SWORD-financing (stock and warrant off-balance sheet research & development) is a special form of
financing invented to help junior
biotech
Biotechnology is the integration of natural sciences and engineering sciences in order to achieve the application of organisms, cells, parts thereof and molecular analogues for products and services. The term ''biotechnology'' was first used ...
companies access institutional capital markets to finance their
R&D via establishing a
special purpose entity 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 services or improvement in offering goods or services. ISO TC 279 in the standard ISO 56000:2020 defines innovation as "a new or changed enti ...
is vital to biotech firms. However,
uncertainty
Uncertainty refers to epistemic situations involving imperfect or unknown information. It applies to predictions of future events, to physical measurements that are already made, or to the unknown. Uncertainty arises in partially observable ...
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 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 consisting of one share of SPE’s equity, one
warrant to purchase a share of the parent firms' common stock, and a
call option 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.
[http://findnwrite.com/memento/reports/91_96189.doc]
See also
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Hybrid security
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Seniority (finance)
In finance, seniority refers to the order of repayment in the event of a sale or bankruptcy of the issuer. Seniority can refer to either debt or preferred stock. Senior debt must be repaid before subordinated (or junior) debt is repaid.The America ...
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Venture lending
References
External links
SWORD-financingon
Investopedia.comReasons 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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Corporate finance
Venture capital