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Baidu promotes fake drug sites-Chinese TV station

By Melanie Lee and Alexei Oreskovic

SHANGHAI/SAN FRANCISCO (Reuters) - A report by China's state-run television station accusing Baidu Inc of promoting counterfeit drugs through its Web search engine should not prove as damaging as a 2008 TV critique that triggered a 40 percent decline in Baidu's shares, analysts said on Monday.

Shares of Baidu, which fell as much as 4 percent on Monday, were down 1.7 percent at $72.26 at mid-afternoon on Nasdaq.

"It seems to be a different issue, a much more manageable issue than what happened in 2008," said Pacific Crest Securities analyst Steve Weinstein.

"I don't think there would be the revenue type of impact that we saw before," he said.

CCTV reported on Sunday that Baidu and other search engines had profited from promoting three websites offering counterfeit drugs that duped more than 3,000 people in China, according to the People's Daily newspaper.

Baidu declined to comment on the accusation.

A source familiar with the situation told Reuters on Monday the sites exploited a loophole in the system, piggybacking on legitimate websites to gain access to buy keywords. The source could not be identified due to the sensitivity of the matter.

The report comes two days before Baidu is expected to issue its quarterly results as it capitalizes on its new advertising system and gains from Google Inc's spat with China. [ID:nTOE66I00P] In the second quarter, Baidu had a 70.8 percent share of China's search market, according to iResearch data.

Baidu's shares have jumped more than 75 percent this year.

In 2008, CCTV aired a similar expose on Baidu selling links to unlicensed medical sites with unproven claims for their products. The company's Nasdaq-listed shares subsequently fell as much as 40 percent, and its fourth-quarter revenues were 14 percent below the mid-point of the company's original forecast, prompting Baidu Chief Executive Robin Li to publicly apologize.

As a result of the scandal, Baidu had overhauled its operations and sacked staff involved.

ThinkEquity analyst Aaron Kessler said the current situation appears more limited in scope.

"This seems like just a few players that have taken advantage of the system," said Kessler.

He said he did not expect the situation to have a material impact on Baidu's financial results, though the company might incur incremental costs to improve its enforcement efforts against unlicensed advertisers.

In the last few years, China has been beset by a series of product safety scandals ranging from tainted milk to fake pharmaceuticals.

The government has announced several crackdowns but the problems persist, aided by a lack of surveillance, generally poor quality standards and corruption.

(Reporting by Melanie Lee and Alexei Oreskovic; Additional reporting by Franklin Paul in New York; Editing by Anshuman Daga, Derek Caney and Richard Chang)

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