A lot of people bet large amounts of money on small biotechs that have one or two promising drugs in trials, hoping to cash in big when that drug becomes a blockbuster. More often than not, they lose their shirts when the FDA gets in the way of their dreams. This is what happened today with Vanda Pharmaceuticals (VNDA).

The FDA rejected its main drug, iloperidone, and requires another clinical trial and additional safety data before it can be approved. The company had high hopes and evidently so did shareholders on the antipsychotic drug. To say the stock got hammered would be an understatement. It plunged 73% to 90 cents in huge trading.

A loss like this can devastate your account permanently if you are not properly diversified. If you like to speculate in these names, make sure and only devote a small fraction of your portfolio to playing these stocks. Unfortunately many investors have and will learn the hard way.