SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

FORM 10-K

 

 

For the fiscal year ended December 31, 2001

 

OR

 

 

For the transition period from                          to                               

 

Commission file number  000-25571

 

AXONYX INC.

(Exact name of small business issuer in its charter)

 

 

Securities registered under Section 12(b) of the Exchange Act:

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.          Yes ý  No o

 

Indicate by check mark disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

The Registrant estimates that the aggregate market value of its Common Stock on March 15, 2002, based on the closing price shown on the Nasdaq National Market on that date, held by its non-affiliates was approximately $40,740,996.

 

The number of shares of Common Stock, par value $0.001, of the Registrant outstanding as of March 27, 2002, was 17,247,371 shares.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Not applicable.

 

 

PART I

 

Item 1.                    Business.

 

GLOSSARY

 

acetylcholinesterase – an enzyme that degrades the neurotransmitter acetylcholine in the brain and other tissues of the body.  Acetylcholine is a chemical substance that sends signals between nerve cells (called neurotransmission) and is therefore called a neurotransmitter.  Neurotransmitters are secreted by neurons (nerve cells) into the space between neurons called the synapse.  Acetylcholine is a primary neurotransmitter in the brain, and is associated with memory and cognition.  Acetylcholinesterase is the enzyme present in the synapse that degrades acetylcholine.

 

analog – one of a series of chemical substances of similar chemical structure.

 

amyloid plaque – amyloid proteins involved in Alzheimer’s Disease and other diseases of amyloidosis aggregate into insoluble fibrils that are deposited in amyloid plaques in the brains of Alzheimer’s patients.

 

beta amyloid precursor protein – this protein (known as beta-APP) is encoded on chromosome 21 and is present in the cell wall of numerous cells within the body including nerve cells of the brain.  Beta-amyloid protein is derived from this larger protein.

 

beta-amyloid protein – one of more than a dozen types of amyloid proteins found in the body, beta amyloid is normally present in the brain of healthy individuals in small quantities.  Beta-amyloid, derived from the beta-amyloid precursor protein, is over-produced in Alzheimer’s Disease and Down’s Syndrome.  In Alzheimer’s Disease, the beta-amyloid protein undergoes a conformational change, aggregates and is deposited as insoluble fibrils in amyloid plaques in the brain.

 

beta-sheet breaker peptide – a molecule composed of naturally occurring amino acids, the building blocks of proteins, that is designed to bind to and prevent the conversion of the normal form of protein to the misshapen form that forms plaques.

 

butyrylcholinesterase – an enzyme that is normally found widely in the body.  Its function in the central nervous system remains to be fully understood.  Amongst other roles, it degrades acetylcholine, a primary neurotransmitter in the brain.  Butyrylcholinesterase is found in high concentration in the plaques taken from individuals who have died from Alzheimer’s Disease.  This enzyme also functions to degrade a number of drugs and natural products and is involved in their elimination from the body.

 

cholinergic system – is also called the parasympathetic nervous system; it is involved in nerve transmission related to memory and cognition, as well as the involuntary functioning of major organs such as the heart, lungs and gastrointestinal system.

 

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cortically-projecting neurons – these are the nerve cells that connect the mid-brain to the cortical areas in the front part of the brain where nerve cells involved in memory and cognition are concentrated.  In Alzheimer’s Disease, the loss of these connecting nerve cells result in a reduction in the amount of the neurotransmitter acetylcholine, and the loss of mental capacity or cognition.

 

neuroblastoma cell cultures – these are a type of cell derived from the human brain that can be grown in containers in the lab (in vitro) where they are able to reproduce and carry out many activities as if they were residing in the brain, including the synthesis and secretion of proteins such as the beta-amyloid protein which, in the human brain, can form plaques.  A neuroblastoma cell culture is used to study brain cell function in a simple in vitro system, which allows testing of the ability of drugs to prevent the formation of the beta-amyloid precursor protein and secretion of beta amyloid.

 

prion – is a contraction of the descriptive term, proteinaceous infectious proteins.  Prions, unlike viruses, bacteria and fungi, have no DNA and consist only of protein and the infectious form can cause degenerative brain diseases.

 

prion-related diseases – these are degenerative diseases of the brain that are thought to be caused by an infectious protein called a prion.  Such diseases include Creutzfeldt Jakob Disease, new variant (nvCJD) in humans, Bovine Spongiform Encephalopathy (BSE or Mad Cow Disease) in cows, and Scrapies disease in sheep.

 

transdermal formulation – a formulation refers to the mixture of chemical substances used to promote the absorption of a drug.  A formulation that promotes the absorption of a drug from the skin is called a transdermal formulation (a skin patch).

 

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TABLE OF CONTENTS

 

A.	Axonyx – Introduction
B.	Business Strategy
C.	Axonyx Drug Development Programs
D.	Out-Licensed Technology
E.	Competition
F.	Government Regulation
G.	Strategic Alliances
H.	Marketing and Sales
I.	Patents, Trademarks, and Copyrights
J.	Employees

 

A.            Axonyx – Introduction

 

Axonyx Inc. is a biopharmaceutical company engaged in the business of acquiring and developing central nervous system (CNS) drug candidates, primarily in the areas of memory and cognition.  Axonyx acquires patent rights to CNS pharmaceutical compounds that it believes may have significant potential market impact and works to advance the compounds through pre-clinical and clinical development towards regulatory approval.  Axonyx has acquired worldwide exclusive patent rights to three main classes of therapeutic compounds designed for the treatment of Alzheimer’s Disease (AD), Mild Cognitive Impairment (MCI), and related diseases.  Axonyx has also acquired patent rights to a fourth class of potential therapeutic compounds designed for the treatment of prion related diseases.  Axonyx licensed these patent rights from New York University (NYU) and, via a sublicense, from the National Institutes of Health\National Institute on Aging (NIA).

 

Axonyx’s most advanced drug candidate, Phenserine, is an acetylcholinesterase inhibitor designed for the treatment of AD, with possible application to the treatment of MCI and related memory diseases.  Axonyx has sublicensed its Amyloid Inhibitory Peptides designed for the treatment of AD and Prion Inhibitory Peptides designed for the diagnosis and treatment of prion diseases such as Bovine Spongiform Encephalopathy (also known as Mad Cow Disease) and the human form of the disease, Creutzfeldt Jakob Disease, new variant to Applied Research Systems ARS Holding N.V., a subsidiary of Serono International, S.A., a Swiss biopharmaceutical company.

 

In December 2000 Axonyx incorporated Axonyx Europe BV, a wholly owned subsidiary, in the Netherlands.  Gosse Bruinsma, M.D., currently the Chief Operating Officer and Treasurer of Axonyx, was appointed the President of Axonyx Europe BV.  Axonyx Europe explores out-licensing opportunities for Axonyx’s licensed technologies in Europe and other areas outside the United States, facilitates communication with Axonyx’s European shareholders, and may assist in organizing and administering future potential pre-clinical and clinical research in Europe.  Axonyx Europe has established a Scientific Advisory Board to assist in clinical protocol design as well as the identification of novel CNS technology and products for potential licensing.

 

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Axonyx’s executive offices are located at 825 Third Avenue, 40th Floor, New York, New York 10022, telephone number (212) 688-4770.  It also maintains offices at 1001 4th Avenue Plaza, Suite 3228, Seattle, Washington 98154, telephone number (206) 340-0211, at 200 Hurlbutt St., Wilton, Connecticut 06897, telephone number (203) 762-2097, and at 4041 State Highway 14, Stevenson, Washington 98648, telephone number (509) 427-5132.  Axonyx Europe BV maintains an office at Bilderdijkstraat 9, 2311 XD Leiden, The Netherlands, telephone number (31) 71 589 3463.

 

Axonyx’s fiscal year end is December 31.

 

B.            Business Strategy

 

Axonyx’s business strategy is to: (1) identify, acquire and exploit rights to new technologies and compounds relating to AD and other neurological disorders; (2) enhance the value of those assets through further out-sourced research and development, specifically preclinical and clinical testing towards regulatory approval; (3) market its drugs through licensing agreements with major pharmaceutical companies; and (4) work to develop promising compounds utilizing contract research organizations and collaborations with third parties such as its current licensor at the NIA, and through corporate ventures with companies such as Serono International, S.A., a subsidiary of which signed a License Agreement with Axonyx in October 2000.  Axonyx expects to derive its revenues, if any, from certain up-front and sub-licensing fees, royalties on drug product sales and appropriate milestone payments.

 

Axonyx’s long term goal is to become a partially integrated pharmaceutical company with capabilities in drug research and development, preclinical and clinical investigation, and regulatory affairs.  As Axonyx itself does not currently maintain any laboratory or research premises, it out-sources its preclinical research and development, utilizing instead such facilities on a contractual or collaborative basis at academic and research institutions, as well as contract research organizations.  Axonyx also utilizes corporate licensing arrangements to further the development of its pharmaceutical assets.  Through Fall 2001, Axonyx funded research in laboratories at the New York University School of Medicine and Axonyx has also funded a researcher at the NIA’s laboratories.  Research is ongoing at Serono International laboratories in Geneva on certain technologies sublicensed by Axonyx to Serono’s subsidiary ARS pursuant to a license agreement.  Pursuant to a Research Agreement with Thomas Jefferson University signed in April of 2001, Axonyx is funding a two year research program concerning a potential pharmaceutical compound named Gilatide and related analog compounds that are designed to enhance memory and cognition.  Axonyx is sponsoring the development of a diagnostic test for AD at the University of Melbourne (Australia).  Axonyx also supports research projects at specific well-regarded institutions such as the Mayo Clinic in Jacksonville, Florida, and the University of Indiana in Indianapolis, Indiana.  Axonyx intends to develop other corporate partnerships with well established and well capitalized pharmaceutical companies for the clinical development of its compounds and for their potential production, commercialization and marketing.

 

Considering the commercialization infrastructure necessary to effectively market its drug products, Axonyx will seek joint ventures or collaborations with other pharmaceutical

 

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companies, both domestically and outside the United States.  Axonyx will seek corporate partners, such as Serono, who will be responsible for all or part of the clinical development, regulatory approval, manufacturing and marketing of the specific drug products.  Under such an arrangement, Axonyx expects to receive certain up-front and sub-licensing fees, milestone payments, and royalties on drug product sales.

 

C.            Axonyx Drug Development Programs

 

General

 

Axonyx is pursuing (1) the development of three different types of licensed pharmaceutical products for the treatment of AD, (2) Gilatide, a potential pharmaceutical compound designed to enhance memory and cognition with potential applications to the treatment of a wide range of memory disorders including AD, (3)  a diagnostic test for AD, and (4) a pharmaceutical product for prion-related diseases.  The three licensed AD pharmaceutical approaches include:  (1) Phenserine, a potent inhibitor of acetylcholinesterase, (2) a butyrylcholinesterase inhibitor which will be chosen from a series of selectively acting compounds, the best studied of which are Phenethylnorcymserine (PENC) and Bisnorcymserine, and, (3) through its sublicense with a subsidiary of Serono International, S.A., compounds called Amyloid Inhibitory Peptides (AIPs) which may prevent and reverse the formation of amyloid plaques in AD.  ARS, through Serono, is conducting research on the AIP compounds.  Each of these AD-targeted classes of compounds has a different therapeutic mechanism of action and represents innovative platform technology from which additional potential therapeutic and diagnostic agents could be developed.

 

Axonyx has the option to obtain the exclusive license to two other technologies related to the diagnosis and treatment of AD:  (1) a potential pharmaceutical compound named Gilatide and related analog compounds that are designed to enhance memory and cognition being developed at Thomas Jefferson University and (2) a potential diagnostic test for Alzheimer’s Disease being developed at the University of Melbourne (Australia).  Axonyx is sponsoring the development of the diagnostic test for AD at the University of Melbourne (Australia) and is sponsoring the Gilatide Research Program at Thomas Jefferson University.

 

Through its sublicense with Axonyx, ARS, at Serono research facilities, is also conducting research on compounds called Prion Inhibitory Peptides (PIPs) designed for the diagnosis and treatment of prion diseases such as Bovine Spongiform Encephalopathy (also known as Mad Cow Disease) and the human form of the disease, Creutzfeldt Jakob Disease, new variant.

 

Despite the fact that we cannot assure you that the technologies and pharmaceutical compounds that Axonyx is developing will ultimately prove to be profitable, Axonyx will be required to continue to spend substantial capital on research and development in the foreseeable future in order to enhance its proprietary pharmaceutical portfolio, and to seek to acquire new potential products.  New technologies and/or pharmaceutical compounds in the field of AD, Mild Cognitive Impairment, related diseases associated with cognitive impairment, and prion related diseases by other entities could adversely affect the future marketability of Axonyx’s proprietary

 

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products.  Consequently, Axonyx will need to continue its funding of research and development of new technologies and pharmaceutical compounds in order to remain competitive.  In fiscal years 1999, 2000 and 2001, Axonyx spent $784,000, $1,635,000 and $3,298,000 respectively, on sponsored and contract research and development of its technologies and pharmaceutical compounds.

 

Alzheimer’s Disease Overview

 

Alzheimer’s Disease is a degenerative brain disease that, with individual variations, advances from memory lapses to confusion, personality and behavior changes, communication problems and impaired judgment.  Over the years, AD patients become unable to care for themselves, and the disease eventually leads to death.  It is estimated that more than 4 million Americans and 12 million people worldwide suffer from AD.  Risk factors for the disease include age and family history.  According to the Alzheimer’s Association, one in 10 persons over 65 and half of those over 85 years old are affected by the disease.

 

While scientists are not certain of the specific causes of Alzheimer’s, scientific discoveries have identified important hallmarks of the disease.  Neurofibrillary tangles within brain nerve cells and extracellular senile plaques in the cholinergic pathways of the brain have been linked to the death of nerve cells in AD patients.  Two schools of thought in the scientific community have been historically divided between those that believe that the neurofibrillary tangles composed of tau protein within the nerve cells are responsible for the disease and those that believe that the senile plaques composed of beta-amyloid protein are the cause.  Recent research indicates that the beta-amyloid plaques are likely to be the primary cause of AD.

 

According to the most widely accepted theory concerning the cause of AD, there are two important events leading to the formation of beta-amyloid plaques.  The first event involves the abnormal processing of the amyloid precursor protein.  In AD, the amyloid precursor protein (beta-APP) is sequentially cleaved into pieces by two enzymes, creating protein fragments, one of which is the beta-amyloid peptide.  The second key event is the conversion of beta-amyloid into insoluble beta-sheets that aggregate to form insoluble fibrous masses (fibrils).  These fibrils are deposited as part of the neurotoxic amyloid plaques that appear to cause the death of neurons in the brain.  The beta-amyloid protein is a protein normally found in the brain that is over-produced in Alzheimer’s Disease and is considered the toxic agent responsible for neuronal cell death.  There are two strategies for preventing the formation of these amyloid plaques:  (1) preventing the formation of beta-amyloid through the abnormal processing of its parent molecule, beta—APP, and (2) removing beta-amyloid from the brain or preventing its aggregation into plaques.  A third approach to treating AD involves the disassembly of the fibrils constituting existing amyloid plaques.

 

Alzheimer’s Disease is characterized by increasing cognitive impairment and progressive loss of memory.  These impairments are caused, over time, by a loss of neurons of the cholinergic system of the brain and a loss of cortically-projecting neurons that connect the mid-brain with the cortical areas in the forebrain, particularly affecting brain areas associated with memory and learning.  Under normal healthy conditions, acetylcholine is produced by cholinergic neurons, released to carry messages to other cells, then broken down for reuse.  With

 

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AD, the loss of these cholinergic neurons results in the decreased synthesis and availability of acetylcholine, the neurotransmitter involved in mediating many memory and learning functions.  Acetylcholinesterase is the enzyme primarily responsible for degrading acetylcholine at the synaptic gap between neurons, thus decreasing the availability of this neurotransmitter.  By inhibiting acetylcholinesterase, the amount of available acetylcholine to carry messages between surviving neurons is increased, leading to improvements in memory and cognition.

 

Recent research suggests that for specific nerve pathways within the brain of AD patients the presence of the enzyme butyrylcholinesterase increases relative to acetylcholinesterase.  Normally these two enzymes coexist throughout the body, with acetylcholinesterase predominating in degrading acetylcholine.  Butyrylcholinesterase is additionally found in many other body tissues and functions to degrade a number of drugs such as codeine.  In the brain of AD patients, as acetylcholinesterase levels gradually fall there is a parallel increase in butyrylcholinesterase levels in specific nerve pathways within the cortex and the hippocampus, areas associated with AD. Like acetylcholinesterase, butyrylcholinesterase degrades acetylcholine at the synaptic gap between neurons, decreasing the availability of this key neurotransmitter.  Research in cell culture studies indicates that the increase in butyrylcholinesterase activity amplifies the toxicity of beta amyloid.  This enzyme was identified as a target for inhibition in AD as it also terminates the action of the neurotransmitter acetylcholine in specific nerve pathways in regions of the brain associated with AD and is found in high concentration in amyloid plaques in the brains of AD patients.

 

The treatment of people with AD is a multi billion-dollar industry in the United States alone and constitutes an extremely large and continually expanding potential market with an unmet therapeutic need.  Currently there are four drugs approved in the United States that provide at best marginal symptomatic relief for one aspect of AD:  Cognex® (developed by Warner Lambert), Aricept® (Pfizer and Eisai), Exelon® (Novartis) and Reminyl® (Johnson & Johnson).  One of the Axonyx compounds, Phenserine, an acetylcholinesterase inhibitor, has shown in preclinical studies a therapeutic and safety profile potentially superior to Aricept®, the leading product currently on the market.  Axonyx’s butyrylcholinesterase inhibitor drug candidates attack the disease in other effective ways, representing a potentially new platform technology for the treatment of AD.

 

Given the complexity of the disease, and uncertainty concerning the specific mechanisms causing AD, it appears likely that a “cocktail approach” to treating the disease will be utilized in the future.  We believe that safe and effective drugs could be used in conjunction to attack the disease from different approaches.

 

In addition to inhibiting key enzymes associated with the neural transmission of acetylcholine in preclinical studies conducted by the NIA, the acetylcholinesterase inhibitor Phenserine and the butyrylcholinesterase inhibitors appear to have the ability to inhibit the formation of beta-APP and to reduce levels of the beta-amyloid peptide, the primary component of amyloid plaques.  In animal studies, both types of compounds have been shown to improve cognitive performance.

 

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Program 1:  Inhibitors of Acetylcholinesterase and Beta-Amyloid Precursor Protein (Beta-APP) Formation

 

Axonyx’s most advanced compound, Phenserine, is designed to selectively inhibit acetylcholinesterase, the enzyme primarily responsible for degrading acetylcholine at the synaptic gap between neurons, thus increasing the availability of this neurotransmitter.  Phenserine has been shown to be a potent and selective inhibitor of this enzyme in the rat brain and increases memory and learning over a wide therapeutic range in aged rats without causing toxic side effects.  The compound readily enters the brain, has minimal activity in other organs outside the brain, and has a long duration of action.  In preclinical studies, Phenserine was shown to have a brain to blood ratio of 10:1.  Increasing the concentration of the active drug agent in the brain versus the rest of the body maximizes the effects of the drug while reducing side effects.

 

Phenserine also has the unusual ability to inhibit the formation of the beta-amyloid precursor protein (beta-APP), a large protein that is the source of the neurotoxic peptide, beta amyloid.  By inhibiting the formation of beta-APP, Phenserine can decrease the presence of the beta amyloid protein that is deposited in the brain as amyloid plaques, apparently causing eventual neuronal cell death.  These studies were conducted at laboratories at the NIA in human neuroblastoma cell cultures and in vivo in rodents.  Studies in human neuroblastoma cell lines showed that the compound reduces the formation of beta-amyloid peptide.  Additional animal studies are being conducted in the transgenic mouse to confirm these findings.  The transgenic mouse is a bio-engineered animal that mimics hallmark pathologic changes that occur in the human AD brain.  These results suggest that Phenserine may have the ability to slow the progression of AD in addition to providing symptomatic relief for the cognitive changes.

 

In December 1999, Axonyx initiated Phase I human clinical trials for Phenserine utilizing healthy elderly patients at a U.S. research center.  These Phase I safety and tolerance trials involving both single and multiple dosing were successfully completed in September 2000.

 

In October 2001, Axonyx completed a Phase II proof-of-concept clinical trial with Phenserine utilizing AD patients.  This Phase II proof-of-concept trial was designed to determine the drug’s safety and possibly a trend toward efficacy in patients exhibiting mild to moderate AD.  The trial included 72 patients, with 48 patients receiving two daily doses of the drug and 24 patients received a placebo.  The safety results from the trial substantiated Phase I results in indicating that the drug is safe and well tolerated.  There was a low incidence of side effects associated with the digestive tract, with 8.5% of patients receiving the drug reporting nausea and 2.1% reporting vomiting.  Dizziness, reported by 17% of the patients receiving the larger dose of the drug, was the side effect reported most often.  Although the trial was not of the duration necessary and did not include the number of patients required to detect statistically significant clinical improvement in efficacy, nevertheless certain memory tests showed statistically significant results while other tests showed a trend towards statistical significance.

 

Based on these encouraging Phase II clinical results, Axonyx believes that a Phase III development program is warranted.  In preparation for Phase III clinical trials, Axonyx is completing pre-clinical tests on the final drug formulation of Phenserine, undertaking the scale

 

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up of production of the final formulation to meet NDA manufacturing and commercialization requirements, finalizing drug stability studies, and designing the protocols for the Phase III clinical trial program, which will be submitted to U.S. and European regulatory authorities for review.  The timing for the initiation of the Phase III clinical trial for Phenserine depends on the completion of these tasks as well as the raising of the additional funds necessary to finance these clinical trials.  Axonyx may also undertake a follow-up Phase II trial with Phenserine to gauge the drug’s effect on beta-APP processing.

 

Phenserine Analogs

 

Axonyx is assessing the properties of other Phenserine analogs which are also potent inhibitors of acetylcholinesterase such as Tolserine, that may ultimately prove to have certain additional advantages for use in AD, and Thiatolserine, a compound which has characteristics that may be suitable for development as a transdermal agent, one that is absorbed through a patch placed on the skin.  In November 2000 Axonyx initiated preclinical studies on Tolserine necessary to file an Investigational New Drug Application with the FDA.

 

Program 2:  Inhibitors of Butyrylcholinesterase and Beta-Amyloid Precursor Protein (Beta-APP) Formation

 

Our butyrylcholinesterase inhibitor compounds are designed to specifically inhibit butyrylcholinesterase, an enzyme similar to acetylcholinesterase.  Normally these two enzymes coexist throughout the body, with acetylcholinesterase predominating in degrading acetylcholine.  In the brain of AD patients, as acetylcholinesterase levels gradually fall, there is a parallel increase in burytylcholinesterase levels in specific nerve pathways within the cortex and the hippocampus, areas associated with AD.  Like acetycholinesterase, butyrylcholinesterase degrades acetylcholine at the synaptic gap between neurons, decreasing the availability of this key neurotransmitter.  Research indicates that the increase in butyrylcholinesterase activity in the brains of AD patients amplifies the toxicity of beta amyloid.  This enzyme was identified as a target for inhibition in AD as it also terminates the action of the neurotransmitter acetylcholine in specific nerve pathways in regions of the brain associated with AD and is found in high concentration in amyloid plaques in the brains of AD patients.  Our butyrylcholinesterase inhibitor compounds act to counter butyrylcholinesterase, thus enhancing the availability of acetylcholine, improving memory and cognition.  Inhibition of butyrylcholinesterase may also reduce any increased toxicity of beta amyloid caused by the presence of butyrylcholinesterase in amyloid plaques.

 

Several of the butyrylcholinesterase inhibitor drug candidates in our drug portfolio, including Cymserine, Phenethylnorcymserine (PENC) and Bisnorcymserine, have been studied extensively in preclinical studies and have been found to have many of the characteristics desirable for use in AD.  Like Phenserine, these compounds have a dual mechanism of action in that, in addition to inhibiting the butyrylcholinesterase enzyme, they also inhibit the formation of beta-APP in cell culture, and in rats.  These preclinical findings indicate that these butyrylcholinesterase inhibitor compounds may have an important role in preventing the formation of amyloid plaques in AD, in addition to its inhibition of butyrylcholinesterase.  The compounds readily enter the brain, they have a long duration of action and are highly active in

 

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improving memory and learning in the aged rat.  Axonyx will select one of these butyrylcholinesterase inhibitor compounds for development based on the strength of their patent protection and the relative advantages of the compounds in preclinical studies.  Currently it appears that Bisnorcymserine has has several advantages over the other compounds in preclinical results.  Bisnorcymserine appears to be the most potent butyrylcholinesterase inhibitors in our patent portfolio, has a 100-fold selectivity over acetylcholinesterase, behavoiral work shows it to improve memory in rodent models, and it reduces beta-APP in tissue cultures.  Bisnorcymserine has three potential uses:  (1) as an inhibitor of butyrylcholinesterase, (2) as an inhibitor of the production of beta-APP, thus inhibiting the formation of amyloid plaques, and (3) as an early diagnostic marker.  Using PENC, Axonyx has successfully developed a manufacturing process that could serve as a model for the scale up process to produce sufficient quantities of Bisnorcymserine for further preclinical studies.

 

Program 3:  Gilatide Research Program

 

On April 1, 2001, Axonyx entered into a Research Agreement with Thomas Jefferson University under which Axonyx agreed to fund a Gilatide Research Program for two years.  The research program concerns a potential pharmaceutical compound named Gilatide and related analog compounds that are designed to enhance memory and cognition.  Gilatide is a small 9 amino acid peptide based on a compound isolated from the saliva of the Gila Monster.  In preclinical animal studies, Gilatide exhibited potent memory enhancing effects mediated through a receptor pathway that has not been previously implicated in learning and memory.  As the Gilatide-based pharmaceutical compound appears to act on a novel target, it may become a platform for the development of unique therapeutic agents for cognitive disorders, including age-related memory loss, mild cognitive impairment and Alzheimer’s Disease.

 

Program 4:  Treatment of Mild Cognitive Impairment/Age Related Loss of Memory

 

The biological and safety profile of Phenserine based on preclinical and clinical data suggests that this drug candidate should be considered for treatment of individuals with mild cognitive impairment (“MCI”) and for age associated memory impairment.  Axonyx intends to explore the opportunities for developing Phenserine for these indications if the ongoing human clinical trials continue to generate results that are consistent with the preclinical findings.  The other compounds in Axonyx’s portfolio, especially Gilatide, may also be considered for treatment of MCI and related indications if they show the necessary efficacy and tolerability profile.

 

Program 5:  Alzheimer’s Disease Diagnostic Development Program

 

In October 1999 Axonyx entered into a joint development agreement with the Department of Pathology at the University of Melbourne in Australia to develop proprietary technology for a diagnostic test for Alzheimer’s Disease.  With the potential development of new therapeutic approaches to the treatment of AD, such as Serono’s AIPs sublicensed from Axonyx and the butyrylcholineserase inhibitors, early and accurate diagnosis of the disease is essential.  Axonyx’s sponsored research at the University of Melbourne aims to develop a new diagnostic

 

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test that would help to accurately discriminate AD from other dementias at an early stage of the disease and to ensure that the optimal therapeutic strategy is used with particular patients.

 

At present, the only way of diagnosing AD is mainly through a process of elimination involving clinically examining patients using both neurological and non-neurological tests.  This lengthy and subjective examination can be a stressful and time-consuming approach and does not always distinguish AD from other dementia causing diseases.  A definitive diagnosis can only be obtained post-mortem at present.  Dr. David Small, head of the Laboratory of Molecular Neurobiology at the University of Melbourne has presented findings identifying variants of acetylcholinesterase and butyrylcholinesterase that showed diagnostic potential as chemical markers to distinguish AD from other dementias.  The diagnostic test being developed at the University of Melbourne involves a fingerprint-type analysis of those chemical markers found in cerebrospinal fluid that have the potential to change in patients with the propensity to develop AD.

 

D.            Out-Licensed Technology

 

Axonyx signed a License Agreement with Applied Research Systems ARS Holding N.V. (ARS), a wholly owned subsidiary of Serono International, S.A. (Serono) effective September 15, 2000.  Serono is a Swiss-based biotechnology company listed on the NYSE.  Under the License Agreement, Axonyx granted an exclusive, worldwide sublicense of its patent rights and know-how regarding the development and marketing of the Amyloid Inhibitory Peptide and the Prion Inhibitory Peptide technology (the “Licensed Products”) to ARS.  Axonyx will receive milestone payments upon the occurrence of certain events in the development of the Licensed Products and royalty payments upon the sale of products resulting from the licensed technology.  In addition, ARS paid Axonyx a nonrefundable and noncreditable up-front license fee in the amount of $1,500,000.  Serono has indicated that it may be in a position to begin human studies with an AIP in 2002.

 

Amyloid Inhibitory Peptides (AIPs)

 

In Alzheimer’s Disease the conversion of beta-amyloid protein into insoluble beta-sheets that aggregate to form insoluble fibrous masses (fibrils) is a key event that leads eventually to neuronal cell death in the brains of AD patients.  These fibrils are deposited as part of the neurotoxic amyloid plaques that appear to cause the death of neurons in the brain.  The beta-amyloid protein is a protein normally found in the brain that is over-produced in Alzheimer’s Disease.

 

The AIPs, also referred to as beta-sheet breaker peptides, have been designed to block the aggregation of beta-amyloid in a competitive manner by binding to the beta-sheet form of the amyloid protein, thus preventing the formation of amyloid plaques in the brain.

 

In experiments in vitro and in vivo at labs at NYU with one of the AIPs, the compound inhibited the formation of amyloid fibrils, caused disassembly of preformed fibrils and prevented neuronal cell death in cell culture.  In a rat model of amyloidosis, an AIP reduced beta-amyloid protein deposition and significantly blocked the formation of amyloid fibrils.  In addition, one of

 

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the AIPs has been shown to cause a significant reduction of established amyloid deposits in the brains of rats.  These results indicate the potential for a drug based on the AIP technology to prevent the formation of the amyloid plaques, and to treat AD patients who already have amyloid plaques.  Thus, the AIPs may not only prevent the formation of amyloid plaques in but also disassemble existing amyloid plaques.

 

Ongoing preclinical development of compounds based on the AIPs is being undertaken by ARS, through Serono, at the Serono Pharmaceutical Research Institute in Geneva, Switzerland.  Scientists at Serono are developing a formulation of the AIP compound which could enter human clinical trials in 2002.

 

Prion Inhibitory Peptides (PIPs)

 

There is increasing evidence that prions (proteinaceous infectious particles) are the infectious agents that cause Bovine Spongiform Encephalopathy (BSE), Creutzfeldt-Jakob Disease, new variant (nvCJD) and possibly other transmissable spongiform encephalopathies.  These diseases have caused grave concern in Europe and the U.S. because of the potential for their transmission to humans through the meat supply.  These fatal neurodegenerative disorders are characterized by spongiform degeneration of the brain and, in many cases, by deposits of prions into plaques.  The infectivity of prions is believed to be associated with an abnormal folding of the prion protein.  This folding involves a conversion of the alpha-helical form to the beta-sheet form that can be deposited in plaques in the brain.

 

Serono, through its sublicense with Axonyx, is developing a series of Prion Inhibitory Peptides (PIPs), that interact in vitro with the normal form of the prion to prevent its conversion to the abnormal form, and to interact with the abnormal form to cause it to revert to a normal prion.  In earlier research at NYU, incubation of the PIPs with toxic prions taken from BSE and nvCJD infected cows caused a reversion of the toxic prions to the normal form.  These findings suggest a strategy for designing diagnostics and therapeutic treatments for prion related diseases.

 

Ongoing preclinical development of compounds based on the PIPs is being undertaken by ARS, through Serono, at the Serono Pharmaceutical Research Institute in Geneva, Switzerland.

 

E.             Competition

 

Axonyx competes with many large pharmaceutical companies that are developing and marketing drug compounds similar to those being developed by Axonyx, especially in the area of acetylcholinesterase inhibitors.  Many large pharmaceutical companies and smaller biotechnology companies have well funded research departments concentrating on therapeutic approaches to AD.  Axonyx expects substantial competition from these companies as they develop different and/or novel approaches to the treatment of AD.  Some of these approaches may directly compete with the compounds that Axonyx is or is considering to develop.

 

In the intense competitive environment that is the pharmaceutical industry, those companies that complete clinical trials, obtain regulatory approval and commercialize their drug products first will enjoy competitive advantages.  Axonyx believes that the compounds covered

 

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by its patent rights have characteristics that may enable them, if fully developed, to have a market impact.

 

A number of major pharmaceutical companies have programs to develop drugs for the treatment of Alzheimer’s Disease.  Many of these drugs are acetylcholinesterase inhibitors.  Warner-Lambert (Cognex®), Eisai/Pfizer (Aricept®), Novartis (Exelon®) and, most recently, Johnson & Johnson (Reminyl®), have marketed compounds of this type in the United States.  Cognex® was effectively removed from the market in 1998 due to severe side effects and Aricept currently dominates the market with $433 million in U.S. sales in 2000.  First Horizon has licensed Cognex® from Warner Lambert and has announced plans to launch a new formulation of Cognex® in 2002.  Several other pharmaceutical companies have acetylcholinesterase inhibitors in human clinical trials.

 

Two biotechnology companies have drugs in clinical trials that are based on a beta-amyloid approach to the treatment of AD.  In addition, two small biotechnology companies appear to be pursuing preclinical studies on the amyloid inhibitory peptide approach similar in scope and direction as that of our sub-licensee Serono.  Another company is developing ways to inhibit plaque deposition by interfering with the transporter molecules that carry beta-amyloid from the cell membrane, where it is produced from APP, to the cell exterior where the amyloid plaques are formed.  Several pharmaceutical companies are working on compounds designed to block the secretase enzymes involved in beta-APP processing.  Elan Pharmaceuticals, the California based subsidiary of the Elan Corporation of Dublin, Ireland, has developed a vaccine designed to cause the immune system to mount antibodies against the amyloid proteins that make up amyloid plaques.  This vaccine showed efficacy in genetically altered mice but Phase II human clinical trials were suspended by Elan due to the incidence of side effects in some patients.

 

In the area of butyrylcholinesterase inhibition, Novartis’ drug Exelon® is a dual inhibitor of both acetylcholinesterase and butyrylcholinesterase.

 

Many other pharmaceutical companies are developing pharmaceutical compounds for the treatment of AD or other memory or cognition impairments based on other therapeutic approaches to the disease.  These drugs could become competitors for, or have additive, synergistic clinical effects with any drug product resulting from research on Gilatide, or Axonyx’s other AD targeted drug candidates.  Examples of those competitive approaches include pharmaceutical compounds designed to stimulate glutamate receptors involved in memory and learning, target nicotinic and muscarinic receptors to increase the release of certain neurotransmitters, activate nerve regeneration, magnify the signals reaching aging neurons from other brain cells, and to modulate GABA (a neurotransmitter) receptors.

 

In the field of prions, and prion-related diseases, one company, Prionics, A.G., of Zurich, Switzerland, has a diagnostic test for animal use that is approved in Europe.  Prionics is also researching the treatment of nvCJD in humans.  Two other companies have veterinary diagnostic tests for Bovine Spongiform Encephalopathy (BSE) approved in the European Union and two additional companies are developing such diagnostic tests.

 

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In the area of AD diagnosis, Nymox is developing a urine test that measures a protein found in elevated concentrations in early AD patients.

 

F.             Government Regulation

 

Regulation by governmental authorities in the United States and foreign countries is an important factor in the development, manufacture and marketing of Axonyx’s proposed products.  It is expected that all of Axonyx’s products will require regulatory approval by governmental agencies prior to their commercialization.  Human therapeutic products are subject to rigorous preclinical and clinical testing and other approval procedures by the Food and Drug Administration (FDA) and similar regulatory agencies in foreign countries.

 

Preclinical testing is conducted on animals in the laboratory to evaluate the potential efficacy and the safety of a potential pharmaceutical product.  The results of these studies are submitted to the FDA as a part of an Investigational New Drug (IND) application, which must be approved before clinical testing in humans can begin.  Typically, the clinical evaluation process involves three phases.  In Phase I, clinical trials are conducted with a small number of human subjects to determine the early safety profile, the pattern of drug distribution and metabolism.  In Phase II, clinical trials are conducted with groups of patients afflicted with a specific disease to determine preliminary evidence of efficacy, the optimal dosages, and more extensive evidence of safety.  In Phase III, large scale, multi-center, comparative clinical trials are conducted with patients afflicted with a target disease in order to provide enough data to demonstrate the efficacy and safety required by the FDA.  The results of the preclinical and clinical testing are submitted to the FDA in the form of a New Drug Application (NDA) for approval to commence commercial sales.  In responding to an NDA, the FDA may grant marketing approval, request additional information, or deny the application if the FDA determines that the application does not satisfy its regulatory approval criteria.  We cannot assure you that approvals will be granted on a timely basis, if at all.  Similar regulatory procedures are in place in countries outside the United States.

 

In October 2001, Axonyx completed a Phase II proof of concept human clinical trial with Phenserine utilizing AD patients at three sites in the United States.  Axonyx’s butyrylcholinesterase inhibitor program is at least several years behind Phenserine in preclinical development.  The AIP product development is under the direction of ARS, through its arrangements with Serono, who has indicated that they may begin human testing in 2002.

 

G.            Strategic Alliances

 

On April 1, 1997 Axonyx entered into a Research and License Agreement with New York University pursuant to which NYU granted Axonyx an exclusive worldwide license to certain patent applications covering AIPs, PIPs and related technology, and any inventions that arise out of ongoing research funded by Axonyx.  The patent license terminates, on a country-by-country basis, upon expiration of the last to expire of the licensed patents or eight years from the date of first commercial sale of a licensed product in such country, whichever is later.  In addition to royalties on future sales of products developed from the patented technologies, milestone payments and patent filing and prosecution costs, Axonyx undertook to fund four

 

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years of research at the NYU School of Medicine at Dr. Frangione’s laboratory at a cost of $300,000 per year.  That obligation ceased in the Fall of 2001.  Axonyx has an exclusive license to all inventions in the field arising from this research on the AIPs and PIPs.

 

On April 3, 1997, Axonyx Inc. also signed stock option agreements with NYU and Drs. Frangione and Soto, the lead scientists involved in the sponsored research, under which Axonyx Inc. has issued an aggregate of 917,369 shares of common stock in partial consideration for the worldwide exclusive patent rights.

 

On February 27, 1997, Axonyx acquired the worldwide exclusive patent rights to Phenserine, Cymserine (a butyrylcholinesterase inhibitor), their analogs and related acetylcholinesterase and butyrylcholineserase inhibitory compounds (not including PENC or Bisnorcymserine) via a sublicense with CURE, LLC, from the Public Health Service, parent agency of the National Institutes of Health\National Institute on Aging (NIH\NIA).  Axonyx has periodically sponsored some of the researchers at the NIA facilities involved in fields of research related to the licensed patent rights.  Under the license agreement, Axonyx Inc. agreed to pay royalties to CURE, LLC on future sales of products developed from the patented technologies, as well as an upfront fee, milestone payments and patent filing and prosecution costs.  Four patents have been issued in the United States.  Certain pass through provisions from the License Agreement between CURE, LLC and the PHS are contained in Axonyx’s License Agreement with CURE, LLC.  Those provisions cover certain reserved government rights to the licensed patents, obligations to meet certain benchmarks and perform a commercial development plan, as well as indemnification, termination and modification of rights.  The license terminates upon the last to expire of the licensed patents or the term of the agreement between CURE, LLC and the PHS, whichever occurs first.

 

Effective September 15, 2000 Axonyx entered into a License Agreement with Applied Research Systems ARS Holding N.V., a wholly owned subsidiary of Serono International S.A., covering the amyloid and prion inhibitory peptide technologies.  Under this agreement Axonyx received a $1.5 million up front payment, may receive milestone payments and royalties on the sale of approved drug compounds derived from the licensed technology.  Previously, on May 17, 1999 Axonyx had signed a Development Agreement and Right to License (Development Agreement).  Under the Development Agreement, Axonyx granted an exclusive right to license its patent rights and know-how regarding the AIPs to ARS.  ARS paid Axonyx a $250,000 fee for the right to license.

 

In conjunction with the Development Agreement between Axonyx and Serono, Serono entered into an employment agreement with Dr. Claudio Soto, one of the lead scientists involved in the research on the AIPs and PIPs, who performed professional services for Axonyx from February 1999 after his departure from New York University School of Medicine in December 1998 until May 1999.  Dr. Soto is continuing his work on development of the AIP and PIP technologies at Serono under the License Agreement.

 

On October 1, 1999 Axonyx entered into an agreement with the University of Melbourne (Australia).  In addition to the payment of costs associated with the filing and prosecution of any patent applications resulting from collaborative research, Axonyx has committed approximately

 

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$60,000 per year for three years ending October 2002 to fund research aimed at developing a diagnostic test for Alzheimer’s Disease.  Both parties will own any resulting intellectual property as tenants in common in equal shares.  In addition, Axonyx has an option to acquire an exclusive worldwide license to the intellectual property or patents resulting from the research project.

 

On April 1, 2001, Axonyx entered into a Research Agreement with Thomas Jefferson University under which Axonyx agreed to fund a Gilatide Research Program for two years at a cost of $125,000 per year.  The research program concerns a potential pharmaceutical compound named Gilatide and related analog compounds that are designed to enhance memory and cognition.  In addition, Thomas Jefferson University granted Axonyx an option to acquire from the University a worldwide exclusive license to a patent application pertaining to the Gilatide technology and to any invention arising out of the research program.

 

Under the terms of a Research Agreement with Indiana University signed in August 2001, Axonyx is funding studies concerning the effects of Phenserine, Tolserine and certain butyrylcholineserase inhibitor compounds on the beta-APP processing of beta-amyloid using in vitro studies and in vivo studies with transgenic mice.  Axonyx has agreed to fund this research project for a one year period at a cost of $125,000.  Indiana University has granted Axonyx an option to acquire the worldwide exclusive rights to the intellectual property arising out of the research project.

 

Axonyx is also funding a research project at the Mayo Clinic Jacksonville entitled “Effects of Cholinergic Drugs on APP Metabolism” that involves in vitro studies on cell lines and in vivo studies using transgenic mice assessing the action of Phenserine, Tolserine, and certain butyrylcholinesterase inhibitors on certain aspects of the metabolism of beta-APP.  Under the terms of a Sponsored Research Agreement and Option signed with the Mayo Foundation for Medical Education and Research and the Mayo Clinic Jacksonville in May 2001, Axonyx is funding the research project for a one year period at a cost of $125,000, with an option to acquire the exclusive worldwide rights to the intellectual property arising out of the research project.

 

H.            Marketing and Sales

 

Axonyx does not intend to manufacture or market any products it may develop.  Axonyx intends to license to, or enter into strategic alliances with, larger pharmaceutical and veterinary companies that are equipped to manufacture and/or market Axonyx’s products, if any, through their well developed distribution networks.  Axonyx may license some or all of its worldwide patent rights to more than one company to achieve the fullest development, marketing and distribution of its products, if any.

 

I.              Patents, Trademarks, and Copyrights

 

Axonyx has obtained exclusive worldwide licenses to five patents issued by the United States Patent and Trademark Office, and to one patent application pending in the United States.  Axonyx has sublicensed to Serono’s subsidiary ARS its rights to one of the five patents listed below and to two patent applications.  Axonyx is a co-owner of one application, and the sole owner of one additional application pending in the United States.  Associated foreign patent

 

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applications have been filed.  Axonyx will continue to seek to obtain additional licenses from universities and other research institutions.

 

On February 27, 1997, Axonyx Inc. obtained an exclusive worldwide license from the NIH’s parent agency, the Public Health Service (PHS), to patents and patent applications relating to Phenserine, Cymserine (a butyrylcholinesterase inhibitor), their analogs and related acetylcholinesterase and butyrylcholinesterase inhibitory compounds from the laboratory of Dr. Nigel Greig and his collaborators via a sublicense with CURE, LLC.  Foreign counterparts to the licensed patents and applications have been filed in Europe, Japan, Australia, and Canada.

 

Axonyx obtained an exclusive worldwide license from New York University to one U.S. patent and one pending continuation application thereof from the laboratory of Dr. Blas Frangione at the NYU School of Medicine through a research and license agreement entered into with NYU, effective April 1, 1997.  The NYU patent and application relate to the AIPs and PIPs.  Associated foreign patent applications have been filed in Europe, Japan, Australia, and Canada.  In addition, Axonyx obtained an exclusive license to all inventions in the field arising from ongoing research.  These patent rights have been sublicensed by Axonyx to ARS, a subsidiary of Serono International, S.A.

 

Issued Patents

 

U.S. Patent 5,171,750 issued December 15, 1992 for “Substituted Phenserines as Specific Inhibitors of Acetylcholinesterase”.

 

U.S. Patent 5,378,723 issued January 3, 1995 for “Carbamate Analogs of Thiaphysovenine and Method for Inhibiting Cholinesterases”.

 

U.S. Patent 5,409,948 issued April 25, 1995 for “Method for Treating Cognitive Disorders with Phenserine”.

 

U.S. Patent 5,998,460 issued December 7, 1999 for “Phenylcarbamates of (-)-Eseroline, (-)-N1-Noreseroline and (-)-N1-Benzylnoreseroline: Selective Inhibitors of Acetyl and Butyrylcholinesterase, Pharmaceutical Compositions and Method of Use Thereof.”

 

U.S. Patent 5,948,763 issued September 7, 1999 for “Peptides and Pharmaceutical Compositions thereof for Treatment of Disorders or Diseases Associated with Abnormal Protein Folding into Amyloid or Amyloid-like Deposits”

 

Patents Pending

 

Note that we cannot assure you that corresponding patents will be issued or that the scope of the coverage claimed in the following patent applications will not be significantly reduced prior to any patent being issued.

 

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A pending patent application directed to certain highly selective butyrylcholinesterase inhibitors, including PENC and Bisnorcymserine, resulting from a collaboration between Dr. Hausman of Axonyx