Tandem Diabetes Care (TNDM) Q4 2025: Pharmacy Channel to Reach 15% of U.S. Sales Amid PAYGO Model Shift

2026-02-19 | By EarningsIQ Research

Tandem Diabetes Care’s Q4 capped a transformative year, setting new records while laying the groundwork for a business model overhaul that will reshape revenue recognition and expand access. The company’s pivot to a pay-as-you-go (PAYGO) pharmacy model will create a near-term sales headwind but promises a more predictable, higher-margin revenue stream and greater patient reach. Execution on technology launches and international direct expansion further position Tandem for accelerated growth beyond 2026.

Summary

• Business Model Overhaul: Tandem’s PAYGO pharmacy shift will reshape revenue timing and margin structure.
• Margin Expansion Focus: Operational leverage and product cost reductions drive gross margin gains despite sales transition headwinds.
• Growth Platform Set: Direct international moves and a robust innovation pipeline underpin long-term market expansion.

Performance Analysis

Tandem delivered a record quarter and year, surpassing $1 billion in sales and achieving double-digit growth both domestically and internationally. Q4 marked the company’s highest-ever sales, gross margin, and pump shipments, with U.S. sales up 14% and international up 17%. The U.S. market saw over 27,000 pump shipments, driven by renewals and meaningful conversion from multiple daily injection (MDI) users. Notably, renewals made up more than half of shipments, while MDI conversions accounted for about two-thirds of new customers.

The pharmacy channel nearly doubled sequentially, reaching 7% of U.S. sales, yet remains a small portion of the installed base, signaling substantial runway as the PAYGO model scales. Internationally, direct operations in three new countries contributed to record sales, though transition costs and distributor buybacks tempered reported growth. Margin expansion was a highlight, with gross margin up three percentage points year-over-year and Q4 adjusted EBITDA hitting 11% of sales. Cash flow turned positive in the back half, and the company exited the year with a strong liquidity position.

• Channel Shift Impact: Pharmacy sales represented just 4% of U.S. sales in 2025, but management expects this to rise to 15% in 2026, with a multi-year target above 70%.
• Gross Margin Trajectory: Q4 gross margin reached 58%, benefiting from cost reductions, mix, and pricing, and is projected to approach 60% by year-end 2026.
• Renewal and MDI Mix: High renewal rates and continued MDI conversion signal strong customer retention and market expansion, providing resilience as the business model evolves.

While near-term sales growth will be moderated by the shift to PAYGO and direct international transitions, underlying shipment growth and margin improvement set up Tandem for a structurally stronger, more scalable model.

Executive Commentary

Strategic Positioning

1. PAYGO Pharmacy Model: Redefining Revenue and Access

Tandem’s transition to a pay-as-you-go (PAYGO) pharmacy model—where reimbursement occurs over time as supplies are purchased, rather than upfront—represents a fundamental shift in revenue recognition and patient onboarding. This model removes large out-of-pocket costs for patients, streamlines physician prescribing, and enables higher recurring reimbursement rates for Tandem, estimated at over four times the traditional DME (durable medical equipment) channel. While the transition will pressure near-term reported revenue, it structurally increases lifetime customer value and predictability.

2. Direct International Expansion: Margin and Market Control

Going direct in Europe (UK, Switzerland, Austria) enables Tandem to capture higher average selling prices (ASPs), improve customer relationships, and build local infrastructure. The playbook developed in 2025 will be used to expand direct operations to additional countries in 2026 and 2027. Management expects direct ASPs to be at least 30% higher than distributor pricing, partially offsetting transition headwinds such as inventory buybacks and distributor destocking.

3. Innovation Pipeline: Expanding Addressable Market

Product launches and pipeline milestones in 2026 will broaden Tandem’s addressable market and competitive differentiation. Key launches include the international rollout of Mobi, integration with Freestyle Libre 3 Plus and Dexcom’s 15-day sensor, and the pivotal launch of Mobi Tubeless, the world’s first patch pump with extended wear technology. The pipeline also targets type 2 diabetes, pregnancy indications, and next-generation closed-loop systems, supporting growth beyond the current cycle.

4. Cost Structure and Margin Leverage

Operational efficiency, manufacturing scale, and product cost reductions (notably from Mobi) are central to margin expansion. Management expects gross margin to reach 60% by Q4 2026, with a long-term target of 65%. R&D and SG&A discipline, alongside channel mix improvements, support the goal of a 25% operating margin over time.

5. U.S. Renewal and MDI Conversion Sustainability

High renewal capture rates and continued MDI conversions provide a stable foundation for U.S. shipment growth, even as the renewal opportunity moderates in coming years. The pharmacy model reduces reliance on four-year renewal cycles, shifting the business toward recurring supply revenue and higher retention.

Key Considerations

Tandem’s 2025 performance marks an inflection point, with execution across commercial modernization, technology launches, and business model transformation. The next 12-24 months will test the scalability and margin realization of these initiatives as channel mix and international transitions play out.

Key Considerations:

• PAYGO Transition Dynamics: 2026 will see a pronounced revenue headwind as upfront sales are replaced by recurring supply revenue, but shipment growth and margin expansion are more indicative of underlying health.
• Pharmacy Channel Penetration: Scaling from 4% to 15% of U.S. sales in 2026, with a multi-year path to over 70%, will require ongoing payer contracting and patient migration efforts.
• International Direct Execution: Direct operations bring higher ASPs and customer proximity, but transition costs and operational complexity could weigh on near-term results.
• Pipeline Delivery: Timely regulatory clearance and launches for new products (Mobi Tubeless, sensor integrations) are critical to sustaining shipment momentum and market share.
• Renewal and Retention Shifts: The move to a recurring pharmacy model reduces dependency on renewal cycles, but maintaining high customer retention and satisfaction remains essential.

Risks

Execution risk is elevated as Tandem juggles business model transformation, international direct expansion, and multiple product launches. Delays in payer contracting or regulatory clearances, slower-than-expected pharmacy migration, or operational missteps in new international markets could extend revenue headwinds or compress margins. Competitive dynamics, especially in patch pumps and closed-loop systems, remain intense, and any stumbles could impact share gains and pricing power.

Forward Outlook

For Q1 2026, Tandem guided to:

• Worldwide sales of $236 to $240 million, incorporating $10 million in transition headwinds.
• Gross margin starting near 54%, rising to 60% by Q4.

For full-year 2026, management provided:

• Worldwide sales of $1.65 to $1.85 billion, with $85 to $95 million in model transition headwinds.
• U.S. pump shipments to grow 10-11%, with pharmacy sales reaching 15% of U.S. total.
• Adjusted EBITDA margin of 5-6% for the year, turning positive after Q1 seasonality.

Management emphasized shipment growth, margin expansion, and pharmacy channel penetration as key indicators for 2026, with accelerated growth expected in 2027 as PAYGO and direct international models mature.

• Margin expansion will be driven by channel mix and manufacturing scale.
• International direct operations are expected to scale throughout the year, with additional markets transitioning in Q4.

Takeaways

Investors should focus on shipment growth, pharmacy channel penetration, and gross margin trajectory as the key indicators of Tandem’s underlying progress during this business model transition.

• Model Transition Watch: The shift to PAYGO will temporarily mask shipment-driven growth in reported revenue, but structurally increases recurring revenue and margin potential as the installed base migrates.
• Pipeline and Direct Expansion: Product launches and international direct operations are central to both near-term differentiation and long-term market control, but require flawless execution to offset transition friction.
• Future Growth Visibility: By 2027, management expects the full benefit of the new model—higher recurring revenue, margin expansion, and a broader addressable market—to drive renewed acceleration in top and bottom line growth.

Conclusion

Tandem’s Q4 and 2025 results mark both a performance high point and a structural pivot, as the company leans into a PAYGO pharmacy model and direct international expansion. While near-term reported growth will be muted, the underlying business is positioned for higher-margin, recurring revenue and long-term market share gains. Execution on channel migration and pipeline delivery will determine the pace of value realization for shareholders.

Industry Read-Through

Tandem’s aggressive move to a PAYGO pharmacy model is a watershed for the insulin pump and broader diabetes device market, signaling a shift toward recurring, lower-friction revenue streams and improved patient access. Other device makers will face pressure to match pricing transparency and ease of onboarding, particularly as payers and patients demand lower upfront costs. The international direct model, with its higher ASPs and customer proximity, sets a template for medtech firms seeking to capture more value and data from global markets. The success or challenges of Tandem’s transition will be closely watched as a bellwether for business model evolution across the sector.

TNDM Healthcare Medical Devices Diabetes Pharmacy Channel Recurring Revenue Gross Margin Innovation