(Reuters) -Pfizer ( PFE ) plans to sweeten its bid for Metsera ( MTSR ), a person familiar with the matter told Reuters, after a judge denied its request to block rival drugmaker Novo Nordisk's $10 billion offer for the biotech company. 

Pfizer ( PFE ) is racing against the clock to salvage its takeover of Metsera ( MTSR ), after a dramatic private bidding war with Novo over the start-up developing next-generation GLP-1 treatments for obesity. Pfizer's ( PFE ) merger agreement with Metsera ( MTSR ) would expire at midnight ET (0500 GMT) without an improved bid.

The competition began quietly in January, when Novo made a $2 billion approach for Metsera ( MTSR ). Negotiations escalated behind the scenes, but the battle only became public last week, when Novo launched an unsolicited bid - its seventh - that threatened Pfizer's ( PFE ) previously announced $7.3 billion agreement.

What looked like a done deal for Pfizer ( PFE ) quickly unraveled. Pfizer ( PFE ) and Novo escalated their offers this week and the fight on Wednesday intensified by the hour, as the two jockey for position in what some analysts forecast will be a $150 billion obesity drug market by early next decade.

The Wall Street Journal earlier reported the news of Pfizer's ( PFE ) impending bid.

SETBACKS FOR BOTH BIDDERS ON WEDNESDAY

Pfizer ( PFE ) and Novo both faced setbacks on Wednesday.

A Delaware judge on Wednesday rejected Pfizer's ( PFE ) bid to temporarily block Metsera ( MTSR ) from ending its merger agreement and accepting Novo's $10 billion offer.

Earlier on Wednesday, the top U.S. trade regulator said the structure of Novo's bid for Metsera ( MTSR ) may run afoul of U.S. antitrust law if the companies do not file for premerger review.

The Danish drugmaker believes its offer - which includes half of the payment upfront but delays voting control until a later stage - complies with regulatory requirements and allows time for regulatory review, a person close to the situation said.

Daniel Guarnera, director of the U.S. Federal Trade Commission's competition bureau, told the parties' legal teams in a letter disclosed on Wednesday that public health could be hurt by the proposed merger's structure, with Metsera ( MTSR ) getting large payments upfront in exchange for limits on its independence.

He said the deal may violate provisions of U.S. antitrust law if they take steps toward consummating the deal without prior regulatory review.

REGULATORY CHALLENGES

Novo is trying to recover its once-commanding position in obesity drugs that it has lost to Eli Lilly, while Pfizer ( PFE ) attempts to overcome past stumbles in that market.

In legal arguments on Wednesday, Pfizer's ( PFE ) lawyer, Jonathan M. Moses of Wachtell, Lipton, Rosen & Katz, said Novo's offer was illegal and contained risks that would lead to regulators blocking it. But the court denied Pfizer's ( PFE ) claim.

Guarnera's letter marks the second time the FTC has taken action during the negotiations. Shortly after Novo's surprise bid last week, Pfizer ( PFE ) received early antitrust clearance from the FTC.

NOVO DEFENDS DEAL STRUCTURE

In response to the FTC, Novo said its "deal structure is consistent with antitrust laws," and that it is in discussions regarding issues raised in the FTC's letter.

Guarnera urged the companies to cooperate rather than risk daily civil fines.

"Metsera ( MTSR ), its shareholders, and its employees may have reduced incentive to continue its development efforts to bring its pharmaceutical products to market," he wrote.

Metsera ( MTSR ) did not immediately respond to a request for comment.

On Tuesday, both Novo Nordisk and Pfizer ( PFE ) raised their offers for Metsera ( MTSR ).

Novo's revised bid includes an upfront payment of $62.20 per share, along with an additional $24 contingent on future milestones. In response, Pfizer ( PFE ) increased its proposal to $70 per share, bringing its total valuation of the biotech firm to as much as $8.1 billion.

Metsera ( MTSR ) stock fell 2.5% on Wednesday to $71.38, but rose after market hours to $76.

Novo shares closed in Europe down 4.5% on Wednesday. Pfizer ( PFE ) ended up 1.3%.