OBJECTIVES: To define the concept of pharmaceutical innovation, examine whether it merits reward, and identify mechanisms for its incentivisation. METHODS: Whether or not a medicine is innovative dependents on its novelty and the benefits it generates. Novelty requires something new, original and perhaps ingenious and is a necessary, but not sufficient, requirement for innovation. Novel pharmaceutical attributes include: new target of pharmacological mechanism of action, new chemical structure, improved formulation, improved pharmacokinetics and efficient methods of production. Benefits depend on perspective. Whereas a patient would value health-related quality of life, life expectancy, safety and convenience, payers of healthcare (e.g. UK NHS) may legitimately value population health and cost-effectiveness. A society might additionally value non-health benefits such as attracting pharmaceutical company investment in skilled jobs, and social responsibility (e.g. environment, neglected diseases). RESULTS: An effective vaccine developed in the UK against malaria would be considered highly innovative from a societal perspective, but not from an NHS perspective, as malaria does not affect NHS patients.  CONCLUSION: Health benefits to NHS patients are already rewarded to (and in some cases beyond) the threshold for cost-effectiveness (£30,000 per QALY). There is no incentive for paying an additional premium. However, where benefits of innovation to society exceed the costs, there is an argument for reward. This should not be through price increases, but through taxation and patent laws. The Patent Box, which will decrease the corporation tax to 10% on profits from UK patents, is one such mechanism. Alternatively, a ‘value-based patenting’ scheme might vary patent duration according to the benefits achieved, as the clinical evidence matures from the time of licensing. This might benefit patients through the earlier introduction of generics when branded products are mediocre, reward genuinely innovative products, while still allowing the introduction of ‘me-toos’ to compete on price.