Called whenever an NPC drops an item upon its death, such as health kits, armor batteries, etc.

It will NOT be called for dropped weapons, with exception of Half-Life: Source NPCs, since they don't use actual weapon entities and create a weapon entity on death.
GM:PlayerDroppedWeapon works for NPC weapon drops already. (Yes, it's not a typo)

It will also not be called for live grenades spawned by Zombine.