UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 20-F



| |  ̈ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
| | - | ----------------------------------------------------------------------------------------------



OR



| | x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| | - | ------------------------------------------------------------------------------------



For the fiscal year
ended December 31, 2013



OR



| |  ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| | - | ----------------------------------------------------------------------------------------



OR



| |  ̈ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| | - | -------------------------------------------------------------------------------------------



Date of event requiring
this shell company report ________________



Commission file number 001-35773



|RedHill Biopharma Ltd.                                
|------------------------------------------------------
|(Exact name of Registrant as specified in its charter)
|                                                      
|N/A                                                   
|(Translation of Registrant’s name into English)       
|                                                      
|Israel                                                
|(Jurisdiction of incorporation or organization)       



|21 Ha’arba’a Street, Tel Aviv 64739, Israel                                            
|---------------------------------------------------------------------------------------
|(Address of principal executive offices)                                               
|                                                                                       
|Ori Shilo, Deputy Chief Executive Officer Finance and Operations                       
|21 Ha’arba’a Street, Tel Aviv 64739, Israel                                            
|Tel: 972-3-541-3131; Fax: 972-3-541-3144                                               
|(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)



Securities registered or to be registered
pursuant to Section 12(b) of the Act.



|Title of class                                                       |  | Name of each exchange on which registered
|-------------------------------------------------------------------- |  | -----------------------------------------
|American Depositary Shares, eachrepresenting ten Ordinary Shares (1) |  | Nasdaq Capital Market                    
|                                                                     |  |                                          
|Ordinary Shares, par value NIS 0.01 per share(2)                     |  | Nasdaq Capital Market                    



| | (1) | Evidenced by American Depositary Receipts.
| | --- | ------------------------------------------

| | (2) | Not for trading, but only in connection with the listing of the American Depositary Shares.
| | --- | -------------------------------------------------------------------------------------------



Securities
registered or to be registered pursuant to Section 12(g) of the Act:





|None            
|----------------
|(Title of Class)





Securities
for which there is a reporting obligation pursuant to Section 15(d) of the Act:



|None            
|----------------
|(Title of Class)



Indicate the number of outstanding shares
of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 64,399,692



Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.



Yes  ̈   No  x



If this report is an
annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Securities Exchange Act 1934.



Yes  ̈   No  x



Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.



x
Yes    No



Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).



Yes  ̈   No
 ̈



Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):



|Large Accelerated filer   ̈ | Accelerated filer   ̈ | Non-accelerated filer  x
|-------------------------- | -------------------- | ------------------------



Indicate by check mark
which basis of accounting the registrant has used to prepare the financial statements included in this filing:



U.S. GAAP  ̈



International Financing Reporting Standards
as issued by the International Accounting

Standards Board x

Other  ̈



If “Other”
has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has
elected to follow.



Item 17 £
Item 18 £



If this is an annual
report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).



Yes  ̈ 
 No  x



We are an “emerging
growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and, as such, may elect to
comply with certain reduced public company reporting requirements.











TABLE OF CONTENTS



|ITEM 1.       | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS                        | 4  
|------------- | ---------------------------------------------------------------------------- | ---
|ITEM 2.       | OFFER STATISTICS AND EXPECTED TIMETABLE                                      | 4  
|ITEM 3.       | KEY INFORMATION                                                              | 4  
|ITEM 4.       | INFORMATION ON THE COMPANY                                                   | 25 
|ITEM 4A.      | UNRESOLVED STAFF COMMENTS                                                    | 55 
|ITEM 5.       | OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                 | 55 
|ITEM 6.       | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                   | 64 
|ITEM 7.       | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                            | 82 
|ITEM 8.       | FINANCIAL INFORMATION                                                        | 86 
|ITEM 9.       | THE OFFER AND LISTING                                                        | 86 
|ITEM 10.      | ADDITIONAL INFORMATION                                                       | 88 
|ITEM 11.      | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 101
|ITEM 12.      | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 102
|ITEM 13.      | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                              | 104
|ITEM 14.      | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 104
|ITEM 15.      | CONTROLS AND PROCEDURES                                                      | 104
|ITEM 16.      | [RESERVED]                                                                   | 105
|ITEM 16A.     | AUDIT COMMITTEE FINANCIAL EXPERT                                             | 105
|ITEM 16B.     | CODE OF ETHICS                                                               | 105
|ITEM 16C.     | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                       | 105
|ITEM 16D.     | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.                  | 105
|ITEM 16E.     | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.      | 106
|ITEM 16F.     | CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT.                                | 106
|ITEM 16G.     | CORPORATE GOVERNANCE                                                         | 106
|ITEM 16H.     | MINE SAFETY DISCLOSURE                                                       | 107
|ITEM 17.      | FINANCIAL STATEMENTS                                                         | 107
|ITEM 18.      | FINANCIAL STATEMENTS                                                         | 107
|ITEM 19.      | EXHIBITS                                                                     | 107
|EXHIBIT INDEX | 110                                                                         



2







______________________________________________________________________________



Unless the context otherwise requires,
all references to “RedHill,” “we,” “us,” “our,” the “Company” and similar
designations refer to RedHill Biopharma Ltd. The term “NIS” refers to New Israeli Shekels, the lawful currency of the
State of Israel, the terms “dollar”, “US$” or “$” refer to U.S. dollars, the lawful currency
of the U.S. Our functional and presentation currency is the U.S. dollar. Foreign currency transactions in currencies other than
the U.S. dollar are translated in this Annual Report into U.S. dollars using exchange rates in effect at the date of the transactions.



All references to the term “therapeutic
candidates” includes both pharmaceuticals and programs related to their development, such as diagnostics and devices.



________________________________



FORWARD-LOOKING STATEMENTS



Some of the statements
under the sections entitled “Item 3. Key Information — Risk Factors,” “Item 4. Information on
the Company,” “Item 5. Operating and Financial Review and Prospects” and elsewhere in this Annual Report may
include forward looking statements. These statements involve known and unknown risks, uncertainties and other factors that may
cause our actual results, performance or achievements to be materially different from any future results, performance or achievements
expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terms including
“anticipates”, “believes”, “could”, “estimates”, “expects”, “intends”,
“may”, “plans”, “potential”, “predicts”, “projects”, “should”,
“will”, “would”, and similar expressions intended to identify forward-looking statements. Forward-looking
statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties.
In addition, the sections of this Annual Report entitled “Item 4. Information on the Company” contain information obtained
from independent industry and other sources that we have not independently verified. You should not put undue reliance on any forward-looking
statements. Unless we are required to do so under U.S. federal securities laws or other applicable laws, we do not intend to update
or revise any forward-looking statements.



Factors that could cause our actual results
to differ materially from those expressed or implied in such forward-looking statements include, but are not limited to



| | • | the initiation, timing, progress and results of our research, manufacturing, preclinical studies,
clinical trials, and other therapeutic candidate development efforts, as well as the extent and number of additional studies that
we may be required to conduct;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | our ability to advance our therapeutic candidates into clinical trials or to successfully complete
our preclinical studies or clinical trials;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------



| | • | our receipt of regulatory clarity and approvals for our therapeutic candidates, and the timing of
other regulatory filings and approvals;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------



| | • | the research, manufacturing, clinical development, commercialization, and market acceptance of our
therapeutic candidates;
| | - | --------------------------------------------------------------------------------------------------------------------------



| | • | our ability to establish and maintain corporate collaborations;
| | - | ---------------------------------------------------------------



| | • | the interpretation of the properties and characteristics of our therapeutic candidates and of the
results obtained with our therapeutic candidates in research, manufacturing, preclinical studies or clinical trials;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | the implementation of our business model, strategic plans for our business and therapeutic candidates;
| | - | ------------------------------------------------------------------------------------------------------



| | • | the scope of protection we are able to establish and maintain for intellectual property rights covering
our therapeutic candidates and our ability to operate our business without infringing the intellectual property rights of others;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | estimates of our expenses, future revenues capital requirements and our needs for additional financing;
| | - | -------------------------------------------------------------------------------------------------------



| | • | competitive companies, technologies and our industry; and
| | - | ---------------------------------------------------------



| | • | the impact of the political and security situation in Israel on our business.
| | - | -----------------------------------------------------------------------------



___________________________________



3









| | ITEM 1. | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
| | ------- | -----------------------------------------------------



Not applicable.



| | ITEM 2. | OFFER STATISTICS AND EXPECTED TIMETABLE
| | ------- | ---------------------------------------



Not applicable.



| | ITEM 3. | KEY INFORMATION
| | ------- | ---------------



| | A. | Selected Financial Data
| | -- | -----------------------



The following table sets forth our selected
financial data, which is derived from our financial statements prepared in accordance with International Financial Reporting Standards
as issued by the International Accounting Standards Board, or IFRS. We have derived the selected financial data as of December
31, 2012 and 2013 and for the years ended December 31, 2011, 2012 and 2013 from our audited financial statements included elsewhere
in this Annual Report on Form 20-F. We have derived the selected financial data as of December 31, 2009, 2010 and 2011 and for
the period from August 3, 2009 (date of incorporation) through December 31, 2009 and for the year ended December 31, 2010 from
our audited financial statements not included in this Annual Report. You should read this selected financial data in conjunction
with, and it is qualified in its entirety by, our historical financial information and other information provided in this Annual
Report including “Item 5. Operating and Financial Review and Prospects” and our financial statements and related notes
appearing elsewhere in this Annual Report.



|                                                                    |  | As of December 31                    |            |   | Period from August 3, 2009 to December 31 | 
|------------------------------------------------------------------- |  | ------------------------------------ | ---------- | - | ----------------------------------------- | 
|                                                                    |  | 2013                                 |            |   | 2012                                      | 
|                                                                    |  | (U.S. dollar in thousands) (audited) |           
|Statement of Comprehensive Loss                                     |  |                                      |            |   |                                           | 
|Revenues                                                            |  |                                      | 12         |   |                                           | 
|Research and development expenses                                   |  |                                      | (8,100     | ) |                                           | 
|General and administrative expenses                                 |  |                                      | (2,684     | ) |                                           | 
|Other income (expenses)                                             |  |                                      | -          |   |                                           | 
|Operating loss                                                      |  |                                      | (10,772    | ) |                                           | 
|Financial income                                                    |  |                                      | 158        |   |                                           | 
|Financial expenses                                                  |  |                                      | (14        | ) |                                           | 
|Financial income (expenses) – net                                   |  |                                      | 144        |   |                                           | 
|Loss and comprehensive loss                                         |  |                                      | (10,628    | ) |                                           | 
|Loss per ordinary share – basic and diluted (in U.S. dollars)       |  |                                      | (0.17      | ) |                                           | 
|Number of ordinary shares used in computing loss per ordinary share |  |                                      | 62,379,171 |   |                                           | 



4







|                                |  | As of December 31                     |        
|------------------------------- |  | ------------------------------------- | -------
|                                |  | 2013                                  |        
|                                |  | (U.S. dollars in thousands) (audited) |        
|Balance Sheet Data:             |  |                                       |        
|Cash and short term investments |  |                                       | 12,113 
|Working capital                 |  |                                       | 10,186 
|Total assets                    |  |                                       | 14,340 
|Total liabilities               |  |                                       | 2,415  
|Accumulated deficit             |  |                                       | (33,260
|Equity                          |  |                                       | 11,925 



| | B. | Capitalization and Indebtedness
| | -- | -------------------------------



Not applicable.



| | C. | Reasons for the Offer and Use of Proceeds
| | -- | -----------------------------------------



Not applicable.



| | D. | Risk Factors
| | -- | ------------



You should carefully consider the risks
we describe below, in addition to the other information set forth elsewhere in this Annual Report, including our financial statements
and the related notes beginning on page F-1, before deciding to invest in our ordinary shares or our American Depositary Shares.
These material risks could adversely impact our results of operations, possibly causing the trading price of our ordinary shares
and American Depositary Shares to decline, and you could lose all or part of your investment.



Risks Related to Our Financial Condition
and Capital Requirements



We are a clinical development stage
biopharmaceutical company with a history of operating losses. We expect to incur additional losses in the future and may never be
profitable.



We are a clinical development stage biopharmaceutical
company. Since our incorporation in 2009, we have been focused on acquiring and in-licensing therapeutic products and performing
research and development. All of our therapeutic candidates are in the clinical development stage, and none has been approved for
marketing or is being marketed or commercialized. Most of our therapeutic candidates require additional clinical trials before
we can obtain the regulatory approvals in order to initiate commercial sales. We have incurred losses since inception, principally
as a result of research and development and general administrative expenses in support of our operations. We experienced net losses
of approximately $10.6 million in 2013, $10.3 million in 2012 and $15.5 million in 2011. As of December 31, 2013, we had an accumulated
deficit of approximately $33.2 million. We may incur significant additional losses as we continue to focus our resources on prioritizing,
selecting and advancing our therapeutic candidates. Our ability to generate revenue and achieve profitability depends mainly upon
our ability, alone or with others, to successfully develop our therapeutic candidates, obtain the required regulatory approvals
in various territories and commercialize our therapeutic candidates. We may be unable to achieve any or all of these goals with
regard to our therapeutic candidates. As a result, we may never be profitable or achieve significant and/or sustained revenues.



Our limited operating history makes
it difficult to evaluate our business and prospects.



We have a limited operating history and
our operations to date have been limited primarily to acquiring and in-licensing therapeutic candidates, research and development,
raising capital and recruiting scientific and management personnel and third party partners. We have not yet demonstrated an ability
to commercialize or obtain regulatory approval for any of our therapeutic candidates. Consequently, any predictions about our future
performance may not be accurate, and you may not be able to fully assess our ability to complete development and/or commercialize
our therapeutic candidates, obtain regulatory approvals, or achieve market acceptance or favorable pricing for our therapeutic
candidates.



5







Our current working capital is not
sufficient to complete our research and development with respect to all of our therapeutic candidates. We will need to raise additional
capital to achieve our strategic objectives of acquiring, developing and commercializing therapeutic candidates, and our failure
to raise sufficient capital would significantly impair our ability to fund our operations, develop our therapeutic candidates,
attract development and/or commercial partners and retain key personnel.



We have funded our operations primarily
through public and private offerings of our securities. We plan to fund our future operations through commercialization and out-licensing
of our therapeutic candidates and raising additional capital. As of December 31, 2013, we had cash and short term investments
of approximately $12.1 million, and as of February 23, 2014, we had cash and short term investments of approximately $34.2 million.
These amounts are not sufficient to complete the research and development of all of our therapeutic candidates, and accordingly
we may need to raise additional capital in the coming year.



Our business presently generates an insignificant
amount of revenues, and given that we plan to continue expending substantial funds in research and development, including clinical
trials, we will need to raise additional capital in the future through either debt or equity financing or pursuant to development
or commercialization agreements with third parties with respect to particular therapeutic candidates. However, we cannot be certain
that we will be able to raise capital on commercially reasonable terms or at all, or that our actual cash requirements will not
be greater than anticipated. We may have difficulty raising needed capital or securing a development or commercialization partner
in the future as a result of, among other factors, our lack of revenues from commercialization of the therapeutic candidates, as
well as the inherent business risks associated with our company and present and future market conditions. In addition, global and
local economic conditions may make it more difficult for us to raise needed capital or secure a development or commercialization
partner in the future and may impact our liquidity. If we are unable to obtain future financing, we may be forced to delay, reduce
the scope of, or eliminate one or more of our research, development or commercialization programs related to our therapeutic candidates,
any of which may have material adverse effect on our business, financial condition and results of operations. Moreover, to the
extent we are able to raise capital through the issuance of debt or equity securities, it could result in substantial dilution
to existing stockholders.



Our long term capital requirements
are subject to numerous risks.



Our long term capital requirements are
expected to depend on many potential factors, including, among others:



| | · | the number of therapeutic candidates in development;
| | - | ----------------------------------------------------



| | · | the regulatory clarity and path of each of our therapeutic candidates;
| | - | ----------------------------------------------------------------------



| | · | the progress, success and cost of our clinical trials and research and development programs including
manufacturing;
| | - | --------------------------------------------------------------------------------------------------------------------



| | · | the costs, timing and outcome of regulatory review and obtaining regulatory clarity and approval
of our therapeutic candidates and addressing regulatory and other issues that may arise post-approval;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the costs of enforcing our issued patents and defending intellectual property-related claims;
| | - | ---------------------------------------------------------------------------------------------



| | · | the costs of manufacturing, developing sales, marketing and distribution channels;
| | - | ----------------------------------------------------------------------------------



| | · | our ability to successfully commercialize our therapeutic candidates, including securing commercialization
agreements with third parties and favorable pricing and market share; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | our consumption of available resources more rapidly than currently anticipated, resulting in the
need for additional funding sooner than anticipated.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------



6







Risks Related to Our Business and Regulatory
Matters



If we and/or our commercialization
partners are unable to obtain U.S. Food and Drug Administration and/or other foreign regulatory authority clarity and approval
for our therapeutic candidates, we and/or our commercialization partners will be unable to commercialize our therapeutic candidates.



To date, we have not marketed, distributed
or sold any therapeutic candidate or other product. Currently, we have six therapeutic candidates in various programs and clinical
development stages, “RHB-101” for the treatment of hypertension, heart failure and left ventricular dysfunction; “RHB-102”
for the prevention of chemotherapy and radiotherapy induced nausea and vomiting and potentially for other diseases; “RHB-103”
for the treatment of acute migraine headaches; “RHB-104” for the treatment of Crohn’s disease and potentially
other diseases; “RHB-105” for the eradication of H. Pyloriinfection; and “RHB-106” for bowel preparation
prior to abdominal procedures such as surgery or colonoscopy. Our therapeutic candidates are subject to extensive governmental
laws, regulations and guidelines relating to development, clinical trials, manufacturing and commercialization of drugs. We may
not be able to obtain marketing approval for any of our therapeutic candidates in a timely manner or at all.



Any material delay in obtaining, or the
failure to obtain, required regulatory clarity and approvals will increase our costs and materially and adversely affect our ability
to generate future revenues. Any regulatory approval to market a therapeutic candidate may be subject to limitations on the indicated
uses for marketing the therapeutic candidate or may impose restrictive conditions of use, including cautionary information, thereby
limiting the size of the market for the therapeutic candidate. We also are, and will be, subject to numerous regulatory requirements
from both the U.S. Food and Drug Administration and foreign state agencies that govern the conduct of clinical trials, manufacturing
and marketing authorization, pricing and third-party reimbursement. Moreover, approval by one regulatory authority does not ensure
approval by other regulatory authorities in separate jurisdictions. Each jurisdiction may have different approval processes and
may impose additional testing, development and manufacturing requirements for our therapeutic candidates than other jurisdictions.
Additionally, the U.S. Food and Drug Administration or other foreign regulatory bodies may change their approval policies or adopt
new laws, regulations or guidelines in a manner that delays or impairs our ability to obtain the necessary regulatory approvals
to commercialize our therapeutic candidates.



Clinical trials and related non-clinical
studies may involve a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not
be predictive of future trial results. We and/or commercialization partners will not be able to commercialize our
therapeutic candidates without completing such trials.



We have limited experience in conducting
and managing the clinical trials that are required to commence commercial sales of our therapeutic candidates. Clinical trials
and related non-clinical studies are expensive, complex, can take many years and have uncertain outcomes. We cannot predict whether
we, independently or through third parties, will encounter problems with any of the completed, ongoing or planned clinical trials
that will cause delays, including suspension of the clinical trial, or delay of data analysis or release of the final report. The
clinical trials of our therapeutic candidates may take significantly longer to complete than is estimated. Failure can occur at
any stage of the testing and we may experience numerous unforeseen events during, or as a result of, the clinical trial process
that could delay or prevent commercialization of our current or future therapeutic candidates.



In connection with the clinical trials
for our therapeutic candidates and other therapeutic candidates that we may seek to develop in the future, either on our own or
through licensing or partnering agreements, we face various risks and uncertainties, including but not limited to:



| | · | delays in securing clinical investigators or trial sites for the clinical trials;
| | - | ---------------------------------------------------------------------------------

| | · | delays in receiving import or other government approvals to ensure appropriate drug supply;
| | - | -------------------------------------------------------------------------------------------

| | · | delays in obtaining institutional review board and other regulatory approvals to commence a clinical
trial;
| | - | -----------------------------------------------------------------------------------------------------------



| | · | negative or inconclusive results from clinical trials;
| | - | ------------------------------------------------------

| | · | the U.S. Food and Drug Administration
or other foreign regulatory authorities may disagree with the number, design, size, conduct or implementation of our clinical studies;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | the U.S. Food and Drug Administration
or other foreign regulatory authorities may require us to conduct additional clinical trials and/or studies;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------

| | · | an inability to monitor patients adequately during or after treatment;
| | - | ----------------------------------------------------------------------

| | · | problems with investigator or patient compliance with the trial protocols;
| | - | --------------------------------------------------------------------------



7







| | · | a therapeutic candidate may not prove safe or efficacious; there may be unexpected or even serious
adverse events and side effects from the use of a therapeutic product;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | the results with respect to any therapeutic candidate may not confirm the positive results from
earlier preclinical studies or clinical trials;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------

| | · | the results may not meet the level of statistical significance required by the U.S. Food and Drug
Administration or other foreign regulatory authorities;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | the results will justify only limited and/or restrictive uses, including the inclusion of warnings
and contraindications, which could significantly limit the marketability and profitability of the therapeutic candidate;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | the clinical trials may be delayed or not completed due to the failure to recruit suitable candidates
or if there is a lower rate of suitable candidates than anticipated or if there is a delay in recruiting suitable candidates; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | changes to the current regulatory requirements related to clinical trials which can delay, hinder
or lead to unexpected costs in connection with our receiving the applicable regulatory approvals.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



A number of companies in the pharmaceutical
and biotechnology industries, including those with greater resources and experience than us, have suffered significant setbacks
in advanced clinical trials, even after seeing promising results in earlier clinical trials. As such, despite the results reported
in earlier clinical trials of our therapeutic candidates, we do not know if the clinical trials we conduct will demonstrate adequate
efficacy and safety sufficient to obtain regulatory approval to market our therapeutic candidates. If any of the clinical trials
of any therapeutic candidate do not produce favorable results, our ability to obtain regulatory approval for the therapeutic candidate
may be adversely impacted, which will have a material adverse effect on our business, financial condition and results of operations.



If we do not establish collaborations
for our therapeutic candidates or otherwise raise substantial additional capital, we will likely need to alter our development
and any commercialization plans.



Our drug development programs and the potential
commercialization of our therapeutic candidates will require additional cash to fund expenses. As such, our strategy includes selectively
partnering or collaborating with multiple pharmaceutical and biotechnology companies to assist us in furthering development and/or
potential commercialization of our therapeutic candidates, in some or all jurisdictions. Although we are currently aware of numerous
potential third party partners for the development or commercialization of our therapeutic candidates, we may not be successful
in entering into new collaborations with third parties on acceptable terms, or at all. In addition, if we fail to negotiate and
maintain suitable development and/or commercialization agreements, we may have to limit the size or scope of our activities or
we may have to delay one or more of our development or commercialization programs. Any failure to enter into development or commercialization
agreements with respect to the development, marketing and commercialization of any therapeutic candidate or failure to develop,
market and commercialize such therapeutic candidate independently will have an adverse effect on our business, financial condition
and results of operation.



Any collaborative arrangements that
we establish may not be successful or we may otherwise not realize the anticipated benefits from these collaborations. We do not
control third parties with whom we have or may have collaborative arrangements, and we rely on them to achieve results which may
be significant to us. In addition, any future collaboration arrangements may place the development and commercialization of our
therapeutic candidates outside our control, may require us to relinquish important rights or may otherwise be on terms unfavorable
to us.



Each of our
collaborative arrangements requires us to rely on external consultants, advisors, and experts for assistance in several key functions,
including clinical development, manufacturing, regulatory, market research, intellectual property and commercialization. We do
not control these third parties, but we rely on them to achieve results which may be significant to us. Relying upon collaborative
arrangements to develop and commercialize our therapeutic candidates subjects us to a number of risks, including but
not limited to:



| | · | we may not be able to control the amount and timing of resources that our collaborators may devote
to our therapeutic candidates;
| | - | ---------------------------------------------------------------------------------------------------------------------------------

| | · | should a collaborator fail to comply with applicable laws, rules, or regulations when performing
services for us, we could be held liable for such violations;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | our collaborators may experience financial difficulties or changes in business focus;
| | - | -------------------------------------------------------------------------------------

| | · | our collaborators partners may fail to secure adequate commercial supplies of our therapeutic candidates
upon marketing approval, if at all;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------

| | · | our collaborators partners may have a shortage of qualified personnel;
| | - | ----------------------------------------------------------------------

| | · | we may be required to relinquish important rights, such as marketing and distribution rights;
| | - | ---------------------------------------------------------------------------------------------



8







| | · | business combinations or significant changes in a collaborator’s business strategy may adversely
affect a collaborator’s willingness or ability to complete its obligations under any arrangement;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | under certain circumstances, a collaborator could move forward with a competing therapeutic candidate
developed either independently or in collaboration with others, including our competitors; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | collaborative arrangements are often terminated or allowed to expire, which could delay the development
and may increase the cost of developing our therapeutic candidates.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



If any of these scenarios materialize,
they could have adverse effect on our business, financial condition or results of operations.



We rely on third parties to conduct
our clinical trials and related non-clinical studies, and those third parties may not perform satisfactorily, including, but not
limited to, failing to meet established deadlines for the completion of such clinical trials.



We do not have the ability to independently
conduct clinical trials and related non-clinical studies for our product candidates, and we rely on third parties, such as contract
research organizations, medical institutions, contract laboratories, development and commercialization partners, clinical investigators
and independent study monitors to perform this function. Our reliance on these third parties for clinical development activities
reduces our control over these activities. Furthermore, these third parties may also have relationships with other entities, some
of which may be our competitors. Although we have, in the ordinary course of business, entered into agreements with such third
parties, we continue to be responsible for confirming that each of our clinical trials is conducted in accordance with its general
investigational plan and protocol. Moreover, the U.S. Food and Drug Administration requires us to comply with regulations and standards,
commonly referred to as good clinical practices, for conducting, recording and reporting the results of clinical trials to assure
that data and reported results are credible and accurate and that the trial participants are adequately protected. Our reliance
on third parties does not relieve us of these responsibilities and requirements. To date, we believe our contract research organizations
and other similar entities with which we are working have performed well. However, if these third parties do not successfully carry
out their contractual duties or meet expected deadlines, we may be required to replace them. Although we believe that there are
a number of other third-party contractors we could engage to continue these activities, it may result in a delay of the affected
trial and additional costs. Accordingly, we may be delayed in obtaining regulatory approvals for our therapeutic candidates and
may be delayed in our efforts to successfully commercialize our therapeutic candidates for targeted diseases.



In addition, our ability to bring our therapeutic
candidates to market depends on the quality and integrity of data that we present to regulatory authorities in order to obtain
marketing authorizations. Although we attempt to audit and control the quality of third party data, we cannot guarantee the authenticity
or accuracy of such data, nor can we be certain that such data has not been fraudulently generated.



If third parties do not manufacture
our therapeutic candidates in sufficient quantities, in the required timeframe, and at an acceptable cost, clinical development
and commercialization of our therapeutic candidates would be delayed.



We do not currently own or operate manufacturing
facilities, and we rely, and expect to continue to rely, on third parties to manufacture clinical and commercial quantities of
our therapeutic candidates. Our reliance on third parties includes our reliance on them for quality assurance related to regulatory
compliance. Our current and anticipated future reliance upon others for the manufacture of our therapeutic candidates may adversely
affect our future profit margins, if any, and our ability to develop therapeutic candidates and commercialize any therapeutic candidates
on a timely and competitive basis.



We may not be able to maintain our existing
or future third party manufacturing arrangements on acceptable terms, if at all. If for some reason our manufacturers do not perform
as agreed or expected, we may be required to replace them. Although we are not substantially dependent upon our existing manufacturing
agreements since we could replace them with other third party manufacturers, we may incur added costs and delays in identifying,
engaging, qualifying and training any such replacements.



In October 2012, we and our clinical manufacturer
for RHB-104 mutually terminated our relationship after we concluded that another manufacturer would be better suited to conduct
the scale up required to produce our clinical trial material in sufficient quantities and fulfill our timeline. It is possible
that in the future we may be required to terminate other third party manufacturers, which may cause us to incur additional costs
or delays.



9







We rely on third party contract vendors
to manufacture and supply us with high quality API, or active pharmaceutical ingredients, in the quantities we require on a timely
basis.



We currently do not manufacture any API
ourselves. Instead, we rely on third-party vendors for the manufacture and supply of our APIs that are used to formulate our therapeutic
candidates. While there are many potential API suppliers in the market, if these suppliers are incapable or unwilling to meet our
current or future needs on acceptable terms or at all, we could experience a delay in conducting additional clinical trials of
our therapeutic candidates and incur additional costs.



While there may be several alternative
suppliers of API in the market, we have not conducted extensive investigations into the quality or availability of their APIs.
As a result, we can provide no assurances that supply sources will not be interrupted from time to time. Changing API suppliers
or finding and qualifying new API suppliers can be costly and take a significant amount of time. Many APIs require significant
lead time to manufacture. There can also be challenges in maintaining similar quality or technical standards from one manufacturing
batch to the next.



If we are not able to find stable, affordable,
high quality, or reliable supplies of our API, we may not be able to produce enough supplies of our therapeutic candidates, which
could affect our business, financial condition or results of operation.



We anticipate continued reliance
on third-party manufacturers if we are successful in obtaining marketing approval from the U.S. Food and Drug Administration and
other regulatory agencies for any of our therapeutic candidates.



To date, our therapeutic candidates have
been manufactured in relatively small quantities for preclinical testing and clinical trials by third-party manufacturers. If the
U.S. Food and Drug Administration or other regulatory agencies approve any of our therapeutic candidates for commercial sale, we
expect that we would continue to rely, at least initially, on third-party manufacturers to produce commercial quantities of our
approved therapeutic candidates. These manufacturers may not be able to successfully increase the manufacturing capacity for any
of our approved therapeutic candidates in a timely or economic manner, or at all. Significant scale-up of manufacturing may require
additional validation studies, which the U.S. Food and Drug Administration must review and approve. If they are unable to successfully
increase the manufacturing capacity for a therapeutic candidate, or we are unable to establish our own manufacturing capabilities,
the commercial launch of any approved products may be delayed or there may be a shortage in supply.



We and our third-party manufacturers
are, and will be, subject to regulations of the U.S. Food and Drug Administration and other foreign regulatory authorities.



We and our contract manufacturers are,
and will be, required to adhere to laws, regulations and guidelines of the U.S. Food and Drug Administration or other foreign regulatory
authorities setting forth current good manufacturing practices. These laws, regulations and guidelines cover all aspects of the
manufacturing, testing, quality control and recordkeeping relating to our therapeutic candidates. We and our manufacturers may
not be able to comply with applicable laws, regulations and guidelines. We and our manufacturers are and will be subject to unannounced
inspections by the U.S. Food and Drug Administration, state regulators and similar foreign regulatory authorities outside the U.S.
Our failure, or the failure of our third party manufacturers, to comply with applicable laws, regulations and guidelines could
result in the imposition of sanctions on us, including fines, injunctions, civil penalties, failure of regulatory authorities to
grant marketing approval of our therapeutic candidates, delays, suspension or withdrawal of approvals, license revocation, seizures
or recalls of our therapeutic candidates, operating restrictions and criminal prosecutions, any of which could significantly and
adversely affect regulatory approval and supplies of our therapeutic candidates, and materially and adversely affect our business,
financial condition and results of operations.



Even if we obtain regulatory approvals,
our therapeutic candidates will be subject to ongoing regulatory review. If we fail to comply with continuing U.S. and applicable
foreign laws, regulations and guidelines, we could lose those approvals, and our business would be seriously harmed.



Even if our therapeutic candidates receive
regulatory approval, we or our commercialization partners, as applicable, will be subject to ongoing reporting obligations, including
pharmacovigilance, and the therapeutic candidates and the manufacturing operations will be subject to continuing regulatory review,
including inspections by the U.S. Food and Drug Administration or other foreign regulatory authorities. The results of this ongoing
review may result in the withdrawal of a therapeutic candidate from the market, the interruption of the manufacturing operations
and/or the imposition of labeling and/or marketing limitations. Since many more patients are exposed to drugs following their marketing
approval, serious but infrequent adverse reactions that were not observed in clinical trials may be observed during the commercial
marketing of the therapeutic candidate. In addition, the manufacturer and the manufacturing facilities that we or our commercialization
partners use to produce any therapeutic candidate will be subject to periodic review and inspection by the U.S. Food and Drug Administration
and other foreign regulatory authorities. Later discovery of previously unknown problems with any therapeutic candidate, manufacturer
or manufacturing process, or failure to comply with rules and regulatory requirements, may result in actions, including but not
limited to the following:



10







| | · | restrictions on such therapeutic candidate, manufacturer or manufacturing process;
| | - | ----------------------------------------------------------------------------------

| | · | warning letters from the U.S. Food and Drug Administration or other foreign regulatory authorities;
| | - | ---------------------------------------------------------------------------------------------------

| | · | withdrawal of the therapeutic candidate from the market;
| | - | --------------------------------------------------------

| | · | suspension or withdrawal of regulatory approvals;
| | - | -------------------------------------------------

| | · | refusal to approve pending applications or supplements to approved applications that we or our
commercialization partners submit;
| | - | ---------------------------------------------------------------------------------------------------------------------------------

| | · | voluntary or mandatory recall;
| | - | ------------------------------

| | · | fines;
| | - | ------

| | · | refusal to permit the import or export of our therapeutic candidates;
| | - | ---------------------------------------------------------------------

| | · | product seizure or detentions;
| | - | ------------------------------

| | · | injunctions or the imposition of civil or criminal penalties;
| | - | -------------------------------------------------------------

| | · | adverse publicity; or
| | - | ---------------------

| | · | if we, or our commercialization partners, suppliers, third party contractors or clinical investigators
are slow to adapt, or are unable to adapt, to changes in existing regulatory requirements or the adoption of new regulatory requirements
or policies, we or our commercialization partners may lose marketing approval for any of our therapeutic candidates if any of our
therapeutic candidates are approved, resulting in decreased or lost revenue from milestones, product sales or royalties.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Modifications to our therapeutic
candidates, or to any other therapeutic candidates that we may develop in the future, may require new regulatory clearances or
approvals or may require us or our development and/or commercialization partners, as applicable, to recall or cease marketing these
therapeutic candidates until clearances are obtained.



Modifications to our therapeutic candidates,
after they have been approved for marketing, if at all, or to any other pharmaceutical product or medical device that we may develop
in the future, may require new regulatory clearance or approvals, and, if necessitated by a problem with a marketed product, may
result in the recall or suspension of marketing of the previously approved and marketed product until clearances or approvals of
the modified product are obtained. The U.S. Food and Drug Administration and other foreign regulatory authorities require pharmaceutical
products and device manufacturers to initially make and document a determination of whether or not a modification requires a new
approval, supplement or clearance. A manufacturer may determine in conformity with applicable laws, regulations and guidelines
that a modification may be implemented without pre-clearance by the U.S. Food and Drug Administration or other foreign regulatory
authorities; however, the U.S. Food and Drug Administration or other foreign regulatory authorities can review a manufacturer’s
decision and may disagree. The U.S. Food and Drug Administration or other foreign regulatory authorities may also on their own
initiative determine that a new clearance or approval is required. If the U.S. Food and Drug Administration or other foreign regulatory
authorities require new clearances or approvals of any pharmaceutical product for which we or our development and/or commercialization
partners previously received marketing approval, we or our development and/or commercialization partners may be required to recall
such therapeutic candidate and to stop marketing the therapeutic candidate as modified, which could require us or our development
and/or commercialization partners to redesign the therapeutic candidate and cause a material adverse effect on our business, financial
condition and results of operations.



We depend on our ability to identify
and in-license or acquire therapeutic candidates to achieve commercial success.



Our six therapeutic candidates were all
acquired by us or licensed to us by third parties. We evaluate internally and with external consultants each therapeutic candidate.
However, there can be no assurance as to our ability to accurately or consistently identify therapeutic candidates that are likely
to achieve commercial success. In addition, even if we identify additional therapeutic candidates that are likely to achieve commercial
success, there can be no assurance as to our ability to in-license or acquire such therapeutic candidates under favorable terms
or at all.



If we cannot meet our obligations
under our acquisition or in-license agreements or we cannot renegotiate our obligations, or if other events occur that are not
within our control such as bankruptcy of a licensor, we could lose the rights to our therapeutic candidates and/or experience delays
in developing our therapeutic candidates, or incur additional costs, which could have a material adverse effect on our business.



11







We acquired our rights to three of our
therapeutic candidates, RHB-104, RHB-105 and RHB-106, from a third party pursuant to an asset and purchase agreement. In addition,
we in-licensed our rights to three other therapeutic candidates, RHB-101, RHB-102, and RHB-103 pursuant to license agreements in
which we received exclusive worldwide perpetual licenses to certain patent rights and know-how related to these therapeutic candidates.
These agreements require us to make payments and satisfy various performance obligations in order to maintain our rights and licenses
with respect to these therapeutic candidates. If we do not meet our obligations under these agreements, or if other events occur
that are not within our control such as the bankruptcy of a licensor, we could lose the rights to our therapeutic candidates, experience
delays in developing our therapeutic candidates and/or incur additional costs, any of which could have a material adverse effect
on our business, financial condition and results of operations. In addition, our agreement with IntelGenx Corp. requires us to
renegotiate certain provisions of the contract in the event the agreed-to budget is exceeded by a certain amount. In the event
we are required to renegotiate this agreement, there is no guarantee that we will agree upon new terms promptly, or at all, which
could delay the development of RHB-103.



In addition,
we are responsible for the cost of filing and prosecuting certain patent applications and maintaining certain issued patents licensed
to us. If we do not meet our obligations under these agreements in a timely manner and/or
if other events occur that are not within our control, such as the bankruptcy of a licensor, which impacts our ability to prosecute
certain patent applications and maintain certain issued patents licensed to us, we could lose the rights to our therapeutic candidates
which could have a material adverse effect on our business, financial condition and results of operations.



If we are not able to secure patents
related to RHB-102, our ability to commercialize RHB-102 or enter into commercialization agreements with potential partners with
respect to this product may be adversely affected.



The party from whom we originally licensed
RHB-102, SCOLR Pharma Inc., a U.S. publicly traded company, announced during 2013 that it had ceased business operations. Under
the terms of the license agreement between RedHill and SCOLR Pharma, should SCOLR Pharma file for bankruptcy, RedHill has the protection
afforded to the licensee under the United States Bankruptcy Code. Moreover, RedHill has independently filed with the USPTO a provisional
patent application, owned by RedHill, covering the formulation of RHB-102.



We are taking active steps to further safeguard
our rights under the RHB-102 license agreement; however, there is no guarantee that these steps will be successful. SCOLR Pharma
itself is a licensee of relevant patents from other third parties, and it is possible that due to SCOLR Pharma's financial condition
that it may be or become in breach of obligations to such third party licensors, which may adversely affect our rights in RHB-102.
We are continuing the development program of RHB-102 as planned, and we are not expecting any delays in such program resulting
from SCOLR Pharma's decision to cease operations. However, any complications in our ability to secure patents related to RHB-102
could harm our ability to obtain marketing approval for RHB-102, commercialize the product or to enter into commercialization agreements
with potential partners.



Our business could suffer if we are
unable to attract and retain key employees.



The loss of the services of members of
senior management or other key personnel could delay or otherwise adversely impact the successful completion of our planned clinical
trials or the commercialization of our therapeutic candidates or otherwise affect our ability to manage our company effectively
and to carry out our business plan. These key personnel are Dror Ben-Asher, our Chief Executive Officer, and Reza Fathi, our Senior
Vice President for Research and Development. We do not maintain key-man life insurance. Although we have entered into employment
or consultancy agreements with all of the members of our senior management team, members of our senior management team may resign
at any time. High demand exists for senior management and other key personnel in the pharmaceutical industry. There can be no assurance
that we will be able to continue to retain and attract such personnel.



Our growth and success also depend on our
ability to attract and retain additional highly qualified scientific, technical, business development, marketing, managerial and
finance personnel. We experience intense competition for qualified personnel, and the existence of non-competition agreements between
prospective employees and their former employers may prevent us from hiring those individuals or subject us to liability from their
former employers. In addition, if we elect to independently commercialize any therapeutic candidate, we will need to build and
expand our marketing and sales capabilities. While we attempt to provide competitive compensation packages to attract and retain
key personnel, many of our competitors are likely to have greater resources and more experience than we have, making it difficult
for us to compete successfully for key personnel. If we cannot attract and retain sufficiently qualified technical employees on
acceptable terms, we may not be able to develop and commercialize competitive therapeutic candidates. Further, any failure to effectively
integrate new personnel could prevent us from successfully growing our company.



12







We face several risks associated
with international business.



We operate our business in multiple international
jurisdictions. Such operations could be affected by changes in foreign exchange rates, capital and exchange controls, expropriation
and other restrictive government actions, changes in intellectual property legal protections and remedies, trade regulations and
procedures and actions affecting approval, production, pricing, and marketing of, reimbursement for and access to, our therapeutic
candidates, as well as by political unrest, unstable governments and legal systems and inter-governmental disputes. Any of these
changes could adversely affect our business.



Risks Related to Our Industry



Even if our therapeutic candidates
receive regulatory approval or do not require regulatory approval, they may not become commercially viable products.



Even if our
therapeutic candidates are approved for commercialization, they may not become commercially viable products. For example, if we
or our commercialization partners receive regulatory approval to market a therapeutic candidate, approval may be subject to limitations
on the indicated uses or subject to labeling or marketing restrictions which could materially and adversely affect the marketability
and profitability of the therapeutic candidate. In addition, a new therapeutic candidate may appear promising at an early stage
of development or after clinical trials but never reach the market, or it may reach the market but not result in sufficient product
sales, if any. A therapeutic candidate may not result in commercial success for various reasons, including but
not limited to:



| | · | difficulty in large-scale manufacturing, including yield and quality;
| | - | ---------------------------------------------------------------------

| | · | low market acceptance by physicians, healthcare payors, patients and the medical community as a
result of lower demonstrated clinical safety or efficacy compared to other products, prevalence and severity of adverse side effects,
or other potential disadvantages relative to alternative treatment methods;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | insufficient or unfavorable levels of reimbursement from government or third-party payors, such
as insurance companies, health maintenance organizations and other health plan administrators;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | infringement on proprietary rights of others for which we or our commercialization partners have
not received licenses;
| | - | -----------------------------------------------------------------------------------------------------------------------

| | · | incompatibility with other therapeutic products;
| | - | ------------------------------------------------

| | · | other potential advantages of alternative treatment methods and competitive forces that may make
it more difficult for us to penetrate a particular market segment;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | ineffective marketing and distribution support;
| | - | -----------------------------------------------

| | · | lack of significant competitive advantages over existing products on the market;
| | - | --------------------------------------------------------------------------------

| | · | lack of cost-effectiveness or unfavorable pricing compared to other alternatives available on the
market; or
| | - | ------------------------------------------------------------------------------------------------------------

| | · | timing of market introduction of competitive products.
| | - | ------------------------------------------------------



Physicians, various other health care providers,
patients, payers or the medical community in general may be unwilling to accept, utilize or recommend any of our approved therapeutic
candidates. If we are unable, either on our own or through third parties, to manufacture, commercialize and market our proposed
formulations or therapeutic candidates when planned, or develop commercially viable therapeutic candidates, we may not achieve
any market acceptance or generate revenue.



The market for our therapeutic candidates
is rapidly changing and competitive, and new drug delivery mechanisms, drug delivery technologies, new drugs and new treatments
which may be developed by others could impair our ability to maintain and grow our business and remain competitive.



The pharmaceutical and biotechnology industry
is highly competitive, and we face significant competition from many pharmaceutical, biopharmaceutical and biotechnology companies
that are researching and marketing products designed to address the indications for which we are currently developing therapeutic
candidates or for which we may develop therapeutic candidates in the future. There are various other companies that currently market
and/or are in the process of developing products that address all of the indications or diseases treated by our therapeutic candidates.
For information regarding our competition, see Item 4. “Information on the Company – B. Business Overview – Our
Therapeutic Candidates.”



13







New drug delivery mechanisms, drug delivery
technologies, new drugs and new treatments that have been developed or that are in the process of being developed by others may
render our therapeutic candidates noncompetitive or obsolete, or we may be unable to keep pace with technological developments
or other market factors. Some of these technologies may have an entirely different approach or means of accomplishing similar therapeutic
effects compared to our therapeutic candidates. Technological competition from pharmaceutical and biotechnology companies, universities,
governmental entities and others is intense and is expected to increase. Many of these entities have significantly greater research
and development capabilities, human resources and budgets than we do, as well as substantially more marketing, manufacturing, financial
and managerial resources. These entities represent significant competition for us. Acquisitions of, or investments in, competing
pharmaceutical or biotechnology companies by large corporations could increase such competitors’ financial, marketing, manufacturing
and other resources.



The potential widespread acceptance of
therapies that are alternatives to ours may limit market acceptance of our formulations or therapeutic candidates, even if commercialized.
Many of our targeted diseases and conditions can also be treated by other medication or drug delivery technologies. These treatments
may be widely accepted in medical communities and have a longer history of use. The established use of these competitive drugs
may limit the potential for our therapeutic candidates to receive widespread acceptance if commercialized.



We could be adversely affected if
healthcare reform measures substantially change the market for medical care or healthcare coverage in the U.S.



On March
23, 2010, President Obama signed the “Patient Protection and Affordable Care Act” (P.L. 111-148) and on March 30, 2010,
the President signed the “Health Care and Education Reconciliation Act” (P.L. 111-152), collectively commonly referred
to as the “Healthcare Reform Law.” The Health Reform Law included a number of new rules regarding health insurance,
the provision of health care, and conditions to reimbursement for healthcare services provided to Medicare and Medicaid patients.
Through the rule making process, substantial changes are being made to the current system for paying for healthcare in the U.S.,
including changes made in order to extend medical benefits to those who currently lack insurance coverage. Extending coverage to
a large population could substantially change the structure of the health insurance system and the methodology for reimbursing
medical services and drugs. This legislation is one of the most comprehensive and significant reforms ever experienced by the U.S.
in the healthcare industry and is expected to have meaningful ramifications on tens of millions of citizens in the U.S. This legislation
is expected to impact the scope of healthcare insurance, the insurance refunds from the insurance companies and possibly also the
costs of medical products. Additionally, the Healthcare Reform Law’s provisions are
designed to encourage providers to find cost savings in their clinical operations. Pharmaceuticals represent a significant portion
of the cost of providing care. Through modified reimbursement rates and other incentives, the U.S. government is requiring that
providers identify the most cost-effective services, supplies and pharmaceuticals. This environment has caused changes in the purchasing
habits of providers and resulted in specific attention to the pricing negotiation, product selection and utilization review surrounding
pharmaceuticals. To the extent that our products are at some point reimbursable by Federal programs, this attention may result
in our products being chosen less frequently or the pricing being substantially lowered. However, at this stage, we are unable
to estimate the full extent of the direct and/or indirect impact of the new legislation on us.



These structural changes could entail modifications
to the existing system of private payors and government programs (Medicare, Medicaid and State Children’s Health Insurance
Program), creation of a government-sponsored healthcare insurance source, or some combination of both, as well as other changes.
Restructuring the coverage of medical care in the U.S. could impact the reimbursement for prescribed drugs and pharmaceuticals,
such as those we and our development and/or commercialization partners are currently developing. If reimbursement for our approved
therapeutic candidates, if any, is substantially reduced in the future, or rebate obligations associated with them are substantially
increased, our business could be materially and adversely impacted.



Extending medical benefits to those who
currently lack coverage will likely result in substantial cost to the U.S. federal government, which may force significant additional
changes to the healthcare system in the U.S. Much of the funding for expanded healthcare coverage may be sought through cost savings.
While some of these savings may come from realizing greater efficiencies in delivering care, improving the effectiveness of preventive
care and enhancing the overall quality of care, much of the cost savings may come from reducing the cost of care. Cost of care
could be reduced by decreasing the level of reimbursement for medical services or products (including those pharmaceuticals currently
being developed by us or our development and/or commercialization partners), or by restricting coverage (and, thereby, utilization)
of medical services or products. In either case, a reduction in the utilization of, or reimbursement for, any therapeutic candidate
for which we receive marketing approval in the future could have a materially adverse effect on our financial performance.



14







Several states and private entities mounted
legal challenges to the healthcare reform legislation. That litigation culminated in a decision from the U.S. Supreme Court on
July 26, 2012 that generally upheld the healthcare reform legislation as constitutional. However, the Supreme Court held that the
legislation improperly required the States to expand their Medicaid programs to cover more individuals. As a result, the States
now have a choice as to whether they will expand the numbers of individuals covered by their respective State Medicaid programs.
Some States have already indicated that they will not expand their Medicaid programs and will develop other cost saving and coverage
measures to provide care to currently uninsured residents. Many of these efforts to date have included the institution of Medicaid
managed care programs. The manner in which these cost saving measures are implemented could have a materially adverse effect on
our financial performance.



If third-party payors do not adequately
reimburse customers for any of our therapeutic candidates that are approved for marketing, they might not be purchased or used,
and our revenues and profits will not develop or increase.



Our revenues and profits will depend heavily
upon the availability of adequate reimbursement for the use of our approved therapeutic candidates, if any, from governmental or
other third-party payors, both in the U.S. and in foreign markets. Reimbursement by a third-party payor may depend upon a number
of factors, including but not limited to the third-party payor’s determination that the use of an approved therapeutic candidate
is:



| | · | a covered benefit under its health plan;
| | - | ----------------------------------------

| | · | safe, effective and medically necessary;
| | - | ----------------------------------------

| | · | appropriate for the specific patient;
| | - | -------------------------------------

| | · | cost-effective; and
| | - | -------------------

| | · | neither experimental nor investigational.
| | - | -----------------------------------------



Obtaining reimbursement approval for a
therapeutic candidate from each government or other third-party payor is a time-consuming and costly process that could require
us or our development and/or commercialization partners to provide supporting scientific, clinical and cost-effectiveness data
for the use of our therapeutic candidates to each payor. Even when a payor determines that a therapeutic candidate is eligible
for reimbursement, the payor may impose coverage limitations that preclude payment for some uses that are approved by the U.S.
Food and Drug Administration or other foreign regulatory authorities. Reimbursement rates may vary according to the use of the
therapeutic candidate and the clinical setting in which it used, may be based on payments allowed for lower-cost products that
are already reimbursed, may be incorporated into existing payments for other products or services, and may reflect budgetary constraints
and/or imperfections in Medicare, Medicaid or other data used to calculate these rates.



In the U.S., there have been, and we expect
that there will continue to be, federal and state proposals to constrain expenditures for medical products and services, which
may affect payments for our therapeutic candidates in the U.S. In addition, there is a growing emphasis on comparative effectiveness
research, both by private payors and by government agencies. To the extent other drugs or therapies are found to be more effective
than our products, payors may elect to cover such therapies in lieu of our products and/or reimburse our products at a lower rate.
We believe that legislation that reduces reimbursement for our therapeutic candidates could adversely impact how much or under
what circumstances healthcare providers will prescribe or administer our therapeutic candidates, if approved. This could materially
and adversely impact our business by reducing our ability to generate revenue, raise capital, obtain additional collaborators and
market our therapeutic candidates, if approved. At this stage, we are unable to estimate the extent of the direct and/or indirect
impact of any such federal and state proposals.



Further, the Centers for Medicare and Medicaid
Services frequently change product descriptors, coverage policies, product and service codes, payment methodologies and reimbursement
values. Third-party payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates,
and both the Centers for Medicare and Medicaid Services and other third-party payors may have sufficient market power to demand
significant price reductions.



We could be exposed to significant
drug product liability claims which could be time consuming and costly to defend, divert management attention and adversely impact
our ability to obtain and maintain insurance coverage.



The clinical trials that we conduct, and
the testing, manufacture, marketing and commercial sale of our therapeutic candidates, involve and will involve an inherent risk
that significant liability claims may be asserted against us. We currently have a product liability policy that includes coverage
for our clinical trials. Should we decide to seek additional insurance against such risks before our product sales commence, there
is a risk that such insurance will be unavailable to us, or if it can be obtained at such time, that it will be available at an
unaffordable cost. Even if we obtain insurance, it may prove inadequate to cover claims and/or litigation costs, especially in
the case of wrongful death claims. Product liability claims or other claims related to our therapeutic candidates, regardless of
their outcome, could require us to spend significant time and money in litigation or to pay significant settlement amounts or judgments.
Any successful product liability or other claim may prevent us from obtaining adequate liability insurance in the future on commercially
desirable or reasonable terms. An inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect
against potential product liability claims could prevent or inhibit the commercialization of our products and therapeutic candidates.
A product liability claim could also significantly harm our reputation and delay market acceptance of our therapeutic candidates.



15







Global economic conditions may make
it more difficult for us to commercialize our therapeutic candidates



The pharmaceutical industry, like other
industries and businesses, continues to face the effects of the challenging economic environment. Patients experiencing the effects
of the challenging economic environment, including high unemployment levels and increases in co-pays, may switch to generic products,
delay treatments, skip doses or use less effective treatments to reduce their costs. Challenging economic conditions in the U.S.
have increased the number of patients in the Medicaid program, under which sales of pharmaceuticals are subject to substantial
rebates and, in many states, to formulary restrictions limiting access to brand-name drugs. In addition, in Europe and in a number
of emerging markets there are government-mandated reductions in prices for certain pharmaceutical products, as well as government-imposed
access restrictions in certain countries. All of the aforesaid may make it more difficult for us to commercialize our therapeutic
candidates.



Our business involves risks related
to handling regulated substances which could severely affect our ability to conduct research and development of our therapeutic
candidates.



In connection
with our or our development and/or commercialization partners’ research and clinical development activities, as well as the
manufacture of materials and therapeutic candidates, we and our development and/or commercialization partners are subject to federal,
state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent
discharge, handling and disposal of certain materials, biological specimens and wastes. We and our development and/or commercialization
partners may be required to incur significant costs to comply with environmental and health and safety regulations in the future.
Our research and clinical development, as well as the activities of our manufacturing and commercialization partners, both now
and in the future, may involve the controlled use of hazardous materials, including but not limited to certain hazardous chemicals.
We cannot completely eliminate the risk of accidental contamination or injury from these materials. In the event of such an occurrence,
we could be held liable for any damages that result and any such liability could exceed our resources.



Risks Related to Intellectual Property



We
may be unable to adequately protect or enforce our rights to intellectual property, causing us to lose valuable rights. Loss of
patent rights may lead us to lose market share and anticipated profits.



Our success depends, in part, on our ability,
and the ability of our commercialization partners to obtain patent protection for our therapeutic candidates, maintain the confidentiality
of our trade secrets and know how, operate without infringing on the proprietary rights of others and prevent others from infringing
our proprietary rights.



We try to protect our proprietary position
by, among other things, filing U.S., European, and other patent applications related to our therapeutic candidates, inventions
and improvements that may be important to the continuing development of our therapeutic candidates.



Because the patent position of pharmaceutical
companies involves complex legal and factual questions, we cannot predict the validity and enforceability of patents with certainty.
Our issued patents and the issued patents of our commercialization partners may not provide us with any competitive advantages,
or may be held invalid or unenforceable as a result of legal challenges by third parties or could be circumvented. Our competitors
may also independently develop drug delivery technologies or products similar to ours or design around or otherwise circumvent
patents issued to, or licensed by, us. Thus, any patents that we own or license from others may not provide any protection against
competitors. Our pending patent applications, those we may file in the future or those we may license from third parties may not
result in patents being issued. If these patents are issued, they may not provide us with proprietary protection or competitive
advantages. The degree of future protection to be afforded by our proprietary rights is uncertain because legal means afford only
limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage.



Patent rights are territorial; thus, the
patent protection we do have will only extend to those countries in which we have issued patents. Even so, the laws of certain
countries do not protect our intellectual property rights to the same extent as do the laws of the U.S. and the European Union.
Competitors may successfully challenge our patents, produce similar drugs or products that do not infringe our patents, or produce
drugs in countries where we have not applied for patent protection or that do not respect our patents. Furthermore, it is not possible
to know the scope of claims that will be allowed in published applications and it is also not possible to know which claims of
granted patents, if any, will be deemed enforceable in a court of law.



16







After the completion of development and
registration of our patents, third parties may still manufacture and/or market therapeutic candidates in infringement of our patent
protected rights. Such manufacture and/or market of our therapeutic candidates in infringement of our patent protected rights is
likely to cause us damage and lead to a reduction in the prices of our therapeutic candidates, thereby reducing our anticipated
profits.



In addition, due to the extensive time
needed to develop, test and obtain regulatory approval for our therapeutic candidates, any patents that protect our therapeutic
candidate may expire early during commercialization. This may reduce or eliminate any market advantages that such patents may give
us. Following patent expiration, we may face increased competition through the entry of generic products into the market and a
subsequent decline in market share and profits.



In addition, in some cases we may rely
on our licensors to conduct patent prosecution, patent maintenance or patent defense on our behalf. Therefore, our ability to ensure
that these patents are properly prosecuted, maintained, or defended may be limited, which may adversely affect our rights in our
therepeutic products. Any failure by our licensors or development partners to properly conduct patent prosecution, patent maintenance
or patent defense could harm our ability to obtain approval or commercialization of the products, thereby reducing our anticipated
profits.



If we are unable to protect the confidentiality
of our trade secrets or know-how, such proprietary information may be used by others to compete against us.



In addition to filing patents, we generally
try to protect our trade secrets, know-how and technology by entering into confidentiality or non-disclosure agreements with parties
that have access to it, such as our development and/or commercialization partners, employees, contractors and consultants. We also
enter into agreements that purport to require the disclosure and assignment to us of the rights to the ideas, developments, discoveries
and inventions of our employees, advisors, research collaborators, contractors and consultants while we employ or engage them.
However, these agreements can be difficult and costly to enforce or may not provide adequate remedies. Any of these parties may
breach the confidentiality agreements and willfully or unintentionally disclose our confidential information, or our competitors
might learn of the information in some other way. The disclosure to, or independent development by, a competitor of any trade secret,
know-how or other technology not protected by a patent could materially adversely affect any competitive advantage we may have
over any such competitor.



To the extent that any of our employees,
advisors, research collaborators, contractors or consultants independently develop, or use independently developed, intellectual
property in connection with any of our projects, disputes may arise as to the proprietary rights to this type of information. If
a dispute arises with respect to any proprietary right, enforcement of our rights can be costly and unpredictable and a court may
determine that the right belongs to a third party.



Legal proceedings or third-party
claims of intellectual property infringement and other challenges may require us to spend substantial time and money and could
prevent us from developing or commercializing our therapeutic candidates.



The development, manufacture, use, offer
for sale, sale or importation of our therapeutic candidates may infringe on the claims of third-party patents or other intellectual
property rights. The nature of claims contained in unpublished patent filings around the world is unknown to us and it is not possible
to know which countries patent holders may choose for the extension of their filings under the Patent Cooperation Treaty, or other
mechanisms. We may also be subject to claims based on the actions of employees and consultants with respect to the usage or disclosure
of intellectual property learned at other employers. The cost to us of any intellectual property litigation or other infringement
proceeding, even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the costs of such
litigation or proceedings more effectively because of their substantially greater financial resources. Uncertainties resulting
from the initiation and continuation or defense of intellectual property litigation or other proceedings could have a material
adverse effect on our ability to compete in the marketplace. Intellectual property litigation and other proceedings may also absorb
significant management time. Consequently, we are unable to guarantee that we will be able to manufacture, use, offer for sale,
sell or import our therapeutic candidates in the event of an infringement action.



In the event of patent infringement claims,
or to avoid potential claims, we may choose or be required to seek a license from a third party and would most likely be required
to pay license fees or royalties or both. These licenses may not be available on acceptable terms, or at all. Even if we were able
to obtain a license, the rights may be non-exclusive, which could potentially limit our competitive advantage. Ultimately, we could
be prevented from commercializing a therapeutic candidate or be forced to cease some aspect of our business operations if, as a
result of actual or threatened patent infringement or other claims, we are unable to enter into licenses on acceptable terms. This
inability to enter into licenses could harm our business significantly.



17







We may be subject to other patent-related
litigation or proceedings that could be costly to defend and uncertain in their outcome.



In addition to infringement claims against
us, we may in the future become a party to other patent litigation or proceedings before regulatory agencies, including interference
or re-examination proceedings filed with the U.S. Patent and Trademark Office or opposition proceedings in other foreign patent
offices regarding intellectual property rights with respect to our therapeutic candidates, as well as other disputes regarding
intellectual property rights with development and/or commercialization partners, or others with whom we have contractual or other
business relationships. Post-issuance oppositions are not uncommon and we, our development and/or commercialization partners will
be required to defend these opposition procedures as a matter of course. Opposition procedures may be costly, and there is a risk
that we may not prevail which could harm our business significantly.



Risks
Related to our Ordinary Shares and American Depositary Shares



We
may be a passive foreign investment company, or PFIC, for U.S. federal income tax purposes in 2013 or in any subsequent year
which may have negative tax consequences for U.S. investors.



We will be treated as a PFIC for U.S. federal
income tax purposes in any taxable year in which either (i) at least 75% of our gross income is “passive income” or
(ii) on average at least 50% of our assets by value produce passive income or are held for the production of passive income. Based
on our estimated gross income, the average value of our gross assets, and the nature of our business, we believe that we may be
classified as a PFIC in the current taxable year and in future years. In addition, because we have valued our goodwill based on
the market value of our equity, a decrease in the price of our ordinary shares may result in our becoming a PFIC. If we are treated
as a PFIC for any taxable year during which a U.S. investor held our ordinary shares or American Depositary Shares, certain adverse
U.S. federal income tax consequences could apply to the U.S. investor. See “Item 10. Additional Information – E. Taxation
– Foreign Exchange Regulations – Passive Foreign Investment Companies.”



The market price of our ordinary
shares and our American Depositary Shares are subject to fluctuation, which could result in substantial losses by our investors.



The stock
market in general and the market price of our ordinary shares on the Tel Aviv Stock Exchange and our American Depository Shares
on The Nasdaq Capital Market in particular, are subject to fluctuation, and changes in our share price may be unrelated to our
operating performance. The market price of our ordinary shares on the Tel Aviv Stock Exchange has fluctuated in the past, and we
expect it will continue to do so. It is likely that the market price of our American Depositary Shares will likewise be subject
to wide fluctuations. The market price of our ordinary shares and American Depositary Shares are and will be subject to a number
of factors, including but not limited to:



| | · | announcements of technological innovations or new therapeutic candidates by us or others;
| | - | -----------------------------------------------------------------------------------------

| | · | announcements by us of significant acquisitions, strategic partnerships, in-licensing, out-licensing,
joint ventures or capital commitments;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------

| | · | expiration or terminations of licenses, research contracts or other development or commercialization
agreements;
| | - | ----------------------------------------------------------------------------------------------------------------

| | · | public concern as to the safety of drugs we, our development or commercialization partners or others
develop;
| | - | -------------------------------------------------------------------------------------------------------------

| | · | the volatility of market prices for shares of biotechnology companies generally;
| | - | --------------------------------------------------------------------------------

| | · | success or failure of research and development projects;
| | - | --------------------------------------------------------

| | · | departure of key personnel;
| | - | ---------------------------

| | · | developments concerning intellectual property rights or regulatory approvals;
| | - | -----------------------------------------------------------------------------

| | · | variations in our and our competitors’ results of operations;
| | - | -------------------------------------------------------------

| | · | changes in earnings estimates or recommendations by securities analysts, if our ordinary shares
or American Depositary Shares are covered by analysts;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | changes in government regulations or patent decision;
| | - | -----------------------------------------------------

| | · | developments by our development and/or commercialization partners; and
| | - | ----------------------------------------------------------------------

| | · | general market conditions and other factors, including factors unrelated to our operating performance.
| | - | ------------------------------------------------------------------------------------------------------



These factors and any corresponding price
fluctuations may materially and adversely affect the market price of our ordinary shares and result in substantial losses by our
investors.



18







Additionally, market prices for securities
of biotechnology and pharmaceutical companies historically have been very volatile. The market for these securities has from time
to time experienced significant price and volume fluctuations for reasons unrelated to the operating performance of any one company.
In the past, following periods of market volatility, shareholders have often instituted securities class action litigation. If
we were involved in securities litigation, it could have a substantial cost and divert resources and attention of management from
our business, even if we are successful.



Future sales of our ordinary shares
or American Depositary Shares could reduce the market price of our ordinary shares and American Depositary Shares.



All of our outstanding ordinary shares
are registered and available for sale in Israel. In addition, as of February 24, 2014, we had non-tradable warrants to purchase
an aggregate of 7,087,726 ordinary shares and non-tradable warrants to purchase an aggregate of 357,896 ADSs (each representing
10 ordinary shares) and options to purchase 14,735,000 ordinary shares under our 2010 Stock Option Plan. See “Item 6. Directors,
Senior Management and Employees – E. Share Ownership – Stock Option Plans.” Substantial sales of our ordinary
shares or American Depositary Shares, or the perception that such sales may occur in the future, including sales of shares issuable
upon the exercise of options and warrants, may cause the market price of our ordinary shares or American Depositary Shares to decline.
Moreover, the issuance of shares underlying our options and warrants will also have a dilutive effect on our shareholders, which
could further reduce the price of our ordinary shares and American Depositary Shares on their respective exchanges.



Should we issue ADSs or ordinary
shares at a price below $9.50 or $0.95 per share, respectively, or warrants or other convertible securities pursuant to which ADSs
or ordinary shares may be acquired at a price below $9.50 or $0.95 per share, respectively, we may be required to issue additional
ADSs, without any new consideration, to various investors, potentially resulting in substantial dilution to you.





Pursuant
to the terms of the securities purchase agreements that we entered into in December 2013 with OrbiMed Israel Partners Limited Partnership
and Broadfin Healthcare Master Fund, LTD, until we consummate a financing or series of financings that result in at least $13,800,000
of gross proceeds (after taking into account the subsequent private placement announced by us on January 22, 2014), should we issue
any ADSs or ordinary shares at a price below $9.50 or $0.95 per share, respectively, or warrants or other convertible or exchangeable
securities pursuant to which ADSs or ordinary shares may be acquired at a price below $9.50 or $0.95 per share, respectively (other
than in connection with employment arrangements and certain business combinations and strategic transactions), then we are obligated
to issue additional ADSs to these investors in an amount sufficient that the total offering price paid by each such investor for
its ADSs under its respective securities purchase agreement, when divided by the total number of ADSs originally issued to such
investor under such securities purchase agreement plus the additional ADSs issued as a result of this lower price issuance and
any additional ADSs issued as a result of any previous lower price issuances, will result in an actual price paid by the investor
per ADS equal to either (i) such lower price, in the case of a subsequent issuance by us of lower priced ADSs or convertible or
exchangeable securities pursuant to which ADSs may be acquired, or (ii) the product of (a) ten and (b) such lower price, in the
case of a subsequent issuance by us of lower priced ordinary shares or convertible or exchangeable securities pursuant to which
ordinary shares may be acquired. As this protection is a full ratchet adjustment regardless of the number of securities subsequently
issued by us, it could result in substantial dilution to you should we consummate any non-exempt issuance pursuant to which ADSs
or ordinary shares are acquired or may be acquired from us at a price below $9.50 or $0.95 per share, respectively.



Our ordinary shares and our American
Depositary Shares are traded on different markets and this may result in price variations.



Our ordinary shares have been traded on
the Tel Aviv Stock Exchange since February 2011, and our American Depositary Shares have been listed on The Nasdaq Capital Market
since December 27, 2012. Trading in our securities on these markets take place in different currencies (U.S. dollars on The Nasdaq
Capital Market and New Israeli Shekels, or NIS, on the Tel Aviv Stock Exchange), and at different times (resulting from different
time zones, different trading days and different public holidays in the U.S. and Israel). The trading prices of our securities
on these two markets may differ due to these and other factors. Any decrease in the price of our securities on one of these markets
could cause a decrease in the trading price of our securities on the other market.



An active market may not develop
for our American Depositary Shares on The Nasdaq Capital Market, and this may limit the ability of our investors to sell our American
Depositary Shares in the U.S.



19







Our American Depositary Shares began
trading on The Nasdaq Capital Market last year, and an active trading market for our American Depositary Shares may never develop
or may not be sustained if one develops. If an active market for our American Depositary Shares does not develop, it may be difficult
to sell your American Depositary Shares.



We may incur significant additional
increased costs as a result of the listing of our American Depositary Shares on The Nasdaq Capital Market, and our management may
be required to devote substantial time to new compliance initiatives as well as to compliance with ongoing U.S. and Israeli reporting
requirements.



As a public company in the U.S., we may
incur additional significant accounting, legal and other expenses as a result of the listing of our securities on both The Nasdaq
Capital Market and the Tel-Aviv Stock Exchange. These may include costs associated with reporting requirements of the Securities
and Exchange Commission and the Nasdaq Marketplace Rules. These rules and regulations have increased our legal and financial compliance
costs, introduced new costs such as investor relations, travel costs, stock exchange listing fees and shareholder reporting, and
made some activities more time consuming and costly. These laws, rules and regulations make it more difficult, and have made it
more costly for us to obtain certain types of insurance, including director and officer liability insurance. The impact of these
requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors,
our board committees or as executive officers and may require us to pay more for such positions.



As an “emerging growth company,”
as defined in the JOBS Act, we may take advantage of certain temporary exemptions from various reporting requirements, including,
but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes Oxley
Act (and the rules and regulations of the SEC thereunder). When these exemptions cease to apply, we expect to incur additional
expenses and devote increased management effort toward ensuring compliance with them. We cannot predict or estimate the amount
of additional costs we may incur as a result of complying with these additional reporting requirements.



As a foreign private issuer, we are
permitted to follow certain home country corporate governance practices instead of applicable Securities and Exchange Commission
and Nasdaq Stock Market requirements, which may result in less protection than is accorded to investors under rules applicable
to domestic issuers.



As a foreign private issuer, we are permitted
to follow certain home country corporate governance practices instead of those otherwise required under the Nasdaq Marketplace
Rules for domestic issuers. For instance, we follow home country practice in Israel with regard to, among other things, composition
of the board of directors, which does not require that a majority of a company's board of directors be independent, director nomination
procedure and quorum at shareholders’ meetings. In addition, we follow our home country law, instead of the Nasdaq Marketplace
Rules, which require that we obtain shareholder approval for certain dilutive events, such as for the establishment or amendment
of certain equity based compensation plans, an issuance that will result in a change of control of the company, certain transactions
other than a public offering involving issuances of a 20% or more interest in the company and certain acquisitions of the stock
or assets of another company. Following our home country governance practices as opposed to the requirements that would otherwise
apply to a U.S. company listed on the Nasdaq Capital Market may provide less protection than is accorded to investors under the
Marketplace Rules of The Nasdaq Stock Market applicable to domestic issuers.



In addition, as a foreign private issuer,
we are exempt from the rules and regulations under the U.S. Securities Exchange Act of 1934, as amended, related to the furnishing
and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing
profit recovery provisions contained in Section 16 of the U.S. Securities Exchange Act of 1934, as amended. In addition, we are
not required under the U.S. Securities Exchange Act of 1934, as amended, to file annual, quarterly and current reports and financial
statements with the Securities and Exchange Commission as frequently or as promptly as domestic companies whose securities are
registered under the U.S. Securities Exchange Act of 1934, as amended.



We may fail to maintain effective
internal controls over financial reporting, which may adversely affect investor confidence in our company and, as a result, may
affect the value of our ordinary shares.



We are required, pursuant to Section 404
of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control
over financial reporting. Pursuant to the JOBS Act, we are classified as an “emerging growth company,” and we are exempt
from certain reporting requirements, including the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. Under
this exemption, our auditor will not be required to attest to and report on management’s assessment of our internal controls
over financial reporting during a five year transition period commencing in 2013.



20







Our management report regarding our internal
control over financial reporting must include, among other things, disclosure of any material weaknesses identified by our management
in our internal control over financial reporting. The continuous process of strengthening our internal controls and complying with
Section 404 is complicated and time-consuming.



We have documented and tested our internal
control systems and procedures in order for us to comply with the requirements of Section 404. While our assessment of our internal
control over financial reporting resulted in our conclusion that as of December 31, 2013, our internal control over financial reporting
was effective, we cannot predict the outcome of our testing in future periods. If we fail to maintain the adequacy of our internal
controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial
reporting. Failure to maintain effective internal control over financial reporting could result in investigation or sanctions by
regulatory authorities, and could have a material adverse effect on our operating results, investor confidence in the accuracy
and completeness of our financial reports, which would cause the price of our ordinary shares to decline.



Because we became a reporting company
under the Securities Exchange Act of 1934, as amended, by means of filing a Form 20-F, we may have difficulty attract the attention
of research analysts at major brokerage firms.



Because we did not become a reporting company
by conducting an underwritten initial public offering, we may have difficulty attracting the attention of security analysts at
major brokerage firms in order for them to provide coverage of our company. The failure to receive research coverage or support
in the market for our shares will have an adverse effect on our ability to develop a liquid market for our American Depositary
Shares.



We currently do not anticipate paying
cash dividends, and accordingly, shareholders must rely on the appreciation in our American Depositary Shares for any return on
their investment.



We currently anticipate that we will retain
future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash
dividends for the foreseeable future. Therefore, the success of an investment in our American Depositary Shares will depend upon
any future appreciation in their value. There is no guarantee that our American Depositary Shares will appreciate in value or even
maintain the price at which our shareholders have purchased their shares.



You may not receive the same distributions
or dividends as those we make to the holders of our ordinary shares, and, in some limited circumstances, you may not receive dividends
or other distributions on our ordinary shares and you may not receive any value for them, if it is illegal or impractical to make
them available to you.



The depositary for the American Depositary
Shares has agreed to pay to you the cash dividends or other distributions it or the custodian receives on ordinary shares or other
deposited securities underlying the American Depositary Shares, after deducting its fees and expenses. You will receive these distributions
in proportion to the number of ordinary shares your American Depositary Shares represent. However, the depositary is not responsible
if it decides that it is unlawful or impractical to make a distribution available to any holders of American Depositary Shares.
For example, it would be unlawful to make a distribution to a holder of American Depositary Shares if it consists of securities
that require registration under the Securities Act of 1933, as amended, but that are not properly registered or distributed under
an applicable exemption from registration. In addition, conversion into U.S. dollars from foreign currency that was part of a dividend
made in respect of deposited ordinary shares may require the approval or license of, or a filing with, any government or agency
thereof, which may be unobtainable. In these cases, the depositary may determine not to distribute such property and hold it as
“deposited securities” or may seek to effect a substitute dividend or distribution, including net cash proceeds from
the sale of the dividends that the depositary deems an equitable and practicable substitute. We have no obligation to register
under U.S. securities laws any American Depositary Shares, ordinary shares, rights or other securities received through such distributions.
We also have no obligation to take any other action to permit the distribution of American Depositary Shares, ordinary shares,
rights or anything else to holders of American Depositary Shares. In addition, the depositary may withhold from such dividends
or distributions its fees and an amount on account of taxes or other governmental charges to the extent the depositary believes
it is required to make such withholding. This means that you may not receive the same distributions or dividends as those we make
to the holders of our ordinary shares, and, in some limited circumstances, you may not receive any value for such distributions
or dividends if it is illegal or impractical for us to make them available to you. These restrictions may cause a material decline
in the value of the American Depositary Shares.



Holders of American Depositary Shares
must act through the depositary to exercise their rights as shareholders of our company.



21







Holders of our American Depositary Shares
do not have the same rights of our shareholders and may only exercise the voting rights with respect to the underlying ordinary
shares in accordance with the provisions of the deposit agreement for the American Depositary Shares. Under Israeli law, the minimum
notice period required to convene a shareholder meeting is no less than 35 or 21 calendar days, depending on the proposals on the
agenda for the shareholders meeting. When a shareholder meeting is convened, holders of our American Depositary Shares may not
receive sufficient notice of a shareholders’ meeting to permit them to withdraw their ordinary shares to allow them to cast
their vote with respect to any specific matter. In addition, the depositary and its agents may not be able to send voting instructions
to holders of our American Depositary Shares or carry out their voting instructions in a timely manner. We will make all reasonable
efforts to cause the depositary to extend voting rights to holders of our American Depositary Shares in a timely manner, but we
cannot assure holders that they will receive the voting materials in time to ensure that they can instruct the depositary to vote
their American Depositary Shares. Furthermore, the depositary and its agents are not responsible for any failure to carry out any
instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, holders of our
American Depositary Shares may not be able to exercise their right to vote and they may lack recourse if their American Depositary
Shares are not voted as they requested. In addition, in the capacity as an American Depositary Share holder, they are not able
to call a shareholders’ meeting.



The depositary for our American Depositary
Shares gives us a discretionary proxy to vote our ordinary shares underlying American Depositary Shares if a holder of our American
Depositary Shares does not vote at shareholders’ meetings, except in limited circumstances, which could adversely affect
their interests.



Under the deposit agreement for the American
Depositary Shares, the depositary gives us a discretionary proxy to vote our ordinary shares underlying American Depositary Shares
at shareholders’ meetings if a holder of our American Depositary Shares does not vote, unless:



| | · | we have instructed the depositary that we do not wish a discretionary proxy to be given;
| | - | ----------------------------------------------------------------------------------------

| | · | we have informed the depositary that there is substantial opposition as to a matter to be voted
on at the meeting; or
| | - | ---------------------------------------------------------------------------------------------------------------------

| | · | a matter to be voted on at the meeting would have a material adverse impact on shareholders.
| | - | --------------------------------------------------------------------------------------------



The effect of this discretionary proxy
is that a holder of our American Depositary Shares cannot prevent our ordinary shares underlying such American Depositary Shares
from being voted, absent the situations described above, and it may make it more difficult for shareholders to influence the management
of our company. Holders of our ordinary shares are not subject to this discretionary proxy.



Risks Related to our Operations in Israel



We conduct our operations in Israel
and therefore our results may be adversely affected by political, economic and military instability in Israel and its region.



We are incorporated under the laws of the
State of Israel, our principle offices are located in central Israel and some of our officers, employees and directors are residents
of Israel. Accordingly, political, economic and military conditions in Israel and the surrounding region may directly affect our
business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and
its Arab neighbors. Any hostilities involving Israel or the interruption or curtailment of trade within Israel or between Israel
and its trading partners could adversely affect our operations and results of operations and could make it more difficult for us
to raise capital. In addition, recent political uprisings and conflicts in various countries in the Middle East, including Egypt
and Syria, are affecting the political stability of those countries. It is not clear how this instability will develop and how
it will affect the political and security situation in the Middle East. This instability has raised concerns regarding security
in the region and the potential for armed conflict. In addition, it is widely believed that Iran, which has previously threatened
to attack Israel, has been stepping up its efforts to achieve nuclear capability. Iran is also believed to have a strong influence
among extremist groups in the region, such as Hamas in Gaza and Hezbollah in Lebanon. The tension between Israel and Iran and/or
these groups may escalate in the future and turn violent, which could affect the Israeli economy generally and us in particular.
Any armed conflicts, terrorist activities or political instability in the region could adversely affect business conditions and
could harm our results of operations. For example, any major escalation in hostilities in the region could result in a portion
of our employees being called up to perform military duty for an extended period of time. Parties with whom we do business have
sometimes declined to travel to Israel during periods of heightened unrest or tension, forcing us to make alternative arrangements
when necessary.



22







Our commercial insurance does not cover
losses that may occur as a result of events associated with the security situation in the Middle East. Although the Israeli government
currently covers the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot assure
you that this government coverage will be maintained. Any losses or damages incurred by us could have a material adverse effect
on our business. Any armed conflicts or political instability in the region would likely negatively affect business conditions
and could harm our results of operations.



Further, in the past, the State of Israel
and Israeli companies have been subjected to an economic boycott. Several countries still restrict business and trade activity
with the State of Israel and with Israeli companies. These restrictive laws and policies may have an adverse impact on our operating
results, financial condition or the expansion of our business.



Our operations may be disrupted as
a result of the obligation of management or personnel to perform military service.



Many of our employees in Israel, including
members of our senior management, perform up to one month, and in some cases more, of annual military reserve duty until they reach
the age of 45 or older and, in the event of a military conflict, may be called to active duty. There have also been periods of
significant call-ups of military reservists, and it is possible that there will be military reserve duty call-ups in the future.
Our operations could be disrupted by the absence of a significant number of our employees. Such disruption could materially adversely
affect our business, financial condition and results of operations.



Because a certain portion of our
expenses is incurred in currencies other than the U.S. dollar, our results of operations may be harmed by currency fluctuations
and inflation.



Our reporting and functional currency is
the U.S. dollar. Most of the royalty payments from our agreements with our development and/or commercialization partners are payable
in U.S. dollars, and we expect our revenues from future licensing agreements to be denominated mainly in U.S. dollars or in Euros.
We pay a substantial portion of our expenses in U.S. dollars; however, a portion of our expenses, related to salaries of the employees
in Israel and payment to part of the service providers in Israel and other territories, are paid in NIS and in other currencies.
In addition, a portion of our financial assets is held in NIS and in other currencies. As a result, we are exposed to the currency
fluctuation risks. For example, if the NIS strengthens against the U.S. dollar, our reported expenses in U.S. dollars may be higher
than anticipated. In addition, if the NIS weakens against the U.S. dollar, the U.S. dollar value of our financial assets held in
NIS will decline.



Provisions of our 2010 Option Plan,
Israeli law and our Articles of Association may delay, prevent or otherwise impede a merger with, or an acquisition of, our company,
or an acquisition of a significant portion of our shares, which could prevent a change of control, even when the terms of such
a transaction are favorable to us and our shareholders.





Our 2010 Option Plan provides that all
options granted by us will be fully accelerated upon a "takeover" of the Company. A "takeover" is defined in
our 2010 Option Plan as an event in which any person, entity or group that was not an "interested party", as defined
in the Israeli Securities Law – 1968, on the date of the initial public offering of our securities on the Tel Aviv Stock
Exchange, shall become a "controlling shareholder". A “controlling shareholder” for these purposes
means a controlling shareholder as defined in the Israel Securities Law, 1968. See “Item 6. Directors, Senior Management
and Employees – E. Share Ownership – Option Plan” for a description of interested parties under the Israeli Securities
Law – 1968.





The Israeli Companies Law, 1999, or the
Israeli Companies Law, regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires
special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may
be relevant to these types of transactions. For example, a merger may not be consummated unless at least 50 days have passed from
the date that a merger proposal was filed by each merging company with the Israel Registrar of Companies and at least 30 days from
the date that the shareholders of both merging companies approved the merger. In addition, a majority of each class of securities
of the target company must approve a merger. Moreover, the Israeli Companies Law provides that certain purchases of securities
of a public company are subject to tender offer rules. As a general rule, the Israeli Companies Law prohibits any acquisition of
shares in a public company that would result in the purchaser holding 25% or more, or more than 45% of the voting power in the
company, if there is no other person holding 25% or more, or more than 45% of the voting power in a company, respectively, without
conducting a special tender offer. The Israeli Companies Law further provides that a purchase of shares or voting rights of a public
company or a class of shares of a public company, which will result in the purchaser’s holding 90% or more of the company’s
shares or class of shares, is prohibited unless the purchaser conducts a full tender offer for all of the company’s shares
or class of shares. The purchaser will be allowed to purchase all of the company’s shares or class of shares (including those
shares held by shareholders who did not respond to the offer), if either (i) the shareholders who do not accept the offer hold
less than 5% of the issued and outstanding share capital of the company or of the applicable class, and more than half of the shareholders
who do not have a personal interest in the offer accept the offer, or (ii) the shareholders who do not accept the offer hold less
than 2% of the issued and outstanding share capital of the company or of the applicable class. The shareholders, including those
who indicated their acceptance of the tender offer (except if otherwise detailed in the tender offer document), may, at any time
within 6 months following the completion of the tender offer, petition the court to alter the consideration for the acquisition.
At the request of an offeree of a full tender offer which was accepted, the court may determine that the consideration for the
shares purchased under the tender offer was lower than their fair value and compel the offeror to pay to the offerees the fair
value of the shares. Such application to the court may be filed as a class action.



23







In addition, the Israeli Companies Law
provides for certain limitations on a shareholder that holds more than 90% of the company’s shares, or class of shares.



Pursuant to our articles of association,
the size of our board of directors shall be no less than 5 persons but no more than 7, excluding at least two external directors.
The directors, except for our external directors, are divided into three classes, as nearly equal in number as possible. At each
annual general meeting, the term of one class of directors expires, and the directors of such class are re-nominated to serve an
additional three year term that expires at the annual general meeting held in the third year following such election. This process
continues indefinitely. Such provisions of our articles of association make it more difficult for a third party to effect a change
in control or takeover attempt that our management and board of directors oppose.



Furthermore, Israeli tax considerations
may, in certain circumstances, make potential transactions unappealing to us or to some of our shareholders. For example, Israeli
tax law does not recognize tax-free share exchanges to the same extent as U.S. tax law. With respect to mergers, Israeli tax law
allows for tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of numerous conditions, including
a holding period of two years from the date of the transaction during which sales and dispositions of shares of the participating
companies are restricted. Moreover, with respect to certain share swap transactions, the tax deferral is limited in time, and when
such time expires, the tax becomes payable even if no actual disposition of the shares has occurred.



These and other similar provisions could
delay, prevent or impede an acquisition of us or our merger with another company, or an acquisition of a significant portion of
our shares, even if such an acquisition or merger would be beneficial to us or to our shareholders. See “Item 10. Additional
Information - B. Memorandum and Articles of Association.”



It may be difficult to enforce a
U.S. judgment against us and our officers and directors named in this Annual Report in Israel or the U.S., or to serve process
on our officers and directors.



We are incorporated in Israel. Most of
our executive officers and directors listed in this Annual Report reside outside of the U.S., and all of our assets and most of
the assets of our executive officers and directors are located outside of the U.S. Therefore, a judgment obtained against us or
most of our executive officers and our directors in the U.S., including one based on the civil liability provisions of the U.S.
federal securities laws, may not be collectible in the U.S. and may not be enforced by an Israeli court. It may also be difficult
for you to affect service of process on these persons in the U.S. or to assert U.S. securities law claims in original actions instituted
in Israel.



Your obligations and responsibilities
as a shareholder are governed by Israeli law which may differ in some respects from the obligations and responsibilities of shareholders
of U.S. companies. Israeli law may impose obligations and responsibilities on a shareholder of an Israeli company
that are not imposed upon shareholders of corporations in the U.S.



We are incorporated under Israeli law.
The obligations and responsibilities of the holders of our ordinary shares are governed by our articles of association and Israeli
law. These obligations and responsibilities differ in some respects from the obligations and responsibilities of shareholders in
typical U.S.-based corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith toward the
company and other shareholders and to refrain from abusing its power in the company, including, among other things, in voting at
the general meeting of shareholders on matters such as amendments to a company’s articles of association, increases in a
company’s authorized share capital, mergers and acquisitions and interested party transactions requiring shareholder approval.
In addition, a shareholder who knows that it possesses the power to determine the outcome of a shareholder vote or to appoint or
prevent the appointment of a director or executive officer in the company has a duty of fairness toward the company. There is limited
case law available to assist us in understanding the implications of these provisions that govern shareholders’ actions.
These provisions may be interpreted to impose additional obligations and responsibilities on holders of our ordinary shares that
are not typically imposed on shareholders of U.S. corporations.



24







Claims for indemnification by our
directors and officers may reduce our available funds to satisfy successful stockholder claims against us and may reduce the amount
of money available to us.



The Israeli Companies Law and our Articles
of Association permit us to indemnify our directors and officers for acts performed by them in their capacity as directors and
officers. The Israeli Companies Law and our Articles of Association provide that a company may not exempt or indemnify a director
or an office holder nor enter into an insurance contract, which would provide coverage for any monetary liability incurred as a
result of (a) a breach by the director or officer of his duty of loyalty, except for insurance and indemnification where the director
or officer acted in good faith and had a reasonable basis to believe that the act would not prejudice the company; (b) a breach
by the director or officer of his duty of care if the breach was done intentionally or recklessly, except if the breach was solely
as a result of negligence; (c) any act or omission done with the intent to derive an illegal personal benefit; or (d) any fine,
civil fine, monetary sanctions, or forfeit imposed on the officer or director. See “Item 6. Directors, Senior Management
and Employees – C. Board Practices - Corporate Governance Practices - Exemption, Insurance and Indemnification of Directors
and Officers."



We have issued letters of indemnification
to our directors and officers, pursuant to which we have agreed to indemnify them in advance for any liability or expense imposed
on or incurred by them in connection with acts they perform in their capacity as a director or officer, subject to applicable law.
The amount of the advance indemnity is limited to the higher of 25% of our then shareholders’ equity, per our most recent
annual financial statements, or $5 million.



Our indemnification obligations limit the
personal liability of our directors and officers for monetary damages for breach of their duties as directors by shifting the burden
of such losses and expenses to us. Although we have obtained directors and officers liability insurance providing coverage for
up to $10 million a year, certain liabilities or expenses covered by our indemnification obligations may not be covered by such
insurance or the coverage limitation amounts may be exceeded. As a result, we may need to use a significant amount of our funds
to satisfy our indemnification obligations, which could severely harm our business and financial condition and limit the funds
available to stockholders who may choose to bring a claim against our company. These provisions and resultant costs may also discourage
us from bringing a lawsuit against directors and officers for breaches of their duties, and may similarly discourage the filing
of derivative litigation by our shareholders against the directors and officers even though such actions, if successful, might
otherwise benefit our shareholders.



| | ITEM 4. | INFORMATION ON THE COMPANY
| | ------- | --------------------------



| | A. | History and Development of the Company
| | -- | --------------------------------------



Our legal and commercial name is RedHill
Biopharma Ltd. The company was incorporated on August 3, 2009 and was registered as a private company limited by shares under the
laws of the State of Israel. Our principal executive offices are located at 21 Ha’arba’a Street, Tel Aviv, Israel and
our telephone number is 972-3-541-3131.



In February 2011, we completed our initial
public offering in Israel, pursuant to which we issued 14,302,300 ordinary shares, and 7,151,150 tradable Series 1 Warrants to
purchase 7,151,150 ordinary shares for aggregate gross proceeds of approximately $14 million. On December 27, 2012, we completed
the listing of our ADSs on The Nasdaq Capital Market. Our ordinary shares are traded on the Tel Aviv Stock Exchange under the symbol
“RDHL,” our Series 1 Warrants are traded on the Tel Aviv Stock Exchange under the symbol “RDHL.W1,” and
our ADSs are traded on the Nasdaq Capital Market under the symbol "RDHL".



Our capital expenditures for the years
ended December 31, 2013, 2012 and 2011 were $14,000, $5,000 and $139,000, respectively. Our current capital expenditures involve
equipment and leasehold improvements.



| | B. | Business Overview
| | -- | -----------------



We are an emerging Israeli biopharmaceutical
company focused primarily on the development and acquisition of therapeutic candidates. In particular, we acquire or in-license
and develop patent-protected new formulations and combinations of existing drugs in advanced stages of development. From inception,
we have invested total of $1.56 million on acquisitions.



25







Our primary therapeutic focus is on inflammatory
and gastrointestinal (GI) diseases, including cancers and related conditions.



Depending on the specific development program,
our therapeutic candidates are designed to provide improvements over existing drugs by improving their safety profile, reducing
side effects, lowering the number of administrations, using a more convenient administration form, providing a cost advantage and/or
exhibiting greater efficacy. Where applicable, we intend to seek U.S. Food and Drug Administration approval for the commercialization
of certain of our therapeutic candidates through the alternative Section 505(b)(2) regulatory path under the Federal Food, Drug,
and Cosmetic Act of 1938, as amended, and in corresponding regulatory paths in other foreign jurisdictions. Our current pipeline
consists of six late clinical development therapeutic candidates, two of which have completed bioequivalence clinical trials subject
to review and approval by the U.S. Food and Drug Administration and, in some cases, regulatory authorities in other countries.



We generate our pipeline of therapeutic
candidates by identifying, rigorously validating and in-licensing or acquiring products that are consistent with our products strategy
and that we believe exhibit a relatively high probability of therapeutic and commercial success. Our therapeutic candidates have
not yet been approved for marketing and, to date, there have been no meaningful sales. We intend to commercialize our therapeutic
candidates through licensing and other commercialization arrangements with pharmaceutical companies on a global and territorial
basis. We may also evaluate, on a case by case basis, co-development and similar arrangements and the commercialization of our
therapeutic candidates independently.



Our Strategy



Our goal is to become a significant player
in the development of pharmaceuticals for treatment of inflammatory and gastrointestinal (GI) diseases, including cancers and related
conditions with a particular focus on improvements, enhancements and/or innovative uses of existing drugs.



Key elements of our strategy are to:



| | · | identify and acquire rights to products from companies in the pharmaceutical field, which have
encountered cash flow or operational problems or that decide to divest one or more of their products for various reasons. We identify
such opportunities through our broad network of contacts and other sources in the pharmaceutical field.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | produce enhancements of existing pharmaceutical products, including broadening their range of indications
or launching innovative and advantageous pharmaceutical products based on existing products. Because there is a large knowledge
base regarding existing products, the preclinical, clinical and regulatory requirements needed to obtain marketing approval for
enhanced formulations are relatively well defined. In particular, clinical study designs, inclusion criteria and endpoints previously
accepted by regulators may sometimes be re-used. In addition to reducing costs and time to market, we believe that targeting therapeutics
with proven safety and efficacy profiles provides us a better prospect of clinical success.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | acquire rights to and develop products that are intended to treat pronounced clinical needs, have
patent protection, and have target markets totaling tens of millions to billions of dollars.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | acquire rights to and develop products based on different technologies designed to reduce our dependency
on any specific product technology.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------



| | · | capitalize on the U.S. Food and Drug Administration’s 505(b)(2) regulatory pathway to obtain
more timely and efficient approval of our formulations of previously approved products, when applicable. Under the 505(b)(2) process,
we are able to seek U.S. Food and Drug Administration approval of a new dosage form, strength, route of administration, formulation,
dosage regimen, or indication of a pharmaceutical product that has previously been approved by the U.S. Food and Drug Administration.
This enables us to partially rely on the U.S. Food and Drug Administration’s findings of safety and/or efficacy for previously
approved drugs, thus avoiding the duplication of costly and time consuming preclinical and various human studies. See “Government
Regulations and Funding - Section 505(b)(2) New Drug Applications.”
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | cooperate with third parties to develop and/or commercialize therapeutic candidates in order to
share costs and leverage the expertise of others.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------



Our six current clinical stage therapeutic
candidates include “RHB-101”, “RHB-102”, “RHB-103”, “RHB-104”, “RHB-105”
and “RHB-106” and related research and development programs, the most advanced of which are described below.



26







Our Therapeutic Candidates



RHB–101



RHB-101 is intended for the treatment of
hypertension, heart failure and left ventricular dysfunction (following myocardial infarction) by means of controlled release of
an active ingredient known as carvedilol, which is designed to be administered to patients on a once-daily basis. Carvedilol is
a nonselective β-adrenergic blocking agent with α1-blocking activity providing its clinical effect through two different
mechanisms. β-adrenergic blockade slows the heart rate and promotes its effect by decreasing the work or output of the heart.
α1 adrenergic blockade is effected within the vascular system and lowers blood pressure. We believe that our once-daily RHB-101
is an improvement over existing generic carvedilol-containing drugs, which are administered several times per day.



RHB-101 is based on a patented technology
for the controlled release of drugs administered orally. The technology is based on a drug-release polymer system built of an external
envelope that is consumed at a slow rate, and an internal matrix that breaks down on contact with the fluids of the gastrointestinal
system, releasing the drug at a constant rate according to the drug’s exposed geometric surface.



We acquired the rights to RHB-101 under
a November 18, 2009 agreement with Egalet a/s, pursuant to which we received a worldwide, exclusive and perpetual license to certain
patent rights related to RHB-101. See “– Acquisition and License Agreements – License Agreement for RHB-101.”



Competition and Market



The pharmaceutical market targeted by RHB-101
has over 200 million users worldwide according to a 2012 report by Scrip Intelligence. According to EvaluaPharma, a provider of
market intelligence for the pharmaceutical sector, generic carvedilol products entered this market in 2007. The worldwide target
market of RHB-101 is estimated at a total value in excess of $500 million according to sales market data integrated from the European
and U.S. 2013 sales data for carvedilol from IMS Health, a provider of information for the health care industry, and 2012 sales
data of Coreg CR® from EvaluatePharma, a leading market intelligence and information resource. At present, the market
can be divided into two parts:



The first part of the market includes generic
drugs based on the immediate release of the generic active ingredient known as carvedilol (such as Coreg® produced by GlaxoSmithKline).
These drugs are administered to patients twice a day, due to their relatively short active span, as opposed to the once daily administration
of RHB-101. Administration once per day instead of several times per day has the potential to be a significant advantage, including
improved compliance, especially for the elderly who commonly take a relatively large number of drugs over long periods of time.



The second part of the market is based
on a patented drug known under the trade name of Coreg CR® (produced by GlaxoSmithKline). This drug is an improvement over
the generic Coreg® drug, having a longer duration of action and being administered once per day. One of the potential advantages
of RHB-101 over Coreg CR® is that RHB-101 is expected to be priced below the current price of Coreg CR®. Further potential
advantages indicated by studies conducted to date consist of: (i) a reduced food effect on bioavailability, expected to allow patients
to take RHB-101 with or without food while Coreg CR® is indicated to be taken with food and (ii) a markedly reduced dose (approximately
27% less API in mol units).



In 2012, sales of Coreg CR® in the
U.S. reached approximately $209 million according to the EvaluatePharma 2012 annual U.S. product sales report. Coreg CR® is
not marketed in Europe. The European market of immediate release carvedilol in 2013 was in excess of $200 million according to
IMS Health. In 2013, the sale of generic immediate release of carvedilol reached approximately $100 million in the U.S. according
to data published by IMS Health. Consolidating sales data for both segments of the market indicate that the worldwide target market
of RHB-101 is in excess of $500 million.



To the best of our knowledge, although
the U.S. patent on Coreg CR® is expected to expire in the coming years, generic competitors of Coreg CR® may reach the
market immediately. In particular, in 2008 Mutual Pharmaceutical Company Inc. submitted an application in the U.S. for approval
of a generic version of this drug and reached an agreement with GlaxoSmithKline, pursuant to which GlaxoSmithKline agreed, after
several rounds of court hearings, not to sue Mutual Pharmaceutical Company Inc. Entry of generic drugs competing with Coreg CR®
may cause a significant decrease in the price of Coreg CR®, thereby reducing the current price differential between this drug
and the segment of generic carvedilol-containing drugs.



27







Clinical Development



We are currently searching for a strategic
partner to jointly develop RHB-101.



The following chart summarizes the clinical
trial history and status of RHB-101:

28









|Clinicaltrial name |  | Developmentphase oftheclinicaltrial |  | Purpose of the clinicaltrial                                                                                                                                                                |  | Clinicaltrial site      |  | Plannednumber ofsubjects ofthe trial |  | Numberofsubjects |  | Nature andstatus of thetrial                                                                                |  | Schedule      |  | Totalincurredcost as ofDecember31, 2013
|------------------ |  | ----------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- |  | ------------------------------------ |  | ---------------- |  | ----------------------------------------------------------------------------------------------------------- |  | ------------- |  | ---------------------------------------
|                   |  |                                     |  |                                                                                                                                                                                             |  |                         |  |                                      |  |                  |  |                                                                                                             |  |               |  |                                        
|CL-EG- 01          |  | Phase I                             |  | Pharmacokinetic (PK) comparison of once-daily administration of the product in 25 mg concentration against carvedilol, and the impact of food on the product’s absorption in the human body |  | Shandon Clinic, Ireland |  | 30                                   |  | 30               |  | The trial was performed and indicated that food does not have any impact on the absorption of the product   |  | Ended in 2004 |  | -                                      
|                   |  |                                     |  |                                                                                                                                                                                             |  |                         |  |                                      |  |                  |  |                                                                                                             |  |               |  |                                        
|CL-EG- 02          |  | Phase I                             |  | PK comparison of repeat product administration in 25 mg concentration against carvedilol                                                                                                    |  | Shandon Clinic, Ireland |  | 30                                   |  | 30               |  | The trial was performed and indicated that there is PK similarity between the products                      |  | Ended in 2004 |  | -                                      
|                   |  |                                     |  |                                                                                                                                                                                             |  |                         |  |                                      |  |                  |  |                                                                                                             |  |               |  |                                        
|CL-EG- 04          |  | Phase I                             |  | PK comparison of once-daily administration of two different product formulations in a concentration of 50 mg against carvedilol                                                             |  | Shandon Clinic, Ireland |  | 12                                   |  | 12               |  | The trial was performed and indicated that one of the formulations is pharmacokinetically preferable        |  | Ended in 2007 |  | -                                      
|                   |  |                                     |  |                                                                                                                                                                                             |  |                         |  |                                      |  |                  |  |                                                                                                             |  |               |  |                                        
|CL-EG- 09          |  | Phase I                             |  | PK comparison of once-daily administration of two different formulations of the product in a concentration of 12.5 mg against carvedilol                                                    |  | Shandon Clinic, Ireland |  | 14                                   |  | 14               |  | The trial was performed and indicated that one of the formulations is pharmacokinetically preferable        |  | Ended in 2007 |  | -                                      
|                   |  |                                     |  |                                                                                                                                                                                             |  |                         |  |                                      |  |                  |  |                                                                                                             |  |               |  |                                        
|PLT-11             |  | Pilot                               |  | Feasibility check of PK comparison of the product with Coreg CR®                                                                                                                            |  | RA Chem Pharma India    |  | 36                                   |  | 36               |  | The trial was performed and provided initial and partial information on potential comparison with Coreg CR® |  | Ended in 2011 |  | Approx. $60,000                        



Supplemental studies will be required as
part of the RHB-101 global development program and regulatory strategy.



In March 2013, RedHill held a Scientific
Advice meeting regarding RHB-101 with the Danish Health and Medicines Authority (DKMA) Based on the feedback from the DKMA, RedHill
believes that no further clinical studies will be required prior to submission of the MAA. The Company plans to focus on certain
chemistry, manufacturing and control modules, the completion of which is expected to allow the submission of an MAA.



In May 2013, RedHill held a Type B meeting
with the U.S Food and Drug Administration (FDA) regarding RHB-101. Based on the feedback received from FDA, prior to the NDA submission,
the Company will be required to conduct a comparative bioavailability study and a dose linearity study.



29







We cannot predict with certainty our development
costs and they may be subject to changes. See “Item 3. Key Information – D. Risk Factors – Risk Related to Our
Financial Condition and Capital Requirements.”



RHB-102



RHB-102 is a once-daily controlled release
oral formulation of ondansetron, a leading member of the family of 5HT-3 serotonin receptor inhibitors. It is intended to prevent
chemotherapy and radiotherapy induced nausea and vomiting.



RHB-102 utilizes a technology called CDT®
that uses salts to provide a controlled release of ondansetron. The CDT® platform enables controlled release drug design (i.e.,
measured rate of introduction of active drug) at a relatively low manufacturing cost.



We acquired the rights to RHB-102 under
a May 2, 2010 agreement with SCOLR Pharma Inc., pursuant to which we received a worldwide, exclusive and perpetual license to various
patent rights and know-how related to RHB-102. See “– Acquisition and License Agreements – License Agreement
for RHB-102.”



Competition and Market



Nausea and vomiting prevention (anti-emetic)
treatments account for a large market share of oncology-support treatments. In 2013, the worldwide market for treatments for prevention
of chemotherapy-induced nausea and vomiting was estimated to have exceeded $1.4 billion. Of this market, 5-HT3 serotonin receptor
inhibitors are estimated to have exceeded $940 million in 2013 (RHB-102 belongs to this family of inhibitors) according to 2013
sales data reports from EvaluatePharma.



To the best of our knowledge, the main
competitors of RHB-102 are other 5-HT3 serotonin receptor inhibitors. This class of medication is derived from the active ingredient
ondansetron (such as the generic drug marketed in the U.S. under the trade name Zofran®, produced by GlaxoSmithKline). Additional
first-generation generic drugs from the same family contain the active ingredient granisetron (marketed in the U.S. under the name
Kytril®, produced by Hoffman-La Roche Ltd.) or the active ingredient dolasetron (marketed in the U.S. under the name of Anzemet®,
produced by Sanofi-Aventis Group). In addition, a second-generation drug containing the active ingredient palonosetron is still
under patent and marketed in the U.S. under the name Aloxi, by Eisai Pharmaceuticals Inc., or Eisai.



Zofran® is a leading 5HT-3 serotonin
receptor inhibitor drug, reaching worldwide sales of approximately $106 million in 2013 according to data from EvaluatePharma.
This drug contains the active ingredient ondansetron and became generic in December 2006. The drug is available in oral tablet
and intravenous (IV) formulations. The price of the drug varies broadly and reaches up to $85 for a single chemotherapy treatment.



Granisetron and dolasetron are additional
first-generation generic drugs from the same family of 5HT-3 serotonin receptor inhibitors. Although there are no significant differences
in the mechanisms of action between them and ondansetron, sales of ondansetron products exceed those of granisetron and dolasetron.
The generic drugs containing these active ingredients are available both orally and intravenously and by transdermal patch. The
price of the Granisetron tablets is approximately $40-$60 for each chemotherapy treatment (5 days of anti-emetic therapy) and the
price of Anzemet® (dolasetron) tablets is approximately $350 for each chemotherapy treatment (5 days of anti-emetic therapy).
Their relatively high cost is one of the reasons that ondansetron-based drugs are more widely used.



Aloxi® is a second-generation drug
from the same family of inhibitors. To the best of our knowledge, it is currently administered only intravenously (IV) in the U.S.
It has longer duration of action in the body and is the only drug in this family that was approved for use with an indication of
nausea and vomiting prevention for more than 24 hours from the chemotherapy treatment (delayed onset). This means that the drug
continues to be effective from the time of its administration for more than the ensuing 24 hours. The price of this drug is significantly
higher than Zofran® and is estimated at approximately $400 per treatment. To the best of our knowledge, an oral version of
this drug was approved in August 2008 in the U.S., but is not currently marketed in the U.S.



The potential advantages of RHB-102 compared
to Zofran® are significant. A single dose of RHB-102 is anticipated to prevent chemotherapy or radiotherapy induced nausea
and vomiting over a time window of approximately 24 hours. This effectiveness period is significantly longer than the effective
time of Zofran® 8mg, which is indicated to be administered several times a day. This is potentially advantageous for cancer
patients undergoing chemotherapy and radiation treatments that would prefer to avoid the need to take additional drugs (tablets)
during the day after the treatment, when they may suffer attacks of nausea and vomiting.



30







The potential advantages of RHB-102 compared
to Aloxi®, the only drug that has a relatively long-term effect (beyond 24 hours, as stated above), is the delivery method
and price. Aloxi® is a drug that in the United States is delivered intravenously (IV) and costs approximately $400 per dose.
RHB-102 is planned to be delivered orally, in tablet form. Oral administration is expected to allow independent self-administration
by patient, save patient travel time to the clinic or hospital and reduce health care professional work load, thus significantly
lowering its cost as opposed to currently available IV alternatives. To the best of our knowledge, there are several plans to develop
new products in the area of nausea and vomiting prevention, including the development of a product that directly competes with
RHB-102, for controlled release of ondansetron, based on a different technology of controlled release, by the Eurand N.V. (which
merged with Axcan Pharma, and changed its name after the merger to Aptalis Pharma Inc.). To the best of our knowledge, this product
completed Phase II trials.



Clinical Development



In April 2012, we completed a comparative
bioavailability trial, comparing the bioavailability of RHB-102 (24mg) administered once to Zofran® 8mg tablet administered
three times over a 24 hour period. The final results of the study, which we received in June 2012, showed that one dose of RHB-102
(24mg) provides patients with comparable exposure to Zofran® 8mg tablet administered three times over a 24 hour period.



In September 2013, we completed a single-dose
fed/fasted crossover study of RHB-102. The increase in bioavailability for the extended-release formulation after administration
in the fed state is consistent with the pharmacokinetics of Zofran® (ondansetron) immediate release formulation in the fed
state.



In October 2013, we completed a 3-way crossover
comparative bioavailability study of RHB-102 given once daily for 5 consecutive days vs. Zofran 8mg given twice daily for two days
(the approved regimen for Moderately Emetogenic Chemotherapy Induced Nausea and Vomiting (MECINV) vs. Zofran 24mg in single administration
given for one day (the approved regimen for Highly Emetogenic Chemotherapy Induced Nausea and Vomiting HECINV).



In order to carry out clinical trials for
RHB-102, in November 2011 we entered into an agreement with our Canadian service provider which entered into a back-to-back agreement
with Algorithme Pharma Inc., a Canadian clinical research organization specializing in the performance of clinical trials. Algorithme
Pharma Inc. performed the clinical trials described above for RHB-102 from February to April 2012. See “– Master Service
Agreement with 7810962 Canada Inc.”



The following chart summarizes the clinical
trial history and status of RHB-102:



|Clinical trialname   |  | Developmentphase of theclinical trial |  | Purpose of theclinical trial                                                                                                                         |  | Clinicaltrial site               |  | Plannednumber ofsubjects ofthe trial |  | Numberofsubjects |  | Nature andstatus of thetrial                                                                                               |  | Schedule         |  | Totalincurredcost as ofDecember31, 2013
|-------------------- |  | ------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- |  | ------------------------------------ |  | ---------------- |  | -------------------------------------------------------------------------------------------------------------------------- |  | ---------------- |  | ---------------------------------------
|                     |  |                                       |  |                                                                                                                                                      |  |                                  |  |                                      |  |                  |  |                                                                                                                            |  |                  |  |                                        
|Biovail 838332783283 |  | Phase I                               |  | PK test of three different formulations of the product in a concentration of 24 mg compared to Zofran 8 mg administered 3 times per day              |  | Biovail Contact Research, Canada |  | 30                                   |  | 30               |  | The trial was performed and indicated that one of the formulations is suitable for continuing the development process      |  | Ended in 2007    |  | -                                      
|                     |  |                                       |  |                                                                                                                                                      |  |                                  |  |                                      |  |                  |  |                                                                                                                            |  |                  |  |                                        
|ODO-P1-494           |  | Comparative Bioavailablity            |  | Comparison between once-daily administration of several formulations of RHB-102 to  administration of Zofran® 8mg three times per day, 8 hours apart |  | Algorithme Pharma, Canada        |  | 26                                   |  | 26               |  | Successfully completed the study, meeting its objectives of bioequivalence as defined by U.S. Food and Drug Administration |  | Ended in Q2 2012 |  | Approx. $1.7 million                   



31







|ODO-P2-665       |  | Comparative Bioavailability |  | Comparison of the bioavailability of RHB-102 with and without food                                                                                                                                |  | Algorithme Pharma, Canada |  | 14               |  | 14 |  | Successfully completed the study                                              |  | Completed in September 2013   |  | $0.1 million
|---------------- |  | --------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | ---------------- |  | -- |  | ----------------------------------------------------------------------------- |  | ----------------------------- |  | ------------
|                 |  |                             |  |                                                                                                                                                                                                   |  |                           |  |                  |  |    |  |                                                                               |  |                               |  |             
|ODO-P3-520       |  | Comparative Bioavailability |  | Study of ondansetron plasma accumulation over multiple day dosing of RHB-102, in comparison with administration of Zofran® 8mg twice per day for 2 days, in comparison to Zofran® 24mg given once |  | Algorithme Pharma, Canada |  | 18               |  | 18 |  | Successfully completed the study                                              |  | Completed in October 2013     |  | $0.3 million
|                 |  |                             |  |                                                                                                                                                                                                   |  |                           |  |                  |  |    |  |                                                                               |  |                               |  |             
|ODO-P4-420       |  | Comparative Bioavailability |  | Comparison of the bioavailability of RHB-102                                                                                                                                                      |  | Algorithme Pharma, Canada |  | 18               |  |    |  | To support EU regulatory path                                                 |  | Expected to start in Q 2 2014 |  |             
|                 |  |                             |  |                                                                                                                                                                                                   |  |                           |  |                  |  |    |  |                                                                               |  |                               |  |             
|To be determined |  | Phase III                   |  | Randomized double blind placebo controlled phase III study in undisclosed indication                                                                                                              |  | To be determined          |  | To be determined |  |    |  | Evaluating the safety and efficacy of RHB-102 in a new undisclosed indication |  | To be determined              |  |             



In light
of the positive results of the clinical trials, we are currently in discussions with the U.S. Food and Drug Administration regarding
the U.S. marketing approval pathway for RHB-102. In view of the ongoing discussions with the U.S. Food and Drug Administration,
and in parallel to pursuing an NDA for chemotherapy and radiotherapy induced nausea and vomiting, we are pursuing an additional
new indication. If approved by the U.S. Food and Drug Administration, we expect that the new indication
would significantly expand the potential market opportunity for RHB-102, and we are considering to conduct a Phase III study in
order to provide support for the submission of an NDA targeting this additional indication.



In parallel to exploring approval pathways
in the U.S. for multiple indications, we are planning to pursue a Marketing Authorization Application (MAA) in Europe for chemotherapy
and radiotherapy induced nausea and vomiting. To that extent, we intend to conduct a comparative bioavailability study of RHB-102
against the European sourced Zofran reference listed drug, as required by European regulations.



We cannot predict with certainty our development
costs and they may be subject to changes. See “Item 3. Key Information – D. Risk Factors – Risk Related to Our
Financial Condition and Capital Requirements.”



RHB-103



RHB-103 is an oral thin film formulation
of rizatriptan intended for the treatment of acute migraine headaches. Migraine is a neurovascular disorder (related to nerves
and blood vessels) characterized by recurrent headaches in one side or both sides of the head. In general, migraine headaches are
accompanied by nausea and increased sensitivity to light and sound. Migraines are generally treated through the usage of triptans,
a class of molecules that narrow (constrict) blood vessels in the brain in order to relieve swelling and other migraine symptoms.
Examples of triptans include sumatriptan, zolmitriptan and rizatriptan, the basis of RHB-103. RHB-103 rapidly dissolves in the
mouth.



The product is based on a patented technology
called “VersaFilmTM.” This technology allows the production of thin film strips that dissolve rapidly in
the mouth, allowing the drug to be absorbed through the oral mucosa and into the bloodstream. The proprietary VersaFilmTM
technology is a novel, non-mucoadhesive, fast dissolving oral dosage form.



32







The VersaFilmTM platform offers
potential advantages that include fast absorption of the drug and the convenience of use compared to conventional tablets.



We acquired the rights to RHB-103 under
an August 26, 2010 joint development and commercialization agreement with IntelGenx Corp., pursuant to which we received a worldwide,
exclusive and perpetual license to various patent rights and know-how related to RHB-103. See “– License Agreement
for RHB-103” for more information regarding this agreement.



Competition and Market



To the best of our knowledge, the main
marketing competitors of RHB-103 are oral drugs from the triptan family, such as rizatriptan from Merck and Co., Inc., which is
marketed in the U.S. under the name of Maxalt® and in generic form since 2012, and sumatriptan, produced by GlaxoSmithKline
and marketed in the U.S. as Imitrex® and in generic form since 2006. The target market for RHB-103 is the triptan market, which
was estimated at approximately $1 billion worldwide in 2013 according to a 2013 annual sales report from EvaluatePharma, a leading
market intelligence and information resource.



In December 2012, the patent on rizatriptan
expired and as of the date of this filing, there are various generic versions of Maxalt® and of MaxaltMLT® available for
prescription. According to the 2013 annual report of Merck and Co., Inc., the worldwide direct sales of Merck and Co.'s rizatriptan
based drugs in 2013 were $149 million. According to an article in the journal Current Pain and Headache Reports 2004 by Dr. David
W. Dodick et. al., Rizatriptan (Maxalt®) is considered one of the oral triptans with the highest effectiveness among the triptan
family.



Until December 2012, sumatriptan was the
leading generic triptan competitor on the market. While its price is generally lower than the rizatriptan based drugs on the market,
it ranks lower than these drugs in terms of effectiveness. We believe that this limited efficacy will likely also be true with
respect to the single-use, battery-powered patch that actively delivers sumatriptan which was developed by NuPathe, Inc., approved
by the FDA in January 2013 and acquired by Teva Pharmaceutical Industries Ltd.



We believe that RHB-103 will compare favorably
to the other triptan drugs due to the fact that it is delivered through oral dissolution, rather than through conventional tablets.
This feature may be especially appealing to migraine patients who suffer from migraine-related nausea, which according to an article
published by Lipton RB et al. is estimated to affect 80% of all of total migraine population. We believe that RHB-103 will
also be advantageous to pediatric and geriatric populations who often struggle with swallowing capsules with water.



Clinical Development



In April 2012, we and IntelGenx, Corp.
completed a bioequivalence clinical trial in Canada, subject to the U.S. Food and Drug Administration review and approval, in order
to examine the pharmacokinetic equivalence between the soluble film of RHB-103 and rizatriptan of Merck & Co. Inc. (Maxalt
MLT®), using 26 volunteers. The final results of the clinical trial, which we received in August 2012, demonstrated that RHB-103
met its specified endpoints and the U.S. Food and Drug Administration criteria in all parameters for bioequivalence with rizatriptan
of Merck & Co. Inc. (Maxalt MLT®).



On November 7, 2012, we and IntelGenx Corp.
held a pre-New Drug Application, or pre-NDA, meeting with the FDA.



Based on the clinical trial and the outcome
of the pre-NDA meeting, we and IntelGenx Corp. filed an New Drug Application (NDA) with the U.S. Food and Drug Administration (FDA)
for U.S. marketing approval under the 505(b)(2) regulatory path for RHB-103 in March 2013. FDA indicated that the NDA is subject
to a standard 10-month review period and will have a Prescription Drug User Fee Act ("PDUFA") goal date of February 3,
2014. The PDUFA action goal date is the targeted date for FDA to complete its review of the NDA.



On February 4, 2014, we and IntelGenx Corp.
announced that we had received a complete response letter from FDA indicating certain matters that would need to be addressed prior
to obtaining approval for marketing. These matters related primarily to third party Chemistry, chemistry, manufacturing and controls
issues, as well to packaging and labeling of the film. The FDA’s letter did not raise any safety issues or questions regarding
the results of the clinical trials. As such, we believe that responses to these questions can be delivered to FDA within a few
weeks.



In November 2013, we and IntelGenx Corp.
reported a positive European Scientific Advice meeting with the German Federal Institute for Drugs and Medical Devices (BfArM)
regarding RHB-103. The Scientific Advice meeting with the BfArM provided sufficient clarity with regard to the regulatory path.
Consequently, RedHill plans to conduct a small bioavailability study comparing RHB-103 to the European reference product for the
purpose of submitting a Marketing Authorization Application (MAA) for marketing approval of RHB-103 in the EU in 2014.



33







The following chart summarizes the clinical
trial history status of RHB-103:



|Clinical trialname |  | Developmentphase of theclinical trial |  | Purpose ofthe clinicaltrial              |  | Clinicaltrial site        |  | Plannednumberofsubjectsof thetrial |  | Numberofsubjects |  | Nature andstatus of the
trial                                                                                                   |  | Schedule         |  | Total incurredcost as ofDecember 31,2013
|------------------ |  | ------------------------------------- |  | ---------------------------------------- |  | ------------------------- |  | ---------------------------------- |  | ---------------- |  | ------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- |  | ----------------------------------------
|                   |  |                                       |  |                                          |  |                           |  |                                    |  |                  |  |                                                                                                                                 |  |                  |  |                                         
|PLT—008-09         |  | Phase I                               |  | PK comparison with a parallel product    |  | RA Chem Pharma, India     |  | 10                                 |  | 10               |  | The trial was performed and indicated similarity between the PK profile of the product and the profile of the reference product |  | Ended in 2009    |  | -                                       
|                   |  |                                       |  |                                          |  |                           |  |                                    |  |                  |  |                                                                                                                                 |  |                  |  |                                         
|RZA-P9-688         |  | Comparative Bioequivalence            |  | PK comparison
        with Maxalt MLT®   |  | Algorithme Pharma, Canada |  | 26                                 |  | 26               |  | Successfully completed the study demonstrating bioequivalence as defined by U.S. Food and Drug Administration                   |  | Ended in Q2 2012 |  | Approx.
        $1.1 million            
|RZA-P3-697         |  | Comparative Bioequivalence            |  | PK comparison
        with Maxalt Lingua |  | Algorithme Pharma, Canada |  | 26                                 |  | 26               |  | Expected to start in Q1 2014                                                                                                    |  | RZA-P3-697       |  | Comparative Bioequivalence              



Supplemental studies may be required as
part of the RHB-103 global development program and regulatory strategy.



We cannot predict with certainty our development
costs and they may be subject to changes. See “Item 3. Key Information – D. Risk Factors – Risk Related to Our
Financial Condition and Capital Requirements.”



RHB-104



RHB-104 is intended for the treatment of
Crohn’s disease which is a serious inflammatory disease of the gastrointestinal system that may cause severe abdominal pain
and bloody diarrhea, malnutrition and potential life-threatening complications.



RHB-104 is a patented combination of clarithromycin,
clofazimine and rifabutin, three generic antibiotic ingredients, in a single capsule and was developed to treat Mycobacterium
avium paratuberculosis,or MAP, infections in Crohn’s disease. According to a 2007 article in The Lancet Infectious Diseases
by Feller et. al., which contains a meta-analysis of 18 published scientific and clinical studies, Crohn’s disease patients
are seven times more likely to be infected with MAP than non-Crohn’s patients.



To date, Crohn’s disease has been
considered to be an autoimmune disease, but the exact pathological mechanism is unclear. Dr. Robert J. Greenstein suggested in
The Lancet Infectious Diseases, 2003 that Crohn’s disease is caused by MAP, the same organism responsible for a major cause
of disease in animal agriculture production, domestic and wild animals. This hypothesis is supported by an expanding number of
scientific and clinical studies published in peer reviewed journals since a National Institute of Allergy and Infectious Diseases
conference that focused on MAP in Crohn’s disease took place in 1998. Specific genetic loci like NOD2 have been implicated
in Crohn’s disease and are suspected of decreased recognition of MAP in the body.



In 2011, we obtained U.S. Food and Drug
Administration “Orphan Drug” status for RHB-104 for the treatment of Crohn’s disease in the pediatric population.
See – “Government Regulations and Funding Orphan Drug Designation.”



34







The formulation for RHB-104 is presently
complete and manufacturing of the all-in-one capsules for our clinical trials and NDA submission is currently in process. Stability
testing of the clinical trial material is ongoing.



We acquired the rights to RHB-104, RHB-105
and RHB-106 pursuant to an asset purchase agreement with Giaconda Limited, a publicly traded Australian company. See “Acquisition
and License Agreements – Acquisition of RHB-104, RHB-105 and RHB-106.”



In recent years, a diagnostic technology
enabling the identification of the presence of MAP bacterial DNA in patients was developed and patented by Professor Saleh Naser
of the University of Central Florida in Orlando. On September 15, 2011, we entered into an agreement with the University of Central
Florida Research Foundation, Inc., pursuant to which we acquired the exclusive rights in this patented diagnostic test. See “–
Acquisition and License Agreements – License Agreement related to RHB-104.”



On February 12, 2012, we entered into an
agreement with Quest Diagnostics Ltd. to develop a commercial diagnostic test for detecting the presence of MAP bacteril DNAa in
the blood based upon the rights we acquired from University of Central Florida Research Foundation, Inc. We intend to use this
test in connection with our planned RHB-104 clinical trials and potentially in future commercial applications of RHB-104.



Market



According to a report on the epidemiology
of Inflammatory Bowel Disease published by Datamonitor in August 2012, there were approximately 534,000 Crohn’s patients
in the U.S. in 2011, which number is expected to increase by 12% to approximately 598,800 by 2021. The disease is now considered
to be the second most common chronic inflammatory disorder after rheumatoid arthritis. According to Dr. Andrew Yu in an article
published in Current Medical Research Opinions in 2008, the total direct medical cost of Crohn’s disease in the U.S. was
estimated to be $7.8 billion to $11.2 billion in 2006. Including indirect costs, the total economic burden of Crohn’s disease
was estimated to be $10.9 billion to $15.5 billion.



The MAP bacterium is suspected of being
a major factor in causing the inflammatory symptoms of Crohn’s disease patients. According to a study by Professor Saleh
Naser et. al. in 2004 in The Lancet Infectious Diseases, approximately 40-50% of Crohn’s disease patients have been found
to be infected with these bacteria. EvaluatePharma, a leading market intelligence and information resource, estimates the market
of drug treatments for Crohn’s disease to have exceeded $4 billion worldwide in 2013 and estimates the worldwide market for
drug treatment of Crohn’s disease to reach $5 billion by 2015.



Competition



Unlike other drugs on the market for the
treatment of Crohn’s disease which are immunosuppressive agents, RHB-104 is intended to directly address the suspected cause
of the disease, MAP bacterial infection. To the best of our knowledge, there is no other drug approved for marketing that targets
infections of MAP bacteria in Crohn’s disease patients.



Currently available drugs on the market
for the treatment of Crohn’s disease offer only symptomatic relief, the effects of which are largely temporary and accompanied
by numerous adverse effects. A report of these side effects is shown in the following chart published by Dr. Carol Nacy et. al.
in a report from the American Academy of Microbiology that was published in June 2007.



|Drug Family                                                                                               |  | Example of Drug from theFamily                           |  | Effect                                                                                                                                      |  | Common Side Effects                                                                                                           
|--------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------
|                                                                                                          |  |                                                          |  |                                                                                                                                             |  |                                                                                                                               
|Corticosteroids                                                                                           |  | Prednisone                                               |  | Relatively good effectiveness, for some patients only.                                                                                      |  | Headaches, swinging moods, muscle and bone weakness, heart failure, diabetes and risk of infections.                          
|                                                                                                          |  |                                                          |  |                                                                                                                                             |  |                                                                                                                               
|Immunomodulatory drugs                                                                                    |  | 6-Mercaptopurine
        Methotrexate                    |  | High effectiveness, but only for a certain time and for some patients.                                                                      |  | Suppresses the immune system causing risks of infection or even cancer, negative side effects on the liver, kidneys and blood.
|                                                                                                          |  |                                                          |  |                                                                                                                                             |  |                                                                                                                               
|Biological agents –Anti-TNF-α drugs. The TNF (Tumor Necrosis Factor) is a component of the immune system. |  | infliximab
        Adalimumab
        Certolizumab pegol |  | Administered intravenously (IV) or subcutaneously every 1-8 weeks. Effective for some patients (30-40%). Effectiveness decreases over time. |  | Suppresses a central component of the immune system. Risk of infectious diseases, cancer and damage to the nervous system.    



35







We may also be exposed to potentially competitive
products which may be under development to treat Crohn’s disease, including Sequella’s CM Analog, an innovative cellular
therapy with stem cells by Hospital Clinic in Barcelona, Spain, which is in early stage of development, and new biological and
other anti-TNFα therapies which are under development to treat Crohn’s disease.



Clinical Development



We are currently conducting our first clinical
trial in North America and Israel (MAP US), and potentially other countries, as well as preparing a second clinical trial in Europe,
before potentially submitting applications for marketing approval for RHB-104 from the U.S. Food and Drug Administration through
the 505(b)(2) regulatory path. These trials, based on the analysis and data of a Phase III trial conducted in Australia, are designed
as a Phase III trial for Crohn’s disease patients in North America and Israel, and a Phase III trial for Crohn’s disease
patients in at least six countries in Europe. In the Phase III clinical trial in Australia, sponsored by Pharmacia and published
by Professor Warwick Selby et al in 2007 in the medical journal Gastroenterology, the primary objectives were to evaluate the ratio
of patients with recurrent symptoms of the disease following initial induction of remission with16 weeks of treatment. Subjects
were subsequently assessed at 52, 104 and 156 weeks. The main secondary objective was the percent of patients whose achieved clinical
remission at 16 weeks. Although the study did not meet the main objective of showing a difference in relapse rate with long-term
treatment, there was a statistically significant difference between the treatment groups in the percentage of subjects in remission
at week 16. Professor Marcel Behr and Professor James Hanley from McGill University published a re-analysis of the study in The
Lancet Infectious Diseases in June 2008 based on the intent-to-treat (ITT) principle and found that there was a significant statistical
advantage for the active therapy over the placebo throughout the period of administration that disappeared once the active therapy
was discontinued.



The trial of RHB-104 in North America and
Israel is being led by Professor David Y. Graham, MD, from Baylor College of Medicine, Houston, Texas, U.S., while the clinical
trial of RHB 104 in Europe will be led by Professor Colm O’Morain, MD, of Meath and Adelaide Hospital, Dublin, Ireland.



We are also currently examining the possibility
of carrying out clinical trials on pediatric patients that suffer from Crohn’s disease, a population for which RHB-104 received
“Orphan Drug” status in 2011. If successful in these trials, we intend to apply for regulatory approval of a pediatric
indication of RHB-104.



On October 21, 2012, we entered into an
agreement, with our Canadian service provider which entered into a back-to-back agreement with Corealis Pharma, Inc., a Canadian
drug manufacturer, to manufacture and supply RHB-104 for our clinical trials. See " – Manufacturing Agreement Related
to RHB-104."



In June 2011, we entered into an agreement
with our Canadian service provider, which entered into a back-to-back agreement with PharmaNet Canada Inc. for the provision of
clinical trial services for the RHB-104 adult studies in North America and Europe. In March 2012, our Canadian service provider
entered into another agreement with PharmaNet Canada Inc. for the provision of clinical trial services for a pediatric trial of
RHB-104. We have not yet set a date for starting the pediatric clinical trial, nor have we applied for U.S. Food and Drug Administration
approval to undertake this trial. See “– Master Service Agreements with Canadian service provider” and see also
"– Clinical Services Agreement related to RHB-104."



Subsequent to our discussions with the
U.S. Food and Drug Administration for approval to conduct the North American trial based upon an Investigative New Drug (IND) approved
by the U.S. Food and Drug Administration on July 18, 2007, we made a number of changes to the original protocol. On August 29,
2012, we revised the IND filed by Giaconda with the submission of a new Phase III protocol to the U.S. Food and Drug Administration,
and after 30 days, the IND became effective. Based upon the response from the U.S. Food and Drug Administration on issues relating
to the clinical study, additional changes have been made, and will be made, to the clinical study in North America and Israel.



Approximately 240 Crohn’s disease
subjects are expected to participate in the clinical trial in North America and Israel, and potentially other countries. Half of
the patients will receive RHB-104 and half will receive a placebo drug over a period of approximately six months to determine efficacy,
with and additional follow 6 month follow-up period to further investigate efficacy, maintenance and safety. A Clinical Trial Application
(CTA) may be submitted in Europe in the coming months.



36







The following chart summarizes the clinical
trial history and status of RHB-104 and its earlier individual active agents:



|Clinicaltrialauthor/design-nation |  | Developmentphase ofthe clinicaltrial                                 |  | Purpose of theclinical trial                                                                      |  | Clinical trialsite                                                       |  | Plannednumber ofsubjects ofthe trial |  | Number.ofsubjects |  | Nature and status of thetrial                                                                                                        |  | Schedule                                          |  | Totalincurredcost as ofDecember31, 2013
|--------------------------------- |  | -------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------ |  | ------------------------------------ |  | ----------------- |  | ------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------------------------- |  | ---------------------------------------
|                                  |  |                                                                      |  |                                                                                                   |  |                                                                          |  |                                      |  |                   |  |                                                                                                                                      |  |                                                   |  |                                        
|Borody 2002                       |  | Phase IIa                                                            |  | Examining the effect of the treatment on Crohn’s disease patients                                 |  | Center for Digestive Disease, Australia                                  |  | 12                                   |  | 12                |  | Performed                                                                                                                            |  | Ended in 2002                                     |  |                                        
|                                  |  |                                                                      |  |                                                                                                   |  |                                                                          |  |                                      |  |                   |  |                                                                                                                                      |  |                                                   |  |                                        
|Borody 2005                       |  | Phase II                                                             |  | Examining the effect of the treatment on Crohn’s disease patients                                 |  | Center for Digestive Disease, Australia                                  |  | 52                                   |  | 52                |  | Performed                                                                                                                            |  | Ended in 2005                                     |  |                                        
|                                  |  |                                                                      |  |                                                                                                   |  |                                                                          |  |                                      |  |                   |  |                                                                                                                                      |  |                                                   |  |                                        
|Selby                             |  | Phase III                                                            |  | Examining the effect of the treatment with the product on Crohn’s
    disease patients            |  | 20 clinical centers in Australia                                         |  | 213                                  |  | 211               |  | The trial was performed and indicated promising improvement rates,
    although it did not meet the main trial objective, as defined |  | Published in 2007                                 |  |                                        
|                                  |  |                                                                      |  |                                                                                                   |  |                                                                          |  |                                      |  |                   |  |                                                                                                                                      |  |                                                   |  |                                        
|Biovail PK study 2007             |  | PK Study                                                             |  | Optimize the formulation of RHB-104 on a PK basis.                                                |  | Toronto, Ontario                                                         |  | 24                                   |  | 24                |  | Trial compared two formulations to determine the optimum formulation
    for RHB-104                                                 |  | Ended in 2007                                     |  |                                        
|                                  |  |                                                                      |  |                                                                                                   |  |                                                                          |  |                                      |  |                   |  |                                                                                                                                      |  |                                                   |  |                                        
|MAP US                            |  | Phase
        III
        (N.
        America and Israel – “MAP US”) |  | Examining the product’s effectiveness in alleviating  symptoms
    of Crohn’s disease in patients |  | Approx. 37 clinical centers in  the US, 11 in Israel and
    5 in Canada |  | 240                                  |  |                   |  | Phase III trial in North America and Israel has commenced                                                                            |  | First patient entered study in Q3 2013            |  | $5.1
        million                   
|                                  |  |                                                                      |  |                                                                                                   |  |                                                                          |  |                                      |  |                   |  |                                                                                                                                      |  |                                                   |  |                                        
|To be determined                  |  | Phase
        III
        (Europe
        – “MAP Europe”)            |  | Examining the product’s effectiveness in alleviating symptoms
    of Crohn’s disease in patients  |  | To be determined                                                         |  | To be determined                     |  |                   |  | Under examination                                                                                                                    |  |                                                   |  |                                        
|                                  |  |                                                                      |  |                                                                                                   |  |                                                                          |  |                                      |  |                   |  |                                                                                                                                      |  |                                                   |  |                                        
|Food Effect Study                 |  | Phase
        I PK Study                                             |  | Examining the effect of food versus fasting on the pharmacokinetics
    of the product            |  | Quebec, Canada                                                           |  | 84                                   |  | 84                |  | In process                                                                                                                           |  | Clinical Study Report expected mid-February, 2014 |  |                                        
|                                  |  |                                                                      |  |                                                                                                   |  |                                                                          |  |                                      |  |                   |  |                                                                                                                                      |  |                                                   |  |                                        
|RHB-P2-753                        |  | Phase 1                                                              |  | Drug-drug interaction study                                                                       |  | Algorithme Pharma, Canada                                                |  | 36                                   |  |                   |  |                                                                                                                                      |  | Expected to start in Q1 2014                      |  |                                        



Supplemental studies will be required as
part of the RHB-104 global development program and regulatory strategy.



We cannot predict with certainty our development
costs and they may be subject to changes. See “Item 3. Key Information – D. Risk Factors – Risk Related to Our
Financial Condition and Capital Requirements.”



37







Multiple Sclerosis



We have performed several pre-clinical
studies including three pre-clinical studies in an experimental autoimmune encephalomyelitis (EAE) mouse model of Multiple Sclerosis
(MS) to investigate the potential impact of RHB-104 in treating MS. The first pre-clinical study measured cytokine production (biomarkers
of inflammation) and demonstrated that the RHB-104 treatment led to a significant reduction of pro-inflammatory cytokine concentrations
of IL-6 and TNF, which are associated with inflammation and MS, compared to the control group. The second pre-clinical study measured
the efficacy of RHB-104 as prophylactic therapy, and the treatment with RHB-104 demonstrated a significant reduction in the inflammatory
area and level of demyelination, compared with the control group. The third pre-clinical study measured relapses, demonstrating
RHB-104’s efficacy in significantly reducing the incidence of relapse, compared with the control group. Following these pre-clinical
studies, we are conducting a Phase IIa proof of concept clinical trial at two sites in Israel. This clinical trial was initiated
in June 2013 with interim results expected during the fourth quarter of 2014.



MS is an inflammatory, demyelinating, and
neurodegenerative disease of the central nervous system of uncertain etiology that exhibits characteristics of both infectious
and autoimmune pathology. There is a growing consensus in the medical community that a dysregulated immune system plays a critical
role in the pathogenesis of MS.



The following chart summarizes the clinical
trial history and status of RHB-104-MS:



|Trial name                                                                  |  | Developmentphase |  | Purpose of the
trial                                                                                            |  | Clinicaltrial sites |  | Plannednumber ofsubjects ofthe trial |  | Number.of
subjectscurrentlyenrolled |  | Nature andstatus of the
trial |  | Schedule                            |  | Totalincurredcost as ofDecember31, 2013
|--------------------------------------------------------------------------- |  | ---------------- |  | --------------------------------------------------------------------------------------------------------------- |  | ------------------- |  | ------------------------------------ |  | ----------------------------------- |  | ----------------------------- |  | ----------------------------------- |  | ---------------------------------------
|                                                                            |  |                  |  |                                                                                                                 |  |                     |  |                                      |  |                                     |  |                               |  |                                     |  |                                        
|Experimental Autoimmune Encephalomyelitis (EAE) Mouse T-cell Function Study |  | Pre-Clinical     |  | Measure cytokine production as a measure of inflammation in EAE mice treated with RHB-104 vs. negative controls |  | -                   |  |                                      |  |                                     |  |                               |  | Completed 2012                      |  |                                        
|                                                                            |  |                  |  |                                                                                                                 |  |                     |  |                                      |  |                                     |  |                               |  |                                     |  |                                        
|Experimental Autoimmune Encephalomyelitis (EAE) Prophylaxis Study           |  | Pre-Clinical     |  | Scoring EAE severity in mice treated prophylactically with RHB-104 vs. negative controls                        |  | -                   |  |                                      |  |                                     |  |                               |  | Completed 2012                      |  |                                        
|                                                                            |  |                  |  |                                                                                                                 |  |                     |  |                                      |  |                                     |  |                               |  |                                     |  |                                        
|Experimental Autoimmune Encephalomyelitis (EAE) Relapse Study               |  | Pre-Clinical     |  | Scoring EAE severity in mice treated with RHB-104 vs. negative and positive controls                            |  | -                   |  |                                      |  |                                     |  |                               |  | Completed 2012                      |  |                                        
|                                                                            |  |                  |  |                                                                                                                 |  |                     |  |                                      |  |                                     |  |                               |  |                                     |  |                                        
|Lipopolysaccharide (LPS)-induced cytokine production study                  |  | Pre-Clinical     |  | Measure LPS induced cytokine production in C57BL/6 mice treated with RHB-104 vs. negative and positive controls |  | -                   |  |                                      |  |                                     |  |                               |  | Completed 2013                      |  |                                        
|                                                                            |  |                  |  |                                                                                                                 |  |                     |  |                                      |  |                                     |  |                               |  |                                     |  |                                        
|CEASE-MS                                                                    |  | Phase IIa        |  | Exploratory                                                                                                     |  | Israel              |  | 16                                   |  | 0                                   |  | In process                    |  | Interim results expected in Q1 2015 |  | $0.3 million                           



Additional studies will be required as
part of the RHB-104 Multiple Sclerosis global development program and regulatory strategy.



We cannot predict with certainty our development
costs and they may be subject to changes. See “Item 3. Key Information – D. Risk Factors – Risk Related to Our
Financial Condition and Capital Requirements.”



38







RHB-105



RHB-105 is intended for the eradication
of H. Pylori bacterial infection in the gastrointestinal tract. RHB-105 is a combination of three approved drug products
– omeprazole, which is a proton pump inhibitor (prevents the secretion of hydrogen ions necessary for digeston of food in
the stomach), and amoxicillin and rifabutin which are antibiotics. RHB-105 is administered to patients orally.



Chronic infection with H. Pylori
irritates the mucosal lining of the stomach and small intestine. The original discovery of the H. Pylori bacteria and its
association with peptic ulcer disease, warranted the Nobel Prize in 2005. H. Pylori infection has since been associated
with a variety of outcomes which include: dyspepsia (non-ulcer or functional), peptic ulcer disease (duodenal ulcer and gastric
ulcer), primary gastric B-cell lymphoma, vitamin B12 deficiency, iron deficiency anemia and gastric cancer.



Gastric cancer is the second most frequent
cancer worldwide and is associated with a poor prognosis (5-year survival rate of only 10-15% in patients with advanced disease).
Almost all gastric cancer is now known to be attributable to H. pylori infection, and H. pylori eradication seems
to either eliminates, stabilizes, or reduces risk for progression to gastric cancer, depending upon the severity and extent of
damage present when the H. pylori infection is cured.



As noted above, we acquired the rights
to RHB-105 pursuant to an agreement with Giaconda Limited. See “– Acquisition and License Agreements – Acquisition
of RHB-104, RHB-105 and RHB-106.”



Competition and Market



The most popular treatments of H. Pylori
type bacteria combine clarithromycin or metronidazole antibiotics with amoxicillin and a proton pump inhibitor. Such current standard
of care treatments fail in more than 20% of the patients due to the development of antibiotic resistance, as reported by Dr. Lennita
Wannmacher in a 2011 report submitted to the World Health Organization. The potential advantage of RHB-105 over these drugs (such
as PrevPac® of Takeda Pharmaceuticals NA and Pylera® of Aptalis Pharma) was shown in a Phase II study comprising 130 subjects,
in which RHB-105 was shown to eradicate H. Pylori in over 90% of treated patients who failed previous eradication attempts
using the current standard of care treatment, as published in the 2006 study report by Dr. TJ. Borody, et. al. in Alimentary Pharmacology
& Therapeutics.



Approximately three million H. Pylori
infected patients are treated per annum in the U.S. according to a 2007 report by Colin W. Howden, MD, et. al. in The American
Journal of Managed Care. Based on this figure, combined with the price of current treatments, we estimate that the U.S. market
of RHB-105 to be between $1 billion and $1.5 billion.



Clinical Development



RHB-105 completed a Phase II clinical trial
in Australia. A phase III study in the US is currently underway. We intend to seek marketing approval for RHB-105 from the U.S.
Food and Drug Administration through the 505(b)(2) regulatory path.



We entered into an agreement with Professor
David Y. Graham, MD, from Baylor College of Medicine, Houston, Texas, U.S., to serve as the lead investigator of the first Phase
III clinical trial of RHB-105.



39







The following chart summarizes the clinical
trial history and status of RHB-105:



|Clinical 
trialname |  | Developmentphase of theclinical trial |  | Purpose ofthe clinical
trial                                                                                                                   |  | Clinical trialsite                      |  | Plannednumber.ofsubjectsof the
trial |  | Number
ofSubjects |  | Nature andstatus of thetrial                                                                                                                            |  | Schedule                                                     |  | Totalincurredcost as ofDecember31, 2013
|------------------- |  | ------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------- |  | ------------------------------------ |  | ----------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------ |  | ---------------------------------------
|                    |  |                                       |  |                                                                                                                                                |  |                                         |  |                                      |  |                   |  |                                                                                                                                                         |  |                                                              |  |                                        
|-                   |  | Phase IIa                             |  | Examining the product’s effectiveness in treating H. Pylori infections in patients for whom standard of care had failed to treat the infection |  | Center for Digestive Disease, Australia |  | 130                                  |  | 130               |  | The trial was performed and indicated that the treatment is effective for bacteria patients for whom standard of care had failed to treat the infection |  | Ended in 2005                                                |  | -                                      
|                    |  |                                       |  |                                                                                                                                                |  |                                         |  |                                      |  |                   |  |                                                                                                                                                         |  |                                                              |  |                                        
|TBD                 |  | Comparative Bioavailability           |  | Comparing the bioavailability of RHB-105 to the bioavailability of an equivalent dose of commercially available active ingredients             |  | Algorithme Pharma
        Canada        |  | 16                                   |  | 15                |  | Successfully completed                                                                                                                                  |  | Completed in December 2013                                   |  | $0.2 million                           
|                    |  |                                       |  |                                                                                                                                                |  |                                         |  |                                      |  |                   |  |                                                                                                                                                         |  |                                                              |  |                                        
|ERADICATE Hp        |  | Phase III                             |  | Examining the effectiveness, safety and pharmacokinetics of the final formulation                                                              |  | 8 sites in the US                       |  | 90                                   |  | TBD               |  | Initiated Actively enrolling patients                                                                                                                   |  | Completion expected by 3Q2014first patient dosed in Dec 2013 |  | $0.9 million                           



Supplemental studies will be required as
part of the RHB-105 global development program and regulatory strategy.



We cannot predict with certainty our development
costs and they may be subject to changes. See “Item 3. Key Information – D. Risk Factors – Risk Related to Our
Financial Condition and Capital Requirements.”



RHB-106



RHB-106 is a tablet intended for the preparation
and cleansing of the gastrointestinal tract prior to the performance of abdominal procedures, including diagnostic tests, such
as colonoscopy, barium enema or virtual colonoscopy, as well as surgical interventions, such as laparotomy.



As noted above, we acquired the rights
to RHB-106 pursuant to an agreement with Giaconda Limited. See “– Acquisition and License Agreements – Acquisition
of RHB-104, RHB-105 and RHB-106.”



Competition and Market



According to a 2012 report by EvaluatePharma,
the world market of products intended for cleansing the gastrointestinal system was estimated at approximately $1.4 billion in
2013.



To the best of our knowledge, the main
competitors for RHB-106 are gastrointestinal cleansing products based on polyethylene glycol (PEG 3350). These products are delivered
in the form of water-soluble powder, and require users to drink between 2-4 liters of solution before performance of the gastroenterological
procedure. In addition to the need to drink considerable amounts of solution, a common side effect that raises difficulties with
users is the accompanying harsh and unpleasant taste leading to potential difficulties with patient compliance. RHB-106 offers
the potential for improved patient compliance because it is tasteless and eliminates the need for drinking liters of poor tasting
electrolyte solution. RHB-106 also has an advantage compared to currently available tableted products in the field, in that it
does not contain sodium phosphate, an active ingredient linked with a risk of nephrotoxicity.



An additional
product, called PrepoPikTM in the U.S. is manufactured by Ferring Pharmaceuticalsand received Food and Drug Administration approval on July 17, 2012. The product, marketed
under the name PicoPrepTM in other countries, is based on an active chemical ingredient called sodium picosulfate, the
same active ingredient used in RHB-106. This product is also used for clearing the gastrointestinal system and it is given in the
form of a water-soluble powder and requires drinking quantities of fluids.



40







Products administered in the form of tablets
or capsules that were released on the market in the U.S., such as OsmoPrep® and Visicol® (produced by Salix Pharmaceuticals
Inc.) and Fleet (produced by C.B. Fleet Company, Inc., or C.B. Fleet), are based on a chemical substance called sodium phosphate.
In December 2008, the U.S. Food and Drug Administration published a severe warning against the use of these products due to rare
but severe side effects linked to kidney damage. As a consequence of this development, the over-the-counter products of C.B. Fleet
were recalled from the market, while the prescription products must carry a severe warning (black box label). As announced by Salix
Pharmaceuticals Inc., following the black box warning received from the U.S. Food and Drug Administration, sales in 2009 of these
products declined by 39% compared to 2008.



A leading product among the PEG 3350 family
of products is MoviPrep®, marketed by Salix Pharmaceuticals, Inc. in the U.S. and by Norgine in Europe. Its price in the U.S.
varies from $40 to $60 per dose. It requires drinking of about 2 liters of solution and some users report it has an unpleasant
taste. EvaluatePharma, a leading market intelligence and information resource, estimates that the annual U.S. sales of MoviPrep®
in 2013 were approximately $77 million. The potential advantage of RHB-106 over the current competitor products of the PEG 3350
type (such as MoviPrep®), as well as over PicoPrepTM, is that it is tasteless, eliminates the need to drink several
liters of solution, and spares the patient the exposure to the harsh tastes that may accompany these products. RHB-106 also does
not fall under the black box warning against nephrotoxicity issued by the U.S. Food and Drug Administration in December 2008 with
respect to currently marketed capsule preparations which are based on sodium phosphate.



Clinical Development



Giaconda Limited completed a Phase IIa
clinical trial in which 62 patients who underwent elective colonoscopies were prospectively randomized to receive either a hypertonic
solution with PicoPrepTM (sodium picosulphate) capsules, PicoPrepTM capsules alone, standard GlycoprepTM
(PEG) or PicoPrepTM sachets. The clinical trial showed that the PicoPrepTM capsules were the preferred option
by the patients and resulted in a lower number of mild adverse events than the other preparations. In terms of “ease of completion”,
more subjects in the PicoPrepTM capsule arm, as compared to the GlycoPrepTM arm, rated this bowel preparation
as easy to complete.



RHB-106 is currently in the final formulation
stages. We intend to seek marketing approval from the U.S. Food and Drug Administration through the 505(b)(2) regulatory path.



The following chart summarizes the clinical
trial history and status of RHB-106:



|Clinicaltrial name |  | Developmentphase of theclinical trial |  | Purpose ofthe clinicaltrial                                                    |  | Clinicalsite                            |  | Plannednumber ofsubjects ofthe trial |  | Numberofsubjects |  | Natureand statusof the trial |  | Performanceschedule |  | Totalincurredcost as ofDecember 31,2013
|------------------ |  | ------------------------------------- |  | ------------------------------------------------------------------------------ |  | --------------------------------------- |  | ------------------------------------ |  | ---------------- |  | ---------------------------- |  | ------------------- |  | ---------------------------------------
|                   |  |                                       |  |                                                                                |  |                                         |  |                                      |  |                  |  |                              |  |                     |  |                                        
|-                  |  | Phase IIa                             |  | Comparison of the product’s effectiveness and safety with an existing products |  | Center for Digestive Disease, Australia |  | 60                                   |  | 60               |  | Performed                    |  | Ended in 2005       |  | -                                      



Supplemental studies will be required as
part of the RHB-106 global development program and regulatory strategy.



We cannot predict with certainty our development
costs and they may be subject to changes. See “Item 3. Key Information – D. Risk Factors – Risk Related to Our
Financial Condition and Capital Requirements.”



41







Summary



A summary of our therapeutic candidates’
key programs is provided below:



|Name of Product |  | RelevantIndication                                                |  | Potential Advantages
OverMost Existing Treatments                                                                              |  | Development Stage                                                                                                                                                         |  | Rights in the Product                                      
|--------------- |  | ----------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------
|                |  |                                                                   |  |                                                                                                                                |  |                                                                                                                                                                           |  |                                                            
|RHB-101         |  | Heartfailure and hypertention                                     |  | Once-daily oral administration, reduced food affect, reduced does (less API)                                                   |  | Under  review, additional preparations required prior to marketing application                                                                                            |  | Worldwide, exclusive license                               
|                |  |                                                                   |  |                                                                                                                                |  |                                                                                                                                                                           |  |                                                            
|RHB-102         |  | Oncology support anti-emetic and potentially another indication   |  | Reduced number of drug administrations, improved compliance and adherence                                                      |  | Under review and discussions with FDA regarding marketing approval application                                                                                            |  | Worldwide, exclusive license                               
|                |  |                                                                   |  |                                                                                                                                |  |                                                                                                                                                                           |  |                                                            
|RHB-103         |  | Acute migraine                                                    |  | Avoids exacerbation of nausea, administration without water, ease of use, convenient portability and discrete carriage and use |  | NDA filed and accepted, Complete response letter (CRL) received and response is being prepared.  Planned European marketing application subject to a bioequivalence study |  | Worldwide, exclusive license and co-development            
|                |  |                                                                   |  |                                                                                                                                |  |                                                                                                                                                                           |  |                                                            
|RHB-104         |  | Crohn’s disease                                                   |  | Novel mechanism of action and improved clinical benefit (targeting suspected underlying cause of Crohn's disease               |  | Phase III study in N. America and Israel ongoing                                                                                                                          |  | Acquired all rights to the product, worldwide and exclusive
|                |  |                                                                   |  |                                                                                                                                |  |                                                                                                                                                                           |  |                                                            
|RHB-104         |  | Multiple Sclerosis (MS)                                           |  | Oral formulation targeting suspected underlying cause of MS                                                                    |  | Phase IIa study in Israel ongoing                                                                                                                                         |  | Acquired all rights to the product, worldwide and exclusive
|                |  |                                                                   |  |                                                                                                                                |  |                                                                                                                                                                           |  |                                                            
|RHB-104         |  | Rheumatoid Arthritis (RA); Systemic Lupus Erythematosus
    (SLE) |  | Oral formulation targeting suspected underlying cause of RA and SLE                                                            |  | Completed pre-clinical studies                                                                                                                                            |  | Acquired all rights to the product, worldwide and exclusive
|                |  |                                                                   |  |                                                                                                                                |  |                                                                                                                                                                           |  |                                                            
|RHB-105         |  | H. Pylori infection                                               |  | Improved efficacy, potential to overcome bacterial resistance, all-in-one pill                                                 |  | Phase III study in the U.S. ongoing                                                                                                                                       |  | Acquired all rights to the product, worldwide and exclusive
|                |  |                                                                   |  |                                                                                                                                |  |                                                                                                                                                                           |  |                                                            
|RHB-106         |  | Bowel preparation                                                 |  | Oral pill to avoids severe bad taste; No known nephrotoxicity issues                                                           |  | In preparation for Phase II/III studies                                                                                                                                   |  | Acquired all rights to the product, worldwide and exclusive



Acquisition and License Agreements



License Agreement for RHB-101



On November 18, 2009, we entered into an
agreement with Egalet a/s, a private Danish pharmaceutical company, pursuant to which Egalet a/s granted us a worldwide, exclusive
and perpetual license to use its rights in patents and know how relating to a therapeutic candidate containing the active ingredient
“Carvedilol” and which is referred to by Egalet a/s as “Egalet Carvedilol.” The name given to this product
by us is RHB-101.



The license granted to us includes the
right to grant sublicenses. The license covers the development, manufacture, commercialization, use, sale, offer for sale and import
of the product for all uses, including medical uses, diagnostics, and other uses in human beings and/or animals.



The granted license is exclusive with regard
to Egalet Carvedilol. We also received a non-exclusive license in additional patents for which Egalet a/s retained a right to use
such patents in connection with other products.



42







In consideration for the license, we paid
Egalet a/s $100,000. Furthermore, we are obligated under the license to pay Egalet a/s the following additional amounts:



| | · | $200,000 on the date of our filing of an application for marketing of the product with the U.S.
Food and Drug Administration and acceptance by the U.S. Food and Drug Administration of such filing for review;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | $500,000 on the date of receipt of the marketing approval from the U.S. Food and Drug Administration;
and
| | - | ---------------------------------------------------------------------------------------------------------



| | · | royalties at a rate of 30% of the amounts received by us from our own sales or from sublicenses
payments, for a fixed period up to the expiration of the patents exclusively granted to us or 12 years from the date of the first
sale of the product, whichever is earlier, in any country where a patent forming the subject of the license is registered.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Egalet a/s had the right to terminate the
license if we fail to initiate clinical trials within 24 months, except if the failure to do so was due to the decision of regulatory
authorities, is related to technical problems or other reasons beyond our control or influence. We believe that we satisfied this
requirement.



We have the right to terminate the agreement
if Egalet a/s is in material breach and does not cure the breach within ninety (90) days, and we may voluntarily terminate the
agreement upon providing thirty (30) days written notice to Egalet a/s.



The license also included various intellectual
property representations of Egalet a/s, including that the intellectual property licensed to us did not infringe upon third party
patents or other intellectual property rights, except for one patent in Europe and one patent in the U.S. We subsequently filed
an objection to the validity of the relevant European patent and on May 27, 2011, the European Patent Office annulled that patent.
With respect to the patent in the U.S., we believe that RHB-101 does not infringe that patent to the extent that RHB-101 contains
a “carvedilol free base” and does not contain carvedilol phosphate. RHB-101 does not contain carvedilol phosphate at
present and only contains carvedilol free base.



License Agreement for RHB-102



On May 2, 2010, we entered into an agreement
with SCOLR Pharma, Inc., a publicly traded Seattle based pharmaceutical company, that granted us a worldwide, exclusive and perpetual
license to use patents and know how relating to an oral formulation for sustained release of ondansetron, a generic active chemical
substance, for any pharmaceutical indication or treatment usage, diagnostic usage or any other use in human beings or in animals.
The name given to the product by us is RHB-102.



The license granted to us includes the
right to grant sublicenses. The license covers the development, manufacture, commercialization, use, sale, offer for sale and import
of products for all uses, including medical uses, diagnostics, and other uses in human beings and/or animals. However, under the
license agreement SCOLR Pharma, Inc. retained certain rights and is entitled to make use of the know- how for purposes other than
RHB-102 and/or products outside of RHB-102’s field of use, which is defined as all indications, including therapeutic, diagnostic
and other human and or animal uses.



In consideration for the granting of the
license, we paid SCOLR Pharma, Inc. an up-front payment of $100,000. Furthermore, we are obligated under the license to pay to
SCOLR Pharma, Inc. additional amounts, as follows:



| | · | $250,000 upon the receipt of U.S. Food and Drug Administration approval for marketing the product;
| | - | --------------------------------------------------------------------------------------------------



| | · | $250,000 upon the first sale of the product; and
| | - | ------------------------------------------------



| | · | royalty payments.
| | - | -----------------



Royalties are payable to SCOLR Pharma,
Inc. at a rate of 8% of our net sales or sublicensing fees, for the shorter of:



| | · | expiration of the last patent granted under the license;
| | - | --------------------------------------------------------



| | · | 10 years from the date of the sale of the first product by us or any third party; and
| | - | -------------------------------------------------------------------------------------



| | · | a date when the total of all payments made to SCOLR Pharma, Inc. reach an aggregate of $30 million.
| | - | ---------------------------------------------------------------------------------------------------



43







The agreement requires us to make a good
faith, continuous and diligent effort to allocate appropriate financial resources to prepare, initiate and complete the clinical
development of RHB-102 and file an application for regulatory marketing approval in accordance with industry standards. If we do
not comply with this undertaking, SCOLR Pharma, Inc. may terminate the license, except if our failure is due to development failures,
negative regulatory decisions, and/or other reasons beyond our control.



We have the right to terminate the agreement
if SCOLR Pharma Inc. is in material breach and does not cure the breach within ninety (90) days, and we may voluntarily terminate
the agreement upon providing thirty (30) days written notice to SCOLR Pharma Inc.



Furthermore, if we have not received U.S.
Food and Drug Administration approval for the marketing of the product within 36 months, or if product sales do not occur within
48 months following the transfer of the know- how to us, which was 30 days following the date of the agreement, SCOLR Pharma, Inc.
may terminate the agreement, unless we elect to pay the relevant milestone payment within 45 days from the date SCOLR Pharma, Inc.
notifies us of its intention to terminate the agreement.



SCOLR Pharma Inc. announced during 2013
that it had ceased business operations. Under the terms of the license agreement with SCOLR, should SCOLR file for bankruptcy,
RedHill has the protection afforded to the licensee under the United States Bankruptcy Code. We are taking active steps to further
safeguard our rights under the RHB-102 license agreement. “Item 3. Key Information – D. Risk Factors – Risk Related
to Our Business and Regulatory Matters – If we are not able to secure patents related to RHB-102, our ability to commercialize
RHB-102 or enter into commercialization agreements with potential partners with respect to this product may be adversely affected.”



License Agreement for RHB-103



On August 26, 2010, we entered into a joint
development and commercialization agreement with IntelGenx Corp. under which IntelGenx Corp. granted us a worldwide, exclusive
and perpetual license to use its rights in patents and know-how relating to a triptan formula based on the VersaFilmTM
technology and which we call RHB-103.



The license includes the right to grant
sublicenses. The license covers the co-developing, selling, offering for sale and importing the product for all indications, including,
but not limited to, acute treatment of migraine attacks with or without an aura and all other therapeutic, diagnostic, and other
human /or animal uses.



The license provides that IntelGenx Corp.
reserves the right to grant licenses to manufacture the product, subject to the approval of a steering committee. The agreement
further limits our right to grant sublicenses by requiring that we give prior notice to IntelGenx Corp. of the identity of any
proposed sub-licensee and provide IntelGenx Corp. with information regarding the main elements of the proposed sublicense agreement.
If IntelGenx Corp. objects to a sublicense, the proposed sublicense will be presented for the approval of a steering committee.



Pursuant
to the agreement, as amended, the parties agreed on joint product development activities.
Accordingly, IntelGenx Corp. agreed to devote sufficient resources (subject to the approved budget in the agreement) in order to
conduct clinical trials and file an application with the U.S. Food and Drug Administration for marketing of the product, and we
agreed to finance the balance of the development in the amount of approximately $$1.1 million.



The joint development of the product is
to be conducted through a steering committee, comprised of an equal number of members appointed by us and IntelGenx Corp. The committee
is charged with supervising progress of our research and development efforts, reporting on possible delays and deciding on required
revisions in the plan. IntelGenx Corp. has the deciding vote in any vote relating to issues of development, regulation and manufacture,
while we have the deciding vote in any vote relating to issues of licensing, commercialization and collaborations.



In consideration for the license, we made
up-front and milestone payments in the aggregate amount of $800,000 and we are required to make additional milestone payments of
up to $500,000 upon receipt of U.S. Food and Drug Administration marketing approval for the product.



In addition, we are required to make royalty
payments to IntelGenx Corp. of 20% of net sales if the product is marketed by us and 60% of the first $2 million of net sublicense
fees, and 40% of net sublicensing fees thereafter, if the product is marketed by sublicensees. However, if we bear the regulatory
costs in a sublicense arrangement, royalties will be 20% of net sublicense fees until we recover these costs, plus 10% interest,
and if IntelGenx Corp. bears such costs, royalties will be 70% of net sublicense fees.



44







The agreement provides that all intellectual
property developed or to be developed exclusively by IntelGenx Corp. will belong exclusively to IntelGenx Corp. and will be licensed
to us, and the intellectual property to be developed or financed jointly by IntelGenx Corp. and us will be jointly owned by us
and IntelGenx Corp., and each party may make use of such joint intellectual property for uses not competing with either the product
or the other party.



The agreement is of unlimited duration
and will remain in force until terminated in accordance with its terms. Either party may terminate the agreement if (i) the other
party is in material breach and does not cure within ninety (90) days; or (ii) a bankruptcy or liquidation event occurs with respect
to the other party. This agreement also provides that we may terminate the agreement for convenience upon providing thirty (30)
days written notice to IntelGenx Corp.



Acquisition of RHB-104, RHB-105 and
RHB-106



On August 11, 2010 we entered into an asset purchase agreement with Giaconda Limited, a publicly traded
Australian company, pursuant to which Giaconda Limited transferred all of its patents, tangible assets, production files, regulatory
approvals and other data related to the “Myoconda”, “Heliconda” and “Picoconda” products to
us. We renamed these products RHB-104, RHB-105 and RHB-106, respectively. Giaconda Limited further transferred to us products in
process, product samples and raw materials, as well as certain rights of first refusal with respect to intellectual property in
relation to digestive condition treatments. The agreement excluded from the transfer the rights to two other products of Giaconda
Limited that are not related to RHB-104, RHB-105 and RHB-106. However, to the extent that the intellectual property associated
with these two other products shall be required for the research, development, manufacture, registration, import/export, use, commercialization,
distribution, sale and/or offer for sale of any of RHB-104, RHB-105 and RHB-106, Giaconda Limited granted us an exclusive worldwide
assignable right to such intellectual property for such purposes. The closing under this agreement occurred on August 26, 2010.



In consideration for the assets purchased
by us, we paid Giaconda Limited $500,000. We and Giaconda Limited also agreed that until the expiration of the last patent transferred
to us, we will pay to Giaconda Limited 7% of net sales from the sale of the products by us and 20% of the royalties received from
sublicensees, in each case, only after we recoup the amounts and expenses exceeding an approved budget.



Under the
agreement, it was agreed that none of Giaconda Limited, Prof. Thomas Borody, the developer of the products, nor their respective
affiliates may compete with us or assist others to compete with us with respect to the products and acquired technology. Such non-compete
undertaking shall be in force for a period of time of up to 10 years from the date of the
agreement.



The agreement provides that, should we
elect not to proceed with the registration proceedings or the maintenance of any patent transferred to us, we will notify Giaconda
Limited and Giaconda Limited will have the right to proceed with the registration, maintenance, development and commercialization
of such patent at its expense. Should Giaconda Limited exercise such right, it will be entitled to all amounts received in connection
with sales relating to such patent.



The agreement also requires us to make
a good faith, continuous and commercially reasonable effort to allocate appropriate financial resources to prepare, initiate and
complete the clinical development of the products (with the exception of Picoconda) and file an application for regulatory marketing
approval in accordance with industry standards. Development failures, negative regulatory decisions, and/or other reasons beyond
our control will not constitute a breach of this obligation. Should we breach this obligation with respect to the development of
any of the products, and fail to cure the breach within 90 days from the date that Giaconda Limited sends us a default notice,
Giaconda Limited may buy back all of the intellectual property rights with respect to such product for the original purchase price,
plus the related development costs incurred by us through the date of the buy-back.



License Agreement for MAP diagnostic
test related to RHB-104



On September 18, 2011, we entered into
a license agreement with the University of Central Florida Research Foundation, Inc. pursuant to which we were granted an exclusive
license for all indications and medical uses to a patent-protected diagnostic test that identifies the presence of MAP bacterial
DNA in peripheral blood through DNA testing. The license covers future commercial use of the test, including its manufacture, marketing,
sale and commercialization.



Under the agreement, we may grant sublicenses
for the test with the consent of the University of Central Florida Research Foundation, Inc., which consent may not be unreasonably
withheld.



45







In consideration for the license, we made
one-time payment and another annual payment for the minimum royalty payment in year two of the agreement in the aggregate amount
of $55,000, and we are required to make additional annual minimum royalty payments of $15,000 in year three, $20,000 in year four
and $35,000 each every year thereafter. These annual minimum payment amounts will be deducted from future royalty payments.



In addition, we are required to make royalty
payments equal to payments 7% of future sales, or an annual minimum amount noted above, as well as 20% of payments we receive from
granting sublicenses.



The agreement will remain in force on a
country by country basis until the last patent covered by the agreement expires. The University of Central Florida Research Foundation
may terminate the agreement if (i) we are in material breach; (ii) if we fail to pay royalties when due and payable following provision
of sixty (60) days notice; or (iii) a bankruptcy or liquidation event occurs with respect to us. We may terminate the agreement
at any time by providing ninety (90) days written notice to the University of Central Florida Research Foundation.



License of Two Additional Therapeutic
Candidates



On October 21, 2012, we signed a term sheet
for an exclusive worldwide licensing agreement with SCOLR Pharma Inc.

for two proprietary therapeutic candidates,
both extended release proprietary formulations of currently available pharmaceutical products, subject to completion of due diligence
and execution of a binding agreement. We have elected not to enter into a binding agreement to acquire these two products from
SCOLR Pharma. SCOLR Pharma Inc. announced during 2013 that they had ceased business operations. See "- License Agreement for
RHB-102" above.



Master Service Agreement with 7810962
Canada Inc.



On April 28, 2011, we entered into a master
service agreement, which was later amended, with 7810962 Canada Inc., our Canadian service provider for various project management
services. According to the agreement, as amended, we agreed to pay our Canadian service provider a monthly fee of $7,500. The agreement
allowed our Canadian service provider to enter into service agreements with third parties for the relevant services. The agreement
may be terminated by either party upon 30 days’ advance notice.



The agreement with our Canadian service
provider provides that certain research and development services related to our projects will be carried out pursuant to our specific
requests and upon the signing of specific agreements for each project. Such agreements shall include a description of the required
services, service terms and fees. To date, we, through our Canadian service provider, have entered into manufacturing, clinical
services and regulatory agreements with respect to RHB-102, RHB-104 and RHB-105.



Furthermore, pursuant to the agreement,
the Canadian service provider may provide us with a discount to the research and development services with respect to incentives
programs from various authorities that may be granted to the Canadian service provider in the future. As of December 31, 2013,
we had received from our Canadian service provider total discounts of approximately $0.6 million, and our Canadian service provider
estimates additional discount until December 2013 to be approximately $0.4 million.



Manufacturing Agreements



Manufacturing Agreement Related to RHB-102



On March 21, 2011, we entered into an agreement
with a U.S. drug manufacturer, Pharmaceutics International, Inc., for the manufacture and supply of RHB-102 for our clinical trial.
On May 24, 2012 and on July 13, 2012, we entered into further agreements with Pharmaceutics International, Inc. to manufacture,
test and supply registration batches of RHB-102.



The agreement provides for Pharmaceutics
International, Inc. to manufacture sufficient amounts of RHB-102 for our clinical trials and other planned tests pursuant to our
specifications and in accordance with regulatory requirements.



Pursuant to this agreement, as amended,
the manufacturer is entitled to receive up to approximately $1.2 million payable upon the completion of milestones during the production
periods and reimbursement of certain expenses. Milestone payments will be triggered upon the manufacturer performing various services,
such as API and raw materials sourcing, formulation and manufacturing work, development, manufacturing process, project management
support and regulatory support, analytical work and stability work. Actual payment amounts may deviate significantly due to changes
in the manufacturing processes, the cost of raw materials, laboratory tests and other expenses, subject to the consent of the parties.
Milestones are currently expected to be achieved over the next few years.



46







Manufacturing Agreements Related to
RHB-104



On April 28, 2011, we entered into an agreement
with our Canadian service provider which entered into a back-to-back agreement with Uman Pharma, Inc., a Canadian drug manufacturer,
to manufacture and supply RHB-104 for the clinical trials.



The agreement provided for Uman Pharma,
Inc. to manufacture sufficient amounts of RHB-104 for our clinical trials, NDA submission batches, and other planned tests pursuant
to our specifications and in accordance with regulatory requirements. All manufacturing will be done under good manufacturing practices
(GMP), as proscribed by the U.S. Food and Drug Administration.



Pursuant to the agreement, as amended,
the manufacturer is entitled to receive approximately $1.4 million, payable upon the completion of milestones during the production
periods and reimbursement of certain expenses. Milestone payments will be triggered upon the manufacturer performing various services,
such as sourcing, formulation and manufacturing work, development, manufacturing process, project management support and regulatory
support, analytical work and stability work. Actual payment amounts may deviate significantly due to changes in the manufacturing
processes, the cost of raw materials, laboratory tests and other expenses, subject to the consent of the parties. Milestones are
currently expected to be achieved over the next few years.



On October 14, 2012, we mutually terminated
this agreement with our Canadian service provider, resulting in the concurrent termination of the related back-to-back agreement
between the Canadian service provider and Uman Pharma Inc. Through the end of October, we paid Uman Pharma approximately $1.1 million.
No additional amounts are payable to Uman Pharma.



On October 21, 2012, we entered into a
new agreement with our Canadian service provider which, in turn, entered into a back-to-back agreement with Corealis Pharma Inc.
to complete the manufacturing and supply of RHB-104 for our clinical trials. Pursuant to this agreement and subsequent amendments,
the manufacturer is entitled to receive total amount of approximately $464,000 in connection with completion of various milestones
during the production and stability tests periods and the reimbursement of various expenses. All manufacturing will be done under
GMP. Milestone payments will be triggered upon the performance by the manufacturer of various services, such as manufacturing process,
project management support and regulatory support, analytical work and stability work. Actual payment amounts may deviate significantly
due to changes in the manufacturing processes, the cost of raw materials, laboratory tests and other expenses, subject to the consent
of the parties. Milestones are currently expected to be achieved over the next two years. The total costs of the manufacturing
agreements with the Canadian service provider are expected to be approximately $1.9 million. See “– Master Service
Agreement with 7810962 Canada Inc.” for a description of our agreement with our Canadian service provider.



Manufacturing Agreement Related to RHB-105



On July 5, 2011, we entered into an agreement
with our Canadian service provider which entered into a back-to-back agreement with Corealis Pharma Inc., a Canadian drug manufacturer,
to formulate, manufacture and supply a clinical trial batch of RHB-105.



The agreement provides for Corealis Pharma
Inc. to manufacture sufficient amounts of RHB-105 for our clinical trials and other planned tests pursuant to our specifications
and in accordance with regulatory requirements.



Pursuant
to this agreement, as amended, the manufacturer is entitled to receive approximately $500,000 payable upon the completion of milestones
during the production periods and for reimbursement of certain expenses. Milestone payments will be triggered upon the performance
by the manufacturer of various services, such as raw materials formulation and manufacturing
work, development, manufacturing process, project management support and regulatory support, analytical work and stability work.
Actual payment amounts may deviate significantly due to changes in the manufacturing processes, the cost of raw materials, laboratory
tests and other expenses, subject to the consent of the parties. Milestones are currently expected to be achieved over the next
few years.



The agreement will remain in force until
terminated. This agreement provides that either party may terminate the agreement (i) if the other party is in material breach
and does not cure within thirty (30) days or (ii) upon a bankruptcy or liquidation event with respect to the other party.



47







See “– Master Service Agreement
with 7810962 Canada Inc.” for a description of our agreement with our Canadian service provider.



Manufacturing Agreement Related to RHB-106



On June 27, 2011, we entered into an agreement,
which was subsequently amended, with Pharmaceutics International Inc., a U.S. drug manufacturer, for the manufacture of RHB-106.



The agreement provides for Pharmaceutics
International Inc. to manufacture sufficient amounts of RHB-106 for our clinical trials and other planned tests pursuant to our
specifications and in accordance with regulatory requirements.



Pursuant
to this agreement, as amended, the manufacturer is entitled to receive approximately $462,000, payable in upon the completion of
milestones during the production periods and reimbursement of certain expenses over a period of approximately 3 years. Milestone
payments will be triggered upon the performance by the manufacturer of various services, such as raw materials sourcing, formulation
and manufacturing work, development, manufacturing process, project management support and regulatory support, analytical work
and stability work. Actual payment amounts may deviate significantly due to changes in the manufacturing processes, the cost of
raw materials, laboratory tests and other expenses, subject to the consent of the parties. Milestones
are currently expected to be achieved over the next few years.



Either party may terminate the agreement
if the other party is in material breach and does not cure within sixty (60) days (ten (10) days in connection with monetary obligations).
We may terminate the agreement at any time and for any reason upon providing thirty (30) days written notice to Pharmaceutics International
Inc. Pharmaceutics International Inc. may terminate the agreement if we fail to authorize purchase of material needed in connection
with the services.



Clinical Services Agreement related
to RHB-104



On June 15, 2011, we entered into an agreement
with our Canadian service provider which entered into a back-to-back agreement with inVentive Health (f/k/a PharmaNet Canada Inc.),
a subsidiary of an international CRO company, and other related entities, for the purpose of performing the clinical trials for
RHB-104. inVentive Health specializes in the performance of clinical trials and pursuant to the agreement is responsible for the
performance of the clinical trials, including entering into agreements with medical centers to perform the trials, supervision
of the performance and progress of the trials and the analysis of the results, all pursuant and subject to applicable regulatory
requirements.



Pursuant to this agreement and subsequent
amendments, inVentive Health is entitled to receive $10.5 million in connection with the Phase III clinical trial in North America
and Israel. The fee includes payment of $5 million in connection with professional services to be provided by inventive Health,
as well as reimbursement of investigator grant costs and pass-through costs to be paid during the trials. The payments will be
spread over the period of the clinical trials and based upon quarterly administration fees, milestones payments of up to $4.8 million
based on patient recruitment, completion of subject dosing and report preparation, investigators grants paid to research centers
that participate in the trail, as well reimbursements of certain expenses. These fees, however, may vary widely from time to time
in accordance with the final clinical trials protocol and payments to be made to third parties, such as investigator grants costs.



The agreement includes a timetable for
the recruitment of patients, performance of the trials and analysis of results, including a timetable for the performance of ongoing
patient follow-up. Such timetables may vary as a result of possible delays in recruitment of patients for the clinical trials.



The agreement will remain in force until
all relevant services have been provided and we have made all payments thereunder, or until terminated. Either party may terminate
the agreement (i) if the other party is in material breach and does not cure within thirty (30) days; or (ii) upon a bankruptcy
or liquidation event with respect to the other party. This agreement also provides that we may terminate the agreement at any time
without cause upon providing forty five (45) days written notice to our Canadian service provider.



In March,
2012, we entered into an agreement with our Canadian service provider which entered into a back-to-back agreement with inventive
Health for the provision of clinical trial services, for pediatric trial of RHB-104.



See “– 4.10 Amendment to Clinical
Services Agreement, dated June 15, 2011, by and between RedHill and 7810962 Canada Inc.” for a description of our agreement
with our Canadian service provider.



48







Intellectual Property



Our success depends in part on our ability
to obtain and maintain proprietary protection for our technology, its therapeutic applications, and related technology and know-how,
to operate without infringing the proprietary rights of others and to prevent others from infringing our proprietary rights. Our
policy is to seek to protect our proprietary position by, among other methods, filing U.S. and foreign patent applications related
to our proprietary technology, inventions and improvements that are important to the development of our business. We also rely
on our trade secrets, know-how and continuing technological innovation to develop and maintain our proprietary position. We vigorously
defend our intellectual property to preserve our rights and gain the benefit of our technological investments.



We have rights either through assignment,
asset purchase or in-licensing to a total of 136 issued patents and 22 patent applications. The patents and patent applications
are registered in various jurisdictions, the details of each family of patents being provided below. In addition, we have licensed
rights to various platform technologies on a non-exclusive basis.



RHB-101



One family of our patents and patent applications
is in-licensed by us and is comprised of ten issued patents. This family is entitled “Controlled Release Solid Dispersion
of carvedilol” and relates to RHB-101. The patent family has a priority date of September 21, 2001 and assuming no extension
or adjustment of term, the patents in this family will expire September 23, 2022. This patent family is licensed from Egalet a/s
as part of our licensing agreement and relates to controlled release pharmaceutical composition for oral use comprising a solid
dispersion of:



| | · | at least one therapeutically, prophylactically and/or diagnostically active substance (including
carvedilol), which is at least partially in an amorphous form,
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | a pharmaceutically acceptable polymer that has plasticizing properties, and
| | - | ---------------------------------------------------------------------------



| | · | optionally, a stabilizing agent, the active substance having a limited water solubility, and the
composition being designed to release the active substance with a substantially zero order release.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



This family of patents includes patents
granted in Austria, Belgium, Switzerland, Germany, Denmark, Spain, France, the United Kingdom, Ireland and Italy.



A second family of our patents and patent
applications is in-licensed by us from Egalet a/s and is comprised of one patent in the U.S. related to a controlled release pharmaceutical
composition for oral use comprising carvedilol. This family is entitled “Controlled Release Carvedilol Compositions”
and also relates to RHB-101. The patent family has a priority date of November 8, 2002, and the U.S. application once granted will
expire June 6, 2024, including a patent term adjustment of 219 days.



RHB-102



A third family is in-licensed by us and
is comprised of four issued patents in the U.S., Canada, Mexico and Europe. April 15, 2014 is the deadline for determining which
specific countries to validate the European patent. An application is pending in Hong Kong. This family is entitled “Monolithic
tablet for controlled drug release” and has priority date of March 9, 1998. The non-U.S. patents in this family will expire
March 2, 2019 and the U.S. patent will expire on March 9, 2018. This family is in-licensed from SCOLR Pharma, Inc. as part of our
licensing agreement and relates to a swellable hydrophilic matrix tablet that delivers drugs in a controlled manner over a long
period of time. The drug is disposed in a matrix composed of HPMC or polyethylene oxide, in the presence of a salt, which may be
a combination of salts.



A fourth patent family is in-licensed by
us and is comprised of 22 issued patents and two pending patent applications. This family is entitled “Amino Acid Modulated
extended Release Dosage Form” and has an earliest priority date of December 20, 1999 for the U.S. patents, and the earliest
US patent will expire December 20, 2019. The non-U.S. patents will expire February 20, 2022. The patent has been granted in the
U.S., Canada, Australia and Europe and two patent applications are still pending in Japan.



49







This family is licensed from SCOLR Pharma,
Inc. and covers an extended release tablet comprising a plurality of granules of an effective amount of a pharmaceutically active
compound, at least one amino acid, and an intragranular polymer in which the granule is dispersed within a hydrophilic extragranular
polymer matrix which is more rapidly hydrating than the intragranular polymer.



A fifth family, currently including one
US provisional patent application filed on March 14, 2013, is owned by us and relates to extended release ondansetron formulations.



RHB-103



A sixth patent family is in-licensed by
us from IntelGenx Corp. and is comprised of three issued patents in the US. one pending U.S. non-provisional patent application,
and one pending U.S. provisional patent application filed July 31, 2013. As part of the agreement with IntelGenx Corp., we were
granted a worldwide, exclusive and perpetual license which includes the right to grant sub-licenses to these patents and applications.
These patents and applications cover various aspects of the VersaFilmTM technology. The central U.S. patent (7,132,113)
for a multi-layer film formulation comprising the combination of a hydroxypropyl cellulose and a modified starch was issued November
7, 2006 and expires in 2022.



RHB-104



A seventh family of our patents and patent
applications is owned by us and is comprised of thirty six issued patents (including U.S., Australia, Canada, Israel, New Zealand,
Norway, Philippines, South Africa, Austria, Belgium, Switzerland, Lichtenstein, Cyprus, Germany, Denmark, Spain, Finland, France,
the United Kingdom, Greece, Ireland, Italy, Luxembourg, Monaco, the Netherlands, Portugal and Sweden). This family is entitled
“Method and composition for treating inflammatory bowel disease” and relates to RHB-104. The patent family has priority
rights dating to April 1, 1997 and the patents in this family will expire April 1, 2018. This patent family was acquired from Giaconda
Limited as part of our asset purchase agreement with them.



This family relates to a method and composition
of medications used to treat inflammatory bowel disease, which includes Crohn’s disease. It further provides combinations
of anti-atypical mycobacterial agents effective against the atypical mycobacterial strains. It also provides a method of potentially
immunizing patients with extracts of non-pathogenic mycobacteria.



A eighth family of patents and patent applications
is owned by us and is comprised of six patent applications in the US, Canada, Europe, Israel, Japan-and the Philippines, and granted
patents in the US, Australia. South Africa and New Zealand... In Europe we have the option, once the European application is granted,
to validate the European patent in a total of 35 countries. This patent family was acquired from Giaconda Limited as part of our
asset purchase agreement with them and is related to RHB-104.



The family is entitled “Method and
composition for treating inflammatory bowel disease” and covers improved compositions comprising rifabutin, clarithromycin,
and clofazimine for use in the treatment of Inflammatory Bowel Diseases. In one instance, the compositions may comprise a formulation
of rifabutin, clarithromycin, and clofazimine in a single dosage form, such as a capsule, tablet, etc., with one or more specific
excipients.



The family also covers a method for formulating
the compositions to provide a solid oral dosage form of the composition which has improved efficacy and a reduced likelihood of
side effects.

RHB-105



A ninth family of our patents and patent
applications is owned by us and comprised of twenty issued patents (including the U.S., Australia, Canada, Austria, Belgium, Switzerland/Liechtenstein,
Cyprus, Germany, Denmark, Spain, France, the United Kingdom, Greece, Ireland, Italy, Luxembourg, Monaco, the Netherlands, Portugal
and Sweden). This family is entitled “Improved Method of Eradication of H.pylori” and relates to RHB-105. The
patent family has priority rights dating to April 30, 1998 and the patents in this family will expire April 30, 2019. This patent
family was acquired as part of the asset purchase agreement with Giaconda Limited.



The family relates to methods for the treatment
and/or prevention of recurrence of a gastrointestinal disorder associated with H. Pylori, which entails administering to
the patient a therapeutically effective amount of a first antibiotic, which is an ansamycin and a therapeutically effective amount
of at least a second antibiotic or antimicrobial agent. The invention also provides pharmaceutical compositions for use in the
methods of the invention.



50







A tenth family relates to pharmaceutical
compositions and methods for the treatment of disorders associated with infection by H. pylori or the prevention of recurrence
of disorders associated with infection by H. pylori. This family includes one pending U.S. patent application and one pending
PCT International patent application.



RHB-106



An eleventh family of our patents and patent
applications is owned by us and is comprised of seven issued patents in the U.S., Australia, Canada and New Zealand and one application
in Europe (designating Austria, Belgium, Switzerland/Liechtenstein, Germany, Denmark, Spain, Finland, France, United Kingdom, Greece,
Ireland, Italy, Luxembourg, Monaco, Netherlands, Portugal and Sweden). This family is entitled “Improved Preparation for
colonic evacuation” and relates to RHB-106. The patent family has priority rights dating to November 3, 1995 and the non-U.S.
patents in this family will expire November 1, 2016 and the U.S. patents October 31, 2016.



This patent family was acquired from Giaconda
Limited as part of our asset purchase transaction and relates to an osmotic colonic evacuant in solid oral dosage form comprising
an orthostatic lavage in powder form and a pharmaceutically acceptable excipient, diluent and/or adjuvant. It also relates to a
method of evacuating a patient’s colon, a method of treating small bowel bacterial overgrowth or irritable bowel syndrome
and a method of treating acute or chronic bacterial bowel infection. It further relates to a sequential pack for the oral administration
of at least two treatment regimens including a first treatment regimen comprising an osmotic colonic evacuant in solid oral dosage
form, in unit dosage form adapted and presented for a first administration period, together with a second treatment regimen comprising
an osmotic colonic evacuant in solid oral dosage form, in unit dosage form adapted and presented for a second administration period.



A twelfth family is owned by us and at
present includes one U.S. provisional application. The title of this application is “A formulation and method of manufacturing
a formulation for use in colonic evacuation” and relates to a new formulation of RHB 106. The U.S. provisional application
was filed July 27, 2012 and a Patent Cooperation Treaty Application (PCT/IB2013/001640) was filed 26 July 2013.



RHB-104 - new indications



A thirteenth
family is owned by us and is comprised of two U.S. provisional patent applications. The title of these applications is “A
composition and method for treating an autoimmune disease” and relates to new indications for RHB-104. The first U.S. provisional
application was filed September 20, 2011 and the second U.S. provisional application was filed September 21, 2011. On
September 19, 2012, we completed a PCT filing and additional filings occurred in Pakistan and Taiwan. The national stage deadline
for filing additional foreign patent applications is March 20, 2014.



We filed two U.S. provisional patent applications
on March 14, 2013 relating to new indications for RHB-104 and methods of manufacturing RHB-104.



Protocol for detection of the
Intracellular Infection Mycobacterium avium paratuberculosis in blood



A fourteenth family of patents is a single
patent licensed from the University of Central Florida Research Foundation Inc. (UCF) and is entitled Protocol for detection of
the Intracellular Infection Myobacterium avium paratuberculosis in blood. It was granted in the U.S. (7,488,580 B1) and has a priority
date of March 8, 2006, expiring in 2026. This patent relates to a method and kit for detection of intracellular MAP infection in
blood and blood derivative samples from humans by culture and PCR. The technology can screen for MAP in blood samples from patients
having inflammatory and non-inflammatory bowel disease, and the results used to identify those patients for appropriate treatment
with antibiotics. The method and kit allows monitoring and evaluation of the outcome of antibiotic therapy.



The patent positions of companies like
ours are generally uncertain and involve complex legal and factual questions. Our ability to maintain and solidify our proprietary
position for our technology will depend on our success in obtaining effective claims and enforcing those claims once granted.



51







Government Regulations and Funding



Pharmaceutical companies are subject to
extensive regulation by national, state and local agencies such as the U.S. Food and Drug Administration in the U.S., the Ministry
of Health in Israel, or the European Medicines Agency (EMA). The manufacture, distribution, marketing and sale of pharmaceutical
products are subject to government regulation in the U.S. and various foreign countries. Additionally, in the U.S., we must follow
rules and regulations established by the U.S. Food and Drug Administration requiring the presentation of data indicating that our
products are safe and efficacious and are manufactured in accordance with current good manufacturing practices (cGMP) regulations.
If we do not comply with applicable requirements, we may be fined, the government may refuse to approve our marketing applications
or allow us to manufacture or market our products, and we may be criminally prosecuted. We and our manufacturers and clinical research
organizations may also be subject to regulations under other federal, state and local laws, including, but not limited to, the
U.S. Occupational Safety and Health Act, the Resource Conservation and Recovery Act, the Clean Air Act and import, export and customs
regulations as well as the laws and regulations of other countries. The U.S. government has increased its enforcement activity
regarding illegal marketing practices domestically and internationally. As a result, pharmaceutical companies must ensure their
compliance with the Foreign Corrupt Practices Act and federal healthcare fraud and abuse laws, including the False Claims Act.



These regulatory requirements impact our
operations and differ from one country to another, so that securing the applicable regulatory approvals of one country does not
imply the approval of another country. However, securing the approval of a more stringent body, i.e. the U.S. Food and Drug
Administration, may facilitate receiving the approval by a regulatory authority in a different country where the regulatory requirements
are similar or less stringent. The approval procedures involve high costs and are manpower intensive, usually extend over many
years and require highly skilled and professional resources.



U.S. Food and Drug Administration Approval
Process





The steps required to be taken before a
new drug may be marketed in the U.S. generally include:



| | · | Completion of pre-clinical laboratory and animal testing;
| | - | ---------------------------------------------------------



| | · | The submission to the U.S. Food and Drug Administration of an investigational new drug, or IND, application which must be evaluated
and found acceptable by the U.S. Food and Drug Administration before human clinical trials may commence;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Performance of adequate and well-controlled human clinical trials to establish the safety and efficacy of the proposed drug
for its intended use; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Submission and approval of an NDA.
| | - | ----------------------------------



Clinical studies are conducted under protocols
detailing, among other things, the objectives of the study, what types of patients may enter the study, schedules of tests and
procedures, drugs, dosages, and length of study, as well as the parameters to be used in monitoring safety, and the efficacy criteria
to be evaluated. A protocol for each clinical study and any subsequent protocol amendments must be submitted to the U.S. Food and
Drug Administration as part of the IND.



In all the countries that are signatories
of the Helsinki Declaration (including Israel), the prerequisite for conducting clinical trials (on human subjects) is securing
the preliminary approval of the competent authorities of that country to conduct medical experiments on human subjects in compliance
with the other principles established by the Helsinki Declaration.



The clinical testing of a drug product
candidate generally is conducted in three sequential phases prior to approval, but the phases may overlap or be combined. A fourth,
or post approval, phase may include additional clinical studies. The phases are generally as follows:



Phase I. In Phase 1 clinical studies,
the product is tested in a small number of patients with the target condition or disease or in healthy volunteers. These studies
are designed to evaluate the safety, dosage tolerance, metabolism and pharmacologic actions of the product candidate in humans,
side effects associated with increasing doses, and, in some cases, to gain early evidence on efficacy. The number of participants
included in Phase 1 studies is generally in the range of 20 to 80.



Phase II. In Phase II studies, in
addition to safety, the sponsor evaluates the efficacy of the product candidate on targeted indications to determine dosage tolerance
and optimal dosage and to identify possible adverse effects and safety risks. Phase II studies typically are larger than Phase
I but smaller than Phase III studies and may involve several hundred participants



52







Phase III. Phase III studies typically
involve an expanded patient population at geographically-dispersed test sites. They are performed after preliminary evidence suggesting
effectiveness of the product candidate has been obtained and are designed to further evaluate clinical efficacy and safety, to
establish the overall benefit-risk relationship of the product candidate and to provide an adequate basis for a potential product
approval. Phase III studies usually involve several hundred to several thousand participants.



Phase IV.Phase IV clinical
trials are post marketing studies designed to collect additional safety data as well as potentially expand a product indication.
Post marketing commitments are required of, or agreed to by, a sponsor after the U.S. Food and Drug Administration has approved
a product for marketing. These studies are used to gain additional information from the treatment of patients in the intended therapeutic
indication and to verify a clinical benefit in the case of drugs approved under accelerated approval regulations. If the U.S. Food
and Drug Administration approves a product while a company has ongoing clinical trials that were not necessary for approval, a
company may be able to use the data from these clinical trials to meet all or part of any Phase IV clinical trial requirement.
These clinical trials are often referred to as Phase IV post-approval or post marketing commitments. Failure to promptly conduct
Phase IV clinical trials could result in the inability to deliver the product into interstate commerce, misbranding charges, and
civil monetary penalties.



Clinical trials must be conducted in accordance
with the U.S. Food and Drug Administration’s good clinical practices, or GCP, requirements. The U.S. Food and Drug Administration
may order the temporary or permanent discontinuation of a clinical study at any time or impose other sanctions if it believes that
the clinical study is not being conducted in accordance with U.S. Food and Drug Administration requirements or that the participants
are being exposed to an unacceptable health risk. An institutional review board, or IRB, generally must approve the clinical trial
design and patient informed consent at study sites that the IRB oversees and also may halt a study, either temporarily or permanently,
for failure to comply with the IRB’s requirements, or may impose other conditions. Additionally, some clinical studies are
overseen by an independent group of qualified experts organized by the clinical study sponsor, known as a data safety monitoring
board or committee. This group recommends whether or not a trial may move forward at designated check points based on access to
certain data from the study. The clinical study sponsor may also suspend or terminate a clinical trial based on evolving business
objectives and/or competitive climate.



As a product candidate moves through the
clinical testing phases, manufacturing processes are further defined, refined, controlled and validated. The level of control and
validation required by the U.S. Food and Drug Administration increases as clinical studies progress. We and the third-party manufacturers
on which we rely for the manufacture of our product candidates and their respective components (including the active pharmaceutical
ingredient, or API) are subject to requirements that drugs be manufactured, packaged and labeled in conformity with cGMP. To comply
with cGMP requirements, manufacturers must continue to spend time, money and effort to meet requirements relating to personnel,
facilities, equipment, production and process, labeling and packaging, quality control, recordkeeping and other requirements.



Assuming completion of all required testing
in accordance with all applicable regulatory requirements, detailed information on the product candidate is submitted to the U.S.
Food and Drug Administration in the form of an NDA, requesting approval to market the product for one or more indications, together
with payment of a user fee, unless waived. An NDA includes all relevant data available from pertinent nonclinical and clinical
studies, including negative or ambiguous results as well as positive findings, together with detailed information on the chemistry,
manufacture, controls and proposed labeling, among other things. To support marketing approval, the data submitted must be sufficient
in quality and quantity to establish the safety and efficacy of the product candidate for its intended use to the satisfaction
of the U.S. Food and Drug Administration.



If an NDA submission is accepted for filing,
the U.S. Food and Drug Administration begins an in-depth review of the NDA. Under the Prescription Drug User Fee Act, or PDUFA,
the U.S. Food and Drug Administration’s goal is to complete its initial review and respond to the applicant within twelve
months of submission, unless the application relates to an unmet medical need in a serious or life-threatening indication, in which
case the goal may be within eight months of NDA submission. However, PDUFA goal dates are not legal mandates and U.S. Food and
Drug Administration response often occurs several months beyond the original PDUFA goal date. Further, the review process and the
target response date under PDUFA may be extended if the U.S. Food and Drug Administration requests or the NDA sponsor otherwise
provides additional information or clarification regarding information already provided in the NDA. The NDA review process can,
accordingly, be very lengthy. During its review of an NDA, the U.S. Food and Drug Administration may refer the application to an
advisory committee for review, evaluation and recommendation as to whether the application should be approved. The U.S. Food and
Drug Administration is not bound by the recommendation of an advisory committee, but it typically follows such recommendations.
Data from clinical studies are not always conclusive and the U.S. Food and Drug Administration and/or any advisory committee it
appoints may interpret data differently than the applicant.



53







After the U.S. Food and Drug Administration
evaluates the NDA and inspects manufacturing facilities where the drug product and/or its API will be produced, it will either
approve commercial marketing of the drug product with prescribing information for specific indications or issue a complete response
letter indicating that the application is not ready for approval and stating the conditions that must be met in order to secure
approval of the NDA. If the complete response letter requires additional data and the applicant subsequently submits that data,
the U.S. Food and Drug Administration nevertheless may ultimately decide that the NDA does not satisfy its criteria for approval.
The U.S. Food and Drug Administration could also approve the NDA with a Risk Evaluation and Mitigation Strategies, or REMS, plan
to mitigate risks, which could include medication guides, physician communication plans, or elements to assure safe use, such as
restricted distribution methods, patient registries and other risk minimization tools. The U.S. Food and Drug Administration also
may condition approval on, among other things, changes to proposed labeling, development of adequate controls and specifications,
or a commitment to conduct post-marketing testing. Such post-marketing testing may include phase 4 clinical studies and surveillance
to further assess and monitor the product’s safety and efficacy after approval. Regulatory approval of products for serious
or life-threatening indications may require that participants in clinical studies be followed for long periods to determine the
overall survival benefit of the drug.



If the U.S. Food and Drug Administration
approves one of our product candidates, we will be required to comply with a number of post-approval regulatory requirements. We
would be required to report, among other things, certain adverse reactions and production problems to the U.S. Food and Drug Administration,
provide updated safety and efficacy information and comply with requirements concerning advertising and promotional labeling for
any of our products. Also, quality control and manufacturing procedures must continue to conform to cGMP after approval, and the
U.S. Food and Drug Administration periodically inspects manufacturing facilities to assess compliance with cGMP, which imposes
extensive procedural, substantive and record keeping requirements. If we seek to make certain changes to an approved product, such
as certain manufacturing changes, we will need U.S. Food and Drug Administration review and approval before the change can be implemented.
For example, if we change the manufacturer of a product or its API, the U.S. Food and Drug Administration may require stability
or other data from the new manufacturer, which will take time and is costly to generate, and the delay associated with generating
this data may cause interruptions in our ability to meet commercial demand, if any. While physicians may use products for indications
that have not been approved by the U.S. Food and Drug Administration, we may not label or promote the product for an indication
that has not been approved. Securing U.S. Food and Drug Administration approval for new indications is similar to the process for
approval of the original indication and requires, among other things, submitting data from adequate and well-controlled studies
that demonstrate the product’s safety and efficacy in the new indication. Even if such studies are conducted, the U.S. Food
and Drug Administration may not approve any change in a timely fashion, or at all.



We rely, and expect to continue to rely,
on third parties for the manufacture of clinical and future commercial, quantities of our product candidates. Future U.S. Food
and Drug Administration and state inspections may identify compliance issues at these third-party facilities that may disrupt production
or distribution or require substantial resources to correct. In addition, discovery of previously unknown problems with a product
or the failure to comply with applicable requirements may result in restrictions on a product, manufacturer or holder of an approved
NDA, including withdrawal or recall of the product from the market or other voluntary, U.S. Food and Drug Administration-initiated
or judicial action that could delay or prohibit further marketing. Newly discovered or developed safety or efficacy data may require
changes to a product’s approved labeling, including the addition of new warnings and contraindications, and also may require
the implementation of other risk management measures. Many of the foregoing could limit the commercial value of an approved product
or require us to commit substantial additional resources in connection with the approval of a product. Also, new government requirements,
including those resulting from new legislation, may be established, or the U.S. Food and Drug Administration’s policies may
change, which could delay or prevent regulatory approval of our products under development.



Section 505(b)(2) New Drug Applications



As an alternate path for U.S. Food and
Drug Administration approval of new indications or new formulations of previously-approved products, a company may file a Section 505(b)(2)
NDA, instead of a “stand-alone” or “full” NDA. Section 505(b)(2) of the Food, Drug, and Cosmetic Act,
or FDC, was enacted as part of the Drug Price Competition and Patent Term Restoration Act of 1984, otherwise known as the Hatch-Waxman
Amendments. Section 505(b)(2) permits the submission of an NDA where at least some of the information required for approval
comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference. Some
examples of products that may be allowed to follow a 505(b)(2) path to approval are drugs that have a new dosage form, strength,
route of administration, formulation or indication.



The Hatch-Waxman Amendments permit the
applicant to rely upon certain published nonclinical or clinical studies conducted for an approved product or the U.S. Food and
Drug Administration’s conclusions from prior review of such studies. The U.S. Food and Drug Administration may require companies
to perform additional studies or measurements to support any changes from the approved product. The U.S. Food and Drug Administration
may then approve the new product for all or some of the labeled indications for which the reference product has been approved,
as well as for any new indication supported by the NDA. While references to nonclinical and clinical data not generated by the
applicant or for which the applicant does not have a right of reference are allowed, all development, process, stability, qualification
and validation data related to the manufacturing and quality of the new product must be included in an NDA submitted under Section 505(b)(2).



54







To the extent that the Section 505(b)(2)
applicant is relying on the U.S. Food and Drug Administration’s conclusions regarding studies conducted for an already approved
product, the applicant is required to certify to the U.S. Food and Drug Administration concerning any patents listed for the approved
product in the U.S. Food and Drug Administration’s Orange Book publication. Specifically, the applicant must certify that:
(i) the required patent information has not been filed; (ii) the listed patent has expired; (iii) the listed patent
has not expired, but will expire on a particular date and approval is sought after patent expiration; or (iv) the listed patent
is invalid or will not be infringed by the new product. The Section 505(b)(2) application also will not be approved until
any non-patent exclusivity, such as exclusivity for obtaining approval of a new chemical entity, listed in the Orange Book for
the reference product has expired. Thus, the Section 505(b)(2) applicant may invest a significant amount of time and expense
in the development of its products only to be subject to significant delay and patent litigation before its products may be commercialized.



Orphan Drug Designation



The Orphan Drug Act of 1983, or Orphan
Drug Act, encourages manufacturers to seek approval of products intended to treat “rare diseases and conditions” with
a prevalence of fewer than 200,000 patients in the U.S. or for which there is no reasonable expectation of recovering the development
costs for the product. For products that receive Orphan Drug designation by the U.S. Food and Drug Administration, the Orphan Drug
Act provides tax credits for clinical research, U.S. Food and Drug Administration assistance with protocol design, eligibility
for U.S. Food and Drug Administration grants to fund clinical studies, waiver of the U.S. Food and Drug Administration application
fee, and a period of seven years of marketing exclusivity for the product following U.S. Food and Drug Administration marketing
approval.



| | C. | Organizational Structure
| | -- | ------------------------



Not applicable.



| | D. | Property, Plant and Equipment
| | -- | -----------------------------



On December 24 2013, we entered into amendment
to the lease agreement for the lease of offices in the “Platinum” building at 21 Ha’arba’a Street, Tel
Aviv, Israel. Pursuant to the lease agreement, as amended, we lease approximately 394 square meters of office space, a 27 square
meter warehouse and six parking spaces. The monthly rent is NIS 61,000 (approximately $17,000 based on the representative U.S.
dollar – NIS rate of exchange of 3.51 on February 23, 2014), linked to the Israeli Consumer Price Index of January
2011. The lease term under the amendment is will expire on January 31, 2017, with an option to extend the lease term by three additional
years. As security for its obligations under the Lease Agreement, we provided a bank guarantee in the amount of NIS 280,000 ($80,000
based on the representative U.S. dollar – NIS rate of exchange of 3.51 on February 23, 2014). Since April 2011, these
offices have served as our corporate headquarters.



| | ITEM 4A. | UNRESOLVED STAFF COMMENTS
| | -------- | -------------------------



Not applicable.



| | ITEM 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS
| | ------- | --------------------------------------------



You should read the following discussion
of our financial condition and results of operations in conjunction with the financial statements and the notes thereto included
elsewhere in this Annual Report.  The following discussion contains forward-looking statements that reflect our plans,
estimates and beliefs.  Our actual results could differ materially from those discussed in the forward-looking statements. Factors
that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report, particularly
those in “Item 3. Key Information – Risk Factors.”



55







Company Overview



We are an emerging Israeli biopharmaceutical
company focused primarily on the development and acquisition of therapeutic candidates. In particular, we acquire or in-license
and develop patent-protected new formulations and combinations of existing drugs in advanced stages of development.



Our primary therapeutic focus is on inflammatory
and gastrointestinal (GI) diseases, including cancers and related conditions.



Depending on the specific development program,
our therapeutic candidates are designed to provide improvements over existing drugs by improving their safety profile, reducing
side effects, lowering the number of daily administrations, using a more convenient administration form, providing a cost advantage
and/or exhibiting greater efficacy. Where applicable, we intend to seek U.S. Food and Drug Administration approval for the commercialization
of certain of our therapeutic candidates through the alternative Section 505(b)(2) regulatory path under the Federal Food, Drug,
and Cosmetic Act of 1938, as amended, and in corresponding regulatory paths in other foreign jurisdictions. Our current pipeline
consists of six late clinical development therapeutic candidates.



We have funded our operations primarily
through public (in Israel) and private offerings of our securities. Because our therapeutic candidates are currently in development,
we cannot estimate when and if we will generate significant revenues in the future.



The following is a description of our six
therapeutic candidates:



RHB-101 is a patented formulation once-daily
controlled release formulation of carvedilol intended for the treatment of hypertension, heart failure and left ventricular dysfunction
(following myocardial infarction). We acquired the rights to RHB-101 pursuant to a November 18, 2009 agreement with Egalet a/s.
Pursuant to this agreement, we received a worldwide, exclusive and perpetual license to certain patent rights related to RHB-101.
We paid Egalet a/s $100,000 and are required to make milestone payments of up to $700,000 and pay future royalties, for a fixed
period of time as determined under the agreement, at a rate of 30% of the amounts received by us from sales of the product by us
or from sublicenses payments. See “Item 4. Information on the Company – B. Business Overview – Acquisition and
License Agreements - License Agreement for RHB-101.”



RHB-102 is a patented formulation once-daily
controlled release oral formulation of ondansetron, in combination with salts, intended for the prevention of chemotherapy and
radiotherapy induced nausea and vomiting, by means of an oral formulation of ondansetron. RHB-102 is anticipated to prevent chemotherapy
and radiotherapy induced nausea and vomiting over a time frame of approximately 24 hours. On May 2, 2010, we received a worldwide,
exclusive and perpetual license to use patents and know how relating to RHB-102 from SCOLR Pharma, Inc. in exchange for an up-front
payment of $100,000, milestone payments of up to $500,000 and future royalties, for a fixed period of time as determined under
the agreement, of 8% of our net sales or sublicense fees. See “Item 4. Information on the Company – B. Business Overview
– Acquisition and License Agreements - License Agreement for RHB-102.” SCOLR Pharma announced during 2013 that it had
ceased business operations. See “Item 3. Key Information – D. Risk Factors – Risk Related to Our Business and
Regulatory Matters – If we are not able to secure patents related to RHB-102, our ability to commercialize RHB-102 or enter
into commercialization agreements with potential partners with respect to this product may be adversely affected.”



RHB-103 is a patented oral thin film formulation
of rizatriptan intended for the treatment of acute migraine headaches. On August 26, 2010, we entered into a joint development
and commercialization agreement with IntelGenx Corp. pursuant to which IntelGenx Corp. granted us a worldwide, exclusive and perpetual
license to use RHB-103 and to grant sublicenses. In consideration for the license, we made up-front and milestone payments in the
aggregate amount of $800,000 and are required to make additional milestone payments of up to $500.000. In addition, we are required
to make royalty payments to IntelGenx Corp. of 20% of net sales if the product is marketed by us and 40% of net sublicense fees
if the product is marketed by sublicensees. However, in certain events the royalty payments could range between 20% to 70% of net
sublicense fees. See “Item 4. Information on the Company – B. Business Overview – Acquisition and License Agreements
– License Agreement for RHB-103.”



RHB-104 is a patented combination of three
antibiotics (i.e., clarithromycin, clofazamine and rifabutin) in a single capsule that is intended for the treatment Crohn’s
disease and potential other auto diseases. Unlike other drugs on the market for the treatment of Crohn’s disease that are
immunosuppressive agents, RHB-104 is intended to directly address the suspected cause of the disease. On August 11, 2010, we entered
into an asset purchase agreement with Giaconda Limited, pursuant to which we acquired ownership rights in patents, tangible assets,
production files and regulatory approvals and other data and certain third party agreements related to RHB-104, RHB-105 and RHB-106
in exchange for $500,000 and royalty payments of 7% of net sales and 20% of sublicense fees, in each case, only after we recoup
the amounts and expenses exceeding the approved budget. See “Item 4. Information on the Company – B. Business Overview
– Acquisition and License Agreements – Acquisition of RHB-104, RHB-105 and RHB-106.”



56







RHB-105 is a patented combination of three
drugs – omeprazole, which is a proton pump inhibitor, amoxicillin and rifabutin, both of which are antibiotics. RHB-105 is
intended for the treatment of H. Pylori bacterial infection in the gastrointestinal tract. We acquired ownership rights
in patents, tangible assets, production files and regulatory approvals and other data and certain third party agreements related
to RHB-105 pursuant to the Asset Purchase Agreement with Giaconda Limited described above. See “Item 4. Information on the
Company – B. Business Overview – Acquisition and License Agreements – Acquisition of RHB-104, RHB-105 and RHB-106.”



RHB-106 is a patented formulation in tablet
form intended for the preparation and cleansing of the gastrointestinal tract prior to the performance of abdominal procedures.
We acquired ownership rights in patents, tangible assets, production files and regulatory approvals and other data and certain
third party agreements related to RHB-106 pursuant to the Asset Purchase Agreement with Giaconda Limited described above. See “Item
4. Information on the Company – B. Business Overview – Acquisition and License Agreements – Acquisition of RHB-104,
RHB-105 and RHB-106.”



JOBS Act



We are an emerging growth company. Section
107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period
provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. This means that an
“emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise
apply to private companies. We have elected to utilize this exemption, and therefore we will not be subject to the same new or
revised accounting standards as other public companies that are not emerging growth companies. As an “emerging growth company”,
we also elected to rely on other exemptions, including without limitation, not (i) providing an auditor’s attestation report
on our system of internal controls over financial reporting pursuant to Section 404 and (ii) complying with any requirement that
may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the
auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis).
These exemptions will apply until the earliest of (a) the last day of our fiscal year during which we have total annual gross revenues
of at least $1.0 billion; (b) the last day of our fiscal year following the fifth anniversary of the date of the first sale of
our ordinary shares pursuant to an effective registration statement closing of this offering (in our case, December 31, 2018);
(c) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or
(d) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act of 1934, which would occur
if the market value of our ordinary shares held by non-affiliates is $700 million or more as of the last business day of our most
recently completed fiscal quarter.



Components of Statement of Comprehensive
Loss



Revenues



In 2013, 2012 and 2011, we recorded non-significant
revenues in connection with royalty payments received from a third party licensee of limited rights to a patent that we acquired
from Giaconda Limited. Our therapeutic candidates are currently in development, and therefore, we cannot estimate when and if we
will generate significant revenues in the future.



Research and Development Expenses



See “– C. Research and Development,
Patents and Licenses” below.



General and Administrative Expenses



General and administrative expenses consist
primarily of compensation for employees, directors and consultants in executive and operational functions and professional services.
Other significant general and administration costs include office related expenses and travel, conferences, investor relations
and other costs.



57







Financial Income and Expense



Financial income and expense consist of
non-cash financing expenses in connection with accretion and settlement of royalty obligations to investors, interest earned on
our cash, cash equivalents and short-term bank deposits, bank fees and other transactional costs and expense or income resulting
from fluctuations of the U.S. dollar and other currencies, in which a portion of our assets and liabilities are denominated in
NIS. In 2013, the majority of the financial income, net was from a gain on financial assets at fair value and from changes in the
exchange rates on our cash, cash equivalents and bank deposits held in currencies other than the U.S. dollar. In 2012, the majority
of the finance expenses were accretion and settlement of royalty obligations to investors.



Critical Accounting Policies and Estimates



The preparation of financial statements
in conformity with International Financial Reporting Standards, or IFRS, requires companies to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates
and judgments are subject to an inherent degree of uncertainty, and actual results may differ. Our significant accounting policies
are more fully described in Note 2 to our financial statements included elsewhere in this Annual Report. Critical accounting estimates
and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future
events that are believed to be reasonable under the circumstances, and are particularly important to the portrayal of our financial
position and results of operations. Our estimates are primarily guided by observing the following critical accounting policies:



Impairment
of Intangible Assets -Since the development of our therapeutic candidates has not yet been completed and they are defined
as research and development assets acquired by us, we review, on an annual basis or when indications
of impairment are present, whether those assets are impaired. We make judgments to determine whether indications are present that
require reviewing the impairment of these intangible assets. An impairment loss is recognized for the amount by which the assets’
carrying amount exceeds its recoverable amount. The recoverable amounts of cash generating units are based on our estimates as
to the development of the therapeutic candidates, changes in market scope, market competition and timetables for regulatory approvals.
Since our inception, we have not recognized impairment to our intangible assets. Since the above require certain judgments and
the use of estimates, actual results may differ from our estimations and as a result would increase or decrease our related actual
results.



Recent Accounting Pronouncements



The recent accounting pronouncements are
set forth in Note 2 to our audited financial statements beginning on page F-1 of this Annual Report. We are assessing the expected
effect of the accounting pronouncements on our financial statements.



A. Operating Results



History of Losses



Since inception in 2009, we have generated
significant losses mainly in connection with the research and development of our therapeutic candidates. Such research and development
activities are expected to expand over time and will require further resources if we are to be successful. As a result, we expect
to continue incurring operating losses, which may be substantial over the next several years, and we will need to obtain additional
funds to further develop our research and development programs. As of December 31, 2013, we had an accumulated deficit of approximately
$33.3 million.



We expect to continue to fund our operations
over the next several years through public or private equity offerings, debt financings or through commercialization of our therapeutic
candidates.



As of December 31, 2013, we had approximately $12.1 million ofcash, cash equivalents and short term investments, and as of February 23, 2014, following the closing of the private placement
transactions and the exercise of warrants, we had cash and short term investments of approximately $34.2 million.



Quarterly Results of Operations



The following tables show our unaudited
quarterly statements of operations for the periods indicated. We have prepared this quarterly information on a basis consistent
with our audited financial statements and we believe it includes all adjustments, consisting of normal recurring adjustments necessary
for a fair statement of the information shown. Operating results for any quarter are not necessarily indicative of results for
a full fiscal year.



58







Three Months Ended



|Statements
    of operations        |  | March
31 |       |  | June
30 |  |       | Sep.
    
30 |  |  | Dec.
    
31 |  |  | March
31 |       |  | June
30 |  |       | Sep.
    
30 |  |  | Dec.
    
31 |  |  | March
31 |       |  | June
30 |  |       | Sep.
    
30 |  |  | Dec.
    
31 | 
|----------------------------------- |  | -------- | ----- |  | ------- |  | ----- | ------------ |  |  | ------------ |  |  | -------- | ----- |  | ------- |  | ----- | ------------ |  |  | ------------ |  |  | -------- | ----- |  | ------- |  | ----- | ------------ |  |  | ------------ | 
|                                    |  |          |       |  |         |  |       |              |  |  |              |  |  |          |       |  |         |  |       |              |  |  |              |  |  |          |       |  |         |  |       |              |  |  |              | 
|                                    |  | 2011     |       |  | 2012    |  |       | 2013         | 
|                                    |  |          |      
|Revenues                            |  |          | 6     |  |         |  | 3     |              |  |  | 11           |  |  |          | 3     |  |         |  | 4     |              |  |  | 5            |  |  |          | 3     |  |         |  | 4     |              |  |  | 4            | 
|Research and development expenses   |  |          | 843   |  |         |  | 1,176 |              |  |  | 1,540        |  |  |          | 1,855 |  |         |  | 2,330 |              |  |  | 1,498        |  |  |          | 1,379 |  |         |  | 1,248 |              |  |  | 1,346        | 
|General and administrative expenses |  |          | 509   |  |         |  | 679   |              |  |  | 687          |  |  |          | 607   |  |         |  | 607   |              |  |  | 573          |  |  |          | 550   |  |         |  | 871   |              |  |  | 675          | 
|Operating loss                      |  |          | 1,346 |  |         |  | 1,852 |              |  |  | 2,216        |  |  |          | 2,459 |  |         |  | 2,933 |              |  |  | 2,066        |  |  |          | 1,926 |  |         |  | 2,115 |              |  |  | 2,017        | 
|Financial income                    |  |          | 765   |  |         |  | 381   |              |  |  | 20           |  |  |          | 5     |  |         |  | 258   |              |  |  | 40           |  |  |          | 57    |  |         |  | (158  | )            |  |  | 43           | 
|Financial expenses                  |  |          | 8,045 |  |         |  | 57    |              |  |  | 533          |  |  |          | 166   |  |         |  | 59    |              |  |  | 247          |  |  |          | 98    |  |         |  | 1.079 |              |  |  | 3            | 
|Net loss                            |  |          | 8,626 |  |         |  | 1,528 |              |  |  | 2,729        |  |  |          | 2,620 |  |         |  | 2,734 |              |  |  | 2,273        |  |  |          | 1,967 |  |         |  | 2,352 |              |  |  | 1,977        | 



Our quarterly revenues and operating results
of operations have varied in the past and are expected to vary in the future due to numerous factors. We believe that period-to-period
comparisons of our operating results are not necessarily meaningful and should not be relied upon as indications of future performance.



Comparison of the Year Ended December
31, 2013 to the Year Ended December 31, 2012



Research and Development Expenses



Research and development expenses for the
year ended December 31, 2013 were $8.1 million, an increase of $1.6 million, or 25%, compared to $6.5 million for the year ended
December 31, 2012. The increase resulted primarily from approximately $2.4 million in clinical trial costs related mainly to RHB-102,
RHB-103 and RHB-104 and RHB-105 which were partially offset mainly by a $1 million discount from the Canadian service provider
mainly related to RHB-104 development expenses.



General and Administrative Expenses



General and administrative expenses for
the year ended December 31, 2013 were $2.7 million, an increase of $0.1 million, or 4%, compared to $2.6 million for the year ended
December 31, 2012. The increase resulted primarily from an increase in payroll and related expenses as result of recruitments of
new employees, partially offset by a decrease in share-based payments.



Operating Loss



During the
year ended December 31, 2013 our operating loss was approximately $10.8 million, an increase of $1.8 million, or 20%, compared
to $9 million for the year ended December 31, 2012. The increase in operating loss was mainly due to an increase in our research
and development activities mentioned above.



Financing Income and Expenses



We recognized net financial income of $0.1
million for the year ended December 31, 2013, compared to net financial expenses of $1.3 million for the year ended December 31,
2012. The income for the year of 2013 derived from fair value gain on financial assets and changes in exchange rates while the
expenses for the year of 2012 represented primarily a non-cash financing expense of $1.5 million due to the accretion and settlement
of royalty obligations to investors.



Comparison of the Year Ended December
31, 2012 to the Year Ended December 31, 2011



Research and Development Expenses



Research and development expenses for the
year ended December 31, 2012 were $6.5 million, an increase of $1.1 million, or 20%, compared to $5.4 million for the year ended
December 31, 2011. The increase resulted primarily from approximately $1.2 million in manufacturing and clinical trial costs related
to the development of RHB-102, RHB-103, RHB-104 and RHB-105 and clinical trials costs related to RHB-102 and RHB-103.



59







General and Administrative Expenses



General and administrative expenses for
the year ended December 31, 2012 were $2.6 million, an increase of $0.1 million, or 0.4%, compared to $2.5 million for the year
ended December 31, 2011. The increase resulted primarily from major increase in professional services mainly due to the NASDAQ
listing that was mostly offset by a decrease in share-based payments expenses.



Operating Loss



During the
year ended December 31, 2012 and 2011, our operating loss was approximately $9.0 million and $7.9 million, respectively. This
increase in operating loss was mainly due to an increase in our research and development activities mentioned
above.



Financing Income and Expenses



We recognized net financial expenses of
$1.3 for the year ended December 31, 2012, compared to net financial expenses of $7.6 million for the year ended December 31,
2011. The expenses for the year of 2012 represented primarily a non-cash financing expense of $1.5 million due to the accretion
and settlement of royalty obligations to investors. The expenses for the year of 2011 represented primarily one-time non-cash
financing expense of $7.9 million related to the revaluation of our mandatory convertible loans at fair value at the time of their
conversion into shares prior to our initial public offering.



| | B. | Liquidity
                                         and Capital Resources
| | -- | ------------------------------------------------------------------------



Liquidity and Capital
Resources



Our therapeutic candidates are in the research
and development stage and therefore do not generate significant revenues. To date, our activities have been financed by raising
capital. Since inception, we have raised an aggregate of approximately $12.6 million from private investors pursuant to investment
and/or loan agreements prior to the initial public offering on the Tel Aviv Stock Exchange, gross proceeds of approximately $14
million from our initial public offering on the Tel Aviv Stock Exchange, gross proceeds of approximately $3.1 million from the
exercise of non-tradable options and warrants following the listing and gross proceeds of approximately $4 million (based on the
representative U.S. dollar–NIS rate of exchange of 3.48 on February 2, 2014) from the exercise of series 1 tradable warrants,
gross process of approximately $6.5 million in a private financing shortly prior to the listing on NASDAQ, gross proceeds of approximately
$8.5 million in a private financing of ADSs in January 2014, and gross proceeds of approximately $11.7 million in a private financing
of shares in January 2014 (based on the representative U.S. dollar–NIS rate of exchange of 3.49 on January 22, 2014). As
December 31, 2013, we had approximately $12.1 million of cash, cash equivalents and short term investments.



Below is a summary of our material financing
transactions since our inception:



From September to November 2009, we entered
into investment agreements pursuant to which we raised an aggregate of $975,000 from the issuance of 649,673 preferred shares
and 129,935 warrants exercisable into preferred shares at an exercise price of $0.45 per preferred share. We received gross proceeds
of an aggregate of $584,000 from the subsequent exercise of all warrants issued under our 2009 investment agreements for 1,299,347
preferred shares.



From June 2010 to August 2010, we entered
into loan agreements with a number of investors, pursuant to which we received gross proceeds of approximately $3.5 million. The
loans issued under these loan agreements accrued interest at an annual rate of 8% and were payable upon conversion of the loans.
Under the terms of the loan agreements, we agreed to pay the investors certain royalty payments with regard to possible future
sales of two of our therapeutic candidates. The loan agreements were subsequently replaced in their entirety by a mandatory convertible
loan agreement, other than the obligation to pay royalties to the investors which remained in effect. On December 26, 2012, we
acquired these royalty rights from all of the investors and then terminated them in consideration for the issuance of 2,317,186
ordinary shares. The mandatory convertible loan agreement subsequently was converted into shares and warrants immediately prior
to the completion of our initial public offering on the Tel Aviv Stock Exchange. See “Item 7. Major Shareholders –
B. Related Party Transactions –Acquisition of Royalties Rights.”



On November 7, 2010, we entered into additional
mandatory convertible loan agreements with a number of investors pursuant to which we received proceeds of approximately $7.6
million. The loans accrued interest at an annual rate of 8%. Such loans were subsequently converted into shares and warrants immediately
prior to the completion of our initial public offering on the Tel Aviv Stock Exchange.



60







On February 3, 2011, we raised gross proceeds
of approximately $14 million in connection with our initial public offering on the Tel Aviv Stock Exchange of 14,302,300 ordinary
shares and 7,151,150 tradable Series 1 Warrants. Each tradable Series 1 Warrant was exercisable through February 2, 2014 into
one ordinary share. By February 2, 2014, the warrant expiration date, 3,246,082 Series 1 Warrants had been exercised for an aggregate
amount of $4 million (based on the representative U.S. dollar–NIS rate of exchange of 3.498 on February 2, 2014).



Since our initial public offering, investors
in our mandatory convertible loans exercised 3,414,523 warrants for an aggregate gross amount of approximately $2.8 million. The
unexercised warrants have expired.



On January 10, 2013, we issued in a private placement 6,481,280 ordinary shares at a price per share of
NIS 4.00 (approximately $1.14 based on the representative U.S. dollar – NIS rate of exchange of 3.51 on February 23, 2014)
and non-tradable warrants to purchase up to 3,240,640 ordinary shares at exercise prices ranging
from $1.18 to $1.54, depending on the date of exercise.



The warrants are exercisable until January
10, 2015. The current exercise price for each warrant share (the “Warrant Price”) is $1.54. As of February 24, 2014,
336,400 warrants had been exercised at a price of $1.34 per share for aggregate proceeds to the Company of approximately $451,000.



On January 8, 2014, we issued in a private
placement a total of 894,740 units, each consisting of one ADS and a three-year warrant to purchase 0.4 of an ADS, at a purchase
price of $9.50 per Unit, for an aggregate gross amount of $8.5 million. We also issued warrants to purchase 357,896 ADSs in the
aggregate at an exercise price of $11 per ADS. Investors in the private placement were OrbiMed Israel Partners Limited Partnership
and Broadfin Healthcare Master Fund, LTD.



On January 21, 2014, we issued in a private
placement a total of 10,458,740 ordinary shares at a purchase price of NIS 3.9 per share and three-year warrants to purchase 4,183,496
ordinary shares in the aggregate at an exercise price of NIS 4.9 per ordinary share, linked to changes in the NIS-US dollar exchange
rate, for an aggregate gross amount of $11.7 million (based on the representative U.S. dollar–NIS rate of exchange of 3.49
on January 22, 2014). Investors in the private placement were Israeli institutional investors Migdal Insurance Company, Yelin
Lapidot, and Excellence Nessuah, as well as Sphera Global Healthcare Master Fund and two private Israeli investment firms.



We estimate
that so long as no significant revenues are generated from our therapeutic candidates, we will need to raise substantial additional
funds to acquire, develop and commercialize therapeutic candidates, as our current cash and short-term investments are not sufficient
to complete the research and development of all of our therapeutic candidates and fund our operations. However, additional financing
may not be available on acceptable terms, if at all. Our future capital requirements will depend on many factors including
but not limited to:



| | · | the
                                         regulatory path of each of our therapeutic candidates;
| | - | ---------------------------------------------------------------------------------------------------



| | · | our
                                         ability to successfully commercialize our therapeutic candidates, including securing
                                         commercialization agreements with third parties and favorable pricing and market share;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the
                                         progress, success and cost of our clinical trials and research and development programs;
| | - | -------------------------------------------------------------------------------------------------------------------------------------



| | · | the
                                         costs, timing and outcome of regulatory review and obtaining regulatory approval of our
                                         therapeutic candidates and addressing regulatory and other issues that may arise post-approval;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the
                                         costs of enforcing our issued patents and defending intellectual property-related claims;
| | - | --------------------------------------------------------------------------------------------------------------------------------------



| | · | the
                                         costs of developing sales, marketing and distribution channels;
| | - | ------------------------------------------------------------------------------------------------------------



| | · | our
                                         consumption of available resources more rapidly than currently anticipated, resulting
                                         in the need for additional funding sooner than anticipated; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | we
                                         may consume available resources more rapidly than currently anticipated, resulting in
                                         the need for additional funding sooner than anticipated.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



61







If we are unable to commercialize or out-license
its therapeutic candidates or obtain future financing, we may be forced to delay, reduce the scope of, or eliminate one or more
of our research and development programs related to the therapeutic candidates, which may have material adverse effect on our
business, financial condition and results of operations. “Item 3. Key Information – D. Risk Factors – Risk Related
to Our Financial Condition and Capital Requirements – Our current working capital is not sufficient to complete our research
and development with respect to all of our therapeutic candidates. We will need to raise additional capital to achieve our strategic
objectives of acquiring, developing and commercializing therapeutic candidates, and our failure to raise sufficient capital would
significantly impair our ability to fund our operations, develop our therapeutic candidates, attract development and/or commercial
partners and retain key personnel.”



Cash Flow



Operating activities



For the year ended December 31, 2013, net
cash flow used in operating activities was approximately $8.4 million, compared to approximately $6.8 million for the year ended
December 31, 2012 and $4.7 million for the year ended December 31, 2011. The increase in net cash flow used in operating activities
was a direct result of the increase in our operations, reflected mainly by increased research and development expenses. The increase
in net cash flow used in operating activities in 2012 compared to 2011 was a direct result of the significant increase in our operations,
reflected by increased payments for research and development activities and increased payment of salaries, consultant fees, and
payments to other service providers.





Investment activities



Net cash flow resulted from investing
activities for the year ended December 31, 2013 was approximately $1.1 million, compared to approximately net cash flow $3.0 million
in the year ended December 31, 2012 and net cash of $4.7 million used in the year ended December 31, 2011. For the year ended
December 31, 2013, we invested a total of $0.2 million in intangible assets and we received proceeds of $0.9 million from sale
financial assets at fair value and $0.5 million from withdrawal from bank deposits to cash and cash equivalents. For the year
ended December 31, 2012, we invested a total of $1 million in the purchasing of marketable securities and we received proceeds
of $1.6 million from sale of marketable securities and $2.5 million from withdrawal from bank deposits to cash and cash equivalents.
For the year ended December 31, 2011, we invested a total of $4.5 million in bank deposits and in purchasing of marketable securities.



Financing activities



Net cash flow resulting from financing
activities for the year ended December 31, 2013 amounted to approximately $2.3 million, compared with approximately $6.6 million
for the year ended December 31, 2012 and $13.8 million for the year ended December 31, 2011. In 2013, most of the cash flows from
financing activities resulted from the exercise of warrants from the August and November 2010 mandatory convertible loans in a
total amount of $2.2 million, while in 2012 most of the cash flow was from investment agreements for the issuance ordinary shares
and warrants in consideration of an aggregate investment amount of approximately $6.2 million, and in 2011 most of the cash flow
was from financing activities derived from cash raised in our initial public offering.



C. Research and Development,
Patents and Licenses



Our research and development expenses
consist primarily of costs of clinical trials, professional services, share-based payments and payroll and related expenses. The
clinical trials costs are mainly related to payments to third parties to manufacture our therapeutic candidates, to perform clinical
trials with our therapeutic candidates and to provide us with regulatory services. We charge all research and development expenses
to operations as they are incurred. We expect our research and development expense to remain our primary expense in the near future
as we continue to develop our therapeutic candidates.



Clinical trial expenses



Set forth below is a summary of the gross
external clinical trial costs allocated to our therapeutic candidates on an individual basis for the years ended December 31,
2011, 2012 and 2013.



62







|                           |  | 2011 |     |  | 2012 |  |     | 2013 |  |  | Total Costs Since 
    Project Inception | 
|-------------------------- |  | ---- | --- |  | ---- |  | --- | ---- |  |  | ---------------------------------------- | 
|                           |  |      |     |  |      |  |     |      |  |  |                                          | 
|RHB-101                    |  |      | 0.2 |  |      |  | -   |      |  |  | 0.1                                      | 
|RHB-102                    |  |      | 0.3 |  |      |  | 1.0 |      |  |  | 0.9                                      | 
|RHB-103                    |  |      | 0.2 |  |      |  | 0.6 |      |  |  | 0.3                                      | 
|RHB-104                    |  |      | 1.4 |  |      |  | 1.6 |      |  |  | 3.1                                      | 
|RHB-105                    |  |      | 0.2 |  |      |  | 0.3 |      |  |  | 0.6                                      | 
|RHB-106                    |  |      | 0.2 |  |      |  | 0.1 |      |  |  | -                                        | 
|Total direct project costs |  |      | 2.5 |  |      |  | 3.6 |      |  |  | 5.0                                      | 



Research and development expenses



From our inception through December 31,
2013, we have incurred research and development expenses of approximately $20.8 million. Set below is a summary of our research
and development expenses based on the type of expenditure.



|                             |  | Amount invested in R&D     |    
|---------------------------- |  | -------------------------- | ---
|                             |  | (U.S. dollars in millions) |    
|                             |  |                            |    
|                             |  | 2011                       |    
|Payroll and related expenses |  |                            | 0.4
|Professional services        |  |                            | 0.7
|Share-based payments         |  |                            | 1.4
|Clinical trials, net         |  |                            | 2.5
|Patents expenses             |  |                            | 0.2
|Other                        |  |                            | 0.2
|Total                        |  |                            | 5.4



Due to the inherently unpredictable nature
of clinical development processes, we are unable to estimate with any certainty the costs we will incur in the continued development
of the therapeutic candidates in our pipeline for potential commercialization.



While we are currently focused on advancing
each of our therapeutic candidates, our future research and development expenses will depend on the clinical success of each therapeutic
candidate, as well as available resources and the ongoing assessments of each therapeutic candidate’s commercial potential.
In addition, we cannot forecast with any degree of certainty which therapeutic candidates may be subject to future commercialization
arrangements, when such commercialization arrangements will be secured, if at all, and to what degree such arrangements would
affect our development plans and capital requirements. See “Item 3. Key Information – D. Risk Factors – If we
and/or our commercialization partners are unable to obtain U.S. Food and Drug Administration and/or other foreign regulatory authority
approval for our therapeutic candidates, we and/or our commercialization partners will be unable to commercialize our therapeutic
candidates.”



As we obtain results from clinical trials,
we may elect to discontinue or delay development and clinical trials for certain therapeutic candidates in order to focus our
resources on more promising therapeutic candidates or projects. Completion of clinical trials by us or our licensees may take
several years or more, but the length of time generally varies according to the type, complexity, novelty and intended use of
a therapeutic candidate. See “Item 3. Key Information – D. Risk Factors – Risks Related to Our Business and
Regulatory Matters.”



We expect our research and development
expenses to increase from current levels as we continue the advancement of our clinical trials and therapeutic candidates’
development. The lengthy process of completing clinical trials and seeking regulatory approvals for our therapeutic candidates
requires substantial expenditures. Any failure or delay in completing clinical trials, or in obtaining regulatory approvals, could
cause a delay in generating product revenue and cause our research and development expenses to increase and, in turn, have a material
adverse effect on our operations. Due to the factors set forth above, we are not able to estimate with any certainty if and when
we would recognize any net revenues from our projects.



63







| | D. | Trend Information
| | -- | -----------------



We are an emerging Israeli biopharmaceutical
company focused primarily on the development and acquisition of our therapeutic candidates. It is not possible for us to predict
with any degree of accuracy the outcome of our research and development or our commercialization success with regard to any of
our therapeutic candidates. Our research and development expenditure is our primary expenditure. Increases or decreases in research
and development expenditures are primarily attributable to the level and results of our clinical trial activities and the amount
of expenditure on those trials.



| | E. | Off-Balance Sheet
                                         Arrangements
| | -- | -----------------------------------------------------------------------



Since inception, we have not entered into
any transactions with unconsolidated entities whereby we have financial guarantees, subordinated retained interests, derivative
instruments or other contingent arrangements that expose us to material continuing risks, contingent liabilities, or any other
obligations under a variable interest in an unconsolidated entity that provides us with financing, liquidity, market risk or credit
risk support.



| | F. | Tabular Disclosure
                                         of Contractual Obligations
| | -- | --------------------------------------------------------------------------------------



The following table summarizes our significant
contractual obligations on December 31, 2013:



|                                      |  |                             |       |  |           |  |       |       |  |  |       |  |  | More   |   
|------------------------------------- |  | --------------------------- | ----- |  | --------- |  | ----- | ----- |  |  | ----- |  |  | ------ | --
|                                      |  |                             |       |  | Less than |  |       | 1-3   |  |  | 3-5   |  |  | than 5 |   
|                                      |  | Total                       |       |  | 1 year    |  |       | Years |  |  | years |  |  | years  |   
|                                      |  | (U.S. dollars in thousands) |      
|                                      |  | (Unaudited)                 |      
|Office lease  obligations             |  |                             | 640   |  |           |  | 208   |       |  |  | 415   |  |  |        | 17
|Accounts payable and accrued expenses |  |                             | 2,415 |  |           |  | 2,415 |       |  |  |       |  |  |        |   
|Total                                 |  |                             | 3,055 |  |           |  | 2,623 |       |  |  | 415   |  |  |        | 17



The foregoing table does not include our
in-license agreements with Egalet a/s, SCORR Pharma, Inc. and IntelGenx Corp., our agreement with the University of Central Florida
Research Foundation, Inc., and our asset sale agreement with Giaconda Limited, pursuant to which we are obligated to make various
payments upon the achievement of agreed upon milestones and/or make certain royalty payments since we are unable to currently
estimate the actual amount or timing of these payments. If all of the milestones are achieved over the life of each in-licensing
agreement, we will be required to pay, in addition to royalties on our net income, an aggregate amount of approximately $1.9 million.
All of our in-licensing agreements are terminable at-will by us upon prior written notice of 30 days. See “Item 4. Information
on the Company — Business Overview — Acquisition and License Agreements.”



The foregoing table also does not include
payments payable under our manufacturing agreements or payments under our clinical services agreements, all of which are contingent
upon the completion of milestones. See “Item 4. Information on the Company - Business Overview - Manufacturing Agreements”
and “Item 4. Information on the Company – Business Overview – Clinical Services Agreement Related to RHB-104.”



| | ITEM 6. | DIRECTORS, SENIOR
                                         MANAGEMENT AND EMPLOYEES
| | ------- | -----------------------------------------------------------------------------------



| | A. | Directors
                                         and Senior Management
| | -- | ------------------------------------------------------------------------



The following table sets forth the name,
age and position of each of our executive officers and directors as of the date of this Annual Report.



64







|Name                   |  | Age |  | Position(s)                                                        
|---------------------- |  | --- |  | -------------------------------------------------------------------
|                       |  |     |  |                                                                    
|Executive Officers     |  |     |  |                                                                    
|Dror Ben-Asher         |  | 48  |  | Chief Executive Officer and Chairman of the board of directors     
|Ori Shilo              |  | 47  |  | Deputy Chief Executive Officer Finance and Operations, and Director
|Reza Fathi, Ph.D.      |  | 59  |  | Senior Vice President Research and Development                     
|Gilead Raday           |  | 39  |  | Senior Vice President Corporate and Product Development            
|Adi Frish              |  | 44  |  | Senior Vice President Business Development and Licensing           
|Guy Goldberg           |  | 38  |  | Chief Business Officer                                             
|Uri Hananel Aharon     |  | 33  |  | Chief Accounting Officer                                           
|                       |  |     |  |                                                                    
|Directors              |  |     |  |                                                                    
|Dr. Shmuel Cabilly (2) |  | 64  |  | Director                                                           
|Eric Swenden           |  | 70  |  | Director                                                           
|Dr. Kenneth Reed       |  | 60  |  | Director                                                           
|Dan Suesskind (1)      |  | 70  |  | Director                                                           
|Ofer Tsimchi (1), (2)  |  | 54  |  | External Director                                                  
|Aliza Rotbard (1), (2) |  | 68  |  | External Director                                                  



(1)	Member of our audit committee
that also serves as our financial statements committee.

(2)	Member of our compensation
committee.



Executive officers



Dror Ben-Asherhas served as our
Chief Executive Officer and as a director since August 3, 2009. Since May 4, 2011, Mr. Ben- Asher has also served as Chairman
of our board of directors. From January 2002 to November 2010, Mr. Ben- Asher served as a manager at P.C.M.I. Ltd., an affiliate
of ProSeed Capital Holdings CVA, which provides us with certain advisory services. Mr. Ben-Asher is currently a director at Agrea
Ltd. Mr. Ben-Asher holds an LLB from the University of Leicester, UK, an MJur. from Oxford University, UK and completed LLM studies
at Harvard University in the U.S.



Ori Shilo has served as our Deputy
Chief Executive Officer Finance and Operations since November 1, 2010 and as a director since August 3, 2009. From 2009 to 2010,
Mr. Shilo served as our Vice President Finance and Operations. From 2000 to 2010, Mr. Shilo served as Chief Executive Officer
of P.C.M.I. Ltd. Mr. Shilo is currently a director at P.C.M.I. Ltd. and G. Shilo Holdings Ltd. Mr. Shilo holds a B.A in Business
Administration from the Academic College for Management in Rishon Lezion, Israel and an MBA in Business Administration from the
Ben Gurion University in Beer Sheva, Israel. The board of directors has determined that Mr. Shilo is a financial and accounting
expert under Israeli law.



Reza
Fathi, Ph.D., has served as our Senior Vice President Research and Development since May 1, 2010. From 2005 to 2009, Dr. Fathi
served as a Director of Research in XTL Biopharmaceuticals Inc., a biotechnology company engaged in developing small molecule
clinical candidates for infectious diseases. Prior to that, between 2000-2005, Dr. Fathi served as Director of Research at Vivoquest,
Inc., responsible for developing a number of novel natural product based combinatorial technologies
for infectious diseases such as HCV and HIV. Between 1998-2000, he served as a Manager of Chemical Biology Research at the Institute
of Chemistry and Chemical Biology (ICCB) at Harvard Medical School, pioneering chemical genetics to identify small molecules in
cancer biology, and from 1991-1998 headed the Discovery Group at PharmaGenics, Inc. Dr. Fathi holds a Postdoctoral and Ph.D. in
Chemistry from Rutgers University, NJ, U.S.



Gilead Radayhas served as our
Senior Vice President Corporate and Product Development since December 5, 2012. From November 2010 to December 2012, Mr. Raday
served as our Vice President Corporate and Product Development. From January 2010 until October 2010, Mr. Raday served as Interim
Chief Executive Officer of Sepal Pharma Plc., an oncology drug development company, and from January 2009 to December 2009, he
was an independent consultant, specializing in business development and project management in the field of life sciences. From
2004 to 2008, Mr. Raday was a partner in Charles Street Securities Europe, LLP, an investment banking firm, where he was responsible
for the field of life sciences. Mr. Raday serves on the boards of Sepal Pharma Plc., and ViDAC Limited. Mr. Raday previously served
on the boards of Morria Biopharmaceuticals Plc.,Vaccine Research International Plc., TKsignal Plc., and Miras Medical Imaging
Plc. He received his MSc in Neurobiology from the Hebrew University of Jerusalem and an MPhil in Biotechnology Management from
Cambridge University, UK.



65







Adi Frishhas served as our Senior
Vice President Business Development and Licensing since December 5, 2012. From October 2010 to December 2012, Mr. Frish served
as our Vice President Business Development and Licensing. From 2006 to 2010, Mr. Frish served as the Chief Business Development
at Medigus Ltd., a medical device company in the endoscopic field, and from 1998 to 2006, Mr. Frish was an associate and a partner
at the law firm of Y. Ben Dror & Co. Mr. Frish holds an LLB from Essex University, UK and an LLM in Business Law from the
Bar-Ilan University, Israel.



Guy Goldberg has served as our
Chief Business Officer since July 16, 2012. From July 2007 to July 2012, Mr. Goldberg served as Vice President and then as Senior
Vice President of Business Operations at Eagle Pharmaceuticals, a specialty injectable drug development company, based in New
Jersey. From 2004 to 2007, Mr. Goldberg was an associate at ProQuest Investments, a healthcare focused venture capital firm, and
from 2002 to 2004, Mr. Goldberg was a consultant at McKinsey & Company. Mr. Goldberg holds a B.A. in Economics and Philosophy
from Yale University and a J.D. from Harvard Law School in the U.S.



Uri Hananel Aharonhas served as
our Chief Accounting Officer since April 12, 2011. From 2007 to 2011, Mr. Aharon served as a team manager at Ernst & Young
Israel, specializing in auditing and financial consulting for companies traded on The Nasdaq Stock Market and the Tel Aviv Stock
Exchange, both in the biotech and high-tech sectors. From 2004 to 2007, Mr. Aharon served as an accounting intern at Ziv Haft,
BDO. Mr. Aharon holds a BA in Accounting and Economics from the Hebrew University of Jerusalem, Israel and an MBA in Business
Taxation from the Academic College for Management in Rishon Lezion, Israel.



Directors



Dr. ShmuelCabilly has served as
a member of our board of directors since August 26, 2010, and has served on our compensation committee since May 5, 2011. Dr.
Cabilly currently serves on the board of directors of BioKine Therapeutics Ltd., Biologic Design Ltd., Mobydom Ltd., Neuroderm
Ltd., Dentack Implants Ltd., Ornim Inc., OPLON B.V., Efranat Ltd. and BioCep Ltd. Dr. Cabilly holds a BSC Biology from the Ben
Gurion University of Beer Sheva, Israel, an MSC in Immunology and Microbiology from the Hebrew University of Jerusalem, Israel
and a PhD in Immunology and Microbiology from the Hebrew University of Jerusalem, Israel.



Eric Swenden has served as a member
of our board of directors since May 3, 2010, and has served on our investment committee since May 5, 2011. From 1966 until 2001
Mr. Swenden served in various positions including Chief Executive Officer (since 1985) and Executive Chairman (since 1990) of
Vandemoortele Food Group, a privately held Belgium-based European food group with revenue of approximately EUR 2 billion, and
he currently serves on the board of directors of Lifeline Scientific, Inc., TBC S.A., Alterpharma N.V. and Gudrun N.V. Mr. Swenden
holds an M.A. in Commercial Science from the University of Antwerp, Belgium. The board of directors has determined that Mr. Swenden
is a financial and accounting expert under Israeli law.



Dr. Kenneth Reedhas served as
a member of our board of directors since December 15, 2009. Dr. Reed is a dermatologist, practicing in a private practice under
the name of Kenneth Reed MD PC. Dr. Reed currently serves on the board of directors of Minerva Biotechnologies Corporation. Dr.
Reed received his B.A from Brown University in the United States and a M.D. from the University of Medicine and Dentistry of New
Jersey in the U.S. Dr. Reed is a board certified dermatologist with over 25 years of clinical experience since completing the
Harvard Medical School Residency Program in Dermatology.



Dan Suesskindhas served as a member
of our board of directors since February 21, 2011, and has served on our audit committee and investment committee since May 5,
2011. From 1977 to 2008, Mr. Suesskind served as the Chief Financial Officer of Teva Pharmaceutical Industries Ltd. Mr. Suesskind
served as a director of Teva Pharmaceutical Industries Ltd. between 1981 to 2001andagain since 2010. In addition,
Mr. Suesskind currently serves on the board of directors of Syneron Medical Ltd., Israel Corporation Ltd. as well as a member
of the board of trustees of the Hebrew University. Mr. Suesskind is one of the founders and a member of the steering committee
of the Israeli Forum of Chief Financial Officers.Mr. Suesskind holds a BA in Economics and Political Science from the
Hebrew University of Jerusalem, Israel and an MBA in Business Administration from University of Massachusetts in the U.S. The
board of directors has determined that Mr. Suesskind is a financial and accounting expert under Israeli law.



66







Ofer Tsimchihas served as an external
director on our board of directors since May 4, 2011, a member of our audit committee and as the Chairman of our compensation
committee since May 5, 2011. Since 2008, Mr. Tsimchi has served as the Chairman of the board of directors of Polysack Plastic
Industries Ltd. and Polysack-Agriculture Products, and since 2006 he has served as a Partner in the Danbar Group Ltd., a holding
company. Mr. Tsimchi currently serves on the board of directors of Polysack Plastic Industries Ltd, Kidron Industrial Materials
Ltd., Amutat Zionut 2000, Danbar Group Ltd, and Polysack Agriculture Hi-Technologies. Mr. Tsimchi received his BA in Economics
and Agriculture from the Hebrew University of Jerusalem, Israel. The board of directors has determined that Mr. Tsimchi is a financial
and accounting expert under Israeli law.



Aliza Rotbardhas served as an
external director on our board of directors since May 4, 2011, as the Chairman of our audit committee and a member of our compensation
committee since May 5, 2011. Ms. Rotbard served as the Deputy General Manager of the Tel-Aviv Stock Exchange, was the founder
and CEO of DOORS Information Systems and currently serves as an external director of Kamada Ltd., ProSeed Venture Capital Fund
Ltd., AIG-American Insurance Group, Hadera Paper Ltd., R.V.B. Holdings Ltd. and Queenco Leisure International Ltd. Ms. Rotbard
also serves as a director of Israel Discount Bank, MobileMax Technologies Ltd. and Pointer Telocation Ltd. Ms. Rotbard holds a
B.Sc. in Mathematics and Physics from the Hebrew University of Jerusalem, Israel. The board of directors has determined that Ms.
Rotbard is a financial and accounting expert under Israeli law.



| | B. | Compensation
| | -- | ------------



The aggregate compensation paid, and benefits
in-kind granted to or accrued on behalf of all of our executive officers and directors for their services, in all capacities, to
us during the year ended December 31, 2013 was approximately $2.4 million. Out of that amount $1.3 million was paid as salary and
consultants fees, $0.9 million was attributed to the value of the options granted to directors and senior management during 2013,
approximately $0.1 million was attributed to retirement plans and $0.1 million attributed to other long-term benefits. No additional
amounts have been set aside or accrued by us to provide pension, retirement or similar benefits.



Employment Agreements



We have entered into employment or consultant
agreements with each of our executive officers. All of these agreements contain customary provisions regarding noncompetition,
confidentiality of information and assignment of inventions. However, the enforceability of the noncompetition provisions may
be limited under applicable laws.



For information on exemption and indemnification
letters granted to our officers and directors, please see “ – 6.C. Board Practices – Exemption, Insurance and
Indemnification of Directors and Officers.”



Director Compensation



Under the Israeli Companies Law, and related
regulations, external directors are entitled to a fixed annual compensation and an additional payment for each meeting attended.
We currently pay our external directors, Mr. Ofer Tsimchi and Ms. Aliza Rotbard, an annual cash fee of NIS 42,200 (approximately
$12,000, based on the representative U.S. dollar– NIS rate of exchange of 3.51 on February 23, 2014) and a cash
fee of NIS 2,820 (approximately $800, based on the representative U.S. dollar – NIS rate of exchange of 3.51 on February
23, 2014) per meeting (or a smaller amount in case they do not physically attend the meeting).



Effective as of October 1, 2011, Dr. Reed,
Mr. Swenden, Dr. Cabilly and Mr. Suesskind receive the same cash remuneration as was approved for the external directors as described
above.



On
July 18, 2013, our shareholders approved equity grants to each of Mr. Swenden, Dr. Reed and Mr. Suesskind. On July 31, 2013, each
of Mr. Swenden, Dr. Reed and Mr. Suesskind was granted seven (7) year options to purchase 100,000 ordinary shares at an exercise
price of $1.12 per share. The options vest quarterly over four (4) years in equal parts, which commenced retroactively as of April,
1, 2013. The options will become fully vested, in accordance with the terms of the grant, on March 31, 2017.



67







Executives and Directors Compensation





Employment Agreement
with Mr. Dror Ben-Asher



On November 1, 2010
we entered into an employment agreement with Mr. Dror Ben-Asher, pursuant to which he serves as our Chief Executive Officer. Mr.
Ben-Asher also currently serves as Chairman of our board of directors.



Pursuant to the terms
of the agreement, as amended, Mr. Ben-Asher is entitled to a monthly salary of NIS 55,000 (approximately $16,000, based on the
representative U.S. dollar– NIS rate of exchange of 3.51on February 23, 2014), a car allowance of NIS 6,000 (approximately
$1,700, based on the representative U.S. dollar – NIS rate of exchange of 3.51on February 23, 2014), reimbursement
for all mobile phone expenses, contributions to a pension fund/directors’ insurance fund, advanced study fund, disability
insurance and leave days, all as provided for in his employment agreement.



The agreement further
provides that if the agreement is terminated in connection with a “hostile takeover,” Mr. Ben-Asher shall be entitled
to a special one-time bonus equal to his then current monthly salary and retirement benefits, including payments to an advanced
study fund and pension arrangement and car expense reimbursement, multiplied by 12. A “hostile takeover” is defined
in the employment agreement as an occurrence where a person, entity or group that was not an interested party under the Israeli
Securities on the date of the initial public offering of our ordinary shares, becomes a “controlling shareholder,”
within the meaning of such term in the Israeli Securities Law 1968, or a “holder,” as defined in the Israel Securities
Law 1968, of 25% or more of the voting rights in the Company. See “ – E. Share Ownership –Option Plan”
for a description of interested parties under the Israeli Securities Law. In addition, on January 19, 2011, we amended the terms
of Mr. Ben-Asher’s options to provide that in the event any person, entity or group that was not an interested party at
the time of our IPO becomes a "controlling shareholder", as defined in our 2010 Option Plan, all options granted to
Mr. Ben-Asher prior to the IPO, including the options granted subject to completion of our IPO shall immediately vest in full.
In addition, on September 24, 2012, our board of directors approved the amendment of the terms of Mr. Ben-Asher’s options
to provide that in the event any person, entity or group that was not an interested party at the time of our IPO becomes a "controlling
shareholder", as defined in our 2010 Option Plan, all options granted to Mr. Ben-Asher after completion of our IPO shall
immediately vest in full. The September 24, 2012 amendment was approved by our shareholders on November 6, 2012. See “ –
E. Share Ownership –Option Plan” for a description of interested parties under the Israeli Securities Law –
1968.



We may terminate the
employment agreement with Mr. Ben-Asher upon 180-days prior notice, while Mr. Ben-Asher may terminate the agreement upon 90-days
prior notice.



On
July 31, 2013 we granted Mr. Ben-Asher seven (7) year options to purchase 300,000 ordinary shares at an exercise price of $1.12
per share. The options vest quarterly over four (4) years in equal parts, which commenced retroactively as of April, 1, 2013.
The options will become fully vested, in accordance with the terms of the grant, on March 31, 2017.





Employment Agreement
with Mr. Ori Shilo



On November 1, 2010,
we entered into an employment agreement with Mr. Ori Shilo, pursuant to which Mr. Shilo serves as our Deputy Chief Executive Officer
Finance and Operations. Mr. Shilo also currently serves as one of our directors.



Pursuant to
the terms of the agreement, as amended, Mr. Shilo is entitled to a monthly salary of NIS 45,000 (approximately $13,000, based on
the representative U.S. dollar – NIS rate of exchange of 3.51 on February 23, 2014), a car allowance of NIS 5,000
(approximately $1,400 based on the representative U.S. dollar – NIS rate of exchange of 3.51 on February 23, 2014),
reimbursement for all mobile phone expenses, contributions to a pension fund/directors’ insurance fund, advanced study fund,
disability insurance and leave days, all as provided for in his employment agreement.



The agreement further
provides that if the agreement is terminated in connection with a “hostile takeover”, Mr. Shilo will be entitled to
a special one-time bonus equal to his then current monthly salary and retirement benefits, including payments to an advanced study
fund and pension arrangement and car expense reimbursement, multiplied by 12. In addition, on January 19, 2011, we amended the
terms of Mr. Shilo’s options to provide that in the event any person, entity or group that was not an interested party at
the time of our IPO becomes a "controlling shareholder", as defined in our 2010 Option Plan, all options granted to
Mr. Shilo prior to the IPO, including the options granted subject to completion of our IPO shall immediately vest in full. In
addition, on September 24, 2012, our board of directors approved the amendment of the terms of Mr. Shilo’s options to provide
that in the event any person, entity or group that was not an interested party at the time of our IPO becomes a "controlling
shareholder", as defined in our 2010 Option Plan, all options granted to Mr. Shilo after completion of our IPO shall immediately
vest in full. The September 24, 2012 amendment was approved by our shareholders on November 6, 2012. See “ – E. Share
Ownership –Option Plan” for a description of interested parties under the Israeli Securities Law – 1968.



68







We may terminate the
employment agreement with Mr. Shilo upon 180-days prior notice, while Mr. Shilo may terminate the agreement upon 90-days prior
notice.



On
July 31, 2013 we granted Mr. Shilo seven (7) year options to purchase 250,000 ordinary shares at an exercise price of $1.12 per
share. The options vest quarterly over four (4) years in equal parts, which commenced retroactively as of April, 1, 2013. The
options will become fully vested, in accordance with the terms of the grant, on March 31, 2017. The equity grant is in accordance
with our Compensation Policy.



Compensation Policy



On July 31, 2013, our shareholders approved
a compensation policy for our officers and directors in accordance with Amendment No. 20 to the Israeli Companies Law, pursuant
to which we are required to determine the compensation of our officers and directors in accordance with a D&O compensation
policy. The policy was previous approved by our Board of Directors, upon recommendation of our Compensation Committee.



The compensation policy is in effect for
three years from the 2013 annual general meeting. The compensation policy principles were designed to grant proper, fair and well-considered
remuneration to our officers, in alignment with our long-term best interests and overall organizational strategy. Part of the
rationale is that the Compensation Policy should encourage our officers to identify with our objectives, and an increase in officer
satisfaction and motivation should retain the employment of high-quality officers in our service over the long term.



| | C. | Board Practices
| | -- | ---------------



Appointment of Directors and Terms of
Officers



Pursuant to our articles
of association, the size of our board of directors shall be no less than 5 persons but no more than 7, excluding at least two
external directors. The directors, except for our external directors, are divided into three classes, as nearly equal in number
as possible. At each annual general meeting, which is required to be held annually, but not more than fifteen months after the
prior annual general meeting, the term of one class of directors expires, and the directors of such class are re-nominated to
serve an additional three year term that expires at the annual general meeting held in the third year following such election.
This process continues indefinitely. The directors of the first class, currently consisting of Dror Ben-Asher and Ori Shilo, will
hold office until our annual general meeting to be held in the year 2014. The directors of the second class, currently consisting
of Dr. Kenneth Reed, and Eric Swenden, will hold office until our annual general meeting to be held in the year 2015, and the
directors of the third class, currently consisting of Dr. Shmuel Cabilly and Dan Suesskind, will hold office until our annual
general meeting to be held in the year 2013. Until the next annual general meeting, the board of directors may elect new directors
to fill vacancies, or increase the number of members of the board of directors up to the maximum number provided in our articles
of association. Any director so appointed may hold office until the first general shareholders’ meeting convened after the
appointment.



Pursuant to the Israeli
Companies Law, one may not be elected and may not serve as a director in a public company if he or she does not have the required
qualifications and the ability to dedicate an appropriate amount of time for the performance of his duties as a director in the
company, taking into consideration, among other things, the special needs and size of the company. In addition, a public company
may convene an annual general meeting of shareholders to elect a director, and may elect such director, only if prior to such
shareholders meeting, the nominee declares, among other things, that he or she possesses all of the required qualifications to
serve as a director (and lists such qualifications in such declaration) and has the ability to dedicate an appropriate amount
of time for the performance of his duties as a director of the company.



Under the Israeli Companies
Law, the entering by a public company into a contract with a non-controlling director as to the terms of his office, including
exculpation, indemnification or insurance, requires the approval of the compensation committee, the board of directors and the
shareholders of the company.



69







A recent amendment to
the Israeli Companies Law requires that the terms of service and engagement of the CEO, directors or controlling shareholders
(or a relative thereof) receive the approval of the compensation committee, board of directors, and shareholders, subject to limited
exceptions. Similarly, the terms of service and engagement of any officer other than the CEO must receive the approval of the
compensation committee and board of directors. However, shareholder approval is required if the compensation of such officer other
than the CEO is not in accordance with a new compensation policy the Company is required to adopt. The recent amendment to the
Israeli Companies Law requires that by August 11, 2013 the board and shareholders (with approval by a Special Majority, as defined
below) adopt a compensation policy applicable to Company officers and directors which must take into account, among other things,
providing proper incentives to directors and officers, the risk management of the company, the officer’s contribution to
achieving corporate objectives and increasing profits, and the function of the officer or director. Under the Israeli Companies
Law, a Special Majority requires (i) the vote of at least a majority of the shares held by shareholders who are not controlling
shareholders or have a personal interest in the proposal (shares held by abstaining shareholders shall not be taken into account);
or (ii) that the aggregate number of shares voting against the proposal held by such shareholders does not exceed 2% of the Company's
voting shareholders.



We have service contracts with two of
our directors, Dror Ben-Asher and Ori Shilo that provide for benefits upon termination of their employment as directors. For more
information, see “ – B. Compensation – Executives and Director Compensation.”



Independent and External Directors
- Israeli Companies Law Requirements



We are subject to the provisions of the
Israeli Companies Law. The Israeli Minister of Justice has adopted regulations exempting companies like us whose shares are traded
outside of Israel from some provisions of the Israeli Companies Law.



Under the Israeli Companies
Law, companies incorporated under the laws of Israel whose shares are either (i) listed for trading on a stock exchange or (ii)
have been offered to the public in or outside of Israel, and are held by the public (Public Company) are required to appoint at
least two external directors. The Israeli Companies Law provides that a person may not be appointed as an external director if
the person is a relative of the controlling shareholder or if the person or the person’s relative, partner, employer, someone
to whom he is subordinated directly or indirectly or any entity under the person’s control, has, as of the date of the person’s
appointment to serve as external director, or had, during the two years preceding that date, any affiliation with us, our controlling
shareholder, any relative of our controlling shareholder, as of the date of the person’s appointment to serve as external
director, or any entity in which, currently or within the two years preceding the appointment date, the controlling shareholder
was the company or the company's controlling shareholder; and in a company without a controlling shareholder or without a shareholder
holding 25% or more of the voting rights in the company, any affiliation to the chairman of the board of directors, to the general
manager (Chief Executive Officer), to a shareholder holding 5% or more of the company's shares or voting rights, or to the chief
officer in any field as of the date of the person’s appointment. The term “affiliation” includes:



| | · | an
                                         employment relationship;
| | - | --------------------------------------------------------------------

| | · | a
                                         business or professional relationship maintained on a regular basis;
| | - | ---------------------------------------------------------------------------------------------------------------

| | · | control;
                                         and
| | - | -----------------------------------------------------

| | · | service
                                         as an office holder, other than service as a director who was appointed in order to serve
                                         as an external director of a company when such company was about to make an initial public
                                         offering.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Under the Israeli Companies
Law, an “office holder” is defined as a general manager, chief business manager, deputy general manager, vice-general
manager, any person filing any of these positions in a company even if he holds a different title, director or any manager directly
subordinate to the general manager.



However, a person may
not serve as an external director if the person or the person’s relative, partner, employer, someone to whom he is subordinated
directly or indirectly or any entity under the person’s control has business or professional relationship with an entity
which an affiliation with is prohibited as detailed above, even if such relationship is not on a regular basis (excluding negligible
relationship). In addition, a person who received compensation other than the compensation permitted by the Israeli Companies
Law may not serve as an external director.



Regulations under the
Israeli Companies Law, provide for various instances and kinds of relationships in which an external director will not be deemed
to have “affiliation” with the public company for which he serves, or is a candidate for serving as an external director.



70







No person can serve
as an external director if the person’s positions or other businesses create, or may create a conflict of interests with
the person’s responsibilities as a director or may impair his ability to serve as a director. In addition, a person who
is a director of a company may not be elected as an external director of another company if, at that time, a director of the other
company is acting as an external director of the first company. Until the lapse of two years from termination of office, a company,
its controlling shareholder, or a company controlled by him may not engage an external director, his spouse, or child to serve
as an office holder in the company or in any entity controlled by the controlling shareholder and cannot employ or receive professional
services for consideration from that person, and may not grant such person any benefit either directly or indirectly, including
through a corporation controlled by that person. The same restrictions apply to relatives other than a spouse or a child, but
such limitations shall only apply for one year from the date such external director ceased to be engaged in such capacity. In
addition, if at the time an external director is appointed, all current members of the board of directors, who are neither controlling
shareholders nor relatives of controlling shareholders, are of the same gender, then the external director to be appointed must
be of the other gender.



Under the Israeli Companies
Law, a public company is required to appoint as an external director, a person who has “professional expertise” or
a person who has “financial and accounting expertise,” provided that at least one of the external directors must have
“financial and accounting expertise.” However, if at least one of our other directors (1) meets the independence
requirements of the Securities Exchange Act of 1934, as amended, (2) meets the standards of the Nasdaq Stock Market for membership
on the audit committee and (3) has financial and accounting expertise as defined in the Israeli Companies Law and applicable
regulations, then neither of our external directors is required to possess financial and accounting expertise as long as both
possess other requisite professional qualifications. The determination whether a director possesses financial and accounting expertise
is made by the board of directors.



Under the Israeli Companies
Law regulations, a director having financial and accounting expertise is a person who, due to his education, experience and qualifications
is highly skilled in respect of, and understands, business-accounting matters and financial reports in a manner that enables him
to understand in depth the company’s financial statements and to stimulate discussion regarding the manner in which the
financial data is presented. Under the Israeli Companies Law regulations, a director having professional expertise is a person
who has an academic degree in either economics, business administration, accounting, law or public administration or another academic
degree or has completed other higher education studies, all in an area relevant to the main business sector of the company or
in a relevant area for the board of directors position, or has at least five years of experience in one of the following or at
least five years of aggregate experience in two or more of the following: a senior management position in the business of a corporation
with a substantial scope of business, in a senior position in the public service or a senior position in the main field of the
company’s business.



Under the Israeli Companies
Law, each Israeli public company is required to determine the minimum number of directors with “accounting and financial
expertise” that such company believes is appropriate in light of the company’s type, size, the scope and complexity
of its activities and other factors. Once a company has made this determination, it must ensure that the necessary appointments
to the board of directors are made in accordance with this determination. Our board of directors determined that two directors
with “accounting and financial expertise” is appropriate for us. Our board of directors currently has five directors
with such “accounting and financial expertise.”



External directors are
to be elected by a majority vote at a shareholders’ meeting, provided that either (1) the majority of shares voted
at the meeting, including at least a majority of the votes of the shareholders who are not controlling shareholders (as defined
in the Israeli Companies Law), do not have a personal interest in the appointment (excluding a personal interest which did not
result from the shareholder’s relationship with the controlling shareholder), vote in favor of the election of the director
without taking abstentions into account; or (2) the total number of shares of the above mentioned shareholders who voted
against the election of the external director does not exceed two percent of the aggregate voting rights in the company.



The initial term of
an external director is three years and may be extended for two additional three-year terms under certain circumstances and conditions.
Nevertheless, regulations under the Israeli Companies Law provide that companies, whose shares are listed for trading both on
the Tel Aviv Stock Exchange and on the Nasdaq Stock Market, may appoint an external director for additional three-year terms,
under certain circumstances and conditions. External directors may be removed only in a general meeting, by the same percentage
of shareholders as is required for their election, or by a court, and in both cases only if the external directors cease to meet
the statutory qualifications for their appointment or if they violate their duty of loyalty to us.  Each committee authorized
to exercise any of the powers of the board of directors, is required to include at least one external director and the audit committee
is required to include all of the external directors.



An external director
is entitled to compensation and reimbursement of expenses in accordance with regulations promulgated under the Israeli Companies
Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with serving as a
director except for certain exculpation, indemnification and insurance provided by the company.



71







Ms. Aliza Rotbard and
Mr. Ofer Tsimchi currently serve as our external directors.



Committees



Israeli Companies Law Requirements



Our board of directors has established
three standing committees, the audit committee, the compensation committee and the investment committee.



Audit Committee



Under the Israeli Companies
Law, the board of directors of a public company must appoint an audit committee, comprised of at least three directors including
all of the external directors.



The majority of the
members of the audit committee, as well as the majority of members present at audit committee meetings, must be “independent”
(as such term is defined below) and the chairman of the audit committee must be an external director. In addition, the following
are disqualified from serving as members of the audit committee: the chairman of the board of directors, the controlling shareholder
and her or his relatives, any director employed by the company or by its controlling shareholder or by an entity controlled by
the controlling shareholder, a director who regularly provides services to the company or to its controlling shareholder or to
an entity controlled by the controlling shareholder, and any director who derives most of its income from the controlling shareholder.
Any persons not qualified from serving as a member of the audit committee may not be present at the audit committee meetings during
the discussion and at the time decisions are made, unless the chairman of the audit committee determines that the presence of
such person is required to present a matter to the meeting or if such person qualifies under an available exemption in the Companies
Law.



An “independent
director” is defined as an external director or a director who meets the following conditions: (i) satisfies certain conditions
for appointment as an external director (as described above) and the audit committee has determined that such conditions have
been met and (ii) has not served as a director of the company for more than nine consecutive years, with any interruption of up
to two years in service not being deemed a disruption in the continuity of such service.



The role of the audit
committee under the Israel Companies Law is to examine suspected flaws in our business management, in consultation with the internal
auditor or our independent accountants and suggest appropriate course of action in order to correct such flaws. In addition, the
approval of the audit committee is required to effect specified actions and related party transactions.



Additional functions
to be performed by the audit committee include, among others, the following:



| | · | determination
                                         whether certain related party actions and transactions are “material” or
                                         “extraordinary” for purposes of the requisite approval procedures;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | to
                                         assess the scope of work and compensation of the company’s independent accountant;
| | - | ------------------------------------------------------------------------------------------------------------------------------



| | · | to
                                         assess the company’s internal audit system and the performance of its internal
                                         auditor and if the necessary resources have been made available to the internal auditor
                                         considering the company’s needs and size; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | to
                                         determine arrangements for handling complaints of employees in relation to suspected
                                         flaws in the business management of the company and the protection of the rights of such
                                         employees.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our audit committee
also serves as our financial statements committee. The members of our audit committee are Ms. Aliza Rotbard, Mr. Ofer Tsimchi
and Mr. Dan Suesskind.



Compensation Committee



According to the Companies
Law, the board of directors of a public company must establish a compensation committee consisting of at least three directors
and including all of the external directors who must constitute a majority of its members. The remaining members must be qualified
to serve on the audit committee pursuant to Companies Law requirements described above. The compensation committee chairman must
be an external director. Any persons not qualified from serving as a member of the compensation committee may not be present at
the compensation committee meetings during the discussion and at the time decisions are made, unless the chairman of the compensation
committee determines that the presence of such person is required to present a matter to the meeting or if such person qualifies
under an available exemption in the Companies Law.



72







The provisions of the
Companies Law that govern the compensation and reimbursement terms of external directors also apply to members of the compensation
committee who are not external directors. Our compensation committee, which consists of Mr. Ofer Tsimchi (chairman), Ms. Aliza
Rotbard and Dr. Shmuel Cabilly, administers issues relating to our global compensation plan with respect to our employees, directors
and consultants. Our compensation committee is responsible for making recommendations to the board of directors regarding the
issuance of share options and compensation terms for our officers and directors and for determining salaries and incentive compensation
for our executive officers and incentive compensation for our other employees and consultants. Each of the members of the compensation
committee is “independent” as such term is defined in the Nasdaq Listing Rules.



Investment Committee



Our investment committee,
which consists of Mr. Dan Seusskind, Mr. Eric Swenden and Mr. Ori Shilo, assists the board in fulfilling its responsibilities
with respect to the Company's financial and investment strategies and policies, including determining policies and guidelines
on these matters and monitoring implementation. It is also authorized to approve certain financial transactions and review risk
factors associated with management of the Company finances and the mitigation of such risks, as well as financial controls and
reporting and various other finance-related matters.



Nasdaq Stock Market Requirements



Under the Nasdaq Marketplace
Rules, we are required to maintain an audit committee consisting of at least three members, all of whom are independent and are
financially literate and one of whom has accounting or related financial management expertise.



The independence requirements
of Rule 10A-3 of the Securities Exchange Act of 1934, as amended, implement two basic criteria for determining independence:



| | · | audit
                                         committee members are barred from accepting directly or indirectly any consulting, advisory
                                         or other compensatory fee from the issuer or an affiliate of the issuer, other than in
                                         the member’s capacity as a member of the board of directors and any board committee,
                                         and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | audit
                                         committee members may not be an “affiliated person” of the issuer or any
                                         subsidiary of the issuer apart from her or his capacity as a member of the board of directors
                                         and any board committee.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Securities and Exchange Commission
has defined “affiliate” for non-investment companies as “a person that directly, or indirectly through one or
more intermediaries, controls, or is controlled by, or is under common control with, the person specified.” The term “control”
is intended to be consistent with the other definitions of this term under the Securities Exchange Act of 1934, as amended, as
“the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person,
whether through the ownership of voting securities, by contract, or otherwise.” A safe harbor has been adopted by the Securities
and Exchange Commission, under which a person who is not an executive officer or 10% shareholder of the issuer would be deemed
not to have control of the issuer.



In accordance with the Sarbanes-Oxley
Act of 2002 and the Nasdaq Marketplace Rules, the audit committee is directly responsible for the appointment, compensation and
performance of our independent auditors. In addition, the audit committee is responsible for assisting the board of directors
in reviewing our annual financial statements, the adequacy of our internal controls and our compliance with legal and regulatory
requirements. The audit committee also oversees our major financial risk exposures and policies for managing such potential risks,
discusses with management and our independent auditor significant risks or exposure and assesses the steps management has taken
to minimize such risk.



As
noted above, the members of our audit committee include Ms. Aliza Rotbard, Mr. Ofer Tsimchi and Mr. Dan Suesskind, with Ms.
Rotbard serving as chairman. All members of our audit committee meet the requirements for financial literacy under the Nasdaq
Marketplace Rules. Our board of directors has determined that each member of our audit committee
is an audit committee financial expert as defined by the Securities and Exchange Commission rules and has the requisite financial
experience as defined by the Nasdaq Marketplace Rules. Each of the members of the audit committee is “independent”
as such term is defined in Rule 10A-3(b)(1) under the Securities Exchange Act of 1934, as amended.



73







Corporate Governance Practices



Internal Auditor



Under the Israeli Companies
Law, the board of directors must appoint an internal auditor proposed by the audit committee. The role of the internal auditor
is, among others, to examine whether our actions comply with the law and orderly business procedure. Under the Israeli Companies
Law, the internal auditor may not be an interested party, an office holder, a relative of an interested party, or a relative of
an office holder, nor may the internal auditor be our independent accountant or its representative. Ms. Dana Gottesman-Erlich,
Partner at Risk Advisory and Internal Auditing Group at BDO Israel, serves as our internal auditor.



Duties of Office Holders and Approval
of Specified Related Party Transactions Under Israeli Law



Fiduciary Duties of Office Holders



The Israeli Companies
Law imposes a duty of care and a duty of loyalty on all office holders of a company, including directors and executive officers.
The duty of care requires an office holder to act with the level of care, according to which a reasonable office holder in the
same position would have acted under the same circumstances.

The duty of care includes
a duty to use reasonable means to obtain:



| | · | information
                                         on the appropriateness of a given action brought for the office holder’s approval
                                         or performed by him by virtue of his position; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | all
                                         other important information pertaining to the previous actions.
| | - | ------------------------------------------------------------------------------------------------------------



The duty of loyalty
requires an office holder to act in good faith and for the benefit of the company, and includes a duty to:



| | · | refrain
                                         from any action involving a conflict of interest between the performance of the office
                                         holder’s duties in the company and his personal affairs;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | refrain
                                         from any activity that is competitive with the company’s business;
| | - | -------------------------------------------------------------------------------------------------------------------



| | · | refrain
                                         from usurping any business opportunity of the company to receive a personal gain for
                                         the office holder or others; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | disclose
                                         to the company any information or documents relating to a company’s affairs which
                                         the office holder has received due to his position as an office holder.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Under the Israeli Companies
Law, directors’ compensation arrangements require audit committee approval, board of directors’ approval and shareholder
approval.



The Israeli Companies
Law requires that an office holder of a company promptly and, in any event, not later than the first board meeting at which the
transaction is discussed, disclose any personal interest that he may have and all related material facts or document known to
her or him, in connection with any existing or proposed transaction by the company. A personal interest of an office holders includes
a personal interest of the office holder’s relative, of a company in which the office holder or the office holder’s
relative is, a shareholder which holds 5% or more of a company’s share capital or its voting rights, a director or a general
manager, or in which the office holder has the right to appoint at least one director or the general manager. A personal interest
also includes a personal interest of a person who votes according to a proxy of another person, even if the other person has no
personal interest, and a personal interest of a person who gave a proxy to another person to vote on his behalf – all whether
the discretion how to vote lies with the person voting or not. In the case of an extraordinary transaction, the office holder’s
duty to disclose applies also to a personal interest of the office holder’s relative.



Under Israeli law, an
extraordinary transaction is a transaction:



| | · | other
                                         than in the ordinary course of business;
| | - | ---------------------------------------------------------------------------------------



74







| | · | other
                                         than on market terms; or
| | - | -----------------------------------------------------------------------



| | · | that
                                         is likely to have a material impact on the company’s profitability, assets or liabilities.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------



Under the Israeli Companies
Law, once an office holder complies with the above disclosure requirement, the board of directors may approve an ordinary transaction
between the company and an office holder, or a third party in which an office holder has a personal interest, unless the articles
of association provide otherwise. A transaction that is adverse to the company’s interest cannot be approved. Subject to
certain exceptions, the audit committee and the board of directors must approve the conditions and term of office of an office
holder (which is not a director).



If the transaction is
an extraordinary transaction, both the audit committee and the board of directors, in that order, must approve the transaction.
Under specific circumstances, shareholder approval may also be required. Whoever has a personal interest in a matter, which is
considered at a meeting of the board of directors or the audit committee, may not be present at this meeting or vote on this matter.
However, if the chairman of the board of directors or the chairman of the audit committee has determined that the presence of
such person is required to present a matter to the meeting, such officer holder may be present at the meeting. Notwithstanding
the foregoing, if the majority of the directors have a personal interest in a matter, a director who has the personal interest
in this matter may be present at this meeting or vote on this matter, but the board of directors decision requires the shareholder
approval.



Controlling Shareholder
Transactions and Actions



Under the Israeli Companies
Law, the disclosure requirements which apply to an office holder also apply to a controlling shareholder of a public company and
to a person who would become a controlling shareholder as a result of a private placement. A controlling shareholder includes
a person who has the ability to direct the activities of a company, other than if this power derives solely from his/her position
on the board of directors or any other position with the company. In addition, for such purposes a controlling shareholder includes
a shareholder that holds 25% or more of the voting rights in a public company if no other shareholder owns more than 50% of the
voting rights in the company. Extraordinary transactions with a controlling shareholder or in which a controlling shareholder
has a personal interest, including a private placement in which a controlling shareholder has a personal interest; and the terms
of engagement of the company, directly or indirectly, with a controlling shareholder or his or her relative (including through
a corporation controlled by a controlling shareholder), regarding the company’s receipt of services from the controlling
shareholder, and if such controlling shareholder is also an office holder of the company or an employee, regarding his or her
terms of office and employment, require the approval of the audit committee, the board of directors and the shareholders of the
company, in that order. The shareholders approval must include either:



| | · | a
                                         majority of the shareholders who have no personal interest in the transaction and who
                                         are participating in the voting, in person, by proxy or by written ballot, at the meeting
                                         (votes abstaining shall not be taken into account); or
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the
                                         total number of shares voted against the proposal by shareholders without a personal
                                         interest does not exceed 2% of the aggregate voting rights in the Company.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition, any such
transaction whose term is more than three years requires the above mentioned approval every three years, unless, with respect
to transactions not involving the receipt of services or compensation, the audit committee approves a longer term as reasonable
under the circumstances.



However, under regulations,
promulgated pursuant to the Israeli Companies Law, certain transactions between a company and its controlling shareholders, or
the controlling shareholder’s relative, do not require shareholder approval.



For information concerning
the direct and indirect personal interests of certain of our office holders and principal shareholders in certain transactions
with us, see “Item 7. Major Shareholders – B. Related Party Transactions.”



The Israeli Companies
Law requires that every shareholder that participates, either by proxy or in person, in a vote regarding a transaction with a
controlling shareholder indicate whether or not that shareholder has a personal interest in the vote in question, the failure
of which results in the invalidation of that shareholder’s vote.



The Israeli Companies
Law further provides that an acquisition of shares in a public company must be made by means of a tender offer if as a result
of the acquisition the purchaser would become a holder of 45% of the voting rights of the company, unless there is a holder of
more than 45% of the voting rights of the company or would become a holder of 25% of the voting rights unless there is another
person holding 25% of the voting rights. This restriction does not apply to:



75







| | · | an
                                         acquisition of shares in a private placement, if the acquisition had been approved in
                                         a shareholders meeting under certain circumstances;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | an
                                         acquisition of shares from a holder of at least 25% of the voting rights, as a result
                                         of which a person would become a holder of at least 25% of the voting rights; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | an
                                         acquisition of shares from a holder of more than 45% of the voting rights, as a result
                                         of which the acquirer would become a holder of more than 45% of the voting rights in
                                         the company.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Regulations under the
Israeli Companies Law provide that the Israeli Companies Law’s tender offer rules do not apply to a company whose shares
are publicly traded outside of Israel, if, pursuant to the applicable foreign laws or stock exchange rules, there is a restriction
on the acquisition of any level of control of the company, or if the acquisition of any level of control of the company requires
the purchaser to make a tender offer to the public shareholders. It is the view of the Israeli Securities Authority that U.S.
securities laws and stock exchange rules do not impose the required restriction on the acquisition of any level of control of
a company, and therefore the Israeli Companies Law’s special tender offer rules would apply to a company whose shares are
publicly traded in the U.S.



The Israeli Companies
Law further provides that a shareholder has a duty to act in good faith towards the company and other shareholders when exercising
his rights and duties and shall refrain from oppressing other shareholders, including in connection with the voting at a shareholders’
meeting on:



| | · | any
                                         amendment to the articles of association;
| | - | --------------------------------------------------------------------------------------



| | · | an
                                         increase in the company’s authorized share capital;
| | - | -----------------------------------------------------------------------------------------------



| | · | a
                                         merger; or
| | - | -----------------------------------------------------



| | · | approval
                                         of certain transactions with control persons and other related parties, which require
                                         shareholder approval.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition, any controlling
shareholder, any shareholder who knows that it possesses power to determine the outcome of a shareholder vote and any shareholder
who, pursuant to the provisions of a company’s articles of association, has the power to appoint or prevent the appointment
of an office holder in the company, or has any other power over the company, is under a duty to act with fairness towards the
company. Under the Israeli Companies Law, the laws that apply to a breach of a contract will generally also apply to a breach
of duty of fairness.



Exemption, Insurance and Indemnification
of Directors and Officers



Office Holder Exemption



Under the Israeli Companies Law, a company
may not exempt an officer or director from liability with respect to a breach of his duty of loyalty, but may exempt in advance
an officer or director from liability to the company, in whole or in part, with respect to a breach of his duty of care, except
in connection with a prohibited distribution made by the company, if so provided in its articles of association. Our articles
of association provide for this exemption from liability for officers and directors.



Office Holder Insurance



The Israeli Companies Law and our articles
of association provide that, subject to the provisions of the Israeli Companies Law, we may obtain insurance for our officers
and directors for any liability stemming from any act performed by an officer or director in his capacity as an officer or director,
as the case may be with respect to any of the following:



| | · | a
                                         breach of such officer’s or director’s duty of care to us or to another person;
| | - | --------------------------------------------------------------------------------------------------------------------------



| | · | a
                                         breach of such officer’s or director’s duty of loyalty to us, provided that
                                         such officer or director acted in good faith and had reasonable cause to assume that
                                         his act would not prejudice our interests;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



76







| | · | a
                                         financial liability imposed upon such officer or director in favor of another person;
| | - | --------------------------------------------------------------------------------------------------------------------------------



| | · | financial
                                         liability imposed on the officer or director for payment to persons or entities harmed
                                         as a result of violations in administrative proceedings as described in Section 52(54)(a)(1)(a)
                                         of the Israeli Securities Law (the “Party Harmed by the Breach”);
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | expenses
                                         incurred by such officer or director in connection with an administrative proceeding
                                         conducted in his matter, including reasonable litigation expenses, including legal fees;
                                         or
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | a
                                         breach of any duty or any other obligation, to the extent insurance may be permitting
                                         by law.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On February 15, 2012, at our general meeting
of shareholders, our shareholders authorized us to purchase, from time to time, liability insurance to cover officers and directors,
except for officers and directors who are controlling shareholders, together with their relatives, and interested controlling
shareholders. Pursuant to this authorization, we may purchase this insurance commencing on the date of the approval of the general
shareholders’ meeting and ending on the 2015 annual general shareholders’ meeting, to be convened in 2016, provided
that:



| | · | the
                                         policy provides up to $13,000,000 of liability coverage per period and per event; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------



| | · | that
                                         the annual insurance premium is not more than $15,000 (the "Framework Resolution").
| | - | ---------------------------------------------------------------------------------------------------------------------------------



On September 24, 2012, our board of directors
approved an amendment of the Framework Resolution for our directors and officers liability insurance policy, pursuant to which
we may purchase, from time to time, liability coverage of up to $30 million with a total annual insurance premium of up to $130,000.
The liability insurance policy will also cover directors and/or officers who are considered controlling shareholders. The board
of directors resolved that the amended insurance framework would be effective from the date the amended framework is approved
by our general meeting of shareholders and ending at our annual general meeting for the year 2016 to be convened in 2017.



On November 6, 2012, at our general meeting
of shareholders, our shareholders approved the proposed amendment to the Framework Resolution, pursuant to which we may acquire
a new insurance policy shortly prior to the time of the listing of our shares on Nasdaq and thereafter. Further to such approval,
our audit committee and board of directors will approve, on a yearly basis, that the new insurance policy complies with the terms
of the amended Framework Resolution and that they are fair and reasonable under the circumstances, taking into account our exposure
and the market conditions.



Subsequent to the amendment to the Framework
Resolution, our audit committee and board of directors resolved in November 2012 to purchase directors and officers liability
insurance policy, pursuant to which the amount of insurance covered under the policy would be $20 million and the total annual
policy premium would be $69,000.



Pursuant to the foregoing approvals, we
carry directors and officers liability insurance.



Indemnification of Office Holders



The Israeli Companies Law provides that
a company may indemnify an officer or director for payments or expenses associated with acts performed in his capacity as an officer
or director of the company, provided the company’s articles of association include the following provisions with respect
to indemnification:



| | · | a
                                         provision authorizing the company to indemnify an officer or director for future events
                                         with respect to a monetary liability imposed on him in favor of another person pursuant
                                         to a judgment (including a judgment given in a settlement or an arbitrator’s award
                                         approved by the court), so long as such indemnification is limited to types of events
                                         which, in the board of directors’ opinion, are foreseeable at the time of granting
                                         the indemnity undertaking given the company’s actual business, and in such amount
                                         or standard as the board of directors deems reasonable under the circumstances. Such
                                         undertaking must specify the events that, in the board of directors’ opinion, are
                                         foreseeable in view of the company’s actual business at the time of the undertaking
                                         and the amount or the standards that the board of directors deemed reasonable at the
                                         time;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



77







| | · | a
                                         provision authorizing the company to indemnify an officer or director for future events
                                         with respect to reasonable litigation expenses, including counsel fees, incurred by an
                                         officer or director in which he is ordered to pay by a court, in proceedings that the
                                         company institutes against him or instituted on behalf of the company or by another person,
                                         or in a criminal charge from which he was acquitted, or a criminal charge in which he
                                         was convicted for a criminal offense that does not require proof of criminal intent;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | a
                                         provision authorizing the company to indemnify an officer or director for future events
                                         with respect to reasonable litigation fees, including attorney’s fees, incurred
                                         by an officer or director due to an investigation or proceeding filed against him by
                                         an authority that is authorized to conduct such investigation or proceeding, and that
                                         resulted without filing an indictment against him and without imposing on him financial
                                         obligation in lieu of a criminal proceeding, or that resulted without filing an indictment
                                         against him but with imposing on him a financial obligation as an alternative to a criminal
                                         proceeding in respect of an offense that does not require the proof of criminal intent
                                         or in connection with a monetary sanction;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | a
                                         provision authorizing the company to indemnify an officer or director for future events
                                         with respect to a Party Harmed by the Breach;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | a
                                         provision authorizing the company to indemnify an officer or director for future events
                                         with respect to expenses incurred by such officer or director in connection with an administrative
                                         proceeding, including reasonable litigation expenses, including legal fees; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | a
                                         provision authorizing the company to retroactively indemnify an officer or director.
| | - | -------------------------------------------------------------------------------------------------------------------------------



Limitations on Insurance, Exemption
and Indemnification



The Israeli Companies Law and our articles
of association provide that a company may not exempt or indemnify an office holder nor enter into an insurance contract, which
would provide coverage for any monetary liability incurred as a result of any of the following:



| | · | a
                                         breach by the officer or director of his duty of loyalty, except for insurance and indemnification
                                         where the officer or director acted in good faith and had a reasonable basis to believe
                                         that the act would not prejudice the company;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | a
                                         breach by the officer or director of his duty of care if the breach was done intentionally
                                         or recklessly, except if the breach was solely as a result of negligence;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | any
                                         act or omission done with the intent to derive an illegal personal benefit; or
| | - | ---------------------------------------------------------------------------------------------------------------------------



| | · | any
                                         fine, civil fine, monetary sanctions, or forfeit imposed on the officer or director.
| | - | ---------------------------------------------------------------------------------------------------------------------------------



In addition, under the Israeli Companies
Law, exemption of, indemnification of, and procurement of insurance coverage for, our officers and directors must be approved
by our audit committee and board of directors and, in specified circumstances, by our shareholders.



Letters of Indemnification



We
have issued our officers and directors letters of indemnification, pursuant to which we have agreed to indemnify each officer
and director in advance for any liability or expense imposed on or incurred by him in connection with acts performed by him in
the capacity of an officer or director, subject to the provisions of the letters of indemnification
agreement. As approved by our shareholders on July 18, 2013, the amount of the advance indemnity is limited up to $5 million.



As part of the indemnification
letters, we exempted our directors and officers, in advance, to the extent permitted under law, from any liability for any damage
incurred by them, either directly or indirectly, due to the breach of an officer’s or director’s duty of care vis-
à-visus, within his acts in his capacity as an officer or director. The letter provides that so long as not permitted
under law, we do not exempt an officer or director in advance from his liability to us for a breach of the duty of care upon distribution,
to the extent applicable to the officer or director, if any. The letter also exempts an officer or director from any liability
for any damage incurred by him, either directly or indirectly, due to the breach of the officer or director’s duty of care
vis- à-visus, by his acts in his capacity as an officer or director prior to the letter of exemption and indemnification
becoming effective.



78







| | D. | Employees
| | -- | ---------



As of February 24, 2014, we had 8 employees
and we also received services from 10 consultants who provide services to us in the U.S., Canada and Belgium.



|                              |  | As of December 31, |  
|----------------------------- |  | ------------------ | -
|                              |  | 2011               |  
|                              |  | Company Employees  |  
|Management and administration |  |                    | 5
|Research and development      |  |                    | 1



While none of our employees is party to
a collective bargaining agreement, certain provisions of the collective bargaining agreements between the Histadrut (General Federation
of Labor in Israel) and the Coordination Bureau of Economic Organizations (including the Industrialists’ Associations) are
applicable to our employees by order of the Israel Ministry of Labor. These provisions primarily concern the length of the workday,
minimum daily wages for professional workers, pension fund benefits for all employees, insurance for work-related accidents, procedures
for dismissing employees, determination of severance pay and other conditions of employment. We generally provide our employees
with benefits and working conditions beyond the required minimums.



We have never experienced any employment-related
work stoppages and believe our relationship with our employees is good.



| | E. | Share
                                         Ownership
| | -- | --------------------------------------------------------



The following table sets forth information
regarding the beneficial ownership of our outstanding ordinary shares as of February 24, 2014 of each of our directors and executive
officers individually and as a group based on information provided to us by our directors and executive officers. The information
in this table is based on 87,388,314 ordinary shares outstanding as of such date. The number of ordinary shares beneficially
owned by a person includes ordinary shares subject to options or warrants held by that person that were currently exercisable
at, or exercisable within 60 days of, February 24, 2014. The ordinary shares issuable under these options and warrants are
treated as if they were outstanding for purposes of computing the percentage ownership of the person holding these options and
warrants but not the percentage ownership of any other person.  None of the holders of the ordinary shares listed in
this table have voting rights different from other holders of the ordinary shares.



79







|                                                             |  | Number of  Shares
    Beneficially Held |            |  | Percent of Class | 
|------------------------------------------------------------ |  | --------------------------------------- | ---------- |  | ---------------- | 
|Directors                                                    |  |                                         |            |  |                  | 
|Eric Swenden (1)                                             |  |                                         | 4,893,746  |  |                  | 
|Dr. Kenneth Reed (2)                                         |  |                                         | 4,201,472  |  |                  | 
|Dr. Shmuel Cabilly (3)                                       |  |                                         | 4,628,178  |  |                  | 
|Dan Suesskind (4)                                            |  |                                         | 1,046,150  |  |                  | 
|Ofer Tsimchi (5)                                             |  |                                         | 150,000    |  |                  | 
|Aliza Rotbard (6)                                            |  |                                         | 180,000    |  |                  | 
|                                                             |  |                                         |            |  |                  | 
|Executive officers                                           |  |                                         |            |  |                  | 
|Dror Ben-Asher (7)                                           |  |                                         | 5,496,030  |  |                  | 
|Ori Shilo (8)                                                |  |                                         | 4,894,383  |  |                  | 
|Gilead Raday (9)                                             |  |                                         | 897,500    |  |                  | 
|Reza Fathi, Ph.D. (10)                                       |  |                                         | 953,334    |  |                  | 
|Adi Frish (11)                                               |  |                                         | 567,500    |  |                  | 
|Uri Hananel Aharon (12)                                      |  |                                         | 164,750    |  |                  | 
|Guy Goldberg (13)                                            |  |                                         | 120,833    |  |                  | 
|All directors and executive officers as a group (13 persons) |  |                                         | 28,193,876 |  |                  | 



* Less than 1.0%



| | (1) | Consists of options to purchase
                                         265,000 ordinary shares exercisable within 60 days of February 24, 2014. The exercise
                                         price of these options range between $0.165 and $1.12 per share, and the options expiry
                                         date range between 2017 and 2020. See "Item 5. Operating and Financial Review and
                                         Prospects – B. Liquidity and Capital Resources" for more information regarding
                                         the warrants.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Consists of options to purchase
                                         265,000 ordinary shares exercisable within 60 days of February 24, 2014. The exercise
                                         price of these options range between $0.165 and $1.12 per share, and the options expiry
                                         date range between 2017 and 2020. See "Item 5. Operating and Financial Review and
                                         Prospects – B. Liquidity and Capital Resources" for more information regarding
                                         the warrants.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | Consists of (i) options to
                                         purchase 240,000 ordinary shares exercisable within 60 days of February 24, 2014 and
                                         (ii) non-tradable warrants to purchase 494,000 ordinary shares. The exercise price
                                         of these options is $0.5 per share, and the options expiry date range between 2017 and
                                         2018. See "Item 5. Operating and Financial Review and Prospects – B. Liquidity
                                         and Capital Resources" for more information regarding the warrants.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) | Consists of (i) options to
                                         purchase 885,000 ordinary shares exercisable within 60 days of February 24, 2014 and
                                         (ii) non-tradable warrants to purchase 37,050 ordinary shares. The exercise price
                                         of these options range between $0.5 and $1.12 per share, and the options expire between
                                         2018 and 2020. See "Item 5. Operating and Financial Review and Prospects –
                                         B. Liquidity and Capital Resources" for more information regarding the warrants.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (5) | Consists of options to purchase
                                         150,000 ordinary shares exercisable within 60 days of February 24, 2014. The exercise
                                         price of these options is $1.05 per share, and the options expire in 2018.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (6) | Consists of options to purchase
                                         150,000 ordinary shares exercisable within 60 days of February 24, 2014. The exercise
                                         price of these options is $1.05 per share, and the options expire in 2018.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (7) | Consists of options to purchase
                                         2,765,000 ordinary shares exercisable within 60 days of February 24, 2014 and. The
                                         exercise price of these options range between $0.165 and $1.12 per share, and the options
                                         expiry date range between 2017 and 2020. See "Item 5. Operating and Financial Review
                                         and Prospects – B. Liquidity and Capital Resources" for more information regarding
                                         the warrants.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (8) | Consists of options to purchase
                                         2,299,168 Ordinary exercisable within 60 days of February 24, 2014. The exercise
                                         price of these options range between $0.165 and $1.12 per share, and the options expiry
                                         date range between 2017 and 2020. See "Item 5. Operating and Financial Review and
                                         Prospects – B. Liquidity and Capital Resources" for more information regarding
                                         the warrants.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (9) | Consists of options to purchase
                                         897,500 ordinary shares exercisable within 60 days of February 24, 2014. The exercise
                                         price of these options range between $0.165 and $1.12 per share, and the options expiry
                                         date range between 2017 and 2020.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (10) | Consists of options to purchase
                                         953,334 ordinary shares exercisable within 60 days of February 24, 2014. The exercise
                                         price of these options range between $0.165 and $1.12 per share, and the options expiry
                                         date range between 2017 and 2020.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



80







| | (11) | Consists of options to purchase
                                         567,500 ordinary shares exercisable within 60 days of February 24, 2014. The exercise
                                         price of these options range between $0.165 and $1.12 per share, and the options expiry
                                         date range between 2017 and 2020.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (12) | Consists of options to purchase
                                         162,500 ordinary shares exercisable within 60 days of February 24, 2014. The exercise
                                         price of these options range between $0.69 and $1.12 per share, and the options expiry
                                         date range between 2018 and 2020.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (13) | Consists of options to purchase
                                         120,833 ordinary shares exercisable within 60 days of February 24, 2014. The exercise
                                         price of these options range between $0.7 and $1.12 per share, and the options expiry
                                         date range between 2019 and 2020.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Option Plans



2010 Option Plan



In 2010, we adopted the RedHill Biopharma
Ltd. 2010 Option Plan. The 2010 Option Plan provides for the granting of options to our directors, officers, employees, consultants
and service providers and individuals who are their employees, and to the directors, officers, employees, consultants and service
providers of our subsidiaries and affiliates. The 2010 Option Plan provides for options to be issued at the determination of our
board of directors in accordance with applicable laws. As of February 24, 2014, there were 14,735,000 ordinary shares issuable
upon the exercise of outstanding options under the 2010 Option Plan.



Administration of Our Option Plan



Our option
plan is administered by our board of directors, or a compensation committee to be appointed thereby, regarding the granting of
options and the terms of option grants, including exercise price, method of payment, vesting schedule, acceleration of vesting
and the other matters necessary in the administration of these plans. Options granted under the 2010 Option Plan to eligible Israeli
employees, officers and directors are granted under Section 102 of the Israel Income Tax Ordinance pursuant to which the options
or the ordinary shares issued upon their exercise must be allocated or issued to a trustee and be held in trust for two years
from the date upon which such options were granted in order to benefit from the provisions
of Section 102. Under Section 102, any tax payable by an employee from the grant or exercise of the options is deferred until
the transfer of the options or ordinary shares by the trustee to the employee or upon the sale of the options or ordinary shares,
and gains may qualify to be taxed as capital gains at a rate equal to 25%, subject to compliance with specified conditions. See
“Item 10. Additional Information – E. Taxation – Israeli Tax Considerations.”



Options granted under 2010 Option Plan
as amended generally vest over a period of 4 years and expire seven (7) years after the grant date. The 2010 Option Plan, however,
permits options to have a term of up to 10 years. If we terminate a grantee for cause (as such term is defined in the 2010 Option
Plan) the right to exercise all the options granted to the grantee, the grantee’s vested and unvested options will expire
immediately, on the earlier of:



| | · | termination
                                         of the engagement; or
| | - | --------------------------------------------------------------------------



| | · | the
                                         date of the notice of the termination of the engagement.
| | - | -----------------------------------------------------------------------------------------------------



Upon termination of employment for any
other reason, other than in the event of death, disability, retirement after the age of 60 or for cause, all unvested options
will expire and all vested options will generally be exercisable for 90 days following termination, or such other period as determined
by the plan administrator, subject to the terms of the 2010 Option Plan and the governing option agreement.



Under our 2010 Option Plan, in the event
any person, entity or group that was not an interested party at the time of our initial public offering becoming a controlling
shareholder, options that granted by us will be accelerated, so that the grantee will be entitled to exercise
all of those options. An “interested party” is defined in the Securities Law and includes, among others:



| | · | a
                                         holder of 5% or more of the outstanding shares or voting rights of an entity;
| | - | ------------------------------------------------------------------------------------------------------------------------



| | · | a
                                         person entitled to appoint one or more of the directors or chief executive officer of
                                         an entity;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



81







| | · | a
                                         director of an entity or its chief executive officer;
| | - | ------------------------------------------------------------------------------------------------



| | · | an
                                         entity, in which an individual referred to above holds 25% or more of its outstanding
                                         shares or voting rights, or is entitled to appoint 25% or more of its directors; or
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | a
                                         person who initiated the establishment of the entity.
| | - | ------------------------------------------------------------------------------------------------



A “controlling shareholder”
in this paragraph is a controlling shareholder, as defined in the Israel Securities Law, 1968, or any person, entity or group
becoming a holder, as defined in the Israel Securities Law, 1968, of 25% or more of the voting rights in us. This option acceleration
clause, however, only applies with respect to the 3,080,000 options granted to our employees and consultants before our initial
public offering in Israel and to the 6,210,000 options allocated upon completion of our initial public offering in Israel to our
employees and consultants.





Our 2010 Option Plan was amended to provide
that all options which we granted or may grant under the plan will be accelerated, so that the grantees will be entitled to exercise
all of such options, in the event any person, entity or group that was not an interested party at the time of our initial public
offering on the Tel Aviv Stock Exchange becomes a controlling shareholder. A “controlling shareholder” in this paragraph
is a controlling shareholder, as defined in the Israel Securities Law, 1968.





Upon termination of employment due to
death or disability, or retirement after the age of 60, subject to the board of directors’ approval, all the vested options
at the time of termination will be exercisable for 24 months, or such other period as determined by the plan administrator, subject
to the terms of the 2010 Option Plan and the governing option agreement.



In the event of the sale of all or a substantial
part of our assets, or a merger transaction in which we are not the surviving corporation and the surviving corporation does not
assume the options granted under the 2010 Option Plan or otherwise grants options to purchase the surviving corporation’s
shares in exchange for such option, all of the options that were scheduled to vest within 12 months of the date of such transaction
shall vest immediately prior the closing of such transaction.



| | ITEM 7. | MAJOR SHAREHOLDERS
                                         AND RELATED PARTY TRANSACTIONS
| | ------- | ------------------------------------------------------------------------------------------



| | A. | Major
                                         Shareholders
| | -- | -----------------------------------------------------------



The following table sets forth certain
information regarding the beneficial ownership of our outstanding ordinary shares as of February 24, 2014, by each person or entity
known to beneficially own 5.0% or more of our outstanding ordinary shares. The information with respect to beneficial ownership
of the ordinary shares is given based on information reported in such shareholder's Schedule 13G, and if no Schedule 13G was filed,
based on the information provided to us by the shareholders.



The information in this table is based
on 87,388,314 ordinary shares outstanding as of such date. In determining the number of ordinary shares beneficially owned by
a person, we include any shares as to which the person has sole or shared voting power or investment power, as well as any ordinary
shares subject to options or warrants held by that person that were currently exercisable at, or exercisable within 60 days of
February 24, 2014. The ordinary shares issuable under these options and warrants are treated as if they were outstanding
for purposes of computing the percentage ownership of the person holding these options and warrants but not the percentage ownership
of any other person. None of the holders of the ordinary shares listed in this table have voting rights different from other
holders of ordinary shares.



82







|                                                |  | Number of Shares
    Beneficially Held |           |     | Percent of Outstanding
    Equity | 
|----------------------------------------------- |  | -------------------------------------- | --------- | --- | --------------------------------- | 
|OrbiMed Israel Partners Limited Partnership (1) |  |                                        | 8,842,120 | (2) |                                   | 
|Mr. Dror Ben-Asher (3)                          |  |                                        | 5,496,030 |     |                                   | 
|Mr. Eric Swenden (4)                            |  |                                        | 4,893,746 |     |                                   | 
|Mr. Ori Shilo (5)                               |  |                                        | 4,894,383 |     |                                   | 
|Dr. Kenneth Reed (6)                            |  |                                        | 4,201,472 |     |                                   | 
|Dr. Shmuel Cabilly (7)                          |  |                                        | 4,628,178 |     |                                   | 
|Migdal Insurance Company (8)                    |  |                                        | 5,025,643 |     |                                   | 
|Yelin Lapidot (9)                               |  |                                        | 5,025,643 |     |                                   | 



| | (1) | OrbiMed Israel GP Ltd.
                                         ("OrbiMed Israel") is the general partner of OrbiMed Israel BioFund GP Limited
                                         Partnership ("OrbiMed BioFund"), which is the general partner of OrbiMed Israel
                                         Partners Limited Partnership, an Israel limited partnership (“OrbiMed Partners”),
                                         which holds the ADSs and warrants. OrbiMed Israel, as the general partner of OrbiMed
                                         BioFund, and OrbiMed BioFund, as the general partner of OrbiMed Partners, may be deemed
                                         to share voting and investment power with respect to the ordinary shares underlying the
                                         ADSs and warrants held by OrbiMed Partners. The address of OrbiMed Israel Partners Limited
                                         Partners is 89 Medinat HaYehudim St., Herzliya 46766, Israel.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Includes an aggregate
                                         of 631,580 ADSs, each representing 10 ordinary shares, and warrants ("Warrants")
                                         to purchase 252,632 ADSs with exercise price of $11 and an expiration date of January
                                         7, 2017 purchased by OrbiMed Israel Partners Limited Partnership in the private placement
                                         that closed on January 8, 2014. See "Item 5. Operating and Financial Review and
                                         Prospects – B. Liquidity and Capital Resources" for more information regarding
                                         the warrants. The Warrants to purchase ADSs contain an issuance limitation that prohibits
                                         the holder from exercising the Warrants to the extent that after giving effect to such
                                         issuance after exercise the holder (together with the holder’s affiliates, and
                                         any other persons acting as a group together with the holder or any of the holder’s
                                         affiliates), would beneficially own in excess of 9.9% of the ordinary shares outstanding
                                         immediately after giving effect to the issuance of the ADSs issuable upon exercise of
                                         the warrants.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | Consists of options to
                                         purchase 2,765,000 ordinary shares exercisable within 60 days of February 24, 2014. The
                                         exercise price of these options range between $0.165 and $1.12 per share, and the options
                                         expiry date range between 2017 and 2020. See "Item 5. Operating and Financial Review
                                         and Prospects – B. Liquidity and Capital Resources" for more information regarding
                                         the warrants.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) | Consists of (i) options
                                         to purchase 265,000 ordinary shares exercisable within 60 days of February 24, 2014. The
                                         exercise price of these options range between $0.165 and $1.12 per share, and the options
                                         expiry date range between 2017 and 2020. See "Item 5. Operating and Financial Review
                                         and Prospects – B. Liquidity and Capital Resources" for more information regarding
                                         the warrants.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (5) | Consists of options to
                                         purchase 2,299,168 ordinary shares exercisable within 60 days of February 24, 2014. The
                                         exercise price of these options range between $0.165 and $1.12 per share, and the options
                                         expiry date range between 2017 and 2020. See "Item 5. Operating and Financial Review
                                         and Prospects – B. Liquidity and Capital Resources" for more information regarding
                                         the warrants.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (6) | Consists of (i) options
                                         to purchase 265,000 ordinary shares exercisable within 60 days of February 24, 2014. The
                                         exercise price of these options range between $0.165 and $1.12 per share, and the options
                                         expiry date range between 2017 and 2020. See "Item 5. Operating and Financial Review
                                         and Prospects – B. Liquidity and Capital Resources" for more information regarding
                                         the warrants.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (7) | Consists of (i) options
                                         to purchase 240,000 ordinary shares exercisable within 60 days of February 24, 2014 and
                                         (ii) non-tradable warrants to purchase 494,000 ordinary shares. The exercise price
                                         of these options is $0.5 per share, and the options expiry date range between 2017 and
                                         2018. See “Item 10. Additional Information – A. Share Capital” for
                                         more information regarding the warrants. See "Item 5. Operating and Financial Review
                                         and Prospects – B. Liquidity and Capital Resources" for more information regarding
                                         the warrants.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



83







| | (8) | Consists of (i) 3,589,745
                                         ordinary shares and (ii) warrants to purchase 1,435,898 ordinary shares exercisable within
                                         60 days of February 24, 2014 with exercise price of NIS 4.9 ($1.401 based on the exchange
                                         rate reported by the Bank of Israel on January 12, 2014), linked to changes in the NIS-US
                                         dollar exchange rate and with an expiration date of January 19, 2017. See "Item
                                         5. Operating and Financial Review and Prospects – B. Liquidity and Capital Resources"
                                         for more information regarding the warrants. The shares beneficially owned by Migdal
                                         Insurance Company are held for members of the public through, among others, provident
                                         funds, mutual funds, pension funds and insurance policies, which are managed by subsidiaries
                                         of Migdal Insurance Company, according to the following segmentation: 3,286,333 Ordinary
                                         Shares are held by profit participating life assurance accounts (including Ordinary Shares
                                         issuable upon the exercise of warrants to purchase Ordinary Shares) and 1,739,310 Ordinary
                                         Shares are held by provident funds and companies that manage provident funds (including
                                         Ordinary Shares issuable upon the exercise of warrants to purchase Ordinary Shares),
                                         each of which subsidiaries operates under independent management and makes independent
                                         voting and investment decisions.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (9) | Consists of (i) 3,589,745
                                         ordinary shares and (ii) warrants to purchase 1,474,270 ordinary shares exercisable within
                                         60 days of February 24, 2014 with exercise price of NIS 4.9 ($1.401 based on the exchange
                                         rate reported by the Bank of Israel on January 12, 2014), linked to changes in the NIS-US
                                         dollar exchange rate and with expiration date of January 19, 2017. See "Item 5.
                                         Operating and Financial Review and Prospects – B. Liquidity and Capital Resources"
                                         for more information regarding the warrants. The shares are beneficially owned by provident
                                         funds managed by Yelin Lapidot Provident Funds Management Ltd. and mutual funds managed
                                         by Yelin Lapidot Mutual Funds Management Ltd. (the “Subsidiaries”), each
                                         a wholly-owned subsidiary of Yelin Lapidot Holdings Management Ltd. ("Yelin Lapidot
                                         Holdings").  . Mr. Dov Yelin and Mr. Yair Lapidot each owns 24.38% of
                                         the share capital and 25% of the voting rights of Yelin Lapidot Holdings and are responsible
                                         for the day-to-day management of Yelin Lapidot Holdings. The Subsidiaries operate
                                         under independent management and make their own independent voting and investment decisions. Any
                                         economic interest or beneficial ownership in any of the shares is held for the benefit
                                         of the members of the provident funds or mutual funds, as the case may be.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Based on information obtained from the
Tel Aviv Stock Exchange, as of February 17, 2014, there were approximately 13 shareholders of record with a United States address
which held approximately 23,611,109 ordinary shares directly or represented by ADSs, representing in the aggregate approximately
27% of our then outstanding share capital.



At the time of our incorporation in 2009,
ProSeed Capital Holdings CVA held approximately 46% of our outstanding shares. Following the issuance by us of additional shares,
including in connection with our initial public offering in Israel, and the distribution by ProSeed Capital Holdings CVA in November
2011 of substantially of all of its shares in us to its shareholders, it currently holds less than one percent of our shares.



At the time of our incorporation in 2009,
Benjamin Van Oudenhove, the chief executive officer and chairman of ProSeed Capital Holdings CVA, held approximately 10.5% of
our outstanding shares, in addition to his indirect holdings through ProSeed Capital Holdings CVA. Following the issuances of
additional shares, including in connection with our initial public offering in Israel, he currently beneficially holds less than
5% of our shares.



| | B. | Related
                                         Party Transactions
| | -- | -------------------------------------------------------------------



Agreement with R.E. Investments



On August 7, 2010, we entered into an
agreement with R.E. Investments, an entity owned by Benjamin Van Oudenhove, pursuant to which R.E. Investments provides us with
strategic consulting services in the fields of finance, mergers and acquisitions and business development, with an emphasis on
Europe.



Pursuant to this agreement, R.E. Investments
is entitled to success fees of 3%, plus value added tax, if necessary, of the value of any transaction resulting from its introductions.
R.E. Investments is entitled to such payment for a period of 12 months from the date of termination of the agreement. Pursuant
to this agreement, we paid R.E. Investments $4,000 and $56,000 in 2011 and 2010, respectively.



On November 6, 2012, we entered into an
amendment to this agreement pursuant to which the success fees were increased to 5%, plus value added tax, if applicable, of the
value of any transaction resulting from the introductions made by R.E. Investments from November 6, 2012 through December 31,
2012 which result in investments in the Company



84







In the agreement, R.E. Investments agreed
that so long as it serves as our consultant, and for a period of 2 years from the date of termination of the agreement, it will
not interfere in our relationship with customers, suppliers, employees, consultants, investment partners, investors and creditors
during this period.



Pursuant to the agreement, R.E. Investments
was granted options to acquire 400,000 of our ordinary shares at an exercise price of $0.55 per share and Mr. Van Oudenhove was
granted options to acquire 100,000 of our ordinary shares at an exercise price of $0.55 per share (all which numbers reflect adjustments
made following the distribution of bonus shares to our shareholders at the time of our initial public offering on the Tel Aviv
Stock Exchange). All of these unexercised options granted to R. E. Investments and Mr. Van Oudenhove will lapse upon the earlier
of our merger or acquisition or on September 1, 2012. On August 29, 2012 all these options were exercised into 500,000 ordinary
shares.



February 2011 Initial Public Offering



In February 2011, we completed our initial
public offering in Israel, under which Dr. Cabilly invested $975,000, Mr. Swenden invested $535,000, Mr. Shilo invested $29,000
and Dr. Reed invested $24,000 out of a total amount of approximately $14 million. See "Item 5. Operating and Financial Review
and Prospects – B. Liquidity and Capital Resources".



Please see “Item 6. Directors, Senior
Management and Employees – B. Compensation – Executives and Director Compensation” for a description of our
employment agreements with Dror Ben-Asher and Ori Shilo.



November 2012 Private Placement



On January 10, 2013, we issued in a private
placement 6,481,280 ordinary shares at a price per share of NIS 4.00 and non-tradable warrants to purchase up to 3,240,640 ordinary
shares. As part of this private placement, Dr. Cabilly invested $1 million and Mr. Suesskind invested $75,000 out of a total of
$6.56 million. For more information on the private placement, please see "Item 5. Operating and Financial Review and Prospects
– B. Liquidity and Capital Resources".



Acquisition of Royalties Rights



From June 2010 to August 2010, we entered
into loan agreements with a number of investors, pursuant to which we received gross proceeds of approximately $3.5 million. The
loans we received under these loan agreements accrued interest at an annual rate of 8%, which was payable upon the conversion
of the loans.



Under the terms of the loan agreements,
we agreed to pay the investors 5% of the proceeds of (i) net sales by us or our sublicensees or distributors; and (ii) down payments
and milestone payments from sublicenses or distributor transactions paid to us in connection with the first two new products purchased
by us subsequent to the closing of this loan financing. Such royalties were payable (i) with regard to net sales over a period
of five years from the date of the first commercial sale of either of these products; and (ii) with regard to down payments and
milestone payments over a period of five years commencing from August 11, 2010. Following approvals from our board of directors
and shareholders, it was determined that the investors would be entitled to royalties with respect to RHB-103 for the treatment
of acute migraine headaches and RHB-104 for the treatment of Crohn's disease.



On August 31, 2010, each of these loan
agreements was replaced in their entirety by a new mandatory convertible loan agreement. However, the obligation to pay the investors
the royalty payments described above remained in full force and effect.



On January 10, 2013, following approval
of our shareholders, we issued an aggregate of 2,317,186 ordinary shares in exchange for the acquisition and termination of the
royalty rights granted to investors pursuant to the August 2010 mandatory convertible loan agreement. In connection with such
transaction, each investor received a number of shares on a pro-rata basis in accordance with their respective royalty rights.
As part of the transaction, the following three directors who were investors in the August 2010 mandatory convertible loan agreement
were issued ordinary shares: Dr. Kenneth Reed - 233,688 ordinary shares; Mr. Eric Swenden - 433,993 ordinary shares; and Dr. Shmuel
Cabilly - 333,841ordinary shares, and Mr. Amram Hayut, a brother-in-law of Mr. Shilo, received 56,753 ordinary shares, out of
a total amount of approximately $3.5 million.



| | C. | Interests of Experts
                                         and Counsel
| | -- | -------------------------------------------------------------------------



Not applicable.



85







| | ITEM 8. | FINANCIAL INFORMATION
| | ------- | ---------------------



| | A. | Financial Statements
                                         and Other Financial Information
| | -- | ---------------------------------------------------------------------------------------------



The financial statements
required by this item are found at the end of this Annual Report, beginning on page F-1.



Legal Proceedings



From time to time, we
may become party to legal proceedings and claims in the ordinary course of business. We are not currently a party to any significant
legal proceedings.



Dividend Policy



We have never declared or paid cash dividends
to our shareholders. Currently we do not intend to pay cash dividends. We currently intend to reinvest any future earnings in
developing and expanding our business. Any future determination relating to our dividend policy will be at the discretion of our
board of directors and will depend on a number of factors, including future earnings, our financial condition, operating results,
contractual restrictions, capital requirements, business prospects, applicable Israeli law and other factors our board of directors
may deem relevant.



| | B. | Significant Changes
| | -- | -------------------



Except as otherwise
disclosed in this Annual Report, no significant change has occurred since December 31, 2013.



| | ITEM 9. | THE OFFER AND
                                         LISTING
| | ------- | --------------------------------------------------------------



| | A. | Offer and Listing
                                         Details
| | -- | ------------------------------------------------------------------



Our ordinary shares have been trading
on the Tel Aviv Stock Exchange under the symbol “RDHL” since February 2011.



Ordinary Shares



The following table sets forth, for the
periods indicated, the reported high and low closing sales prices of our ordinary shares on the Tel Aviv Stock Exchange in NIS
and U.S. dollars. U.S. dollar per ordinary share amounts are calculated using the U.S. dollar representative rate of exchange
on the date to which the high or low market price is applicable, as reported by the Bank of Israel.



86







|                                     |  | NIS                          |      |  | $U.S.                        | 
|------------------------------------ |  | ---------------------------- | ---- |  | ---------------------------- | 
|                                     |  | Price per Ordinary
    Share |      |  | Price per Ordinary
    Share | 
|                                     |  | High                         |      |  | Low                          | 
|Annual                               |  |                              |      |  |                              | 
|2014 (through February 23, 2014)     |  |                              | 4.73 |  |                              | 
|2013                                 |  |                              | 4.29 |  |                              | 
|2012                                 |  |                              | 4.19 |  |                              | 
|2011(beginning on February 3, 2011)  |  |                              | 3.80 |  |                              | 
|                                     |  |                              |      |  |                              | 
|Quarter                              |  |                              |      |  |                              | 
|2014                                 |  |                              |      |  |                              | 
|First quarter (through February 23)  |  |                              | 4.73 |  |                              | 
|2013                                 |  |                              |      |  |                              | 
|Fourth quarter                       |  |                              | 3.87 |  |                              | 
|Third quarter                        |  |                              | 3.79 |  |                              | 
|Second quarter                       |  |                              | 3.99 |  |                              | 
|First quarter                        |  |                              | 4.29 |  |                              | 
|2012                                 |  |                              |      |  |                              | 
|Fourth quarter                       |  |                              | 4.19 |  |                              | 
|Third quarter                        |  |                              | 2.99 |  |                              | 
|Second quarter                       |  |                              | 2.95 |  |                              | 
|First quarter                        |  |                              | 2.52 |  |                              | 
|                                     |  |                              |      |  |                              | 
|Most Recent Six Months               |  |                              |      |  |                              | 
|February  2014 (through February 23) |  |                              | 4.57 |  |                              | 
|January  2014                        |  |                              | 4.73 |  |                              | 
|December 2013                        |  |                              | 3.87 |  |                              | 
|November 2013                        |  |                              | 3.77 |  |                              | 
|October 2013                         |  |                              | 3.71 |  |                              | 
|September 2013                       |  |                              | 3.69 |  |                              | 
|August 2013                          |  |                              | 3.69 |  |                              | 



On
February 23, 2014, the last reported sales price of our ordinary shares on the TASE was NIS 4.45 per share, or $1.27 per share
(based on the exchange rate reported by the Bank of Israel for such date). On February 23, 2014 the exchange rate of the NIS
to the U.S. dollar was $1.00 = NIS 3.51, as reported by the Bank of Israel.





ADSs



Our ADSs have been trading on the Nasdaq
Capital Market under the symbol “RDHL” since December 26,2012.



The following table sets forth, for the
periods indicated, the reported high and low closing sale prices of our ADSs on the Nasdaq Capital Market in U.S. dollars.



87







|                                         |  | $U.S.         |      
|---------------------------------------- |  | ------------- | -----
|                                         |  | Price per ADS |      
|                                         |  | High          |      
|2014                                     |  |               | 13.76
|2013                                     |  |               | 13.60
|                                         |  |               |      
|Quarter                                  |  |               |      
|First quarter 2014 (through February 23) |  |               | 13.76
|Fourth quarter 2013                      |  |               | 11.80
|Third quarter 2013                       |  |               | 10.73
|Second quarter 2013                      |  |               | 11.94
|First quarter 2013                       |  |               | 13.60
|                                         |  |               |      
|Most Recent Six Months                   |  |               |      
|February 2014 (through February 23)      |  |               | 13.48
|January 2014                             |  |               | 13.76
|December 2013                            |  |               | 11.80
|November 2013                            |  |               | 10.97
|October 2013                             |  |               | 11.15
|September 2013                           |  |               | 10.73
|August 2013                              |  |               | 10.59



On February 23, 2014, the last reported
sales price of our ADSs on the Nasdaq Capital Market was $12.9 per ADS.



| | B. | Plan of
                                         Distribution
| | -- | -------------------------------------------------------------



Not applicable.



| | C. | Markets
| | -- | -------



Our ordinary shares are listed and traded
on the Tel Aviv Stock Exchange, and our ADSs, each representing ten ordinary share and evidenced by an American depositary receipt,
or ADR, are traded on the Nasdaq Capital Market under the symbol “RDHL.” The ADRs were issued pursuant to a Depositary
Agreement entered into with The Bank of New York.



| | D. | Selling
                                         Shareholders
| | -- | -------------------------------------------------------------



Not applicable.



| | E. | Dilution
| | -- | --------



Not applicable.



| | F. | Expenses
                                         of the Issue
| | -- | --------------------------------------------------------------



Not applicable



| | ITEM 10. | ADDITIONAL INFORMATION
| | -------- | ----------------------



| | A. | Share
                                         Capital
| | -- | ------------------------------------------------------



Not applicable



88







| | B. | Memorandum
                                         and Articles of Association
| | -- | -------------------------------------------------------------------------------



Securities Registers



Our transfer agent and
register is Bank of New York Mellon and its address is 101 Barclay Street, New York, NY.



Objects and Purposes



According to Section
4 of our articles of association, we shall engage in any legal business. Our number with the Israeli Registrar of Companies is
514304005.



Private Placements



Under the Israeli Companies
Law, if (i) as a result of a private placement a person would become a controlling shareholder or (ii) a private placement will
entitle investors to receive 20% or more of the voting rights of a company as calculated before the private placement, and all
or part of the private placement consideration is not in cash or in public traded securities or is not in market terms and if
as a result of the private placement the holdings of a substantial shareholder shall increase or as a result of it a person shall
become a substantial shareholder, then in either case, the allotment must be approved by the board of directors and by the shareholders
of the company. A “substantial shareholder” is defined as a shareholder who holds five percent or more of the company’s
outstanding share capital, assuming the exercise of all of the securities convertible into shares held by that person. In order
for the private placement to be on “market terms” the board of directors has to determine, on the base of detailed
explanation, that the private placement is on market terms, unless proven otherwise.



Board of Directors



Under our articles of association, resolutions
by the board of directors shall be decided by a majority of votes of the directors present, or participating, in the case of voting
by media, and voting, each director having one vote.



In addition, the Israeli
Companies Law requires that certain transactions, actions and arrangements be approved as provided for in a company’s articles
of association and in certain circumstances by the compensation or audit committee and by the board of directors itself. Those
transactions that require such approval pursuant to a company’s articles of association must be approved by its board of
directors. In certain circumstances, compensation or audit committee and shareholder approval is also required. See “Item
6. Directors, Senior Management and Employees – C. Board Practices.”



The Israeli Companies
Law requires that a member of the board of directors or senior management of the company promptly and, in any event, not later
than the first board meeting at which the transaction is discussed, disclose any personal interest that he or she may have, either
directly or by way of any corporation in which he or she is, directly or indirectly, a 5%or greater shareholder, director
or general manager or in which he or she has the right to appoint at least one director or the general manager, as well as all
related material information known to him or her, in connection with any existing or proposed transaction by the company. In addition,
if the transaction is an extraordinary transaction, (that is, a transaction other than in the ordinary course of business, otherwise
than on market terms, or is likely to have a material impact on the company’s profitability, assets or liabilities), the
member of the board of directors or senior management must also disclose any personal interest held by his or her spouse, siblings,
parents, grandparents, descendants,spouse’s descendants, siblings and parents, and the spouses of any of the
foregoing.



Once the member of the
board of directors or senior management complies with the above disclosure requirement, a company may approve the transaction
in accordance with the provisions of its articles of association. Under the provisions of the Israeli Companies Law, whoever has
a personal interest in a matter, which is considered at a meeting of the board of directors or the audit committee, may not be
present at this meeting or vote on this matter, unless it is not an extraordinary transaction as defined in the Israeli Companies
Law. However, if the chairman of the board of directors or the chairman of the audit committee has determined that the presence
of an office holder with a personal interest is required for the presentation of a matter, such officer holder may be present
at the meeting. Notwithstanding the foregoing, if the majority of the directors have a personal interest in a matter, they shall
be allowed to participate and vote on this matter, but an approval of the transaction by the shareholders in the general meeting
shall be required.



89







Our articles of association
provide that, subject to the Israeli Companies Law, all actions executed in good faith by the board of directors or by a committee
thereof or by any person acting as a director or a member of a committee of the board of directors, will be deemed to be valid
even if, after their execution, it is discovered that there was a flaw in the appointment of these persons or that any one of
these persons was disqualified from serving at his or her office.



Our articles of association
provide that, subject to the provisions of the Israeli Companies Law, the board of directors may appoint board of directors’
committees. The committees of the board of directors shall report to the board of directors their resolutions or recommendations
on a regular basis, as shall be prescribed by the board of directors. The board of directors may cancel the resolution of a committee
that has been appointed by it; however, such cancellation shall not affect the validity of any resolution of a committee, pursuant
to which we acted, vis-à-vis another person, who was not aware of the cancellation thereof. Decisions or recommendations
of the committee of the board which require the approval of the board of directors will be brought to the directors’ attention
a reasonable time prior to the discussion at the board of directors.



According to the Israeli
Companies Law, a contract of a company with its directors, regarding their conditions of service, including the grant to them
of exemption from liability from certain actions, insurance, and indemnification as well as the company’s contract with
its directors on conditions of their employment, in other capacities, require the approval of the compensation committee, the
board of directors, and the shareholders.



Description of Securities



Ordinary Shares



The following is a description
of our ordinary shares. Our authorized share capital is 200,000,000 ordinary shares, par value NIS 0.01 per share.



The ordinary shares
do not have preemptive rights, preferred rights or any other right to purchase our securities. Neither our articles of association
nor the laws of the State of Israel restrict the ownership or voting of ordinary shares by non-residents of Israel, except for
subjects of countries which are enemies of Israel.



Transfer of Shares.
Fully paid ordinary shares are issued in registered form and may be freely transferred pursuant to our articles of association
unless that transfer is restricted or prohibited by another instrument.



Notices. Under
the Israeli Companies Law and our articles of association, we are required to publish notices in two Hebrew-language daily newspapers
at least 14 calendar days’ prior notice of a shareholders’ meeting. However, under regulations promulgated under the
Israeli Companies Law, we are required to publish notice in two daily newspapers at least 35 calendar days prior any shareholders’
meeting in which the agenda includes matters which may be voted on by voting instruments. Regulations under the Israeli Companies
Law exempt companies whose shares are listed for trading both on a stock exchange in and outside of Israel, from some provisions
of the Israeli Companies Law. An amendment to these regulations exempts us from the requirements of the Israeli proxy regulation,
under certain circumstances.



According to the Israeli
Companies Law and the regulations promulgated thereunder, for purposes of determining the shareholders entitled to notice and
to vote at such meeting, the board of directors may fix the record date not more than 40 nor less than four calendar days prior
to the date of the meeting, provided that an announcement regarding the general meeting shall be given prior to the record date.



Election of Directors.
The number of directors on the board of directors shall be no less than five but no more than seven, not including at least two
external directors. The general meeting is entitled, at any time and from time to time, in a resolution approved by a majority
of 75% or more of the votes cast by those shareholders present and voting at the meeting in person, by proxy or by a voting instrument,
not taking into consideration abstaining votes, to change the minimum and/or maximum number of directors as stated above. For
more information, please see “Item 6. Directors, Senior Management and Employees – C. Board Practices – Appointment
of Directors and Terms of Office.”



Dividend and Liquidation
Rights. Our profits, in respect of which a resolution was passed to distribute them as dividend or bonus shares, shall be
paid pro rata to the amount paid or credited as paid on account of the nominal value of shares held by the shareholders. In the
event of our liquidation, the liquidator may, with the general meeting’s approval, distribute parts of our property in specie
among the shareholders and he may, with similar approval, deposit any part of our property with trustees in favor of the shareholders
as the liquidator, with the approval mentioned above deems fit.



90







Voting, Shareholders’
Meetings and Resolutions.Holders of ordinary shares are entitled to one vote for each ordinary share held on all matters
submitted to a vote of shareholders. The quorum required for an ordinary meeting of shareholders consists of at least two shareholders
present, in person or by proxy, or who has sent us a voting instrument indicating the way in which he is voting, who hold or represent,
in the aggregate, at least 25% of the voting rights of our outstanding share capital. A meeting adjourned for lack of a quorum
is adjourned to the same day in the following week at the same time and place or any time and place as prescribed by the board
of directors in notice to the shareholders. At the reconvened meeting one shareholder at least, present in person or by proxy
constitutes a quorum except where such meeting was called at the demand of shareholders. With the agreement of a meeting at which
a quorum is present, the chairman may, and on the demand of the meeting he must, adjourn the meeting from time to time and from
place to place, as the meeting resolves. Annual general meetings of shareholders are held once every year within a period of not
more than 15 months after the last preceding annual general shareholders’ meeting. The board of directors may call special
general meetings of shareholders. The Israeli Companies Law provides that a special general meeting of shareholders may be called
by the board of directors or by a request of two directors or 25% of the directors in office, whichever is the lower, or by shareholders
holding at least 5% of our issued share capital and at least 1% of the voting rights, or of shareholders holding at least 5% of
our voting rights.



An ordinary resolution
requires approval by the holders of a majority of the voting rights present, in person or by proxy, at the meeting and voting
on the resolution.



Allotment of Shares.Our board of directors has the power to allot or to issue shares to any person, with restrictions and condition as it deems
fit.



Private Placements



For information on private
placements, see “Item 10. Additional Information - B. Memorandum and Articles - Private Placements.”



Acquisitions under
Israeli Law



Full Tender Offer



A person wishing to
acquire shares of an Israeli public company and who would as a result hold over 90% of the target company’s issued and outstanding
share capital is required by the Israeli Companies Law to make a tender offer to all of the company’s shareholders for the
purchase of all of the issued and outstanding shares of the company.



A person wishing to
acquire shares of an Israeli public company and who would as a result hold over 90% of the issued and outstanding share capital
of a certain class of shares is required to make a tender offer to all of the shareholders who hold shares of the same class for
the purchase of all of the issued and outstanding shares of the same class.



If the shareholders
who do not respond to or accept the offer hold less than 5% of the issued and outstanding share capital of the company or of the
applicable class of the shares, and more than half of the shareholders who do not have a personal interest in the offer accept
the offer, all of the shares that the acquirer offered to purchase will be transferred to the acquirer by operation of law. However,
a tender offer will be accepted if the shareholders who do not accept it hold less than 2% of the issued and outstanding share
capital of the company or of the applicable class of the shares.



Upon a successful completion
of such a full tender offer, any shareholder that was an offeree in such tender offer, whether such shareholder accepted the tender
offer or not, may, within six months from the date of acceptance of the tender offer, petition the Israeli court to determine
whether the tender offer was for less than fair value and that the fair value should be paid as determined by the court. However,
under certain conditions, the offeror may determine in the terms of the tender offer that an offeree who accepted the offer will
not be entitled to petition the Israeli court as described above.



If the shareholders
who did not respond or accept the tender offer hold at least 5% of the issued and outstanding share capital of the company or
of the applicable class, the acquirer may not acquire shares of the company that will increase its holdings to more than 90% of
the company’s issued and outstanding share capital or of the applicable class from shareholders who accepted the tender
offer.



The description above
regarding a full tender offer shall also apply, with necessary changes, when a full tender offer is accepted and the offeror has
also offered to acquire all of the company’s securities.



91







Special tender offer



The Israeli Companies
Law provides that an acquisition of shares of an Israeli public company must be made by means of a special tender offer if as
a result of the acquisition the purchaser would become a holder of at least 25% of the voting rights in the company. This rule
does not apply if there is already another holder of at least 25% of the voting rights in the company.



Similarly, the Israeli
Companies Law provides that an acquisition of shares in a public company must be made by means of a special tender offer if as
a result of the acquisition the purchaser would become a holder of more than 45% of the voting rights in the company, if there
is no other shareholder of the company who holds more than 45% of the voting rights in the company.



These requirements do
not apply if the acquisition (i) occurs in the context of a private offering, on the condition that the shareholders meeting approved
the acquisition as a private offering whose purpose is to give the acquirer at least 25% of the voting rights in the company if
there is no person who holds at least 25% of the voting rights in the company, or as a private offering whose purpose is to give
the acquirer 45% of the voting rights in the company, if there is no person who holds 45% of the voting rights in the company;
(ii) was from a shareholder holding at least 25% of the voting rights in the company and resulted in the acquirer becoming a holder
of at least 25% of the voting rights in the company; or (iii) was from a holder of more than 45% of the voting rights in the company
and resulted in the acquirer becoming a holder of more than 45% of the voting rights in the company.



The special tender offer
may be consummated only if (i) at least 5% of the voting power attached to the company’s outstanding shares will be acquired
by the offeror and (ii) the special tender offer is accepted by a majority of the votes of those offerees who gave notice of their
position in respect of the offer; in counting the votes of offerees, the votes of a holder in control of the offeror, a person
who has personal interest in acceptance of the special tender offer, a holder of at least 25% of the voting rights in the company,
or any person acting on their or on the offeror’s behalf, including their relatives or companies under their control, are
not taken into account.



In the event that a
special tender offer is made, a company’s board of directors is required to express its opinion on the advisability of the
offer or shall abstain from expressing any opinion if it is unable to do so, provided that it gives the reasons for its abstention.



An office holder in
a target company who, in his or her capacity as an office holder, performs an action the purpose of which is to cause the failure
of an existing or foreseeable special tender offer or is to impair the chances of its acceptance, is liable to the potential purchaser
and shareholders for damages resulting from his acts, unless such office holder acted in good faith and had reasonable grounds
to believe he or she was acting for the benefit of the company. However, office holders of the target company may negotiate with
the potential purchaser in order to improve the terms of the special tender offer, and may further negotiate with third parties
in order to obtain a competing offer.



If a special tender
offer was accepted by a majority of the shareholders who announced their stand on such offer, then shareholders who did not respond
to the special offer or had objected to the special tender offer may accept the offer within four days of the last day set for
the acceptance of the offer. In the event that a special tender offer is accepted, then the purchaser or any person or entity
controlling it and any corporation controlled by them shall refrain from making a subsequent tender offer for the purchase of
shares of the target company and may not execute a merger with the target company for a period of one year from the date of the
offer, unless the purchaser or such person or entity undertook to effect such an offer or merger in the initial special tender
offer.



Merger



The Israeli Companies
Law permits merger transactions if approved by each party’s board of directors and, unless certain requirements described
under the Israeli Companies Law are met, a majority of each party’s shareholders, by a majority of each party’s shares
that are voted on the proposed merger at a shareholders’ meeting.



The board of directors
of a merging company is required pursuant to the Israeli Companies Law to discuss and determine whether in its opinion there exists
a reasonable concern that, as a result of a proposed merger, the surviving company will not be able to satisfy its obligations
towards its creditors, taking into account the financial condition of the merging companies. If the board of directors has determined
that such a concern exists, it may not approve a proposed merger. Following the approval of the board of directors of each of
the merging companies, the boards of directors must jointly prepare a merger proposal for submission to the Israeli Registrar
of Companies.



92







For purposes of the
shareholder vote, unless a court rules otherwise, the merger will not be deemed approved if a majority of the shares voting at
the shareholders meeting (excluding abstentions) that are held by parties other than the other party to the merger, any person
who holds 25% or more of the means of control (See “Management – Audit Committee – Approval of Transactions
with Related Parties” for a definition of means of control) of the other party to the merger or any one on their behalf
including their relatives (See “Management – External Directors – Qualifications of External Directors”
for a definition of relatives) or corporations controlled by any of them, vote against the merger.



In addition, if the
non-surviving entity of the merger has more than one class of shares, the merger must be approved by each class of shareholders.



If the transaction would
have been approved but for the separate approval of each class of shares or the exclusion of the votes of certain shareholders
as provided above, a court may still rule that the company has approved the merger upon the request of holders of at least 25%
of the voting rights of a company, if the court holds that the merger is fair and reasonable, taking into account the appraisal
of the merging companies’ value and the consideration offered to the shareholders.



Under the Israeli Companies
Law, each merging company must send a copy of the proposed merger plan to its secured creditors. Unsecured creditors are entitled
to receive notice of the merger, as provided by the regulations promulgated under the Israeli Companies Law. Upon the request
of a creditor of either party to the proposed merger, the court may delay or prevent the merger if it concludes that there exists
a reasonable concern that, as a result of the merger, the surviving company will be unable to satisfy the obligations of the target
company. The court may also give instructions in order to secure the rights of creditors.



In addition, a merger
may not be completed unless at least 50 days have passed from the date that a proposal for approval of the merger was filed with
the Israeli Registrar of Companies and 30 days from the date that shareholder approval of both merging companies was obtained.



Anti-takeover Measures



The Israeli Companies
Law allows us to create and issue shares having rights different from those attached to our ordinary shares, including shares
providing certain preferred or additional rights to voting, distributions or other matters and shares having preemptive rights.
We do not have any authorized or issued shares other than ordinary shares. In the future, if we do create and issue a class of
shares other than ordinary shares, such class of shares, depending on the specific rights that may be attached to them, may delay
or prevent a takeover or otherwise prevent our shareholders from realizing a potential premium over the market value of their
ordinary shares. The authorization of a new class of shares will require an amendment to our articles of association which requires
the prior approval of a majority of our shares represented and voting at a general meeting. Shareholders voting at such a meeting
will be subject to the restrictions under the Israeli Companies Law described in “— Voting.”



| | C. | Material Contracts
| | -- | ------------------



Securities
Purchase Agreements with OrbiMed and Broadfin



On December 30
and December 31, 2013, we entered into Securities Purchase Agreements with OrbiMed Israel Partners Limited Partnership (“OrbiMed”)
and Broadfin Healthcare Master Fund, LTD. (“Broadfin”) for the sale of a total of 894,740 units, each consisting of
one ADS and a three-year warrant to purchase 0.4 of an ADS, at a purchase price of $9.50 per unit, for an aggregate gross amount
of $8.5 million. The warrants are exercisable for 357,896 ADSs in the aggregate (each representing 10 ordinary shares) at an exercise
price of $11 per ADS. The parties closed the transaction on January 8, 2014.



The Warrants
are immediately exercisable, have a three year term expiring on January 6, 2017 and may be exercised either for cash or on a cashless
basis. The exercise price of the Warrant and the number of shares issuable upon exercise of the Warrant are subject to adjustments
for stock dividends, stock splits, reverse splits or similar events, for dividends or other distributions to Company shareholders
of Company assets (or rights to acquire assets), and for grants to Company shareholders of convertible securities or rights to
purchase securities or property. Upon the occurrence of a transaction involving a change in control of the Company in which the
consideration is all cash, the Warrant, if not previously exercised, will be cancelled and the holder would receive the cash it
would have received had it exercised the Warrant immediately prior to the transaction. For all other changes in control transactions,
the successor entity must assume the entire obligation under the Warrant and the successor entity must be a public company traded
on a US exchange.



93







Under the agreements,
until we have raised an aggregate of $28 million ($25.5 million in the agreement with Broadfin, which was for an investment of
$2.5 million and signed a day after the agreement with OrbiMed) from the sale and issuance of securities, including ordinary shares,
any other of our capital stock, ADSs, or any evidences of indebtedness or other securities representing or directly or indirectly
convertible into or exchangeable for our capital stock (whether issued alone or together as "units") (the "Additional
Securities"), if we issue Additional Securities at a price per Additional Security of less than $9.50 (such lower price,
the "Subsequent Offering Price"), upon each such issuance we will issue to the investors a number of additional ADSs
as necessary to reduce the effective price per Unit to the Subsequent Offering Price. If ordinary shares and/or ADSs are offered
with any other rights, the "Subsequent Offering Price" will be calculated for each "unit" in such offering,
consisting of one ordinary share (or ADS) plus the number of other rights per share in such offering. An adjustment will also
apply to the issuance of convertible securities or warrants at a conversion or exercise price per share of less than $9.50 (adjusted
for Ordinary Share-ADR ratio). "Additional Securities" excludes securities issued under our stock option plan, ordinary
shares issued upon the exercise of currently outstanding options or warrants, ordinary shares issued for acquisition of any entity
or other reorganization or joint venture, and securities issued (i) in connection with the acquisition of, or licensing arrangements
for, pharmaceutical products, (ii) to suppliers or third party service providers in connection with the provision of goods or
services or (iii) in connection with sponsored research, collaboration, technology license, development, OEM, marketing or other
similar agreements or strategic partnerships, in each case if approved by the board and not in connection with a capital raising
transaction.



We agreed to file
with the Securities and Exchange Commission a registration statement covering the ADS to be issued to the investors as well as
the ADS issuable upon exercise of the Warrant. The agreement provides for liquidated damages if the Company doesn't meet the deadlines
for filing the registration statement and causing the registration statement to be declared effective or if the registration statement
does not remain in effect for the period of time required under the agreement. We filed the registration statement with the Securities
and Exchange Commission, and it was declared effective on February 4, 2014.



Share Purchase
Agreements with Israeli Institutional and other Investors



On January 14,
2014, we entered into Share Purchase Agreements with Israeli institutional investors Migdal Insurance Company, Yelin Lapidot,
and Excellence Nessuah, as well as Sphera Global Healthcare Master Fund and two private Israeli investment firms for the sale
of a total of 10,458,740 ordinary shares at a purchase price of NIS 3.9 per share and three-year warrants to purchase 4,183,496
ordinary shares in the aggregate at an exercise price of NIS 4.9 per ordinary share, linked to changes in the NIS-US dollar exchange
rate, for an aggregate gross amount of $11.7 million (based on the representative U.S. dollar–NIS rate of exchange of 3.49
on January 22, 2014). The parties closed the transaction on January 21, 2014.



We undertook,
for a period of six months from the execution of the Share Purchase Agreements, not to issue additional ordinary shares to investors
unless the effective price per ordinary share in the future issuance is equal to or greater than NIS 3.455 (approximately $0.98
based on the representative U.S. dollar – NIS rate of exchange of 3.51 on February 23, 2014) per share. For purposes of
the agreements, "effective price" refers to the price per share at which shares will be issued by us, and in the case
of the issuance of shares together with warrants for no additional consideration, the price per share will be reduced by the value
of the warrant calculated in accordance with the Black & Scholes model. The limitation described in this paragraph will apply
to issuance of securities to new investors only, whether in a private or public offering, but will not apply to issuance of shares
to other investors in the private placement, issuances of shares pursuant to a share option plan for advisors, officers, directors
and employees of ours, issuances of shares upon exercise of warrants outstanding on the date of the share purchase agreements,
and similar issuances. Following completion of such six month period, we will be permitted to raise additional financing without
any limitation.



The Warrants
are immediately exercisable and expire on January 19, 2017. The exercise price of the Warrant and/or the number of shares issuable
upon exercise of the Warrant are subject to adjustments for stock splits, reverse splits or similar events, for cash dividends
or distribution of bonus shares to our shareholders, and for grants to our shareholders of rights to acquire securities of ours
of any kind.



For a description of other material agreements,
please see also "Information on the Company – B. Business Overview – Acquisition and License Agreements"
and "Information on the Company – B. Business Overview – Manufacturing Agreements - Manufacturing Agreement Related
to RHB-104.”



94







| | D. | Exchange Controls
| | -- | -----------------



Israeli law and regulations
do not impose any material foreign exchange restrictions on non-Israeli holders of our ordinary shares. In May 1998, a new
“general permit” was issued under the Israeli Currency Control Law, 1978, which removed most of the restrictions that
previously existed under the law and enabled Israeli citizens to freely invest outside of Israel and freely convert Israeli currency
into non-Israeli currencies. Dividends, if any, paid to holders of our ordinary shares, and any amounts payable upon our dissolution,
liquidation or winding up, as well as the proceeds of any sale in Israel of our ordinary shares to an Israeli resident, may be
paid in non-Israeli currency or, if paid in Israeli currency, may be converted into U.S. dollars at the rate of exchange prevailing
at the time of conversion.



| | E. | Taxation
| | -- | --------



Israeli Tax Considerations



General



The following is a summary of the material
tax consequences under Israeli law concerning the purchase, ownership and disposition of our ordinary shares or American Depositary
Shares (the “Shares”).



This discussion does not purport to constitute
a complete analysis of all potential tax consequences applicable to investors upon purchasing, owning or disposing of our Shares.
In particular, this discussion does not take into account the specific circumstances of any particular investor (such as tax-exempt
entities, financial institutions, certain financial companies, broker-dealers, investors that own, directly or indirectly, 10%
or more of our outstanding voting rights, or foreign companies, Israeli residents holding 25% or more of their shares or having
the right to 25% or more of their income or profit, all of whom are subject to special tax regimes not covered under this discussion).
To the extent that issues discussed herein are based on legislation which has yet to be subject to judicial or administrative
interpretation, there can be no assurance that the views expressed herein will accord with any such interpretation in the future.



Potential investors are urged to consult
their own tax advisors as to the Israeli or other tax consequences of the purchase, ownership and disposition of the Shares, including,
in particular, the effect of any foreign, state or local taxes.



General Corporate Tax Structure
in Israel



The Israeli corporate tax rate applicable
to Israeli resident companies in 2013 is 25%. As of January 1, 2014 and thereafter, the Israeli corporate tax rate will be 26.5%.



Taxation of Shareholders



Capital Gains



Capital gains tax is imposed on the disposal
of capital assets by an Israeli resident and on the disposal of such assets by a non-Israeli resident if those assets are either
(i) located in Israel; (ii) are shares or a right to a share in an Israeli resident corporation, or (iii) represent, directly
or indirectly, rights to assets located in Israel. The Israeli Income Tax Ordinance distinguishes between “Real Gain”
and the “Inflationary Surplus.” Real Gain is the excess of the total capital gain over Inflationary Surplus computed
generally on the basis of the increase in the Israeli Consumer Price Index between the date of purchase and the date of disposal.



As of January 1, 2013, the real capital
gain accrued by individuals on the sale of the Shares will be taxed at the rate of 25%. However, if the individual shareholder
is a “Controlling Shareholder” (i.e., a person who holds, directly or indirectly, alone or together with another,
10% or more of one of the Israeli resident company’s means of control) at the time of sale or at any time during the preceding
12 month period, such gain will be taxed at the rate of 30%.



95







Individual and corporate shareholders dealing in securities in Israel are taxed at the tax rates applicable
to business income - 25% for corporations in 2013 (which increased to 26.5% in January 2014) and
a marginal tax rate of up to 48% in 2013 for individuals (an additional 2% tax rate would be levied on individuals whose taxable
income from in Israel exceeds NIS 811,560 (approximately $231,000 based on the representative U.S. dollar – NIS rate of exchange
of 3.51on February 23, 2014) in 2013). Notwithstanding the foregoing, capital gains generated from the sale of our Shares by a
non-Israeli shareholder may be exempt from Israeli tax under the Israeli Income Tax Ordinance provided that the following cumulative
conditions are met: (i) the Shares were purchased upon or after the registration of the Shares on the stock exchange, (ii) the
seller does not have a permanent establishment in Israel to which the generated capital gain is attributed, and (iii) if the seller
is a corporation, less than 25% of its means of control or the rights to its profit or income are held by or attributed to Israeli
resident shareholders. In addition, the sale of the Shares may be exempt from Israeli capital gains tax under the provisions of
an applicable double tax treaty. For example, the Convention between the Government of the U.S. and the Government of the State
of Israel with respect to Taxes on Income (the “U.S.- Israel Double Tax Treaty”) exempts a U.S. resident from Israeli
capital gain tax in connection with the sale of the Shares, provided that: (i) the U.S. resident owned, directly or indirectly,
less than 10% of the voting power of the company at any time within the 12 month period preceding such sale; (ii) the U.S. resident,
being an individual, is present in Israel for a period or periods of less than 183 days during the taxable year; and (iii) the
capital gain from the sale was not derived through a permanent establishment of the U.S. resident in Israel.



Withholding Obligations - Either the purchaser, the Israeli stockbroker or the financial institution through
which the Shares are held, are obligated, subject to the above mentioned exemptions, to withhold tax upon the sale of Shares at
a 25% tax ratefrom the "Real Gain" for corporations and individuals,
and at a rate of 26.5% for corporation as of January 1, 2014.



Upon the sale of traded securities, a
detailed return, including a computation of the tax due, must be filed and an advanced payment must be paid to the Israeli Tax
Authority on January 31 and July 31 of every tax year in respect of sales of traded securities made within the previous six months.
However, if all tax due was withheld at source according to applicable provisions of the Israeli Income Tax Ordinance and regulations
promulgated thereunder, such return need not be filed and no advance payment must be paid. Capital gains are also reportable on
annual income tax returns.



Dividends



As of January 1, 2013, dividends distributed
by a company to a shareholder who is an Israeli resident individual will be generally subject to income tax at a rate of 25%.
However, a 30% tax rate will apply if the dividend recipient is a Controlling Shareholder, as defined above, at the time of distribution
or at any time during the preceding 12 month period. If the recipient of the dividend is an Israeli resident corporation, such
dividend will be generally exempt from Israeli income tax provided that the income from which such dividend is distributed, derived
or accrued within Israel.



As of January 1, 2013, dividends distributed
by an Israeli resident company to a non-Israeli resident (either individual or corporation) are generally subject to tax on the
receipt of such dividends at the rate of 25% (30% if the dividend recipient is a Controlling Shareholder at the time of distribution
or at any time during the preceding 12 month period). These rates may be reduced under the provisions of an applicable double
tax treaty. Thus, under the U.S.-Israel Double Tax Treaty, the following tax rates will apply in respect of dividends distributed
by an Israeli resident company to a U.S. resident: (i) if the U.S. resident is a corporation which holds during that portion of
the taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at
least 10% of the outstanding shares of the voting stock of the Israeli resident paying corporation and not more than 25% of the
gross income of the Israeli resident paying corporation for such prior taxable year (if any) consists of certain types of interest
or dividends the tax rate is 12.5%; (ii) if both the conditions mentioned in section (i) above are met and the dividend is paid
from an Israeli resident company’s income which was entitled to a reduced tax rate applicable to an Approved Enterprise/Benefited
Enterprise/Preferred Enterprise – the tax rate is 15%; and (iii) in all other cases, the tax rate is 25%. The aforementioned
rates under the U.S.-Israel Double Tax Treaty will not apply if the dividend income is attributed to a permanent establishment
of the U.S. resident in Israel.



We are obligated to withhold tax upon
the distribution of dividends at the following withholding tax rates: (A) for securities registered and held by a clearing corporation:
(i) Israeli resident corporations – 0%, (ii) Israeli resident individuals – 25%, and (iii) non-Israeli residents -
25%, unless reduced under the provisions of an applicable double tax treaty; and (B) in all other cases: (i) Israeli resident
corporations – 0%, (ii) Israeli resident individuals – 25% or 30% tax rate if the dividend recipient is a Controlling
Shareholder at the time of the distribution or at any time during the preceding 12 months period)), and (iii) non-Israeli residents
- 25% or 30% tax rate as referred to above with respect to Israeli resident individuals, unless reduced under the provisions of
an applicable double tax treaty.



Foreign Exchange Regulations



Non-residents of Israel who hold our Shares
are able to receive any dividends, and any amounts payable upon the dissolution, liquidation and winding up of our affairs, repayable
in non-Israeli currency at the rate of exchange prevailing at the time of conversion. However, Israeli income tax is generally
required to have been paid or withheld on these amounts. In addition, the statutory framework for the potential imposition of
currency exchange control has not been eliminated, and may be restored at any time by administrative action.



96







U.S Federal Income Tax Considerations



The following is a summary
of the material U.S. federal income tax consequences that apply to U.S. Holders who hold our Shares as capital assets for tax
purposes. This summary is based on current provisions of the Internal Revenue Code of 1986, as amended (the “Code”),
current and proposed Treasury regulations promulgated thereunder, and administrative and judicial decisions as of the date hereof,
all of which are subject to change, possibly on a retroactive basis. This summary does not address all U.S. federal income tax
matters that may be relevant to a particular perspective holder or all tax considerations that may be relevant with respect to
an investment in our Shares.



This summary does not
address tax considerations applicable to a holder of our Shares that may be subject to special tax rules including, without limitation,
the following:

| |  | 
| |  | 

| | • | dealers
                                         or traders in securities, currencies or notional principal contracts;
| | - | ----------------------------------------------------------------------------------------------------------------------

| |  | 
| |  | 

| | • | financial
                                         institutions;
| | - | ----------------------------------------------------------------

| |  | 
| |  | 

| | • | insurance
                                         companies;
| | - | -------------------------------------------------------------

| |  | 
| |  | 

| | • | real estate
                                         investment trusts;
| | - | -----------------------------------------------------------------------

| |  | 
| |  | 

| | • | banks;
| | - | ------

| |  | 
| |  | 

| | • | investors
                                         subject to the alternative minimum tax;
| | - | ------------------------------------------------------------------------------------------

| |  | 
| |  | 

| | • | tax-exempt
                                         organizations;
| | - | ------------------------------------------------------------------

| |  | 
| |  | 

| | • | traders
                                         that have elected mark-to-market accounting;
| | - | ---------------------------------------------------------------------------------------------



| | • | investors that hold Shares
                                         as part of a “straddle”, “hedge”, or “conversion transaction”
                                         with other investments;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | regulated investment companies;
| | - | -------------------------------



| | • | investors that actually or
                                         constructively own 10 percent or more of our voting shares;
| | - | -------------------------------------------------------------------------------------------------------------------------------



| | • | investors that are treated
                                         as partnerships or other pass through entities for U.S. federal income purposes and persons
                                         who hold the Shares through partnerships or other pass through entities; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | U.S. Holders, as defined
                                         below, whose functional currency is not the U.S. dollars.
| | - | ---------------------------------------------------------------------------------------------------------------------------



This summary does not
address the effect of any U.S. federal taxation other than U.S. federal income taxation. In addition, this summary does not include
any discussion of state, local, or foreign tax consequences to a holder of our Shares.



You are urged to
consult your own tax advisor regarding the foreign and U.S. federal, state, and local and other tax consequences of an investment
in the Shares.



| | · | For
                                         purposes of this summary, a “U.S. Holder” means a beneficial owner of a Share
                                         that is for U.S. federal income tax purposes:
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | an
                                         individual who is a citizen or resident of the U.S.;
| | - | ------------------------------------------------------------------------------------------------

| | · | a
                                         corporation (or other entity taxable as a corporation for U.S. federal income tax purposes)
                                         created or organized in the U.S. or under the laws of the U.S. or any political subdivision
                                         thereof;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | an
                                         estate, the income of which is subject to U.S. federal income tax regardless of its source;
                                         or
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | a
                                         trust (1) if (a) a court within the U.S. is able to exercise primary supervision over
                                         the administration of the trust; and (b) one or more U.S. persons have the authority
                                         to control all substantial decisions of the trust; or (2) that has a valid election in
                                         effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



If an entity that is
classified as a partnership for U.S. federal tax purposes holds Shares, the U.S. federal tax treatment of its partners will generally
depend upon the status of the partners and the activities of the partnership. Entities that are classified as partnerships for
U.S. federal tax purposes and persons holding Shares through such entities should consult their own tax advisors.



In general, if you hold
American Depositary Shares, you will be treated as the holder of the underlying shares represented by those American Depositary
Shares for U.S. federal income tax purposes. Accordingly, no gain or loss will be recognized if you exchange American Depositary
Shares for the underlying Shares represented by those American Depositary Shares.



97







Distributions



Subject to the discussion
under “Passive Foreign Investment Companies” below, the gross amount of any distribution, including the amount of
any Israeli taxes withheld from these distributions (see “Israeli Tax Considerations”), actually or constructively
received by a U.S. Holder with respect to Shares will be taxable to the U.S. Holder as foreign source dividend income to the extent
of our current and accumulated earnings and profits as determined under U.S. federal income tax principles. The U.S. Holder will
not be eligible for any dividends received deduction in respect of the dividends paid by domestic corporations. Distributions
in excess of earnings and profits will be non-taxable to the U.S. Holder to the extent of the U.S. Holder’s adjusted tax
basis in its Shares. Distributions in excess of such adjusted tax basis will generally be taxable to the U.S. Holder as capital
gain from the sale or exchange of property as described below under “Sale or Other Disposition of Shares.” If we do
not report to a U.S. Holder the portion of a distribution that exceeds earnings and profits, the distribution will generally be
taxable as a dividend even if that distribution would otherwise be treated as a non-taxable return of capital or as capital gain
under the rules described above. The amount of any distribution of property other than cash will be the fair market value of that
property on the date of distribution.



Under the Code, certain
dividends received by non-corporate U.S. Holders will be subject to a maximum income tax rate of 20%. This reduced income tax
rate is only applicable to dividends paid by a “qualified foreign corporation” that is not a PFIC and only with respect
to shares held by a qualified U.S. Holder (i.e., a non-corporate holder) for a minimum holding period (generally 61 days during
the 121-day period beginning 60 days before the ex-dividend date). We should be considered a qualified foreign corporation if
we are not treated as a PFIC because (i) we are eligible for the benefits of a comprehensive tax treaty between Israel and the
U.S., which includes an exchange of information program, and (ii) the American Depositary Shares are readily tradable on an established
securities market in the U.S. As discussed below, however, we may be classified as a “passive foreign investment company”
(see “Passive Foreign Investment Companies” below). Accordingly, dividends paid by us to individual U.S. Holders may
not be eligible for the reduced income tax rate applicable to qualified dividends.



The amount of any distribution
paid in a currency other than U.S. dollars (a “foreign currency”) including the amount of any withholding tax thereon,
will be included in the gross income of a U.S. Holder in an amount equal to the U.S. dollar value of the foreign currency calculated
by reference to the exchange rate in effect on the date of the U.S. Holder’s (or, in the case of American Depositary Shares,
the depositary’s) receipt of the dividend, regardless of whether the foreign currency is converted into U.S. dollars. If
the foreign currency is converted into U.S. dollars on the date of receipt, a U.S. Holder generally should not be required to
recognize a foreign currency gain or loss in respect of the dividend. If the foreign currency received in the distribution is
not converted into U.S. dollars on the date of receipt, a U.S. Holder will have a basis in the foreign currency equal to its U.S.
dollar value on the date of receipt. Any gain or loss on a subsequent conversion or other disposition of the foreign currency
will be treated as U.S. source ordinary income or loss.



Subject to certain conditions
and limitations, any Israeli taxes withheld on dividends may be creditable against a U.S. Holder’s U.S. federal income tax
liability, subject to generally applicable limitations. The rules relating to foreign tax credits and the timing thereof are complex.
U.S. Holders should consult their own tax advisors regarding the availability of a foreign tax credit in their particular situation
(including, in the case of a U.S. corporation that owns 10 percent or more of our voting shares, the possible application of Section
902 of the Code).



Sale or Other Disposition
of Shares



If a U.S. Holder sells
or otherwise disposes of its Shares, gain or loss will be recognized for U.S. federal income tax purposes in an amount equal to
the difference between the amount realized on the sale or other disposition and such holder’s adjusted basis in the Shares.
Subject to the discussion below under the heading “Passive Foreign Investment Companies,” such gain or loss generally
will be a capital gain or loss and will be a long-term capital gain or loss if the holder had held the Shares for more than one
year at the time of the sale or other disposition. Long-term capital gains realized by non-corporate U.S. Holders are generally
subject to a preferential U.S. federal income tax rate. In general, gain or loss recognized by a U.S. Holder on the sale or other
disposition or our Shares will be U.S. source gain or loss for purposes of the foreign tax credit limitation.



If a U.S. Holder receives
foreign currency upon a sale or exchange of Shares, gain or loss will be recognized in the manner described above under “Distributions.”
In addition, gain or loss, if any, recognized on the subsequent sale, conversion, or disposition of such foreign currency will
be U.S. source ordinary income or loss for foreign tax credit limitation purposes. However, if such foreign currency is converted
into U.S. dollars on the date received by the U.S. Holder, the U.S. Holder generally should not be required to recognize any foreign
currency gain or loss on such conversion.



98







A U.S. Holder who holds
Shares through an Israeli broker or other Israeli intermediary may be subject to Israeli withholding tax on any capital gains
recognized on a sale or other disposition of the Shares if the U.S. Holder does not obtain approval of an exemption from the Israeli
Tax Authorities or claim any allowable refunds or reductions. U.S. Holders are advised that any Israeli tax paid under circumstances
in which an exemption from (or a refund of or a reduction in) such tax was available will not be creditable for U.S. federal income
tax purposes. U.S. Holders are advised to consult their Israeli broker or intermediary regarding the procedures for obtaining
an exemption or reduction.



Medicare Tax on Unearned Income



U.S. Holders that are
individuals, estates or trusts will be required to pay an additional 3.8% tax on their investment income, including dividends
paid on the Shares and capital gains from the sale or other disposition of the Shares.



Passive Foreign Investment Companies



For U.S. federal income
tax purposes, we will be considered a passive foreign investment company (“PFIC”) for any taxable year in which either
75% or more of our gross income is passive income, or at least 50% of the average value of all of our assets for the taxable year
produce or are held for the production of passive income. For this purpose, passive income includes dividends, interest, royalties,
rents, annuities, and the excess of gains over losses from the disposition of assets which produce passive income. If we were
determined to be a PFIC for U.S. federal income tax purposes, highly complex rules would apply to U.S. Holders owning Shares.



Based on our estimated
gross income, the average value of our gross assets, and the nature of our business, we believe that we may be classified as a
PFIC in the current taxable year and in future years. Our status as a PFIC will depend on the composition of our assets and activities
in each year and because this is a factual determination there can be no assurance that we will not be considered a PFIC for the
current taxable year or for any future taxable year. If we are treated as a PFIC in any year during which a U.S. Holder owns Shares,
certain adverse tax consequences could apply, as described below. If we are treated as a PFIC for any taxable year,



| | · | a
                                         U.S. Holder would be required to allocate income recognized upon receiving certain dividends
                                         or gain recognized upon the disposition of Shares ratably over its holding period for
                                         such Shares,
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the
                                         amount allocated to each year during which we are considered a PFIC other than the year
                                         of the dividend payment or disposition would be subject to tax at the highest individual
                                         or corporate tax rate, as the case may be, and an interest charge would be imposed with
                                         respect to the resulting tax liability allocated to each such year,
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the
                                         amount allocated to the year of the dividend payment or disposition would be taxable
                                         as ordinary income, and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the
                                         favorable dividend rate discussed above with respect to dividends paid to certain non-corporate
                                         U.S. Holders would not apply.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As described below,
certain elections may be available that would result in alternative treatments (such as mark-to-market or qualified electing fund
treatment) to U.S. Holders of our Shares. A U.S. Holder that makes an election to treat us as a qualified electing fund (an “electing
U.S. Holder”) is required for each taxable year to include in income a pro rata share of the ordinary earnings of the qualified
electing fund as ordinary income and a pro rata share of the net capital gain of the qualified electing fund as long-term capital
gain, subject to a separate election to defer payment of taxes, which deferral is subject to an interest charge. A U.S. Holder
may make a qualified electing fund election only if we furnish the U.S. Holder with certain tax information. We have agreed to
supply an electing U.S. Holder with the information necessary to report income and gain pursuant to a qualified election in the
event we are classified as a PFIC. Alternatively, another method to avoid the aforementioned treatment is for a U.S. Holder to
make a timely mark-to-market election in respect of its Shares. If a U.S. Holder elects to mark-to-market its Shares, the excess
of the fair market value of the Shares at the close of each tax year over such U.S. Holder’s adjusted tax basis in such
Shares will be included in income. If the fair market value of the Shares is less than the U.S. Holder’s adjusted tax basis
in its Shares at the close of the tax year, the U.S. Holder may generally deduct the excess of the adjusted tax basis of the Shares
over their fair market value at such time. However, such deductions generally would be limited to the net mark-to-market gains,
if any, that were included in income by such holder with respect to our Shares in prior years. Income recognized and deductions
allowed under the mark-to-market provisions, as well as any gain or loss on the disposition of Shares with respect to which the
mark-to-market election is made, are treated as ordinary income or loss.



99







If during any taxable
year of a U.S. Holder ending on or after December 31, 2013 such U.S. Holder owns ordinary shares and we are a PFIC in such year,
the U.S. Holder generally will be required to file an IRS Form 8621 (Information Return by a Shareholder of a Passive Foreign
Investment Company or Qualified Electing Fund) with respect to the company (generally with the U.S. Holder’s federal income
tax return for that year), unless a de minimis exception applies. U.S. Holders are urged to consult their tax advisors
regarding their annual filing requirements.



You are urged to
consult your own tax advisor regarding the possibility of us being classified as a PFIC and the potential tax consequences arising
from the ownership and disposition of an interest in a PFIC.



Backup Withholding
and Information Reporting



Payments of dividends
with respect to Shares and the proceeds from the sale, retirement, or other disposition of Shares made by a U.S. paying agent
or other U.S. intermediary will be reported to the IRS and to the U.S. Holder as may be required under applicable U.S. Treasury
regulations. We, or an agent, a broker, or any paying agent, as the case may be, may be required to withhold tax (backup withholding),
currently at the rate of 28%, if a non-corporate U.S. Holder that is not otherwise exempt fails to provide an accurate taxpayer
identification number and comply with other IRS requirements concerning information reporting. Certain U.S. Holders (including,
among others, corporations and tax-exempt organizations) are not subject to backup withholding. Any amount of backup withholding
withheld may be used as a credit against your U.S. federal income tax liability provided that the required information is furnished
to the IRS. U.S. Holders should consult their tax advisors as to their qualification for exemption from backup withholding and
the procedure for obtaining an exemption.



| | F. | Dividends
                                         and Paying Agents
| | -- | --------------------------------------------------------------------



Not applicable.



| | G. | Statement
                                         by Experts
| | -- | -------------------------------------------------------------



Not applicable.



| | H. | Documents
                                         on Display
| | -- | -------------------------------------------------------------



We are subject to the information reporting
requirements of the Securities Exchange Act of 1934, as amended, applicable to foreign private issuers, and under those requirements
we file reports with the Securities and Exchange Commission. Those other reports or other information may be inspected without
charge at the Securities and Exchange Commission’s public reference room at 100 F Street, N.E., Room 1580, Washington, D.C.
20549. Copies of the material may be obtained by mail from the Public Reference Branch of the Securities and Exchange Commission
at such address, at prescribed rates. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information
on the public reference room. Our filings with the Securities and Exchange Commission are also available to the public through
the Securities and Exchange Commission’s website at http://www.sec.gov.



As a foreign private issuer, we are exempt
from the rules under the Securities Exchange Act of 1934, as amended, related to the furnishing and content of proxy statements,
and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions
contained in Section 16 of the Securities Exchange Act of 1934, as amended. In addition, we are not required under the Securities
Exchange Act of 1934, as amended, to file annual, quarterly and current reports and financial statements with the Securities and
Exchange Commission as frequently or as promptly as U.S. companies whose securities are registered under the Securities Exchange
Act of 1934, as amended. However, we are required to comply with the informational requirements of the Securities Exchange Act
of 1934, as amended, and, accordingly, file current reports on Form 6-K, annual reports on Form 20-F and other information with
the Securities and Exchange Commission.



In addition, since our ordinary shares
are traded on the Tel Aviv Stock Exchange, we have filed Hebrew language periodic and immediate reports with, and furnish information
to, the Tel Aviv Stock Exchange and the Israeli Securities Authority, as required under Chapter Six of the Israel Securities Law,
1968. Copies of our filings with the Israeli Securities Authority can be retrieved electronically through the MAGNA distribution
site of the Israeli Securities Authority (www.magna.isa.gov.il) and the Tel Aviv Stock Exchange website (www.maya.tase.co.il).



100







We maintain a corporate website at www.redhillbio.com.Information contained on, or that can be accessed through, our website does not constitute a part of this Annual Report.



| | I. | Subsidiary Information
| | -- | ----------------------



Not applicable.



| | ITEM 11. | QUANTITATIVE
                                         AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
| | -------- | ---------------------------------------------------------------------------------------------------



Market risk is the risk of loss related
to changes in market prices, including interest rates and foreign exchange rates, of financial instruments that may adversely
impact our financial position, results of operations or cash flows. Our overall risk management program focuses on the unpredictability
of financial markets and seeks to minimize potential adverse effects on our financial performance.



Risk of Interest Rate Fluctuation
and Credit Exposure Risk



In the near future, we do not anticipate
undertaking any significant long-term borrowings. At present, our credit and interest risk arises from cash and cash equivalents,
deposits with banks as well as accounts receivable. A substantial portion of our liquid instruments is invested in short-term
deposits in highly-rated institutions.



We estimate that because the liquid instruments
are invested mainly for the short-term and with highly-rated institutions, the credit and interest risk associated with these
balances is immaterial. The primary objective of our investment activities is to preserve principal while maximizing the income
we receive from our investments without significantly increasing risk and loss. Our investments are exposed to market risk due
to fluctuations in interest rates, which may affect our interest income and the fair market value of our investments. We manage
this exposure by performing ongoing evaluations of our investments.



Market Price Risk



We may be exposed to market price risk
because of investments in tradable securities held by us and classified in our financial statements on as financial assets at
fair value through profit or loss. To manage the price risk arising from investments in tradable securities, we invest in marketable
securities with high ratings and diversify our investment portfolio.



Foreign Currency Exchange Risk



Our foreign currency exposures give rise
to market risk associated with exchange rate movements of the U.S. dollar, our functional and reporting currency, mainly against
the NIS and other currencies. Although the U.S. dollar is our functional currency and reporting currency, a portion of our expenses
are denominated in NIS. Our NIS expenses consist principally of payments to employees or service providers and short term investments
in currencies other than the U.S. dollar. We anticipate that a sizable portion of our expenses will continue to be denominated
in currencies other than the U.S. dollar. If the U.S. dollar fluctuates significantly against the NIS it may have a negative impact
on our results of operations. We manage our foreign exchange risk by aligning the currencies for holding short term investments
with the currencies of expected expenses, based on our expected cash flows.



Portfolio diversification is performed based
on risk level limits that we set. To date, we have not engaged in hedging transactions. In the future, we may enter into currency
hedging transactions to decrease the risk of financial exposure from fluctuations in the exchange rates of our principal operating
currencies. These measures, however, may not adequately protect us from the material adverse effects of such fluctuations.



| | (A) | Set forth below is a sensitivity
                                         test to possible changes in U.S. dollars/ NIS exchange rate as of December 31, 2013:
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------



101







|Sensitive instrument                  |  | Income (loss) from
    change in exchange rate (U.S. dollars in thousands) |    |   | Value (U.S. dollars
    in thousands) |  |     | Income (loss) from
    change in exchange rate (U.S dollars in thousands) | 
|------------------------------------- |  | -------------------------------------------------------------------------- | -- | - | ------------------------------------- |  | --- | ------------------------------------------------------------------------- | 
|                                      |  | Down 2%                                                                    |    |   | Down 5%                               |  |     |                                                                           | 
|Cash and cash equivalents             |  |                                                                            | 37 |   |                                       |  | 94  |                                                                           | 
|Bank deposits                         |  |                                                                            | -  |   |                                       |  | 1   |                                                                           | 
|Financial asset at fair value         |  |                                                                            | 5  |   |                                       |  | 12  |                                                                           | 
|Accounts receivable                   |  |                                                                            | 1  |   |                                       |  | 3   |                                                                           | 
|Accounts payable and accrued expenses |  |                                                                            | (5 | ) |                                       |  | (14 | )                                                                         | 
|Total loss                            |  |                                                                            | 38 |   |                                       |  | 96  |                                                                           | 



(B) As of the date of this Annual Report,
our interest rate risk exposure is in respect to bank deposits, which expose us to risk due to change in fair value interest rates.
As of December 31, 2013, these deposits carry annual interest of 0.6%-0.77%. Under these low interest rates, reasonable changes
in interest rates are expected have negligible impact on the fair value of these assets.



| | ITEM 12. | DESCRIPTION
                                         OF SECURITIES OTHER THAN EQUITY SECURITIES
| | -------- | -----------------------------------------------------------------------------------------------



| | A. | Debt Securities
| | -- | ---------------



Not
applicable.



| | B. | Warrants and Rights
| | -- | -------------------



Not applicable



| | C. | Other Securities
| | -- | ----------------



Not applicable



| | D. | American
                                         Depositary Shares
| | -- | -------------------------------------------------------------------



Each of our American Depositary Shares,
or ADSs, represents 10 of our ordinary shares. Our ADSs trade on The Nasdaq Capital Market.



The form of the deposit agreement for
the ADSs and the form of American Depositary Receipt (ADR) that represents an ADS have been incorporated by reference as exhibits
to this Annual Report on Form 20-F. Copies of the deposit agreement are available for inspection at the principal office of The
Bank of New York Mellon, located at 101 Barclay Street, New York, New York 10286, and at the principal office of our custodians,
Bank Leumi Le-Israel, 34 Yehuda Halevi St., Tel-Aviv 65546, Israel and Bank Hapoalim B.M., 104 Hayarkon Street, Tel Aviv 63432,
Israel.



102







Fees and Expenses





|Persons depositing or
    withdrawing shares or American Depositary Share holders must pay:                                                                                                                                                    |  | For:                                                                                                                                                                                                                                                                                   
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|$5.00 (or less) per 100 American Depositary Shares (or portion
    of 100 American Depositary Shares)                                                                                                                                          |  | ·   Issuance
        of American Depositary Shares, including issuances resulting from a distribution of shares or rights or other property
        ·   Cancellation
        of American Depositary Shares for the purpose of withdrawal, including if the deposit agreement terminates
|$0.05 (or less) per American Depositary Share                                                                                                                                                                                                  |  | ·Any
    cash distribution to American Depositary Share holders                                                                                                                                                                                                                        
|A fee equivalent to the fee that would be payable if securities
    distributed to you had been shares and the shares had been deposited for issuance of American Depositary Shares                                                            |  | ·Distribution
    of securities distributed to holders of deposited securities which are distributed by the depositary to American Depositary
    Share holders                                                                                                                        
|$0.05 (or less) per American Depositary Shares per calendar
    year                                                                                                                                                                           |  | ·Depositary
    services                                                                                                                                                                                                                                                               
|Registration or transfer fees                                                                                                                                                                                                                  |  | ·Transfer
    and registration of shares on our share register to or from the name of the depositary or its agent when you deposit or withdraw
    shares                                                                                                                              
|Expenses of the depositary                                                                                                                                                                                                                     |  | ·   Cable,
        telex and facsimile transmissions (when expressly provided in the deposit agreement)
        ·   converting
        foreign currency to U.S. dollars                                                                                                                
|Taxes and other governmental charges the depositary or the custodian
    have to pay on any American Depositary Share or share underlying an American Depositary Share, for example, stock transfer
    taxes, stamp duty or withholding taxes |  | ·As
    necessary                                                                                                                                                                                                                                                                      
|Any charges incurred by the depositary or its agents for servicing
    the deposited securities                                                                                                                                                |  | ·As
    necessary                                                                                                                                                                                                                                                                      





The depositary collects its fees for delivery
and surrender of American Depositary Shares directly from investors depositing shares or surrendering American Depositary Shares
for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to
investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees.
The depositary may collect its annual fee for depositary services by deduction from cash distributions or by directly billing
investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to
provide fee-attracting services until its fees for those services are paid.



From time to time, the depositary may
make payments to us to reimburse and/or share revenue from the fees collected from American Depositary Share holders, or waive
fees and expenses for services provided, generally relating to costs and expenses arising out of establishment and maintenance
of the American Depositary Share program. In performing its duties under the deposit agreement, the depositary may use brokers,
dealers or other service providers that are affiliates of the depositary and that may earn or share fees or commissions.



103







| | ITEM 13. | DEFAULTS, DIVIDEND
                                         ARREARAGES AND DELINQUENCIES
| | -------- | ----------------------------------------------------------------------------------------



Not
applicable



| | ITEM 14. | MATERIAL MODIFICATIONS
                                         TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
| | -------- | ---------------------------------------------------------------------------------------------------------------------



Not applicable



| | ITEM 15. | CONTROLS AND
                                         PROCEDURES
| | -------- | ----------------------------------------------------------------



| | (a) | Disclosure
                                         Controls and Procedures
| | --- | ---------------------------------------------------------------------------



We performed an evaluation of the effectiveness
of our disclosure controls and procedures that are designed to ensure that information required to be disclosed on Form 20-F and
filed with the Securities and Exchange Commission is recorded, processed, summarized and reported timely within the time period
specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities
Exchange Act of 1934, as amended, is accumulated and communicated to the issuer’s management, including its principal executive
and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding
required disclosure. There can be no assurance that our disclosure controls and procedures will detect or uncover all failures
of persons within the company to disclose information otherwise required to be set forth in our reports. Nevertheless, our disclosure
controls and procedures are designed to provide reasonable assurance of achieving the desired control objectives. Based on our
evaluation, our management, including our Chief Executive Officer and Deputy CEO Finance and Operations, have concluded that our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d) - 15(e) of the Securities Exchange Act of 1934, as
amended) as of the end of the period covered by this report are effective at such reasonable assurance level.



| | (b) | Management’s
                                         Annual Report on Internal Control over Financial Reporting
| | --- | ----------------------------------------------------------------------------------------------------------------



Our management, under the supervision
of our chief executive officer and Deputy CEO Finance and Operations, is responsible for establishing and maintaining adequate
internal control over our financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act of 1934, as amended.
The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. Internal control over financial reporting includes policies and procedures that:



| |  ̈ | pertain to the maintenance of records that in reasonable detail
    accurately and fairly reflect our transactions and asset dispositions;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------



| |  ̈ | provide reasonable assurance that transactions are recorded
    as necessary to permit the preparation of our financial statements in accordance with generally accepted accounting principles;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  ̈ | provide reasonable assurance that receipts and expenditures
    are made only in accordance with authorizations of our management and board of directors (as appropriate); and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  ̈ | provide reasonable assurance regarding the prevention or timely
    detection of unauthorized acquisition, use or disposition of assets that could have a material effect on our financial statements.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Due to its inherent limitations, internal
controls over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.



Under the supervision and with the participation
of our management, including our chief executive officer and Deputy CEO Finance and Operations, we assessed the effectiveness
of our internal control over financial reporting as of December 31, 2013 based on the framework for Internal Control-Integrated
Framework set forth by The Committee of Sponsoring Organizations of the Treadway Commission (COSO)(1992). Based on our assessment
and this framework, our management concluded that the Company's internal control over financial reporting were effective as of
December 31, 2013.



104







| | (c) | Attestation
                                         Report of Registered Public Accounting Firm
| | --- | ------------------------------------------------------------------------------------------------



Not applicable.



| | (d) | Changes in
                                         Internal Controls over Financial Reporting
| | --- | ----------------------------------------------------------------------------------------------



There were no changes in our internal
control over financial reporting that occurred during the year ended December 31, 2013 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.



| | ITEM 16. | [RESERVED]
| | -------- | ----------



| | ITEM 16A. | AUDIT
                                         COMMITTEE FINANCIAL EXPERT
| | --------- | -------------------------------------------------------------------------



Our board of directors
has determined that Aliza Rotbard, Dan Suesskind and Ofer Tsimchi are audit committee financial experts. Ms. Rotbard, Mr. Tsimchi
and Mr. Suesskind are independent directors for the purposes of the Nasdaq rules.



| | ITEM 16B. | CODE
                                         OF ETHICS
| | --------- | -------------------------------------------------------



As of the date of this Annual Report,
we have adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions. This code of ethics is posted on our website, http://ir.redhillbio.com/governance.cfm



| | ITEM 16C. | PRINCIPAL
                                         ACCOUNTANT FEES AND SERVICES
| | --------- | -------------------------------------------------------------------------------



Fees Paid to Independent Registered
Public Accounting Firm



The following table sets forth, for each
of the years indicated, the aggregate fees billed by our independent registered public accounting firm for professional services.



|                           |  | Year Ended December 31,     |    
|-------------------------- |  | --------------------------- | ---
|                           |  | 2012                        |    
|Services Rendered          |  | (U.S. dollars in thousands) |    
|Audit (1)                  |  |                             | 70 
|Audit related services (2) |  |                             | 157
|Tax (3)                    |  |                             | -  
|Total                      |  |                             | 227



|(1) | Audit fees consist of services that would normally
    be provided in connection with statutory and regulatory filings or engagements, including services that generally only the
    independent accountant can reasonably provide.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Audit related services relate to work regarding a public listing.                                                                                                                                                                   
|(3) | Tax fees relate to tax compliance, planning and advice.                                                                                                                                                                             



Audit Committee Pre-Approval Policies
and Procedures



Our audit committee’s specific responsibilities
in carrying out its oversight of the quality and integrity of the accounting, auditing and reporting practices of the Company
include the approval of audit and non-audit services to be provided by the external auditor. The audit committee approves in advance
the particular services or categories of services to be provided to the Company during the following yearly period and also sets
forth a specific budget for such audit and non-audit services. Additional non-audit services may be pre-approved by the audit
committee.



| | ITEM 16D. | EXEMPTIONS
                                         FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
| | --------- | ----------------------------------------------------------------------------------------------------



Not applicable.



105







| | ITEM 16E. | PURCHASES
                                         OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
| | --------- | ----------------------------------------------------------------------------------------------------------------



Not applicable



| | ITEM 16F. | CHANGE
                                         IN REGISTRANT’S CERTIFYING ACCOUNTANT.
| | --------- | --------------------------------------------------------------------------------------



Not applicable



| | ITEM 16G. | CORPORATE
                                         GOVERNANCE
| | --------- | -------------------------------------------------------------



Nasdaq Stock Market Listing Rules and
Home Country Practices



As a foreign private issuer, we are permitted
to follow Israeli corporate governance practices instead of Nasdaq Marketplace Rules, provided that we disclose which requirements
we are not following and the equivalent Israeli requirement. We rely on this “foreign private issuer exemption” with
respect to the following items:



| | • | Independent Directors - Our board of
    directors includes two external directors in accordance with the Israeli Companies Law, but does not require that a majority
    of our board members be independent as required by the Nasdaq Listing Rules. Furthermore, Israeli law does not require, nor
    do our independent directors conduct, regularly scheduled meetings at which only our independent directors are present.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | • | Shareholder Approval - We
        seek shareholder approval for all corporate actions requiring such approval in accordance with the requirements of the
        Israeli Companies Law, which are different from the shareholder approval requirements under the Nasdaq Listing Rules.
        The NASDAQ Listing Rules require that we obtain shareholder approval for certain dilutive events, such as for the establishment
        or amendment of certain equity-based compensation plans and arrangements, issuances that will result in a change of control
        of a company, certain transactions other than a public offering involving issuances of 20% or more of the shares or voting
        power in a company, and certain acquisitions of the stock or assets of another company involving issuances of 20% or more
        of the shares or voting power in a company or if any director, officer or holder of 5% or more of the shares or voting
        power of the company has a 5% or greater interest in the company or assets to be acquired or consideration to be paid
        and the transaction could result in an increase in the outstanding common shares or voting power by 5% or more.
        
        Under the Israeli Companies Law,
        shareholder approval is required for any transaction, including any grant of equity-based compensation, to a director
        or a controlling shareholder, but is not generally required to establish or amend an equity based compensation plan. Similarly,
        shareholder approval is required for a private placement that is deemed a “extraordinary private placement”
        or that involves a director or controlling shareholder. A “extraordinary private placement” is a private placement
        in which a company issues securities representing 20% or more of its voting rights prior to the issuance and the consideration
        received pursuant to such issuance is not comprised, in whole or in part, solely of cash or securities registered for
        trade on an exchange or which is not made pursuant to market conditions, and as a result of which the shareholdings of
        a 5% holder of the shares or voting rights of the company increases or as a result of which a person will become a holder
        of 5% of the shares or voting rights of the company or a controlling shareholder after the issuance.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | • | Quorum - As permitted under the Israeli Companies
    Law, pursuant to our articles of association, the quorum required for an ordinary meeting of shareholders consists of at least
    two shareholders present in person or by proxy who hold or represent at least 25% of the voting rights of our shares (and
    in an adjourned meeting, with some exceptions, any number of shareholders), instead of 33 1/3% of the issued share capital
    required under the Nasdaq Listing Rules.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        



| | · | Nominations
                                         Committee - As permitted under the Israeli Companies Law, our board of directors
                                         selects director nominees subject to the terms of our articles of association which provide
                                         that incumbent directors are re-nominated for additional terms. Directors are not selected,
                                         or recommended for board of director selection, by independent directors constituting
                                         a majority of the board's independent directors or by a nominations committee comprised
                                         solely of independent directors as required by the Nasdaq Listing Rules.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Otherwise, we comply with the rules generally
applicable to U.S. domestic companies listed on the Nasdaq Stock Market. We may in the future decide to use the foreign private
issuer exemption with respect to some or all of the other Nasdaq Marketplace Rules related to corporate governance. We also comply
with Israeli corporate governance requirements under the Israeli Companies Law applicable to public companies.



106







| | ITEM 16H. | MINE
                                         SAFETY DISCLOSURE
| | --------- | ---------------------------------------------------------------



Not applicable



| | ITEM 17. | FINANCIAL STATEMENTS
| | -------- | --------------------



Not applicable



| | ITEM 18. | FINANCIAL STATEMENTS
| | -------- | --------------------



The financial statements required by this
item are found at the end of this Annual Report, beginning on page F-1.



| | ITEM 19. | EXHIBITS
| | -------- | --------



See Exhibit Index on page 110.



107







Glossary of Industry Terms



Certain standards and
other terms specific to our industry that are used in this Annual Report are defined below:



5-HT3 family receptor inhibitors
- play a role in mediating nausea and vomiting, and as such, demonstrate anti-emetic efficacy.



Bioequivalence - the absence of
a significant difference in the rate and extent to which the active ingredient or active moiety in pharmaceutical equivalents
or pharmaceutical alternatives becomes available at the site of drug action when administered at the same molar dose under similar
conditions in an appropriately designed study. To be considered “bioequivalent”, certain standards specified by the
US Food and Drug Administration must be met.



Carvedilol- a
non-selective beta blocker/alpha-1 blocker indicated in the treatment of hypertension and/or congestive heart failure (CHF).



cGMP
- Current Good Manufacturing Practice - Standards, procedures and guidelines
designed for production quality control.



Clinical trial material (CTM) manufacturing- manufacturing of study supplies provided by the study sponsor to the clinical investigator.



CRO - a Contract Research Organization,
also called a clinical research organization (CRO) is a service organization that provides outsourced pharmaceutical research
services.



H. pylori (Helicobacter
pylori)- a Gram-negative bacterium found in the stomach. It was identified in 1982 by Dr. Barry Marshall and Dr. Robin
Warren and is associated with peptic ulcer disease and development of gastric cancer.



IND - Investigational New Drug-
a status assigned by the Food and Drug Administration to a drug before allowing its use in humans, so that experimental clinical
trials may be conducted.



MAP bacterium (Mycobacterium avium
subspecies paratuberculosis (MAP)) - an obligate pathogenic bacterium in the genus Mycobacterium.



NDA - New Drug Application -an
application by drug sponsors to the Food and Drug Administration for approval of a new pharmaceutical for sale and marketing in
the U.S.



Ondansetron - Ondansetron is a
drug in class of medications called serotonin 5-HT3 receptor antagonists. Ondansetron works by blocking the action
of serotonin, a natural substance that may cause nausea and vomiting.



Orphan Drug Status - the designation
of Orphan Drug status to drugs that are in the process of development for the treatment of rare diseases. This status provides
tax reductions and the exclusive rights to the cure for a specific condition for a period of seven years post-approval.



Pivotal Bioequivalence (BE) Clinical
Trial -a study the data from which is submitted to the Food and Drug Administration in support of a marketing application
of a test drug that is being compared to a referenced existing (already approved) drug. Sufficient similarity between the test
and the reference drug is required, according to certain standards specified by the Food and Drug Administration, which must be
met.



108







Stability Testing- as part of the
cGMP regulations, the Food and Drug Administration requires that drug products bear an expiration date determined by appropriate
stability testing. The stability of drug products needs to be evaluated over time in the same container-closure system in which
the drug product is marketed.



Triptans- serotonin 5-hydroxytryptamine (5-HT) receptor agonists drugs used for the treatment
of migraine.



Rizatripan - a serotonin 5-HT 1B/1D
receptor agonist of the triptan class of drugs.



Mycobacterium avium subspecies paratuberculosis
(MAP) - MAP is the causative agent of Johne disease, a chronic granulomatous ileitis occurring mainly in ruminants. MAP has
been incriminated as the cause of Crohn disease in humans.



109







REDHILL BIOPHARMA LTD.

2013 FINANCIAL STATEMENTS



TABLE OF CONTENTS



|                                                        | Page
|------------------------------------------------------- | ----
|                                                        |     
|Report of Independent Registered Public Accounting Firm | F-2 
|                                                        |     
|Statements of Comprehensive Loss                        | F-3 
|                                                        |     
|Statements of Financial Position                        | F-4 
|                                                        |     
|Statements of Changes in Equity                         | F-5 
|                                                        |     
|Statements of Cash Flows                                | F-7 
|                                                        |     
|Notes to the Financial Statements                       | F-8 


































REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders
of

REDHILL BIOPHARMA LTD.



We have audited the accompanying statements
of financial position of RedHill Biopharma Ltd. (the "Company") as of December 31, 2013 and 2012 and the related statements
of comprehensive loss, changes in equity and cash flows for each of the three years in the period ended on December 31, 2013.
These financial statements are the responsibility of the Company's Board of Directors and management. Our responsibility is to
express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the Company's Board of Directors and management, as
well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.



In our opinion, the accompanying financial
statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31,
2013 and 2012 and the results of its operations, changes in equity and cash flows for each of the three years in the period ended
on December 31, 2013, in accordance with International Financial Reporting Standards ("IFRS") as issued by the International
Accounting Standards Board ("IASB").



|Tel-Aviv, Israel  | /s/ Kesselman & Kesselman                                    
|----------------- | -------------------------------------------------------------
|February 24, 2014 | Certified Public Accountants (Isr.)                          
|                  | A member firm of PricewaterhouseCoopers International Limited



Kesselman & Kesselman, Trade Tower,
25 Hamered Street, Tel-Aviv 6812508, Israel,

P.O Box 50005 Tel-Aviv 6150001 Telephone:
+972 -3- 7954555, Fax:+972 -3- 7954556, www.pwc.com/il



F-2







REDHILL BIOPHARMA
LTD.

STATEMENTS OF COMPREHENSIVE LOSS



|                                                               |  |      |  | Year ended December 31    |        
|-------------------------------------------------------------- |  | ---- |  | ------------------------- | -------
|                                                               |  | Note |  | 2013                      |        
|                                                               |  |      |  | U.S. dollars in thousands |        
|                                                               |  |      |  |                           |        
|REVENUE                                                        |  |      |  |                           | 12     
|RESEARCH
    AND DEVELOPMENT EXPENSES, net                     |  | 17   |  |                           | (8,100 
|GENERAL AND ADMINISTRATIVE EXPENSES                            |  | 18   |  |                           | (2,684 
|OPERATING LOSS                                                 |  |      |  |                           | (10,772
|FINANCIAL INCOME                                               |  |      |  |                           | 158    
|FINANCIAL EXPENSES                                             |  |      |  |                           | (14    
|FINANCIAL
    INCOME (EXPENSES),net                            |  | 19   |  |                           | 144    
|LOSS AND COMPREHENSIVE LOSS                                    |  |      |  |                           | (10,628
|LOSS
    PER ORDINARY SHARE - basic and diluted (U.S. dollars) |  | 20   |  |                           | (0.17  



The accompanying notes are an integral
part of these financial statements.



F-3







REDHILL BIOPHARMA LTD.

STATEMENTS OF FINANCIAL POSITION



|                                                      |  |      |  | December 31               |        
|----------------------------------------------------- |  | ---- |  | ------------------------- | -------
|                                                      |  | Note |  | 2013                      |        
|                                                      |  |      |  | U.S. dollars in thousands |        
|CURRENT ASSETS:                                       |  |      |  |                           |        
|Cash and cash equivalents                             |  | 5    |  |                           | 11,851 
|Bank deposits                                         |  |      |  |                           | 19     
|Financial assets at fair value through profit or loss |  | 6    |  |                           | 243    
|Prepaid expenses and receivables                      |  | 7    |  |                           | 488    
|                                                      |  |      |  |                           | 12,601 
|NON-CURRENT ASSETS:                                   |  |      |  |                           |        
|Restricted bank deposits                              |  |      |  |                           | 81     
|Fixed assets                                          |  | 8    |  |                           | 103    
|Intangible assets                                     |  | 9    |  |                           | 1,555  
|                                                      |  |      |  |                           | 1,739  
|TOTAL ASSETS                                          |  |      |  |                           | 14,340 
|                                                      |  |      |  |                           |        
|CURRENT LIABILITIES -                                 |  |      |  |                           |        
|Accounts payable and accrued expenses                 |  | 11   |  |                           | 2,415  
|                                                      |  |      |  |                           |        
|COMMITMENTS                                           |  | 13   |  |                           |        
|                                                      |  |      |  |                           |        
|EQUITY:                                               |  | 15   |  |                           |        
|Ordinary shares                                       |  |      |  |                           | 174    
|Ordinary shares to be issued                          |  |      |  |                           | -      
|Additional paid-in capital                            |  |      |  |                           | 43,144 
|Warrants                                              |  |      |  |                           | 1,867  
|Accumulated deficit                                   |  |      |  |                           | (33,260
|TOTAL EQUITY                                          |  |      |  |                           | 11,925 
|                                                      |  |      |  |                           |        
|TOTAL LIABILITIES AND EQUITY                          |  |      |  |                           | 14,340 



The accompanying notes are an integral
part of these financial statements.



F-4







(Continued) - 1

REDHILL BIOPHARMA LTD.

STATEMENTS OF CHANGES IN EQUITY



|                                                                         |  |          |     |  | Ordinary                  |  |       | Convertible |  |  | Additional |   |  |          |        |   |             |  |       |              | 
|------------------------------------------------------------------------ |  | -------- | --- |  | ------------------------- |  | ----- | ----------- |  |  | ---------- | - |  | -------- | ------ | - | ----------- |  | ----- | ------------ | 
|                                                                         |  | Ordinary |     |  | shares to be              |  |       | preferred   |  |  | paid-in    |   |  |          |        |   | Accumulated |  |       |              | 
|                                                                         |  | shares   |     |  | issued                    |  |       | shares      |  |  | capital    |   |  | Warrants |        |   | deficit     |  |       | Total equity | 
|                                                                         |  |          |     |  | U.S. dollars in thousands | 
|BALANCE AT JANUARY 1, 2011                                               |  |          | 3   |  |                           |  | -     |             |  |  | 2          |   |  |          | 925    |   |             |  | 45    |              | 
|CHANGES DURING THE YEAR ENDED DECEMBER 31, 2011:                         |  |          |     |  |                           |  |       |             |  |  |            |   |  |          |        |   |             |  |       |              | 
|Comprehensive loss                                                       |  |          | -   |  |                           |  | -     |             |  |  | -          |   |  |          | -      |   |             |  | -     |              | 
|Exercise of warrants into convertible preferred shares                   |  |          | -   |  |                           |  | -     |             |  |  | *          |   |  |          | 629    |   |             |  | (45   | )            | 
|Conversion of convertible preferred shares into ordinary shares          |  |          | 2   |  |                           |  | -     |             |  |  | (2         | ) |  |          |        |   |             |  |       |              | 
|Distribution of bonus shares                                             |  |          | 42  |  |                           |  | -     |             |  |  |            |   |  |          | (42    | ) |             |  |       |              | 
|Conversion of mandatory convertible loans to equity                      |  |          | 53  |  |                           |  | -     |             |  |  | -          |   |  |          | 17,381 |   |             |  | 1,749 |              | 
|Issuance of ordinary shares and warrants under public offering           |  |          | 39  |  |                           |  | -     |             |  |  | -          |   |  |          | 11,352 |   |             |  | 1,271 |              | 
|Exercise of warrants into ordinary shares                                |  |          | 3   |  |                           |  | -     |             |  |  | -          |   |  |          | 923    |   |             |  | (334  | )            | 
|Share-based compensation to employees and service providers              |  |          | -   |  |                           |  | -     |             |  |  | -          |   |  |          | -      |   |             |  | -     |              | 
|BALANCE AT DECEMBER 31, 2011                                             |  |          | 142 |  |                           |  | -     |             |  |  | -          |   |  |          | 31,168 |   |             |  | 2,686 |              | 
|BALANCE AT JANUARY 1, 2012                                               |  |          | 142 |  |                           |  | -     |             |  |  | -          |   |  |          | 31,168 |   |             |  | 2,686 |              | 
|CHANGES DURING THE YEAR ENDED DECEMBER 31, 2012:                         |  |          |     |  |                           |  |       |             |  |  |            |   |  |          |        |   |             |  |       |              | 
|Comprehensive loss                                                       |  |          | -   |  |                           |  | -     |             |  |  | -          |   |  |          | -      |   |             |  | -     |              | 
|Exercise of options into ordinary shares                                 |  |          | 1   |  |                           |  | -     |             |  |  | -          |   |  |          | 301    |   |             |  | -     |              | 
|Cash receipt on account of ordinary shares and warrants, see note 15a(6) |  |          | -   |  |                           |  | 5,661 |             |  |  | -          |   |  |          | -      |   |             |  | 587   |              | 
|Settlement of the royalty obligations, see note 12                       |  |          | -   |  |                           |  | 2,359 |             |  |  | -          |   |  |          | -      |   |             |  | -     |              | 
|Share-based compensation to employees and service providers              |  |          | -   |  |                           |  | -     |             |  |  | -          |   |  |          | -      |   |             |  | -     |              | 
|BALANCE AT DECEMBER 31, 2012                                             |  |          | 143 |  |                           |  | 8,020 |             |  |  | -          |   |  |          | 31,469 |   |             |  | 3,273 |              | 



* Represents
amount less than $1 thousand.



F-5







(Concluded) - 2

REDHILL BIOPHARMA LTD.

STATEMENTS OF CHANGES IN EQUITY



|                                                                  |  |                         |     |  | Ordinary  |  |        | Additional |  |  |          |  |  |             |        |   |              | 
|----------------------------------------------------------------- |  | ----------------------- | --- |  | --------- |  | ------ | ---------- |  |  | -------- |  |  | ----------- | ------ | - | ------------ | 
|                                                                  |  | Ordinary                |     |  | shares to |  |        | paid-in    |  |  |          |  |  | Accumulated |        |   |              | 
|                                                                  |  | shares                  |     |  | be issued |  |        | capital    |  |  | Warrants |  |  | deficit     |        |   | Total equity | 
|                                                                  |  | US dollars in thousands |    
|                                                                  |  |                         |    
|BALANCE AT JANUARY 1, 2013                                        |  |                         | 143 |  |           |  | 8,020  |            |  |  | 31,469   |  |  |             | 3,273  |   |              | 
|CHANGES DURING THE YEAR ENDED DECEMBER 31, 2013:                  |  |                         |     |  |           |  |        |            |  |  |          |  |  |             |        |   |              | 
|Comprehensive loss                                                |  |                         | -   |  |           |  | -      |            |  |  | -        |  |  |             | -      |   |              | 
|Exercise of warrants and options into ordinary shares, net        |  |                         | 7   |  |           |  | -      |            |  |  | 3,311    |  |  |             | (1,138 | ) |              | 
|Issuance of ordinary shares and warrants, see notes 15a(6) and 12 |  |                         | 24  |  |           |  | (8,020 | )          |  |  | 8,087    |  |  |             | 9      |   |              | 
|Warrants expiration                                               |  |                         | -   |  |           |  | -      |            |  |  | 277      |  |  |             | (277   | ) |              | 
|Share-based compensation to employees and service providers       |  |                         | -   |  |           |  | -      |            |  |  | -        |  |  |             | -      |   |              | 
|BALANCE AT DECEMBER 31, 2013                                      |  |                         | 174 |  |           |  | -      |            |  |  | 43,144   |  |  |             | 1,867  |   |              | 



The accompanying notes are an integral
part of these financial statements.



F-6







REDHILL BIOPHARMA LTD.

STATEMENTS OF CASH FLOWS



|                                                                                   |  | Year ended December 31    |        
|---------------------------------------------------------------------------------- |  | ------------------------- | -------
|                                                                                   |  | 2013                      |        
|                                                                                   |  | U.S. dollars in thousands |        
|CASH FLOWS FROM OPERATING ACTIVITIES:                                              |  |                           |        
|Loss                                                                               |  |                           | (10,628
|Adjustments in respect of income and expenses not involving cash flows:            |  |                           |        
|Share-based compensation to employees and service providers                        |  |                           | 1,255  
|Fair value losses on mandatory convertible loans                                   |  |                           | -      
|Depreciation                                                                       |  |                           | 24     
|Fair value losses (gains) on financial assets at fair value through profit or loss |  |                           | (54    
|Revaluation of bank deposits                                                       |  |                           | (16    
|Accretion and settlement of royalty obligations to investors                       |  |                           | -      
|Exchange differences in respect of cash and cash equivalents                       |  |                           | (64    
|Changes in asset and liability items:                                              |  |                           |        
|Decrease (increase) in prepaid expenses and receivables                            |  |                           | (290   
|Increase in accounts payable and accrued expenses                                  |  |                           | 1,337  
|Net cash used in operating activities                                              |  |                           | (8,436 
|CASH FLOWS FROM INVESTING ACTIVITIES:                                              |  |                           |        
|Purchase of fixed assets                                                           |  |                           | (14    
|Purchase of intangible assets                                                      |  |                           | (210   
|Changes in investment in bank deposits                                             |  |                           | 477    
|Purchase of financial assets at fair value through profit or loss                  |  |                           | -      
|Proceeds from sale of financial assets at fair value through profit or loss        |  |                           | 876    
|Net cash provided by (used in) investing activities                                |  |                           | 1,129  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                              |  |                           |        
|Proceeds from issuance of ordinary shares and warrants, net                        |  |                           | 100    
|Exercise of warrants and options into shares, net of expenses                      |  |                           | 2,180  
|Net cash provided by financing activities                                          |  |                           | 2,280  
|INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                   |  |                           | (5,027 
|EXCHANGE DIFFERENCES ON CASH AND CASH EQUIVALENTS                                  |  |                           | 64     
|BALANCE OF CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                          |  |                           | 16,814 
|BALANCE OF CASH AND CASH EQUIVALENTS AT END OF YEAR                                |  |                           | 11,851 
|SUPPLEMENTARY INFORMATION ON INTEREST RECEIVED IN CASH                             |  |                           | 30     
|SUPPLEMENTARY INFORMATION ON FINANCING ACTIVITIES NOT INVOLVING CASH FLOWS:        |  |                           |        
|Settlement of the royalty obligations                                              |  |                           | -      
|Conversion of mandatory convertible loans                                          |  |                           | -      



The accompanying notes are an integral
part of these financial statements.



F-7







REDHILL BIOPHARMA LTD.

NOTES TO THE FINANCIAL STATEMENTS



NOTE 1 - GENERAL INFORMATION:



| | a. | General
| | -- | -------



RedHill Biopharma Ltd. (the
"Company") was incorporated in Israel on August 3, 2009 and is active in the pharmaceutical industry. The Company is
focused primarily on the development and acquisition of therapeutic candidates (the "Drugs"). In particular, the Company
acquires or in-licenses and develops patent-protected new formulations and combinations of existing drugs in advanced stages of
development. Additionally, the Company's strategy is to commercialize these Drugs (in cooperation with and/or through pharmaceutical
and biotechnology companies) and to acquire rights in additional drugs.



The Company's primary therapeutic
focus is on inflammatory and gastrointestinal (GI) diseases, including cancers and related conditions.



In February 2011, the Company
listed its securities on the Tel-Aviv Stock Exchange (“TASE”) and they have been traded on the TASE since then. Since
December 2012, the Company's American Depositary Shares (“ADSs”) have been listed on the NASDAQ Capital Market (“NASDAQ”).



The Company's registered address
is at 21 Ha'arba'a St, Tel-Aviv, Israel.



The Company is still engaged
in the research and development of its therapeutic candidates. Accordingly, the Company is unable to estimate if and when its business
will generate positive cash flow. Through December 31, 2013, the Company had accumulated an operating loss and its activities have
been funded through public and private offerings of the Company's securities.



The Company plans to fund its
future operations through commercialization of its therapeutic candidates, out-licensing certain programs and raising additional
capital. The Company's current cash resources are not sufficient to complete the research and development of all of the Company's
therapeutic candidates. Management expects that the Company will incur more losses as it continues to focus its resources on advancing
its therapeutic candidates based on a prioritized plan that will result in negative cash flows from operating activities. The Company
believes its existing capital resources should be sufficient to fund its current and planned operations for at least the next 12
months. See subsequent event note 22 for capital raised in January 2014.



If the Company is unable to
commercialize or out-license its therapeutic candidates or obtain future financing, the Company may be forced to delay, reduce
the scope of, or eliminate one or more of its research, development programs or commercialization related to the therapeutic candidates,
any of which may have a material adverse effect on the Company's business, financial condition and results of operations.



| | b. | Approval of financial statements
| | -- | --------------------------------



These financial statements were
approved by the Board of Directors on February 24, 2014.



F-8







REDHILL BIOPHARMA LTD.

NOTES TO THE FINANCIAL STATEMENTS (continued)



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:



| | a. | Basis for presentation of the financial statements
| | -- | --------------------------------------------------



The financial statements of the
Company as of December 31, 2013 and 2012 and for each of the three years in the period ended on December 31, 2013 have been prepared
in accordance with International Financial Reporting Standards, ("IFRS"), as issued by the International Accounting Standards
Board ("IASB").



The significant accounting policies
described below have been applied consistently in relation to all the periods presented, unless otherwise stated.



The financial statements have
been prepared under the historical cost convention, subject to adjustments in respect of revaluation of financial assets and financial
liabilities at fair value through profit or loss.



The preparation of financial statements
in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its
judgment in the process of applying the Company’s accounting policies. The areas involving a higher degree of judgment or
complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in note 3.
Actual results could differ significantly from those estimates and assumptions.



| | b. | Translation of foreign currency balances and transactions:
| | -- | ----------------------------------------------------------



| | 1) | Functional and presentation currency
| | -- | ------------------------------------



Items included in the financial
statements are measured using the currency of the primary economic environment in which the Company operates (the “Functional
Currency”). The financial statements are presented in U.S. dollars, which is the Company’s functional and presentation
currency.



| | 2) | Transactions and balances
| | -- | -------------------------



Foreign currency transactions
in currencies different from the Functional Currency (hereafter foreign currency, mostly New Israeli Shekels ("NIS"))
are translated into the Functional Currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange
differences resulting from the settlement of such transactions and from the translation at period-end exchange rates of monetary
assets and liabilities denominated in foreign currencies are recorded to the statement of comprehensive loss among financing income
or expenses.



| | c. | Cash and cash equivalents
| | -- | -------------------------



Cash and cash equivalents include
cash on hand and unrestricted short-term bank deposits with maturities of three months or less.



F-9







REDHILL BIOPHARMA LTD.

NOTES TO THE FINANCIAL STATEMENTS (continued)



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES(continued):



| | d. | Fixed assets
| | -- | ------------



Fixed assets are recognized
as assets only if (a) it is probable that future economic benefits associated with the item will flow to the Company and (b) the
cost of the item can be measured reliably.



Fixed assets items are initially
recognized at acquisition cost. Fixed assets items are stated at cost less accumulated depreciation and impairment losses.

Depreciation is computed by
the straight- line method, to reduce the cost of fixed assets to their residual value over their estimated useful lives as follows:



|                               |  | %   
|------------------------------ |  | ----
|Computers                      |  | 33  
|Office furniture and equipment |  | 8-15



Leasehold improvements are depreciated
by the straight-line method over the shorter of the term of the lease or the estimated useful life of the improvements.

The assets’ residual values,
useful lives and depreciation method are reviewed, and adjusted, if appropriate, at least once a year.



| | e. | Research and development:
| | -- | -------------------------



| | 1) | Research and development assets acquired by the Company, the development of which has not been
completed yet, are stated at cost and are not amortized; these assets are tested for impairment once a year. At the time these
assets will be available for use, they will be amortized by the straight line method over their useful lives.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2) | Research expenses are charged to profit or loss as incurred. An intangible asset arising from development
of the Company's Drugs is recognized if all of the following conditions are met:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | It is technically feasible to complete the intangible assets so that it will be available for use;
| | - | --------------------------------------------------------------------------------------------------

| | · | Management intends to complete the intangible asset and use it or sell it;
| | - | --------------------------------------------------------------------------

| | · | There is an ability to use or sell the intangible asset;
| | - | --------------------------------------------------------

| | · | It can be demonstrated how the intangible asset will generate probable future economic benefits;
| | - | ------------------------------------------------------------------------------------------------

| | · | Adequate technical, financial and other resources to complete the development and to use or sell
the intangible asset are available; and costs associated with the intangible asset during development can be measured reliably.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-10







REDHILL BIOPHARMA LTD.

NOTES TO THE FINANCIAL STATEMENTS (continued)



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES(continued):



Other development costs that do
not meet the above criteria are recognized as expenses as incurred. Development costs previously recognized as an expense are not
recognized as an asset in a subsequent period.



As of December
31, 2013 and 2012, the Company has not yet capitalized development costs.



| | 3) | Amounts paid to purchase intellectual property of drugs are capitalized and carried as intangible
assets. Amounts due for future payment, based on agreements, will be accrued upon reaching the relevant milestones.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



4) Research
and development costs for the performance of clinical trials and manufacturing by subcontractors are recognized as incurred.



| | f. | Impairment of non-financial assets
| | -- | ----------------------------------



Depreciable assets are tested
for impairment if any events have occurred or changes in circumstances have taken place, which might indicate that their carrying
amounts may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds
its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use.
For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash
flows (cash-generating units). Nonfinancial assets that were subject to impairment are reviewed for possible reversal of the impairment
recognized in respect thereof at each date of statement of financial position.



Research and development assets,
the development of which has not been completed yet, are not amortized and are tested for impairment on an annual basis.



| | g. | Financial assets:
| | -- | -----------------



| | 1) | Classification
| | -- | --------------



The financial assets of the Company
are classified into the following categories: financial assets at fair value through profit or loss and loans and receivables.
The classification depends on the purpose for which the financial assets were acquired. The Company's management determines the
classification of its financial assets at initial recognition.



| | a) | Financial assets at fair value through profit or loss
| | -- | -----------------------------------------------------



This category includes financial
assets that are managed and their performance is evaluated on a fair value basis. Thus, upon their initial recognition, these assets
are designated by management at fair value through profit or loss. Assets in this category are classified as current assets if
expected to be settled within 12 months; otherwise, they are classified as noncurrent.



F-11







REDHILL BIOPHARMA LTD.

NOTES TO THE FINANCIAL STATEMENTS (continued)



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES(continued):



| | b) | Loans and receivables
| | -- | ---------------------



Loans and receivables are
non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included
in current assets, except for maturities greater than 12 months after the statement of financial position date (for which they
are classified as noncurrent assets). The loans and receivables of the Company are comprised of "receivables", "cash
and cash equivalents" and "bank deposits" in the statement of financial position.



| | 2) | Recognition and measurement
| | -- | ---------------------------



Regular purchases and sales of
financial assets are recognized on the trade date, which is the date on which the asset is delivered to the Company or delivered
by the Company. Investments are initially recognized at fair value plus transaction costs for all financial assets not carried
at fair value through profit or loss.



Financial assets measured at fair
value through profit or loss are initially recognized at fair value, and transaction costs are expensed in profit or loss. Financial
assets are derecognized when the rights to receive cash flows from the investments have expired or have been transferred and the
Company has transferred substantially all risks and rewards of ownership. Financial assets at fair value through profit or loss
are subsequently carried at fair value. Loans and receivables are measured in subsequent periods at amortized cost using the effective
interest method.



Gains or losses arising from changes
in the fair value of financial assets at fair value through profit or loss are presented in the statement of comprehensive loss
under "financial income or expenses".



| | h. | Trade payables
| | -- | --------------



Trade payables are obligations
to pay for goods or services that have been acquired from suppliers in the ordinary course of business. Accounts payable are classified
as current liabilities if payment is due within one year or less, otherwise they are presented as noncurrent liabilities.



Trade payables are recognized
initially at fair value and subsequently measured at amortized cost using the effective interest method.



| | i. | Share capital
| | -- | -------------



The Company's ordinary shares
are classified as the Company's share capital. Incremental costs directly attributed to issuance of new shares or warrants are
presented under equity as a deduction from the proceeds of issuance.



F-12







REDHILL BIOPHARMA LTD.

NOTES TO THE FINANCIAL STATEMENTS (continued)



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES(continued):



| | j. | Employee benefits:
| | -- | ------------------



| | 1) | Pension and retirement benefit obligations:
| | -- | -------------------------------------------



In any matter related to payment
of pension and severance pay to employees to be dismissed or to retire from the Company, the Company operates in accordance with
labor laws.



Labor laws and agreements in
Israel and the Company's practice require the Company to pay severance pay and/or pensions to employees dismissed or retiring from
their employer in certain circumstances.



The Company has a severance
pay plan in accordance with Section 14 of the Israeli Severance Pay Law with the plan handled as a defined contribution plan. According
to the plan, the Company regularly makes payments to severance pay or pension funds without having a legal or constructive obligation
to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee
service in the current and prior periods. Contributions for severance pay or pension are recognized as employee benefit expenses
when they are due commensurate with receipt of work services from the employee and no further provision is required in the financial
statements.



| | 2) | Vacation and recreation pay
| | -- | ---------------------------



Under Israeli law, each employee
is entitled to vacation days and recreation pay, both computed on an annual basis. The entitlement is based on the period of employment.
The Company records a liability and an expense for vacation and recreation fees, based on the benefit accumulated for each employee.



| | k. | Share-based payments
| | -- | --------------------



The Company operates a number
of equity-settled, share-based compensation plans to employees (as defined in IFRS 2 "Share-Based Payments") and service
providers. As part of the plans, the Company grants employees and service providers, from time to time and at its discretion, options
to purchase Company shares. The fair value of the employee and service provider services received in exchange for the grant of
the options is recognized as an expense in profit or loss and is carried to accumulated deficit under equity. The total amount
recognized as an expense over the vesting period of the options (the period during which all vesting conditions are expected to
be met) was determined as follows:



Share-based
payments to employee by reference to the fair value of the options granted at date of grant.

Share-based
payments to service providers by reference to the fair value of the service provided.



F-13







REDHILL BIOPHARMA LTD.

NOTES TO THE
FINANCIAL STATEMENTS (continued)



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES(continued):



Vesting conditions are included
in assumptions about the number of options that are expected to vest. The total expense is recognized over the vesting period,
which is the period over which all of the specified vesting conditions are to be satisfied.



At the end of each reporting
period, the Company revises its estimates of the number of options that are expected to vest based on the nonmarket vesting conditions.
The Company recognizes the impact of the revision to original estimates, if any, in profit or loss, with a corresponding adjustment
to accumulated deficit.



When exercising options, the
Company issues new shares, with proceeds, less directly-attributable transaction costs, recognized as share capital (par value)
and share premium.



| | l. | Revenue recognition
| | -- | -------------------



Revenue is measured at the fair
value of the consideration received or receivable for providing rights to use the Company's intangible assets. Revenue is presented
net of VAT, returns, credits and discounts.



Revenue is recognized when the
amount of revenue can be reliably measured; it is probable that future economic benefits will flow to the Company and the stage
of completion of a transaction as of the reporting period end can be measured reliably. The amount of revenue is not considered
to be reliably measurable until all conditions associated with the transaction are settled.



| | m. | Leases
| | -- | ------



Leases in which a significant
portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under
operating leases are charged to the statement of comprehensive loss on a straight-line basis over the period of the lease.



| | n. | Loss per ordinary share
| | -- | -----------------------



The computation of basic loss
per share is based, as a general rule, on the Company's loss divided by the weighted average number of ordinary shares outstanding
during the period.



In calculating the diluted loss
per share, the Company adds to the average number of shares outstanding that was used to calculate the basic loss per share the
weighted average of the number of shares to be issued assuming all shares that have a potentially dilutive effect have been exercised
into shares.



F-14







REDHILL BIOPHARMA LTD.

NOTES TO THE FINANCIAL STATEMENTS (continued)



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES(continued):



| | o. | Deferred taxes
| | -- | --------------



Deferred income tax is recognized,
using the liability method, for temporary differences arising between the tax bases of assets and liabilities and their carrying
amounts in the financial statements.



Deferred income tax is determined
using tax rates (and laws) that have been enacted or substantially enacted by the statement of financial position date and are
expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred
income tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which
the temporary differences can be utilized.



Since the Company is unable
to assess whether it will have taxable income in the foreseeable future, no deferred tax assets were recorded in these financial
statements.



| | p. | Standards and interpretations to existing standards that are not yet in effect and have not
been early adopted by the Company:
| | -- | ------------------------------------------------------------------------------------------------------------------------------



International
Financial Reporting Standard No. 9 "Financial Instruments" (hereafter - IFRS 9)



IFRS 9, ‘Financial instruments’,
addresses the classification, measurement and recognition of financial assets and financial liabilities. IFRS 9 was issued in November
2009 and October 2010. It replaces the parts of IAS 39 that relate to the classification and measurement of financial instruments.
IFRS 9 requires financial assets to be classified into two measurement categories: those measured as at fair value and those measured
at amortized cost. The determination is made at initial recognition. The classification depends on the entity’s business
model for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial liabilities,
the standard retains most of the IAS 39 requirements. The main change is that, in cases where the fair value option is taken for
financial liabilities, the part of a fair value change due to an entity’s own credit risk is recorded in other comprehensive
income rather than the income statement, unless this creates an accounting mismatch. The Company has yet to assess IFRS 9’s
full impact. The Company will also consider the impact of the remaining phases of IFRS 9 when completed by the International Accounting
Standards Board.



F-15











REDHILL BIOPHARMA LTD.

NOTES TO THE FINANCIAL STATEMENTS (continued)



NOTE 3 - CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS



Estimates and judgments are
continually evaluated and are based on historical experience and other factors, including expectations of future events that are
believed to be reasonable under the circumstances.



The Company makes judgments
and estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related
actual results. The material judgments, estimates and assumptions that have a significant risk of causing a material adjustment
to the carrying amounts of assets and liabilities within the next financial year are in respect of impairment of intangible assets:



The Company reviews once a year
or when indications of impairment are present, whether research and development assets are impaired, see also note 2f.



The Company makes judgments
to determine whether indications are present that require reviewing impairment of these intangible assets.



An impairment loss is recognized
for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amounts of cash generating
units are based on Company's estimates as to the development of the Drugs, changes in market scope, market competition and timetables
for regulatory approvals.



NOTE 4 - FINANCIAL INSTRUMENTS
AND FINANCIAL RISK MANAGEMENT:



| | a. | Financial risk management:
| | -- | --------------------------



| | 1) | Financial risk factors
| | -- | ----------------------



The Company’s activities
expose it to a variety of financial risks: market risk (including foreign exchange risk and price risk), credit and interest risks
and liquidity risk. The Company’s overall risk management program focuses on the unpredictability of financial markets and
seeks to minimize potential adverse effects on the Company’s financial performance.



Risk management is performed
by the Deputy Chief Executive Officer, Finance and Operations of the Company, who identifies and evaluates financial risks in close
cooperation with the Company's Chief Executive Officer.



F-16







REDHILL BIOPHARMA LTD.

NOTES TO THE FINANCIAL STATEMENTS (continued)



NOTE 4 - FINANCIAL INSTRUMENTS
AND FINANCIAL RISK MANAGEMENT (continued):



The Company’s finance
department is responsible for carrying out risk management activities in accordance with policies approved by its Board of Directors.
The Board of Directors provides guidelines for overall risk management, as well as policies dealing with specific areas, such as
exchange rate risk, interest rate risk, credit risk, use of financial instruments, and investment of excess cash. In order to minimize
the risk exposure to market risk and credit risk the Company invested the majority of its cash balances in highly-rated bank deposits
with maturities of less than a year, and the remaining balance is invested in high rated marketable securities.



| | (a) | Market risks
| | --- | ------------



Foreign exchange risk - the
Company might be exposed to foreign exchange risk as a result of making payments to employees or service providers and investment
of some liquidity in currencies other than the U.S. dollar (i.e. the functional, reporting and presentation currency of the Company).
The Company manages the foreign exchange risk by aligning the currencies for holding liquidity with the currencies of expected
expenses, based on the expected cash flows of the Company. Had the Functional Currency of the Company been stronger by 5% against
the NIS, assuming all other variables remained constant, the Company would have recognized an additional expense of $96 thousand,
$74 thousand and $393 thousand in profit or loss for the years ended, December 31, 2013, 2012 and 2011 respectively.



Price risk - the Company is
sometimes exposed to equity securities price risk because of investments held by the Company and classified on the statement of
financial position as financial assets at fair value through profit or loss. To manage its price risk arising from investments
in equity securities, the Company invests in marketable securities with high ratings and diversifies its investment portfolio.



Portfolio diversification is
done based on risk level limits set by the Company.



| | (b) | Credit and interest risks
| | --- | -------------------------



Credit and interest risk arise
from cash and cash equivalents, deposits with banks as well as accounts receivable. A substantial portion of liquid instruments
of the Company are invested in short-term deposits in highly-rated banks. The Company estimates that since the liquid instruments
are mainly invested for the short term and with highly-rated institutions, the credit and interest risk associated with these balances
is immaterial.



| | (c) | Liquidity risk
| | --- | --------------



Prudent liquidity risk management
requires maintaining sufficient cash and the availability of funding through an adequate amount of committed credit facilities.



F-17







REDHILL BIOPHARMA LTD.

NOTES TO THE FINANCIAL STATEMENTS (continued)



NOTE 4 - FINANCIAL INSTRUMENTS
AND FINANCIAL RISK MANAGEMENT(continued):



Management monitors rolling
forecasts of the Company’s liquidity reserve (comprising cash and cash equivalents and deposits). This is generally carried
out based on the expected cash flows in accordance with practice and limits set by the management of the Company.



The Company is in an R&D
stage and has not yet generated significant revenue from the sale of drugs or royalties; it is therefore exposed to liquidity risk,
taking into consideration the forecasts of cash flows required to finance its investments and other activities.



As of December 31, 2013 and
2012, the Company’s financial liabilities include accounts payable and accrued expenses for period less than 1 year.



| | 2) | Capital risk management
| | -- | -----------------------



The Company’s objectives
when managing capital are to safeguard the Company’s ability to continue as a going concern in order to provide returns for
shareholders and to maintain an optimal capital structure to reduce the cost of capital. It should be indicated that the Company
is in the development stage and has not yet generated significant revenue from the sale of drugs or from royalties.



| | 3) | Fair value estimation
| | -- | ---------------------



The following is an analysis
of financial instruments measured at fair value using valuation methods. The different levels have been defined as follows:



| | · | Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1)
| | - | ------------------------------------------------------------------------------------------

| | · | Inputs other than quoted prices included within level 1 that are observable for the asset or liability,
either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2)
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Inputs for the asset or liability that are not based on observable market data (that is, unobservable
inputs) (level 3)
| | - | -----------------------------------------------------------------------------------------------------------------------



The fair value of financial
instruments traded in active markets is based on quoted market prices at dates of statements of financial position. A market is
regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing
service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s
length basis. These instruments are included in level 1.



F-18







REDHILL BIOPHARMA LTD.

NOTES TO THE FINANCIAL STATEMENTS (continued)



NOTE 4 - FINANCIAL INSTRUMENTS
AND FINANCIAL RISK MANAGEMENT(continued):



The fair value of financial
instruments that are not traded in an active market is determined by using valuation techniques. These valuation techniques maximize
the use of observable market data where it is available and rely as little as possible on entity-specific estimates. If all significant
inputs required to fair value an instrument are observable, the instrument is included in level 2.



If one or more of the significant
inputs is not based on observable market data, the instrument is included in level 3.



As of December 31, 2013 and
2012, the financial instruments of the Company presented at fair value are financial assets at fair value through profit or loss
in the amounts of $243 thousand and $1,065 thousand, respectively. Those instruments are classified as level 1.



| | b. | Classification of financial instruments by groups:
| | -- | --------------------------------------------------



|                                                      |  | Assets at fair value through profit or loss |       |  | Loans and receivables |  |        | Total | 
|----------------------------------------------------- |  | ------------------------------------------- | ----- |  | --------------------- |  | ------ | ----- | 
|                                                      |  | U.S. dollars in thousands                   |      
|                                                      |  |                                             |       |  |                       |  |        |       | 
|As of December 31, 2013:                              |  |                                             |       |  |                       |  |        |       | 
|Cash and cash equivalents                             |  |                                             | -     |  |                       |  | 11,851 |       | 
|Bank deposits                                         |  |                                             | -     |  |                       |  | 100    |       | 
|Financial assets at fair value through profit or loss |  |                                             | 243   |  |                       |  | -      |       | 
|Receivables (except prepaid expenses)                 |  |                                             | -     |  |                       |  | 427    |       | 
|                                                      |  |                                             | 243   |  |                       |  | 12,378 |       | 
|                                                      |  |                                             |       |  |                       |  |        |       | 
|As of December 31 ,2012:                              |  |                                             |       |  |                       |  |        |       | 
|Cash and cash equivalents                             |  |                                             |       |  |                       |  | 16,814 |       | 
|Bank deposits                                         |  |                                             |       |  |                       |  | 561    |       | 
|Financial assets at fair value through profit or loss |  |                                             | 1,065 |  |                       |  |        |       | 
|Receivables (except prepaid expenses)                 |  |                                             |       |  |                       |  | 84     |       | 
|                                                      |  |                                             | 1,065 |  |                       |  | 17,459 |       | 



F-19







REDHILL BIOPHARMA LTD.

NOTES TO THE FINANCIAL STATEMENTS (continued)



NOTE 4 - FINANCIAL INSTRUMENTS
AND FINANCIAL RISK MANAGEMENT(continued):



| | c. | Composition of financial instruments by currency:
| | -- | -------------------------------------------------



|                                                      |  | Dollar                    |        |  | Foreign currency (mainly NIS) |  |       | Total | 
|----------------------------------------------------- |  | ------------------------- | ------ |  | ----------------------------- |  | ----- | ----- | 
|                                                      |  | U.S. dollars in thousands |       
|As of December 31, 2013:                              |  |                           |        |  |                               |  |       |       | 
|Assets:                                               |  |                           |        |  |                               |  |       |       | 
|Cash and cash equivalents                             |  |                           | 9,712  |  |                               |  | 2,139 |       | 
|Bank deposits                                         |  |                           | -      |  |                               |  | 100   |       | 
|Financial assets at fair value through profit or loss |  |                           | -      |  |                               |  | 243   |       | 
|Receivable (except prepaid expenses)                  |  |                           | 365    |  |                               |  | 62    |       | 
|                                                      |  |                           | 10,077 |  |                               |  | 2,544 |       | 
|Liabilities -                                         |  |                           |        |  |                               |  |       |       | 
|accounts payable and accrued expenses                 |  |                           | 2,143  |  |                               |  | 272   |       | 
|                                                      |  |                           | 7,934  |  |                               |  | 2,272 |       | 
|As of December 31, 2012:                              |  |                           |        |  |                               |  |       |       | 
|Assets:                                               |  |                           |        |  |                               |  |       |       | 
|Cash and cash equivalents                             |  |                           | 15,849 |  |                               |  | 965   |       | 
|Bank deposits                                         |  |                           | 473    |  |                               |  | 88    |       | 
|Financial assets at fair value through profit or loss |  |                           | -      |  |                               |  | 1,065 |       | 
|Receivable (except prepaid expenses)                  |  |                           | -      |  |                               |  | 84    |       | 
|                                                      |  |                           | 16,322 |  |                               |  | 2,202 |       | 
|Liabilities -                                         |  |                           |        |  |                               |  |       |       | 
|accounts payable and accrued expenses                 |  |                           | 734    |  |                               |  | 344   |       | 
|                                                      |  |                           | 15,588 |  |                               |  | 1,858 |       | 



F-20







REDHILL BIOPHARMA LTD.

NOTES TO THE FINANCIAL STATEMENTS (continued)



NOTE 5 - CASH AND CASH EQUIVALENTS:



|                         |  | December 31               |       
|------------------------ |  | ------------------------- | ------
|                         |  | 2013                      |       
|                         |  | U.S. dollars in thousands |       
|Cash in bank             |  |                           | 7,711 
|Short-term bank deposits |  |                           | 4,140 
|                         |  |                           | 11,851



The carrying
amounts of the cash and cash equivalents approximate their fair values.



NOTE 6 - FINANCIAL ASSETS
AT FAIR VALUE THROUGH PROFIT OR LOSS



These financial assets as of
December 31, 2013 and 2012 represent a portfolio of Israeli, NIS-denominated marketable securities, which is managed and valued
by the Company based on the fair value of all portfolio securities.



Taking into consideration the
manner of management of the portfolio and the evaluation of its performances, the Company classified the entire investment in marketable
securities as financial assets at fair value through profit or loss. The fair value of the securities is based on their exchange
market price at the end of the reporting date trading day.



NOTE 7 - PREPAID EXPENSES
AND RECEIVABLES:



|                                              |  | December 31               |    
|--------------------------------------------- |  | ------------------------- | ---
|                                              |  | 2013                      |    
|                                              |  | U.S. dollars in thousands |    
|Prepaid expenses                              |  |                           | 61 
|Discount from Service Provider – see note 17b |  |                           | 363
|Government institutions                       |  |                           | 62 
|Other                                         |  |                           | 2  
|                                              |  |                           | 488



The fair value of receivables,
which constitute financial assets, approximates their carrying amount.



F-21







REDHILL BIOPHARMA LTD.

NOTES TO THE FINANCIAL STATEMENTS (continued)



NOTE 8 - FIXED ASSETS:



The composition
of assets and accumulated depreciation, grouped by major classifications:



|                                                     |  | Cost                      |     |  | Accumulated depreciation |  |     | Depreciated balance | 
|---------------------------------------------------- |  | ------------------------- | --- |  | ------------------------ |  | --- | ------------------- | 
|                                                     |  | December 31               |     |  | December 31              |  |     | December 31         | 
|                                                     |  | 2013                      |     |  | 2012                     |  |     | 2013                | 
|                                                     |  | U.S. dollars in thousands |    
|Office furniture and equipment (including computers) |  |                           | 84  |  |                          |  | 70  |                     | 
|Leasehold improvements                               |  |                           | 82  |  |                          |  | 82  |                     | 
|                                                     |  |                           | 166 |  |                          |  | 152 |                     | 



NOTE 9 - INTANGIBLE ASSETS



The intangible assets represent
R&D assets with respect to intellectual property rights of the Drugs purchased by the Company under licensing agreements or
under asset acquisition agreements. The changes in those assets are as follows:



|                             |  | Year ended December 31    |      
|---------------------------- |  | ------------------------- | -----
|                             |  | 2013                      |      
|                             |  | U.S. dollars in thousands |      
|Cost:                        |  |                           |      
|Balance at beginning of year |  |                           | 1,345
|Additions during the year    |  |                           | 210  
|Balance at end of year       |  |                           | 1,555



For further
details, see note 13.



As
of December 31, 2013 the Company did not recordimpairment of these intangible assets.



NOTE 10 - LIABILITY FOR
EMPLOYEE RIGHTS UPON RETIREMENT:



| | a. | Labor laws and agreements in Israel require the Company to pay severance pay and/or pensions to
an employee dismissed or retiring from their employment in certain circumstances.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. | The Company's pension liability and the Company's liability for payment of severance pay for employees
in Israel for whom the liability is within the scope of Section 14 of the Severance Pay Law is covered by ongoing deposits with
defined contribution plans. The amounts deposited are not included in the statements of financial position.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The amounts charged as an expense
in respect of defined contribution plans in 2013, 2012 and 2011 were $62 thousand, $58 thousand and $51 thousand respectively.
Of those amounts, approximately half were charged to general and administrative expenses and half to research and development expenses.



F-22







REDHILL BIOPHARMA LTD.

NOTES TO THE FINANCIAL STATEMENTS (continued)



NOTE 11 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES:



|                                     |  | December 31               |      
|------------------------------------ |  | ------------------------- | -----
|                                     |  | 2013                      |      
|                                     |  | U.S. dollars in thousands |      
|Trade payables                       |  |                           | 882  
|Expenses payable                     |  |                           | 1,263
|Employees and employees institutions |  |                           | 205  
|Government institutions              |  |                           | 65   
|                                     |  |                           | 2,415



The fair value of the accounts payable and accrued
expense balances approximates their carrying amounts.



NOTE 12 - ROYALTY OBLIGATIONS
TO INVESTORS



As part of the mandatory convertible loan agreements
with investors from August 2010, the investors were entitled to royalties equal to 5% of future revenue from two therapeutic candidates
purchased by the Company.



On December 26, 2012, a General
Shareholders Meeting of the Company approved the acquisition and settlement of the royalty rights granted to investors pursuant
to the August 2010 mandatory convertible loan agreements in exchange for the issuance of an aggregate of 2,317,186 Company ordinary
shares, with each investor entitled to receive a number of shares on a pro-rata basis in accordance with its respective royalty
rights. The royalty obligation was presented as amortized cost.



On the date of the approval, the Company was relieved
of its royalty obligations and the associated liability was derecognized. The fair value of the shares to be issued was $2,359
thousand. The increase, prior to settlement, in the royalty obligations amortized cost resulted primarily from interest accretion
and from management's estimate with regard to future royalties. The excess between the fair value of the shares over the amortized
cost of the liability as of the approval date was recorded on the statement of comprehensive loss under financial expenses. The
shares were issued on January 10, 2013.



F-23







REDHILL BIOPHARMA LTD.

NOTES TO THE FINANCIAL STATEMENTS (continued)



NOTE
13 - COMMITMENTS:



| | a. | Agreements to purchase intellectual property of drugs:
| | -- | ------------------------------------------------------



| | 1) | On November 18, 2009, the Company entered into an agreement with a Danish company to provide the
Company with the exclusive rights to a drug that treats congestive heart failure, left atrium dysfunction and high blood pressure.
According to the agreement, the Company paid the Danish company an initial amount of $100 thousand, and later will transfer to
the Danish company additional amounts of up to $700 thousand based on achieving regulatory milestones as agreed between the parties.
Under the agreement, the Company agreed to pay the Danish company royalties at 30% of the Company's revenues generated by the drug,
less specified amounts incurred in the 12 years from the date marketing begins, or until the patent expires, whichever is the earliest
in each country where the drug will be marketed. According to the agreement, the Company will obtain exclusive global rights for
completing development and for production, commercialization, marketing and selling the drug. Through December 31, 2013, the Company
paid the Danish company $100 thousand.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2) | On May 2, 2010, the Company entered into an agreement with a U.S. publically-traded company that
grants the Company an exclusive license to use rights relating to a drug that treats chemotherapy, radiation and surgery-induced
nausea and vomiting. Under the agreement, the Company paid the U.S. company an initial amount of $100 thousand, and will later
pay the U.S. company an amount of up to $500 thousand, based on regulatory milestones set between the parties. Under the agreement,
the Company agreed to pay the U.S. company royalties equal to 8% of Company revenues from selling the drug, less certain amounts
as detailed in the agreement, during a period which is the shorter of: (1) expiry of the last patent granted under the license;
(2) ten years from the beginning of marketing the drug by the Company or any third party; and (3) the date in which the amount
of all payments to the U.S. company reach $30 million. Through December 31, 2013, the Company paid $100 thousand to the U.S. company.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In 2013, the U.S. company announced
that it had ceased business operations. Under the terms of the license agreement, the Company has the protection afforded to the
licensee under the United States Bankruptcy Code. The Company is currently assessing the expected effect, if any, on its future
commitments. The Company is taking active steps to safeguard its rights however there is no guarantee the Company will be able
to safeguard its rights under the license agreement.



| | 3) | On August 26, 2010, the Company entered into an agreement with a Canadian-based company which is
traded in the U.S. and Canada, to co-develop a drug for the treatment of migraines. Under the agreement, the Company paid the Canadian
company an initial amount of $500 thousand on the date of signing the agreement, and later will transfer additional amounts of
up to $800 thousand based on achieving milestones as agreed between the parties. In addition, the Company will participate in additional
drug research and development costs.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-24







REDHILL BIOPHARMA LTD.

NOTES TO THE FINANCIAL STATEMENTS (continued)



NOTE
13 - COMMITMENTS(continued):



Under
the agreement, the Company will pay a 60% royalty to the Canadian company for the first $2 million in revenue. For revenues beyond
the $2 million, the Company will pay royalties at 20% - 40% of the Company's income from the drug. The agreement is for an indefinite
period.



Through
December 31, 2012, the Company paid the Canadian Company for the license of the drug under the agreement a total of approximately
$800 thousand. In addition, through December 31, 2013, the Company participated in the drug research and development costs in the
amount of $1.1 million that was recorded in the statements of comprehensive loss under research and development expenses.



| | 4) | On August 11, 2010, the Company entered into an agreement with an Australian company listed on
the Australian stock exchange in an asset purchase agreement to acquire intellectual property of the Australian company relating
to three therapeutic candidates for the treatment of intestinal and digestion conditions. Under the purchase agreement, the Company
paid the Australian company an initial amount of $500 thousand and later another payment in the range of 7% - 20% of Company revenues
from the sale of the drugs. Through December 31, 2013, the Company paid the Australian company a total of $500 thousand.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5) | On September 18, 2011, the Company entered into an agreement with a U.S. academic institution (hereinafter
– "the Academic Institution") to acquire exclusive rights to a diagnostic test (hereinafter – the "Test")
for certain bacteria relatively prevalent among patients of a certain condition of the intestines and digestive tract.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Under
the agreement, in addition to an initial payment of $45 thousand, the Company will pay the Academic Institution royalties in the
range of 7% - 20% of the amount received by the Company from revenues resulting from rights to the Test and other potential payments
in immaterial amounts. Through December 31, 2013, the Company paid the Academic Institution a total amount of $55 thousand.



The acquisition
of rights was intended to allow the Company to screen patients for clinical trials and, in the future, may be used commercially,
if and when approved for marketing, in combination with treatment with one of the drugs that was purchased from the Australian
company.



| | b. | Operating lease agreement
| | -- | -------------------------



The Company
entered into an operating lease agreement for the offices it uses. The agreement will expire on January 31, 2017 (hereafter “date
of end of rental period”) with an option to extend the rental period by an additional 3 years. The projected rental payments
until the end of the rental period, at rates in effect at December 31, 2013, are $210 thousand per year.



As of
December 31, 2013 an amount of $81 thousand was deposited with a bank to secure the lease payments.



F-25







REDHILL BIOPHARMA LTD.

NOTES TO THE FINANCIAL STATEMENTS (continued)



NOTE 14 - INCOME TAX:



| | a. | Measurement of results for tax purposes
| | -- | ---------------------------------------



The Company elected to compute
its taxable income in accordance with Income Tax Regulations (Rules for Accounting for Foreign Investors Companies and Certain
Partnerships and Setting their Taxable Income), 1986. Accordingly, the Company’s taxable income or loss is calculated in
U.S. dollars.



The results of the Company are
measured for tax purposes in accordance with Accounting Principles Generally Accepted in Israel (Israeli GAAP). These financial
statements are prepared in accordance with IFRS. The difference between IFRS and Israeli GAAP, both on an annual and a cumulative
basis causes a difference between taxable results and the results reflected in these financial statements.



| | b. | Tax rates
| | -- | ---------



The income of the Company is
subject to corporate tax rate. Israeli corporate tax rate for 2013 and 2012 was 25%.



On August 5, 2013, the Law of
Change in National Priorities (Legislative Achieve Budget for the Years 2013 and 2014), 2013, was published, which provided, inter
alia, raising the corporate tax rate to a rate of 26.5% from 2014 and thereafter.



| | c. | Carry forward losses
| | -- | --------------------



The balance of carry forward
losses as of December 31, 2013 is $17 million. These tax carry forward losses have no expiration date.

Deferred tax assets on losses
for tax purposes carried forward to subsequent years are recognized if utilization of the related tax benefit against a future
taxable income is expected. The Company has not created deferred taxes on its carry forward losses since their utilization is not
expected in the foreseeable future.



| | d. | Deductible temporary differences
| | -- | --------------------------------



The amount of cumulative deductible
temporary differences, other than carry forward losses (as mentioned in c. above), for which deferred tax assets have not been
recognized in the statement of financial position as of December 31, 2013 and 2012, were $8 million and $4.5 million, respectively.
These temporary differences have no expiration dates.



| | e. | Tax assessments
| | -- | ---------------



The Company has not been assessed
for tax purposes since its incorporation.



F-26







REDHILL BIOPHARMA LTD.

NOTES TO THE FINANCIAL STATEMENTS (continued)



NOTE 15 - EQUITY:



| | a. | Share capital:
| | -- | --------------



| | 1) | Composition
| | -- | -----------



Company share capital is composed
of ordinary shares of NIS 0.01 par value, as follows:



|                |  | Number of shares |        
|--------------- |  | ---------------- | -------
|                |  | December 31      |        
|                |  | 2013             |        
|                |  | In thousands     |        
|Authorized      |  |                  | 200,000
|                |  |                  |        
|Issued and paid |  |                  | 64,400 



The Company’s ordinary
shares are traded on the TASE and the Company’s ADSs are traded on the NASDAQ under the symbols “RDHL.” Each
ADS represents 10 ordinary shares. The last reported market price for the Company’s securities on December 31, 2013 was $11.80
per ADS on the NASDAQ and $1.11 per share on the TASE (based on the exchange rate reported by the Bank of Israel for such date).



| | 2) | Changes in share capital
| | -- | ------------------------



On July 31, 2013, a general
meeting of shareholders approved the increase of the authorized share capital of the Company to NIS 2 million, divided into
200,000,000 ordinary shares, NIS 0.01 par value per share.



| | 3) | Conversion of mandatory convertible loans
| | -- | -----------------------------------------



In February
2011, all of the mandatory convertible loans raised from investors in August and November 2010, were automatically converted into
19,818,314 Company ordinary shares and to warrants, based on their terms, just prior to the Company's Initial Public Offering on
the TASE.



Through November 2013, the
Company received notifications on the exercise of the above warrants that had been granted to investors. In 2011, the Company issued
803,667 ordinary shares for $0.6 million, net of issuance costs. In 2013, the Company issued 2,550,865 ordinary shares for $2.2
million, net of direct issuance costs. The remaining 629,995 unexercised warrants expired along with any right or claim whatsoever
of the holder.



F-27







REDHILL BIOPHARMA LTD.

NOTES TO THE FINANCIAL STATEMENTS (continued)



NOTE 15 - EQUITY (continued):



| | 4) | Public offering
| | -- | ---------------



On February 3, 2011, the Company
completed a public offering of securities on the TASE under a prospectus dated February 2, 2011. As part of the offering, the Company
issued 14,302,300 ordinary shares and 7,151,150 warrants (Series 1). Issuance proceeds (gross) amounted to $14 million, less
direct issuance costs of $1.3 million, thereby amounting to $12.7 million.



| | 5) | Exercise of options
| | -- | -------------------



During 2012, the Company received
notifications on the exercise of the 600,000 non-tradable options issued to service providers and notifications on the exercise
of 70,000 options that were issued to a consultant in August 2010. Accordingly, the Company issued 670,000 ordinary shares for
$302 thousand.



During 2013, the Company received
notifications of exercise with respect to options that had been issued to a consultant in August 2010 and in February 2011. Accordingly,
the Company issued 60,000 ordinary shares for $13 thousand.



| | 6) | In December 2012, the Company entered into investment agreements with a group of investors for
the issuance of 6,481,280 ordinary shares and 3,240,640 warrants exercisable into ordinary shares in consideration of an aggregate
investment amount of approximately $6.56 million. Through December 31, 2012, the Company received with respect to the investment
agreements a total of approximately $6.25 million, net of direct issuance cost of $212 thousand. This amount was allocated to ordinary
shares to be issued and warrants based on their fair value. The ordinary shares and warrants were issued on January 10, 2013. For
information regarding the terms of the warrants, see b(2) below.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. | Warrants:
| | -- | ---------



| | 1) | The warrants (Series 1) issued as part of the Company initial public offering on the TASE
were exercisable from issuance through February 2, 2014. Through February 2014 the Company received notifications on the exercise
of the warrants (Series 1) for exercise price per ordinary share of $1.25. Accordingly, in February 2014, the Company issued 3,246,082
ordinary shares for $4 million, net of issuance costs. The remaining 3,905,068 unexercised warrants (Series 1) expired along
with any right or claim whatsoever of the holder.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2) | The warrants issued under the investment agreement, as described in a(6) above, are exercisable
into 3,240,640 ordinary shares, for a period of 24 months. As of December 31, 2013 the exercise price of each warrant ranges
from $1.34 to $1.54, depending on the date of exercise.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-28







REDHILL BIOPHARMA LTD.

NOTES TO THE FINANCIAL STATEMENTS (continued)



NOTE 15 - EQUITY (continued):



Through February 24, 2014, the
Company received notifications of exercise with respect to the warrants at an exercise price per ordinary share of $1.34. Accordingly,
in January 2014, the Company issued 336,400 ordinary shares for $437 thousand, net of issuance costs. The current exercise price
of the remaining 2,904,240 outstanding warrants is $1.54 per ordinary share.



NOTE 16 - SHARE-BASED PAYMENTS



On May 30, 2010, a general meeting
of shareholders approved the option plan of the Company for 2010 (the "Option Plan"), after being approved by the Board
of Directors resolved in 2010 and 2011 to increase the Option Plan, the Company is allowed to allocate 22,080,000 options to employees
and directors. The terms and conditions of the grants were determined by the Board of Directors and are according to the Option
Plan.



In addition, in 2010 and 2011,
the Company's Board of Directors approved grants of 600,000 options to Company service providers beyond the scope of the Company's
Option Plan.



| | a. | Following is information on options granted in 2013:
| | -- | ----------------------------------------------------



|                                                       |  | Number of options granted                                                                                  |                                                    |  |                                                                                                                          | 
|------------------------------------------------------ |  | ---------------------------------------------------------------------------------------------------------- | -------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------ | 
|                                                       |  | According
                                         to Option Plan of the Company                           |                                                    |  | Exercise price
                                         to 1 ordinary share
                                         ($) | 
|Date
                                         of Grant |  | Other
                                         than directors
                                         (1) |                                                    |  | To directors (1)                                                                                                         | 
|May 2013                                               |  |                                                                                                            | 1,930,000                                          |  |                                                                                                                          | 
|July 2013                                              |  |                                                                                                            | *
                                         550,000 |  |                                                                                                                          | 
|                                                       |  |                                                                                                            | 2,480,000                                          |  |                                                                                                                          | 



* The
options were allocated to officers who also serve as directors.



| | 1) | The options will vest as follows: for employees and consultants of the Company who had provided
services to the Company for a period exceeding one year as of the date of grant, the options will vest in 16 equal quarterly installments
over a four-year period. For employees and consultants of the Company who provided services to the Company for a period of less
than one year as of the date of grant, the options will vest as follows: 1/4 of the options will vest one year following the grant
date, and the rest over the following three years in 12 equal quarterly installments.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-29







REDHILL BIOPHARMA LTD.

NOTES TO THE FINANCIAL STATEMENTS (continued)



NOTE 16 - SHARE-BASED PAYMENTS(continued):



| | 2) | The fair value of all options on the date of grant was U.S. $1.5 million. The fair value of the
options was computed using the binomial model and the underlying data used was mainly the following: price of the Company's ordinary
share: $0.98- $1.067, expected volatility: 66.08%-66.55%, risk-free interest rate: 1.4%-1.95% and expected useful life to exercise:
seven years.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. | Options granted in 2012:
| | -- | ------------------------



|              |  | Number of options granted               |            |  |                  | 
|------------- |  | --------------------------------------- | ---------- |  | ---------------- | 
|              |  | According to Option Plan of the Company |            |  |                  | 
|Date of grant |  | Other than directors (1)                |            |  | To directors (1) | 
|January 2012  |  |                                         | 825,000    |  |                  | 
|February 2012 |  |                                         | *1,000,000 |  |                  | 
|June 2012     |  |                                         | 200,000    |  |                  | 
|              |  |                                         | 2,025,000  |  |                  | 



*The options were allocated to officers
who also serve as directors.



| | 1) | The options will vest as follows: In the first year, 1/3 of the options after one year from the
date of grant, or 1/6 of the total number of options at the end of each calendar half year. In the second and third years, 1/6
of the remaining options at the end of each calendar half year or 6-month period.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2) | The fair value of the options on the date of grant was computed using the binomial model. The underlying
data used for computing the fair value of the options are mainly as follows: ordinary share price, based on share price in the
public offering: $0.52-$0.675, expected volatility: 67.53%-68.49%, risk-free interest rate: 1.06%-1.43% (the risk-free interest
rate is determined based on rates of return on maturity of unlinked U.S. treasury bonds with time to maturity that equals the average
life of the options); expected dividend at $0 and expected life to exercise of 7 years.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-30







REDHILL BIOPHARMA LTD.

NOTES TO THE FINANCIAL STATEMENTS (continued)



NOTE 16 - SHARE-BASED PAYMENTS(continued):



| | c. | Changes in the number of shares and weighted averages of exercise prices are as follows:
| | -- | ----------------------------------------------------------------------------------------



|                                 |  | Year ended December 31 |           
|-------------------------------- |  | ---------------------- | ----------
|                                 |  | 2013                   |           
|                                 |  | Number of options      |           
|Outstanding at beginning of year |  |                        | 12,015,000
|Exercised                        |  |                        | (60,000   
|Granted                          |  |                        | 2,780,000 
|Outstanding at end of year       |  |                        | 14,735,000
|Exercisable at end of year       |  |                        | 11,596,667



| | d. | The following is information about exercise price and remaining useful life of outstanding options at year-end:
| | -- | ---------------------------------------------------------------------------------------------------------------



|December 31, 2013                            |            |  | December 31, 2012    | 
|-------------------------------------------- | ---------- |  | -------------------- | 
|Number of options outstanding at end of year |            |  | Exercise price range | 
|                                             | 14,735,000 |  |                      | 



| | e. | Expenses recognized in profit or loss for the options are as follows:
| | -- | ---------------------------------------------------------------------



| |  | Year ended December 31    |      
| |  | ------------------------- | -----
| |  | 2013                      |      
| |  | U.S. dollars in thousands |      
| |  |                           | 1,255



The remaining compensation expenses
as of December 31, 2013 are $915 thousand and will be expensed in full by March 2017.



The options granted to Company
employees in Israel are governed by relevant rules in Section 102 to the Israel Income Tax Ordinance (hereinafter the “Ordinance”).
According to the treatment elected by the Company and these rules, the Company is not entitled to claim as tax deductions the amounts
charged to employees as a benefit, including amounts recognized as payroll benefits in Company accounts for the options the employees
received within the Option Plan.



Options granted to option holders
who are related parties of the Company are governed by Section 3(i) to the Ordinance.



F-31







REDHILL BIOPHARMA LTD.

NOTES TO THE FINANCIAL STATEMENTS (continued)



NOTE 17 - RESEARCH AND DEVELOPMENT EXPENSES,net:



|a.                                           |  | Year ended December 31    |      
|-------------------------------------------- |  | ------------------------- | -----
|                                             |  | 2013                      |      
|                                             |  | U.S. dollars in thousands |      
|Payroll and related expenses                 |  |                           | 426  
|Professional services                        |  |                           | 1,272
|Share-based payments                         |  |                           | 753  
|Clinical trials                              |  |                           | 6,019
|Patents expenses                             |  |                           | 233  
|Other                                        |  |                           | 363  
|Discount from Service Provider, see b. below |  |                           | (966 
|                                             |  |                           | 8,100



| | b. | In 2013, the Company received notification from its Canadian service provider ("Service Provider")
that the Canadian authorities successfully completed their review of the Service Provider's request for certain incentive cash
benefits related to research and development activities provided by the Service Provider for the Company. In 2013, the Service
Provider received the requested benefits from the Canadian authorities, and subsequently the Company received a discount from the
Service Provider for research and development services provided from 2011 through February 2013 in the amount of $603 thousand.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As of December 31, 2013 the
Company expects to receive an additional discount of $363 thousand in respect of research and development services provided by
the Service Provider from March 2013 through December 31, 2013.



NOTE 18 - GENERAL AND ADMINISTRATIVE EXPENSES:



|                             |  | Year ended December 31    |      
|---------------------------- |  | ------------------------- | -----
|                             |  | 2013                      |      
|                             |  | U.S. dollars in thousands |      
|Payroll and related expenses |  |                           | 754  
|Share-based payments         |  |                           | 501  
|Professional services        |  |                           | 997  
|Office related expenses      |  |                           | 131  
|Other                        |  |                           | 301  
|                             |  |                           | 2,684



F-32







EDHILL BIOPHARMA LTD.

NOTES TO THE FINANCIAL STATEMENTS (continued)



NOTE 19 - FINANCIAL EXPENSES (INCOME),net:



|                                                                          |  | Year ended December 31   |     
|------------------------------------------------------------------------- |  | ------------------------ | ----
|                                                                          |  | 2013                     |     
|                                                                          |  | U.S dollars in thousands |     
|Financial income:                                                         |  |                          |     
|Fair value gain on financial assets at fair value through profit or loss  |  |                          | 54  
|Income from changes in exchange rates                                     |  |                          | 74  
|Other                                                                     |  |                          | 30  
|                                                                          |  |                          | 158 
|Financial expenses:                                                       |  |                          |     
|Fair value losses on mandatory convertible loans                          |  |                          | -   
|Accretion and settlement of royalty obligations to investors              |  |                          | -   
|Fair value losses on financial assets at fairvalue through profit or loss |  |                          | -   
|Other                                                                     |  |                          | 14  
|                                                                          |  |                          | 14  
|Financial expenses (income) – net                                         |  |                          | (144



NOTE 20 - LOSS PER ORDINARY SHARE



The basic loss per share is
computed by dividing the Company's loss by the weighted average number of ordinary shares outstanding during the period.

The diluted loss per share is
identical to the basic loss per share since the effect of potential dilutive shares in anti-dilutive.



Set forth below are data taken
into account in the computation of loss per share:



|                                                                                 |  | Year ended December 31 |       
|-------------------------------------------------------------------------------- |  | ---------------------- | ------
|                                                                                 |  | 2013                   |       
|                                                                                 |  |                        |       
|Loss as reported in the financial statements (in thousands of dollars)           |  |                        | 10,628
|Weighted average of ordinary shares outstanding during the period (in thousands) |  |                        | 62,379
|Basic and diluted loss per share (dollars)                                       |  |                        | 0.17  



F-33







REDHILL BIOPHARMA LTD.

NOTES TO THE FINANCIAL STATEMENTS (continued)



NOTE 21 - RELATED PARTIES:



| | a. | Key management includes members of the Board of Directors, the Chief Executive Officer and Deputy
Chief Executive Officer, Finance and Operations.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------



|                                                             |  | Year ended December 31    |    
|------------------------------------------------------------ |  | ------------------------- | ---
|                                                             |  | 2013                      |    
|                                                             |  | U.S. dollars in thousands |    
|                                                             |  |                           |    
|Key management compensation:                                 |  |                           |    
|Salaries and other short-term employee benefits              |  |                           | 555
|Post-employment benefits                                     |  |                           | 48 
|Share-based payments                                         |  |                           | 515
|Other long-term benefits                                     |  |                           | 25 
|                                                             |  |                           |    
|Transactions with key management:                            |  |                           |    
|Accretion and settlement of royalty obligations to investors |  |                           | -  
|Fair value on mandatory  convertible loans                   |  |                           | -  



| | b. | Balances with related parties:
| | -- | ------------------------------



|                                     |  | December 31              |    
|------------------------------------ |  | ------------------------ | ---
|                                     |  | 2013                     |    
|                                     |  | U.S. dollars in thousand |    
|Current liabilities -                |  |                          |    
|credit balance in "accounts payable" |  |                          | 146



NOTE
22 - EVENTS SUBSEQUENT TO DECEMBER 31, 2013:



| | a. | In January 2014, the Company raised aggregate gross amount of $8.5 million from two new investors
in the form of private placements of ADSs and warrants.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------



The
Company issued a total of 894,740 ADSs and warrants to purchase 357,896 ADSs at a purchase price of $9.50 per unit of one ADS and
0.4 warrants (the “Unit”). The warrants have a three-year term and may be exercised either for cash or on a cashless
basis at an exercise price of $11.00 per ADS. In addition, if the Company issues new securities at a price per unit which is less
than $9.50 (such lower price, the "Subsequent Offering Price"), the Company will issue to the investors a number of additional
ADSs as necessary to reduce the effective price per Unit to the Subsequent Offering Price. If ordinary shares and/or ADSs are offered
with any other rights, the Subsequent Offering Price will be calculated for each unit in such offering, consisting of one ordinary
share (or ADS) plus the number of other rights per share in such offering. This provision
applies until the Company raises a certain threshold of capital. The threshold is $28 million in the agreement with the first investor
and $25.5 million in the agreement with the second investor signed one day later.



F-34







REDHILL BIOPHARMA LTD.

NOTES TO THE FINANCIAL STATEMENTS (continued)



NOTE 22 - EVENTS SUBSEQUENT TO DECEMBER
31, 2013(continued):



| | b. | In January 2014, the Company raised an aggregate gross amount of $11.7 million from a select group
of new investors (hereafter the “Group”) in the form of a private placement. The Company issued to the Group a total
of 10,458,740 ordinary shares and warrants to purchase a total of 4,183,496 ordinary shares, which have a three-year term and are
exercisable at a an exercise price of $1.4 per ordinary share.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------


























F-35







EXHIBIT INDEX



The exhibits filed with or incorporated
into this Registration Statement are listed in the index of exhibits below





|Exhibit
        Number |  | Exhibit
    Description                                                                                                                                                                                                                                                                                                                                                                     
|---------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                       |  |                                                                                                                                                                                                                                                                                                                                                                                             
|1.1                    |  | Articles of Association of
    the Registrant, as amended (unofficial English translation).                                                                                                                                                                                                                                                                                                 
|                       |  |                                                                                                                                                                                                                                                                                                                                                                                             
|2.1                    |  | Form of Deposit Agreement
    among the Registrant, the Bank of New York Mellon, as Depositary, and all Owners and Holders from time to time of American
    Depositary Shares issued hereunder (incorporated by reference to Exhibit 1 to the Registration Statement on Form F-6 filed
    by The Bank of New York Mellon with the Securities and Exchange Commission on December 6, 2012).
|                       |  |                                                                                                                                                                                                                                                                                                                                                                                             
|2.2                    |  | Form of American Depositary
    Receipt (incorporated by reference to Exhibit 1 to the Registration Statement on Form F-6 filed by The Bank of New York Mellon
    with the Securities and Exchange Commission on December 6, 2012).                                                                                                                                                        
|                       |  |                                                                                                                                                                                                                                                                                                                                                                                             
|4.1†                   |  | Exclusive License Agreement,
    dated November 18, 2009, by and between the Registrant and Egalet a/s (RHB-101) (incorporated by reference to Exhibit 4.1
    to Draft Registration Statement on Form DRS disseminated with the Securities and Exchange Commission, dated December 3, 2012).                                                                                               
|                       |  |                                                                                                                                                                                                                                                                                                                                                                                             
|4.2                    |  | Exclusive License Agreement,
    dated May 2, 2010, by and between the Registrant and SCOLR Pharma Inc. (RHB-102) (incorporated by reference to Exhibit 4.2
    to Draft Registration Statement on Form DRS disseminated with the Securities and Exchange Commission, dated October 26, 2012).                                                                                              
|                       |  |                                                                                                                                                                                                                                                                                                                                                                                             
|4.3†                   |  | Co- Development and Commercialization
    Agreement, dated August 26, 2010, by and between the Registrant and IntelGenx Corp. (incorporated by reference to Exhibit
    4.3 to Draft Registration Statement on Form DRS disseminated with the Securities and Exchange Commission, dated December 3,
    2012).                                                                              
|                       |  |                                                                                                                                                                                                                                                                                                                                                                                             
|4.4†                   |  | Side Letter Agreement, dated
    January 31, 2013, by and between the Registrant and IntelGenx Corp.                                                                                                                                                                                                                                                                                        
|                       |  |                                                                                                                                                                                                                                                                                                                                                                                             
|4.5†                   |  | Asset Purchase Agreement,
    dated August 11, 2010, by and between the Registrant and Giaconda Limited (RHB-104, 105, 106) (incorporated by reference to
    Exhibit 4.4 to Draft Registration Statement on Form DRS disseminated with the Securities and Exchange Commission, dated December
    3, 2012).                                                                                
|                       |  |                                                                                                                                                                                                                                                                                                                                                                                             
|4.6†                   |  | License Agreement, dated
    September 15, 2011, by and between the Registrant and University of Central Florida Research Foundation (incorporated by reference
    to Exhibit 4.5 to Draft Registration Statement on Form DRS disseminated with the Securities and Exchange Commission, dated
    October 26, 2012).                                                                       
|                       |  |                                                                                                                                                                                                                                                                                                                                                                                             
|4.7                    |  | Independent Consulting Agreement,
    dated as of August 23, 2010, by and between the Registrant and R.E. Investments (incorporated by reference to Exhibit 4.8
    to Draft Registration Statement on Form DRS disseminated with the Securities and Exchange Commission, dated October 26, 2012).                                                                                          
|                       |  |                                                                                                                                                                                                                                                                                                                                                                                             
|4.8†                   |  | Master Service Agreement,
    dated April 28, 2011, by and between the Registrant and 7810962 Canada Inc. and amendment (incorporated by reference to Exhibit
    4.12 to Draft Registration Statement on Form DRS disseminated with the Securities and Exchange Commission, dated October 26,
    2012).                                                                                   
|                       |  |                                                                                                                                                                                                                                                                                                                                                                                             
|4.9†                   |  | Second Amendment to Master
    Services Agreement, dated May 29, 2013 by and between the Registrant and 7810962 Canada Inc.                                                                                                                                                                                                                                                                 



110







|4.10† |  | Manufacturing Agreement, dated April 28, 2011, by
    and between 7810962 Canada Inc. and the Registrant (regarding RHB-104) and amendments (incorporated by reference to Exhibit
    4.13 to Draft Registration Statement on Form DRS disseminated with the Securities and Exchange Commission, dated December
    3, 2012).
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |  |                                                                                                                                                                                                                                                                                                                              
|4.11† |  | Manufacturing Agreement, dated October 21, 2012, by and between
    7810962 Canada Inc. and the Registrant (regarding RHB-104) (incorporated by reference to Exhibit 4.14 to Draft Registration
    Statement on Form DRS disseminated with the Securities and Exchange Commission, dated October 26, 2012).                 
|      |  |                                                                                                                                                                                                                                                                                                                              
|4.12† |  | Clinical Services Agreement, dated June 15, 2011, by and between
RedHill and 7810962 Canada Inc. and amendment (regarding RHB-104) (incorporated by reference to Exhibit 4.15 to Draft Registration
Statement on Form DRS disseminated with the Securities and Exchange Commission, dated December 3, 2012).                 
|      |  |                                                                                                                                                                                                                                                                                                                              
|4.13† |  | Second Amendment to Clinical Services Agreement, dated January
    19, 2014, by and between the Registrant and 7810962 Canada Inc.                                                                                                                                                                                           
|      |  |                                                                                                                                                                                                                                                                                                                              
|4.14  |  | Form of Letter of Exemption and Indemnity adopted on July 2013
    (unofficial English translation) (incorporated by reference to Exhibit B to Exhibit 99.1 to Form 6-K disseminated with the
    Securities     and Exchange     Commission, dated June 26, 2013).                                                          
|      |  |                                                                                                                                                                                                                                                                                                                              
|4.15  |  | 2010 Stock Option Plan, as amended.                                                                                                                                                                                                                                                                                          
|      |  |                                                                                                                                                                                                                                                                                                                              
|4.16  |  | Form of Share Purchase Agreement, dated November
    26, 2012 by and between the Registrant and each of the investors (incorporated by reference to Exhibit 4.19 to Draft Registration
    Statement on Form DRS disseminated with the Securities and Exchange Commission, dated December 18, 2012).                         
|      |  |                                                                                                                                                                                                                                                                                                                              
|4.17  |  | Securities Purchase Agreement, dated December 30, 2013 by and
    between the Registrant and OrbiMed Israel Partners Limited Partnership (together with Form of Warrant attached as Exhibit
    A).                                                                                                                          
|      |  |                                                                                                                                                                                                                                                                                                                              
|4.18  |  | Securities Purchase Agreement, dated December 31, 2013 by and
    between the Registrant and Broadfin Healthcare Master Fund, LTD (together with Form of Warrant attached as Exhibit A).                                                                                                                                     
|      |  |                                                                                                                                                                                                                                                                                                                              
|4.19  |  | Form of Share Purchase Agreement, dated January 13, 2014 by and
    between the Registrant and each of the investors (together with Form of Warrant attached as Exhibit A) (unofficial English translation).                                                                                                                 
|      |  |                                                                                                                                                                                                                                                                                                                              
|12.1  |  | Certification by Chief Executive Officer pursuant to Section
    302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                      
|      |  |                                                                                                                                                                                                                                                                                                                              
|12.2  |  | Certification by Chief Financial Officer pursuant to Section 302
    of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                      
|      |  |                                                                                                                                                                                                                                                                                                                              
|13    |  | Certification by Chief Executive Officer and Chief Financial
    Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                          
|      |  |                                                                                                                                                                                                                                                                                                                              
|15.1  |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                                                    



| | † | Portions of
                                         this exhibit have been omitted and filed separately with the Securities and Exchange
                                         Commission pursuant to a confidential treatment request.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



111







SIGNATURE



The Registrant hereby
certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.



| | REDHILL BIOPHARMA LTD
| | ---------------------
| |                      
| | By:                  
| |                      
| |                      
| |                      
| | By:                  
| |                      
| |                      



Date: February 24, 2014



112