When Mireille Gingras made her first trip to China six years ago, Xian Ping Lu was exactly the sort of person she was hoping to meet, and the company he had founded -- Chipscreen Biosciences -- just the sort she wanted to do business with. She just hadn't been sure they existed.

The Montreal-born neurobiologist had started her own San Diego consulting firm, HUYA Bioscience, which tried to help Big Pharma and biotech firms latch on to promising early-stage drug developments across the globe.

China hadn't been on her radar back then. For the pharmaceutical and biotech industries -- just like toys or consumer electronics -- China was (and to a large extent still is) a source of inexpensive products that can be sold, as Wal-Mart (WMT) might put it, "for everyday low prices." China has been an increasing source of generic drug development for pharma, but not the kind of research-intensive, expensive-to-develop medicines that are the stuff of patents and high profit margins. "People didn't think there was anything happening there back then," Gingras says.

But China over the past 30 years has proved one thing above all: It doesn't stand still. What was true five years ago -- that there is no innovation, that it's a knock-off economy in a high-tech world -- is less true today. For the past decade Beijing has made no secret of its intention to create a competitive biosciences industry: It has thrown billions of dollars into trying to develop the new sector -- $12 billion alone for drug development in the past five years, according to China Bio, a San Diego-based consulting firm.

Gingras, meanwhile, was betting that there is a role for nimble Western companies -- and not just pharma giants -- to take advantage of a fledgling industry in China. After just her first trip, says Gingras, "I thought it possible that a wave of innovation was coming. There were a lot of very bright people in the field, many of whom had worked at universities or companies in the West and had returned to China. I thought it might just be possible to get out in front of that wave."

Xian Ping Lu was one of those returnees. He had gotten his doctorate in molecular biology at the Peking Medical College, then headed for balmier climes: He did postgraduate work at the University of California at San Diego and then joined the famed Burnham Institute, a cancer research center in nearby La Jolla. In 1995 he and a colleague started a small company doing research into skin disease -- a firm that eventually became a wholly owned subsidiary of Galderma, one of the leading firms in the world devoted to dermatology. He was still running that company after selling it to Galderma when the growth, and the ambition, of his home country intervened.

Lu got a call from a former colleague then teaching at Tsinghua University in Beijing -- considered the MIT of China. "You really should come back," his friend told him. "There's a lot happening here." In the fall of 2000 he made up his mind to return, taking a teaching post at Tsinghua, but that was only a way station. Lu persuaded five Chinese colleagues still working in the U.S. to join him in Beijing and then set out to raise venture capital to fund a company that he would start. Some of the 50 million renminbi (about $7.5 million in today's dollars) he eventually managed to drum up by the end of 2001 came from venture capital funds run by the city governments in Beijing and neighboring Tianjin. Part of it came from private venture capitalists.

But the process was a slog -- "very bureaucratic," he says, not like California -- so he and his colleagues decided they'd locate their new company in Shenzhen, the birthplace of China's economic miracle, just across the border from Hong Kong. "We knew we could not be dependent on the government. We needed to be where there was a thriving market economy," says Lu. Chipscreen Biosciences -- a company whose goal was to develop small-molecule therapeutics (think Genzyme (GENZ)) to treat a variety of diseases, including cancer -- opened its doors in late 2001.

Mireille Gingras, meanwhile, had decided to go all in with China. She raised some money and started a new company, HUYA, which would be devoted to helping bring innovative therapies out of China into the U.S. for clinical development. She began spending much of her time in China, trying to establish relationships with leading pharmaceutical companies, government research institutes, and university laboratories. She was nothing if not persistent, attending every industry conference in China she could get into, trying to make contacts with as many Chinese biotech researchers that she could. In 2006 she and Lu had a chance meeting at an international biotech conference.

By then Lu and his team's intellectual pedigree had attracted the attention of several global pharma giants. "But we found that those discussions went very slowly," Lu says. "Lots of [Big Pharma] people still have doubts as to whether Chinese biotech firms can innovate. They, for the most part, are still looking for copycat generics and manufacturing cost savings. That's not us, and it was very frustrating."

Gingras's HUYA, by contrast, "had one goal," Lu says: "to be the first to identify innovative therapies in China and to look at partnership and distribution globally. It fit very well with what we wanted to do." It also helped that Lu liked Gingras, who can be brash and has a sense of humor that Lu acknowledges "can be a little loopy." After their first few meetings she converted Lu's Chinese given name -- Xian Ping -- into an English sound-alike: She called him "Champagne" Lu, and has ever since.

HUYA and Chipscreen agreed to try to bring a new anti-ovarian cancer drug the Chinese firm had developed into clinical trials in the U.S. Testing in China, Gingras says, has shown the compound to be "potentially safer and more efficacious than other drugs in its class" currently on the market in the developed world. The key gatekeeper is the U.S. Food and Drug Administration. China, because of scandals like the one surrounding tainted ingredients in heparin, a popular blood thinner sold worldwide by several giant firms, has a dubious reputation for pharmaceutical safety. "And, honestly, it wasn't clear how the FDA would react," Gingras says, when HUYA brought Chipscreen's anticancer drug to it. HUYA presented the FDA with all the testing and the results that had taken place in China, and the U.S. regulator declared it sound. Late last year it won FDA approval to begin clinical trials on human patients in the U.S.

It was a validation of the HUYA business model. HUYA does not seek to take drugs like the anticancer agent to market itself; its involvement will be only through the second phase of testing for new drugs. (Once the initial safety of a drug has been confirmed in Phase I, Phase II trials, designed to assess how well the drug works, are performed on larger groups -- 20 to 300 people.) HUYA monetizes its investment by then licensing the drug -- assuming it proves efficacious -- to a Big Pharma or biotech company for sale outside of China.

For Chipscreen the allure is obvious: It gives a relatively small Chinese firm global reach. HUYA will oversee the Phase I testing in the U.S., and late last month Gingras announced an agreement with Quintiles Transnational in Research Triangle, N.C., which will co-develop the Chipscreen drug internationally.

Not everyone in the VC-biotech world was convinced that the HUYA model would work. Despite China's determination to nurture a homegrown, innovative biotech industry over the past decade, it has not, to date anyway, had a lot to show for it. Truly innovative drugs -- an anticholera vaccine that can be taken orally was developed in China two years ago, for example -- have been few and far between. Both Gingras and Lu believe it's "only a matter of time," as the HUYA CEO says -- and maybe not that much time.

She now monitors the work being done at no less than 54 Chinese institutes and universities, and believes she has indeed gotten out in front of a coming wave of innovation. HUYA has more than 3,000 drugs in its relationship pipeline in China. "That's an enormous number," says Dennis Gillings, CEO of Quintiles, for a country that over the past few years has had few truly innovative treatments come to market.

Returnees like Lu are helping drive the wave. His Chipscreen now employs 55 scientists in its research and development unit, and the anticancer drug they've produced is indeed an early test of Gingras's thesis; if it makes it successfully through trials in the U.S. and Europe -- as it already has in China -- she and Champagne Lu will be toasting each other with the bubbly.