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.
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