Bristol-Myers Squibb Co. and Alder Biopharmaceuticals Inc. said Tuesday they signed a collaboration deal potentially worth $1 billion, with a key focus on a rheumatoid arthritis treatment.

Bristol-Myers will pay Alder $85 million upfront for ALD518, which is now past midstage development for rheumatoid arthritis, an inflammatory condition that can cause joint damage. The agreement also includes the potential for development-based and regulatory-based milestone payments of up to $764 million and sales-based milestones that could be more than $200 million.

Alder will also receive sales royalties. Meanwhile, Alder gives Bristol-Myers exclusive worldwide rights to develop and sell ALD518 for all potential indications, excluding cancer.

Bristol-Myers already sells the drug Orencia as a rheumatoid arthritis treatment. Sales rose 36 percent to $162 million during the third quarter.

Alder, based in Bothell, Wash., has an option to require New York-based Bristol-Myers Squibb to make an equity investment of up to $20 million in Alder during an initial public offering.