Multiple interacting factors influence the uptake and diffusion of medicines which are critical to improving health. However, there is a gap in our knowledge on how regulatory policies and other national health systems attributes combine to impact on the utilisation of innovative drugs, and health system goals and objectives. Our review demonstrates that strong regulation adversely affects, access to innovation, reduces incentives for research-based firms to develop innovative products and leads to short- and long-term welfare losses. Short-term efficiency gains from reducing pharmaceutical expenditures may actually increase total healthcare costs, reduce user choice, and in some cases, adversely affect health outcomes. Decision makers need to adopt a holistic approach to policy making, and consider potential impact of regulations on the uptake and diffusion of innovations, innovation systems and health system goals.