The prices of cheap, life-saving treatments for rare children's diseases are being increased by drug companies to levels where hospitals can barely afford them.

The companies are exploiting EU regulations concerning "orphan drugs" - drugs which are of benefit to fewer than five per 10,000 people - despite the rules being put in place in order to encourage the invention of new medicines.

Two children in Middlesbrough were hospitalised and put on drips after supplies of a cheap chemical which was necessary to keep them alive ran out. The chemical manufacturer can no longer provide the hospital with carbamyl glutamate because a drug company is in the process of securing a licence and sole marketing rights to the compound under what is known as the orphan drug regulations passed by the EU.

The drug company, Orphan Europe, based in Paris but with a branch in Henley, Oxfordshire, has increased the price of carbamyl glutamate from around £700 to £1,500 a year to £80,000 to £106,000 (depending on dosage) and will soon have a 10 year monopoly on its supply.

The orphan drug regulations were passed in Europe in 1999, following similar legislation in the US. They were intended to reward companies that invested in research leading to new drugs for rarer diseases which would not normally have a big market. But companies such as Orphan Europe are taking commonly used products through the licensing system and reaping the benefits even though they have not invented the drugs and have spent nothing on original research.

"It's a scam and it should be exposed as such," said Sam Richmond, consultant neonatologist at Sunderland district general hospital. "It would appear we have no alternative but to pay their outrageous price or break the law."

UK consultants with experience of these rare disorders are horrified by the soaring price of this and other drugs which were previously available in raw chemical form. "These are patients with rare biochemical disorders. Very often what we need to give them are not drugs but substances that they lack. For years we have bought these compounds from the labs," said James Leonard, of the Institute of Child Health in London, who originally diagnosed the Middlesbrough children. He has contacted the Department of Health.

"The problem is that the government does not know what to do. This is EU law and they have shot themselves in the foot. Colleagues on the continent are also wringing their hands," he said.

Orphan Europe has obtained a licence to produce other compounds that have been used for years in the UK. The price has risen steeply in each case. Sodium phenylbutyrate, which is used to treat a build-up of toxic ammonia in children with the same enzyme disorder, used to cost £36 for 100 grams. Orphan Europe is now the sole supplier of the chemical, refined into a licensed medicine, and charges £860 for 266g, around 10 times the original price.

The price of intravenous ibuprofen, used in premature babies, has risen from under £1.62 per 300mg ampoule to more than £60 for a 10mg ampoule since the company was given a licence.

Nitric oxide, used to improve the blood supply to the lungs of premature babies, has been sold by British Oxygen to a INO Therapeutics, which is based in France.

The company has obtained a licence for nitric oxide under the orphan drug regulations and later this year will supply machines to hospitals for delivering the gas at a cost of around £90 an hour. Consultants at Liverpool women's hospital's neonatal intensive care unit calculated in a letter to the Lancet last month that the cost of nitric oxide for 16 tiny babies who were given it on their unit last year would rise from around £2,000 at the moment to £63,640.

Orphan Europe denies that it has done nothing to justify the increases. Pierre Mambrini, a pharmacist employed by the company responsible for the development of carbamyl glutamate, said that researching the drugs and formulating ways to purify the compound had cost money.

"For 10 years these physicians have been treating their patients with a chemical and they do not know what they have," he said. The price was justified, in his view, by the quality and safety of the medicine his company was producing."