Stock and Warrant Off-Balance Sheet R&D (SWORD)

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.

Understanding 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 the 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 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 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.

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  1. Michael E. Solt. "SWORD Financing of Innovation in the Biotechnology Industry," Page 73. Financial Management. Accessed Oct. 12, 2021.

  2. Biotechnology Innovation Organization. "What Is Biotechnology?" Accessed Oct. 12, 2021.

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