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The increased prevalence of temporomandibular joint osteoarthritis (TMJOA) in children and adolescents has drawn considerable attention as it may interfere with mandibular condyle growth, resulting in dento-maxillofacial deformities. However, treatments for osteoarthritis have been ineffective at restoring the damaged bone and cartilage structures due to poor understanding of the underlying degenerative mechanism. In this study, we demonstrate that Gli1 cells residing in the subchondral bone contribute to bone formation and homeostasis in the mandibular condyle, identifying them as osteogenic progenitors in vivo. Furthermore, we show that, in a TMJOA mouse model, derivatives of Gli1+ cells undergo excessive expansion along with increased but uneven distribution of osteogenic differentiation in the subchondral bone, which leads to abnormal subchondral bone remodeling via Hedgehog (Hh) signaling activation and to the development of TMJOA. The selective pharmacological inhibition and specific genetic inhibition of Hh signaling in Gli1 osteogenic progenitors result in improved subchondral bone microstructure, attenuated local immune inflammatory response in the subchondral bone, and reduced degeneration of the articular cartilage, providing in vivo functional evidence that targeting Hh signaling in Gli1 osteogenic progenitors can modulate bone homeostasis in osteoarthritis and provide a potential approach for treating TMJOA.