I ran into the same problem, once I got the tactics down on the breeders, I found I could take them on a little earlier, but the hordes of hostile rattkins are tough.I found that I had to use the corners of doors and buildings, to provide a minimal front for them to attack, and use a lot of ranged attacks and spells. If you can make it out of the breeders hut, back down to the next hut on the right, it is pretty defensible.
If you can manage to get to the Don's hut, he and Calzone will help you take out the hostile rattkins (they apparently want to keep you alive for tasks more than they care about the Rakuza).
Tools for Wizardry(r) 7