Packages of Marlboro cigarettes produced by Philip Morris International are seen at the grocery store in Warsaw, Poland May 29, 2024. REUTERS/Kacper Pempel

By Prerna Bedi and Emma Rumney

(Reuters) -The cost of Philip Morris' efforts to drive uptake of key nicotine pouch brand Zyn spooked investors on Tuesday, fuelling fears about future sales even after higher third-quarter growth.

Shares in the world's largest tobacco company by market capitalization dropped by more than 9% by 1439 GMT after the company outlined major one-off promotions, price changes and other support for the brand in the third quarter, costing $100 million.

"This is more of a one-off," Philip Morris International's CEO Jacek Olczak told Reuters in an interview.

"I'm not worried about the margin profile of Zyn," he said, adding there was ample room to grow.

PMI has spent years developing a portfolio of smoking alternatives to help it offset long-term declines in its cigarette brands like Marlboro.

Zyn, which users insert under the lip to get a nicotine buzz, has emerged as a star performer in PMI's portfolio. But it has disappointed investors recently, and some worry stiff competition from rivals offering lower prices poses a threat going forward.

ZYN SHIPMENT VOLUMES GROW, DOUBTS LINGER

PMI said that it had taken steps to "ensure competitive price positioning" for Zyn and had launched promotions in the quarter, including in September when adult consumers purchasing other nicotine products got a free can of Zyn in some locations.

This impacted third-quarter revenue and operating income growth in the Americas, the company said, but also drove growth.

Zyn shipment volumes grew 37% from a year earlier to 205 million cans in the United States, by far its biggest market.

PMI's share price has rallied nearly 30% this year as the company resolved Zyn supply constraints and on optimism about the group's outlook.

Bernstein analyst Callum Elliot said that while Zyn's third-quarter growth was reassuring, it raised questions about sustainability and the cost of growth going forward.

PMI also trimmed the top end of its forecast range for annual operating profit growth due to higher U.S. investments, likely related to Zyn, he added.

CFO Emmanuel Babeau told investors on a call that Zyn had enjoyed "abnormal" levels of profitability in the past amid supply constraints.

It would maintain a price premium against rivals and the best margin profile in PMI's portfolio, but promotional activity would be higher going forward, he said.

The company expects an adjusted annual profit of $7.46 to $7.56 per share, compared with its prior forecast of $7.43 to $7.56.

(Reporting by Prerna Bedi in Bengaluru and Emma Rumney in London; Editing by Joe Bavier and Susan Fenton)