Following the diagram presented in Part 1, the Drug Discovery stage begins with the identification of a target site that is linked to a disease. (Note: some researchers refer to this as the pre-Drug Discovery stage.)
The main goal behind the Drug Discovery stage is to identify or envision a hit compound(s) that can offer some potential for activity at the target site. A hit compound(s) is uncovered from an array of resources such as: natural products, de novo, high-throughput screening, biotechnology, serendipity, searching across structural libraries, past experiences on similar targets, etc. The hit compound(s) is validated, and barring any toxicity issues, the compound is transitioned from hit to lead compound for the next stage of the development process Drug Design.
The Innovation website presents a similar description on drug development in industry. It also includes a nice movie summarizing the development.