The research, published in PLOS Biology, was done in a lab, with samples containing scalp hair follicles from more than 40 male hair-transplant patients.
The researchers, from the University of Manchester, first latched onto an old immunosuppressive drug, cyclosporine A, used since the 1980s to prevent transplant organ rejection and reduce symptoms of autoimmune disease.
The scientists found that the drug reduced the activity of a protein called SFRP1, a key growth regulator that affects many tissues including hair follicles.
But because of its side effects, CsA was unsuitable as a baldness treatment.
The team went on to look for another agent that targeted SFRP1 and found that WAY-316606 was even better at suppressing the protein.
Dr Hawkshaw said the treatment could "make a real difference to people who suffer from hair loss".
What causes hair loss?
Hair loss is a daily occurrence and generally nothing to worry about. Some types are temporary and some are permanent.