UPDATE 1-Vanda shares soar 8-fold on surprise drug approval

* Schizophrenia drug OK comes after July setback

* Shares rise 643 percent

* Vanda sees launch later this year

* Vanda may consider partner (Recasts; adds CEO, analyst comment; updates shares)

By Esha Dey

BANGALORE, May 7 (Reuters) - Shares of Vanda Pharmaceuticals Inc (VNDA.O) soared nearly eight-fold on Thursday, after the U.S. approval of its once-rejected schizophrenia drug stunned Wall Street.

The 643 percent jump in Vanda's shares comes a month after fellow biotechnology company Dendreon Corp (DNDN.O) saw its stock more than double on positive data for its prostate cancer vaccine -- underscoring the potential bountiful rewards of investing in small pharmaceutical and biotech companies.

The two success stories may provide a spark for small drugmakers, which have struggled over the last year to raise capital because of the weak economy and tight credit markets, combined with concerns about healthcare reform.

"There's a lot less risk in most of these beaten up biotechs at these levels," said John McCamant, editor of the Medical Technology Stock Letter. "With this kind of reward you might want to dip the toes in, create a portfolio of five beaten up biotechs, or 10."

Tiny Vanda -- which traded for $1 earlier this week and had its biggest shareholder calling for liquidation -- plans to launch the drug on its own later this year, but is open to partnership options, CEO Mihael Polymeropoulos told Reuters.

The approval of Vanda's Fanapt, announced on Wednesday after U.S. markets closed, stunned investors. Vanda had received a "not-approvable" letter for the drug from the U.S. Food and Drug Administration in July and resubmitted its marketing application last November.

"In one of the most surprising moves we've seen out of the FDA this year, the agency did a complete about face on (the drug)," Natixis Bleichroeder analyst Corey Davis said in a research note. "Perhaps the presence of a new commissioner is already having an effect."

Since the July denial, Rockville, Maryland-based Vanda had cut jobs and suspended all commercial and development activities to reduce cash burn.

Caris & Co analyst David Moskowitz, who had dropped coverage on the stock after the non-approval, expressed surprise that the approval was based on the same data set submitted earlier, with no additional trials conducted.

"It's truly a shame for the investors and analysts who invested in the company, the employees who lost their jobs as the product was not approved in the first cycle ... and for patients who will have late access to the medicine because of the FDA's inappropriate first cycle review," Moskowitz said.

Vanda's Polymeropoulos told Reuters the approval was based on additional analysis of the existing data set. The company had also said that it did not have capital to conduct additional trials requested by the FDA.