Gilead (GILD ) reports Q3 earnings Tuesday. Analysts expect revenue of $7.15 billion and eps of $2.61. The revenue estimate implies a 4.7% decline sequentially. Q4 could mark the second consecutive quarter of revenue declines. Investors should focus on the following key items.

HCV Revenue Could Fall Off A Cliff

The decline in Gilead's HCV revenue has been well-documented. Many of the sickest patients in the U.S. have already been treated. Secondly, more of the payer mix is shifting towards volume buyers like the VA and Medicare who have the heft negotiate steep discounts. Declining starts and declining average selling price ("asp") have caused HCV revenue to free fall.

Total revenue grew 11% Y/Y for quarter ended June 2016. The biggest driver of growth came from Specialty Brands - including Acthar and Inomax - which was up 43%. Revenue from Specialty Generics and Nuclear Imaging fell by 14% and 4%, respectively.

All of the company's revenue growth was derived from the Specialty Brands. Therakos Immunotherapy and Hemostasis Products generated sales of $66 million last quarter. These drugs were not under Mallinckrodt's umbrella in the year earlier period. That said, the company's organic growth was only 3%. Why would anyone get excited about 3% organic growth? Secondly, Mallinckrodt appears to be similar to Valeant (NYSE:VRX ) - a serial acquirer of brands. Without its acquisition machine, the value of its business model could be in question.

Is Acthar In Jeopardy?

Acthar used to treat infantile spasms and certain autoimmune conditions is of immense importance to Mallinckrodt. It generated 31% of operating revenue. Specialty Brands has a higher operating income margin (52%) than the overall company (45); that implies that Acthar's contribution to operating income could be higher than 31%. In Q4 2015, Citron's Andrew Left questioned the effectiveness of Acthar and contended Mallinckrodt could have problems with reimbursements from insurance companies.

Last week, Citron took another swipe at Acthar. Left accused Mallinckrodt of understating the percentage of Acthar's sales represented by Medicaid/Medicare. Left claimed Medicaid/Medicare made up over 60% of Acthar's revenue and not the 25% the company had allegedly represented. The thesis goes that (i) Mallinckrodt could come onto the government's radar for charging excessive prices for Acthar and (ii) any reduction in purchases by the government would have an outsized effect on the company's bottom line.

MNK took a 7-8% hit on the Citron report. In my opinion, if Acthar is as ineffective as Left has made it out to be, then the government allocations for the drug could come into question. I would expect management to speak to Acthar's effectiveness on the earnings call, and hopefully follow up hard data on the matter.

Takeaway

Sans acquisitions, Mallinckrodt's top-line growth would be stagnant. Any pullback in Acthar sales or threat to its acquisition model could be disastrous. MNK trades at 7.0x run-rate EBITDA, which is low for biotech stocks. The market could be telling us that Mallinckrodt, with only 6% of revenue allocated to R&D, is not a biotech company. Its debt of $6.3 billion is at 3.7x run-rate EBITDA. As we have learned from Valeant's debacle, high debt levels could amplify Mallinckrodt's potential downfall.

Management's effectiveness on the earnings call could be critical to maintaining support for MNK. At this juncture I believe the risks of owning MNK outweigh the rewards.