Putting Your Money Where Your Mouth Is

Public outcry after the publication of muckraker and socialist Upton Sinclair's turn-of-the-century novel The Jungle, an expose on the appalling sanitary conditions in Chicago's meat-packing industry, led Congress to pass the Pure Food and Drug Act of 1906.

Today, America's food supply is the safest it's ever been. Much has been learned since French scientist Louis Pasteur, a half-century ago, first developed the thermal sterilization technique that still bears his name. Yet even now, Britain's devastating outbreak of foot-and-mouth disease (ruining rural economies by forcing the slaughter of over 700,000 cows, sheep and pigs) and Europe's human-brain-wasting mad cow disease (a.k.a. bovine spongiform encephalopathy) demonstrate the continued importance of food safety and animal health technologies.

Each year, the average American consumes 118 lbs of red meat, 68 lbs of poultry, 15 lbs of fish, 30 lbs of cheese, 298 lbs of fruit and 421 lbs of vegetables. Keeping those food products safe is a $10-billion high-tech industry, often overlooked by investors.

Mad cow disease may be the scariest of today's food-borne pathogens, but it is by no means the only one. Other microbial contaminates like E. coli, salmonella, campylobacter and listeria monocytogenes sicken an estimated 76 million Americans each year, according to the Centers for Disease Control and Prevention, of which 325,000 will require hospitalization, and 5,100 will die.

Currently, only three companies offer tests for mad cow disease, two of which are private and European, and the other, Bio-Rad Laboratories , where the test accounts for a mere trace of the company's 8,000-product revenue stream. But a broader look at the animal health and food safety industry provides a wealth of interesting opportunities.

Antimicrobial Company Alcide

Redmond, Wash.-based Alcide(ALCD Quote), for example, develops proprietary antimicrobial and surface disinfectants effective against bacteria, fungi, viruses and mycoplasma for the dairy, poultry, beef, fruit and vegetable and health care industries.

Alcide has been selling its antimicrobial UDDERgold products to the dairy industry since 1988, preventing untold cases of bovine mastitis, a painful infection of the cow's udder that halts milk production. The fast-acting, long-lasting, breathable germicidal barrier makes it superior to competing solutions, which wear off quickly and may irritate both the cow's skin and the farmer's. The company's 4XLA dip product destroys dangerous microorganisms like staphylococcus aureus and streptococcus agalactiae within 15 seconds of contact, yet is harmless to humans and cows.

Alcide's acidified sodium chlorite Sanova antimicrobial is sprayed on split chicken carcasses in poultry processors' high-speed production lines before chilling, and is displacing competitor Rhodia's(RHA Quote) tri-sodium phosphate safety product. Expanding from a base of just three poultry plants using Sanova systems two years ago, 27 such facilities today process 4.8 billion pounds of chicken annually, a 15% domestic market share.

Likewise, Sanova is now being added to existing steam pasteurization techniques for red meat, especially downstream where the meat may be cut up and further processed into sausages. (An outbreak of listeria in hot dogs killed 21 Americans in 1999, grim testimony to the fact that beef-grinding entails higher risk because the greater the surface area, the more possible entry points for contamination.) This makes Sanova the most broadly registered, fastest-growing antimicrobial available in the food safety industry.

While Alcide's mature udder care business may be its best known, company President John Richards points out that it's Sanova that's driving growth. On March 26, the Environmental Protection Agency approved Sanova for processing intact raw agricultural commodities -- i.e., fruits and vegetables -- opening up another huge potential market for the company. Not only are the bacteria, mold, yeast and viruses on the produce's surface killed, but spoilage is often reduced, lengthening shelf life.

Alcide shares dropped sharply in August 1998 and the company lost money in 1999 and 2000, all of which stemmed from a severed relationship with a major distributor and increased spending on product development. Complex product regulation by the U.S. Department of Agriculture, Food and Drug Administration and EPA notwithstanding, the company now appears to be in solid turnaround mode.

Testing Firm Neogen

Another promising company is Lansing, Mich.-based Neogen(NEOG Quote), which produces a line of 250 products for animal health and food safety applications. Founded in 1982, the company's two divisions each compete in equal-sized markets.

For animal health, Neogen makes equine botulism vaccines, penicillin residue tests for dairy cows, veterinary instruments, diagnostics and nutritional supplements, competing in a $600 million segment of the overall $3 billion animal health market. In food safety, the company's Reveal and Alert testing products for E. coli and salmonella enteritidis (Se) and its diagnostics for food allergens and genetically modified corn (unapproved for human consumption), constitute another $600 million opportunity. An estimated 7 million Se-infected poultry eggs are produced in the U.S. annually. Ingesting raw, incompletely cooked eggs or contaminated poultry has made Se the leading cause of salmonellosis since 1994.

Neogen products are used throughout the farm-to-home production chain monitoring safety at various Hazard Analysis Critical Control Points, such as prior to slaughter and post beef grinding.

The presence of food-borne pathogens can be detected with Neogen's lateral format Reveal products. Similar to a home pregnancy test, a tiny sample of enrichment culture is deposited into the test's sample port. The sample is then drawn through a reagent zone containing specific antibodies. If any Se, for example, is present, it will bind to the antibodies, producing a visible line.

In just 15 minutes, the test produces a one- or two-line result, indicating either negative or positive for the presence of pathogens. Designed for speed, reliability and simplicity of use, Neogen's test kits enable food workers with minimal training in microbiology to perform the task.

More complex quantifiable results can be obtained from the company's line of Enzyme Linked Immuno-Sorbent Assay (ELISA) Alert testing products. The 96 microwell ELISA format Alert for E. Coli, for example, allows simultaneous screening of up to 94 samples in 35 minutes after eight hours' enrichment. Colored test results are determined optically by a microwell plate or strip reader. The need for such quick-turnaround, high-count sampling to determine the scope of the problem is very real: Ten separate outbreaks of the potentially deadly bacterium occurred during the 1980s, some causing panic at national fast food chains. In 1997, the USDA ordered Hudson Foods to close a meat-processing plant, recalling 25 million pounds of ground beef on a similar scare.

Neogen also makes tests to detect the presence of listeria, a bacterium that thrives in a variety of temperature, pH and salinity environments, therefore endangering meat, eggs, seafood, vegetables, etc., and campylobacter, the No. 1 bacterial cause of food-borne illness. Often found in raw poultry, campylobacter has also been linked to reactive arthritis and Guillain-Barre syndrome, a paralyzing neurological disorder.

Customers like the USDA's Food Safety Inspection Service, Tyson Foods(TSN Quote), Sara Lee(SLE Quote) and the FDA are constant users of Neogen's consumables, making NEOG a low beta stock, offering consistent profits and gross margins. For the nine months ended Feb. 28, 2001, Neogen's sales rose 51% to $25.7 million and its EPS increased 30% to 39 cents, reflecting the continued strong growth of its food safety division.

Coming next week: Part 2 of this article considers other companies worth taking a look at.