Embryonic stem cells (ESCs) will become a source of models for a wide range of adult differentiated cells, providing that reliable protocols for directed differentiation can be established. Stem-cell technology has the potential to revolutionize drug discovery, making models available for primary screens, secondary pharmacology, safety pharmacology, metabolic profiling and toxicity evaluation. Models of differentiated cells that are derived from mouse ESCs are already in use in drug discovery, and are beginning to find uses in high-throughput screens. Before analogous human models can be obtained in adequate numbers, reliable methods for the expansion of human ESC cultures will be needed. For applications in drug discovery, involving either species, protocols for directed differentiation will need to be robust and affordable. Here, we explore current challenges and future opportunities in relation to the use of stem-cell technology in drug discovery, and address the use of both mouse and human models.