The therapeutic effects of the Sonic hedgehog (Shh) have been difficult to evaluate because of its relatively short serum half‐life. To address this issue polyethylene glycol modification (PEGylation) was investigated as an approach to improve systemic exposure. Shh was PEGylated by a targeted approach using cysteines that were engineered into the protein by site‐directed mutagenesis as the sites of attachment. Sixteen different versions of the protein containing one, two, three, or four sites of attachment were characterized. Two forms were selected for extensive testing in animals, Shh A192C, which provided a single site for PEGylation, and Shh A192C/N91C, which provided two sites. The PEGylated proteins were evaluated for reaction specificity by SDS‐PAGE and peptide mapping, in vitro potency, pharmacokinetic and pharmacodynamic properties, and efficacy in a sciatic nerve injury model. Targeted PEGylation was highly selective for the engineered cysteines and had no deleterious effect on Shh function in vitro. Systemic clearance values in rats decreased from 117.4 mL/h/kg for unmodified Shh to 29.4 mL/h/kg for mono‐PEGylated Shh A192C that was modified with 20 kDa PEG‐maleimide and to 2.5 mL/h/kg for di‐PEGylated Shh A192C/N91C modified with 2, 20 kDa PEG vinylsulfone adducts. Serum half‐life increased from 1 h for unmodified Shh to 7.0 and 12.6 h for the mono‐ and di‐PEGylated products. These changes in clearance and half‐life resulted in higher serum levels of Shh in the PEG–Shh‐treated animals. In Ptc‐LacZ knock‐in mice expressing lacZ under regulation of the Shh receptor Patched, about a 10‐fold lower dose of PEG‐Shh was needed to induce β‐galactosidase than for the unmodified protein. Therapeutic treatment of mice with PEG‐Shh enhanced the regeneration of injured sciatic nerves. These studies demonstrate that targeted PEGylation greatly alters the pharmacokinetic and pharmacodynamic properties of Shh, resulting in a form with improved pharmaceutical properties.