Much like Bane said, a "Multiplayer(network) physics engine" is a physic engine running on the server side. Much like any game logic running on a server side(to prevent cheating).
To prevent lag, you can have a physics engine running per-frame on each client for fluid motion between server updates. Another engine instance running on the server updating the players less frequently for correctness and cheat prevention.
Note on latency or LAG:
There is no magic cure for lag, you simply have to optimize your code as much as possible and wait for technology to do the rest. Most latency isn't due to the amount of data you sent each sec. It actually has to do with number of milliseconds it takes that data to travel (could be distance related/ technology* related). Sending more data should not affect latency much with today's tech, because you will likely still be able to send data as frequently.
In the old days, the bandwidth and the amount of data transferred were the bottleneck as far as latency goes, the connection was so slow (4Kb), it actually needed more time to send slightly more data.
That is still true today only in cases where the amounts of data transferred is very large (streaming HD content on Netflix 2.3Gig per hour). The modern connection speed can handle game data pretty well, 10-40 physical objects moving around are not going to noticeably affect performance.
For instance, if for some reason we switched from Ethernet to InfiniBand, the latency would decrease dramatically even though, it may or may not affect bandwidth.