Tandem Diabetes Care Inc Q4 FY2025 Earnings Call

Good day, and thank you for standing by. Welcome to the Tandem Diabetes Care Fourth Quarter 2025 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Susan Morrison, Executive Vice President and Chief Administrative Officer. Please go ahead.

Hello, and welcome to Tandem's Fourth Quarter and Year-end 2025 Earnings Call. Today's discussion will include forward-looking statements. These statements reflect management's expectations about future events, our product pipeline, development timelines, and financial performance and operating plans, and speak only as of today's date. There are risks and uncertainties that could cause actual results to differ materially from those anticipated or projected in our forward-looking statements, which are described in our press release issued earlier today and under the Risk Factors portion of our most recent annual report on Form 10-K. Today's discussion will also include references to both GAAP and non-GAAP financial measures. Please refer to our earnings release issued today and available on the Investor Center portion of our website for a reconciliation of these measures to their most directly comparable GAAP financial measure and other information regarding our use of non-GAAP financial measures. John Sheridan, Tandem's President and CEO, will be leading today's call, and he'll be joined by Leigh Vosseller, Executive Vice President and Chief Financial Officer. Following their prepared remarks, the operator will open the call up for questions. Thanks in advance for limiting yourself to one question before getting back into the queue. I'll now turn the call over to John.

Thanks, Susan, and welcome, everyone. 2025 was a defining year for Tandem, where we surpassed the milestone of $1 billion in sales while delivering on our mission to provide new innovations, improved outcomes, and a revolutionary experience to nearly 0.5 million customers worldwide. Momentum built across the year and culminated in Q4 results where we set multiple records while delivering double-digit growth and improved profitability. Seeing the dedicated efforts and strategic focus of our entire team makes me both proud of what we've accomplished and excited for what lies ahead. In addition to our financial performance, I'm equally proud of our execution against the three key initiatives we prioritized at the beginning of the year, which were modernizing our commercial operations, delivering new technology, and shaping our business model. Together, these changes are transformational for our company and set a strong foundation for Tandem to drive sustainable growth and profitability in 2026 and beyond. In my prepared remarks today, I'll be speaking to each of these key initiatives, starting with the modernization of our commercial organization, which positions us for strengthened execution worldwide. In the United States, we expanded our sales team and updated our sales processes. We also began implementing new systems during 2025 that will provide significant efficiencies and benefits to our sales team in 2026. In addition, we began expanding our dedicated commercial efforts for people living with type 2 diabetes. Turning to our international business, we delivered a strong performance in 2025, setting record sales once again. This accomplishment is even more impressive as we did so while preparing for direct commercial operations in the U.K., Switzerland, and Austria. The transition activities went exceptionally well as our team hired talent in these countries while smoothly coordinating the distributor separations and implementing the necessary back-end infrastructure. As a result, I am proud to share that we are now live and beginning to serve customers through our direct operations in Europe. Our learnings from going direct in these countries will serve as a playbook to further expand our direct operations internationally in 2026 and 2027, which provides us the opportunity to deepen relationships with the diabetes community while improving both price and margins. Complementing our commercial efforts was the second key initiative for 2025, delivering new technology across our portfolio. Early in the year, we launched Control-IQ+, our next-generation automated insulin delivery algorithm that is indicated for people living with type 1 diabetes down to age 2 and for adults with type 2 diabetes, which doubles our addressable market. It's designed for easy onboarding and use. We also generated clinical evidence that allows us to use training to simplify the carb-counting experience. We ended 2025 launching two highly sought-after pump features in the U.S., which were the launch of FreeStyle Libre 3 Plus for t:slim and Android Control for Mobi. Early response to both of these offerings has been positive and contributed to our growth in the fourth quarter. We plan to build on this momentum in 2026 and have multiple new products either imminently launching, awaiting regulatory clearance, or reaching key milestones in the development path. We'll have three new product launches in the second quarter, which include a scaled launch of Mobi internationally, a launch of Mobi integration with the FreeStyle Libre 3 Plus beginning in the U.S. and Dexcom's 15-day sensor integration on both pumps and platforms globally. We also recently submitted a 510(k) with the FDA for a pregnancy indication for Control-IQ+ technology. Tandem is a company founded on innovation. And in 2026, we plan to uphold the ongoing commitment to redefining pump wearability with the launch of Mobi Tubeless. This will be Tandem's first patch pump offering and the world's first patch pump with extended wear technology. As a reminder, Mobi Tubeless is our novel infusion site option with the existing Mobi pump that transforms it into a tubeless patch device, allowing for interchangeability between tube and tubeless wear on one platform. We plan to file our 510(k) submission in the second quarter and are preparing for its launch in the second half of the year. In addition, our pipeline also includes SteadiSet, our extended wear infusion set technology, our next-generation Mobi featuring further miniaturization from our Sigi technology, software features such as dual glucose ketone sensor integration, and our pursuit of offering the world's most robust fully closed-loop AID system. Tandem's leadership in AID has been evident since we first launched Control-IQ in 2020. We are committed to maintaining this position and plan to begin a pivotal trial for the fully closed-loop algorithm later this year in support of FDA filing in 2027. As you can see, our innovations across Tandem's pump systems, applications, and insights continue to define why our pipeline is the most exciting in diabetes. Finally, our third main initiative in 2025 centered on reshaping our business model, which is expected to be one of the most impactful levers to deliver both market growth and profitability. We took significant steps to advance our pharmacy strategy across the United States. Pharmacy access is widely associated with the significant advantages of offering customers lower average out-of-pocket costs and easier onboarding. It also provides benefits to health care providers through a streamlined prescription process and a benefit to payers by providing access to technology that improves member outcomes with enhanced data visibility. As a result, manufacturers like Tandem typically receive greater economic reimbursement when serving customers through the pharmacy channel. Our first year of experience with pharmacy access proved these assumptions to be true. Therefore, in 2026, we are accelerating our efforts to increase pharmacy coverage for both t:slim X2 and Mobi platforms and plan to drive utilization of the pharmacy benefit for all our customers. A key aspect of this acceleration is our decision to adopt a pay-as-you-go reimbursement structure, which creates a near-term offset to sales while significantly strengthening our business model over time. Our business is distinctly advantaged in making this sort of transition as we have more than 300,000 existing customers regularly ordering supplies in the U.S. By transitioning these customers to pharmacy, it provides them the channel benefits faster while helping mitigate Tandem's near-term impact to revenue. We considered a PayGo business model when we first launched into the pharmacy channel in 2025, and based on the experience we gained in payer interactions throughout the year, have decided it is strategically the right move for our business now to drive market expansion and profitability. With the addition of PayGo, Tandem will be best-in-class in all ways with products, outcomes, service, affordability, and accessibility.

Thanks, John. 2025 was a record year for Tandem, which is highlighted by our milestone achievement of more than $1 billion in worldwide sales and multiple records in Q4, including our highest sales, gross margin, and pump shipments. In 2025, worldwide sales grew 12%, our second year in a row of double-digit sales growth based on a 10% increase in the U.S. to $707 million and 15% internationally to $308 million. Focusing on the fourth quarter, our record worldwide sales of $290 million represented 15% year-over-year growth. This is the strongest sales quarter in our company's history and is of particular significance as it was achieved during a period of commercial transformation. In the U.S., our Q4 sales increased 14% to $210 million. This growth was driven by more than 27,000 pump shipments, our highest quarterly achievement. Renewals from our loyal customers made up more than half of the shipments, and MDI conversions represented approximately two-thirds of customers new to Tandem, consistent with trends across the year. We also benefited from a greater portion of our supply sales through the pharmacy channel. In all, sales through the pharmacy channel nearly doubled from Q3, growing to $16 million or 7% of total U.S. sales this quarter. Only a few percent of our total installed base ordered supplies through pharmacy in Q4, creating a meaningful opportunity as we expand awareness and accessibility for our large existing base of over 300,000 customers. Internationally, we grew 17% year-over-year in the fourth quarter, delivering $80 million in sales and 11,000 pump shipments. This marks our strongest Q4 performance to date, driven by growth in both pump and supply shipments. We also realized benefit from favorable FX, offset by $4 million associated with our transition to direct operations, primarily impacting pump sales. For the full year, the total distributor destocking and inventory buyback impact was approximately $7 million, slightly lower than the $10 million we had estimated due to a partial delay in timing from 2025 to the first quarter of 2026. Turning to margins, we delivered on our commitment to improving profitability in a meaningful way. We expanded gross margin by three percentage points to 54% for the full year and reported our highest quarterly margin ever at 58%. This achievement stems from success in reducing product costs, driving manufacturing efficiency, and executing on our pricing and channel initiatives. We managed our Q4 operating expenses well as they were essentially flat year-over-year and sequentially. This reflected investments in SG&A to support our commercial initiatives, offset by planned efficiencies throughout the organization. As a result, adjusted EBITDA was 11% of sales in the fourth quarter, a 10 percentage point improvement over the prior year. Additionally, we generated our first positive operating margin since 2021 at 3% of sales in Q4, which is an improvement of 15 percentage points over the prior year. One key contributor to this leverage was a reduction in non-cash stock-based compensation to a reduced quarterly run rate of approximately $20 million. We exited the year with nearly $300 million in total cash and investments, generating free cash flow in both Q3 and Q4. We have great conviction that the combination of our differentiated portfolio of products and business model changes provide us the ability to achieve our long-term objectives of accelerated sales growth with a gross margin of at least 65% and an operating margin of 25%. Demonstration of this momentum was evident as we exited 2025. As John discussed, we are entering 2026 in the U.S. with a new value proposition as we transition to a pay-as-you-go reimbursement model in the pharmacy channel. PayGo can be a key driver for accelerated pump adoption as it eliminates the upfront payment at the time of pump purchase, which has historically been one of the top barriers for adoption. A PayGo business model also lends to a more predictable revenue stream as customers purchase supplies over time, unconstrained by renewal cycles. In transition from a model where revenue is typically recognized upfront, 2026 sales growth may be more moderated. We have the added benefit that can come from shifting our sizable existing installed base into pharmacy to lessen the near-term impact to sales. In all, this transition positions us well for meaningful long-term value creation. Our new PayGo contracts are expected to be effective beginning late in the first quarter. Importantly, in 2026, pump shipments will be the key indicator of our progress in growing the market while expanding margins. Pump shipments in the U.S. are expected to increase 10% to 11% year-over-year, returning to new pump growth led by MDI conversions. Renewal pumps are expected to comprise more than half of total shipments. The catalysts enabling this growth are new technology in expanded markets and pharmacy channel access, building off last quarter's momentum and scaling across the year. Contribution from Mobi Tubeless is not included at this time as its benefit will depend on FDA clearance and launch timing. We will be providing additional metrics this year for greater visibility into the pay-as-you-go transition, which we will discuss at a high level on today's call. More details on our assumptions are provided in the earnings call slide deck posted in the Investor Center portion of our website. Starting with pumps, we anticipate that pump orders through the DME channel will still make up approximately 80% of our shipments in 2026 while we scale pharmacy access. Over the course of two to three years, we expect the ratio between the channels to flip and the majority of our shipments will be through pharmacy. When serving a customer through pharmacy, there will be no upfront reimbursement for the pump. Sales will be recognized consistent with recurring supply purchases, which are anticipated to be reimbursed at a premium of more than four times DME, pricing in line with what is seen in the market today. The sales impact of this transition between the channels is anticipated to be the most pronounced in 2026 while we build up the percent of our installed base ordering supplies through pharmacy. Exiting 2025, our U.S. installed base was approximately 325,000 with a low single-digit percent ordering supplies through pharmacy. As a result, our 2026 U.S. sales are expected to be in the range of $730 million to $745 million based on growth in pump shipments of 10% to 11% year-over-year. This incorporates $70 million to $80 million of pricing headwinds, reflecting our adoption of a pay-as-you-go model. Pharmacy sales are expected to be approximately 15% of total U.S. sales in 2026, up from 4% in 2025. In the long term, sales through pharmacy are expected to make up more than 70%. When thinking about the cadence of U.S. sales across 2026, total pump shipments are expected to follow a seasonal curve similar to 2025. For example, in Q1 of 2025, we saw a nearly 30% decline from Q4 of 2024 due to DME deductible resets on January 1. The pharmacy penetration rate is expected to start low in the first quarter, similar to levels we saw exiting 2025 and scale linearly across the year. Turning to our international business, we began direct commercial operations in Switzerland, U.K., and Austria in the first quarter of 2026. Sales productivity in these countries is expected to scale across the year. In the fourth quarter, we plan to transition to a direct model in additional key European markets. In the direct model, ASP premiums will vary by geography, expected to be at least 30% higher than our current pricing in the individual markets. These ASP gains will partially offset an anticipated $15 million associated with distributor destocking and inventory buybacks. As a result, our 2026 international sales are expected to be in the range of $335 million to $340 million for the year. Direct sales represented approximately 5% of total international sales in 2025 and are expected to be similar in the first quarter of 2026 as we scale our direct launches. For the full year of 2026, we expect direct sales will be approximately 15% of total international sales. Overall, worldwide sales for 2026 are expected to be in the range of $1.065 billion to $1.085 billion. This incorporates $85 million to $95 million in total sales headwinds associated with our strategic business model changes. Worldwide sales are expected to be in the range of $236 million to $240 million in the first quarter. This includes approximately $10 million of headwinds split between the U.S. and international. Our clearest indicator of success in 2026 will be market expansion as measured by pump shipments and will not be evident in our sales growth expectations as we progress towards a more predictable and profitable revenue stream. We also maintain our commitment to delivering meaningful margin expansion, reflecting benefit from our pricing strategies, a focus on product cost reduction, and continued spending rigor. Gross margin is expected to step up to a range of 56% to 57%, scaling from nearly 54% in the first quarter to 60% in the fourth quarter. Adjusted EBITDA is also expected to demonstrate leverage in the range of 5% to 6% for the full year of 2026. We anticipate adjusted EBITDA to be negative 2% to negative 1% of sales in Q1 due primarily to U.S. seasonality returning to positive in Q2. In summary, we now have multiple levers that can grow the business independent of new product cycles. In combination with our expansive product portfolio, we believe these business model initiatives provide the opportunity for us to deliver accelerated growth in 2027 and beyond.

Thanks, Leigh. As you can see, 2025 was a year full of tremendous accomplishments that position Tandem for increasing success. Our ongoing dedication to innovation and improving our customers' lives continues to motivate us to reach new milestones. I want to thank every member of the Tandem team for your steadfast pursuit of excellence, collaboration, and adherence to our shared mission. Your contributions have driven our success and will propel us to another year of meaningful progress, impact, and growth. This is an important and exciting time in Tandem's journey. We are well positioned to deliver best-in-class technology to our customers in a more streamlined and cost-effective way while advancing our global business model and creating meaningful long-term value for our shareholders. Thank you, everyone, for joining us today, and I look forward to updating you as the company continues to progress.

Our first question comes from the line of Matt Miksic from Barclays.

Congratulations on a strong finish, both in terms of revenue and EBITDA. I expect there will be numerous questions regarding the new model. I appreciate the detailed information in the presentation, which effectively outlines everything. This is a topic that has garnered attention, especially in the realm of diabetes, where the trend is moving towards automated insulin delivery systems. One question I have is regarding the guidance you provided for Q1, which is clear for the full year in the U.S. The international growth, facing a $15 million headwind, appears to suggest underlying growth of about 9% to 10%, which might be interpreted as mid-teens growth. It seems like you could achieve low double-digit U.S. shipments and mid-teens underlying growth internationally, leading to an overall low double-digit performance metric for next year, excluding the PayGo changes?

I think that's correct, Matt. I think if you look at the overall revenue growth or shipment growth for the year, it's going to be in the line of 10% to 11%. So it's going to be double-digit growth in shipments. And we also expect to see a return to growth in new shipments. I would say that, that is the best indication of our performance next year, including the profitability because when you look at the revenue numbers, the revenue numbers are impacted by the headwinds from the pricing that comes along with PayGo. So this is a very impactful change in the business. We're very excited about it. I think when you look at it, I mean, basically, we double or more than double the revenue, the lifetime revenue from a patient, and that's a substantial change while at the same time, we are going to substantially reduce their out-of-pocket and improve the experience. So that's a real win on both sides. And like I said, we're very excited about this. It's going to be impactful. And I think when you look at the impact on the P&L, I mean, certainly, there's a revenue hit from the pricing headwind. But when you look at the gross margin, you look at adjusted EBITDA, we do show solid performance there. And as I said, shipment growth is the real numbers to look at in 2026 for us.

Our next question comes from Mathew Blackman from TD Cowen.

Great. There’s a lot to discuss and inquire about. I’d like to know about the expectation of around 20% of pumps going through the pharmacy by 2026. Can you provide some context on your current position regarding coverage and contracting and your expectations for the end of the year? I’m trying to understand the 20% mix in relation to your progress in contracting.

Sure, I'd be happy to provide that information. There are two key aspects to consider regarding our coverage. We currently have contracts with all the major pharmacy benefit managers, covering about 80% of lives under contract. Our primary focus, however, is on formulary access, which currently covers approximately one-third of lives. This is just the starting point as we introduce the pay-as-you-go model for pharmacy, with contracts set to take effect late in the first quarter. Initially, I anticipate low volume, but we expect it to increase throughout the year, averaging around 20% of pump shipments with no upfront payment. This approach is somewhat distinct from our installed base that we foresee ordering through the pharmacy channel. While we face some challenges with the upfront payments, we can alleviate these by transitioning more of our current durable medical equipment customers into the pharmacy channel. Initially, we had less than 5% of orders coming from this channel at the end of the fourth quarter, but we expect that percentage to grow over the year. On average, we expect around 10% of our customers to be ordering their supplies through the pharmacy channel over the course of the year.

Our next question comes from Larry Biegelsen from Wells Fargo.

Congrats on a nice quarter here and on the bold move here. And as Matt Miksic said upfront, this has been, I guess, talked about for a long time, John, this pay-as-you-go model. So my questions are really why now? Why is this the right time? And the long-term pharmacy goals, why is 80% the right number in 2 to 3 years? I assume that excludes Medicare fee-for-service. And how are you thinking about attrition changing with the pay-as-you-go model?

We have been considering this for some time, and in the fourth quarter, we gained significant experience in our pharmacy business. We have had discussions with several payers, and we believe this is very feasible. We have been focused on pharmacy for a while, and I feel that now is absolutely the right moment to make this change. There are several positive aspects concerning the business, and as I mentioned, this is a significant decision for us. However, it is the correct one, and we are very enthusiastic about it.

I'll take the question about the goals and your question on attrition. So as we think about the goals, this is just the beginning, and we're working to build up additional formulary access and as well as within the formularies that we have to build up attachment from the downstream payer plans. And so what we see is over the two to three years is what it will take for us to build up to optimal coverage, if you want to call it that, where at that point, we probably will have at least 70% of our sales going through the pharmacy channel. So that's a complete flip of our business model, obviously, from where it is today. And attrition is a question that we're often asked as we think about the pharmacy channel at all, where people don't necessarily have what you would call lock-in periods like they have in DME. And what we've seen in our experience in the DME channel is that even though people stay with us for four years because of that warranty period, we see people staying well beyond the four years, whether it's through another pump purchase or just staying on the pump outside of warranty because high quality of the pump, it just keeps working, so there's no need to transition. And so we feel comfortable that when people try out our technology, they stick with it. And even in this model where maybe they won't have the same sort of dynamics in terms of restrictions from switching from one to another, we think they'll stick with us.

Our next question comes from Chris Pasquale from Nephron Research.

I appreciate all the additional info and the different metrics this quarter is going to be helpful to track these initiatives as they go forward. John, I wanted to ask about the international transition. When you first sort of talked about this, it seemed like it was largely going to be a 2025 headwind. But now it sounds like it's going to have a significant impact on 2026 and possibly even beyond depending on sort of what other countries you're getting into late this year. Can you talk about why it's such a protracted process? And how do we think about the point at which you've completed this transition to direct?

I believe our team has done an outstanding job this year. We've successfully transitioned away from distributors and started hiring a sales force for the new markets we're entering. Additionally, we've built and installed the necessary infrastructure to ship products and manage billing, which are significant accomplishments. Entering these new countries this year, we're taking on considerable operations. Given that we're expanding into three countries this year, attempting to do everything simultaneously would be too risky. Therefore, spacing this out over two years is the best approach. This year, we completed all the groundwork and are now operational in those three countries, using this experience as a blueprint for the next countries we'll enter in 2027. We feel optimistic about our progress, and it seems we’ve structured the timeline appropriately. By 2027, we anticipate completing most of our planned transition. Looking ahead, we aim to establish a hybrid model that includes both direct business and continued partnerships with many of our excellent distributors in international markets. Overall, the process has gone smoothly, and we expect it to continue as we move into 2026 and 2027.

Our next question comes from Danielle Antalffy from UBS.

Really congrats on a good quarter and for making this move here. I guess, Leigh, just on the leverage, that was really nice to see in the quarter. Good to see in the guidance and the commitment to that. I'm just curious what the different levers are here. Obviously, ultimately, pricing in the pharmacy and the significantly higher ASP there is helping. But maybe talk a little bit about the levers going forward in '26 but also as you think over the next few years.

Sure. Thanks for the question, Danielle. You named probably one of the biggest levers we have right now, which is pricing. As we look at the value that can come from this transition that we're making in the pay-as-you-go model, that will continue to bear great fruit for us in the next couple of years in terms of a growth perspective on revenue and profitability. But also, so important to remind that we do have a number of product cost reduction initiatives in place. One of them really comes from Mobi as we continue to build and scale that part of the business. In the long term, Mobi, and we're getting very close with the pumps to being at scale. The manufacturing cost of a Mobi versus the t:slim is 10% to 15% lower. So that's one piece of it. And then as we continue to build up the cartridges and think about that contribution, that will be 20% or lower or higher, I should say, reduction in cost versus the t:slim. So as Mobi continues to grow in scale, that will continue to drive gross margin benefit, too. And then you can just take that forward and think about any new product that we launch. Part of our design principles in the R&D process are to consider that new products need to have a better margin profile than the products that we have in the market today and continue to improve upon the products that we have in the market today. And so I would say between pricing and our initiatives within the manufacturing and R&D areas, that's really what's going to drive that leverage in gross margin. And then they get a little further down the P&L to the operating margin. Similarly, we continue to look at our infrastructure and think about what's the best way, how to be most efficient. And we're constantly looking for opportunities and ways to reduce the need to hire more people in the future and just better serve our customers with a lower headcount base going forward.

Our next question comes from Mathew O'Brien from Piper Sandler.

I'd love to talk about the acceleration that you're expecting on the new pump shipment side here in '26. It's one of the better numbers we've seen over the last several years. And I know you have Mobi coming out with Libre 3 Plus and then the 15-day, but you're not assuming any benefit from Tubeless here in '26. So why the confidence in the ability to do that without especially that patch kind of product here in '26 and maybe deconstruct how you get there to see that kind of acceleration?

I would say that while we don't have Mobi in the revenue plan, that's typically the way we've done it in the past, a little bit more conservative when it comes to uncertainty. I would say that we have high confidence we're going to get this thing approved this year. And when you consider Mobi, it will now have multiple sensors integration. It will have Android, and it will have iOS, and then it will also have a Tubeless implementation. There's nothing else like that on the market. I think as you look at the buildup, just to get to the Tubeless product, we are adding a great deal of functionality to these products. We're also expanding Mobi into the OUS markets, and we're expanding FreeStyle Libre 3 into the OUS markets as well, which has been a point of competition. I think when both those products are there, it's going to be a completely different picture. And so I think the pipeline is certainly a big piece of it. I would say that a lot of the work that we've done with the sales force in terms of improving their productivity, as we mentioned, we have a brand-new system coming online here next month, basically. That's going to substantially improve their efficiency and productivity. So we expect to see that contribute to the new starts. And then finally, I think that pharmacy, pharmacy is something that we think is going to have an impact on our business this year. So I think when you look at that, really, it's the new technology, it's the sales organization, the improvements that happened there last year, and then it's also pharmacy. I think the combination of those will drive the growth that we're going to see in 2026.

Our next question comes from Mike Kratky from Leerink Partners.

Congrats on the great quarter. Maybe to start, just wanted to circle back on some of the Tubeless Mobi commentary. Did I have that right, you said planning on submitting the 510(k) submission in the second quarter of this year is the first part?

That's correct. Yes, we plan on submitting in the second quarter. We have had a great deal of very responsive support from the FDA. And so we do feel highly confident that we'll get it approved in the second half of the year.

Our next question comes from the line of Matt Taylor from Jefferies.

I get your comments on pharmacy shift and going to flip in a few years. Can you talk about at a high level, how that's going to impact the P&L and sales growth in '27 and '28 in more detail? It's a little bit confusing as you're going to continue to have that shift through the next few years.

Sure. Happy to. When we consider the challenges this year, they are expected to be more significant as we begin this period. Currently, we lack support from supply sales or reimbursement on supplies. For every PayGo customer in our model, we will receive reimbursement for supplies that is over four times what we earn from DME today. As we grow our base of customers who can access a pump with no upfront cost, this will positively impact our revenue in the next couple of years. Additionally, we have over 300,000 t:slim Mobi customers in our existing base, and moving them from the DME to the pharmacy channel will also enhance revenue, providing immediate benefits as soon as they switch their ordering. It's important to note that while we face a temporary headwind this year, which may slow revenue growth, we are still achieving margin expansion. This demonstrates the potential of this shift in the first year, and we can anticipate even greater improvements in the coming years.

Our next question comes from Shagun Singh from RBC Capital Markets.

I was wondering if you can shed some light on cadence through the year. So the $70 million to $80 million revenue headwind, how do we see it through the year? I think you indicated that this will be effective, I believe you said in late Q1 '26. So anything you can share on cadence on sales and margins, that would be helpful.

Sure. So I think the way to think about it is, obviously, in this first quarter, it's going to be a very low percent of our shipment volumes that will have this effect from the PayGo reimbursement. So the bulk of those headwinds are probably going to be hitting more in the last couple of quarters of the year. And so think about it as low single-digit percentage scaling up to a number that averages to 20% for the year. And margins also, so as we have the same opportunity to transition our supply customers, similar to what we've seen in years past, margins will start lowest in the first quarter. So call it, nearly 54%, getting up to about 60% in the fourth quarter of the year. So you can think about that scaling pretty linearly across the quarters this year. I should add that in the first quarter, in particular, we factored in about $10 million of headwinds worldwide. And you can think about that as roughly split between our international operations and the transition to going direct and between the headwinds that we could see in the first quarter for the PayGo transition.

Our next question comes from John Block from Stifel.

I'll pivot to international. And maybe, Leigh, you can talk to some of those moving parts. It seems like you've got, call it 3% revenue growth from the extra 30% price on an incremental 10% of volumes. I'm guessing your FX tailwind, I don't know, is 4%, 5%. Then you got this headwind from the move to direct. So maybe you can just flesh it out what's the underlying growth. It seems like it might be 7%, 8%, high single digits and compare that to how you exited the year, which seems on a really, really good trajectory of mid- to high teens.

Thanks for the question, John. You're right. There are a lot of moving parts. I think at the highest level, I'll just start with the fact that we are actually very strong in the international markets and continuing to expand the market. Majority of our shipments today still come from new customers, and we're just beginning to see a more meaningful contribution from the renewal opportunities there. And then you take some of these structural pieces and you think about it. So as you come into 2026, we have the benefit from those markets that are going direct already that are going to provide that price appreciation. And so this year, you're not going to see the full effect of that 30% that you mentioned. That's the way to think about long term. Any market that goes direct, we should see a premium of approximately 30% in any given year. The pricing, when you blend it this year, direct to distribution, it's probably mid-single to high single-digit price increase building up across the year as we transition into those markets. That is, if you will, it's funding the headwinds that we're going to see in the additional markets that are going to go direct this year. So as we think about that headwind, we've sized that at about $15 million and thinking about, as I just mentioned, roughly $5 million-ish in the first quarter. And the rest of it, majority will be hitting in the back part of the year, probably the fourth quarter. But underlying all of this, we're very confident and excited about the opportunity we have in the market. Part of the reason for going direct in these markets is this puts us closer to the customer, better able to sell and the benefits of our technology and bring more people over to Tandem.

Our next question comes from Travis Steed from Bank of America Securities.

I wanted to ask about the quote in the press release you're talking about accelerating sales growth in 2027 and beyond. It's been a while since I've seen you guys talk about a year ahead. I just want to see what kind of is driving that visibility and confidence, how much of that is pay-as-you-go versus Mobi and as you kind of look forward and plan ahead?

I believe the most significant aspect will be the ongoing rollout of the pay-as-you-go model. Although we face some challenges this year, we expect to make considerable progress. As we integrate more of our existing customer base and new clients into the pay-as-you-go model, the impact on revenue will be considerable and will grow over time. Thus, the transition to pay-as-you-go is certainly the most impactful factor. Additionally, as Leigh mentioned, there is also the chance to transition the 325,000 existing customers to pharmacy services, which is significant. We also have an exciting pipeline with many technologies set to launch this year, including the first extended-wear patch, which should be quite impactful. Currently, we believe there is no competitor to our patch, and we will soon offer a device with the same form factor available in the pharmacy channel, featuring a superior algorithm. We anticipate it will perform very well. Moving forward, we have an exciting pipeline including our transition to a fully closed-loop system, which we hope to see in the market by 2027 or 2028. All these factors contribute to our management team's confidence in achieving growth in 2027 and beyond.

Our next question comes from Jeff Johnson from Baird.

I am on a train. So if I break up here, I'll just jump back in queue. But Leigh, you mentioned that the pharmacy pricing is going to be consistent with what others are out there on a tubed pump side in the pharmacy channel. Just to put a number on that for modeling purposes, $450 a month, is that a reasonable price to dump into our model as we try to build this out? And you talked about some of your installed base maybe starting to get their supplies in the pharmacy channel. I think from your comments, it sounded like they get that same price for their supplies, but ostensibly that higher supply price is also supposed to include some amortization of the pump. So if I'm a current user that jumps into the pharmacy channel, am I also going to get that $450 a month or whatever the right number is there? Just help out.

Yes, there were many insightful comments and questions, Jeff. This year, I want everyone to approach this with the understanding that we are just beginning our journey. We are rolling out these new contracts in the market, effective late in the first quarter. The contracts include a variety of terms. Consider the potential dynamics, such as whether we have preferred or non-preferred access, which will affect the rebates and the amount of co-pay assistance we provide. To sum it up, I suggest using around $350 per month per customer as a starting point for modeling this year. This will help us establish a baseline while we closely monitor the trends in actual utilization and the mix of contracts we have. Over time, we will provide further guidance on how to interpret where the average might be. I believe this figure represents a significant advantage compared to current DME pricing. Regarding your question about current users versus new pump recipients, think of it as a reset. From now on, our business will operate independently of whether someone is getting a pump today, ensuring consistent pricing for all customers. Once again, I recommend starting with about $350 per month as a modeling reference, and we will keep you updated as we gather more information.

Our next question comes from Jayson Bedford from Raymond James & Associates.

This is Elaine on for Jason. I wanted to ask a question on type 2. So could you please give us some color on the progress there? There was also an update to the ADA guidelines recently on C-peptide testing. How does this new guideline help with your discussions with CMS? And can this lead to an inflection in type 2 new starts?

Right. So I mean, we're excited about the type 2 market. It doubles the size of our addressable market in both the U.S. and OUS. In 2025, we obviously got the indication. We ran the pilot, and we went to full commercial availability in the fourth quarter. We learned a great deal in the pilot, and we actually saw a pretty significant bump in starts between the third and fourth quarter, the quarter that we actually had the full organization working on this. As we look at 2026, it's basically a core that we intend to focus on type 2 and invest in marketing and also some research relative to PCP and OUS markets. I think we've got tailwinds as we enter the market with FreeStyle Libre 3 and Mobi implementation. Obviously, Mobi Tubeless and pharmacy channel is also going to drive uptick. And relative to the C-peptide decision, it's also a potential positive for us as the Senate has asked CMS to review the NCD and make a decision in August of 2026, which is not that far away. And certainly, having that go away will substantially improve Medicare's access. So we have one quarter with the data, and it's very positive. And I think that we're looking forward to seeing good growth in 2026 based on everything that we've got going on.

Our next question comes from Richard Newitter from Truist.

This is Felipe on for Rich. Just in the context of renewal pump shipments, we get a lot of questions about a potential drop-off in 2027, considering the prior four-year drop-off in new patient starts. I'm just wondering if you could help give us some context on how you're thinking about, I guess, out-year pump shipments and how that fits into your strategy with pharmacy and maybe any potential offset you can get in pharmacy if there is a potential drop-off in pump shipments in 2027?

Certainly. It's important to note that while there might be a slight decline in opportunities over the next few years, we still anticipate that renewal shipments will grow in double digits year-over-year this year based on our typical model. This provides us with a solid foundation for growth, even though we expect new opportunities in 2026 to remain flat compared to 2025. Transitioning to the pharmacy channel is crucial for us, as it lessens our dependence on renewals. Our customer retention rates are strong, and we want to make it easier for patients to get their pumps without the hassle of frequent renewals or insurance issues. As we anticipate a decline in opportunities in the U.S., we feel confident in our ability to continue growing the business. Additionally, I want to emphasize that our renewal opportunities internationally are increasing and becoming a significant contributor, offering us plenty of growth potential in the coming years.

Our next question comes from David Roman from Goldman Sachs.

This is Phil filling in for David. I wanted to focus on the gross margin trajectory, as there's been significant emphasis on sales and sales cadence moving forward. However, there is likely a headwind to gross margin this year due to the sales transition. Could you discuss the trajectory or the exit rate for underlying gross margins this year or when things might normalize in 2027, and help quantify the headwind we might face this year that could improve next year or beyond?

Sure. So maybe I'll just start with the fact that in 2025, before we even had a meaningful pharmacy opportunity, we already stepped up gross margins substantially year-over-year by three points on an annual basis. And in 2026, I think important to understand that even with this moderated sales growth rate, we can still expand margins another two to three points. And so we expect to exit this year at about a 60% rate. And you make a good point about the headwinds, putting a little bit of pressure on margins. So that just means that it gives us more opportunity to expand those faster in the future. And so we're very focused on driving that. I mean, it's a very important part of our business with everyone. We've always been focused on sales growth, but what we want to show is that we have the ability to drive margins like you see at competitive levels across the market.

Our next question comes from Joanne Wuensch from Citi.

There's a lot going on in 2026, both in the U.S. and outside the United States. You've sort of addressed sort of how to think about the first quarter, but can you help me understand revenue and, I guess, gross margins, the progression throughout the year? I mean, not to give specific second, third or fourth quarter guidance, but maybe ratios or something just to sort of lay the groundwork so we set the models up correctly.

Sure. I'm happy to help with that. So I'll start with the U.S. I think that's where you see probably where you're trying to untangle all the parts and pieces and how they might influence the year. From the perspective of U.S. shipments, let's start with that. And remembering that still 80% of our shipments will be through DME this year. I would expect the same seasonal curve on pump shipments. So you think about the lowest point in Q1, the highest point in Q4. And that has a heavy influence on gross margins. And I would say the way our margins have been structured historically. And so where we've always seen that pumps have the highest gross margin, and supplies are meaningfully lower than that. And so that's why you can expect a similar trajectory of gross margin across the year, starting at about 54%, scaling up to 60%. And when I say scaling up, I mean measurably stepping up across each quarter of the year because even though we have these headwinds, if you will, on the pump price with the pump going out the door at $0, we have that opportunity to continue to fuel margin expansion with the pricing benefit that will come from the supplies and the supplies we shift into the pharmacy channel. We also have the OUS business to help there. So we're going to be scaling up our direct business across the year, and that is also positive and beneficial to gross margins despite those headwinds that we expect to see there. And so I would say when you think about the revenue models and the margin models, this year, not yet too dissimilar from what you've seen from years past. But we do expect, as we look ahead, as pharmacy becomes a bigger piece of our business, it will start to level out those seasonal curves to some extent. But for now, I think I would start with similar assumptions to what you've seen before.

Our next question comes from William Plovanic from Canaccord Genuity.

Could you clarify how many months it will take to reach breakeven on the PayGo model in your projections? Additionally, I noticed there wasn't any mention of free cash flow for 2026. Do you anticipate it will be positive in that year? I'm also curious about the quarterly cash burn. Historically, Q1 tends to see a significant cash burn, so I want to ensure there are no surprises. Can you provide some insights on this?

Absolutely. I'll start with the breakeven question. There are various ways to address that, but one perspective to consider is regarding a PayGo customer. Each customer has a breakeven point associated with the $0 pump offer, and it takes several months to recoup costs through supply sales. However, when we leverage our existing customer base, you can view it as one PayGo customer alongside two existing ones, resulting in breakeven in just a few months. Thus, it won’t take long to recover from any headwinds we might face. This also relates to the cash situation. We exited 2025 with positive free cash flow. Typically, we experience a dip in the first quarter due to annual payouts for incentives and compensation. This year, accounting for all factors during the transition, we anticipate being free cash flow neutral and expect to return to a positive cash flow position by the end of the year as we progress into 2027. As we undergo this transition, we will be particularly mindful of our cash balance, which is a good way to frame our outlook for the year.

Leigh, I wanted to emphasize another aspect of the transition to PayGo that may not be immediately apparent. Moving to PayGo removes many of the obstacles we face with DME. Currently, DME presents challenges for physicians when prescribing it, as they must navigate a complex process to provide justification for the purchase. This is frustrating for patients who have to repeatedly provide information, which takes time. Additionally, one of the major issues in the DME channel is the significant out-of-pocket costs. Many patients may need to pay their full deductible, which can exceed $1,000. The advantage of the pharmacy channel is that it reduces this friction; it's convenient for both patients and physicians, eliminating the burden of a large upfront payment. Consequently, monthly payments can be lower. This effectively addresses the challenges we face in DME, which explains our expectation that the pharmacy channel will lead to an increase in new patients, ultimately benefiting the business.

Our next question comes from the line of Suraj Kalia from Oppenheimer & Company.

This is Shaymus on behalf of Suraj. Can you discuss what needs to be done to transition patients from DME to the pharmacy? Is there anything you can do to expedite that process? Additionally, as you shift toward pharmaceutical services with the pay-as-you-go model, do you need to consider any percentages related to bad debt or uncollectible amounts as you move to those contracts?

Thank you for the question. I'll address the last part first. There's nothing unusual in terms of accounting treatment to consider; you can view it as a typical revenue stream as supplies are acquired over time. Regarding how to transition patients, the first step is to inform them about the financial advantages from an out-of-pocket perspective. When comparing to DME supplies, they often face deductibles at the beginning of the year, which can lead to higher out-of-pocket costs then. However, pharmacy options tend to offer more consistency, and we can help reduce or subsidize that co-pay. The key is to help them understand the financial benefits. Many customers express how much they appreciate our customer service and worry that this change could impact that relationship, so we reassure them that this transition is beneficial for them financially, and we will continue to provide the same level of service they expect. One minor challenge is that we do need an additional prescription from the physician, so we will involve them in writing a new prescription for the patient in the pharmacy channel. These challenges are manageable; they require effort, which is why this won't happen overnight. We're confident in our ability to transition customers, especially as we increase access and broaden our offerings across the market.

Our next question comes from Mike Kratky from Leerink Partners.

Mike sorry, you got cut off the last time.