They "spool together" the chip version of the important cells in say, a lung, and see what impact a potential drug has on those functions.
At the moment, the FDA does not consider this sufficient to decide if a drug warrants human testing, but it allows pharmcos to rule out large numbers of compounds internally, saving time, not to mention rats.
Merck is an early adopter, working hard on feasibility of concept. They are trying to create 10 organs and see how they interact in the presences of certain drugs.
In the case of the "lung on a chip," researchers can make the thin silicone rubber layer go in and out and let air anf fluid pass.
This may work better, when perfected, that the rat-based system. For one thing, rats don't get asthma. It's a human disease. So some medications based on rats has not worked in humans.
The chip might produce better results.
Pretty cool? The rats are excited.