Johnson & Johnson has entered a $3.7 billion agreement to advance ARO-HBV, an RNA interference therapy being developed by Arrowhead Pharmaceuticals Inc. to treat hepatitis B.

The companies also agreed to develop and commercialize up to three additional RNA interference, or RNAi, drug candidates, as selected by J&J, using Arrowhead's proprietary TRiM platform. RNAi medicines can be used to silence genes that cause disease in the body.

In return, Arrowhead Pharmaceuticals will receive $175 million in an upfront payment as well as a $75 million equity investment from J&J, which will buy the company's shares at $23 each. Arrowhead is eligible to receive up to $1.6 billion in milestone payments tied to ARO-HBV, while $1.9 billion are linked to the option and licensing of the three additional target candidates.

Arrowhead is also eligible to receive royalties on the net sales of commercialized products under the collaboration.

J&J will receive an exclusive, worldwide license for ARO-HBV, which is being studied in a phase 1/2 clinical trial known as AROHBV1001 to treat patients with a chronic hepatitis B virus infection. J&J will be responsible for the clinical development and commercialization once the trial is complete.

Meanwhile, J&J is also responsible for funding the discovery and development of additional targets and will have the option to license such drug candidates from Pasadena, Calif.-based Arrowhead Pharmaceuticals once they are ready to be studied in clinical trials.

If the licensing option is exercised, Janssen will be fully responsible for further development of the therapies.

The deal is expected to close in the fourth quarter of 2018, subject to antitrust approvals in the U.S. and other customary closing conditions.