Nestle will plow some $500 million to expand its medical nutrition business over the next decade, with the aim of capitalizing on a growing market for foods to help treat chronic conditions such as diabetes and obesity, the Swiss consumer company said Monday.

Nestle SA said it wants to "pioneer a new industry between food and pharma" by creating a medical nutrition institute in Switzerland and a stand-alone subsidiary called Nestle Health Science SA.

The Vevey-based company is already one of the world's biggest makers of processed foods including Nesquik cereal, Haagen-Dazs ice cream and Nespresso coffee, with sales of some $100 billion last year.

The drive to expand into the medical nutrition segment is a direct challenge to North Chicago, Illinois-based Abbott Laboratories, which has steadily increased its presence outside the traditional pharmaceutical market.

Peter Brabeck-Letmathe, Nestle's chairman and former chief executive, said existing health care systems are struggling to cope with the growing number of people suffering from diabetes, obesity, cardiovascular disease and Alzheimer's.

"Personalized health science nutrition is about finding efficient and cost-effective ways to prevent and treat acute and chronic diseases in the 21st century," he said.

While the focus will initially be on rich countries, where sedentary lifestyles have led to an epidemic of such conditions, Brabeck pointed to China's growing health care budget as evidence of a worldwide market for nutritional products.

"Obesity is not the privilege of the Europeans or the Americans," he said.

Brabeck acknowledged that developing medicinal foods will put Nestle under closer scrutiny from the U.S. Food and Drug Administration and other regulators, who have increasingly been cracking down on the claims about the health benefits of consumer products.

Chief Executive Paul Bulcke described the new venture as a "promising business opportunity" in a market that could eventually be worth $100-150 billion. Medical nutrition is considered more profitable than the consumer foods business, where margins are traditionally very low because of fierce competition.

Nestle Health Science SA will start operation Jan. 1, 2011, and be run "at arm's length" from the main food and beverages business. The new subsidiary will ingest Nestle's existing medical nutrition business, which had a turnover $1.6 billion last year.

Brabeck said the company will be actively looking for acquisition and licensing opportunities in the field of health and nutrition, but rejected the idea of buying a pharmaceutical company. Nestle is sitting on a sizable war chest following the sale of its stake in eye care company Alcon to Novartis for a net profit of $45 billion.

Last month Nestle purchased British company Vitaflo, which makes foods for people with inherited metabolic disorders.

The new Institute of Health Sciences will be run by Emmanuel E. Baetge, former chief scientific officer of San Diego-based biotech company ViaCyte, and will be based at the Swiss Federal Institute of Technology in Lausanne.

Nestle share rose 0.4 percent to 52.90 Swiss francs ($53.77) on the Zurich exchange.