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Why GI Dynamics Inc has plummeted today

Shareholders of GI Dynamics Inc (ASX: GID) have watched helplessly as their shares have lost more than two thirds of their value today, despite generally strong conditions for Australian equities.

So What: GI Dynamics is a medical device manufacturer developing innovative treatments for obesity and type 2 diabetes. The company released two market-sensitive announcements after the close of trade on Thursday, one of which stated that GI Dynamics would discontinue its U.S. pivotal clinical trial of EndoBarrier Therapy, otherwise known as the ENDO trial, for the treatment of obese patients with uncontrolled type 2 diabetes.

The decision to cease the trial follows discussions held with the US Food and Drug Administration after the trial showed an incidence rate of approximately 3.5% for a bacterial infection of the liver known as hepatic abscess, compared to a previously established safety threshold of 2.0%.

The company said: “We know that our decision to terminate the ENDO Trial will be a major disappointment to our patients and the clinicians who have supported the ENDO Trial, as well as our investors, but we believe that this is the responsible decision to take in the interests of all stakeholders.”

It certainly wasn’t wrong about disappointing shareholders who sold the shares down almost 69% to a fresh low of 4.2 cents, wiping roughly $40 million of shareholder value.

GI Dynamics’ second update related to its operations for the quarter ended 30 June 2015. During the period, GI Dynamics said that revenue fell to just US$0.3 million compared to the US$0.8 million achieved in the prior corresponding period – a result it attributed to “a decrease in sales across all markets.” At the same time, cost of revenues more than tripled to US$2 million.

Now What: Investing in the biomedical sector is rife with risks. Just as a successful trial can yield enormous returns, a failure can result in devastating losses, just as investors of GI Dynamics have been shown today. With a diminishing cash balance and a future plagued with uncertainty, investors would be best to avoid GI Dynamics altogether.

For those investors looking for exposure to the sector, it would be a safer option to look at well-established companies like ResMed Inc. (CHESS)(ASX: RMD) and Sirtex Medical Limited (ASX: SRX). Alternatively, there are plenty of great opportunities presenting themselves outside of the medical industry.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. 

The Motley Fool Australia has no position in any of the stocks mentioned. 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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