AFFILIATE SUBORDINATION AGREEMENT

Exhibit 10.5

EXECUTION COPY

AFFILIATE SUBORDINATION AGREEMENT

This AFFILIATE SUBORDINATION AGREEMENT (this “Agreement”) is entered into as of September 30, 2008, by and among Jay Levy (“Levy”), Jaynjean Levy Family Limited Partnership, a Delaware limited partnership (the “Partnership” and, together with Levy, the “Subordinated Creditors”), Unigene Laboratories, Inc., a Delaware corporation (the “Company”), and Victory Park Management, LLC , a Delaware limited liability company, as Agent for all Senior Lenders party to the Senior Credit Agreement described below.

R E C I T A L S

A. The Company, Agent and Senior Lenders (as hereinafter defined) have entered into the Senior Credit Agreement pursuant to which, among other things, Senior Lenders have agreed, subject to the terms and conditions set forth in the Senior Credit Agreement, to purchase certain senior notes from the Company. All of the Company’s obligations to Agent and Senior Lenders under the Senior Credit Agreement and the other Senior Debt Documents (as hereinafter defined) are secured by first-priority liens on and security interests in substantially all of the now existing and hereafter acquired real and personal property of the Company (the “Collateral”).

B. Prior to the date hereof, the Company has issued the Subordinated Notes (as defined below) to the Subordinated Creditors. All of the Company’s obligations evidenced by the Subordinated Notes are, after giving effect to this Agreement, secured by second-priority liens on and security interests in certain of the Collateral as described in Schedule A attached hereto.

C. As an inducement to and as one of the conditions precedent to the agreement of Agent and Senior Lenders to consummate the transactions contemplated by the Senior Credit Agreement (the “Transactions”), Agent and Senior Lenders have required the execution and delivery of this Agreement, and the consent to the Transactions, by Subordinated Creditors and the Company in order to set forth the relative rights and priorities of Agent, Senior Lenders and Subordinated Creditors under the Senior Debt Documents and the Subordinated Debt Documents (as hereinafter defined).

NOW, THEREFORE, in order to induce Agent and Senior Lenders to consummate the transactions contemplated by the Senior Credit Agreement, and for other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the parties hereto hereby agree as follows:

1. Definitions . The following terms shall have the following meanings in this Agreement:

“ Agent ” shall mean Victory Park Management, LLC, as Agent for the Senior Lenders, or any other Person appointed by the holders of the Senior Debt as administrative agent for purposes of the Senior Debt Documents and this Agreement.

“ Bankruptcy Code ” shall mean Title 11 of the United States Code, as amended from time to time and any successor statute and all rules and regulations promulgated thereunder.

“ Distribution ” means, with respect to any indebtedness, obligation or security, (a) any payment or distribution by any Person of cash, securities or other property, by set-off or otherwise, on account of such indebtedness, obligation or security, (b) any redemption, purchase or other acquisition of such indebtedness, obligation or security by any Person or (c) the granting of any lien or security interest to or for the benefit of the holders of such indebtedness, obligation or security in or upon any property of any Person.

“ Enforcement Action ” shall mean (a) to take from or for the account of the Company or any guarantor of the Subordinated Debt, by set-off or in any other manner, the whole or any part of any moneys which may now or hereafter be owing by the Company or any such guarantor with respect to the Subordinated Debt, (b) to sue for payment of, or to initiate or participate with others in any suit, action or proceeding against the Company or any such guarantor to (i) enforce payment of or to collect the whole or any part of the Subordinated Debt or (ii) commence judicial enforcement of any of the rights and remedies under the Subordinated Debt Documents or applicable law with respect to the Subordinated Debt, (c) to accelerate the Subordinated Debt, (d) to exercise any put option or to cause the Company or any such guarantor to honor any redemption or mandatory prepayment obligation under any Subordinated Debt Document, (e) to notify account debtors or directly collect accounts receivable or other payment rights of the Company or any such guarantor or (f) to take any action under the provisions of any state or federal law, including, without limitation, the Uniform Commercial Code, or under any contract or agreement, to enforce, foreclose upon, take possession of or sell any property or assets of the Company or any such guarantor including the Collateral.

“ Permitted Subordinated Debt Payments ” means payments of regularly scheduled payments of principal of, and interest on, the Subordinated Debt due and payable on a non-accelerated basis in accordance with the schedule of payments set forth on Schedule B attached hereto.

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“ Person ” means any natural person, corporation, general or limited partnership, limited liability company, firm, trust, association, government, governmental agency or other entity, whether acting in an individual, fiduciary or other capacity.

“ Proceeding ” shall mean any voluntary or involuntary insolvency, bankruptcy, receivership, custodianship, liquidation, dissolution, reorganization, assignment for the benefit of creditors, appointment of a custodian, receiver, trustee or other officer with similar powers or any other proceeding for the liquidation, dissolution or other winding up of a Person.

“ Refinancing Senior Debt Documents ” shall mean any financing documentation which replaces the VPC Loan Documents and pursuant to which the Senior Debt under the VPC Loan Documents are refinanced, as such financing documentation may be amended, supplemented or otherwise modified from time to time in compliance with this Agreement.

“ Senior Credit Agreement ” shall mean the Financing Agreement, dated as of the date hereof, by and among the Company, the Agent and Senior Lenders (as the same may be amended, restated, supplemented or otherwise modified from time to time) and any successor loan, credit or financing agreement or note or similar agreement or instrument pursuant to which the obligations under such Financing Agreement (or its successor) are refinanced and replaced in whole or in part, as such successor may be amended, restated, supplemented or otherwise modified from time to time.

“ Senior Debt ” shall mean all obligations, liabilities and indebtedness of every nature of the Company from time to time owed to Agent or any Senior Lender under the Senior Debt Documents, including, without limitation, the principal amount of all debts, claims and indebtedness, accrued and unpaid interest and all fees, costs and expenses, whether primary, secondary, direct, contingent, fixed or otherwise, heretofore, now and from time to time hereafter owing, due or payable, whether before or after the filing of a Proceeding under the Bankruptcy Code together with (a) any amendments, modifications, renewals or extensions thereof to the extent not prohibited by the terms of this Agreement and (b) any interest accruing thereon after the commencement of a Proceeding, without regard to whether or not such interest is an allowed claim. Senior Debt shall be considered to be outstanding whenever any loan commitment under the Senior Debt Document is outstanding.

“ Senior Debt Documents ” shall mean the VPC Loan Documents and, after any refinancing of the Senior Debt under the VPC Loan Documents, the Refinancing Senior Debt Documents.

“ Senior Default ” shall mean any “Event of Default” under the Senior Debt Documents, or any condition or event that, after notice or lapse of time or both, would constitute such an Event of Default if that condition or event were not cured or removed within any applicable grace or cure period set forth therein.

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“ Senior Default Notice ” shall mean a written notice from Agent to Subordinated Creditors pursuant to which Subordinated Creditors are notified of the occurrence of a Senior Default, which notice incorporates a reasonably detailed description of such Senior Default and which notice expressly states that it is a “Senior Default Notice” hereunder.

“ Senior Lenders ” shall mean the holders of the Senior Debt.

“ Subordinated Debt ” shall mean all of the obligations of the Company to Subordinated Creditors evidenced by or incurred pursuant to the Subordinated Debt Documents.

“ Subordinated Debt Documents ” shall mean the Subordinated Notes, any guaranty with respect to the Subordinated Debt, any security agreement or other collateral document securing the Subordinated Debt and all other documents, agreements and instruments now existing or hereinafter entered into evidencing or pertaining to all or any portion of the Subordinated Debt.

“ Subordinated Debt Default ” shall mean a default in the payment of the Subordinated Debt or in the performance of any term, covenant or condition contained in the Subordinated Debt Documents or any other occurrence permitting any Subordinated Creditor to accelerate the payment of all or any portion of the Subordinated Debt.

“ Subordinated Debt Default Notice ” shall mean a written notice from any Subordinated Creditor or the Company to Agent pursuant to which Agent is notified of the occurrence of a Subordinated Debt Default, which notice incorporates a reasonably detailed description of such Subordinated Debt Default and which notice states that it is a “Subordinated Debt Default Notice” hereunder.

“ Subordinated Notes ” shall mean each of (i) the Secured Promissory Note dated as of May 10, 2007 issued by the Company in favor of the Partnership in an aggregate principal amount of $7,418,803 and (ii) the Secured Promissory Note dated as of May 10, 2007 issued by the Company in favor of Levy in an aggregate principal amount of $8,318,714.

“ Transactions ” has the meaning set forth in the recitals hereto.

“ VPC Loan Documents ” shall mean the Senior Credit Agreement and all other agreements, documents and instruments executed from time to time in connection therewith, as the same may be amended, supplemented or otherwise modified from time to time.

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2. Subordination .

2.1 Subordination of Subordinated Debt to Senior Debt . The Company covenants and agrees, and each Subordinated Creditor by its acceptance of the Subordinated Debt Documents (whether upon original issue or upon transfer or assignment) likewise covenants and agrees, notwithstanding anything to the contrary contained in any of the Subordinated Debt Documents, that the payment of any and all of the Subordinated Debt shall be subordinate and subject in right and time of payment, to the extent and in the manner hereinafter set forth, to the prior indefeasible payment in full in cash of all Senior Debt, whether outstanding on the date hereof or hereafter created, incurred, assumed or guaranteed. No right of Agent or any Senior Lender to enforce the subordination of the Subordinated Debt may be impaired by any act or failure to act by Agent or any Senior Lender or by the failure of the Company or any Subordinated Creditor to comply with the terms and provisions of this Agreement and the Subordinated Debt Documents. Each holder of Senior Debt, whether such Senior Debt is now outstanding or hereafter created, incurred, assumed or guaranteed, shall be deemed to have acquired Senior Debt in reliance upon the provisions contained in this Agreement.

2.2 Liquidation, Dissolution, Bankruptcy . In the event of any Proceeding involving the Company or the liquidation or dissolution of the Company:

(a) All Senior Debt shall first be indefeasibly paid in full in cash and all commitments to lend under the Senior Debt Documents shall be terminated before any Distribution, whether in cash, securities or other property, or otherwise, shall be made to any Subordinated Creditor on account of any Subordinated Debt.

(b) Any Distribution, whether in cash, securities or other property, or otherwise, which would otherwise, but for the terms hereof, be payable or deliverable in respect of the Subordinated Debt shall be paid or delivered directly to Agent (to be held and/or applied by Agent in accordance with the terms of the Senior Debt Documents) until all Senior Debt is indefeasibly paid in full in cash and all commitments to lend under the Senior Debt Documents shall have been terminated. Each Subordinated Creditor irrevocably authorizes, empowers and directs any debtor, debtor in possession, receiver, trustee, liquidator, custodian, conservator or other Person having authority, to pay or otherwise deliver all such Distributions to Agent. Each Subordinated Creditor also irrevocably authorizes and empowers Agent, in the name of such Subordinated Creditor, to demand, sue for, collect and receive any and all such Distributions.

(c) Each Subordinated Creditor agrees not to initiate, prosecute or participate in any claim, action or other proceeding challenging (i) the enforceability, validity, perfection or priority of the Senior Debt or any liens and security interests securing the Senior Debt or (ii) the exercise of any rights or remedies of Agent or any Senior Lender in respect of the Senior Debt or any liens or security interests securing the Senior Debt.

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(d) Each Subordinated Creditor agrees that Agent and Senior Lenders may consent to the use of cash collateral or provide financing to the Company on such terms and conditions and in such amounts as Agent and Senior Lenders, in their sole discretion, may decide and, in connection therewith, the Company may grant to Agent and Senior Lenders liens and security interests upon all of the property of the Company, which liens and security interests (i) shall secure payment of all Senior Debt (whether such Senior Debt arose prior to the commencement of any Proceeding or at any time thereafter) and all other financing provided by Senior Lenders during such Proceeding and (ii) shall be superior in priority to the liens and security interests, if any, in favor of such Subordinated Creditor on the property of the Company. Each Subordinated Creditor agrees that it will not object to or oppose a sale or other disposition of any property securing all of any part of the Senior Debt free and clear of security interests, liens or other claims of such Subordinated Creditor under Section 363 of the Bankruptcy Code or any other provision of the Bankruptcy Code if Agent and Senior Lenders have consented to such sale or disposition. Each Subordinated Creditor agrees not to assert any right it may have to “adequate protection” of such Subordinated Creditor’s interest in any Collateral in any Proceeding and agrees that it will not seek to have the automatic stay lifted with respect to any Collateral without the prior written consent of Agent. Each Subordinated Creditor waives any claim it may now or hereafter have arising out of Agent’s or Senior Lenders’ election, in any Proceeding instituted under the Bankruptcy Code, of the application of Section 1111(b)(2) of the Bankruptcy Code, and/or any borrowing or grant of a security interest under Section 364 of the Bankruptcy Code by the Company, as debtor in possession. Each Subordinated Creditor further agrees that it will not seek to participate or participate on any creditor’s committee without Agent’s prior written consent.

(e) Each Subordinated Creditor agrees to execute, verify, deliver and file any proofs of claim in respect of the Subordinated Debt requested by Agent in connection with any such Proceeding and hereby irrevocably authorizes, empowers and appoints Agent its agent and attorney-in-fact to (i) execute, verify, deliver and file such proofs of claim upon the failure of such Subordinated Creditor promptly to do so prior to 30 days before the expiration of the time to file any such proof of claim and (ii) vote such claim in any such Proceeding upon the failure of such Subordinated Creditor to do so prior to 15 days before the expiration of the time to vote any such claim; provided Agent shall have no obligation to execute, verify, deliver, file and/or vote any such proof of claim. In the event that Agent votes any claim in accordance with the authority granted hereby, the applicable Subordinated Creditor shall not be entitled to change or withdraw such vote.

(f) The Senior Debt shall continue to be treated as Senior Debt and the provisions of this Agreement shall continue to govern the relative rights and priorities of Senior Lenders and Subordinated Creditors even if all or part of the Senior Debt or the security interests securing the Senior Debt are subordinated, set aside, avoided, invalidated or disallowed in connection with any such Proceeding, and this Agreement

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and the relative rights and priorities of Senior Lenders and Subordinated Creditors hereunder shall be reinstated if at any time any payment of any of the Senior Debt is rescinded or must otherwise be returned by any holder of Senior Debt or any representative of such holder.

2.3 Subordinated Debt Payment Restrictions .

(a) Notwithstanding the terms of the Subordinated Debt Documents, the Company hereby agrees that it shall not make, and each Subordinated Creditor hereby agrees that it shall not accept, any Distribution with respect to the Subordinated Debt (other than Permitted Subordinated Debt Payments subject to the terms of subsection 2.2 of this Agreement) until the Senior Debt has been indefeasibly paid in full in cash and all commitments to lend under the Senior Debt Documents shall have been terminated; provided, however, that the Company and Subordinated Creditors further agree that no Permitted Subordinated Debt Payment may be made by the Company or accepted by any Subordinated Creditor if, at the time of such payment, a Senior Default exists and such Senior Default shall not have been waived.

(b) The Company may resume Permitted Subordinated Debt Payments (and may make any Permitted Subordinated Debt Payments missed due to the application of paragraph (a) of this subsection 2.3) in respect of the Subordinated Debt or any judgment with respect thereto upon a waiver or cure of such Senior Default.

(c) No Senior Default shall be deemed to have been waived or cured for purposes of this subsection 2.3 unless and until the Company shall have received a written waiver or notice of cure from Agent or all Senior Lenders.

2.4 Subordinated Debt Standstill Provisions . Until the Senior Debt has been indefeasibly paid in full in cash and all commitments to lend under the Senior Debt Documents shall have been terminated, Subordinated Creditors shall not, without the prior written consent of Agent, take any Enforcement Action with respect to the Subordinated Debt. Notwithstanding the foregoing, Subordinated Creditors may file proofs of claim against the Company in any Proceeding involving the Company. Any Distributions or other proceeds of any Enforcement Action obtained by any Subordinated Creditor in violation of the foregoing prohibition shall in any event be held in trust by it for the benefit of Agent and Senior Lenders and promptly paid or delivered to Agent for the benefit of Senior Lenders in the form received until all Senior Debt has been indefeasibly paid in full in cash and all commitments to lend under the Senior Debt Documents shall have been terminated. For the avoidance of doubt, each Subordinated Creditor hereby agrees that, upon receipt of any Distributions or other amounts arising from any Liens granted in favor thereto on assets or properties not constituting Collateral, such Subordinated Creditor shall hold such Distributions or other amounts in trust for the benefit of Agent and Senior Lenders and promptly pay or deliver such Distributions or other amounts to Agent for the benefit of Senior Lenders in the form received until all Senior Debt has been indefeasibly paid in full in cash and all commitments to lend under the Senior Debt Documents shall have been terminated.

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2.5 Incorrect Payments . If any Distribution on account of the Subordinated Debt not permitted to be made by the Company or accepted by Subordinated Creditors under this Agreement is made and received by any Subordinated Creditor, such Distribution shall not be commingled with any of the assets of such Subordinated Creditor, shall be held in trust by such Subordinated Creditor for the benefit of Agent and Senior Lenders and shall be promptly paid over or delivered to Agent for application (in accordance with the Senior Debt Documents ) to the payment of the Senior Debt then remaining unpaid, until all of the Senior Debt shall have been indefeasibly paid in full in cash and there shall be no further commitments to lend unde