In the weird world of drug partnerships, GlaxoSmithKline (NYSE:GSK), maker of antismoking nicotine patches, is teaming up with Targacept (NASDAQ:TRGT) to investigate the positive effects of nicotine.

Targacept, spun off from tobacco giant Reynolds American (NYSE:RAI) in 2000, will receive an up-front payment of $35 million -- $15 million of which will come from Glaxo's purchase of the company's stock. The partnership will look at five areas that neuronal nicotinic receptors (NNRs) might affect: pain, obesity, addiction, Parkinson's disease, and of course, smoking cessation. If all the milestones are met, Targacept could receive as much as $1.5 billion from Glaxo, including double-digit royalty payments from sales of products that make it to market.

Neuronal nicotinic receptors are a subclass of nerve cell receptors found throughout the nervous system. While nicotine does bind to them -- that's how they got their name -- the receptors function in a wide variety of biologic processes by releasing neurotransmitters. The only approved drug targeting NNRs is Pfizer's (NYSE:PFE) smoking-cessation product Chantix, which has performed extremely well since its launch last year. Memory Pharmaceuticals (NASDAQ:MEMY) and Sanofi-Aventis (NYSE:SNY) also have drugs in development that target NNRs.

Targacept has developed a drug discovery system that allows it to find small molecules that bind to specific NNRs. It will continue to use this technology to discover new therapeutics and advance them into the clinic. Glaxo has hedged its bets in the deal; it doesn't have to decide whether to pick up the new compounds until after Targacept has performed a proof-of-concept phase 2 clinical trial. The deal also covers one of Targacept's lead candidates, TC-2696, currently in a phase 2 trial for acute postoperative pain.

Targacept already has a licensing agreement with AstraZeneca (NYSE:AZN) to market its phase 2b Alzheimer's drug. The influx of cash from Glaxo should allow the company to increase research and development in other therapeutic areas in which NNRs may be involved, which might elicit additional partnerships.

Targacept is still years away from a marketable drug, and the class of drugs it's designing is risky, to say the least. But if it can move another drug or two through phase 2 trials, it should have a proof of concept that's more in line with the greater-than-$200 million market cap it's been sporting since the partnership announcement.

Want to know the latest drug stock we've picked for the Fool's market-beating Rule Breakers newsletter? Click here to take a look at all our recommendations with a free 30-day trial.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. GlaxoSmithKline is an Income Investor recommendation. Pfizer is a pick of the Inside Value team. The Fool's disclosure policy is loved by everyone.