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UPDATE 1-Cypress Bioscience rejects Ramius' buyout overture

* Says Ramius deal undervalues company

* Says proposal is not in best interest of stockholders (Adds details)

Aug 6 (Reuters) - U.S. drugmaker Cypress Bioscience Inc CYPB.O on Friday rejected the $154 million buyout proposal floated by hedge fund Ramius LLC in July, saying the deal grossly undervalues the company.

Ramius, which owns a 9.9-percent stake in Cypress, offered to buy the drugmaker for about $154 million, or $4 a share in cash, and demanded the board to abstain from approving any further acquisitions.

Cypress said in a statement early on Friday that the Ramius proposal was not in the best interests of other stockholders.

“We have concluded you do not have a proper purpose for the inspection of Cypress’ books and records and we will take all necessary action to defend that position and protect the interests of the other Cypress stockholders,” Cypress Chief Executive Jay Kranzler wrote in a letter to Ramius.

Shares of Cypress, which develops drugs to treat central nervous system disorders, closed down 1.1 percent at $3.59 Thursday on Nasdaq.

On Wednesday, Cypress discontinued its right to co-promote Savella with partner Forest Laboratories FRX.N, and said it would reduce its workforce by about 86 percent, affecting 123 employees.

The issue flared up on Thursday when Ramius sent a letter to Cypress objecting to the company’s decision to discontinue co-promoting fibromyalgia drug Savella with partner Forest Laboratories for only $2 million. [ID:nnSGE6740L8] (Reporting by Sakthi Prasad in Bangalore; Editing by Valerie Lee)