OBJECTIVE: To assess the cost-effectiveness of olanzapine compared with lithium in relapse prevention of bipolar I disorder.METHODS: Resource use data from a 52-week double-blind randomised controlled trial of olanzapine versus lithium (n = 431) were used to determine costs of both treatments. Resources considered were study drug, concomitant medication, hospitalisations and laboratory tests. This trial also reported relative safety and efficacy. Australian cost data were applied to the resource utilisation from the trial to estimate the overall treatment costs associated with each therapy. Study drug and concomitant medication prices were sourced from the Schedule of Pharmaceutical Benefits and E-MIMS, while national casemix costs were applied to hospitalisations. Rather than episodic costing, a mixture of fixed and marginal costs were used. Laboratory test prices were from the Medicare Benefits Schedule. RESULTS: The overall cost of therapy for olanzapine patients was A$9340 (US$6452), compared with A$9589 (US$6624) for lithium patients. Although the acquisition cost of olanzapine is greater than for lithium, the fewer (82 vs. 88) and shorter hospitalisations (15 vs. 19.7 days) associated with olanzapine relative to lithium therapy lead to this overall cost saving of A$249 (US$172). Olanzapine patients do not require laboratory tests to monitor serum lithium levels, which also contributes to the cost saving. In terms of efficacy, 8.8% (p=0.055) fewer olanzapine patients relapsed compared with lithium patients. Additionally, 13.7% (p<0.001) fewer olanzapine patients suffered manic relapse. Time to relapse analysis confirmed that benefits from olanzapine are maintained over a longer period than those of lithium. Hence, the probability of relapse diverges over time. When costs were varied in sensitivity analyses, olanzapine continued to be cost-effective. CONCLUSIONS: Olanzapine displays greater efficacy and is cost-saving compared to lithium. Hence, olanzapine represents a dominant therapeutic option. Sensitivity analysis indicated that even in extreme circumstances, olanzapine remains cost-effective.