(Yicai) Nov. 17 -- Chinese drugmakers are flocking to list in Hong Kong this year, driven by strong investor interest, recent stock market gains, overseas licensing deals, and regulatory reforms, though cornerstone investors are becoming more selective as valuations rise and the market becomes crowded.

More than 40 Chinese pharmaceutical firms have applied for initial public offerings on the Hong Kong Stock Exchange so far this year, including eight in the first half of this month alone. “We’re conducting an IPO roadshow in Hong Kong,” said an executive at one. "But with so many pharmaceutical companies filing, cornerstone and anchor investors are extremely busy.”

The listed shares of many drugmakers have surged this year, the executive noted, adding that IPOs typically offer some future upside relative to current market prices, attracting investor attention. Pre-IPO companies also want strong cornerstone investors to back their listings, the person said.

“Brokers are actively running roadshows for mainland biotech firms, with some large Hong Kong investors meeting five to six in a single day,” the executive said. “Our roadshow had to wait for investors to schedule their time,” the person pointed out, noting that with the Christmas holiday fast-approaching, Hong Kong investors will soon be on leave.

A key reason behind the surge in IPO filings is that several Chinese drug innovators have signed overseas licensing deals for pipeline drugs, thereby boosting their stock prices. In the first nine months of the year, the Hang Seng Shanghai-Shenzhen-Hong Kong Innovative Drug Select 50 Index had surged 69 percent.

In addition, the reforms to the HKEX IPO offering and pricing system, which took effect in August, lifted cornerstone investor participation in pharmaceutical listings. Data from the exchange show that 23 drugmakers have listed so far this year, 16 of which had cornerstone investors as subscribers.

Six recent IPOs, including Hengrui Pharmaceuticals, had five or more cornerstone investors, including GIC Private, UBS Asset Management, Hillhouse Capital, Lilly Asia Ventures, Boyu Capital, and Clear Lake Capital.

But with the rapid increase in IPOs and the recent slowdown in stock price gains, cornerstone investors are becoming more selective, one investor in the pharmaceutical industry told Yicai.

"The enthusiasm for pharmaceutical listings among investors has changed, but some are still highly sought after," the person noted. “Small interfering RNA drugs, antibody-drug conjugate drugs, and artificial intelligence projects ares still highly sought after.”

Several drugmakers are expected to list on the HKEX in the first quarter of next year, the executive noted, adding that his company also plans to go public in that window.

"The pharmaceutical industry remains highly watched," a source at a Hong Kong IPO sponsor told Yicai. "As many pharmaceutical companies are applying for listings, capital continues to flow into the sector. We believe high-quality or leading investment targets will continue to be popular.”

They also noted that after sector valuations have risen significantly, the pricing power of listing companies and their sponsors will come under close scrutiny. While protecting issuers’ interests as much as possible, the final pricing still needs to leave investors with some room for future gains so as to attract more potential investors during the roadshow, the person said.

Editors: Tang Shihua, Futura Costaglione