Arrowhead Pharmaceuticals Inc. (NASDAQ: ARWR) shares stumbled on Thursday after it announced a license and collaboration agreement with Janssen Pharmaceutica, a subsidiary of Johnson & Johnson (NYSE: JNJ).

The agreement is to develop and commercialize ARO-HBV for the treatment of hepatitis B. Additionally, Arrowhead entered into a research collaboration and option agreement with Janssen to potentially collaborate for up to three additional RNA interference (RNAi) therapeutics against new targets to be selected by Janssen. The transactions have a combined potential value of over $3.7 billion for Arrowhead.

Under the terms of the agreement, Arrowhead will receive $175 million as an upfront payment. Separately, Johnson & Johnson will make a $75 million equity investment in Arrowhead at a price of $23 per share of Arrowhead common stock.

Arrowhead is eligible to receive up to $1.6 billion in milestone payments for the HBV license agreement, including a $50 million milestone payment linked to a Phase 2 study. Arrowhead is also eligible to receive about $1.9 billion in option and milestone payments for the collaboration agreement related to up to three additional targets. Arrowhead is further eligible to receive tiered royalties up to the mid-teens on product sales.

Keep in mind that Arrowhead has a market cap of roughly $1.4 billion.

Christopher Anzalone, Ph.D., Arrowhead’s president and CEO, commented:

This agreement represents an important next step for ARO-HBV. Arrowhead has established a leadership position in the field over the past several years, and Janssen’s proven development capabilities, global commercial reach, and commitment to HBV make it the ideal partner to potentially accelerate our goal of bringing a functional cure to patients with chronic HBV. The collaboration also represents further validation of the TRiM™ platform and provides an important opportunity to create up to three additional novel medicines by leveraging Arrowhead’s speed and expertise in RNAi drug discovery and Janssen’s clinical development and commercial capabilities.

Shares of Arrowhead were last seen down 14% at $15.93, with a consensus analyst price target of $20.50 and a 52-week range of $3.01 to $22.39.

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