"A good RNAi therapeutic against hepatitis B just makes intuitive sense and scientific sense," Christopher Anzalone, president and CEO of Arrowhead Pharmaceuticals Inc., told BioWorld to explain the attraction behind its third-generation HBV candidate, ARO-HBV. The agent is designed to silence the entire HBV transcriptome, intervening upstream of the reverse transcription process that standard-of-care nucleotide and nucleoside analogues affect. "If you can accomplish that, you disrupt the life cycle of that virus," Anzalone said.

That prospect was part of the attraction for Janssen Pharmaceuticals Inc., a unit of Johnson & Johnson (J&J), of New Brunswick, N.J., for an exclusive license and collaboration deal with Arrowhead, which is advancing therapies that silence target genes in genetically driven diseases. Janssen hit a different type of target with its potential $3.7 billion payout to the Pasadena, Calif.-based biotech.

The license addresses development and commercialization of ARO-HBV. In March, Arrowhead moved the RNA interference (RNAi) candidate into a phase I/II study assessing safety and tolerability in healthy volunteers and multiple-dose antiviral activity in individuals with HBV. Beyond the ongoing study, Janssen will assume responsibility for advancing the subcutaneously administered candidate.

Arrowhead also agreed to a research collaboration and option arrangement for up to three additional RNAi therapeutics against targets selected by Janssen. The potential candidates will leverage Arrowhead's Targeted RNAi Molecule, or TRiM platform. Arrowhead will perform discovery, optimization and preclinical development, entirely funded by Janssen, to allow the filing of a U.S. IND application or equivalent. At that point, Janssen will have the option for an exclusive license that, if exercised, will give the pharma responsibility for development and commercialization.

In return, Arrowhead is set to receive $175 million up front plus a $75 million equity investment at a price of $23 per share by Johnson & Johnson Innovation - JJDC Inc. The stake represented a 24 percent premium to Arrowhead's (NASDAQ:ARWR) close of $18.56 on Wednesday.

The remainder comes in milestones. Arrowhead is eligible for up to approximately $1.6 billion in payments for the HBV license agreement, including a $50 million near-term milestone payment linked to a phase II study, and approximately $1.9 billion in option and milestone payments for the collaboration agreement for the additional targets. Arrowhead also could see tiered royalties up to the midteens on related product sales.

The pact represents the biggest HBV deal of the year, according to BioWorld data, and the largest "by a large margin" in Arrowhead's nearly 15-year history, Anzalone said.

If broken into two parts, the collaboration would slide into the No. 9 spot among the top 10 biopharma deals ranked by value for year-to-date 2018, and the licensing pact would be No. 12, according to Karen Carey, BioWorld analyst. Combined, they rank as No. 3.

'Patients could have access to functional cures'

The relationship between the companies began almost a year ago, Anzalone said, when Arrowhead reported data from a phase II trial testing ARC-520, the company's prior-generation RNAi-based drug against chronic HBV infection, at the 22nd biennial HEP DART meeting in Kona, Hawaii. Findings showed that, seven months after the last dose of ARC-520 was administered, patients demonstrated sustained host response, with up to a 5log10 reduction of HBV surface antigen (HBsAg) from baseline. The company also presented preclinical data on ARO-HBV showing that three doses led to reductions in HBV DNA of 3.44log10 in wild-type pHBV mice. In mice without an HBx trigger site, which simulates HBV patients with high levels of integrated HBV DNA, a single dose of ARO-HBV produced a reduction in HBsAg of 2.95log10.

The data represented an important milestone supporting Arrowhead's premise that "a good RNAi therapeutic could combat chronic hepatitis B infection," Anzalone said.

J&J and its business units have "a clear interest in HBV," he added, "and they were on it. They really understood what the data could mean for ARO-HBV."

Arrowhead, Anzalone maintained, offered the early stage expertise that large pharmas often lack, while Janssen represented a commercial giant with a global footprint.

"In discovery, in rapid preclinical development and in rapid early clinical development, we are the best in the business," Anzalone pointed out. "But for a very complex disease like chronic hepatitis B that's going to require large and expensive later-stage development, we knew we needed a good strong partner. And clearly we needed a strong partner for commercialization because HBV is a global issue, and a large part of this is going to be China, where reimbursement is not as straightforward. There's probably no company in the world that is going to bring better tools to negotiate that process."

Janssen and J&J, alone or with partners, have nearly a dozen assets targeting HBV in the pipeline, according to Cortellis Competitive Intelligence. Most remain in discovery, although several have moved into the clinic.

In recent years, J&J companies also have inked multimillion-dollar HBV pacts with companies such as Bavarian Nordic A/S, Arcturus Therapeutics Inc. and Chia Tai Tianqing Pharmaceutical Group Co. Ltd. (See BioWorld Today, Jan. 8, 2016, July 28, 2017, and Oct. 20, 2017.)

On a call with analysts early Thursday, Anzalone "unpacked" the strategic implications of the Janssen deal.

"This partnership maximizes the chances that patients could have access to functional cures, and this is a big thing," he said. "I view ARO-HBV as a very exciting experimental agent against chronic HBV infection, and we recently presented early data demonstrating that we may be silencing the virus deeper than has ever been reported in hard-to-treat patient populations, such as HBe-antigen-negative patients that are increasingly predominating in many regions. We are doing this with a drug candidate that has been very well-tolerated thus far and with a platform that has also shown impressive activity and tolerability in different therapeutic environment, alpha-1 antitrypsin deficiency."

The company's late-breaker submissions in HBV and its alpha-1 antitrypsin deficiency program, ARO-AAT, also were accepted for presentation at next month's American Association for the Study of Liver Diseases (AASLD) Liver Meeting in San Francisco, which Jefferies Group LLC analyst Maury Raycroft cited as part of "a busy schedule" for the company.

Looking ahead to AASLD data following a meeting with management, Raycroft recounted that "the primary goal of the ongoing ARO-HBV trial is to select a dose to move to phase II, which could theoretically morph into a pivotal. The current trial is also to explore where they can generate activity based on patient subtype and demographics. So far, activity looks good at low doses and across patient types."

Phase II plans are expected toward the end of the year or early 2019, he added, and "all go-forward studies will include nucs (entecavir or tenofovir) – they will never assess monotherapy going forward."

Arrowhead is confident that, with ARO-HBV RNAi, it can "decrease production of every HBV Ag," Raycroft pointed out. "Then, they aim to determine what on top of RNAi could get them to cures."

Janssen now will drive that decision-making.

"This is a really great marriage," Anzalone told BioWorld. "We took what we're really good at creating and handed off this asset at the perfect time to the perfect company to take it forward."

Too, the reduction in cost exposure related to ARO-HBV and recently triggered milestone payments from Arrowhead's deal with Amgen Inc. for apolipoprotein A antagonist AMG-890 – combined with $90 million in the bank, as of June 30 – enable the company "to create substantial value by retaining our pipeline," he pointed out. In addition to the clinical AAT effort, preclinical RNAi candidates are targeting hypertriglyceridemia, atherosclerosis, renal cell carcinoma, cystic fibrosis and other indications.

The additional Janssen partnership, for targets outside Arrowhead's pipeline, represents "found value," Anzalone said, providing "a more complete utilization of our TRiM platform," which uses ligand-mediated delivery to enable tissue-specific targeting while maintaining structural simplicity.

In an update, Piper Jaffray's Edward Tenthoff increased the company's price target to $25 from $17, calling the Janssen alliance "transformative" for Arrowhead by "dramatically strengthening the balance sheet, finding a strong partner for ARO-HBV, while retaining the rest of TRiM pipeline."

The transactions are expected to close during the fourth quarter.

On Thursday, Arrowhead's shares closed at $15.33 for a loss of $3.23, or 17.4 percent.