The drug, Rember, targets the build-up of tau protein tangles which form inside the brain nerve cells of people with Alzheimer's. These tangles destroy nerve cells linked to memory, causing forgetfulness.
Professor Claude Wischik of Aberdeen University in northeast Scotland, who co-founded the company which created the drug, hailed the results as "the most significant development in the treatment of the tangles since Alois Alzheimer discovered them in 1907".
Experts have welcomed the findings but say bigger trials are needed to confirm the drug's effects and check it is safe.
An initial study into the drug's effectiveness focused on 321 people with mild and moderate Alzheimer's in Britain and Singapore.
Those on the drug experienced an 81 percent reduction in mental decline after 50 weeks, compared to a placebo group, researchers said.
Reacting to the findings, Professor Clive Ballard, head of research at Britain's Alzheimer's Society, said: "This first modestly-sized trial in humans is potentially exciting... however, we are not there yet.
"Larger scale trials are now needed to confirm the safety of this drug and establish how far it could benefit the thousands of people living with this devastating disease."
Alzheimer's is a degenerative brain disorder which causes problems with memory and behaviour, for which there is currently no cure. It affects around 350,000 people in Britain alone.
The findings were presented at the International Conference on Alzheimer's Disease in Chicago in the United States.