Applied NeuroSolutions Inc. (APNS) will receive $2 million up front in an early stage partnership with Eli Lilly and Co. focused on developing drugs targeting an underlying cause of Alzheimer's disease.

Research will focus on finding biomarkers and using them to develop therapeutics. The deal centers on APNS' work in Alzheimer's, and carries the potential of milestones and royalties down the road, depending on how many targets advance in the clinic.

"This is a very big deal for us," APNS founding scientist Peter Davies said during a conference call, adding that Indianapolis-based Lilly is "a perfect complement" to the "early stage work that we do."

Under the terms, APNS is guaranteed $2 million up front. That includes a $500,000 equity investment, in which Lilly agreed to buy about 1.1 million shares of APNS. In addition, the large pharma firm committed annual research and development funding, which will allow APNS to expedite its AD work.

APNS could receive either up to $20 million on targets it provides, or up to $10 million for targets previously identified or identified during the course of the collaboration. The total amount of targets "has no limit," said Ellen Hoffing, president and CEO of Vernon Hills, Ill.-based APNS.

Beyond that, "we'll have the opportunity to earn royalties," she said. Though she could not disclose specifics, Hoffing said the royalty arrangement "will be very, very valuable down the road."

About 4 million Americans have AD, and by 2010, it's estimated that the disease will affect more than 21 million people in the seven major pharmaceutical markets. Most of the existing drugs - including top-selling Aricept (donepezil, from Eisai Co. Ltd. and Pfizer Inc.), which recorded worldwide sales of $1.7 billion in 2005 - are designed to alleviate symptoms and improve cognition, but do not tackle the underlying causes.

Work at APNS stems from discoveries made by Davies, a professor of pathology and neuroscience at Albert Einstein College of Medicine in New York., who has been involved in AD research since 1974.

There are two recognized pathologies of AD. One is marked by the accumulation of amyloid plaques, characterized by clusters of misfolded amyloid-beta protein. Several investigational products, such as Laval, Quebec-based Neurochem Inc.'s Alzhemed (tramiprosate) and Salt Lake City-based Myriad Genetics Inc.'s Flurizan (R-flurbiprofen), are aimed at reducing the deposit and buildup of amyloid plaques. Both Alzhemed and Flurizan are in Phase III.

Davies' work, however, targets the other known pathology: the formation of neurofibrillary tangles, which results from an excess of an abnormal protein, ptau-231, and contributes to neuron death. Studies have shown a correlation between excess ptau-231 and AD.

APNS also is using Davies' discoveries to develop diagnostics for AD. The company is creating a cerebrospinal fluid (CSF) test and a blood test aimed at detecting AD at an early stage. "There is no FDA-approved diagnostic" for AD, Hoffing said, adding that the deal with Lilly doesn't preclude APNS from seeking a potential partnership for "that side of the equation."

APNS signed a deal in February with Northbrook, Ill.-based Nanosphere Inc. to collaborate on diagnostic tests for AD. That program is applying Nanosphere's Biobarcode protein detection technology to biomarkers identified by APNS.

Shares of APNS (OTC BB:APNS) closed at 36 cents Tuesday, down 6 cents.