Teva Pharmaceutical’s late-stage multiple sclerosis drug laquinimod failed the second of three Phase III studies, the latest in a series of disappointments.

The clinical data indicated that laquinimod was not more effective than a placebo. The study involved 1,331 patients who were treated with one of three options: laquinimod, a placebo, or Avonex, an older MS drug made by Biogen Idec Inc. The patients were assigned to the treatment groups at random. However, Teva said MRI scans showed the patients in the laquinimod and Avonex groups had more brain lesions, which indicates they had more severe multiple sclerosis.

People from Teva say that they can explain why the treatment failed to demonstrate a significant improvement in the annualized relapse rate and intend to forge ahead with marketing applications in the EU and the U.S. But investors weren’t so sanguine about the setback, pushing Teva shares down more than 7% by mid-morning as shares of its partner, Sweden’s Active Biotech (ACTI.ST), plunged 55%.

According to the researchers, the study backed up the findings of the first Phase III, which demonstrated a reduction in the risk of disability progression and brain tissue loss. But while the randomization process was done properly, the “placebo and treatment study groups showed dissimilarity in two baseline magnetic resonance imaging characteristics,” Teva said in a statement. “According to a standard and pre-specified sensitivity analysis included within the original statistical analysis plan, when this imbalance was corrected laquinimod demonstrated a significant reduction in the annualized relapse rate.”

“We are encouraged by the overall outcomes achieved in the laquinimod Phase III clinical development program, and plan to submit applications to regulatory authorities in the U.S. and EU,” said Professor Yitzhak Peterburg, Teva’s group vice president, global branded products. “Teva remains committed to the clinical development of laquinimod and is confident that the drug could provide a unique option for the treatment of multiple sclerosis.”

Whether or not Teva can persuade regulators to overlook the Phase III pratfall, though, remains to be seen. Analysts were distinctly disappointed last April when laquinimod failed to lower the relapse rate as much as they had hoped for in Phase III. With Novartis’s Gilenya on the market and Biogen Idec reporting late-stage success with its oral MS drug BG-12, an approval isn’t enough to guarantee blockbuster sales. And some analysts this morning were quick to give Biogen Idec an improved position in the race for regulatory approval.