The Irish singer, who is a judge alongside Sandilands on Australia's Got Talent, said that he is concerned for his friend who has missed filming on the reality show and also his breakfast radio slot for the past week.
McFadden told The Daily Telegraph: "[He's] been really down. I think everything's getting on top of him. When we say he's sick it's more than just being in bed with the flu. I don't know if it's depression, he's just not a happy camper at the moment."
He said that Sandilands is upset at his recent scandals that have seen numerous sponsors boycott his radio station.
"It's breaking him," McFadden revealed.
Advertisers such as Vodafone and Jenny Craig dumped The Kyle and Jackie O Show after Sandilands launched a foul-mouthed tirade against a journalist who criticised his TV programme.
Sandilands is also believed to be heartbroken at the news that his ex-wife Tamara Jaber, from whom he split in 2010, is in a new relationship with semi-professional sports star Ken Aseme.
The star's job on Australia's Got Talent is believed to be on the line after he failed to show up at the live auditions at the weekend. Producers asked Dancing with the Stars Australia judge Todd McKenney to step in as a guest panel member at the last minute.
> Kyle Sandilands under investigation after radio tirade
> Kyle Sandilands bosses at Austereo react to sponsor boycott