In T9 Beta a pen contracted pox with ~50 onions still inside. Another pen 240 coords away had < 10 onions but was safe. Owner of the safe pen took out all but 1 sheep and upped the onions to about 104. I killed 1 poxed sheep per minute for 4 minutes and the 240 coord away pen did not contract pox. (Y1-Akhet I-14) - tehm w/ Ashen Template:T8 Below

Sheep may contract Sheep Pox from

Being underfed/starving (evidence requested)
Slaughter of nearby sheep with Pox (confirmed)
Randomly (2 adjacent pens, but only 1 has pox - highly unlikely 2nd was just outside radius of nearby slaughter)

Treatment

Once Advanced Animal Husbandry has been researched, give the sheep Sheep Supplement

Alternatively if Sheep Supplement is not available yet, build a new pen nearby and then destroy the infected pen. Your sheep will pop up and can be transferred to the new pen