The revolutionary induced pluripotent stem cell (iPSC) technology provides a new path for cell replacement therapies and drug screening. Patient-specific iPSCs and subsequent differentiated cells manifesting disease phenotypes will finally position human disease pathology at the core of drug discovery. Cells used to test the toxic effects of drugs can also be generated from normal iPSCs and provide a much more accurate and cost-effective system than many animal models. Here, we highlight the recent progress in iPSC-based cell therapy, disease modeling and drug evaluations. In addition, we discuss the use of small molecule drugs to improve the generation of iPSCs and understand the reprogramming mechanism. It is foreseeable that the interplay between iPSC technology and small molecule compounds will push forward the applications of iPSC-based therapy and screening systems in the real world and eventually revolutionize the methods used to treat diseases.