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TARGACEPT, !NC. Pharmaceutical Related ~echnologies of R.J. Reynolds Tobacc b Company DEVELOPMENT OF PRECLINICAL CANDIDATES FOR SCHIZOPHRENIA Non-Confidential May, 1997 RJR0000001707049991 700413019

because the methodologies allow the interactive evaluation of the effects of structural changes of drugs held inside the surface maps. The importance of the above technologies cannot be overstated because the molecular determinants of subtype specificity are sufficiently subtle that they render conventional medicinal chemistry-based approaches inefficient for the design of drugs for highly specified targets, such as nAChR subtypes. PentadTM based design is ideally suited ~o the efficient discovery of highly targeted Schizophrenia leads. The power of PentadTM is illus4rated in the figure below, in which the various classes of compounds developed by Targacept as'a result of employing PentadTM have provided a hit rate of more than 50% for all compounds'through the initial binding screen. Targacept Hit Rate 90 60 70 99 60 m 50 ~ 40 S 2 30 20 10 0 ee 2 ¢ 2 FUNCTIONAL ORGANIZATION The organization is composed of two integrated divisions: Pharmacology and Chemistry. The drug discovery process is a coordinated effort of these two divisions whose representatives form core product discovery and development teams. The divisiot}s are supplemented by RJR's Toxicology Support Team and an extensive network of acadgmic collaborators and contractors. The PentadTM drug discovery system effectively integrates c emistry, pharmacology and toxicology for the efGcient discovery and development of cli~ical candidates for the treatment of Schizophrenia. 9 RJR0000001707049991 70D4i 3027

In Vivo Pharmacology • RJR-2403 produces significant increases in acetylcholine (ACh), dopamine (DA), norepinephrine (NE) and serotonin (5-HT) in rat cortex. Release of 5-HT was significantly higher compared to nicotine. Peak ihcreases in ACh were grrcater than those produced by an equal dose of nicotine. The, release of DA and NE was lower than that produced by nicotine. • RJR-2403 was 20 to 50-fold less potent than nicotine in causing changes in body temperature, respiration rate, locomotor (Y-maze) activity and acoustic startle. • RJR-2403 was 10 to 20 times less potent than nic,otine in eliciting increases in heart rate and blood pressure. • RJR-2403 (0.1 mg/kg) or nicotine (1.0 mg/kg) significantly reversed the effects of scopolamine-induced amnesia in a passive avoidance paradigm. • RJR-2403 (0.1 or 1.0 mg/kg) significantly reversed the effects of inecamylamine- induced amnesia in a water navigation paradigm. , • Orally administered RJR-2403 significantly increased the performance of normal young rats in an 8 arm radial aim maze paradigm', • RJR-2403 effects on long and short term memory were assessed using radial arm maze performance in rats whose performance was impaired by ibotenic acid lesions of the forebrain cholinergic projection system. RJR! 2403 not only showed effects on working memory (place task) in lesioned animals;, but also demonstrated significant improvement in reference memory, both in lesioq'ed and control animals. RJR-2403 also resulted in improvement in both working and reference memory (cue task) in control animals. By comparison nicotine showed significant effects only for reference memory (place task) in lesioned animals. h.TR'-:40.i Scl/'etv Arsesse3tent RJR-2403 has completed all required regulatory toxicology $tudies and a Phase I single rising dose study in human volunteers. 6 RJR0000001707049991 700413024

Pentad "' Optirrtizes Schizriphrertia Drug Discwver'y ' ]n uts Out uls . Biological ~ nrugDiscovery Activities Process Rc6ncments Receptor -~ MechanisnusofAction Charecterimion 11 d , -~ 1{ighly Targeted l..eads Chemical Structures 1'fe~clinical Candidates L - Testing At the heart of PentadTM are unique pharmacophores predictive of activation of nicotinic receptor subtypes relevant to Schizophrenia, quantitative structure activity relationships for a host. of compound classes, novel and proprietary molecular modeling approaches, powerful neural networks and custom software. One aspect of the PentadTM drug discovery system is centered around methods that lead to a more complete understanding of molecular recognition and respoq'se processes and application of this understanding to rational Schizophrenia drug design. Examples of accomplishments to date include: • the demonstration that specific atoms of nicotinic ligand~interact in unique and predictable ways with amino acids in the binding site of relevant nA hRs; • the development of a novel method for estimating entropv changes that occur when structurally flexible ligands bind to the receptor. Another aspect of PentadTM is the conduct of quantitative structure activity relationship (QSAR) studies which have led to an understanding of the con•elatiods between various target activities and changes in molecular structure. QSAR methodologies serve two distinct purposes. They enable the streamlining of synthetic efforts and are used to de sign new classes of drug leads. Accomplishments to date include; • a predictive QSAR model of functional activity ((X4(32 -e i ontaining receptor subtypes), • a QSAR predictive of binding affinity for a variety of co$npound classes, and • a number of pharmacophore models that are able to disc~~iminate between CNS, ganglionic and muscle activation. IThe third major focus in the development of PentadTM is the'!use of techniques related to QSAR to map the surfaces of various receptor subtype binding sites~,. This is of particular significance 8 RJR0000001707049991 700413026

TARGACTPT'S APPROACH TO DISCOVERY AND DEVELOPMENT OF CLINICAL CANDII)ATI+JS FOR SCHIZOPHRENIiA. , Targacept utilizes a battery of screens to rapidly discover and characterize potential drug candidates. These consist of both in vitro and inn vivo model; designed to screen targeted leads for receptor subtype selectivity, side effects liabilities and be~avioral effects in relevant animal models. In vivo studies aree conducted acutely and chronically following sub-cutaneous injection and oral delivery. Primary In tritrn Screens Secondary In Vivo Behavioral Screens Pretox / PanLabs F--0 Dis Model --N Regulatory Toxicology Targacept currently has a portfolio of compounds paterttedfar CNS disorders including schizophrenia. A number of candidates having a marked CNS/PNS selectivity are described below. Candidates were selected on their ability to bind with high affinity, actiu,ate the a4R2 nAChR subtype (EC5o in nM and En,Ax as percentage of nicotine's effect) and lack activation of the human muscle receptor or rodent ganglionic receptors (as percentage of nicbtine's effect). RJR # Binding Affinity (t1M) oc4(32 EC50 (nb1) a4p2 E,„,,, (%n) Muscle I Activatio' n ( %r, ) Ganglia Activation (%O Status 2401 26 "f32. 91 0 0 Phase atll t 97 1639 85 2800 86 12 8 Pre•Clinical 1645 10 470 62 0 0 Pre-Clinical 1654 5 379 59 5 0 Pre-Clinical 1647 9 235 84 0 0 Pre-Clinical 4 RJR0000001707049991 700413022

SCHI7OPHRE1vTL~ • Schizophrenia is a term used to describe the most chronicr and disabling of the major mental illnesses. The etiology of schizophrenia, which may be one or multiple disorders, is unknown. • Prevalence of schizophrenia in the general population is approximately 1%. The U.S. market for schizophrenia therapeutics is estimated to be $1 billion. • Neuroleptics have been used for treatment, albeit at the expense of considerable adverse side effects. • There exists a variety of experimental animal and epidenliological evidence suggesting a beneficial role of nicotinic compounds in the treatment of schizophrenia. Compelling evidence has linked the 0 nAChR with schizophrenia a>}d Targacept has a battery of a7- selective compounds. StF1.'BRP'1vat"v of r'rkQionitl5" ..~.......~..~....~......m.m....._...........m..... , Recent findings have established a link between a specific CNS nicotinicc receptor subtype (a7) and deficits observed in schizophrenic patients. These and otiher findings supporting a nicotinic therapeutic intervention in schizophrenia can be summarized, as follows. 1. Recent studies have shown that there is a decreased number of hippocampal nicotinic receptors in postmortem brain tissue of schizophrenic pa ients. 2. There is improved 'affect' in smoking versus non-smoki~g schizophrenic patients. 3. Nicotine has been shown to improve sensory gating defi6ts in animals and schizophrenics (normalization of P-50). 4. Blockade of the 0 nicotinic receptor induces a gating deficit similar to that seen in schizophrenia. 5. Dopamine deficiency in the frontal areas has been implioated in the negative symptoms (anhedonia, apathy, ambivalence) of schizophrenia and dicotinic ligands enhance dopamine release. 6. A genetic linkage between schizophrenia and a7 nicotinjc receptors has been reported. ~ Summary of major findings Nicotinic receptor function in schizophrenia. Leonard, S I, Adams, C., Breese, C.R., Adler, L.E., Bickford, P., Byerley, W., Coon, H., Griffith, J.M., MiJle•, C., Myles-Worsley, M., Nagamoto, H.T., Rollins, Y., Stevens, K.E., Waldo, M., Freedman, R. Schizophrenia Bulletin 22(3):431-45,1996. • Biochemical, molecular, and genetic studies of sensdry processing (the P50 auditory- evoked potential gating deficit) suggest that one of the n uronal nicotinic receptors, the alpha 7 nicotinic receptor, may function in an inhibitory neuroial pathway involved in this phenotype. I • The P50 deficit is normalized in nongating subjects b y nicotine. i 2 RJR0000001707049991 700413020

• In an animal model of the P50 gating deficit, antagonists of lhe alpha 7 nicotinic receptor block normal gating of the second of paired auditory stirriuli. Regional localization of receptor expression includes areas known to function in sensory filtering. • Expression of the alpha 7»cceptor is decreased in hippocampal brain tissue, dissected postmortem, from schizophrenia subjects. • Linkage analysis between the P50 deficit in multiplex schizophrenia pedigrees and DNA markers throughout the genome yielded positive lod scores to DNA markers mapping to a region of chromosome 15 containing the alpha 7 nicotinic receptor gene. 11 e>asleArce in grs.rstmozts:rxa braier tissue fsw tia.°crease;.1 numbers of hipLRoenarn.ls•,r€ nieolinit° receptors in schizophrenia. Freedman, R., Hall, M., Adler, L.E., Leonard, S. Biological Psychiatry. 38(]):22-33, 1995. • This study tests the hypothesis that nicotinic choliner •c receptors are decreased in the hippocampus of schizophrenics. The hypothesis is derivd from the finding that alpha- bungaroloxin causes a defect in the inhibitory gating of attditory-evoked potentials in laboratory animals that resembles a defect in auditory sensory gating observed in schizophrenics. ' • Nicotine transiently normalizes this psychophysiological deficit in schizophrenic patients. • Postmortem brain tissue was obtained from eight schizopln•enic and eight age-matched nonschizophrenic subjects. • Alpha-bungarotoxin binding was significantly decreased in the tissue from the schizophrenic patients, with seven of eight patients below the range of the nonschizophrenic subjects. i • There was also a significant decrease in the binding of cytisine. The results were not related to generalized hippocampal cell loss, drug expos~re at time of death or smoking history. This initial study suggests that schizophrenic patients have fewer nicotinic receptors in the hippocampus, a condition which may lead to failure of cholinergic activation of inhibitory interneurons, manifest clinically as decreased gating of response to sensory stimulation. ! 3 RJR0000001707049991 700413021

SUMMARY OF `1'ARGA(TP°1''S SCRI;7:OPTIENIA RESEARCH ANE:l 1:11:{.V1«:.l'_.OPM1+;NI' PROGRANI ASSETS LEVERAGED IN THE SCHIZOPHRENIA PROGRAM • Pentad'' M, a proprietary drug discovery system, highly predictivc of novel, efficacious ligands for the major known nAChR targets. • A broad range of molecular target assays, with staff expelrienced in the conduct and analysis of such assays. • Target-selective analogs for at least four nAChR subtypes developed and charactetized. • More than 30 U. S. patent applications, covering both coMpositions-of-matter and methods of use, involving the most potent nAChR ligands and thoscl,with thc greatest known CNS:PNS ratio reported to date submitted, issued or allowed. • Eight distinct chemical families generated, characterized'and analyzed, covering many highly targeted lead compounds for a number of CNS and PNS kiisorders. • An extensive network of external collaborators, involvin~ leading academic nAChR scientists and institutions worldwide. • Complete laboratory, management and research staff inftastructure for nAChR drug discovery, chemical synthesis, in vitro and in vivo screen~ng, patenting of new chemicall entities and preclinical toxicological evaluation, ; APPLYING THE PENTADTM IIRUG DISCUVERI' SYST.EM TO SCHIZOPHRENIA The nicotinic acetylcholine receptor has been one of the mos~t intensely studied of all receptors. Despite this fact, very few published studies exist about the ature of its interaction with neurotransmitters and drugs and how these interactions lead~to various physiological outcomes. Targacept's unique and proprictaiy PentadTM drug discovery;, system is shedding light on this complex problem and has been used successfully to advancel Targacept's Schizophrenia drug discovery activities. PentadTM is a proprietary knowledge-based system integrating all relevant areas of research to optimize nicotinic drug discovery. Utilizing biological activities derived from pharmacological and toxicological studies, chemical structures, physicochemical properties and receptor characterization, PentadTM provides a powerful technology platfortn for Schizophrenia drug discovery. It is used to refine Targacept's drug discovery process, provide unprecedented understanding of the mechanisms of action of nicotinic ligands and receptor subtypes, design highly targeted leads and develop pre-clinical candidates. Knowledge gained from testing these highly targeted leads and pre-clinical candidates provides feedback for further refinements, making PentadTM a dynamic and highly predictive drug discovery system. 7 RJR0000001707049991 700413025

RJR-2403: A HIGHLY 7"ARGT:TF.D THERAPEUTIC CANDIDATE j;,JR _-i:x(~; }>lic2rrt717C:?1(?,c:`•' RJR-2403 is a CNS selective nicotinic agonist. Results of extensive in vitro and in vivo pharmacological testing indicate that the molecule may have !lherapeutic potential in ncurodegenerative diseases (Lippiello, P.M. et al., Drug DevGlopment Research, 38: 169-176, 1996; Bencherif, M. et al., JPET 279: 1413-1421, 1996; Li}ipiello, P.M. et al., JPET, 279: 1422-1429, 1996; Lippiello, P.M. et al., In Alzheimer's Disease from Molecular Biology to Therapy. Eds. R. Becker and E. Giacobini, Boston, Bascl, Berlin Birkhauser. pp 281-286, 1996). In Vitro Pharmacology • RJR-2403 binds with high affinity to rat brain cortex (K; = 26 ± 3 nM). • RJR-2403 is a poor competitive inhibitor of 1251-a-bungarotoxin binding in mouse brain (Ki = 36,000 nM). • RJR-2403 is a poor competitive inhibitor (ICSO >I, 0,000 nM) at a variety of receptor sites including Angiotensin 11, Bradykinin B2, ChplecystokininA_B, Dopamine D; and D4,Z, Endothelin ETA-B, Galanin, Histamine H3, ~ainate, Leukotriene B4, Muscarinic M1.3, Neurokinin NKI, Neuropeplide Y2, NMDA; Phencyclidine, PAF, Serotonin 5- HTIA-s, Sigma sj, Sodium Channel-2, Thromboxdnc A2, TRH and VIP. In addition, RJR-2403 is a poor inhibitor of Calcineurin, Cal}iain, EGF Tyrosine Kinase, Nitric Oxide Synthase (Constitutive or Inducible), Protein Kinase Ca and Cp. • RJR-2403 is comparable to nicotine in activatinglrat thalamic synaptosomes (EC5o = 732 ± 155 nM; EmaX == 91 ± 8% for RJR-2403 and EC5o = 591 ± 120 nM; E,,,ax = 100 ± 25% for nicotine) I • RJR-2403 is one-tenth as potent as nicotine in inducing dopamine release from striatal synaptosomes (EC5o = 938 ± 172 nM; Emax = 82 ± 5% for RJR-2403 and ECso = 100 ± 25 nM; E,~,x = 100 f 13% for nicotine). I • At concentrations up to I mM, RJR-2403 does not significantly activate ganglion- type nAChRs, muscle type nAChRs, or muscarinic receptors. • RJR-2403 does not antagonize nicotine-stimulated muscle or ganglionic nAChR function (ICSO> 1mM). • RJR-2403 is less than one-tenth as potent as nicotine with greatly reduced efficacy at inducing ileum contraction. • Chronic exposure of M 10 cells to RJR-2403 (10 M) results in up-regulation of high affinity nAChRs phenomenologically similar to that seen with nicotine. • RJR-2403 (10 and 100 µM) resulted in greater pcak activation (ca. 200%) than either nicotine or acetylcholine using a two-electrode v6ltage-clamp configuratiitn in Xenopus oocytes following the expression of the!,a4 and 432 cRNA subunits. • RJR-2403, in contrast to nicotine, did not result i~ a persistent loss of function suggesting either that it is less desensitizing or that the kinetics of recovery from desensitization are accelerated. 5 RJR0000001707049991 70041 3023