I refused to give the recipe to the scholar, 'met him again', killed him and the thugs.
After that, the quest had been marked as complete, its description ending with unanswered question about the scholar's identity.

But when I take Roche's side after the big boss fight much later and enter Loredo's territory, this quest is marked as "failed". What gives?
Do I need to help the Squirrels to bring this quest to a close? Did I forget to do something earlier? Is this just a bug?

"met him again" = just outside the town, entering the forest? Do you mean you refused to be blindfolded and then made your way to their hideout and killed them there?

I can't explain why that's happening, but one thing disappointed me a bit about this quest.
If you refuse to be blindfolded, the resulting journal entry at their hideout describes you as "just after the money" and killing them afterwards doesn't change that. Agreeing to be blindfolded and then killing them after disagreeing with their plans seems the only way to end up as the good guy :3

Funny that, because I just reached that point in the game, and was wondering why I wasn't given the choice NOT to hand in the drug recipe to the scoundrels.

Thank you for the tip, Rammurg ^.^

Nope, no blindfolding was even suggested, because I flat out refused to give him the recipe (second dialogue at the docks, option 3) after I dealt with the alchemist and learned that the incense was not poison, but drug.
The scholar answered, "We'll meet again", and so we did. They attacked me on that spot.

Visiting their lair might be a good idea, though.

...the lair entrance is welded shut at this point, so no luck.
Looks like it's just a bug, then.

Damnit, this happened to me too! Though I have no idea where their lair is, I went through the boss fight thinking that the quest was done (earlier I had refused to give them the recipe) and as soon as I had defeated the boss it failed the quest on me! That sucks man, I hate having failed quests in games.

Do you also have a ghost of the scholar standing on the spot of the ambush?

He appeared some time after I left and came back to the place, standing at one spot and swinging his sword. Later, he stopped swinging and just stood there, non-interactive.

Must choose blindfolding, you save a lot of time and earn 1000 orens.

1000 orens? I gave the scholar the formula and allowed the blindfolding, but i only got 250 orens (I checked my money before and after quest completion). Yes, the game guide states 1000 orens, but that appears to be in error.

Actually, I just checked it again, just to be sure. I gave the scholar the real formula, let him blindfold me both coming and going, and got 200 orens (not 250 as i had originally thought). Game was set to difficult. 200 orens seems hardly worth it for giving Salamandra a source of legal fisstech and being the "bad guy".

If you let them to blindfold you, you can get a reference to the first game and Salamandra. :) Noticed this on my second playthrough today.

How much money did you get from them?

Sorry, no idea, but I don't think it was anything near 1000.

My first attempt I gave him the real incense but I ended up with Tawny Owl and stuff(didn't pay attention) but couldn't find my weapoons Where were they?? I redid the quest and fought everyone and got them in the chest!!