I would have a skin scraping done. Obviously chewing himself to baldness is not normal. I would get to the root of the problem. It could be mange, mites, etc. If nothing shows up on the scrape, start looking at auto immune disorders, have bloodwork pulled, etc.
IMO, the breeder should NOT have released this puppy to you. They knew about the problem, how could they not? They have saddled you with vet bills and worry.
A reputable breeder would not send home a puppy with this issue, and concealed in a blanket? Ugh.