Updated with additional information.

PRINCETON, NJ ( TheStreet) -- The discovery of liver toxicity in a Pharmasset ( VRUS) hepatitis C drug Friday has investors panicked that similar problems could crop up in competing drugs from Inhibitex ( INHX) and Idenix Pharmaceuticals ( IDIX).

Pharmasset first spooked investors Friday morning with the announcement that hepatitis C patients were being pulled off treatment with PSI-938 because of laboratory measurements suggesting the experimental drug was negatively affecting liver function.

Importantly, PSI-938 is not the keystone jewel in Pharmasset's hepatitis C pipeline for which Gilead Sciences ( GILD) is paying $11 billion to acquire. Gilead's main interest is in Pharmasset's drug PSI-7977, which remains untouched by Friday's announcement.

Pharmasset said the safety problem with PSI-938 does not trigger an escape clause written into the Gilead purchase agreement that allows Gilead to walk away if a serious adverse event or safety issue is discovered in a key Pharmasset drug.

Regardless, Pharmasset shares were down 2% to $125.28 Friday, even as the company reaffirmed its belief that the Gilead deal will close in the first quarter of next year. Gilead is acquiring Pharmasset for $137 per share.

The real investor panic took place in Inhibitex, which is developing a hepatitis C drug known as INX-189 that shares similarities in chemical structure with Pharmasset's now-tainted PSI-938. With Pharmasset bought for $11 billion, investors have been betting that Inhibitex could be the next hepatitis C drug company to get gobbled up.

But if PSI-938 was causing liver damage, then perhaps treatment with INX-189 runs the same risk -- not a pleasant thought for a company trading at a high takeover premium already.

No evidence of INX-189 induced liver damage has been reported yet, but just that possibility hit Inhibitex hard with shares plunging almost 50% in Friday's pre-market trading. The stock recovered somewhat when regular trading opened but Inhibitex is still down 21% to $10.29.

Analysts rushed to defend Inhibitex, pulling out their medicinal chemistry textbooks to demonstrate that while INX-189 was similar in some respects to Pharmasset's PSI-938, the two drugs also have structural differences.

For hepatitis C investors, Friday was clearly a day to regret sleeping through your college chemistry classes. Here's what JMP Securities analyst Liisa Bayko had to say to clients about INX-189:

"In our view, it is important to note that PSI-938 has a different active species (2-fluoro guanosine triphosphate) than INX-189 (2-methyl guanosine triphosphate) and that the compounds are not similar outside of the guanosine base - looking at the compounds as a whole, we believe INX-189 is more structurally similar to PSI-7977 than PSI-938. We also note that there are guanosine drugs marketed such as acyclovir, and therefore we do not believe that guanosine is the reason for the PSI-938 toxicity."

Deutstch Bank analyst Robyn Karnauskas held a call for clients Friday morning with an Inhibitex executive and a medicinal chemist who has worked on INX-189 and is familiar with other hepatitis C drugs.

On the call, Inhibitex re-affirmed the absence of liver-related toxicity in clinical studies of INX-189 to date at doses up to 100 mg. In one ongoing study, four patients treated with 100 mg of INX-189 have gone through 10 weeks of treatments, with two of those patients completing treatment.

Not all are convinced that INX-189 is in the clear.

"If you compare the activated forms of each (which happens pretty fast) the 2 structures are much much closer: specifically, varying only in that 938 has a F at C-2' in and 189 has a OH (F is a chemical isostere of OH)...The 938 result does not necessarily mean the same will hold for 189, but as I see it, it increases odds," said one buy-side analyst, referring to a side-by-side diagram of the chemical structures of INX-198 and PSI-939. This analyst had a short position in Inhibitex and was using Friday's slide to partially cover.

Idenix Pharmaceuticals is developing hepatitis C drugs in the same class as Inhibitex and Pharmasset, so naturally, shares were down 10% to $7 Friday.

Perhaps, the only people chuckling Friday were executives at Vertex Pharmaceuticals ( VRTX), which was supposed to be a hepatitis C also ran due to the looming entrant of drugs like those from Pharmasset and Inhibitex. Perhaps Vertex isn't out of the hepatitis C game quite yet. Vertex shares were up 5% to $33.20.

--Written by Adam Feuerstein in Boston.

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Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.