

         (a)      Each Claimant agrees to comply with its obligations under the
Umbrella Agreement and that (i) on each Contingent Purchase Amount Payment Date
such Claimant will pay to Watson any amounts, if any, that it is obligated to
pay pursuant to Section 2.3(b)(ii) of the Umbrella Agreement, and (ii) it will
promptly deliver to Watson any amounts it receives from Halsey that are required
to be handed over to Watson pursuant to Section 5.5(c) of the Umbrella
Agreement.

         (b)      Each Claimant (the "Indemnifying Claimant") shall indemnify
and hold each other Claimant and its officers, employees, agents, successors and
assigns (each an "Indemnified Party") harmless against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses (including reasonable attorneys fees and disbursements) or
disbursements of any kind or nature whatsoever ("Losses") which may be imposed
on, incurred by or asserted against the Indemnified Party as a result of the
failure of the Indemnifying Claimant or its Affiliate to comply with Section
4.2(a) above.

         (c)      In the event that an Indemnified Party believes it is entitled
to indemnification pursuant to Section 4.2(b), such Indemnified Party may make
demand upon the applicable Indemnifying Claimant(s) and such Indemnifying
Claimant(s) shall, within seven business days after receipt thereof, either (i)
pay its indemnification obligation in full, or (ii) request an accounting of the
Losses from such Indemnified Party. Upon receipt of such accounting setting
forth in reasonable detail the computation of the amount of the Losses and
reasonable evidence thereof, the Indemnifying Claimant(s) shall promptly pay the
amount thereof.

         (d)      To the extent that an Indemnifying Claimant's undertakings set
forth in Section 4.2(b) may be unenforceable, such Indemnifying Claimant shall
contribute the maximum amount that it is permitted to contribute under
applicable Law to the payment and satisfaction of all applicable Losses incurred
by the Indemnified Party.

4.3 COOPERATION

         In connection with any dispute with Watson with respect to or other
claim relating to the Umbrella Agreement, each Claimant shall cooperate with the
other Claimants and the Agent with respect to such dispute or claim and shall
make available to the other Claimants and the Agent all such witnesses, records,
materials and information in the Claimant's possession or under the Claimant's
control relating thereto as is reasonably required by such other Claimant(s) or
the Agent.

<PAGE>

                                   ARTICLE 5

                                  MISCELLANEOUS

5.1 WAIVER

         No failure on the part of the Agent, a Holder or the Holders to
exercise, and no delay in exercising, any right, power, or remedy hereunder
shall operate as a waiver thereof.

5.2 GOVERNING LAW

         This Agreement and the rights of the parties hereunder shall be
governed in all respects by the laws of the State of New York wherein the terms
of this Agreement were negotiated, excluding to the greatest extent permitted by
law any rule of law that would cause the application of the laws of any
jurisdiction other than the State of New York.

5.3 SEVERABILITY

         If any provision or portion of any provision of this Agreement is held
to be unenforceable or invalid by any court of competent jurisdiction, the
remaining portions of any such provision and the remaining provisions hereof
shall remain in effect.

5.4 FURTHER ASSURANCES

         The Holders and the Agent shall execute, in a proper and timely manner,
at or after the date hereof, such additional documents and instruments as may be
reasonably requested by the other parties in connection with the consummation or
confirmation of the transactions contemplated by this Agreement.

5.5 COUNTERPARTS

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

5.6 AMENDMENT

         No modification or amendment to this Agreement may be made except by a
written instrument signed by the Agent and the Requisite Holders; provided, that
any amendment to Article 4 shall require the written consent of each Claimant.

5.7 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 the Holders, then to the address set forth opposite the name of
each of the Holders on the signature page

<PAGE>

hereof and if to Agent, then to the attention of Bruce F. Wesson, c/o Galen
Partners III, L.P., 610 Fifth Avenue, Fifth Floor, New York, New York, 10020.

5.8 ARBITRATION

         Any controversy or claim arising out of or related to this contract, or
the breach thereof, shall be settled by arbitration before three arbitrators in
New York City to be administered by the American Arbitration Association under
its Commercial Arbitration Rules, and judgment on the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof.

5.9 TERMINATION

         This Agreement shall terminate and be of no further force or effect
upon the written consent to such termination by the Requisite Holders.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

<PAGE>

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

GALEN PARTNERS III, L.P.                     CARE CAPITAL INVESTMENTS II, LP
By: Claudius, L.L.C., General Partner        By: Care Capital II, LLC, as
610 Fifth Avenue, 5th Fl.                    general partner
New York, New York 10019                     47 Hulfish St., Suite 310
                                             Princeton, NJ 08542

                                             By: _____________________________
___________________________                  Name:  David R. Ramsay
By: Srini Conjeevaram                        Title: Authorized Signatory
Its: General Partner

GALEN PARTNERS INTERNATIONAL, III, L.P.      ESSEX WOODLANDS HEALTH
By: Claudius, L.L.C., General Partner        VENTURES V, L.P.
610 Fifth Avenue, 5th Floor                  190 South LaSalle Street, Suite
New York, New York 10020                     2800
                                             Chicago, IL 60603

___________________________                  ___________________________
By: Srini Conjeevaram                        By: Immanuel Thangaraj
Its: General Partner                         Its: Managing Director

GALEN EMPLOYEE FUND III, L.P.                DENNIS ADAMS
By: Wesson Enterprises, Inc.                 120 Kynlyn Road
610 Fifth Avenue, 5th Floor                  Radnor, Pennsylvania  19312
New York, New York 10020

___________________________                  ___________________________
By: Bruce F. Wesson
Its: General Partner

MICHAEL WEISBROT                             SUSAN WEISBROT
1136 Rock Creek Road                         1136 Rock Creek Road
Gladwyne, Pennsylvania 19035                 Gladwyne, Pennsylvania 19035

___________________________                  ___________________________

<PAGE>

PETER STIEGLITZ                              GEORGE E. BOUDREAU
RJ Palmer LLC                                222 Elbow Lane
156 West 56th Street, 5th Floor              Haverford, PA 19041
New York, New York 10019

___________________________                  ___________________________

JOHN E. HEPPE, JR.
237 W. Montgomery Avenue
Haverford, Pennsylvania 19041

___________________________

<PAGE>

                                   SCHEDULE I

                            PARTICIPATION PERCENTAGES

<TABLE>
<CAPTION>
             NAME OF HOLDER                    PARTICIPATION PERCENTAGE
-----------------------------------------------------------------------
<S>                                            <C>
Essex Woodlands Health Ventures V, L.P.               [37.75%*]
     Care Capital Investments, L.P.                   [21.82%*]
        Galen Partners III, L.P.                      [34.49%*]
 Galen Partners International III, L.P.                [3.12%*]
     Galen Employee Fund III, L.P.                     [0.14%*]
  Michael Weisbrot and Susan Weisbrot                  [1.13%*]
              Dennis Adams                             [0.91%*]
           George E. Boudreau                          [0.36%*]
            Peter Stieglitz                            [0.15%*]
           John E. Heppe, Jr.                          [0.15%*]
                                                       -----
                 TOTAL                                   100%
                                                       -----
</TABLE>

* These percentages are subject to being finalized.

</TEXT>
</DOCUMENT>
