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. Research and Development - R&D

    Research and development refers to the work a business conducts ...
  2. Biotechnology Industry ETF

    A biotechnology industry exchange-traded fund (ETF) invests in ...
  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. Put Warrant

    A put warrant is a type of security that gives the holder the ...
Related Articles
  1. Insurance

    How To Do Qualitative Analysis On Biotech Companies

    These analytical methods will help you size up a biotech company and make a winning investment.
  2. Investing

    Risks and Rewards of Biotech Companies

    We look at the risks and rewards of investing in biotech companies.
  3. 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.
  4. 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.
  5. Insights

    And The King of R&D Spending Is

    When it comes to investing in other countries, knowing how much is being spent on research and development, and where it's be spent, is important for any investor.
  6. Investing

    The Top 5 Biotechnology ETFs for 2016 (XBI, IBB)

    Read analyses of the top biotech ETFs for 2016, and learn about the characteristics of the funds that may be poised to rebound.
  7. Investing

    The Top 5 Biotechnology Mutual Funds for 2016

    Explore detailed analyses of the top biotechnology-related mutual funds for 2016, and learn about the characteristics of these funds poised for a rebound.
  8. Investing

    IBB: iShares NASDAQ Biotechnology ETF

    Learn about the iShares Nasdaq Biotechnology exchange-traded fund, which offers one of the most diversified ways of investing in the biotechnology sector.
  9. Investing

    Top 3 Biotech ETFs (XBI, IBB)

    Learn about three popular ETFs in the biotechnology sector, how they differ, and which ones may be appropriate for long term investors.
  10. Trading

    Biotech Breakouts Suggest It Is Time to Buy

    Bullish chart patterns on key biotech names are presenting traders with the best risk/reward setup of 2017.
RELATED FAQS
  1. What are the benefits of R&D (research and development)?

    Learn about the many benefits of research and development (R&D) efforts for companies in competitive markets, including the ... Read Answer >>
  2. Biotech vs Pharmaceutical company

    Though biotech and pharmaceutical companies share similar business features, there also have differences. Here, we'll distinguish ... 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. 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 >>
  5. What is the difference between research and development and product development?

    Understand the difference between research and development and product development. Learn why a company would want to invest ... Read Answer >>
Hot Definitions
  1. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  2. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  3. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  4. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  5. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  6. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
Trading Center