I was preparing to do some patching and paint half my house. Started removing railing and things and when the small paint peels were hit with a knife 3 foot strips came off. My brother and I stripped all the paint which came off easily in huge sheets! This is half of my house (living, dining rooms, kitchen, bathroom, hallway and entryway). The culprit is a yellow substance on the drywall that is very chalky. No one can figure out if it is bad primer or crappy builders paint. Some sections are down to drywall some have a full coat of non adhering yellow powder and some have a mix of both. The drywall has some sagging and was glued with a few screws. I have to decide whether to seal, skim coat, seal, prime and paint or tear it down and put up new board. I am going crazy trying to decide!
Sounds like a remove and replace. If it was just the chalky substance I would say clean it coat with Gardz,prime and paint. But since it is sagging I think you should remove it, maybe add some extra bracing for support and replace.