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Borrower Expectations for the Return of Student Loan Repayment

After forty-three months of forbearance, the pause on federal student loan payments has ended. Originally enacted at the onset of the COVID-19 pandemic…

After forty-three months of forbearance, the pause on federal student loan payments has ended. Originally enacted at the onset of the COVID-19 pandemic in March 2020, the administrative forbearance and interest waiver lasted until September 1, 2023, and borrowers’ monthly payments resumed this month. As discussed in an accompanying post, the pause on student loan payments afforded borrowers over $260 billion in waived payments throughout the pandemic, supporting borrowers’ consumption and savings over the last three years. In this post, we analyze responses of student loan borrowers to special questions in the August 2023 SCE Household Spending Survey designed to gauge the expected impact of the payment resumption on future spending growth, the risk of credit delinquency for borrowers, and the economy at large. The findings suggest that the payment resumption will have a relatively small overall effect on consumption, on the order of a 0.1 percentage point reduction in aggregate spending from August levels, and a (delayed) return of student loan delinquency rates back to pre-pandemic levels. Across groups, we see little variation in spending responses but find that low-income borrowers, female borrowers, those with less than a bachelor’s degree, and those who were not in repayment before the pandemic expect the highest likelihood of missed student loan payments.

The SCE Household Spending Survey is fielded every four months as a rotating module of the Survey of Consumer Expectations (SCE), which itself is a monthly, nationally representative internet-based survey of a rotating panel of household heads conducted by the Federal Reserve Bank of New York since June 2013. Here, we focus on responses by about 1,000 respondents to a special set of questions added to the August 2023 survey. Of these respondents, 225 reported having outstanding student loans, of which a subset of 151 respondents indicated that their federal student loans were previously “paused” but will be entering repayment in October. The remaining group includes those whose payments were never paused or those who are enrolled in school full-time and not resuming repayment. We asked those borrowers entering repayment how they plan to afford their looming monthly student loan payments and how their probability of missing student and non-student-loan payments will change due to the payment resumption.

We begin by briefly discussing our sample. An overwhelming majority of our sample of student loan borrowers held federal loans (with 74 percent reporting they hold federal loans only and 20 percent reporting they hold both federal and private loans). Of the 151 respondents who will be entering repayment, 71 percent were making monthly payments prior to the payment pause; roughly half of the borrowers in repayment were in a standard (ten-year) repayment plan (36 percent) and half were in an income-driven repayment (IDR) plan (35 percent). About 23 percent of our sample entering repayment were in deferment or forbearance prior to the pandemic, most under in-school deferment. Around 6 percent of ­borrowers were not actively making payments despite payments being required.

Expectations for Income-Driven Repayment Enrollment

We began by asking borrowers if they would enter the standard ten-year repayment plan (the default option) or enroll in an IDR plan. The Biden Administration recently debuted a new IDR plan, the Saving on a Valuable Education (SAVE) plan, that lowered payments for low-income borrowers and has already enrolled over four million borrowers (as of September 5). Our survey results suggest that the appealing terms of the SAVE plan for low-income borrowers will likely increase enrollment in IDR plans. Of those borrowers who were previously in a standard repayment plan, 20 percent expect to enroll in an IDR plan, and 84 percent of those who were previously in an IDR plan expect to remain enrolled in IDR—results that taken together would represent a modest uptick in IDR enrollment among the more seasoned borrowers. Meanwhile, borrowers who were not in repayment prior to the pandemic overwhelmingly favor IDR over the standard payment, with 78 percent of first-time repayers stating an intent to enroll in IDR. As shown by the flows in the chart below, we estimate the IDR enrollment among those in repayment would increase from 50 percent pre-pandemic to 58 percent after payments resume.

The SAVE Plan Will Likely Drive New Interest in Income-Driven Repayment (IDR) for Student Loan Borrowers

Chart showing projected flows into standard repayment plans (to 42.1% of repayers) and income-driven repayment plans (to 57.9% of repayers) after the payment pause lifts.
Source: New York Fed SCE Household Spending Survey, August 2023.
Notes: To classify borrowers into pre-pandemic groups, we asked respondents “Prior to March 2020, were you making most of the payments on these loans?,” with the following options: (a) Yes, I was in a standard repayment plan; (b) Yes, I was in an income-driven repayment plan; (c) No, my payments were deferred (i.e., in-school deferment, military deferment, etc.); or (d) No, payments were required but I was not making most payments. To classify borrowers into post-pause groups, we framed our question in this way: “The automatic forbearance and interest waiver for federal student loans will end after August 2023. In September, interest will begin to accrue, and payments will be due starting in October. What are you planning to do after student loan payment resumes? (select all that apply),” with the following options: (a) Make the standard monthly payments; (b) Enroll in an income-driven repayment plan; (c) Skip some payments; (d) Other (please specify); and (e) Not applicable (I am in school, and payments will not be required). Respondents selecting (e) were excluded from the sample. Borrowers were sorted into “standard repayment plan” or IDR using responses to (a) or (b) and open-ended responses from (d).

Expectations for Changes to Monthly Spending

Next, we turn to borrower’s expectations for changes in monthly spending (separate from student loan payments) due to the resumption of payments. More specifically, we ask borrowers, “When student loan payments resume from October, how do you expect that the payment resumption will affect your average monthly spending in the three months starting with October 2023?” On average, borrowers expect to reduce consumption by around $56 per month from their average monthly spending reported in August. If we scale this monthly decline up to the 28 million borrowers with federally-managed loans currently in forbearance, this would suggest nearly a $1.6 billion decline in monthly spending, or 0.1 percentage point of August 2023 personal consumption expenditures (PCE). For context, average monthly student loan payments for federally-managed loans was around $6 billion prior to the pandemic.

In the chart below, we plot the average reported change in expected October spending for paused borrowers as a share of their August reported average monthly spending. Most groups report relatively small expected reductions in spending while some groups report higher expected future spending despite the resumption of payments (survey panelists without student loans also report higher future spending). These relatively modest consumption declines, although not statistically different from zero, could be because borrowers already began adjusting consumption prior to August or because borrowers plan to reduce and/or deplete savings to make payments. They are also likely to reflect the large share expecting to enroll in the more generous IDR program. Due to our relatively small sample size, 95 percent confidence bands are wide across groups; however, the point estimates with the largest differences are between those with at least a bachelor’s degree (who expect larger spending reductions) and those with less than a bachelor’s degree, potentially reflecting differences in average outstanding student loan balances and payment sizes.

Paused Student Loan Borrowers Only Expect Modest Consumption Declines from August Spending when Payments Resume

Source: New York Fed SCE Household Spending Survey, August 2023.
Notes: The chart reports point estimates and 95 percent confidence intervals for the expected change in spending as a share of average monthly spending, split by various groups. To calculate this share, we asked borrowers, “When student loan payments resume from October, how do you expect that the payment resumption will affect your average monthly spending in the three months starting with October 2023? Please exclude loan payments from your estimation of spending. Starting October 2023, I expect my average monthly spending to (increase/decrease) by [ ].” We then asked borrowers for their average monthly spending at the time of survey: “Approximately, what do you think was your average monthly household spending during the past three months? I estimate that my average monthly household spending was [ ].” We compute the percent change in spending for each respondent using a ratio of these two answers.

Expectations for Missing Student Loan Payments

We also asked paused student loan borrowers about the expected probability (“percent chance”) they would miss a student loan payment or a non-student-debt payment in the three months following the payment resumption. Overall, paused borrowers reported an average probability of missing a student loan debt payment of 22.6 percent. Note that this statistic may overstate expected hardship and payment difficulty. Recent guidance from the U.S. Department of Education informs student loan servicers to not report missed payments to credit bureaus. As such, borrowers may be more likely to voluntarily miss payments while consequences are less severe.

In the chart below, we compare the self-reported probability of missing a student loan payment across several groups, finding stark and statistically significant differences across gender and income. Female respondents reported more than twice the probability of missing a student loan payment at 28.9 percent compared to 12.5 percent for males. Additionally, borrowers with household income lower than $60,000 reported an average probability of missing a payment of nearly 39 percent, compared to 14.3 percent for those with household income above $60,000. Although the estimates are not statistically different, non-white borrowers reported a higher average likelihood of missing a payment than white non-Hispanic borrowers and those without a college degree reported a higher likelihood than those with a degree. Lastly, we see a large difference in expectations for missed payments between borrowers who were in repayment prior to the pause and those who are entering repayment for the first time, with first-time repayers expecting more than twice the likelihood of missed student loan payments.

Expectations for Missed Student Loan Payments Are High, but Similar to Pre-Pandemic Levels

This chart compares the self-reported probability of missing a student loan payment across gender, age, education, household income, race and pre-pandemic repayment status, finding stark and statistically significant differences across gender and income.
Source: New York Fed SCE Household Spending Survey, August 2023.
Notes: The chart reports point estimates and 95 percent confidence intervals for the expected likelihood a respondent will miss student loan payments once payments resume, split by various groups. More specifically, we ask, “When student loan payments resume from October, what is the percent chance that you will miss a minimum payment on any of your student loan debt, federal and/or private, in the three months starting with October 2023?”

But how do expectations for missed payments compare to payment delinquency before the payment pause? While we do not have an apples-to-apples, pre-pandemic comparison for expectations of student loan missed payments, we can compare this probability with the borrower delinquency rate from our 2022 Student Loan Update, based on credit report data. As shown in the update, in the fourth quarter of 2019, roughly 15 percent of all student loan borrowers were either ninety or more days delinquent or in default. However, the denominator on this delinquency rate includes borrowers not in repayment, a category of borrowers we exclude from this SCE survey sample. Removing the 15.4 million borrowers reported by the Department of Education as not in repayment (that is, in school, grace, deferment, or forbearance) suggests a pre-pandemic delinquency rate of 23 percent (for those in repayment)—a rate quite similar to the self-reported average probability of missing a student loan payment in the SCE survey of 22.6 percent.

Expectations for Missing Non-Student-Loan Payments

Lastly, we asked student loan borrowers to report the expected increase in the likelihood of missing a non-student-debt monthly obligation (such as a mortgage, credit card, or auto loan payment) due to student loan payments restarting. On average, borrowers reported a 11.8 percent increase in the likelihood of missing a non-student debt payment owing to the student debt payment resumption. Borrowers across groups were also much more similar in their expectations of missing payments for other obligations than for student loans, with no evidence of statistical difference between groups. Interestingly, female respondents reported a lower probability of missing a non-student-loan payment than male respondents (although not statistically different). That female respondents report a far higher likelihood of missing student loan payments than males suggests female borrowers may be more likely than male borrowers to prioritize their non-student-loan obligations ahead of student debt if they face difficulties fulfilling all debt obligations.

Conclusion

Consumer spending has been surprisingly strong so far in 2023. However, there is considerable concern about the strength of headwinds stemming from the resumption of student loan payments, with some economic forecasters predicting it could lower consumption growth by as much as 0.8 percentage point. There are also concerns about rising delinquencies as payments resume, perhaps to levels higher than before the pandemic. Our findings here based on expectations survey responses suggest only modest reductions in spending for borrowers entering repayment (of approximately 0.1 percentage point of August PCE) and likelihood of missed student loan payments roughly in line with pre-pandemic levels. One reason for these relatively small effects is that potentially many borrowers already made changes to their savings and consumption decisions after learning that payments would certainly resume in October. The chart below shows some evidence for this hypothesis. Here, we plot the daily deposits at the U.S. Treasury by the Department of Education, of which the overwhelming majority are federal student loan payments. We see that deposits increased after the U.S. Supreme Court decision reversing the broad student loan forgiveness program and continued to rise up until the end of the zero percent interest waiver. This pattern seems consistent with some borrowers electing to make bulk payments against their loans after learning that their loans would not be forgiven and before interest resumed.

Total Daily Education Department Deposits at U.S. Treasury

This chart plots the daily deposits at the U.S. Treasury by the Department of Education from April-October 2023.
Source: U.S. Department of Treasury.

Another likely reason behind the less-than-dire forecast as the payment pause ends is the strength still apparent in the health of the U.S. consumer. Several policy changes by the White House and Department of Education bode well, too. A large take-up of the new SAVE plan would reduce monthly payments and waive unpaid interest for low-income student loan borrowers, and a one-year “on ramp” for borrowers will ignore missed payments for credit reporting purposes. In addition, more than $127 billion in federal student loans across over 3.6 million borrowers was cancelled or forgiven during the pandemic payment pause. While these factors will make the resumption of payments more smooth than otherwise, and lessen the expected decline in consumption growth, some student loan borrowers will surely struggle managing their debt obligations just as before the pandemic forbearance. Nevertheless, we expect the potential spillover to the broader economy to be limited, and we will continue to monitor developments in the coming months.

Chart data

Rajashri Chakrabarti is the head of Equitable Growth Studies in the Federal Reserve Bank of New York’s Research and Statistics Group.  

Daniel Mangrum is a research economist in Equitable Growth Studies in the Federal Reserve Bank of New York’s Research and Statistics Group.

Sasha Thomas is a research analyst in the Federal Reserve Bank of New York’s Research and Statistics Group.

Photo: portrait of Wilbert Vanderklaauw

Wilbert van der Klaauw is the economic research advisor for Household and Public Policy Research in the Federal Reserve Bank of New York’s Research and Statistics Group.

How to cite this post:
Raji Chakrabarti, Daniel Mangrum, Sasha Thomas, and Wilbert van der Klaauw, “Borrower Expectations for the Return of Student Loan Repayment,” Federal Reserve Bank of New York Liberty Street Economics, October 18, 2023, https://libertystreeteconomics.newyorkfed.org/2023/10/borrower-expectations-for-the-return-of-student-loan-repayment/.


Disclaimer
The views expressed in this post are those of the author(s) and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author(s).

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Glimpse Of Sanity: Dartmouth Returns Standardized Testing For Admission After Failed Experiment

Glimpse Of Sanity: Dartmouth Returns Standardized Testing For Admission After Failed Experiment

In response to the virus pandemic and nationwide…

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Glimpse Of Sanity: Dartmouth Returns Standardized Testing For Admission After Failed Experiment

In response to the virus pandemic and nationwide Black Lives Matter riots in the summer of 2020, some elite colleges and universities shredded testing requirements for admission. Several years later, the test-optional admission has yet to produce the promising results for racial and class-based equity that many woke academic institutions wished.

The failure of test-optional admission policies has forced Dartmouth College to reinstate standardized test scores for admission starting next year. This should never have been eliminated, as merit will always prevail. 

"Nearly four years later, having studied the role of testing in our admissions process as well as its value as a predictor of student success at Dartmouth, we are removing the extended pause and reactivating the standardized testing requirement for undergraduate admission, effective with the Class of 2029," Dartmouth wrote in a press release Monday morning. 

"For Dartmouth, the evidence supporting our reactivation of a required testing policy is clear. Our bottom line is simple: we believe a standardized testing requirement will improve—not detract from—our ability to bring the most promising and diverse students to our campus," the elite college said. 

Who would've thought eliminating standardized tests for admission because a fringe minority said they were instruments of racism and a biased system was ever a good idea? 

Also, it doesn't take a rocket scientist to figure this out. More from Dartmouth, who commissioned the research: 

They also found that test scores represent an especially valuable tool to identify high-achieving applicants from low and middle-income backgrounds; who are first-generation college-bound; as well as students from urban and rural backgrounds.

All the colleges and universities that quickly adopted test-optional admissions in 2020 experienced a surge in applications. Perhaps the push for test-optional was under the guise of woke equality but was nothing more than protecting the bottom line for these institutions. 

A glimpse of sanity returns to woke schools: Admit qualified kids. Next up is corporate America and all tiers of the US government. 

Tyler Durden Mon, 02/05/2024 - 17:20

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Four burning questions about the future of the $16.5B Novo-Catalent deal

To build or to buy? That’s a classic question for pharma boardrooms, and Novo Nordisk is going with both.
Beyond spending billions of dollars to expand…

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To build or to buy? That’s a classic question for pharma boardrooms, and Novo Nordisk is going with both.

Beyond spending billions of dollars to expand its own production capacity for its weight loss drugs, the Danish drugmaker said Monday it will pay $11 billion to acquire three manufacturing plants from Catalent. It’s part of a broader $16.5 billion deal with Novo Holdings, the investment arm of the pharma’s parent group, which agreed to acquire the contract manufacturer and take it private.

It’s a big deal for all parties, with potential ripple effects across the biotech ecosystem. Here’s a look at some of the most pressing questions to watch after Monday’s announcement.

Why did Novo do this?

Novo Holdings isn’t the most obvious buyer for Catalent, particularly after last year’s on-and-off M&A interest from the serial acquirer Danaher. But the deal could benefit both Novo Holdings and Novo Nordisk.

Novo Nordisk’s biggest challenge has been simply making enough of the weight loss drug Wegovy and diabetes therapy Ozempic. On last week’s earnings call, Novo Nordisk CEO Lars Fruergaard Jørgensen said the company isn’t constrained by capital in its efforts to boost manufacturing. Rather, the main challenge is the limited amount of capabilities out there, he said.

“Most pharmaceutical companies in the world would be shopping among the same manufacturers,” he said. “There’s not an unlimited amount of machinery and people to build it.”

While Novo was already one of Catalent’s major customers, the manufacturer has been hamstrung by its own balance sheet. With roughly $5 billion in debt on its books, it’s had to juggle paying down debt with sufficiently investing in its facilities. That’s been particularly challenging in keeping pace with soaring demand for GLP-1 drugs.

Novo, on the other hand, has the balance sheet to funnel as much money as needed into the plants in Italy, Belgium, and Indiana. It’s also struggled to make enough of its popular GLP-1 drugs to meet their soaring demand, with documented shortages of both Ozempic and Wegovy.

The impact won’t be immediate. The parties expect the deal to close near the end of 2024. Novo Nordisk said it expects the three new sites to “gradually increase Novo Nordisk’s filling capacity from 2026 and onwards.”

As for the rest of Catalent — nearly 50 other sites employing thousands of workers — Novo Holdings will take control. The group previously acquired Altasciences in 2021 and Ritedose in 2022, so the Catalent deal builds on a core investing interest in biopharma services, Novo Holdings CEO Kasim Kutay told Endpoints News.

Kasim Kutay

When asked about possible site closures or layoffs, Kutay said the team hasn’t thought about that.

“That’s not our track record. Our track record is to invest in quality businesses and help them grow,” he said. “There’s always stuff to do with any asset you own, but we haven’t bought this company to do some of the stuff you’re talking about.”

What does it mean for Catalent’s customers? 

Until the deal closes, Catalent will operate as a standalone business. After it closes, Novo Nordisk said it will honor its customer obligations at the three sites, a spokesperson said. But they didn’t answer a question about what happens when those contracts expire.

The wrinkle is the long-term future of the three plants that Novo Nordisk is paying for. Those sites don’t exclusively pump out Wegovy, but that could be the logical long-term aim for the Danish drugmaker.

The ideal scenario is that pricing and timelines remain the same for customers, said Nicole Paulk, CEO of the gene therapy startup Siren Biotechnology.

Nicole Paulk

“The name of the group that you’re going to send your check to is now going to be Novo Holdings instead of Catalent, but otherwise everything remains the same,” Paulk told Endpoints. “That’s the best-case scenario.”

In a worst case, Paulk said she feared the new owners could wind up closing sites or laying off Catalent groups. That could create some uncertainty for customers looking for a long-term manufacturing partner.

Are shareholders and regulators happy? 

The pandemic was a wild ride for Catalent’s stock, with shares surging from about $40 to $140 and then crashing back to earth. The $63.50 share price for the takeover is a happy ending depending on the investor.

On that point, the investing giant Elliott Investment Management is satisfied. Marc Steinberg, a partner at Elliott, called the agreement “an outstanding outcome” that “clearly maximizes value for Catalent stockholders” in a statement.

Elliott helped kick off a strategic review last August that culminated in the sale agreement. Compared to Catalent’s stock price before that review started, the deal pays a nearly 40% premium.

Alessandro Maselli

But this is hardly a victory lap for CEO Alessandro Maselli, who took over in July 2022 when Catalent’s stock price was north of $100. Novo’s takeover is a tacit acknowledgment that Maselli could never fully right the ship, as operational problems plagued the company throughout 2023 while it was limited by its debt.

Additional regulatory filings in the next few weeks could give insight into just how competitive the sale process was. William Blair analysts said they don’t expect a competing bidder “given the organic investments already being pursued at other leading CDMOs and the breadth and scale of Catalent’s operations.”

The Blair analysts also noted the companies likely “expect to spend some time educating relevant government agencies” about the deal, given the lengthy closing timeline. Given Novo Nordisk’s ascent — it’s now one of Europe’s most valuable companies — paired with the limited number of large contract manufacturers, antitrust regulators could be interested in taking a close look.

Are Catalent’s problems finally a thing of the past?

Catalent ran into a mix of financial and operational problems over the past year that played no small part in attracting the interest of an activist like Elliott.

Now with a deal in place, how quickly can Novo rectify those problems? Some of the challenges were driven by the demands of being a publicly traded company, like failing to meet investors’ revenue expectations or even filing earnings reports on time.

But Catalent also struggled with its business at times, with a range of manufacturing delays, inspection reports and occasionally writing down acquisitions that didn’t pan out. Novo’s deep pockets will go a long way to a turnaround, but only the future will tell if all these issues are fixed.

Kutay said his team is excited by the opportunity and was satisfied with the due diligence it did on the company.

“We believe we’re buying a strong company with a good management team and good prospects,” Kutay said. “If that wasn’t the case, I don’t think we’d be here.”

Amber Tong and Reynald Castañeda contributed reporting.

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Petrina Kamya, Ph.D., Head of AI Platforms at Insilico Medicine, presents at BIO CEO & Investor Conference

Petrina Kamya, PhD, Head of AI Platforms and President of Insilico Medicine Canada, will present at the BIO CEO & Investor Conference happening Feb….

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Petrina Kamya, PhD, Head of AI Platforms and President of Insilico Medicine Canada, will present at the BIO CEO & Investor Conference happening Feb. 26-27 at the New York Marriott Marquis in New York City. Dr. Kamya will speak as part of the panel “AI within Biopharma: Separating Value from Hype,” on Feb. 27, 1pm ET along with Michael Nally, CEO of Generate: Biomedicines and Liz Schwarzbach, PhD, CBO of BigHat Biosciences.

Credit: Insilico Medicine

Petrina Kamya, PhD, Head of AI Platforms and President of Insilico Medicine Canada, will present at the BIO CEO & Investor Conference happening Feb. 26-27 at the New York Marriott Marquis in New York City. Dr. Kamya will speak as part of the panel “AI within Biopharma: Separating Value from Hype,” on Feb. 27, 1pm ET along with Michael Nally, CEO of Generate: Biomedicines and Liz Schwarzbach, PhD, CBO of BigHat Biosciences.

The session will look at how the latest artificial intelligence (AI) tools – including generative AI and large language models – are currently being used to advance the discovery and design of new drugs, and which technologies are still in development. 

The BIO CEO & Investor Conference brings together over 1,000 attendees and more than 700 companies across industry and institutional investment to discuss the future investment landscape of biotechnology. Sessions focus on topics such as therapeutic advancements, market outlook, and policy priorities.

Insilico Medicine is a leading, clinical stage AI-driven drug discovery company that has raised over $400m in investments since it was founded in 2014. Dr. Kamya leads the development of the Company’s end-to-end generative AI platform, Pharma.AI from Insilico’s AI R&D Center in Montreal. Using modern machine learning techniques in the context of chemistry and biology, the platform has driven the discovery and design of 30+ new therapies, with five in clinical stages – for cancer, fibrosis, inflammatory bowel disease (IBD), and COVID-19. The Company’s lead drug, for the chronic, rare lung condition idiopathic pulmonary fibrosis, is the first AI-designed drug for an AI-discovered target to reach Phase II clinical trials with patients. Nine of the top 20 pharmaceutical companies have used Insilico’s AI platform to advance their programs, and the Company has a number of major strategic licensing deals around its AI-designed therapeutic assets, including with Sanofi, Exelixis and Menarini. 

 

About Insilico Medicine

Insilico Medicine, a global clinical stage biotechnology company powered by generative AI, is connecting biology, chemistry, and clinical trials analysis using next-generation AI systems. The company has developed AI platforms that utilize deep generative models, reinforcement learning, transformers, and other modern machine learning techniques for novel target discovery and the generation of novel molecular structures with desired properties. Insilico Medicine is developing breakthrough solutions to discover and develop innovative drugs for cancer, fibrosis, immunity, central nervous system diseases, infectious diseases, autoimmune diseases, and aging-related diseases. www.insilico.com 


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