Collins had agreed a two-year deal to make the switch from Worcester but an extensive screening highlighting the 25-year-old had not recovered from a previous injury.
Sale have not revealed the nature of the injury, but Collins has so far been unable to start pre-season - with the club feeling he is still some way off.
Executive director Steve Diamond said: "It's a big disappointment for James and for Sale Sharks but we have to consider the player's welfare. We wish him well in his future career."
Chief executive Mick Hogan added: "We are sorry that this situation has arisen, and extend to James our best wishes for his long-term future."
Collins had come through the academy set-up at Worcester, going on to win international honours at Under-19s and Sevens levels.
His last appearance for the Warriors, though, came in the promotion play-off pool victory over Nottingham, with Collins having been stretchered off in the first half.
Gilbert has released a new line of rugby cleats. The Gilbert Virtuo 8S is part of the exciting new product. Check it out.
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The Nike Tiempo is a solid rugby cleat and one of few styles still made from full-grain natural leather.
The Gilbert Blitz 8S rugby cleat is a great cleat at a great price of $69.99. Get a new pair of cleats today.
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Wear the crest of the British and Irish Lions on your t-shirt. A great look for the summer.
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The USA Rugby Pro Alternate rugby jersey is perfect for any fan of the Eagles. Get yours to wear during the summer Test matches.
The NEW All Blacks 2013/14 jersey has arrived at World Rugby Shop. Dare to wear the colors of the All Blacks.