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Here’s why GI Dynamics Inc crashed 60% today

Medical device maker GI Dynamics Inc (ASX: GID) has emerged from a trading halt today, plummeting by as much as 60% to just 12 cents per share in the process.

The trading halt had been requested pending a “material announcement” regarding its business, GI Dynamics announced today that the US Food and Drug Administration (FDA) had put a hold on enrolment in the company’s ongoing pivotal clinical trial of EndoBarrier in the US.

So What: GI Dynamics is focused on the development of non-surgical treatments for type 2 diabetes and obesity and EndoBarrier is one of its major products. While shipments of EndoBarrier were disrupted late last year, the FDA’s decision comes as yet another setback for GI Dynamics and its shareholders.

According to the release, the FDA’s decision came after four cases of bacterial infection in the liver among the 325 subjects currently enrolled in the trial. The bacterial infection, known as hepatic abscess, was known to be related to the treatment and has occurred on a higher-than-anticipated rate. Subsequently, the FDA has requested more information to further assess the treatment’s risk/benefit profile.

Now What: The market’s reaction today is a perfect example of how risky the biotechnology industry is. While the profits can be amazing when things go right (queue Sirtex Medical Limited (ASX: SRX)), enormous losses can also be suffered whenever the company experiences a setback.

A much safer way to make money on the stock market is to invest in high-quality businesses with enormous growth potential. Our top analyst has recently named his top stock pick for 2015, which is actually an ultra-promising tech company well worth checking out.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned. You can follow Ryan on Twitter @ASXvalueinvest.

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