Digital Angel can track animals in a high-tech way Company can benefit in wake of mad cow scare By Alina Tugend, New York Times From cows to cats, the work of finding and identifying animals is becoming more high-tech. And that could prove promising for the Digital Angel Corp., a St. Paul company that has been tracking livestock for six decades. After two bumpy years, Digital Angel has a new management team and smells opportunity in the global war on mad cow disease and in technology for locating everything from lost pets to downed pilots. "All it takes is for one more case of mad cow, and watch things take off," said David Talbot, managing director of the brokerage firm Melhado, Flynn & Associates and an investor in Digital Angel. In December, after the Agriculture Department announced the first case of mad cow disease in the United States, Digital Angel's stock more than doubled. The company already has a hit in its Home Again microchips, which can be implanted in pets and read with a scanner for identification. About 70,000 animal shelters and veterinarians around the world have the scanners, and more than 2 million of the nation's 100 million pets have received the chips, which. are about the size of a grain of rice and are injected with a syringe. "They have been a growth business for us every year for the past three or four years," said Kevin N. McGrath, who became Digital Angel's chief executive last month. The company predicts that sales of the chips will increase substantially this year from $8 million last year. A rival company, Avid Identification Systems of Norco, says it has implanted its FriendChip tracking devices in about 5 million pets in the United States. But Digital Angel says it has a patent on a product that will go one step further and allow veterinarians to use its scanners to take pets' temperatures, as an alternative to the rectal procedure that often causes animals to panic. The product, called Bio-Thermo, is being tested in Britain and will be marketed in the United States in about six months, McGrath said Digital Angel also has high hopes for its devices that track helicopters and downed pilots. It bought a company called Outerlink, which provides satellite-based systems for locating and communicating with helicopters and other vehicles like trucks. And it reports strong demand for beacons made by its Signature Industries subsidiary that help find pilots who have bailed out of their planes. McGrath says the Royal Air Force in Britain has purchased 5,000 of the beacons, using some of them in Iraq, and it plans to replace them with new models next year. The Indian Air Force has just signed a $7.5 million contract to buy an unspecified number of them, he says, and his company has begun demonstrating them to the U.S. Army. Eventually, the technology could serve consumers, to find, for example, lost hikers, skiers or sailors, McGrath says. Digital Angel has longstanding ties with government agencies to track both wildlife and livestock. It has contracts with the Energy Department worth about $9 million a year. to determine the effects of hydroelectric dams on salmon by tagging the fish and tracking their movements. It also has a small contract to supply the Agriculture Department with radio-frequency identification tags and microchips for tracking sheep, which are vulnerable to a degenerative disorder known as scrapie, and captive deer and elk, which can suffer from chronic wasting disease. Both afflictions are similar to mad cow disease. But perhaps Digital Angel's biggest business opening is the sudden urgency of the worldwide effort to contain mad cow disease, a fatal condition that in rare cases has been transferred to humans. In the 1990s it swept through Britain, creating havoc for beef farmers as sales fell at home and abroad. In the United States, the Agriculture Department is considering a measure to require electronic ear tags on all of the nation's 95 million cows by July 2006, up from just 10 percent today, to trace their origins and contacts with other cows. A national tracking system like this would replace the current state-by-state patchwork, according to Scott Stuart, president of the National Livestock Producers Association. Depending on how it is set up, the program could be worth millions. "If we get 50 percent of the market, we're not talking hundreds of millions" in sales of livestock-tagging gear, McGrath said, but even so, sales could "double or even quadruple" from last year's $7 million. Digital Angel is in a good position to cash in on the trend toward cattle tracking, but there are lots of competitors, Stuart warns. AllFlex USA Inc. in Dallas dominates the market internationally, though primarily in nonelectronic visual tags. Eventually, implanting cattle with chips might prove popular, but that is probably a long way off, given many ranchers' preference for old-fashioned, hot-iron branding, Stuart said. Some cattlemen even consider ear tags an invasion of privacy and a potential liability threat, he said. "You hear people say, 'It's not for me,' but we say if we don't have a good system in place, their whole population could be wiped out." Both Digital Angel and AllFlex say they are getting a lot of attention from potential investors, the livestock industry and state governments. "It's a very dynamic time," said Glenn Fischer, AllFlex's senior vice president in North America. A major jackpot is in Brazil, which has no national identification system and 150 million head of cattle. Digital Angel says it is pursuing deals in Latin America and is also looking at Europe, especially Scotland, which plans a tracking program for its sheep. The company's new management team has taken charge over the last six months, headed by McGrath, a former vice president at the Hughes Electronics Corp. Digital Angel, which is 73-percent owned by Applied Digital Solutions and has 250 employees, has been making plastic tags for livestock for almost 60 years, originally under the name Fearing Manufacturing. "It used to be a paper tag glued to the back of an animal," said Kevin Nieuwsma, president of the company's radio-frequency identification division. "Then, there was a plastic-coated tag in the ear," still the most popular method, though electronic tags began to replace them in the 1980s. Digital Angel has fallen on hard times in recent years, posting a loss of $92 million on sales of $33.6 million in 2002 and a loss of $4.9 million on revenue of $8.3 million in the first nine months of last year. McGrath attributed the poor performance to increased development costs and several write-offs, some related to acquisitions. "The real operating losses are closer to $9 million," he said. "That's why I can speak with a reasonable degree of confidence about the future." He predicted an end to the red ink sometime this year. Other people inside and outside the company said it had spread itself too thin. "The company made a bunch of big bets," McGrath said. "It's not that they shouldn't have made them, but they shouldn't have made as many." One big disappointment was an investment in a wristwatch that relied on the Global Positioning System to keep track of children or aging parents with Alzheimer's. The technology did not live up to its promise, Talbot said. "The past is messy," he said, but "the future looks quite exciting."