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Here’s why GI Dynamics Inc shares sank today

GI Dynamics Inc (ASX: GID) has suffered another setback today after the company provided investors with an update on its first-quarter financial results. The stock fell 7.4%, which compares to a 0.4% lift for the ALL ORDINARIES (Index: ^AXAO) (ASX: XAO), ahead of the Reserve Bank’s latest decision on interest rates.

So What: GI Dynamics is a medical device group which boasts a market capitalisation of roughly $64 million. It is involved in the development of non-surgical treatments targeting patients with type-2 diabetes and obesity.

In its earnings update today, the company said that revenue during the period had fallen by 50% compared to the prior corresponding period to US$0.6 million, caused by a decrease in sales across all markets. Overall, its net loss ballooned out to US$10.3 million (compared to US$9.7 million in the same period last year), while its cash balance fell by US$11.2 million to US$40 million.

Now What: Investing in the biotechnology sector is risky at the best of times. While every investor dreams of finding the next CSL Limited (ASX: CSL) or Sirtex Medical Limited (ASX: SRX), there are 10 times as many companies which could result in enormous losses.

GI Dynamics has been hit hard recently due to the US Food and Drug Administration’s (FDA) decision to put a halt on enrolments in the company’s pivotal clinical trial of EndoBarrier Therapy. Although the company is still able to monitor and collect data from those subjects already enrolled in the trial, the FDA’s decision certainly increases the risk of the trial not succeeding.

While I’m not suggesting GI Dynamics is necessarily a ‘dud’ stock, it is a risky prospect and one that investors should perhaps avoid, for now.

A much safer bet than GI Dynamics

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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.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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