Dec. 14 (Bloomberg) -- Nestle SA, the world's biggest food company, agreed to buy the medical-nutrition unit of Swiss drugmaker Novartis AG for $2.5 billion to tap growing demand for meals that help hospital patients return to health.

The unit makes food laced with protein or extra calories for patients weakened by surgery or cancer, as well as feeding pumps that deliver nutrients directly to the stomach. Nestle said in a statement that the unit generates annual sales of about $950 million.

The market for nutritional food is expanding at about 7 percent a year, faster than the 1 to 2 percent for the food market as a whole, according to Kepler Equities. Vevey, Switzerland-based Nestle is focusing on higher-priced health foods after selling coffee, cocoa and dairy units.

``This is not a transformation, but a small step towards nutrition and wellness'' for Nestle, Jon Cox, an analyst with Kepler in Zurich, said in an interview. ``At first glance, the price seems high.''

Nestle shares rose 75 centimes, or 0.2 percent, to 430.5 Swiss francs at 9:06 a.m. in Zurich. Novartis shares gained 35 centimes, or 0.5 percent, to 70.45 francs.

Food makers have been targeting health-conscious consumers, with France's Danone selling a yogurt that improves digestion.

Chasing Numico

The transaction should be completed in the second half of next year after regulators review the agreement, the companies said in separate statements.

Vevey, Switzerland-based Nestle is betting the acquisition will give it a boost in chasing Royal Numico NV, which has margins of 26 percent in clinical nutrition. Nestle estimates revenue from clinical nutrition products and foods with branded active ingredients, including its line of Clinutren puddings, grew at ``double-digit'' rates last year.

Numico's third-quarter sales of its clinical nutrition foods rose 10 percent to 186 million euros.

``The move propels Nestle into a strong No. 2 position in the fast-growing and profitable healthcare nutrition segment, where so far Nestle played only a minor role,'' the food company said in the statement. Nestle said the acquisition won't have an immediate impact on earnings.

Novartis Chief Executive Officer Daniel Vasella is selling the business to concentrate on medicines and vaccines. Novartis already sold a unit that makes Isostar energy drinks, to ABN Amro Holding NV for $271 million in March. Another food division, known for the malt drink Ovaltine, was sold to Associated British Foods Plc at the end of 2002 for 398.6 million Swiss francs ($330 million).

To contact the reporter on this story: Hugo Miller in Geneva on hugomiller@bloomberg.net.

Last Updated: December 14, 2006 03:45 EST