Drug absorption from lipid-based formulations (LBFs) in the gastrointestinal (GI) tract is the result of a series of processes, including formulation dispersion, interaction with biliary and pancreatic secretions, drug solubilisation and supersaturation, and finally intestinal permeability. Optimal formulation design is dependent on a good understanding of the limitations to, and drivers of, absorption, but for LBFs the complexity of these processes makes data interpretation complex. The current study has re-examined a previous in vitro digestion–in situ perfusion model to increase physiological relevance and has used this model to examine drug absorption from LBFs. The composition of rat bile and jejunal fluid was also characterised to identify in vivo-relevant conditions. Digestion was initiated using rat bile/pancreatic fluid and the formulation and digestive enzymes mixed immediately prior to entry into the jejunum (allowing dilution/digestion to occur at the absorptive site). These conditions were employed to study drug absorption from LBFs of high (fenofibrate, FFB) and low (saquinavir, SQV) permeability compounds. The impact of polymeric precipitation inhibitors (PPIs) was also evaluated. For FFB, supersaturation, initiated by formulation interaction with biliary/pancreatic fluids, appeared to drive absorption and the addition of the PPIs poly(glycidyl methacrylate) (PPGAE) and hydroxypropylmethyl cellulose (HPMC), reduced drug precipitation, increased FFB supersaturation and increased absorption from a Type IV LBF of FFB. For a Type IIIB LBF however, PPIs were ineffective at increasing absorption. The impact of PPIs on the absorption of a less permeable drug, SQV, was similarly evaluated and again drug absorption appeared to be related to the extent of supersaturation, although in this case PPI were unable to promote absorption. For both FFB and SQV, drug absorption patterns obtained with the in vitro digestion–in situ perfusion mode, correlated well with in vitro supersaturation data and in vivo drug exposure data from oral bioavailability studies. The data are consistent with a mode of drug absorption where rapid dilution of LBFs with biliary and pancreatic secretions at the absorptive site in the upper small intestine drives transient supersaturation, that supersaturation is a significant driver of drug absorption for both low and high permeability drugs, and that PPIs delay drug precipitation, enhance supersaturation and promote drug absorption in a drug and formulation specific manner.