Targacept Inc. got an impressive stock boost Friday, jumping 20 percent on an early stage deal with GlaxoSmithKline plc to develop drugs targeting neuronal nicotinic receptors for pain and other disorders.

The alliance is accompanied by a $35 million up-front payment, comprised $20 million in cash and $15 million in an equity investment. London-based GSK agreed to purchase 1.3 million shares of Targacept's common stock priced at $11.76 per share, a nice premium to Thursday's closing price of $9. Beyond that, Targacept is eligible to receive up to $1.5 billion in potential milestones - with $1 billion of that to come from pre-commercial achievements - upon the successful development of product candidates across five therapeutic areas: pain, smoking cessation, obesity, addiction and Parkinson's disease. Targacept also would receive tiered double-digit royalties, depending on product sales.

"These are the kinds of deals that come along once in a lifetime," said Donald deBethizy, president and CEO of Targacept. "We've been celebrating."

The excitement was echoed on Wall Street, which sent shares of Targacept (NASDAQ:TRGT) up $1.79, or 20 percent, to close at $10.79 on July 27.

Analyst Terence Flynn, of Lazard Capital Markets, maintained a "buy" rating on the company's stock and wrote in a research note that the GSK alliance further validates "the concept of targeting nicotinic receptors for therapeutic purposes and . . . the strength of Targacept's pipeline and Pentad discovery platform."

It's a platform that the Winston-Salem, N.C.-based firm has been perfecting since its days as a subsidiary of the R. J. Reynolds Tobacco Co. aimed at studying the chemistry and biology of nicotine. The company focuses on a class of drugs targeting neuronal nicotinic receptors (NNRs), which are found on nerve cells and work to regulate the central nervous system.

Targacept's Pentad technology is designed to discover small-molecule drugs targeting NNRs, and the company has identified a range of potential indications, such as Alzheimer's disease, schizophrenia, anxiety and pain, to name a few.

"We knew we had a great" platform, deBethizy said, and "we've been chomping at the bit to get enough resources to get some of the discovery deals going."

Enter GSK, which signed Targacept under its Centers of Excellence for External Drug Discovery (CEEDD) program, which aims at building the pharma company's pipeline by investing in early biotech efforts.

Mark Strobeck, vice president of drug discovery transactions for GSK, said during a conference call that the goal of CEEDD is to allow a biotech firm "to partner with a large pharmaceutical company earlier in the development process and maintain its independence through clinical proof of concept," all the while receiving a stream of success-based funding.

Those kinds of early stage deals are becoming an industry trend. "There's a lot of new science emerging, so people are starting to take a little more risk," deBethizy said. As a result, biotech firms are able to sign preclinical deals "with Phase IIb economics."

As part of its role in the collaboration, Targacept will be responsible for research and discovery of small-molecule therapies that target predefined NNR subtypes and then will develop the most promising candidate in each of those five therapeutic areas through proof-of-concept studies. After that, GSK would have the option to take the programs into late-stage development and commercialization. And one of the best parts of the deal, deBethizy said, is that the financial structure ensures Targacept adequate funding for its work. Up to $16 million in milestones could be doled out for each of the five therapeutic programs prior to starting proof of concept.

Though alliance negotiations initially included only preclinical programs, Targacept's two lead pain products soon were added to the mix. TC-2696, which is designed to modulate the activity of the alpha4beta2 NNR, is in a Phase II trial for acute postoperative pain in patients undergoing third molar extraction, and pending successful results, expected by the end of this year, will enter a proof-of-concept trial. Following behind is TC-6499, which also targets the alpha4beta2 NNR. That compound is slated to start clinical testing before the end of 2007.

For both pain products, Targacept has retained a co-promotion option in the U.S. "We want to make sure we hold on to specialty opportunities," deBethizy said, adding that the company has a similar arrangement in its potential $300 million 2005 deal with London-based AstraZeneca plc. That collaboration includes TC-1734, now AZD3489, which started a 500-patient Phase IIb trial earlier this month in Alzheimer's disease. AstraZeneca is expected to start a separate Phase IIb study next month to test the compound in cognitive deficits in schizophrenia.

Targacept also is progressing clinical candidates on its own. Earlier this month, the company started a Phase I trial of TC-5619, a small molecule aimed at modulating the alpha7 NNR, believed to regulate inflammation arising from injury or infection, with possible implications on cognitive function. It also is in Phase I with TC-2216, which modulates alpha4beta2 to treat depression and anxiety.

Targacept, which has not yet reported its second-quarter earnings, posted a net loss of $4.8 million for the three months ending March 31. Alan Musso, the company's vice president and chief financial officer, reported during the conference call that the firm's current cash position, including the $35 million up-front payment from GSK, exceeds $90 million. He added that Targacept should end the year with about $75 million in the bank.