UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 20-F/A



(Amendment No. 1)





| |  ̈ | 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, 2012



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, each representing 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:
52,990,361



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















EXPLANATORY NOTE



This Amendment No. 1 on Form 20-F/A (the “Amendment”) to our Annual Report on Form 20-F for the fiscal year ended December
31, 2012 filed with the Securities and Exchange Commission on February 19, 2013 (the “Form 20-F”), is being filed solely
to amend Item 5.A. ("Operating and Financial Review and Prospects – Operating Results") to correct a typographical
error in the net loss for the three months ended December 31, 2012 appearing in the Quarterly Results of Operations table.



Other than as described above, this Amendment does not amend, update or restate any other information included in the Form 20-F.  This
Amendment does not reflect any events that have occurred after the date of the initial filing of the Form 20-F, and as a result,
our Annual Report on Form 20-F for the fiscal year ended December 31, 2012, as amended by this Amendment, continues to speak
as of the initial filing date of the Form 20-F, except for the officer certifications which speak as of the filing date of the
Amendment.

___________________________













TABLE OF CONTENTS



|ITEM 1.   | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS                        | 3  
|--------- | ---------------------------------------------------------------------------- | ---
|ITEM 2.   | OFFER STATISTICS AND EXPECTED TIMETABLE                                      | 3  
|ITEM 3.   | KEY INFORMATION                                                              | 3  
|ITEM 4.   | INFORMATION ON THE COMPANY                                                   | 24 
|ITEM 4A.  | UNRESOLVED STAFF COMMENTS                                                    | 53 
|ITEM 5.   | OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                 | 53 
|ITEM 6.   | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                   | 63 
|ITEM 7.   | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                            | 84 
|ITEM 8.   | FINANCIAL INFORMATION                                                        | 88 
|ITEM 9.   | THE OFFER AND LISTING                                                        | 88 
|ITEM 10.  | ADDITIONAL INFORMATION                                                       | 90 
|ITEM 11.  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 103
|ITEM 12.  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 104
|ITEM 13.  | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                              | 106
|ITEM 14.  | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 106
|ITEM 15.  | CONTROLS AND PROCEDURES                                                      | 106
|ITEM 16.  | [RESERVED]                                                                   | 106
|ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT                                             | 106
|ITEM 16B. | CODE OF ETHICS                                                               | 107
|ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                       | 107
|ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.                  | 107
|ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.      | 107
|ITEM 16F. | CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT.                                | 107
|ITEM 16G. | CORPORATE GOVERNANCE                                                         | 107
|ITEM 16H. | MINE SAFETY DISCLOSURE                                                       | 108
|ITEM 17.  | FINANCIAL STATEMENTS                                                         | 108
|ITEM 18.  | FINANCIAL STATEMENTS                                                         | 108
|ITEM 19.  | EXHIBITS                                                                     | 108
|          | GLOSSARY OF INDUSTRY TERMS                                                   | 109



i







______________________________________________________________________________



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.

________________________________



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



| | • | the 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 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.
| | - | -----------------------------------------------------------------------------



________________________________



ii







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, 2009, 2010, 2011 and 2012 and for the period from August 3, 2009 (date of incorporation) through December
31, 2009 and for the years ended December 31, 2010, 2011 and 2012, from our audited financial statements included elsewhere in
this Annual Report on Form 20-F. 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.
The unaudited selected financial data were prepared on a basis consistent with our audited financial statements and include, in
the opinion of our management, all adjustments necessary for the fair presentation of the financial information contained in those
statements.





|                                                                        |  | Year
    ended December 31                                                 |            |   | Period
    from August 3, 2009 to December 31, 2009 | 
|----------------------------------------------------------------------- |  | -------------------------------------------------------------------------- | ---------- | - | --------------------------------------------------- | 
|                                                                        |  | 2012                                                                       |            |   | 2011                                                | 
|                                                                        |  | (U.S. dollars in
    thousands, except share and per share data) (audited) |           
|Statement of Comprehensive Loss                                         |  |                                                                            |            |   |                                                     | 
|Revenues                                                                |  |                                                                            | 16         |   |                                                     | 
|Research and development expenses                                       |  |                                                                            | (6,455     | ) |                                                     | 
|General and administrative expenses                                     |  |                                                                            | (2,601     | ) |                                                     | 
|Other income (expenses)                                                 |  |                                                                            | -          |   |                                                     | 
|Operating loss                                                          |  |                                                                            | (9,040     | ) |                                                     | 
|Financial income                                                        |  |                                                                            | 197        |   |                                                     | 
|Financial expenses                                                      |  |                                                                            | (1,483     | ) |                                                     | 
|Financial expenses – net                                                |  |                                                                            | (1,286     | ) |                                                     | 
|Loss and comprehensive loss                                             |  |                                                                            | (10,326    | ) |                                                     | 
|Loss per ordinary share – basic and diluted
    (in U.S. dollars)       |  |                                                                            | (0.20      | ) |                                                     | 
|Number of ordinary shares used in computing loss
    per ordinary share |  |                                                                            | 52,595,128 |   |                                                     | 





3







|                                |  | As
    of December 31                      |        
|------------------------------- |  | ------------------------------------------ | -------
|                                |  | 2012                                       |        
|                                |  | (U.S. dollars in
    thousands)  (audited) |        
|Balance Sheet Data:             |  |                                            |        
|Cash and short term investments |  |                                            | 18,365 
|Working capital                 |  |                                            | 17,485 
|Total assets                    |  |                                            | 20,096 
|Total liabilities               |  |                                            | 1,078  
|Accumulated deficit             |  |                                            | (23,887
|Equity                          |  |                                            | 19,018 



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 consolidated
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. Many, if not all, 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 $10.3 million in 2012, net losses of approximately $15.5 million in 2011,
and net losses of approximately $2.5 million in 2010. As of December 31, 2012, we had an accumulated deficit of approximately $23.9
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 then 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.



4







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.



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, 2012, we had cash and short
term investments of approximately $18.4 million. This amount is 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 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; and
| | - | -----------------------------------------------------------------------

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



5







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 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 clinical development,
“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; “RHB-103” for the treatment of acute
migraine headaches; “RHB-104” for the treatment of Crohn’s disease; “RHB-105” for the treatment of
Helicobacter pyloriinfection, a major cause of peptic ulcer disease; 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 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 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 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 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;
| | - | --------------------------------------------------------------------------



6







| | · | 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 whether any Phase II/III or other clinical trials
we may 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 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, and intellectual property. 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:



| | · | 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;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------



7







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

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

| | · | 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 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 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 these 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.



8







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. We do not believe that this action delayed or will delay the initiation of our clinical studies with
RHB-104 or will cause us to incur additional significant costs. However, 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.



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 investigation 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,
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.



9







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 such as:



| | · | 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 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 accurately or consistently select therapeutic candidates that have
the highest likelihood to achieve commercial success.



10







If we cannot meet our obligations
under our acquisition or in-license agreements or we cannot renegotiate our obligations, we could lose the rights to our therapeutic
candidates and/or experience delays in developing our therapeutic candidates, which could have a material adverse effect on our
business.



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-license 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 products. If we do not meet our obligations under these agreements, 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.
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, 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.



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
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.



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 products, as well as by political unrest, unstable governments and legal systems and inter-governmental disputes. Any of
these changes could adversely affect our business.



11







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:



| | · | 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.”



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.



12







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.



In 2010, the U.S. Congress adopted
important legislation regarding health insurance, the provision of health care, and conditions to reimbursement for healthcare
services provided to Medicare and Medicaid patients. Under the new legislation, substantial changes are going to be 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. Such legislation is one of the most comprehensive and significant
reforms ever experienced by the U.S. in the health care field and is expected to have meaningful ramifications on tens of millions
of citizens in the U.S. Such legislation is expected to impact the scope of health care insurance, the insurance refunds from the
insurance companies and possibly also the costs of medical products. At this stage, we are unable to estimate the 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
biopharmaceuticals, 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 biopharmaceuticals
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.



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 the third-party payor’s determination that the use of an approved therapeutic candidate
is:



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



13







| | · | 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. 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 and has an aggregate limit of liability of US $10,000,000. 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.



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



The biopharmaceutical 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 biopharmaceutical 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.



14







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.



After the completion of development
and registration of our patents, third parties may still act to manufacture and/or market our 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.



15







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.



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.



16







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 2012 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:



| | · | 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.



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.



17







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 19, 2013, we had outstanding 7,151,150 tradable
Series 1 warrants which are traded on the Tel Aviv Stock Exchange and exercisable for an aggregate of 7,151,150 ordinary shares,
6,421,500 non-tradable warrants to purchase an aggregate of 6,421,500 ordinary shares and 12,015,000 options to purchase 12,015,000
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.



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.



Our American Depositary
Shares have only recently began trading on The Nasdaq Capital Market, and an active market may not develop, which may limit the
ability of our investors to sell our American Depositary Shares in the U.S.



Our American Depositary Shares
have only recently begun trading on The Nasdaq Capital Market, 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 has 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 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.



18







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.



As a result of becoming
a U.S. Securities and Exchange Commission registrant, we are obligated to develop and maintain proper and effective internal controls
over financial reporting. We may not complete our analysis of our internal controls over financial reporting in a timely manner,
or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our company
and, as a result, 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. This assessment must include disclosure of any material weaknesses identified by our management
in our internal control over financial reporting. In addition, depending on the market value of our shares held by the public and
legal and regulatory requirements, our independent registered public accounting firm will be required to issue an opinion on management's
assessment of those matters, which will be tested in connection with the filing of our second annual report on Form 20-F after
the listing of our ADSs on The Nasdaq Capital Market.



We have not completed the challenging
process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section
404. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation
and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be
unable to assert that our internal controls are effective.



If we are unable to assert that
our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to
express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness
of our financial reports, which would cause the price of our common 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 not be able to 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 do not expect security analysts of major brokerage firms to provide
coverage of our company in the near future. In addition, major investment banks may be less likely to agree to underwrite secondary
offerings on our behalf than they might if we were to become a public reporting company by means of an initial public offering.
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.





19







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.



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 shareholders 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.



20







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. During the winter of 2012, Israel was engaged in an armed conflict with Hamas, a militia group and political
party operating in the Gaza Strip. This conflict involved missile strikes against civilian targets in various parts of Israel and
negatively affected business conditions in Israel. Recent political uprisings and civil resistance demonstrations 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, or the Arab Spring in general, will develop and how it will affect the political and security situation in the Middle
East. This instability may lead to deterioration of the political relationships that exist between Israel and these countries,
and have 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.



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 male 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.



21







Provisions of our 2010
Stock 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 Stock Option Plan provides
that all options granted by us prior the completion of our initial public offering and options granted subject to completion of
our initial public offering and options which we granted after September 24, 2012, will be fully accelerated upon a "takeover"
of the Company. A "takeover" is defined in our 2010 Stock 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, shall become a "controlling shareholder". A “controlling shareholder”
for these purposes means 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 our voting rights. See “Item 6. Directors,
Senior Management and Employees – E. Share Ownership – Stock 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.



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.



22







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.



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 consolidated shareholders’ equity, per our
most recent consolidated annual financial statements, or $3 million.



23







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, 2012, 2011 and 2010 were $5,000, $139,000 and $8,000, 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 acquired through asset purchases or in-licensing.
In particular, we acquire or in-license and develop patent-protected new formulations and combinations of existing drugs in advanced
stages of development.



Our strategy is to acquire the
therapeutic candidates for relatively small down and milestone payments and relatively high royalties. From inceptions we invested
total of 1.35 Million on acquisitions.



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. Upon and subject to receipt of the requisite
approvals, 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.



24















Our Strategy



Our goal is to become a significant player
in the development of pharmaceuticals that represent 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”, each of which are described below.



Our Therapeutic Candidates



RHB–101



RHB-101 is intended for the treatment
of hypertension, heart failure and left ventricular dysfunction (following myocardial infraction) 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.



25







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 the 2007 annual report
of GlaxoSmithKline, generic products have entered this market since 2007. In 2011, the target worldwide market of RHB-101 reached
a total value in excess of $500 million according to sales market data integrated from a 2012 report by Scrip Intelligence, the
2011 annual report of GlaxoSmithKline and European 2011 sales data for carvedilol from IMS Health, a provider of information for
the health care industry. 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 2011, sales of Coreg CR® in the
U.S. reached approximately $240 million according to the 2011 annual report of GlaxoSmithKline. Coreg CR® is not marketed
in Europe. The European market of immediate release carvedilol in 2011 was in excess of $200 million according to IMS Health.
In 2010, the sale of generic immediate release of carvedilol reached $273 million in the U.S. alone 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 2023, 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.



Clinical Development



We are currently reassessing RHB-101’s
development strategy, including its regulatory path, for the possible obtainment of marketing approvals in the U.S., pursuant
to the 505(b)(2) regulatory path, and in Europe, based on a number of clinical trials previously conducted by us and Egalet a/s.
In addition, 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:



26







|Clinicaltrial name |  | Developmentphase oftheclinicaltrial               |  | Purpose of the clinicaltrial                                                                                                                                                                        |  | Clinicaltrial site      |  | Plannednumber ofsubjectsof the trial |  | Numberofsubjects |  | Nature andstatus of thetrial                                                                                    |  | Schedule          |  | Totalaccruedcost as ofDecember31, 2012
|------------------ |  | ------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- |  | ------------------------------------ |  | ---------------- |  | --------------------------------------------------------------------------------------------------------------- |  | ----------------- |  | --------------------------------------
|                   |  |                                                   |  |                                                                                                                                                                                                     |  |                         |  |                                      |  |                  |  |                                                                                                                 |  |                   |  |                                       
|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               
|                   |  |                                                   |  |                                                                                                                                                                                                     |  |                         |  |                                      |  |                  |  |                                                                                                                 |  |                   |  |                                       
|To be determined   |  | We are examining the relevant regulatory strategy |  | Under examination                                                                                                                                                                                   |  | To be determined        |  | To be determined                     |  | -                |  | Under examination                                                                                               |  | Under examination |  |                                       



Supplemental studies will be required
as part of the RHB-101 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.”



27







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 2010, the worldwide market for treatments for prevention
of chemotherapy-induced nausea and vomiting exceeded $2 billion. Of this market, 5-HT3 serotonin receptor inhibitors are estimated
at approximately $1 billion in 2010 (RHB-102 belongs to this family of inhibitors) according to BCC Research, a leading market
intelligence and information resource.



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 Groupe). 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 $400 million in 2011 according to integration of data from
IMS Health and the 2011 annual report of GlaxoSmithKline. 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 Kytril® and Anzemet® drugs varies roughly between $100 and $180 for each chemotherapy treatment.
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 radiation treatments who 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.



28







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. Together
with literature data on the relationship between the efficacy and pharmacokinetics of ondansetron, RedHill believes that these
results indicate that the efficacy and safety of the two pharmaceutical products would be expected to be similar.



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.”



In light of the positive results of the
clinical trial, we are currently in discussions with the U.S. Food and Drug Administration regarding the U.S. marketing approval
pathway for RHB-102.



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 ofsubjectsof the trial |  | Numberofsubjects |  | Nature andstatus of thetrial                                                                                                                                                                                   |  | Schedule                    |  | Accruedcost as ofDecember31, 2012
|---------------------------- |  | ------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- |  | ------------------------------------ |  | ---------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- |  | ---------------------------------
|                             |  |                                       |  |                                                                                                                                                         |  |                                  |  |                                      |  |                  |  |                                                                                                                                                                                                                |  |                             |  |                                  
|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 in compliance with the trial’s bioequivalence and safety objectives, meeting its objectives
        of bioequivalence as defined by U.S. Food and Drug Administration |  | Ended
        in Q2 2012    |  | Approx. $1.3 million             
|                             |  |                                       |  |                                                                                                                                                         |  |                                  |  |                                      |  |                  |  |                                                                                                                                                                                                                |  |                             |  |                                  
|TBD                          |  | Supplementary Pharmacokinetics        |  | Comparison of the bioavailability of RHB-102 with and without
    food                                                                                  |  | Algorithme Pharma, Canada        |  | 14                                   |  | TBD              |  | Under examination                                                                                                                                                                                              |  | Planned to begin in H1 2013 |  |                                  
|                             |  |                                       |  |                                                                                                                                                         |  |                                  |  |                                      |  |                  |  |                                                                                                                                                                                                                |  |                             |  |                                  
|TBD                          |  | Supplementary Pharmacokinetics        |  | Study of ondansetron plasma accumulation over multiple day dosing
    of RHB-102                                                                        |  | Algorithme Pharma, Canada        |  | TBD                                  |  | TBD              |  | Under examination                                                                                                                                                                                              |  | Planned to begin in 2013    |  |                                  





29









Supplemental studies will be required
as part of the RHB-102 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-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 VersaFilmTMtechnology is a novel, non-mucoadhesive, fast dissolving oral dosage form.



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 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 $2.1
billion worldwide in 2011 according to a 2011 report by Business Insights.



According to the 2011 annual report of
Merck and Co., Inc., the direct sales of Maxalt® worldwide in 2011 accounted for $639 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. According to HTA (Health Technology Assessment),
the price of one 10 mg tablet is approximately $37. The U.S. patent of Maxalt® is expected to expire in the U.S. in December
2012. It should be noted that, to the best of our knowledge, and based on investigations performed by us, we were prevented from
marketing RHB-103 in the U.S. until December 2012, due to the validity of the existing patent of Merck & Co. Inc.



Until December 2012, sumatriptan was the
only 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 approved by the FDA in January 2013
and will be marketed as as ZecuityTM by NuPathe, Inc. beginning in the fourth quarter of 2013.



30







In December 2012, the patent on rizatriptan
expired and as of the date of this filing, nine generic versions of Maxalt® and a few generic versions of MaxaltMLT® are
available for prescription, including one by PAR Pharmaceutical and one by Mylan.



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 should be especially appealing to pediatric and geriatric populations that 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 this clinical trial and the outcome
of the pre-NDA meeting, we and IntelGenx Corp. intend to file an NDA with the U.S. Food and Drug Administration for U.S. marketing
approval under the 505(b)(2) regulatory path during the first quarter of 2013.



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 thetrial                                                                                                        |  | Schedule                 |  | Accruedcost as ofDecember31, 2012
|------------------ |  | ------------------------------------- |  | ------------------------------------------------------ |  | ------------------------- |  | ---------------------------------- |  | ---------------- |  | ----------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ |  | ---------------------------------
|                   |  |                                       |  |                                                        |  |                           |  |                                    |  |                  |  |                                                                                                                                     |  |                          |  |                                  
|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.
        $800,000         



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.”



31







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 Dr. Martin 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. According to Dr. Robert Greenstein’s
article published in The Lancet Infectious Diseases in 2003, the hypothesis that Crohn’s disease is caused by an interaction
between MAP bacteria and the immune systems of individuals having a predisposition to the pathological inflammatory reaction is
supported by increasing evidence. This hypothesis is further supported by an increasing number of scientific and clinical studies
published in peer reviewed journals since a National Institute of Allergy and Infectious Diseases conference in 1998 that focused
on MAP in Crohn’s disease.



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.”



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 is currently in progress.



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 bacteria 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 bacteria 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. These patients represent our target market. EvaluatePharma, a source for commercial analysis
of the pharmaceutical and biotech sector, estimates the market for diagnosis and drug treatment of Crohn’s disease to have
been approximately $3 billion worldwide in 2011 and estimates the worldwide market for diagnosis and drug treatment of Crohn’s
disease to reach $5 billion by 2016.



32







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 infection. To the best of our knowledge, there is no other drug approved for marketing that treats 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 Drugfrom the Family        |  | 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. |  | Remicade, (Infliximab)
        Humira |  | Administered intravenously (IV) every 2-8 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.    



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 anti-TNFα
therapies which may be under development to treat Crohn’s disease.



Clinical Development



We are currently preparing two clinical
trials, one in the U.S. and one Europe, before 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 six countries in Europe. In the Phase III clinical trial in Australia, sponsored by
Pharmacia and published by Professor Warwick Selby in 2007 in the medical journal Gastroenterology, the main objective was to
evaluate the ratio of patients with recurrent symptoms of the disease in the 12th, 24th and 36th month of disease, out of the
patients who had achieved remission after 16 weeks of treatment. The main secondary objective was the rate of patients whose clinical
condition improved within the first 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 will be 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. Upon the successful completion of 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."



33







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 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. 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, followed by an additional
follow-up period of approximately six months to confirm safety. A further Clinical Trial Application (CTA) may be submitted in
Europe in the coming months.



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



|Clinical trialname       |  | Developmentphase of theclinical trial                                |  | Purpose of theclinical trial                                                                      |  | Clinicaltrial site                      |  | Plannednumber ofsubjects ofthe trial |  | Number.ofsubjects |  | Nature andstatus of thetrial                                                                                                         |  | Schedule                        |  | Accruedcost as ofDecember31, 2012
|------------------------ |  | -------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------- |  | --------------------------------------- |  | ------------------------------------ |  | ----------------- |  | ------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------- |  | ---------------------------------
|                         |  |                                                                      |  |                                                                                                   |  |                                         |  |                                      |  |                   |  |                                                                                                                                      |  |                                 |  |                                  
|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                   |  | Biovail PK study 2007            
|                         |  |                                                                      |  |                                                                                                   |  |                                         |  |                                      |  |                   |  |                                                                                                                                      |  |                                 |  |                                  
|To be determined         |  | Phase
        III
        (N.
        America and Israel – “MAP US”) |  | Examining the product’s effectiveness in alleviating  symptoms
    of Crohn’s disease in patients |  | To
        be determined                |  | 240                                  |  |                   |  | Preparations for Phase III trial in North America and Israel                                                                         |  | Expected to commence in Q2 2013 |  | $2.5
        million             
|                         |  |                                                                      |  |                                                                                                   |  |                                         |  |                                      |  |                   |  |                                                                                                                                      |  |                                 |  |                                  
|To be determined         |  | Phase
        III
        (Europe
        – “MAP Europe”)            |  | Examining the product’s effectiveness in alleviating Crohn’s
    disease patients                 |  | To be determined                        |  | To be determined                     |  |                   |  | Under examination                                                                                                                    |  | -                               |  |                                  
|                         |  |                                                                      |  |                                                                                                   |  |                                         |  |                                      |  |                   |  |                                                                                                                                      |  |                                 |  |                                  
|To be
        determined |  | Pediatric trial                                                      |  | Examining the product’s effectiveness in alleviating Crohn’s
    disease in pediatric patients    |  | To be determined                        |  | To be determined                     |  |                   |  | Under examination                                                                                                                    |  | -                               |  |                                  



34







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.”



Multiple Sclerosis



We are also exploring, through preliminary
research, the potential impact of RHB-104 in treating Multiple Sclerosis, or MS, indication. To date, we have performed three
pre-clinical studies in an experimental autoimmune encephalomyelitis (EAE) mouse model of 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 making advanced preparations for starting
a Phase IIa proof of concept clinical trial to be run in Israel. Such clinical trial is currently expected to commence in Q1 2013
and to conclude during the second quarter of 2014, with interim results expected during the first 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.



|Trial name                                                                      |  | Developmentphase  |  | Purpose of thetrial                                                                                                 |  | Clinicaltrial sites |  | Plannednumber ofsubjects ofthe trial |  | Number.ofsubjectscurrentlyenrolled |  | Nature andstatusof the trial |  | Schedule                        |  | Accruedcost as ofDecember31, 2012
|------------------------------------------------------------------------------- |  | ----------------- |  | ------------------------------------------------------------------------------------------------------------------- |  | ------------------- |  | ------------------------------------ |  | ---------------------------------- |  | ---------------------------- |  | ------------------------------- |  | ---------------------------------
|                                                                                |  |                   |  |                                                                                                                     |  |                     |  |                                      |  |                                    |  |                              |  |                                 |  |                                  
|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 positivecontrols  |  | -                   |  |                                      |  |                                    |  | Completed 2013               |  |                                 |  |                                  
|                                                                                |  |                   |  |                                                                                                                     |  |                     |  |                                      |  |                                    |  |                              |  |                                 |  |                                  
|CEASE-MS                                                                        |  | Phase
        IIa |  | Exploratory                                                                                                         |  | Israel              |  | 16                                   |  | 0                                  |  | Start-up                     |  | Expected to commence in Q1 2013 |  | 70,000                           





35









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.”



RHB-105



RHB-105 is intended for the treatment
of Helicobacter pylori bacterial infection in the gastrointestinal tract. RHB-105 is a combination of three approved drug
products – omeprazole, which is a proton pump inhibitor (the natural body pump that produces the gastric acids used for
digesting the food in the stomach), and amoxicillin and rifabutin which are antibiotics. RHB-105 is administered to patients orally.



Chronic infection with Helicobacter
pylori irritates the mucosal lining of the stomach and small intestine. This condition is further exacerbated by the acidic
environment within the upper gastro intestinal tract, and can eventually result in a peptic ulcer. According to a 2004 article
in The Emerging Infectious Diseases by William M. Duck et. al., patients with a peptic ulcer may complain of abdominal pain, nausea,
vomiting and weight loss. In addition, these bacteria are a major risk factor for the development of stomach cancer.



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 Helicobacter
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) was shown in a Phase II study comprising 130 subjects, in
which RHB-105 was shown to eradicate Helicobacter 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 Helicobacter
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.



36







Clinical Development



RHB-105 completed a Phase II clinical
trial in Australia and is planned to undergo a Phase II/III study in North America, which is currently anticipated to commence
during the second quarter of 2013, subject to receipt of necessary regulatory approvals. 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 clinical
trial of RHB-105.



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



|Clinicaltrialname |  | Developmentphase of theclinical trial |  | Purpose ofthe clinicaltrial                                                                                                                                  |  | Clinical trialsite                      |  | Plannednumber.ofsubjectsof thetrial |  | NumberofSubjects |  | Nature andstatus of thetrial                                                                                                                                |  | Schedule                        |  | Accruedcost as ofDecember31, 2012
|----------------- |  | ------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------------------- |  | ----------------------------------- |  | ---------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- |  | ---------------------------------
|                  |  |                                       |  |                                                                                                                                                              |  |                                         |  |                                     |  |                  |  |                                                                                                                                                             |  |                                 |  |                                  
|-                 |  | Phase IIa                             |  | Examining the product’s effectiveness in treating Helicobacter
    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                   |  | -                                
|                  |  |                                       |  |                                                                                                                                                              |  |                                         |  |                                     |  |                  |  |                                                                                                                                                             |  |                                 |  |                                  
|To be determined  |  | Phase
        II/III                  |  | Examining the effectiveness, safety and pharmacokinetics of the
    final formulation                                                                        |  | To be determined                        |  | To be determined                    |  |                  |  | Preparations for Phase II/III trial in North America                                                                                                        |  | Expected to commence in Q2 2013 |  | $0.6
        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.”



37







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
2011.



To the best of our knowledge, the main
competition 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.



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 estimates that the annual worldwide sales of MoviPrep® and the parallel
product marketed outside of the U.S. (Movicol®) in 2011 were approximately $400 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 formulation
stage. 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:



38







|Clinicaltrial name |  | Developmentphase of theclinical trial |  | Purpose ofthe clinicaltrial                                                                                  |  | Clinicalsite                            |  | Plannednumber ofsubjects ofthe trial |  | Numberofsubjects |  | Natureand statusof the trial |  | Performanceschedule |  | Accruedcost as ofDecember31, 2012
|------------------ |  | ------------------------------------- |  | ------------------------------------------------------------------------------------------------------------ |  | --------------------------------------- |  | ------------------------------------ |  | ---------------- |  | ---------------------------- |  | ------------------- |  | ---------------------------------
|                   |  |                                       |  |                                                                                                              |  |                                         |  |                                      |  |                  |  |                              |  |                     |  |                                  
|-                  |  | 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       |  | -                                
|                   |  |                                       |  |                                                                                                              |  |                                         |  |                                      |  |                  |  |                              |  |                     |  |                                  
|To be determined   |  | To be determined                      |  | Comparison of the product’s effectiveness and safety (in
    its final formulation) with an existing product |  | To be determined                        |  | To be determined                     |  | -                |  | To be determined             |  | To be determined    |  | Approx.
        $200,000         



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.”



Summary



A summary of our therapeutic candidates
is provided below:



|Name of Product |  | RelevantIndication            |  | Potential Advantages OverMost Existing Treatments                                            |  | Development Stage                                     |  | Rights in the Product                                      
|--------------- |  | ----------------------------- |  | -------------------------------------------------------------------------------------------- |  | ----------------------------------------------------- |  | -----------------------------------------------------------
|                |  |                               |  |                                                                                              |  |                                                       |  |                                                            
|RHB-101         |  | Cardiovascular                |  | Once-daily                                                                                   |  | Under review                                          |  | Worldwide, exclusive license                               
|                |  |                               |  |                                                                                              |  |                                                       |  |                                                            
|RHB-102         |  | Oncology
        support      |  | Reduced number of drug administrations                                                       |  | In preparation for application for marketing approval |  | Worldwide, exclusive license                               
|                |  |                               |  |                                                                                              |  |                                                       |  |                                                            
|RHB-103         |  | Acute
        migraine        |  | Discrete dosage form and ease of use                                                         |  | In preparation for application for marketing approval |  | Worldwide, exclusive license and co-development            
|                |  |                               |  |                                                                                              |  |                                                       |  |                                                            
|RHB-104         |  | Crohn’s
        disease       |  | Novel
        mechanism of action and improved clinical benefit                              |  | In preparation
        for Phase III studies          |  | Acquired all rights to the product, worldwide and exclusive
|                |  |                               |  |                                                                                              |  |                                                       |  |                                                            
|RHB-104         |  | Multiple Sclerosis (MS)       |  | Oral formulation targeting underlying cause of MS                                            |  | In preparation
        for Phase IIa study            |  | Acquired all rights to the product, worldwide and exclusive
|                |  |                               |  |                                                                                              |  |                                                       |  |                                                            
|RHB-105         |  | Helicobacter pylori infection |  | Improved effectiveness                                                                       |  | In preparation
        for Phase II/III studies       |  | Acquired all rights to the product, worldwide and exclusive
|                |  |                               |  |                                                                                              |  |                                                       |  |                                                            
|RHB-106         |  | Bowel
        preparation     |  | An oral
        pill. Avoids severe bad taste
        No known
        nephrotoxicity issues |  | In preparation
        for Phase II/III studies       |  | Acquired all rights to the product, worldwide and exclusive



39







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.



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.



40







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.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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.



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, 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
$849,000, subject to deviations of 10%.



41







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 $600,000 and we are required to make additional milestone payments
of up to $700,000 as follows:



| | · | $200,000
                                                                                                               upon the filing
                                                                                                               of an NDA and acceptance
                                                                                                               of the filing by
                                                                                                               the U.S. Food and
                                                                                                               Drug Administration;
                                                                                                               and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | $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, in 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.



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. 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.



42







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 to a patent-protected diagnostic test that identifies the presence of MAP 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.



We intend to use this test in order to
identify the MAP status of the subjects in the clinical study, thereby allowing a correlation of MAP status and treatment response
to RHB-104.



Under the license agreement, we received
an exclusive license for all indications and medical uses of the test in exchange for a one-time payment of $45,000. Furthermore,
we agreed to pay royalties of 7% of future sales, or an annual minimum amount noted below, as well as 20% of payments we receive
from granting sublicenses.



The agreement provides that the annual
minimum royalty payment amount shall be $10,000 in year two, $15,000 in year three, $20,000 in year four and $35,000 every year
thereafter. These annual minimum payment amounts shall be deducted from future royalty payments.



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 Agreement for RHB-107 and RHB-108



On October 21, 2012, we signed a term
sheet for an exclusive worldwide licensing agreement with SCOLR Pharma Inc. Subject to completion of due diligence and execution
of a binding agreement, the agreement would provide us a worldwide, perpetual, exclusive license for all indications for two proprietary
therapeutic candidates, both 12 hour extended release proprietary formulations of currently available pharmaceutical products.
The first therapeutic candidate is extended release ibuprofen, which to the best of our knowledge, has completed a Phase III study
in the U.S. To the best of our knowledge, prior to the NDA submission to the U.S. Food and Drug Administration, we will be required
to complete an “Actual Use study,” the purpose of which is to assess safety under conditions resembling non-prescription
use (OTC). The second therapeutic candidate is extended release pseudoephedrine, which has, to the best of our knowledge, completed
a pivotal bioequivalence trial. To the best of our knowledge, an Abbreviated New Drug Application was submitted to the U.S. Food
and Drug Administration and a complete response letter was received citing certain deficiencies. We would have the primary responsibility
for development and commercialization of the therapeutic candidates in cooperation with SCOLR Pharma Inc. would receive royalties
in the event either therapeutic candidate generates commercial sales. For extended release ibuprofen, SCOLR Pharma Inc. would
be entitled to a royalty of between 20% and 50%, depending on the distribution channel and territory, and for extended release
pseudoephedrine, SCOLR Pharma Inc. would be entitled to a royalty of between 8% and 15% depending on the distribution channel.
The consummation of this licensing transaction is subject to our further due diligence as well as a negotiation and execution
of a definitive agreement. The term sheet establishes various mechanisms, including payment-related mechanisms, in the event the
agreement is not executed; however, we are entitled not to enter into an agreement, with no payment to SCOLR Pharma, in the event
that material deviations emerge during the due diligence process. The term sheet also includes a framework for potential future
cooperation between the parties with respect to other products. Our discussions with SCOLR Pharma continue and we cannot guarantee
that we will in fact enter into a definitive agreement with SCOLR Pharma Inc. or that the terms that we ultimately agree to will
be similar to the terms described in the term sheet.



43







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 $10,000. 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, RHB-105 and RHB-106.



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, 2012
we estimated, that in the future we may receive from our Canadian service provider discounts of approximately $0.5 million. As
of December 31, 2012, we had not recorded any research and development expense deductions.



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.



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.



44







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, the manufacturer is entitled
to receive approximately $350,000 upon the completion of 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 few years. The total costs of the two manufacturing agreements with the Canadian service provider
are expected to be approximately $1.8 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.



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.



45







Pursuant
to this agreement, as amended, the manufacturer is entitled to receive approximately $400,000, 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 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



PharmaNet Canada Inc. specializes in the
performance of clinical trials and pursuant to the agreement will be 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, PharmaNet Canada Inc. is entitled to receive $8 million in connection with the Phase III clinical trial in North America
and the Phase III clinical trial in Europe, as well as reimbursement of costs and investigator grants to be paid during the trials.
The payments will be spread out over the period of the clinical trials and based upon quarterly administration fees, payments
of up to approximately $4 million during the course of the clinical trials subject to the satisfaction of certain milestones and
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 and payments for various laboratory tests
during the clinical trials, including tests to identify the MAP bacterium.



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 PharmaNet
Canada Inc. for the provision of clinical trial services, for pediatric trial of RHB-104.



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



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 104 issued patents and 21 patent applications in 12 different patent families. 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.



46







RHB-101



One family of our patents and patent applications
is in-licensed by us and is comprised of ten issued patents and one patent application. 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 one patent
application filed in the U.S., and 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 application which has been granted a Notice of
Allowance 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 three issued patents in the U.S., Canada and Mexico, and two pending patent applications in Europe and Hong Kong.
Nineteen countries are designated in the European application. 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 24 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.



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.



RHB-103



A fifth patent family is in-licensed by
us from IntelGenx Corp. and is comprised of three issued patents in the U.S. and one pending patent application. 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 that is the basis for RHB-103. 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.



47







RHB-104



A sixth family of our patents and patent
applications is owned by us and is comprised of thirty five issued patents (including U.S., Australia, Canada, Israel, Japan,
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) and two
pending patent applications. 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 seventh family of our patents and patent
applications is owned by us and is comprised of seven patent applications in Australia, Canada, Europe (Austria, Belgium, Bulgaria,
Croatia, Cyprus, Czech Republic, Switzerland/Liechtenstein, Germany, Denmark, Estonia, Spain, Finland, France, United Kingdom,
Greece, Hungary, Ireland, Iceland, Italy, Latvia, Lithuania, Luxembourg, Macedonia, Malta, Monaco, Netherlands, Norway, Poland,
Portugal, Romania, Slovenia, Slovakia, Sweden and Turkey), Israel, Japan, South Africa and the Philippines, and one granted patent
in New Zealand. In the U.S., we have received a notice of issuance. 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



An eighth 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 eighth 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 Helicobacter 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.



RHB-106



A ninth 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 ninth 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.



48







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 tenth 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.



RHB-104 - new indications



An eleventh
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 select non-PCT countries.



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



A twelfth 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.



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.



49







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



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 studies required of, or agreed to by, a sponsor that are conducted 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.



50









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.



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.



51







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).



52







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 February 23, 2011 we entered into a
lease agreement for the lease of offices in the “Platinum” building at 21 Ha’arba’ah Street, Tel Aviv,
Israel. Pursuant to the lease agreement, we lease approximately 310 square meters of office space, a 27 square meter warehouse
and six parking spaces. The monthly rent is NIS 48,000 (approximately $13,000, based on the representative U.S. dollar –
NIS rate of exchange of 3.684 on February 17, 2013), linked to the Israeli Consumer Price Index of January 2011. The lease term
under the agreement is as of March 1, 2011 up to February 28, 2016, 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 ($76,000,
based on the representative U.S. dollar – NIS rate of exchange of 3.684 on February 17, 2013). 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.”



Company Overview



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



53







Depending on the specific development program,
our therapeutic candidates are designed to provide improvements over existing drugs by improving the 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, two of which have completed bioequivalence clinical trials subject
to review and approval by the U.S. Food and Drug Administration.



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.”



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 $600,000 and are required to make additional milestone payments of up to $700.000. 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 of
Inflammatory Bowel Disease (IBD) but has focused on Crohn’s disease patients. 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.”



54







RHB-105 is a patented combination of three
drugs – omeprazole, which is a proton pump inhibitor, and amoxicillin and rifabutin, both of which are antibiotics. RHB-105
is intended for the treatment of Helicobacter 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.”



Components of Statement of Comprehensive
Loss



Revenues



In 2012 and in 2011, we recorded non-significant
revenues for the first time, 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 directors, employees and consultants in executive and operational functions. Other significant general
and administration costs include office related expenses, professional fees for outside accounting and legal services, travel costs,
insurance premiums and depreciation.



Financial Income and Expense



Financial income and expense consist of
non-cash financing expenses in connection with the revaluation of mandatory convertible loans that we entered into during 2010.
The fair value of these loans was measured at the time of initial issuance. Subsequent to initial recognition of the fair value
of these loans, changes in fair value were charged to financial expense or financial income. Immediately before the completion
of our initial public offering, all of these loans were automatically converted into ordinary shares and warrants. See “Item
10. Additional Information – C. Material Contracts – Loan Agreements – August 2010 Mandatory Convertible Loan
Agreements.” Other financial income and expense include revaluing certain royalty liabilities due to investors in our mandatory
convertible loans, 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 2012, the majority of the finance expenses were accretion and settlement of royalty
obligations to investors. In 2011, the majority of the finance expenses were generated from the revaluation to fair value of the
mandatory convertible loans upon their conversion to shares and warrants prior to our initial public offering.



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:



55







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 will need to obtain additional
funds to further develop our research and development programs. As of December 31, 2012, we had an accumulated deficit of approximately
$23.9 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, 2012, we had approximately
$18.4 million of cash, cash equivalents and short term investments.



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 presentation of the information shown. Operating results for any quarter are not necessarily indicative of results for
a full fiscal year.



|Three Months Ended |  | 
|------------------ |  | 





|                                    |  | March31                                     |    |  | June30 |  |     | Sept.30 |  |  | Dec.31 |  |  | March31 |     |  | June30 |  |       | Sep.30 |  |  | Dec.31 |  |  | March31 |       |  | June
    30 |  |       | Sep.30 |  |  | Dec.31 | 
|----------------------------------- |  | ------------------------------------------- | -- |  | ------ |  | --- | ------- |  |  | ------ |  |  | ------- | --- |  | ------ |  | ----- | ------ |  |  | ------ |  |  | ------- | ----- |  | ----------- |  | ----- | ------ |  |  | ------ | 
|                                    |  | 2010                                        |    |  | 2011   |  |     | 2012    | 
|                                    |  | (U.S. dollars in thousands
    - Unaudited) |    |  |        |  |     |         | 
|Statements of operations            |  |                                             |    |  |        |  |     |         |  |  |        |  |  |         |     |  |        |  |       |        |  |  |        |  |  |         |       |  |             |  |       |        |  |  |        | 
|Revenues                            |  |                                             | -  |  |        |  | -   |         |  |  | -      |  |  |         | -   |  |        |  | 6     |        |  |  | 3      |  |  |         | 11    |  |             |  | 3     |        |  |  | 4      | 
|Research and development expenses   |  |                                             | 39 |  |        |  | 86  |         |  |  | 202    |  |  |         | 409 |  |        |  | 843   |        |  |  | 1,176  |  |  |         | 1,540 |  |             |  | 1,855 |        |  |  | 2,330  | 
|General and administrative expenses |  |                                             | 37 |  |        |  | 106 |         |  |  | 173    |  |  |         | 202 |  |        |  | 509   |        |  |  | 679    |  |  |         | 687   |  |             |  | 607   |        |  |  | 607    | 
|Other expenses (income)             |  |                                             | -  |  |        |  | 58  |         |  |  | 60     |  |  |         | 361 |  |        |  | -     |        |  |  | -      |  |  |         | -     |  |             |  | -     |        |  |  | -      | 
|Operating loss                      |  |                                             | 76 |  |        |  | 250 |         |  |  | 435    |  |  |         | 972 |  |        |  | 1,346 |        |  |  | 1,852  |  |  |         | 2,216 |  |             |  | 2,459 |        |  |  | 2,933  | 
|Financial income                    |  |                                             | 1  |  |        |  | 1   |         |  |  | 16     |  |  |         | 404 |  |        |  | 765   |        |  |  | 381    |  |  |         | 20    |  |             |  | 5     |        |  |  | 258    | 
|Financial expenses                  |  |                                             | 4  |  |        |  | 7   |         |  |  | 1,222  |  |  |         | -   |  |        |  | 8,045 |        |  |  | 57     |  |  |         | 533   |  |             |  | 166   |        |  |  | 59     | 
|Net loss                            |  |                                             | 79 |  |        |  | 256 |         |  |  | 1,641  |  |  |         | 569 |  |        |  | 8,626 |        |  |  | 1,528  |  |  |         | 2,729 |  |             |  | 2,620 |        |  |  | 2,734  | 







56







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, 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.



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.



Comparison of the Year Ended December
31, 2011 to the Year Ended December 31, 2010



Revenues



During the
year ended December 31, 2011, we recorded revenues for the first time in the amount of $23,000, in connection with royalty payments
received from a third party licensee of limited rights to a patent that we acquired from Giaconda Limited. In
the year ended December 31, 2010, we had no such revenue.



Research and Development Expenses



Research and development expenses for the
year ended December 31, 2011 were $5.4 million, compared to $0.7 million for the year ended December 31, 2010. This increase resulted
primarily from an increase of $2.3 million in manufacturing and supply costs related to the clinical trials of RHB-102, RHB-103,
RHB-104, RHB-105 and RHB-106, fees paid to third parties engaged to conduct our clinical trials for RHB-104 and a $2.1 million
increase in salaries and consulting fees (including an increase from share-based payments made to several employees and consultants
in the amount of $1.4 million) mainly due to an increase of the number of employees and consultants and option grants in connection
with and following our initial public offering.



General and Administrative Expenses



General and administrative expenses for
the year ended December 31, 2011 were $2.5 million, compared to $0.5 million for the year ended December 31, 2010. This increase
resulted mainly from an increase of $1.6 million in our payroll and consultant expenses, mainly due to higher share-based payments
of $1.4 million in connection with and following our initial public offering, and the transfer of our operations to offices in
Tel Aviv in April 2011.



57







Other Income and Expenses



In 2011, we had no other expenses, compared
to $0.5 million for the year ended December 31, 2010 that was related to financing agent fees paid in connection with our mandatory
convertible loans.



Operating Loss



In 2011, our operating loss amounted to
approximately $7.9 million, compared to $1.7 million in 2010. The increase was due to growth in our activities, which was reflected
mainly in an increase in research and development expenses and general and administrative expenses described above, including an
increase of share-based payments of $2.8 million in connection with and following our initial public offering.



Financing Income and Expenses



We recognized net financial expenses of
$7.6 million in the year ended December 31, 2011, compared to net financial expense of $0.8 million for the year ended December
31, 2010. This increase resulted primarily from a one-time non-cash financing expense of $7.49 million in the year ended December
31, 2011 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. In addition, the increase in financial expenses was offset by an increase of $0.5 million
in financial income resulting primarily from changes in foreign exchange rates on our cash balances, which had a positive effect
on our net assets during the year ended December 31, 2011.



| | 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 $700,000 from the exercise
of options and warrants following the listing, and gross process of approximately $6.5 million in a private financing shortly prior
to the listing on NASDAQ. As December 31, 2012, we had approximately $18.4 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.



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 remain 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 10. – C. Material Contracts – Loan Agreements
– August 2010 Mandatory Convertible Loan Agreements.”



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. See “Item 10. – C. Material
Contracts – Loan Agreements – November 2010 Mandatory Convertible Loan Agreement.”



58







In January 2011, we received gross proceeds
of an aggregate of $584,000 in connection with the exercise of all warrants issued under our 2009 investment agreements for 1,299,347
preferred shares.



In 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 is exercisable through February 2, 2014 into one
ordinary share (i) at a dollar-linked exercise price of NIS 3.8 (approximately $1.03 based on the representative U.S. dollar –
NIS rate of exchange of 3.684 on February 17, 2013) through February 2, 2012 and (ii) at a dollar-linked exercise price of NIS
4.6 (approximately $1.25, based on the representative U.S. dollar – NIS rate of exchange of 3.684 on February 17, 2013) from
February 3, 2012 to February 2, 2014. The tradable Series 1 Warrants expire on February 2, 2014.



Since our initial public offering, investors
in our mandatory convertible loans have exercised warrants for an aggregate gross amount of approximately $600,000











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 $1.08 based on the representative U.S. dollar
– NIS rate of exchange of 3.684 on February 17, 2013) 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. In connection with this private placement we
received an aggregate investment amount of approximately $6.56 million. Investors included existing shareholders, including two
of our directors, Dr. Cabilly and Mr. Suesskind.



The warrants will be exercisable for a
period of two (2) years until January 10, 2015. The exercise price for each warrant share (the “Warrant Price”) will
be calculated as follows: (i) in the event the holder exercises the warrant by July 10, 2013 (the “Initial Exercise Period”),
the Warrant exercise price will be $1.18 ; (ii) in the event the holder exercises the holder's warrant within six (6) months following
the end of the Initial Exercise Period (the “Second Exercise Period”), the Warrant exercise price will be $1.34; and
(iii) in the event the holder exercises the holder's warrant following the end of the Second Exercise Period and until January
10, 2015, the warrant exercise price will be $1.54.



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:



| | · | 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.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------



59







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 and development programs related to the therapeutic candidates, which may have material
adverse effect on the Company's business, financial condition and results of operations.



Cash Flow



Operating activities



For the year ended December 31, 2012, net
cash flow used in operating activities was approximately $6.8 million compared to approximately $4.7 million for the year ended
December 31, 2011 and $1.6 million for the year ended December 31, 2010. The increase in net cash flow used in operating activities
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 used in investing activities for the year ended December 31, 2012 totaled approximately $3 million compared to approximately
$4.7 million for the year ended December 31, 2011 and $1million for the year ended December 31, 2010. 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. For the year ended December 31, 2010, we invested $1.1 million to acquire rights to pharmaceutical products.



Financing activities



Net cash flow resulting from financing
activities for the year ended December 31, 2012 amounted to approximately $6.6 million, compared with approximately $13.8 million
for the year ended December 31, 2011 and $11.1 million for the year ended December 31, 2010. In 2012, most of the cash flows from
financing activities resulted from investment agreements for the issuance ordinary shares and warrants in consideration of an aggregate
investment amount of approximately $6.2 million, while in 2011; most of the cash flows from financing activities were derived from
cash raised in our initial public offering. In 2010, our cash flows from financing activities were derived from our mandatory convertible
loans.



C. Research and Development,
Patents and Licenses



Our research and development expenses consist
primarily of costs of clinical trials, salaries and consulting fees (including share-based payments), and fees paid to external
service providers. We primarily use external service providers to manufacture our therapeutic candidates and to perform clinical
trials with our therapeutic candidates. 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, 2010,
2011 and 2012.



60







|                                 |  | Year Ended December 31,  |     |  |      | 
|-------------------------------- |  | ------------------------ | --- |  | ---- | 
|                                 |  | 2010                     |     |  | 2011 | 
|                                 |  | U.S. dollars in millions |    
|                                 |  |                          |    
|RHB-101                          |  |                          | -   |  |      | 
|RHB-102                          |  |                          | 0.1 |  |      | 
|RHB-103                          |  |                          | -   |  |      | 
|RHB-104                          |  |                          | -   |  |      | 
|RHB-105                          |  |                          | -   |  |      | 
|RHB-106                          |  |                          | -   |  |      | 
|Total gross direct project costs |  |                          | 0.1 |  |      | 



Research and development expenses



From our inception through December 31,
2012, we have incurred research and development expenses of approximately $12.7 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) |     |  | From incorporation date until December 31, | 
|---------------------------- |  | ------------------------------------------------- | --- |  | ------------------------------------------ | 
|                             |  | 2011                                              |     |  | 2012                                       | 
|Payroll and related expenses |  |                                                   | 0.4 |  |                                            | 
|Professional services        |  |                                                   | 0.7 |  |                                            | 
|Share-based payments         |  |                                                   | 1.4 |  |                                            | 
|Clinical trials              |  |                                                   | 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.”



61







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.



| | 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 expenditure 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, 2012:



|                                      |  | Total                                   |       |  | Less than 1 year |  |       | 1-3 years |  |  | 3-5 years |  |  | More than 5 years |   
|------------------------------------- |  | --------------------------------------- | ----- |  | ---------------- |  | ----- | --------- |  |  | --------- |  |  | ----------------- | --
|                                      |  | (U.S. dollars in thousands) (Unaudited) |      
|                                      |  |                                         |       |  |                  |  |       |           |  |  |           |  |  |                   |   
|Office lease obligations              |  |                                         | 455   |  |                  |  | 117   |           |  |  | 312       |  |  |                   | 26
|Accounts payable and accrued expenses |  |                                         | 1,078 |  |                  |  | 1,078 |           |  |  |           |  |  |                   |   
|                                      |  |                                         |       |  |                  |  |       |           |  |  |           |  |  |                   |   
|Total                                 |  |                                         | 1,533 |  |                  |  | 1,195 |           |  |  | 312       |  |  |                   | 26



The foregoing table does not include our
in-license agreements with Egalet a/s, SCLOR 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.”



62







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.



|Name                   |  | Age |  | Position(s)                                                        
|---------------------- |  | --- |  | -------------------------------------------------------------------
|                       |  |     |  |                                                                    
|Executive
    Officers |  |     |  |                                                                    
|Dror Ben-Asher         |  | 47  |  | Chief Executive Officer and Chairman of the board of directors     
|Ori Shilo              |  | 46  |  | Deputy Chief Executive Officer Finance and Operations, and Director
|Reza Fathi, Ph.D.      |  | 58  |  | Senior Vice President Research and Development                     
|Gilead Raday           |  | 38  |  | Senior Vice President Corporate and Product Development            
|Adi Frish              |  | 43  |  | Senior Vice President Business Development and Licensing           
|Guy Goldberg           |  | 37  |  | Chief Business Officer                                             
|Ira N. Kalfus, M.D.    |  | 51  |  | Chief Medical Officer                                              
|Uri Hananel Aharon     |  | 32  |  | Chief Accounting Officer                                           
|                       |  |     |  |                                                                    
|Directors              |  |     |  |                                                                    
|Dr. Shmuel Cabilly (2) |  | 63  |  | Director                                                           
|Eric Swenden           |  | 69  |  | Director                                                           
|Dr. Kenneth Reed       |  | 59  |  | Director                                                           
|Dan Suesskind (1)      |  | 69  |  | Director                                                           
|Ofer Tsimchi (1), (2)  |  | 53  |  | External Director                                                  
|Aliza Rotbard (1), (2) |  | 67  |  | External Director                                                  



|Member of our audit committee that also serves as our financial statements committee.
|-------------------------------------------------------------------------------------
|                                                                                     
|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.



63







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., Morria Biopharmaceuticals Plc. and ViDAC
Limited. Mr. Raday previously served on the boards of 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.





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.







Ira N. Kalfus, M.D.has served
as our Chief Medical Officer since August 15, 2010. Dr. Kalfus has over 22 years’ experience in the healthcare industry,
and has been a biotech and drug development consultant since 2006. From 2006-2008, Dr. Kalfus was a consultant and then Vice President,
Medical Affairs at Lev Pharmaceuticals Inc., a development stage biopharmaceutical company. Dr. Kalfus led the clinical development
of CINRYZE, the first approved C1 inhibitor therapy for Hereditary Angioedema. Lev Pharmaceuticals was acquired by ViroPharma Incorporated
in 2008 for $530 million. Dr. Kalfus has been a medical director and clinical peer reviewer for US Healthcare, Aetna, and Group
Health Insurance. From 1990-2004, Dr. Kalfus practiced internal medicine in New York. He also served as President of the Staff
Society at the LIJ Division of the North Shore LIJ Health System. Dr. Kalfus received his B.A. in Biology from Columbia University
and his M.D. from the Albert Einstein College of Medicine.



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.



64







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., Irody Inc., Biologic Design Ltd., Silenseed Ltd., Mobydom
Ltd., Neuroderm Ltd., Dentack Implants Ltd., Ofakim Hi-Tech Ventures Ltd., Meytag Hi-Tech Ventures Ltd., Dia Cardio Ltd., Pixcell
Medical Technologies Ltd., Medasense Biometrics Ltd., L.R.S. Ltd., Algomia Ltd. Velocee Inc., A.G.M. Biological Products Development
Ltd. Ornim Inc. N.E.D. Next Dimension Ltd., OPLON B.V., ONECALL CONTACT CENTERS LTD., Coeruleus Ltd., Efranat Ltd. BioCep Ltd.,
Health Watch Technologies Ltd., and VIDAC Pharma 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., ERDA 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 Migdal Insurance and Financial Holdings Ltd., Syneron Medical Ltd.,
Gefen Biomed Investments Ltd., Israel Corporation Ltd. as well as a member of the board (and finance and investment committee)
of the Jerusalem Foundation, a member of the investment committee of the Israel Academy of Science and Humanities and 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.





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.



65







B.	Compensation



The aggregate compensation paid, and benefits
in-kind granted to or accrued on behalf of all of our directors and senior management for their services, in all capacities, to
us during the year ended December 31, 2012 was approximately $1.5 million. This amount included approximately $44,000 for long-term
benefits paid to retirement plans on behalf of our senior management during the year ended December 31, 2012. 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 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, 5754-1999,
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 fee of NIS 42,200 (approximately
$11,500, based on the representative U.S. dollar– NIS rate of exchange of 3.684 on February 17, 2013) and a fee of
NIS 2,820 (approximately $770, based on the representative U.S. dollar – NIS rate of exchange of 3.684 on February
17, 2013) per meeting (or a smaller amount in case they do not physically attend the meeting). In addition, each of Mr. Tsimchi
and Ms. Rotbard received options to purchase 150,000 ordinary shares at an exercise price of $1.05 per share, which expire in 2018.



In 2010, each of Mr. Swenden and Dr. Reed
received options to purchase 90,000 ordinary shares at an exercise of $0.165 per share, which expire in 2017, and Dr. Cabilly received
an option to purchase 90,000 ordinary shares at an exercise of $0.50 per share, which expire in 2017 (the 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). These options vest over a period of 3 years, a third of which vested at the first anniversary, and the remaining
of which vest in 8 subsequent equal quarterly installments.



In 2011, the following options were granted
upon completion of our initial public offering:



| | · | Mr. Sweden: options to purchase 150,000 ordinary shares at an exercise price of $0.50 per share,
which expire in 2018;
| | - | ----------------------------------------------------------------------------------------------------------------------



| | · | Mr. Suesskind: options to purchase 860,000 ordinary shares at an exercise price of $0.50 per share,
which expire in 2018;
| | - | -------------------------------------------------------------------------------------------------------------------------



| | · | Dr. Reed: options to purchase 150,000 ordinary shares at an exercise price of $0.50 per share,
which expire
| | - | -----------------------------------------------------------------------------------------------------------

in 2018; and



| | · | Dr. Cabilly: options to purchase 150,000 ordinary shares at an exercise price of $0.50 per share,
which expire in 2018.
| | - | -----------------------------------------------------------------------------------------------------------------------



A third of these options vested on February
3, 2012, and the remaining options vest in 8 subsequent equal quarterly installments (subject to rounding) commencing March 31,
2012.



On January
19, 2011, our shareholders approved a recommendation from the board of directors to cause all options granted to our directors,
prior to our initial public offering and at the time of our initial public offering, to immediately vest in the event of a “takeover”
as defined in our 2010 Stock Option Plan. See “– F. Share Ownership – Stock Option Plans.” In addition,
on September 24, 2012 our board of directors approved the amendment of all options granted to our directors after
completion of our IPO 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 such options will immediately vest
in full. The amendment was approved by our shareholders on November 6, 2012. See “ – E. Share Ownership – Stock
Option Plan” for a description of interested parties under the Israeli Securities Law – 1968.



66







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.



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, Mr. Ben-Asher is entitled to a monthly salary of NIS 55,000 (approximately $14,920, based on the representative
U.S. dollar– NIS rate of exchange of 3.684 on February 17, 2013), a car allowance of NIS 5,000 (approximately $1,360,
based on the representative U.S. dollar – NIS rate of exchange of 3.684 on February 17, 2013), 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 – Stock 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
– Stock 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 May 30, 2010 Mr. Ben-Asher
was granted 7 year options to purchase 750,000 ordinary shares at an exercise price of $0.165 per share. 250,000 of these options
vested on February 2, 2011, and the remaining 500,000 options vest in 8 subsequent quarterly installments of 62,500 options commencing
March 31, 2011 (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).



Upon completion of the
initial public offering, Mr. Ben-Asher was granted 7 year options to purchase 1,540,000 ordinary shares at an exercise price of
$0.50 per share. 513,333 of these options vested on February 3, 2012, and the remaining 1,026,667 options vest in 8 subsequent
equal quarterly installments of 128,333 options (except for one installment of 128,337) commencing March 31, 2012.



On February 15, 2012 we amended Mr. Ben-Asher’s
employment agreement in order to increase his car allowance, as of January 1, 2011, from NIS 5,000 (approximately $1,360, based
on the representative U.S. dollar – NIS rate of exchange of 3.684 on February 17, 2013) to NIS 6,000 (approximately
$1,630, based on the representative U.S. dollar – NIS rate of exchange of 3.684 on February 17, 2013).



On February 15, 2012 we granted Mr. Ben-Asher
7 year options to purchase 600,000 ordinary shares at an exercise price of $0.72. These options vest in 6 equal installments of
100,000 options every 6 months following January 1, 2012.



67







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, Mr. Shilo is entitled to a monthly salary of NIS 45,000 (approximately $12,210, based on the representative U.S.
dollar – NIS rate of exchange of 3.684 on February 17, 2013), a car allowance of NIS 4,000 (approximately $1,090 ,
based on the representative U.S. dollar – NIS rate of exchange of 3.684 on February 17, 2013), 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 –
Stock Option Plan” for a description of interested parties under the Israeli Securities Law – 1968.



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 May 30, 2010 Mr. Shilo
was granted 7 year options to purchase 750,000 ordinary shares at an exercise price of $0.165 per share. 250,000 of these options
vested on February 2, 2011, and the remaining 500,000 options vest in 8 subsequent quarterly installments of 62,500 options commencing
March 31, 2011 (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).



Upon completion of the
initial public offering, Mr. Shilo was granted 7 year options to purchase 1,220,000 ordinary shares at an exercise price of $0.50
per share. 406,667 of these options vested on February 3, 2012, and the remaining 813,333 options vesting in 8 subsequent equal
quarterly installments of 101,666 options (except for one installment of 101,671) commencing March 31, 2012.



On February 15, 2012 we amended Mr. Shilo’s
employment agreement in order to increase his car allowance, as of January 1, 2011, from NIS 4,000 (approximately $1,090, based
on the representative U.S. dollar – NIS rate of exchange of 3.684 on February 17, 2013) to NIS 5,000 (approximately
$1,360, based on the representative U.S. dollar – NIS rate of exchange of 3.684 on February 17, 2013).



On February 15, 2012, we granted Mr. Shilo
7 year options to purchase 400,000 ordinary shares at an exercise price of $0.72. These options vest in 6 equal installments of
66,667 options (except for one installment of 66,665) every 6 months following January 1, 2012.



Employment Agreement
with Mr. Gilead Raday



On November 1, 2010,
we entered into an employment agreement with Mr. Gilead Raday, pursuant to which Mr. Raday serves as our Senior Vice President
Corporate and Product Development.



68







Pursuant to the terms
of the agreement, Mr. Raday is entitled to a monthly salary of NIS 30,000 (approximately $8,140, based on the representative U.S.
dollar – NIS rate of exchange of 3.684 on February 17, 2013), a car allowance of NIS 3,000 (approximately $810, based
on the representative U.S. dollar – NIS rate of exchange of 3.684 on February 17, 2013), reimbursement for all mobile
phone expenses up to NIS 400 a month (approximately $110, based on the representative U.S. dollar – NIS rate of exchange
of 3.684 on February 17, 2013), 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. Raday 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 6. In addition, on January 19, 2011, we amended the terms
of Mr. Raday’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. Raday
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. Raday’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. Raday 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 –
Stock Option Plan” for a description of interested parties under the Israeli Securities Law – 1968. Mr. Raday’s
employment agreement may be terminated by either us or Mr. Raday upon 60-day prior notice.



On August 24, 2010, Mr.
Raday was granted 7 year options to purchase 310,000 ordinary shares at an exercise price of $0.165 per share. 103,333 of these
options vested on February 2, 2011, and the remaining 206,667 options vest in 8 subsequent quarterly installments of 25,833 options
(except for one installment of 25,836) commencing March 31, 2011 (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).



Upon completion of the
initial public offering, Mr. Raday was granted 7 year options to purchase 500,000 ordinary shares at an exercise price of $0.50
per share. 166,667 of these options vested on February 3, 2012, and the remaining 333,333 options vesting in 8 subsequent equal
quarterly installments of 41,667 options (except for one installment of 41,664) commencing March 31, 2012.



On January 5, 2012, we
amended Mr. Raday’s employment agreement in order to increase his car allowance from NIS 3,000 (approximately $810, based
on the representative U.S. dollar – NIS rate of exchange of 3.684 on February 17, 2013) to NIS 4,000 (approximately
$1,090, based on the representative U.S. dollar – NIS rate of exchange of 3.684 on February 17, 2013) and his monthly
salary from NIS 30,000 (approximately $8,140, based on the representative U.S. dollar –NIS rate of exchange of 3.684
on February 17, 2013) to NIS 36,000 (approximately $9,770, based on the representative U.S. dollar – NIS rate of exchange
of 3.684 on February 17, 2013), each as of January 1, 2012.



On January 5, 2012, we granted Mr. Raday
7 year options to purchase 75,000 ordinary shares at an exercise price of $0.72. These options vest in 6 equal installments of
12,500 options every 6 months following January 1, 2012.



Consultancy
Services Agreement with Reza Fathi, PhD



On May 11, 2010 we entered
into a consulting agreement with Reza Fathi, PhD, to serve as our director of research operations



Pursuant to the terms
of the agreement, Dr. Fathi is entitled to a monthly payment of $4,000 and reimbursement of expenses in the fixed amount of $100.
On August 25, 2010, we amended this agreement and Dr. Fathi was appointed as our Senior Vice President R&D as of August 1,
2010, and his monthly payment was increased to $10,000. On January 1, 2011, we amended the agreement in order to increase Dr. Fathi’s,
monthly payment to $13,000 and expense reimbursement amount of $300. On October 1, 2011, we amended the agreement again in order
to increase Dr. Fathi’s monthly payment to $16,000.



69







The agreement further
provides that if the agreement is terminated in connection with a “hostile takeover”, Dr. Fathi will be entitled to
a special one-time bonus in the amount of his then current monthly consultancy payment, multiplied by 6. In addition, on January
19, 2011, we amended the terms of Dr. Fathi’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 Dr. Fathi 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 Dr. Fathi’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 Dr. Fathi 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 – Stock Option Plan” for a description of interested parties under the Israeli
Securities Law – 1968. Dr. Fathi’s employment agreement may be terminated by either us or Dr. Fathi upon 60-days prior
notice.



On May 30, 2010, Dr.
Fathi was granted 7 year options to purchase 90,000 ordinary shares at an exercise price of $0.165 per share. 30,000 of these options
vested on February 2, 2011, and the remaining 60,000 options vest in 8 quarterly subsequent installments of 7,500 options commencing
March 31, 2011 (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).



On August 6, 2010, Dr.
Fathi was granted 7 year options to purchase 180,000 ordinary shares respectively at an exercise price of $0.165 per share. 60,000
of these options vested on May 30, 2011, and the remaining 120,000 options vest in 8 subsequent equal quarterly installments of
15,000 options commencing June 30, 2011 (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).



Upon completion of our
initial public offering, Dr. Fathi was granted 7 year options to purchase 500,000 ordinary shares at an exercise price of $0.50
per share. 166,667 of these options vested on February 3, 2012, and the remaining 333,333 options vest in 8 subsequent equal quarterly
installments of 41,667 options (except for one installment of 41,664) commencing March 31, 2012.



On January 5, 2012, we
granted Dr. Fathi 7 year options to purchase 200,000 ordinary shares at an exercise price of $0.72. These options vest in 6 equal
installments of 33,333 options (except for one installment of 33,335) every 6 months following January 1, 2012.



| | 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 inthe 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 Cabili 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.



70







Pursuant to the Israeli
Companies Law, 1999, 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.



A recent amendment to
the 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 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 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.



71







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.



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.



72







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.



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.



73







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





Under a recent amendment
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.



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.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



74







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.



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;
| | - | --------------------------------------------------------------------------



75







| | · | 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;
| | - | ----------------------------------------------



| | · | 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:



76











| | · | 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:



| | · | 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.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



77







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;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | 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.



78







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;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | 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.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



79







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. The amount of the advance indemnity is limited to the higher of 25% of our then consolidated shareholders’ equity
per our most recent consolidated annual financial statements or $3 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.



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



As of February 19, 2013, we had 7 employees
and we also received services from 9 consultants who provide services to us in the U.S., Canada and Belgium.



|                              |  | As of December 31, |  
|----------------------------- |  | ------------------ | -
|                              |  | 2010               |  
|                              |  | Company Employees  |  
|Management and administration |  |                    | 3
|Research and development      |  |                    | 1



80







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 19, 2013 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 61,788,827 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 19, 2013. 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.



|                                                             |  | Number of  Shares Beneficially Held |            |  | Percent of Class | 
|------------------------------------------------------------ |  | ----------------------------------- | ---------- |  | ---------------- | 
|Directors                                                    |  |                                     |            |  |                  | 
|                                                             |  |                                     |            |  |                  | 
|Eric Swenden (1)                                             |  |                                     | 5,104,246  |  |                  | 
|Dr. Kenneth Reed (2)                                         |  |                                     | 4,146,472  |  |                  | 
|Dr. Shmuel Cabilly (3)                                       |  |                                     | 4,575,678  |  |                  | 
|Dan Suesskind (4)                                            |  |                                     | 806,150    |  |                  | 
|Ofer Tsimchi (5)                                             |  |                                     | 100,000    |  |                  | 
|Aliza Rotbard (6)                                            |  |                                     | 100,000    |  |                  | 
|                                                             |  |                                     |            |  |                  | 
|Executive officers                                           |  |                                     |            |  |                  | 
|Dror Ben-Asher (7)                                           |  |                                     | 4,870,001  |  |                  | 
|Ori Shilo (8)                                                |  |                                     | 4,422,715  |  |                  | 
|Gilead Raday (9)                                             |  |                                     | 711,250    |  |                  | 
|Reza Fathi, Ph.D. (10)                                       |  |                                     | 702,500    |  |                  | 
|Adi Frish (11)                                               |  |                                     | 375,000    |  |                  | 
|Ira Kalfus (12)                                              |  |                                     | 365,535    |  |                  | 
|Uri Hananel Aharon (13)                                      |  |                                     | 89,750     |  |                  | 
|Guy Goldberg                                                 |  |                                     | -          |  |                  | 
|All directors and executive officers as a group (14 persons) |  |                                     | 26,369,297 |  |                  | 



* Less than 1.0%



| | (1) | Consists of (i) options to purchase
                                                                 202,500 ordinary shares exercisable within 60 days of February
                                                                 19, 2013 and (ii) tradable series 1 warrants to purchase 273,000
                                                                 ordinary shares and non-tradable warrants to purchase 297,161
                                                                 ordinary shares. The exercise price of these options range
                                                                 between $0.165 and $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.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



81







| | (2) | Consists of (i) options to purchase
                                                                 210,000 ordinary shares exercisable within 60 days of February
                                                                 19, 2013 and (ii) tradable series 1 warrants to purchase 12,000
                                                                 ordinary shares. The exercise price of these options range
                                                                 between $0.165 and $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.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | Consists of (i) options to purchase
                                                                 187,500 ordinary shares exercisable within 60 days of February
                                                                 19, 2013 and (ii) tradable series 1 warrants to purchase 497,500
                                                                 ordinary shares and non-tradable warrants to purchase 668,801
                                                                 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
                                                                 645,000 ordinary shares exercisable within 60 days of February
                                                                 19, 2013 and (ii) non-tradable warrants to purchase 37,050 ordinary
                                                                 shares. The exercise price of these options is $0.5 per
                                                                 share, and the options expire in 2018. 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
                                                                 100,000 ordinary shares exercisable within 60 days of February
                                                                 19, 2013. The exercise price of these options is $1.05 per share,
                                                                 and the options expire in 2018.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (6) | Consists of options to purchase
                                                                 100,000 ordinary shares exercisable within 60 days of February
                                                                 19, 2013. The exercise price of these options is $1.05 per share,
                                                                 and the options expire in 2018.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (7) | Consists of (i) options to purchase
                                                                 2,117,500 ordinary shares exercisable within 60 days of February
                                                                 19, 2013 and (ii) tradable series 1 warrants to purchase 22,671
                                                                 ordinary shares. The exercise price of these options range
                                                                 between $0.165 and $0.72 per share, and the options expiry date
                                                                 range between 2017 and 2019. See "Item 5. Operating and
                                                                 Financial Review and Prospects – B. Liquidity and Capital
                                                                 Resources" for more information regarding the warrants.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (8) | Consists of (i) options to purchase
                                                                 1,827,500 Ordinary exercisable within 60 days of February 19,
                                                                 2013 and (ii) tradable series 1 warrants to purchase 33,883 ordinary
                                                                 shares and non-tradable warrants to purchase 59,432 ordinary
                                                                 shares. The exercise price of these options range between
                                                                 $0.165 and $0.72 per share, and the options expiry date range
                                                                 between 2017 and 2019. 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
                                                                 711,250 ordinary shares exercisable within 60 days of February
                                                                 19, 2013. The exercise price of these options range between $0.165
                                                                 and $0.72 per share, and the options expiry date range between
                                                                 2017 and 2019.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (10) | Consists of options to purchase
                                                                  702,500 ordinary shares exercisable within 60 days of February
                                                                  19, 2013. The exercise price of these options range between
                                                                  $0.165 and $0.72 per share, and the options expiry date range
                                                                  between 2017 and 2019.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (11) | Consists of options to purchase
                                                                  375,000 ordinary shares exercisable within 60 days of February
                                                                  19, 2013. The exercise price of these options range between
                                                                  $0.165 and $0.72 per share, and the options expiry date range
                                                                  between 2017 and 2019.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (12) | Consists of (i) options to purchase
                                                                  224,167 ordinary shares exercisable within 60 days of February
                                                                  19,2013 and (ii) non-tradable warrants to purchase 17,480
                                                                  ordinary shares. The exercise price of these options range
                                                                  between $0.165 and $0.69 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.
                                                                  Consists of options to purchase 75,000 ordinary shares exercisable
                                                                  within 60 days of February [ ], 2013. The exercise price of
                                                                  these options is $0.69 per share, and the options expire in
                                                                  2018.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



82







| | (13) | Consists of options to purchase
                                                                  87,500 ordinary shares exercisable within 60 days of February
                                                                  19, 2012. The exercise price of these options is $0.69 per share,
                                                                  and the options expire in 2018.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Stock 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 19, 2013, there were 12,015,000 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.



Options granted under our 2010 Option
Plan generally vest over a period of 3 years and expire 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 to such grantee 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;
| | - | --------------------------------------------------------------------------------------------------



| | · | 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.
| | - | -------------------------------------------------------



83







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.



Under our 2010 Option Plan, options which
we granted after September 24, 2012 will be accelerated, so that the grantee 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 becomes a
controlling shareholder. A “controlling shareholder” in this paragraph is a controlling shareholder, as defined in
the Israel Securities Law, 1968. The board of directors also approved that options granted to our directors under our 2010 Option
Plan after completion of our initial public offering and prior to September 24, 2012 will also be accelerated under the same circumstances
and it was approved by our shareholders on November 6, 2012 . See “ – B. Compensation – Executives and Directors
Compensation.”



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 19, 2013, 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 provided to us by the shareholders.



The information in this table is based
on 61,788,827 ordinary shares outstanding as of such date. The number of ordinary shares beneficially owned by a person includes
ordinary shares subject to options held by that person that were currently exercisable at, or exercisable within 60 days of February
19, 2013. The ordinary shares issuable under these options are treated as if they were outstanding for purposes of computing
the percentage ownership of the person holding these options 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.



|                       |  | Number of Shares Beneficially Held |           |  | Percent of Class | 
|---------------------- |  | ---------------------------------- | --------- |  | ---------------- | 
|Mr. Dror Ben-Asher (1) |  |                                    | 4,870,001 |  |                  | 
|Mr. Eric Swenden (2)   |  |                                    | 5,104,246 |  |                  | 
|Mr. Ori Shilo (3)      |  |                                    | 4,422,715 |  |                  | 
|Dr. Kenneth Reed (4)   |  |                                    | 4,146,472 |  |                  | 
|Dr. Shmuel Cabilly (5) |  |                                    | 4,081,678 |  |                  | 



84







| | (1) | Consists of (i) options
                                                                        to purchase 2,117,500 ordinary shares exercisable within
                                                                        60 days of February 19, 2013 and (ii) Tradable Series
                                                                        1 Warrants to purchase 22,671 ordinary shares. The
                                                                        exercise price of these options range between $0.165 and
                                                                        $0.72 per share, and the options expiry date range between
                                                                        2017 and 2019. See "Item 5. Operating and Financial
                                                                        Review and Prospects – B. Liquidity and Capital
                                                                        Resources" for more information regarding the warrants.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Consists of (i) options
                                                                        to purchase 202,500 ordinary shares exercisable within
                                                                        60 days of February 19, 2013 and (ii) Tradable Series
                                                                        1 Warrants to purchase 273,000 ordinary shares and non-tradable
                                                                        warrants to purchase 297,161 ordinary shares. The
                                                                        exercise price of these options range between $0.165 and
                                                                        $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.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | Consists of (i) options
                                                                        to purchase 1,827,500 ordinary shares exercisable within
                                                                        60 days of_ February 19, 2013 and (ii) Tradable Series
                                                                        1 Warrants to purchase 33,883 ordinary shares and non-tradable
                                                                        warrants to purchase 59,432 ordinary shares. The
                                                                        exercise price of these options range between $0.165 and
                                                                        $0.72 per share, and the options expiry date range between
                                                                        2017 and 2019. 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 210,000 ordinary shares exercisable within
                                                                        60 days of February 19, 2013 and (ii) Tradable Series
                                                                        1 Warrants to purchase 12,000 ordinary shares. The
                                                                        exercise price of these options range between $0.165 and
                                                                        $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.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (5) | Consists of (i) options
                                                                        to purchase 187,500 ordinary shares exercisable within
                                                                        60 days of February 19, 2013 and (ii) tradable series
                                                                        1 warrants to purchase 668,801 ordinary shares and non-tradable
                                                                        warrants to purchase 668,801 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.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As of February13, 2013, there were approximately 20 shareholders of record with a United States address. As
of February 13, 2013, these United States record holders held approximately 816,907 ordinary shares directly and an additional
3,509,290 ordinary shares in the form of ADSs, representing in the aggregate approximately 7.0% 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
| | -- | --------------------------



Consulting Agreement with ProSeed Capital
Holdings CVA



On June 3, 2010, we entered into a consulting
agreement with ProSeed Capital Holdings CVA, which at the time was one of our major shareholders and whose security holders included
a number of our own shareholders, pursuant to which ProSeed Capital Holdings CVA agreed to promote our business with potential
investors and partners. According to the agreement, ProSeed Capital Holdings CVA was entitled to success fees in the amount of
6%, plus value added tax, if necessary, of any investment where the investor was introduced to us by ProSeed Capital Holdings
CVA. ProSeed Capital Holdings CVA was to be entitled to such commission for a period of 18 months from the date of termination
of the agreement. In accordance with the terms of this agreement, we paid ProSeed Capital Holdings CVA $66,000 and $75,000 in
2011 and 2010, respectively. This agreement was terminated by the parties on September 5, 2010.



85







In December 2011, ProSeed Capital Holdings
CVA distributed substantially all of its holdings in us to its security holders. Until such distribution, ProSeed Capital Holdings
CVA was considered, pursuant to instructions from the Israeli Securities Authority, as jointly holding our shares together with
ProSeed Capital Holdings CVA’s security holders, Dror Ben-Asher, Ori Shilo, Eric Swenden, Benjamin Van Oudenhove and Pascal
Weerts. Accordingly, such persons were deemed as interested parties for reporting and the approval of transactions under Israeli
law. See "Item 7. Major Shareholders and Related Party Transactions – A. Major Shareholders"



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



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.



Agreement with Pascal Weerts



On October 1, 2010, we entered into a
consultancy agreement with Pascal Weerts through UpperWest BVBA, one of our shareholders. This agreement was amended on December
1, 2010 and on October 1, 2011 and January 5, 2012. Pursuant to this agreement, Mr. Weerts is entitled, in consideration for his
provision to us of consulting services as Director of Corporate and Legal Affairs, to $8,000 per month and an expense reimbursement
of $200 per month. Either of the parties may terminate this agreement upon 30 days’ notice.



On October 1, 2010, Mr. Weerts was granted
7 year options to purchase 60,000 ordinary shares at an exercise price of $0.165 per share. 20,000 of these options vested on
October 1, 2011 with the remaining 40,000 options vesting in 8 subsequent installments of 5,000 options every three months following
October 1 (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).



Upon completion of our initial public
offering, Mr. Weerts was granted 7 year options to purchase 90,000 ordinary shares at an exercise price of $0.50 per share. 30,000
of these options vested on February 3, 2012, with the remaining 60,000 options vesting in 8 subsequent equal installments of 7,500
options every three months following February 3, 2012.



On January 5, 2012, we granted Mr. Weerts
7 year options to purchase 75,000 ordinary shares at an exercise price of $0.72 per share. These options vest in 6 equal installments
of 12,500 options every 6 months following January 1, 2012.



86







August 2010 Mandatory Convertible Loan
Agreements



From June 2010 to August 2010, we entered
into a loan agreement with a number of investors, under which Mr. Swenden invested $650,000, Dr. Cabilly invested $500,000, Dr.
Reed invested $350,000, and Amram Hayut, a brother-in-law of Mr. Shilo, invested $85,000, out of a total amount of approximately
$3.5 million. Under the terms of the loan agreement, we agreed to pay the investors certain royalty payments with regard to two
of our therapeutic candidates. In August 2010, the loan agreement was replaced in its entirely by a new convertible loan agreement
under which all the loans thereunder, accrued interest at an annual rate of 8% and was converted into ordinary shares and ordinary
share warrants upon the completion of our initial public offering. However, the obligation to pay the investors the royalty payments
described above remains in full force and effect. Our board of directors approved a proposed acquisition and termination of the
royalty rights granted to the investors. See "Item 10. Additional Information – C. Material Contracts – Loan
Agreements – August 2010 Mandatory Convertible Loan Agreements" for more information.



November 2010 Mandatory Convertible
Loan Agreement



In November 2010, we entered into a convertible
loan agreement with a number of investors, under which Dr. Reed invested $500,000, Mr. Swenden invested $200,000 and Mr. Shilo
invested $170,000, out of a total amount of approximately $7.6 million. Under the terms of the convertible loan agreement, the
loan accrued interest at an annual rate of 8% and was converted into ordinary shares and ordinary share warrants upon the completion
of the initial public offering. See "Item 10. Additional Information – C. Material Contracts – Loan Agreements
– November 2010 Mandatory Convertible Loan Agreement" for more information.



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



On January 10, 2013, 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 will receive 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.
For more information on the royalty right acquisition, please see “Item 10. Additional Information – C. Material Contracts
– Loan Agreements – August 2010 Mandatory Convertible Loan Agreements”.



| | C. | Interests of Experts and Counsel
| | -- | --------------------------------



Not applicable.



87







| | 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, 2012.





| | 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.



88







|                                         |  | NIS                      |      |  | $ U.S.                   | 
|---------------------------------------- |  | ------------------------ | ---- |  | ------------------------ | 
|                                         |  | Price Per Ordinary Share |      |  | Price Per Ordinary Share | 
|                                         |  | High                     |      |  | Low                      | 
|Annual                                   |  |                          |      |  |                          | 
|2012                                     |  |                          | 4.19 |  |                          | 
|2011                                     |  |                          | 3.80 |  |                          | 
|                                         |  |                          |      |  |                          | 
|Quarterly                                |  |                          |      |  |                          | 
|First Quarter 2013 (through February 14) |  |                          | 4.29 |  |                          | 
|Fourth Quarter 2012                      |  |                          | 4.19 |  |                          | 
|Third Quarter 2012                       |  |                          | 2.99 |  |                          | 
|Second Quarter 2012                      |  |                          | 2.95 |  |                          | 
|First Quarter 2012                       |  |                          | 2.52 |  |                          | 
|Fourth Quarter 2011                      |  |                          | 2.80 |  |                          | 
|Third Quarter 2011                       |  |                          | 3.00 |  |                          | 
|Second Quarter 2011                      |  |                          | 3.55 |  |                          | 
|First Quarter 2011                       |  |                          | 3.80 |  |                          | 
|                                         |  |                          |      |  |                          | 
|Most Recent Six Months                   |  |                          |      |  |                          | 
|February 2013 (through February 14)      |  |                          | 4.10 |  |                          | 
|January 2013                             |  |                          | 4.29 |  |                          | 
|December 2012                            |  |                          | 4.00 |  |                          | 
|November 2012                            |  |                          | 4.02 |  |                          | 
|October 2012                             |  |                          | 4.19 |  |                          | 
|September 2012                           |  |                          | 2.99 |  |                          | 
|August 2012                              |  |                          | 2.38 |  |                          | 



On February 14, 2013, the last reported
sales price of our ordinary shares on the Tel Aviv Stock Exchange was NIS 4.04 per share, or $1.10 per share (based on the representative
U.S. dollar – NIS rate of exchange of 3.684 on February 17, 2013).



Our tradable Series 1 Warrants are also
traded on the Tel Aviv Stock Exchange. Currently there are 7,151,150 tradable Series 1 Warrants outstanding, each of which is
exercisable into one ordinary share at a per share price of NIS 4.60 or $1.25 (based on the representative U.S. dollar –NIS rate of exchange of 3.684 on February 17, 2013). The exercise price is linked to the last known representative rate of
the U.S. dollar on the exercise date as published by the Bank of Israel. The base rate for linkage is the representative rate
of the U.S. dollar published by the Bank of Israel on January 28, 2011 (NIS 3.68 = $1). On February 14, 2013, the last reported
sales price of our tradable Series 1 Warrants on the Tel Aviv Stock Exchange was NIS 1.20, or $0.33 per Warrant (based on the
representative U.S. dollar – NIS rate of exchange of 3.684 on February 17, 2013).



ADSs



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 beginning from
December 27, 2012 through to February 14, 2013.



|                                    |  | U.S.$         |      
|----------------------------------- |  | ------------- | -----
|                                    |  | Price Per ADS |      
|                                    |  | High          |      
|Most Recent Three Months:           |  |               |      
|February 2013 (through February 14) |  |               | 12.29
|January 2013                        |  |               | 13.60
|December 2012  (from December 27) * |  |               | -    



*There was no trading of our
ADSs on the Nasdaq Capital Market during December 2012.



On February 14, 2013, the last reported
sales price of our ADSs on the Nasdaq Capital Market was $10.71 per ADS.



| | B. | Plan of Distribution
| | -- | --------------------



Not applicable.



89







| | 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



| | 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.



90







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.



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 100,000,000 ordinary shares, par value NIS 0.01 per share.



91







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.



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.”



92







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.



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.



93







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.



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.



94







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
| | -- | ------------------



Loan Agreements



August 2010 Mandatory Convertible Loan
Agreements



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. We agreed to use the proceeds from this financing to finance the acquisition of additional products, licensing transactions,
clinical trials and current expenditures (general corporate activity).



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 are payable (i) with regard to net sales over a period
of 5 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 5 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 convertible loan agreement, pursuant to which the loans accrued interest at
an annual rate of 8% and were automatically convertible into ordinary shares and ordinary share warrants upon the occurrence of
specified events, including an initial public offering of our shares. However, the obligation to pay the investors the royalty
payments described above remained in full force and effect.



Immediately prior to the completion of
our initial public offering on the Tel Aviv Stock Exchange, all outstanding loans under the loan agreements, together with accrued
interest, were converted into (i) 6,281,858 ordinary shares at a conversion price of NIS 2.11 (approximately $0.57 based on the
representative U.S. dollar – NIS rate of exchange of 3.684 on February 17, 2013) per share and (ii) warrants exercisable
for an aggregate number of ordinary shares equal to approximately $1 million (representing 30% of the aggregate original loan
amount) divided by the exercise price, as determined below. Investors became entitled to receive their pro rata share of the shares
and warrants based on their respective loan amounts. The exercise price for the warrants was calculated as follows:



| | · | for
                                                                                                               warrants exercised
                                                                                                               within 6 months
                                                                                                               of our initial
                                                                                                               public offering
                                                                                                               on the Tel Aviv
                                                                                                               Stock Exchange,
                                                                                                               the exercise price
                                                                                                               per share would
                                                                                                               have been 130%
                                                                                                               of the conversion
                                                                                                               price per share,
                                                                                                               or $0.74;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



95







| | · | for
                                                                                                               warrants exercised
                                                                                                               between 6 and 12
                                                                                                               months following
                                                                                                               our initial public
                                                                                                               offering on the
                                                                                                               Tel Aviv Stock
                                                                                                               Exchange, the exercise
                                                                                                               price per share
                                                                                                               would have been
                                                                                                               140% of the conversion
                                                                                                               price per share,
                                                                                                               or $0.8;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | for
                                                                                                               warrants exercised
                                                                                                               between 12 months
                                                                                                               following our initial
                                                                                                               public offering
                                                                                                               on the Tel Aviv
                                                                                                               Stock Exchange
                                                                                                               through their expiration
                                                                                                               date which is August
                                                                                                               11, 2013, the exercise
                                                                                                               price per share
                                                                                                               is 150% of the
                                                                                                               conversion price
                                                                                                               per share, or $0.86.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In December 2012, our shareholders approved
an acquisition and termination of the royalty rights granted to investors pursuant to the August 2010 mandatory convertible loan
agreement in consideration for the issuance of an aggregate of 2,317,186 ordinary shares, pursuant to which each investor will
receive a number of shares on a pro-rata basis in accordance with their respective royalty rights (the "Royalty Acquisition").
The Royalty Acquisition closed on January 10, 2013.



November 2010 Mandatory Convertible
Loan Agreement



On November 7, 2010, we completed a financing
of approximately $7.6 million pursuant to a convertible loan agreement we signed with investors. Under this convertible loan agreement,
the loan accrued interest at an annual rate of 8% and was automatically convertible into ordinary shares and ordinary share warrants
upon the occurrence of specified events, including an initial public offering of our shares.



Immediately prior to the completion of
our initial public offering on the Tel Aviv Stock Exchange, outstanding loans under this convertible loan agreement, together
with accrued interest, were converted into (i) 13,536,456 ordinary shares at a conversion price of NIS 2.11 (approximately $0.57
based on the representative U.S. dollar – NIS rate of exchange of 3.684 on February 17, 2013) per share and (ii) warrants
exercisable for an aggregate number of ordinary shares equal to approximately $2.3 million (representing 30% of the aggregate
original loan amount) divided by the exercise price of the warrants, as calculated in the same manner as the warrants described
above. The warrant contain the same terms as the warrants described above other than their expiration date which is November 9,
2013. Investors became entitled to receive their pro rata share of the shares and warrants based on their respective loan amounts.



Underwriting Agreement



In connection with our February 2011 initial
public offering of shares on the Tel Aviv Stock Exchange, on January 30, 2011, we entered into an underwriting agreement with
Poalim I.B.I. Underwriting and Issuing Ltd. as the leading underwriter and Apex Underwriting and Issue Management Ltd., Excellence
Nessuah Underwriting (1993) Ltd., Meitav Issuing Finance Ltd. and Rosario Underwriting Services (A.S.) Ltd.



Pursuant to this agreement, the underwriters
agreed to irrevocably acquire from us, each according to a rate set forth in the agreement, an aggregate of 16,400 units (each
unit comprised of 100 shares and 50 warrants) offered according to the prospectus with respect to which we would provide notice
if no requests had been submitted for the acquisition thereof, or if the full price had not been paid to us with respect thereto,
in connection with the public offering. Since requests were received for the purchase of all the securities offered to the public
under the prospectus, the underwriters were not required to acquire any securities.



In consideration for the undertakings
and services of the principal managers and underwriters pursuant to the Underwriting Agreement, including issue coordination services,
we paid, by means of the leading underwriter, a total of approximately $913,000 placement agent fee and cost reimbursement of
approximately $198,000. We also provided the underwriters with certain indemnification undertakings in connection with the public
offering.



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.”



96







| | 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 2012 is 25%.



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, 2012, 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%. In addition, capital gains generated by an individual claiming deduction
of financing expenses in respect of such gain will be taxed at the rate of 30%.



Individual and corporate shareholders
dealing in securities in Israel are taxed at the tax rates applicable to business income - 25% for corporations in 2012 and a
marginal tax rate of up to 48% in 2012 for individuals (an additional 2% tax rate would be levied on individuals whose taxable
income from Israeli sources exceeds NIS 811,560 (approximately $220,293 based on the representative U.S. dollar – NIS rate
of exchange of 3.684 on February 17, 2013) 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
(not applicable in respect of Shares purchased on or after January 1, 2009), (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.



97







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 rate for corporations and individuals.



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 June 30 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, 2012, 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, 2012, 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.



98







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.



99







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.



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 before January 1, 2013 will be subject to a maximum income tax rate of 15%. 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 stock, the possible application of Section
902 of the Code).



100







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.



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



For taxable years beginning
after December 31, 2012, certain 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,
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | a U.S. Holder would be required
                                                                  to make an annual return on IRS Form 8621 regarding distributions
                                                                  received and gains realized with respect to the Shares, and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | the favorable dividend rate
                                                                  discussed above with respect to dividends paid to certain non-corporate
                                                                  U.S. Holders prior to January 1, 2013 would not apply.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



101







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.



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.



102













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).



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.



103







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, 2012:
| | --- | ---------------------------------------------------------------------------------------------------------------------



|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             |  |                                                                        | 13 |   |                                   |  | 33  |                                                                       | 
|Bank deposits                         |  |                                                                        | -  |   |                                   |  | 1   |                                                                       | 
|Financial asset at fair value         |  |                                                                        | 21 |   |                                   |  | 53  |                                                                       | 
|Accounts receivable                   |  |                                                                        | 2  |   |                                   |  | 4   |                                                                       | 
|Accounts payable and accrued expenses |  |                                                                        | (7 | ) |                                   |  | (17 | )                                                                     | 
|Total loss                            |  |                                                                        | 30 |   |                                   |  | 74  |                                                                       | 



(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, 2012, these deposits carry annual interest of 0.52%-1.83%. 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.



104







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.



105







| | 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



This Annual Report does not include a report
of management’s assessment regarding internal control over financial reporting or an attestation report of the company’s
registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for
newly public companies.



(c)           Attestation
Report of Registered Public Accounting Firm



See statement in section (b).



(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, 2012 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.



106







| | 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,     |   
|-------------------------- |  | --------------------------- | --
|                           |  | 2011                        |   
|Services Rendered          |  | (U.S. dollars in thousands) |   
|Audit (1)                  |  |                             | 52
|Audit related services (2) |  |                             | - 
|Tax (3)                    |  |                             | - 
|Total                      |  |                             | 52



| | (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.



| | 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:



107







| | • | 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.



| | 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.





108







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.



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.



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.





109







RedHill Biopharma Ltd.

Index to Financial Statements

as of December 31, 2012

|                                                        | 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 - F-40

















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, 2012 and
2011 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, 2012. 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 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, 2012 and 2011 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, 2012, in accordance with International Financial Reporting Standards ("IFRS") as issued by the
International Accounting Standards Board ("IASB").



|Tel-Aviv, Israel  | /s/ Kesselman & Kesselman                                    
|----------------- | -------------------------------------------------------------
|February 19, 2013 | Certified Public Accountants (Isr.)                          
|                  | A member firm of PricewaterhouseCoopers International Limited





F-2







REDHILL BIOPHARMA LTD.



STATEMENTS OF COMPREHENSIVE LOSS



|                                            |  |      |    |  | Year ended  December 31   | 
|------------------------------------------- |  | ---- | -- |  | ------------------------- | 
|                                            |  | Note |    |  | 2012                      | 
|                                            |  |      |    |  | U.S. dollars in thousands | 
|                                            |  |      |    |  |                           | 
|REVENUE                                     |  |      |    |  |                           | 
|RESEARCH AND DEVELOPMENT EXPENSES           |  |      | 17 |  |                           | 
|GENERAL AND ADMINISTRATIVE EXPENSES         |  |      | 18 |  |                           | 
|OTHER EXPENSES                              |  |      | 19 |  |                           | 
|OPERATING LOSS                              |  |      |    |  |                           | 
|FINANCIAL INCOME                            |  |      |    |  |                           | 
|FINANCIAL EXPENSES                          |  |      |    |  |                           | 
|FINANCIAL EXPENSES NET                      |  |      | 20 |  |                           | 
|                                            |  |      |    |  |                           | 
|LOSS AND COMPREHENSIVE LOSS                 |  |      |    |  |                           | 
|                                            |  |      |    |  |                           | 
|LOSS PER ORDINARY SHARE – basic and diluted |  |      | 21 |  |                           | 



The accompanying notes are
an integral part of these financial statements.



F-3







REDHILL BIOPHARMA LTD.



STATEMENTS OF FINANCIAL POSITION



|                                                      |  |      |    |  | December 31                | 
|----------------------------------------------------- |  | ---- | -- |  | -------------------------- | 
|                                                      |  | Note |    |  | 2012                       | 
|                                                      |  |      |    |  | U.S. dollars in 
thousands | 
|CURRENT ASSETS:                                       |  |      |    |  |                            | 
|Cash and cash equivalents                             |  |      | 5  |  |                            | 
|Bank deposits                                         |  |      | 5  |  |                            | 
|Financial assets at fair value through profit or loss |  |      | 6  |  |                            | 
|Prepaid expenses and receivables                      |  |      | 7  |  |                            | 
|                                                      |  |      |    |  |                            | 
|NON-CURRENT ASSETS:                                   |  |      |    |  |                            | 
|Restricted bank deposit                               |  |      |    |  |                            | 
|Fixed assets                                          |  |      | 8  |  |                            | 
|Intangible assets                                     |  |      | 9  |  |                            | 
|                                                      |  |      |    |  |                            | 
|Total assets                                          |  |      |    |  |                            | 
|                                                      |  |      |    |  |                            | 
|CURRENT LIABILITIES -                                 |  |      |    |  |                            | 
|Accounts payable and accrued expenses                 |  |      | 11 |  |                            | 
|                                                      |  |      |    |  |                            | 
|NON-CURRENT LIABILITIES:                              |  |      |    |  |                            | 
|                                                      |  |      |    |  |                            | 
|Royalty obligations to investors                      |  |      | 12 |  |                            | 
|Total liabilities                                     |  |      |    |  |                            | 
|                                                      |  |      |    |  |                            | 
|COMMITMENTS                                           |  |      | 13 |  |                            | 
|                                                      |  |      |    |  |                            | 
|EQUITY:                                               |  |      | 15 |  |                            | 
|Ordinary shares                                       |  |      |    |  |                            | 
|Ordinary shares to be issued                          |  |      |    |  |                            | 
|Additional paid-in capital                            |  |      |    |  |                            | 
|Warrants                                              |  |      |    |  |                            | 
|Accumulated deficit                                   |  |      |    |  |                            | 
|Total equity                                          |  |      |    |  |                            | 
|                                                      |  |      |    |  |                            | 
|Total liabilities and equity                          |  |      |    |  |                            | 



The accompanying notes are an integral
part of these financial statements.



F-4







REDHILL BIOPHARMA LTD.



STATEMENTS OF CHANGES IN EQUITY



|                                                                |  |                         |     |  | Convertible |  |    | Additional |  |  |          |   |  |             |       |   |              | 
|--------------------------------------------------------------- |  | ----------------------- | --- |  | ----------- |  | -- | ---------- |  |  | -------- | - |  | ----------- | ----- | - | ------------ | 
|                                                                |  | Ordinary                |     |  | preferred   |  |    | paid-in    |  |  |          |   |  | Accumulated |       |   |              | 
|                                                                |  | shares                  |     |  | shares      |  |    | capital    |  |  | Warrants |   |  | deficit     |       |   | Total equity | 
|                                                                |  | US dollars in thousands |    
|                                                                |  |                         |     |  |             |  |    |            |  |  |          |   |  |             |       |   |              | 
|BALANCE AT JANUARY 1, 2010                                      |  |                         | 3   |  |             |  | 2  |            |  |  | 925      |   |  |             | 45    |   |              | 
|CHANGES DURING THE YEAR ENDED DECEMBER 31,2010:                 |  |                         |     |  |             |  |    |            |  |  |          |   |  |             |       |   |              | 
|Comprehensive loss                                              |  |                         | -   |  |             |  | -  |            |  |  | -        |   |  |             | -     |   |              | 
|Share-based compensation to employees and service providers     |  |                         | -   |  |             |  | -  |            |  |  | -        |   |  |             | -     |   |              | 
|BALANCE AT DECEMBER 31, 2010                                    |  |                         | 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 |   |              | 



| | * | Represents amount less than $1 thousand.
| | - | ----------------------------------------



The accompanying notes are an integral
part of these financial statements.



F-5







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, 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(8) |  |                         | -   |  |           |  | 5,661 |            |  |  | -        |  |  |             | 587   |  |              | 
|Settlement of the royalty obligations, see note 12d                      |  |                         | -   |  |           |  | 2,359 |            |  |  | -        |  |  |             | -     |  |              | 
|Share-based compensation to employees and service providers              |  |                         | -   |  |           |  | -     |            |  |  | -        |  |  |             | -     |  |              | 
|BALANCE AT DECEMBER 31, 2012                                             |  |                         | 143 |  |           |  | 8,020 |            |  |  | 31,469   |  |  |             | 3,273 |  |              | 



The accompanying notes are an integral
part of these financial statements.



F-6







REDHILL BIOPHARMA LTD.



STATEMENTS OF CASH FLOWS



|                                                                                                          |  | Year ended  December 31 |        
|--------------------------------------------------------------------------------------------------------- |  | ----------------------- | -------
|                                                                                                          |  | 2012                    |        
|                                                                                                          |  | US dollars in thousands |        
|                                                                                                          |  |                         |        
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                     |  |                         |        
|Loss                                                                                                      |  |                         | (10,326
|Adjustments in respect of income and expenses not involving cash flows:                                   |  |                         |        
|Share-based compensation to employees and service providers                                               |  |                         | 1,648  
|Fair value losses on mandatory convertible loans                                                          |  |                         | -      
|Depreciation                                                                                              |  |                         | 24     
|Fair value losses (gains) on financial assets at fair value through profit or loss                        |  |                         | (57    
|Revaluation of bank deposits                                                                              |  |                         | (4     
|Accretion and settlement of royalty obligations to investors                                              |  |                         | 1,473  
|Exchange differences in respect of cash and cash equivalents                                              |  |                         | (12    
|Changes in asset and liability items:                                                                     |  |                         |        
|Decrease (increase) in prepaid expenses and receivables                                                   |  |                         | (109   
|Increase in accounts payable and accrued expenses                                                         |  |                         | 568    
|Net cash used in operating activities                                                                     |  |                         | (6,795 
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                     |  |                         |        
|Purchase of fixed assets                                                                                  |  |                         | (8     
|Purchase of intangible assets                                                                             |  |                         | (100   
|Changes in investment in bank deposits                                                                    |  |                         | 2,529  
|Acquisition of financial assets at fair value through profit or loss                                      |  |                         | (1,032 
|Proceeds from sale of financial assets at fair value through profit or loss                               |  |                         | 1,588  
|Net cash used in investing activities                                                                     |  |                         | 2,977  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                     |  |                         |        
|Proceeds on account of shares and warrants, net                                                           |  |                         | 6,248  
|Proceeds from issuance of shares and warrants under February 2, 2011 prospectus, net of issuance expenses |  |                         | -      
|Exercise of warrants and options into shares, net of expenses                                             |  |                         | 302    
|Proceeds from mandatory convertible loans and royalty obligations to investors                            |  |                         | -      
|Net cash provided by financing activities                                                                 |  |                         | 6,550  
|INCREASE IN CASH AND CASH EQUIVALENTS                                                                     |  |                         | 2,732  
|EXCHANGE DIFFERENCES ON CASH AND CASH EQUIVALENTS                                                         |  |                         | 12     
|BALANCE OF CASH AND CASH EQUIVALENTS AT BEGINNING OF
    YEAR                                             |  |                         | 14,070 
|BALANCE OF CASH AND CASH EQUIVALENTS AT END OF YEAR                                                       |  |                         | 16,814 
|                                                                                                          |  |                         |        
|Supplementary information on interest received in cash                                                    |  |                         | 126    
|Supplementary Information on financing activities not involving cash flows :                              |  |                         |        
|Settlement of the royalty obligations                                                                     |  |                         | 2,359  
|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") acquired through asset purchases
or in-licensing. In particular, the Company acquires or in-licenses and develops patent-protected new formulations and combinations
of existing drugs in advanced stages of development with the objective of obtaining marketing approvals for these drugs. Additionally,
the Company's strategy is to commercialize these drugs (in cooperation and/or through pharmaceutical and biotechnology companies)
and to acquire rights in additional drugs.



In February 2011, the Company
listed its securities on the Tel Aviv Stock Exchange (TASE) and they have been traded on the TASE since that time. Since December
2012, the Company's American Depositary Shares (“ADSs”) are also listed on the NASDAQ Capital Market. See note 15.



The Company's registered address
is at 21 Ha'arba'a St, Tel Aviv, Israel.



The Company is still in 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, 2012, the Company has 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.



If the Company is unable to
commercialize or out-license its therapeutic candidates or obtaining future financing, the Company may be forced to delay, reduce
the scope of, or eliminate one or more of its research and development programs related to the therapeutic candidates, 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 February19, 2013.



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, 2012 and 2011 and for each of the three years in the period ended on December 31, 2012 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 to the intangible asset during development can be measured reliably.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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, 2012 and
2011, the Company has not yet capitalized development costs.



F-10







REDHILL BIOPHARMA LTD.

NOTES TO THE
FINANCIAL STATEMENTS (continued)



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES(continued):



| | 3) | Amounts paid to purchase intellectual property of drugs are capitalized
and carried as intangible assets. Amounts due for future payment, based on the agreement, 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 comprise "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. | Financial liabilities:
| | -- | ----------------------



| | 1) | Classification:
| | -- | ---------------



| | a) | Financial liabilities at fair value through profit or
loss
| | -- | ----------------------------------------------------------



This category includes financial
liabilities designated by management as at fair value through profit or loss. Financial liabilities at fair value through profit
or loss of the Company were the mandatory convertible loans exercisable into a variable number of shares and warrants.



Gains or losses arising from
changes in the fair value of those financial liabilities at fair value through profit or loss are presented in the statement of
comprehensive loss under "financial income or expenses".



F-12







REDHILL BIOPHARMA LTD.

NOTES TO THE FINANCIAL STATEMENTS (continued)



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES(continued):



| | b) | Other Financial Liabilities
| | -- | ---------------------------



Other financial liabilities
are initially measured at fair value, net of transaction costs. In subsequent periods, the other financial liabilities are presented
at amortized cost. Any difference between the consideration (net of transaction costs) and the redemption value is carried to profit
or loss over the term of the liability, using the effective interest method.



Financial liabilities are classified
as current liabilities, unless the Company has an unconditional right to defer settlement of the liability for at least 12 months
after the end of the reporting period, for which they are classified as noncurrent liabilities.



| | 2) | Derecognition of financial liabilities
| | -- | --------------------------------------



A financial liability is derecognized
when the obligation under the liability is settled, cancelled or expired. The financial liability is settled when the Company:

| | - | Repays the liability by cash payment, other financial assets, issuance of shares, goods or services,
or
| | - | -------------------------------------------------------------------------------------------------------

| | - | Is legally released from the liability.
| | - | ---------------------------------------



Where an existing financial
liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are
substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition
of a new liability with the difference in the respective carrying amount recognized in profit or loss. Where the replacement or
change is immaterial, they are accounted for as changes to the terms of the original financial liability.



| | i. | 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.



| | j. | Share capital
| | -- | -------------



The Company's ordinary shares
and convertible preferred 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-13







REDHILL BIOPHARMA LTD.

NOTES TO THE FINANCIAL STATEMENTS (continued)



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES(continued):



| | k. | 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 the 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.



| | l. | 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-14







REDHILL BIOPHARMA LTD.

NOTES TO THE
FINANCIAL STATEMENTS (continued)



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES(continued):



Nonmarket 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.



| | m. | Provisions
| | -- | ----------



Provisions are recognized when
the Company has a present legal or constructive obligation as a result of past events and it is probable that an outflow of resources
will be required to settle the obligation. Provisions are measured by discounting the future cash outflow at a pretax interest
rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The carrying
amount of the provision is adjusted in each reporting period in order to reflect the passage of time and the changes in the carrying
amounts are carried to the profit and loss.



| | n. | 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.



| | o. | 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.



F-15







REDHILL BIOPHARMA LTD.

NOTES TO THE FINANCIAL STATEMENTS (continued)



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES(continued):



| | p. | 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 converted
into shares. The potential shares, as above are only taken into account in cases where their effect is dilutive (increasing the
loss per share). Since the addition of potential shares reduces loss per share, these potential shares are not taken into account,
and basic and diluted loss per share is identical.



| | q. | 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. However, deferred tax liabilities are not recognized if they arise from the initial recognition
of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither
accounting nor taxable profit or loss.



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 taxes were recorded in these financial statements.



| | r. | Standards and interpretations to existing standards that are not yet effective and have not
been early adopted by the Company
| | -- | -----------------------------------------------------------------------------------------------------------------------------



| | 1) | International Financial Reporting Standard No. 9 "Financial Instruments" (hereafter -
IFRS 9)
| | -- | ---------------------------------------------------------------------------------------------

The first part of IFRS 9, dealing
with the classification and measurement of financial assets, was issued in November 2009 (hereinafter first part of IFRS 9)
and the second part of IFRS 9, which includes guidance on financial liabilities and derecognition of financial instruments was
issued in 2010. IFRS 9 replaces certain parts of IAS 39 "Financial Instruments: Recognition and Measurement" (hereinafter
IAS 39) relating to the classification and measurement of financial instruments. IFRS 9 requires that financial assets will be
classified into one of the following two categories: financial assets measured after initial recognition at fair value and financial
assets measured after initial recognition at amortized cost. The decision on classification is made on the date of initial recognition,
based on the entity's business model and the characteristics and the projected contractual cash flows from the asset. As to financial
liabilities, IFRS 9 retains most guidance of IAS 39, with the main change being that entities with financial liabilities designated
at fair value through profit or loss (FVTPL) recognize changes in the fair value due to changes in the liability’s credit
risk (own credit risk) directly in other comprehensive income (OCI), unless this creates an accounting mismatch.



F-16







REDHILL BIOPHARMA LTD.

NOTES TO THE FINANCIAL STATEMENTS (continued)



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES(continued):



As to amounts recognized as
above in other comprehensive income, the income or loss will not be recycled. However, it is possible to transfer accumulated income
or loss between equity items.



In December 2011, an
amendment to IFRS 9 and IFRS 7 "Financial Instruments: Disclosures" (hereinafter the amendment). The amendment
deferred the mandatory effective date of the IFRS 9 and the transition provision for implementation, and added certain
disclosure requirements for the transition (hereinafter the additional disclosures).

According to IFRS 9 after the
amendment, both parts of IFRS 9 will apply to annual periods commencing on January 1, 2015 and thereafter. Entities can elect to
early adopt IFRS 9, but it is not permitted to adopt early the second part of IFRS 9 without implementing the first part of IFRS
9 on the same date. On the other hand, it is possible to early adopt the first part of IFRS 9 without being required to implement
the second part of IFRS 9 on the same date.



Entities adopting IFRS 9 for
reporting periods:



| | 1) | Prior to January 1, 2012 are neither required to restate comparatives on first-time implementation
and provide the additional disclosures.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | Beginning January 1, 2013 and prior to January 1, 2013 will be required to restate comparatives
and provide the additional disclosures.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------

| | 3) | Beginning on January 1, 2013 or thereafter will not be required to restate comparatives but will
be required to provide additional disclosures.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------



The Company is assessing the
expected effect of IFRS 9 on the financial statements and the timing of adoption.



| | 2) | IFRS 13 "Fair Value Measurement" (hereinafter IFRS 13)
| | -- | ------------------------------------------------------



IFRS 13 aims to improve consistency
and reduce complexity by providing a precise definition of 'fair value' and a single source of fair value measurement and disclosure
requirements for use across IFRSs. The requirements do not extend the use of fair value accounting, but provide guidance on how
it should be applied where its use is already required or permitted by other standards within IFRSs. IFRS 13 should be applied
for annual periods commencing on January 1, 2013 or thereafter. Early adoption is permitted with a related disclosure. IFRS 13
is applied prospectively as of the beginning of the annual period in which it is initially applied. The disclosure requirements
of the new guidance do not need to be applied in comparative information for periods before initial application of IFRS 13.



The Company is assessing the
expected effect of IFRS 13 on the financial statements.



F-17







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 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.



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.



F-18











REDHILL BIOPHARMA LTD.

NOTES TO THE FINANCIAL STATEMENTS (continued)



NOTE
4 - FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT(continued):



| | (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 US 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 variable remained constant, the Company would have recognized an additional expense of $74 thousand
and $393 thousand in profit or loss for the years ended, December 31, 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 arises
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
implies maintaining sufficient cash and the availability of funding through an adequate amount of committed credit facilities.



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.



F-19







REDHILL BIOPHARMA LTD.

NOTES TO THE
FINANCIAL STATEMENTS (continued)



NOTE
4 - FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT(continued):



The table presented below
classifies the Company's financial liabilities into relevant maturity groupings based on the remaining period to the contractual
maturity date. The amounts presented in the table represent the contractual undiscounted cash flows.



|                                      |  | Less than 1 year        |       |  | Between 1
    and 5
    years |  |       | More than 5 years | 
|------------------------------------- |  | ----------------------- | ----- |  | ----------------------------- |  | ----- | ----------------- | 
|                                      |  | US dollars in thousands |      
|As of December 31, 2012:              |  |                         |       |  |                               |  |       |                   | 
|Accounts payable and Accrued expenses |  |                         | 1,078 |  |                               |  | -     |                   | 
|                                      |  |                         |       |  |                               |  |       |                   | 
|As of December 31, 2011:              |  |                         |       |  |                               |  |       |                   | 
|Accounts payable and Accrued expenses |  |                         | 513   |  |                               |  | -     |                   | 
|Royalty obligations to investors      |  |                         | -     |  |                               |  | 1,929 |                   | 
|                                      |  |                         | 513   |  |                               |  | 1,929 |                   | 



| | 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 table below analyses financial
instruments carried at fair value through profit of loss, by 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-20







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, 2012 and
2011, the financial instruments of the company presented at fair value are financial assets at fair value through profit or loss
in the amounts of 1,065 and 1,564, accordingly. Those instruments are classified as level 1.



The following table presents
the change in instruments measured at level 3 for the year ended December 31, 2011:

|                                              |  | Financial liabilities at fair value
    through profit or loss |        
|--------------------------------------------- |  | -------------------------------------------------------------- | -------
|                                              |  | US dollars in thousands                                        |        
|Balance at January 1, 2011:                   |  |                                                                | 11,245 
|Amounts recognized in profit or loss          |  |                                                                | 7,938  
|Conversion of the mandatory convertible Loans |  |                                                                | (19,183
|Balance
    at December 31, 2011              |  |                                                                | -      



F-21







REDHILL BIOPHARMA LTD.

NOTES TO THE
FINANCIAL STATEMENTS (continued)



NOTE
4 - FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT(continued):



| | b. | Classification of financial
                                                                       instruments by Groups:
| | -- | -------------------------------------------------------------------------------------------------------------------------



|                                                      |  | Assets at fair
                                                                                value through profit or loss |       |  | Loans and
    receivables |  |        | Total | 
|----------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------- | ----- |  | ------------------------- |  | ------ | ----- | 
|                                                      |  | US dollars in thousands                                                                                                     |      
|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 |       | 
|As of December 31 ,2011:                              |  |                                                                                                                             |       |  |                           |  |        |       | 
|Cash and cash equivalents                             |  |                                                                                                                             |       |  |                           |  | 14,070 |       | 
|Bank deposits                                         |  |                                                                                                                             |       |  |                           |  | 3,086  |       | 
|Financial assets at fair value through profit or loss |  |                                                                                                                             | 1,564 |  |                           |  |        |       | 
|Receivable (excluding prepaid expenses)               |  |                                                                                                                             |       |  |                           |  | 19     |       | 
|                                                      |  |                                                                                                                             | 1,564 |  |                           |  | 17,175 |       | 



|                                      |  | Financial liabilities at
    amortized cost |      
|------------------------------------- |  | ------------------------------------------- | -----
|As of December 31, 2012:              |  |                                             |      
|Accounts payable and accrued expenses |  |                                             | 1,078
|As of December 31, 2011:              |  |                                             |      
|Accounts payable and accrued expenses |  |                                             | 513  
|Royalty obligations to investors      |  |                                             | 886  
|                                      |  |                                             | 1,399



F-22







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:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------



As of December
31, 2012:

|                                                      |  | Dollar                  |        |  | Foreign currency
    (mainly NIS) |  |       | Total | 
|----------------------------------------------------- |  | ----------------------- | ------ |  | --------------------------------- |  | ----- | ----- | 
|                                                      |  | US dollars in thousands |       
|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 |       | 



As
of December 31, 2011:

|                                                      |  | Dollar                  |        |  | Foreign currency
    (mainly NIS) |  |       | Total | 
|----------------------------------------------------- |  | ----------------------- | ------ |  | --------------------------------- |  | ----- | ----- | 
|                                                      |  | US dollars in thousands |       
|Assets:                                               |  |                         |        |  |                                   |  |       |       | 
|Cash and cash equivalents                             |  |                         | 9,857  |  |                                   |  | 4,213 |       | 
|Bank deposits                                         |  |                         | 3,000  |  |                                   |  | 86    |       | 
|Financial assets at fair value through profit or loss |  |                         | -      |  |                                   |  | 1,564 |       | 
|Receivables (excluding prepaid expenses)              |  |                         | -      |  |                                   |  | 19    |       | 
|                                                      |  |                         | 12,857 |  |                                   |  | 5,882 |       | 
|Liabilities:                                          |  |                         |        |  |                                   |  |       |       | 
|Accounts payable and accrued expenses                 |  |                         | 338    |  |                                   |  | 175   |       | 
|Royalty obligations to investors                      |  |                         | 886    |  |                                   |  | -     |       | 
|                                                      |  |                         | 1,224  |  |                                   |  | 175   |       | 
|                                                      |  |                         | 11,633 |  |                                   |  | 5,707 |       | 



F-23







REDHILL BIOPHARMA LTD.

NOTES TO THE
FINANCIAL STATEMENTS (continued)



NOTE
5 - CASH AND CASH EQUIVALENTS AND BANK DEPOSITS:



| | a. | Cash
                                                                                         and Cash Equivalents:
| | -- | -------------------------------------------------------------------------------------------------------------------

|                         |  | December 31             |       
|------------------------ |  | ----------------------- | ------
|                         |  | 2012                    |       
|                         |  | US dollars in thousands |       
|Cash in bank             |  |                         | 6,703 
|Short-term bank deposits |  |                         | 10,111
|                         |  |                         | 16,814



The carrying
amounts of the cash and cash equivalents approximate their fair values.



| | b. | Bank
                                                                                         Deposits
| | -- | ------------------------------------------------------------------------------------------------------



The bank
deposits are for terms of three months to one year and bear interest at annual rates of between 0.95% - 1.83%.



NOTE
6 - FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS



These financial assets as
of December 31, 2012 and 2011 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
its their exchange market price at the end of the reporting date trading day.



NOTE
7 - PREPAID EXPENSES AND RECEIVABLES:



|                        |  | December 31             |    
|----------------------- |  | ----------------------- | ---
|                        |  | 2012                    |    
|                        |  | US dollars in thousands |    
|Prepaid expenses        |  |                         | 114
|Government institutions |  |                         | 81 
|Other                   |  |                         | 3  
|                        |  |                         | 198



The fair value of receivables,
which constitute financial assets, approximates their carrying amount.



The maximal exposure to credit
risks as of statement of the financial position date in respect of the receivable balances is the fair value of the entire receivables
in respect of those balances net of nonmonetary balances (arising from prepaid expense). The Company does not hold collaterals
in connection with these receivables.



F-24







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         | 
|                                                         |  | 2012                    |     |  | 2011                     |  |     | 2012                | 
|                                                         |  | US dollars in thousands |    
|Office furniture and equipment (including
    computers) |  |                         | 70  |  |                          |  | 65  |                     | 
|Leasehold improvements                                   |  |                         | 82  |  |                          |  | 82  |                     | 
|                                                         |  |                         | 152 |  |                          |  | 147 |                     | 



NOTE
9 - INTANGIBLE ASSETS



The intangible assets represent
R&D assets with respect to intellectual property rights in 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  |      
|------------------------------ |  | ----------------------- | -----
|                               |  | 2012                    |      
|                               |  | US dollars in thousands |      
|Cost:                          |  |                         |      
|Balance at beginning of period |  |                         | 1,245
|Additions during the period    |  |                         | 100  
|Balance at end of period       |  |                         | 1,345



For further
details, see note 13.



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 employer dismissed or retiring from their employ
                                                                       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 2012 and 2011were $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-25







REDHILL BIOPHARMA LTD.

NOTES TO THE
FINANCIAL STATEMENTS (continued)



NOTE 11 - ACCOUNTS PAYABLE AND ACCRUED
EXPENSES:

|                                     |  | December 31             |      
|------------------------------------ |  | ----------------------- | -----
|                                     |  | 2012                    |      
|                                     |  | US dollars in thousands |      
|Trade payables                       |  |                         | 313  
|Expenses payable                     |  |                         | 571  
|Employees and employees institutions |  |                         | 150  
|Government institutions              |  |                         | 44   
|                                     |  |                         | 1,078



The fair value of the accounts
payable and accrued expense balances approximates their carrying amounts.



NOTE
12 - MANDATORY CONVERTIBLE LOANS AND ROYALTY OBLIGATIONS TO INVESTORS:



| | a. | First
                                                                                        convertible loans:
| | -- | ----------------------------------------------------------------------------------------------------------------



| | 1) | In August 2010, the Company,
                                                                  raised $3.5 million from investors (part of which were shareholders)
                                                                  in the form of convertible loans ("the first convertible
                                                                  loans"). The loans were denominated in dollars, bore interest
                                                                  at an annual rate of 8%, were convertible into the Company's
                                                                  ordinary shares and warrants, and in any case were not repayable
                                                                  in cash.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2) | Under the first convertible
                                                                  loans agreement, in addition to the terms described in (1) above,
                                                                  the investors were entitled to royalties equal to 5% of future
                                                                  revenue from two therapeutic candidates purchased by the Company,
                                                                  in connection with both Net Sales and advances or milestones
                                                                  as part of licensing transaction as follows:
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) | Royalty income on net sales and/or
                                                                 royalty income on sales by licensed reseller and/or distributors
                                                                 were to be paid over 5 years upon the commencement of commercial
                                                                 sales of one of the therapeutic candidates.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) | Royalty income from down payments
                                                                 and milestones were to be paid over a period of 5 years commencing
                                                                 from August 11, 2010 (the closing date of the first convertible
                                                                 loan).
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The right
to royalties also existed following any conversion of the convertible loans.



F-26







REDHILL
BIOPHARMA LTD.

NOTES TO THE
FINANCIAL STATEMENTS (continued)



NOTE
12 – MANDATORY CONVERTIBLE LOANS AND ROYALTY OBLIGATION TO INVESTORS(continued):



| | 3) | The consideration received for
                                                                  the first convertible loans was divided into two components
                                                                  for measurement purposes mandatory convertible loans based on
                                                                  their fair value and the balance was assigned to royalties'
                                                                  obligation which is carried at amortized cost (using the embedded
                                                                  effective interest on the date of issuance).
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The effective
interest rate on the royalties' obligation is 27.98%.



| | b. | Second
                                                                                         convertible loans
| | -- | -----------------------------------------------------------------------------------------------------------------



In November 2010, the Company
completed an additional capital round raising $7.6 million in mandatory convertible loans to Israeli and foreign investors (hereinafter
- the second convertible loans). The terms of the loans are the same as the terms of the first convertible loans, except for the
entitlement for royalties.



| | c. | Conversion of the mandatory
                                                                       convertible loans
| | -- | --------------------------------------------------------------------------------------------------------------------



Based on the convertible loans
terms, just prior to the Company's Initial Public Offering, all of the mandatory convertible loans were automatically converted
into 19,818,314 Company's ordinary shares and to warrants. The conversion ratio was $0.5721 of convertible loan (and all accrued
interest) into 1 ordinary share, as stipulated by the loans agreements. As to the terms of the warrants, see note 15c(1).



| | d. | Acquisition and termination
                                                                       of the royalty rights
| | -- | ------------------------------------------------------------------------------------------------------------------------



On December 26, 2012, a General
Shareholders Meeting of the Company approved the acquisition and termination of the royalty rights granted to investors pursuant
to the August 2010 mandatory convertible loan agreement 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 their respective royalty
rights. The royalty obligation was presented as amortized cost. At date of the approval the Company got relief from its royalty
obligations and the associated liability was derecognized. The fair value of the shares to be issued is $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. Since the shares were not
issued as of December 31, 2012, the fair value of the shares is included in equity under ordinary shares to be issued. The shares
were issued on January 10, 2013.



F-27







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 will pay 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, 2012, the
                                                                Company paid the Danish company $100 thousand.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2) | On May 2, 2010, the Company entered
                                                                into an agreement with a US publically traded company that grants
                                                                the Company an exclusive license to use rights in a drug that
                                                                treat chemotherapy, radiation and surgery induced nausea and vomiting.
                                                                Under the agreement, the Company will pay the US company an initial
                                                                amount of $100 thousand, and will later pay the US 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 US 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 US company reach $30 million. Through December 31, 2012, the
                                                                Company paid $100 thousand to the US company.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3) | On August 26, 2010, the Company
                                                                entered into an agreement with a Canadian based company which
                                                                is traded in the US and Canada, to a 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 of up to $934
                                                                thousand.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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 $600 thousand. In addition, through December 31, 2012, the Company participated in the drug research and development
costs in the amount of $800 thousand that was recorded in the statements of comprehensive loss under research and development
expenses.



F-28







REDHILL
BIOPHARMA LTD.

NOTES TO THE
FINANCIAL STATEMENTS (continued)



NOTE
13 - COMMITMENTS(continued):



| | 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
                                                                 will pay 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, 2012,
                                                                 the Company paid the Australian company a total of $500 thousand.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5) | On September 18, 2011, the Company
                                                                entered into an agreement with a US academic institution (hereinafter
                                                                – "the Academic Institution") to acquire exclusive
                                                                rights to a diagnostic test (hereinafter – the "test")
                                                                for a certain bacteria that is 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, 2012, the Company paid the Academic Institution a total amount of $45 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 above.



| | 6) | In October 2012 a term sheet was
                                                                entered into between the Company and a US pharmaceutical company
                                                                for the acquisition by the Company of exclusive rights to two
                                                                proprietary extended release therapeutic candidates. The signing
                                                                of a detailed agreement is subject to due diligence to be conducted
                                                                by the Company. For the first extended release therapeutic candidates,
                                                                the US company would be entitled to a royalty of between 20%-50%
                                                                depending on distribution channel and territory and for the second
                                                                the US company would be entitled to royalty of 8%-15% depending
                                                                on distribution channel.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. | Operating lease agreement
| | -- | -------------------------



The Company
entered into operating lease agreement for the offices it uses. The agreement will expire on February 28, 2016 (hereafter –
date of end of rental period) with an option to extend the rental period by additional 3 years. The projected rental payments
until the end of the rent period, at rates in effect at December 31, 2012, are $155 thousand per year.



As of
December 31, 2012 an amount of $75 thousand was deposited with a bank to secure the lease payments.



F-29







REDHILL
BIOPHARMA LTD.

NOTES TO THE
FINANCIAL STATEMENTS (continued)



NOTE 14 - INCOME TAX:



| | a. | Measurement of results
                                                                         for tax purposes
| | -- | ----------------------------------------------------------------------------------------------------------------



The results
of the Company are measured for tax purposes in NIS and in accordance with Accounting Principles Generally Accepted in Israel
(Israeli GAAP). These financial statements are prepared in dollars and in accordance with IFRS. The difference between the NIS
and the exchange rate of the dollar and differences 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 the normal corporate tax rate. Corporate tax rate for 2012 was 25% (2011 - 24%).



On December 6, 2011, the Law
for Changing the Tax Burden (Legislative Amendments), 2011, was published in Reshumot (the official gazette of the Israeli government),
halting the phased reduction in corporate tax rates that was enacted in 2009, and setting the corporate tax rate at 25% in 2012
and thereafter.



| | c. | Carry
                                                                                           forward losses
| | -- | ---------------------------------------------------------------------------------------------------------------



The balance of carry forward
losses as of December 31, 2012 is $10 million. These tax loss carry forwards 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 loss carry forwards (as mentioned in c. above), for which deferred tax assets have not been
recognized in the statement of financial position as of December 31, 2012 and 2011, were $4.5 million and $2.5 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-30







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 and of NIS 0.01 par value, as follows:





|                                  |  | Number of shares |        
|--------------------------------- |  | ---------------- | -------
|                                  |  | December 31      |        
|                                  |  | 2012             |        
|                                  |  | In thousands     |        
|Authorized
    share capital      |  |                  | 100,000
|                                  |  |                  |        
|Issued
    and paid share capital |  |                  | 52,990 



As of December 31, 2012, the
market price on the Tel Aviv Stock Exchange of the Company's ordinary shares was $1.02. As of December 31, 2012, the Company's
ADSs were listed on the NASDAQ Capital Market and their trading commenced on January 7, 2013, Each ADSs represents 10 ordinary
shares.



| | 2) | Rights attached to Company shares:
| | -- | ----------------------------------



| |  | Ordinary shares provide holders
                                                              the rights to participate and vote in shareholders meetings, a right
                                                              to appoint directors, a right to receive a share of earnings and
                                                              a right to participate in remaining assets upon liquidation after
                                                              convertible preferred shares.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3) | Changes in share capital:
| | -- | -------------------------



| | (a) | On January 27, 2011, the general
                                                               meeting of the Company ratified replacing the existing articles
                                                               of incorporation with a new one that better fits a public company.
                                                               Under the new articles, the outstanding preferred shares were converted
                                                               into ordinary shares and the authorized share capital was consolidated
                                                               into a single type of ordinary shares, NIS 0.01 par value
                                                               per share.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | On January 16, 2011, the Company's
                                                                  Board of Directors resolved to increase the issued and outstanding
                                                                  share capital of the Company to NIS 1 million, divided
                                                                  into 100,000,000 ordinary shares, NIS 0.01 par value per
                                                                  share..
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) | On January 16, 2011, the Board
                                                                  of Directors of the Company resolved to distribute bonus shares
                                                                  based on a 1:10 ratio, such that each shareholder received 9
                                                                  bonus shares for each share held by that shareholder. The distribution
                                                                  of bonus shares was performed on February 3, 2011.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-31







REDHILL BIOPHARMA LTD.

NOTES TO THE FINANCIAL STATEMENTS (continued)



NOTE 15 - EQUITY (continued):



| | 4) | In September 2009 and November
                                                                2009, the Company entered into investment agreements with a number
                                                                of investors. Under these agreements, the Company issued to the
                                                                investors 649,673 convertible preferred shares and 129,935 warrants
                                                                exercisable into convertible preferred shares. Issuance proceeds
                                                                amounted to $975 thousand and were divided between convertible
                                                                preferred shares and warrants.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In January 2011, all warrants
that were issued to investors during 2009 were exercised into preferred shares. Accordingly, the Company issued 1,299,347 convertible
preferred shares for $584 thousand.



| | 5) | As to the conversion of all mandatory
                                                                convertible loans into 19,818,314 ordinary shares and to warrants
                                                                - see note 12c.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In June to August 2011, the
Company received notifications on the exercise of part of the above warrants. Accordingly, the Company issued 803,667 ordinary
shares for $592 thousand, net of issuance costs.



| | 6) | As to the issuance of 14,302,300
                                                                ordinary shares and 7,151,150 warrants in a public offering -
                                                                see b. below.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 7) | In April to August 2012, the Company
                                                               received notifications on the exercise of the 600,000 non-tradable
                                                               options issued to service providers and a notice 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.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 8) | 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 $6,248 thousand, 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. As of December
                                                               31, 2012, the shares were not issued, thus the cash received
                                                               in respect thereof is included in equity under ordinary shares
                                                               to be issued. The shares were issued on January 10, 2013. As to
                                                               the terms of the warrants - see c(3) below.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. | 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). The price of a package of 100 shares and 50
warrants was NIS 361 ($98.1 at the exchange rate on the date of issuance).



Issuance proceeds (gross) amounted
to $14 million, less direct issuance costs of $1.3 million, thereby amounting to $12.7 million. Issuance proceeds (net) was allocated
to the issued shares and warrants based on the fair value of each of these equity instruments and was recognized in equity.



F-32







REDHILL BIOPHARMA LTD.

NOTES TO THE FINANCIAL STATEMENTS (continued)



NOTE 15 - EQUITY (continued):



| | c. | Warrants:
| | -- | ---------



| | 1) | The warrants that were issued
                                                                to investors as part of the conversion of the mandatory convertible
                                                                loans are exercisable on any trading day until expiration. Expiration
                                                                date of the warrants will be the earlier of: (1) three years after
                                                                the date of issuance (February 3, 2011) or (2) a transaction for
                                                                transferring control over the company, as this term is defined
                                                                in the convertible loan agreements.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As of December 31, 2012, warrants
outstanding are exercisable into 3,180,861 ordinary shares for a total exercise price of $2.7 million. In accordance with the
term of the warrants, the number of shares resulting from the exercise of the warrants is based upon the date of exercise. The
number of the shares is subject to reduction based on the time elapsed from the date of issuing the warrants to the exercise thereof.



| | 2) | The warrants (Series 1) are exercisable
                                                                since their listing and through February 2, 2014, with each warrant
                                                                (Series 1) is exercisable into one ordinary share for $1.03 since
                                                                the date of listing and through February 2, 2012, and for $1.25
                                                                from February 3, 2012 to February 2, 2014. The warrants (Series
                                                                1) not exercised by February 2, 2014 will expire.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As of December 31, 2012, 7,151,150
warrants (Series 1) are outstanding.



| | 3) | The warrants issued under the
                                                                investment agreement, as described in a(8) above, are exercisable
                                                                unto 3,240,640 ordinary shares, for a period of 24 months. Exercise
                                                                price of each warrant ranges from $1.18 to $1.54, depending on
                                                                the date of exercise.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



NOTE 16 - SHARE-BASED PAYMENTS



On May 30, 2010, the general
meeting of shareholders approved the option plan of the Company for 2010 (the "Option Plan"), after being approved by
the Board of Directors on February 2, 2010. The terms and conditions of the grants were determined by the Board of Directors and
according to the plan. The Company is allowed to allocate 3,080,000 (adjusted to reflect the distribution of bonus shares) options
to employees and directors.



On August 6, 2010, the Company's
Board of Directors approved a grant of 500,000 (adjusted to reflect the distribution of bonus shares) options to Company service
providers beyond the scope of the Company's Option Plan.



F-33







REDHILL BIOPHARMA LTD.

NOTES TO THE FINANCIAL STATEMENTS (continued)



NOTE 16 - SHARE-BASED PAYMENTS



On November 1, 2010, the Board
of Directors resolved to enlarge the Option Plan of the Company by 7,000,000 additional options (adjusted to reflect the distribution
of bonus shares). In addition, on January 19, 2011, the Board of Directors resolved to increase the Option Plan of the Company
such that the Company is permitted to grant an additional 12,000,000 options of the Company.



| | a. | Following is information
                                                                        on options granted in 2011:
| | -- | ----------------------------------------------------------------------------------------------------------------------------



|              |  | Number of options granted                   |            |  |                                            | 
|------------- |  | ------------------------------------------- | ---------- |  | ------------------------------------------ | 
|              |  | According to option
    plan of the Company |            |  | To service providers, not under
    option | 
|Date of grant |  | Other than directors
    (1)                |            |  | To directors (1)                           | 
|January 2011  |  |                                             | *4,900,000 |  |                                            | 
|January 2011  |  |                                             | -          |  |                                            | 
|March 2011    |  |                                             | 120,000    |  |                                            | 
|May 2011      |  |                                             |            |  |                                            | 
|August 2011   |  |                                             | 350,000    |  |                                            | 
|              |  |                                             | 5,370,000  |  |                                            | 

| | * | 2,760,000 options were allocated to
                                                              officers who also serve as directors.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------



| | 1) | The options will vest as follows:
                                                                1/3 of the options after one year from the date of grant, and
                                                                subsequently, 1/12 of the shares at the end of each calendar quarter
                                                                over the following two years. Unexercised options will expire
                                                                on the earlier of: a sale of all or most Company assets or shares;
                                                                the Company being merged or consolidated into another Company;
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



or after
7 years since their date of grant. In addition, in certain circumstances, the Company's Board of Directors has the authority to
decide on an early vesting of some of the options granted to the option holder or compensating the option holder, including by
extending the life of the options. Each of the options is exercisable at a ratio of 1 option to 1 ordinary share.



| | 2) | The options granted not under
                                                                  the Company's Option Plan will vest as follows: half after 6
                                                                  months since the date of grant and the remainder after one year
                                                                  since the date of grant. Unexercised options will expire on
                                                                  the earlier of : a sale of all or most Company assets or shares;
                                                                  the Company being merged or consolidated into another Company;
                                                                  or an initial public offering of Company shares through September
                                                                  1, 2012. On January 16, 2011, the Board of Directors approved
                                                                  an amendment indicating that the options will not expire automatically
                                                                  upon a public offering of Company shares.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Each of
these options is exercisable at a ratio of 1 option to 1 ordinary share.



F-34







REDHILL BIOPHARMA LTD.

NOTES TO THE
FINANCIAL STATEMENTS (continued)



NOTE 16 - SHARE-BASED PAYMENTS(continued):



| | 3) | The fair value of the options
                                                                  on the date of grant was computed using the binomial model.
                                                                  The underlying data use for computing the fair value of the
                                                                  options are mainly as follows: ordinary share price, based on
                                                                  share price in the public offering: $0.53-$0.97, expected volatility:
                                                                  68.4%-72.8%, risk-free interest rate: 1.65%-2.89% (the risk-free
                                                                  interest rate is determined based on rates of return on maturity
                                                                  of unlinked US 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.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. | Options granted in
                                                                        2012:
| | -- | ------------------------------------------------------------------------------------------------



|              |  | Number of options granted                   |            |  |                                 | 
|------------- |  | ------------------------------------------- | ---------- |  | ------------------------------- | 
|              |  | According to option plan of
    the Company |            |  | To service providers, not under | 
|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 use 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
                                                                US 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-35







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 |           
|------------------------------------ |  | ---------------------- | ----------
|                                     |  | 2012                   |           
|                                     |  | Number of options      |           
|Outstanding at beginning
    of year |  |                        | 10,660,000
|Exercised                            |  |                        | (670,000  
|Granted                              |  |                        | 2,025,000 
|Outstanding at end of year           |  |                        | 12,015,000
|Exercisable at end of year           |  |                        | 7,816,667 



| | d. | The following is information
                                                                       about exercise price and remaining useful life of outstanding
                                                                       options at year-end:
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





|December 31, 2012                                |            |  | December 31, 2011    | 
|------------------------------------------------ | ---------- |  | -------------------- | 
|Number of options outstanding
    at end of year |            |  | Exercise price range | 
|                                                 | 12,015,000 |  |                      | 



| | e. | Expenses recognized
                                                                       in profit or loss for the options are as follows:
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------





|Year ended December 31  |      
|----------------------- | -----
|2012                    |      
|US dollars in thousands |      
|                        | 1,648



The remaining compensation
expenses as of December 31, 2012 are $608 thousand and will be expensed in full by June 2015.



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 plan.



Options granted to option holder
who are related parties of the Company are governed by Section 3(i) to the Ordinance.





F-36







REDHILL BIOPHARMA LTD.

NOTES TO THE
FINANCIAL STATEMENTS (continued)



NOTE 17 - RESEARCH AND DEVELOPMENT
EXPENSES:





|                             |  | Year ended December 31  |      
|---------------------------- |  | ----------------------- | -----
|                             |  | 2012                    |      
|                             |  | US dollars in thousands |      
|                             |  |                         |      
|Payroll and related expenses |  |                         | 529  
|Professional services        |  |                         | 933  
|Share-based payments         |  |                         | 862  
|Clinical trials              |  |                         | 3,620
|Patents expenses             |  |                         | 240  
|Other                        |  |                         | 271  
|                             |  |                         | 6,455



NOTE 18 - GENERAL AND ADMINISTRATIVE EXPENSES:



|                             |  | Year ended December 31  |      
|---------------------------- |  | ----------------------- | -----
|                             |  | 2012                    |      
|                             |  | US dollars in thousands |      
|                             |  |                         |      
|Payroll and related expenses |  |                         | 517  
|Share-based payments         |  |                         | 787  
|Professional services        |  |                         | 879  
|Office related expenses      |  |                         | 122  
|Other                        |  |                         | 296  
|                             |  |                         | 2,601



| | * | Including a management fee of $180
                                                               thousand in 2010.
| | - | -------------------------------------------------------------------------------------------------------------------



NOTE 19 - OTHER EXPENSES:



In the year ended December 31,
2010, the expenses were due to fees for recruiting investors.



F-37







REDHILL BIOPHARMA LTD.

NOTES TO THE
FINANCIAL STATEMENTS (continued)



NOTE 20 - FINANCIAL EXPENSES,net:



|                                                                               |  | Year ended December 31  |      
|------------------------------------------------------------------------------ |  | ----------------------- | -----
|                                                                               |  | 2012                    |      
|                                                                               |  | US dollars in thousands |      
|Financial income:                                                              |  |                         |      
|Fair value gain on financial assets
    at fair value through profit or loss   |  |                         | 57   
|Income from changes in exchange rates                                          |  |                         | 21   
|Other                                                                          |  |                         | 119  
|                                                                               |  |                         | 197  
|Financial expenses:                                                            |  |                         |      
|Fair value losses on mandatory convertible loans                               |  |                         | -    
|Accretion and settlement of royalty obligations
    to investors               |  |                         | 1,473
|Fair value losses on financial assets at fair
    value through profit or loss |  |                         | -    
|Other                                                                          |  |                         | 10   
|                                                                               |  |                         | 1,483
|Financial
    expenses - net                                                   |  |                         | 1,286



NOTE 21 - 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 |       
|------------------------------------------------------------------------------------ |  | ---------------------- | ------
|                                                                                     |  | 2012                   |       
|                                                                                     |  |                        |       
|Loss as reported in the financial statements (in
    thousands of dollars)           |  |                        | 10,326
|Weighted average of ordinary shares outstanding
    during the period (in thousands) |  |                        | 52,595
|Basic and
    diluted loss per share (dollars)                                       |  |                        | 0.20  



F-38







REDHILL BIOPHARMA LTD.

NOTES TO THE
FINANCIAL STATEMENTS (continued)



NOTE 22 - 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 |    
|---------------------------------------------------------------- |  | ----------------------- | ---
|                                                                 |  | US dollars in thousands |    
|                                                                 |  | 2012                    |    
|                                                                 |  |                         |    
|Key management compensation:                                     |  |                         |    
|Salaries and other short-term employee
    benefits              |  |                         | 373
|Post-employment benefits                                         |  |                         | 44 
|Share-based payments                                             |  |                         | 974
|Other long-term benefits                                         |  |                         | 22 
|                                                                 |  |                         |    
|Transactions with Key management:                                |  |                         |    
|Accretion and settlement of royalty obligations
    to investors |  |                         | 637
|Fair value on mandatory convertible loans                        |  |                         | -  



| | b. | Balances with related
                                                                     parties:
| | -- | ---------------------------------------------------------------------------------------------------



|                                                           |  | December 31            |    
|---------------------------------------------------------- |  | ---------------------- | ---
|                                                           |  | 2012                   |    
|                                                           |  | US dollars in thousand |    
|Current liabilities - credit balance in "accounts payable" |  |                        | 131
|Noncurrent liabilities:                                    |  |                        |    
|                                                           |  |                        | -  
|Balance of Royalty obligations to investors *              |  |                        | -  



| | * | See also note 12.
| | - | -----------------



F-39







REDHILL BIOPHARMA LTD.

NOTES TO THE
FINANCIAL STATEMENTS (continued)



NOTE
23 - EVENTS SUBSEQUENT TO DECEMBER 31, 2012:



In January 2013, the Company
was informed by its Canadian service provider ("service provider") that a review by governmental authorities was successfully
completed and, subject to a final approval, the service provider may be granted with incentives with regard to past research and
development operations. Subject to such final approval, the Company is entitled to certain discounts in respect of past payments
to the service provider for research and development services, estimated to be approximately $300 thousand with an additional
future discount of approximately $200 thousand resulting from research and development operations in 2012.



______________________

_______________________________

______________________



F-40







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 (unofficial
    English translation) (incorporated by reference to Exhibit 1.1 to Draft Registration Statement on Form DRS disseminated with
    the Securities and Exchange Commission, dated October 26, 2012).                                                                                                                                 
|                       |  |                                                                                                                                                                                                                                                                                                                                                                                             
|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†                   |  | 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).                                                                                    
|                       |  |                                                                                                                                                                                                                                                                                                                                                                                             
|4.5†                   |  | 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).                                                                       
|                       |  |                                                                                                                                                                                                                                                                                                                                                                                             
|4.6†                   |  | Fee Agreement, dated June 3, 2010, by and between
    the Registrant and ProSeed Capital Holdings CVA (incorporated by reference to Exhibit 4.6 to Draft Registration Statement
    on Form DRS disseminated with the Securities and Exchange Commission, dated October 26, 2012).                                                                                                          
|                       |  |                                                                                                                                                                                                                                                                                                                                                                                             
|4.7†                   |  | Termination of Fee Agreement, dated August
    6, 2010, by and between the Registrant and ProSeed Capital Holdings CVA (incorporated by reference to Exhibit 4.7 to Draft
    Registration Statement on Form DRS disseminated with the Securities and Exchange Commission, dated October 26, 2012).                                                                                         
|                       |  |                                                                                                                                                                                                                                                                                                                                                                                             
|4.8                    |  | 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).                                                                                          
|                       |  |                                                                                                                                                                                                                                                                                                                                                                                             
|4.9                    |  | Form Loan Agreement, dated between June to
    August 2010, by and between the Registrant and each of the lenders (incorporated by reference to Exhibit 4.9 to Draft Registration
    Statement on Form DRS disseminated with the Securities and Exchange Commission, dated October 26, 2012).                                                                                              





110









|4.10  |  | Form of Term of Convertible Loan,
    dated August 31, 2010, by and between the Registrant and each of the lenders of the Loan Agreement Letter (incorporated by
    reference to Exhibit 4.10 to Draft Registration Statement on Form DRS disseminated with the Securities and Exchange Commission,
    dated October 26, 2012).                                                             
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |  |                                                                                                                                                                                                                                                                                                                                                                                               
|4.11  |  | Form of Convertible Loan Agreement, November
    7, 2010 by and between the Registrant and each of the lenders (incorporated by reference to Exhibit 4.11 to Draft Registration
    Statement on Form DRS disseminated with the Securities and Exchange Commission, dated October 26, 2012).                                                                                                  
|      |  |                                                                                                                                                                                                                                                                                                                                                                                               
|4.12† |  | Master Service Agreement, dated April 28, 2011,
    by and between the Registrant. and 7810962 Canada Inc. and amendments (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).                                                                                       
|      |  |                                                                                                                                                                                                                                                                                                                                                                                               
|4.13† |  | 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).                                                                 
|      |  |                                                                                                                                                                                                                                                                                                                                                                                               
|4.14† |  | 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).                                                                                  
|      |  |                                                                                                                                                                                                                                                                                                                                                                                               
|4.15† |  | 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).                                                                      
|      |  |                                                                                                                                                                                                                                                                                                                                                                                               
|4.16  |  | Underwriting Agreement made and entered on
    January 30, 2011, by and between the Registrant and to Poalim I.B.I Underwriting & Issuing Ltd. (Free English translation
    accompanied by the Hebrew original) (incorporated by reference to Exhibit 4.16 to Draft Registration Statement on Form DRS
    disseminated with the Securities and Exchange Commission, dated October 26, 2012).
|      |  |                                                                                                                                                                                                                                                                                                                                                                                               
|4.17  |  | Form of Letter of Exemption and Indemnity adopted
    on January 2010, as amended in February 2012 (Free English translation accompanied by the Hebrew original) (incorporated by
    reference to Exhibit 4.17 to Draft Registration Statement on Form DRS disseminated with the Securities and Exchange Commission,
    dated October 26, 2012).                                            
|      |  |                                                                                                                                                                                                                                                                                                                                                                                               
|4.18  |  | Option Plan (2010), as amended (incorporated
    by reference to Exhibit 4.18 to Draft Registration Statement on Form DRS disseminated with the Securities and Exchange Commission,
    dated October 26, 2012).                                                                                                                                                                              





|4.19 |  | 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).
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |  |                                                                                                                                                                                                                                                                                                     
|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.                                                                                                                                                             





|† | 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: | /s/ Dror Ben-Asher   
| |     | Name:                
| |     | Title:               
| |     |                      
| | By: | /s/
    Ori Shilo    
| |     | Name:                
| |     | Title:               





Date: March 4, 2013







112