OBJECTIVE: To explore the mechanism of action and structural effects of MM-II, a dispersion of "empty" multilamellar large liposomes composed of dimyristoyl phosphatidylcholine (DMPC) and dipalmitoyl phosphatidylcholine (DPPC), which durably reduced pain in a phase 2b study in knee osteoarthritis (OA) patients. METHOD: MM-II liposomes were manufactured using a defined ratio of DMPC and DPPC, resulting in a lipid phase transition temperature range overlapping with the temperature of human OA knees. MM-II cartilage coating in the presence and absence of compression load was assessed using labeled MM-II. Lubrication of damaged cartilage by MM-II was tested in cartilage-on-glass friction tests and pin-on-disc wear tests. Knee distribution of intra-articularly injected MM-II was assessed in healthy and OA rabbit knees. Structural effects were assessed using a rat OA model comparing to DPPC liposomes, DMPC liposomes, a mixture of DPPC and DMPC liposomes, and vehicle. RESULTS: In a pin-on-disc model, MM-II reduced cartilage wear by up to 44% compared to control. MM-II liposomes bound to cartilage discs preferentially under compression load. Coating of cartilage and menisci with MM-II was also observed in both healthy and OA rabbit knees. Cartilage-bound MM-II efficiently lubricated damaged cartilage discs. In a rat OA model, MM-II demonstrated 53% reduction in tibial cartilage degeneration and the least associated mononuclear cell recruitment compared to other groups. CONCLUSIONS: Reduction in cartilage degeneration by MM-II in OA rats is likely mediated through formation of a lubricative layer at the cartilage surface, though additional mechanisms could be mediating pain reduction demonstrated in clinical trials.