This Phase 2 ASX Biotech stock is only at cash backing, but has enormous upside!

Phase 2 ASX Biotech stocks tend to be capitalised at $40-110m, but Percheron (ASX:PER) is only at cash backing. In other words, it has the same market capitalisation as cash at bank, meaning the market is not ascribing any value to its clinical programs.

To be fair, it is less than a year since its last clinical program ceased development, as well as less than a quarter since it in-licensed its new program and it isn’t exactly certain what indication the Phase 2 trial will look at. But even so, Percheron has an asset with spectacular Phase 1 results and the question of Phase 2 is not a question of if, or even when (because it is most likely to be in 2026), but what indication. The company has plenty of options.

Percheron: A Phase 2 ASX Biotech stock only at cash backing

Percheron is trading at ~$10m which is roughly the same amount of cash it has. This time last year, it was hoping for good results from a Phase 2b trial of a treatment for Duchenne Muscular Dystrophy (DMD). Unfortunately, the results were not good and the company had to look for another asset.

HMBD-002 is that treatment – Percheron in-licensed it from Singaporean company Hummingbird. HMBD-002 is a drug that works by suppressing VISTA, an immune checkpoint. Drugging immune checkpoints has been an increasingly popular way oncology developers battle cancer in the last 15 years. There are nearly a dozen drugs on the market, the most popular of which is Merck’s Keytruda.

But most of these target a checkpoint called PD-1, whilst HMBD-002 targets VISTA. Short for ‘V-domain Ig suppressor of T cell activation’, VISTA sits on various immune system cells and plays an important part in suppressing T-cell responses.

VISTA makes a difference

Pre-clinical studies have suggested that drugging VISTA has a powerful anti-cancer immune response in a wide range of tumours. VISTA was previously considered ‘undruggable’ because of its extensive expression on myeloid cells, leading to safety issues like cytokine release syndrome (CRS) and/or a pharmacokinetic sink, but HMBD-002 appears to have resolved this.

The subsequent Phase 1 study was the first in human study for the drug and its encouraging results offered confidence that a Phase 2 study is the logical next step. The safety profile was excellent, and whilst there were several different types of cancers tested, it was noted that there were encouraging durations of response.

The promise of HMBD-002 lies not just in its clinical results, but also the fact that it can work at picomolar concentrations, has IP protection to at least 2038, and can be reliably manufactured at 500L scale with high yield and recovery, as well as with viable COGs.

Next stop Phase 2

Once the full set of results from Phase 1 are avaliable, Percheron plans a Phase 2 trial which should begin next year. It remains to be seen if the proposed Phase 2 will indicate multiple cancer types or just one. It is also yet to be determined if HMBD-002 will be used alone or in combination with existing therapies or other treatment modalities.

It may ultimately be the case that there could be multiple smaller Phase 2 trials rather than 1 larger one. All of this will be determined once the final set of Phase 1 results become available, in consultation with the company’s clinicians and advisors, based on what would be most promising. Two possible indications could be Triple-negative breast cancer (TNBC) and Squamous Cell Cancer of the Head and Neck (SCCHN) but this will be determined in the coming months.

The Biotech Patent cliff is a reason to be excited

Have you heard of the term ‘Biotech Patent Cliff‘? Over the rest of this decade, the world’s top 20 drug makers are facing the loss of US$180bn in sales all because patents for them are expiring which will mean competitors will be able to produce and sell generic versions of the drug. One of these is Keytruda.

What will this mean for Percheron? This could mean it could be bought out early, especially if trials indicate it could ‘enhance’ existing drugs when working in combination with them. Big Pharma is on the hunt for new assets. Keytruda owner Merck forked out US$10bn just a few weeks ago to buy Verona Pharma, the maker of COPD drug Ohtuvayre.

Crucial to HMBD-002 being attractive to would-be suitors, will be maintaining its status as the most advanced VISTA antibody in clinical development as well as having low toxicity.

Major upside awaits

Our friends at Pitt Street Research have published a note on Percheron and observed that Phase 3 ASX biotech stocks trade at an average of $78.8m. This would suggest a share price of $0.064 per share.

Looking further ahead, Phase 3 biotech Immutep is at $381.7m and whilst Percheron has some way to go before Phase 3, this does show there could be even more upside if Phase 2 is successful. Immutep is a good comparable because it represents the main listed play related to an immune checkpoint, in this case LAG-3, short for lymphocyte activation gene-3.

Pitt Street has also modelled multiple NPV scenarios for HMBD-002, considering various indications. The two main possibilities are for TNBC and SCCHN and it has modelled NPVs of $162.4m and $207.7m. These do fall short of the tens of billions of dollars big pharma is buying out other companies, but does represent significant upside and potentially a bargain if it could ‘pay for itself’ in a year or two.

So while there is a long way to go for Percheron, it does deserve to be trading above cash backing right now, and we expect the company’s re-rate to begin once there is clarity on the Phase 2 direction.

Percheron is a research client of Pitt Street Research.

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