* Divestment comes as Novartis reviews sub-scale operations
* Acquisition to make diagnostics 20 pct of Grifols business
* Deal expected to close in first half of 2014
* Grifols shares up 3.5 percent, Novartis adds 0.9 percent
By Silke Koltrowitz and Sarah White
ZURICH/MADRID, Nov 11 (Reuters) - Switzerland's Novartis has agreed to sell its blood transfusion testing unit to Spain's Grifols for $1.68 billion, in an increasingly buoyant market for healthcare deals.
The sale comes as Novartis carries out a broad review of operations following the departure of veteran chairman and one-time CEO Daniel Vasella, the architect of the merger of Ciba-Geigy and Sandoz that created Novartis in 1996.
The acquisition will give critical mass and a significant U.S. presence to Grifols' previously small diagnostics business, which in future will account for a fifth of its revenues.
The healthcare industry is undergoing a wave of mergers and acquisitions as large drugmakers shed non-core activities, while simultaneously trying to bolster their new drug pipelines by buying up smaller firms.
Current Novartis Chief Executive Joe Jimenez and new Chairman Joerg Reinhardt have both stressed they will only hang on to businesses that are among world leaders.
Jimenez said on Monday he started the review of Novartis's businesses - including the blood unit which carries out tests to ensure blood transfusions do not contain infections - in the spring and the matter had gone to the board over the summer.
He said other potential sell-offs were possible as Novartis examines whether three sub-scale businesses - vaccines and diagnostics, over-the-counter (OTC) products and animal health - have a long-term future in the group.
"We need to have global scale in these businesses and right now we're in that process of gaining scale or considering other options for these businesses," he said in an interview.
Analysts at Jefferies said the Grifols deal marked the first move in a long-awaited restructuring and they expected vaccines to be the next area of focus.
The brokerage previously estimated the combined vaccines and diagnostics unit could be worth around $7.7 billion, suggesting the remaining part could eventually be sold for some $6 billion.
Novartis has three core businesses where it is either market leader or number two in various segments - pharmaceuticals, eyecare and generic medicines.
Jimenez said the group would continue to look for bolt-on acquisitions to strengthen its leading market positions. "However, we're very disciplined from a financial standpoint and prices have increased in biotech and overall healthcare in the last few months," he said.
He added the company would provide a general overview of strategy, as well as an in-depth look at the pharmaceutical business, particularly oncology, at an investor day on Nov. 22.
Many global drugmakers, including Pfizer and GlaxoSmithKline, have stepped up the pace of restructuring amid investor demands for management to return more capital to shareholders and unlock value trapped inside large firms.
THREE TIMES SALES MULTIPLE
The deal with Grifols gives Novartis a good price for the U.S.-based blood transfusion diagnostics unit, which was acquired in 2006 as part of Chiron and which had net sales in 2012 of around $565 million.
Novartis is keeping other diagnostics that are closely linked to its pharmaceuticals pipeline.
Vontobel analyst Andrew Weiss said the transfusion diagnostics business was one with no synergies to the remainder of the Novartis group and the price of three times sales seemed "fair" and in line with valuations in the sector.
For Grifols, the world's third-largest blood products maker, the acquisition means diagnostics will now make up 20 percent of its revenue, up from 4 percent now, and that annual turnover in the business will grow to around $1 billion.
Nuria Pascual, deputy finance director at Barcelona-based Grifols, said she did not rule out further acquisitions, adding the current pace of deal-making in the healthcare sector reflected a trend towards greater focus by companies.
"There is a lot of activity right now ... it's perhaps because there is an evolution towards specialisation," she said.
Grifols shares rose 3.5 percent by 1040 GMT. Novartis was up 0.9 percent and Europe's health sector up 0.5 percent.
Pharmaceutical deals have been among the brightest spots in a small merger and acquisition revival in recent months, with Amgen's $10.4 billion purchase of Onyx Pharmaceuticals in the United States among bigger transactions.
Also on Monday, Shire said it had agreed to buy ViroPharma for about $4.2 billion to create a leading force in treatments for rare diseases.
Grifols said it would finance its purchase with a $1.5 billion loan, pushing up its debt to 3.2 times earnings before interest, tax, depreciation and amortisation (EBITDA), according to a spokeswoman for the company. The adjusted debt to EBITDA ratio was 2.6 times at the end of September.
The deal requires regulatory approvals and is expected to be completed in the first half of 2014, the companies said.
Nomura acted as financial adviser to Grifols. Novartis declined to name the banks it worked with on the transaction.