MedcoHealth Solutions, Inc. (NYSE: MHS) dispenses 500 million prescriptions each year, and assists drug plans with negotiating discounts with pharmaceutical companies and processing claims. The company today said it will pay $1.5 billion in cash to acquire PolyMedica Corp. (NASDAQ: PLMD), which distributes blood glucose test kits, insulin, syringes, and other supplies directly to the homes of a million diabetes patients through its Liberty Healthcare division.

One of my former students is an executive at PolyMedica and we recently discussed some of its efforts to cut costs and tighten its operations, but I had no idea this deal was in the works. The deal appears to make sense to me because MedcoHealth has a long history of making drug delivery more efficient. And my hunch is that MedcoHealth will streamline PolyMedica's delivery of diabetes supplies.

MedcoHealth envisions a big market for diabetes supply distribution. It estimates that 17 million Americans are currently treated for diabetes, with more than one million patients diagnosed each year. With diabetes care spending increasing by 14.5% annually, diabetes treatments by 2009 are expected to overtake cholesterol medicines as the fastest-growing drug category.

The 17% premium MedcoHealth is paying over Monday's closing price suggests that it believes PolyMedica will be able to add significantly to its profits as it takes a bigger piece of the diabetes market. With MedcoHealth's stock up following the announcement, investors seem to agree that this is a healthy deal.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.