Abstract: Hits, leads and drug candidates constitute three millstones in the course of drug discovery and development. The definition of drug candidates is a critical point in the value chain of drug innovation, which not only differentiates the research and development stages, but more importantly, determines the perspective and destiny of the pre-clinical and clinical studies. All outcomes from the development stage are actually attributed to the chemical structure of candidates. The quality of candidates, however, is restricted by the drug-likeness of lead compounds, which in turn is decided by the characteristics of hits. The hit-to-lead is to provide a promising and druggable structure for further development, whereas the optimization of lead compounds is a process to transform an active compound into a drug, which in essence is molecular manipulation in multi-dimensional space related to pharmacodynamic, pharmacokinetic, physico-chemical, and safety properties. This review discusses the strategic principles in hit discovery, lead identification and optimization, as well as drug candidate definition with practical examples.