As far as drop rates go, they follow a fairly strict divisible scale.
Drop rates can be one of these tiers:
1/1 (100%)
1/2 (50%)
1/4 (25%)
1/8 (12.5%)
1/16 (6.25%)
1/32 (3.125%)
1/64 (1.5625%)
1/128 (.78135%)
1/256 (.390625%)
That is to say, if you had an item such as Beehive Chips from LV0 bees, which I believe fall under the 1/4 section, and you used an AoE WS or -Ga spell to kill them all off, your current target will be affected by TH and will have no change in drop rate, but the ones killed by the collateral damage will drop two tiers and not be affected by TH. Essentially, this lowers the drop rate for a 1/4 item to a 1/16 chance, or by 40%, not counting the influence of TH.
Tl;dr version, TH doesn't work on mobs killed by AoE and their base drop rate lowers two tiers.