Liposomal formulations have been developed to improve the therapeutic index of encapsulated drugs by altering the balance of on- and off-targeted distribution. The improved therapeutic efficacy of liposomal drugs is primarily attributed to enhanced distribution at the sites of action. The targeted distribution of liposomal drugs depends not only on the physicochemical properties of the liposomes, but also on multiple components of the biological system. Pharmacokinetic⁻pharmacodynamic (PK⁻PD) modeling has recently emerged as a useful tool with which to assess the impact of formulation- and system-specific factors on the targeted disposition and therapeutic efficacy of liposomal drugs. The use of PK⁻PD modeling to facilitate the development and regulatory reviews of generic versions of liposomal drugs recently drew the attention of the U.S. Food and Drug Administration. The present review summarizes the physiological factors that affect the targeted delivery of liposomal drugs, challenges that influence the development and regulation of liposomal drugs, and the application of PK⁻PD modeling and simulation systems to address these challenges.