SWORD-financing (stock and warrant off-balance sheet research & development financing) is a special form of

financing Funding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time from an organization or company. Generally, this word is used when a firm use ...

invented to help junior

biotech Biotechnology is a multidisciplinary field that involves the integration of natural sciences and engineering sciences in order to achieve the application of organisms and parts thereof for products and services. Specialists in the field are kn ...

companies access institutional capital markets to finance their

research and development Research and development (R&D or R+D), known in some countries as OKB, experiment and design, is the set of innovative activities undertaken by corporations or governments in developing new services or products. R&D constitutes the first stage ...

(R&D) via establishing a

special purpose entity A special-purpose entity (SPE), also called a special-purpose vehicle (SPV) or a financial vehicle corporation (FVC), is a legal entity (usually a limited company of some type or, sometimes, a limited partnership) created to fulfill narrow, speci ...

and giving the investors partial rights to the outcomes of the R&D projects that they are funding.

Overview

Innovation Innovation is the practical implementation of ideas that result in the introduction of new goods or service (economics), services or improvement in offering goods or services. ISO TC 279 in the standard ISO 56000:2020 defines innovation as "a n ...

is vital to biotech firms. However,

uncertainty Uncertainty or incertitude refers to situations involving imperfect or unknown information. It applies to predictions of future events, to physical measurements that are already made, or to the unknown, and is particularly relevant for decision ...

of the commercial viability and regulatory approval of new products and technologies makes innovation a very risky undertaking. Conventional internal financing of innovation is generally not possible because biotech firms tend to be small with meager profits and few cash resources. SWORD financing can be used instead to encourage innovation by diversifying risk across wide financial markets. With SWORD, investors, who are usually institutional investors or wealthy individuals looking to capitalize on the latest technology, are given an opportunity to identify and finance underfunded, yet attractive projects. An SPE acts as an intermediary between the parent company and the investors, separating the project from the existing liabilities of the parent company. To provide flexibility and

liquidity Liquidity is a concept in economics involving the convertibility of assets and obligations. It can include: * Market liquidity In business, economics or investment, market liquidity is a market's feature whereby an individual or firm can quic ...

for all the parties, an SPE issues special securities (units) and raises finance via public or private offerings. In essence, one unit is a

portfolio Portfolio may refer to: Objects * Portfolio (briefcase), a type of briefcase Collections * Portfolio (finance), a collection of assets held by an institution or a private individual * Artist's portfolio, a sample of an artist's work or a ...

consisting of one share of SPE’s equity, one warrant to purchase a share of the parent firms' common stock, and a

call option In finance, a call option, often simply labeled a "call", is a contract between the buyer and the seller of the call Option (finance), option to exchange a Security (finance), security at a set price. The buyer of the call option has the righ ...

for the parent firm to buy back shares of SPE.

Comparison to other financing methods for biotech companies

As above, SWORD is generally preferred over the other financing methods because it provides flexibility in making investment and financing decisions that can enable a biotech firm to engage in R&D that otherwise might not be undertaken.

Equity financing

Equity financing is expensive for the biotech industry especially if the use of funds is for R&D. Investors will be sceptical of the returns of their investments as the outcome of R&D is not always guaranteed to say the least. In order to raise funds with equity financing, therefore, biotech firms may have to give away a large portion.

Debt financing

Since product development and regulatory approval in the biotech industry takes considerable time, an R&D venture financed by debt might default on interest payments before the R&D proves successful. Debt also adds significant risk to the business entity. Debt financing might not even be possible in this case as the assets (or collateral) with these types of projects is very small.

Venture capital

Venture capitalists might demand a high stake in the company. The company will want to prevent this due to loss of ownership. Further, VC's may place restrictive covenants or ratchets that may reduce the flexibility of the biotech firms in their R&D projects.

Strategic alliances

SWORD is preferred over strategic alliances because it allows the biotech firm to retain potential significant rewards of the product development.

References

External links

SWORD-financing
on

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Reasons for Financing R&D using the SWORD structure by Alexandra K. TheodossiouMichael E. Solt. SWORD Financing of Innovation in the Biotechnology Industry
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