Pasadena-based Arrowhead Pharmaceuticals Inc. has entered a licensing agreement with Johnson & Johnson to develop a drug to treat the hepatitis B virus in a deal that could be worth up to $3.7 billion, the company announced Oct. 4.

Arrowhead Pharmaceuticals has sold the global rights to its ARO-HBV drug to Janssen Pharmaceuticals Inc., part of the New Jersey-based Janssen Pharmaceutical Companies of Johnson & Johnson, for $175 million.

In addition, Johnson & Johnson Innovation - JJDC Inc. will make a $75 million equity investment in Arrowhead. With performance milestones, the license and cooperation agreement could be worth up to $3.7 billion, company officials said.

The deal is expected to close in the fourth quarter. Shares in Arrowhead plunged nearly 17 percent to around $15.40 following news of the agreement.

“This agreement represents an important next step for ARO-HBV,” said Christopher Anzalone, its chief executive, in a statement. “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 (hepatitis B virus) make it the ideal partner to potentially accelerate our goal of bringing a functional cure to patients with chronic HBV.”

Arrowhead Pharmaceuticals employs a broad portfolio of RNA-interference (RNAi) drugs designed to inhibit harmful proteins by silencing the genes that cause them. Its Targeted RNAi Molecule (TRIM) targets specific genes in order to affect production of specific proteins.

Last month, the company presented initial clinical data that pointed to a functional cure for the hepatitis B virus infection. More data from the phase 1/2 trial is expected in November.

“This is huge,” said Ahmed Enany, chief executive of the Southern California Biomedical Council, a Los Angeles trade group, of the deal. “We’re talking about a multi-billion commitment. It’s a huge vote of confidence from Janssen, and an interest in RNAi drugs.”

Health business reporter Dana Bartholomew can be reached at dbartholomew@labusinessjournal.com. Follow him on Twitter @_DanaBart.