SOURCE: FLICKR USER STOCKMONKEYS.COM.

What: Following news that it's amending its previous collaboration agreement with Eli Lilly (LLY -0.12%), Incyte Corporation (INCY -0.78%) shares jumped 11.62% higher today.

So what: Eli Lilly has returned rights to develop Jakafi for use in the treatment of graft versus host disease (GVHD) to Incyte, thereby allowing Incyte to license ex-U.S. rights in this indication to Novartis (NVS 0.95%).

Under the amended agreement with Eli Lilly, Incyte will pay $35 million to Eli Lilly now and may make additional payments to it upon the achievement of regulatory milestones.

At the same time, an amendment to its existing relationship with Novartis gives Novartis R&D and commercialization rights to Jakafi in this indication outside the United States. In exchange for those rights, Novartis will make payments to Incyte upon the achievement of both development and regulatory milestones. If Jakafi is commercialized outside the U.S. in the GVHD indication, Novartis will pay Incyte royalties on those ex-U.S. sales.

Now what: The agreements resolve some uncertainty regarding the potential path to develop and eventually commercialize Jakafi in GVHD, an important indication with a significant need for new treatment options.

Jakafi is currently approved for use in treating polycythemia vera and myelofibrosis patients. Incyte markets Jakafi in the U.S., and Novartis markets it in other countries. In February, Incyte issued guidance calling for global Jakafi net sales of between $800 million and $815 million.

Following this amendment, Eli Lilly will continue to own global rights to baricitinib, a rheumatoid arthritis drug that it co-developed with Incyte and that Eli Lilly filed for FDA approval of in January.

Overall, developing Jakafi for GVHD with Novartis makes more sense given Novartis' existing experience with Jakafi. Novartis' willingness to sign on to this program also suggests it believes Jakafi has a decent shot at clinical success In GVHD. If that's true, then an eventual approval in this indication would further expand Jakafi's addressable patient population, boosting Incyte's sales and profit in the process.