Is internal coating essential on a backpack?

A: I'm not sure you have a problem, Tim, and here's why: Your pack never was waterproof in the first place. The complexity and expense involved in sealing a pack is such that only a very few makers have attempted to seal one entirely, most notably Vaude, with packs such as the Hobb Creek ($180). See, packs are made of pack cloth (duh...), a fabric that's very tough but requires a very thick thread. So it's literally full of holes, unlike a very fine fabric such as a polyester microfiber which by its very nature is nearly waterproof. That's why people make pack covers—polyurethane-coated bags that fit over a pack.

I've had packs where that stuff peels off the inside, too. To be honest, I dunno what it is. But the pack's performance isn't altered by it. The Nikwax will help the first burst of water bead up and perhaps run off. If it keeps raining, the pack cover and inside garbage bag will be your next line of defense. With those steps, your pack will be as waterproof as it ever was. Which, without the pack cover and garbage bag, is not very darned waterproof.