Avanir Pharmaceuticals (NASDAQ: AVNR) had high hopes for AVP-923, a neuropathy pain treatment for Alzheimer's, Parkinson's, and autism. However, AVP-923 failed to do better than placebo in a key mid-stage multiple sclerosis trial, disappointing investors and knocking shares down more than 50% in December. Here's why investors may not want to give up on Avanir -- yet.

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AVP-923 isn't an unproven drug. A different formulation is already being sold by Avanir as Nuedexta, a treatment that won FDA approval in 2010 for involuntary crying or emotions, known as pseudobulbar affect, or PBA -- a secondary condition typically caused by neurological disease, including MS, or brain injury.

So far, Nuedexta has been a success. Avanir reported that Nuedextra's sales grew 15% to $23 million in the fourth quarter from the third quarter, giving the compound a net revenue annual run rate of $100 million. Based on Avanir's experience with Nuedexta, the company thinks other formulations of the compound could significantly broaden the drug's use as a neuropathy pain reliever across the primary causes of PBA.

This belief was backed up in early stage MS trials; however, it was disputed in the recently failed mid-stage study when AVP-923 failed to outperform placebo.Avanir thinks the failure may not reflect AVP-923's true potential, however, given that results from the placebo group were better than expected.  As a result, Avanir will be poring over the data to see if there's a way to salvage the MS program.

It's a setback, but it's not over yet
Nuedexta may soon have help footing Avanir's R&D bill from AVP-825, a breath-powered therapy for acute migraine. Avanir filed for AVP-825's approval with the FDA at the end of January, and if the therapy gets the go-ahead, it will become the only dry-powder inhaled version of sumatriptan -- a drug GlaxoSmithKline (NYSE:GSK) sold as Imitrex before losing patent protection in 2009.  

No one knows whether AVP-825 will win market share if it gets approved; however, Imitrex was a highly successful compound for Glaxo. Pozen (NASDAQ: POZN) licensed the drug to Glaxo in 2003, and Imitrex went on to become a blockbuster, generating more than $1 billion in sales in 2008 -- the year before it lost patent protection.

Pozen (NASDAQ: POZN) sold its royalty rights to an investor for $75 million in 2011, so it no longer has ties to the therapy; however, Glaxo still made $295 million selling various formulations of Imitrex last year. 

Outside of AVP-825, Avanir is also developing AVP-786, another version of Nuedexta. This time, Avanir is combining dextromethorphan with deuterium to increase effectiveness and make it last longer in the body. Avanir believes these advantages will make AVP-786 successful as a treatment for treatment resistant major depression. Avanir is advancing the drug into human trials this year.

And Avanir (NASDAQ: AVNR) hasn't given up on AVP-923, either. The company enrolled its first patient in a phase 2 proof-of-concept trial as a treatment for levodopa-induced dyskinesia, or LID, last year. Levodopa is the standard of care for treating Parkinson's, and its chronic use can result in the muscle control disorder. More than 50% of Parkison's patients treated with levodopa for more than five to 10 years will develop LID, suggesting an opportunity for AVP-923. 

Fool-worthy final thoughts
Nuedexta's double-digit sequential revenue growth shouldn't be ignored -- particularly if growth continues again this quarter. Since other biotechs are being acquired at up to 10 times sales, an argument can be made that Avanir's current market cap of $600 million reflects only Nuedexta and doesn't price in Avanir's (NASDAQ: AVNR) potential from its AVP-825 migraine therapy, AVP-786, or a resurrection of AVP-923. If that's the case, investors may want to keep an eye out for the FDA's decision on AVP-825 and early results from the Parkinson's study, which are expected later this year.