Pharmacy-benefits manager Medco Health Solutions Inc. said on Tuesday it agreed to buy PolyMedica Corp. for $1.2 billion, in a move to expand its diabetes care services.

Medco currently manages more than $6.5 billion in drug spending for its 2.8 million patients with diabetes. The PolyMedica acquisition is expected to add 1 million members.

Diabetes care represents one of the fastest growing segments of health care in a market, Medco said. Diabetics make up 5 percent of the U.S. population, but account for more than 15 percent of total drug spending, Medco said.

The acquisition is part of Medco's efforts to expand its business that handles specialty medicines. Medicines prescribed by specialists have been one of the main growth areas in the pharmaceutical market. Such drugs are often more modern biotech products that are expensive or require special handling.

Medco broadened its specialty business dramatically in 2005, when it bought Accredo Health for $2.3 billion. Accredo provides pharmacy services focusing on medicines that are complicated to manage and often address chronic, life-threatening diseases.

Medco and PolyMedica began collaborating in 2006 and Medco currently handles more than 50,000 prescriptions per week for PolyMedica's patients. Earlier this year, PolyMedica began providing Medicare Part B administration services and supplies to certain Medco clients.

Under terms of the deal, Medco will pay $53 per share of PolyMedica, a 17 percent premium to PolyMedica's closing price of $45.29 on Monday on the Nasdaq.

Based on PolyMedica's 22.9 shares outstanding as of August 3, the deal is valued at $1.2 billion. Including debt, the deal is valued at $1.5 billion.

Shares of PolyMedica jumped 14.3 percent before the opening bell. Before news of the acquisition, the stock had gained about 13 percent this year. PolyMedica trades at about 21 times earnings forecasts for fiscal 2008, which is below the average 29 times earnings seen for the health care sector.

The deal, which is expected to close later this year, is expected to add slightly to Medco's earnings in 2008.

Lazard served as Medco's financial adviser, while Deutsche Bank Securities Inc. represented PolyMedica.

(Reporting by Euan Rocha in New York and Jessica Hall in Philadelphia)