SWORD Financing of Innovation in the Biotechnology Industry

Michael E. Solt

Financial Management, 1993, vol. 22, issue 2

Abstract: A financing arrangement known as stock warrant off-balance sheet research and development (SWORD) has been used recently in the biotechnology industry to finance innovation. Innovation is important to biotech firms because it provides the competitive edge necessary for survival, yet it is very risky because of the uncertainty about the commercial viability and regulatory approval of new products and technologies. Biotech firms are so small that they cannot diversify this risk internally across projects, and conventional internal financing of innovation is generally not possible because biotech firms tend to be lacking in both profitability and cash resources. Since a SWORD is offered to the investment public, the innovation risk can be diversified across many investors and their portfolios. The SWORD technique may lead to a more efficient allocation of the risk of innovation over the financial markets.

Date: 1993
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