May 9, 2016 / 10:52 AM / a year ago

China curbs Baidu healthcare ads business after student's death

Baidu's company logo is seen at its headquarters in Beijing December 17, 2014.Kim Kyung-Hoon

BEIJING (Reuters) - Chinese regulators have imposed limits on the number of lucrative healthcare adverts carried by Baidu Inc (BIDU.O) following the death of a student who underwent an experimental cancer treatment which he found using China's biggest Internet search engine.

Baidu's Nasdaq-listed shares fell more than 3 percent in morning trade on Monday following the move. Healthcare accounts for 20 to 30 percent of the company's search revenue, analysts at Nomura and Daiwa said, while search revenues represented some 84 percent of the web services firm's total sales in 2015.

Baidu's shares have dropped almost 14 percent since the controversy over the death of student Wei Zexi erupted at the start of the month.

The new rules mean the company must clean up in-search healthcare adverts and the positioning of paid-for search adverts of any kind cannot only be based on the highest bidder, said a statement from the internet, industry and health regulators which was posted on the website of the Cyberspace Administration of China.

The number of such adverts must also account for no more than 30 percent of a page of search results, the statement said.

"If they do enforce that, it would likely significantly cut into revenues," said Mark Natkin, managing director of Beijing-based Marbridge Consulting.

A spokeswoman for Baidu said it accepted the regulator's decision and it would implement the requirements placed on it following the investigation.

"This overhaul will affect Baidu's short-term interests," the company said in a statement.

The company will immediately review its in-search adverts for healthcare and won't help medical institutions that haven't gained regulatory approval to advertise, the statement said, adding that it would implement the investigation's recommendations by the end of May.

The best case scenario for Baidu after the probe would have been a cash penalty, analysts wrote last week.

Instead, the regulators have opted for what Nomura analyst Shi Jialong called a "more severe punishment".

Although Baidu can still advertise healthcare treatments the move still comes as a blow to the company, which has managed to maintain good government relations amid a broader crackdown on Internet media since President Xi Jinping came to power in early 2013.

"In our worst-case scenario, we estimate that 10-15 percent of Baidu's total search revenue would be at risk, assuming very strict regulations on medical online advertising going forward," wrote Daiwa analyst John Choi last week.

Baidu has come in for fierce online criticism for how it handles adverts within its search results.

Before his death, 21-year-old student Wei Zexi not only accused the military-run hospital that provided the failed treatment of misleading claims about its effectiveness but also alleged that Baidu, which controls 80 percent of the Chinese search market, had promoted false medical information.

Baidu said when the inquiry started it was also conducting an investigation and would fully cooperate with the regulator.

The company said it applied particular vigilance to healthcare customers, with screening for misleading adverts and a verification program with additional scrutiny for medical advertisers and had cleaned up its customer base.

After a separate investigation Chinese regulators had ordered the fixing of "serious problems" at the military-run hospital, which had been found to be illegally working with a private healthcare business, unlawfully advertising services and using unauthorized clinical technology, according to the official Xinhua news agency.

(This story updates share price move, adds comments from Baidu, analyst, hospital probe details refiled to correct verb form in first paragraph)

Editing by Alexander Smith, Greg Mahlich

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