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The mechanisms by which prolactin controls proliferation of mammary epithelial cells (MECs) and morphogenesis of the breast epithelium are poorly understood. We show that cyclin D1(-/-) MECs fail to proliferate in response to prolactin and identify IGF-2 as a downstream target of prolactin signaling that lies upstream of cyclin D1 transcription. Ectopic IGF-2 expression restores alveologenesis in prolactin receptor(-/-) epithelium. Alveologenesis is retarded in IGF-2-deficient MECs. IGF-2 and prolactin receptor mRNAs colocalize in the mammary epithelium. Prolactin induces IGF-2 mRNA and IGF-2 induces cyclin D1 protein in primary MECs. Thus, IGF-2 is a mediator of prolactin-induced alveologenesis; prolactin, IGF-2, and cyclin D1, all of which are overexpressed in breast cancers, are components of a developmental pathway in the mammary gland.