Wallach studied under Friedrich Wöhler at the University of Göttingen, receiving his doctorate in 1869. He joined August Kekule at the University of Bonn (1870), where he taught pharmacy and became professor in 1876. From 1889 to 1915 he was director of the Chemical Institute at Göttingen.

While at Bonn, Wallach became interested in the molecular structure of a group of essential oils that were widely used in pharmaceutical preparations. Many of these oils were thought at the time to be chemically distinct from one another, since they occurred in a variety of plants. Kekule virtually denied that they could be analyzed. Nevertheless, Wallach, a master of experimentation, was able by repeated distillation to separate the components of these complex mixtures. Then, by studying their physical properties, he could distinguish among the compounds many that were quite similar to one another. He was able to isolate from the essential oils a group of fragrant substances that he named terpenes, and he showed that most of these compounds belonged to the class now called isoprenoids (isoprenoid). Wallach's work laid the scientific basis for the modern perfume industry.