The increasing cost of drug development together with a significant drop in the number of new drug approvals raises the need for innovative approaches for target identification and efficacy prediction. Here, we take advantage of our increasing understanding of the network-based origins of diseases to introduce a drug-disease proximity measure that quantifies the interplay between drugs targets and diseases. By correcting for the known biases of the interactome, proximity helps us uncover the therapeutic effect of drugs, as well as to distinguish palliative from effective treatments. Our analysis of 238 drugs used in 78 diseases indicates that the therapeutic effect of drugs is localized in a small network neighborhood of the disease genes and highlights efficacy issues for drugs used in Parkinson and several inflammatory disorders. Finally, network-based proximity allows us to predict novel drug-disease associations that offer unprecedented opportunities for drug repurposing and the detection of adverse effects.