UPDATE 2-Baidu promotes fake drug sites-Chinese TV station

* Baidu accused of directing users to fake drug sites

* Baidu declined comment

* U.S. shares fall 2 percent in pre-market trade

* Analysts expect limited impact to Baidu’s financials
(Recasts lead; adds analyst comments, San Francisco dateline;
updates stock)

By Melanie Lee and Alexei Oreskovic

SHANGHAI/SAN FRANCISCO, July 19 (BestGrowthStock) – A report by
China’s state-run television station accusing Baidu Inc
(BIDU.O: ) 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 (Read more about Google Stock Analysis)’s (GOOG.O: ) 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.

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

UPDATE 2-Baidu promotes fake drug sites-Chinese TV station