All Hedgehog morphogens are released from producing cells, despite being synthesized as N- and C-terminally lipidated molecules, a modification that firmly tethers them to the cell membrane. We have previously shown that proteolytic removal of both lipidated peptides, called shedding, releases bioactive Sonic hedgehog (Shh) morphogens from the surface of transfected Bosc23 cells. Using in vivo knockdown together with in vitro cell culture studies, we now show that glypican heparan sulfate proteoglycans regulate this process, through their heparan sulfate chains, in a cell autonomous manner. Heparan sulfate specifically modifies Shh processing at the cell surface, and purified glycosaminoglycans enhance the proteolytic removal of N- and C-terminal Shh peptides under cell-free conditions. The most likely explanation for these observations is direct Shh processing in the extracellular compartment, suggesting that heparan sulfate acts as a scaffold or activator for Shh ligands and the factors required for their turnover. We also show that purified heparan sulfate isolated from specific cell types and tissues mediates the release of bioactive Shh from pancreatic cancer cells, revealing a previously unknown regulatory role for these versatile molecules in a pathological context.