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As the government investigation into the case of bovine spongiform encephalopathy, or mad cow disease, enters its second week, investors continue to speculate on small-cap technology stocks that could have a role in combating or controlling the disease.

On Wednesday,

Orchid Biosciences

( ORCH) jumped to a 19-month-high after the company touted plans to capitalize on its expertise combating scrapie, a chronic wasting disease in sheep that is similar to mad cow. Orchid, which rose 43 cents, or 30.1%, to $1.85, on 23 million shares, said in a press release early Wednesday morning that it tested a half-million sheep for scrapie in the U.K. and would be expanding its operations to help trace strands of DNA in food.

"Orchid's business in DNA testing of animals for food safety has grown rapidly in the last few years, increasing from zero in mid-2001 to approximately 15% of our projected $50 million top-line revenues in 2003," said Paul Kelly, CEO. "We are actively pursuing opportunities to expand Orchid's scrapie susceptibility genotyping business in Europe and North America."

On Tuesday, Agriculture Secretary Ann Veneman outlined the government's response to mad cow disease in a press conference. It included stricter testing policies of the nation's meat supply. Sensing the new business opportunities, Orchid -- and a number of other companies -- have been positioning themselves to benefit from the increased vigilance.

Specifically, Orchid announced that it would be using its expertise in scrapie to develop a suite of tests to analyze trace elements of disease in meat and expected to have those tests up in 2004.

"The recent incidents involving mad cow disease in cattle in the U.S. and Canada are fueling consumer food safety concerns worldwide and increasing demands for additional measures to ensure the safety of meat products," said George Poste, the company's chairman. "Both preventative disease susceptibility testing and DNA-based food traceability testing can help governments, farmers and livestock companies to ensure the safety of these products used by millions each day."

Another big area of stock speculation involves the USDA's plan to electronically track livestock to help contain outbreaks and better understand how they occur.

"USDA has worked with partners at the federal and state levels and in industry for the past year and a half on the adoption of standards for a verifiable nationwide animal identification system to help enhance the speed and accuracy of our response to disease outbreaks across many different animal species," Veneman said. "I have asked USDA's chief information officer to expedite the development of the technology architecture to implement this system."

With the national ID system on the fast track and millions of dollars in government contacts possibly at stake, shares of another company that has experience with scrapie,

Digital Angel

(DOC) - Get Physicians Realty Trust Report

, have attracted attention. Shares have been extremely volatile in recent sessions, jumping 55 cents, or 14.1%, to $4.44 on Tuesday, on 2.9 million shares, 29 times the normal daily volume.

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After the Dec. 23 outbreak, the company released a pair of press releases touting its radio frequency identification devices, or RFID, which can be implanted in animals and used to track them from birth to slaughter.

But investors should be cautious and understand what they're buying into. Digital Angel, which is uncovered by Wall Street analysts, continues to post losses, and had just $727,000 in cash as of the third quarter. Furthermore, the company wasn't able to boost business in Canada after the Canadian outbreak of the disease surfaced on May 20, despite issuing a pair of press release touting its RFID devices.

As of the third quarter, the company's working capital was negative, with $13.5 million in current assets vs. $15.8 million in current liabilities. It has been paying for operations by issuing warrants to lenders. On July 31, the company sold a $2 million convertible note and a five-year warrant to purchase 125,000 shares to Laurus Master Fund. A month later, Digital Angel spent $150,000 to terminate its credit agreement with Wells Fargo and enter a new $5 million one with Laurus.

"The proceeds for those notes were used for working capital purposes," said Jim Santelli, Digital Angel's CFO, who said the company wasn't a bankruptcy risk. "We disclose in our 10-Q that we expect to have enough cash on hand to operate our business in the next 12 months, both from cash from operations and other funding efforts. We don't see any problem with financing."

While its cash position is tight, Digital Angel said its business prospects were solid. In an interview with

TheStreet.com

on Monday, Kevin Nieuwsma, president of the company's RFID division, said it has been in discussions with the USDA about the use of its tracking products. On Oct. 7, the company announced a deal to provide the USDA with 300,000 RFID tags and has already used the RFID devices to track millions of endangered fish for the Department of Energy.

Orchid Biosciences and Digital Angel aren't the only companies attracting investor interest and they aren't the only companies with tests, or tracking methods, that the USDA could be interested in. Competition for government contracts can be fierce and there's no guarantee that a small company will land a big deal.

A privately held Fort Collins, Colo.-based company named Optibrand uses retinal scans to track cattle and announced Tuesday a five-year contract to provide privately held Swift & Co., the nation's third-largest beef processor, with its products.

Advanced ID

(AIDO.OB)

, an over-the-counter stock, and

eMerge Interactive

sell RFID-based tracking devices to the beef industry as well. On Tuesday, Advanced ID rose 8 cents, or 8.9%, to 97 cents, while eMerge rose 15 cents, or 12.6%, to $1.34.