Shares of Chinese Search Engine Giant Baidu Tumble $45 On Drug Ads By Unlicensed Providers

Shares of Chinese search engine operator Baidu.com, got pounded today due to a report by China’s state television network that Baidu may have let unlicensed health clinics buy popular medical ad keywords on its search engine.

Shares of Baidu fell $4480, or 25%, to close at $134.09, in afternoon trading.

Earlier, the stock traded as low as $130.51, its cheapest price since May 2007.

Sterne Agee & Leach analyst James Lee said Monday that a report by CCTV over the weekend into medical malpractice in China indicated some consumers may have found their way to improperly licensed or unlicensed private clinics and health centers via advertisements that came up when they searched for health-related topics on Baidu.

Baidu, which holds a 70 percent share of the search market in China, removed the ads for medical practitioners that were considered questionable over the weekend, Lee said.

He sees the report as hurting Baidu’s reputation, but doesn’t think it will be hurt financially as much as Monday’s share price decline seemed to indicate. Lee doesn’t think health-related ads make up that much of the company’s total advertising.

“The stock is obviously overreacting,” he said.

In a client note, Piper Jaffray analyst Gene Munster said the questionable ads on Baidu “were typically selling drugs; we do not believe these are fake drugs per se, but were being sold through non-accredited medical Web sites that should not score as high on sponsored results.”

Munster said that Baidu acknowledged in an online statement that this is true and that it has to put more focus toward sales practices, not just its technology.

Share of Baidu traded over $200 a share just last week.

Seems like this is a big over reaction to a correctable problem.