The opium poppy has been cultivated by mankind since 3400BCE in lower Mesopotamia, with chemical analysis in the 19th Century revealing that most of its effects could be ascribed to two alkaloids, codeine and morphine. It was in 1874 that C.R. Alder Wright, an English chemist, had been experimenting with combining morphine with various acids. After several hours of boiling down anhydrous morphine alkaloid with acetic anhydride, he discovered that he had produced a more potent form of morphine which he called diacetylmorphine (or morphine diacetate).
Wright's invention was pretty much forgotten until it was re-synthesized 23 years later by another chemist, Felix Hoffman who was working at Bayer pharmaceutical company in Germany. Hoffmann was under instructions from his supervisor Heinrich Dreser to produce codeine, similar to morphine but less potent and less addictive. What he ended up with however, was diamorphine; one and a half to two times more potent than morphine itself.
Bayer's research department coined the drug's new name Heroin, based on the German heroisch meaning heroic or strong. In 1895, Bayer marketed heroin as an over-the-counter drug aimed mainly as a substitute for cough suppressants, that came with none of morphine's addictive side-effects (oh the irony).
From there, well I guess the rest is history, but I personally wasn't aware of how heroin came to be. It was eventually banned by the League of Nations (a forerunner to the United Nations) in 1925, although it took more than three years for this to be implemented and enforced. Bayer lost some of its trademark rights to heroin under the 1919 Treaty of Versailles after the Germans were defeated in World War One.
Sources
Heroin on Wikipedia (https://en.wikipedia.org/wiki/Heroin)
Yes, Bayer Promoted Heroin for Children (http://www.businessinsider.com/yes-bayer-promoted-heroin-for-children-here-are-the-ads-that-prove-it-2011-11)