However, uncertainty 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.
To provide flexibility and liquidity for all the parties, an SPE issues special securities (units) and raises finance via public or private offerings.
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.
SWORD is preferred over strategic alliances because it allows the biotech firm to retain potential significant rewards of the product development.