AXONYX INC - 10-K Annual Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2003
Commission file number: 000-25571

AXONYX INC.
500 Seventh Avenue, 10^th Floor
New York, New York 10018
Telephone (212) 645-7704
I.R.S. Employer Identification Number: 86-0883978
State or Other jurisdiction of Incorporation or Organization: NEVADA
COMMON STOCK $0.001 PAR VALUE

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 |X| No |_|

Indicate by check mark if 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. |_|

Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). |_| Yes |X| No

The registrant estimates that the aggregate market value of its Common Stock on March 22, 2004, based on the closing price shown on the Nasdaq SmallCap Market on that date, held by its non-affiliates was approximately $244,000,000.

The number of shares of Common Stock, par value $0.001, of the Registrant outstanding as of March 22, 2004, was 47,983,989 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Not Applicable.

Table of Contents

		Page

PART I

Item 1.	Business	4
Item 2.	Properties	30
Item 3.	Legal Proceedings	30
Item 4.	Submission of Matters to a Vote of Security Holders	30

PART II

Item 5.	Market for Common Equity Stock and Related Stockholder Matters	31
Item 6.	Selected Financial Data	34
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 7A.	Quantitative and Quantitative Disclosures About Market Risks	57
Item 8.	Financial Statements and Supplementary Data	57
Item 9.	Changes in and Discussion with Accountants on Accounting and Financial Disclosures	57
Item 9A	Controls and Procedures	57

PART III

Item 10.	Directors, Executive Officers of the Registrant	58
Item 11.	Executive Compensation	63
Item 12.	Security Ownership of Certain Beneficial Owners and Management	68
Item 13.	Certain Relationships and Related Transactions	71
Item 14.	Principal Accountant Fees and Services	72

EXHIBIT INDEX		73

SIGNATURES		78

FINANCIAL STATEMENTS		F-1

EXHIBITS		II-1

This Form 10-K contains “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995 that are based on current expectations, estimates and projections. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. These statements involve potential risks and uncertainties; therefore, actual results may differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they were made. We do not undertake any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

Axonyx cannot assure that the Phase IIB and/or the Phase III clinical trial, or others, if any, with Phenserine will prove successful, that the safety and efficacy profile of Phenserine exhibited in the previous small Phase II trial will remain the same in the Phase IIB and Phase III clinical trials, or future clinical trials, if any, that the preclinical results related to the regulation of beta-APP will be substantiated by the Phenserine Phase IIB clinical trial and that Phenserine will be able to slow the progression of Alzheimer’s disease, that the Phase IIB clinical trial data will differentiate Phenserine from the currently marketed drugs, that the efficacy results of the Phase III trial will prove pivotal, that the efficacy data from the Phase IIB clinical trial will be able to be used in the Phase III trial efficacy data, that Axonyx will obtain the necessary financing to complete the Phase III Phenserine trials, that the Company’s development work on Phenserine will support an NDA filing, that the results of the Phase III trials will allow Phenserine to be approved by the FDA, that the FDA will grant marketing approval for Phenserine, that if Phenserine is approved by the FDA, it will prove competitive in the market, and that Axonyx will obtain licensing or corporate partnership agreements that will enable acceleration of the development of and optimize marketing opportunities for, Phenserine, or that Axonyx will be able to advance any other potential memory enhancing compound toward IND status. Axonyx undertakes no obligation to publicly release the result of any revisions to such forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

We do not undertake to discuss matters relating to our ongoing clinical trials or our regulatory strategies beyond those which have already been made public or discussed herein.

PART I

Item 1. Business

TABLE OF CONTENTS

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

A. Recent Events

OXIS International Inc.

On January 15, 2004, the Company entered into agreements to acquire approximately 53% of the outstanding voting stock of OXIS International, Inc. (OTC: OXIS.OB). OXIS is a biopharmaceutical/diagnostic company engaged in the development of research diagnostics, nutraceuticals and therapeutics in the field of oxidative stress.

Under the terms of separate agreements entered into with several holders of OXIS common stock, Axonyx acquired an aggregate of approximately 14 million shares of OXIS stock, in consideration for its issuance of an aggregate of approximately 1.6 million shares of unregistered Axonyx common stock. Axonyx also agreed to register its shares being issued in the exchange in the near future. Together with shares of OXIS stock held personally by Marvin S. Hausman, M.D., Axonyx’s Chairman and Chief Executive Officer, Axonyx will control approximately 57% of Oxis’ voting stock.

The exchange ratio for the securities being exchanged was based on a ten-day historical average of the closing prices for the stock of the two companies.

Dr. Hausman indicated that management of Axonyx has no current intention to acquire OXIS’ remaining outstanding shares, which will continue to trade on the OTC Bulletin Board. Representatives of Axonyx have been in touch and are working with members of OXIS’ management and board of directors to continue efforts to improve OXIS’ operations and management, to complement its board with designees of Axonyx and to discuss strategies for maximizing and enhancing stockholder value.

Private Placement

On January 8, 2004, the Company entered into definitive agreements with new and existing institutional investors relating to a private placement of $50,000,000 of securities through the sale of 9,650,183 shares of common stock at $5.15 per share. These agreements also involve the acquisition by the investor group of five-year warrants to purchase an additional 2,412,546 shares of the Company’s stock at an exercise price of $7.25 per share. The Company filed a registration statement with the SEC for the resale of common stock sold in the private placement. The registration was declared effective on February 12, 2004.

Rodman & Renshaw Inc. was the lead placement agent for this transaction. Punk Ziegel & Co. acted as the financial advisor and a placement agent to Axonyx.

Axonyx plans to use the net proceeds of this financing transaction to support and expand the Company’s research and development activities.

B. Axonyx – Introduction, Business Strategy

We are engaged in the business of acquiring and developing novel post-discovery central nervous system drug candidates, primarily in areas of memory and cognition. We acquire patent rights to central nervous system pharmaceutical compounds we believe may have significant potential market impact and work to advance the compounds through preclinical and clinical development towards regulatory approval. We have acquired worldwide exclusive patent rights to three main classes of therapeutic compounds designed for the treatment of Alzheimer’s disease (AD), Mild Cognitive Impairment, and related diseases. We have acquired patent rights to a class of potential therapeutic compounds designed for the treatment of prion related diseases, which are degenerative diseases of the brain that are thought to be caused by an infectious form of a protein called a prion. Prions, unlike viruses, bacteria and fungi, have no DNA and consist only of protein. Such diseases include Creutzfeldt Jakob Disease, new variant in humans, Bovine Spongiform Encephalopathy (BSE or Mad Cow Disease) in cows, and Scrapies disease in sheep. We licensed these patent rights separately from New York University and from the National Institutes of Health/National Institute on Aging (via a sublicense). We also have co-inventorship rights to a patent application regarding a therapeutic compound named Posiphen designed for the treatment of Alzheimer’s disease.

We out-source all of our preclinical and clinical research and development, utilizing contract research organizations, or CROs, and sponsored research arrangements. We have contracted with several CROs to undertake the pre-clinical and clinical development of Phenserine. We have entered into a License Agreement with Applied Research Systems ARS Holding N.V. (ARS), a subsidiary of Serono International, S.A. (Serono), a Swiss biopharmaceutical company, under which ARS has the rights to conduct research and development on certain of our licensed technologies. We received an up-front fee and a milestone payment, and may receive future milestone payments and royalties, under the License Agreement. We do not currently maintain any laboratory or research premises.

Our current business strategy is to concentrate our financial resources primarily on the further development of our licensed compounds, and in particular, Phenserine, an inhibitor of acetylcholinesterase, that is our lead drug candidate for the treatment of AD. Acetylcholinesterase is an enzyme in the synapse 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, or 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.

In early June 2003, we initiated a Phase IIb clinical trial designed evaluate the effects of Phenserine on the levels of beta-amyloid precursor protein and beta amyloid in the plasma and cerebrospinal fluid of AD patients. The beta amyloid protein is one of more than a dozen types of amyloid proteins found in the body. Beta amyloid is derived from the beta-amyloid precursor protein normally present in the brain of healthy individuals in small quantities. Beta-amyloid, derived from the beta-amyloid precursor protein, is over-produced in AD and Down’s Syndrome. In AD, the beta-amyloid protein undergoes a conformational change, aggregates and is deposited as insoluble fibrils in amyloid plaques in the brain. The beta-amyloid precursor protein 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. In late June 2003 we also initiated a Phase III potentially pivotal clinical trial to further examine the safety and efficacy of Phenserine on AD patients.

In addition to the Phenserine clinical program, we are sponsoring pre-clinical research relating to an assay method for screening drug candidates for Alzheimer’s disease. Pursuant to a sublicense agreement with ARS, ARS has the rights to undertake research and development concerning the development of (1) compounds called Amyloid Inhibitory Peptides, or AIPs, which may prevent and reverse the formation of amyloid plaques in AD, and (2) a pharmaceutical compound for prion-related diseases. 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 amyloid plaques that appear to be a cause of the death of neurons in the brain. 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. The beta-sheet breaker peptide is 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 is found in amyloid plaques.

Given sufficient financial resources, we may, in the future, sponsor further pre-clinical development of Tolserine, another acetylcholinesterase inhibitor, some of our butyrylcholinesterase inhibitors, and initiate pre-clinical development of Posiphen, a compound that appears to decrease the formation of the beta-amyloid precursor protein with potential applications in the treatment of AD. Acetylcholinesterase inhibitors are drugs designed to selectively inhibit acetylcholinesterase. Butyrylcholinesterase is 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 AD. This enzyme also functions to degrade a number of drugs and natural products and is involved in their elimination from the body.

The AD targeted approaches include:

	1)		Phenserine, an inhibitor of acetylcholinesterase and the beta-amyloid precursor protein, our lead drug candidate, and Tolserine, another follow-on acetylcholinesterase inhibitor;

	2)		a butyrylcholinesterase inhibitor which will be chosen from a series of selectively acting compounds;

	3)		Posiphen, a compound that decreases the formation of beta-amyloid precursor protein;

	4)		through our sublicense with ARS, a subsidiary of Serono, which is described in greater detail below, compounds called Amyloid Inhibitory Peptides (AIPs) which may prevent and reverse the formation of amyloid plaques in AD.

On May 2, 2000, ARS, a subsidiary of Serono, exercised its right to license certain of our patent rights under the Development Agreement and Right to License signed with us in May of 1999. Under that agreement, ARS paid us a $250,000 non-refundable fee for the right to license. Pursuant to the resulting License Agreement, which became effective on September 15, 2000, ARS acquired exclusive worldwide patent rights to our AIP and Prion Inhibitory Peptide technologies, called the Licensed Products. In conjunction with the signing of the License Agreement with ARS, we generated $1.5 million of revenue in the form of an up-front license fee. We received a milestone payment of $1 million in April 2003 from ARS in relation to the initiation of a Phase I clinical trial with a licensed AIP compound. We may generate additional revenues from ARS if they reach certain development milestones concerning the licensed compounds or other products and related intellectual property, although additional milestone payments did not occur in fiscal year 2003. Axonyx could receive milestone payments from ARS in an aggregate amount of $13 million if the Licensed Product involved is a patented product covered by the sub-licensed patents and patent applications and it achieves certain developmental milestones up through health registration approval. The amount of aggregate milestone payments through health registration approval would be $7 million if the Licensed Product involved was developed by Serono during the one year term of the Development Agreement we entered into with ARS in May 1999. We cannot assure you that licensed compounds or products will reach any particular stage of development requiring a milestone payment, that licensed compounds or products will ever reach the market and give rise to royalty payments, or that additional revenues from patent licensing will be generated or that Serono will continue with any research and development activities.

Through our sublicense with ARS, Serono has the right to conduct research and development work on compounds called 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.

We are also funding research at Monash University in Australia relating to the development of an assay method for the rapid screening of potential drug candidates for the treatment of Alzheimer’s disease. We have signed a Research Agreement with the principal researcher, David Henry Small, Ph.D., to fund this research over a three-year period ending in May 2005.

In December 2000 Axonyx incorporated Axonyx Europe BV, a wholly owned subsidiary, in the Netherlands. Gosse Bruinsma, M.D., currently the President and Chief Operating Officer of Axonyx Inc., was appointed the President of Axonyx Europe BV. The majority of our clinical development activities and a significant amount of our preclinical development activities are carried out in Europe. The Axonyx Europe office manages, directs, and controls these activities. Axonyx Europe explores and pursues out-licensing opportunities for Axonyx’s licensed technologies in Europe and elsewhere, and facilitates communication with Axonyx’s European shareholders and Serono.

We have incurred negative cash flows from operations since the inception of the company in 1997. Our net losses for the three fiscal years ended 2001, 2002, and 2003 were $8,144,000, $6,256,000 and $8,106,000 respectively. As of December 31, 2003, we had an accumulated deficit of $33,728,000 and our operating losses are continuing. We have no products available for sale and we do not expect to have any products commercially available for several years, if at all.

On January 20, 2004, we announced that we entered into agreements to acquire approximately 53% of the outstanding voting stock of OXIS International, Inc. (OTC: OXIS.OB). OXIS is a biopharmaceutical/diagnostic company engaged in the development of research diagnostics, nutraceuticals and therapeutics in the field of oxidative stress. Under the terms of separate agreements entered into with several holders of OXIS common stock, we acquired an aggregate of approximately 14 million shares of OXIS stock, in consideration for our issuance of an aggregate of approximately 1.6 million shares of our unregistered common stock. We have agreed to register our shares of common stock being issued in the exchange in the near future. Marvin S. Hausman, M.D., our Chairman and Chief Executive Officer, owns 1,161,532 shares of OXIS common stock, representing approximately 4% of OXIS’ voting stock. Dr. Hausman’s shares of OXIS common stock were not subject to this exchange for our common stock.

Axonyx was incorporated in Nevada on July 29, 1997. Our principal executive offices are located at 500 Seventh Avenue, 10^th Floor, New York, New York 10018, and our telephone number is (212) 645-7704.

C. Axonyx Drug Development Programs

General

We are currently focusing on the clinical development of our lead acetylcholinesterase inhibitor, Phenserine. In addition, we are sponsoring pre-clinical research on an assay method for screening drug candidates for Alzheimer’s disease being developed at Monash University in Australia.

Axonyx continues to prioritize our utilization of financial resources for drug development, and we have decided not to exercise our option to acquire patent rights to Gilatide and related analog compounds, potential pharmaceutical compounds designed to enhance memory and cognition. Consequently, the sponsored research program at Thomas Jefferson University was terminated.

Through our sublicense with ARS, a subsidiary of Serono International, S.A., ARS is conducting research at Serono research and development facilities on compounds called Amyloid Inhibitory Peptides (AIPs) which may prevent and reverse the formation of amyloid plaques in AD. ARS, at Serono research and development 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.

Given sufficient financial resources, we may, in the future, sponsor further pre-clinical development of:

	(1)		Posiphen, a compound that appears to decrease the formation of the beta-amyloid precursor protein with potential applications in the treatment of AD,

	(2)		One or more butyrylcholinesterase inhibitors which will be chosen from a series of selectively acting compounds, the best studied of which are Phenethylnorcymserine (PENC) and Bisnorcymserine and

	(3)		Tolserine, another acetylcholinesterase inhibitor.

Each of the AD-targeted classes of compounds in our portfolio has a different therapeutic mechanism of action and represents innovative platform technology from which additional potential therapeutic and diagnostic agents could be developed.

Our AD-targeted approaches include the following, which are described in more detail below:

	(1)		Phenserine, an inhibitor of acetylcholinesterase and beta-amyloid precursor protein, our lead drug candidate, and Tolserine, a follow on compound of the same class;

	(2)		a butyrylcholinesterase inhibitor which will be chosen from a series of selectively acting compounds;

	(3)		Posiphen, a compound that decreases the formation of beta-amyloid precursor protein;

	(4)		through our sublicense with ARS, a subsidiary of Serono, compounds called Amyloid Inhibitory Peptides (AIPs) which may prevent and reverse the formation of amyloid plaques in AD.

Despite the fact that we cannot assure you that the technologies and pharmaceutical compounds that we are developing will ultimately prove to be profitable, we will be required to continue to spend substantial capital on research and development in the foreseeable future in order to enhance our 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 our proprietary products. Consequently, we will need to continue our funding of research and development of new technologies and pharmaceutical compounds in order to remain competitive. In fiscal years 2001, 2002 and 2003, we spent $3,298,000, $2,610,000 and $4,627,000respectively, on sponsored and contract research and development activities associated with our 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 time, AD patients become increasingly 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, the disease affects one in 10 persons over 65 and half of those over 85 years old are affected by the disease.

While scientists are not completely certain of the specific causes of Alzheimer’s, scientific discoveries have identified important hallmarks of the disease. 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. Both 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. Recent research indicates that a disruption or an abnormality in beta-amyloid metabolism and the formation of amyloid plaques are most likely to be the primary causes 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 beta-amyloid precursor protein (beta-APP). In AD, 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 AD and is considered the toxic agent responsible for neuronal cell death. There are a number of strategies for preventing the formation of these amyloid plaques: (1) preventing the formation of beta-amyloid through the inhibition of the processing of its parent molecule, beta–APP, (2) inhibiting the enzymes that cleave the beta-APP, (3) removing beta-amyloid from the brain or preventing its aggregation into plaques, and (4) the disassembly of the 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. The 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. Cortically-projecting neurons 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 AD, 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.

Under normal healthy conditions, the neurotransmitter acetylcholine is produced by cholinergic neurons and released to carry messages to other cells, then broken down for reuse. The production and transmission of signals across neurons by acetylcholine is responsible, at least in part, for our memory, learning and cognitive functions. Having caused a signal to be passed from one neuron to the next, acetylcholine is subsequently broken down by an enzyme called acetylcholinesterase. In AD, the loss of these cholinergic neurons results in the decreased synthesis and availability of acetylcholine. 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 that have been approved in the United States that provide at best marginal symptomatic relief for one aspect of AD, inhibition of acetylcholinesterase: 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 and clinical studies a therapeutic and safety profile potentially superior to Aricept®, the leading product currently on the market. Unlike Aricept, Phenserine has demonstrated, in pre-clinical testing utilizing transgenic mice, 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 data from Phase II clinical trials, Phenserine showed that the incidence of adverse events in mild to moderate AD patients on their maintenance dose of Phenserine was generally less than Aricept (based on the FDA approved patient packaging insert for Aricept). Axonyx’s butyrylcholinesterase inhibitor drug candidates attack the disease in other potentially 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 multi-drug approach to treating the disease will be utilized in the future. We believe that safe and effective drugs could potentially be prescribed in order to attack the disease through a number of different mechanisms of action.

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 our 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.

Phenserine: An Inhibitor of Acetylcholinesterase and Beta-Amyloid Precursor Protein (Beta-APP) Formation

Our 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 dosage 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 potentially reducing peripherally mediated 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 soluble beta amyloid protein that is potentially 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. Neuroblastoma cell cultures 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. Additional animal studies using the transgenic mouse have confirmed 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, we 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, we 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 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 higher 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.

We initiated two related Phenserine clinical trials in June 2003. The first is a randomized placebo-controlled double-blind Phase IIb trial that will evaluate the effects of two different dosages of Phenserine given for a six month period on the levels of the beta-amyloid precursor protein (beta-APP) and beta amyloid in the plasma and cerebrospinal fluid of 75 mild to moderate Alzheimer’s disease patients. This Phase IIb trial is intended to substantiate in vitro and in vivo preclinical data that has consistently shown that Phenserine can reduce the levels of beta-APP and beta amyloid, and differentiate Phenserine from the acetylcholinesterase inhibitors currently on the market. It is believed by many that one of the key underlying pathological processes in Alzheimer’s disease is associated with the amyloid cascade and inhibition of this process could potentially modify Alzheimer’s disease progression. Patients in this trial will also undergo testing with the standard memory and cognition tests recommended by the United States FDA and European regulatory authorities. This Phase IIb trial is underway at several facilities in Europe. We have contracted with JSW Research, an Austrian contracting research organization to undertake this trial. Other CROs provide program management, program quality assurance and quality control service, manage and analyze the data associated with this clinical trial.

Based on the encouraging Phase II clinical results, we determined that a Phase III clinical trial was warranted. In preparation for Phase III clinical trials, we completed a number of pre-clinical tests on the final drug formulation of Phenserine, scaled up of production of the final formulation to meet NDA manufacturing and potential future commercialization requirements, advanced drug stability studies, and designed the protocol for the Phase III clinical trial. The clinical protocol was submitted to the European Regulatory Authorities and was included with U.S. FDA Annual Phenserine IND update. We have contracted with contracting research organizations to complete this work. NOTOX Safety and Environmental Research B.V. of Holland has been awarded an approximately $1.25 million contract to conduct a pre-clinical carcinogenicity study, that began in October 2002, and is expected to be completed in the first quarter of 2005. Other CROs conducted Phase I clinical bioavailability trials and shelf life testing on the final formulation of Phenserine. During 2002, Rhodia Chirex, an active pharmaceutical ingredient (API) manufacturer, was engaged to develop and manufacture Phenserine drug product at scale.

Following these preparations, the second trial was initiated in June 2003 and was designed to potentially be one of the pivotal Phase III trials for the NDA submission in the USA and its equivalent in Europe. This randomized double-blind placebo-controlled trial is being conducted at multiple centers throughout Europe. It examines the safety and efficacy of two dosages of Phenserine given for a six-month period in mild to moderate Alzheimer’s disease patients. The ability of Phenserine to improve memory and cognition will be measured by the standard ADAS-cog and CIBIC-plus efficacy endpoints, which are recommended by the FDA as well as the ADCS-ADL to meet European regulatory requirements. This Phase III trial will recruit up to 375 patients, and has been contracted to JSW Research, which is undertaking the running of this clinical trial for us, with other CROs providing the program management and program quality assurance and quality control service, and data management and analysis with regard to the clinical trial.

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 and for age associated memory impairment. We intend 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 our portfolio may also be considered for treatment of mild cognitive impairment and related indications if they show the necessary efficacy and tolerability profile.

Sponsored Research Program: Alzheimer’s Disease Assay Method Development Program

Effective September 1, 2002, we entered into a Research Agreement and a Consulting Agreement with David Henry Small, Ph.D., and an Intellectual Property Assignment Agreement with David Henry Small, Ph.D., Marie-Isabel Aquilar, Ph.D., Supundi Subasinghe (“Assignment Agreement”). Each of these agreements relate to the development of an assay method for the rapid screening of potential drug candidates for the treatment of Alzheimer’s Disease. The Research Agreement funds a research project concerning further development of the assay method under the guidance of Dr. Small for a three year period commencing October 1, 2002, for Australian $90,000 per year. The research project pursuant to the Research Agreement is being undertaken by Dr. Small at Monash University in Clayton, Australia.

Under the Assignment Agreement Dr. Small and two other co-inventors have assigned a patent application concerning the assay method in return for revenue sharing upon commercialization of the assay method. Under the Consulting Agreement with Dr. Small, we engaged Dr. Small for a three year period for Australian $20,000 per year and a grant of stock options for consulting services related to the development of the assay method.

The assay method that is the subject of the patent application and the sponsored research project is a process targeted at identifying early biochemical events associated with beta-amyloid toxicity. The accumulation of beta-amyloid in the brain is one of the key biochemical events in Alzheimer’s disease. Dr. Small’s research with this process confirmed the central role of beta-amyloid binding as a key pathological event in nerve cell membrane damage. Data from pre-clinical in vitro studies undertaken in Dr. Small’s laboratory has shown that there is a strong correlation between the binding of beta-amyloid to cell membranes and the resulting cell damage. The assay method process is based on a technique known as “surface plasmon resonance”. The assay method can be used to further the discovery of potential Alzheimer’s disease drug candidates that have a specific action on the damage caused by beta-amyloid.

Other Compounds in the Axonyx Drug Portfolio

There are other potential pharmaceutical compounds that we have patents rights to that may be further developed in the future, given sufficient financial resources.

Other Acetylcholinesterase Inhibitors

We have assessed certain properties of our other potent inhibitors of acetylcholinesterase such as Tolserine, that may ultimately prove to have certain additional advantages for use in AD, and Thiatolserine, a compound that has characteristics that may be suitable for development as a transdermal agent, one that is absorbed through a patch placed on the skin. Within this drug class however, we will continue to focus our resources on Phenserine.

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

Our butyrylcholinesterase inhibitor compounds are designed to selectively 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 concomitant 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 improving memory and learning in the aged rat. If we have sufficient resources in the future, we may select one of these butyrylcholinesterase inhibitor compounds for further 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 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, we have 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.

Posiphen

On March 22, 2002, we filed a provisional patent application resulting from a collaboration between Gosse B. Bruinsma, M.D. of Axonyx and Dr. Nigel Greig of the NIH/NIA, on a co-inventorship basis, covering a method for treating patients with Alzheimer’s disease and other cognitive disorders with Posiphen, a potential pharmaceutical compound that is the positive isomer of Phenserine. Posiphen, unlike Phenserine, is not an acetylcholinesterase inhibitor. Posiphen’s mechanism of action results in decreases in the formation of the beta-amyloid precursor protein through RNA translational inhibition. Axonyx owns this patent application jointly with the NIH\NIA. Initial manufacturing activities of Posiphen have been initiated in order to support preclinical testing of Posiphen. This preclinical testing may potentially support future clinical trials in human subjects. Human studies will require approval from regulatory agencies in the U.S. and elsewhere.

D. Out-Licensed Technology

We 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, we granted an exclusive, worldwide sublicense of our 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. The License Agreement provides for the making of 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 us a nonrefundable and noncreditable up-front license fee in the amount of $1.5 million. Under the License Agreement, ARS would pay us an aggregate amount of $14 million if the licensed product involved is a patented product covered by the sub-licensed patents and patent applications achieve health registration approval. The amount of aggregate milestone payments through health registration approval would be $7 million if the licensed product involved was developed by Serono during the term of our Development Agreement with ARS.

We recently learned that Serono is evaluating whether to continue further development of the licensed technologies. Any decision to delay or terminate development would mean that our receipt of any milestone payments referred to above would in turn either be delayed or eliminated. We are currently in discussions with Serono about the existing licensing arrangements and about possible alternative structures and collaborations that might be used to potentially exploit the licensed technology. We cannot guarantee whether such discussions will result in mutually beneficial alternative structures and/or collaborations.

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

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 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.

Under the terms of the agreement, preclinical development of compounds based on the AIPs is undertaken by ARS, through Serono, at the Serono Pharmaceutical Research Institute in Geneva, Switzerland. Scientists at Serono developed a formulation of the AIP compound which entered into a Phase I clinical trial in April 2003.

Prion Inhibitory Peptides (PIPs)

There is increasing evidence that prions are the infectious agents that cause Bovine Spongiform Encephalopathy (BSE), Creutzfeldt-Jakob Disease, new variant (nvCJD) and possibly other prion-related diseases. 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.

ARS, through its sublicense with Axonyx, is developing, at Serono facilities, a series of Prion Inhibitory Peptides, or 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.

Under the terms of our licensing agreement 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

We compete with many large and small pharmaceutical companies that are developing and/or marketing drug compounds similar to those being developed by us, 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. We expect 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 we are currently or are considering developing.

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. We believe that the compounds covered by our 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 over $1 billion in U.S. sales in 2002. Several other pharmaceutical companies have acetylcholinesterase inhibitors in human clinical trials. In addition, Forest Laboratories’ NamendaÔ (memantine HCl) was recently approved in the USA for the treatment of moderate to severe AD as monotherapy or in combination with donepezil, a commonly prescribed acetylcholinesterase inhibitor. Memantine has a different mechanism of actin that is focused on the glutamate pathway and can potentially also be prescribed together with Phenserine.

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, continues to research and development work on 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 one or more of our 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.

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 our proposed products. It is expected that all of our 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 in the USA. Typically, the clinical evaluation process involves three phases. In Phase I, clinical trials are conducted with a small number of healthy 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, statistically-driven 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 FDA requires that all pre-clinical and clinical testing, as well as manufacturing of drug product, meet certain Good Practices guidelines, including Good Manufacturing Processes, Good Laboratory Practices and Good Clinical Practices. These guidelines are designed to ensure formal training, standard operating procedures, independent performance checks and measures, the accuracy, consistency, validity and completeness of the particular activity. In our case, Contract Research Organizations, or CROs, and academic or other sponsored research laboratories that we utilize for our pre-clinical and clinical research, as well as active pharmaceutical ingredient (API) manufacturing of pure drug product, must comply with these guidelines. Our contracted manufacturers, sponsored research labs and CROs undertake to adhere to Good Manufacturing Processes, Good Laboratory Practices and Good Clinical Practices. We select only CROs that have a record of adherence to those standards and have internal quality assurance and control functions in place to ensure such adherence. However, no assurance can be given that these CROs will in fact completely adhere to the relevant standards in their work for us.

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, we completed a Phase II proof of concept human clinical trial with Phenserine utilizing AD patients at five sites in the United States. The only drug for which we have filed an IND is Phenserine. Our butyrylcholinesterase inhibitor program is in preclinical development. The AIP product development is under the direction of Serono, through our arrangements with their subsidiary ARS, and they began Phase I human testing in 2003.

G. Strategic Alliances

New York University

On April 1, 1997 we entered into a Research and License Agreement with New York University pursuant to which NYU granted us an exclusive worldwide license to certain patent applications covering AIPs, PIPs and related technology, and any inventions that arose out of the research project funded by us. Aggregate milestone payments under the agreement total $525,000, with $175,000 payable once for each of one Alzheimer’s disease treatment product, one prion treatment product and one neuro-imaging product. We must pay minimum annual royalty payments to NYU in the amount of $150,000 per year beginning in 2004, through the expiration or termination of the agreement. We also undertook to comply with a development plan annexed to the agreement, that contains deadlines by which we or our sublicensee is to achieve certain development milestones, including commencing clinical trials, for an AIP and PIP compound.

Under the Research and License Agreement, we are obligated to pay all patent filing, prosecution and maintenance costs. In addition, we paid NYU $25,000 upon signing the agreement in connection with patent expenses incurred prior to the signing of the agreement. We have the right to bring suit against any third party infringers and are responsible for all of our costs and expenses or those of NYU incurred in conjunction with such suit. If we are rewarded a recovery in our suit against a third party infringer, we may utilize such recovery to pay for our costs and expenses in bringing such action, and we must pay NYU a portion of any excess recovery over such costs and expenses. If we choose not to bring such a suit, and NYU exercises its right to do so, NYU will pay the costs and expenses of such a suit against a third party infringer. NYU has the right to reimburse itself for costs and expenses incurred in such a suit out of any sums recovered, and will pay us fifty percent of the amount of such recovery in excess of NYU’s costs and expenses.

We issued an aggregate of 600,000 shares of common stock to NYU and two scientists involved in the research upon signing of the agreement. These 600,000 shares of common stock had a fair market value of $240,000 when they were issued. In addition, we granted additional shares of common stock to NYU and the two scientists pursuant to certain anti-dilution relative to the shares issuance at a price of $0.001 per share. We issued an aggregate of 317,369 shares of common stock to NYU and the two scientists in 2000. We recorded accounting charges of $1,965,000 for the fair market value of 305,074 of the 317,369 shares deemed issued in 1999 and recorded accounting charges of $138,000 for the fair market value of final tranche of 12,295 shares issued in 2000 to complete the shares issuances to NYU and the two scientists.

In addition to royalties on future sales of products developed from the patented technologies, milestone payments and patent filing and prosecution costs, we undertook to fund four 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, after we had paid an aggregate of $1,200,000. Under the agreement with NYU, we received an exclusive license to all inventions in the field arising from this research on the AIPs and PIPs. We did not receive notice from NYU that any inventions in the field arose out of the research project on the AIPs and PIPs.

The patent license terminates, on a country-by-country basis, upon expiration of the last to expire of the licensed patents (June 2015 for the United States) or eight years from the date of first commercial sale of a licensed product in such country, whichever is later. Either party can terminate the Research and License Agreement if the other party materially breaches or defaults in the performance or observance of any of the provisions of the agreement and such breach or default is not cured within 60 days or, in the case of failure to pay any amounts due under the agreement, within 30 days after giving notice by the other party specifying such breach or default, or automatically and without further action if either NYU or Axonyx discontinues its business or becomes insolvent or bankrupt. Upon termination of the agreement all rights in and to the covered patent rights shall revert to NYU and we will not be entitled to impinge on such patent rights. Termination of the agreement would not relieve either party of any obligation to the other party incurred prior to such termination. Certain provisions of the Research and License Agreement will survive and remain in full force and effect after any termination, including provisions relating to confidentiality, liability and indemnification, security for indemnification, and use of name of the other party without prior written consent except under certain circumstances.

On October 11, 2002, we signed a Fourth Amendment with New York University to the Research and License Agreement between New York University and Axonyx dated April 1, 1997. The amendment modifies the development plan annexed to the Research and License Agreement regarding deadlines by which Axonyx or our sublicensee is to achieve certain development milestones, including commencing clinical trials, for an AIP compound. The amendment extends the dates by which we or our sublicensee undertakes to meet certain development and commercialization benchmarks, including the commencement of Phase I clinical trials for an AIP compound. The amendment also modifies the terms of the milestone payment provisions of the Research and License Agreement, delays the due date for the next development plan report and contains releases and waivers of default by the university and Axonyx. NYU waived any past failures on our part to develop Licensed Products in accordance with the schedule provided in the development plan under the Research and License Agreement. ARS, a wholly owned subsidiary of Serono International, S.A., who sublicensed the patents covered by the Research and License Agreement between New York University and Axonyx, is undertaking the development and commercialization of the AIP and PIP compounds at Serono facilities in Geneva, Switzerland.

CURE, LLC, Public Health Service/National Institutes of Health

On February 27, 1997, we acquired the worldwide exclusive patent rights to Phenserine, Cymserine (a butyrylcholinesterase inhibitor), their analogs (one of a series of chemical substances of similar chemical structure) 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). We have 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, we agreed to pay royalties to CURE, LLC of up to 3% of the first $100 million and 1% thereafter of net product sales of, and sub-licensed royalties on, products developed from the patented technologies. We also agreed to pay an upfront fee in the amount of $25,000, milestone payments aggregating $600,000 when certain clinical and regulatory milestones are reached, and patent filing and prosecution costs. We have been paying minimum annual royalty payments of $10,000 since January 31, 2000, which will increase to $25,000 per year on commencement of sales of the product until the expiration or termination of the agreement. Any royalty payments made to CURE shall be credited against the minimum payments. 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 our License Agreement with CURE, LLC and are binding on us as if we were a party to the License Agreement with the PHS. Those provisions cover certain reserved government rights to the licensed patents, preparation, filing, maintenance and prosecution of the licensed patents, obligations to meet certain benchmarks and perform a commercial development plan, manufacturing restrictions, as well as indemnification, termination and modification of rights. PHS reserves on behalf of the U.S. government or any foreign government or international organization pursuant to any existing or future treaty or agreement with the U.S. government an irrevocable, nonexclusive, nontransferable, royalty free license for the practice of all inventions licensed pursuant to the License Agreement between CURE and PHS for research or other purposes. Prior to the first commercial sale we must provide PHS with licensed products or material for PHS’ use. After making the first commercial sale of licensed products until expiration of the agreement, we must use our reasonable best efforts to make the licensed products and processes reasonably accessible to the U.S. public. PHS reserves the right to terminate or modify the License Agreement if it is determined that such action is necessary to meet requirements for public use specified by federal regulations. We are also obligated, under these pass through provisions, to manufacture licensed products substantially in the U.S., unless a written waiver is obtained in advance from the PHS. We undertake to develop and commercialize any licensed products covered by the patents pursuant to a commercial development plan contained in a pass through provision from the CURE-PHS license agreement. If we fail to cure non-compliance with the commercial development plan after notice from CURE within a reasonable period of time, we could be in material breach of the agreement.

Under the pass through provisions from the License Agreement between CURE, LLC and the PHS, the PHS is primarily responsible for the preparation, filing, prosecution and maintenance of the patents covered by the License Agreement. Pursuant to our agreement with CURE, LLC, we have assumed full responsibility for the preparation, filing, prosecution and maintenance of the covered patents, and have reimbursed CURE, LLC for its patent expenses as part of the $25,000 up front fee. We have the right to pursue any actions against third parties for infringement of the patents covered by our License Agreement with CURE, LLC. Upon the conclusion of any such infringement action we may bring, we are entitled to offset unrecovered litigation expenses incurred in connection with the infringement action against a percentage of the aggregate milestone payments and royalties owed to CURE, LLC. In the event that fifty percent of such litigation expenses exceed the amount of royalties payable by us, the expenses in excess may be carried over as a credit on the same basis into succeeding years. A credit against litigation expenses will not reduce the royalties due in any calendar year to less than the minimum annual royalty. Any recovery we make in such an infringement action shall be first applied to reimburse CURE for royalties withheld as a credit against litigation expenses and we may utilize the remainder to pay for our litigation expense. Any remaining recoveries will be shared equally by us and CURE.

The reversionary rights provision of the License Agreement sets certain deadlines by which we are to achieve certain development milestones, including commencing clinical trials, for Phenserine. If we fail to comply with the development benchmarks set forth in the reversionary rights provision, or the commercial development plan, or pay the required penalty fees, then all rights to the patents may, at CURE’s election, revert to CURE, and the agreement will terminate. In addition, we have the right to terminate the agreement with 60 days notice without cause. Either party may terminate the agreement upon cause, if the other party materially breaches or defaults in the performance of any provision of the agreement and has not cured such breach or default within 90 days after notice of such breach or default, or if either party discontinues its business or becomes insolvent or bankrupt. Unless terminated first, the license terminates upon the last to expire of the licensed patents (December 2016 in the United States for the covered patent which will expire last).

On May 27, 2002, we signed an amendment letter with CURE, LLC that amends the License Agreement between Axonyx and CURE dated February 27, 1997. The amendment modifies the reversionary rights provision of the License Agreement regarding deadlines by which we are to achieve certain development milestones, including commencing clinical trials, for Phenserine. The amendment extends the dates by which reversionary rights arise if we fail to meet certain development benchmarks, including the commencement of Phase III clinical trials for Phenserine. On July 11, 2002, the Public Health Service, the parent agency of the NIA, signed an amendment to the Patent License Agreement – Exclusive between the Public Health Service and CURE dated January 31, 1997, which, among other things, amends the commercial development plan and benchmark provisions of the original agreement and extends the dates by which CURE or its sublicensee Axonyx is required to commence clinical trials for Phenserine and file a New Drug Application for Phenserine.

Applied Research Systems ARS Holding N.V./Serono International S.A.

Effective September 15, 2000 we 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 we received a $1.5 million up front payment, may receive milestone payments and royalties on the sale of approved drug compounds derived and from the licensed technology. Previously, on May 17, 1999 we and ARS had signed a Development Agreement and Right to License (Development Agreement). Under the Development Agreement, we granted an exclusive right to license the patent rights and know-how regarding the AIPs to ARS. ARS paid us a $250,000 fee for the right to license.

Under the License Agreement with ARS, we could receive milestone payments from ARS in an aggregate amount of $14 million if the Licensed Product involved is a patented product covered by the sub-licensed patents and the patent application achieves certain developmental milestones up through health registration approval. The amount of aggregate milestone payments through health registration approval would be $7 million if the licensed product involved was developed by Serono during the term of our Development Agreement with ARS.

ARS’ obligation to pay royalties under the License Agreement with respect to any country extends from the date of first commercial sale in such country to the later of the tenth anniversary of the date of such first commercial sale in such country or the date of expiration or invalidation of the covered patents claiming the relevant licensed product in such country (currently June 2015 based on covered issued patents in the United States). ARS has the unilateral right to terminate the License Agreement without cause at any time upon 30 days notice to Axonyx. The agreement may be terminated for cause if the other party is in breach of its material obligations and has not cured such breach within 90 days after receipt of notice from the non-breaching party. In the event that ARS terminates the agreement for cause, the licenses under the agreement become fully paid up, perpetual licenses and in some circumstances ARS may be entitled to complete access to an related intellectual property. Upon any termination of our Research and License Agreement with NYU, the License Agreement with ARS does not terminate, but our rights and obligations with respect to the patent rights covered by the NYU Research and License Agreement shall be automatically assigned to NYU. Certain provisions of the License Agreement and the Development Agreement will survive after expiration of termination, including provisions relating to representations and warranties, indemnification, and confidentiality.

Under the License Agreement we agreed to file, prosecute and maintain the covered patent rights. We have the right to pursue any actions against third parties for infringement of the patent rights covered by the License Agreement. We shall bear all expenses of any such suit brought by us. ARS has the right to join such an infringement suit and if it does so, shall pay one half of the costs of such a suit. Any recovery derived from such suit shall be used first to reimburse us and ARS for reasonable out-of-pocket legal expenses relating to the suit, with any remaining amounts to be shared equally by the parties. If, after the expiration of 90 days notice of any third party infringement by one party to the other, we have not obtained discontinuance of such infringement or brought suit against the third party infringer, then the royalty in effect in such country shall be reduced by fifty percent. Such reduced royalty rate shall continue until such infringement ceases. After such 90 days ARS may bring suit against a third party infringer and join us as a plaintiff, however, ARS shall pay the expenses of bringing such suit and will retain any recovery or damages derived from such suit.

In conjunction with our Development Agreement with a subsidiary of 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 us from February 1999 after his departure from New York University School of Medicine in December 1998 until May 1999. Dr. Soto left the employ of Serono in 2003 and is currently a professor of neurology and Director of the Protein Misfolding Disorders Laboratory at the University of Texas Medical Branch in Galveston, Texas. Dr. Soto is assisting us in our discussions with Serono about potential future collaborations, as described below.

Dr. David Henry Small/Monash University

Effective September 1, 2002, we entered into a Research Agreement and a Consulting Agreement with David Henry Small, Ph.D., and an Intellectual Property Assignment Agreement with David Henry Small, Ph.D., Marie-Isabel Aquilar, Ph.D., Supundi Subasinghe (“Assignment Agreement”). Each of these agreements relate to the development of an assay method for the rapid screening of potential drug candidates for the treatment of Alzheimer’s disease. We are responsible for patent filing and prosecution and maintenance of all patents covered by or arising from any of these agreements. The research project pursuant to the Research Agreement is being undertaken by Dr. Small at Monash University in Clayton, Australia.

The Research Agreement funds a research project concerning further development of the assay method under the guidance of the supervisor, Dr. Small, for a three year period commencing October 1, 2002 and expiring on October 1, 2005, for Australian $90,000 per year. Dr. Small assigned all rights, title and interest in the intellectual property arising from the research project in return for revenue sharing of future sales of net sales of products arising from the research project intellectual property. Dr. Small retained rights to all intellectual property that was the property of, claimed by, or licensed to Dr. Small prior to the effective date of the Research Agreement, or which is developed by or on behalf of Dr. Small independently of the research project during the term of the Research Agreement or of the Consulting Agreement. We granted to Dr. Small a non-exclusive, personal, non-sublicensable, non-transferable, royalty-free, worldwide, perpetual and irrevocable license to use for his own research and educational purposes the research project intellectual property. Dr. Small granted us a