The Alchemist was once part of The Citadel when the Mages controlled River's Rest. In 4058, the building fell into disrepair when trolls and krolvin joined forces and invaded the Rest. While there is no evidence that any actual fighting occurred during the battle, the building was blundered and defaced afterward.
More recently, the Alchemist was briefly inhabited by a powerful mage in 5103 who erected a barrier around the building while he worked on his arcane experiments. Shortly after the powerful mage arrived, there was a large explosion in the Alchemist which blasted a hole in the side of the building and revealed a previously unknown basement and underground tunnel. Whether these were added by the powerful mage or part of the original building are speculation at this point.
Immediately after the explosion, River's Rest was invaded by V'reen morphs which were either created or summoned by the mage who had taken over the Alchemist. These creatures took on the appearance, skills, and abilities of a random adventurer or townsperson (some even impersonating the rabbit, Captain, and aardvark), making them either extremely easy or difficult to combat, depending on who they mimicked.
Behind the Scenes
The changes to the Alchemist that were made during the powerful mage storyline were lost in the transition from GS3 to GS4 because they were made after the snapshot of GS3 was taken.
The Alchemist was restored to its former (destroyed) glory on 7/21/08. At the same time, the Archmage's assistant, Wyvenaveil, was finally laid to rest.