What is 'Stock And Warrant Off-Balance Sheet R&D - SWORD'

Stock And Warrant Off-Balance Sheet R&D (SWORD) is a form of financing that helps biotechnology firms access research and development funding while reducing risk to the company. Innovation is a key characteristic for biotech firms to remain competitive in the market, and SWORD financing provides young firms an avenue to create and control their own research sponsors.

BREAKING DOWN 'Stock And Warrant Off-Balance Sheet R&D - SWORD'

Stock And Warrant Off-Balance Sheet R&D (SWORD) is a financing option developed to help biotechnology companies access capital for research and development. SWORD financing establishes a separate entity with the purpose of raising research and development funding.

SWORD financing benefits biotech companies, particularly young companies with little capital on hand, by facilitating the development projects they would otherwise be unable to afford, and reducing the risk to current shareholders.  SWORDs allow companies to minimize the effects of R&D spending on the firm's bottom line.

Investors, often institutional investors or wealthy individuals speculating on emerging technologies, typically benefit from the SWORD approach by receiving a portion of the rights to the R&D outcomes. In some cases, investors will also receive warrants on stock in the parent company.
A typical SWORD agreement establishes an entity serving as a middleman between the biotech firm and the R&D investors. The SWORD will own the property rights to the R&D, usually providing a license in perpetuity to the biotech firm to use the technologies as they develop products and projects. The financial obligations of the SWORD remain fully separate from the parent firm, and financing for this separate entity ultimately comes from a public offering. A SWORD owning a successful technology could then effectively be bought back by the parent company by calling on common stock.

SWORD Impact on Biotechnology and Innovation

As we have seen, SWORD financing provides an important layer of financial security to biotechnology companies, which rely on research and development to remain competitive. The biotechnology sector consists of firms engaged in a wide range of industries, including medicine, pharmaceuticals, food and fuel. Rooted in principles of understanding and manipulating the ways living organisms function, biotechnology has been responsible for enormous advances in areas such as disease control, crop yields, pollution control and human lifespan.

As an economic sector, innovation is a crucial aspect for biotech firms to remain competitive in the market. The risks are high, and the margins are slim, especially for young companies. More traditional forms of funding research and development, including venture capital, strategic alliances, equity financing or debt financing present unattractive barriers to small firms looking to retain control of their company and its returns.

RELATED TERMS
  1. Off-Balance Sheet (OBS)

    Off-balance sheet is the classification of an asset or debt that ...
  2. Return On Research Capital - RORC

    Return On Research Capital is a measure to assess the revenue ...
  3. Price-To-Innovation-Adjusted Earnings

    Price-to-innovation-adjusted earnings is a variation of the P/E ...
  4. Warrant

    A derivative that gives the holder the right, but not the obligation, ...
  5. Warrant Premium

    The warrant premium represents the cost of purchasing a share ...
  6. Financing

    Financial institutions and banks are in the business of providing ...
Related Articles
  1. Investing

    Risks and Rewards of Biotech Companies

    We look at the risks and rewards of investing in biotech companies.
  2. Trading

    Biotech Stocks Trade Near Major Levels of Support

    With biotech stocks tumbling toward long-term levels of support, we take a closer look at how active traders will trade the bounce.
  3. Investing

    (XBI, FBT, IBB) 3 Bond ETFs in the Biotech Sector

    Learn about the top biotechnology ETFs, such as the SPDR S&P Biotech ETF, the First Trust NYSE Arca Biotech ETF and the iShares Nasdaq Biotech ETF.
  4. Insights

    Pharmaceutical Vs. Biotech Investing: Is It Worth The Risk?

    Investopedia explains: Both pharma and biotech stocks are faced with a costly process that, when successful, can produce extremely profitable products. However, the process is unpredictable.
  5. Investing

    XBI: SPDR S&P Biotech ETF

    Discover the investment management style of SPDR S&P Biotech ETF, and learn which investors can benefit from the fund's focused biotech holdings.
  6. Investing

    Are Bears About to Burst the Biotech Bubble? (IBB, BIB)

    The recent biotech rally has richly rewarded many investors. So will the fortunes be soon swept away?
  7. Investing

    Trump Foreshadows a Bleak Outlook for Biotech

    Biotech sector stocks surged after the election, but pulled back when Trump targeted drug companies.
  8. Investing

    R&D Spending And Profitability: What's The Link?

    Return on research capital (RORC), can help investors measure how much profit R&D spending actually generates.
  9. Investing

    A Look at Bank of America Ahead of Earnings (BAC)

    Lowered estimates will make the earnings easier to beat and by a higher margin. But it's a double-edged sword.
RELATED FAQS
  1. How much of a drug company's spending is allocated to research and development on ...

    Explore the level of spending on research and development in the pharmaceutical sector, and how it compares to R&D spending ... Read Answer >>
  2. What country spends the most on research and development?

    Discover which country spends the most on research and development, in both dollar terms and as a percentage of gross domestic ... Read Answer >>
  3. How are stock warrants different from stock options?

    Stock option and stock warrant may have similar function. However, company uses these two financial instruments for different ... Read Answer >>
  4. I own some stock warrants. How do I exercise them?

    A stock warrant gives the holder the right to buy shares at a certain price before expiration. Learn how to utilize these ... Read Answer >>
  5. What is finance?

    Finance is the study of how money is managed and the process of acquiring needed funds. Personal finance, corporate finance ... Read Answer >>
Trading Center